Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: March 7, 2017

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

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

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

(Internal quotations and citations omitted).

Posted: March 6, 2017

Trial Court Ordered to Determine Undertaking Based on Evidentiary Submissions

On February 23, 2017, the First Department issued a decision in Spivak v. Bertrand, 2017 NY Slip Op. 01460, reversing a trial court’s determination of the undertaking to be posted in conjunction with an injunction, explaining:

We find that the amount of the undertaking fixed by the motion court is not rationally related to the damages that defendants-appellants may sustain by reason of an injunction finally determined to have been unwarranted. Accordingly, we remand the matter to Supreme Court to set the amount of the undertaking upon the receipt of competent evidence of the potential losses by the company and the value of the company’s hard assets

(Internal quotations and citations omitted).

Posted: March 5, 2017

Court Vacates Order Granting Motion to Dismiss Based on Plaintiff’s Counsel’s Failure to Appear at Oral Argument – a Cautionary Tale on the Importance of Using eTrack!

On February 17, 2017, Justice Knipel of the Kings County Commercial Division issued a decision in Leggette, Brashears & Graham, Inc. v. Gemini Arts Initiative, Inc., 2017 NY Slip Op 30311(U), vacating a prior order that had granted the defendant’s motion to dismiss on default based on plaintiff’s counsel’s failure to appear at oral argument. The Court explained:

A party seeking to vacate an order entered upon his or her failure to appear at oral argument to oppose a motion is required to demonstrate both a reasonable excuse for the default and the existence of a potentially meritorious opposition to the motion. The determination whether to vacate a default is generally left to the sound discretion of the motion court, and will not be disturbed if the record supports such determination.

Plaintiff’s excuse of law office failure was reasonable. Moreover, there is no evidence that plaintiff intended to abandon the action, that its default was willful, or that defendants were prejudiced. In addition, plaintiff has established that it has a meritorious cause of action, warranting an adjudication of the extant motion on the merits. Accordingly, the prior order is vacated.

(Citations omitted.) The Court then proceeded to deny the motion to dismiss in part and grant it in part.

Although Plaintiff’s counsel dodged a bullet in the end, this decision underscores the importance of signing up for eTrack for all your active cases to insure you are aware of scheduled appearances. eTrack, which we previously blogged about here, is the only official notification of the scheduling of oral arguments and other appearances. The parties will not ordinarily receive notice of Court appearances through the e-filing system.

Posted: March 4, 2017

Motion to Correct Judgment Cannot be Used to Litigate New Issues

On February 15, 2017, Justice Ramos of the New York County Commercial Division issued a decision in DLJ Mortgage Capital, Inc. v. Hoey, 2017 NY Slip Op. 30303(U), denying a motion to correct a judgment because it sought to litigate new issues, explaining:

A court has the inherent power to correct any mistake, defect or irregularity in the papers or procedures in the action not affecting a substantial right of a party. A motion to correct is properly denied when the correction does not involve a mere mistake, defect, or irregularity in the judgment, but raises an issue which was not previously litigated in the action. Nunc pro tunc treatment may not be used when third parties have substantive rights in play that may be altered by recording a fact as of a prior date when it did not then exist.

Here, the Assignees have not established that the Judgment contains a mistake, defect or irregularity, and therefore, the judgment should not be changed. First, DLJ did not move for summary judgment on the fifth and seventh causes of action in motion 049. In the Judgment, this Court only directed Halifax to convey title to certain real properties to the named transferees by executing deeds and other such documents as may be necessary. This Court neither declared DLJ to be a beneficial holder nor intended to impose an equitable lien on the fraudulently conveyed properties. Second, the issue of whether the Judgment relates back to the date the notices of pendency filed by DLJ was not previously litigated in motion 049, and therefore cannot be regarded as a mere mistake, defect, or irregularity in the Judgment.

In addition, the correction sought by the Assignees would alter other parties’ substantive rights, including the Stout Entities. DLJ and the Stout Entities have stipulated to resolve all issues of priority in the Listed Properties in Kings County, Supreme Court, and the court has ordered that the Stout Entities have priority over DLJ. Nunc pro tunc treatments sought by the Assignees include declaring DLJ as a beneficial holder of the Listed Properties and imposing equitable lien on those properties, which is contrary to what the court held in the Halifax Action. Therefore, this Court cannot grant to the Assignees the relief they seek.

(Internal quotations and citations omitted).

Posted: March 3, 2017

No Fraud Claim for Lost Profits

On February 23, 2017, the First Department issued a decision in Norcast v. Castle Harlan, Inc., 2017 NY Slip Op. 01479, affirming the dismissal of a fraud claim seeking lost profits damages, explaining:

This action arises from the sale of a business by plaintiffs to a special purpose vehicle part-owned by defendant. Plaintiffs claim that defendant fraudulently induced them to sell the business for the deflated purchase price of $190 million by concealing the true identity of the buyer, a competitor business.

Plaintiffs’ fraud-based claims (including fraud, conspiracy to defraud, fraud in the inducement, negligent misrepresentation, and aiding and abetting fraud) were properly dismissed because the damages sought were impermissibly speculative. Damages for fraud are calculated according to the “out-of-pocket” rule and must reflect the actual pecuniary loss sustained as the direct result of the wrong. Damages may only properly compensate plaintiffs for what they lost because of the fraud, not for what they might have gained, and there can be no recovery of profits which would have been realized in the absence of fraud. Here, plaintiffs seek to recover the profits they might have gained had the true identity of the buyer been revealed. But there is no way of knowing what purchase price would have been agreed upon had the buyer’s identity been known. Nor is there any suggestion that the agreed price was unfair, as it was voluntarily accepted by plaintiffs, who had their own financial advisors, as the result of a competitive bidding process and was $20 million higher than the next highest bid.

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

Posted: March 2, 2017

Fraud Claim Survives Split Decision Regarding When Plaintiff Could Have Discovered Claim

On February 23, 2017, the First Department issued a decision in Norddeutsche Landesbank Girozentrale v. Tilton, 2017 NY Slip Op. 01482, affirming the denial of a motion to dismiss a fraud claim because of questions of fact regarding when the plaintiff became aware of the fraud.

In Norddeutsche Landesbank Girozentrale, the majority found that there were questions of fact regarding when the plaintiff became aware of the fraud, explaining:

Here, it is undisputed that, when plaintiffs commenced the action, six years had passed since plaintiffs made their investments in the Funds. The question, then, is whether plaintiffs discovered, or could with reasonable diligence have discovered, the fraud more than two years before commencement.

The inquiry as to whether a plaintiff could, with reasonable diligence, have discovered the fraud turns on whether the plaintiff was possessed of knowledge of facts from which the fraud could be reasonably inferred. Generally, knowledge of the fraudulent act is required and mere suspicion will not constitute a sufficient substitute. Where it does not conclusively appear that a plaintiff had knowledge of facts from which the fraud could reasonably be inferred, a complaint should not be dismissed on motion and the question should be left to the trier of the facts.

At the same time, it is well settled that if a party omits an inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.

Defendants maintain that plaintiffs should have inferred the existence of the fraudulent scheme they allege as early as 2009, based on the various documents and events they present in support of their motion. Plaintiffs counter that the “clues” defendants contend they should have picked up were insufficient for them to establish the crux of their complaint, which is that the Funds were not CDOs, but rather a method by which defendants could use borrowed money to enrich themselves by plundering the Portfolio Companies. Giving to plaintiffs, as we must, the most favorable interpretation of defendants’ evidence, we find that plaintiffs had insufficient facts before the SEC proceeding to plead their causes of action.

(Internal citations omitted) (emphasis added).

The dissent, on the other hand, would have ordered the dismissal of the plaintiff’s claims, explaining:

The majority concludes that until the SEC proceeding was commenced in March 2015, plaintiffs had insufficient facts to plead these claims. At the heart of this finding is the majority’s belief that plaintiffs’ knowledge of the existence of some equity holdings in the Funds was not something that warranted further inquiry because the Funds were permitted to hold incidental equity interests, such as “equity kickers,” and that the evidence presented by defendants, which can be interpreted in a myriad of ways, was not enough to alert plaintiffs to the true nature of the Funds.

However, the Zohar II Indenture disclosed in 2005 that Zohar II, at its inception, would purchase equity interests in 24 portfolio companies from another fund of the Patriarch defendants. A February 2007 Patriarch presentation, which plaintiffs received, stated that Zohar II was created “in order to purchase companies,” that it focused on the “[a]cquisition of [*9]companies during periods of transition,” and that the Zohar Funds provide “[p]urchasing power to acquire companies.” The presentation also disclosed that the Funds had acquired or were going to acquire equity interests in 37 portfolio companies, including majority stakes in 23, and 100% stakes in seven.

Furthermore, in a December 12, 2011 Investor Call relating to Zohar III, in which plaintiffs participated, Tilton told plaintiffs that it was “really important to understand” that the Funds were “not like in any way typical CDOs”, that the Funds “will be made and broken by the ultimate value of the companies, which truly includes all the equity value in these companies, and that you’re never going to see until these companies are sold and the cash has come in,” and that the monthly reports provided to investors did not include the equity interests held by the Funds. The transcript of the call also shows that plaintiffs were aware that Zohar III’s equity holdings were not subject to the various quality tests mandated in the Fund documents and that investors were told that “[t]he only thing we can do is continue to manage these deals for cash, for the cash test, and to try to increase the value of the underlying companies, such that when we sell them, they’ll be a huge benefit to the value of the equity which you don’t see.” While the call was for Zohar III, it also put plaintiffs on inquiry notice with respect to their investment in Zohar II, since much of Tilton’s discussion was directed to the Funds generally and since the investment strategies for both Funds appear to be substantially similar.

Thereafter, in 2012, Patriarch publicly filed a Form ADV with the SEC which disclosed that “[o]ften, [Patriarch] seeks to make opportunistic investments on behalf of its CDO clients with the primary purpose of obtaining influence over or control of financially-troubled companies, focusing on turning around’ these Assets by restoring their value . . . .” Numerous filings in unrelated lawsuits, bought between 2009 and 2011, also referred to the Funds’ direct acquisition of equity interests in portfolio companies. Moreover, plaintiffs knew that the Funds were underperforming when Moody’s downgraded them twice before February 2011 and the S & P downgraded the CDOs in 2010.

This satisfied defendants’ burden of establishing prima facie that plaintiffs were on inquiry notice of their fraud claims more than two years before the action was commenced in May 2015.

Noting that the investments were marketed as blind funds that did not identify the portfolio companies, plaintiffs argue that since defendants controlled all of the information that was produced in the monthly reports, no investors could have discovered the fraud until the SEC revealed the details of its investigation on March 30, 2015. In this regard, plaintiffs maintain that the disclosures defendants point to, at most, created a mere suspicion of fraud, which is insufficient to impute knowledge of the fraud (see CSAM Capital, Inc. v Lauder, 67 AD3d 149, 156 [1st Dept 2009]). Plaintiffs reason that while investors were told that there could be “equity kickers,” which plaintiffs describe as a “small piece of equity granted to a lender in order to improve the rate of return or otherwise incentivize the lender to take on the risk of lending,” defendants did not disclose that their investments would be used to purchase controlling equity interests. Thus, plaintiffs posit that it was not until the SEC made public its investigation that they were prompted to conduct their own investigation in which they learned that defendants were operating a risky private equity venture that they were using to generate excessive management fees.

While the majority adopts these arguments, defendants’ evidentiary submissions, viewed as a whole, are not consistent with plaintiffs’ understanding that the Funds would only receive equity that was “acquired incidentally.” Rather, they show that an integral purpose of the Funds was to acquire majority stakes in portfolio companies. While plaintiffs contend that only the possibility of equity kickers was disclosed, the evidentiary materials demonstrate that the Funds were “anything but typical [CDOs], for better or for worse” and had or would obtain majority or [*10]100% stakes in many portfolio companies, putting plaintiffs on notice that the Funds were or would be operating far differently from what they purportedly believed, and that recovering on their investment would depend, at least in part, on “the sale of [the Portfolio] Companies” (see K-Bay Plaza, LLC v Kmart Corp., 132 AD3d 584, 590 [1st Dept 2015] [the plaintiff was on inquiry notice due to discrepancy between expected proceeds and proceeds actually received]; see also Gutkin, 85 AD3d at 688 [the plaintiff “had constructive knowledge of the alleged fraud” from quarterly reports that did not reflect the plaintiff’s understanding of the terms of the agreement]). Moreover, none of the disclosures relied on by defendants, which show that the Funds were acquiring controlling interests in portfolio companies, was in defendants’ unique possession and plaintiff has not shown how the existence of a blind trust prevented plaintiffs’ from discovering the alleged fraud had they exercised due diligence.

Posted: March 1, 2017

Terms and Conditions Sent to Party Several Days After Parties’ Agreement Part of Contract

On February 21, 2017, the First Department issued a decision in Lion Copolymer, LLC v. Kolmar Americas, Inc., 2017 NY Slip Op. 01307, holding that terms and conditions sent to a party several days after the parties reached an agreement were part of the agreement, explaining:

In July 2011, representatives from plaintiff Lion Copolymer, LLC (Lion) and Kolmar agreed, during a telephone call, that Kolmar would provide Lion with a certain amount of the industrial chemical butadiene that met certain specifications. Kolmar subsequently sent an email confirming the major details of the agreed-upon deal, and several days later, Kolmar sent a formal Transaction Confirmation and its terms and conditions, which included a provision that if Lion did not object within 48 hours, these documents would make up the parties’ agreement. These documents also contained a forum selection/choice of law provision, a waiver of warranty provision, and a notice of claim provision.

We agree with the motion court that the Transaction Confirmation and Kolmar’s terms and conditions, to which Lion did not object, constituted the parties’ agreement. The forum selection, waiver of warranty and notice of claim provisions did not constitute a material alteration such as would require Lion’s consent for enforcement.

Posted: February 28, 2017

Arguments of Interest in the Court of Appeals in March 2017

Upcoming arguments in the Court of Appeals of interest to commercial litigators in March 2017 include the following:

  • Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc. (to be argued Wednesday, March 22) (“Contracts–Breach or performance of contract–Residential mortgage-backed securities—Whether the “sole remedy” provision requiring defendant to cure or repurchase mortgage loans not conforming to representations and warranties prohibits plaintiffs from seeking money damages for breach of a contractual provision providing that the contract contains no untrue statements.”). See our post about the First Department’s decision here.
  • Connaughton v. Chipotle Mexican Grill (to be argued Tuesday, March 28) (“Fraud–Fraud in the inducement–Whether plaintiff, a chef who entered into an at-will employment relationship with defendants, adequately alleged a cause of action for fraudulent inducement based upon defendants’ “superior knowledge” of previous business dealings that they withheld from plaintiff to induce him to accept their offer of employment, and whether he sufficiently alleged damages.”). See our post about the First Department’s decision here.
  • Carlson v. AIG (to be argued Tuesday, March 28) (“Whether the appellate division erred in holding that the insurance policy was not ‘issued or delivered’ in New York, thus precluding plaintiff from bringing suit against tortfeasor’s insurance company under insurance law § 3420 (a) (2); automobile insurance–cartage agreement between defendant DHL express (USA) and defendant MVP Delivery and Logistics, Inc.–whether MVP vehicle driven by tortfeasor during the underlying motor vehicle accident was a vehicle ‘hired’ by DHL and thus covered under its automobile insurance.”). See the Fourth Department’s decision here.
Posted: February 28, 2017

Contract Claim Dismissed; Definition of Defined Term Governed, Not Usual Understanding

On February 8, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in CP JBAM Holdings LLC v. Shapiro, 2017 NY Slip Op. 30274(U), dismissing a breach of contract claim because the defined meaning of a key term governed, not the usual meaning of the term, explaining:

The primary issue in this case is whether Irene “obtained” the “Approvals”, which section 2.2.4 requires her to do before being entitled to the first $9 million of the Approval Payment. While the verb used to describe her obligation under section 2.2.4 is “obtain”, what it means to “obtain” the Approvals turns on what the Approvals, a defined term, actually encompass. The first of the Approvals, the LPC Approval, is expressly defined to include actual approval of the Plans by LPC.

Thus, the parties do not dispute that actual LPC approval (in the colloquial sense) is required for Irene to “obtain” the LPC Approval. That being said, the parties disagree about whether DOB had to actually approve the Plans as compliant with the myriad applicable regulatory requirements (e.g., zoning) for Irene to be said to have obtained the LAA Approval. That is because, unlike the LPC approval, which explicitly requires actual approval by the LPC, the LAA Approval is defined as follows:

the Plans shall be submitted to the New York City Department of Buildings [DOB] for a determination on the Plans[‘] compliance with the New York City Building Code, Zoning Resolution and New York State Multiple Dwelling Law standards for light and air.

. . .

To be sure, an agreement in which Irene was actually obligated to obtain DOB approval prior to being entitled to the $9 million would have been commercially reasonable. But that is not something that may inform the court’s analysis. Nor is the fairness of the deal actually stuck by these sophisticated parties an issue. Instead, as Irene correctly contends, the Agreement very clearly delineates when actual regulatory approval is required and when it is not. To hold that the LAA Approval includes actual DOB approval would be to redefine the term LAA Approval. The court is not permitted to rewrite the Agreement in this manner.

There is no question that the parties and their counsel understand how the relevant regulatory approval processes work and the interplay between the various agencies that were required to bless the proposed condominium development. With this understanding, they only premised one payment – the final $1 million – on actual DOB approval. Their decision to omit DOB approval from the definition of LAA approval must be given effect. For this reason, JBAM’s claims premised on Irene’s failure to procure DOB approval are dismissed.

(Internal citations omitted).

Posted: February 27, 2017

Equitable Subrogation Not Available Against Third Party Whose Liability Arises By Contract; Case Remanded For Consideration of Contractual Subrogation Claim

On January 17, 2017, the First Department issued a decision in Millennium Holdings LLC v. Glidden Co., 2017 NY Slip Op. 00258, holding that the doctrine of equitable subrogation did not permit an insurance carrier to recover against a third-party whose liability to the insured arose only by contract, and remanding the case to the trial court to determine whether a claim could be made for contractual subrogation.

We previously blogged about the Court of Appeals’ decision in this case, which held that the so-called “anti-subrogation rule” did not preclude a carrier from pursuing a subrogation claim against a party that was not an insured or additional insured under the policy.

As explained in our prior post, “the doctrine of equitable subrogation entitles an insurer to stand in the shoes of its insured to seek indemnification from third parties whose wrongdoing has caused a loss for which the insurer is bound to reimburse. Subrogation rights can also be created by contract (e.g., the terms of an insurance party)” At issue in Millennium Holding was whether an insurance carrier could subrogate to its insured’s contractual indemnification claim against a third party. Following the Court of Appeals’ decision, the case went back to the First Department, which held that the carrier could not invoke equitable subrogation against a third-party whose liability arises only by contract, and not because of any wrongdoing. Because some of the insurance policies contained an express subrogation clause, the court also considered the issue of contractual subrogation. With one Justice dissenting, the First Department found ambiguities in the parties’ agreements, and it remanded the case to the trial court to consider those agreements “in light of the extrinsic evidence.” Specifically, the indemnification agreement was contained in an asset purchase agreement between Millennium (the insured and the indemnitee under the agreement), and ANP (the indemnitor). The Court noted that “[t]he asset purchase agreement as a whole contemplates that Millennium will maximize its insurance coverage before seeking indemnity from ANP, and that ANP will receive the benefits of Millennium’s coverage under the policies,” and these provisions “would arguably be rendered meaningless if ANP were required to repay the insurers through subrogation.” Justice Andrias dissented, concluding that ANP’s indemnification obligation was not ambiguous and that nothing in the agreements waived any subrogation claim by an insurer.