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Current Developments in the Commercial Divisions of the
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Posted: March 29, 2014

Judiciary Law Section 487 Claims Must Be Brought in Forum in Which Misconduct Occurred

On March 20, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Alliance Network, LLC v. Sidley Austin LLP, 2014 NY Slip Op. 50430(U), dismissing Judiciary Law Section 487 claims because they were not brought in the action in which the alleged misconduct occurred.

In Alliance Network, the plaintiffs brought a number of claims relating to a failed real estate development, including claims against several lawyers and law firms alleging that they had violated Judiciary Law § 487 in an earlier, related litigation. The court dismissed those claims, explaining:

Section 487 of the Judiciary Law provides that an attorney who is guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party shall forfeit to the party injured treble damages, to be recovered in a civil action. The Attorney Defendants seek dismissal of Plaintiffs’ Section 487 claim on several grounds, including failure to state a claim. However, before delving into the parties’ arguments as to each of the misrepresentations alleged, there is a threshold issue that troubles the Court and requires dismissal of Plaintiffs’ claims.

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Posted: March 28, 2014

Transcripts and Videos of Arguments in the Court of Appeals for the Week of February 17, 2014, Now Available

Transcripts and videos of arguments in the Court of Appeals for the week of February 17, 2014, are now available on the Court of Appeals website.

On February 10, 2014, we noted two cases of interest from the oral arguments for the week of February 17, 2014:

  • Docket No. 63: Matter of Kapon v. Koch (considering whether a court ruling on a motion, under CPLR 3119(e), to quash an out-of-state subpoena to a non-party witness should apply the generally applicable standards under CPLR Article 31, or should instead review the subpoena with “solicitude” to ensure that a New York resident with no stake in the litigation is not unduly burdened).  See the transcript and the video.
  • Docket No. 54: Mashreqbank PSC v. Ahmed Hamad Al Gosaibi & Brothers Company (considering whether a motion to dismiss a third-party action on forum non conveniens grounds, under CPLR 327(a), empowers the court to dismiss the main action on the same ground, even though no party to that action moved for that relief).  See the transcript and the video.
Posted: March 28, 2014

Defendant Whose CPLR 3220 Offer Was Rejected is Entitled to Her Attorneys’ Fees Related to Proving Damages From Time of Offer

On March 27, 2014, the First Department issued a decision in Abreu v. Barkin & Associates Realty, Inc., 2014 NY Slip Op. 02146, clarifying that an offer of judgment under CPLR 3220 entitles the offering party not just to costs but also to its attorneys’ fees related to proving damages.

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Posted: March 27, 2014

LLC Member Not Permitted to Withdraw From LLC

On March 12, 2014, Justice Kitzes of the Queens County Commercial Division issued a decision in In the Matter of Kassab, Index No. 14428/2013, ruling on two pending motions in a special proceeding involving claims for judicial dissolution of two closely-held entities and related relief.

This post focuses on the resolution of the respondent’s motion to dismiss the petitioner’s third cause of action to withdraw as a member of an LLC.

Section 606(a) of the LLC Law provides that member of an LLC may only withdraw if the right of withdrawal is provided for in the operating agreement “unless an operating agreement provides otherwise, a member may not withdraw from a limited liability company prior to the dissolution and winding up of the limited liability company.”

In Kassab, Justice Kitzes dismissed the petitioner’s claim to withdraw, writing:

Thus, under the statute, a member may withdraw from a limited liability company only as provided in its operating agreement. If the operating agreement is silent, a member may not withdraw prior to the dissolution of the company. Here, [the LLC]’s operating agreement provides, in pertinent part, that “a Member of the Company may withdraw from the Company in accordance with the Limited Liability Company Law.” Therefore, as there has been no dissolution of [the LLC], and as petitioner does not allege the existence of some other agreement or consent, the third cause of action fails to state a claim for withdrawal under the provisions of Limited Liability Company Law § 606. That branch of respondent’s motion which seeks to dismiss the third cause of action, is granted.

(Internal citations omitted.)

NOTE: Schlam Stone & Dolan LLP represents the petitioner in this action.

Posted: March 26, 2014

Default Judgment Not Vacated When No Reasonable Excuse is Offered for the Default

On March 25, 2014, the First Department issued a decision in Sunrise Capital Partners Management LLC v. Glattstein, 2014 NY Slip Op. 01994, affirming a default judgment.

In Sunrise Capital Partners, the trial court granted the plaintiff judgment by default when the defendants failed to answer and later denied the defendants’ motion to vacate the default judgment. The First Department affirmed, explaining:

Defendants’ excuse that they did not contact outside counsel because they were relying on in-house counsel to resolve the matter is insufficient, as they offered no facts as to how or why they believed in-house counsel was handling the matter. Moreover, defendants’ excuse that they believed plaintiffs did not intend to proceed with the lawsuit is conclusory. Defendants have not alleged any statements made by plaintiffs that would indicate they were not serious about prosecuting their claim. Accordingly, defendant has failed to proffer an acceptable excuse for the default, and the Court need not determine whether a meritorious defense exists.

(Internal citations omitted).

New York courts can be lenient in vacating defaults.  However, as this decision shows, that leniency is not unlimited.  If your client has an excuse for its default, make sure you take the time fully to explain and document it.

Posted: March 25, 2014

Party Bound By Discovery Stipulation Signed by His Counsel

On March 19, 2014, the Second Department issued a decision in Born to Build, LLC v. Saleh, 2014 NY Slip Op. 01703, discussing the binding nature of stipulations between counsel concerning discovery.

In Born to Build, “[t]he appellant agreed, as part of a so-ordered preliminary conference stipulation and order signed by his attorney . . . to be deposed in New York at the office of the plaintiff’s counsel.” Later, the appellant moved for a protective order, asking that he be deposed “by remote electronic means.” The trial court denied the motion and the Second Department affirmed, explaining that:

[s]uch a stipulation constitutes a binding contract.

While a court may relieve a party of the consequences of a stipulation made during litigation where there is cause sufficient to invalidate a contract, such as fraud, collusion, mistake, or accident, here, the appellant failed to demonstrate good cause sufficient to invalidate the stipulation. He also failed to demonstrate that his attorney lacked the authority to enter into the stipulation on his behalf. In any event, the appellant failed to establish that traveling from his home in Hong Kong to New York to be deposed would cause him undue hardship.

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

This decision makes the important point that as a litigator, if you make an agreement with your adversary, you should expect to be held to it.

Posted: March 24, 2014

Claim For Legal Malpractice Accrues When Client Receives Negligent Work Product

On March 6, 2014, Justice Bransten of the New York County Commercial Division issued a decision in XE Partners, LLC v. Skadden Arps Slate Meagher & Flom LLP, 2014 NY Slip Op. 30668(U), dismissing an action for attorney malpractice under the applicable three-year statute of limitations.

XE Partners arose from legal advice the defendant law firm provided to the plaintiff LLC, in 2008, regarding the withdrawal of certain members from the LLC. The withdrawing members brought an arbitration against the LLC claiming that “Plaintiff failed to follow a key provision of the LLC Agreement and used an inappropriate business valuation.” In 2010, the arbitration panel ruled in favor of the withdrawing members. In 2013, the LLC brought a legal malpractice action against the law firm that had advised it in 2008, alleging that “the work performed by [the law firm] was at the heart of the [ ] Members’ action against [the LLC].” Justice Bransten granted the law firm’s motion to dismiss, concluding that the claim accrued when the allegedly negligent advice was provided in 2008 and was therefore time-barred because the claim was not brought within the 3-year limitations period:

Under New York law, it is well settled that a legal malpractice claim accrues when all the facts necessary to file the cause have occurred and the injured party can obtain relief in court. What is important is when the malpractice was committed, not when the client discovered it.

As explained by the Court of Appeals in the accounting malpractice context: the claim accrues upon the client’s receipt of the accountant’s work product since this is the point that a client reasonably relies on the accountant’s skill and advice and, as a consequence of such reliance, can become liable for tax deficiencies. Receipt of the accountant’s advice is the time when all the facts necessary to the cause of action have occurred and an injured party can obtain relief.

The reasoning of Ackerman has been extended to attorney malpractice claims. For example, in Proskauer Rose Goetz & Mendelsohn LLP v. Munao, 270 A.D.2d 150 (1st Dep’t 2000), the First Department cited Ackerman in holding that a client’s legal malpractice counterclaims accrued when the client received defendant’s purportedly negligent work product. The First Department likewise held in Nuzum v. Field, 106 A.D.3d 541, 541 (1st Dep’t 2013), deeming legal malpractice claims brought in connection with the drafting of promissory notes time-barred where brought more than three years after the allegedly defective documents were prepared.

Viewed in this framework, Plaintiffs legal malpractice cause of action is clearly barred by the statute of limitations. Plaintiffs’ claim accrued when Defendants’ allegedly negligent work product was received by Defendants. To paraphrase Ackerman, this was the time when all the facts necessary to the cause of action occurred and when Plaintiff was able to obtain relief. Since the advice was given in 2008, Plaintiffs’ 2013 filing was untimely.

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

The plaintiff argued that it did not suffer actionable injury (and its claim therefore did not accrue) until the arbitration panel ruled against in 2010. There is a certain logic to that argument (since it was arguably not until that adverse ruling that the plaintiff’s economic injury materialized), and the plaintiff cited a Second Department decision that appears to support that position. See Frederick v. Meighan, 75 A.D.3d 528 (2d Dep’t 2010) (“inasmuch as the plaintiff did not sustain ‘actionable injury’ until this Court awarded the buyers specific performance in the underlying action, the plaintiff’s legal malpractice cause of action against them was not time-barred.”). However, Justice Bransten concluded that, “[e]ven accepting Plaintiff’s reading of Frederick as correct for the sake of argument, this reading is in conflict with Ackerman and its First Department progeny and therefore is not controlling.”

This decision illustrates that a legal malpractice claim must be diligently pursued, lest it become time-barred. Indeed, if an attorney gives negligent advice that creates a liability for the client more than three years later, it is possible that the claim could become time-barred before the client suffers significant damages to prompt a malpractice lawsuit.

Posted: March 23, 2014

Denying Petitioner is Shareholder Can Constitute Oppressive Conduct Justifying Corporate Dissolution

On March 11, 2014, Justice Friedman of the New York County Commercial Division issued a decision in Quazzo v. 9 Charlton St. Corp., 2014 NY Slip Op. 30625(U), discussing the standard for corporate dissolution based on oppression.

In Quazzo, the petitioner sought, among other things, to dissolve a New York corporation of which she claimed to be a shareholder. The respondents moved to dismiss the dissolution claim on the ground that the petitioner had not established that she was the subjected to oppression by the respondents. The court disagreed, explaining: (more…)

Posted: March 22, 2014

Court of Appeals Arguments of Interest for the Week of March 24, 2014

Arguments the week of March 24, 2014, in the Court of Appeals that may be of interest to Commercial Division practitioners include:

  • Docket No. 71: Golden v. Citibank, N.A. (To be argued Tuesday, March 25, 2014) (concerning whether a bank may refuse payment on a cashier’s check on a showing that it received no consideration for issuing the check). See the Second Department decision here.
  • Docket No. 64: Clemente Brothers Contracting Corp. v. Hafner-Milazzo (To be argued Wednesday, March 26, 2014) (concerning whether parties may by contract reduce the statutory one-year limit on reporting forgeries in UCC 4-406 to 14 days). See the Second Department decision here.
  • Docket No. 81: CDR Créances S.A.S. v. Maurice Cohen; CDR Créances S.A.S. v, Leon Cohen (To be argued Thursday, March 27, 2014) (concerning the proper burden of proof for striking a defendant’s pleadings and dismissing an action for fraud on the court). See the First Department decision here.