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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: March 21, 2017

Vacatur Based on Releases Denied; Defendant Failed Timely to Raise Issue

On March 7, 2017, the First Department issued a decision in Grinshpun v. Borokhovich, 2017 NY Slip Op. 01662, affirming the denial of a motion for vacatur for failing timely to bring it, explaining:

Defendant failed to show, in support of vacatur pursuant to CPLR 5015(a)(2), that the agreements in which plaintiffs allegedly released him from liability could not have been previously discovered by the exercise of due diligence. Defendant has been in possession of the agreements since the inception of the litigation. While he claims that he was unable to access the agreements due to hurricane damage to his home office and marital difficulties, lack of access did not prevent him from alerting the court to their existence. Defendant claims that he did not know of the releases. However, he admits knowing that plaintiffs “promised to release him” and that, in consideration for one of the agreements, he was to be “left in peace.” This knowledge should have prompted further inquiry. At the very least, defendant should have brought the November 2006 release to the court’s attention when it was produced to his attorneys, one year before the instant motion was made.

(Internal citations omitted) (emphasis added).

Posted: March 20, 2017

Statute of Limitations Runs From When Contract is Signed, Not When it is Dated

On March 9, 2017, the First Department issued a decision in Natixis Real Estate Capital Trust 2007-HE2 v. Natixis Real Estate Holdings, LLC, 2017 NY Slip Op. 01796, holding that the statute of limitations on a claim for breaches of representations and warranties accrues when the contract is signed, not when it is dated, explaining:

We next examine Natixis’s argument that the entire action must be dismissed as untimely commenced. A breach of contract cause of action generally must be commenced within six years of the breach. Natixis contends that this action is time-barred because the PSA is dated “as of April 1, 2007,” but plaintiff did not sue until April 30, 2013, i.e., more than six years later. This type of argument has been rejected by this Court.

This Court has held that a claim for breach of warranty accrues at the time the contract is executed, not on its “as of” date.

Here, the PSA was executed on April 30, 2007. The Trust at issue closed on April 30, 2007. Moreover, the PSA defines “Closing Date” as April 30, 2007. Thus, April 30, 2013 (the date plaintiff commenced this action) was the last day on which plaintiff could sue, and the action is therefore timely.

Natixis sets forth no convincing reason why this Court should depart from stare decisis. On the contrary, this Court’s rationale in U.S. Bank N.A. makes perfect sense:

The claim cannot accrue earlier [than the date the contract is executed], because until there is a binding contract, there can be no claim for breach of warranty. Additionally, in the residential mortgage-backed securities . . . context, . . . the claim cannot generally accrue before the contract, because the trust that is the recipient of the representations and warranties typically does not come into existence prior to the closing of the transaction. Furthermore, the representations and warranties were made as of the closing date.”

(Internal citations omitted).

Posted: March 19, 2017

Assignment of Claim”Of Any Nature Whatsoever” Sufficient to Assign Tort Claims

On March 6, 2017, Justice Scarpulla of the New York County Commercial Division issued a decision in Optimal Strategic U.S. Equity Ltd. v. SPV OSUS Ltd., 2017 NY Slip Op. 50284(U), holding that the assignment of a claim “of any nature whatsoever” was sufficient to assign a tort claim, explaining:

Under New York law, absent language demonstrating an intent to do so, tort claims do not automatically pass to an assignee.

There must be some demonstrated and direct intent to assign claims sounding in tort in an assignment, but New York law does not require any specific language to accomplish the transfer of tort causes of action. Rather, words are sufficient which show an intention of transferring such rights.

The Banque Arabe court specifically held that the phrase “all of [the assignor’s] rights, title and interest” in a loan participation agreement was not demonstrative of an intent to assign a claim against the lead lender for rescission of that agreement based on fraud claims, concluding that this reference to the contract may be deemed insufficient under Fox to transfer claims for rescission or fraud in the inducement. Nevertheless, the Banque Arabe court did conclude there was a valid assignment of fraud claims as a result of broader language elsewhere in the assignment. There was also a transfer of all of the assignor’s rights and interest in the loan transaction, which was construed to be broader than an interest in the contract and, thus, sufficient to effect the assignment of tort claims based on fraud.

The Assignment at issue in this case, like the assignment in the Banque Arabe case, does much more than assign to SPV all of OSUS’s “rights, title and interest in and to the” Allowed Claim. Section 1 (b) of the Assignment also transferred to SPV “all rights and benefits of Assignor related to the Purchased Claim, including . . . (ii) any action or claim . . . of any nature whatsoever, whether against the Debtor or any other party, arising out of or in connection with the Purchased Claim” (emphasis added). This language plainly includes third-party tort claims, so long as the claims arise out of, or are in connection with, the Allowed Claim.

(Internal quotations and citations omitted).

Posted: March 18, 2017

Insurer Entitled to Judgment as a Matter of Law Based on Plaintiff’s Misrepresentations

On March 1, 2017, the Second Department issued a decision in Estate of Gen Yee Chu v. Otsego Mutual Fire Insurance Co., 2017 NY Slip Op. 01536, affirming the grant of judgment as a matter of law to an insurer based on the insured’s misrepresentations, explaining:

A trial court’s grant of a CPLR 4401 motion for judgment as a matter of law is appropriate where the trial court finds that, upon the evidence presented, there is no rational process by which the fact trier could base a finding in favor of the nonmoving party. In considering such a motion, the trial court must afford the party opposing the motion every inference which may properly be drawn from the facts presented, and the facts must be considered in a light most favorable to the nonmovant.

Applying these principles here, the Supreme Court properly granted the defendant’s motion for judgment as a matter of law. In order to establish the right to rescind an insurance policy, an insurer must show that its insured made a material misrepresentation of fact when he or she secured the policy. A misrepresentation is material if the insurer would not have issued the policy had it known the facts misrepresented.

Here, the plaintiff’s own testimony established that his house was structurally configured as a three-family dwelling, and thus, the statement on his insurance application indicating that it was a two-family dwelling was a misrepresentation. Although the plaintiff testified that he believed his house was a legal two-family dwelling, an insurer may rescind a policy if the insured made a material misrepresentation of fact even if the misrepresentation was innocently or unintentionally made. Further, the defendant established that the plaintiff’s misrepresentation was material through the uncontroverted testimony of its witnesses and documentary evidence, including its underwriting guidelines, which established that the defendant did not insure three-family dwellings, and would not have issued the subject policy if the plaintiff and his wife had disclosed that the house contained three dwelling units. Thus, there was no rational process by which the jury could have found in favor of the plaintiffs.

(Internal quotations and citations omitted).

Posted: March 17, 2017

Court Properly Granted Default Judgment; No Reasonable Excuse for Default

On March 1, 2017, the Second Department issued a decision in Jing Shan Chen v. R & K 51 Realty, Inc., 2017 NY Slip Op. 01541, affirming the grant of a default judgment because of lack of a reasonable excuse for the default, explaining:

To successfully oppose a motion for leave to enter a default judgment based on the failure to appear or timely serve an answer, a defendant must demonstrate a reasonable excuse for its delay and the existence of a potentially meritorious defense. Similarly, to extend the time to answer the complaint and to compel the plaintiff to accept an untimely answer as timely, a defendant must provide a reasonable excuse for the delay and demonstrate a potentially meritorious defense to the action. The determination of what constitutes a reasonable excuse lies within the trial court’s discretion. Here, the defendant’s principal’s unsubstantiated denial of receipt of the summons and complaint served through the Secretary of State did not amount to a reasonable excuse for the defendant’s default. Further, although the defendant’s principal averred that he learned of the action in January 2015, after the time to answer or otherwise appear had elapsed, the defendant failed to establish a reasonable excuse for not appearing in the action until several months later. Since the defendant failed to demonstrate a reasonable excuse for its default, we need not reach the issue of whether the defendant demonstrated the existence of a potentially meritorious defense.

(Internal quotations and citations omitted).

Posted: March 16, 2017

Attorney Release in Agreement Insufficient to Bind Attorney to Agreement’s Arbitration Clause

On March 2, 2017, the First Department issued a decision in Matter of Kramer Levin Naftalis & Frankel LLP v. Cornell, 2017 NY Slip Op. 01643, holding that an attorney release in a separation agreement was insufficient to bind that attorney to the agreement’s arbitration clause, explaining:

Respondents failed to demonstrate that the parties agreed to arbitrate the subject dispute. The potential future benefit, if any, flowing to petitioners from the attorney release in the separation agreement containing the arbitration clause is too attenuated to justify an exception to the usual rule that nonsignatories cannot be compelled to arbitrate. There is no evidence that petitioners knowingly exploited the benefits of the agreement. The allegations against petitioners show, if anything, that they may have exploited the contractual relation of the parties, but not the agreement itself.

Nor is there evidence to support respondents’ contention that petitioners used the signatories as their agents to obtain the attorney release. Moreover, while an agent may bind its nonsignatory principal to an arbitration agreement where the nonsignatory seeks to compel arbitration with another signatory, this is not a case in which a nonsignatory seeks to compel arbitration with a signatory.

(Internal quotations and citations omitted).

Posted: March 15, 2017

RMBS Fraud Claim Dismissed for Inability to Tie Losses to Misrepresentations

On March 2, 2017, the First Department issued a decision in Basis PAC-Rim Opportunity Fund (Master) v. TCW Asset Management Co., 2017 NY Slip Op. 01644, dismissing an RMBS fraud action on summary judgment for failure to tie the plaintiff’s losses to the defendant’s misrepresentations, explaining:

A fraud claim requires proof by clear and convincing evidence as to each element of the claim. One such element is causation, and to establish causation, plaintiffs must prove both that defendant’s misrepresentation induced plaintiffs to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiffs complain (loss causation). Transaction causation is akin to reliance, and requires only an allegation that but for the claimed misrepresentations or omissions, the plaintiff would not have entered into the detrimental securities transaction.

Loss causation is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff. To establish loss causation a plaintiff must prove that the subject of the fraudulent statement or omission was the cause of the actual loss suffered. Moreover, when the plaintiff’s loss coincides with a marketwide phenomenon causing comparable losses to other investors, the prospect that the plaintiff’s loss was caused by the fraud decreases, and a plaintiff’s claim fails when it has not proven that its loss was caused by the alleged misstatements as opposed to intervening events. Indeed, when an investor suffers an investment loss due to a market crash of such dramatic proportions that the losses would have occurred at the same time and to the same extent regardless of the alleged fraud, loss causation is lacking. Although the Loreley case concerned a motion to dismiss and thus focused on pleading requirements for loss causation, that court did note that whether plaintiffs can prove their allegations – and whether defendants in turn can proffer evidence that the CDOs would have collapsed regardless, due to the larger crash in the mortgage-backed securities market – are evidentiary matters for later phases of this lawsuit.

Here, TCW has proffered evidence that Dutch Hill would have collapsed regardless of the assets selected by TCW due to the housing market crash – a marketwide phenomenon causing comparable losses to other investors. TCW submitted an expert affidavit in which the expert opined that even if TCW had selected assets that complied with the Dutch Hill model and comported with TCW’s representations to Basis, Basis would still have suffered a loss due to an external and intervening cause – namely, the housing market crash. The expert conducted a common form of regression analysis to analyze the effect that macroeconomic factors had on pools of collateral consistent with Dutch Hill II’s core asset portfolio in order to create a benchmark against which to compare the performance of the loan pools analyzing the collateral in Dutch Hill II. The TCW expert found that any CDO backed by pools of loans consistent with Dutch Hill II’s core asset portfolio would have suffered losses as a consequence of the general market downturn. Ultimately, the expert concluded that Basis’s economic losses were caused by unforeseeable macroeconomic events.

In response, Basis failed to raise an issue of fact. Despite having pleaded in its amended complaint that TCW allowed Dutch Hill to contain toxic securities that performed significantly worse than a benchmark portfolio comprised of similar mortgage-backed bonds, Basis failed to produce any evidence that under the circumstances here involving the collapse of the RMBS market, it was TCW’s misrepresentations, rather than market forces, that caused the investment losses. Instead, Basis’s expert, in response, provided a general overview of the role of various players involved in CDO transactions as well as his opinion and interpretation of internal TCW emails discussing the investment vehicle at issue and the health of the market. However, Basis’s expert failed to address or even discuss Basis’s argument that no suitable collateral then existed and that TCW lied about its existence, and that this misrepresentation caused Basis to lose their entire investment. Basis’s expert did not analyze the quality or performance of the assets purchased by TCW. Basis’s expert’s conclusory assessment of the economic damages suffered by Basis addressed only transaction causation, stating that in the absence of fraudulent inducement and concealment, plaintiffs aver that Basis would not have invested $27,000,000 plus and would therefore not have suffered this total loss. This was insufficient to raise an issue of fact as to loss causation.

We do not mean to suggest that all cases in which a plaintiff alleges fraud will be unable to survive summary judgment in the event of a market collapse. However, in this case, it is Basis’s complete failure to meet its burden on the issue of loss causation that compels our decision.

(Internal quotations and citations omitted).

Posted: March 14, 2017

Past Consideration Received and Acknowledged Sufficient Consideration Under Contract

On February 28, 2017, the First Department issued a decision in Neo Universe Inc. v. Ito, 2017 NY Slip Op. 01491, holding that there had been sufficient consideration for a loan agreement and note, explaining:

Plaintiff Shinji Mitsunaga (plaintiff), principal of the corporate plaintiff, demonstrated his entitlement to judgment by the introduction of the Loan Agreement, the Promissory Note (Note), and plaintiff’s own testimony that defendant had not paid any portion of the debt owed under the Loan Agreement and Note. It was then defendant’s burden to demonstrate a lack of consideration, which he failed to do. Plaintiffs’ alleged failure to provide any evidence of the loan disbursement to defendant does not demonstrate a lack of consideration, as plaintiffs were not required to demonstrate that there was adequate consideration for the note. Defendant also incorrectly asserts that the Basic Contract does not contain any obligation on the part of defendant to personally guarantee or repay these monies. In fact, the Basic Contract, pursuant to which plaintiff testified that he loaned the money to defendant through defendant’s wife’s company, unequivocally identifies defendant as “B” in the agreement, and states that the money which plaintiff must give to defendant company shall be considered as a loan to B.

The trial court improperly found that plaintiff’s admission that he never gave any money to defendant in 2004 warranted dismissal of the complaint for lack of consideration for the Loan Agreement and Note, both executed in 2004. The Loan Agreement expressly states that plaintiff “is owed” the amount expressed in that agreement, clearly indicating that the debt owed was preexisting. This past consideration, the receipt and adequacy of which were both acknowledged by defendant in the Loan Agreement, is sufficient to enforce the debt instruments. Moreover, plaintiff’s own testimony with regard to the payments pursuant to the Basic Contract, executed in 2003, and the checks in evidence, executed between 2003 and 2004, support the existence of past consideration.

(Internal quotations and citations omitted).

Posted: March 13, 2017

Whether Insurer Waived Limitations Period By Seeking Information Creates Question of Fact

On March 2, 2017, Justice Singh of the New York County Commercial Division issued a decision in Anthony T. Rinaldi, LLC v. Anchorage Construction Corp., 2017 NY Slip Op. 30427(U), declining to dismiss a claim as time barred because of issues of fact as to whether an insurer waived the limitations defense, or was estopped from invoking it.

In Anthony T. Rinaldi, a contractor terminated a subcontract for cause and then sought coverage under a subcontract performance bond. The bond provided that any lawsuit must be commenced within one year after construction work under the subcontract ceased. As the end of the limitations period approached, the contractor was negotiating with the insurer, which sought additional information concerning the claim. According to the contractor’s counsel, the insurer gave assurances that “if any time was required to complete the determination process beyond the impending deadline to commence a legal action under the terms of the performance bond, [the insurer] would have no objection to agreeing to an extension.” However, when the contractor subsequently filed suit, the insurer moved to dismiss the claim as untimely.

The court explained the standards for governing a waiver of the statute of limitations, and the related doctrine of equitable estoppel:

While it is well established that an insurer’s request for documentation regarding an insured’s claim does not waive or toll a contractual limitations period, a contracting party may orally waive enforcement of a contract term notwithstanding a provision to the contrary.

However, waiver should not be lightly presumed and must be based on a clear manifestation of intent to relinquish a contractual protection. In order to establish waiver and avert summary judgment, plaintiff must show a clear manifestation of intent by defendant to relinquish the protection of the contractual limitations period. Generally, the existence of an intent to forgo such a right is a question of fact.

An estoppel rests upon the word or deed of one party upon which another rightfully relies, and, so relying, changes his position to his injury. A party may not, even innocently, mislead an opponent, and then claim the benefit of his deception. . . . Courts have found that an estoppel may be predicated upon evidence that the defendant, by resort to settlement negotiations, intended to lull the plaintiff into inactivity to induce it to continue negotiations until after the expiration of the time within which an action could be maintained.

(Citations omitted). Justice Singh proceeded to find issues of fact as to what assurances the insurer had given concerning the statute of limitations. Accordingly, he declined to dismiss the claim pending discovery.

One lesson here is not to rely on oral assurances that an adversary will waive a statute of limitations defense. Instead, get a written tolling agreement if settlement negotiations are ongoing and a limitations period is drawing to a close.

Posted: March 13, 2017

Allegations of Malicious Prosecution and Defamation Based on Allegations in Complaint Upheld

On February 28, 2017, the First Department issued a decision in Thomas v. G2 FMV, LLC, 2017 NY Slip Op. 01511, upholding claims for malicious prosecution and defamation based on allegations in a complaint, explaining:

Plaintiff alleges that, for improper purposes, defendants brought an action for a declaration that he resigned from G2 Investment Group, LLC without “Good Reason” under G2 FMV, LLC’s operating agreement.

The complaint states a cause of action for malicious prosecution. It pleads the absence of probable cause by alleging that no person of ordinary care and prudence would believe that plaintiff was not entitled to resign under the terms of the operating agreement. It pleads malice by alleging that defendants brought the declaratory judgment action for the purpose of silencing plaintiff as a whistle blower, causing damage to his reputation, and wrongfully denying him fair market value for his shares in G2 FMV. It pleads “special injury” by alleging with particularity that plaintiff had a consulting arrangement with Forbes Private Capital Group, LLC, and was terminated as a direct result of the allegations in the complaint in the declaratory judgment action.

The complaint states a cause of action for defamation. Because the declaratory judgment action was “a sham action,” defendants are not entitled to the protection of the absolute judicial privilege. Defendants’ allegations that they had “Cause” under the operating agreement to terminate plaintiff, but decided not to do so, have no bearing on the issue of “Good Reason.” Nor, contrary to defendants’ contention, did plaintiff consent to publication of the defamatory statements by opposing defendants’ motion to seal the complaint in the declaratory judgment action. . . . .

The complaint states causes of action for malicious prosecution and defamation as against the individual defendants who served as corporate officers by alleging that those defendants participated in the commission of the torts.

(Internal quotations and citations omitted).