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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: August 10, 2017

Lost Profits Found to be Recoverable as General, Not Consequential, Damages

On August 3, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in AGE Group, Ltd. v. Martha Stewart Living Omnimedia, Inc., 2017 NY Slip Op 31639(U), holding that lost profits were recoverable as general rather than consequential damages, explaining:

MSLO also wrongly contends that this case may be dismissed if AGE cannot prove, without resort to impermissible speculation, that it suffered damages proximately caused by MSLO’s breach. It is well settled that nominal damages may be awarded on a breach of contract claim. Therefore, summary dismissal is not appropriate.

That said, AGE has developed a record on which it might be capable of proving damages in the form of the profits it would have earned on Pet Product sales had MSLO not breached. It is the law of the case that AGE may seek such damages. Indeed, the only damages AGE could have suffered from MSLO’s breach are the profits it lost the opportunity to make on the MSLO Agreement. Contrary to MSLO’s contentions, where, as here, the lost profits are the direct and immediate fruits of the contract, and not purely related to collateral business dealings, such lost profits are recoverable as general (as opposed to consequential) damages. Even if AGE’s lost profits were considered collateral to the contact because they involved sales to another retailer, they could still be recoverable if (1) it is demonstrated with certainty that the damages have been caused by the breach, (2) the extent of the loss is capable of proof with reasonable certainty, and (3) it is established that the damages were fairly within the contemplation of the parties. These factors are issues for trial and not amenable to resolution on this summary judgment motion. At trial, AGE may seek to recover lost profits if it can establish they were the natural and probable consequence of defendant’s breach.

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

Posted: August 9, 2017

Insured Not Entitled to Indemnification Because It Settled Claims Without Insurer’s Permission

On August 8, 2017, the First Department issued a decision in Bovis Lend Lease (LMB), Inc. v. Arch Insurance Co., 2017 NY Slip Op. 06049, holding that an insured forfeited its right to indemnification by entering into a settlement without its insurer’s permission, explaining:

Under paragraph 4 of the parties’ Companion Agreement, Bovis was required to obtain Arch’s consent to the settlement of the claims and counterclaims asserted by and against Bovis and Lower Manhattan Development Corporation (LMDC), in order to seek indemnification from Arch. Bovis’s contractual remedy in the event of Arch’s refusal to consent to a settlement, whether or not such refusal was reasonable, was to be indemnified by Arch “for all damages suffered in excess of the result that [Bovis] would have obtained if the settlement had been accepted.” By entering, contrary to the plain terms of the Companion Agreement, into a settlement with LMDC to which Arch had refused to consent, Bovis breached the Companion Agreement and forfeited its right to the contractual remedy for Arch’s refusal to consent to a settlement acceptable to Bovis, whether or not Arch withheld its consent in good faith. Accordingly, Arch is entitled to summary judgment dismissing Bovis’s third-party claim against it.

Posted: August 8, 2017

Merger Clause Bars Fraud Claim

On July 31, 2017, Justice Sherwood of the New York County Commercial Division issued a decision in Representaciones E Investigaciones Medicas, S.A. De C.V. v. Abdala, 2017 NY Slip Op. 31619(U), dismissing a fraud claim relating to the acquisition of a pharmaceutical company based on a contract’s merger clause.

In Representaciones E Investigaciones Medicas, the plaintiffs’ fraud claim was based on alleged misrepresentations relating to compliance with the law. The court first found that to the extent that it was based on breach of contractual representations and warranties, it was duplicative of the plaintiffs’ breach of contract claim and must be dismissed. To the extent “the fraud claim is based on false statements . . . made during due diligence, it is barred by the” purchase agreement’s merger clause. The court explained:

According to the complaint, Teva was shown false documents and given false information during due diligence, and, deceived, decided to proceed with the transaction. However, Teva is a sophisticated entity and performed extensive due diligence. Plaintiffs are correct that where the complaint states a cause of action for fraud, the parol evidence rule is not a bar to showing the fraud — either in the inducement or in the execution — despite an omnibus statement that the written instrument embodies the whole agreement, or that no representations have been made. However, this waiver is not unenforceably broad, as plaintiffs claim. Here, plaintiff has in the plainest language announced and stipulated that it is not relying on any representations as to the very matter as to which it now claims it was defrauded. Such a specific disclaimer destroys the allegations in plaintiffs complaint that the agreement was executed in reliance upon these contrary oral representations. . . . The merger clause in the SPA disclaims reliance on materials presented or viewed during due diligence, which is exactly the basis for the plaintiffs’ claim for fraud. As mentioned above, Teva is a sophisticated entity. If it had wanted to include a carve-out that it could rely on the materials presented to it, or information included in due diligence, or a representation that the material it viewed during due diligence was correct, it could have done so. It did not.

Plaintiffs further argue that the merger clause cannot be enforced here, because it only applies where the facts represented are not matters peculiarly within the representing party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, , , , Here, plaintiffs allege the defendants presented them with the double-bookkeeping documents, false responses to their due diligence requests, and powerpoint slides with false information, and hid the true facts from them during the due diligence process. However, they also allege they performed extensive and thorough due diligence. . . . [P]laintiffs have not alleged how the alleged misrepresentations remained particularly in the knowledge of the defendants despite Teva’s access to Rimsa’s personnel, facility, and products. . . .

It is well settled that the general rule is that if the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations. Where a party has no knowledge of a latent condition and no way of discovering the existence of that condition in the exercise of reasonable diligence then he may overcome a specific disclaimer clause and introduce parol evidence of fraudulent inducement. Here, plaintiffs have provided no explanation for why the truth was outside their reach. Unlike the plaintiffs in TIAA Global Investors, Teva provides no reason that it could not have discovered the truth. It only states it did not discover the truth. Plaintiffs have failed to allege facts to support their argument that the merger agreement cannot be enforced. Accordingly, the first cause of action alleging fraud shall be dismissed.

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

Posted: August 7, 2017

Intermediary Was Not Agent With Authority to Bind Trust

On August 1, 2017, Justice Friedman of the New York County Commercial Division issued a decision in Arnon Ltd (IOM) v. Beierwaltes, 2017 NY Slip Op. 31605(U), holding that an intermediary was not an agent with authority to bind a trust with respect to the purchase of artwork.

First, the court discussed the principles of actual and apparent authority, explaining:

Agency may be based on actual or apparent authority of the agent to act on behalf of the principal. Actual authority, in turn, may be based on an express or direct grant of authority to the agent or may be implied based on the principal’s manifestations which, though indirect, would support a reasonable inference of an intent to confer such authority. Implied actual authority must be based on a showing that the principal performed verbal or other acts that gave the agent the reasonable impression that he had authority to enter into the contract. Apparent authority must be based on words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction. The agent cannot by his own acts imbue himself, with apparent authority. Moreover, a third party with whom the agent deals may rely on an appearance of authority only to the extent that such reliance is reasonable.

Next, the court examined the question of whether the alleged principal’s failure to respond to an e-mail that implied that the intermediary was the principal’s agent created authority in the intermediary:

In discussing the effect of Ms. de Carte’s silence in response to the email, Amon does not distinguish between implied actual authority and apparent authority, and does not cite legal authority on the effect of such silence on these separate bases for authority. There is case law that silence may, under appropriate circumstances, manifest authority, although New York law on this issue does not appear to be extensive.

Here, however, the silence of Ms. de Carte in response to the January 12 email is insufficient as a matter of law to manifest either implied actual or apparent authority. Ms. de Carte is neither directly addressed in the email, nor identified as a representative of Amon. The email address used for Ms. de Carte is a Trident, not Amon, address, and there is no indication in the email that Trident and Amon are interrelated entities. As defendants correctly point out, there is nothing on the face of the email to connect Ms. de Carte with Amon. Further, the email does not detail the terms of the sale of the Kore, and it affirmatively states that Arnon is part of Mr. Sofer’s trust and is managed by independent directors. Ms. de Carte’s failure to respond, within a very short time frame, to such an email could not have led a reasonable person in defendants’ position to conclude that Ms. de Carte, and through her, Amon, bestowed on Mr. Sofor the authority to bind Amon to a $650,000 contract.

Ms. de Carte’s silence in response to the January 12 email thus fails to raise a triable issue of fact as to apparent authority. Ms. de Carte’s silence in response to this email similarly fails to raise a triable issue of fact as to Amon’s claim that Amon bestowed implied actual authority on Mr. Sofer for the one Kore transaction. . . . Mr. Sofer and Ms. de Carte repeatedly testified that Mr. Sofer recommended purchases but that only Amon had the power to contract for them, and that formal approval was required. In the face of this testimony, Ms. de Carte’s non-response to the January 12 email could not have given Mr. Sofer the reasonable impression that he had authority to enter into this one contract. At most, Ms. de Carte’s silence could be interpreted as manifesting agreement that Mr. Sofer was authorized to engage in intermediary discussions or negotiations, but that the independent directors referred to in the January 12, 2013 email must still make the final decision as to whether to bind Amon to the purchase and must approve a formal written contract.

Amon’s reliance on prior dealings is also insufficient to raise a triable issue of fact as to Mr. Sofer’s apparent authority to bind Amon to the one Kore transaction. As a general rule, the mere creation of an agency for some purpose does not automatically invest the agent with apparent authority to bind the principal without limitation. An agent’s power to bind his principal is coextensive with the principal’s grant of authority. Further, the existence of apparent authority depends upon a factual showing that the third party relied upon the misrepresentations of the agent because of some misleading conduct on the part of the principal not the agent.

(Internal quotations and citations omitted).

Posted: August 6, 2017

Party Need Not Produce Documents Relating to Settlement Discussions

On July 27, 2017, Justice Ramos of the New York County Commercial Division issued a decision in Five Star Electric Corp. v. A.J. Pegno Construction Co., Inc./Tully Construction Co., Inc., 2017 NY Slip Op. 31591(U), holding that a party was not required to produce documents relating to settlement discussions, explaining:

Documents and claims analyses disclosed during settlement discussions are inadmissible for the purpose of establishing Pegno/Tully or the City’s liability in the underlying action. Moreover, the claims analyses and correspondence that Five Star seeks, with the Confidentiality Agreement in place, are neither material nor necessary to the prosecution of this action.

This Court recognizes the competing public policy concerns between encouraging settlements and pre-trial disclosure, but finds that requiring disclosure would undermine future settlement negotiations.

(Internal quotations and citations omitted).

Posted: August 5, 2017

Property Owner Not Liable to Subcontractor for General Contractor’s Obligations

On July 26, 2017, Justice Emerson of the Suffolk County Commercial Division issued a decision in County Wide Flooring, Corp. v. Town of Huntington, 2017 NY Slip Op. 50967(U), holding that a property owner was not liable for a general contractor’s contractual obligations to a subcontractor, explaining:

When, as here, there is an express contract between the general contractor and the subcontractor, the owner of the subject premises may not be held directly liable to the subcontractor on a theory of implied or quasi-contract unless the owner has, in fact, assented to such an obligation. The mere fact that the owner has consented to the improvements provided by the subcontractor and accepted their benefit does not render the owner liable to the subcontractor, whose sole remedy lies against the general contractor.

It is undisputed that there is no privity of contract between the plaintiff and the Town and that the plaintiff’s contract was with Wenger. Contrary to the plaintiff’s contentions, the subcontract with Wenger bars any claim against the Town sounding in quantum meriut or unjust enrichment. Moreover, the record does not reflect that the Town expressed a willingness to pay the plaintiff for the work it performed at the ice rink.

The plaintiff’s reliance on General Municipal Law § 106-b is misplaced. That section merely sets forth the procedure for payment by public owners of property to contractors and for payment by contractors to subcontractors. It does not create a private cause of action, nor does it impose any liability upon public owners for the their failure or the failure of their contractors to comply therewith. Subdivision (2) of § 106-b expressly provides, “Nothing provided herein shall create any obligation on the part of the public owner to pay or to see to the payment of any moneys to any subcontractor or materialman from any contractor nor shall anything provided herein serve to create any relationship in contract or otherwise, implied or expressed, between the subcontractor or materialman and the public owner.” Accordingly, the motion is granted, and the complaint is dismissed insofar as asserted against the Town.

(Internal quotations or citations omitted).

Posted: August 4, 2017

Request for Indemnification Under BCL Denied on Procedural Grounds

On July 13, 2017, Justice Emerson of the Suffolk County Commercial Division issued a decision in Federico v. Brancato, 2017 NY Slip Op 50968(U), denying a request for indemnification under the Business Corporation Law on procedural grounds.

First, the court reviewed the legal framework for the indemnification of officers and directors under the BCL:

Business Corporation Law § 722 is permissive in that it allows, but does not require, the corporation to indemnify directors and officers as long as the prescribed standard of conduct is satisfied. Under § 722(a), a corporation may indemnify an officer or director who is made a party to a civil action or proceeding against judgments, fines, amounts paid in settlement and reasonable expenses, including attorney’s fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in the best interests of the corporation. In the context of derivative actions, § 722(c) provides that a corporation may indemnify officers and directors who acted in good faith and in the best interests of the corporation against amounts paid in settlement and reasonable expenses, including attorney’s fees, actually and necessarily incurred by them in connection with the defense or settlement of such action.

A director or officer who has been successful on the merits or otherwise is entitled to indemnification for the defense of any civil action against him. This type of indemnification has been termed mandatory indemnification because the corporation does not have discretion whether or not to grant it. Any outcome that does not result in a finding of liability is considered a success for purposes of this subsection.

Notwithstanding the failure of a corporation to provide for indemnification, and despite any contrary resolution of the board of directors or of the shareholders, indemnification may be awarded by a court to the extent authorized by the statutes. No indemnification may be awarded by a court, however, if it would be inconsistent with a corporate provision disallowing indemnification, or otherwise limiting it, in effect at the time of the accrual of the cause of action asserted in the action or proceeding in which the expenses were incurred or other amounts were paid.

For a corporation to grant permissive indemnification under § 722, a determination must be made that the director or officer’s conduct has conformed to the requisite standard of conduct by one of the following procedures: (1) a vote by a quorum of directors who are not parties to the action or proceeding, (2) a written opinion by independent legal counsel or by the board based on an opinion by independent legal counsel, or (3) shareholder approval. The statutory scheme does not specify any procedure that must be followed to grant mandatory indemnification, but merely provides that, when an officer or director has been successful on the merits or otherwise, he shall be entitled to indemnification. Resort to a court for indemnification is authorized when the corporation has failed to provide for indemnification on a voluntary basis under § 722 and when indemnification has been refused by the directors or shareholders in a specific case under § 723.

Next, the court addressed the application before it:

The instant motion is premature insofar as the Senior Brancatos seek indemnification for the $475,754.52 in legal fees and expenses that they have already incurred in defense of this action. The record does not reflect that the Senior Brancatos sought indemnification from Challenge Graphics prior to making this motion. Moreover, the motion was not made on notice to Challenge Graphics, as required by Business Corporation Law § 724(b). It, therefore, cannot be determined from the record presently before the court whether indemnification would be inconsistent with a corporate provision disallowing indemnification, or otherwise limiting it, in effect at the time of the accrual of the causes of action asserted by the plaintiff.

The Senior Brancatos also seek an advance of legal fees and expenses in the amount of $75,000.00 for anticipated legal fees and expenses from February 1, 2017, until the conclusion of this action. When indemnification is sought by judicial action, Business Corporation Law § 724 (c) authorizes the allowance of necessary litigation expenses during the pendency of the action if the court finds that the defendant has, by his pleadings or during the course of litigation, raised genuine issues of fact or law. Here, the issue of liability has already been determined, and the issue of damages is determined simultaneously herewith. The action is, therefore, no longer pending. Accordingly, the motion is denied.

(Internal quotations and citations omitted).

Posted: August 3, 2017

Court Enforces Warranty Waiver, Dismissing Claim

On August 2, 2017, the Second Department issued a decision in Joka Industries, Inc. v. Doosan Infracore America Corp., 2017 NY Slip Op. 05941, affirming the dismissal of a breach of warranty claim based on a contractual waiver, explaining:

[T]he defendants demonstrated their prima facie entitlement to judgment as a matter of law dismissing the causes of action alleging breach of the implied warranty of fitness for a particular purpose and breach of the implied warranty of merchantability by demonstrating that they expressly and conspicuously disclaimed these implied warranties in the contract of sale. Similarly, the defendants demonstrated their prima facie entitlement to judgment as a matter of law dismissing the cause of action to recover consequential and incidental damages by establishing that the cause of action was barred by a limitation of liability provision in the contract of sale. In opposition, the plaintiff failed to raise a triable issue of fact as to whether the disclaimers of the implied warranties were enforceable and as to whether the limitation of liability provision was unconscionable.

(Internal quotations and citations omitted).

Posted: August 2, 2017

First Department Reaffirms Indenture Trustee’s Fiduciary Duties

On August 1, 2017, the First Department issued a decision in Cece & Co. Ltd. v. U.S. Bank N.A., 2017 NY Slip Op. 05924, reaffirming that an indenture trustee cannot take advantage of trust beneficiaries for its own benefit, even if the indenture does not prohibit its actions. On the same day, the First Department issued a decision in NMC Residual Ownership L.L.C. v. U.S. Bank N.A., 2017 NY Slip Op. 05923, deciding a similar issue in a different appeal using the same reasoning.

In Cece & Co., the defendant trustee of RMBS trusts “purchased the trust assets for its own account at below market value.” Relying on the rule that “[u]nlike an ordinary trustee, the rights, duties and obligations of an indenture trustee are not defined by a fiduciary relationship. Instead, they are defined exclusively by the terms of the agreements by which the relationships were formed,” the motion court dismissed the plaintiff’s claim, holding that the indenture allowed the trustee to purchase trust assets. The First Department reversed and reinstated the plaintiff’s breach of contract claim, explaining:

An indenture trustee clearly owes the security holders a duty to perform its ministerial functions with due care. Most importantly, the courts have recognized that even an indenture trustee has a fundamental duty to avoid conflicts of interest. Avoiding conflicts of interest encompasses a trustee’s duty not to profit at the possible expense of the beneficiary. . . . .

At bar, while the trustee had an express right to purchase the remaining trust assets in its own name, there was no express contractual right to purchase the assets at less than market value. In the absence of an express contractual right to do so, the trustee’s action clearly constitutes a prohibited conflict of interest, because it financially benefitted the trustee at the expense of the residual security holders. The trustee completely defeated the equity value of the trust assets that belonged to the residual security owners by usurping the profitable value of the assets for itself.

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

Posted: August 1, 2017

Court Denies Summary Judgment Motion Due to Defendant’s Failure to Attend Deposition

On July 25, 2017, Justice Ostrager of the New York County Commercial Division issued a decision in Zoullas v. Zoullas, 2017 NY Slip Op. 31574(U), finding that a plaintiff’s claims were time-barred but nonetheless refusing to grant summary judgment because of the defendant’s failure to appear for deposition despite having been ordered to do so, explaining:

In sum, but for the fact that plaintiff has been deprived of the opportunity to either conduct the deposition of the defendant or call the defendant as an adverse witness at trial, defendant has a meritorious motion for summary judgment. But, absent compelling proof that the defendant is unavailable to participate in these proceedings, there is no basis for granting the defendant summary judgment, particularly where, as here, the defendant has been repeatedly ordered to produce competent medical proof that the defendant cannot participate in these proceedings.

(Internal quotations and citations omitted).