Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: March 1, 2018

Court Of Appeals Holds That Res Judicata Effect Of Federal Judgment Extends To Unasserted Compulsory Counterclaims

On February 20, 2018, a divided Court of Appeals decided Paramount Pictures Corp. v. Allianz Risk Transfer AG, 2018 NY Slip Op 01150, affirming the First Department’s ruling that res judicata bars a party from asserting a claim in state court that constituted a compulsory counterclaim in a prior federal action.

In the prior action, the Allianz defendants had sued Paramount on various federal-law and state-law tort claims arising from their investment in a special purpose vehicle set up by Paramount. The federal action was dismissed based upon, inter alia, a covenant in the relevant agreements barring suits against Paramount. Then, Paramount filed its own action in New York County Supreme Court seeking damages from the investors arising from their breach of the covenant not to sue. The investors moved to dismiss on the grounds of res judicata, arguing that Paramount’s new claim was barred because it should have been raised in the federal action as a compulsory counterclaim under FRCP 13(a).

The Supreme Court (Oing, J.) denied the motion, ruling that New York was a permissive counterclaim jurisdiction counterclaims were not covered by res judicata. The First Department reversed, holding that the res judicata effect of federal judgement extended to compulsory counterclaims. The Court of Appeals granted leave to appeal and affirmed the First Department.

Judge Garcia, writing for a three-judge plurality, held that federal common law would determine the res judicata effect of the federal judgment, because the federal action contained both federal-law and state-law claims. The plurality then held that, under federal common law, the investors’ claims and Paramount’s counterclaim were the same “claim” for res judicata purposes, because they arose from “the same transaction or series of transactions . . . the same evidence [was] needed to support both claims, and [ ] the facts essential to the second were present in the first.”

Judge Rivera, in a two-judge concurrence, rejected as unnecessary the plurality’s decision to hold that federal common law determined the res judicata effect of a federal judgment addressing both federal-law and state-law claims. The concurrence noted that New York’s res judicata rules would result in the same outcome—res judicata is determined by the judgment’s effect in its home jurisdiction; the permissive-counterclaim rule only applies to New York judgments, not to judgments from mandatory counterclaim jurisdictions. In other words, “because the federal court would bar Paramount from filing a second action to pursue its breach of contract claim, that same claim is barred under res judicata in our New York courts.”

Finally, Judge Wilson dissented, arguing that two analyses should be performed—the state-law claims should have the res judicata effect of a forum-state judgment, and the federal-law claims should have the res judicata effect prescribed by common law, and if res judicata applied under either rule, res judicata would bar the subsequent action. Judge Wilson diverted from the plurality in his analysis of the federal common-law res judicata effects of the federal securities claim—for him, the proper question was whether a second judgment on the breach of contract claim would “nullify th[e] federal judgment or impair the rights established in the first action.” He rejected the “same transaction” analysis on the grounds that it would effectively subsume FRCP 13(a) into the common law of res judicata. Instead, he would hold that federal res judicata was narrower than FRCP 13(a), and that a second action arising from the same transaction could proceed in state court as long as it would not “nullify th[e] federal judgment or impair the rights established in the first action.” Because Paramount’s second lawsuit would not attack the first judgment, it should be allowed to proceed (regardless of whether it would be barred by FRCP 13(a) if it were filed in federal court).

Although the decision is divided and intricate, it does seem clear that—regardless of the method used—the res judicata effect of federal judgments extends to FRCP 13(a) compulsory counterclaims. Under the plurality’s reasoning, federal res judicata is functionally co-extensive with FRCP 13(a)’s mandatory counterclaim rule, and under the concurrence’s reasoning, New York would automatically follow federal res judicata, including FRCP 13(a).

Posted: February 28, 2018

Upcoming Arguments in the Court of Appeals in March

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

  1. Skanska USA Building, Inc. v Atlantic Yards B2 Owner, LLC (No. 38) (to be argued Tuesday, March 20, 2018) (“Contracts–Breach or Performance of Contract–Construction maintenance contract for construction of high-rise residential tower in the Atlantic Yards project in Brooklyn–whether the Appellate Division erred in its interpretation of Lien Law § 5 as it applied to the security provided for contractor payment in this project–nature of bond or undertaking required to be posted for labor and materials furnished for work on public improvement; corporations–piercing of corporate veil–whether the Appellate Division erred in finding that plaintiff failed to plead a veil-piercing claim; attorney and client–disqualification–whether the Appellate Division erred in declining to disqualify one of defendants’ law firms based on a conflict of interest.”)

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Posted: February 27, 2018

Indenture Trustee Can Bring Claims to Recover Losses Incurred by all Noteholders from Unpaid Notes

On February 20, 2018, the Court of Appeals issued a decision in Cortlandt St. Recovery Corp. v. Bonderman, 2018 NY Slip Op. 01149, holding that an indenture trustee can bring claims to recover losses incurred by all noteholders from unpaid notes, explaining:

An indenture is essentially a written agreement that bestows legal title of the securities in a single Trustee to protect the interests of individual investors who may be numerous or unknown to each other. As a partial solution to the collective-action problem presented by a fluctuating group of securities-holders with diverse interests, an indenture trustee is appointed to act as a type of agent on behalf of the securities-holders collectively. Unlike the ordinary trustee, who has historic common-law duties imposed beyond those in the trust agreement, an indenture trustee is more like a stakeholder whose duties and obligations are exclusively defined by the terms of the indenture agreement. Therefore, to determine the trustee’s authority to pursue the causes of action in the appeal before us, we look to the language of the indenture.

Under New York law, interpretation of indenture provisions is a matter of basic contract law, and we construe an indenture subject to the rule that a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms. It is well established that when reviewing a contract, particular words should be considered, not as if isolated from the context, but in the light of the obligation as a whole and the intention of the parties manifested thereby. . . . .

Indenture section 6.03, titled “Other Remedies,” states, in relevant part: “If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture.” Occurrences that would be considered an “Event of Default” are enumerated in section 6.01, and include a default in the payment of interest when due for 30 days, default in the payment of principal of any Note when due at its maturity, and the failure by Hellas I or Hellas Finance to comply for 60 days after notice with its other agreements contained in the indenture. Thus, by the terms of the agreement, the trustee is empowered to bring this third-party suit against the defendants in order to recover monies due and unpaid on the PIK notes.

(Internal quotations and citations omitted).

This decision relates to a significant part of our practice: litigation regarding structured finance transactions. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding litigation about financial products and services.

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Posted: February 26, 2018

Second Department Holds That Yellowstone Remedy Can Be Waived In A Commercial Lease

On January 31, 2018, the Second Department issued a decision in 159 MP Corp. v. Redbridge Bedford, LLC, 2018 N.Y. Slip Op. 00537, in which a divided Second Department panel upheld a decision by Justice Schmidt of the Kings County Supreme Court that denied a Yellowstone application and dismissed a declaratory judgment action seeking a ruling that the parties’ lease agreement was in full force and effect.

The procedural history followed a common pattern: the parties signed a commercial lease, four years later the landlord presented the tenant with a 10-day notice to cure, and, prior to the expiration of the cure period, the tenant (here, the plaintiff) commenced an action in Supreme Court seeking, inter alia, a declaration that the lease was in full force and effect, and a Yellowstone injunction preventing the cure period from expiring while the action was pending. (A Yellowstone injunction is a routinely-granted interim remedy in commercial lease disputes; it stays the running of any cure period while the existence of the underlying breach is determined by the court, thereby permitting the tenant to both contest the breach and then attempt to cure if they lose.) However, the landlord opposed the Yellowstone injunction on the grounds that the remedy was barred by the lease, which provided that tenant “waives its right to bring a declaratory judgment action with respect to any provision of this Lease or with respect to any notice sent pursuant to the provisions of this Lease. . . . It is further agreed that . . . it is the intention of the parties hereto that their disputes be adjudicated via summary proceedings.”

The IAS Court denied the Yellowstone application and dismissed the action:

The court reasoned that although the leases did not expressly prohibit Yellowstone applications, such relief was nevertheless encompassed within the broader provisions of Paragraph 67(H) in the riders that prohibited declaratory judgment actions. The court construed the waiver of declaratory remedies as an agreement to instead resolve contractual disputes through the mechanism of summary proceedings. The court further noted that the waiver of declaratory remedies did not prevent any of the parties from performing the agreements, or from commencing actions seeking damages for either breach of contract or tortious conduct. The court did not address whether the plaintiffs’ waiver of declaratory judgment remedies in Paragraph 67(H) of the riders violated public policy, as the issue had neither been raised in the pleadings nor in any of the papers submitted in connection with the plaintiffs’ motion or the defendant’s cross motion. Finding that all the plaintiffs’ claims were actual or disguised causes of action for declaratory relief, the court denied the plaintiffs’ motion and granted the defendant’s cross motion for summary judgment dismissing the complaint.

The Appellate Division affirmed. First, it held that the lease provision did in fact prohibit Yellowstone applications, finding that “a tenant’s preemptive action to have the court determine that the lease has not been breached is in the nature of declaratory judgment . . . . By nature and definition, a Yellowstone injunction springs from the declaratory judgment action that gives rise to it.” Accordingly, the fact that the lease term did not specifically mention Yellowstone applications was “of no moment.” Second, it held that a contractual prohibition on Yellowstone applications was not barred by public policy. The majority reasoned that the right to contract “is itself a sacred and protected public policy that should not be interfered with lightly,” that substantial rights were often waived by contract, especially in commercial leases (such as, for example, the right to a jury trial), and that the Legislature has already created a list of rights that may not be waived in an written or oral lease, which the courts should not supplement without good cause. More specifically, the majority held that “the right to a declaratory judgment, inclusive of the Yellowstone relief sought here, is not so vaulted as to be incapable of self-alienation;” and that the tenant’s retention of the right to other legal remedies (such as money damages) “mitigate[ed] the public policy concerns.”

In dissent, Justice Connolly agreed that the prohibition on declaratory judgments necessarily barred Yellowstone relief, but would have held that provision unenforceable as against public policy. The dissent argued that the right to a declaratory judgment was not just a personal benefit but also a social benefit: “The declaratory judgment action serves an important public policy function in resolving controversies before they escalate into a breakdown of the contractual relationship . . . . Thus, the declaratory judgment action promotes civility in contractual relations, allowing the parties to obtain a judicial interpretation of their rights and obligations so that, rather than suing for damages or specific performance after the fact, they may fulfill their promises to one another.” Specifically as relates to lease disputes, “the declaratory judgment action, together with the Yellowstone injunction, serve a valuable public policy role in relations between commercial landlords and tenants,” and “a summary proceeding does not provide an adequate substitute for the important rights forfeited by the broad waiver at issue here.” None of the waiveable rights enumerated by the majority “involve the fundamental and societally critical right of affirmative and meaningful access to the courts for judicial review, or a suitable substitute forum for dispute resolution.”

This decision is of great significance to any lawyer dealing with commercial leases or lease disputes—as the dissent noted, the tenant probably had no idea that it was waiving the right to obtain a Yellowstone injunction when it signed the lease, and a landlord’s ability to identify similar language in any particular lease will become a significant factor in future real estate litigation. It also remains to be seen whether the First Department will follow the majority or the dissent when this issue inevitably appears before it.

We litigate Yellowstone injunctions–a motion to prevent a landlord from evicting a commercial tenant of defaults under the lease–for both landlords and tenants. Contact Schlam Stone & Dolan of Counsel Niall D. Ó Murchadha at if you are involved in a dispute regarding the termination of a commercial lease because of a default under the lease.

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Posted: February 24, 2018

Claim for Referral Fees Barred by Statute of Frauds

On February 6, 2018, Justice Emerson of the Suffolk County Commercial Division issued a decision in MacKay v Paesano, 2018 NY Slip Op 50212(U), holding that a claim for referral fees was barred by the statute of frauds and could not be saved by the doctrine of partial performance, explaining:

The sixth cause of action alleges that the parties had an enforceable agreement, which the defendants breached by failing to compensate the plaintiff in accordance with its terms. Paesano seeks dismissal of this cause of action on the ground that it is barred by the statute of frauds.

Contrary to the plaintiff’s contentions, the statute of frauds, specifically General Obligations Law § 5-701 (a) (10), is applicable to the facts of this case. General Obligations Law § 5-701(a)(10) bars the enforcement of an oral agreement to pay compensation for services rendered in negotiating, inter alia, a business opportunity. Negotiating includes procuring an introduction to a party to the transaction or assisting in the negotiation or consummation of the transaction. An agreement to compensate a plaintiff for procuring customers for a defendant falls squarely within the broad language of General Obligations Law § 5-701(a)(10).

The plaintiff contends that the part-performance exception takes this matter out of the statute of frauds. The doctrine of part performance is purely an equitable doctrine, unrecognized at law. It, therefore, does not apply when the action is pleaded as one at law and seeks only money damages, without any specific prayer for equitable relief. While the plaintiff does not seek specific performance of the alleged oral agreement, he has asserted a cause of action for promissory estoppel.

Promissory estoppel eludes classification as either entirely legal or entirely equitable. When a plaintiff sues for contract damages and uses detrimental reliance as a substitute for consideration, the analogy is to an action at law. On the other hand, when a plaintiff uses promissory estoppel to circumvent application of the statute of frauds, the claim is more equitable in nature. To invoke the power that equity possesses to trump the statute of frauds, a plaintiff must demonstrate an “unconscionable” injury, which the plaintiff has not done in this case. In the absence of a claim for equitable relief, the doctrine of part-performance is not applicable.

Moreover, part-performance may be invoked only if the plaintiff’s actions can be characterized as unequivocally referable to the alleged agreement. It is not sufficient that the oral agreement gives significance to the plaintiff’s actions. Rather, the actions alone must be unintelligible, or at least extraordinary, and explainable only with reference to the oral agreement. In sum, the plaintiff’s actions must be inconsistent with any other explanation.

The actions upon which the plaintiff relies (studying for and passing the Series 65 Exam and his efforts to affiliate Frank MacKay Talent with Morgan Stanley) are not unequivocally referable to the alleged oral agreement. There are a myriad of reasons why the plaintiff may have become a Registered Investment Advisor and sought to affiliate with Morgan Stanley, including that he was acting on his own behalf. As previously noted, the record reflects that Frank MacKay Talent and Morgan Stanley executed a Professional Alliance Agreement in early 2013. Neither the defendants nor P.C. Wealth Management, which employs the defendants, are referred to anywhere in that agreement. Accordingly, the sixth cause of action for breach of contract is dismissed as barred by the statute of frauds.

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

Contract law–usually straightforward–has traps for the unwary, like the requirement that some contracts be in writing (the statute of frauds). And as this decision shows, sometimes there are ways to escape from those traps, but the exceptions are narrow and, as shown here, difficult to meet. Contact Schlam Stone & Dolan partner John Lundin at if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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Posted: February 23, 2018

All Risk Insurance Policy Did Not Cover Loss From Returning Property to Its Rightful Owner

On February 13, 2018, the First Department issued a decision in Dae Assoc., LLC v. AXA Art Ins. Corp., 2018 NY Slip Op. 01026, holding that an “all risk” insurance policy did not cover a loss from returning property to its rightful owner, explaining:

The all-risk policy at issue, which covered insured property for “all loss or damage to insured property,” did not apply to plaintiff art gallery’s contractual liability to purchasers of stolen artwork that was returned to its rightful owner. Defective title is clearly not a physical loss or damage from any external cause. Despite the fact that the phrase “loss or damage” in the policy was not qualified by terms such as “direct” or “physical,” we may not, under the guise of strict construction, rewrite a policy to bind the insurer to a risk that it did not contemplate and for which it has not been paid. Title insurance has been regarded as a separate type of contract not falling within any of the three basic classes of insurance. It is not reasonable to interpret a policy so broadly that it becomes another type of policy altogether.

(Internal quotations and citations omitted).

This post relates to insurance coverage, a topic that is an important part of our practice and that is the sole focus of Schlam Stone & Dolan’s Insurance Coverage Blog. Contact Schlam Stone & Dolan partner Bradley J. Nash, who heads the firm’s insurance recovery practice, at, if you or a client have questions regarding insurance coverage.

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Posted: February 22, 2018

Shareholder’s Failure to Help Run Company No Basis for Reducing His Shareholding

On February 13, 2018, Justice Kornreich of the New York County Commercial Division issued a decision in Stavroulakis v. Pelakanos, 2018 NY Slip Op. 50180(U), holding that a shareholder’s failure to help run a company was not a valid basis for reducing his shareholding, explaining:

To the extent defendants invoke the concept of “fairness” by contending that it was fair to cut plaintiff out of the Company because he was not working for it, . . . that contention is legally baseless. When the restaurants were opened and the Company was formed, the evidence shows the parties understood that only some of the shareholders would have to work for the Company. Those that did were paid a salary. Neither the BCL nor any executed shareholders’ agreement contains any requirement for plaintiff to work for the Company. Defendants do not dispute this fact. Rather, they relied on a subjective belief that plaintiff’s lack of contributions warranted taking plaintiff’s interest in the Company.

This belief is misguided at best and disingenuous at worst. Many businesses have passive investors. After the initial investment, the passive investor’s stake in the company may be worth far more than the amount invested. This is a good thing, and is an aspirational outcome in the minds of many who decide to chance their money on a fledgling business. If investors intend to condition an equity grant on the requirement of further contribution (either labor or capital), they must expressly agree to such a condition. The majority investors may not, as here, later decide that pari passu treatment of active and passive investors is not fair. Likewise, to the extent a majority believes a business would be better off without a problem shareholder, there is legal recourse available to them, such as a buyout or a freeze-out merger. The Shareholder Defendants did not avail themselves of these permissible options, but took all of the Company’s assets, leaving plaintiff with equity in an empty shell corporation. This is corporate malfeasance amounting to a breach of the Shareholder Defendants’ breach of their fiduciary duty of loyalty to the Corporation. They engaged in corporate waste and stole the Company’s corporate opportunities and gave them to their newly formed LLCs. Plaintiff has standing to prosecute these claims on the Company’s behalf given the Shareholder Defendants’ substantial likelihood (now, really, a guaranteed possibility) of personal liability.

(Internal 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: February 21, 2018

Derivative Action Dismissed for Failure to Plead Demand Futility With Particularity

On February 13, 2018, the First Department issued a decision in Retirement Plan for Gen. Empls. of the City of N. Miami Beach v. McGraw, 2018 NY Slip Op. 01027, dismissing a derivative action for failure to plead demand futility with particularity, explaining:

The motion court correctly dismissed the complaint, as plaintiffs failed to adequately plead, with particularity, that the demand requirement, pursuant to Business Corporation Law § 626(c), was excused.

Plaintiffs’ claim that six of the 12 members of the then current board of directors were self-interested is insufficient. Four of these director defendants are alleged to be interested based solely on ties with companies that received credit ratings from S & P, with no explanation as to how these affiliations compromised their independence in evaluating a demand. The mere fact of director defendant Robert McGraw’s fraternal relationship with director defendant Harold McGraw III, whom the complaint does not directly implicate in any misconduct, is insufficient to establish control. The claim of self-interest for the sixth director defendant, based upon a role at S & P which began in 2011, long after the alleged misconduct, is also insufficient.

Plaintiffs’ claims that the board of directors failed to fully inform themselves about S & P’s ratings of RMBS and CDOs, that they turned a blind eye to various red flags, and that their abdication of oversight of S & P’s business practices was so egregious that it could not constitute a valid exercise of business judgment, also lack the requisite particularity. The board’s regular meetings demonstrate that they were fulfilling their fiduciary obligations. Further, S & P took responsive action to the subpoenas and lawsuits filed, beginning in August 2007, concerning S & P’s rating of RMBS and CDOs, by, among other things, downgrading thousands of securities and announcing new measures to strengthen their ratings criteria and improve transparency.

(Internal quotations and citations omitted).

This decision illustrates the special pleading requirements for derivative actions (where a shareholder brings an action on behalf of a corporation). Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.

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Posted: February 20, 2018

Defendant Not Required to Produce Tax Returns

On February 15, 2018, the First Department issued a decision in Weingarten v. Braun, 2018 NY Slip Op. 01130, holding that a defendant was not required to produce tax returns in discovery, explaining:

While New York has a broad policy of discovery, favoring disclosure, disclosure of tax returns is disfavored because of their confidential and private nature, requiring the party seeking to compel production to make a strong showing of necessity and demonstrate that the information contained in the returns is unavailable from other sources. Here, plaintiff failed to identify the particular information the tax returns of Braun will contain and its relevance to the claims made here. How Braun put the allegedly improperly obtained property to use, e.g., by allegedly claiming a loss on his personal taxes, is extraneous to whether the property was, in fact, improperly obtained.

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

A big part of complex commercial litigation is giving, receiving and evaluating evidence (this is called “discovery”). The scope of discovery in New York is broad, but as this decision shows, it is not unlimited. Contact Schlam Stone & Dolan partner John Lundin at if you or a client has a question regarding discovery obligations (and what to do if a litigant is not honoring those obligations).

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Posted: February 19, 2018

Non-Party Properly Held in Contempt for Violating Stipulation and Order of Which He Had Knowledge

On February 6, 2018, the First Department issued a decision in Tishman Constr. Corp. v. United Hispanic Constr. Workers, Inc., 2018 NY Slip Op. 00795, holding a non-party in contempt for violating a stipulation and order, explaining:

The court properly found that appellants disobeyed the stipulation and order, which was negotiated by the parties and set forth the conditions for protests held by UHCW. These conditions expressed an unequivocal mandate of which appellants were well aware, and their violation of the order prejudiced plaintiffs’ right to conduct business without disturbance, thus justifying the finding of contempt.

The court properly exercised jurisdiction over Rodriguez, who is president of UHCW and who signed the 2012 stipulation and order that was subsequently violated. Although Rodriguez was not personally served in the action, it is undisputed that he was involved in the negotiation of the stipulation, and was knowledgeable of the conditions set forth therein. Furthermore, the evidence presented at the contempt hearing demonstrated that Rodriguez himself violated the court’s mandates. Under these circumstances, Rodriguez, even as a nonparty, can be punished for UHCW’s violations of the stipulation and order.

(Internal quotations and citations omitted).

No matter who you are or what kind of litigation you are involved in, you must obey the court’s orders. As this decision shows, even if you are not a party to a litigation, you can be punished for violating the court’s orders. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have have been accused of violating a court order.

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