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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: March 21, 2014

Statute of Frauds and At-Will Employment Doctrine Bar Claim for Unpaid Commissions

On March 7, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Niyazov v. Park Fragrance, LLC, 2014 NY Slip Op. 30610(U), holding that a combination of the statute of frauds and the at-will employee doctrine resulted in an employee having no claim based on a unilateral change to his right to earn commissions.

In Niyazov, the plaintiff sued his former employer and its owners for unpaid pay and commissions. In deciding the defendants’ motion to dismiss, the trial court examined the plaintiff’s rights in light of both the at-will employee doctrine and the statute of frauds. Because the decision is fact-dependant, we have repeated below both an excerpt of the relevant facts and the court’s reasoning. (more…)

Posted: March 20, 2014

Failure to Provide Client With Engagement Letter or Notice of Right to Arbitrate Dooms Suit for Fees

On March 19, 2014, the Second Department issued a decision in Gary Friedman, P.C. v. O’Neill, 2014 NY Slip Op. 01711, affirming the dismissal of a law firm’s action for its fees.

Gary Friedman, P.C. was not an appeal from a commercial case. However, the issues it addresses–the failure to provide a client with an engagement letter or to provide notice of a client’s right to arbitrate–affect commercial litigators as much as anyone else. The Second Department’s decision says it all:

The plaintiff commenced this action to recover legal fees for services rendered to the defendant. After a nonjury trial, the Supreme Court dismissed the complaint finding, inter alia, that the plaintiff failed to comply with 22 NYCRR 137.6 and 1215.1, and failed to establish the right to recover legal fees on the basis of quantum meruit.

Except in limited circumstances, where an attorney institutes an action to recover a fee, the attorney must provide written notice by certified mail or by personal service of the client’s right to elect to arbitrate and must allege in the complaint that the client received notice of his or her right to pursue arbitration and did not file a timely request to arbitrate (see 22 NYCRR 137.6). A plaintiff’s failure to provide the defendant with written notice of his or her right to elect to submit the fee dispute to arbitration, and the failure to allege in the complaint that the defendant received such notice and did not file a timely request for arbitration, require dismissal of the complaint (see Herrick v. Lyon, 7 AD3d 571). Here, the Supreme Court properly dismissed the complaint upon finding that the plaintiff failed to properly serve the defendant with written notice of his right to arbitrate the fee dispute, and upon the plaintiff’s failure to allege in the complaint that the defendant received such notice and did not file a timely request for arbitration (see 22 NYCRR 137.6; Herrick v. Lyon, 7 AD3d 571).

In addition, the Supreme Court properly found that the plaintiff failed to comply with the requirements of 22 NYCRR 1215.1 and failed to establish that he was entitled to recover legal fees in quantum meruit. Except in limited circumstances, an attorney must provide his or her client with a written letter of engagement or enter into a written retainer agreement explaining, inter alia, the scope of the legal services to be provided, the fees to be charged, and the expenses and billing practices (see 22 NYCRR 1215.1). An attorney’s noncompliance with 22 NYCRR 1215.1 does not preclude him or her from recovering the value of professional services rendered on a quantum meruit basis (see Seth Rubenstein, P.C. v Ganea, 41 AD3d 54). Nonetheless, an attorney who fails to comply with rule 1215.1 bears the burden of proving the terms of the retainer and establishing that the terms of the alleged fee arrangement were fair, fully understood, and agreed to by the client (see id.). Here, the court properly found that the plaintiff failed to comply with 22 NYCRR 1215.1 and failed to establish that the terms of the fee arrangement were fair, fully understood, and agreed to by the defendant.

Posted: March 19, 2014

Upcoming City Bar Panel on Mediation

On Thursday, May 8, 2014, from 6:00 PM – 8:00 PM, the City Bar Association will host a panel on Perspectives on 20 Years of Mediation in New York and Implications for the Future. The panel will be held at the New York City Bar, 42 West 44th Street, New York, NY.

The “panel will look back on 20 years of mediation in New York State and the future of mediation in the state from the perspective of litigators, judges, in-house counsel, academics and mediators. Former Chief Judge Judith S. Kaye will receive a commendation for her support of mediation at a reception following the panel discussion.”

One of the panelists will be Justice Shirley Werner Kornreich of the New York County Commercial Division.

Posted: March 19, 2014

Quantum Meruit Claim Survives Even When Contract Claim Dismissed on Statute of Frauds Grounds

On March 18, 2014, the First Department issued a decision in Chapman, Spira & Carson, LLC v. Helix BioPharma Corp., 2014 NY Slip Op. 01685, finding that a breach of contract claim should have been dismissed on statute of frauds grounds but that a related quantum meruit claim survived.

In Chapman, there was no signed writing, but there where e-mails that “evidenced the fact of plaintiff’s employment by defendant.” As the First Department explained:

[P]laintiff’s breach of contract claim is barred by General Obligations Law § 5-701(a)(10), although the statute does not bar plaintiff’s quantum meruit claim. In Davis & Mamber, this Court held that for a writing evidencing a contract to satisfy the Statute of Frauds a memorandum must contain expressly or by reasonable implication all the material terms of the agreement, including the rate of compensation if there has been agreement on that matter. Applying this rule, Davis & Mamber precluded a contract claim for failure to satisfy the applicable provision of the statute of frauds, because the relied-on writings lacked any reference to the agreed-on compensation; however, it permitted a quantum meruit claim, because the rule for a writing establishing quantum meruit claims is less exacting, requiring only that the writing evidenced the fact of plaintiff’s employment by defendant to render the alleged services. Here, as in Davis & Mamber, the emails of [the defendant’s] chairman and CEO[] fail to make any reference to payment terms, and accordingly fail to satisfy the statute of frauds as to the contract claim. However, they suffice to show that [the defendant] employed plaintiff, and are therefore enough to satisfy the statute for purposes of plaintiff’s quantum meruit claim.

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

This decision shows how a claim that cannot survive as a breach of contract claim might still be brought as a quantum meruit claim.

Posted: March 18, 2014

Defaulting Defendant’s Insurer Has Standing To Intervene

On March 6, 2014, Justice Friedman of the New York County Commercial Division issued a decision in CMS Life Insurance Opportunity Fund, L.P. v. Progressive Capital Solutions, LLC, 2014 NY Slip Op. 30592(U), granting a defendant’s insurer’s motion to intervene.

In CMS Life Insurance Opportunity Fund, the plaintiffs filed their second amended complaint against Progressive Capital Solutions, LLC (“Progressive”) and a number of other defendants alleging, with respect to Progressive, that it had negligently supervised a co-defendant, Puglisi. In February 2013, Progressive and Puglisi’s attorney moved to withdraw. He answered on behalf of Puglisi but not Progressive. Once the motion to withdraw was granted, the plaintiffs moved for a default judgment against Progressive on liability. Progressive failed to appear by counsel even after the thirty-day stay, as well as additional time provided to oppose the motion, had expired, and the default motion was granted in June 2013.

Non-party intervenor Ironshore Speciality Insurance Company (“Ironshore”) provided coverage for Progressive. Ironshore had disclaimed coverage regarding the initial complaint, and had not been notified of the second amended complaint or asked to defend by Progressive.  Ironshore apparently became aware of the default in June 2013, when the plaintiffs sent two letters notifying Ironshore that the default motion was pending and had been granted. Ironshore then attempted to contact Progressive, without success. In August 2013, Ironshore asked plaintiffs to consent to Ironshore’s intervention and vacatur of the default, but they refused. Ironshore moved to intervene in August 2013.

The court granted Ironshore’s motion to intervene (as well as its motion to vacate the default). The court found that Ironshore’s motion was timely under CPLR § 1013, because only two months had elapsed between Ironshore becoming aware of counsel’s withdrawal and Progressive’s default, and that time was spent attempting to contact Progressive and to vacate the default on consent. The court also noted that the case was “far from its ultimate resolution.” Intervening to vacate a default did not amount to prejudice to plaintiffs where the inquest on damages had not been held and discovery was ongoing with regard to the other defendants.

On the second part of the test for permissive intervention, whether the intervenor has “a bona fide interest,” the court is almost silent, stating merely that “it cannot seriously be argued that Ironshore is not an interested party.” The opinion never discusses any potential waiver of coverage by Progressive. Indeed, in its discussion of Ironshore’s motion to vacate, the court notes that plaintiffs had entered into an agreement with Progressive’s former Managing Member “that any judgment they obtain against him will be paid from applicable liability insurance proceeds.”

Posted: March 17, 2014

Lost Rent Not Available Remedy for Tenant’s Failure to Repair

On March 11, 2014, a divided panel of the First Department issued a decision in Building Service Local 32B-J Pension Fund v. 101 Limited Partnership, 2014 NY Slip Op, 01544, addressing issues arising from a commercial tenant’s breach of duty to repair its premises.

Building Service Local 32B-J Pension Fund arose out of a commercial lease that required the tenant to keep the premises in repair and to surrender it to the landlord in good condition. The landlord sent the tenant a notice stating that the tenant had violated its duty to repair and that it intended to enter the premises and conduct the repairs itself. In response, the tenant commenced the action and obtained a Yellowstone-type preliminary injunction—supported by a bond in excess of $4m—prohibiting the landlord from entering the premises to make repairs. After the lease expired, the landlord counterclaimed for damages arising from tenant’s failure to repair, seeking, inter alia, damages for lost rent because the tenant’s actions had delayed the landlord in repairing and re-leasing the premises. The tenant moved to dismiss that claim and to dissolve the bond, both of which were granted by the motion court.

The majority affirmed dismissal of the claim for delay damages, holding that:

It is well settled that lost rent is not recoverable as damages for breach of a lease covenant requiring a tenant to keep the premises in good repair . . . . If the action is brought before the lease expires, a landlord can recover the injury done to the reversion, i.e. the difference between the value of the premises with the improvement and absent the improvement . . . . if the action is brought after the expiration of the lease term, the measure of the damages is the cost of putting the premises into repair.

(Internal citations and quotations omitted.)

The majority also relied upon the fact that the lease nowhere provided that “additional rent beyond the term of the lease” would be available as a remedy for failure to repair.

However, the majority did hold that lost rent may be available “as damages against the undertaking” under CPLR 6312(b), which provides for “all damages and costs which may be sustained by reason of the injunction,” and reversed the motion court’s release of the bond for failure to consider whether the preliminary injunction was warranted.

The dissent agreed that delay damages would be available against the bond, but also would have held that delay damages were available under the lease:

The lease contains no limitation on landlord’s right to recover damages for a default under the Upkeep Clause or from tenants’ blocking landlord’s contractual right to perform the system repair work itself if tenants fail to do so. Thus, landlord is entitled to recover its economic losses, including delay damages, if proven, that were caused by tenants’ breach and that the parties had reason to foresee as a likely result of the breach.

This case illustrates both the need for leases to specify that lost rent will be an available measure of damages, and also the need for a sufficient bond. Setting aside questions of proof, if not for the substantial bond obtained, the landlord might have been left without a remedy for any lost rent.

Posted: March 16, 2014

Recent Decision Illustrates Rules for Computation of Pre-Judgment Interest

On March 6, 2014, Justice Friedman of the New York County Commercial Division issued a decision in New York City Housing Authority v. Spectrum Contracting Group, Inc., 2014 NY Slip Op. 30568(U), illustrating the application of CPLR 5001 in computing pre-judgment interest.

CPLR 5001(b) provides the rule for determining the date from which pre-judgment interrest is computed:

(b) Date from which computed. Interest shall be computed from the earliest ascertainable date the cause of action existed, except that interest upon damages incurred thereafter shall be computed from the date incurred. Where such damages were incurred at various times, interest shall be computed upon each item from the date it was incurred or upon all of the damages from a single reasonable intermediate date.

The decision in New York City Housing Authority illustrates the application of CPLR 5001(b):

[The plaintiff] also seeks an award of pre-judgment interest on the damages incurred as a result of [the defendant’s] breaches. An award of prejudgment interest upon a sum awarded because of a breach of performance of a contract is not discretionary. Prejudgment interest at the statutory rate of 9% shall be computed from the earliest ascertainable date the cause of action existed or upon each item from the date it was incurred or upon all of the damages from a single reasonable intermediate date when damages were incurred at various times. The earliest ascertainable date in contract actions arises when the breach occurred and the claim accrued, not from the finding of liability.

Here, the Special Referee made no finding as to when the breaches occurred, and [the plaintiff] concedes that it is unclear as to what the first ascertainable date is. As a result, [the plaintiff] seeks an award of pre-judgment interest on damages arising from [the defendant’s] breach of the construction contract (first cause of action) as of the date that each payment was made to remediate those damages. Alternatively, [the plaintiff] seeks an award as of July 9, 2011, the midway date of [the plaintiff’s] first and last payments as a reasonable intermediate date. [The plaintiff] admits that it cannot determine when it sustained its damages from [the defendant’s] breach of the change order release agreement (second cause of action) and requests that the court award pre-judgment interest from the date of commencement of the action.

The court declines to order interest from each remediation payment for the breach of the construction contract and finds that the July 9, 2011 is a reasonable intermediate date, especially as the damages continued to be incurred after the instant action was commenced on July 30, 2010. [The plaintiff] should be awarded pre-judgment interest on the damages for the first cause of action in the amount of $1, 145,981.92 from July 9, 2011. With respect to the damages from the second cause of action, [the plaintiff] offers no possible intermediate date, and, therefore, the date of commencement is an appropriate date for calculation of interest. [The plaintiff] should be awarded pre-judgment interest on the damages for the second cause of action in the amount of $841,500 from July 30, 2010.

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

Posted: March 15, 2014

Lack of Sophistication No Excuse for Not Bringing Action Before Statute of Limitations Runs

On March 11, 2014, the First Department issued a decision in Apt v. Morgan Stanley DW, Inc., 2014 NY Slip Op. 01541, examining the application of the statute of limitations and discovery rules relating to fraud.

In Apt, an employee of the defendants “allegedly churned trades on” a brokerage account. The First Department affirmed the trial court’s decision dismissing the complaint on statute of limitations ground, explaining:

The court correctly dismissed the action as time-barred. Actions based upon fraud must be commenced within the greater of six years from the date the cause of action accrued or two years from the time the plaintiff or the person under whom the plaintiff claims discovered the fraud, or could with reasonable diligence have discovered it.

Here, the wrongful conduct occurred at the latest on August 29, 2005 when [the defendants] terminated [the broker]. Thus, the action, commenced in January 2012, more than six years later, is untimely. Contrary to plaintiffs’ contention, the complaint alleges no facts showing that [the defendants] fraudulently concealed [the broker’s] commissions or his termination . . . so as to toll the statute of limitations. To the extent plaintiffs contend that [the defendants’] failure to disclose such facts warranted tolling the statute of limitations, there is no fiduciary relationship arising from an ordinary broker-client relationship. Thus, plaintiffs’ argument that [the defendants are] equitably estopped from asserting the statute of limitations defense is unavailing.

Nor is the action timely under the two-year discovery rule. [The account holder] could have discovered facts constituting the fraud, or could have done so with reasonable diligence, in 2004 or at the latest on August 29, 2005 based on her receipt of the confirmation slips and monthly statements. Even accepting as true the affidavit of plaintiffs’ expert that the 611 pages of confirmation slips he reviewed did not fully reflect [the broker’s] commissions, the confirmations and statements should have reflected the excessive trading activity on the accounts during the relevant period. Plaintiffs’ contention that [the account holder] was inexperienced and unsophisticated is insufficient to toll the statute of limitations. The test as to when fraud should with reasonable diligence have been discovered is an objective one, and the duty of inquiry arises where the circumstances are such as to suggest to a person of ordinary intelligence the probability that he or she has been defrauded.

(Internal quotations and citations omitted).

The statute of limitations can impose harsh consequences, but as this decision shows, courts enforce it even against sympathetic plaintiffs.

Posted: March 14, 2014

For Insurance Purposes, Cash is “In Transit” Even While it is Being Held in the Carrier’s Vault

On March 11, 2014, the First Department issued a decision in CashZone Check Cashing Corp. v. Vigilant Insurance Co., 2014 NY Slip Op. 01565, finding that money embezzled from an armored car service’s vault was nonetheless “in transit” for purposes of insurance coverage.

CashZone Check Cashing arose out of the embezzlement of money being delivered to the plaintiff’s ATMs. Mount Vernon Money Center (“MVMC”)—a non-party—would collect cash from the Federal Reserve on plaintiff’s behalf and then take the cash to MVMC’s vault, where it would be loaded into ATM cassettes, which would then be placed into the plaintiff’s ATMs. Over time, MVMC embezzled around $450,000 of the plaintiff’s money by commingling it with other funds while it was in the vault.

The defendant, which insured plaintiff’s cash while it was “in transit,” denied coverage, and the motion court agreed, awarding defendant summary judgment because “the money was not stolen while it was in an armored vehicle or while the vehicle was being loaded or unloaded, or during an incidental stop, but, rather, during a substantive interruption of the transit process, while the money was inside MVMC’s premises for sorting and processing.”

The First Department reversed and awarded summary judgment to the plaintiff, holding that the money was “in transit” even while it was in MVMC’s vault, explaining:

In our view, MVMC’s act of collecting money from the Federal Reserve Bank and transporting it to an MVMC vault, in order to place it in the form necessary for its transportation and delivery to the CashZone locations, was one continuous shipment process. The stop at MVMC’s vault was expressly understood by all concerned as a necessary component of the act of delivery of cash by armored car from the Federal Reserve Bank to plaintiffs’ locations. As long as the cash remained in the possession of the armored car service making the delivery, and the stop was in service to the delivery, we consider the property to have been ‘in transit’ until the contemplated delivery was completed.

The First Department rejected the motion court’s narrower interpretation, writing:

We decline to adopt the proposed semantic distinction between ‘substantive’ and ‘incidental’ interruptions so as to require a different result for the stop at issue here. The interruption in the transit process for cash sorting and processing may be somewhat different from an interruption enabling the carrier’s employees to eat or rest. Yet, it was part of, or ‘incidental to,’ the understood, contracted-for process by which the armored car carrier would do its job, namely, taking the cash from the site of the pickup and delivering it for use at plaintiff’s business locations. Because the contemplated delivery process necessarily included the sorting and processing of the money, we consider the entire process to be included in the ‘transit’ of the cash.

This decision illustrates the general practice of New York courts to interpret policies in a way that finds coverage.

Posted: March 13, 2014

No Separate Cause of Action For Insurance Carrier’s Bad Faith Claims Handling

On February 26, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Orient Overseas Associates v. XL Insurance America, Inc., 2014 NY Slip Op. 30488(U), dismissing a claim against a property insurance carrier for “bad faith claims handling” on the ground that no such cause of action exists under New York law, explaining:

It is not clearly decided whether there is a separate cause of action for bad faith claims handling in New York. While some courts have held yes (see, e.g., Orman v. GEICO Gen. Ins. Co., 964 NYS2d 61 [Sup Ct Kings Cty 2012]), many more have held to the contrary (see, e.g., Mutual Assoc. Adm’r, Inc. v. National Union Fire Ins. Co. of Pittsburgh. PA, 2012 NY Misc LEXIS 4657 [Sup Ct New York Cty 2012], Jackson v. AXA Equitable Life Ins. Co., 2011 NY Misc LEXIS 4466 [Sup Ct, New York Cty 2011), Handy & Harman American Int ‘t Grp., Inc., 2008 NY Misc LEXIS 7522 [Sup Ct, New York Cty 2008]).

This court determines that there is no separate cause of action for bad faith claims handling.

Justice Schweitzer noted that the Court of Appeals’ decisions in two companion cases (Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York, 10 N.Y.3d 187 (2008), and Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200) recognize the possibility of a claim for consequential damages against an insurance company for breach of the covenant of good faith and fair dealing, arising from “bad faith in the claims handling process.” To state such a claim, the insured must plead that it suffered damages (beyond the disputed coverage amount) that are “both quantifiable and identifiable.” The court held that the plaintiff had not made any such allegations:

Even with the potential availability of consequential damages, this claim must fail because the consequential damages being sought are not quantified nor identified, and it is not based upon different facts than the breach of contract claim. In order to recover consequential damages the harm that occurred beyond the breach of contract must be proven—thus identifying the consequential damages, and none has been shown. Further, the consequential damages must be quantified in some way, which here they are not. Had the plaintiff alleged specific loss beyond what is contractually disputed, there may be reason to allow for consequential damages. This is not the case, however. The court will entertain an amended complaint in this respect.

This decision shows the difficulty of pleading a claim damages against an insurance carrier beyond the disputed coverage amount. There is long-standing authority permitting a policyholder to recover attorneys’ fees incurred in a coverage action where the insurance company engages in “such bad faith in denying coverage that no reasonable carrier would, under the given facts, be expected to assert it.” Sukup v. State of New York, 19 N.Y.2d 519, 522 (1967). In practice, this is a hard standard to satisfy. If the insurer can demonstrate an “arguable basis” for disclaiming coverage, no fees are awarded, even if the insured prevails in the lawsuit. See, e.g., Greenberg Eleven Union Free School Dist. v. National Union Fire Ins. Co., 304 A.D.2d 334, 336-37 (1st Dep’t 2003).