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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: March 15, 2017

RMBS Fraud Claim Dismissed for Inability to Tie Losses to Misrepresentations

On March 2, 2017, the First Department issued a decision in Basis PAC-Rim Opportunity Fund (Master) v. TCW Asset Management Co., 2017 NY Slip Op. 01644, dismissing an RMBS fraud action on summary judgment for failure to tie the plaintiff’s losses to the defendant’s misrepresentations, explaining:

A fraud claim requires proof by clear and convincing evidence as to each element of the claim. One such element is causation, and to establish causation, plaintiffs must prove both that defendant’s misrepresentation induced plaintiffs to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiffs complain (loss causation). Transaction causation is akin to reliance, and requires only an allegation that but for the claimed misrepresentations or omissions, the plaintiff would not have entered into the detrimental securities transaction.

Loss causation is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff. To establish loss causation a plaintiff must prove that the subject of the fraudulent statement or omission was the cause of the actual loss suffered. Moreover, when the plaintiff’s loss coincides with a marketwide phenomenon causing comparable losses to other investors, the prospect that the plaintiff’s loss was caused by the fraud decreases, and a plaintiff’s claim fails when it has not proven that its loss was caused by the alleged misstatements as opposed to intervening events. Indeed, when an investor suffers an investment loss due to a market crash of such dramatic proportions that the losses would have occurred at the same time and to the same extent regardless of the alleged fraud, loss causation is lacking. Although the Loreley case concerned a motion to dismiss and thus focused on pleading requirements for loss causation, that court did note that whether plaintiffs can prove their allegations – and whether defendants in turn can proffer evidence that the CDOs would have collapsed regardless, due to the larger crash in the mortgage-backed securities market – are evidentiary matters for later phases of this lawsuit.

Here, TCW has proffered evidence that Dutch Hill would have collapsed regardless of the assets selected by TCW due to the housing market crash – a marketwide phenomenon causing comparable losses to other investors. TCW submitted an expert affidavit in which the expert opined that even if TCW had selected assets that complied with the Dutch Hill model and comported with TCW’s representations to Basis, Basis would still have suffered a loss due to an external and intervening cause – namely, the housing market crash. The expert conducted a common form of regression analysis to analyze the effect that macroeconomic factors had on pools of collateral consistent with Dutch Hill II’s core asset portfolio in order to create a benchmark against which to compare the performance of the loan pools analyzing the collateral in Dutch Hill II. The TCW expert found that any CDO backed by pools of loans consistent with Dutch Hill II’s core asset portfolio would have suffered losses as a consequence of the general market downturn. Ultimately, the expert concluded that Basis’s economic losses were caused by unforeseeable macroeconomic events.

In response, Basis failed to raise an issue of fact. Despite having pleaded in its amended complaint that TCW allowed Dutch Hill to contain toxic securities that performed significantly worse than a benchmark portfolio comprised of similar mortgage-backed bonds, Basis failed to produce any evidence that under the circumstances here involving the collapse of the RMBS market, it was TCW’s misrepresentations, rather than market forces, that caused the investment losses. Instead, Basis’s expert, in response, provided a general overview of the role of various players involved in CDO transactions as well as his opinion and interpretation of internal TCW emails discussing the investment vehicle at issue and the health of the market. However, Basis’s expert failed to address or even discuss Basis’s argument that no suitable collateral then existed and that TCW lied about its existence, and that this misrepresentation caused Basis to lose their entire investment. Basis’s expert did not analyze the quality or performance of the assets purchased by TCW. Basis’s expert’s conclusory assessment of the economic damages suffered by Basis addressed only transaction causation, stating that in the absence of fraudulent inducement and concealment, plaintiffs aver that Basis would not have invested $27,000,000 plus and would therefore not have suffered this total loss. This was insufficient to raise an issue of fact as to loss causation.

We do not mean to suggest that all cases in which a plaintiff alleges fraud will be unable to survive summary judgment in the event of a market collapse. However, in this case, it is Basis’s complete failure to meet its burden on the issue of loss causation that compels our decision.

(Internal quotations and citations omitted).

Posted: March 14, 2017

Past Consideration Received and Acknowledged Sufficient Consideration Under Contract

On February 28, 2017, the First Department issued a decision in Neo Universe Inc. v. Ito, 2017 NY Slip Op. 01491, holding that there had been sufficient consideration for a loan agreement and note, explaining:

Plaintiff Shinji Mitsunaga (plaintiff), principal of the corporate plaintiff, demonstrated his entitlement to judgment by the introduction of the Loan Agreement, the Promissory Note (Note), and plaintiff’s own testimony that defendant had not paid any portion of the debt owed under the Loan Agreement and Note. It was then defendant’s burden to demonstrate a lack of consideration, which he failed to do. Plaintiffs’ alleged failure to provide any evidence of the loan disbursement to defendant does not demonstrate a lack of consideration, as plaintiffs were not required to demonstrate that there was adequate consideration for the note. Defendant also incorrectly asserts that the Basic Contract does not contain any obligation on the part of defendant to personally guarantee or repay these monies. In fact, the Basic Contract, pursuant to which plaintiff testified that he loaned the money to defendant through defendant’s wife’s company, unequivocally identifies defendant as “B” in the agreement, and states that the money which plaintiff must give to defendant company shall be considered as a loan to B.

The trial court improperly found that plaintiff’s admission that he never gave any money to defendant in 2004 warranted dismissal of the complaint for lack of consideration for the Loan Agreement and Note, both executed in 2004. The Loan Agreement expressly states that plaintiff “is owed” the amount expressed in that agreement, clearly indicating that the debt owed was preexisting. This past consideration, the receipt and adequacy of which were both acknowledged by defendant in the Loan Agreement, is sufficient to enforce the debt instruments. Moreover, plaintiff’s own testimony with regard to the payments pursuant to the Basic Contract, executed in 2003, and the checks in evidence, executed between 2003 and 2004, support the existence of past consideration.

(Internal quotations and citations omitted).

Posted: March 13, 2017

Whether Insurer Waived Limitations Period By Seeking Information Creates Question of Fact

On March 2, 2017, Justice Singh of the New York County Commercial Division issued a decision in Anthony T. Rinaldi, LLC v. Anchorage Construction Corp., 2017 NY Slip Op. 30427(U), declining to dismiss a claim as time barred because of issues of fact as to whether an insurer waived the limitations defense, or was estopped from invoking it.

In Anthony T. Rinaldi, a contractor terminated a subcontract for cause and then sought coverage under a subcontract performance bond. The bond provided that any lawsuit must be commenced within one year after construction work under the subcontract ceased. As the end of the limitations period approached, the contractor was negotiating with the insurer, which sought additional information concerning the claim. According to the contractor’s counsel, the insurer gave assurances that “if any time was required to complete the determination process beyond the impending deadline to commence a legal action under the terms of the performance bond, [the insurer] would have no objection to agreeing to an extension.” However, when the contractor subsequently filed suit, the insurer moved to dismiss the claim as untimely.

The court explained the standards for governing a waiver of the statute of limitations, and the related doctrine of equitable estoppel:

While it is well established that an insurer’s request for documentation regarding an insured’s claim does not waive or toll a contractual limitations period, a contracting party may orally waive enforcement of a contract term notwithstanding a provision to the contrary.

However, waiver should not be lightly presumed and must be based on a clear manifestation of intent to relinquish a contractual protection. In order to establish waiver and avert summary judgment, plaintiff must show a clear manifestation of intent by defendant to relinquish the protection of the contractual limitations period. Generally, the existence of an intent to forgo such a right is a question of fact.

An estoppel rests upon the word or deed of one party upon which another rightfully relies, and, so relying, changes his position to his injury. A party may not, even innocently, mislead an opponent, and then claim the benefit of his deception. . . . Courts have found that an estoppel may be predicated upon evidence that the defendant, by resort to settlement negotiations, intended to lull the plaintiff into inactivity to induce it to continue negotiations until after the expiration of the time within which an action could be maintained.

(Citations omitted). Justice Singh proceeded to find issues of fact as to what assurances the insurer had given concerning the statute of limitations. Accordingly, he declined to dismiss the claim pending discovery.

One lesson here is not to rely on oral assurances that an adversary will waive a statute of limitations defense. Instead, get a written tolling agreement if settlement negotiations are ongoing and a limitations period is drawing to a close.

Posted: March 13, 2017

Allegations of Malicious Prosecution and Defamation Based on Allegations in Complaint Upheld

On February 28, 2017, the First Department issued a decision in Thomas v. G2 FMV, LLC, 2017 NY Slip Op. 01511, upholding claims for malicious prosecution and defamation based on allegations in a complaint, explaining:

Plaintiff alleges that, for improper purposes, defendants brought an action for a declaration that he resigned from G2 Investment Group, LLC without “Good Reason” under G2 FMV, LLC’s operating agreement.

The complaint states a cause of action for malicious prosecution. It pleads the absence of probable cause by alleging that no person of ordinary care and prudence would believe that plaintiff was not entitled to resign under the terms of the operating agreement. It pleads malice by alleging that defendants brought the declaratory judgment action for the purpose of silencing plaintiff as a whistle blower, causing damage to his reputation, and wrongfully denying him fair market value for his shares in G2 FMV. It pleads “special injury” by alleging with particularity that plaintiff had a consulting arrangement with Forbes Private Capital Group, LLC, and was terminated as a direct result of the allegations in the complaint in the declaratory judgment action.

The complaint states a cause of action for defamation. Because the declaratory judgment action was “a sham action,” defendants are not entitled to the protection of the absolute judicial privilege. Defendants’ allegations that they had “Cause” under the operating agreement to terminate plaintiff, but decided not to do so, have no bearing on the issue of “Good Reason.” Nor, contrary to defendants’ contention, did plaintiff consent to publication of the defamatory statements by opposing defendants’ motion to seal the complaint in the declaratory judgment action. . . . .

The complaint states causes of action for malicious prosecution and defamation as against the individual defendants who served as corporate officers by alleging that those defendants participated in the commission of the torts.

(Internal quotations and citations omitted).

Posted: March 12, 2017

Art Dealer Forfeits Commission Under Faithless Servant Doctrine

On February 27, 2017, Justice Ramos of the New York County Commercial Division issued a decision in Schulhof v. Jacobs, 2017 NY Slip Op. 50264(U), finding an art dealer liable for fraud and holding that she had forfeited her commission on a sale under the faithless servant doctrine.

In Schulhof, the defendant was found liable for fraud because she “misrepresented that” a “buyer was only willing to pay $5.5 million for the Work with knowledge that the buyer was actually willing and ready to pay” (and did pay) “$6.5 million.” The court further held “as a faithless servant,” the defendant “must account to” the plaintiff not only “for the $1 million of secret profits earned for the sale of the Work,” but also that her “disloyalty to” the plaintiff “causes her to forfeit the $50,000 in compensation earned for the sale of the Work.” (Internal quotations and citations omitted).

Posted: March 11, 2017

No Waiver as a Matter of Law Found Where Contract Had Non-Waiver Clause

On March 1, 2017, the Second Department issued a decision in Sunoce Properties, Inc. v. Bally Total Fitness of Greater N.Y., Inc., 2017 NY Slip Op. 01586, holding that there could be no finding of waiver as a matter of law where a contract had a non-waiver provision, explaining:

The presence of a nonwaiver provision in the lease, which stated in relevant part that the failure of the Landlord to insist upon a strict performance of any of the terms, conditions and covenants herein, shall not be deemed a waiver of any rights or remedies that the Landlord may have, and shall not be deemed a waiver of any subsequent breach or default in the terms, conditions and covenants herein contained, itself raised a triable issue of fact as to whether the plaintiff waived its right to assert its breach of contract cause of action.

(Internal quotations and citations omitted).

Posted: March 10, 2017

First Department Examines Scope of Covenant of Good Faith and Fair Dealing

On February 28, 2017, the First Department issued a decision in Transit Funding Associates, LLC v. Capital One Equipment Finance Corp., 2017 NY Slip Op. 01525, examining the scope of the covenant of good faith and fair dealing.

In Transit Funding Associates, the plaintiff, “a financing company that loaned money to Chicago taxi owners and drivers for the purchase of taxi medallions, entered into a commercial loan agreement with defendant lender.” The parties entered into a loan agreement” giving the plaintiff “an $80 million credit line. The agreement provided that” the defendant “would continue funding advances” “from time to time until the close of business on the Termination Date in such sums as” the plaintiff “may request.” The “general obligation of” the defendant “was substantially limited by section 2.1(g) of the loan agreement, which gave” the defendant “the complete authority to decline to advance funds.” The defendant later “began denying all loan advances, regardless of the creditworthiness or circumstances of particular medallion owners.” The plaintiff later brought an action against the defendant, including a claim for breach of the covenant of good faith and fair dealing. The First Department held that that claim should be dismissed, explaining:

In view of the provisions of the loan agreement expressly allowing Capital One to deny any requests for advances in its “sole and absolute discretion,” and specifically authorizing Capital One to deny any such requests for any reason, it cannot be said that Capital One violated the contract by failing to advance funds as requested, even if that decision put TFA out of business.

Although in New York, all contracts imply a covenant of good faith and fair dealing in the course of performance, the existence of the covenant cannot be relied on as grounds for [the plaintiff’s] action. The covenant of good faith and fair dealing cannot negate express provisions of the agreement, nor is it violated where the contract terms unambiguously afford [the defendant] the right to exercise its absolute discretion to withhold the necessary approval. Where a contract allows one party to terminate the contract in its sole discretion and for any reason whatsoever, the covenant of good faith and fair dealing cannot serve to negate that provision. Notably, where the parties intended to limit either party’s rights under the loan agreement so that they could only be exercised in good faith, they specifically included such language; for example, section 1.1 of the agreement allows [the defendant] to establish a valuation methodology “in its sole and absolute discretion exercised in good faith.” In contrast, the provision of section 2.1 authorizing [the defendant] to decline any request for an advance “in its sole and absolute discretion” lacks any such limitation requiring Capital One to act in good faith when doing so. Because [the defendant’s] complained-of conduct consists entirely of acts it was authorized to do by the contract, its alleged motivation for doing so is irrelevant. Simply put, an intent to put [the plaintiff] out of business cannot justify a lawsuit for a claimed breach of the covenant where the express provisions of the agreement allowed [the defendant] to act as it did.

(Internal quotations and citations omitted).

Posted: March 9, 2017

Prior Judgment From English Court Barred New Suit in New York

On February 28, 2017, the First Department issued a decision in Sebastian Holdings, Inc. v. Deutsche Bank, AG, 2017 NY Slip Op. 01518, affirming the dismissal of an action in New York based on an earlier English judgment, explaining:

The claims in this action are the subject of a prior final judgment of an English court, which found in defendant’s favor and denied plaintiff’s counterclaims, awarding defendant a sum of money.

The motion court properly accorded recognition to the judgment of the English court based on the doctrine of comity. Having failed to show fraud in the procurement of the judgment or that recognition of the judgment would do violence to, or be fundamentally offensive and inimical to, some strong public policy of this State, plaintiff is precluded from attacking the validity of the judgment in this action.

To the extent the proposed claims are based upon different theories or seek a different remedy from the claims decided in the English action, they nevertheless are barred because they are predicated upon the same series of transactions and occurrences that formed the basis of that action, and they could have been raised in that action.

(Citations omitted) (emphasis added).

Posted: March 8, 2017

Continuing Wrong Doctrine Does Not Save Plaintiff’s Claims Against Credit Card Issuer

On February 23, 2017, the First Department issued a decision in Henry v. Bank of America, 2017 NY Slip Op. 01436, holding that the continuing wrong doctrine did not save a plaintiff’s untimely claims, explaining:

Plaintiff’s reliance on the continuing wrong doctrine to toll the limitations periods is misplaced. The continuous wrong doctrine is an exception to the general rule that the statute of limitations runs from the time of the breach though no damage occurs until later. The doctrine is usually employed where there is a series of continuing wrongs and serves to toll the running of a period of limitations to the date of the commission of the last wrongful act. Where applicable, the doctrine will save all claims for recovery of damages but only to the extent of wrongs committed within the applicable statute of limitations.

The doctrine may only be predicated on continuing unlawful acts and not on the continuing effects of earlier unlawful conduct. The distinction is between a single wrong that has continuing effects and a series of independent, distinct wrongs. The doctrine is inapplicable where there is one tortious act complained of since the cause of action accrues in those cases at the time that the wrongful act first injured plaintiff and it does not change as a result of continuing consequential damages. In contract actions, the doctrine is applied to extend the statute of limitations when the contract imposes a continuing duty on the breaching party. Thus, where a plaintiff asserts a single breach — with damages increasing as the breach continued — the continuing wrong theory does not apply.

Here, the alleged wrongs are the enrollment of plaintiff in the CPP and PAS programs in March 2001 and 2007, respectively, and there was no breach of a recurring duty. The monthly billings demanding payment of CPP and PAS fees, both before and after plaintiff closed his account, represent the consequences of those wrongful acts in the form of continuing damages, not the wrongs themselves, and do not qualify for application of the continuous wrong doctrine.

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

Posted: March 7, 2017

No Dismissal Because of Prior Pending Action; Relief Sought Not Substantially the Same

On February 23, 2017, the First Department issued a decision in Wimbledon Financing Master Fund, Ltd. v. Bergstein, 2017 NY Slip Op. 01451, affirming the denial of a motion to dismiss based on the existence of a prior pending action, explaining:

Supreme Court providently exercised its broad discretion under CPLR 3211(a)(4) to deny appellants’ motion to dismiss this turnover proceeding under CPLR article 52 based on the pendency of a prior plenary action. While there is some overlap between the parties and claims in this proceeding and the earlier-filed plenary action, the nature of the relief sought is not substantially the same, and the respondents named herein are not identical to the defendants sued in the plenary action. Moreover, given that both this proceeding and the plenary action are pending before the same Justice, appellants will not be prejudiced by the simultaneous pendency of the two related matters.

(Internal quotations and citations omitted).