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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
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).

Posted: March 12, 2014

Person Who Signs Contract on Behalf of Non-Existent Entity Personally Liable

On March 11, 2014, the First Department entered a decision in Sunquest Enterprises, Inc. v. Zar, 2014 NY Slip Op. 01551, addressing the issue of a contract entered into by an allegedly non-existent entity.

In Sunquest Enterprises, the court examined the question of whether defendants who signed a contract on behalf of a non-existent entity were personally liable under the contract. While the court affirmed the trial court’s holding that there was a question of fact regarding the entity’s existence, it explained that “[p]laintiff is correct that, had defendants entered into a contract on behalf of a non-existent entity, . . . they would be personally liable under the contract.”

This decision shows the importance of making sure that the contracting parties in an agreement are correctly identified.

Posted: March 11, 2014

Lawyer’s “Stalking” of Jurors Leads to Mistrial

On March 5, 2014, Justice Karalunas of the Onondaga County Commercial Division issued a decision in Varano v. FORBA Holdings, LLC, 2014 NY Slip Op. 50312(U), addressing inappropriate counsel contact with jurors.

We have excerpted Justice Karalunas’s opinion below. We think the practice tips are plain:

In a decision dated November 18, 2013 and order dated December 2, 2013, this court exercised its discretion to grant a new trial. The decision was not made lightly. In fact, it disturbed a unanimous jury verdict for the defense after a 15-day trial and the use of tremendous judicial resources. The decision was required because the conduct of a third party, an attorney named Scott Greenspan, violated the sanctity of the jury, imperiled the administration of justice, and was prejudicial and likely influenced the jury’s verdict. (more…)

Posted: March 10, 2014

Findings In SEC and NYSE Administrative Orders Do Not Trigger Dishonest Act Exclusion Under Professional Liability Policy

On February 28, 2014, Justice Ramos of the New York County Commercial Division issued a decision in J.P. Morgan Securities Inc. v. Vigilant Insurance Co., 2014 NY Slip Op. 50284(U), ruling that administrative orders by the SEC and a New York Stock Exchange hearing panel did not constitute a “judgment or other final adjudication” sufficient to trigger a Dishonest Acts Exclusion under a professional liability policy.

J.P. Morgan v. Vigilant, arose from regulatory investigations of Bear Sterns “for allegedly facilitating late trading and deceptive market timing on behalf of certain customers for the purchase and sale of shares in mutual funds.” In connection with a settlement of its investigation, the SEC issued an order that “set forth 40 pages of detailed findings pertaining to Bear Stearns’ facilitation of late trading and market timing practices,” and concluded that Bear Stearns “willfully aided and abetted violations of the federal securities law.” The order expressly stated that Bear Stearns was not “admitting or denying the findings.” A similar settlement was reached with the NYSE, after which Bear Stearns settled 13 civil class actions lawsuits involving late trading and market timing allegations.

Bear Stearns’ insurers disclaimed coverage, arguing that the SEC and NYSE findings triggered a Dishonest Act Exclusion in the applicable policies, which barred coverage for any claims (more…)

Posted: March 9, 2014

Second Department Finds Private Right of Action Under Prompt Pay Law

On March 5, 2014, the Second Department issued a decision in Maimonides Medical Center v. First United American Life Insurance Co., 2014 NY Slip Op. 01441, examining whether there is a private right of action against insurers under Insurance Law § 3224-a (the Prompt Pay Law).

In Maimonides Medical Center, the Second Department held that a health care provider can assert claims against an insurer for violating Insurance Law § 3224-a, the Prompt Pay Law, which “sets forth time frames within which an insurer must either pay a claim, notify the claimant of the reason for denying a claim, or request additional information.” The court reasoned:

Where a statute does not expressly confer a private cause of action upon those it is intended to benefit, a private party may seek relief under the statute only if a legislative intent to create such a right of action is fairly implied in the statutory provisions and their legislative history. This inquiry involves three factors: (1) whether the plaintiff is one of the class for whose particular benefit the statute was enacted; (2) whether recognition of a private right of action would promote the legislative purpose; and (3) whether creation of such a right would be consistent with the legislative scheme.

Only the third factor, which is generally the most critical, is disputed here.

[The defendant] contends that the third factor has not been satisfied because private enforcement of the statute would be inconsistent with the legislative scheme, which delegates enforcement to the Superintendent. The amicus health plan organization agrees. This contention is not persuasive. We conclude that a private right of action, in addition to administrative enforcement, is fully consistent with the legislative scheme, and that a private right of action is to be implied.

No doubt there will be more litigation over this issue, which creates yet another basis for litigation against insurers.

Posted: March 8, 2014

Court Identifies Elements of Claim for Aiding and Abetting Undue Influence

On February 28, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in Goldberg v. HSBC Securities (USA), Inc., 2014 NY Slip Op. 30481(U), examining the elements of a claim of aiding and abetting undue influence.

In Goldberg, the executor of an estate brought claims related to alleged undue influence over the decedent, including a claim for aiding and abetting undue influence against two defendants. In deciding the motion to dismiss brought by those defendants, the court considered whether such a tort existed and, if so, what its elements were, explaining:

No authoritative New York case concludes that there exists in New York a cause of action for aiding and abetting undue influence. Plaintiff relies on Medeiros v. John Alden Life Ins. Co., 1990 U.S. Dist. LEXIS 10393, 1990 WL 115606 (S.D.N.Y. 1990) for the proposition that one may be held liable for aiding and abetting another’s undue influence. On a motion for summary judgment, the court in Medeiros found that “[u]nder New York law, however, a person may be liable for aiding and abetting the tortious act of another where plaintiff demonstrates: (1) that the principal/third party violated the law or engaged in tortious conduct; (2) that the defendant knew or should have known that the violation or conduct was occurring; and (3) that defendant’s conduct gave substantial assistance or encouragement to the principal to engage in the violation or tortious conduct.”

The standard articulated by the court in Medeiros is essentially that for aiding and abetting fraud. Critical to a claim for aiding and abetting fraud is that the plaintiff plead “substantial assistance.” In addition, aiding and abetting fraud must be pleaded with the specificity sufficient to satisfy CPLR 3016 (b). Substantial assistance exists where (1) a defendant affirmatively assists, helps conceal, or by virtue of failing to act when required to do so enables the fraud to proceed, and (2) the actions of the aider/abettor proximately caused the harm on which the primary liability is predicated.

(Internal quotations and citations omitted). The court went on to find that the plaintiff had failed “to allege substantial assistance with sufficient particularity to satisfy CPLR 3016(b).”

Posted: March 7, 2014

Standard for Pre-Award Attachment Under CPLR 7502(c) is that Award Must Otherwise Be “Rendered Ineffectual”

On March 6, 2014, the First Department issued a decision in Matter of Kadish v. First Midwest Securities, Inc., 2014 NY Slip Op. 01517, addressing the standard in deciding motions for CPLR 7502(c) attachments.

In Matter of Kadish, the First Department addressed whether, in addition to the grounds stated in CPLR 7502(c)–that without the attachment, the award will be rendered ineffectual–a petitioner seeking a pre-award attachment also must also demonstrate the traditional factors for injunctive relief under CPLR article 63.

Without making a clear statement, the court implied that the “rendered ineffectual” standard is the only one governing Article 75 attachments, writing:

CPLR 7502(c) provides, in pertinent part, that the court may

entertain an application for an order of attachment or for a preliminary injunction in connection with an arbitration . . . but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief. The provisions of articles 62 [attachment] and 63 [injunction] of this chapter shall apply to the application, including those relating to undertakings and to the time for commencement of an action (arbitration shall be deemed an action for this purpose), except that the sole ground for the granting of the remedy shall be as stated above”

(emphasis added).

Respondent FMSI disputes this standard, citing to multiple cases which involve injunctions under CPLR 7502(c), and clarify that, in addition to the usual three-prong test for preliminary injunctions under article 63 of the CPLR, a petitioner must demonstrate that a potential arbitral award could be rendered ineffectual (see Interoil LNG Holdings, Inc. v Merrill Lynch PNG LNG Corp., 60 AD3d 403, 404 [1st Dept 2009]; Founders Ins. Co. Ltd. v Everest Natl. Ins. Co., 41 AD3d 350, 351 [1st Dept 2007]; Erber v Catalyst Trading, 303 AD2d 165 [1st Dept 2003]; Matter of Cullman Ventures [Conk], 252 AD2d 222, 230 [1st Dept 1998]; Koob v IDS Fin. Servs., 213 AD2d 26 [1st Dept 1995]; see also SG Cowen Sec. Corp. v Messih, 224 F3d 79, 81-84 [2d Cir 2000] [detailed analysis of interplay between CPLR 7502 and CPLR article 63]).

Recent cases of this Court, however, continue to apply the “rendered ineffectual” standard with regard to a CPLR 7502(c) attachment in aid of arbitration (Matter of Sojitz Corp. v Prithvi Info. Solutions Ltd., 82 AD3d 89, 96 [1st Dept 2011] [citing Matter of H.I.G. Capital Mgt. v Ligator, 233 AD2d 270, 271 [1st Dept 1996]; Sullivan & Worcester LLP v Takieddine, 73 AD3d 442, 442 [1st Dept 2010]), and we agree with this interpretation.

The First Department went on to find that “under either standard, petitioner’s evidentiary showing was insufficient” to support the imposition of a pre-award attachment.

The implication of this decision is that the First Department will require only that an award be “rendered ineffectual” in order to grant a CPLR 7502(c) attachment. Hopefully, at some point the court will provide clearer guidance. Until then, litigators seeking an Article 75 attachment still must be prepared to address an argument that they must meet the traditional Article 63 standards for preliminary injunctive relief as well.

Posted: March 5, 2014

Buyer’s Broker Not Third-Party Beneficiary of Real Estate Sales Contract That Refers Only to Commission to Seller’s Broker

On February 20, 2014, Justice Pines of the Suffolk County Commercial Division issued a decision in Saunders Ventures, Inc. v. Morrow, 2014 NY Slip Op. 30455(U), holding that a buyer’s broker was not a third-party beneficiary of a real estate sales contract.

In Saunders Ventures, the plaintiffs, who alleged that they procured the buyer of real property sold by the trust of which the moving defendants’ were successor trustees, sued for unpaid real estate commissions. The moving defendants moved to dismiss on the ground that the only contract relating to commissions to which the trust was a party was the contract with the seller’s broker. The plaintiffs opposed the motion, arguing that they were third-party beneficiaries of the contract of sale for the property which referred to the selling broker’s commission. The trial court held that the plaintiffs were not third-party beneficiaries, explaining:

One who seeks to maintain an action for breach of contract as a third party beneficiary must establish that: 1) there is an existing and valid binding contract between the signatories; 2) the contract was intended for the third party’s benefit; and 3) the benefit to third party is clear and direct as opposed to incidental. It must be established that the language of the subject contract clearly evidences an intent to permit enforcement by the third party; therefore, courts are reluctant to construe an intent to benefit a third party in the absence of clear contractual language evincing such intent.

In the context of claims by an alleged procuring broker, there appears to be no basis for a claim against a seller that contracts solely with the listing broker and makes no commitment to the broker who assisted in procuring the sale. Thus, in Fischer v RSWP Realty LLC d/b/a Prudential Rand Realty et al, 19 AD 3d 540, 798 NYS 2d 72 (2d Dep’t 2005), the Second Department held that dismissal of a procuring broker’s claim against the vendor was warranted where no express nor implied contract (existed between such broker and the vendors, whose sole brokerage contract was the listing agreement with the listing broker. The same conclusion was reached in a procuring broker’s claim against seller in REMAX Homes and Estates, Inc. v Ivan Leist, 308 AD 2d 439, 764 NYS 2d 107 (2d Dep’t 2003).

(Internal quotations and citations omitted) (emphasis added). Finding no evidence supporting the plaintiffs’ argument that they had established the elements of being a third-party beneficiary, the court dismissed the plaintiffs’ claims against the moving defendants.

This decision illustrates the narrow scope of the third-party beneficiary doctrine in New York.