Blogs

Commercial Division Blog

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

Posted: December 22, 2013

Inability to Read or Write English Does Not Excuse Failure to Answer

On November 11, 2013, Justice Whelan of the Suffolk County Commercial Division issued a decision in OneWest Bank, FSB v. Navarro, 2013 NY Slip Op. 52053(U), denying a motion for leave to serve a late answer despite the defendant’s claim that she did not read or write English.

In OneWest Bank, the defendant claimed that she failed timely to answer because she did not understand the complaint or the legal process. The court denied her motion to file a late answer, explaining:

The excuses proffered by defendant Navarro for her delay in answering the summons and complaint are premised in part upon her inability to read or write English, her lack of knowledge and understanding of legal processes and procedures and her participation in the court scheduled settlement conferences detailed above. However, recent appellate case authorities have instructed that confusion or ignorance of the law, legal processes and/or court procedures do not constitute reasonable excuses for the failure to answer or otherwise appear. Defendant Navarro’s inability to read or write English may not serve as a reasonable excuse for her failure to answer. Persons under disabilities such as blindness or illiteracy are not per se excused from the terms of their contracts as they are obliged to employ reasonable efforts to understand the contents thereof prior to signing. A party whose mastery of English is imperfect must make reasonable efforts to have the document made clear to him or her.

(Internal quotations and citations omitted).

OneWest Bank stands as a reminder that courts can construe a reasonable excuse for failure to answer very narrowly.

Posted: December 21, 2013

Attempt To Certify Class Action by Tenants Injured By Hurricane Sandy Summarily Dismissed

On December 11, 2013, Justice Kornreich of the New York County Commercial Division issued a decision in Adler v. Ogden Cap Props., LLC, 2013 NY Slip Op. 23428, denying class certification to a plaintiff class purporting to represent all renters in the State of New York against a proposed defendant class of all landlords in the State of New York, with the goal of obtaining rent rebates for violations of the warranty of habitability, RPL § 253-b, caused by Superstorm Sandy.

The proposed class representatives asserted a number of claims, which Justice Kornreich addressed as follows:

  • The warranty of habitability is based in contract, so claims under RPL § 253-b cannot be brought against non-parties to the lease, such as landlords’ agents;
  • For the same reason, plaintiffs could not recover on their unjust enrichment claims, which cannot be brought where there is a contract between the parties;
  • Two of the plaintiffs who left their apartments before the storm—as opposed to being forced out afterwards because of uninhabitable conditions caused by the storm—were not eligible for warranty of habitability damages, because RPL § 253-b is intended to compensate people for living in an uninhabitable residence;
  • The plaintiffs who left before the storm were ineligible to serve as class representatives because they had no individual claim under RPL § 253-b;
  • Because each member of the proposed plaintiff class had vastly different damages, the proposed plaintiff class was so legally defective on its face as to not even merit class discovery, and the largest possible class that the court would even consider would be composed of the tenants of a particular building;
  • A defendant class would not be certified either, due to due process concerns and the factual differences between each landlord’s conduct;
  • Individual actions in the Housing Court were likely the most effective route to compensating tenants for warranty of habitability damages.

Based upon these holdings, all claims were dismissed. Those tenants who remained in their apartments during the storm were given leave to replead, but were cautioned that the court had serious misgivings about certifying any plaintiff or defendant class.

Posted: December 20, 2013

Legal Malpractice Claim Survives Despite No Allegation of Attorney-Client Relationship

On December 18, 2013, the Second Department issued a decision in Mr. San, LLC v. Zucker & Kwestel, LLP, 2013 NY Slip Op. 08416, holding that, in exceptional circumstances, a legal malpractice claim can survive a motion to dismiss despite the lack of an attorney-client relationship.

The Second Department’s opinion was brief:

While the complaint does not allege an attorney-client relationship between the plaintiffs and the defendants, it sets forth a claim which falls within “the narrow exception of fraud, collusion, malicious acts or other special circumstances” under which a cause of action alleging attorney malpractice may be asserted absent a showing of privity.

The trial court’s decision appealed from explained the basis for plaintiff’s claim:

This is an action for aiding and abetting fraud. Plaintiffs invested substantial amounts of money with Gershon Barkany who held himself out as a financial advisor and real estate investor. Plaintiffs allege that Barkany represented that the money was to be used to fund real estate loans and other investments but Barkany was actually running a Ponzi scheme. Plaintiffs further allege that Barkany presented defendants Zucker & Kwestel LLP and Steven Kwestel as his attorneys in connection with the sham real estate transactions, and the firm accepted wire transfers of plaintiffs’ funds into its escrow account.
. . .
Absent fraud, collusion, malicious acts, or other special circumstances, an attorney is not liable to third parties, for harm caused by professional negligence, unless there is a relationship sufficiently approaching privity between the attorney and the alleged client. This rule protects attorneys from legal malpractice suits by indeterminate classes of plaintiffs whose interests may be at odds with the interests of the acknowledged client

Since an attorney-client relationship does not depend upon a formal retainer agreement or upon payment of a fee, the court must look to the words and actions of the. The unilateral belief of a plaintiff alone does not confer upon him or her the status of a client

Plaintiffs allege that Barkany presented defendants as his attorneys, rather than the attorneys for the plaintiffs. An attorney for an organization is not the attorney for its members. However, it appears that no company had been formed at the time that plaintiffs made their investment. At the time that plaintiffs invested their funds, their interests seemed aligned with Barkany, at least as to the expected profitabilty of the venture. Moreover, the fact that Kwestel borrowed money from Barkany suggests that there may have been collusion between client and attorney and perhaps even knowledge on Kwestel’s part as to Barkany’s fraud upon the plaintiff. In these circumstances, the court must give plaintiffs the benefit of the possible favorable inference that an attorney-client relationship arose when defendants accepted plaintiffs’ money into their escrow account.

Lawyers should be aware of the rule that makes them potentially liable to parties who are not their clients in exceptional circumstances; it might be better to avoid such situations because of the potential conflict between the fiduciary obligation to a client and the concern for malpractice liability to a non-client.

Posted: December 19, 2013

Post-Judgment Interest Constitutes Covered Damages Under Excess Liability Policy

On December 17, 2013, the Court of Appeals issued a decision in Herzl Ragins, et al. v. Hospitals Insurance Company, Inc., Docket No. 234, holding that an excess liability carrier was required to pay post-judgment interest that exceeded the limit on the insured’s primary liability insurance.

In Ragins, the excess policy covered “all sums” that the insured was “legally obligated to pay as damages” in excess of the primary policy cap. The Court of Appeals held that interest on the underlying judgment was within the scope of coverage because the policy did not “limit the definition of ‘sums’ to any particular category of damages or liability, or otherwise exclude interest from its reach.” In reaching this conclusion, the Court of Appeals reiterated the well-established principle that insurance contracts are construed broadly in favor of coverage. Therefore, “even if there were any ambiguity as to whether the covered sums under the insurance policy include interest, that ambiguity must be construed against [the insurance company] and in favor of” the insured.

Attorneys dealing with liability insurance policies should bear in mind that, unless expressly limited, courts will interpret coverage broadly to include interest and other sums the insured is “legally obligated to pay.”

Posted: December 18, 2013

Settlement by Related Party In Earlier Action Does Not Bind Plaintiffs in New Action

On December 17, 2013, the First Department issued a decision in BDCM Opportunity Fund II, LP v. Yucaipa Am. Alliance Fund I, LP, 2013 NY Slip Op. 08387, addressing whether plaintiffs were bound by a settlement agreement entered into by a related party in another action.

The First Department agreed with the trial court that plaintiffs were not bound, writing:

Contrary to defendants’ contention, plaintiffs and nonparty (to this action) The CIT Group/Business Credit, Inc.—the defendant and counterclaim plaintiff in the Georgia action—were not privies. In the Georgia complaint, defendants—the plaintiffs in the Georgia action—alleged that CIT’s interests were adverse to those of the other lenders, such as plaintiffs. Nor was CIT acting as plaintiffs’ agent, which in general would make them privies. The settlement agreement between CIT and defendants makes it clear that CIT was acting only on its own behalf, not on plaintiffs’ behalf.

(Internal quotations and citations omitted).

Posted: December 17, 2013

Whether Liquidated Damages Clause is Unenforceable Penalty is Fact Question

On December 6, 2013, Justice Friedman of the New York County Commercial Division issued a decision in 412 W. 12th St. 1N LLC v. C and A Capital LLC, 2013 NY Slip Op. 33099(U), ruling that whether a liquidated damages clause was an unenforcable penalty was a fact question that could not be resolved on a motion to dismiss.

In 412 W. 12th St., the parties executed a mortgage providing that upon default, defendant was entitled to, among other things, default interest at “a rate of interest  equal to the lesser of 24% . . . per annum or the maximum legal rate at the time any such interest is to be calculated” plus a “late charge of 4¢ for each $1 so overdue.”  Plaintiff defaulted, subsequently paid default interest and liquidated damages, and then sued for their return, alleging that they constituted an unenforcable penalty. In response to defendant’s motion to dismiss, the court ruled that it could not determine on a motion to dismiss whether the late payment charge and default interest were unenforceable penalties, writing:

[A] contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. If, however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced. . . . As the Court of Appeals has noted, today the trend favors freedom of contract through the enforcement of stipulated damage provisions as long as they do not clearly disregard the principle of compensation.

On this motion, [defendant] fails to meet its burden of demonstrating both that the damages that would result from a default under the Mortgage Agreement were not readily ascertainable at the time the contract was entered into, and that the default interest rate provision, the late charge provision, or both in combination, are not grossly disproportionate to the probable damages. The issue of what the default interest rate and the late charge were intended to compensate [defendant] for, and what its probable losses were at the time of contracting, cannot be resolved on the record of this motion to dismiss.

(Internal quotations and citations omitted).

A lesson here for both transactional counsel and litigators is it is unwise to assume–even in a commercial transaction–that the courts will hold contracting parties to liquidated damages provisions that cannot be justified by the circumstances.

Posted: December 16, 2013

Insurance Policy Covering Multi-State Risks Governed by Law of State Where Insured is Domiciled

On December 11, 2013, the Second Department issued a decision in QBE Ins. Corp. v. Adjo Contracting Corp., 2013 NY Slip Op. 08238, discussing the choice of law rules determining which law governs the interpretation of a liability insurance policy.

The Second Department wrote:

In the context of liability insurance contracts, the jurisdiction with the most significant relationship to the transaction and the parties will generally be the jurisdiction which the parties understood was to be the principal location of the insured risk. However, where it is necessary to determine the law governing a liability insurance policy covering risks in multiple states, the state of the insured’s domicile should be regarded as a proxy for the principal location of the insured risk.

The rule that an insurance policy covering multi-state risks is governed by the law of the state where the insured is domiciled (as opposed, for example, to the location of the occurrence that triggers coverage) allowed two insurance companies in QBE Ins. Corp. to avoid the duty to defend. Attorneys and businesses should bear the choice of law rules in mind when negotiating, or preparing to assert claims under, insurance policies covering multi-state risks.