Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: December 27, 2017

Failure Strictly to Comply With Service Requirements of LLC Law 304 Makes Service Ineffective

On December 22, 2017, the Fourth Department decided in Chan v. Onyx Capital, LLC, 2017 NY Slip Op. 08966, holding the failure strictly to comply with the service requirements of LLC Law Section 204 makes service ineffective, explaining:

We agree with SRP that plaintiff failed to comply strictly with Limited Liability Company Law § 304 and thus the court did not have jurisdiction over defendant. Pursuant to that statute, first, service upon the unauthorized foreign limited liability company may be made by personal delivery of the summons and complaint, with the appropriate fee, to the Secretary of State. That was done by plaintiff in this case. Second, in order for the personal delivery to the Secretary of State to be sufficient, the plaintiff must also give the defendant direct notice of its delivery of the process to the Secretary of State, along with a copy of the process. The direct notice may be given to the defendant personally. That was attempted by plaintiff, but the process server was unable to make personal service inasmuch as the property was unoccupied. In the alternative, the direct notice may be sent to the defendant by registered mail, return receipt requested. That was attempted by plaintiff in this case, but the mail was returned to plaintiff as undeliverable.

In the final step, plaintiff must file an affidavit of compliance. Where, as here, a copy of the process is mailed in accordance with this section, there shall be filed with the affidavit of compliance either the return receipt signed by such foreign limited liability corporation or other proof of delivery or, if acceptance was refused by it, the original envelope with a notation by the postal authorities that acceptance was refused.

It is well settled that strict compliance with Limited Liability Company Law § 304 is required, including as to the filing of an affidavit of compliance. The Court of Appeals in Flick v Stewart-Warner Corp. (76 NY2d 50 [1990], rearg denied 76 NY2d 846 [1990]) analyzed Business Corporation Law § 307, which is substantively identical to Limited Liability Company Law § 304. The Court explained that the statute contains procedures calculated to assure that the foreign corporation, in fact, receives a copy of the process. The Court held that the proof called for in the affidavit of compliance is that the required actual notice has been given either by personal service or by registered mail. These are not mere procedural technicalities but measures designed to satisfy due process requirements of actual notice.

In this case, as outlined above, plaintiff failed to comply with step two of Limited Liability Company Law § 304. We reject plaintiff’s contention that nothing more was required of her after the registered mail was returned as undeliverable. Inasmuch as plaintiff failed to comply with step two, she necessarily also failed to comply with step three, which would show that a party complied with the service requirements of section 304.

The rules regarding how you start a lawsuit and bring the defendants into it can sometimes be esoteric. And, as shown here, there are sometimes special rules regarding the service of businesses. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have a question regarding the proper way to serve a defendant, bringing them into a lawsuit.

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Posted: December 26, 2017

Prior Representation Not Shown to be Substantially Related so as to Justify Attorney Disqualification

On December 21, 2017, the Third Department issued a decision in NYAHSA Services, Inc., Self-insurance Trust v. People Care Inc., 2017 NY Slip Op. 08930, holding that a prior representation was not so substantially related to a current dispute in which prior counsel was adverse so as to justify that counsel’s disqualification, explaining:

A party seeking disqualification of its adversary’s lawyer must prove: (1) the existence of a prior attorney-client relationship between the moving party and opposing counsel, (2) that the matters involved in both representations are substantially related, and (3) that the interests of the present client and former client are materially adverse. In resolving such a motion, a court must balance the vital interest in avoiding even the appearance of impropriety against concern for a party’s right to representation by counsel of choice and danger that such motions can become tactical derailment weapons for strategic advantage in litigation. Here, the parties agree that there was a prior attorney-client relationship between defendant and the firm and that the interests of defendant and LeadingAge are materially in conflict. They disagree as to whether the scope of the firm’s prior representation of defendant is substantially related to its current representation of LeadingAge or, in the alternative, whether there is a reasonable probability that confidential information imparted by defendant to the firm may be used or disclosed in its representation of LeadingAge. Upon review, we agree with Supreme Court that defendant did not meet its heavy burden to establish that LeadingAge should be deprived of the counsel of its choice.

Defendant’s motion was supported by the affidavit of the chief executive officer of defendant’s parent company (hereinafter the CEO). Initially, the CEO asserted that he had been unaware of the firm’s representation of LeadingAge until 2016, when he saw the firm identified as counsel to LeadingAge in one of the prior appeal decisions from this Court. The CEO further asserted that the firm had previously represented defendant throughout the time period when defendant was a member of plaintiff, and that the firm had advised defendant on labor and employment issues: including workers’ compensation insurance recommendations due to the skyrocketing cost of workers’ compensation coverage. He asserted that defendant had provided the firm with confidential financial, payroll and tax information and information related to defendant’s finances and management and employment practices, including documents for legal advice regarding efforts to reduce workers’ compensation claims costs. One attorney of the firm, whom the CEO described as a close and confidential advisor, had provided the primary representation of defendant from 1997 until his death in 2005. The CEO asserted that this attorney had offered advice upon labor and employment issues as well as a wide variety of other business matters. According to the CEO, several other attorneys at the firm provided representation to defendant on labor and employment issues thereafter, between 2005 and 2008, and defendant and the firm continued to discuss their relationship and continued representation until 2010.

The CEO asserted in general fashion that the firm was aware of defendant’s membership in plaintiff and of the private considerations underpinning its decision to join plaintiff, alleging that the topic of defendant’s membership in plaintiff was revisited several times in verbal conversations with the attorney who passed away. Specifically, the CEO stated that he and the deceased attorney discussed defendant’s workers’ compensation coverage during breakouts in collective bargaining sessions, and that the cost of coverage was a significant factor in such negotiations. However, these allegations fell short of claims that the deceased attorney ever provided advice to defendant about membership in plaintiff or any other group self-insured trust, nor did the CEO assert that defendant provided the firm with any confidential information specifically related to these matters. Defendant further submitted a list of invoices that it had paid to the firm and a sample invoice from June 2004 detailing time spent by the deceased attorney in representing defendant. The listed invoices did not reveal the nature of any of the underlying matters, and the sample invoice indicated only that it pertained to labor representation. Neither document made any reference to workers’ compensation issues, group self-insured trusts, plaintiff, or defendant’s membership in plaintiff.

In opposition, two attorneys at the firm — the managing partner of the firm’s labor relations and employment law department and another partner in that department — averred by affidavit that they had represented defendant between 2005 and 2007 on such labor matters as collective bargaining negotiations, union grievances and matters before the National Labor Relations Board. They asserted that their representation of defendant ended in 2007 and that the firm had only minimal contact with defendant thereafter. Each asserted that neither he nor the firm had advised defendant on workers’ compensation matters or made recommendations regarding workers’ compensation coverage, that defendant never provided the firm with any information related to its membership in plaintiff and that the firm did not advise defendant about this membership. They also asserted that, as attorneys, it was not their practice to offer advice or recommendations related to workers’ compensation coverage to any client, that they did not offer such advice or recommendations to defendant and that the firm does not practice workers’ compensation law.

More than mere generalized assertions are required to justify disqualification. Upon review, we agree with Supreme Court that the CEO’s vague and conclusory assertions regarding verbal conversations with a now-deceased attorney about the cost of workers’ compensation coverage were inadequate to establish a substantial relationship between the firm’s prior representation of defendant in general labor and employment matters and the matters involved in its current representation of LeadingAge. Likewise, defendant failed to establish that it is reasonably probable that any confidential information will be used or disclosed in the current litigation. In view of the general and unsubstantiated nature of defendant’s allegations, we find no abuse of discretion in the court’s determination.

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

We both bring and defend motions relating to attorney conflicts and do appeals of the decisions on those motions. Contact Schlam Stone & Dolan partner John Lundin at if you face a situation where counsel may be–or is accused of being–conflicted.

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Posted: December 25, 2017

Questions of Fact Preclude Dissolution of Partnership on Summary Judgment

On December 12, 2017, Justice Bransten of the New York County Commercial Division issued a decision in Magid v. Magid, 2017 NY Slip Op. 32603(U), holding that questions of fact precluded summary judgment in a dissolution action, explaining:

On their first cause of action, plaintiffs seek an Order dissolving 110 East, and giving plaintiffs the right to wind up 110 East by selling the Premises and conducting a final accounting and distribution of the partnership assets. . . .

Partnership Law § 63 provides that the court may order the dissolution of a partnership where a partner willfully or persistently commits a breach of the partnership with him, or where other circumstances render a dissolution equitable. Where the partners are deadlocked, and the partnership is consequently unable to make any decisions, it is equitable to dissolve the partnership. No one can be forced to continue as a partner against his will. As the Appellate Division, First Department has said when discussing the related area of the duties of shareholders in a closely held corporation:

The law exacts a high degree of fidelity and good faith in dealings between partners in a the conduct of the affairs of the partnership. The same obligations are likewise applicable to shareholders in a close corporation. However, where a deadlock exists to the extent that dissension becomes the order of the day, the impasse may effectively destroy the loyalty and good faith expected of such stockholders in their dealings with each other. The inevitable result is the downfall of the business. In such a case, dissolution affords to the court an appropriate remedy to judicially direct what in actuality is obvious to all, that the deadlock and the dissension have effectively destroyed the orderly functioning of the corporation.

The reason for such dissension is irrelevant; the only issue is whether the relationship between the partners is irretrievably dysfunctional

At the outset, the court notes that defendants do not accurately identify the requirements to show a deadlock. While the cases cited by plaintiffs have largely concerned partnerships where the competing owners of ownership groups each held 50% of the partnership, defendants do not point to any authority stating that a 50/50 division is necessary for the court to find that a partnership is irretrievably deadlocked. Indeed, it is seemingly disingenuous for L. Magid to argue that the partnership is not deadlocked on, at the very least, the issues of refinancing, a sale of the Premises, a the removal of L. Magid as property manager, when L. Magid has responded to his partners’ proposals related to those issues with threats of litigation. Nor have defendants shown that 110 East’s continued profitability and day-to-day operations necessarily defeat plaintiffs’ claim.

This Court notes, contrary to the defendants’ argument, it has already had to intervene in this action to order the parties not to communicate with each other, except through counsel. It is not at all clear that 110 East would continue to function in the absence of this directive. Further, whether or not the dissension has impacted or will impact 110 East’s or any partner’s finances is irrelevant to whether dissolution is warranted.

L. Magid argues that his status as property manager and his refusal to consent to a sale of the Premises are both protected by the 110 East Agreement, and, thus, cannot be the basis of a deadlock. However, the 110 East Agreement does not require the consent of all managing partners to terminate a contract with an outside entity, such as the property manager; though it does require such consent to enter into a contract in the first place.

. . .

Ultimately, a decision on this cause of action requires credibility judgments of the kind that are inappropriate on a motion for summary judgment. It is clear that, despite defendants’ efforts to downplay it, significant acrimony and dissension exists among the partners. Such dissension is farther amplified by the fact that, unlike many partnerships, 110 East is a family partnership, with all of its attendant personal factors. Moreover, the alleged complaints regarding the management of the building are intertwined with the broader partnership disputes, as L Magid also serves as property manager. Yet, dissension and animosity, by themselves, are not enough; the discord must raise an irreconcilable barrier to the continued functioning and prosperity of the partnership.

Here, the parties have raised issues of fact as to the level of dysfunction caused by their personal animosity, and whether such dysfunction impacts the management of the Premises and 110 East’s ability to function. Under these circumstances, summary judgment is not appropriate for either side.

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

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Indeed, Schlam Stone & Dolan partner Jeffrey M. Eilender and associate Lee J. Rubin were contributors to the recently-released 2017 Supplement to Litigating the Business Divorce by Kurt Heyman and Melissa Donimirski. Contact Jeffrey Eilender at or Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding a business divorce.

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Posted: December 24, 2017

Upcoming Arguments in the Court of Appeals in January

Upcoming arguments in the Court of Appeals in January 2018 that may be of interest to commercial litigators include:

  1. Forman v Henkin APL-2016-00222 (to be argued Tuesday, January 2, 2018) (“Disclosure–Discovery and Inspection–Scope of disclosure–social media–whether a personal injury plaintiff may be compelled to produce photographs privately posted on Facebook and authorizations related to plaintiff’s private Facebook messages.”)
  2. Dormitory Authority v Samson Construction APL-2016-00202 (to be argued Thursday, January 4, 2018) (“Negligence–Architect’s Malpractice–Whether Dormitory Authority may pursue a negligence claim against the architect in addition to its breach of contract claim arising out of damages incurred during site excavation for the construction project’s foundation; parties–whether City of New York, a nonparty to the underlying construction contract, can assert a claim as a third-party beneficiary as ultimate end-user of the building to be constructed.”)
  3. Cortlandt Street Recovery Corp. v Bonderman (and three related actions) APL-2017-00014 (to be argued Tuesday, January 9, 2018) (“Parties–Standing–Whether indenture trustee had standing to assert causes of action for breach of contract, fraudulent conveyance, unlawful corporate distribution, unjust enrichment, and based on an alter ego theory; corporations–disregarding the corporate entity–whether complaint sufficiently stated a cause of action under a veil-piercing theory.”)
  4. Paramount Pictures Corporation v Allianz Risk Transfer AG APL-2016-00221 (to be argued Tuesday, January 9, 2018) (“Judgments–Res Judicata–Application of Federal Rule of Civil Procedure 13(A) to New York State court cases; whether a party’s failure to assert a compulsory counterclaim in a prior federal action precluded the party from pursing the counterclaim in a subsequent state court action under the doctrine of res judicata.”)

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Posted: December 23, 2017

Transcripts and Videos of Arguments in the Court of Appeals for November 2017 Now Available

On November 6, 2017, we noted four cases of interest from the oral arguments before the Court of Appeals in November 2017:

  1. Desrosiers v Perry Ellis Menswear (No. 121) and Vasquez v National Securities Corporation (No. 122) (argued on Tuesday, November 14, 2017) (“Actions–Class Actions–Whether putative class members were entitled to notice of discontinuance of the action under CPLR 908 despite that the time for the individual plaintiff to move for class certification had expired under CPLR 902.”) See the transcript and the video.
  2. Nomura Home Equity Loan, Inc. v Nomura Credit & Capital, Inc. (No. 39-Reargument) (argued on Tuesday, November 14, 2017) (“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 the transcript and the video.
  3. Global Reinsurance Corp. of America v Century Indemnity Co. (No. 124) (argued on Wednesday, November 15, 2017) (“Insurance–Reinsurance–Whether a per occurrence liability cap in a reinsurance contract limits the total reinsurance available under the contract to the amount of the cap regardless of whether the underlying policy is understood to cover expenses such as, for instance, defense costs.”) See the transcript and the video.

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Posted: December 22, 2017

General Provisions of Delaware LLC Law Do Not Trump Specific Provisions of LLC Agreement

On December 14, 2017, the First Department issued a decision in Estate of Calderwood v. ACE Group International LLC, 2017 NY Slip Op. 08750, holding that the general provisions of the Delaware law limited liability company regarding personal representatives did not trump the specific provisions of an LLC agreement, explaining:

According to defendants, under the terms of the LLC Agreement, at the time of Alex’s death he became a “Withdrawing Member” and “cease[d] to be a Member of the Company” and his successor in interest, the Estate, retained only the rights to distributions.

The Estate, however, argues that § 18-705 of the Delaware Limited Liability Company Act (LLC Act) is a mandatory provision pursuant to which the personal representative of a deceased member may exercise all of the member’s rights, notwithstanding the limitations contained in the LLC Agreement. Section 18-705 provides that if a member who is an individual dies the member’s personal representative may exercise all of the member’s rights for the purpose of settling the member’s estate or administering the member’s property, including any power under a limited liability company agreement of an assignee to become a member.

The Estate argues that because section 18-705 refers to all of the member’s rights, the statute does not limit the rights of a personal representative to those rights given to a successor in interest under the LLC Agreement. We disagree. First, under the Act, the parties to an LLC agreement have substantial authority to shape their own affairs and in general, any conflict between the provisions of the Act and an LLC agreement will be resolved in favor of the LLC agreement. Second, the LLC Act’s primary function is to fill gaps, if any, in a limited liability company agreement. This gap-filling provision is not required here because the LLC Agreement specifically addresses the exact situation in which the parties currently find themselves.

In an effort to further bolster its argument that section 18-705 controls here, the Estate relies on the lack of the phrase unless otherwise provided in a limited liability company agreement in section 18-705 as evidence of its mandatory status. However, and as noted by the motion court, this argument has already been considered and rejected by the Delaware courts. Also notable, section 18-705 contains the phrase may exercise, which connotes the voluntary, not mandatory or exclusive, set of options.

We also reject the Estate’s argument that section 18-705 is likely to be mandatory under Delaware law because the purpose of section 18-705 is, in part, to protect third-party successors in interest. The Estate contends that section 18-705, in this case, protects vulnerable heirs’ interests by allowing them to exercise all of the deceased member’s rights. However, and as the motion court correctly stated, to hold that § 18-705 alters a member’s rights upon death in a manner contravening the LLC Agreement is inconsistent with the well settled law articulated by the Delaware courts – that the substantive rights of LLC members are governed by contract. This interpretation is in line with Chancellor Chandler’s statement in R & R Capital, LLC, that for Shakespeare, it may have been the play, but for a Delaware limited liability company, the contract’s the thing. Ultimately, it is the contract that compels the Court’s decision in this case because it is the contract that defines the scope, structure, and personality of limited liability companies. Thus, whether section 18-705 is mandatory or permissive, we, nonetheless, find that in this case, it does not override section 9.7(b) of the LLC Agreement.

(Internal quotations and citations omitted).

This decision touches on an area of commercial litigation that is a significant part of our practice: disputes regarding the ownership and control of closely-held businesses. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding such a dispute.

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Posted: December 21, 2017

Motion to Dismiss Defamation Claims Granted Based on Qualified Privilege

On December 7, 2017, Justice Ostrager of the New York County Commercial Division issued a decision in L.Y.E. Diamonds Ltd. v. Gemological Institute of America Inc., 2017 NY Slip Op. 32576(U), dismissing a defamation claim on a motion to dismiss based on qualified privilege, explaining:

In a defamation action, such as this, a qualified privilege negates any presumption of implied malice flowing from a defamatory statement, and places the burden of proof on this issue upon the plaintiff. A qualified privilege may be found where a statement is fairly made by a person in the discharge of some public or private duty, legal or moral, or in the conduct of his own affairs, in a matter where his interest is concerned. One such conditional, or qualified, privilege extends to a communication made by one person to another upon a subject in which both have an interest. The privilege underscores a public policy in favor of the flow of information between persons sharing a common interest. Occasions conditionally privileged afford a protection based upon a public policy which recognizes that it is essential that true information shall be given whenever it is reasonably necessary for the protection of one’s own interests, the interests of third persons, or certain interests of the public. In prior actions sounding in defamation, this common-interest privilege has been extended to members of a board of directors, constituent physicians of a health insurance plan, and members of a faculty tenure committee.

Defendants GIA and Moses (the “GIA Defendants”) assert that any liability stemming from the Alert is protected by a qualified common-interest privilege. In response, plaintiffs argue that even if the GIA defendants are protected by a qualified privilege, that such a privilege must be pleaded as an affirmative defense and cannot be asserted in a pre-answer motion to dismiss. The First Department has held, however, that such a privilege can be found at the pleading stage. Here, the GIA Defendants have presented documentary evidence of their client agreements with plaintiffs which were in effect at the time of the Alert. The client agreements clearly state that GIA maintains the right to make public via GIA’s website or otherwise, the names of clients it reasonably suspects of treating diamonds. Indeed, as the Amended Complaint and motion papers make crystal clear, GIA undoubtedly protects the interests of third persons in the diamond industry. The Alert was intended to serve that public function by warning interested parties of potentially treated diamonds, pursuant to GIA’s client agreement with plaintiffs. A qualified privilege therefore shields the GIA Defendants from liability unless plaintiffs can allege malice in more than merely conclusory terms.

As discussed at length during oral argument, plaintiffs’ Amended Complaint epitomizes the type of conclusory allegations of malice that are insufficient to overcome the moving defendants’ qualified common-interest privilege. The Amended Complaint states that defendants published defamatory statements with malice without alleging any facts to support an inference that GIA “spoke out of spite or ill will, and that such malicious motivation was the one and only cause for the publication. Thus, plaintiffs’ conclusory allegations of malice are insufficient to overcome the privilege, and the causes of action sounding in defamation and trade libel are dismissed as to the GIA Defendants.

(Internal quotations and citations omitted).

Civil litigation can involve claims that cause real reputational harm, but not every statement can be the subject of a defamation claim. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions about whether statements about you or your business can be the basis for a claim for defamation.

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Posted: December 20, 2017

Split Court of Appeals Holds that RMBS Trusts Cannot Get General Contract Damages for Claims Covered by Sole Remedy Provision

On December 12, 2017, the Court of Appeals issued a decision in Nomura Home Equity Loan, Inc., Series 2006-FM2 v. Nomura Credit & Capital, Inc., 2017 NY Slip Op. 08622, holding that RMBS trusts cannot get general contract damages for claims covered by “sole remedy” provisions.

Nomura is an RMBS put back action: an action in which the trustee of a residential mortgage backed securities trust claimed that the mortgage loans placed in the trust were defective in various ways. The trustee–HSBC–sought both “specific performance of the remedy that expressly applies to such breaches under the contracts, i.e., that defendant either cure the breaches or repurchase the loans” as well as “general contract damages for alleged breaches of representations made by defendant concerning the transaction as a whole, specifically the representation that the contracts and related documents contained no untrue statements.” The question before the Court of Appeals was “whether claims for general contract damages based on alleged breaches of a ‘no untrue statement’ provision can withstand a motion to dismiss based on a contract provision mandating cure or repurchase as the sole remedy for breaches of mortgage loan-specific representations and warranties.” A divided court held “that, inasmuch as the claims for general contract damages at issue here are grounded in alleged breaches of the mortgage loan-specific representations and warranties to which the limited remedy fashioned by the sophisticated parties applies, plaintiffs’ claims for general contract damages should be dismissed,” explaining:

[C]ourts must honor contractual provisions that limit liability or damages because those provisions represent the parties’ agreement on the allocation of the risk of economic loss in certain eventualities. Contract terms providing for a “sole remedy” are sufficiently clear to establish that no other remedy was contemplated by the parties at the time the contract was formed, for purposes of that portion of the transaction, especially when entered into at arm’s length by sophisticated contracting parties.

. . . . “[W]e accept as true HSBC’s allegations of pervasive breaches of the representations made as to the mortgage loans and misleading omissions in the transaction documents, including the mortgage loan files, mortgage loan schedules, and prospectus supplements. Significantly, however, the complaints themselves affirmatively pleaded that the claims based on alleged breaches of the No Untrue Statement Provision were grounded in misrepresentations and omissions with respect to the Mortgage Loans, themselves. That is, HSBC claimed that it was defendant’s breaches of the Mortgage Representations — found in section 8 of the MLPAs, and expressly incorporated by reference in section 2.03 of each PSA — that were systemic in nature.

Indeed, HSBC alleged that certain appraisals included in the mortgage loan files were inflated and, thus, there was strong reason to believe that these appraisals did not conform to federal guidelines and professional standards, which would constitute a breach of the Mortgage Representation that each appraisal on file was so prepared prior to approval of the mortgage loan. Morever, HSBC claimed that misrepresentations in the mortgage loan files and missing or incomplete loan files constituted breaches of section 8 Mortgage Representations, specifically those representations made by defendant that no fraud was involved in the origination or servicing of the mortgage loans and that each mortgage loan arose out of the originator’s practice in accordance with its underwriting guidelines. The alleged deficiencies in the mortgage loan schedules were also grounded in violations of the Mortgage Representations — in particular, HSBC claimed that providing the purportedly flawed documents to the rating agencies violated defendant’s representation that it had provided such rating agencies with only true and correct information. Similarly, HSBC averred that certain statements in the prospectus supplements constituted breaches of the Mortgage Representations concerning appraisals and underwriting guidelines.

. . . Therefore, even accepting HSBC’s allegations as true and giving HSBC the benefit of every favorable inference, it is readily apparent from the face of the complaints that the alleged breaches of the No Untrue Statement Provision are, in fact, based upon alleged breaches of the Mortgage Representations. However, under both the MLPAs and the PSAs, the sole remedy for breaches of the Mortgage Representations is cure or repurchase. HSBC cannot subvert this exclusive remedies limitation” of liability by simply re-characterizing its claims. Rather, reading the contracts as a harmonious and integrated whole and honoring the exclusive remedy that these sophisticated parties fashioned, we conclude that the Sole Remedy Provision applies, precluding HSBC from seeking general contract damages for the particular claims challenged on this appeal.

(Internal quotations and citations omitted).

Judge Feinman dissented in part, concurring “that breaches of representations and warranties that would otherwise be subject to the sole remedy provision cannot escape this provision merely because they are systemic in nature,” but disagreeing with the majority on the question of whether “every claimed breach of the No Untrue Statement Provision was simply a breach of section 8 which HSBC had re-characterized as a breach of section 7,” and arguing that “[r]ather, in the Series 2006-FM2 and Series 2007-3 complaints, HSBC does not merely allege pervasive breach of the section 8 representations — which the majority is right to reject — but also breaches that by their own terms fell outside of the scope of section 8 in the first place.”

Judge Rivera dissented on both questions, arguing that general contract damages–while barred by the parties’ pooling and servicing agreement for allegations of loan-by-loan breaches, were available under the separate mortgage loan purchase agreement covering the sale of the loans as a remedy for systematic breaches of the seller’s representations and warranties, explaining:

Ultimately, if the risk of the loans in the pool had been correctly calculated, then it would make sense for defendant to repurchase or replace loans that violate the warranties, as this would be a small number. Yet, this scheme does not address large scale breaches where defendant intentionally manipulated the risk assessment by waiving in non-conforming loans. Interpreting section 7 to encompass transaction-wide claims furthers the purpose of the securitization because investors would not buy in if they could not rely on defendant’s business practices to adequately document and assess risk.

Schlam Stone & Dolan represents investors in RMBS actions against underwriters and trustees. If you or a client are RMBS investors and have questions regarding potential claims against a trustee or how to influence the trustee’s prosecution of a put back action like the one at issue in Nomura, contact Schlam Stone & Dolan partner John Lundin at

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Posted: December 19, 2017

CPLR 908 Requirement for Class Notice and Court Approval Applies to Not-Yet-Certified Class Actions

On December 12, 2017, the Court of Appeals issued a decision in Desrosiers v. Perry Ellis Menswear, LLC, 2017 NY Slip Op. 08620, holding that the CPLR 908 requirements for class notice and court notice apply even to not-yet-certified class actions.

In Desrosiers, the parties to putative class actions settled before class certification, raising (in different procedural contexts) the question of whether class notification and court approval were required to settle. The Court of Appeals first held that “[t]he text of CPLR 908 is ambiguous with respect to this issue,” and then went on to focus on the weight it should give to a 1982 First Department decision holding that CPLR 908 applied to settlements reached before certification. It explained:

In New York, the only appellate-level decision to address this issue as it pertains to CPLR 908 (other than the two decisions on appeal here) is Avena v Ford Motor Co. (85 AD2d 149 [1st Dept 1982]). In that case, the named plaintiffs settled with the defendant before class certification, and the settlement was without prejudice to putative class members. The trial court refused to approve the settlement without first providing notice to the putative class members. The Appellate Division affirmed that determination, concluding that CPLR 908 applied to settlements reached before certification. The First Department reasoned that the potential for abuse by private settlement at this stage is obvious and recognized, and that the named plaintiffs had a fiduciary obligation to disclose relevant facts to putative class members.

This Court has never overruled Avena or addressed this particular issue, and no other department of the Appellate Division has expressed a contrary view. Consequently, for 35 years Avena has been New York’s sole appellate judicial interpretation of whether notice to putative class members before certification is required by CPLR 908.

Generally, we have often been reluctant to ascribe persuasive significance to legislative inaction. We have distinguished, however, instances in which the legislative inactivity has continued in the face of a prevailing statutory construction. Thus, when the Legislature, with presumed knowledge of the judicial construction of a statute, forgoes specific invitations and requests to amend its provisions to effect a different result, we have construed that to be some manifestation of legislative approbation of the judicial interpretation, albeit of the lower courts. Stated another way, it is a recognized principle that where a statute has been interpreted by the courts, the continued use of the same language by the Legislature subsequent to the judicial interpretation is indicative that the legislative intent has been correctly ascertained. The underlying concern, of course, is that public policy determined by the Legislature is not to be altered by a court by reason of its notion of what the public policy ought to be.

Granted, the persuasive significance of legislative inaction in this context carries more weight where the legislature has amended the statute after the judicial interpretation but its amendments do not alter the judicial interpretation, or when the judicial interpretation stems from a decision of this Court or unanimous judgment of the intermediate appellate courts. Nevertheless, the fact that the legislature has not amended CPLR 908 in the decades since Avena has been decided is particularly persuasive evidence that the court correctly interpreted the legislature’s intent as it existed when CPLR 908 was enacted in light of developments occurring in the years after Avena was decided.

Specifically, in 2003, Federal Rules of Civil Procedure rule 23 (e) was amended to clarify that the district court must approve any settlement, voluntary dismissal, or compromise involving a “certified class,” and that the court must provide notice of such to “all class members who would be bound” by the proposal. Thus, under the current federal rule, mandatory approval and notice of a proposed settlement is now required only for certified classes.

That same year, the New York City Bar Association’s Council on Judicial Administration recommended several changes to CPLR article 9, including amendments to CPLR 908. The Council opined that, unlike the updated federal rule, CPLR 908 should continue to require judicial approval of settlement at the pre-certification stage, but that notice to putative class members before certification should be discretionary, not mandatory, and should be provided when necessary to protect members of the putative class. Various committees of the City Bar made the same recommendation in 2015. Notwithstanding these repeated proposals, and the legislature’s awareness of this issue, the legislature has left CPLR 908 untouched from its original version as enacted in 1975.

Thus, despite criticisms of the Avena decision, the 2003 amendment of the federal rule upon which CPLR 908 was modeled to address this situation, and specific and repeated calls to the legislature to amend the statute, the legislature has not amended CPLR 908, either to state that Avena was not a correct interpretation of its original intent or to express its revised, present intent. Under these circumstances, and in light of the legislative history discussed above, we conclude that the legislature’s refusal to amend CPLR 908 in the decades since Avena was decided indicates that the Avena decision correctly ascertained the legislature’s intent.

Any practical difficulties and policy concerns that may arise from Avena’s interpretation of CPLR 908 are best addressed by the legislature, especially considering that there are also policy reasons in favor of applying CPLR 908 in the pre-certification context, such as ensuring that the settlement between the named plaintiff and the defendant is free from collusion and that absent putative class members will not be prejudiced. The balancing of these concerns is for the legislature, not this Court, to resolve.

(Internal quotations and citations omitted).

This is a decision not just about class actions but also about how the Court of Appeals, New York’s highest court, decides cases where there is no precedent to guide it. Contact Schlam Stone & Dolan partner Richard Dolan at if you or a client have an appeal–or seeks permission to appeal–to the New York Court of Appeals.

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Posted: December 18, 2017

Court Declines to “Create Insurance Coverage Where None Exists” Based on Waiver Argument

On November 14, 2017, the First Department issued a decision in Illinois Union Insurance Co. v. Grandview Palace Condominiums Association, 2017  NY Slip Op. 07957, holding that an insured was not entitled to coverage under a property insurance policy where it failed to satisfy a policy condition — namely, that the insured “maintain automatic sprinkler systems in complete working order in all buildings in its multi-building condominium complex.  The Court rejected the insured’s argument that the insurance company had waived the condition or was estopped from asserting it as a defense to coverage, holding that a waiver/estoppel argument could not “create coverage where none exists under the policy.”

This decision illustrates the importance of satisfying policy conditions.  We have a great deal of experience advising clients regarding insurance coverage issues.  If you or a client have a questions regarding the terms of an insurance policy, contact Schlam Stone Partner Brad Nash.

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