Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
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).

Posted: January 30, 2017

Error of Law by Arbitrator Insufficient Basis to Vacate Award

On January 24, 2017, the First Department issued a decision in Matter of Yarmak v. Penson Financial Services Inc., 2017 NY Slip Op. 00433, holding that even if an arbitrator had made errors of law, that was not sufficient grounds to vacate an arbitral award, explaining:

Even if the arbitrators’ dismissal of petitioner’s claims prior to the completion of her case in chief violated Financial Industry Regulatory Authority (FINRA) Manual rule 12504, which provides that dismissals at such an early juncture are discouraged, the arbitrators were entitled to interpret the rule. In any event, any error in interpretation is a mere error of law that does not provide a basis for vacatur. The same holds true with respect to the arbitrators’ application of the Texas statute of limitations pursuant to the choice of law clause in the parties’ agreement.

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

Posted: January 29, 2017

Plaintiff Fails to State Claim for Reporter’s Failure to Publish Article Based on Plaintiffs’ Exclusive Information

On January 13, 2017, Justice Ramos of the New York County Commercial Division issued a decision in Rondeau v. Berman, 2017 NY Slip Op. 30079(U), holding a plaintiff had failed to state a claim for breach of contract arising from a reporter’s failure to publish an article based on the plaintiff’s exclusive tip.

In Rondeau, the

Plaintiff, an athletic performance coach, created a program (the “Free Throw Program”) to assist basketball players in improving their free throw shooting. . . . In April 1999, Plaintiff alleges that he began to work with Allan Houston, a former player of the New York Knickerbockers to help him improve his shooting through the Mental zone Program. . . . In June 1999, Plaintiff first met Berman, when Berman was covering The Knicks during the NBA Finals. Plaintiff and Berman did not have any further contact until December 2007. On June 22, 2009, Plaintiff alleges that he contacted Berman via e-mail, notifying him that he had newsworthy information that
Berman may be interested in. Plaintiff and Berman met in person on July 2, 2009 and Plaintiff notified Berman of his willingness to give Berman “exclusive” entitlement to a newsworthy article.

Berman did not end up publishing the article; the plaintiff in response brought an action against him and others. The court dismissed the plaintiff’s breach of contract claim, explaining:

The issue is whether the terms of the alleged oral contract are sufficiently definite to give rise to an enforceable agreement. Although a manifestation of intention may be perceived as an offer, it cannot be considered a contract unless its terms are reasonably certain. Thus, a mere agreement to agree, in which a material term is left open for future negotiations, is too vague to be enforceable.

Here, Plaintiff alleges that Berman agreed to write an article containing newsworthy information regarding Plaintiff’s success with the Knicks, his meeting with The Knicks’ executive Glen Grunwald (“Grunwald”), Grunwald’s decision to not hire Plaintiff, and The Knicks’ recent downfall. However, Plaintiff fails to allege that there was an agreement as to the date of publication, the length of the Newsworthy Article, whether it would appear in the New York Post, specific research guidelines, and the content of said article, which are all material terms.

Further, Plaintiff does not allege that there was an agreement as to Plaintiff’s remedy should the Newsworthy Article not be published. The alleged contract was merely an agreement to agree that Berman would publish an article in exchange for exclusivity. Because the alleged oral contract is too vague to ascertain
its material terms, it is not capable of being enforced.

(Internal quotations and citations omitted).

Posted: January 28, 2017

Pre-Action Discovery Not Available to Revive Already-Dismissed Action

On January 11, 2017, Justice Oing of the New York County Commercial Division issued a decision in Culligan Soft Water Co. v. Clayton Dubilier & Rice, LLC, 2017 NY Slip Op. 30074(U), holding that a litigant could not use pre-action discovery to revive an already-dismissed action, explaining:

[P]laintiffs seek an order compelling discovery from the Lender Defendants under the guise of pre-action disclosure. Given the procedural history of this action, this effort is misplaced.

CPLR 3102(c) provides:

Before an action is commenced, disclosure to aid in bringing an action, to preserve information or to aid in arbitration, may be obtained, but only by court order. The court may appoint a referee to take testimony.

Plaintiffs cannot rely on CPLR 3102(c) because they are not able to satisfy its pre-condition to such disclosure, namely, “before an action is commenced.” Here, they do not seek pre-action disclosure to aid in drafting their original complaint, but, instead, seek such disclosure to draft their Fourth Amended Complaint. This fact alone precludes plaintiffs’ use of CPLR 3102(c).

In any event, even if CPLR 3102(c) were available, plaintiffs would still not be entitled to the disclosure they seek pursuant to this provision. While pre-action disclosure may be appropriate to identify potential defendants, it may not be used to ascertain whether a prospective plaintiff has a cause of action worth pursuing or”to explore alternative theories of liability. Furthermore, to obtain an order for pre-action disclosure, the party moving for such relief must demonstrate that he or she has a meritorious cause of action, and that the information sought is material and necessary to the actionable wrong. Here, plaintiffs do not meet this burden. In their memorandum of law, plaintiffs conclusorily argue, without citing to any supporting affidavit or evidentiary facts, that the requested materials prove, inter alia, the culpability of the CDR Defendants, as well as the liability of the accountants, lawyers, and other professionals who may have given Culligan
Limited faulty advice to identify proper parties to be named, or excluded, as defendants, and will provide additional information to prove that they are, in fact, the proper plaintiffs in this action. Under these circumstances, plaintiffs are essentially seeking pre-action disclosure to determine whether they have a cause of action worth pursuing against the CDR Defendants and other third parties, and to explore alternative theories of liability, which are improper uses of CPLR 3102(c).

(Internal quotations and citations omitted).