Commercial Division Blog

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

Motion Extending Time to Serve Made 18 Months After Service Was Contested Not Improperly Granted

On April 20, 2017, the First Department issued a decision in Deutsche Bank, AG v. Vik, 2017 NY Slip Op. 03075, holding that a trial court did not abuse its discretion in granting a motion to extend time to serve made 18 months after service was contested, explaining:

The motion court exercised its discretion in a provident manner in granting the extension both for good cause shown and in the interest of justice. Although plaintiff waited to move for the extension until 18 months after service was contested, this was not unreasonable under the circumstances presented. Furthermore, other relevant factors weighed in favor of granting the motion including plaintiff’s diligence, the expiration of the statute of limitations on a number of the plaintiff’s claims and the absence of prejudice to defendant in light of his actual notice of the summons and complaint. Where some factors weigh in favor of granting an interest of justice extension and some do not, this Court will not disturb the motion court’s discretion-laden determination.

(Internal quotations and citations omitted).

Posted: April 26, 2017

Insurer Required to Provide Coverage Because of Flaws in its Letter Disclaiming Coverage

On April 19, 2017, the Second Department issued a decision in Unified Window Systems, Inc. v. Endurance American Specialty Insurance Co., 2017 NY Slip Op. 03036, holding that an insurer had to provide coverage because of defects in its letter disclaiming coverage, explaining:

Endurance initially disclaimed coverage on the ground that the policy had been cancelled for nonpayment of premiums. The initial burden of demonstrating a valid cancellation of a policy is on the insurance company which disclaimed coverage. In support of their motion for summary judgment, the plaintiffs submitted evidence establishing, prima facie, that the notice of cancellation produced by Endurance did not comply with the terms of the insurance policy requiring that a notice of cancellation be mailed at least 15 days before the effective date of cancellation, and that the cancellation notice Endurance purportedly mailed to LIES failed to reference the pertinent subparagraph of Insurance Law § 3426(c)(1)(A), as required by Insurance Law § 3426(h).

In opposition to the motion, Endurance failed to raise a triable issue of fact. . . .

Endurance waived its right to disclaim coverage based upon the Employer’s Liability and Designated Ongoing Operations exclusions because it failed to include these grounds for disclaimer in the original disclaimer letter. In any event, its disclaimer based on these exclusions was untimely as a matter of law.

(Internal quotations and citations omitted).

Posted: April 25, 2017

Communications With Insurance Brokers Not Privileged

On April 17, 2017, Justice Bransten of the New York County Commercial Division issued a decision in Mt. McKinley Insurance Co. v. Corning Inc., 2017 NY Slip Op. 30704(U), holding that an insured’s communications with its insurance brokers were not privileged, explaining:

Corning did not produce approximately 50 confidential communications between and among it, its attorneys and its insurance brokers, Johnson & Higgins (“J&H”). Asserting the attorney-client privilege, Corning withheld: (1) documents related to certain asbestos personal-injury actions; (2) documents related to asbestos-related bodily-injury actions; (3) documents related to coverage disputes resulting in handling agreements; and (4) documents related to the PCC bankruptcy.

. . .

While neither Continental nor Corning offers New York case law germane to the circumstances here, Corning urges this court to follow the decision of the District Court for Southern District of New York in In re Copper Mkt. Litig., in which the attorney-client privilege stretched to cover a public-relations firm retained by a corporation. The District Court, relying on the United States Supreme Court decision in Upjohn Co. v United States, reasoned that the public relations firm could fairly be equated with the corporation for purposes of analyzing the availability of the attorney-client privilege to protect communications to which the firm was a party concerning its scandal-related duties. Since In re Copper Mkt. Litig., other District Courts in New York have considered whether the attorney-client privilege should be extended to protect communications between counsel and a non-party, corporate consultant-treated as a de facto employee-such as a
construction-management-services company or a financial advisor. Each decision analyzed several factors that warranted treatment of a non-party as a de facto employee.

One factor is whether the corporation had the resources to conduct the activity completed by the third-party on its behalf. . . . Another factor is whether the third-party had authority to make decisions on the corporation’s behalf. . . . Courts also consider whether the third-party’s actions, on behalf of the corporation, carried legal implications. . . . Next, courts will look at whether the third-party’s services were substantially related to obtaining legal advice. . . . Lastly, courts will examine whether the third-party, as a result of its services for the corporation, uniquely possessed information that the corporation did not have.

Corning attempts to invoke the reasoning in In re Copper Mkt. Litig. but fails to meet its burden of establishing that the attorney-client privilege covers communications with its insurance brokers. In a conclusory fashion, Corning claims that J&H employees acted as agents of Corning and Coming’s attorneys both as functional employees and as translators to assist Corning’s Legal Department in rendering legal advice. It lends no support, however, to these bare-bones statements. Rather than submit an affidavit from any J&H employee to substantiate its claims, Corning offers the affidavit of its counsel who merely alleges, among other things, that J&H employees were responsible for communicating Coming’s position to the Insurers regarding coverage matters, negotiating written agreements in the coverage disputes, and for reporting to Corning and Corning’s Legal Department.

Corning also fails to set forth any allegation that J&H was necessary to fulfill a function that Corning was incapable of handling, that J&H’s services were substantially for the purposes of obtaining legal advice-and not simply for insurance-brokerage services or that J &H uniquely possessed information that Corning did not have. Indeed, it has been held that the necessity element means more than just useful and convenient but requires the involvement be indispensable or serve some specialized purpose in facilitating attorney client communications.

Moreover, this Court is mindful of the admonition in Export-Import Bank of the United States: the attorney-client privilege should not be expanded without considerable caution. In light of Coming’s failure to satisfy its burden of demonstrating the existence of a valid privilege, Continental’s motion to compel is granted.

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

Posted: April 24, 2017

Defendant Need Not Make Misrepresentations to be Liable for Aiding and Abetting Fraud

On April 13, 2017, Justice Bransten of the New York County Commercial Division issued a decision in Universal Processing Services of Wisconsin v. Berger, 2017 NY Slip Op. 30747(U), upholding a claim for aiding abetting fraud even though there was no allegation that the defendants made any misrepresentations to the plaintiff, explaining:

To state a cause of action for aiding and abetting fraud, the plaintiff must allege (1) the existence of the underlying fraud, (2) actual knowledge, and (3) substantial assistance.

Regarding the first element, to assert the underlying occurrence of fraud, the Complaint must allege (1) a material misrepresentation of an existing fact, (2) made with knowledge of the falsity, (3) an intent to induce reliance thereon, (4) justifiable reliance upon the misrepresentation, and (5) damages. Notably, while a material misrepresentation of fact and justifiable reliance must be alleged with respect to the underlying fraud claim, neither must be alleged with respect to the defendants against whom the aiding and abetting claim is asserted.

Regarding the second element, a plaintiff alleging an aiding and abetting fraud claim may plead actual knowledge generally, particularly at the prediscovery stage, so long as such intent may be inferred from the surrounding circumstances.

Regarding the third element, substantial assistance exists where (1) a defendant affirmatively assists, helps conceal, or by virtue of failing to act when required to do so enables the fraud to proceed, and (2) the actions of the aider/abettor proximately caused the harm on which the primary liability is predicated. The element of substantial assistance may similarly be inferred from the circumstances alleged in the complaint.

Finally, where a cause of action is based upon fraud or aiding and abetting fraud, the circumstances constituting the wrong must be stated in detail.

. . . . Defendants’ arguments conflate the required elements of fraud with the elements aiding and abetting fraud. Indeed, false statements and reliance are not elements of an aiding and abetting claim, so the Complaint need not allege either with regards to the named Defendants. Rather, the Court concludes that the Complaint properly asserts that the underlying fraud was
committed by non-parties The Loft, Scorsetti, and Sungame, among others, by alleging the non-parties falsely represented to Plaintiff that the tablet purchases were valid, and by alleging that Plaintiff reasonably relied on these representations in processing the transactions.

To properly allege that Defendants aided and abetted The Loft, Scorsetti, and Sungame in this fraud, Plaintiff need only allege that Defendants (1) knew of the fraud and (2) offered substantial assistance. While the Complaint contains no direct factual allegations of Defendants knowledge or direct participation, the complaint nonetheless alleges a series of circumstances from which the Court can reasonably infer Defendants’ knowing participation in the Merchants’ fraudulent scheme.

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

Posted: April 23, 2017

Action Dismissed for Failure Timely to Respond to Demand for Complaint

On February 21, 2017, Justice Platkin of the Albany County Commercial Division issued a decision in Javoroski v. SelectQuote Insurance Service, Inc., 2017 NY Slip Op. 50465(U), dismissing an action because of the plaintiff’s failure timely to respond to a demand for a complaint.

In Javoroski, the plaintiff initiated an action by filing a Summons with Notice. Two of the defendants “filed a notice of appearance on September 27, 2016 and demanded service of the complaint.” The plaintiff did not serve the complaint until December 14, 2016. The court granted the defendants’ motion to dismiss for failure timely to serve a complaint, explaining:

Pursuant to CPLR 3012 (b), plaintiff was required to serve her complaint within twenty days after service of defendants’ demand. Plaintiff concedes that she did not comply with that deadline. Thus, to successfully oppose defendants’ motion, plaintiff is required to show that she has both a reasonable excuse for the delay and a meritorious cause of action.

Plaintiff’s counsel acknowledges that defendants’ notice of appearance and demand for the complaint was received on October 3, 2016, but plaintiff did not attempt to serve a complaint until December 14, 2016. Plaintiff’s attorney explains that the delay was due, in part, to a need to conduct further research to ascertain the identity of the correct defendant or defendants. He states that his extensive research disclosed five different entities that included SelectQuote in their names and that Charan J. Singh was affiliated with one or all of the SelectQuote entities.

Counsel further explains that, after receiving defendants’ notice of appearance, he renewed his research so that he could ascertain whether the appearing SelectQuote entity was, in fact, the entity that sold the life insurance policy to plaintiff’s husband. In doing so, he removed the notice of appearance from the incoming mail resulting in the 20 day notice deadline not being diaried. According to plaintiff’s attorney, this law office failure was not discovered until he received defendants’ motion to dismiss.

For their part, defendants reject plaintiff’s characterization of the delay as short. They note that the complaint was served 79 days after defendants’ demand and 118 days after service of the summons with notice. Defendants also submit proof that their moving papers were delivered to plaintiff on November 29, 2016, but the attempted service of the complaint did not occur for an additional two weeks.

Defendants also argue that the excuse for the delay proffered by plaintiff’s attorney — that research was required to find the correct defendant — is not reasonable. According to defendants, the notice of appearance and demand for a complaint plainly identifies SelectQuote Insurance Services as the correct entity name, which negated any need for research into its name. Defendants also challenge the claim of plaintiff’s counsel that lingering doubt about the identify of the proper defendants prevented him from timely filing and serving a complaint, observing that the complaint served in December 2016 pleads identical, repetitive allegations against all five iterations of SelectQuote’s name listed in the caption of the summons. As such, defendants argue, it was not necessary for the plaintiff to identify the correct corporate name to prepare the Complaint, and any confusion over SelectQuote’s name is simply a pretext for the plaintiff’s inexplicable failure to meet the deadline.

Even if plaintiff’s attorney had a legitimate need to research the name of the correct corporate entity, it did not absolve plaintiff of the obligation to serve a duly demanded complaint within the time allowed by statute. Further, as defendants point out, the complaint that plaintiff ultimately attempted to serve was not limited to allegations against the correct SelectQuote defendant. Thus, this does not seem to be a case where plaintiff lacked sufficient information at the time when the summons was served to assert the general allegations that eventually were put into her complaint.

(Internal quotations and citations omitted).

Posted: April 22, 2017

Collateral Estoppel Does Not Bar Claims Regarding Painting’s Ownership

On April 18, 2017, the First Department issued a decision in Reif v. Nagy, 2017 NY Slip Op. 02920, holding that collateral estoppel did not bar claims regarding a painting’s ownership, explaining:

In 2005, David Bakalar, a Massachusetts industrialist turned sculptor, brought suit against the heirs of Grunbaum seeking, inter alia, a declaration that he was the rightful owner of the Schiele work “Seated Woman,” a piece he had owned for over 40 years. Nagy’s contention that the dismissal in Bakalar, which was based upon application of the doctrine of laches, collaterally estops plaintiffs from pursuing their claims to two other Schiele pieces, “Woman in a Black Pinafore” and “Woman Hiding Her Face,” is misplaced. Collateral estoppel requires the issue to be identical to that determined in the prior proceeding, and requires that the litigant had a full and fair opportunity to litigate the issue. Neither of those requirements has been shown here where the purchaser, the pieces, and the time over which the pieces were held differ significantly. The three works are not part of a collection unified in legal interest such to impute the status of one to another.

(Internal quotations and citations omitted).

Posted: April 21, 2017

Court Rejects Late-Filed Opposition to Motion

On April 3, 2017, Justice Whelan of the Suffolk County Commercial Division issued a decision in Nationstar Mortgage, LLC v. MacPherson, 2017 NY Slip Op. 30677(U), striking an opposition to a motion for summary judgment because it was filed later than the date allowed in the parties’ stipulated briefing schedule.

Most of us have encountered at least once in our careers an opponent who appears to feel free to disregard court rules or agreements they make in the course of litigation because, usually, they get away with it. Not always. In Nationstar Mortgage, the court struck an opposition to a motion for summary judgment because it was filed four days late, explaining:

The parties filed a stipulation, as NYSCEF Doc. No. 25, adjourning the motion to July 13, 2016 “and the Opposition papers shall be served and filed by July 6,2016.” Here, the record reveals that the affirmation in opposition was not filed until July 10, 2016 as NYSCEF Doc. No. 26. Such a filing is untimely pursuant to the filed stipulation between the parties. Same was rejected by counsel for the plaintiff by notice of return and rejection as NYSCEF Doc. No. 28. . . . Here, the affirmation in opposition was not timely filed and an affidavit of service has never been filed. These defects render the opposing papers by the answering defendants jurisdictionally defective since the failure to provide proper service of a motion deprives the court of jurisdiction to entertain the motion. Since the affirmation in opposition violated the filed stipulation and the mandatory e-filing rules established by the Chief Administrator of the Courts, as authorized by the State Legislature in CPLR 2103(b)(7), the document is deemed untimely and a nullity.

(Internal quotations and citations omitted).

Posted: April 20, 2017

Plaintiff Lacked Standing to Bring Derivative Claims on Behalf of LLC

On April 12, 2017, Justice Oing of the New York County Commercial Division issued a decision in Pokoik v. Norsel Realties, 2017 NY Slip Op. 50459(U), dismissing claims as derivative claims on behalf of an LLC that the plaintiffs lacked standing to bring.

First, Justice Oing held that the plaintiffs’ claims were derivative, rather than direct, explaining:

Under New York law, a shareholder lacks standing to pursue a direct cause of action to redress wrongs suffered by the corporation. Rather, such claims must be asserted derivatively, for the benefit of the corporation.

In general, a plaintiff asserting a derivative claim seeks to recover for injury to the business entity, while a plaintiff asserting a direct claim seeks redress for injury to him or herself individually. In analyzing whether a plaintiff’s claim is truly direct or derivative, courts look at the nature of the harm alleged and who is principally harmed: the corporation or the individual shareholders.

New York courts have identified numerous categories of claims, including claims of mismanagement or diversion of assets for a manager’s own benefit and excessive compensation, as derivative in nature, and, as such, they must be pleaded on behalf of the corporation. Furthermore, a claim that the shareholders have been injured by a diminution in the value of their stock is a derivative claim belonging to the corporation, and not a direct cause of action for the shareholders. Derivative claims which are improperly pleaded as direct claims must be dismissed for lack of standing.

Here, a review of all of plaintiffs’ claims in a light most favorable to them unequivocally demonstrates that they are based on alleged injuries to Norsel purportedly caused by the decisions to adopt an apparently below-market ground lease rent, and to transfer its interest in the Property to Norsel LLC, as well as the transfer of the ground lease from Norsel Realties to Norsel LLC. In fact, plaintiffs allege that the acts underlying the amended complaint were directed at Norsel as an entity, repeatedly asserting that such acts were not in the best interests of Norsel, and that Norsel Realties as a whole is damaged $131,000,000. Plaintiffs also rely on the purported injury to Norsel as the basis for their individual claims in which they assert that they have been injured in an amount equal to their ownership percentage multiplied by the $131,000,000 allegedly loss to Norsel. Under these circumstances, plaintiffs’ direct claims, which are based on allegations that their interests in Norsel have been diminished through the adoption of the ground rent at issue, are inherently derivative claims. Plaintiffs’ remaining allegations that defendants mismanaged Norsel for their own benefit, i.e., by transferring ownership to Norsel LLC, are similarly derivative in nature. Accordingly, to the extent that plaintiffs attempt to bring direct claims against Norsel or its partners, they do not have standing to do so because the claims asserted in the amended complaint are strictly derivative in nature — the claims and damages alleged result from purported injuries to Norsel.

(Internal quotations and citations omitted). Next, Justice Oing examined whether the plaintiffs had standing to bring derivative claims on behalf of the LLC. He held that they did not, explaining:

New York courts have held that because derivative actions bind absent interest holders they take on the attributes of a class action and a plaintiff must therefore demonstrate that he will fairly and adequately represent the interests of the shareholders and the corporation, and that he is free of adverse personal interest or animus. If a plaintiff cannot demonstrate such representation, the derivative causes of action will be dismissed.

In the amended complaint, plaintiffs decided to name all interest holders other than plaintiffs themselves as defendants. Having brought their claims against all other Norsel partners, plaintiffs cannot purport to simultaneously represent the interests of these adverse defendant partners. Unlike plaintiffs’ initial complaint, which named only Steinberg and Lieberman as interest holders in Norsel and commenced on behalf of Norsel and all of its partners, by naming all other Norsel partners in the amended complaint there cannot even be a theoretical group of interest holders left on whose behalf plaintiffs purport to act. Indeed, in this amended complaint, plaintiffs Leon Pokoik and his family own or otherwise control approximately 10% of Norsel but assert derivative claims against the partners representing the other approximately 90% of the ownership interests. This presents a prototypical conflict of interest.

Plaintiffs’ inherent conflict of interest is also presented by the fact that because they own a 12.788% ownership interest in 575 Associates, which net leases the Property from 575 Realties, plaintiffs are attempting to double dip — they are simultaneously receiving funds from 575 Associates in the form rental income while suing Norsel over the same ground rent.

In addition, plaintiffs do not appear to have any genuine concern for Norsel or its related entities. While plaintiffs seek to extract monetary damages from their partners based upon their extremely high property appraisals, they do not request any relief, such as the revision of the subject ground lease rent or court oversight of the appraisal process, that would benefit Norsel. Indeed, plaintiffs ignore the fact that their $20 million proposed annual rent, an almost 90% increase, would make business operations more difficult for 575 Associates which, in turn, would jeopardize Norsel itself.

Lastly, plaintiffs failed to demonstrate on this record that they are free from personal animus. Lead plaintiff Leon Pokoik has repeatedly sued his business partners and his own family. The pleadings in each of Leon Pokoik’s actions are filled with allegations of mismanagement and improper conduct allegedly perpetrated by numerous individuals and closely-held entities, similar to the allegations made here. Given Leon Pokoik’s litigious nature, the totality of the circumstances constrains this Court to conclude that this action is a weapon in the total arsenal so as to gain leverage in the other disputes. Having named all of the Norsel partners with whom plaintiffs disagree as defendants in this action, and given Leon Pokoik’s demonstrated animus, plaintiffs’ self-interest is palpably obvious to the point that they are unable to show that they will adequately represent the interest of these defendants. Thus, the amended complaint must be dismissed.

(Internal quotations and citations omitted).

Posted: April 19, 2017

Plaintiff And Defendant’s Counsel Both Disqualified Due To Simultaneous Conflicted Representations

On March 3, 2017, Justice Sherwood of the New York County Commercial Division issued a decision in Georgetown Co., LLC v. IAC/Interactive Corp., 2017 NY Slip Op. 30676(U), granting motions to disqualify both plaintiffs’ counsel and defendants’ counsel.

Georgetown Co. involves a dispute over a $35 million rights fee associated with development rights to a property in Manhattan.

First, defendant IAC moved to disqualify plaintiff Georgetown’s counsel, DLA Piper, on the grounds that DLA Piper had represented IAC in an unrelated action in California. DLA Piper alleged that it had withdrawn from the California engagement, and that a retainer agreement with IAC’s subsidiary in the California action contained a conflict waiver that could be attributed to IAC. The Court first noted that an attorney-client conflict “is to be determined as of the time the conflict arises, and not at the time the motion to disqualify is finally brought before the court,” and that, when the New York action was filed, DLA Piper was still representing IAC in the California action. Even if this fact, standing alone, did not establish a prima facie conflict of interest, the Court found that DLA Piper’s motion to withdraw, which was was made over IAC’s objection, was intended to permit DLA Piper to represent an adverse “preferred client.” This, in turn, established prejudice to IAC. The Court further held that, by its plain terms, the conflict waiver only applied, not to IAC.

At the same time, non-party Joseph Rose made a motion to intervene and seek disqualification of Kasowitz Benson Torres & Friedman LLP, which was representing IAC. Rose, who had substantial ownership interests in Georgetown and would likely be a significant witness, was simultaneously being represented by Kasowitz in his divorce proceeding. He alleged that Kasowitz had access to his confidential information, including financial information relating to the fee dispute at issue. Kasowitz argued that Rose’s matrimonial lawyers were leaving to start their own firm, taking Rose’s file with them, that Rose’s information had not been shared with the rest of the firm, and that the only source of conflict was “simultaneous representation in unrelated matters of clients whose interests are only economically adverse,” which did not merit disqualification. The Court disagreed, holding, as above, that the conflict was to be assessed as of its inception, and that Kasowitz’s client IAC was “substantially averse” to Rose, and that an ethical wall could not overcome an unwaived conflict between current clients of the same firm. Accordingly, Kasowitz was also disqualified.

Posted: April 18, 2017

Extrinsic Evidence May be Admitted Prior to Exclusion Being Strictly Construed Against Insurer

On April 13, 2017, the First Department issued a decision in Heartland Brewery, Inc. v. Nova Casualty Co., 2017 NY Slip Op. 02908, holding that extrinsic evidence may be admitted prior to an exclusion being strictly construed against an insurer, explaining:

The question of whether the terms of a contract, such as an insurance policy, are ambiguous is a question of law for the courts to determine. The contract language is to be read in light of common speech and interpreted according to the reasonable expectations and purposes of ordinary business people when making ordinary business contracts.

When it comes to exclusions from coverage, the exclusion must be specific and clear in order to be enforced and ambiguities in exclusions are to be construed most strongly against the insurer. As this Court has recognized, there are circumstances where extrinsic evidence may be admitted prior to an exclusion being strictly construed against an insure, and where ambiguous words are to be construed in the light of extrinsic evidence or the surrounding circumstances, the meaning of such words may become a question of fact for the jury.

Here, the language of FEMA’s flood zone regulations raises an issue of fact rendering the insurance policy’s exclusion of flood coverage ambiguous.

(Internal quotations and citations omitted).