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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: February 8, 2014

Justice Kapnick Gives Qualified Approval to $8.5 billion Settlement of Mortgage-Backed Securities Claims

On January 31, 2014, former New York County Commercial Division Justice Barbara Kapnick (now sitting on the First Department) issued a long-awaited decision in Matter of Bank of New York Mellon, 2014 NY Slip Op. 30309(U), approving in most respects an $8.5 billion settlement between Bank of New York Mellon, as trustee of trusts holding mortgage-backed securities issued by Countrywide Financial Corp., and Bank of America, which acquired Countrywide in 2008.

Upon reaching the settlement, which resolved claims for breaches of representations and warranties concerning the underlying mortgages and violations of prudent loan servicing obligations, Bank of New York sought judicial approval of the settlement under Article 77 of the CPLR, which authorizes a special proceeding “to determine a matter relating to any express trust.” A group of institutional investors intervened to support the settlement, and various other investors intervened in opposition and/or to obtain more information about the settlement. (Our firm represented a group of investors who intervened in the proceeding and participated in discovery.) Following extensive discovery and motion practice, Justice Kapnick, on her final day in the Commercial Division, largely approved the settlement as within the bounds of the trustee’s “reasonable judgment.” She did, however, find that the trustee abused its discretion on one point—settling without adequate investigation of potential repurchase claims for modified mortgage loans. This caveat has created significant uncertainty, since the original settlement was contingent on Bank of New York obtaining judicial approval of its actions. The proceeding is now assigned to Justice Scarpulla, who, Reuters reports, has stayed Justice Kapnick’s decision from taking effect until February 19. Given the amounts at stake, further litigation in the trial court and on appeal can be expected.

Posted: February 7, 2014

Defendants Succeed in Limiting Most of the Categories of Damages in Lawsuit; Punitive Damages Claim Survives

On January 23, 2014, Justice Marks of the New York County Commercial Division issued a decision in Johnson v. Rose, 2014 NY Slip Op. 30262(U), limiting the categories of damages available in that action.

In Johnson, the plaintiffs brought “fraud, legal malpractice and other claims” against a law firm and two of its partners “arising from plaintiffs’ participation in a failed tax shelter.” Among the issues addressed in the defendants’ motion to dismiss was the extent of the damages the plaintiffs could claim. While the court did not dismiss the plaintiffs’ fraud claim, it did limit the categories of damages available on that claim, explaining:

Plaintiffs assert a wide variety of damages in connection with their fraud claim, including a return of the fees they paid to engage in the transaction, and reimbursement of the penalties assessed against them by the IRS. Defendants move to dismiss or strike plaintiffs’ request for back taxes and interest, lost opportunity, lost dividends, stock appreciation and punitive damages in connection with the [fraud claim].

In a fraud action, a plaintiff may recover only the actual pecuniary loss sustained as a direct result of the wrong. In other words, under New York’s longstanding out-of-pocket rule, damages for fraud are intended to compensate plaintiffs for what they lost because of the fraud, not for what they might have gained absent the fraud.

Plaintiffs cannot obtain a recovery of back taxes. Plaintiffs have had the use and benefit of the proceeds from selling their stock, and presumably owe taxes on whatever profit they have made. They are not entitled to the windfall of reimbursement for back taxes. Nor may plaintiffs obtain reimbursement for interest they paid to the IRS, as interest on taxes untimely paid does not constitute damages sustained by plaintiff but represents merely a payment to the IRS for his use of the money during the period of time when he was not entitled to it. Accordingly, plaintiffs’ request for back taxes and interest is disallowed. Compl., 160-161, l65(iii), and l66(b). The Court notes that these paragraphs are not to be stricken in their entirety, as they also contain a request for penalties imposed by state and federal tax authorities.

Plaintiffs’ claims for damages stemming from other speculative uses of their monies, such as lost opportunities for investment, stock appreciation and dividends, are also unavailable. Accordingly, these requests are disallowed and paragraphs 162 through 164, and subparagraphs 165(iv), 165(v), 166(d), and 166(e) are stricken.

Punitive damages are not available in the ordinary fraud and deceit case. It is not sufficient that a defendant’s wrongdoing was intentional; it must also evinc[e] a high degree of moral turpitude that demonstrates such wanton dishonesty as to imply a criminal indifference to civil obligations. For the purposes of a motion to dismiss, the Court must take the allegations of the
complaint as true. Plaintiffs have sufficiently alleged that defendants’ conduct was not directed solely at plaintiffs, but was part of a larger fraudulent tax shelter scheme targeting hundreds of clients to whom defendants owed a fiduciary duty. Moreover, construed in the light most favorable to plaintiffs, the allegations further suggest that defendants took advantage of confidential financial information of clients in selecting their targets, actively sought to dissuade clients from seeking independent legal or financial advice about the transaction, and used their status as attorneys to cloak the scheme in seeming legality. At this stage of the litigation, it is not necessary for plaintiffs to prove that they will be entitled to punitive damages; it is sufficient that plaintiffs have adequately alleged morally culpable conduct directed at the public. The Court therefore declines to strike plaintiffs’ request for punitive damages at this time.

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

This decision is yet another example of the use of a motion to dismiss to limit the potential damages in a lawsuit. Here, the defendants were not able to get the claim for punitive damages stricken at the motion to dismiss stage, but otherwise they were able significantly to limit their downside in the litigation.

Posted: February 6, 2014

Motion to Dismiss May be Used to Limit Damages Theories Even if Claims Survive

On February 5, 2014, the Second Department issued a decision in Hecht v. Andover Associates Management Corp., 2014 NY Slip Op. 00632, discussing the dismissal of damages claims on a motion to dismiss.

Hecht is one of the myriad cases relating to the Bernard Madoff Ponzi scheme. One of the defendants in Hecht, an independent auditor, moved to dismiss, including moving to dismiss the claims to the extent they sought certain damages. The Second Department explained that

damages may properly be limited on a motion to dismiss. When a party seeks damages for lost profits, the profits may not be imaginary. It is undisputed that the profits reported by Madoff were completely imaginary. The fictitious profits never existed and, thus, [the plaintiff] did not suffer any loss with respect to the fictitious sum.

(Internal quotations and citations omitted).

This decision reminds us of the option of using a motion to dismiss to limit the potential damages for which a defendant might be liable.

Posted: February 5, 2014

New York County Case Assignment Changes

The elevation of New York County Commercial Division Justice Kapnick to the First Department has resulted not just in the assignment of Justice Scarpulla to the Commercial Division, it also has resulted in the reassignment of Commercial Division and general assignment cases. The Court’s notice regarding these changes is summarized below:

  • Justice Kapnick began her assignment to the First Department effective February 3, 2014.
  • Justice Kapnick has been succeeded in Commercial Division Part 39 by Justice Scarpulla. Commercial Division cases in Part 39 assigned to Justice Kapnick will be reassigned Justice Scarpulla. Unless parties are notified otherwise, Justice Scarpulla will maintain all dates previously scheduled by Justice Kapnick.
  • General Assignment cases assigned to Justice Scarpulla in Part 19 shall be reassigned as soon as possible to Justices Bannon (Part 42), Moulton (Part 57), and Wright (Part 47).
  • General Assignment cases assigned to Justice Kapnick in Part 39 and to Justice Oing in Part 48 are being reassigned to General Assignment Justices generally.
Posted: February 5, 2014

Opportunity to Comment on Proposed Change to Commercial Division Rules

The Office of Court Administration has asked for public comment on yet another proposed change to the rules of the Commercial Division. In addition to the four proposed rule changes about which we posted on January 1, 2014 (the comment period already has closed for two of the four proposals), the court also is seeking public comment on the proposed creation of a Special Masters pilot program in the Commercial Division of the Supreme Court.

Generally, proposal is that:

one or more Commercial Division Justices would participate in an 18-month pilot involving referral of complex discovery issues to a pool of Special Masters comprised of seasoned former practitioners no longer active in the practice of law. Special Masters would be asked to hear and report to the court on discovery issues, and would serve pro bono. The parties would be required to consent to referral of discovery matters to a Special Master and bear any costs related thereto. Procedures would be instituted to ensure the random assignment of Special Masters and to identify and avoid obvious conflicts.

Email comments to CommDivMasters@nycourts.gov by March 31, 2014.

Posted: February 5, 2014

Fact Witness Not Allowed to Channel Expert’s Opinion

On January 22, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Wathne Imports, Ltd. v. PRL USA, Inc., 2014 NY Slip Op. 30261(U), excluding testimony of the plaintiff’s chief executive and co-owner on damages for lack of personal knowledge.

In Wathne Imports, the plaintiff held exclusive licenses to sell luggage bearing various Polo and Ralph Lauren trademarks. When the defendants discontinued some of the lines, the plaintiff sued for its lost profits. The lost profits were, in turn, the subject of this opinion; after being unable to offer a qualified expert witness on damages, the plaintiff turned to its chief executive, Berge Wathne, claiming that she had sufficient personal knowledge from her day-to-day job that she could testify to lost profits as a lay witness.

Relying on a case from the Third Circuit, Lightning Lube v. Witco Corp., 4 F.3d 1153 (3d Cir. 1993), the court initially permitted Ms. Wathne to testify as a lay witness. However, after her deposition, the defendants again moved to preclude her testimony. The court granted their motion, finding that

Ms. Wathne’s testimony relies heavily on data and calculations provided to her by an expert, Glenn Newman. While much of the information provided is empirical data regarding sales, the calculation of Profit Margin and, to some extent, the calculation of Lost Sales, is a subjective calculation requiring specialized knowledge. In fact, the 25% profit margin to which Ms. Wathne seeks to testify, came entirely from Newman’s calculations.

The court distinguished Lightning Lube—where the business owner also relied on documents provided by his accountant—on the grounds that

the owner in Lightning Lube had demonstrated that he was capable of independently performing the calculation . . . . Conversely, Ms. Wathne’s testimony demonstrates that she lacks personal knowledge of these calculations and would not be capable of making the subjective calculations independent of Newman’s reports and counsel’s guidance.

Accordingly, the court excluded Ms. Wathne’s testimony because it “would merely be a conduit for the opinions of experts not subject to cross examination.”

For practitioners, this opinion shows that even an apparently qualified and knowledgeable lay witness may not be able to testify in the place of an expert. It is also noteworthy that the court relied on a federal appellate decision in initially permitting the testimony, and this should be kept in mind when researching precedents for commercial cases.

Posted: February 4, 2014

Landlord’s Alleged Role in Frustrating Achievement of Contract’s Purpose Allows Claim for Breach of Duty of Good Faith and Fair Dealing to Survive Motion to Dismiss

On January 22, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Gelita, LLC v. 133 Second Ave., LLC, 2014 NY Slip Op. 50064(U), refusing to dismiss a claim for breach of the duty of good faith and fair dealing.

Among the many claims brought by the plaintiff that the defendants sought to dismiss was a claim for breach of the duty of good faith and fair dealing. The court declined to dismiss the claim, explaining:

The seven causes of action asserted against the Owner all attempt to arrive at the same legal conclusion — that, as a result of the Premises being unfit for its intended use, plaintiffs are absolved from paying the balance of rent due under the Lease. The Owner’s primary defense is that the Lease explicitly places the burden of building out the Premises and ensuring the suitability of its intended use on plaintiffs’ shoulders. Moreover, as discussed at length in the June Order, the Lease also explicitly disclaims any liability on the part of the Owner for problems arising from such build out or related legal issues, such as regulatory compliance. . . . .

The covenant of good faith and fair dealing in the course of performance is implied in every contract. This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. While the duties of good faith and fair dealing do not imply obligations inconsistent with other terms of the contractual relationship,’ they do encompass any promises which a reasonable person in the position of the promisee would be justified in understanding were included. The duty of good faith and fair dealing may be breached when a party to a contract acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party of the right to receive the benefits under their agreement. However, a claim for breach of the implied covenant of good faith and fair dealing cannot substitute for an unsustainable breach of contract claim. In other words, the covenant of good faith and fair dealing cannot be construed so broadly as to effectively nullify other express terms of the contract, or to create independent contractual rights. Simply put, a plaintiff cannot contend that a defendant has a good faith obligation under a contract when that obligation is expressly disclaimed in the contract itself.

(Internal quotations and citations omitted) (emphasis added).  The court went on to explain that there was a question of fact whether

the Owner [had] committed bad acts in connection with the construction job . . . . Had the Owner done nothing, and left plaintiffs to their own devices, there would be no breach. However, if the Owner had a role in the alleged shoddy construction, the Owner would have played a part in frustrating plaintiffs’ ability to use the Premises and hence would have prevented plaintiffs from reaping the fruits of the contract. . . . Discovery is needed to determine . . . the actual scope of the Owner’s involvement in and responsibility for the alleged shoddy construction.

It is rare to see a claim for the breach of the duty of good faith and fair dealing survive a motion to dismiss. This decision is an example of (alleged) facts establishing such a claim.

Posted: February 3, 2014

Transcripts and Videos of Arguments in the Court of Appeals for the Weeks of January 6 and January 13 Now Available

Transcripts and videos of arguments in the Court of Appeals for the weeks of January 6 and January 13 are now available on the Court of Appeals website.

On January 9, 2014, we noted three cases of interest from the oral arguments for the week of January 6:

  • Docket No. 2: Executive Plaza, LLC v. Peerless Insurance Company (addressing, on a certified question from the Second Circuit, whether a lawsuit under a fire insurance policy is barred by a policy provision that requires any lawsuit be brought within two years of the damage, when a contractual condition precedent to suit could not reasonably be accomplished within two years). The oral argument transcript and video for this case are not available due to “technical difficulties.”
  • Docket No. 8: Biotronik A.G. v. Conor Medsystems Ireland, Ltd. (examining whether the relief sought in an exclusive distributor’s breach of contract claim against a manufacturer for lost profits from sales to third parties constitutes “consequential damages,” and therefore barred under the terms of the distribution agreement, or instead “general damages” given that the distributor’s resale to third parties “was the very purpose of the Agreement”).  See the transcript and the video.
  • Docket No. 11: Voss v. The Netherlands Insurance Company (To be argued Thursday, January 9, 2014) (considering whether the doctrine that an insurance policyholder is “charged with conclusive presumption of knowledge of the terms and limits” of the policy can be invoked to defeat a claim against an insurance broker for negligence in advising the insured as to the adequate amount of insurance).  See the transcript and the video.

On January 14, 2014, we noted four cases of interest to Commercial Division practitioners from the oral arguments for the week of January 13:

  • Docket No. 21: Country-Wide Insurance Company v. Preferred Trucking Services Corp. (concerning the timeliness of a liability carrier’s disclaimer of coverage based on the insured’s non-cooperation in the defense).  See the transcript and the video.
  • Docket No. 24: Melcher v. Greenberg Traurig, LLP (addressing when plaintiff’s claim for “attorney deceit” under Judiciary Law § 487 accrued and therefore whether the claim was timely under the applicable 3-year statute of limitations).  Argument has been rescheduled to February 14, 2014.
  • Docket No. 25: QBE Insurance Corporation v. Jinx-Proof Inc. (concerning whether an insurance carrier’s reservation of rights letters served “as effective written notices of disclaimer” under New York law).  See the transcript and the video.
  • Docket No. 27: Landauer Limited v. Joe Monani Fish Co. (addressing whether an English default judgment is enforceable in New York, despite technical deficiencies in service under CPLR 311, where the parties’ contract provided that any disputes would be litigated in English courts and the defendant had actual notice of the English action before the default judgment was entered).  See the transcript and the video.
Posted: February 3, 2014

Arbitration Clause in E-Mailed Terms and Conditions to Trading Account Agreement Not Sufficient to Bind Parties to Arbitration

On January 30, 2014, the First Department issued a decision in Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc., 2014 NY Slip Op. 00587, affirming a trial court’s refusal to compel arbitration.

In Basis Yield Alpha Fund, the defendant moved to compel arbitration based on a “document entitled ‘General Terms and Conditions’ that was attached to a November 10, 2006 email” to the plaintiff. However, the attachment was never signed by the plaintiff. The First Department affirmed the trial court’s refusal to compel arbitration, explaining:

[The defendant] . . . fails to satisfy the heavy burden of demonstrating that arbitration should be compelled pursuant to CPLR Article 75. As the Court of Appeals has stated, a party will not be compelled to arbitrate absent evidence which affirmatively establishes that the parties expressly agreed to arbitrate their disputes. The agreement must be clear, explicit and unequivocal. An arbitration clause in an unsigned agreement may be enforceable but only when it is evident that the parties intended to be bound by the contract.

Here, there is a substantial question as to whether the parties agreed to arbitrate. In support of its motion to compel arbitration, [the defendant] relied on a mandatory arbitration clause set forth in a document entitled “General Terms and Conditions” that was attached to a November 10, 2006 email. [The defendant] claims to have sent the email to [the plaintiff] in connection with the latter’s opening of a trading account with [the defendant]. It is, however, undisputed that the document was never signed by anyone from [the plaintiff]. More importantly, the director of [the plaintiff’s] managing entity swore in an affidavit that [the plaintiff] never entered into the arbitration agreement [the defendant] proffers.

(Internal quotations and citations omitted).

This decision is a cautionary tale regarding the need to observe formalities in a world of e-mail and Internet communications. There is a substantial body of law regarding the binding effect of e-mail agreements, electronic agreements and the like. Still, when you need to be sure, get a signature.