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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: December 17, 2018

Contract’s Liquidated Damages Clause Held to be an Unenforceable Penalty

On November 30, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Perseus Telecorn, LTD. v. Indy Research Labs, LLC, 2018 NY Slip Op. 33083(U), holding that a contract’s liquidated damages clause was an unenforceable penalty, explaining:

Moreover, even if, as Perseus alleges, Indy had agreed to the terms of the Master Services Agreement, the damages clause of the Master Services Agreement is unenforceable. Liquidated damages are an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement. In Truck Rent-A-Center, the Court of Appeals stated that:

A contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. If, however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced.

Here, the liquidated damages clause of the Master Services Agreement is unenforceable because it is a penalty. Since the cost of the collocation services to be provided by Perseus is readily ascertainable from the foe schedule attached to the Service Order Form, Perseus cannot claim that its damages were impossible to determine at the time it and Indy executed the Service Order Form. actuality the plain language of the “Approval” section resolves any disputes between the terms of the Service Order Form and the Master Services Agreement in favor of the terms expressed in the Service Order Form. See Comp.

Further, the liquidated damages amount is $1,250,650, when Perseus’s actual damages are approximately $170,000. Notably, the liquidated damages amount is more than seven times that of Perseus’s actual damages.

(Internal quotations and citations omitted).

A key element in commercial litigation is proving damages. As this decision shows, agreeing beforehand on the damages that will result from a breach of contract does not always result in an enforceable agreement. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding proving damages.

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Posted: December 16, 2018

Disclaimers of Representations Not Specific Enough to Bar Fraud Claim

On November 19, 2018, Justice Ramos of the New York County Commercial Division issued a decision in Spicer v. Gardaworld Consulting (UK) Ltd., 2018 NY Slip Op. 33088(U), holding that an agreement’s disclaimers were not specific enough to bar a fraud claim, explaining:

To state a claim for fraud, a plaintiff must allege with specificity the intentional misrepresentation of a material fact, justifiable reliance thereon and damages. With respect to reliance, a buyer’s disclaimer of reliance generally precludes its justifiable reliance on the seller’s misrepresentations or omissions where the disclaimer is sufficiently specific to the particular type of fact misrepresented or disclosed, and the alleged misrepresentation or omissions did not concern facts peculiarly within the seller’s knowledge. Thus, where a written contract contains a specific disclaimer as to a specific matter, a plaintiff is precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.

The Court concludes that the contractual disclaimers of reliance by Garda set forth in the SPA do not come close to satisfying the specificity standard articulated by the Court of Appeals. The disclaimers contained in the SPA do not sufficiently track the particular omissions and representations alleged by Garda.

(Internal citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.

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Posted: December 15, 2018

Common-Law Indemnification Unavailable to Defendant Seeking a Recovery for its Own Wrongdoing

On November 30, 2018, Justice Sherwood of the New York County Commercial division issued a decision in Board of Mgrs. of the 650 Sixth Ave. Condominium v. K-W 650 Assoc. LLC, 2018 NY Slip Op. 33050(U), holding the common-law indemnification was not available to a defendant seeking a recovery for its own wrongdoing, explaining:

[C]ommon-law indemnification is unavailable where the direct claims against a defendant seek recovery for defendant’s own wrongdoing. The motion must be granted dismissing the second cross-claim as against GACE.

We frequently litigate issues relating to the advancement or indemnification of litigation expenses such as attorneys’ fees to corporate officers, directors and employees. Such litigation involves both statutory law and parsing the terms of employment agreements and corporate documents. Less common in commercial litigation are claims for common law indemnification or contribution. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a situation where you may be held liable for someone else’s negligence.

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Posted: December 14, 2018

Break in Representation Bars Attempt to Toll Statute of Limitations Under Continuous Representation Doctrine

On November 27, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Boesky v. Levine, 2018 NY Slip Op. 33017(U), holding that a break in representation barred an attempt to toll the statute of limitations under the continuous representation doctrine, explaining:

With respect to Levine, the complaint alleges that he initially promoted the remainder interest tax strategy in 2002 and then proceeded to form the LLCs needed to execute the strategies from 2002 to 2004. Between 2002 and 2004, plaintiffs invested various amounts in these entities and claimed charitable deductions based upon the strategy from 2002 to 2005. Pursuant to CPLR 214(6), an action for nonmedical professional malpractice must be commenced within three years of the date of accrual. Claims for legal malpractice accrue when the malpractice is committed, not when the client learns of it. Therefore, any claims sounding in professional malpractice that are based upon Levine’s advice to participate in the remainder interest tax strategy and the services he provided in order to implement the strategies are untimely under the three year statute of limitations set forth in CPLR 214(6).

Plaintiffs assert, however, that the complaint pleads allegations that Levine continued to represent them in connection with the remainder interest tax strategy until 2016 by advising them on how to proceed with the IRS ‘sand the NYSDF’s challenges to their use of the strategy. Therefore, plaintiffs contend, the continuous representation doctrine applies to toll the statute of limitations. Pursuant to the doctrine of continuous representation, the time within which to sue on the claim is tolled until the attorneys continuing representation of the client with regard to the particular matter terminates. The continuous representation doctrine tolls the running of the statute of limitations on a cause of action against a professional defendant only so long as the defendant continues to represent the plaintiff in connection with the particular transaction which is the subject of the action and not merely during the continuation of a general professional relationship. For the doctrine to apply, there must be a mutual understanding of the need for further representation on the specific subject matter underlying the malpractice claim.

Here, the complaint does not allege that there was an express, mutual agreement to advise plaintiffs on the effect of the remainder interest tax strategy after Levine’s original advice.

Plaintiffs seemingly rely on the principle that the law recognizes that the supposed completion of the contemplated work does not preclude application of the continuous representation toll if inadequacies or other problems with the contemplated work timely manifest themselves after that date and the parties continue the professional relationship to remedy those problems. In this regard, a notion to dismiss pursuant to CPLR 3211(a)(5) will be denied unless the facts establish that a gap between the provision of professional services on the particular matter is so great that the representation cannot be deemed continuous as a matter of law.

Here, the complaint alleges that plaintiffs received counsel from Levine between 2002 to 2004 regarding the tax strategy, However, it was not until three years later, in 2007, that Levine began to counsel them on the same subject matter — i.e., how to handle the IRS’s and NYSDTF’s challenges to the strategy. This three-year gap between the provision of Levine’s services on this matter is so great that the representation cannot be deemed continuous. As such, any claims based upon the advice rendered by Levine from 2002 through 2004 are untimely.

(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 a claim is barred by the statute of limitations.

Posted: December 13, 2018

Fraud Claim Survives Despite Failure to Differentiate Between Acts of Different Defendants

On December 4, 2018, the First Department issued a decision in 47-53 Chrystie Holdings LLC v. Thuan Tam Realty Corp., 2018 NY Slip Op. 08239, upholding a fraud claim despite the plaintiff’s failure to differentiate between the acts of different defendants, explaining:

The complaint states a cause of action for fraud against the individual defendants. Contrary to defendants’ contention, the fact that it refers to the seller shareholders as the “Individual Defendants” does not render the claim insufficiently particularized as to any of the individual defendants. The term “Individual Defendants” does not refer to a diverse group of defendants to whom entirely different acts giving rise to the action may be attributed; it refers to the eight shareholders of the single corporate defendant, each of whom is alleged to have made the same false representation, to wit, that no corporate documents existed. At this stage of the proceedings, it is reasonable to infer that the individual shareholders knew whether this closely held corporation maintained corporate documents and thus that they participated in the alleged wrongful conduct by representing that no documents existed.

(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 12, 2018

Court Lacks Subject Matter Jurisdiction Over Claim Against Foreign Bank By Non-Resident

On November 28, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Garcia v Banco BCT S.A., 2018 NY Slip Op. 32989(U), holding that the court lacked subject matter jurisdiction over a non-resident’s claim against a foreign bank, explaining:

Banking Law section 200-g provides that:
2. Except as otherwise provided in this chapter, an action or special proceeding against a foreign banking corporation may be maintained by another foreign corporation or foreign banking corporation or by a non-resident in the following cases only:

  • (a) where the action is brought to recover damages for the breach of a contract made or to be performed within this state, or relating to properly situated within this state at the time of the making of the contract:
  • (b) where the subject matter of the litigation is situated within this state:
  • (c) where the cause of action arose within this state, except where the object of the action or special proceeding is to affect the title of real property situated outside this state:
  • (d) where the action or special proceeding is based on a liability for acts done within this state by a foreign banking corporation:
  • (e) where the defendant is a foreign banking corporation doing business in this state

Plaintiff claims subsections (d) and (e) apply here. Because there is personal jurisdiction under CPLR 302(a)(1), which provides that a court may exercise personal jurisdiction over any non-domiciliary, or his executor or administrator, who in person or through an agent transacts any business within the state or contracts anywhere to supply goods or services in the state. Plaintiff acknowledges that both provisions require that the action arise from or be based on the acts or business done by the non-domiciliary within the State of New York. Accordingly, this argument fails for the same reason as the personal jurisdiction argument above.

(Internal quotations and citations omitted).

The New York Supreme Court is a court of general jurisdiction, so questions of subject matter jurisdiction rarely arise. However, as this decision shows, there are statutes that prevent some types of claims from being heard in the court. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a court’s jurisdiction to hear a claim.

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Posted: December 11, 2018

Court Enforces Contract Clause Limiting Damages

On November 29, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Lam Platt St. Hotel LLC v. Golden Pearl Constr. LLC, 2018 NY Slip Op. 33018(U), enforcing a contract provision limiting damages, explaining:

The Contract contains a mutual waiver provision, in Rider 8.0A, which clearly limits the damages Lam Platt may seek for breach. Specifically, that provision prohibits recovery of consequential damages arising out of or related to the Contract, except for gross negligence or willful misconduct, which Lam Platt has not alleged. Moreover, the parties explicitly waived recovery of damages for profit. Similarly, Lam Platt’s claim for financing damages has also been waived. This clear agreement between the parties on the allocation of the risk of loss in the event of a breach must be honored. Accordingly, the first cause of action for breach of contract is dismissed to the extent that it asserts damages for lost profits and consequential damages.

(Internal quotations and citation omitted).

A key element in commercial litigation is calculating damages. Contract clauses limiting damages are common and how they are enforced can make a big difference in whether, and if so, how, you litigate an action. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a contractual damages limitation clause.

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Posted: December 10, 2018

Doctrine of Respondeat Superior Imposes Liability on Employer, Not Supervisor

On November 28, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Domus Arbiter Realty Corp. v. Bayrock Group LLC, 2018 NY Slip Op. 33021(U), holding that the doctrine of respondeat superior imposes liability on the employer, not the supervisor, explaining:

Plaintiff has alleged, however, an alternative theory that Defendant McGorty is personally liable pursuant to the doctrine of respondeat superior. It is undisputed that Defendant Zampolli was an employee of Paramount Realty Group of America Corp. Plaintiff alleges, however, that Defendant McGorty, rather than Paramount Realty Corp., held the broker’s license under which Defendant Zampolli is alleged to have operated, thus constituting an employer subject to vicarious liability.

While Defendant McGortv may hold the broker’s license under which Defendant Zampolli operated, the doctrine of respondeat superior does not impose liability on the individual supervisor, rather it serves to impose liability on the corporation. Absent a reason to pierce the corporate veil, New York’s law protects a corporate officer from individual liability. Therefore, the doctrine of respondeat superior, is a nonviable cause of action against Defendant McGorty.

(Internal citations omitted).

Respondeat superior is the legal doctrine under which an employer is responsible for an employee’s wrongdoing. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a situation where an employer may be liable for an employee’s actions.

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Posted: December 9, 2018

Fraud Claim Dismissed Because Plaintiff’s Alleged Reliance Was Not Reasonable

On November 28, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Tall Tower Capital LLC v. Stonepeak Partners, LP, 2018 NY Slip Op. 33024(U), dismissing a fraud claim because the plaintiff’s alleged reliance was not reasonable, explaining:

To allege a cause of action based on fraud, plaintiff must assert a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury. Whether a party’s reliance is justified is often a question of fact not amenable to resolution on a motion to dismiss. In certain situations, however, it is question of law that can be determined from the pleadings.

Stonepeak’s fraud claims are dismissed for lack of justifiable reliance. A sophisticated plaintiff cannot establish that it entered into an arm’s length transaction in justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means of verification that were available to it. This rule applies where the falsity of a representation could have been ascertained by reviewing publicly available information.

The status of the Florida injunction was a matter of public record and could have been independently ascertained by Stonepeak. Stonepeak does not contend otherwise. Stonepeak does not allege that it took any steps to verify whether Denton’s questionnaire response regarding the status of the lawsuit was accurate. Hence, Stonepeak’s claim to have been fraudulently induced to continue working on the Clear Channel deal in reliance on that representation must be dismissed because such reliance is not justifiable due to Stonepeak’s own lack of due diligence. Stonepeak’s negligent misrepresentation claims are dismissed for the same reason.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules, including the rule that a sophisticated businessperson’s reliance on a false statement must be reasonable. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.

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Posted: December 8, 2018

Court Refuses to Vacate Arbitral Award for Arbitrator Bias

On November 28, 2018, Justice Masley of the New York County Commercial Division issued a decision in Matter of Sayre v. Madison Hawk Partner, LLC, 2018 NY Slip Op. 33030(U), refusing to vacate an arbitral award for arbitrator bias, explaining:

As an initial matter, petitioners’ communication was not improper. Paragraph 19 of the Operating Agreement grants the arbitrator the power to award attorneys’ fees of a party if the arbitrator expressly determines that the party against whom such award is entered has caused the dispute, controversy or claim to be submitted to arbitration as a dilatory tactic or in bad faith. Indeed, respondents requested that the arbitrator award it legal fees. This is not a case of a secret communication with the arbitrator.

Respondents have a heavy burden of establishing arbitrator bias by clear and convincing evidence. Contrary to respondents’ argument, there is no per se rule that any communication with an arbitrator regarding payment of fees impairs the integrity of the arbitration process. Respondents’ reliance on Ament v Schubert Piano Co, 172 AD 423 (1st Dept 1916), for this proposition is misplaced since it was decided before the Federal Arbitration Act was enacted in 1925 and long before the public’s enthusiastic support for arbitration.

Courts have found an appearance of bias where there is evidence that a party was prejudiced or denied a fair hearing as a result of an arbitrator’s knowledge that the party failed to pay its portion of the arbitration fees. For example, where the arbitrator barred a party from participating in five days of a seven day hearing, the court found fundamental unfairness and vacated the award. Further, this is not a case where a party could not afford to pay the arbitral fees and is penalized for penurious. Otherwise, respondents’ reliance on cases involving improper arbitrator demands for payment is misplaced. There is no suggestion that respondents were denied a full and fair opportunity to be heard. Indeed, the decision is well drafted and well reasoned. The court declines respondents’ invitation to infer bias or a conflict of interest without any evidence.

(Internal quotations and citations omitted).

Complex 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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