Current Developments in the Commercial Divisions of the
New York State Courts
On August 15, 2017, the First Department issued a decision in LNYC Loft, LLC v. Hudson Opportunity Fund I, LLC, 2017 NY Slip Op. 06147, holding that, absent express authorization in the operating agreement, a New York limited liability company cannot appoint a non-member to a special litigation committee to evaluate a demand by a derivative plaintiff, explaining:
In Tzolis v Wolff, the Court of Appeals recognized the right of a member to sue derivatively on behalf of an LLC. The Court reasoned that the absence of a proposed article concerning derivative suits from the final legislative enactment did not mean that the legislature meant to render derivative suits nonexistent, observing that no legislator is known to have favored such an extreme result.
In the years since Tzolis was decided, courts have looked to New York statutory and common law on partnerships and corporations in determining certain questions arising in the LLC context. For example, it has been held necessary for a plaintiff suing derivatively on behalf of an LLC to allege presuit demand or demand futility, by analogy to section 626(c) of the Business Corporation Law. . . .
It is true, as defendants assert, that Tzolis encouraged courts to fashion remedies to speak to the omissions in the LLC statute. Nonetheless, we decline to uphold the appointment of an SLC where the relevant operating agreements do not delegate managerial authority to nonmembers or nonmanagers or otherwise provide for the appointment of an outsider to serve as an SLC. . . . That is not to say that the appointment of an SLC would in all cases be improper in the LLC context. Indeed, the members may so provide in the operating agreement, and such provision will be enforced in accordance with . . . the parties’ freedom to contract.
On August 15, 2017, the First Department issued a decision in Crabapple Corp. v. Elberg, 2017 NY Slip Op. 06144, holding that an LLC member should not have been removed from management without a hearing, explaining:
Elberg asserts that he is the sole managing member of the LLCs. His sister, nonparty Tamara Pewzner (Pewzner), asserts that their father, Jacob Elberg (Jacob), deceased, was the sole owner of the LLCs and that she is the LLCs co-manager by virtue of her status as the co-executor, along with Elberg, of Jacob’s estate. By virtue of that authority, Pewzner moved in the name of the LLCs to remove Ruben as a co-manager of the defendant entities, asserting, inter alia, that he had breached his fiduciary duties.
Contrary to his contention, Elberg was not removed as the sole “managing member” of the LLCs. The record demonstrates that he was a 40% minority member, not a managing member with the power to act unilaterally on the LLCs’ behalf. The relevant agreements contained no provision regarding the succession of management of the LLCs in the event of the death of Jacob, the majority member. Thus, Jacob’s controlling interest in the LLCs passed to his estate upon his death, and Elberg and Pewzner, the co-executors of the estate, had the authority to act as co-managers of the LLCs. LLC § 608 provides that the executor of a deceased member may exercise all of the member’s rights for the purpose of settling his or her estate.
In view of the foregoing, Elberg’s reliance on the business judgment rule is misplaced. As he was never the sole manager of the LLCs, the business judgment of the LLCs was never his to exercise unilaterally. However, given the conflicting submissions as to the rights of the parties vis-a-vis the LLCs and LPs, as well as whether completing the project or accepting the buyout was the best course of action, the motion court acted prematurely when it granted the motion to remove Elberg as co-manager without holding an evidentiary hearing. Questions of fact exist as to whether movants are entitled to the relief they seek.
(Internal quotations and citations omitted).
On August 2, 2017, Justice Emerson of the Suffolk County Commercial Division issued a decision in JBGR LLC v. Chicago Title Insurance Co., 2017 NY Slip Op. 51006(U), denying a motion to amend an answer filed after the Note of Issue date because of prejudice to the plaintiff, explaining:
While leave to amend a pleading should be freely given, the decision whether to grant such leave is within the court’s sound discretion, to be determined on a case-by-case basis. It must be delay coupled with significant prejudice to the other side, the very elements of the latches doctrine. When the action has already been certified ready for trial, judicial discretion in allowing amendments should be discrete, circumspect, prudent, and cautious. The court should note how long the amending party was aware of the facts upon which the motion was predicated and whether such party offers a reasonable excuse for its delay.
The record reveals that the defendant was aware of the facts upon which its motion is based as early as June 5, 2015, when it sent a letter to the court stating that it intended to move for leave to amend the answer to interpose “zoning” and fraud defenses. In the same letter, the defendant also sought permission to move simultaneously for summary judgment. By letters dated June 17, 2015, the plaintiffs objected to the defendant making a motion for summary judgment on the ground that it would be premature since discovery was not yet complete. Court records indicate that, at a conference on June 22, 2015, the court ruled that there would be no summary judgment motions until the close of discovery. Contrary to the defendant’s contentions, that ruling did not prevent the defendant from moving to amend its answer before moving for summary judgment. That the defendant wanted to make a combined motion does not, in this court’s opinion, constitute a reasonable excuse for the delay. Moreover, discovery is now closed and the case certified ready for trial. The defendant seeks to expand the existing defenses and assert six new defenses in its proposed amended answer. The court finds that, under these circumstances, the plaintiffs would be prejudiced if leave to amend were granted. Accordingly, the motion is denied.
(Internal quotations and citations omitted).
On August 9, 2017, the Second Department issued a decision in Hoeg Corp. v. Peebles Corp., 2017 NY Slip Op. 06066, holding that even where the contract had no merger clause, parol evidence should not have been considered in interpreting it, explaining:
A written agreement that is complete, clear, and unambiguous on its face must be enforced to give effect to the meaning of its terms and the reasonable expectations of the parties, and the court should determine the intent of the parties from within the four corners of the contract without looking to extrinsic evidence to create ambiguities. The parol evidence rule generally operates to preclude evidence of a prior or contemporaneous communication during negotiations of an agreement that contradicts, varies, or explains a written agreement which is clear and unambiguous in its terms and expresses the parties’ entire agreement and intentions. Where, as here, there is no merger clause, the court must examine the surrounding circumstances and the writing itself to determine whether the agreement constitutes a complete, integrated instrument.
Here, both a reading of the written retainer agreement and a consideration of the surrounding circumstances lead to the conclusion that the written retainer agreement is a complete written instrument, and, thus, evidence of what may have been agreed orally between the parties prior to the execution of this integrated written instrument cannot be received to vary the terms of the writing. The written retainer agreement was comprehensive in its scope and coverage and provided that, this agreement shall apply to all properties to be acquired and developed on behalf of the defendant.
(Internal quotations and citations omitted).
On August 3, 2017, following a 6-day bench trial, Justice Dufficy of the Queens County Commercial Division issued a decision in Kassab v. Kasab, 2017 NY Slip Op. 50986(U), ordering the majority shareholder of a family-owned corporation to buy out the minority owner’s shares, and failing that, ordering dissolution of the corporation.
At issue in Kassab was a real estate holding company, owned by two brothers on a 75/25 basis, which held title to two vacant lots in Jamaica, Queens where the brothers operated a parking lot. After a falling out, the older brother and 75 percent owner effectively shut his younger brother out of the business and engaged in “despotic decision-making practices with respect to considering options for the disposition of the real estate holdings of their corporation,” by, among other things, unilaterally rejecting offers to purchase or rent the property. In addition, the Court found that, after the filing of the petition for dissolution, the majority owner was underreporting income from the parking lot business, and diverting funds to himself.
Based on these findings, Justice Dufficy held that there were grounds to order the dissolution of the corporation under Section 1104-a of the Business Corporation Law and New York common law. He entered a judgment giving the majority shareholder ninety days to purchase the minority owner’s interest, at a price determined by the Court based on uncontroverted expert appraisals, without any discounts for lack of marketability. Failing that, the corporation is to be dissolved, its assets sold, and proceeds of sale distributed pro rata to the 25/75% interests of Nissim Kassab and Avraham Kasab.
One interesting aspect of the decision was the Court’s consideration of the post-petition oppressive conduct of the majority owner (e.g., diverting income for his personal enrichment and refusing to consult his brother on all business-related matters). In the equitable context of dissolution proceedings, such post-petition conduct is no less important than pre-petition conduct (indeed, post-petition conduct may also give rise to separate claims for breach of fiduciary duty, various derivative claims, and ultimately to a new dissolution petition). Therefore, it behooves both the petitioner and respondent in a dissolution proceeding to maintain clean hands and to keep consulting with their business partners even after the normal joint operation has been disrupted – because “despotic” and illegal conduct will be held against them.
NOTE: Schlam Stone & Dolan LLP represented the Petitioner Nissim Kassab in this case.
On August 7, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in Epiphany Community Nursery School v. Levey, 2017 NY Slip Op. 31668(U), holding that the two-year discovery rule did not save a fraud claim from being time-barred, explaining:
[A]ll of the claims in the complaint are dismissed as time-barred. While there are 13 causes of action, they all relate to one of two alleged schemes: (1) underpayment for the School’s afterschool and summer camp programs; and (2) money stolen from the School, justified by the provision of alleged fictitious services.
The first scheme occurred in 2002 and 2003, more than a decade before this action was commenced in 2016. There is no applicable New York statute of limitations longer than 6 years. The School recognizes this, but relies on CPLR 213(8), which provides that in an action based upon fraud, the time within which the action must be commenced shall be the greater of six years from the date the cause of action accrued or two years from the time the plaintiff or the person under whom the plaintiff claims discovered the fraud, or could with reasonable diligence have discovered it. It is well settled that the inquiry as to whether a plaintiff could, with reasonable diligence, have discovered the fraud turns on whether the plaintiff was possessed of knowledge of facts from which the fraud could be reasonably inferred.
Defendants contend that the School has always been in possession of the facts from which Hugh’s fraud could be reasonably inferred. They further aver that a reasonably prudent person, especially one that owes fiduciary duties to a non-profit by virtue of being its director (i.e., Wendy), could have discovered with basic diligence that the School was being defrauded. Defendants are correct. The financial terms of the Purchase Agreement were not a secret, nor was the fact that Magic never paid rent or the amounts due on the note. Magic’s nonpayment could easily have been ascertained by performing a cursory review of the School’s bank records.
Moreover, nothing prevented Wendy from ensuring that the terms of the Purchase Agreement were fair (e.g., by obtaining her own appraisal). Indeed, she had a fiduciary duty of care to do so. Under New York law, a director breaches her duty of care when she causes there to be a sustained or systematic failure to exercise oversight over the corporation’s activities.
To the extent the School complains that the Purchase Agreement’s terms were obviously unfair, the court does not disagree. If anything, that fact demonstrates the complete abdication of Wendy’s fiduciary duties. The most charitable reading of the complaint is that Wendy was asleep at the wheel and seemingly violated her duty of care. No reasonable director can justify being ignorant of the level of malfeasance of which the School complains. That Wendy trusted her husband implicitly is irrelevant. Wendy, as the School’s director, had the duty to ascertain the fairness of the Purchase Agreement’s terms and to make sure the School was paid what it was owed. Her knowledge and access to information is imputed to the School. Hence, the School cannot contend that it was not always in a position to discover Hugh’s fraud with reasonable diligence. Consequently, all of the School’s claims predicated on the Purchase Agreement and Magic’s failure to pay the School are dismissed as time-barred.
Turning now to the second category of claims – Hugh’s theft of money from the School, which was allegedly aided and abetted by Davie Kaplan – such claims also are time-barred. Defendants correctly contend that to the extent the Complaint alleges wrongdoing occurring before August 31, 2010-the vast majority of the Complaint-such allegations are barred by the statute of limitations. s with the first category of claims, the School relies on CPLR 213(8) and contends that the discovery period should not begin to run until the School supposedly discovered the fraud within two years of its commencement of this action. In support of this contention, the School avers that Hugh’s scheme was financially sophisticated and concealed with complex accounting shenanigans that made it impossible to detect by a layman such as Wendy. The court disagrees.
As defendants correctly respond, there is no financial alchemy afoot. A simple review of the School’s bank statements would reveal that Hugh transferred nearly $6 million to himself and his companies. While the School complains that Wendy gave Hugh the power to manage its bank accounts, the School cannot credibly contend that Wendy lacked the ability and legal right to obtain and review such records, which would have revealed Hugh’s defalcations. Nor can the School credibly contend that it could not have determined the sham nature of the pretextual services Hugh proffered to justify the pilfering. A corporation and its board may not claim ignorance of its contractors’ services (or lack thereof). The School and Wendy are charged with the knowledge of the millions taken by Hugh, which would have impelled a reasonable person to inquire of Hugh his justifications for taking such amounts. If the answer, presumably, was his supposed services, Wendy, who ran the School, would have been in a position to know if such services were proffered and if agreements to pay the amounts existed. Simply put, reasonable diligence easily would have revealed the fraud. Consequently, the School cannot avail itself of CPLR 213(8)’s two-year-from-discovery rule.
(Internal quotations and citations omitted).
On July 21, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in Cargill Soluciones Empresariales, S.A. De C.V., SOFOM, E.N.R. v. Desarrolladora Farallon S. de R.L. de C.V., 2017 NY Slip Op. 31650(U), awarding judgment and damages on a conversion claim even though the defendant returned the converted funds, explaining:
A conversion takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person’s right of possession. Two key elements of conversion are (1) plaintiffs possessory right or interest in the property and (2) defendant’s dominion over the property or interference with it, in derogation of plaintiffs rights. Where the property is money, it must be specifically identifiable and be subject to an obligation to be returned or to be otherwise treated in a particular manner. The funds of a specific, named bank account are sufficiently identifiable.
There is no question of fact that Rivera converted the $15 million for approximately 18months. Farallon has admitted that Diaz Rivera directed approximately US$15 million of Resort revenues to the Banorte Account in 2013 and 2014, a practice that was finally ended when Cargill SOFOM obtained the Cash Management Order in the SNDA Action on July 8, 2014, directing Capella to give Cargill SOFOM control over the Resort’s cash and finances. This is a textbook example of conversion. While SOFOM does not seek summary judgment on damages, the court rejects defendants’ argument that the conversion claim should be dismissed for lack of damages. While the $15 million was eventually returned, SOFOM lost the right to use that money for approximately 18 months. That money could have been placed in an interest-bearing account, and certainly could have been used for other business purposes. Regardless, even if no actual damages were suffered, damages are not an element of a conversion claim. On the contrary, once a conversion of money is established, the plaintiff is entitled to statutory pre-judgment interest. Summary judgment on liability, therefore, is granted to SOFOM on its conversion claim against Farallon and Rivera. At a minimum, SOFOM will be awarded pre-judgment interest on the converted amount for the approximately 18 months it was in the Banorte Account.
(Internal quotations and citations omitted).
Upcoming arguments in the Court of Appeals that may be of interest to commercial litigators include:
- Princes Point v. Muss Development (to be argued Tuesday, September 5, 2017) (Vendor and Purchaser–Contract for Sale of Real Property–Whether prospective purchaser of real property commits anticipatory breach of contract by commencing an action against sellers for rescission of the contract before the closing date–Whether sellers are required to establish that they are ready, willing and able to close after buyer’s anticipatory breach in order to retain the deposit and certain other payments as liquidated damages.”). See our previous post about the First Department’s decision here.
- Excess Line Association of New York (ELANY) v. Waldorf & Associates (to be argued Thursday, September 7, 2017) (“Parties–Capacity to Sue–Governmental entities–Whether plaintiff association has capacity and standing to sue one of its members to compel compliance with its plan of operation or to recover stamping fees.”) See the Second Department’s decision here.
- Garthon Business v. Stein (to be argued Tuesday, September 12, 2017) (“Arbitration–Agreement to Arbitrate–Successive agreements–whether the Appellate Division correctly held that, as to claims that arose when the first agreement at issue was in force, the forum selection clause in the first agreement, which stated that disputes would be resolved in the courts of the United States of America, survived certain subsequent agreements that terminated prior agreements, contained merger clauses and clauses requiring arbitration of disputes–whether claims that otherwise would be subject to arbitration should be litigated in court because they are ‘inextricably bound’ to claims arising under the first agreement–whether court or arbitrators should decide issue of arbitrability; whether the Appellate Division correctly granted plaintiffs’ motion for discovery on the issues of personal jurisdiction and alter ego.”). See our previous post on the First Department’s decision here.
On August 3, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in AGE Group, Ltd. v. Martha Stewart Living Omnimedia, Inc., 2017 NY Slip Op 31639(U), holding that lost profits were recoverable as general rather than consequential damages, explaining:
MSLO also wrongly contends that this case may be dismissed if AGE cannot prove, without resort to impermissible speculation, that it suffered damages proximately caused by MSLO’s breach. It is well settled that nominal damages may be awarded on a breach of contract claim. Therefore, summary dismissal is not appropriate.
That said, AGE has developed a record on which it might be capable of proving damages in the form of the profits it would have earned on Pet Product sales had MSLO not breached. It is the law of the case that AGE may seek such damages. Indeed, the only damages AGE could have suffered from MSLO’s breach are the profits it lost the opportunity to make on the MSLO Agreement. Contrary to MSLO’s contentions, where, as here, the lost profits are the direct and immediate fruits of the contract, and not purely related to collateral business dealings, such lost profits are recoverable as general (as opposed to consequential) damages. Even if AGE’s lost profits were considered collateral to the contact because they involved sales to another retailer, they could still be recoverable if (1) it is demonstrated with certainty that the damages have been caused by the breach, (2) the extent of the loss is capable of proof with reasonable certainty, and (3) it is established that the damages were fairly within the contemplation of the parties. These factors are issues for trial and not amenable to resolution on this summary judgment motion. At trial, AGE may seek to recover lost profits if it can establish they were the natural and probable consequence of defendant’s breach.
(Internal quotations and citations omitted) (emphasis added).
On August 8, 2017, the First Department issued a decision in Bovis Lend Lease (LMB), Inc. v. Arch Insurance Co., 2017 NY Slip Op. 06049, holding that an insured forfeited its right to indemnification by entering into a settlement without its insurer’s permission, explaining:
Under paragraph 4 of the parties’ Companion Agreement, Bovis was required to obtain Arch’s consent to the settlement of the claims and counterclaims asserted by and against Bovis and Lower Manhattan Development Corporation (LMDC), in order to seek indemnification from Arch. Bovis’s contractual remedy in the event of Arch’s refusal to consent to a settlement, whether or not such refusal was reasonable, was to be indemnified by Arch “for all damages suffered in excess of the result that [Bovis] would have obtained if the settlement had been accepted.” By entering, contrary to the plain terms of the Companion Agreement, into a settlement with LMDC to which Arch had refused to consent, Bovis breached the Companion Agreement and forfeited its right to the contractual remedy for Arch’s refusal to consent to a settlement acceptable to Bovis, whether or not Arch withheld its consent in good faith. Accordingly, Arch is entitled to summary judgment dismissing Bovis’s third-party claim against it.