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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: May 9, 2014

Fraud on the Court Must be Proved by Clear and Convincing Evidence

On May 8, 2014, the Court of Appeals issued a decision in CDR Creances S.A.S. v. Cohen, 2014 NY Slip Op. 03294, adopting a “clear and convincing evidence” standard for motions to strike an adversary’s pleadings under CPLR 3126.

CDR Creances S.A.S., concerned theft of loan funds by diverting them to fictitious entities. After two of the defendants were indicted in federal court in Florida for obstruction of justice and subornation of perjury, the plaintiffs moved to strike those defendants’ pleadings and for a default judgment. After finding that the defendants had, among other things “suborned perjury by providing [witnesses] with a ‘script’ containing false answers to be given to their attorneys and at their depositions; created . . . wholly fictitious individuals and intentionally implicated as controlling the defendant corporations; [and] forged the affidavits of others,” the Supreme Court granted the motion, struck the defendants’ answers, and granted default judgments.

The First Department affirmed. The Court of Appeals granted leave to appeal to address the proper evidentiary and legal standards for such a motion. The court reviewed a number of federal cases and imported the federal “clear and convincing evidence” standard into New York law:

The federal courts have applied the clear and convincing standard in determining whether the offending party’s actions constitute fraud on the court. Characteristic of federal cases finding such fraud is a systematic and pervasive scheme, designed to undermine the judicial process and thwart the non-offending party’s efforts to assert a claim or defense by the offending party’s repeated perjury or falsification of evidence . . . .

We adopt this standard and conclude that in order to demonstrate fraud on the court, the non-offending party must establish by clear and convincing evidence that the offending party has acted knowingly in an attempt to hinder the fact finder’s fair adjudication of the case and his adversary’s defense of the action. A court must be persuaded that the fraudulent conduct, which may include proof of fabrication of evidence, perjury, and falsification of documents concerns issues that are central to the truth-finding process. Essentially, fraud upon the court requires a showing that a party has sentiently set in motion some unconscionable scheme calculated to interfere with the judicial system’s ability impartially to adjudicate a matter by improperly influencing the trier or unfairly hampering the presentation of the opposing party’s claim or defense. A finding of fraud on the court may warrant termination of the proceedings in the non-offending party’s favor . . . . Therefore, once a court concludes that clear and convincing evidence establishes fraud on the court, it may strike a pleading and enter a default judgment.

We caution that dismissal is an extreme remedy that must be exercised with restraint and discretion. Dismissal is most appropriate in cases like this one, where the conduct is particularly egregious, characterized by lies and fabrications in furtherance of a scheme designed to conceal critical matters from the court and the nonoffending party; where the conduct is perpetrated repeatedly and wilfully, and established by clear and convincing evidence, such as the documentary and testimonial evidence found here. Dismissal is inappropriate where the fraud is not central to the substantive issues in the case or where the court is presented with an isolated instance of perjury, standing alone, which fails to constitute a fraud upon the court. In such instances, the court may impose other remedies including awarding attorney fees, awarding other reasonable costs incurred, or precluding testimony. In the rare case where a court finds that a party has committed fraud on the court warranting dismissal, the court should note why lesser sanctions would not suffice to correct the offending behavior.

(Internal citations and quotations omitted) (emphasis added).  The court rejected the defendants’ argument that it should apply a “conclusively demonstrated” standard, noting that “defendants’ standard would permit a party to escape a court’s consideration of claims of egregious acts of deceit by presenting bare denials of the truth of the allegations.”

Applying the “clear and convincing” standard to the facts of the case, the Court of Appeals then held that the lower courts correctly struck the principal defendants’ pleadings based upon the corroborated evidence and the pervasive nature of their deception.

Posted: May 8, 2014

Minor Amendment to a Complaint Proves Fatal to Plaintiff’s Case

On May 6, 2014, the First Department issued a decision in Healthcare I.Q., LLC v. Tsai Chung Chao, 2014 NY Slip Op. 03216, reversing a decision of the New York County Commercial Division and granting summary judgment to the defendant on a previsously-waived affirmative defense that the defendant had asserted in response to an amended complaint.

In Healthcare I.Q., the plaintiff contracted to provide the defendant, a doctor, with coding and billing services, pursuant to which the defendant’s patient and billing records were uploaded into the plaintiff’s proprietary management software program. The contract provided for an initial 36-month term, followed by automatic renewals for 18-month periods, unless either party provided written notice of non-renewal at least ninety days before the end of a renewal period.

After the expiration of the original 36-month period, the defendant ceased making payments. Although he and his staff continued to use the software to review previously-uploaded patient files, they did not upload any additional files. Neither party provided written notice of termination.

The plaintiff sued, alleging that the defendant’s failure to provide notice of termination, as well as his ongoing use of the software, entitled it to payment for two additional 18-month terms.

The defendant moved for summary judgment under General Obligations Law § 5-903(2), which provides that in any contract “for service, maintenance or repair to or for any real or personal property,” automatic renewal provisions may not be enforced by the service provider unless he or she provides the service recipient “written notice, served personally or by certified mail, calling the attention of that person to the existence of such provision in the contract” within a specified time period prior to the automatic renewal. The Supreme Court denied the defendant’s motion on the ground that GOL § 5-903 was an affirmative defense that had not been pled in the answer and had thereby been waived.

When the plaintiff later amended the complaint to increase the ad damnum clause, the defendant included GOL § 5-903 in his amended answer and moved for summary judgment a second time. The trial court both denied the motion and sanctioned the defendant for making a second motion on the same legal ground.

The First Department first vacated the award of sanctions, holding that:

the second summary judgment motion, brought after the pleadings were amended on a substantive issue not previously decided by the court, was procedurally proper. Once plaintiff served the amended complaint, the original complaint was superseded, and the amended complaint became the only complaint in the action. The action was then required to proceed as though the original pleading had never been served. Thus, defendant’s appeal from the prior order denying summary judgment became moot and sufficient cause existed for his motion for summary judgment dismissing the amended complaint.

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

On the merits of GOL § 5-903, the First Department rejected the plaintiff’s argument that the services provided were not “for . . . personal property,” but were instead of a merely “consulting, analytical or administrative nature,” which would take them outside the statute:

The services provided were directly and inextricably related to the billing and medical records of the practice, which are personal property . . . . Here the agreement provided for [plaintiff] to take dominion over the records, and to maintain and organize them on an ongoing basis for billing and reimbursement purposes. This was not merely incidental access to the records in the context of administrative or consulting services.

Accordingly, the plaintiff’s failure to provide timely written notice of the automatic renewal made the renewal provision unenforceable. The defendant’s continuing access to the previously-stored files was justified by necessity and by the plaintiff’s failure to return the files as requested.

This opinion is of interest both because it reminds practitioners that even a minor alteration to a complaint can open the door to new affirmative defenses—here, the plaintiff lost its entire case because of an increase in the ad damnum clause—and also because it calls attention to a little-known section of the GOL that is applicable to a great many contracts with automatic renewal provisions.

Posted: May 7, 2014

Bank Must Honor Cashier’s Check Absent Fraud or Check Being Lost, Stolen, or Destroyed

On May 6, 2014, the Court of Appeals issued a decision in Golden v. Citibank, N.A., 2014 NY Slip Op. 03192, holding that a bank must honor its cashier’s checks “unless there is evidence of fraud, or the check is lost, stolen, or destroyed.”

The background to the court’s brief opinion can be found in the Second Department’s decision appealed from:

On December 29, 2009, the defendant, Citibank, N.A. (hereinafter Citibank), issued a cashier’s check in the sum of $300,000, payable to “Richard Golden as attorney.” This check was deposited by the plaintiff, Richard N. Golden, into his attorney escrow account at JP Morgan Chase Bank hereinafter Chase). Subsequently, Citibank issued a stop payment order on the check, and Chase reversed the credit that had been posted to the plaintiff’s account. . . . Citibank did not submit any evidence that the check was fraudulently issued or obtained, [but rather argued] that the check was stopped because a customer of the bank informed the bank that “she made alternate arrangements to have the funds delivered.”

The Court of Appeals held that the bank was not excused from honoring the check, explaining:

A cashier’s check — essentially, a check drawn by a bank on itself — is presumed to have been issued for value, and the issuance of such a check constitutes an acceptance by the issuing bank, which gives rise to an obligation to pay. When a bank has issued a cashier’s check, it cannot stop payment, unless there is evidence of fraud, or the check is lost, stolen, or destroyed. To the extent Gates v Manufacturers Hanover Trust Co./Capital Region (98 AD2d 829 [3d Dept 1983]) holds otherwise, it was wrongly decided and should not be followed.

(Internal quotations and citations omitted).

Posted: May 6, 2014

Defamation Claim Dismissed Because Not Pled With Particularity

On April 23, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Patterson v. Wilhelmina Intl., Ltd., 2014 NY Slip Op. 31092(U), dismissing a defamation claim because it was not pled with particularity.

In Patterson, the defendant moved to dismiss the plaintiff’s defamation claim. The court granted the motion because the claim was not sufficiently specific, explaining:

CPLR 3016 (a) requires: In an action for libel or slander, the particular words complained of shall be set forth in the complaint, but their application to the plaintiff may be stated generally. Well-established case law has consistently interpreted this section to require that the alleged defamatory words be set forth in haec verba. This requirement is strictly enforced and the exact words must be set forth. Paraphrasing and other descriptions or summaries of the alleged defamatory words, without stating the words themselves, have been held insufficient to satisfy the particularity requirement of CPLR 3016(a).

Here, there is no doubt that [the plaintiff] did not meet the level of specificity required by CPLR 3016(a) as the complaint contains no in haec verba recitation of the challenged statements. The complaint includes various references to the defamatory statements, but never sets the words forth verbatim. . . . The complaint also fails to state the time, manner, and to whom the alleged defamatory statements were made, which is a further requirement to withstand a motion to dismiss. The complaint’s allegations that [the defendant] made unidentified comments to employees of Wilhelmina is plainly insufficient.

(Internal quotations and citation omitted) (emphasis added). However, the court went on to grant the plaintiff’s motion to amend the complaint to add the required specificity.

This decision is a reminder that it is not just fraud claims that must be pleaded with particularity.  Indeed, as the court noted, a defamation claim must contain the exact defamatory words said.

Posted: May 5, 2014

Evidence Inadmissible Under Dead Man’s Statute Admissible In Opposition to Summary Judgment

On March 31, 2014, Justice Schmidt of the Kings County Commercial Division issued a decision in Peck v. Mitchell, 2014 NY Slip Op. 50715(U), applying the Dead Man’s Statute on a motion for summary judgment.

In Peck, the plaintiff asserted claims relating to ownership of her home. The defendant moved for summary judgment on the plaintiff’s claims. One argument raised by the defendant related to the admissibility of the plaintiff’s affidavit, which described an oral agreement between the plaintiff and her now-deceased son regarding ownership of her home. The court explained:

[T]he court rejects defendant’s assertion that the Dead Man’s Statute bars the plaintiff’s evidence regarding the alleged oral agreement. CPLR 4519 (the Dead Man’s Statute) bars testimony from a person interested in the event or a person from, through or under whom such person derives his or her interest or title with regard to any personal transaction or communication with the decedent. Generally, evidence that is inadmissible at trial under CPLR 4519 cannot be used to support a motion for summary judgment. However, statements of a decedent are not rendered inadmissible under the Deadman’s Statute’ (see CPLR 4519), when offered in opposition to a motion for summary judgment. Indeed, hearsay testimony which violates the Dead Man’s Statute (CPLR 4519) may be admitted for the purpose of opposing a motion for summary judgement. Nonetheless, evidence otherwise excludable at trial may not form the sole basis for a court’s determination, and standing alone, may be insufficient to defeat a motion for summary judgment.

Thus, the primary evidence presented in opposition to defendant’s motion (i.e., statements in the plaintiff’s affidavit referencing the alleged oral agreement) will be deemed admissible for purposes of defeating the summary judgment motion as long as there is some supportive admissible evidence.

(Internal quotations and citations omitted) emphasis added). The court went on to hold that other admissible was present and denied the plaintiff’s motion for summary judgment.

The Dead Man’s Statute does not frequently play a role in commercial litigation, but as this decision illustrates, it can have a significant impact and the rules for its application are not straightforward.

Posted: May 4, 2014

Action Transferred to Civil Court After Summary Judgment Limits Damages

On April 23, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Saxon Technologies, LLC v. Wesley Clover Solutions-North America, Inc., 2014 NY Slip Op. 31056(U), transferring an action to Civil Court after determining on a motion for summary judgment that the plaintiff’s damages were limited to less than $3,000.

In Saxon Technologies, the plaintiff asserted claims for breach of a non-solicitation agreement. In deciding the defendant’s motion for summary judgment, the court found that while the plaintiff had suffered damages for breach of the agreement, they were no more than $2,651.11. The court went on to rule that “[a]t best, this is a Civil Court matter. The action, thus, is transferred to Civil Court pursuant to CPLR 325(d) and 22 NYCRR 202.13(a).”

This decision illustrates the power of a Commercial Division justice to transfer a matter out of the Commercial Division if it is not a significant commercial dispute that should be adjudicated there.

Posted: May 3, 2014

No Fraud Without Justifiable Reliance on Alleged Misrepresentation

On May 1, 2014, the First Department issued a decision in Mosaic Caribe, Ltd. v. AllSettled Group, Inc., 2014 NY Slip Op. 03024, dismissing a fraud claim because the alleged reliance was not justifiable.

In Mosaic Caribe, the First Department affirmed the denial of the plaintiff’s motion to amend. Among the issues the First Department addressed was whether the plaintiff had “sufficiently allege[d] justifiable reliance on [the defendant’s alleged] misrepresentation.” The First Department agreed that the plaintiff had not done so, explaining:

Plaintiff, who agreed to purchase the policy at issue at least a year after the alleged misrepresentation, should have sought verification of ownership of the policy before agreeing to purchase it for $3 million. Plaintiff cannot credibly claim that it had no available means of verification, as such information would have been available from defendant or the proposed defendants had plaintiff requested it.

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

This decision serves as a reminder that the justifiable reliance element of a fraud claim exists and–particularly for sophisticated commercial parties–the courts will not overlook it.

Posted: May 2, 2014

Order is Not Appealable Merely Because it Contains Language or Reasoning that a Party Deems Adverse to its Interests

On April 30, 2014, the Second Department issued a decision in George Tsunis Real Estate, Inc. v. Benedict, 2014 NY Slip Op. 02899, discussing types of orders that are not interlocutorily appealable.

In George Tsunis Real Estate, the plaintiff and defendant both appealed the trial court’s denial of the plaintiff’s motion for summary judgment. The Second Department dismissed the defendant’s appeal, explaining:

The appeal from so much of the order as, in effect, denied the plaintiff’s motion for summary judgment on the issue of liability must be dismissed, as the defendants are not aggrieved by that portion of the order (see CPLR 5511). Contrary to the defendants’ contention, the order did not grant the plaintiff’s motion for summary judgment on the issue of liability, but determined that, although the plaintiff made a prima facie showing of its entitlement to judgment as a matter of law, the defendants raised a triable issue of fact as to whether the action is barred by the applicable statute of limitations. To the extent the defendants seek to appeal from the finding that the plaintiff made a prima facie showing of entitlement to judgment as a matter of law, merely because the order appealed from contains language or reasoning that a party deems adverse to its interests does not furnish a basis for standing to take an appeal.

The appeal from so much of the order as denied that branch of the defendants’ cross motion which was to preclude the plaintiff from offering certain evidence at the time of trial must be dismissed because it concerns an evidentiary ruling, which, even when made in advance of a hearing or trial on motion papers, is not appealable as of right or by permission.

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

This decision shows that, as broad as the right to take an interlocutory appeal is in New York, it is not unlimited.

Posted: May 1, 2014

Court of Appeals Arguments of Interest for the Week of May 5, 2014

Arguments the week of May 5, 2014, in the Court of Appeals that may be of interest to commercial litigators.

  • Docket No. 121: Norex Petroleum Limited v. Blavatnik (To be argued Tuesday, May 6, 2014) (addressing whether “CPLR 202, New York’s borrowing statute, which requires a nonresident plaintiff to satisfy the statute of limitations of New York and of the foreign jurisdiction where the claims accrued” trumps 28 USC
    § 1367(d) and CPLR 205(a), which toll the statute of limitations to allow plaintiffs to re-file dismissed federal suits in state court, in situations where the foreign jurisdiction has no analogous tolling statute). See First Department decision here.
  • Docket No. 109: Morpheus Capital Advisors LLC v. UBS AG (To be argued Tuesday, May 6, 2014) (considering the effect of an exclusive agency agreement where the buyer was procured by the seller, not a third-party). See First Department decision here.
  • Docket No. 110: KeySpan Gas East Corporation v. Munich Reinsurance America, Inc. (To be argued Tuesday, May 6, 2014) (considering whether insurers have a common law duty to make a coverage determination as soon as reasonably possible or forfeit their right to deny coverage).
  • Docket No. 112: Quadrant Structured Products Co., Ltd. v. Vertin (To be argued Wednesday, May 7, 2014) (addressing the following question certified from the Delaware Supreme Court: whether, under New York law, the absence of any reference in the no-action clause to the Securities precludes enforcement only of contractual claims arising under the Indenture, or whether the clause also precludes enforcement of all common law and statutory claims that security holders as a group may have).