Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: February 9, 2017

Court of Appeals Accepts Certified Question on Interpretation of Reinsurance Contracts

On January 10, 2017, the Court of Appeals accepted a certified question from the Second Circuit in Global Reinsurance Corporation of America v. Century Indemnity Company, concerning the interpretation of reinsurance contracts. At issue is whether the amount specified in a “Reinsurance Accepted” clause of a reinsurance certificate is an absolute cap, applying both to “losses” and defense “expenses” paid by a liability carrier, or only to “losses.” This distinction would have a massive financial impact in the case, since 90% of the amounts the liability carrier sought to recoup from the reinsurer were for expenses that were far in excess of the “Reinsurance Accepted” cap. Prior Second Circuit precedents suggested that the cap applies to both losses and expenses. However, the court found that contrary arguments advanced by Century Indemnity Company (the liability carrier), which were supported by amicus briefs from four large reinsurance brokers, were “not without force” and warranted consideration by the New York Court of Appeals. The Court explained:

The purpose of reinsurance is to enable the reinsured to spread its risk of loss among one or more reinsurers. If the amount stated in the “Reinsurance Accepted” provision is an absolute cap on the reinsurer’s liability for both loss and expense,then Century’s payments of defense costs could be entirely unreinsured. This seems to be in tension with the purpose of reinsurance. Further, Century and amici note that the premium Global received was “commensurate with its share of policy risk.” Thus, under Certificate X, Global “received 50% of the net (risk) premium” because it “reinsured a 50% part of the [underlying policy] risk.” Interpreting the “Reinsurance Accepted” provision as a cap for both losses and expenses, as we did in Bellefonte, could permit Global to receive 50% of the premium while taking on less than 50% of the risk.

Amici warn that continuing to follow Bellefonte could have “disastrous economic consequences” for the insurance industry. They contend that “potentially massive exposures to insurance companies throughout the industry would be unexpectedly unreinsured[,]” thereby, in amici’s view, “create a gaping hole in reinsurance for many companies, and potentially threaten some with insolvency.”

We find these arguments worthy of reflection. But there are other considerations as well. For example, the principle of stare decisis counsels against overruling a precedent of this Court, especially in cases involving contract rights, where considerations favoring stare decisis are at their acme. Here, reinsurers may have relied on this Court’s opinions in Bellefonte and Unigard in estimating their exposure and in setting appropriate loss reserves. If the interpretive rule set out in those opinions were to shift, such reinsurers would be exposed to unexpected claims beyond their current reserves. . . .

Our intention, therefore, is to seek the New York Court of Appeals as to whether a consistent rule of construction specifically applicable to reinsurance contracts exists; we express no view as to whether such a rule is advisable or what that rule should be. The interpretation of the certificates at issue here is a question of New York law that the New York Court of Appeals has a greater interest and greater expertise in deciding than do we. Accordingly, we conclude that it is prudent to seek the views of the New York Court of Appeals on this important question.

(Citations omitted).

Posted: February 8, 2017

Reargument Denied When Motion Was Based On New Arguments

On January 20, 2017, Justice Oing of the New York County Commercial Division issued a decision in Borah, Goldstein, Altschuler, Nahins & Goidel, P.C. v. Trumbull Ins. Co., 2017 NY Slip Op. 30203(U), denying a motion for reargument advancing a new argument, explaining:

That branch of plaintiff’s motion to reargue based on a business interruption claim under the Business Income and Extra Expense provisions of the Business Policy is denied. A review of plaintiff’s original moving papers confirm that plaintiff did not move for summary judgment pursuant to the Business Interruption and the Extra Expense provisions of the Business Policy, but, instead, the Civil Authority, the Off-Premises Utility Services, and the Dependent Properties provisions. Because arguments pursuant to the Business Interruption and Extra Expense provisions were not raised in the prior motion or in opposition to the cross-motion, they cannot be considered in this reargument motion.

(Internal quotations and citations omitted).

Posted: February 7, 2017

First Department Expands Factors Governing Approval of Nonmonetary Class Action Settlements

On February 2, 2017, the First Department issued a decision in Gordon v. Verizon Communications, Inc., 2017 NY Slip Op. 00742, expanding the list of factors governing approval of nonmonetary factors governing approval of nonmonetary class action settlements.

Gordon involved a nonmonetary class action settlement. As the First Department explained:

The rise of nonmonetary class action settlements began in the 1980s and continued into the 1990s, when complaints of corporate misconduct in the context of mergers and acquisitions prompted calls for corporate governance reforms. . . . In the ensuing decades, however, the use of nonmonetary settlements became increasingly disfavored. Complaints arose that the remedies of “disclosure-only” and other forms of non-monetary settlements themselves proved problematic because they provided minimal benefits either to shareholders or to their corporations. Both courts and commentators came to view the shareholder class action in this context as a “merger tax” and as a cottage industry for the plaintiffs’ class action bar, used to force settlements of nonmeritorious suits and to generate exorbitant attorneys’ fees, causing waste and abuse to the corporation and its shareholders.

. . .

In its capacity as gatekeeper, a court conducting a settlement review in a putative shareholders’ class action has a responsibility to preserve the viability of those nonmonetary settlements that prove to be beneficial to both shareholders and corporations, while protecting against the problems with such settlements recognized since Colt, in order to promote fairness to all parties. Such a review must begin by examining the proposed settlement through the lens of each of the factors we have articulated in our longstanding standard in Colt: the likelihood of success, the extent of support from the parties, the judgment of counsel, the presence of bargaining in good faith, and the nature of the issues of law and fact.

(Internal quotations and citations omitted). The standard in the First Department for reviewing such settlements had been set forth in Matter of Colt Indus. Shareholders Litigation (Woodrow v Colt Indus) (155 AD2d 154, 160 [1st Dept 1990]. In Gordon, the First Department both applied and expanded the Colt factors, explaining:

With respect to the first Colt factor, the likelihood of success on the merits, we have stated that courts are to weigh that factor against the form of the relief offered in the settlement. Here, plaintiff withdrew her claims for monetary damages upon recognizing that they would be difficult to prove at trial. It would be speculative, at best, to assume that plaintiff could have obtained any more helpful disclosures from Verizon by proceeding to trial. The negotiation process, however, provided certainty that plaintiff would obtain at least some additional disclosures, as well as the corporate governance reform she sought. Thus, this factor weighs in favor of approval of the proposed settlement.

With respect to the second Colt factor, the extent of support from the parties for the proposed settlement, although the notice of settlement and final approval was mailed to approximately 2.25 million Verizon shareholders, only three objections to the settlement were filed, all by attorney stockholders, and fewer than 250 Verizon shareholders, or .01 per cent, opted out of the settlement. And on this appeal, neither the parties nor the objectors have opposed the proposed settlement. Rather, their sole opposition is to the award of attorneys’ fees. Because the settlement had the overwhelming support of Verizon shareholders, the second factor also weighs in favor of the proposed settlement.

The third factor to be considered is the judgment of counsel. Here, the parties were represented by counsel who were competent and experienced in the field of complex class action litigation involving breach of fiduciary duties. Thus, counsel were equipped to assist their respective clients in making a reasonable and informed judgment regarding the fairness of the proposed settlement. Thus, this factor also weighs in favor of the proposed settlement.

With regard to the fourth factor, the presence of bargaining in good faith, negotiations are presumed to have been conducted at arm’s length and in good faith where there is no evidence to the contrary. Here, there being no evidence to the contrary, good faith bargaining between petitioner and respondents in arriving at the settlement is presumed, and this factor also weighs in favor of the settlement.

With respect to the fifth Colt factor, the nature of the issues of law and fact, here, plaintiff has abandoned her claims for monetary relief. The remaining issue presented is whether respondents breached their fiduciary duty by failing to make adequate disclosures to the shareholders in the preliminary proxy statement. This issue was more expeditiously resolved by the negotiated settlement process, in which the parties had the opportunity to identify and agree upon the areas in which further disclosure of information would be appropriate. Indeed, a settlement in principle on these issues was reached after two months of discussion. Thus, in this case, each of the five factors set forth by this Court in Colt weighs in favor of the proposed settlement.

This does not end the inquiry, however. More than two decades of mergers and acquisitions litigation following Colt have been informative as to the need to curtail excesses not only on the part of corporate management, but also on the part of overzealous litigating shareholders and their counsel. Accordingly, a revisiting of our five-factor Colt standard is warranted in order to effect an appropriately balanced approach to judicial review of proposed nonmonetary class action settlements and provide further guidance to courts reviewing such proposed settlements in the future.

An approach so informed must necessarily take into account two additional factors. First, as plaintiff argues, the agreed-upon disclosures, corporate governance reforms and any other forms of nonmonetary relief in a proposed settlement should be in the best interests of all of the members of the putative class of shareholders. And second, the proposed settlement should be in the best interest of the corporation and should not be merely a vehicle for the generation of fees for plaintiff’s or class counsel. Accordingly, we now refine our Colt standard of review to add to the five established factors to be used by courts to ensure appropriate evaluation of proposed nonmonetary settlements of class action suits these two additional criteria: whether the proposed settlement is in the best interests of the putative settlement class as a whole, and whether the settlement is in the best interest of the corporation.

(Internal quotations and citations omitted). Applying the new sixth and seventh factors, the First Department held that “the proposed settlement is in the best interests of the putative settlement class as a whole,” by evaluating the supplemental disclosures required by the settlement and found that the “inclusion of a fairness opinion requirement, mandating that in the event that Verizon engages in a transaction involving the sale or spin-off of assets of Verizon Wireless having a book value of in excess of $14.4 billion, Verizon would obtain a fairness opinion from an independent financial advisor, or, in the case of a spin-off, financial advice from an independent financial advisor” “provided a benefit to Verizon shareholders in mandating an independent valuation, without restricting the flexibility of directors in making a pricing determination.” As to the seventh factor, the First Department held that “the lack of a monetary or quantifiable benefit to the corporation does not necessarily preclude such a finding” and that “the proposed settlement would resolve the issues in this case in a manner that would reflect Verizon’s direct input into the nature and breadth of the additional disclosures to be made and the corporate governance reform to be included as part of the proposed settlement. And, by agreeing to the settlement, Verizon avoided having to incur the additional legal fees and expenses of a trial.”

Posted: February 6, 2017

LLC Member Does Not Owe Fiduciary Duty To Managing Member Or To The LLC Itself

On January 31, Justice Singh of the New York County Commercial Division issued a decision in Landes v. Provident Realty Partners II, L.P., 2017 NY Slip Op. 30196(U), denying and granting summary judgment motions made by the parties.

The underlying dispute involves the relationship between several LPs and LLCs holding indirect interests in real property. In brief, 303 BRG-IMICO LLC (“303 LLC”) owned the real property located at 303 East 46th Street, in Manhattan. And 303 LLP was in turn owned 50% by Provident Realty Partners II, L.P. (“PRP”) and 50% by IMICO UN Rental LLC (“IMICO”), with PRP designated the Managing Member. IMICO decided to sell its 50% interest, and offered it to the managing member of PRP LP, who accepted. IMICO’s 50% interest was purchased by a new entity created by PRP LP’s managing partner. When several limited partners of PRP LP learned of the transaction, they sued, claiming that the opportunity to purchase IMICO’s 50% interest was a corporate opportunity of PRP LP, and should have been offered to PRP LP before being sold to a different entity. The plaintiffs alleged breach of fiduciary duty and various related claims against their managing member—essentially, that he had cut them out of the deal. They also alleged that IMICO had aided and abetted the breach of duty.

Plaintiffs moved for summary judgment, and IMICO cross-moved for summary judgment dismissing all claims asserted against it.

The court denied Plaintiffs’ motion for summary judgment on the grounds that, inter alia, they had not established that a corporate opportunity existed—a statement to that effect in a prior First Department decision was dicta, and was not the law of the case because the First Department was considering a motion to dismiss, not a motion for summary judgment.

As to IMICO, the court explained that a claim for aiding and abetting breach of fiduciary duty required both (a) actual knowledge of the underlying breach by, and (b) substantial assistance from, the defendant. The court rejected Plaintiffs’ reliance on authority from the S.D.N.Y. suggesting that a “willful blindness” standard could substitute for actual knowledge, because “not only is this court not bound by federal law, but the First Department has made it clear that in New York, in order to survive a motion for summary judgment on a claim for aiding and abetting a breach of fiduciary duty, plaintiff must establish that IMICO had actual knowledge of any breach of fiduciary duty.” And the court held that actual knowledge had not been established—Plaintiffs’ allegation that IMICO “should have obtained assurances” that PRP LP’s limited partners consented to the sale was insufficient.

The court also found that substantial assistance had not been shown—”the mere inaction of an alleged aider and abettor constitutes substantial assistance only if the defendant owes a fiduciary duty directly to the plaintiff,” and IMICO did not owe a fiduciary duty to PRP LP. In the absence of Appellate Division authority on the question, the court followed the reasoning of a case from the Nassau County Supreme Court and held that, like corporations but unlike partnerships, non-managing members of LLCs do not owe fiduciary duties to the LLC or its managing member:

A non-managing member of an LLC who has a 50% interest in the LLC, such as IMICO does not owe a fiduciary duty to a managing member of the LLC or directly to the LLC. Although not binding, the court’s ruling in Kalikow v. Shalik, 43 Misc.3d 817 (Sup.Ct. Nassau Co. Feb. 26, 2014), is persuasive. In Kalikow, two sole members of an LLC had a 50% interest, with only one of the members identified as the managing member. The court held that based upon the language of New York L.L.C. Law § 409, and the absence of language related to the duty of good faith or loyalty on behalf of a non-managing member of an LLC, that non-managing members do not owe a fiduciary duty to managing members of the LLC or to the LLC itself.

Accordingly, because the record supported a finding of neither actual knowledge nor substantial assistance, Plaintiffs’ motion for summary judgment was denied, and IMICO’s cross-motion was granted. An unpleaded claim for breach of fiduciary duty—on the theory that IMICO owed a direct fiduciary duty to PRP LP as its co-member, was dismissed on the same grounds.

This case is of interest because it clarifies the elements of an aiding and abetting claim by rejecting the S.D.N.Y.’s alternative “willful blindness” standard, and is only the second Commercial Division case holding that non-managing LLC members do not owe fiduciary duties to the LLC or to their managing member.

(Schlam Stone & Dolan LLP is counsel of record to IMICO in this action.)

Posted: February 5, 2017

Agreements’ Forum Selection Clauses Did Not Bind Non-Signatories

On January 30, 2017, Justice Singh of the New York County Commercial Division issued a decision in Sustainable Pte Ltd. v. Peak Venture Partners LLC, 2017 NY Slip Op. 30202(U), holding that defendants were not bound by the forum selection clauses of agreements they did not sign, explaining:

To establish jurisdiction, plaintiffs rely on the Surf Agreement, the letter agreement between Doronin and Amanat, the pledge agreements between PHRL and Sherway, and the Pontwelly Financing Agreement. However, Eliasch, Djangoly, and PHRGL are not parties to any of these agreements and are therefore not subject to the forum-selection clauses contained therein. For the same reasons, ARGL is not subject to personal jurisdiction, as it is not a party to the Surf Agreement, letter agreement, or the pledge agreements.

The only remaining document to which ARGL is a party is the Pontwelly Financing Agreement but plaintiffs are not signatories thereto. Therefore, plaintiffs may only invoke the forum-selection clause in the Pontwelly Financing Agreement if (i) plaintiffs were third-party beneficiaries, (ii) the agreement was part of a global transaction and plaintiffs were parties to other underlying related agreements executed simultaneously, or (iii) plaintiffs were closely related to one of the signatories. Plaintiffs have not sufficiently pied any of the foregoing. Therefore, plaintiffs have not established personal jurisdiction based on any of the cross-moving defendants consent to jurisdiction in any agreement.

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

Posted: February 4, 2017

Court Issues Injunction Enforcing Covenant Not to Compete

On January 12, 2017, Justice Ash of the Kings County Commercial Division issued a decision in Shimon v. Paper Enterprises, Inc., 2017 NY Slip Op. 30101(U), issuing an injunction enforcing a covenant not to compete, explaining:

It is well established that covenants not to compete, which relate to the sale of a business and its accompanying good will, are accorded full enforcement when they are reasonable in scope and duration and are not unduly burdensome. The covenant not to compete is designed to work in conjunction with the implied covenant of the seller to refrain from soliciting his former customers and whether such a covenant is reasonable depends on the circumstances of each case. As a general rule, however, covenants not to compete pursuant to the sale of a business are not treated as strictly as those whose sole purpose is to limit employment. Moreover, New York courts have found three to five year restrictions to be reasonable in the context of the sale of a business.

. . . Where a movant is seeking injunctive relief in a suit to enforce a restrictive covenant that was given ancillary to the sale of a business, courts have held that the movant need not demonstrate actual loss of customers since irreparable harm is presumed to have occurred upon the demonstration of a likelihood of success on the merits.

Here, given the undisputed facts, the Court finds that PEl has established entitlement to the injunctive relief that it seeks. First, Shimon’s contention that he is not bound by the Asset Purchase Agreement is without legal support and is otherwise without merit. Secondly, Shimon fails to provide support for his argument that the geographic scope or duration of the subject restrictive covenant is overly broad. He fails to dispute that PEl’s business extends into the six-state Territory. Accordingly, there is no basis to deem the subject restrictive covenant unenforceable.

(Internal quotations and citations omitted).

Posted: February 3, 2017

No Personal Jurisdiction Found Over Defendant Based on Actions of His Agents

On January 26, 2017, the First Department issued a decision in Coast to Coast Energy, Inc. v. Gasarch, 2017 NY Slip Op. 00532, finding that a plaintiff failed to show that there was personal jurisdiction over a defendant based on the actions of the defendant’s agents, explaining:

Pursuant to CPLR 302(a)(1) a New York court may exercise personal jurisdiction over a nondomiciliary if the nondomiciliary has purposefully transacted business within the state and there is a substantial relationship between the transaction and the claim asserted. . . .

To establish that a defendant acted through an agent, a plaintiff must convince the court that the New York actors engaged in purposeful activities in this State in relation to the transaction for the benefit of and with the knowledge and consent of the defendant and that the defendant exercised some control over the New York actors. To make a prima facie showing of control, a plaintiff’s allegations must sufficiently detail the defendant’s conduct so as to persuade a court that the defendant was a primary actor in the specific matter in question; control cannot be shown based merely upon a defendant’s title or position within the corporation, or upon conclusory allegations that the defendant controls the corporation.

The dissent contends that the third amended complaint satisfies these principles by virtue of plaintiff’s allegations that Wampler was in daily communication with PSNY concerning the subject oil exploration partnerships and drilling operations, that Wampler instructed Gasarch concerning distributions and routinely directed him to transfer funds, and that Gasarch acted for the benefit of and with the knowledge and consent of Wampler, who exercised some control. However, Wampler’s status as a principal of PSNY does not in and of itself confer jurisdiction. Plaintiffs failed to allege facts demonstrating that Wampler controlled Gasarch and PSNY’s activities sufficient to support New York jurisdiction, and plaintiff’s vague, conclusory and unsubstantiated allegations do not suffice to establish long arm jurisdiction.

The allegations that Gasarch only accessed PSNY’s New York bank accounts at Wampler’s direction were previously asserted upon information and belief in the second amended complaint, and plaintiffs offered no new facts or explanation for the change in the third amended complaint. Although plaintiffs added an allegation that according to bank records, Wampler would routinely direct Gasarch to withdraw investor funds from PSNY, they provided no details regarding any such bank records or how they might reflect Wampler’s involvement, and did not attach the bank records as an exhibit to their complaint.

The allegation that Wampler was in daily communication with PSNY concerning the oil exploration partnerships and drilling operations is conclusory, and plaintiff failed to proffer any specific facts to demonstrate how or when Wampler participated in preparing the Private Placement Memoranda for the investments. Similarly, the allegation that Gasarch acted for benefit of and with knowledge and consent of Wampler, who exercised some control contains no detail as to what statements were made, when they were made, what contract they were made in regards to, and whether or not the alleged misrepresentations were relied upon in such a way that would imply liability.

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

Posted: February 2, 2017

Strategic Decisions, Even Flawed Ones, Generally Do Not Support a Malpractice Claim

On January 26, 2017, the First Department issued a decision in Brookwood Companies, Inc. v Alston & Bird LLP, 2017 NY Slip Op. 00535, affirming the dismissal of a legal malpractice claim, explaining:

Decisions regarding the evidentiary support for a motion or the legal theory of a case are commonly strategic decisions and a client’s disagreement with its attorney’s strategy does not support a malpractice claim, even if the strategy had its flaws. An attorney is not held to the rule of infallibility and is not liable for an honest mistake of judgment where the proper course is open to reasonable doubt. Moreover, an attorney’s selection of one among several reasonable courses of action does not constitute malpractice. Brookwood has not alleged facts supporting its claim that A & B’s evidentiary decision, to rely on Nextec’s expert, rather than compromise the merits of Brookwood’s position on other arguments, was an unreasonable course of action.

(Internal quotations and citations omitted).

Posted: February 1, 2017

Court Orders Production of Pre-Litigation Work Product

On January 18, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in Bank of N.Y. Mellon v. WMC Mortgage, LLC, 2017 NY Slip Op. 30139(U), ordering the production of pre-litigation work product, explaining:

The instant motions come before this court in a unique posture. Unlike any case found by the court or any case cited by the parties, the plaintiffs reunderwriting expert report is not based exclusively on that expert’s independent analysis and methodology. Rather, plaintiffs expert relied heavily on the work and methodology of Digital Risk’s pre-litigation reunderwriting. WMC explains:
Plaintiffs re-underwriting expert Mr. Ira Holt, Jr. adopted wholesale the presuit re-underwriting commissioned by the Certificateholders, even though Mr. Holt had little, if any, knowledge of what Digital Risk did to reach its conclusions or of the assumptions upon which they were based. Digital Risk’s methodologies were based on specific directions given by the Certificateholders and Quinn Emanuel. According to WMC, the only way for it to vet the credibility of plaintiffs expert and the methodologies he relied on is to vet the methodologies employed by Digital Risk. While Digital Risk witnesses have been deposed, by virtue of the laxity of its document retention policies, the communications between Digital Risk and the Certificateholders cannot be retrieved from Digital Risk’s ESI custodians. Therefore, WMC seeks these documents from the Certificateholders.

Under these circumstances, the discovery sought by WMC is warranted. Such discovery is material and necessary for the purpose of cross-examining plaintiffs expert on a critical issue in this case – plaintiffs expert testimony regarding the existence of material breaches of the applicable reps and warranties. An application to quash a subpoena should be granted only where the futility of the process to uncover anything legitimate is inevitable or obvious or where the information sought is utterly irrelevant to any proper inquiry.

It should be noted that the discovery sought by WMC is not duplicative and is not available from another source. The burden on the Certificateholders is relatively minimal since WMC, in requesting ESI from a non-party, will have to defray the Certificateholders’ reasonable document collection, review, and production costs, including certain legal fees.

(Internal quotations and citations omitted).

Posted: January 31, 2017

Court Did Not Abuse Discretion in Precluding Expert on Interpretation of ISDA Agreement

On January 24, 2017, the First Department issued a decision in Good Hill Master Fund L.P. v Deutsche Bank AG, 2017 NY Slip Op. 00428, holding that it was not an abuse of discretion to exclude an expert on contract interpretation, explaining:

[T]he trial court properly granted Good Hill’s motion to preclude certain expert testimony proffered by defendant on the interpretation of [ISDA] section 9.1(b)(iii). While the section is confusing, its interpretation is not a matter beyond the ken of a typical fact-finder. Nor does it involve issues of such scientific or technical complexity that require an expert explanation to allow the court to understand it. Moreover, while Deutsche Bank frames the issue as one of market customs and practice, the issue is, as the trial court noted, a matter of contract interpretation, and expert witnesses should not be called to offer opinion as to the legal obligations of parties under a contract; that is an issue to be determined by the trial court.

(Internal quotations and citations omitted).