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Commercial Division Blog

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

Derivative Action Dismissed; Demand Insufficient and Futility Not Shown (New York Count

On January 17, 2017, Justice Singh of the New York County Commercial Division issued a decision in Sims v. Firstservice Corp., 2017 NY Slip Op. 30104(U), dismissing a derivative action for lack sufficient allegations of demand, explaining:

The demand requirement rests on the basic principle of corporate governance that the decisions of a corporation – including the decision to initiate litigation – should be made by the board of directors or the majority of shareholders. Accordingly, the demand requirement is a prophylactic device designed to weed out unnecessary or illegitimate shareholder derivative suits commenced by shareholders for personal gain rather than the benefit of the corporation.

The complaint in the instant matter does not state that plaintiff ever made a pre-suit demand on the board of directors. Plaintiffs communications with the board and the board’s response are set forth at paragraphs 60, 61, 68 and 69 of the.complaint. The complaint alleges that plaintiff posed various questions to the board of directors regarding the garage transaction; requested an opportunity to review documents pertinent to the transaction and bid procedures; and asked the board to meet and discuss facts regarding the transaction. On June 4, 2015, the board consented to plaintiffs review of the garage lease at defendants’ office on June 8, 2015. Plaintiff contends that Virginia Manning refused to meet with him when he showed up ather office. The complaint asserts that during June 2015 the board members never responded in substance to questions plaintiff posed; did not allow any independent review of any relevant documents, despite plaintiffs standing requests for them; and said that the issue of disclosure, access and review would be raised at the July board meeting.

Plaintiff maintains that the board’s delay in responding to the requests for information was deliberate stonewalling until after July 1, 2015, at which time Icon Parking would begin its operations at the garage pursuant to the new lease. The Court finds that the complaint on its face fails to plead a proper demand. BCL 626( c) does not provide any specific instruction for making demand. Accordingly, New York courts have held that the demand to sue need not assume any particular form nor need it be made in any special language. Nevertheless, the demand must be made in earnest, not a simulated effort which must be made apparent to the court.

Here, the complaint does not state that an oral demand was ever made to the board. Nor does that complaint plead that a written demand was made to the board identifying the alleged wrongdoers; describing the factual basis of the alleged wrong and the harm caused to the corporation; requesting that the directors bring suit; providing the directors with sufficient time to consider and act upon the demand; and indicating that litigation would result from an improper refusal to sue.

(Internal quotations and citations omitted).

Posted: January 26, 2017

Test Under Statute of Frauds Is Not Whether Verbal Contract Lasted More Than a Year

On January 11, 2017, Justice Bransten of the New York County Commercial Division issued a decision in Fremuth v. Stetson, 2017 NY Slip Op. 30073(U), discussing the application of the Statute of Fraud’s one year rule:

New York law provides that an agreement will not be recognized or enforceable if it is not in writing and subscribed by the party to be charged therewith when the agreement by its terms is not to be performed within one year from the making thereof. As explained by the Court of Appeals, this provision of the Statute of Frauds has been long interpreted to encompass only those contracts which, by their terms, have absolutely no possibility in fact and law of full performance within one year. As long as the agreement may be fairly and reasonably interpreted such that it may be performed within a year, the Statute of Frauds will not act as a bar however unexpected, unlikely, or even improbable that such performance will occur during that time frame.

. . .

Under the terms alleged, the Verbal Agreement itself is capable of performance in one year. Performance, if it means anything at all, is carrying out the contract by doing what it requires or permits. The hiring of PEI Inc. employees, administration of the PEI Funds, and payment of distributions could be completed within one year. There are many potential circumstances under which this performance could occur, including, but not limited to, the dissolution of PEI Inc. or PEI Funds LLC. Although Defendants urge the Court to consider the likelihood that this Verbal Agreement could be performed in one year, the relevant inquiry is whether the agreement may be fairly and reasonably interpreted to be capable of performance in one year, even if unlikely or even improbable. Here, Defendants have not shown that there was absolutely no possibility in fact and law of performance in one year.

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

Posted: January 25, 2017

Broker Entitled to Fee Under Agreement Even Though Not Procurring Cause of Sale

On January 19, 2017, the First Department issued a decision in Eastern Consolidated Properties, Inc. v. 5 East 59 Realty Holding Co., LLC, 2017 NY Slip Op. 00421, holding that a broker was entitled to a fee on a sale for which he allegedly was not the procuring cause, explaining:

Contrary to the contentions of defendants 5 East 59 Realty Holding Company, LLC and Alexandros Demetriades, the language of the written commission agreement is unambiguous. Pursuant to the agreement, defendant 5 East 59 Realty Holding expressly agreed to pay plaintiff a fee of 1.75% of the purchase price if plaintiff introduced defendants to the party (and any related entities) that ultimately purchased the property at a closing. Plaintiff introduced Paulo Agnelo Malzoni to defendants. Malzoni was the principal of the ultimate purchaser of the property. Thus, plaintiff is entitled to its fee.

Defendants’ argument that plaintiff is not entitled to a fee because it was not the “procuring cause” or “direct and proximate link” for the sale is unavailing, because the parties entered into an agreement that did not make the fee contingent on plaintiff’s negotiation of the transaction.

(Internal quotations and citations omitted).

Posted: January 24, 2017

Inquiry Notice of Fraud Existed When Party Received PPM That Contradicted Oral Promises

On January 19, 2017, First Department issued a decision in Hamrick v. Guralnick, 2017 NY Slip Op. 00400, holding that a party was on inquiry notice of an alleged fraud when it received a private placement memorandum containing statements that contradicted the oral representations upon which it was suing, explaining:

The fraudulent inducement, negligent misrepresentation, and breach of fiduciary duty claims are time-barred. These claims accrued upon plaintiffs’ making their investments. Plaintiffs were placed on inquiry notice of the alleged fraud, negligent misrepresentation, and breach of fiduciary duty when they received the private placement memorandum, which expressly contradicted defendants’ alleged oral representations that the investments’ tax strategy was tested and valid, when they saw — immediately — that they were not receiving the promised returns, and when they learned that the tax strategy was ultimately repudiated by the IRS. Since plaintiffs commenced this action more than six years after the date of their investments and more than two years after they had constructive knowledge of the alleged fraud, negligent misrepresentation, and breach of fiduciary duty, these claims are time-barred.

(Internal citations omitted).

Posted: January 23, 2017

Court of Appeals Grants Leave to Appeal in Case Involving Valuation of Minority Partner’s Interest

On January 10, 2017, the Court of Appeals granted leave to appeal in Congel v. Malfitano, a case involving the valuation of a minority partner’s interest under Partnership Law § 69(2)(c)(II), which entitles a partner who has wrongfully caused the dissolution of a partnership to be paid the “value” of his interest in the partnership less any damages caused to the copartners by the wrongful dissolution.

In Congel, the Second Department held that in determining the valuation, it was appropriate to apply a “minority discount” to reflect the minority partner’s lack of control over the operation of the business. In so holding, the court distinguished case law declining to apply a minority discount in valuing the interest of minority shareholders of a corporation who claim oppressive conduct by the majority. The court explained:

[T]his case does not involve a determination of the “fair value” of a dissenting shareholder’s shares . . . but rather, involves the determination of the “value” of the shares of a partner who has wrongfully caused the dissolution of a partnership pursuant to Partnership Law § 69(2)(c)(II). . . .

[A]pplying a minority discount in the context of valuing a partnership interest would not contravene the distinctly corporate statutory proscription (Business Corporation Law § 501[c]) against treating holders of the same class of stock differently, or undermine the remedial goal of the appraisal statutes to protect shareholders from being forced to sell at unfair values, or inevitably encourage oppressive majority conduct. Moreover, the Court of Appeals’ concern that imposing a minority discount in valuing a dissenting shareholder’s stock would encourage oppressive majority conduct is not relevant here, where the dissolution was caused not by any action on the part of the majority, but rather, was caused by the “wrongful[ ]” conduct of a minority partner (Partnership Law § 69[2][c][II]).

(Citations omitted).

Posted: January 22, 2017

Corporate Officer Not Bound by Corporation’s Contracts

On January 12, 2017, Justice Scarpulla of the New York County Commercial Division issued a decision in Bondoc v. Sklar, 2017 NY Slip Op. 30058(U), holding that a corporate officer was not bound by the corporation’s contracts, explaining:

Generally, an officer or director of a corporation is not personally liable to one who has contracted with the corporation on a theory of inducing a breach of contract, merely due to the fact that, while acting for the corporation, he has made decisions and taken steps that resulted in the corporation’s promise being broken. An agent for a disclosed principal will not be personally bound unless there is clear and explicit evidence of the agent’s intention to substitute or superadd his personal liability for, or to, that of his principal.

In the complaint, plaintiffs do not allege ·any facts that might be interpreted as evidencing an intent by Ligaya Avenida· or Ron Avenida to be personally bound on the
alleged oral contract or the Avenida fee agreement. Plaintiffs do not allege any facts that might indicate that Ligaya Avenida or Ron Avenida exercised complete dominion and control over the corporate Avenida defendants.

(Internal quotations and citations omitted).

Posted: January 21, 2017

Broad Force Majeure Clause Enforced

On January 17, 2017, the First Department issued a decision in Constellation Energy Services of New York, Inc. v. New Water Street Corp., 2017 NY Slip Op. 00260, enforcing a broad force majeure provision, explaining:

Force majeure clauses are to be interpreted in accord with their purpose, which is to limit damages in a case where the reasonable expectation of the parties and the performance of the contract have been frustrated by circumstances beyond the control of the parties. When the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.

. . .

The agreement also provides that a force majeure event may be a defense to a price adjustment claim, stating that plaintiff may seek its increased costs or decreased revenue if it determines that there has been a material and sustained change from an Account’s Baseline for reasons other than Force Majeure. By these express terms, the expansive force majeure clause was intended to protect any party to the agreement which was unable to perform its obligations under the contract by a force majeure event, defined as an event which prevents one Party from performing its obligations hereunder, which event was not (i) within the reasonable control of, or (ii) the result of the negligence of, the Claiming Party, and which, by the exercise of due diligence, the claiming Party is unable to overcome or avoid. The examples that follow this specific definition are qualified by the statement that they are without limitation, and do not limit the application of the clause to the scenario in which the force majeure event curtails or disrupts the transmission of electricity, rather than where the buyer’s actual usage did not meet the baseline because, as a result of the damage from an unforeseen event (Hurricane Sandy), a certain number of tenants were unable to occupy the building, even after power was restored.

Plaintiff argues that the force majeure clause does not provide a defense to its rate adjustment claim because the agreement did not impose a contractual obligation on defendant to reach the baseline, which only served as a basis for determining the final rate. However, plaintiff’s interpretation fails to give due weight to the language of the price adjustment clause allowing plaintiff to recover its increased cost or decreased revenue if the baseline was not met. By allowing plaintiff to recover its decreased revenue, the clause effectively obligated defendant to pay for the baseline amount of electricity, whether it used it or not.

(Internal quotations and citations omitted). The court went on to hold that there were nonetheless questions of fact regarding whether “the force majeure clause would be an absolute defense” and “that” the defendant’s “failure to meet the baseline was an unavoidable result of the storm, including whether or not the tenants could have been restored to their space sooner, and whether the failure to do so was beyond its control.”

Posted: January 20, 2017

No Dismissal on Foreign Statute of Limitations: Insufficient Evidence of Foreign Law

On January 9, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in Multibank, Inc. v. Access Global Capital LLC, 2017 NY Slip Op. 30036(U), declining to dismiss an action based on a foreign statute of limitations because of insufficient evidence of foreign law, explaining:

When a nonresident sues on a cause of action accruing outside New York, CPLR 202 requires the cause of action to be timely under the limitation periods of both New York and the jurisdiction where the cause of action accrued. . . . Consequently, under CPLR 202, to be considered timely, Multibank’s claims must be timely under both New York and Panamanian law. . . .

On this motion, the Besch Defendants are not entitled to dismissal based on the applicable Panamanian statutes of limitation. CPLR 3016(e) provides that where a defense is based upon the law of a foreign country or its political subdivision, the substance of the foreign law relied upon shall be stated. CPLR 3016(e) must be read together with CPLR 4511(b), which states that the court may take judicial notice of foreign law if a party requests it, furnishes the court sufficient information to enable it to comply with the request, and has given each adverse party notice of his intention to request it. CPLR 4511 (d) further provides that a:

copy of a statute or other written law contained in a book or publication, purporting to have been published by a government or commonly admitted as evidence of the existing law in the judicial tribunals of the jurisdiction where it is in force, is prima facie evidence of such law and the unwritten or common law of a jurisdiction may be proved by witnesses or printed reports of cases of the courts of the jurisdiction.

(emphasis added).

While this court may choose to take judicial notice of laws of a foreign jurisdiction, it is only required to do so when the party requesting the notice provides sufficient information to enable it to comply with the request. Expert affidavits interpreting the relevant legal provisions can be a basis for constructing foreign law when accompanied by sufficient documentary evidence. However, this court may decline to take judicial notice of foreign law if it is not provided with sufficient information about the applicability of that law, including the very foreign statutes at issue.

(Internal quotations and citations omitted). The court went on to find that the defendants’ expert affidavit was not sufficient under CPLR 4511.

This decision also has an interesting discussion of non-parties being bound by tolling agreements and equitable tolling.

Posted: January 19, 2017

Party Waived Right to Serve Discovery Demands by Disregarding Case Management Order Deadlines

On January 17, 2017, the First Department issued a decision in Vandashield Ltd v. Isaacson, 2017 NY Slip Op. 00259, holding that a party waived the right to serve discovery demands by failing timely to do so, explaining:

The court providently exercised its discretion in finding, on July 20, 2015, that defendants had waived their right to serve paper discovery demands by disregarding the deadlines set forth in two case management orders.

Citing nonbinding cases, defendants contend that the court could order preclusion only on a clear showing that their failure to comply with the case management orders was willful or contumacious. However, we have upheld preclusion even when a party’s behavior was neither willful nor contumacious.

Defendants contend that the sanction was disproportionate because their motion for a protective order stayed discovery pursuant to CPLR 3103(b). However, the statute says, “Service of a notice of motion for a protective order shall suspend disclosure of the particular matter in dispute” (emphasis added). Defendants’ motion for a protective order against plaintiffs’ discovery demands did not stay their obligation to serve their own discovery demands.

Defendants contend that the sanction was disproportionate because the reason for their delay in serving paper discovery demands was that the parties were engaged in settlement negotiations. However, as the motion court explained, defendants could have requested an extension of the discovery deadline on this basis but failed to do so.

(Internal citations omitted) (emphasis added).

Posted: January 18, 2017

Term Sheet Found to be Binding Contract

On January 6, 2017, Justice Scarpulla of the New York County Commercial Division issued a decision in McGowan v. Clarion Partners, LLC, 2017 NY Slip Op. 30019(U), holding that a term sheet was a binding contract, explaining:

The standard for determining whether the essential terms are included in a contract is necessarily flexible, varying for example with the subject of the agreement, its complexity, the purpose for which the contract was made, the circumstances under which it was made, and the relation of the parties. In order to be enforceable, a contract must contain all of the material terms which one would reasonably have expected to be included under the circumstances. The items which must be set forth in a writing are those terms customarily encountered in a particular transaction.

. . .

The Term Sheet and the Business Plan referenced therein set forth the material terms of the proposed CPE joint venture. . . .

Not all terms of a contract need be fixed with absolute certainty; at some point virtually every agreement can be said to have a degree of indefiniteness. While there must be a manifestation of mutual assent to essential terms, parties also should be held to their promises and courts should not be pedantic or meticulous in interpreting contract expressions. Imperfect expression does not necessarily indicate that the parties to an agreement did not intend to form a binding contract. A strict application of the definiteness doctrine could actually defeat the underlying expectations of the contracting parties.

The parties’ agreement to form a joint venture and their understanding that the performance of that joint venture would require additional documents resolving numerous details is demonstrated by the last provision in the Term Sheet that provides, agreed amongst the parties but subject to signed documentations. Thus, the Term Sheet’s plain language expressed the parties’ intention to be bound.

(Internal quotations and citations omitted).