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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: September 26, 2014

Transcripts and Videos of Arguments in the Court of Appeals for the Week of September 15, 2014, Now Available

On September 8, 2014, we noted two cases of interest from the oral arguments for the week of September 15, 2014:

  • No. 162Motorola Credit Corporation v. Standard Chartered Bank (considering certified questions from the Second Circuit on the application of the “separate entity rule” to post-judgment enforcement proceedings under CPLR Article 52). See the transcript and the video.
  • No. 165Grace v. Law (regarding whether a party who voluntarily discontinues an underlying action and forgoes an appeal thereby abandons his or her right to pursue a claim for legal malpractice). See the transcript and the video.
Posted: September 25, 2014

No Claim for Equitable Subrogation Where Payments Were Voluntary Settlements

On September 12, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Hong Leong Fin. Ltd. (Singapore) v. Morgan Stanley, 2014 NY Slip Op. 51396(U), dismissing a claim for equitable subrogation.

In Hong Leong Fin. Ltd., the defendants moved to dismiss the complaint of “Plaintiff Hong Leong Finance Limited (Singapore) (“HLF”), a Singapore financial company” relating to “HLF’s purchase of credit-linked notes (‘CLNs’), issued by defendant Pinnacle and created and sold by Defendants.” The motion related to a number of claims; this post focuses on its discussion of the plaintiff’s claim for equitable subrogation, which the court dismissed, explaining:

The doctrine of equitable subrogation is applicable to cases where a party is compelled to pay the debt of a third person to protect his own rights, or to save his own property. Thus, where one person uses his property to discharge an obligation owed by another, or a lien upon the property of another, the latter person would be unjustly enriched by the retention of the benefit conferred, so the first person is entitled to be surrogated to the position of the obligee or lien-holder. Equitable subrogation only can be invoked where the payment made was not voluntary — it was either a contractual obligation or the person needed to make it in order to protect its own legal or economic interests. In demonstrating the latter ground, the party seeking subrogation must show that the act is not merely helpful but necessary to the protection of its interests. The purpose of the doctrine is to shift the debt or obligation onto the party who more properly should be accountable to prevent unjust enrichment and an unfair result.

Here, HLF paid its Pinnacle Notes customers as a result of the proceedings before the MAS, which found that HLF violated provisions of Singapore’s Financial Advisors Act. Not only were the payments a voluntary settlement, HLF only partially satisfied its customers’ alleged damage claims regarding the Pinnacle Notes, paying only claims of wrongdoing leveled against HLF in the MAS proceedings. Equitable subrogation requires that the debt be paid in full. It is not intended to be used by a party who merely pays his or her own debt. Contrary to HLF’s argument, Winkelmann v Excelsior Ins. Co., 85 NY2d 577 (1995), does not state that claims for partial equitable subrogation are permitted. Rather, the Court held that where an insurer pays the policy limits to its insured, it may be subrogated to the rights of the insured even though the insured’s losses were not fully covered by the proceeds of the policy (i.e., the losses were above the policy limit). Further, this claim is a quasi-contract claim, and the written Distributor Agreement, with its indemnification provisions, governs this subject matter and precludes recovery in quasi-contract.

(Internal quotations and citations omitted) (emphasis added).

Posted: September 24, 2014

New York does not Follow the “Fiduciary Shield” Doctrine, so Corporate Officers’ Actions on Behalf of a Company can Form the Basis for Personal Jurisdiction over the Officer

On September 8, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Interventure 77 Hudson LLC v. Falcon Real Estate Investment Co. LP, 2014 NY Slip Op. 32401(U), denying a motion to dismiss.

In Interventure 77 Hudson, the underlying dispute concerns alleged mismanagement of a real estate portfolio. However, the motion at issue involved individual officers of the management company, who are being sued in their individual capacities for breach of fiduciary duty. These defendants moved to dismiss under, inter alia, the “fiduciary shield” doctrine, under which various states have held that actions of a corporation cannot be imputed to corporate officers for purposes of personal jurisdiction.

As the court explained, New York does not follow this doctrine:

Messrs. Hallengren’s and Miller’s main argument appears to be that jurisdiction over the individual officers of a corporation may not be based merely on jurisdiction over the corporation. Messrs. Hallengren and Miller misapprehend New York law and plaintiffs’ allegations.

New York has rejected the fiduciary shield doctrine for purposes of analyzing jurisdiction. See Kreutter v. McFadden Oil Corp., 71 N.Y.2d 460, 472 (1988). Jurisdiction can be exercised over officers for their actions on behalf of a company. The McFadden case is particularly instructive. In McFadden, an individual defendant (acting as a corporate agent) had not physically entered New York, but had acted on behalf of non-domiciliary corporations transacting business in New York, specifically the purported sale-leaseback of an oil rig with plaintiff. The court held that the agent represented two corporations during their participation in purposeful corporate acts in this State, and if he acted improperly in representing them, the fact that he acted for one or both of the corporations should not necessarily relieve him from responding to plaintiffs’ claims against him.

Accordingly, actions that the individual defendants took as corporate agents can be taken into account when deciding if New York can assert personal jurisdiction over them.

Posted: September 23, 2014

Reverter Provision Unenforceable if not Recorded within 30 Years; Action for Injunctive Relief or Money Damages can Proceed Regardless

On August 21, 2014, Justice Grays of the Queens County Commercial Division issued a decision in The Roman Catholic Diocese of Brooklyn, N.Y. v. Christ the King Regional High School, 2014 NY Slip Op. 32389(U), granting a motion to dismiss in part.

In 1976, the plaintiff Diocese of Brooklyn conveyed real estate to the defendant by deed, which provided that the defendant would retain the property “so long as the grantee continues the operation of a Roman Catholic High School upon the premises described herein, upon the cessation of which [title] shall revert to the grantor.” A simultaneously-executed agreement contained similar provisions, including provisions that the defendant would use the entire property only for a Catholic high school, and providing for automatic reverter if the plaintiff ceased to “operate said high school.”

In 2010, the defendant leased part of its property to a non-sectarian charter middle school. When the Diocese objected, the defendant asserted that the reverter was unenforceable. The Diocese then commenced the action, seeking declaratory judgments that the reverter was enforceable and also that the defendant had breached the contract, and the defendant moved to dismiss.

Judge Grays dismissed the first cause of action and held that the reverter was unenforceable because of “plaintiff’s failure to record a declaration of intention to preserve the restriction within the time specified therefor in Real Property Law § 345.” RPL 345 requires such a provision to be recorded within 30 years, which the Diocese failed to do. Judge Grays also rejected the Diocese’s argument that RPL 345 barred only the reverter in the deed, and not the reverter in the agreement, holding that RPL 345 applies to all reverters “regardless of the manner in which they came into being.”

On the other hand, Judge Grays refused to dismiss the second cause of action. She found that the language in the agreement regarding the use of the property “creates a restriction on use without a reversionary right that is distinct from the condition subsequent . . .” and that RPL 345 permits an action for injunctive relief or money damages to enforce such a covenant. Judge Grays also refused to apply—at least on the motion to dismiss—the general rule that an agreement of sale merges into a deed and cannot be enforced after closing of title:

In view of the language of the agreement showing the parties’ purpose in entering into the agreement, and considering that the obligation at issue could only be performed after the closing of title and that the agreement was executed the same date as the deed, the documentary evidence proffered does not demonstrate the absence of issues of fact as to whether the parties intended the use restriction to survive the closing.

Judge Grays rejected the argument that the statute of limitations in RPAPL 612 barred the second cause of action, because RPAPL only applies to claims for reverter, and that the six-year contract statute of limitations applied. Because the specific breach complained of—leasing part of the property to the charter school—happened in 2010, the Diocese was within the time limit.

Posted: September 22, 2014

Federal Arbitration Act Does Not Apply to California Insurance Law Requiring Arbitration Agreements to be Filed With State

On September 11, 2014, the First Department issued a decision in Matter of Monarch Consulting, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA., 2014 NY Slip Op. 06158, addressing the interplay between the Federal Arbitration Act’s preemption of state rules invalidating arbitration agreements and the McCarran-Ferguson Act, 15 U.S.C. § 1011, which prevents federal statutes from preempting state laws “regulating the business of insurance,” unless the statute “specifically relates to the business of insurance.”

In Matter of Monarch Consulting, an insurance carrier sought to enforce arbitration provisions in payment agreements collateral to workers’ compensation insurance policies. The policyholders argued that the arbitration provisions were unenforceable because the payment agreements had not been filed with the California Division of Insurance, as required by California law. Ordinarily, notwithstanding state laws to the contrary, the Federal Arbitration Act requires that disputes concerning the validity of a contract containing an arbitration provision (as opposed to a challenge to the validity of the arbitration clause alone) are to be decided by the arbitrators in the first instance, rather than the courts. In this case, the analysis was complicated by the McCarran-Ferguson Act, which, in an effort to preserve the supremacy of the states in regulating the insurance industry, establishes a rule of “reverse preemption”: i.e., that no federal statute “shall be construed to invalidate, impair or supersede any law by any State for the purpose of regulating the business of insurance,” unless the federal statute “specifically relates to the business of insurance.” The First Department held that “applying the FAA to mandate arbitration in this case would, in fact, invalidate, impair, or supersede the California Insurance Code. Therefore, the McCarran-Ferguson Act prevents the FAA from preempting the Code.” The Court explained:

As noted above, the McCarran-Ferguson Act was an attempt to assure that the activities of insurance companies in dealing with their policyholders would remain subject to state regulation. Courts have established a four-part test to determine whether the McCarran-Ferguson Act precludes application of a federal statute (in this case, the FAA). Under this test, a federal statute is precluded if: (1) the statute does not specifically relate to the business of insurance; (2) the acts challenged under the statute constitute the business of insurance; (3) the state has enacted laws regulating the challenged acts; and (4) the state laws would be invalidated, impaired, or superseded by application of the federal statute.

First of all, the FAA does not specifically regulate the business of insurance, and an act specifically relating to the business of insurance is the only type of federal legislation that can preempt state insurance law under McCarran-Ferguson. Furthermore, application of the FAA would modify California law because it would mandate arbitration even though National Union did not, as required by California law, file the payment agreements, and the payment agreements, in turn, contained the arbitration clauses.

* * *

While the California Insurance Code § 11658 does not provide any prohibition against arbitration, enforcing the arbitration clause in this case would nonetheless undermine the goals of California law relating to workers’ compensation insurance by enforcing the arbitration provision in a payment agreement that National Union failed to file. Indeed, the filing requirements are a fundamental underpinning for California’s regulation of workers’ compensation insurance, and those filing requirements are intended largely to permit review of arbitration provisions — provisions, as we noted above, with which the CDI has stated that it is particularly concerned.

(Internal quotations, elision and citations omitted.)

Justice Gische dissented in an opinion joined by Justice Manzanet-Daniels. The dissenters concluded that application of the FAA to require arbitration did not “impair” California insurance law, and therefore “the arbitrators, and not the court, should decide the gateway issue of whether the Payment Agreements containing the arbitration clauses are enforceable”:

Neither California Insurance Code § 11658, nor any other provision of the California Workers’ Compensation Laws, provide an express or implied prohibition against arbitration in insurance disputes. . . .

Relatedly, arbitration does not impair the California legal requirement that workers’ compensation insurance policies must be filed, thereby providing the Commissioner of Insurance with an opportunity to review the policies, because California law does not restrict the power of an arbitrator to address whether the Payment Agreements in these cases were required to be filed, and if so, what the consequences for the failure to file the agreements would be.

(Citations omitted).

Matter of Monarch Consulting is second recent First Department Decision on commercial arbitration that is likely headed to the Court of Appeals, given the 2-justice dissent at the First Department. On August 25, we blogged about the Court’s decision in In re Flintlock Construction Services, LLC v. Weiss, NY Slip Op 05818, which held (by a 3-2 vote) that a choice of law provision providing that the parties’ agreement was to be “construed and enforced” in accordance with New York law was not sufficient to invoke the state’s public policy against the imposition of punitive damages in a private arbitration, and therefore, the issue of punitive damages could be submitted to the arbitrators. We will continue to follow both of these cases.

Posted: September 21, 2014

Assignee of Notes for Purposes of Collection Only Lacks Standing

On September 16, 2014, Justice Friedman of the New York County Commercial Division issued a decision in Cortlandt St. Recovery Corp. v. Hellas Telecom., S.A.R.L., 2014 NY Slip Op. 24268, discussing the standing of an assignee of a note to bring an action to collect on the note.

In Cortlandt St. Recovery Corp., a set of four related actions concerning the payment of “notes issued in public offerings,” the defendant moved to dismiss the complaint of plaintiff “Cortlandt Street Recovery Corp. (Cortlandt), an assignee for collection,” on the ground that it lacked standing. The trial court both granted the motion and denied Cortlandt’s motion to amend, explaining: (more…)

Posted: September 20, 2014

First Department Reverses Trial Court Discovery Order

On September 18, 2014, the First Department issued a decision in MSCI Inc. v. Jacob, 2014 NY Slip Op. 06239, reversing a trial court order limiting discovery.

In MSCI Inc., the First Department acknowledged that “[a] trial court is vested with broad discretion in its supervision of disclosure,” that “deference is afforded to the trial court’s discretionary determinations regarding disclosure,” and that the First Department “rarely and reluctantly invoke[s it] power to substitute [its] own discretion for that of the motion court.” (Internal quotations and citations omitted). However, it noted, the First Department “is vested with the power to substitute its own discretion for that of the motion court, even in the absence of abuse.”  (Internal quotations and citations omitted) (emphasis added).  That is what it did in MSCI Inc.

The details of the discovery dispute in MSCI Inc. (a dispute over trade secrets involving computer source code) are not relevant for this post. The point of this post is simply to note that while a long line of cases show great Appellate Division deference to trial court discovery rulings, the Appellate Division nonetheless continues to exercise its power to substitute its discretion for the trial court’s in discovery disputes.

Posted: September 19, 2014

Transcripts and Videos of Arguments in the Court of Appeals for the Week of September 8, 2014, Now Available

On September 8, 2014, we noted a case of interest from the oral arguments for the week of September 8, 2014:

  • No. 156Ellington v. EMI Music Inc. (regarding the interpretation of the provisions of a royalty agreement between the family of Duke Ellington and music publishers concerning the allocation of revenues from foreign publication of Ellington’s music). See the transcript and the video.
Posted: September 18, 2014

Enforcement of Judgment Not Stayed Pending Appeal When Undertaking Not Filed With County Clerk

On September 4, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Vintage Flooring & Tile, Inc. v DCM of NY LLC, 2014 NY Slip Op 51376(U), declining to recognize a stay of enforcement of a judgment under CPLR 5519(a)(2) where the defendant failed to comply with the formal requirements for an undertaking under Article 25 of the CPLR.

In Vintage Flooring, the defendant (the general contractor on a construction project at the Kings Plaza Mall in Brooklyn) brought an order to show cause seeking an automatic stay of a judgment pending appeal, under CPLR 5519(a)(2), based on a undertaking that was served on the plaintiff but never filed with the Clerk of the Court. Justice Demarest denied the motion, explaining:

Pursuant to CPLR 5519(a)(2), service upon the adverse party of a notice of appeal [for a money judgment] stays all proceedings to enforce the judgment or order appealed from where an undertaking for that sum is given. Pursuant to CPLR 2505, an undertaking together with any affidavit required by [Article 25 of the CPLR] shall be filed with the clerk of the court in which the action is triable, or, upon an appeal, in the office where the judgment or order of the court of original instance is entered, and a copy shall be served upon the adverse party. The undertaking is effective when so served and filed.

In opposition to the Order to Show Cause, petitioner argues that the respondent has not shown proof that it ever filed the Undertaking with the Kings County Clerk. The court takes judicial notice that the Undertaking was not filed with the Kings County Clerk under the present index number. As respondent has not demonstrated any proof that the Undertaking was ever filed with the clerk of the court pursuant to CPLR 2505, the Undertaking was never effective and, therefore, there was no automatic stay pursuant to CPLR 5519(a)(2).

(Internal quotations and citations omitted).

An appeal bond can buy a defendant a reprieve from enforcement of a judgment. However, as this case shows, to be effective, all the requirements of the CPLR must be satisfied.