Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: September 4, 2014

Court of Appeals Accepts Certified Questions Regarding Interpretation of Oil and Gas Leases

On August 28, 2014, the Court of Appeals accepted two certified questions from the Second Circuit in Beardslee v. Inflection Energy, LLC, 12-4897-CV, a case involving the interpretation of oil and gas leases. At issue in Beardslee is the interplay between two provisions in the leases: (1) the so-called “habendum” clause, which sets the duration of the lease, and (2) a force majeure clause, which concerns delays or interruptions in drilling. The habendum clauses at issue provided for a five year initial term, and an option for a secondary term, which would extend “as long thereafter” as the land “is operated by the Lessee in the production of oil or gas.” The force majeure clauses stated: “If and when drilling . . . [is] delayed or interrupted . . . as a result of some order, rule regulation . . . or necessity of the government, or as the result of any other cause whatsoever beyond the control of the Lessee, the time of such delay or interruption shall not be counted against the Lessee, anything in this lease to the contrary notwithstanding.”

After the expiration of the five-year term, the lessee had still not commenced drilling because the only “commercially viable” method of drilling in the property—high-volume hydraulic fracturing, or “fracking”—was subject to a regulatory moratorium in New York (although permits for other unprofitable methods were in theory available). The lessees took the position that the regulations amounted to a force majeure event under the leases, and that the force majeure clause extended the term in the habendum clause. The landowners brought a declaratory judgment action in the Northern District of New York, alleging that the leases expired by their terms after five years because the lessees had not begun drilling. The district judge granted summary judgment to the landowners, declaring the leases expired.

Finding that the case raised novel and important questions of New York law that had not been addressed by the Court of Appeals, or any lower courts, the Second Circuit certified two questions to the Court of Appeals:

1. Under New York Law, and in the context of an oil and gas lease, did the State’s Moratorium amount to a force majeure even?

2. If so, does the force majeure clause modify the habendum clause and extend the primary terms of the leases?

As the Second Circuit noted, the outcome of this case could have “potentially great commercial and environmental significance to State residents and businesses.” We will continue to follow this case as it makes its way through the Court of Appeals.

Posted: September 3, 2014

First Department Decisions Address Use of Emails As “Documentary Evidence” For Motion to Dismiss

On August 28, 2014, the First Department issued decisions in Amsterdam Hospitality Group, LLC v. Marshall-Alan Assoc., Inc., 2014 NY Slip Op. 06007, and Art & Fashion Group Corp. v. Cyclops Production, Inc., 2014 NY Slip Op. 06008, addressing the use of email correspondence as “documentary evidence” for purposes of a motion to dismiss.

One unique feature of New York State motion practice is that, in addition to the motion to dismiss for failure to state a cause of action, the CPLR permits a motion to dismiss on the “ground that . . . a defense is founded upon documentary evidence.” CPLR 3211(a)(1). Amsterdam Hospitality Group and Art Fashion Group are commercial cases (the former a fraud action brought against an executive search firm and the latter an action for breach of an oral joint venture agreement) in which the defendants filed 3211(a)(1) motions based on email correspondence between the parties that allegedly refuted the claims. As the majority observed in Amsterdam Hospitality Group, the New York courts “have grappled with the issue of what writings do and do not constitute documentary evidence, since the term is not defined by statute”:

Judicial records, such as judgments and orders, would qualify as documentary, as should the entire range of documents reflecting out-of-court transactions, such as contracts, deeds, wills, mortgages, and even correspondence. (David D. Siegel, Practice Commentaries, McKinney’s Cons Laws of NY, Book 7B, CPLR C3211:10 at 22). To qualify as “documentary,” the paper’s content must be “essentially undeniable and . . ., assuming the verity of [the paper] and the validity of its execution, will itself support the ground on which the motion is based. (Neither the affidavit nor the deposition can ordinarily qualify under such a test)” (id.).

* * *

As Professor Siegel recognizes, “even correspondence” may, under appropriate circumstances, qualify as documentary evidence. In our electronic age, emails can qualify as documentary evidence if they meet the “essentially undeniable” test.

(Citations omitted) (emphasis added).

In Amsterdam Hospitality Group, the court denied a 3211(a)(1) motion to dismiss claims for fraudulent and negligent misrepresentation, concluding that the emails submitted by the defendant in support of the motion were not sufficiently conclusive to “utterly refute” the plaintiff’s factual allegations:

The emails in this particular case, aside from being not otherwise admissible, are not able to support the motion to dismiss. The “documentary evidence” here . . . do not, standing on their own, conclusively establish a defense to the claims set forth in the complaint. While they may indicate that Bowd put defendants [N.B. it appears this should read “plaintiff”] on notice of potential employment restrictions, other letters indicate that Bowd had, in fact, accepted the offer of employment days before he sent the emails in question. Because defendant has not “negated beyond substantial question” the allegation of reasonable reliance, and the submissions raise factual issues concerning the circumstances and communications underlying plaintiff’s hiring of Bowd, it cannot be concluded that plaintiff has no causes of action for fraudulent and negligent misrepresentation.

Justice DeGrasse dissented, concluding that “documentary evidence consisting of an email sent by Bowd to plaintiff 19 days before Bowd was hired negates the element of justifiable reliance as a matter of law.”

In Art Fashion Group, the First Department unanimously affirmed the denial of a motion to dismiss a claim for breach of an oral joint venture agreement, ruling that the emails submitted by the defendants in support of the motion did not “definitively refute plaintiffs’ claim”:

There is no merit to defendants’ assertion that the emails show, as a matter of law, that no joint venture agreement was reached and that the parties were merely engaging in preliminary negotiations. Even where the parties acknowledge that they intend to hammer out details of an agreement subsequently, a preliminary agreement may be binding.

Although some parts of the emails suggest that all of the details of the joint venture were not fully agreed upon, the emails, when read in their entirety, do not conclusively refute plaintiffs’ allegations that an oral joint venture agreement had in fact been reached. For example, a November 3, 2009 email states that “359 is already operating in AFG’s [office] space” (emphasis added) and was expected to be “cashflow positive by the end of 2009.” This same email talks about “formalizing the establishment of . . . 359 Productions,” suggesting that it was already in existence. Furthermore, in a May 1, 2010 email, plaintiffs’ representative Federico Pignatelli addresses defendant Michael Jurkovac as “[p]artner,” makes reference to “stabiliz[ing] the [c]ompany,” and expresses concern about two managerial changes within the past year.

In a May 13, 2010 email, written six months after the initial email submitted by defendants, Pignatelli informs Jurkovac of his decision “not to proceed anymore with 359P.” Contrary to defendants’ contention, this statement does not unequivocally establish that no joint venture agreement had been reached in the first place. It can just as easily be read as indicating Pignatelli’s decision to terminate an already-established joint venture. The email also discusses 359P’s overhead and notes issues about the extent of the work that was brought into 359P, both of which are consistent with plaintiffs’ claim that a joint venture had been formed. The emails also make reference to other communications, not produced by defendants, identifying issues with 359P’s staff. Thus, it is clear that the emails submitted present only a partial picture of the interactions between the parties.

Finally, although defendants contend that they did not intend to proceed with the alleged joint venture until they executed a formal written agreement, no such express reservation is contained in any of the emails. Because the emails in question fail to definitely refute plaintiffs’ claim that the parties had reached an oral joint venture agreement, dismissal at this stage is not warranted.

(Citations omitted) (emphasis added).

Motions to dismiss based on “documentary evidence” are a useful tool for seeking early dismissal of infirm claims that because of artful pleading may not be easily susceptible to a motion to dismiss based solely on the face of the complaint. However, as these cases illustrate, CPLR 3211(a)(1) is not a means to file an accelerated summary judgment motion. Although in appropriate circumstances email correspondence can form the basis for a motion to dismiss based on “documentary evidence,” where the correspondence is inconclusive or requires further factual development, the motion should be denied.

Posted: September 2, 2014

Second Department Affirms Trial Court Decision Modifying Settlement Agreement

On August 27, 2014, the Second Department issued a decision in Mochkin v. Mochkin, 2014 NY Slip Op. 05963, affirming a trial court decision modifying a settlement agreement that had been entered on the record before it.

In Mochkin, the parties settled a dispute between them “in a stipulation of settlement dated July 25, 2011, which was so-ordered by the Supreme Court.” The stipulation “provided that the Supreme Court would retain jurisdiction ‘in all matters related hereto.'” When the defendant was unable to perform the agreement because the plaintiff had filed a notice of pendency against property involved in the dispute, “the defendant moved for a further extension of time to pay the remaining $700,000,” which the trial court granted. The Second Department affirmed, explaining:

Contrary to the appellant’s contention, the Supreme Court providently exercised its discretion in granting that branch of the defendant’s motion which was to further extend the time for payment of the balance of the settlement funds. A settlement agreement entered into by parties to a lawsuit does not terminate the action unless there has been an express stipulation of discontinuance or actual entry of judgment in accordance with the terms of the settlement. Absent such termination, the court retains its supervisory power over the action and may lend aid to a party who had moved for enforcement of the settlement. Further, CPLR 2004 provides, in pertinent part, that the court may extend the time fixed by any statute, rule or order for doing any act, upon such terms as may be just and upon good cause shown. In addition to the statutory authority, a court has authority under the common law, in its discretion, to grant relief from a judgment or order in the interest of justice, taking into account the equities of the case and the grounds for the requested relief.

Here, the appellant and the defendant executed a stipulation of settlement which was so-ordered by the Supreme Court. It did not contain any provision terminating or discontinuing the action, and no judgment was entered in accordance with its terms. It provided, however, that the Supreme Court would retain jurisdiction in all related matters. Under the circumstances of this case, and pursuant to CPLR 2004 and the court’s common-law supervisory authority, the Supreme Court providently exercised its discretion in granting that branch of the defendant’s motion which was to further extend the time for payment of the balance of the settlement funds provided for in the so-ordered stipulation of settlement dated July 25, 2011.

(Internal quotations and citations omitted).

Posted: September 1, 2014

Court Cites Champerty Law in Denying Motion to Substitute Parties

On August 19, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in Melcher v. Greenberg Traurig LLP, 2014 NY Slip Op. 51296(U), citing New York’s champerty law in denying a motion to substitute parties.

In Melcher, the 74 year-old plaintiff in a Judiciary Law §487 action moved to substitute “a limited liability company, LJBD Recovery LLC (LJBD) for himself as plaintiff” on the ground that “the substitution will avoid delay in prosecuting the case in the event of his death.” The court denied the motion, explaining:

The doctrine of champerty developed to prevent or curtail the commercialization of or trading in litigation. The champerty statutes are intended to prevent the strife, discord and harassment that would be likely to ensue from permitting attorneys and corporations to purchase claims for the purpose of bringing actions thereon. However, in New York, the prohibition of champerty has always been limited in scope and largely directed toward preventing attorneys from filing suit merely as a vehicle for obtaining costs. When an assignment was made after litigation had already begun, courts have allowed a transfer of claims, but prohibited the addition of new claims. The proposed substitution, if allowed, would prejudice the defendants by shifting the risks of litigation to a shell entity, making plaintiff less accessible to discovery, and allowing Melcher, a non-party, to continue to direct the litigation through his alter ego and to collect and retain all of the relevant information and documents. The plaintiff’s rationale for the substitution, to allow the litigation to continue seamlessly in the event of his death, ignores that he is the sole owner and manager of the proposed substitute plaintiff. Plaintiff provides no rationale for how litigation would continue more smoothly with the sole owner and manager of LJBD deceased, than it would with an administrator appointed for a deceased plaintiff. Accordingly, the court declines the invitation to allow the substitution.

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

Posted: August 31, 2014

Contract That Has Consideration When Entered Into Does Not Fail for Lack of Consideration if Circumstances Change

On August 20, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Trilegiant Corp. v. Orbitz, LLC, 2014 NY Slip Op. 24230, declining to dismiss a breach of contract claim for lack of consideration.

In Trilegiant Corp., the plaintiff in a dispute over a services contract moved for summary judgment on three of the defendant’s affirmative defenses. This post focuses on the court’s decision on the defense of lack of consideration:

[The defendant] has raised the affirmative defense of lack of consideration. [It] contends that there had to be consideration for each quarterly termination payment and that [the plaintiff’s] continued use of DataPass is necessary to its claim against [the defendant]. [The defendant] argues that the consideration for the termination payments was supposed to be [the plaintiff’s] forfeit of potential earnings, earnings that [the plaintiff] cannot forfeit if it is not in the business of DataPass.

The law does not support [the defendant’s] argument. It is well settled that an agreement should be interpreted as of the date of its making and not as of the date of its breach. Additionally, if there is consideration for the entire agreement that is sufficient; the consideration supports every other obligation in the agreement. A single promise may be bargained for and given as the agreed equivalent of one promise or of two promises or of many promises. The consideration is not rendered invalid by the fact that it is exchanged for more than one promise.

Considerations of public policy also support this conclusion, because a promisor should not be permitted to renege on a promise either because that specific promise lacks textually designated consideration or because the promisor wants to avoid performance of multiple obligations when the promisee has already performed and has no further obligations concurrent with the promisor’s performance.

While [the defendant] contends that [the plaintiff] has been unable to forfeit earnings from new DataPass customers since it ceased the practice in January 2010, that fact has no bearing on whether there was consideration for the termination payment provision in the MSA. The termination payments were part of the original MSA, and [the plaintiff] is correct when it asserts that the existence of consideration for the MSA itself, whether consisting of either a benefit to the promisor or a detriment to the promisee, is not a disputed material fact in this case.

Additionally, courts do not look to the adequacy of consideration provided that there was consideration, absent fraud or unconscionability. There are no allegations that the MSA was fraudulently agreed upon or that it is unconscionable.

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

Posted: August 30, 2014

Sophisticated Party Cannot Use Lack of Time as Excuse for Failure to Exercise Due Diligence

On August 6, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in Remediation Capital Funding LLC v. Noto, 2014 NY Slip Op. 32157(U), dismissing a fraud claim for failure to show due diligence.

In Remediation Capital Funding , the plaintiffs asserted claims of fraud and fraudulent conveyance in connection with a failed real estate transaction. One of the defendants moved to dismiss. The court granted the motion, holding, among other things, that the plaintiff had failed to show that its reliance on the misrepresentations it alleged was justifiable because it failed to exercise due diligence, explaining:

To make a prima facie claim of fraud, the complaint must allege misrepresentation or concealment of a material fact, falsity, scienter on the part of the wrongdoer, justifiable reliance and resulting injury. Reliance must be found to be justifiable under all the circumstances before a complaint can be found to state a cause of action in fraud.

The essence of the fraud claim is based on the assertion that defendants misrepresented the value of the Properties upon which [the plaintiff] had made the Loan. [The plaintiff] emphasizes that it did not perform any due diligence of its own in assessing the Properties’ value, because [the plaintiff] lacked sufficient time to obtain its own appraisal. This assertion is unavailing as a basis for a finding of justifiable reliance for a sophisticated party . . . .

[The plaintiff] does not dispute the assertion that it had the means to discover the actual value of the Properties by conducling its own appraisal. That it chose not to so because it wanted to participate in a rushed transaction indicates that it willingly assumed the business risk that the facts may not be as represented. [The plaintiff] has not shown, or even alleged, that it was unable to obtain its own appraisal of the value of the Property so as to adhere to its strategy of maintaining a 50% loan-to-value to ensure an equity cushion that would protect it from market downturns. As stated by the Court of Appeals:

If the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing by the exercise of ordinary intelligence the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.

On the face of the complaint [the plaintiff’s] reliance on the alleged misrepresentations by [the moving defendant] was unreasonable as a matter of law. As such, [the plaintiff] has failed to establish reasonable reliance.

. . . Here, . . . the valuation of the Property was not something that was within the particular knowledge of Noto and the other defendants. Nevertheless, [the plaintiff] chose to rely on defendant’s rendition of the value of the Property.

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

Posted: August 29, 2014

Defamation Claim Dismissed Where Statements Were Protected By “Fair Reporting” Privilege

On August 28, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in GEM Holdco, LLC v. Changing World Technologies, L.P., Index No. 650941/2013, ruling that a defamation claim arising from a press release explaining a party’s defenses and anticipated counterclaims in a pending lawsuit was barred by New York’s absolute “fair reporting” privilege.

In GEM Holdco, a lawsuit arising from an investment in a renewable fuel company, the plaintiff issued a press release announcing the filing of an amended complaint. Two hours later, one of the defendants issued its own press release that, in substance, outlined its defenses and anticipated counterclaims in the lawsuit. The plaintiff claimed that the statements in the defendant’s press release were defamatory and amended its complaint again to add a cause of action for defamation. Justice Kornreich dismissed the claim, ruling that the statements in the defendant’s press release were protected by the “fair reporting” privilege set forth in Section 74 of the New York Human Rights Law and could not be the subject of a defamation claim:

It is well settled that public policy mandates that certain communications, although defamatory, cannot serve as the basis for the imposition of liability in a defamation action. When compelling public policy requires that the speaker be immune from suit, the law affords an absolute privilege. The absolute privilege applies to statements uttered in the course of a judicial or quasi-judicial proceeding . . . so long as they are material and pertinent to the questions involved notwithstanding the motive with which they are made. Moreover, the absolute privilege attaches not only to the hearing stage, but to every step of the proceeding in question even if it is preliminary and/or investigatory and irrespective of whether formal charges are ever presented. Whether a statement is at all pertinent to the litigation is determined by an extremely liberal test. A statement made in the course of judicial proceedings is privileged if, by any view or under any circumstances, it may be considered pertinent to the litigation. Additionally, the pertinence of a statement made in the course of judicial proceedings is a question of law for the court, and, in answering that question, any doubts are to be resolved in favor of pertinence.

Plaintiffs, however, argue that the common law absolute ligation privilege does not apply to Ridgeline’s press release because such privilege is inapplicable to out-of-court statements made about a lawsuit. While this is true, section 74 of the New York Civil Rights Law provides for a separate “fair reporting” privilege that covers out-of-court accounts of litigation, such as Ridgeline’s press release.

Ridgeline’s press release, which was issued to indicate its intended course of action with respect to plaintiffs’ first amended complaint discussed in GEM’s press release (issued two hours beforehand), does not make any actual untrue statements of fact. Rather, Ridgeline’s press release outlines its defenses and its intention to assert counterclaims. See Dkt. 166 at 6 (“Ridgeline will pursue civil charges including Fraud, Tortious Interference, and additional claims under the Racketeering in Organized Crime Act . . . and Ridgeline will also show that GEM attempted to extort cash payments from Ridgeline”) (emphasis added). These are inactionable expressions of future intent. That such defenses include allegations of plaintiffs’ fraud does not inherently make the press release actionable. Proving the claims’ underlying merit (or lack thereof) is the very point of this lawsuit. That Ridgeline’s press release may be false does not matter because Ridgeline’s recitation of its accusations is a substantially accurate account of its position in this litigation. Such account is protected by the fair reporting privilege. The fair reporting privilege is not vitiated by the claim that the described allegations have no merit so long as the described allegations actually reflect the defendant’s position in the lawsuit.

(Citations omitted) (emphasis added).

[NOTE: Schlam Stone & Dolan represented the moving defendants in this case]

Posted: August 28, 2014

Acquirer Not Liable for Tortious Interference With Contract of Company it Acquired

On August 4, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in American Water Enterprises Inc. v. Tectura Corp., 2014 NY Slip Op. 32182(U), dismissing a claim for tortious interference with contract.

In American Water Enterprises, the plaintiff asserted a claim for tortious interference with contract against a defendant that was in the process of acquiring Tectura, a company that had a contract with the plaintiff. The court granted the defendant’s motion to dismiss the claim, explaining:

To state a claim for tortious interference with contract, plaintiff must allege (1) existence of a contract between plaintiff and a third party, (2) defendant’s knowledge of the contract, (3) defendant’s intentional inducement of the third party to breach or otherwise render performance impossible, and (4) damages to plaintiff.

[The plaintiff] fails to sufficiently plead the third element, that [the defendant] intentionally interfered with  Tectura’s performance of the contract. [The plaintiff] relies on a statement by one of Tectura’s employees that Tectura’s employees had been told to stop working on the Project due to the Acquisition by [the defendant]. [The plaintiff] asserts elsewhere, however, that [it] has no way of knowing who gave those instructions to Tectura’s employees. These instructions, without allegations that [the defendant] told Tectura employees to stop working, does not state a claim for tortious interference with contract. A company’s decision not to acquire certain assets during an acquisition, particularly the decision not to accept assignment of a contract that is already in default, cannot itself be considered tortious interference with a contract.

Even if this court found otherwise, that [the plaintiff] sufficiently pleaded tortious interference by demonstrating that [the defendant] had affirmatively instructed Tectura employees to cease work, the defendant’s motion to dismiss would be granted because [it] put forth a valid economic interest defense. . . .  It is well settled that a corporation that acquires another corporation and then causes one of the acquired corporation’s contracts to be terminated, is not liable for interference with that contract, because it had an economic justification for its actions. While the facts here present a case of first impression, in that [the defendant’s] acquisition of Tectura was not yet finalized when the alleged interference occurred, the law in cases where the interference occurred after a merger closed is equally applicable here. [The defendant] was in the process of acquiring Tectura’s assets and had an existing economic interest in the affairs of Tectura, which it was privileged to attempt to protect. It is immaterial that the acquisition was not finalized when the alleged interference occurred. Even if [the defendant] interfered with the contract between [the plaintiff] and Tectura, although this court finds that it did not, it had an economic justification for doing so.

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

Posted: August 27, 2014

Defendant Can Be Held Liable Statements in Preliminary Offering Materials it Later Disclaimed

On August 5, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in NRAM PLC v. Societe Generale Corp., 2014 NY Slip Op. 32155(U), holding that the plaintiff had stated a claim for fraud based on statements the defendant later had disclaimed. 

In NRAM PLC, the plaintiff brought “causes of action for fraud, breach of contract, and unjust enrichment in relation to a collateralized debt obligation” against several defendants. One defendant–Societe Generale Corporate and Investment Banking (SGCIB)–moved to dismiss. Among the issues the court addressed in denying SGCIB’s motion were its arguments that it was not liable for the misrepresentations alleged in the Complaint. The court rejected those arguments, explaining:

SGCIB contends that Northern Rock is pointing to alleged misrepresentations in the Pitchbook, and that both the Pitchbook and OC say the offering is being made only through the OC, and that material not contained in the OC may not be relied upon. It is certainly the case in complex financings that there are frequently preliminary and final offering documents that contain such language of limitation. Customarily, large portions of the preliminary document are not excised from the final. Fine tuning and completion is the purpose of the exercise. Not so here, where significant portions of the Pitchbook do not appear in the OC. Much of this material is said to contain misrepresentations made as part of a fraudulent marketing scheme.

The court knows of no precedent for allowing an offerer of securities to use such a mechanic to amble away from liability for key misrepresentations used to induce investors to urchase securities. Disclaimers are recognized in New York in limited situations, if specifically tailored to alert investors to known risks. Abandonment in plain view of essential pieces of a fraudulent marketing plan is a different animal. If tolerated, malefactors would rush to own one. Markets would be negatively impacted, and the cost of capital inefficiently increased. SGCIB’s position is unavailing.

SGCIB contends that the language of the OC shields it from liability because the OC attributes its contents to the Co-Issuers, legal entities just formed to hold the collateral and issue the Notes. Liability for misrepresentations is said to be quarantined to these corporate entities.
Regarding a similar provision, the court in Allstate Ins. Co. v Morgan Stanley & Co., 2013 NY Slip Op 31130(0), said that defendants may be liable for drafting and distributing statements they knew to be false, regardless of who they credit as the source of the information.

The group pleading doctrine supports Northern Rock’s position of SGCIB’s liability. The doctrine allows plaintiffs to rely on a presumption that statements in prospectuses, registration statements or other group-published information are the collective work of those individuals with direct involvement in the everyday business of the company. Under the doctrine, defendants are responsible for the documents they prepare and distribute because no specific connection between fraudulent representations in an offering memorandum and particular defendants is necessary where defendants are insiders or affiliates participating in the offer of the securities in question.

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

Posted: August 26, 2014

Court Grants Summary Judgment Even Though Defendants Sought More Discovery

On August 15, 2014, Justice Whelan of the Suffolk County Commercial Division issued a decision in Flax v. Shirian, 2014 NY Slip Op. 51229(U), rejecting a request to defer decision on a motion for summary judgment pending further discovery.

In Flax, the plaintiffs sought partial summary judgment on their claims in a business divorce action. Among the grounds advanced by the defendants in opposition to the motion was that the “motion [wa]s premature due to the absence of discovery.” The court rejected that argument, explaining:

CPLR 3212(f) permits a party opposing summary judgment to obtain affidavits or discovery when it appears that facts supporting the position of the opposing party exist but cannot be stated. The rule provides that should it appear from affidavits submitted in opposition to the motion that facts essential to justify opposition may exist but cannot then be stated, the court may deny the motion or may order a continuance to permit affidavits to be obtained or disclosure to be had and may make such other order as may be just. A resort to the rule may be successful where the opposing party has not had a reasonable opportunity for disclosure prior to the making of the motion.

Nevertheless, appellate case authorities have long instructed that to avail oneself of the safe harbor this rule affords, the claimant must offer an evidentiary basis to show upon an evidentiary basis, that discovery may lead to relevant evidence or that the facts essential to justify opposition to the motion were exclusively within the knowledge and control of the plaintiff. In addition, the movant must show that his or her ignorance was unavoidable and that reasonable attempts were made to discover the facts which would give rise to a triable issue of fact, as the mere hope or speculation that evidence sufficient to defeat a motion for summary judgment may be uncovered by further discovery is an insufficient basis for denying the motion.

Here, the defendants failed to meet this standard. Their submissions failed to include affidavits or some other evidentiary basis indicating that discovery might lead to relevant evidence. Nor was it established that facts essential to justify opposition were exclusively in the knowledge of the plaintiffs as the defendants’ familiarity with the terms of the Operating Agreement and their knowledge and participation in the events, occurrences and transactions that form the basis of the plaintiff’s claim of dissolution that is premised upon the failure of unanimous consent provision of such agreement belie such a claim warrant the rejection of any claim of prematurity in the plaintiffs’ motion. Moreover, the absence of any claim of non-[*10]compliance with court ordered discovery coupled with defendants’ failure to move for compliance with their outstanding discovery demands or for any of the other remedies afforded by CPLR Article 31 prior to the interposition of this motion, militate against a finding that the defendants were denied a reasonable opportunity to engage in pre-motion discovery that would lead to the discovery of relevant evidence.

(Internal quotations and citations omitted) (emphasis added). Another way to couch the basis for decision here is to say that court’s are most usually guided by practical realities, and if you cannot show the court why sometihng–like additional discovery–matters, it is unlikely that the court will be swayed by the formalistic argument that it has not occurred.