Current Developments in the Commercial Divisions of the
New York State Courts
On October 28, 2013, Justice Whelan of the Suffolk County Commercial Division issued a decision in North Coast Outfitters, Ltd. v. Darling, 2013 NY Slip Op. 32731(U), declining to apply the doctrine of equitable estoppel to toll the statute of limitations in a shareholder dispute.
Justice Whelan explained:
[T]he doctrine of equitable estoppel applies where plaintiff was induced by fraud, misrepresentations or deception to refrain from filing a timely action and the plaintiff demonstrates reasonable reliance on the defendant’s misrepresentations. To be successful, the party seeking to invoke the estoppel doctrine bears the burden of demonstrating that it was diligent in commencing the action within a reasonable time after the facts giving rise to the estoppel have ceased to be operational. Where concealment without actual misrepresentation is claimed to have prevented a plaintiff from commencing a timely action, the plaintiff must demonstrate a fiduciary relationship exists, out of which. an obligation arises to inform the plaintiff of facts material to the underlying claim. In cases like the instant one wherein a fiduciary duty is owing from the defendant, the plaintiff must establish that the defendant’s failure to inform the plaintiff of material facts contributed to the delay in bringing the action.
Justice Whelan found that equitable estoppel did not apply because the plaintiff had not raised “a genuine issue of fact regarding the existence of any lack of knowledge of true facts on the part of the plaintiff or of any subsequent acts of concealment or other failure by [defendant] to disclose material facts he had a duty to disclose which caused the plaintiff’s failure to bring its claim in a timely manner.”
On October 24, 2013, Justice Friedman of the New York County Commercial Division issued a decision in Glanzer & Co., LLC v. Air Line Pilots Association, 2013 NY Slip Op. 32713(U), denying defendant’s motion for summary judgment dismissing plaintiff’s breach of contract claim after concluding that material issues of fact existed with respect to whether defendant had breached a “best efforts” clause in the parties’ contract.
The contract in Glanzer was between an investment bank and an airline pilot’s union that required the union to “use its reasonable best efforts to cause an entity or party other than [the union] . . . to pay . . . a customer investment banking fee,” i.e., a “success fee,” to the plaintiff in connection with labor contract negotiations between the union and U.S. Airways. The airline did not pay plaintiff a success fee, which resulted in the plaintiff suing the union for breaching the “best efforts” clause.
At the close of discovery, the union moved for summary judgment dismissing this claim on the ground that the parties’ agreement contained no objective criteria against which its efforts could be measured. In her decision, Justice Friedman acknowledged a division of authority among New York courts over how to interpret “best effort” clauses. On the one hand, she wrote, there is “substantial authority that for a contractual provision requiring a party to employ reasonable efforts or ‘best efforts’ to be enforceable, there must be objective criteria against which a party’s efforts can be measured, whether the requirement is deemed to be implicit or explicit,” and, “a clear set of guidelines against which to measure a party’s efforts is essential to its enforcement.” (Internal quotation marks and citations omitted). On the other hand, she wrote, “there is also substantial authority that a ‘best efforts’ provision may be enforceable, notwithstanding that the contract itself does not set forth objective criteria by which to measure the best efforts.” (Internal quotation marks and citations omitted). Indeed, Justice Friedman quoted several federal court cases characterizing New York’s best efforts jurisprudence as “murky” and “far from clear.”
Justice Friedman concluded that, “at least where a material question of fact exists as to whether best efforts have been made, a best efforts provision may be enforced in the absence of contractually articulated criteria” and denied the union’s summary judgment motion after finding that such factual disputes existed.
Until New York’s conflicting “best efforts” jurisprudence is reconciled, parties who wish to put “best efforts” clauses in their commercial agreements would be well advised to include objective criteria for measuring the success of such efforts.
On October 29, 2013, Justice Kornreich of the New York County Commercial Division issued a decision in Saska v. Metropolitan Museum of Art, 2013 NY Slip Op. 23366, addressing, among other things, the law of third-party beneficiaries as applied to the Metropolitan Museum of Art’s “pay what you wish” admissions policy.
In Saska, the plaintiffs alleged that they were third-party beneficiaries of the lease entered into by the City and the museum in 1878 that prohibited the museum from charging for admission. The museum, they argued, had violated the lease by charging admission under its “pay what you wish” admissions policy, because that policy required almost all visitors to pay something to enter the museum, even if only a penny. Justice Kornreich found that the plaintiffs were not third-party beneficiaries of the lease, even though they were members of the public that the museum was founded to serve, and even if they were, they were not entitled to the remedy they were seeking:
[A] third-party beneficiary has no greater rights or remedies than the direct parties to a contract. . . . Assuming, arguendo, that plaintiffs are intended beneficiaries of the Lease, they still cannot compel specific performance that differs from the remedy provided for in the Lease. Third-party beneficiaries do not have contractual rights that go beyond or contravene the explicit terms of the contract. To wit, if the City were before this court, it would not get the injunctive relief requested by plaintiffs. Rather, service of a proper Notice to Cure and, if no cure takes place, eviction, is the remedy under the lease. Plaintiffs’ rights as alleged third part beneficiaries are no greater than those of the City.
Further, on this record, there is little . . . doubt that the City has no desire to evict the Museum for the conduct alleged in this action. Plaintiffs should not be permitted to disregard the contracting party’s decision as to the benefits it seeks to gain from its contract and the enforcement benefits it negotiated to achieve those benefits. In other words, plaintiffs cannot force the Museum to abide by the terms of the Lease in a manner that contravenes the express wishes of its landlord.
(Citations and internal quotations omitted).
On October 21, 2013, Justice Bransten of the New York County Commercial Division issued a decision in Gama Aviation Inc. v. Sandton Capital Partners, LP, 2013 NY Slip Op. 32648(U), showing the importance of dilligently identifying and raising discovery disputes.
The Gama Aviation decision dealt with several issues, including two motions to compel the production of documents. Both were denied. Among the reasons for the denial was that the movants did not bring the motions until the close of discovery, as much as two years after document production began. As Justice Bransten held in connection with the motion to compel relating to a non-party:
Although CPLR 3122 does not impose a time limit upon a party seeking discovery to bring a motion to compel production, if a party fails to make a motion to compel within a reasonable time, she may forfeit the right to obtain the items sought. New York courts have consistently held that motions to compel that are filed late in a case, and long after the initial requests were made, are inappropriate and inexcusable, and should be denied without further consideration.
Here, having waited over two years from the issuance of their subpoenas to move to compel KEF to produce documents, and nearly a year after KEF provided documents seeking to cure the deficiencies alleged in plaintiffs’ January 2012 letter, plaintiffs cannot reasonably claim that their delay was excusable, particularly as KEF is not even a party to this litigation. Plaintiffs have had ample opportunity to take discovery from KEF, and as such, the motion to compel is denied.
(Citations and internal quotations omitted) (emphasis added).
The lesson here is plain. At the same time, the solution is not always simple. It can take time to identify the gaps in a document production and to make the record necessary to establish that the documents sought are relevant and that they exist but were not produced. And, of course, courts are justifiably impatient with litigants who do not try to resolve discovery disputes between themselves before raising them with the court. Still, as Gama Aviation illustrates, if you wait until the end of discovery to tee up your discovery disputes, you may have waited too long.
On October 23, 2013, Justice Ramos of the New York County Commercial Division issued a decision in Schoonover v. Massachusetts Mut. Life. Ins. Co., 2013 NY Slip Op. 32682(U), reminding insurance companies that they ignore the notice requirements of the Insurance Law at their peril.
In Schoonover, the plaintiffs, trustees of an insurance trust established by a now-deceased partner at Skadden Arps, purchased life insurance from defendant Mass Mutual through Skadden. From the date of issuance until the insured’s retirement, Skadden paid the monthly charges on the policy. Upon the insured’s retirement, Mass Mutual issued a letter of portability. When premiums had thereafter not been paid, Mass Mutual issued non-payment notices to Skadden and then ultimately notices of cancellation to Skadden as well. Justice Ramos granted summary judgment to the plaintiffs, ruling that the notices to Skadden were not sufficient and that the insurer was required to provide actual notice to the actual address of the insured:
[F]orfeiture of life insurance coverage for nonpayment of premiums is not favored in the law, and will not be enforced absent a clear intention to claim that right. . . . In the same vein, an insurer may not depend upon a default to which its own wrongful act or negligence contributed, and but for which a lapse might not have occurred.
Here, the Certificate and the Policy entitle the Insured to a billing notice after he retired from Skadden, and conditions cancellation of the Policy upon the giving of that notice to him, in addition to a pre-lapse or default notice to the owners of the Certificate, the plaintiffs.
(Internal quotations and citations omitted).
On October 30, 2013, the Second Department issued a decision in Varveris v. Zacharakos, 2013 N.Y. Slip Op. 07028, examining when a corporate officer/director owes a fiduciary duty to the corporation’s shareholders.
In Varveris, the defendant was “a director, officer, shareholder, and managing agent of” a close corporation of which plaintiff was a shareholder. Defendant purchased another shareholder’s shares in the corporation. Plaintiff sued defendant for breach of fiduciary duty in connection with the sale, claiming that defendant had a duty to allow plaintiff to participate in the purchase. The Second Department held that defendant had no fiduciary duty to plaintiff in this situation, writing:
Contrary to the plaintiff’s contention, [defendant]’s status as an officer, director, or shareholder of a close corporation does not, by itself, create a fiduciary relationship as to his individual purchase of another shareholder’s stock.
(Emphasis added) (citations and internal quotations omitted).
Varveris illustrates the importance of context in determining whether someone is a fiduciary.
On October 29, 2013, the First Department issued a decision in Jumax Assoc. v. 350 Cabrini Owners Corp., 2013 NY Slip Op. 06992, illustrating the scope of the doctrine of res judicata. Jumax had
previously commenced an action in 2002 seeking to recover fees that had been paid to defendant co-op pursuant to a license agreement defendant had entered into in or about 1995 with a third-party cellular telephone company, as well as fees that would be paid through the time of judgment. At the time the action was commenced, the license agreement had been amended and extended three times. During the pendency of the prior action, the license agreement was amended and extended two more times.
Jumax lost the 2002 action. Jumax then initiated a new lawsuit “to recover amounts paid pursuant to the amendments entered into during the pendency of the prior action.” The First Department held that such claims were “barred by the doctrine of res judicata.” As the First Department noted, res judicata “applies not only to claims actually litigated but also to claims that could have been raised in the prior litigation.” (Citations and internal quotations omitted) (emphasis added).
Jumax shows that if you have claims and do not bring them in a pending action, you risk losing them forever.
On October 16, 2013, the Second Department issued a decision in Kalmon Dolgin Affiliates, Inc. v. Tonacchio, 2013 NY Slip Op. 06660, illustrating the importance of the documentary evidence prong of a motion to dismiss and its usefulness in dismissing a claim at the beginning of an action. In Kalmon Dolgin, the Second Department partially reversed an opinion by Justice Schmidt of the Kings County Commercial Division, holding that he should have granted a motion to dismiss based on documentary evidence establishing that the signatory to the contract was not actually binding his corporate affiliates to the agreement upon which they were being sued. The Second Department wrote:
Where a party offers evidentiary proof on a motion pursuant to CPLR 3211(a)(7), the focus of the inquiry turns from whether the complaint states a cause of action to whether the plaintiff actually has one. Here, the Supreme Court should have granted that branch of the moving defendants’ motion which was pursuant to CPLR 3211(a)(7) to dismiss the first cause of action insofar as asserted against Katan and 267. The evidentiary material submitted by the moving defendants demonstrated that the plaintiff’s allegation that it had entered into the letter agreement with Katan was “not a fact at all.” Specifically, the moving defendants’ submissions conclusively demonstrated that Katan was not a signatory to the letter agreement, and that 267 was not referenced in that agreement. Since the moving defendants established that neither Katan nor 267 were signatories to the letter agreement, Katan and 267 cannot be bound by it. Although the plaintiff alleged in an affidavit submitted by its president in opposition to the moving defendants’ motion that it was led to believe that Tonacchio was a managing member of 267 and an officer, director, or shareholder of Noreast, and that Tonacchio was authorized to bind all parties to the letter agreement, there is nothing in the letter agreement to suggest that, in signing it, Tonacchio was also binding 267 or Katan to the terms of the letter agreement.
(Citations and internal quotations omitted).
On October 9, 2013, we noted that on October 15, 2013, the Court of Appeals would be hearing argument in Cruz v. TD Bank NA., Docket No. 191, an appeal addressing two questions certified from the US Court of Appeals for the Second Circuit relating to a private right of action for money damages and injunctive relief against banks that violate the Exempt Income Protection Act (EIPA)’s procedural requirements. Both the hearing transcript and a video of oral argument are now available on the court’s website.
On October 24, 2013, the First Department, in a 3-2 decision, issued a decision in BDC Finance L.L.C. v. Barclays Bank PLC, 2013 NY Slip Op. 06963, enforcing a contract in a way that created a significant burden on one party but not the other. This apparent unfair result was due to a “notwithstanding” clause similar to the clause examined in the First Department decision that was a subject of our October 24, 2013 post: “Notwithstanding” Clause Controls Contract Even When It Reads Other Term Out of the Contract.”
The BDC Finance majority (Saxe, DeGrasse, and Richter, JJ.) held that Barclays breached its contract with the plaintiff hedge fund by not immediately complying with the hedge fund’s demand that Barclays return certain collateral pledged to secure a derivative transaction, even though Barclays disputed the amount of collateral that had to be returned. The majority held:
The plain and unambiguous language of the Delivery of Collateral clause requires Barclays to transfer any Return Amount demanded by BDC no later than the business day following the demand. This obligation is unconditional and absolute and exists “[n]otwithstanding anything in the [CSA] to the contrary.” Thus, the Delivery of Collateral clause expressly supercedes the form language in the CSA which would have otherwise permitted Barclays to dispute before paying.
Because this provision was part of a group of agreements that were “negotiated by two sophisticated commercial entities,” the majority would “not, in the guise of contractual interpretation, alter the plain language of the clause.”
The dissenters (Andrias and Gische, JJ.), however, disagreed, and interpreted the contracts as permitting Barclays to refuse to honor the hedge fund’s capital call while the parties made use of the contractually agreed-upon dispute resolution procedures: “[t]he court will endeavor to give the [contract] [the] construction most equitable to both parties instead of the construction which will give one of them an unfair and unreasonable advantage over the other” because “[i]t is highly unlikely that two sophisticated business entities, each represented by counsel, would have agreed to such a harshly uneven allocation of economic power under the Agreement” (citations omitted).
In conclusion, the First Department, albeit by a bare majority, has held sophisticated parties to the plain language of the “notwithstanding clauses” in their contracts, no matter how onerous the result. Lawyers should keep this in mind in drafting and performing contracts. Those who expect a court to ignore contract provisions that are unfair to their clients may be disappointed.