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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: December 3, 2017

Party Cannot Be Held in Contempt for Failing to Pay a Fee Award

On November 29, 2017, the Second Department issued a decision in Liang v. Yi Jing Tan, 2017 NY Slip Op. 08364, holding that a party cannot be held in contempt for failing to pay a fee award, explaining:

The Supreme Court erred in granting, after a hearing, the plaintiff’s motion to hold the defendants’ attorney in civil contempt based upon her failure to pay counsel fees awarded to the plaintiff in an order dated August 12, 2014. Judiciary Law § 753(A)(3) permits a court to punish a party for civil contempt for the non-payment of a sum of money, ordered or adjudged by the court to be paid, in a case where by law execution can not be awarded for the collection of such sum. This is not a case where, by law, execution cannot be awarded. Therefore, the remedy of contempt is unavailable.

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

We are experienced in bringing and defending contempt motions in civil litigation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has questions regarding what acts can constitute contempt or what remedies are available through a motion for contempt.

Posted: December 2, 2017

Implied Covenant of Good Faith Cannot be Used to Create New Contract Rights

On November 16, 2017, Justice Sherwood of the New York County Commercial Division issued a decision in 3839 Holdings LLC v. Theodore Farnsworth, Highland Holdings Group, Inc., 2017 NY Slip Op. 32433(U), dismissing a claim for breach of the covenant of good faith and fair dealing because that covenant cannot be used to create new contract rights, explaining:

A claim that defendants breached the implied covenant of good faith and fair dealing may be properly dismissed as duplicative of the breach of contract claim when both claims arise from the same facts. As the Farnsworth Defendants correctly note the first and second causes of action are virtually identical. For this reason, plaintiffs second cause of action must be dismissed.

Even if this claim were not duplicative of plaintiff’s first cause of action, it would still fail. The implied covenant of good faith and fair dealing embraces a pledge that neither party shall do anything that wil1 have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. The implied covenant is breached when a party acts in a manner that, although not expressly forbidden by the contractual provision, would deprive the other party of the benefits of the agreement. However, the obligations imposed by an implied covenant are limited to obligations in aid and furtherance of the explicit terms of the parties’ agreement. The implied covenant cannot be construed so broadly as to nullify the express terms of a contract, or to create independent contractual rights. To establish a breach of the implied covenant, the plaintiff must allege facts that tend to show that the defendants sought to prevent performance of the contract or to withhold its benefits from the plaintiff. Plaintiffs second cause of action fails to identify any existing contractual obligations that were obstructed, but rather seeks to advance independent contractual rights not already provided for in the agreement. This claim shall be dismissed.

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

The implied covenant of good faith and fair dealing is an important, if often misunderstood, part of New York law. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client faces a situation where a party is being deprived of the benefits of its contract, even if you cannot point to a specific contract term that is being breached.

Posted: December 1, 2017

Litigation Privilege Bars Defamation Claim

On November 28, 2017, the First Department issued a decision in Peters v. Coutsodontis, 2017 NY Slip Op. 08308, holding that the litigation privilege barred a defamation claim, explaining:

Supreme Court properly concluded that the alleged defamatory statements were pertinent to the 2005 action and therefore absolutely protected by the judicial proceedings privilege. The statement in the complaint alleging that Peters fraudulently awarded himself an employment contract, was obviously related to the fraud allegations. The statement regarding the authenticity of the power of attorney related to Peters’ ability to award himself the contract, and was thus pertinent to the allegation that Peters engaged in self-dealing. Public policy favors having litigants speak freely in judicial proceedings.

There are no facts alleged supporting a conclusion that the instant litigation is a sham action brought solely to defame, which would otherwise destroy the privilege. Coutsodontis prosecuted his claims in the 2005 action, opposed plaintiff’s motion to dismiss the 2005 action, and appealed the order of dismissal. His failure to prevail on the 2005 action does not vitiate the privilege, since if the privilege existed only in cases that were ultimately sustained, none of the persons whose candor is protected by the rule — parties, counsel or witnesses — would feel free to express themselves.

(Internal quotations and citations omitted).

Civil litigation can involve claims that cause real reputational harm. As this decision shows, such claims usually are not actionable. We are experienced in advising clients and other counsel on what can be done in such a situation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has questions about defamatory accusations made in the context of a civil lawsuit.

Posted: November 30, 2017

Court Erred in Converting Motion to Dismiss into Motion for Summary Judgment

On November 28, 2017, the First Department issued a decision in Island Intellectual Prop. LLC v. Reich & Tang Deposit Solutions, LLC, 2017 NY Slip Op. 08311, holding that the motion court erred in converting a motion to dismiss into a motion for summary judgment, explaining:

The motion court should not have entertained plaintiffs’ cross motion for summary judgment, as the parties did not chart a course for summary judgment. Defendants objected to the court entertaining the motion as one for summary judgment and the court did not provide adequate notice of its intention to convert the motions pursuant to CPLR 3211(c).

(Internal citations omitted).

Cases in the Commercial Division of the New York courts more often that not involve a motion to dismiss at the outset, so this is a big part of our practice. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has questions about seeking or opposing dismissal of a commercial lawsuit.

Posted: November 29, 2017

K-1s Not Dispositive Proof of Partnership Interests

On November 28, 2017, the First Department issued a decision in Rakosi v. Sidney Rubell Co., LLC, 2017 NY Slip Op. 08341, holding that K-1s were not dispositive proof of a partnership interest, explaining:

Defendants present the entities’ K-1s as dispositive proof that Rubell family LLC-transferees of Rubell’s interests are entity partners; however, such documents, standing alone, do not prove an express partnership exists. They may be relevant to the inquiry, but are not determinative.

(Internal citations omitted).

A significant part of our practice is litigating disputes between the owners of closely-held business entities such as partnerships, limited liability companies or corporations. Often called business divorces, these disputes can be as complex and contentious as any marital divorce. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has questions about a New York business divorce.

Posted: November 28, 2017

Jury Trial Waiver in Escrow Agreement Governed Suit on Related Purchase Agreement

On November 21, 2017, the First Department issued a decision in Highbridge House Ogden LLC v. Highbridge Entities LLC, 2017 NY Slip Op. 08187, holding that a jury trial waiver in an escrow agreement applied to an action based on a related purchase agreement, explaining:

The plain terms of the Purchase Agreement and the Escrow Agreement clearly evince the parties’ intent to waive their rights to a trial by jury. The right to a jury trial may be waived in an instrument other than that representing the agreement upon which the action is founded.

The Escrow Agreement had a broad, clear and complete waiver with respect to “ANY ACTION OR PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT,” and the express terms of both agreements memorialize the parties’ intent that the two documents be read in tandem. The Purchase Agreement provides that the Escrow Agreement, which was attached as an exhibit, was “hereby made part hereof.” It also provided that all exhibits, including the Escrow Agreement, were to be “incorporated into this [Purchase] Agreement as if fully set forth herein.” The Escrow Agreement provided that it and the Purchase Agreement “contain[ed] the entire agreement and understanding between the parties.” Regardless, even if the parties had not intended for the Purchase Agreement and the Escrow Agreement to be read together, this dispute, concerning return of the escrow funds, “arises out of” and is “in connection with” the Escrow Agreement. The broad jury waiver provision in the Escrow Agreement clearly applies.

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

One of the reasons people choose to have their contracts governed by New York law is that it is predictable and enforces the terms to which the parties agreed. However, as this decision shows, not every case is simple. With our focus on litigation in the Commercial Division of the New York state courts, we have participate in myriad cases involving the interpretation of contracts under New York law. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you face a tough question of New York contract law.

Posted: November 27, 2017

No Claim Against Insurer for Breach of the Covenant of Good Faith and Fair Dealing Absent “Foreseeable Consequential Damages”

On October 19, 2017, Justice Scarpulla of the New York County Commercial Division issued a decision in Central Amusement International LLC v. Lexington Insurance Co., 2017 NY Slip Op. 32233(U), holding that an insured failed to state a claim against an insurance company for breach of the covenant of good faith and fair dealing, explaining:

A separate cause of action for bad faith insurance claim handling is not recognized in New York, in the absence of independent, tortious conduct. . . . New York does, however, permit an insured to claim consequential damages for breach of contract in those instances where the insured alleges that the insurance companies’ bad faith handling of the insured’s claim resulted in foreseeable, additional damages, other than damages measured by the amount of insurance coverage.

Central Amusement’s second cause of action for breach of the covenant of good faith and fair dealing cannot stand as a separate claim because the only tortious conduct it alleges concerns Lexington’s alleged breach of its obligation to timely investigate and pay under the insurance contract. Moreover, while Central Amusement states the words “consequential damages,” the damages sought in the breach of the covenant of good faith and fair dealing cause of action are entirely duplicative of the damages sought in the breach of contract cause of action. Central Amusement has not alleged, with any clarity or specificity, any foreseeable consequential damages it suffered by the alleged bad faith handling of Central Amusement’s insurance claim, other than having to litigate this action. For these reasons, the proposed second cause of action lacks merit.

(Citations omitted).

Schlam Stone & Dolan is very experienced in litigating coverage claims against insurers. If you have questions regarding a coverage dispute, contact Schlam Stone & Dolan partner Brad Nash at bnash@schlamstone.com.

Posted: November 26, 2017

Court Refuses to Award Fees for Almost 100 hours of Work on Motion to Compel

On November 3, 2017, Justice Bransten of the New York County Commercial Division issued a decision in Jfurti, LLC v. Verschleiser, 2017 NY Slip Op. 32357(U), refusing to grant an attorneys’ fees for 100 hours of work on a motion to compel, explaining:

It is within the court’s discretion to determine the reasonableness of an attorney’s stated fee. Among the factors the court should consider when determining the reasonableness of fees are: time and labor required, the difficulty of the questions involved, and the skill required to handle the problems presented; the lawyer’s experience, ability and reputation; the amount involved and benefit resulting to the client from the services; the customary fee charged by the Bar for similar services; the contingency or certainty of compensation; the results obtained; and the responsibility involved. In addressing these factors, this Court finds that the Plaintiffs have adequately justified the hourly rates for the partner and associate, yet there remains a vast, unexplained, disparity between the time and labor exerted with the nature of the services and relative difficulty, or lack thereof, of the underlying motion. This court, however, accepts the statements made in the Jakoby Affirmation as well as the supporting timecard that there has been no double dipping of fees pertaining to this motion.

Plaintiffs affirmation spends a significant number of pages, eight out of ten, comparing the amount of work done on this motion for sanctions with the alleged amount of work Defendants performed on the 2014 motion to strike. This court, however, declines to compare the present application for a fee award with the previous award. Plaintiffs are unable to sufficiently demonstrate reasoning for the alleged amount of time needed to draft motion sequence 10, the motion to compel. Plaintiffs have failed to give this Court an adequate breakdown of time worked on the motion, including any relevant call logs for conferences, time spent on legal research, and an express breakdown of time spent logged drafting of the document. They have also not stated that this particular discovery motion was unusually difficult or complex which required any particularly special skills to justify the nearly 100 hours of billing time. As the Court stated on the May 10, 2017 record, the underlying discovery related motion would justify twenty to twenty-five hours’ worth of work, at most. Plaintiffs have failed to provide any arguments or proofs that persuade this court to grant sanctions for more than the twenty hours work.

(Internal quotations and citations omitted).

Litigating for fees can be hard–both because of the high burden you sometimes must meet to be entitled to fees and because it is important to avoid the pitfall of getting an award of fees that is less than what it cost to move for fees. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are litigating an attorney fee award.

Posted: November 25, 2017

Tenant Must Seek Yellowstone Injunction Before Cure Period Ends

On November 22, 2017, the Second Department issued a decision in Riesenburger Properties, LLLP v. Pi Associates, LLC, 2017 NY Slip Op. 08294, affirming the denial of a Yellowstone injunction because the tenant sought the injunction after the time to cure the defects alleged by the landlord had expired, explaining:

A Yellowstone injunction maintains the status quo so that a commercial tenant, when confronted by a threat of termination of its lease, may protect its investment in the leasehold by obtaining a stay tolling the cure period so that upon an adverse determination on the merits the tenant may cure the default and avoid a forfeiture of the lease. To obtain a Yellowstone injunction, the tenant must demonstrate that (1) it holds a commercial lease, (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease, (3) it requested injunctive relief prior to both the termination of the lease and the expiration of the cure period set forth in the lease and the landlord’s notice to cure, and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises.

An application for Yellowstone relief must be made not only before the termination of the subject lease but must also be made prior to the expiration of the cure period set forth in the lease and the landlord’s notice to cure. Where a tenant fails to make a timely request for a temporary restraining order, a court is divested of its power to grant a Yellowstone injunction.

Here, the Supreme Court properly denied the Pi defendants’ motion for a Yellowstone injunction because they did not move for injunctive relief until after the cure period expired and after the notice of cancellation of the lease had been served. Contrary to their contentions, the notices of default were properly served according to the terms of the lease.

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

We litigate Yellowstone injunctions for both landlords and tenants. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding the termination of a commercial lease because of a default under the lease.

Posted: November 24, 2017

Cayman Islands Procedural Law Does Not Apply to Derivative Claims of Cayman Entity in New York Lawsuit

On November 20, 2017, the Court of Appeals issued a decision in Davis v. Scottish Re Group Ltd., 2017 NY Slip Op. 08157, holding that foreign procedural law did not apply to derivative claims relating to a foreign entity in a New York lawsuit, explaining:

The parties agree that Cayman Islands substantive law governs the merits of this action, and were we to address the merits of plaintiff’s claims, we would employ the Cayman Islands Companies Law or other law relied upon by the parties. However, under New York common-law principles, procedural rules are governed by the law of the forum. The parties disagree as to whether Rule 12A is a part of the Cayman Islands substantive law concerning derivative actions, or is a procedural rule that then does not apply to actions litigated in New York. Where there is disagreement as to the nature of a law, the law of the forum normally determines for itself whether a given question is one of substance or procedure. We recognize, however, that the foreign jurisdiction’s designation of the rule as procedural or substantive, while “instructive, is not dispositive.

. . .

We first look at the plain language of Rule 12A. Rule 12A states that it pertains to all derivative actions commenced by writ, and that the trigger for applying to the Grand Court occurs when the defendant has given notice of intention to defend. Both procedures are specific to Cayman Islands litigation. The term writ is clearly inapplicable to jurisdictions, such as New York, in which such actions are not commenced by writ. Additionally, under the Grand Court Rules, the defendant acknowledges service of the writ by completing a specified form which includes a box to be checked off indicating the intent to defend. Under this analysis, Rule 12A is a procedural rule that does not apply in New York Courts.

Rule 12A also states that it applies to “every shareholder action commenced by writ.” By its terms, it does not specifically apply to actions involving Cayman-incorporated companies. The plain meaning of these words is that any derivative action commenced in the Cayman Islands, brought by writ on behalf of any corporation, no matter where incorporated, is subject to Rule 12A. Thus, it serves a gatekeeping function, but only as to derivative actions brought in the Cayman Islands, not for derivative actions, wherever brought, concerning Cayman companies specifically.

In addition, Rule 12A has no provision that would suggest that it applies, as urged by defendants, in derivative actions brought on behalf of Cayman Island companies commenced outside the Cayman Islands. Had the Rules Committee, the body appointed by the Cayman Islands Grand Court to make rules relative to practice and procedure in the Grand Court, intended that Rule 12A apply to derivative actions involving Cayman Islands companies anywhere in the world, it could have expressly provided as such. The British Virgin Islands’ Business Companies Act (2004, § 184C), for instance, requires that any shareholder intending to commence a derivative action on behalf of a BVI-incorporated company, first obtain leave from a BVI court. Likewise, the Canada Business Corporations Act, requires any shareholder seeking to commence a derivative action on behalf of a Canadian corporation to obtain leave from a Canadian court, and upon being granted leave, the action must be commenced solely in certain enumerated Canadian courts. Rule 12A does not have a similar provision and lacks any extra-jurisdictional authority.

. . .

Holding that Rule 12A is procedural does not impose a burden on our courts, or the courts of the Cayman Islands. However, were Rule 12A held to be substantive, it is unclear what procedural path a party seeking to bring a derivative action in New York on behalf of a Cayman company would follow to comply with Rule 12A. Must the party first proceed by writ in the Grand Court and then discontinue the Cayman action to return to, or commence its action here in New York? Would the ruling by the Grand Court that there was a sufficient showing of merit be binding on a New York court on a motion to dismiss or for summary judgment? Rule 12A provides no answers.

Therefore, a Tanges analysis also leads to the conclusion that Rule 12A is procedural in nature. Because the procedural law of the forum typically applies under our conflict of law rules, plaintiff’s failure to first comply with Rule 12A’s leave application procedure does not bar his derivative claims.

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

We routinely represent foreign litigants in US courts, particularly in the Commercial Division of the New York state courts. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are, or represent, a foreign litigant with questions about commercial litigation in New York.