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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: October 30, 2017

Regardless of Merits, Court Should Not Have Granted Injunction When Money Damages Sufficient

On October 19, 2017, the First Department issued a decision in JSC VTB Bank v. Mavlyanov, 2017 NY Slip Op. 07339, holding that regardless of the strength of the plaintiff’s case, the court should not have issued an injunction when money damages were sufficient to redress its injuries, explaining:

[O]n the merits, the court should not have granted a preliminary injunction, because the primary relief sought in this action is money damages. Plaintiff has no specific right to the properties at issue; it seeks to enjoin defendants from transferring, encumbering, or otherwise disposing of their properties so that it will be able to satisfy the judgments it obtained in Russia on defendant Igor Mavlyanov’s (Igor) guaranties.

Even if this were an appropriate case for an injunction, the injunction should not be granted, because the fact that plaintiff can be fully compensated by damages shows that he would not suffer irreparable injury absent the injunction.

(Internal citations omitted).

Posted: October 29, 2017

Fraud Plaintiff Was Unreasonable in Relying on Representation Contradicted by Term Sheet

On October 13, 2017, Justice Masley of the New York County Commercial Division issued a decision in City’s 5th Ave. 54th St. LLC v. 685 Fifth Ave. Owner LLC, 2017 NY Slip Op. 32197(U), dismissing a fraud claim because the plaintiff’s reliance on an oral representation that was contradicted by the parties’ term sheet was unreasonable, explaining:

[P]laintiff alleges in the complaint that Seller and the GGP defendants represented that they would provide the $120 million bridge loan to plaintiff on January 9, 2017, and that plaintiff reasonably relied upon this representation and did not pursue other sources of potential financing. Plaintiff also alleges that at the time Defendants made that representation, they knew that it was false because they had no intention of providing any bridge loan; instead, Defendants coordinated and conspired to commit a fraud against plaintiff by intentionally stringing plaintiff along in bad-faith, all while they were actively marketing the Commercial Unit for sale to third-parties.

. . .

The alleged misrepresentation of fact-that the GGP defendants would provide a bridge loan, buttressed by plaintiff’s allegation that it was not advised that a loan was conditioned upon board approval is belied by the documentary evidence. The court is permitted to consider extrinsic evidence on a CPLR 3211 motion, and, where the essential facts have been negated beyond substantial question by the evidentiary matter submitted, a motion to dismiss is properly granted. As the Term Sheets sent to plaintiff by the GGP defendants demonstrate, the bridge loan negotiations were being conducted at arms length, and each of the Term Sheets contained the same disclaimer on the first page explaining, among other things, that the potential loan, if any, shall be subject to the approval by Nimbus’s board of directors and other internal committees. The Term Sheet disclaimers are also clear that the Term Sheets themselves are mere negotiation instruments, not offers or agreements to extend a loan. Thus, plaintiff was aware that any bridge loan agreement was conditioned upon various factors, including board approval, as well as the fact that a loan agreement, if any, could be reached only upon the execution of further loan documentation. Furthermore, the fraud cause of action is not saved by Mr. Gulay’s statement that despite the contents of the Term Sheet, the GGP Defendants and Seller repeatedly told and promised Mr. Gulay — even after the Term Sheet was distributed on January 9, 2017 — that Nimbus would make the bridge loan as originally agreed. Where a term sheet or other preliminary agreement explicitly requires the execution of a further written agreement before any party is contractually bound, it is unreasonable as a matter of law for a party to rely upon the other party’s promises to proceed with the transaction in the absence of that further written agreement. Where, as here, the Term Sheets expressly state that the documents do not constitute any commitment to lend, and that no agreement to lend exists until satisfactory loan documents have been executed, plaintiff’s allegation that it reasonably and detrimentally relied on oral assurances by defendants that they intended to close the financing agreement are conclusively refuted by the documentary evidence.

(Internal quotations and citations omitted).

Posted: October 28, 2017

Court Refuses to Issue Injunction Enforcing Restrictive Covenants

On September 28, 2017, Justice Emerson of the Suffolk County Commercial Division issued a decision in Devos, Ltd. v. United Returns, Inc., 2017 NY Slip Op. 51379(U), refusing to issue an injunction enforcing restrictive covenants in employment contracts, explaining:

New York courts have long held that, since there are powerful considerations of public policy which militate against sanctioning the loss of a person’s livelihood, restrictive covenants which tend to prevent an employee from pursuing a similar vocation after termination of employment are disfavored by the law. Covenants that restrict an employee’s ability to compete must meet the test of reasonableness. A restraint is reasonable only if it: (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public. A violation of any prong of this three-prong test renders the covenant invalid. Moreover, with respect to the first prong, a covenant will only be subject to specific enforcement if it is reasonable in time and area and then only to the extent necessary to protect the employer from unfair competition which stems from the employee’s use or disclosure of trade secrets or confidential customer lists or from competition by a former employee whose services are unique or extraordinary.

The restrictive covenants at issue in this case are facially overbroad. While the first paragraph is limited temporally to three years, it contains no geographical limitation. It prohibits the individual defendants from engaging in any competitive business within the continental United States and in any countries in which they performed any duties for Devos or had any contact with a Devos customer, including telephone and facsimile transmission. The second paragraph, which prohibits the individual defendants from soliciting any Devos customers with whom they did business and from inducing any Devos representatives or employees from terminating their employment, has no temporal limitation. The court finds that these restrictions are far greater than required to protect any legitimate interest of Devos and that they impose an undue hardship on the individual defendants, all of whom are in their late 40’s or early 50’s and have been employed by Devos or in the pharmaceutical-return industry for 20 years or more. To enforce these covenants would require the individual defendants to endure a three-year period of total unemployment, to accept employment in an entirely different occupation or profession, or to relocate outside of the continental United States to a foreign country where they have never performed any duties for Devos or had any contact with any of Devos’ customers. The defendant Robert Dooley (former Director of Government Affairs Outside the Continental United States), in particular, would potentially be prohibited from relocating anywhere in the world.

The plaintiff contends that the covenants are necessary to protect Devos’ confidential customer information and trade secrets. A trade secret is a formula, pattern, device, or compilation of information that is used in one’s business and that gives the owner an opportunity to obtain an advantage over competitors who do not know or use. An essential requisite to legal protection is the element of secrecy. Secrecy has been defined as (1) substantial exclusivity of knowledge of the formula, process, device, or compilation of information and (2) the employment of precautionary measures to preserve such exclusive knowledge by limiting legitimate access by others.

The plaintiff has made no showing of the precautionary measures taken by Devos to guard the secrecy of the customer lists and other information that it seeks to protect as trade secrets. With respect to customer information, it is well established that, when an employer’s past or prospective customers’ names are readily ascertainable from sources outside its business, trade secret protection will not attach and solicitation by the employee will not be enjoined. The defendants have produced evidence in admissible form that, contrary to the plaintiff’s contentions, the names of Devos’ customers are publicly available and well known within the pharmaceutical-return industry. Moreover, pricing data and market strategies do not constitute trade secrets, and an employee’ recollection of information pertaining to the specific needs and business habits of particular customers is not confidential. The plaintiff’s contention that the defendants used Devos’ confidential and proprietary information to copy the way Devos operates and services its clients is contradicted by the affidavit of the defendant Robert Dooley, who avers that Devos’ systems and processes are used throughout the pharmaceutical-return industry. Mere knowledge of the intricacies of a business is not enough to constitute a trade secret.

In view of the foregoing, the court finds that the plaintiff has failed to establish that the restrictive covenants are necessary to protect Devos from unfair competition which stems from the individual defendants’ use or disclosure of trade secrets or confidential customer lists. Moreover, in addition to being sharply disputed, many of the plaintiff’s allegations are based on hearsay or information and belief. Accordingly, the plaintiff has failed to establish by clear and convincing evidence that it is likely to succeed on the merits and that the balancing of the equities is in its favor.The plaintiff has also failed to establish by clear and convincing evidence that it will be irreparably harmed in the absence of an injunction. It cannot be determined on the record presently before the court whether any loss of good will and/or business by Devos was due to the competing business set up by the defendants or due to its indictment and subsequent criminal conviction. In any event, Devos contends that its business is thriving, that it acquired more than 1,000 new customer accounts in 2015 and 2016, and that the sales representatives who replaced the defendants David Silvis and Christopher Louis have generated more than $800,000 in fees and services for the years 2015 and 2016, respectively.

Finally, the plaintiff contends that, if the court finds the restrictive covenants to be overbroad in time or scope, they should be partially enforced to the extent that the court determines them to be reasonable. Such partial enforcement is unavailable when, as here, the employer fails to demonstrate that the noncompete agreement serves to protect a legitimate employer interest. Moreover, there is evidence in the record that the restrictive covenants were imposed on the individual defendants as a condition of their continued employment for which they received no additional compensation. Accordingly, partial enforcement is not warranted.

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

Posted: October 27, 2017

Summary Judgment in Lieu of Complaint Precluded by Evidence of Lack of Consideration and Fraud

On October 11, 2017, the Second Department issued a decision in Denjonbklyn, Inc. v. Rojas, 2017 NY Slip Op. 07107, holding that a motion for summary judgment in lieu of complaint was properly dismissed because of questions of consideration and fraud in the inducement, explaining:

CPLR 3213 provides a means of obtaining an accelerated judgment where a defendant’s liability is premised upon an instrument for the payment of money only, such as an unconditional guaranty. Here, the plaintiff established its prima facie entitlement to summary judgment by proving the existence of the guaranty, the underlying debt, and the defendant guarantor’s failure to perform under the guaranty. However, as the Supreme Court correctly determined, the defendant raised a triable issue of fact regarding his defense of partial lack of consideration by submitting admissible evidence of the plaintiff’s failure to convey certain assets of the business as promised.

Furthermore, the defendant raised a triable issue of fact as to whether he was induced to execute the guaranty by certain fraudulent representations made by the plaintiff’s president, a defense which the defendant may assert because it is personal to him and because he is the sole owner and principal of OGT. Additionally, the defendant’s guaranty did not contain broad, sweeping language waiving any and all defenses, and thus, did not bar the assertion of defenses herein. Likewise, the plaintiff’s contentions that the proffered defenses are barred by the parol evidence rule and by the presence of a merger clause in the underlying asset purchase agreement are unpersuasive, especially in view of the plaintiff’s failure to provide the court with the various exhibits and schedules that were appended to the agreement.

(Internal quotations and citations omitted).

Posted: October 26, 2017

Action Dismissed Because Plaintiff’s Counsel Did Not Maintain Office in New York

On October 17, 2017, the First Department issued a decision in Arrowhead Capital Finance, Ltd. v. Cheyne Specialty Finance Fund L.P., 2017 NY Slip Op 07219, affirming the dismissal of an action because plaintiff’s counsel did not maintain an office in New York state in violation of Judiciary Law Section 470, explaining:

The record supports the court’s determination that plaintiff’s counsel failed to maintain an in-state office at the time he commenced this action, in violation of Judiciary Law § 470. Plaintiff’s subsequent retention of co-counsel with an in-state office did not cure the violation, since the commencement of the action in violation of Judiciary Law § 470 was a nullity. The court properly permitted defendants to make a second dispositive motion to dismiss since at the time of the first motion defendants had no reason to suspect that plaintiff’s counsel may have violated Judiciary Law § 470.

Defendants did not waive their right to argue that plaintiff’s counsel violated Judiciary Law § 470. Contrary to plaintiff’s contention, the court properly considered evidence submitted in defendants’ reply papers that was responsive to plaintiff’s claims in opposition to defendants’ motion. Contrary to defendants’ further contention, the court was not bound by the holding of a federal district court at the time of the commencement of this action that Judiciary Law § 470 was unconstitutional.

(Internal quotations and citations omitted).

Posted: October 25, 2017

Malpractice Claim Untimely Based on Out-of-State Limitations Period Under Borrowing Statute

On October 17, 2017, the First Department issued a decision in Centre Lane Partners, LLC v. Skadden, Arps, Slate, Meagher, & Flom LLP, 2017 NY Slip Op. 07221, affirming the dismissal of an action as time-barred under New York’s borrowing statute, explaining:

Where the alleged injury is economic in nature, the cause of action is generally deemed to accrue in the state where the plaintiff resides and sustains the economic impact of the loss. Here, the debtors’ principal places of business are in Oregon, and their financial losses were allegedly incurred in that state. Contrary to plaintiffs’ claim, the motion court’s application of Oregon’s two-year statute of limitations via New York’s borrowing statute (CPLR 202) in light of, inter alia, the situs of debtors’ Oregon-based businesses, the legal relationships existing between plaintiffs, debtors and defendants, and the nature of the instant action, was proper and the result would not be absurd, notwithstanding defendants’ place of business being located in New York.

The two challenged asset transfers were completed in April 2013 and May 2013 whereas plaintiffs’ malpractice action was not commenced until March 31, 2016. Plaintiffs, as well as the debtors, were in a position to know of the alleged adverse impact of the asset transfers upon the debtors, as well as the alleged conflict in legal representation provided by defendants. Plaintiffs were not only significant holders of unsecured debt in one of the primary debtors, but they were also the controlling shareholder in the company that purchased the largest of the two asset transfers in question. Moreover, the amended complaint alleged that the person who was the controlling principal of the debtor entities, and whose personal interests defendants had sought to promote in their handling of the debtor entities’ legal affairs, had, in May 2013, strong-armed one of the debtors into purchasing assets that it did not want from another unrelated entity controlled by the individual, all for purposes of including those assets in one of the challenged asset-transfers. The amended complaint further alleged that for nearly 20 years defendants had represented the interests of the debtors and the debtors’ controlling owner, and that in the two transactions in question, defendants represented parties with adverse interests.

Given such factual pleadings, the motion court properly rejected plaintiffs’ argument that Oregon’s discovery/tolling rule for legal malpractice claims rendered this malpractice action timely commenced. The court properly concluded that a reasonable person, knowing the facts that the debtors had available to them at the time of the two challenged transfers, should have been aware of a substantial possibility of defendants’ conflicted representation, as well as the harm that such negligent representation had caused, and such knowledge could not have been gained later than when the debtors filed for Chapter 7 bankruptcy on December 31, 2013.

(Internal quotations and citations omitted).

Posted: October 24, 2017

Action Dismissed for Failure Timely to Serve Complaint

On October 10, 2017, the First Department issued a decision in Goldstein Group Holding, Inc. v. 310 E. 4th St. Housing Development Fund Corp., 2017 NY Slip Op. 07086, holding that an action properly was dismissed for failure timely to serve the complaint on the defendant, explaining:

Supreme Court correctly dismissed the complaint for lack of personal jurisdiction, because plaintiff failed to serve defendant within 120 days after commencement of the action and failed to show that its time for service should be extended for good cause or in the interest of justice. Plaintiff was the substituted plaintiff in a prior foreclosure action against defendant that, three months before plaintiff filed the instant complaint, was dismissed for lack of personal jurisdiction over defendant because defendant-intervenor Howard Brandstein, who had been served on defendant’s behalf, was no longer defendant’s president and was not authorized to accept service on its behalf. Nevertheless, in the instant action, plaintiff initially chose again to try to serve defendant by serving Brandstein, based on its rank speculation that Brandstein might have again become defendant’s president. Plaintiff did not detail its efforts, if any, to learn the identity of defendant’s current president or any other officer whom it might properly serve. While ultimately plaintiff served defendant’s actual president, it did so after expiration of the 120-day period.

Plaintiff then requested an extension of time for service in opposition to defendant’s motion to dismiss, instead of formally cross-moving for an extension. We need not reach the disputed procedural issue regarding whether a formal cross motion was required because the court providently exercised its discretion in denying the request for an extension on its merits. By attempting service on Brandstein, who plaintiff should have known was not authorized to receive service, and making no effort to learn the identity of the current officers, plaintiff failed to act with reasonable diligence in trying to effect service, and thus failed to establish good cause in support of its request. Nor is an extension of time to serve warranted in the interest of justice, given plaintiff’s failure to act with any due diligence to ensure that the instant action was not dismissed for exactly the same reason for which the prior action was dismissed. While the statute of limitations on plaintiff’s claim may have expired, defendant’s low-income tenants have lived through two foreclosure actions and beyond the statute of limitations with the uncertainty whether they may remain in their homes, and plaintiff waited until after expiration of the 120-day period to serve defendant or seek an extension of time.

(Internal citations omitted).

Posted: October 23, 2017

Bringing Action for Rescission/Reformation of Contract Not Anticipatory Breach of That Contract

On October 19, 2017, the Court of Appeals issued a decision in Princes Point LLC v. Muss Development L.L.C., 2017 NY Slip Op. 07298, holding that bringing an action seeking rescission and/or reformation of a contract did not constitute an anticipatory breach of that agreement, explaining:

An anticipatory breach of a contract by a promisor is a repudiation of a contractual duty before the time fixed in the contract for performance has arrived. An anticipatory breach of a contract — also known as an anticipatory repudiation — can be either a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach or a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.

For an anticipatory repudiation to be deemed to have occurred, the expression of intent not to perform by the repudiator must be positive and unequivocal. We have taught that the party harmed by the repudiation must make a choice either to pursue damages for the breach or to proceed as if the contract is valid. We have also clarified that a wrongful repudiation of the contract by one party before the time for performance entitles the nonrepudiating party to immediately claim damages for a total breach.

On this record — and particularly in view of the repeated movement of the new outside closing date — we cannot conclude that the commencement of this action reflects a repudiation of the contract. At the core of this appeal is the unsettled question whether the commencement of an action, particularly one seeking rescission, is an anticipatory breach.

We do not, however, agree with the Appellate Division’s conclusion that, in this context, an action seeking rescission of a contract is markedly different from a declaratory judgment action. To be sure, this action (one for rescission and/or reformation of the purchase agreement based on defendants’ purported misrepresentation with respect to the condition of the property) and a declaratory judgment action necessarily would produce different results. This action is one based on the terms under which the amendments to the contract were entered, and essentially seeks to nullify those terms. A declaratory judgment action would produce a ruling as to the rights of the parties under the terms of the contract, and essentially would determine the meaning of those terms. Nevertheless, in this context — specifically, where the amended complaint seeks, among other things, reformation of the amendments to the contract and specific performance of the original agreement — there was no positive and unequivocal repudiation. There is no material difference between this action and a declaratory judgment action. At bottom, both actions seek a judicial determination as to the terms of a contract, and the mere act of asking for judicial approval to avoid a performance obligation is not the same as establishing that one will not perform that obligation absent such approval.

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

Posted: October 22, 2017

Default Judgment Vacated Because of Possible Misrepresentations in Complaint

On October 10, 2017, Justice Knipel of the Kings County Commercial Division issued a decision in Dean Builders Group, Inc. v. Crew Contracting of New Jersey Inc., 2017 NY Slip Op. 32122(U), vacating a default judgment even though the defendants did not proffer a reasonable excuse for the default because of possible misrepresentations in the Complaint, explaining:

CPLR 5015(a)(3) permits the court that rendered a judgment to relieve a party from it on such terms as may be just on the ground of fraud, misrepresentation, or other misconduct of an adverse party. A defendant moving to vacate a default based on intrinsic fraud, i.e., on the basis that the allegations in the complaint are false, must establish both a reasonable excuse for the default and a potentially meritorious defense to the action.

Here, Crew and Ahmed have proffered no valid excuse for their default in answering the complaint. Consequently, the Court need not address whether they have a potentially meritorious defense. In addition to the grounds set forth in section 5015(a), a court may vacate its own judgment for sufficient reason and in the interests of substantial justice. That is, a court may rely on its inherent authority to vacate a judgment in the interest of substantial justice, rather than its statutory authority under CPLR 5015(a), as the statutory grounds are subsumed by the court’s broader inherent authority.

The plaintiff appears to have obtained the default judgment through an affirmative misrepresentation to the Court that Ahmed executed the bill of sale. Ahmed proffers an affidavit of his handwriting expert opining, based on the comparisons of his signatures on other documents, that the signature in question is not his. Ahmed further proffers his foreign passport indicating that he could not have signed the bill of sale on the day in question. Moreover, the principal sum of the default judgment of $191,543.14 is three times more than (1) the total invoiced amount of $55,100.85 as reflected in the bill of sale, and (2) the amount of $58,212.90 which the plaintiff, in its moving papers, has offered to ABCD and Westchester in return for their concession that the plaintiff may collect on the payment bond. The questioned validity of the bill of sale, coupled with the plaintiffs apparent overstatement of the amount due under the bill of sale, is the type of circumstance warranting vacatur of the default judgment in the interests of justice. Accordingly, the default judgment is vacated. Crew and Ahmed’s default in answering the complaint is also vacated, and they are granted leave to serve a late answer. Inasmuch as Crew and Ahmed did not participate in discovery, it is incomplete, and the Court sua sponte vacates the note of issue and strikes this action from the trial calendar.

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

Posted: October 21, 2017

Court Allows Malpractice Claim Against Firm for Failure to Supervise Partner Go Forward

On September 29, 2017, Justice Masley of the New York County Commercial Division issued a decision in Alrose Steinway, LLC v. Jaspan Schlesinger, LLP, 2017 NY Slip Op. 32082(U), allowing a malpractice claim to go forward based on the firm’s alleged failure to supervise one of its partners, explaining:

In addition to malpractice, plaintiff asserts an interesting claim of failure to supervise in its third cause of action against defendants Jaspan Schlesinger LLP and Steven Schlesinger, the managing partner of the firm. There is no vicarious liability for a general partner in an LLP. New York Partnership Law§ 26 (b). Although plaintiff argues that Mr. Schlesinger is liable under New York Partnership Law § 26(c)(i), which provides that each partner shall be personally and fully liable and accountable for any negligent or wrongful act or misconduct committed by him or her or by any person under his or her direct supervision and control while rendering professional services on behalf of such registered limited liability partnership, it is undisputed that Mr.
Schlesinger never communicated with plaintiff nor supervised Mr. Epstein, another partner. Thus, this causes of action against Mr. Schlesinger are dismissed.

Plaintiff also advances the argument that the absence of any supervisory structure of partners at the firm is malpractice under Partnership Law§ 26 (c) (i). It argues that the law firm, as a whole, has an obligation to make reasonable efforts to ensure that its partners are appropriately supervised. Under this theory, Mr. Epstein’s status as a partner and 39 years of experience is irrelevant. At this early stage, plaintiff may explore this unique theory against the firm alone.

Internal quotations and citations omitted) (emphasis added).