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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: March 27, 2014

LLC Member Not Permitted to Withdraw From LLC

On March 12, 2014, Justice Kitzes of the Queens County Commercial Division issued a decision in In the Matter of Kassab, Index No. 14428/2013, ruling on two pending motions in a special proceeding involving claims for judicial dissolution of two closely-held entities and related relief.

This post focuses on the resolution of the respondent’s motion to dismiss the petitioner’s third cause of action to withdraw as a member of an LLC.

Section 606(a) of the LLC Law provides that member of an LLC may only withdraw if the right of withdrawal is provided for in the operating agreement “unless an operating agreement provides otherwise, a member may not withdraw from a limited liability company prior to the dissolution and winding up of the limited liability company.”

In Kassab, Justice Kitzes dismissed the petitioner’s claim to withdraw, writing:

Thus, under the statute, a member may withdraw from a limited liability company only as provided in its operating agreement. If the operating agreement is silent, a member may not withdraw prior to the dissolution of the company. Here, [the LLC]’s operating agreement provides, in pertinent part, that “a Member of the Company may withdraw from the Company in accordance with the Limited Liability Company Law.” Therefore, as there has been no dissolution of [the LLC], and as petitioner does not allege the existence of some other agreement or consent, the third cause of action fails to state a claim for withdrawal under the provisions of Limited Liability Company Law § 606. That branch of respondent’s motion which seeks to dismiss the third cause of action, is granted.

(Internal citations omitted.)

NOTE: Schlam Stone & Dolan LLP represents the petitioner in this action.

Posted: March 26, 2014

Default Judgment Not Vacated When No Reasonable Excuse is Offered for the Default

On March 25, 2014, the First Department issued a decision in Sunrise Capital Partners Management LLC v. Glattstein, 2014 NY Slip Op. 01994, affirming a default judgment.

In Sunrise Capital Partners, the trial court granted the plaintiff judgment by default when the defendants failed to answer and later denied the defendants’ motion to vacate the default judgment. The First Department affirmed, explaining:

Defendants’ excuse that they did not contact outside counsel because they were relying on in-house counsel to resolve the matter is insufficient, as they offered no facts as to how or why they believed in-house counsel was handling the matter. Moreover, defendants’ excuse that they believed plaintiffs did not intend to proceed with the lawsuit is conclusory. Defendants have not alleged any statements made by plaintiffs that would indicate they were not serious about prosecuting their claim. Accordingly, defendant has failed to proffer an acceptable excuse for the default, and the Court need not determine whether a meritorious defense exists.

(Internal citations omitted).

New York courts can be lenient in vacating defaults.  However, as this decision shows, that leniency is not unlimited.  If your client has an excuse for its default, make sure you take the time fully to explain and document it.

Posted: March 25, 2014

Party Bound By Discovery Stipulation Signed by His Counsel

On March 19, 2014, the Second Department issued a decision in Born to Build, LLC v. Saleh, 2014 NY Slip Op. 01703, discussing the binding nature of stipulations between counsel concerning discovery.

In Born to Build, “[t]he appellant agreed, as part of a so-ordered preliminary conference stipulation and order signed by his attorney . . . to be deposed in New York at the office of the plaintiff’s counsel.” Later, the appellant moved for a protective order, asking that he be deposed “by remote electronic means.” The trial court denied the motion and the Second Department affirmed, explaining that:

[s]uch a stipulation constitutes a binding contract.

While a court may relieve a party of the consequences of a stipulation made during litigation where there is cause sufficient to invalidate a contract, such as fraud, collusion, mistake, or accident, here, the appellant failed to demonstrate good cause sufficient to invalidate the stipulation. He also failed to demonstrate that his attorney lacked the authority to enter into the stipulation on his behalf. In any event, the appellant failed to establish that traveling from his home in Hong Kong to New York to be deposed would cause him undue hardship.

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

This decision makes the important point that as a litigator, if you make an agreement with your adversary, you should expect to be held to it.

Posted: March 24, 2014

Claim For Legal Malpractice Accrues When Client Receives Negligent Work Product

On March 6, 2014, Justice Bransten of the New York County Commercial Division issued a decision in XE Partners, LLC v. Skadden Arps Slate Meagher & Flom LLP, 2014 NY Slip Op. 30668(U), dismissing an action for attorney malpractice under the applicable three-year statute of limitations.

XE Partners arose from legal advice the defendant law firm provided to the plaintiff LLC, in 2008, regarding the withdrawal of certain members from the LLC. The withdrawing members brought an arbitration against the LLC claiming that “Plaintiff failed to follow a key provision of the LLC Agreement and used an inappropriate business valuation.” In 2010, the arbitration panel ruled in favor of the withdrawing members. In 2013, the LLC brought a legal malpractice action against the law firm that had advised it in 2008, alleging that “the work performed by [the law firm] was at the heart of the [ ] Members’ action against [the LLC].” Justice Bransten granted the law firm’s motion to dismiss, concluding that the claim accrued when the allegedly negligent advice was provided in 2008 and was therefore time-barred because the claim was not brought within the 3-year limitations period:

Under New York law, it is well settled that a legal malpractice claim accrues when all the facts necessary to file the cause have occurred and the injured party can obtain relief in court. What is important is when the malpractice was committed, not when the client discovered it.

As explained by the Court of Appeals in the accounting malpractice context: the claim accrues upon the client’s receipt of the accountant’s work product since this is the point that a client reasonably relies on the accountant’s skill and advice and, as a consequence of such reliance, can become liable for tax deficiencies. Receipt of the accountant’s advice is the time when all the facts necessary to the cause of action have occurred and an injured party can obtain relief.

The reasoning of Ackerman has been extended to attorney malpractice claims. For example, in Proskauer Rose Goetz & Mendelsohn LLP v. Munao, 270 A.D.2d 150 (1st Dep’t 2000), the First Department cited Ackerman in holding that a client’s legal malpractice counterclaims accrued when the client received defendant’s purportedly negligent work product. The First Department likewise held in Nuzum v. Field, 106 A.D.3d 541, 541 (1st Dep’t 2013), deeming legal malpractice claims brought in connection with the drafting of promissory notes time-barred where brought more than three years after the allegedly defective documents were prepared.

Viewed in this framework, Plaintiffs legal malpractice cause of action is clearly barred by the statute of limitations. Plaintiffs’ claim accrued when Defendants’ allegedly negligent work product was received by Defendants. To paraphrase Ackerman, this was the time when all the facts necessary to the cause of action occurred and when Plaintiff was able to obtain relief. Since the advice was given in 2008, Plaintiffs’ 2013 filing was untimely.

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

The plaintiff argued that it did not suffer actionable injury (and its claim therefore did not accrue) until the arbitration panel ruled against in 2010. There is a certain logic to that argument (since it was arguably not until that adverse ruling that the plaintiff’s economic injury materialized), and the plaintiff cited a Second Department decision that appears to support that position. See Frederick v. Meighan, 75 A.D.3d 528 (2d Dep’t 2010) (“inasmuch as the plaintiff did not sustain ‘actionable injury’ until this Court awarded the buyers specific performance in the underlying action, the plaintiff’s legal malpractice cause of action against them was not time-barred.”). However, Justice Bransten concluded that, “[e]ven accepting Plaintiff’s reading of Frederick as correct for the sake of argument, this reading is in conflict with Ackerman and its First Department progeny and therefore is not controlling.”

This decision illustrates that a legal malpractice claim must be diligently pursued, lest it become time-barred. Indeed, if an attorney gives negligent advice that creates a liability for the client more than three years later, it is possible that the claim could become time-barred before the client suffers significant damages to prompt a malpractice lawsuit.

Posted: March 23, 2014

Denying Petitioner is Shareholder Can Constitute Oppressive Conduct Justifying Corporate Dissolution

On March 11, 2014, Justice Friedman of the New York County Commercial Division issued a decision in Quazzo v. 9 Charlton St. Corp., 2014 NY Slip Op. 30625(U), discussing the standard for corporate dissolution based on oppression.

In Quazzo, the petitioner sought, among other things, to dissolve a New York corporation of which she claimed to be a shareholder. The respondents moved to dismiss the dissolution claim on the ground that the petitioner had not established that she was the subjected to oppression by the respondents. The court disagreed, explaining: (more…)

Posted: March 22, 2014

Court of Appeals Arguments of Interest for the Week of March 24, 2014

Arguments the week of March 24, 2014, in the Court of Appeals that may be of interest to Commercial Division practitioners include:

  • Docket No. 71: Golden v. Citibank, N.A. (To be argued Tuesday, March 25, 2014) (concerning whether a bank may refuse payment on a cashier’s check on a showing that it received no consideration for issuing the check). See the Second Department decision here.
  • Docket No. 64: Clemente Brothers Contracting Corp. v. Hafner-Milazzo (To be argued Wednesday, March 26, 2014) (concerning whether parties may by contract reduce the statutory one-year limit on reporting forgeries in UCC 4-406 to 14 days). See the Second Department decision here.
  • Docket No. 81: CDR Créances S.A.S. v. Maurice Cohen; CDR Créances S.A.S. v, Leon Cohen (To be argued Thursday, March 27, 2014) (concerning the proper burden of proof for striking a defendant’s pleadings and dismissing an action for fraud on the court). See the First Department decision here.
Posted: March 21, 2014

Statute of Frauds and At-Will Employment Doctrine Bar Claim for Unpaid Commissions

On March 7, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Niyazov v. Park Fragrance, LLC, 2014 NY Slip Op. 30610(U), holding that a combination of the statute of frauds and the at-will employee doctrine resulted in an employee having no claim based on a unilateral change to his right to earn commissions.

In Niyazov, the plaintiff sued his former employer and its owners for unpaid pay and commissions. In deciding the defendants’ motion to dismiss, the trial court examined the plaintiff’s rights in light of both the at-will employee doctrine and the statute of frauds. Because the decision is fact-dependant, we have repeated below both an excerpt of the relevant facts and the court’s reasoning. (more…)

Posted: March 20, 2014

Failure to Provide Client With Engagement Letter or Notice of Right to Arbitrate Dooms Suit for Fees

On March 19, 2014, the Second Department issued a decision in Gary Friedman, P.C. v. O’Neill, 2014 NY Slip Op. 01711, affirming the dismissal of a law firm’s action for its fees.

Gary Friedman, P.C. was not an appeal from a commercial case. However, the issues it addresses–the failure to provide a client with an engagement letter or to provide notice of a client’s right to arbitrate–affect commercial litigators as much as anyone else. The Second Department’s decision says it all:

The plaintiff commenced this action to recover legal fees for services rendered to the defendant. After a nonjury trial, the Supreme Court dismissed the complaint finding, inter alia, that the plaintiff failed to comply with 22 NYCRR 137.6 and 1215.1, and failed to establish the right to recover legal fees on the basis of quantum meruit.

Except in limited circumstances, where an attorney institutes an action to recover a fee, the attorney must provide written notice by certified mail or by personal service of the client’s right to elect to arbitrate and must allege in the complaint that the client received notice of his or her right to pursue arbitration and did not file a timely request to arbitrate (see 22 NYCRR 137.6). A plaintiff’s failure to provide the defendant with written notice of his or her right to elect to submit the fee dispute to arbitration, and the failure to allege in the complaint that the defendant received such notice and did not file a timely request for arbitration, require dismissal of the complaint (see Herrick v. Lyon, 7 AD3d 571). Here, the Supreme Court properly dismissed the complaint upon finding that the plaintiff failed to properly serve the defendant with written notice of his right to arbitrate the fee dispute, and upon the plaintiff’s failure to allege in the complaint that the defendant received such notice and did not file a timely request for arbitration (see 22 NYCRR 137.6; Herrick v. Lyon, 7 AD3d 571).

In addition, the Supreme Court properly found that the plaintiff failed to comply with the requirements of 22 NYCRR 1215.1 and failed to establish that he was entitled to recover legal fees in quantum meruit. Except in limited circumstances, an attorney must provide his or her client with a written letter of engagement or enter into a written retainer agreement explaining, inter alia, the scope of the legal services to be provided, the fees to be charged, and the expenses and billing practices (see 22 NYCRR 1215.1). An attorney’s noncompliance with 22 NYCRR 1215.1 does not preclude him or her from recovering the value of professional services rendered on a quantum meruit basis (see Seth Rubenstein, P.C. v Ganea, 41 AD3d 54). Nonetheless, an attorney who fails to comply with rule 1215.1 bears the burden of proving the terms of the retainer and establishing that the terms of the alleged fee arrangement were fair, fully understood, and agreed to by the client (see id.). Here, the court properly found that the plaintiff failed to comply with 22 NYCRR 1215.1 and failed to establish that the terms of the fee arrangement were fair, fully understood, and agreed to by the defendant.

Posted: March 19, 2014

Upcoming City Bar Panel on Mediation

On Thursday, May 8, 2014, from 6:00 PM – 8:00 PM, the City Bar Association will host a panel on Perspectives on 20 Years of Mediation in New York and Implications for the Future. The panel will be held at the New York City Bar, 42 West 44th Street, New York, NY.

The “panel will look back on 20 years of mediation in New York State and the future of mediation in the state from the perspective of litigators, judges, in-house counsel, academics and mediators. Former Chief Judge Judith S. Kaye will receive a commendation for her support of mediation at a reception following the panel discussion.”

One of the panelists will be Justice Shirley Werner Kornreich of the New York County Commercial Division.

Posted: March 19, 2014

Quantum Meruit Claim Survives Even When Contract Claim Dismissed on Statute of Frauds Grounds

On March 18, 2014, the First Department issued a decision in Chapman, Spira & Carson, LLC v. Helix BioPharma Corp., 2014 NY Slip Op. 01685, finding that a breach of contract claim should have been dismissed on statute of frauds grounds but that a related quantum meruit claim survived.

In Chapman, there was no signed writing, but there where e-mails that “evidenced the fact of plaintiff’s employment by defendant.” As the First Department explained:

[P]laintiff’s breach of contract claim is barred by General Obligations Law § 5-701(a)(10), although the statute does not bar plaintiff’s quantum meruit claim. In Davis & Mamber, this Court held that for a writing evidencing a contract to satisfy the Statute of Frauds a memorandum must contain expressly or by reasonable implication all the material terms of the agreement, including the rate of compensation if there has been agreement on that matter. Applying this rule, Davis & Mamber precluded a contract claim for failure to satisfy the applicable provision of the statute of frauds, because the relied-on writings lacked any reference to the agreed-on compensation; however, it permitted a quantum meruit claim, because the rule for a writing establishing quantum meruit claims is less exacting, requiring only that the writing evidenced the fact of plaintiff’s employment by defendant to render the alleged services. Here, as in Davis & Mamber, the emails of [the defendant’s] chairman and CEO[] fail to make any reference to payment terms, and accordingly fail to satisfy the statute of frauds as to the contract claim. However, they suffice to show that [the defendant] employed plaintiff, and are therefore enough to satisfy the statute for purposes of plaintiff’s quantum meruit claim.

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

This decision shows how a claim that cannot survive as a breach of contract claim might still be brought as a quantum meruit claim.