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Current Developments in the Commercial Divisions of the
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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.

Posted: February 2, 2014

RMBS Planitiff Moves for Leave to Appeal to Court of Appeals

On December 23, 2013, we blogged about the First Department’s decision in ACE Sec. Corp. v. DB Structured Prods., Inc., 2013 NY Slip Op. 08517, which dismissed a mortgage-backed securities lawsuit as barred by the failure both to give the contractually-required notice and an opportunity to cure and to bring suit before the end of the limitations period.  As reported by Reuter’s Allison Frankel, the plaintiff-appellant filed a motion for re-argument or, alternatively, leave to appeal to the Court of Appeals.  On the brief, a copy of which is available here, plaintiff-appellant’s counsel, Kasowitz, Benson, Torres & Friedman LLP, is joined by former U.S. Solicitor General Paul D. Clement.

Posted: February 1, 2014

Derivative Action Dismissed for Failure Adequately to Plead Demand Futility

On January 21, 2014, Justice Kapnick of the New York County Commercial Division issued a decision in Kebis v. Azzurro Capital Inc., 2014 NY Slip Op. 30171(U), dismissing a derivative action for failure adequately to plead demand futility.

In Kebis, the plaintiff brought a derivative action against a corporation’s board of directors alleging “breaches of fiduciary duties and unjust enrichment” in connection with the sale of a division of the corporation. The court granted the defendants’ motion to dismiss for failing to plead demand futility with particularity as required by Delaware law. The court explained: (more…)

Posted: January 31, 2014

Justice Saliann Scarpulla Appointed to New York County Commercial Division

On January 18, 2014, we posted that Governor Cuomo had announced the appointment of Justice Barbara R. Kapnick of the New York County Commercial Division to the First Department.  We have been informed that Justice Saliann Scarpulla of the New York County Supreme Court has been selected to replace Justice Kapnick as a Justice of the Commercial Division.

Justice Scarpulla currently is a Justice of the Supreme Court, New York County.  She was appointed as an Acting Justice 2009 and was elected in 2013.  Justice Scarpulla also served as Judge, Civil Court of the City of New York, New York County from 2002 to 2008 and as Justice Eileen Bransten’s Court Attorney from 1999 to 2001. From 1997 to 1999 she was Senior Vice President and Bank Counsel at Hudson United Bank and from 1993 to 1997 worked for the FDIC New York Legal Services Office as a Counsel/Senior Litigator. Prior to that she was a litigation associate with the firm of Proskauer Rose Goetz & Mendelsohn and a court attorney for Justice Alvin F. Klein’s. She is a graduate of Brooklyn Law School and Boston University.

Congratulations to Justice Scarpulla.

Posted: January 31, 2014

Appellate Divisions Announce Differing Choice-of-Law Analyses for Insurance Claims

On January 28, 2014, the First Department issued a decision in Davis & Partners, LLC v. QBE Ins. Corp., 2014 NY Slip Op. 00449, discussing which state’s law governed a liability policy covering multi-state risks.

Based on the “standard ‘grouping of contacts’ analysis,” the court found that New York law applied because

[t]he contract between contractor Jansons Associates, Inc. and the construction manager was related to a project located in New York. . . . It appears to have been executed in New York. It required Jansons to carry insurance and to name Davis & Partners and RFD 425 Fifth Avenue, both New York entities, as additional insureds under the policy. It contains a choice-of-law provision naming New York as the forum and the governing law of choice. The ‘occurrence’ under the policy and the ensuing litigation occurred in New York. These factors outweigh the fact that Janson’s principal place of business is in New Jersey. As the ‘principal location of the insured risk,’ New York has ‘the most significant relationship to the transaction and the parties.’

On December 16, 2013, we blogged about a recent Second Department decision, QBE Ins. Corp. v. Adjo Contracting Corp., 2013 NY Slip Op. 08238, which took at different approach to the same choice-of-law question, holding that “the state of the insured’s domicile should be regarded as a proxy for the principal location of the insured risk.” The additional insureds under the policy at issue in Davis & Partners were New York entities, but the court did not take that factor as dispositive and instead examined the totality of the circumstances to determine the forum with the “most significant relationship to the transaction and the parties.” These seemingly contradictory holdings illustrate the complexity of choice-of-law issues generally and in the context of insurance policies governing multi-state risks in particular.

Posted: January 30, 2014

Court Allows Filing of Complaint Under Seal Along With Public Redacted Complaint

On January 23, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Shareholder Representative v. Sandoz Inc., 2014 NY Slip Op. 30200(U), granting a motion to file a sealed complaint.

This action arose out of the sale of a pharmaceutical company, which was developing a new drug, to the defendant. The plaintiff alleged that the defendant violated the agreement by failing to meet various “milestones” for the drug’s development.

The plaintiff filed a motion for leave to file the entire complaint under seal. At a hearing on that motion, the court directed the parties to meet and confer regarding how the complaint could be rewritten so that the entire complaint would not have to be sealed. The plaintiff subsequently filed a second motion for leave to file a redacted version of the complaint. The court reviewed the motion under 22 NYCRR 216.1(a), which requires “good cause” for sealing any court record in whole or in part, by balancing the plaintiff’s interest in secrecy with the public interest in access to court records:

Uniform Rule 216.1 further provides that in determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties. Although good cause is not defined in Section 216.1(a), a finding of good cause presupposes that public access to the documents at issue will likely result in harm to a compelling interest of the movant. The First Department has held that the presumption of the benefit of public access to court proceedings takes precedence, and sealing of court papers is permitted only to serve compelling objectives, such as when the need for secrecy outweighs the public’s right to access, e.g., in the case of trade secrets.

(Internal citations and quotations omitted).

The court found that the complaint contained “technical information about a pharmaceutical drug which is still in development,” meeting the definition of a trade secret, and that the redacted complaint “contains sufficient unredacted information, such that the broad contours of this action and the relief sought therein are publically available,” and granted the motion.

For practitioners wanting to file a complaint under seal, this opinion shows that they will have to convince the court of the existence of a trade secret or some comparable interest, and also reminds them that they can help their cause by drafting their complaint in such a way that as little as possible will have to be redacted and offering to file a redacted complaint.

Posted: January 29, 2014

Board Did Not Have Fiduciary Duty to Maximize Shareholder Benefit in Merger Where There was No Change of Control or Break-up

On January 13, 2014, Justice Friedman of the New York County Commercial Division issued a decision in Badowski v. Carrao, 2014 NY Slip Op. 50042(U), dismissing breach of fiduciary claims relating to a merger.

In Badowski, the class action plaintiff alleged that the

individual defendants, the former directors and officers of Vertro, Inc. (Vertro), breached their fiduciary duties to Vertro’s former shareholders by failing to maximize shareholder value, acting in their own interest, and failing to disclose material information in connection with Vertro’s merger with Inuvo, Inc. (Inuvo). Plaintiff further alleges that corporate defendants Vertro, Inuvo, and Anhinga Merger Subsidiary, Inc. (Anhinga) aided and abetted those breaches. Plaintiff seeks rescission of the merger of the two companies, which was completed on March 1, 2012, or, in the alternative, rescissory damages. Defendants move to dismiss the Second Amended Complaint in its entirety for failure to state a claim, pursuant to CPLR 3211(a)(7).

The Badowski decision addresses several interesting issues of Delaware corporate law; we suggest that you read the entire decision. This post addresses only the issue of the duty to maximize shareholder value.

The court held that the actions of the individual defendants were not subject to the heightened Revlon standard of maximizing shareholder value, and instead that it would examine their actions under the business judgment rule. The court explained:

In Revlon, a case involving a hostile take-over, the Court held that once it became apparent that the break-up of the company was inevitable or that the company was for sale, the duty of the board changed from the preservation of the company to the maximization of the company’s value at a sale for the stockholders’ benefit.

As subsequently refined by the Delaware Courts, the Revlon requirement that the directors seek the best value reasonably available to shareholders applies in at least the following three scenarios: (1) when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company; (2) where, in response to a bidder’s offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company; or (3) when approval of a transaction results in a sale or change of control. The Courts have further clarified that the Revlon duty of value maximization is triggered only when a company embarks on a transaction — on its own initiative or in response to an unsolicited offer — that will result in a change of control. In the context of a stock-for-stock merger, a change of control for Revlon purposes can be triggered if the target’s shareholders are relegated to a minority in the resulting entity, and the resulting entity has a controlling stockholder or stockholder group. Where, however, ownership of the merged company will remain in a large, fluid, changeable and changing market, Revlon is not implicated.

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

The court held that the Revlon factors had not been adequately alleged, including that there was no allegation that “the shares of the resulting entity will not be freely traded in the marketplace or that the former Vertro shareholders will be subjected to a controlling shareholder or block of shareholders,” that the sale would not result in a break-up of the company and that triggering “change-in-control provisions contained in contracts of Vertro’s officers and directors” did not “establish change of control for Revlon purposes.”

While there are many take-aways from this decision, one is the importance of transactional counsel to help guide a board through the myriad requirements of Delaware law affecting mergers.

Posted: January 28, 2014

Judicial Estoppel Does Not Apply When the Argument Made Does Not Lead to a Judgment

On January 23, 2014, the First Department issued a decision in Wells Fargo Bank N.A. v. Webster Business Credit Corp., 2014 NY Slip Op 00412, explaining the scope of the doctrine of judicial estoppel.

In Wells Fargo Bank, the trial court dismissed the defendant’s claim for “indemnification from plaintiffs for attorneys’ fees incurred in” defending the action. The First Department affirmed that decision, explaining that the plaintiffs were not estopped from opposing the defendant’s claim for indemnification even though they also had argued that indemnification was required under the contract at issue:

Contrary to defendant’s argument, plaintiffs’ previous assertion of their own claim for contractual indemnification does not judicially estop them from denying that defendant is entitled to indemnification of attorneys’ fees under the agreement. The doctrine of judicial estoppel precludes a party who assumed a certain position in a prior legal proceeding and who secured a judgment in his or her favor from assuming a contrary position in another action simply because his or her interests have changed. As plaintiffs did not prevail on their contractual indemnification claim, the doctrine of judicial estoppel does not apply.

Nor does plaintiffs’ prior claim for contractual indemnification, standing alone, constitute a judicial admission that attorneys’ fees are recoverable in inter-party disputes. On the contrary, plaintiffs’ former construction of the agreement was a legal argument, and not a fact amenable to treatment as a formal judicial admission.

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

Doctrines such as judicial estoppel and judicial admission can be useful tools.  However, this decision shows their limitations.

Posted: January 27, 2014

Ties to New York Bank Found Insufficient to Create General Jurisdiction

On January 14, 2014, Justice Kapnick of the New York County Commercial Division issued a decision in Industrias De Papel R. Remenzoni S.A. v. Banco De Investimentos Credit Suisse (Brasil) S.A., 2014 NY Slip Op. 30074(U), addressing a variety of jurisdictional and forum non conveniens arguments on a motion to dismiss.

In Industrias De Papel, the plaintiff, a Brazilian paper company, sued a number of defendants, including various US and Brazilian Credit Suisse entities, for causes of action arising out of bond purchases. The Credit Suisse entities moved to dismiss for lack of jurisdiction and forum non conveniens.

The plaintiff’s first alleged basis for jurisdiction—and the subject of this post—was under CPLR 301: “A court may exercise such jurisdiction over property, persons, or status as might have been exercised heretofore.” CPLR 301 is New York’s “general jurisdiction” statute, where a defendant who is “engaged in such a continuous and systematic course of doing business here as to warrant a finding of its presence in this jurisdiction,” may be sued on causes of action arising anywhere in the world.

In support of its claim of personal jurisdiction over Credit Suisse Brazil in New York, the plaintiff alleged:

  • The CEO of Credit Suisse Brazil works out of New York and controls Credit Suisse Brazil from New York;
  • Credit Suisse Brazil maintains bank accounts and brokerage accounts in New York;
  • Credit Suisse solicits business in New York through various websites; and
  • Credit Suisse New York serves as Credit Suisse Brazil’s agent by (a) supporting Credit Suisse Brazil’s CEO, and (b) pitching its clients investment opportunities from Credit Suisse Brazil.

The court ruled that factual questions existed regarding the scope of the CEO’s activity in New York, and whether they were sufficient to give rise to general jurisdiction, and rejected the other three asserted bases entirely.

A bank account in New York only gives rise to personal jurisdiction if the bank account is used “for the receipt of substantially all of the income of a foreign corporation and for the payment of substantially all of its business expenses,” and plaintiff’s allegations did not satisfy this standard. An interactive recruiting website or a website providing customers with worldwide access to account information can only give rise to general jurisdiction if “the website is purposefully directed towards New York.” And because merely providing office space and a phone line to another company does not create an agency relationship, and plaintiff’s factual basis for alleging that Credit Suisse New York marketed Credit Suisse Brazil’s products were similarly insufficient, no agency relationship had been asserted.

Accordingly, the court permitted jurisdictional discovery to be taken solely on the nature and scope of Credit Suisse Brazil’s CEO’s business activities in New York.

In this opinion, we can see that courts are reluctant to use incidental banking or marketing activities in New York to serve as a basis for general jurisdiction.

Posted: January 26, 2014

How Not to Get a Case Assigned to the Commercial Division

On January 23, 2014, the First Department issued a decision in BDO USA, LLP v. Phoenix Four, Inc., 2014 NY Slip Op. 00410, illustrating the wrong way to get a case assigned to the Commercial Division.

In this post, we focus on just one aspect of the BDO USA decision, plaintiff’s attempts to assign the action to the Commercial Division. The First Department explained:

[The plaintiff] commenced this action against [the defendants], asserting claims for breach of contract and promissory estoppel. . . Following [the plaintiff’s] filing of the complaint, [the defendants] requested an extension of time to respond, and the parties agreed to a December 24, 2012 response date. However, on December 21, 2012, [the defendants] separately moved to dismiss the complaint under CPLR 3211(a)(1) and (a)(7). [The plaintiff] also filed and served an RJI on the same day. The action was assigned to a non-Commercial Division part.

By letter dated January 3, 2013, [the plaintiff] requested that Supreme Court transfer the action to a Commercial Division part under 22 NYCRR § 202.70. In opposition, [the defendants] argued that [the plaintiff’s] request was untimely under 22 NYCRR § 202.70(e) because [it] had submitted the request more than 10 days after it had received the RJI on December 21, 2012. . . . The Administrative Judge denied [the plaintiff’s] request as untimely, noting that the 10-day time limit under 22 NYCRR § 202.70(e) is strictly construed.

[The plaintiff] then served a notice of voluntary discontinuance without prejudice under CPLR 3217(a)(1). . . . At the same time, [the plaintiff] initiated a new action in Supreme Court . . . and submitted a complaint that is essentially identical to the complaint in this action. [The plaintiff] intended to seek to have the new action transferred to a Commercial Division part once defendants re-filed their motions to dismiss.

In response to [the plaintiff’s] notice of discontinuance, [the defendants] moved under CPLR 3217(b) for an order discontinuing the action with prejudice. Both defendants argued that the motion court should deem [the plaintiff’s] notice with prejudice, because [it] filed the discontinuance for the sole purpose of circumventing the Administrative Judge’s final and non-appealable order. Defendants further argued that the notice of voluntary discontinuance was untimely under CPLR 3217(a)(1) because [the plaintiff] served it after defendants had filed a responsive pleading – that is, their motions to dismiss. Defendants sought, in the alternative, an order deeming [the plaintiff’s] notice of voluntary discontinuance a nullity.

The First Department held that the plaintiff’s notice of discontinuance “was untimely because [it] served it after defendants filed their motions to dismiss” and thus its “notice was ineffective and a nullity, and the motion court should not have deemed defendants’ motions withdrawn.”  That the plaintiff “served its notice of discontinuance in an attempt to circumvent the Administrative Judge’s order denying its request to have its action assigned to the Commercial Division may be a valid basis for granting a discontinuance with prejudice.”

The First Department gave the plaintiff some relief–it remanded to the trial court to consider the motions to dismiss. However, it seems to us that the plaintiff could have avoided all of the trials and tribulations described above simply by filing an RJI to have the action assigned to the Commercial Division as soon as it filed the complaint. There is no rule requiring a party to wait until an answer or motion to dismiss is filed to seek assignment to the Commercial Division. Indeed, it is often helpful to know at the very beginning of an action which justice it is assigned to.