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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: January 1, 2014

Opportunity to Comment on Proposed Changes to Commercial Division Rules

The rules of the Commercial Division change from time-to-time. Currently, there are four proposed rule changes open for public comment.

Proposed creation of a pilot mandatory mediation program in the Commercial Division of the Supreme Court, New York County.
Email comments to CommDivMedPilot@nycourts.gov by February 11, 2014.

Proposed adoption of new Commercial Division Rule 9, relating to the use of accelerated adjudication procedures in the Commercial Division of the Supreme Court.
Email comments to CommDivAccelAdjud@nycourts.gov by February 6, 2014.

Proposed adoption of new Preliminary Conference Form for use in the Commercial Division of the Supreme Court.
Email comments to CommDivPCForm@nycourts.gov by February 3, 2014.

Proposed adoption of a new Rule of the Commercial Division (22 NYCRR § 202.70(g)), relating to use of interrogatories in the Commercial Division of the Supreme Court.
Email comments to CommDivInterrogs@nycourts.gov by January 29, 2014.

Posted: December 31, 2013

Default Judgment Against Corporation in Favor of its Sole Employee Vacated

On December 4, 2013, Justice Schweitzer of the New York County Commercial Division issued a decision in Karian v. Physician’s Choice, Inc., 2013 NY Slip Op. 33219(U), where the president and sole employee of a corporation sued the corporation and caused it to default.

In Karian, plaintiff was the “president and sole employee” of the defendant closely-held corporation. In 2010, three separate actions were filed in Nassau County relating to the corporation–two competing derivative claims and an action for dissolution. In 2012, plaintiff brought an action in New York County against the corporation for unpaid salary. Because plaintiff was the sole employee of defendant, he caused defendant to default and judgment was entered against the defendant. One of defendant’s other shareholders then moved to intervene and to vacate the default judgment. The court granted the motion, writing:

CPLR Rule 5015 provides the grounds upon which a court may grant relief from judgment. CPLR 5015(a)(l) allows relief from judgment because of excusable default. To vacate a default, a party must show that an excusable default and a meritorious claim or defense. Mr. Karian is the president and sole employee of PCI and, as such, only he can mount a defense for the corporation. Mr. Karian had the power to prevent the default, but chose to take no action in the corporation’s defense. Therefore, the court finds that the default is excusable because the failure of the corporation to proceed is wholly the fault of the Plaintiff himself.

We suppose that the idea of having the corporation’s sole employee sue the corporation and taking a default judgment seemed clever at the time, but surely one would be hard pressed to find a court that would let the plaintiff get away with it. Justice Schweitzer did not.

Posted: December 30, 2013

Unambiguous Commercial Contract Enforced As Written Despite Burden

On December 26, 2013, the Second Department issued a decision in Obstfeld v. Thermo Niton Analyzers, LLC, 2013 NY Slip Op. 08601, reaffirming the rule that unambiguous commercial contracts will be enforced as written, even if it results in possible unfairness to one of the parties.

In Obstfeld, plaintiff contracted in December 2001 to provide investment banking services to defendant’s predecessor-in-interest. The agreement was “cancelable on sixty days notice by either party after August 1, 2002. In September 2002, the parties entered into an addendum to the [a]greement” that granted plaintiff “the exclusive right to act as financial advisor for [defendant’s predecessor-in-interest] for the next two rounds of institutional fundraising following the present round, as well as for any investment or merger/acquisition transaction or IPO.” The addendum by its terms “supersede[ed] any inconsistencies between the addendum and the [original] agreement,” but it neither provided for the termination of the amended agreement nor referred to the cancellation provisions in the original agreement.

In June 2003, defendant’s predecessor-in-interest informed plaintiff that it was cancelling the agreement pursuant to the 60 day notice provision on the original agreement. In March 2005, defendant’s predecessor-in-interest was acquired by defendant. Plaintiff demanded, and ultimately sued for, its investment banking fees. The trial court denied the defendant’s motion for summary judgment on the breach of contract claims. The Second Department reversed, writing:

A contract is to be construed in accordance with the parties’ intent, which is generally discerned from the four corners of the document itself. Consequently, a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms. . . .

Contrary to the plaintiffs’ contention, the Agreement, as amended by the Addendum, was not ambiguous with respect to the issue of whether termination was permitted upon 60 days’ notice. Although the Addendum gave Morningside the exclusive right to act as . . . financial advisor for further fundraising, including a possible merger or acquisition, the Addendum in no way abrogated the provision in the Agreement that the parties could end their relationship upon 60 days’ written notice, and thus was not ambiguous. In addition, the terms of the Addendum were not inherently inconsistent with the cancellation provision of the Agreement such that there was need to rely upon the final provision in the Addendum, which stated that the Addendum would “supersede any inconsistencies between the Addendum and the Agreement.”

(Internal quotations and citations omitted).

It is not news that the parol evidence rule is alive and well in New York. It is a little surprising that there are so many decisions that have to remind us of that fact.

Posted: December 29, 2013

Seller Cannot Unilaterally Make Time of the Essence

On December 26, 2013, the Second Department issued a decision in Revital Realty Group, LLC v. Ulano Corp., 2013 NY Slip Op. 08607, illustrating the application of “time is of the essence” in real estate transactions.

In Revital Realty Group, the defendant entered into a contract to sell commercial real estate to plaintiff. “The contract did not make time of the essence regarding the closing date, and it did not contain any mortgage contingency clause.” Approximately two weeks before the closing date, defendant’s “attorney wrote [plaintiff’s] attorney, reminding him” of the closing date and “proclaiming that ‘such date is time of the essence to the Contract.'” Defendant’s attorney pointed out that there was no time is of the essence provision in the contract and proposed a later closing date. The transaction did not close. When plaintiff sued for specific performance of the contract, the defendant answered, asserted counterclaims and moved for summary judgment. The trial court not only denied the motion, it also dismissed defendant’s counterclaims. The Second Department affirmed, explaining:

When a contract for the sale of real property does not make time of the essence, the law permits a reasonable time in which to tender performance, regardless of whether the contract designates a specific date for performance. What constitutes a reasonable time to perform turns on the circumstances of the case. Time may be made of the essence by clear, distinct, and unequivocal notice to that effect giving the other party a reasonable time in which to act.

Here, the contract provided for a closing to take place on March 29, 2012, but did not make time of the essence. Further, as a matter of law, the seller’s attorney’s letter of March 13, 2012, proclaiming “time of the essence” with respect to the closing date was premature and failed to afford the buyer a reasonable time after the March 29, 2012, closing date set forth in the contract within which to perform. Accordingly, the seller failed to demonstrate that it effectively made the March 29, 2012, closing a time of the essence closing date, and the buyer was entitled to a reasonable adjournment of the closing date. Consequently, the buyer cannot be considered in default for failing to appear at the March 29, 2012, closing.

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

The term “time is of the essence” has great power in real estate sales contracts. However, as the decision in Revital Realty Group shows, it is, at the end of the day, a contract term (or not, as here), not magic words that can be invoked at any time for any purpose.

Posted: December 28, 2013

Non-Party Subpoenas Quashed For Failure to Justify the Need for Discovery

On December 5, 2013, Justice Sherwood of the New York County Commercial Division issued a decision in Hildene Capital Mgt., LLC v. Bank of N.Y. Mellon, 2013 NY Slip Op. 33181(U), explaining the standard for obtaining non-party discovery.

In Hildene Capital Mgt., plaintiffs issued deposition subpoenas to two non-parties who already had been “deposed at great length in a previous” action in federal court regarding “the facts and circumstances leading to the preparation of an October 2009 opinion letter concerning the transaction that underlies the” Hildene Capital Mgt. action. The court granted the non-parties’ motions to quash, holding that even though plaintiffs were not parties to the prior action and thus had never had an opportunity to depose the witnesses, plaintiffs had not sufficiently justified deposing the non-parties again. The court explained:

The threshold requirement for disclosure in New York civil actions is that the disclosure sought be material and necessary in the prosecution or defense of an action. This principle is applicable to non-parties as well as parties. However, a disclosure request directed to a nonparty is governed by principles in addition to those governing a party. CPLR § 3101(a)( 4) directs that a nonparty be given notice stating the circumstances or reasons such disclosure is sought or required so as to afford a nonparty who has no idea of the parties’ dispute or a party affected by such request an opportunity to decide how to respond. . . . [T]he determination of whether to quash a nonparty subpoena does not turn solely on whether the discovery sought is relevant. Rather, . . . more than relevance and materiality is necessary to warrant disclosure from a nonparty.

. . .

The court finds [plaintiffs’] proffer in opposition to the motion to quash insufficient in the context of this case to cure the facial deficiency of their subpoenas. It does little to clarify the nature of the inquiry or narrow the scope for the proposed depositions. Thus, [plaintiffs have] failed to meet [their] burden of demonstrating the circumstances and reasons additional testimony from the nonparties is warranted. Moreover, [plaintiffs have] failed to show that the disclosure sought cannot be obtained from other sources.

Litigants often take for granted the right to obtain discovery from third-parties. The court’s decision in Hildene Capital Mgt. illustrates the danger of such an approach; the better approach is to take the requirements of CPLR § 3101(a)(4) seriously and ensure that non-party discovery demands are properly justified (and justifiable).

Posted: December 27, 2013

No Part Performance Exception to Statute of Frauds for Obligations that Cannot be Performed Within a Year

On December 17, 2013, the First Department issued a decision in Gural v. Drasner, 2013 NY Slip Op. 08391, overruling earlier cases recognizing a part performance exception to the Statute of Frauds for contracts that are incapable of being performed within a year.

Plaintiff and defendant allegedly orally agreed that if plaintiff cleared defendant’s land, he could use it for pasturing and that defendant would reimburse plaintiff’s expenses when defendant sold the property. It took several years to clear and improve the land.  When defendant later sold his property, he refused to reimburse plaintiff’s expenses.

Plaintiff sued to recover his expenses. Defendant moved for summary judgment because it took more than one year for plaintiff to perform the alleged oral agreement. Plaintiff argued that part performance took his claim out of the Statute of Frauds. The First Department assumed for purposes of the appeal that the task performed by plaintiff could not possibly have been performed in a year (although it expressed doubts on that score in dicta, noting that “the determination of whether an alleged oral contract can possibly be performed within one year of its making is not conducted by looking back at the actual performance; it requires analysis of what was possible, looking forward from the day the contract was entered into.” (emphasis added)). The First Department then held that there was no part performance exception to the General Obligations Law’s Statute of Frauds for obligations that could not be performed within a year:

Analysis of the part performance exception must begin by emphasizing that General Obligations Law § 5-701 lacks any provision for a part performance exception such as that explicitly provided for by General Obligations Law § 5-703, which concerns contracts for the conveyance of an interest in real property. That is, while § 5-703(4) specifically provides, ‘Nothing contained in this section abridges the powers of courts of equity to compel the specific performance of agreements in cases of part performance,’ the broader statute of frauds provision of § 5-701 contains nothing of the sort —- although, notably, it contains other exceptions (see e.g., §5-701[10] (‘This provision … shall not apply to a contract to pay compensation to an auctioneer, an attorney at law, or a duly licensed real estate broker or real estate salesman’)).

Two relevant principles of statutory construction apply here. The first is that ‘a court cannot amend a statute by inserting words that are not there, nor will a court read into a statute a provision which the Legislature did not see fit to enact’ The second is that an “inference must be drawn that what is omitted or not included was intended to be omitted and excluded.’ Inferring that the Legislature authorized a part performance exception for an oral contract that is not capable of performance within one year violates these principles.

(Internal quotations and citations omitted).

Although Gural was not an appeal from a Commercial Division decision, the principle it announces is important in commercial litigation affected by the Statute of Frauds.

Posted: December 26, 2013

Late Motion for Summary Judgment Rejected, Even When Styled as a Cross-Motion to a Timely-Made Motion

On December 24, 2013, the First Department issued a decision in Kershaw v. Hospital for Special Surgery, 2013 NY Slip Op. 08548, clarifying that the CPLR-mandated deadline for filing a motion for summary judgment cannot be extended simply by styling the motion as a cross-motion to a timely made motion.

Kershaw involved an appeal from a medical malpractice action, not a commercial one, but the procedural point made by the decision applies to all litigation. In Kershaw, the plaintiff filed a Note of Issue on August 24, 2011; the trial court then ordered that summary judgment motions were to be made no later than November 14, 2011. On November 11, 2011, one defendant moved for summary judgment. On January 10, 2012–almost two months after the deadline for summary judgment motions–the other defendant “‘cross-moved’ for summary judgment without providing any explanation whatsoever for its delay.” The trial court denied the second motion as untimely, a decision that a divided panel of the First Department affirmed.

The majority of the panel explained: (more…)

Posted: December 25, 2013

Attorneys’ Fees Award Limited Because Plaintiff Did Not Prevail on All Arguments

On December 24, 2013, the First Department issued a decision in RSB Bedford Assoc. LLC v. Ricky’s Williamsburg, Inc., 2013 NY Slip Op. 08526, showing how a prevailing party’s right to recover its litigation expenses can be limited by the degree to which it prevails.

In RSB Bedford Assoc., the First Department affirmed a damages award for breach of a real estate purchase contract. The First Department’s decision on the damages point is interesting and we recommend that you read it in the linked decision. However, for this post we wish to focus on the First Department’s discussion at the end of the decision regarding plaintiff’s attorneys’ fees. The court held:

While recovery of attorneys’ fees by “the successful party” is provided for in the lease, the Referee properly reduced the amount sought by plaintiff to reflect that while it was the prevailing party, it did not prevail on all of its claims, particularly those seeking “expectancy” (extraordinary) damages.

The right of the prevailing party to recover its attorneys’ fees sometimes provides an incentive for aggressive litigation. RSB Bedford Assoc. reminds us, however, that courts may not allow a prevailing party to recovery fees for aspects of the litigation in which it did not prevail.

Posted: December 24, 2013

Auctioneer Exception to Statute of Frauds Satisfied by Multiple Writings

On December 17, 2013, the Court of Appeals issued a decision in William J. Jenack Estate Appraisers and Auctioneers, Inc., v. Albert Rabizadeh, Docket No. 229, addressing the Statute of Frauds’ requirements for sales at auction.

William J. Jenack Estate Appraisers and Auctioneers involved an auction buyer who sought to avoid a $400,000 auction purchase on the ground that the auctioneer’s documentation could not satisfy the UCC’s Statute of Frauds, and the exception thereto contained in GOL 5-701(a)(6), which provides:

Notwithstanding section 2-201 of the uniform commercial code, if the goods be sold at public auction, and the auctioneer at the time of the sale, enters in the sale book, a memorandum specifying the nature and price of the property sold, the terms of the sale, the name of the purchaser, and the name of the person on whose account the sale was made, such memorandum is equivalent in effect to a note of the contract or sale, subscribed by the party therewith to be charged.

The buyer argued that the sale book failed to satisfy Section 5-701(a)(6) because it failed to name either the buyer—who was identified by a number—or the seller. The Court of Appeals disagreed, holding that an absentee bidder form, which did include the buyer’s name along with his identifying number, could be considered together with the auctioneer’s book as a “related writing”:

We agree with the Appellate Division that the absentee bidder form, along with the clerking sheet, provide the necessary information to establish the name of Rabizadeh as the buyer. This conclusion is inescapable given that each of the documents contained information pertaining to the terms of the sale as required by the Statute. Both contain the item number, the bidder number, the auctioneer, and a detailed description of the item.

The Court of Appeals went on to reject the buyer’s second argument, holding that Section 5-701(a)(6) did not require disclosure of the seller’s name but could be satisfied if the writing named the seller’s agent, such as the auctioneer in this case.

In this case, despite statutory language apparently focusing specifically on the auctioneer’s sale book, the Court of Appeals looked outside the sale book and considered other writings on order to rule that the Statute of Frauds was satisfied, seeming to show their unwillingness to allow parties to avoid commercial transaction based upon purely technical violations of the Statute of Frauds.

Posted: December 23, 2013

Action Dismissed Due to Failure to Give Contractually-Required Notice and Opportunity to Cure Before Expiration of Limitations Period

On December 19, 2013, the First Department issued a decision in ACE Sec. Corp. v. DB Structured Prods., Inc., 2013 NY Slip Op. 08517, dismissing 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.

In ACE Sec. Corp., plaintiff alleged that “defendant breached representations and warranties in connection with the securitization of a pool of mortgage loans governed by a Mortgage Loan Purchase Agreement (MLPA) and a Pooling and Servicing Agreement (PSA). The MLPA and PSA provided that the trustee was not entitled to sue or to demand that defendant repurchase defective mortgage loans until it discovered or received notice of a breach and the cure period lapsed.” The trial court denied a motion to dismiss on statute of limitations grounds, holding “that plaintiff’s claims did not accrue until defendant either failed to timely cure or repurchase a defective mortgage loan.” The First Department disagreed, holding that “the claims accrued on the closing date of the MLPA, March 28, 2006, when any breach of the representations and warranties contained therein occurred.”

The “certificate holders commenced an action on behalf of the trust, after plaintiff refused to do so, on March 28, 2012, the last day of the limitations period.” Unfortunately for them, the

defendant had not received notice of the alleged breach until February 8, 2012. Thus, the 60- and 90-day periods for cure and repurchase had not yet elapsed. The certificate holders’ failure to comply with a condition precedent to commencing suit rendered their summons with notice a nullity.

(Internal quotations and citations omitted).

Moreover,

the certificate holders lacked standing to commence the action on behalf of the trust. The “no-action” clause in § 12.03 of the PSA sets forth as a condition precedent to such an action that the certificate holders provide the trustee with “a written notice of default and of the continuance thereof.” However, the “defaults” enumerated in the PSA concern failures of performance by the servicer or master servicer only. Thus, the PSA does not authorize certificate holders to provide notices of “default” in connection with the sponsor’s breaches of the representations.

(Internal quotations and citations omitted).

One lesson to be learned here is the need to parse carefully any contractual language governing a claim before bringing a breach of contract action. The failure to perform the condition precedent of giving notice and an opportunity to cure proved fatal to plaintiff’s claims here.