Blogs

Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: August 29, 2017

Court Grants Adverse Inference Sanction for Failure Adequately to Preserve Evidence

On August 14, 2017, Justice Scarpulla of the New York County Commercial Division issued a decision in Brook v. Peconic Bay Medical Center, 2017 NY Slip Op. 31728(U), granting an adverse inference sanction for failure adequately to preserve evidence, explaining:

A party that seeks sanctions for spoliation of evidence must show that the party having control over the evidence possessed an obligation to preserve it at the time of its destruction, that the evidence was destroyed with a culpable state of mind, and that the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense. Where the evidence is determined to have been intentionally destroyed or as the result of gross negligence, the relevancy of the destroyed documents is presumed. Generally, the decision whether to impose sanctions, including to what extent, are matters within the discretion of the trial court.

Dr. Brook asserts that defendants should have reasonably anticipated litigation as early as October 2009, when the conduct underlying this litigation occurred, or at least in July 2010 or November 2010, when plaintiff’s former counsel demanded PMBC withdraw the AAR or otherwise be subject to litigation. Based on plaintiff’s letters in July and November 2010, I find that the defendants should have begun preserving and preventing the destruction of documents, including emails, at that time.

Defendants’ failure to institute a formal litigation hold as early as July, 2010, does not necessarily amount to gross negligence per se and is instead one factor that I consider in making a determination as to the alleged spoliator’s culpable state of mind. In evaluating this factor, counsel for defendants submits a letter, dated January 21, 2011, sent to PMBC, which issued a formal litigation hold, provided PMBC with detailed preservation instructions, and identified key players. This occurred approximately six months after defendants should have reasonably anticipated litigation, and one month after Dr. Brook instituted his initial lawsuit against defendants.

Other failures which support a finding of gross negligence, when the duty to preserve electric data has been triggered, include the failure to cease the deletion of email. Here, Dr. Brook presents circumstantial evidence demonstrating that defendants continued to delete emails because defendants were unable to produce missing documents from the original custodian’s account. Defendants point out that most of the missing emails were maintained in other forms, but that does not disprove that defendants deleted emails after the formal litigation hold.

Dr. Brook has shown that defendants did not sufficiently protect and preserve emails from July, 2010, the latest time defendants should have been on notice to do so, till January, 2011, when the first litigation hold was placed. However, defendants have shown that documents, other than emails, from that period were preserved and have been produced. Accordingly, I find that defendants did not act with purpose or with gross negligence. Instead, defendants were simply negligent in failing to preserve emails from July, 2010 till the formal litigation hold was placed by defendants’ counsel, and were negligent in failing to ensure that the litigation hold was thereafter stringently enforced.

With respect to whether the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense, Dr. Brook has submitted some evidence to show that emails supporting his claim were created between July, 2010 and January, 2011. For example, Dr. Brook submits an email non-party Dr. Richard Rubenstein sent to defendant Jay Zuckerman’s PMBC email account, dated August 7, 2011, which defendants are unable to produce. In the email, Dr. Richard Rubenstein objects to signing a statement about the investigation he found inaccurate and raises concern of possible criminal actions. The deleted communication supports Dr. Brook’s allegation of wrongdoing regarding PMBC’s investigation leading to the AAR.

However, Dr. Brook has identified many other emails as missing which do not support his claims and, in any event, Dr. Brook already has copies of these emails. Production of the same emails would merely be cumulative. Where, as here, independent evidence exists that allows the affected party to adequately prepare its case, a less severe sanction is appropriate. Also, many of the emails Dr. Brook submits as evidence of ESI destruction reference oral communications between the parties. Depositions of the individuals sending and receiving those emails may produce sufficient, alternative evidence of the subject matter of the discussions.

Based on the foregoing, and to impose a sanction co1mi1ensurate with the defendants’ conduct, I find that an adverse inference charge is appropriate solely for emails concerning Dr. Brook created by defendants between July, 2010 and January, 2011. This sanction is particularly appropriate because defendants were unable to produce the Rubenstein email or any other communication between PMBC administrators and physicians relating to the investigation into Dr. Brooks made during that time frame.

(Internal quotations and citations omitted).

Posted: August 28, 2017

No Breach of Covenant of Good Faith and Fair Dealing; Plaintiff Received Benefits of Contract

On August 23, 2017, the Second Department issued a decision in Rayham v. Multiplan, Inc., 2017 NY Slip Op. 06306, holding that there was no breach of the covenant of good faith and fair dealing where the plaintiff was not deprived of the benefits of the parties’ contract, explaining:

The Supreme Court also properly granted that branch of the defendants’ motion which was for summary judgment dismissing the cause of action alleging a breach of the implied covenant of good faith and fair dealing. Implicit in every contract is a covenant of good faith and fair dealing, which encompasses any promise that a reasonable promisee would understand to be included. The covenant is breached where one party to a contract seeks to prevent its performance by, or to withhold its benefits from, the other. The defendants’ submissions established, prima facie, that they did not withhold the benefits of, or seek to prevent the performance of, the Beech Street Agreement either in its original form, or as amended.

(Internal quotations and citations omitted).

Posted: August 27, 2017

Court Rejects Expert Reports That Opined on the Law of Legal Ethics

On August 15, 2017, Justice Sherwood of the New York County Commercial Division issued a decision in Melcher v. Greenberg Traurig LLP, 2017 NY Slip Op. 31727(U), rejecting expert reports that opined on the law of legal ethics, explaining:

Questions as to the contours of a lawyer’s ethical obligations to disclosure are issues of law and jury instruction on the applicable law are within the province of the court exclusively. The testimony sought to be admitted through the “expert” testimony of Patrick Conner and Roy Simon intrudes on areas reserved to the court and it is also likely to confuse the jury. The jury is being called upon to determine whether Leslie Corwin, an attorney, engaged in deceit or colluded with an intent to deceive the court or a party.

The jury is not being asked to resolve whether or not he violated the Code of Professional Responsibility (the Code) where the applicable standards are different than those involved here. Moreover, the concept of deceit is readily understandable and does not require interpretation by experts. Although evidence concerning the role of the lawyer in the adversary system may be useful background, issues as to whether and when a lawyer has an obligation to speak are legal questions reserved to the court. Expert testimony is neither helpful nor permitted. Accordingly, the motions to bar testimony of Patrick Conner and Roy Simon are granted with leave to submit revised reports that do not invade the province of the court and are shortened to reflect the limited role of such testimony as background.

(Internal quotations and citations omitted).

Posted: August 26, 2017

Questions of Fact on Whether LLC Could Fulfill its Purpose Barred Dissolution Claim’s Dismissal

On August 16, 2017, the Second Department issued a decision in Mace v. Tunick, 2017 NY Slip Op. 06170, holding that questions of fact precluded the dismissal of a claim for the dissolution of an LLC, explaining:

In order to demonstrate entitlement to dissolution of a limited liability company, the member seeking such relief must establish, in the context of the terms of the operating agreement or articles of incorporation, that (1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2) continuing the entity is financially unfeasible.

Here, the plaintiff alleged in the complaint that Pedani was formed for the purpose of acquiring title to and managing property to serve as Ceres’ headquarters, and that it became impossible to fulfill that purpose once Ceres relocated to a different property, not owned by Pedani. Contrary to the defendants’ contention and the Supreme Court’s conclusion, the defendants did not show, through the operating agreement or any other evidence, that the material fact alleged by the plaintiff regarding Pedani’s purpose is not a fact at all and that no significant dispute exists regarding it. In this respect, the operating agreement did not set forth any particular purpose for Pedani. The court’s determination that Pedani’s purpose was simply to acquire and manage property constituted an impermissible factual finding.

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

Posted: August 25, 2017

Motion Court Should Not Have Denied Motion to Amend

On August 16, 2017, the Second Department issued a decision in Fox Paine & Co., LLC v. Houston Casualty Co., 2017 NY Slip Op. 06163, reversing the denial of a motion to amend, explaining:

In the absence of prejudice or surprise to the opposing party, leave to amend a pleading should be freely granted unless the proposed amendment is palpably insufficient or patently devoid of merit. The determination to permit or deny amendment is committed to the sound discretion of the trial court.

Here, the Supreme Court improvidently exercised its discretion in denying those branches of the plaintiffs’ motion which were for leave to amend the complaint to add factual allegations to the causes of action alleging fraud, breach of fiduciary duty, and aiding and abetting a breach of fiduciary duty. The proposed amendments were not palpably insufficient or patently devoid of merit.

The Supreme Court also improvidently exercised its discretion in denying that branch of the plaintiffs’ motion which was to add a cause of action alleging aiding and abetting fraud. To recover for aiding and abetting fraud, the plaintiff must plead the existence of an underlying fraud, knowledge of the fraud by the aider and abettor, and substantial assistance by the aider and abettor in the achievement of the fraud. Substantial assistance requires an affirmative act on the defendant’s part. In the proposed second amended complaint, the plaintiffs alleged underlying fraud, the defendants’ knowledge of the fraud, and the defendants’ substantial assistance in the achievement of the fraud. The Supreme Court should have granted leave to add a cause of action alleging aiding and abetting fraud, since it was not palpably insufficient or devoid of merit and there was no prejudice to the defendants.

However, the Supreme Court properly denied that branch of the motion which was to add a cause of action alleging conspiracy to commit fraud, since that proposed cause of action was duplicative of the proposed cause of action alleging aiding and abetting fraud.

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

Posted: August 24, 2017

Letters, Affidavits and Transcripts Not 3211(a)(1) Documentary Evidence

On August 16, 2017, the Second Department issued a decision in Fox Paine & Co., LLC v. Houston Casualty Co., 2017 NY Slip Op. 06162, holding that proffered evidence was insufficient to support a motion to dismiss, explaining:

A motion to dismiss a complaint pursuant to CPLR 3211(a)(1) may be granted only if the documentary evidence submitted utterly refutes the factual allegations of the complaint and conclusively establishes a defense to the claims as a matter of law. In order for evidence to qualify as documentary, it must be unambiguous, authentic, and undeniable. Neither affidavits, deposition testimony, nor letters are considered documentary evidence within the intendment of CPLR 3211(a)(1). Accordingly, the letters from the attorney and claims services relied upon by Houston Casualty do not constitute documentary evidence for the purposes of CPLR 3211(a)(1). Additionally, the insurance policy, which does constitute documentary evidence, did not utterly refute the factual allegations of the complaint and did not conclusively establish a defense to the claims as a matter of law.

(Internal quotations omitted).

Posted: August 22, 2017

Professional Malpractice Claim Dismissed for Failure to Present Adequate Expert Testimony

On August 16, 2017, the Second Department issued a decision in Michael v. He Gin Lee Architect Planner, PLLC, 2017 NY Slip Op. 06177, setting aside a jury verdict of professional malpractice against an architect because of the plaintiff’s failure to present adequate expert testimony on accepted architectural standards of practice, explaining:

Where, as here, the causes of action submitted to the jury hinge on allegations of professional malpractice against an architect, it is incumbent upon the plaintiff to present expert testimony to support them. Specifically, the plaintiff in this case alleged that the defendants committed professional malpractice by submitting defective plans to the New York City Department of Buildings (hereinafter the DOB), and by failing to diligently pursue the approval process and timely deal with objections raised by the DOB. Such questions are not within the competence of untutored laypersons to evaluate, as common experience and observation offer little guidance.

The only expert proffered by the plaintiff conceded that he “didn’t see” the defendants’ plans, and when asked, for instance, to opine on whether the defendants’ plans “would have caused a problem” regarding the roof’s ability to bear the weight of certain HVAC equipment, he demurred, answering, “No, I only work for myself.” Moreover, the expert offered no opinion regarding the defendants’ alleged delay in getting their plans approved by the DOB. Given the absence of any expert testimony that the defendants departed from accepted architectural standards of practice, the jury lacked any rational basis for its finding that the defendants committed professional malpractice. Accordingly, that branch of the defendants’ motion pursuant to CPLR 4404(a) which was to set aside the verdict and for judgment as a matter of law should have been granted, and the complaint dismissed.

(Internal quotations and citations omitted).

Posted: August 21, 2017

Court Should Not Have Vacated Default Judgment Where There Was No Reasonable Excuse for Default

On August 16, 2017, the Second Department issued a decision in OneWest Bank, FSB v. Singer, 2017 NY Slip Op. 06184, reversing a trial court decision to vacate a default, holding that no reasonable excuse had been showed for the default.

In OneWest Bank, the trial court dismissed the complaint because of the failure of plaintiff’s counsel to appear at two court conferences. The plaintiff’s motion to vacate the default was granted, but on appeal, the Second Department reversed the decision vacating the default, explaining:

A plaintiff seeking to vacate a default in appearing at a conference is required to demonstrate both a reasonable excuse for its default and a potentially meritorious cause of action. Although a motion to vacate a default is addressed to the sound discretion of the motion court, the defaulting party must submit evidence in admissible form establishing both a reasonable excuse and a potentially meritorious cause of action or defense.

A court has the discretion to accept law office failure as a reasonable excuse for a party’s default. However, it was not the Legislature’s intent to routinely excuse such defaults, and mere neglect is not a reasonable excuse.

Contrary to OneWest’s contention, it failed to provide a detailed and credible explanation of the default. Rather, counsel’s affirmation in support of the motion contained only the conclusory and undetailed allegation of law office confusion after being substituted as counsel for OneWest, which does not constitute a reasonable excuse. No other evidence was submitted to corroborate the allegation. OneWest, therefore, failed to demonstrate a reasonable excuse for its default. Accordingly, the Supreme Court improvidently exercised its discretion in granting OneWest’s motion to vacate its default.

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

It is only human to not want to admit to a mistake. As this decision shows, however, failing fully to explain why you failed to appear at a court conference can lead to consequences much worse than the embarrassment of admitting a mistake.

Posted: August 20, 2017

Insurer Owed Pre-Judgment Interest From Date of Wrongful Disclaimer of Coverage

On August 7, 2017, Justice Ramos of the New York County Commercial Division issued a decision in J.P. Morgan Securities Inc. v Vigilant Insurance Co., 2017 NY Slip Op. 31690(U), holding that an insurer owed pre-judgment interest from the date of its wrongful disclaimer of coverage, explaining:

Once the Insurers repudiated liability and Bear Stearns made, payment of its own covered losses, the law regards the Insurers as being in breach, and as a result, Bear Stearns possesses a liquidated claim. To this effect, the Court granted summary judgment in JP Morgan’s favor, and denied the Insurers’ cross-motion.

In the insurance context, pre-judgment interest runs from the date of a breach on the part of an insurer and a liquidated claim. Thus, JP Morgan is entitled to pre-judgment interest from April 4, 2006, which is the date that Bear Stearns demanded payment from the Insurers for the settlement of the SEC regulatory action.

(Internal citations omitted).