Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: April 20, 2017

Plaintiff Lacked Standing to Bring Derivative Claims on Behalf of LLC

On April 12, 2017, Justice Oing of the New York County Commercial Division issued a decision in Pokoik v. Norsel Realties, 2017 NY Slip Op. 50459(U), dismissing claims as derivative claims on behalf of an LLC that the plaintiffs lacked standing to bring.

First, Justice Oing held that the plaintiffs’ claims were derivative, rather than direct, explaining:

Under New York law, a shareholder lacks standing to pursue a direct cause of action to redress wrongs suffered by the corporation. Rather, such claims must be asserted derivatively, for the benefit of the corporation.

In general, a plaintiff asserting a derivative claim seeks to recover for injury to the business entity, while a plaintiff asserting a direct claim seeks redress for injury to him or herself individually. In analyzing whether a plaintiff’s claim is truly direct or derivative, courts look at the nature of the harm alleged and who is principally harmed: the corporation or the individual shareholders.

New York courts have identified numerous categories of claims, including claims of mismanagement or diversion of assets for a manager’s own benefit and excessive compensation, as derivative in nature, and, as such, they must be pleaded on behalf of the corporation. Furthermore, a claim that the shareholders have been injured by a diminution in the value of their stock is a derivative claim belonging to the corporation, and not a direct cause of action for the shareholders. Derivative claims which are improperly pleaded as direct claims must be dismissed for lack of standing.

Here, a review of all of plaintiffs’ claims in a light most favorable to them unequivocally demonstrates that they are based on alleged injuries to Norsel purportedly caused by the decisions to adopt an apparently below-market ground lease rent, and to transfer its interest in the Property to Norsel LLC, as well as the transfer of the ground lease from Norsel Realties to Norsel LLC. In fact, plaintiffs allege that the acts underlying the amended complaint were directed at Norsel as an entity, repeatedly asserting that such acts were not in the best interests of Norsel, and that Norsel Realties as a whole is damaged $131,000,000. Plaintiffs also rely on the purported injury to Norsel as the basis for their individual claims in which they assert that they have been injured in an amount equal to their ownership percentage multiplied by the $131,000,000 allegedly loss to Norsel. Under these circumstances, plaintiffs’ direct claims, which are based on allegations that their interests in Norsel have been diminished through the adoption of the ground rent at issue, are inherently derivative claims. Plaintiffs’ remaining allegations that defendants mismanaged Norsel for their own benefit, i.e., by transferring ownership to Norsel LLC, are similarly derivative in nature. Accordingly, to the extent that plaintiffs attempt to bring direct claims against Norsel or its partners, they do not have standing to do so because the claims asserted in the amended complaint are strictly derivative in nature — the claims and damages alleged result from purported injuries to Norsel.

(Internal quotations and citations omitted). Next, Justice Oing examined whether the plaintiffs had standing to bring derivative claims on behalf of the LLC. He held that they did not, explaining:

New York courts have held that because derivative actions bind absent interest holders they take on the attributes of a class action and a plaintiff must therefore demonstrate that he will fairly and adequately represent the interests of the shareholders and the corporation, and that he is free of adverse personal interest or animus. If a plaintiff cannot demonstrate such representation, the derivative causes of action will be dismissed.

In the amended complaint, plaintiffs decided to name all interest holders other than plaintiffs themselves as defendants. Having brought their claims against all other Norsel partners, plaintiffs cannot purport to simultaneously represent the interests of these adverse defendant partners. Unlike plaintiffs’ initial complaint, which named only Steinberg and Lieberman as interest holders in Norsel and commenced on behalf of Norsel and all of its partners, by naming all other Norsel partners in the amended complaint there cannot even be a theoretical group of interest holders left on whose behalf plaintiffs purport to act. Indeed, in this amended complaint, plaintiffs Leon Pokoik and his family own or otherwise control approximately 10% of Norsel but assert derivative claims against the partners representing the other approximately 90% of the ownership interests. This presents a prototypical conflict of interest.

Plaintiffs’ inherent conflict of interest is also presented by the fact that because they own a 12.788% ownership interest in 575 Associates, which net leases the Property from 575 Realties, plaintiffs are attempting to double dip — they are simultaneously receiving funds from 575 Associates in the form rental income while suing Norsel over the same ground rent.

In addition, plaintiffs do not appear to have any genuine concern for Norsel or its related entities. While plaintiffs seek to extract monetary damages from their partners based upon their extremely high property appraisals, they do not request any relief, such as the revision of the subject ground lease rent or court oversight of the appraisal process, that would benefit Norsel. Indeed, plaintiffs ignore the fact that their $20 million proposed annual rent, an almost 90% increase, would make business operations more difficult for 575 Associates which, in turn, would jeopardize Norsel itself.

Lastly, plaintiffs failed to demonstrate on this record that they are free from personal animus. Lead plaintiff Leon Pokoik has repeatedly sued his business partners and his own family. The pleadings in each of Leon Pokoik’s actions are filled with allegations of mismanagement and improper conduct allegedly perpetrated by numerous individuals and closely-held entities, similar to the allegations made here. Given Leon Pokoik’s litigious nature, the totality of the circumstances constrains this Court to conclude that this action is a weapon in the total arsenal so as to gain leverage in the other disputes. Having named all of the Norsel partners with whom plaintiffs disagree as defendants in this action, and given Leon Pokoik’s demonstrated animus, plaintiffs’ self-interest is palpably obvious to the point that they are unable to show that they will adequately represent the interest of these defendants. Thus, the amended complaint must be dismissed.

(Internal quotations and citations omitted).

Posted: April 19, 2017

Plaintiff And Defendant’s Counsel Both Disqualified Due To Simultaneous Conflicted Representations

On March 3, 2017, Justice Sherwood of the New York County Commercial Division issued a decision in Georgetown Co., LLC v. IAC/Interactive Corp., 2017 NY Slip Op. 30676(U), granting motions to disqualify both plaintiffs’ counsel and defendants’ counsel.

Georgetown Co. involves a dispute over a $35 million rights fee associated with development rights to a property in Manhattan.

First, defendant IAC moved to disqualify plaintiff Georgetown’s counsel, DLA Piper, on the grounds that DLA Piper had represented IAC in an unrelated action in California. DLA Piper alleged that it had withdrawn from the California engagement, and that a retainer agreement with IAC’s subsidiary in the California action contained a conflict waiver that could be attributed to IAC. The Court first noted that an attorney-client conflict “is to be determined as of the time the conflict arises, and not at the time the motion to disqualify is finally brought before the court,” and that, when the New York action was filed, DLA Piper was still representing IAC in the California action. Even if this fact, standing alone, did not establish a prima facie conflict of interest, the Court found that DLA Piper’s motion to withdraw, which was was made over IAC’s objection, was intended to permit DLA Piper to represent an adverse “preferred client.” This, in turn, established prejudice to IAC. The Court further held that, by its plain terms, the conflict waiver only applied, not to IAC.

At the same time, non-party Joseph Rose made a motion to intervene and seek disqualification of Kasowitz Benson Torres & Friedman LLP, which was representing IAC. Rose, who had substantial ownership interests in Georgetown and would likely be a significant witness, was simultaneously being represented by Kasowitz in his divorce proceeding. He alleged that Kasowitz had access to his confidential information, including financial information relating to the fee dispute at issue. Kasowitz argued that Rose’s matrimonial lawyers were leaving to start their own firm, taking Rose’s file with them, that Rose’s information had not been shared with the rest of the firm, and that the only source of conflict was “simultaneous representation in unrelated matters of clients whose interests are only economically adverse,” which did not merit disqualification. The Court disagreed, holding, as above, that the conflict was to be assessed as of its inception, and that Kasowitz’s client IAC was “substantially averse” to Rose, and that an ethical wall could not overcome an unwaived conflict between current clients of the same firm. Accordingly, Kasowitz was also disqualified.

Posted: April 18, 2017

Extrinsic Evidence May be Admitted Prior to Exclusion Being Strictly Construed Against Insurer

On April 13, 2017, the First Department issued a decision in Heartland Brewery, Inc. v. Nova Casualty Co., 2017 NY Slip Op. 02908, holding that extrinsic evidence may be admitted prior to an exclusion being strictly construed against an insurer, explaining:

The question of whether the terms of a contract, such as an insurance policy, are ambiguous is a question of law for the courts to determine. The contract language is to be read in light of common speech and interpreted according to the reasonable expectations and purposes of ordinary business people when making ordinary business contracts.

When it comes to exclusions from coverage, the exclusion must be specific and clear in order to be enforced and ambiguities in exclusions are to be construed most strongly against the insurer. As this Court has recognized, there are circumstances where extrinsic evidence may be admitted prior to an exclusion being strictly construed against an insure, and where ambiguous words are to be construed in the light of extrinsic evidence or the surrounding circumstances, the meaning of such words may become a question of fact for the jury.

Here, the language of FEMA’s flood zone regulations raises an issue of fact rendering the insurance policy’s exclusion of flood coverage ambiguous.

(Internal quotations and citations omitted).

Posted: April 17, 2017

RMBS Plaintiff’s Claims Dismissed Because of Failure Properly to Assign Tort Claims

On April 12, 2017, Justice Ramos of the New York County Commercial Division issued a decision in Royal Park Investments SA/NV v. Morgan Stanley, dismissing an RMBS plaintiff’s tort claims because they had not been properly assigned to it, explaining:

It is well settled in New York, that the right to assert a fraud claim related to a contract or note does not automatically transfer with the respective contract or note. There must be some language that evinces an intent to transfer fraud claims.

. . .

Here, it is undisputed that the PTA transfers to RPI all rights, title, and interest in and to the Portfolio Property, which is expressly limited to contractual rights and obligations. RPI has failed to persuade this Court that the plain terms of the RTA are ambiguous. Absent evidence of ambiguous language, this Court need not look beyond the four corners of the PTA to determine the issue of standing.

There is simply no language in the documents evidencing an outward expression of an intent to assign the tort claims at issue. Contrary to RPI’s assertions, the above-mentioned language of rights, title, and interest in and to the Portfolio Property reveals no verifiable intention to include tort claims. RPI cannot rely on extrinsic evidence . . . to create an ambiguity in the PTA when none exists. As sophisticated parties represented by counsel that are routinely involved in complex financial transactions, the Court can presume that if they intended to assign non-contractual claims, they would have done so through express language.

(Internal citations omitted).

Posted: April 16, 2017

Appeal Dismissed Because Notice of Appeal Filed More Than 30 Days After Notice of Entry

On April 11, 2017, the First Department issued a decision in Hill Dickinson LLP v. Il Sole Ltd., 2017 NY Slip Op. 02756, dismissing an appeal as untimely, explaining:

The right of direct appeal from the April 2016 order terminated upon entry of a final judgment, and the order may only be reviewed upon appeal from the final judgment. As the notice of appeal from the order and judgment was served more than 30 days after service of the order and judgment, with notice of entry, it was untimely. This is a jurisdictional defect that cannot be waived.

(Internal citations omitted) (emphasis added).

Posted: April 15, 2017

Striking Answer as Discovery Sanction Upheld

On April 12, 2017, the Second Department issued a decision in Mears v. Long, 2017 NY Slip Op. 02782, affirming the striking of defendants’ answer as a discovery sanction, explaining:

The nature and degree of the sanction to be imposed on a motion pursuant to CPLR 3126 is within the broad discretion of the motion court. The striking of a pleading may be appropriate where there is a clear showing that the failure to comply with discovery demands or court-ordered discovery is willful and contumacious. The willful and contumacious character of a party’s conduct can be inferred from the party’s repeated failure to comply with discovery demands or orders without a reasonable excuse.

Here, the defendants’ willful and contumacious conduct can be inferred from their repeated failures, without an adequate excuse, to comply with discovery demands and the Supreme Court’s discovery orders. Accordingly, the court providently exercised its discretion in granting the plaintiffs’ motion pursuant to CPLR 3126 to strike the defendants’ answer and for leave to enter a default judgment against the defendants.

(Internal citations omitted).

Posted: April 14, 2017

Full Amount of Defense Costs in Underlying Action Recoverable as Damages for Wrongful Attachment

On April 11, 2017, the First Department issued a decision in Citibank, N.A. v. Keenan Powers & Andrews PC, 2017 NY Slip Op. 02766, holding that a plaintiff was liable for the full cost of the defense of an action as damages for a wrongful attachment, explaining:

Secure Title is entitled to the damages it suffered as a result of the wrongful attachment. A finding of fault is not required to recover damages under this provision, as plaintiffs are strictly liable for the damages they caused. Under the circumstances, we find that the full amount of defense costs incurred by Secure Title in the underlying litigation was recoverable as damages for plaintiffs’ wrongful attachment under CPLR 6212(e).

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

Posted: April 13, 2017

Upcoming Arguments of Interest in the Court of Appeals

Upcoming oral arguments in the Court of Appeals that may be of interest to commercial litigators include the following:

To be argued April 26, 2017:

  • Case No. 57: Burlington Insurance v. NYC Transit Auth. (“Insurance–Liability Insurance–Construction of policy–Whether the Appellate Division erred in determining that defendants were additional insureds under plaintiff insurer’s general liability policy with a contractor, where the accident for which coverage was sought was not caused by the contractor’s negligence or fault.”). See the First Department’s decision here.

To be argued May 2, 2017:

  • Case No. 62: Wilson v. Dantas (“Courts–Jurisdiction–Long-arm jurisdiction–International financial transaction–Transaction of business in New York–Execution of contracts in New York–Whether the Appellate Division correctly held that the complaint sufficiently alleged that defendants transacted business in NewYork and that plaintiff’s causes of action arise from defendant’s New York contacts; Whether the Appellate Division correctly rejected defendant’s contention that the action should be dismissed on the ground of forum non conveniens.”). See our previous post about the First Department’s decision here.
  • Case No. 63: D&R Global Selections, S.L. v. Bodega Olegaria Falcon Pineiro (“Courts–Jurisdiction–Lack of basis for personal and long-arm jurisdiction–Whether New York courts possessed subject matter jurisdiction over this action, arising from an oral agreement by the nondomiciliary plaintiff broker to procure an American importer for the nondomiciliary defendant winery’s products, pursuant to Business Corporation Law § 1314(b)(4), which requires a showing of personal jurisdiction under CPLR 302.”). See the First Department’s decision here, and our previous post about the Court of Appeals’ decision granting leave to appeal here.
  • Case No. 64: Town of Amherst v. Granite State Insurance (“Arbitration–Agreement to Arbitrate–Whether the Appellate Division erred in determining that it was for the arbitrator, not the court, to decide the validity and effect of a subsequent agreement to litigate a claim that was subject to arbitration under the terms of the parties’ insurance policy.”). See the Fourth Department’s decision here.
Posted: April 12, 2017

No Conspiracy to Breach Fiduciary Duty Claim When Underlying Tort Not Alleged

On March 29, 2017, Justice Oing of the New York County Commercial Division issued a decision in Siras Partners LLC v. Activity Kuafu Hudson Yards LLC, 2017 NY Slip Op. 50443(U), dismissing a civil conspiracy claim because the underlying tort was not alleged, explaining:

While New York does not recognize an independent cause of action for conspiracy to commit a civil tort, allegations of conspiracy are permitted to connect the actions of separate defendants with an otherwise actionable tort. In order to allege civil conspiracy, Siras must sufficiently allege a tort claim, and the following elements: (1) an agreement between two or more parties; (2) an overt act in furtherance of the agreement; (3) the parties’ intentional participation in the furtherance of a plan or purpose; and (4) resulting damage or injury.

. . . The proposed cause of action for civil conspiracy provides that defendant 462-470, an affiliate of defendant Kuafu, purchased the UBS loan as:

part and parcel of a conspiracy with Kuafu and its principals designed to prevent UBS from extending the UBS Loan, unlawfully manufacture a supposed default, and acquire title to the Property free and clear of Siras’s interest in the Project, all in furtherance of Kuafu and its principals’ breach of their fiduciary duties to the Company.

. . .

Siras’ proposed seventh cause of action is insufficiently pleaded. According to the amended complaint and the proposed second amended complaint, Kuafu was a main actor in Siras’ allegations supporting any breach of fiduciary duty claims, yet there is no claim being asserted against Kuafu for breach of fiduciary duty. Also, Siras is not seeking to assert the conspiracy claim against Kuafu. Instead, the allegations set forth in the proposed seventh cause of action attempt to create a nexus between the actions of defendant 462-470 with an unpleaded underlying tort allegedly committed by Kuafu. As such, the proposed seventh cause of action is not sufficiently pleaded against defendant 462-470.

(Internal quotations and citations omitted).

Posted: April 11, 2017

Collateral Manager Not Entitled to Expense Payments Greater Than Provided by Contract

On March 31, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in Commonwealth Advisors, Inc. v Wells Fargo Bank, N.A., 2017 NY Slip Op. 30622(U), holding that the collateral manager of a CDO was not entitled to expense reimbursements greater than were provided in the agreements governing the CDO, explaining:

Commonwealth claims that it should be entitled to recover more than $75,000 because Wells Fargo supposedly assured it that further reimbursement would be provided if Commonwealth liquidated the CDO’s collateral. Commonwealth alleges that detrimentally relied on this promise and that it would not have liquidated the collateral had it known that its Administrative Expenses reimbursement would be capped at $75,000. For the purposes of this motion, the court assumes the truth of these allegations. Nonetheless, these allegations do not state a claim upon which relief may be granted.

Wells Fargo’s alleged assurances are the predicate for Commonwealth’s causes of action for promissory estoppel, negligent misrepresentation, and equitable estoppel, none of which are viable because Commonwealth’s reliance on Wells Fargo’s assurances were not reasonable as a matter of law.

Under the CMA, and by virtue of its fiduciary duties to the CDO, Commonwealth had the obligation to act in the best interests of the CDO (subject, as previously noted, to inapplicable fiduciary duty waivers). If Commonwealth believed, as it professes, that the liquidation of the CDO’s collateral was the right thing to do for the CDO, it had no right to condition such liquidation on Wells Fargo’s promise to provide Administrative Expenses reimbursement in excess-of that permitted by the Indenture. Indeed, there is no basis to believe that Wells Fargo itself had the right to breach the Indenture’s waterfall provisions by remitting Administrative Expenses out of the waterfalls’ order or priority or in excess of the applicable caps. Wells Fargo, as indenture trustee, must carry out its ministerial duties in accordance with the Indenture. Therefore, it was unreasonable for Commonwealth to rely on Wells Fargo’s assurances because the absence of such assurances cannot have legitimately informed Commonwealth’s decision to liquidate the collateral. Simply put, Wells Fargo had no right to violate the Indenture, nor did Commonwealth have the right, as a sophisticated party, to rely on an erroneous interpretation of the Indenture or a promise it should have known would contravene the Indenture. The Indenture serves to protect the rights of the CDO and its noteholders. Commonwealth cannot insist that the Indenture be violated by virtue of the Trustee’s or Commonwealth’s prior erroneous understanding of its waterfall provisions.

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