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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: February 9, 2018

Separate Cause of Action for Accounting Permissible Under Delaware Law

On January 23, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Ambase Corp. v. 111 W. 57th Sponsor LLC, 2018 NY Slip Op. 30160(U), holding that under Delaware law, it is permissible to assert a separate claim for an accounting, explaining:

Defendants maintain that the fourteenth cause of action for an accounting is improper because it seeks the equitable remedy of an accounting. Because Sponsor and Control are organized under Delaware law, this claim is governed by Delaware law. Defendants erroneously claim that because, under Delaware law, an accounting is an equitable remedy, it may not be maintained as a separate cause of action. The cases cited by defendants for this proposition do not support this conclusion. For example, in Albert v Alex Brown Mgt. Servs., Inc. . . . , the Delaware Court of Chancery merely notes that, because an accounting is an equitable remedy, it is necessary to look to the underlying claims before granting an: accounting. Likewise, in Rhodes v Silkroad Equity, LLC . . . , another case cited by defendants, the Court of Chancery declined to dismiss a cause of action for an accounting where it had sustained the underlying claims for which an accounting would be the form of relief.

Likewise, defendants’ contention that a claim for an accounting may not be maintained under Delaware law in the absence of a fiduciary duty is also not supported by the cases cited for that proposition. Pan Am. Trade & Inv. Corp. v Commercial Metals Co. . . . , the case upon which defendants base their contention, only states that, for an accounting to be appropriate, there must be either: (1) mutual accounts between the parties; (2) accounts must be all on one side but there are circumstances of great complication; or (3) there must be a fiduciary relationship between the parties that is the basis for defendant to render an account. Plainly, as members of a joint venture with defendants, plaintiffs are: entitled to an accounting if they establish their underlying claims. Accordingly, the motion to dismiss this claim is dismissed.

(Internal quotations and citations omitted).

An accounting is a common remedy in a business divorce (a break-up between the owners of a closely-held business). This is a big part of our practice. Indeed, Schlam Stone & Dolan partner Jeffrey M. Eilender and associate Lee J. Rubin were contributors to the recently-released 2017 Supplement to Litigating the Business Divorce by Kurt Heyman and Melissa Donimirski. Contact Jeffrey Eilender at jeilender@schlamstone.com or Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.

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Posted: February 8, 2018

Parties Not Allowed to Conduct Additional Relevance Review of Documents Found by ESI Search

On January 29, 2018, Justice Friedman of the New York County Commercial Division issued a decision in Matter of Nomura Asset Acceptance Corp. Alternative Loan Trust, Series 2007-1 v. Nomura Credit & Capital, Inc., 2018 NY Slip Op 30161(U), holding that the parties to an agreement regarding ESI search terms were not allowed to conduct an additional relevance review of the documents found by the ESI search, explaining:

These appeals are brought pursuant to the Part 60 RMBS Putback and Monoline Case Management Order, dated December 7, 2015. In both Rulings, the Special Master directed the Trustee to produce “all documents that are responsive to the Parties’ agreed-upon search terms, but for any document that reasonably appears to be a ‘clear mis-hit’, or is subject to a claim of privilege.” As discussed further below, both Rulings are based on the Special Master’s reasoning that, under the circumstances of these cases, the parties’ arms-length negotiations of ESI search terms reflect an agreement as to broad relevance, and that further “subjective relevance and responsiveness determinations are generally inappropriate.” The Merrill Lynch Ruling does not involve the production of certificateholder documents, whereas the Nomura Ruling does.

The court holds that the Special Master’s Rulings should be affirmed. The parties’ ESI search terms were agreed upon following extensive negotiations that occurred after the Trustee served its responses and objections to Nomura’s and Merrill Lynch’s document requests, respectively. The negotiation of the search terms occurred under the general supervision of Special Master Katz, and with the benefit of guidance provided in his numerous rulings in the coordinated Part 60 RMBS Put-Back Litigation.

. . .

The court finds that the circumstances in which the ESI search tenns were negotiated support the Special Master’s Merrill Lynch and Nomura Rulings that a further relevance review of documents responsive to the search terms is not appropriate. . . . The authorities on which HSBC relies do not support its claim that the Special Master erred in holding that a further relevance review was not appropriate. In Chen-Oster v. Goldman & Sachs Co., . . . as in the cases at issue on these appeals, the parties had served document demands and responses prior to negotiating ESI search terms. The Court permitted a relevance review of search results prior to production, reasoning that the parties had not agreed, and it had not ordered~ that all documents responsive to the terms must be produced. The Court noted that the parties could have agreed to another “model,” in which they would “simply agree on the search methodology, for example by stipulating to search terms, with the understanding that all documents [except privileged documents] shall be produced.” Similarly, in Royal Park Investments SA/NA v. HSBC Bank . . . , the Court permitted the producing party to conduct a responsiveness review of search results, based on a finding that the parties had agreed on ESI search terms but not on how to produce documents that contained those terms. The Court specifically noted that the dispute would have been avoided had the parties agreed on the ESI Search protocol used and the process for producing the documents captured by that protocol before beginning discovery. Here, in contrast, the parties’ ESI search terms were not finalized until after the Special Master’s November 7, 2016 ruling, in which he elucidated his position that the negotiated search terms capture relevant documents and that a further relevance review is generally not appropriate.

(Internal quotations and citations omitted).

A big part of complex commercial litigation is giving, receiving and evaluating evidence (this is called “discovery”). This decision discusses an issue that frequently arises in discovery: searching computers and e-mail accounts for evidence, something that often is done using search terms. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has a question regarding discovery obligations, including search electronic evidence.

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Posted: February 7, 2018

Court Upholds Tortious Interference with Prospective Business Relations Claim

On January 25, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Larren v. Santo Domingo, 2018 NY Slip Op. 30162(U), upholding a claim for tortious interference with prospective economic advantage, explaining:

Santo Domingo moves to dismiss the fourth cause of action of tortious interference with prospective economic advantage, arguing that the allegations are vague and fail state a claim for tortious interference. Review of the complaint shows that plaintiffs allege: (1) that Santo Domingo was aware of actual prospective business relationships with third parties; and (2) that Santo Domingo unlawfully and maliciously interfered with Larren’s, BidKind’s, and Aronis’s business relationships to harm each. Specifically, the complaint alleges a prospective business relationship BidKind had with Chemli, who allegedly committed to invest $5,000,000.00 but later withdrew after Santo Domingo allegedly defamed Larren. Plaintiffs also allege that Santo Domingo interfered with BidKind’s prospective business relationship with iHeartMedia, Inc., and with Aronis Life’s prospective business relationship with Dailymail. Accordingly, the complaint sufficiently plead a cause of action for tortious interference with prospective economic advantage, and I deny dismissal of that cause of action.

(Internal citations omitted).

In New York, there are circumstances where a someone can be held liable for causing someone else to break their contract with you (tortious interference with contract), and they can even be held liable for causing someone not to enter into a contract with you in the first place (tortious interference with prospective economic advantage). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think someone has interfered with your rights relating to a contract.

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Posted: February 6, 2018

Court Enters Judgment Enforcing Foreign Judgment

On January 30, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in VTB Bank (PJSC) v. Mavlyanov, 2018 NY Slip Op. 30166(U), entering an order enforcing a foreign judgment, explaining:

Article 53 of the CPLR (Recognition Act) provides that a foreign country judgment may be enforced by a motion for summary judgment in lieu of complaint. New York has traditionally been a generous forum in which to enforce judgments for money damages rendered by foreign courts. Historically, New York courts have accorded recognition to the judgments rendered in a foreign country under the doctrine of international comity absent some showing of fraud in the procurement of the foreign country judgment or that recognition of the judgment would do violence to some strong public policy of this State. A judgment creditor proceeding under the Recognition Act does not seek any new relief against the judgment debtor, but instead merely asks the court to perform its ministerial function of recognizing the foreign country money judgment and converting it into a New York judgment.

Article 53 of the CPLR also provides that a foreign country judgment will be recognized in New York, unless a ground for nonrecognition under CPLR 5304 is applicable. Pursuant to that statute, a foreign country judgment is not conclusive if it was rendered under a system that does not provide for impartial tribunals or due process procedures, or if the foreign court did not have personal jurisdiction over the defendants. The parties dispute whether the Russian judgments meet the statutory requirements.

CPLR 5302 provides that it applies to any foreign country judgment which is final, conclusive and enforceable where rendered even though an appeal therefrom is pending or it is subject to appeal. In considering whether the foreign country judgment is final, conclusive and enforceable, courts may properly take judicial notice of the law of the foreign country where the judgment was rendered.

The Russian judgments are money judgments that are final, conclusive and enforceable under Russian law. Pursuant to the Russian Code of Civil Procedure (Russian Code), a Russian court judgment becomes enforceable upon expiration of the time within which an appeal may be filed, if no appeal was filed. If an appeal is filed, and the judgment is upheld, the judgment becomes final and enforceable immediately upon issuance of the ruling.

Here, there is no dispute that Mavlyanov’s appeals to the Moscow City Court were resolved in favor of the Bank on November 30, 2016, and that Mavlyanov’s appeals to the cassation court were resolved in favor of the Bank on March 9, 2016 and April 17, 2016. There is no dispute that any further appeal is pending, or that a stay of the execution of the Russian judgments was demanded or issued. Mavlyanov himself concedes that the Russian judgments may be technically deemed final.

For those reasons, the Russian judgments are now final, conclusive, and enforceable, pursuant to Russian law.

(Internal quotations and citation omitted).

We have substantial experience in helping judgment creditors collect on judgments and search for and attach assets worldwide. One part of that effort is using procedures such as the one discussed above to make foreign judgements and arbitral awards enforceable against assets in New York. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client need help collecting on a judgment.

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Posted: February 5, 2018

Fraud Claim Prevails; Plaintiff Not Required to Obtain Representations and Warranties From its Agent

On January 30, 2018, the First Department issued a decision in Schulhof v. Jacobs, 2018 NY Slip Op. 00528, granting plaintiff summary judgment on his fraud claim, explaining:

The motion court also correctly granted summary judgment to plaintiff on his fraud claim. The issue of reasonable reliance can be resolved on a summary judgment motion. Further, plaintiff’s success as a businessman does not preclude a finding of reliance. Defendant told plaintiff that the buyer of the art wished to remain anonymous, which prevented plaintiff from conducting due diligence by, for example, contacting the buyer. Since defendant had a fiduciary relationship with decedent, plaintiff was not required to obtain the kinds of representations and warranties that defendant suggests in her reply brief.

(Internal citations omitted) (emphasis added).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules, including the rule that a sophsticated businessperson’s reliance on a false statement must be reasonable. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.

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Posted: February 4, 2018

No Conversion Claim Based on Loans Made Into General Account

On January 23, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Domingo v. Bidkind, LLC, 2018 NY Slip Op. 30141(U), dismissing a claim for conversion because it did not relate to separate, identifiable funds, explaining:

BidKind argues that I should dismiss the fourth cause of action for conversion of money because Santo Domingo failed to plead that there is a specific, identifiable fund and an obligation to return, or otherwise treat in a particular manner, the specific fund at issue. Even giving Santo Domingo the most favorable inference, he has not stated a conversion claim. The papers submitted show that the funds at issue were general deposits made in the ordinary course of business and were not segregated from other deposits. Accordingly, I dismiss the fourth cause of action for conversion.

(Internal citations omitted) (emphasis added).

Commercial litigation often involves conversion claims. As this decision shows, conversion can involve much more than physical objects. It can involve money (in certain circumstances) as well as intangible property. As this decision shows, there are limits to the law of conversion. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding one person depriving another of her property, whether that property is tangible or intangible, or even involves a discrete fund of money.

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Posted: February 3, 2018

Questions of Fact Regarding Dissension, Deadlock and Financial Viability Preclude Corporation’s Summary Dissolution

On January 22, 2018, Justice Scarpulla of the New York County Supreme Court issued a decision in Matter of Ades v. A&E Stores, Inc., 2018 NY Slip Op. 30128(U), denying summary dissolution of a New York corporation, explaining:

A shareholder owning at least one-half of the votes of the outstanding shares of a corporation entitled to vote in an election of directors may petition the court for dissolution based on at least one of the following grounds:

(1) That the directors are so divided respecting the management of the corporation’s affairs that the votes required for action by the board cannot be obtained.
(2) That the shareholders are so divided that the votes required for the election of directors cannot be obtained.
(3) That there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders.

The petition for dissolution may be granted summarily- a hearing is only required where there is some contested issue determinative of the validity of the application..

Once a petitioner has established a prima facie showing of entitlement to dissolution, it is entirely within the court’s discretion whether to issue an order granting dissolution, and the ultimate remedy of dissolution and forced sale of corporate assets should only be applied as a last resort.

Dissolution is generally appropriate where the complained of internal dissension and/or deadlock impedes the daily functioning of the corporation, thereby posing an irreconcilable barrier to the continued functioning and prosperity of the corporation.

Where the undisputed facts show that genuine dissension and/or deadlock exists, it is irrelevant who is at fault for the underlying conflict, and a hearing is not required. Rather, the critical consideration is the fact that dissension exists and has resulted in a deadlock precluding the successful and profitable conduct of the corporation’s affairs.

However, even if dissension and/or deadlock do exist, allegations that a petitioner acted in bad faith by creating the underlying disputes to justify dissolution constitute a defense to a dissolution proceeding, and a hearing is required.

Here, there is no dispute that Ades and Erani disagree as to whether A&E should be dissolved or whether it should continue to operate. However, A&E is not a service corporation, and because neither Ades nor Erani are responsible for A&E’s day-to-day operations, this disagreement is not dispositive of the fundamental issue of whether the conditions of the statute have been satisfied such that the extraordinary step of judicial dissolution is warranted.

Further, Ades contends that he wants to either sell or liquidate A&E while it is still profitable so that h~ may recoup his investments and avoid any personal financial loss. This alone, however, is not a basis for dissolution under BCL § 1104.

Despite Ades’s contention that no hearing is required and that this application should be summarily granted because there is no dispute that Ades and Erani cannot work together, I cannot determined whether dissolution is appropriate on the papers alone because of the parties’s conflicting submissions and allegations. Material issues of fact exist as to whether the dissension and deadlock alleged by Ades exists and whether Ades acted in bad faith by manufacturing the complained-of disputes and dissension to financially harm A&E and justify dissolution.

If dissension and/or deadlock do exist – and dissolution is not barred by Ades’s alleged bad faith – material issues of fact also exist as to the profitability and financial viability of A&E and whether the proposed dissolution would benefit the shareholders. Accordingly, I order an evidentiary hearing to resolve these material issues of fact. BCL § 1109.

(Internal quotations and citations omitted).

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Indeed, Schlam Stone & Dolan partner Jeffrey M. Eilender and associate Lee J. Rubin were contributors to the recently-released 2017 Supplement to Litigating the Business Divorce by Kurt Heyman and Melissa Donimirski. Contact Jeffrey Eilender at jeilender@schlamstone.com or Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.

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Posted: February 2, 2018

Court Orders Specific Performance of Contract to Sell Real Estate

On January 22, 2018, Justice Scarpulla of the New York County Supreme Court issued a decision in Split Rail Holdings LLC v. 176 Grand St. Corp., 2018 NY Slip Op. 30130(U), granting specific performance of a contract to sell real estate, explaining:

To establish its entitlement to specific performance, the party seeking such relief must establish that it complied with the terms and conditions of the exercise of the option in accordance with the Lease and demonstrate that he or she was ready, willing, and able to perform the contract. Upon the papers submitted I find that Split Rail has established prima facie entitlement to judgment as a matter of law for specific performance because it satisfied the conditions to exercise the option to purchase the Property, and it is ready, willing and able to complete the transaction.

176 Grand argues that Split Rail is unable to prove irreparable harm and also failed to demonstrate that it is ready, willing, and able to complete the purchase of the Property. Regarding irreparable harm, 176 Grand claims that because the Property is commercial, monetary damages are adequate, requiring dismissal of Split Rail’s request for specific performance. However, it is not only the loss of the Property, but also the loss of a bargained-for contractual right to exercise an option to purchase the Property that constitutes irreparable harm.

Moreover, contrary to 176 Grand’s assertion, Split Rail submits sufficient documentary evidence demonstrating its financial ability to purchase the Property for $6,355,477.40, including a commitment letter from Flushing Bank for an $8 million dollar loan 5 and bank statements from Split Rail, Lisa Goode and Christopher Goode demonstrating that additional cash and securities exist to finance the purchase of the Property. Split Rail also complied with the other Lease requirements, including providing 176 Grand with written notice and the contract of sale, securing financing, and ordering a title report.

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

We frequently litigate disputes over the purchase and sale of commercial property. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding a commercial real estate transaction.

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Posted: January 31, 2018

Claims Barred Above Amount Set by Limitation of Liability Provision

On January 23, 2018, the First Department issued a decision in Electron Trading, LLC v. Morgan Stanley & Co. LLC, 2018 NY Slip Op. 00380, holding that certain claims were barred by a limitation of liability provision, explaining:

The limitation of liability provision in the ELA provides, in pertinent part, that “neither party’s total liability under this agreement will exceed the total amounts previously paid by defendant to plaintiff under this agreement and the CSA prior to the date of the applicable claim.” The CSA contains a similar provision. The ELA provides that “the parties acknowledge that these limitations of liability and exclusions of potential damages were an essential element in setting consideration under this agreement”.

It was not error for Supreme Court to rule on the enforceabilty of the liability limitation provision, although it is an affirmative defense, on a motion to dismiss. In the ordinary course of deciding motions, courts consider whether documentary evidence establishes an asserted defense, in this case a defense concerning the limitation of liability provisions in the parties’ contracts.

New York courts routinely enforce such liability-limitation provisions, especially when negotiated by sophisticated parties. The Court of Appeals has recognized that a limitation on liability provision represents the parties’ Agreement on the allocation of the risk of economic loss in the event that the contemplated transaction is not fully executed, which the courts should honor. The parties may later regret their assumption of the risks of non-performance in this manner, but the courts let them lie on the bed they made.

However, such clauses are unenforceable when,

in contravention of acceptable notions of morality, the misconduct for which it would grant immunity smacks of intentional wrongdoing. This can be explicit, as when it is fraudulent, malicious or prompted by the sinister intention of one acting in bad faith. Or, when, as in gross negligence, it betokens a reckless indifference to the rights of others, it may be implicit.

The type of intentional wrongdoing that could render a limitation in a contract unenforceable is that which is unrelated to any legitimate economic self-interest. Stated otherwise, a party can intentionally breach a contract to advance a legitimate economic self-interest and still rely on the contractual limitation provision.

Plaintiff contends that defendant’s insistence that it allow the ATS to be used for the benefit of HFTs impermissibly exceeded the contemplated scope of the ELA and CSA. However, the ELA gave defendant discretion to modify the ATS, and neither agreement refers to “dark pools” or protection from predatory HFTs. Thus, in demanding that plaintiff permit use of the ATS by HFTs, defendant was not seeking any benefit that was in conflict with what it was entitled to under the agreement.

Plaintiff’s broad allegations that defendant insisted that plaintiff undertake acts constituting securities fraud as a precondition to defendant’s performance under the parties’ contracts does not meet the heightened pleading requirements for fraud. Although the allegations globally raise issues that have recently come under legal scrutiny about how HFTs operate within dark pools, the complaint is devoid of specific factual instances of fraud by defendant. Plaintiff also fails to provide any explanation of how defendant’s alleged acts actually violate the securities laws. Without more, the factual allegations in the complaint are insufficient to avoid the liability-limitation provisions in the parties’ agreements. At most, the allegations support a claim of intentional breach, which is insufficient to void the limitation of liability provision.

A key element in commercial litigation is calculating damages. Contract clauses limiting damages are common and how they are enforced can make a big difference in whether, and if so, how, you litigate an action. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a contractual damages limitation clause.

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Posted: January 30, 2018

Documents Protected from Production Under Common Interest Privilege

On January 24, 2018, the Second Department issued a decision in Saint Annes Dev. Co. v. Russ, 2018 NY Slip Op. 00451, holding that documents were protected by the common interest privilege, explaining:

The common-interest privilege is an exception to the traditional rule that the presence of a third party waives the attorney-client privilege. To fall within that exception, the privileged communication must be for the purpose of furthering a legal, as opposed to a commercial, interest common to the client and the third party. The legal interest that those parties have in common must be identical (or nearly identical), as opposed to merely similar. Moreover, the communication must relate to litigation, either pending or anticipated, in order for the exception to apply.

Here, the Supreme Court properly denied the defendants’ motion to compel the production of the subject documents, as these documents were protected by the common-interest privilege.

(Internal quotations and citations omitted).

An issue that arises in almost all complex commercial litigation is identifying evidence that should be withheld from production in evidence because it is subject to the attorney-client or other privilege. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the attorney-client, common interest, work product or other privileges or exemptions from production of evidence.

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