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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: December 17, 2017

Party That Agreed That Arbitrator Did Not Have to Hold Hearing Cannot Vacate Award For Failure to Hold Hearing

On December 1, 2017, Justice Bransten of the New York County Commercial Division issued a decision in 1414 Holdings, LLC v. BMS-PSO, LLC, 2017 NY Slip Op. 32551(U), holding that a party that agreed that an arbitrator did not have to hold a hearing cannot get that arbitrator’s award vacated for failure to hold a hearing, explaining:

CPLR § 7506(b) provides that an arbitrator designates a time and place for a hearing and notify the parties in writing personally or by certified mail not less than eight days before the hearing. At such a hearing, the parties are entitled to be heard, present evidence, and cross-examine witnesses. See CPLR § 7506(c). These requirements may be waived by the parties’ written consent, or by continuing with the arbitration process without objection. See CPLR § 7506(f).

Here, the Landlord signed a Retainer Agreement with Arbitrator Nygard which left the issue of a formal hearing to the arbitrator’s discretion. Arbitrator Nygard then determined that a formal hearing would not be necessary under the terms of the lease agreement. In doing so, the parties waived their right to be heard in a formal proceeding in the event the arbitrator determined a formal hearing was not necessary. Petitioner has failed to provide any evidence of objection to the arbitrator’s decision not to hold a formal hearing pending Arbitrator Nygard’s May 13, 2016 email. Thus, if the Petitioner did not agree to leave the issue of a hearing to the arbitrator’s discretion, the Petitioner should not have agreed, vis-à-vis counsel’s signature, to the conditions contained in Arbitrator Nygard’s Retainer Agreement. The Petitioner should have, instead, looked for an alternative Arbitrator within the time provided by the Lease, or, sought to utilize the contingency provided in the Lease Agreement, an Arbitrator from the American Arbitration Association.

(Internal quotations and citations omitted).

Commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.

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Posted: December 15, 2017

Fraud Claim Dismissed for Failing to Plead Scienter With Particularity

On December 12, 2017, the First Department issued a decision in Fried v. Lehman Brothers Real Estate Associates III, L.P., 2017 NY Slip Op. 08638, affirming the dismissal of a fraud claim for failure adequately to plead scienter with particularity, explaining:

The first and second causes of action, alleging fraudulent misrepresentation and gross negligence in misrepresentation, failed to satisfy the pleading requirements of CPLR 3016(b). The allegations of scienter here were not pleaded with the requisite particularity, but are conclusory, and scienter may not reasonably be inferred from the circumstantial evidence relied on by plaintiffs.

(Internal citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements such as the particularity requirement at issue in this decision. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a fraud-based claim.

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Posted: December 14, 2017

Holder of Promissory Notes Payable to Another Must Establish How It Came to Possess Them to Enforce Them

On December 5, 2017, the First Department issued a decision in 26th LS Series Ltd. v. Brooks, 2017 NY Slip Op. 08487, holding that the holder of promissory notes payable to another must establish how it came to possess them in order to enforce them, explaining:

The notes at issue were expressly payable to Ruby, and the record includes no proof that they were endorsed in blank, or to Teleios, or plaintiff. To the extent plaintiff is in possession of the original notes and related documents, it is a nonholder in possession, and, to enforce the notes against defendants, must account for its possession of them by proving the transactions through which it acquired them. Plaintiff asserts on appeal that the notes were endorsed to it after submission of the cross motion, but this cannot be confirmed on the record before us; moreover, plaintiff does not show how such belated endorsement suffices for present purposes.

As a nonholder, it does not matter that plaintiff is in possession of the instruments now, if it cannot show Teleios acquired them from Ruby before selling them to plaintiff. The court properly recognized that plaintiff had not made this showing as a matter of law, given material issues of fact as to whether or when the Ruby/Teleios transaction closed, what if any consideration may have been paid for the notes, and why new notes, payable to Teleios, were apparently not issued.

As these material factual issues concerning plaintiff’s chain of title to the instruments preclude summary enforcement of the instruments in plaintiff’s favor, they also necessarily preclude plaintiff’s summary enforcement of its alleged security interest in the life insurance policies securing those instruments.

(Internal quotations and citations omitted).

Promissory notes are legal documents that can provide the holder strong rights against the maker of the notes. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding the enforcement of a promissory note.

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Posted: December 13, 2017

Fraud Claim Should Not Have Been Dismissed as Time-Barred; Question of Fact Existed Regarding When Fraud Should Have Been Discovered

On December 5, 2017, the First Department issued a decision in Berman v. Holland & Knight, LLP, 2017 NY Slip Op. 08489, holding that a fraud claim against a law firm should not have been dismissed because there was a question of fact regarding when the fraud should have been discovered, explaining:

The two-year discovery provision does apply to actual fraud (first cause of action). The issue of when a plaintiff, acting with reasonable diligence, could have discovered an alleged fraud involves a mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily on statute of limitations grounds. Instead, the question is one for the trier-of-fact. One cannot say, as a matter of law, that the Internal Revenue Service’s July 2007 deficiency notice, which mentioned only nonparty Derivium, placed plaintiffs on inquiry notice of defendant’s alleged fraud. Plaintiffs plausibly allege that, until defendant produced its file on January 8, 2015 in response to a motion to compel in Tax Court, they had no inkling of its purported fraud. Unlike the subprime crisis in Aozora Bank, Ltd. v Deutsche Bank Sec. Inc., Derivium’s fraud was not common knowledge.

It is true that plaintiffs sued Derivium’s clearing broker-dealers in March 2010. However, plaintiffs would have had far more reason to suspect Derivium’s brokers than their own attorneys. Plaintiffs were entitled to place ultimate trust and confidence in defendant, who represented them.

(Internal quotations and citations omitted).

It is not unusual for the statute of limitations to be an issue in complex commercial litigation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether claims are barred by the statute of limitations.

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Posted: December 12, 2017

Cause of Action for Damage to RMBS Trust Occurs Where Trust is Located

On December 5, 2017, the First Department issued a decision in Deutsche Bank Natl. Trust Co. v. Barclays Bank PLC, 2017 NY Slip Op. 08459, holding that a cause of action for damage to an RMBS trust accrues where the trust is located, explaining:

In 2013, plaintiff commenced the two above-captioned actions, each solely in plaintiff’s capacity as trustee of one of two trusts. In each action, plaintiff asserts, as relevant to this appeal, a cause of action for breach of contract based on each defendant’s alleged breaches of the representations and warranties it had made in connection with the sale, in 2007, of the residential mortgage-backed securities that are pooled in the relevant trust. Each defendant moved to dismiss the action against it, arguing, in pertinent part, that, because plaintiff’s principal place of business is in California, plaintiff’s contractual claim is barred by California’s four-year statute of limitations, pursuant to the borrowing statute (CPLR 202), although it is conceded that the claims would be timely under New York’s six-year statute of limitations. Upon defendants’ respective appeals from Supreme Court’s denial of this aspect of their motions, we reverse.

CPLR 202 requires that an action brought by a nonresident plaintiff, based upon a cause of action accruing without the state, be timely under the respective statutes of limitations of both New York and the place without the state where the cause of action accrued. In Global Fin. Corp. v Triarc Corp., the Court of Appeals set forth the general rule that, in cases where (as here) the alleged injury is purely economic, a cause of action is deemed, for purposes of CPLR 202, to have accrued in the jurisdiction of the plaintiff’s residence.

Plaintiff, a California domiciliary, argues that the plaintiff-residence rule of Global Financial — a case in which the plaintiff was a corporation suing to recover for an injury to itself — should not be applied here, where plaintiff is suing solely in its capacity as trustee of the subject trusts. Rather, plaintiff argues that we should apply the multi-factor test used in Maiden v Biehl, which also dealt with a trustee-plaintiff, to determine where the injury occurred. However, we need not decide whether the plaintiff-residence rule or the multi-factor test applies in this context because, even under the multi-factor test, we find that the injury/economic impact was felt in California and the claims are thus deemed to have accrued there.

Initially, it is undisputed that the domiciles of the trust beneficiaries, which are in various jurisdictions, do not provide a workable basis for determining the place of accrual. As to the New York choice-of-law clauses of the relevant agreements, because these provisions do not expressly incorporate the New York statute of limitations, they cannot be read to encompass that limitation period. By contrast, the subject trust in each action comprises a pool of mortgage loans, originated by California lenders and encumbering California properties, either exclusively (in the Barclays case) or predominantly (in the HSBC case), and, as previously discussed, administered in California by plaintiff, a California-based trustee. Further, it is undisputed that the relevant pooling and servicing agreement (PSA) for each trust contemplates the payment of state taxes, if any, in California. To the extent the physical location of the notes memorializing the securitized mortgage loans has relevance to the analysis, each trust’s PSA contemplates that the notes may be maintained in California, but neither contemplates maintaining the notes in New York.

(Internal quotations and citations omitted).

This decision touches on two areas of commercial litigation that are a significant part of our practice. It is not unusual for the statute of limitations to be an issue in complex commercial litigation. And the particular issue here–the rule in CPLR 202 that the statute of limitations used by a New York court sometimes is the statute of limitations of another state (or even country) is an issue our clients, which are located all over the world, sometimes face. Moreover, we are involved in a number of RMBS litigations. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding which statute of limitations applies to an action brought by a non-New York litigant or claims regarding RMBS or other asset-backed securities.

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Posted: December 11, 2017

Derivative Action Plaintiff Loses Standing–And Action Must Be Dismissed–If It Sells Its Ownership Interest

On December 6, 2017, the Second Department issued a decision in Jacobs v. Cartalemi, 2017 NY Slip Op. 08506, holding that a derivative action plaintiff loses standing–and the action must be dismissed–if it sells it ownership stake in the company on behalf of which the plaintiff is suing, explaining:

Members of a limited liability company (LLC) may bring derivative suits on the LLC’s behalf. In a derivative suit, the remedy sought is for wrong done to the corporation; the primary cause of action belongs to the corporation; and recovery must enure to the benefit of the corporation. In the context of a corporation, the standing of the shareholder is based on the fact that he or she is defending his or her own interests as well as those of the corporation. Where the plaintiff voluntarily disposes of the stock, his or her rights as a shareholder cease, and his or her interest in the litigation is terminated. Being a stranger to the corporation, the former stockowner lacks standing to institute or continue the suit. The same is true in the context of an LLC. In order to maintain a derivative cause of action, a plaintiff must be a member of the LLC. Thus, the Supreme Court properly held that, once the plaintiff withdrew from WIC, he lost standing to maintain any derivative causes of action on behalf of the company, notwithstanding his possible right to a future payment for the value of his membership interest upon his withdrawal.

In light of the plaintiff’s lack of standing to maintain derivative causes of action on behalf of WIC, the Supreme Court properly granted those branches of the defendants’ motion which were for summary judgment dismissing the second, fourth, and fifth causes of action. Allegations of mismanagement or diversion of assets by officers or directors to their own enrichment, without more, plead a wrong to the corporation only, for which a shareholder may sue derivatively but not individually. The subject causes of action, which sought damages for breach of fiduciary duty and waste, and the imposition of a constructive trust, respectively, were all based on alleged wrongs that were committed against WIC and not the plaintiff individually.

For those same reasons, the Supreme Court should have granted that branch of the defendants’ motion which was for summary judgment dismissing the first cause of action, which sought an accounting. The right to an accounting is premised upon the existence of a confidential or fiduciary relationship and a breach of the duty imposed by that relationship respecting property in which the party seeking the accounting has an interest. Here, the plaintiff’s right to an accounting was based on his ability to prove that Cartalemi breached his fiduciary duty to WIC, a claim that is entirely derivative and which the plaintiff, having withdrawn as a member from WIC, no longer had standing to maintain.

(Internal quotations and citations omitted).

This decision touches on two areas of commercial litigation that are a significant part of our practice: derivative actions (where a shareholder brings an action on behalf of a corporation) and business divorce (a break-up between the owners of a closely-held business). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding either of these issues.

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Posted: December 10, 2017

Claim for Misappropriation of Ideas Dismissed on Summary Judgment

On November 14, 2017 Justice Sherwood of the New York County Commercial Division issued a decision in Schroeder v. Cohen, 2017 NY Slip Op. 32463(U), dismissing a claim for misappropriation of ideas, explaining:

This cause of action for misappropriation of ideas requires proof of two elements: (1) a legal relationship between the parties in the form of a fiduciary relationship, an express contract, implied contract, or quasi contract; and (2) an idea that is novel and concrete. In accordance with the First Department’s determination, plaintiffs’ claim for idea misappropriation cannot extend to material in the public domain. It is plaintiffs’ burden to establish proof of novelty and courts apply a stringent test in determining whether an idea qualifies as novel. Novelty requires a showing of true innovation, not merely that a particular idea has not been used before.

Although plaintiffs claim that their ideas and concepts are novel, it is unclear what ideas were allegedly misappropriated by Cohen. In any event, plaintiffs cannot sustain a claim for idea misappropriation because they have not identified any ideas that are not in the public domain. For example, the use of infinite scroll was not invented by plaintiffs, was a common technique used by web developers, and was a feature that could be publicly seen on the Rendezvoo website. Further, plaintiffs cannot rely on a combination of public ideas to satisfy the novelty requirement, because a combination of pre-existing elements is not considered novel..

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

The law protects intellectual property in a number of ways, but that protection is not unlimited; indeed, as this decision shows, in some ways it can be very limited. We frequently litigate intellectual property claims, including trademark, copyright and trade secret claims. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions about whether you have, or face, a claim for theft or infringement of intellectual property.

Posted: December 9, 2017

Conversion Claim Cannot be Based on Money Owed By Contract

On November 22, 2017, Justice Masley of the New York County Commercial Division issued a decision in Caring Professionals, Inc. v. Catholic Health Care System, 2017 NY Slip Op. 32491(U), dismissing a claim for conversion because it sought money owed by contract, explaining:

The claim against the Agencies for conversion is dismissed. 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) plaintiff’s possessory right or interest in the property and (2) defendant’s dominion over the property or interference with it, in derogation of plaintiff’s rights. Where, as here, the conversion claim pertains to money, the funds must be specifically identifiable and be subject to an obligation to be returned or to be otherwise treated in a particular manner.

Provider alleges that the Agencies sought reimbursement from Medicaid for the services rendered by Provider, but failed to pay Provider, using the money for other purposes. However, this allegation does not establish that Provider had an immediate possessory interest in such funds or that they were segregated in a specifically identical manner for Provider’s benefit. Although the complaint·notes that, under 18 NYCRR § 515(2)(b)(4), the “conversion” of funds is listed as an unacceptable practice, that language does not purport to employ the legal definition of “conversion,” and even if it did, a claim for conversion has not been pled for the reasons stated above.

Furthermore, a cause of action for conversion cannot be predicated on a mere breach of contract and the conversion claim here relies upon no facts other than those underlying the contract claim, i.e., the Agencies failed to pay Provider for its services.

(Internal quotations and citations omitted).

This case illustrates a common misuse of a conversion claim. Yet there are circumstances where a claim for conversion will apply to money as well as tangible objects. We have litigated such issues many times. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions about the applicability of legal theories such as conversion and unjust enrichment to claims for money.

Posted: December 8, 2017

50% Shareholder Must Bring Derivative Action, Not Action in Name of Corporation, Against Other 50% Shareholder

On November 9, 2017, Justice Ramos of the New York County Commercial Division issued a decision in U-Trend N.Y. Inv. L.P. v. US Suite LLC, 2017 NY Slip Op. 32502(U), holding that a 50% shareholder could not bring an action in the name of the corporation against the other 50% shareholder and instead must bring a derivative action, explaining:

Where there are only two stockholders each with a 50% share, an action cannot be maintained in the name of the corporation by one stockholder against another with an equal interest and degree of control over corporate affairs. The proper remedy in such a circumstance is a shareholder’s derivative action. Thus, if it is ultimately determined that Aura and U-Trend both had equal control of HSI, U-Trend’s derivative claim, in the name of HSI without naming any HSI directors as defendants, would render its claim non-viable.

(Internal quotations and citations omitted).

This decision touches on two areas of commercial litigation that are a significant part of our practice: derivative actions (where a shareholder brings an action on behalf of a corporation) and business divorce (a break-up between the owners of a closely-held business. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding either of these issues.

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Posted: December 7, 2017

Court Awards Fees to Prevailing Party But Refuses to Award Fees on Fees

On November 22, 2017, Justice Scarpulla of the New York County Commercial Division issued a decision in Park Union Condominium v. 910 Union St., LLC, 2017 NY Slip Op. 32487(U), awarding attorneys’ fees, plus interest on the fees, but refusing to award fees on fees.

In Park Union Condominium, the plaintiff sought an award of fees, interest and fees on fees. The court granted the first two claims but denied the last, explaining:

In general, a party must pay his or her own attorney’s fees unless an award is authorized by an agreement between the parties, or by statute or court rule. . . . .

According to the Condominium and Board, they are entitled to an ·award of their costs, expenses and attorneys’ fees pursuant to Section 16 of the Agreement. Section 16, entitled “Costs and Attorneys’ Fees in Event of Breach,” provides that

Should it be necessary for any Party to commence legal action to enforce the terms of this Agreement, the prevailing party in such action shall be entitled to recover all costs and expenses, including the costs of· investigation, expert fees, court costs, and reasonable attorneys’ fees and disbursements, incurred in connection with the prosecution or defense of such action, as fixed by a court of competent jurisdiction.

To determine if a party has prevailed for the purpose of awarding attorneys’ fees, the court must consider the true scope of the dispute litigated and what was achieved within that scope. A party may be deemed a prevailing party when it was successful on the central claims advanced..

Here, in the First Department Decision, the Board’s and Condominium’s motion for summary judgment in lieu of complaint was granted. In its decision, the First Department determined that: (1) the parties’ Agreement was “an instrument for the payment of money only,” and (2) the Sponsor defaulted by failing to make payment under the terms of the Agreement.

Hence, the Condominium and Board are the prevailing parties with respect to this action because they succeeded on their appeal on June 30, 2016 and were granted summary judgment on the central claim advanced – that the Sponsor breached the Agreement. And, pursuant to Section 16 of the Agreement, the Condominium and Board are therefore entitled to reasonable attorneys’ fees and expenses incurred with respect to this action.

. . .

The Condominium and Board contend that they are entitled to recover statutory interest on the principal contract amount as well as interest on their attorneys’ fee award. In opposition, the Sponsor argues that because interest is not mentioned as recoverable in the Agreement, it is not recoverable.

Despite the Sponsor’s contention, the Agreement’s lack of reference to interest does not prohibit the Condominium and Board from recovering interest as CPLR § 5001 confers the right to interest in cases involving breach of contract. Under CPLR § 5004, such interest shall be at the rate of nine per centum per annum. A settlement agreement is a contract, so I grant the Condominium’s and Board’s request for statutory interest, at the rate of nine per centum per annum, on the principal contract amount.

Further, New York courts have held that CPLR § 5001 enables parties to recover interest on attorneys’ fees and that such interest accrues from the date that the moving party is deemed the prevailing party. Thus, I find that the Condominium and Board may recover interest on their attorneys’ fees award at the statutory rate of 9% from the date they prevailed, June 30, 2016.

Lastly, the Condominium and Board request an award of fees on fees as reimbursement for expenses incurred from efforts to collect their contractual costs and expenses and their statutory interest. Under New York law, an award of fees on fees must be based on a statute or on an agreement. Here, the Agreement does not explicitly provide for an award of fees on fees. I therefore deny the Condominium’s and Board’s request for an award of fees on fees.

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

Litigating for fees can be hard–both because of the high burden you sometimes must meet to be entitled to fees and because it is important to avoid the pitfall of getting an award of fees that is less than what it cost to move for fees. As this decision shows, the general rule is that even if you are entitled to an award of attorneys’ fees, you cannot get fees on fees. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are litigating an attorney fee award.

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