Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: April 16, 2019

Failure to Seek Default Judgment Within One Year of Default Results in Dismissal of Claims

On March 13, 2019, Justice Knipel of the Kings County Commercial Division issued a decision in Matter of Lev v. Rosenberg, 2019 NY Slip Op. 30824(U), holding that a defendant’s failure to seek a default judgment within one year of the plaintiff’s failure to respond to the defendant’s counterclaims was grounds for dismissal of those counterclaims, explaining:

CPLR 3215(c) provides that if the plaintiff fails to take proceedings for the entry of judgment within one year after the default, the court shall not enter judgment but shall dismiss the complaint as abandoned, without costs, upon its own initiative or on motion, unless sufficient cause is shown why the complaint should not be dismissed. Although counterclaims are not specifically mentioned in CPLR 3215, the legislative history reveals that it was intended to apply to counterclaims, in addition to claims pleaded in a complaint. Here, Rosenberg has failed to (1) seek leave to enter a default judgment on his counterclaims against Lev within one year after default, (2) establish a reasonable excuse for his delay in seeking a default judgment on his counterclaims, and (3) demonstrate that his counterclaims are potentially meritorious. Accordingly, all of Rosenberg’s counterclaims against Lev, as set forth in his and Noah’s joint answer, dated Oct. 24, 2016, are dismissed as abandoned, without costs, pursuant to CPLR 3215(c).

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

If you are served with a complaint (or counterclaims, as happened in this case) and fail timely to answer, the court can enter judgment against you: a default judgment. But as this decision shows, failing timely to seek such a judgment can result in the dismissal of the claims that were the subject of the default. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding whether you have been properly served or if a default judgment has been entered against you.

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Posted: April 15, 2019

Court Analyzes Application of Saving Statue to Case That had Been Transferred Multiple Times

On March 25, 2019, Justice Cohen of the New York County Commercial Division issued a decision in Federal Home Loan Bank of Boston v. Moody’s Corp., 2019 NY Slip Op. 30921(U), analyzing the application of New York’s saving statute (CPLR 205) to an action that had been transferred multiple times, explaining:

This case presents a vexing question regarding the application of CPLR § 205(a). The parties agree that the FHLBB’ s claim in this Court, viewed in isolation, would be time barred because the alleged fraud occurred more than six years before the case was filed on November 2, 2017. The FHLBB’s claim can be saved from dismissal only if its filing date is deemed to relate back to the timely filing date of Moody’s I (April 20, 2011), or at least to the removal date of Moody’s II (May 27, 2011). That is where section 205(a) comes in.

CPLR § 205(a), sometimes referred to as the “saving” statute, provides in relevant part that:

If an action is timely commenced and is terminated in any other manner than by a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, a dismissal of the complaint for neglect to prosecute the action, or a final judgment upon the merits, the plaintiff . . . may commence a new action upon the same transaction or occurrence or series of transactions or occurrences within six months after the termination provided that the new action would have been timely commenced at the time of commencement of the prior action.

As the Court of Appeals recently observed, section 205(a) implements the Legislature’s policy preference for the determination of actions on the merits. The statute is remedial in nature and, where applicable, allows plaintiffs to avoid the harsh consequences of the statute of limitations and have their claims determined on the merits where a prior action was commenced within the limitations period, thus putting defendants on notice of
the claims.

The Appellate Division has determined that an out-of-state action is not a prior action within the meaning of section 205(a). The rule appears to have been first announced in Baker v. Commercial Travelers Mutual Accident Ass’n of Am., 3 A.D.2d 265, 266 (4th Dep’t 1957), in which the Fourth Department, addressing a precursor to section 205(a), explained:

Limitations of actions are matters within the concern of the forum. Commencement of suit in another State will not toll or otherwise affect the provisions for limitation of actions in the State of the forum. It follows therefore that, assuming an action was commenced in the United States District Court in Florida where the cause of action arose within the contractual time limit, still that does not make available to the plaintiff the saving statute of New York.

This case presents the unusual (perhaps unique) situation in which the prior action was commenced outside of New York (Moody’s I) but terminated within New York (Moody’s IV). The parties have not cited, nor has the Court found, a case addressing the applicability of CPLR § 205(a) in that context. In the absence of binding authority on point, the Court finds that the most natural reading of the text of section 205(a) is that the FHLBB’s complaint in this case is timely because it was filed within six months of the termination of its prior action by a federal court sitting in New York. That conclusion is bolstered by the Court of Appeals’ admonition that the provision’s broad and liberal purpose is not to be frittered away by any narrow construction.

Here, there is a direct – albeit tumultuous – path from Moody’s I through Moody’s IV. Despite its travels between and among state and federal courts, it was one continuous action. Under federal law, the removal of the case from Massachusetts state court (Moody’s I) to Massachusetts federal court (Moody’s II) did not affect the filing date, which remains the time it was filed in state court.

In turn, after the transfer of the action from Massachusetts federal district court to the SDNY (Moody’s IV), 28 U.S.C. § 1631 provides that the action or appeal shall proceed as if it had been filed in or noticed for the court to which it is transferred on the date upon which it was actually filed in or noticed for the court from which it is transferred.

Although the Court is not bound to take account of federal court procedural rules in its application of CPLR § 205(a), doing so in this case is consistent with the overarching remedial purpose of the New York statute. The federal rules serve the same remedial purpose of avoiding the harsh application of the statute of limitations when the plaintiff is seeking to continue its timely-filed case in the proper forum. The Defendants here plainly have been on notice of the FHLBB’s claims since 2011. Moreover, the final resting place of the action immediately prior to the initiation of the instant case was a New York federal court, and thus applying section 205(a) is consistent with Baker and its progeny.

In sum, the Court finds that the FHLBB’s claim is timely, under CPLR § 205(a), because its prior action was timely commenced in 2011 and the instant case was initiated and served within six months of the termination of that action by the SDNY.

(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 if you or a client have questions regarding whether a claim is barred by the statute of limitations.

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Posted: April 14, 2019

First Department Affirms Order Remanding Arbitration to New Arbitrator

On April 11, 2019, the First Department issued a decision in Policy Admin. Solutions, Inc. v. QBE Holdings, Inc., 2019 NY Slip Op. 02818, affirming a lower court decision to remand an arbitration to a different arbitrator, explaining: “The court providently exercised its discretion in clarifying that the original arbitrator was not to hear the remanded arbitration. That ruling had been appealed and affirmed by this Court (160 AD3d 572, 573 [1st Dept 2018]).”

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

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Posted: April 12, 2019

Contra Proferentem Doctrine Does Not Apply When Contract is Unambiguous and the Parties are Sophisticated

On April 2, 2019, the First Department issued a decision in Churchill Real Estate Holdings LLC v. CBCS Wash. St. LP, 2019 NY Slip Op. 02472, rejecting the application of the contra proferentem doctrine, explaining:

Contrary to defendants’ contention, the doctrine of contra proferentem is inapplicable here, because the language of the agreement is unambiguous, and because the parties are sophisticated.

(Internal citations omitted).

New York contract law–usually straightforward–has traps for the unwary, like the rule, which the court declined to apply here, that ambiguities in a contract are interpreted against the drafter. Contact Schlam Stone & Dolan partner John Lundin at if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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Posted: April 11, 2019

Counsel Waived Privilege by Forwarding E-mail Chain Containing Privileged Conversations to Opponent

On March 15, 2019, Justice Friedman of the New York County Commercial Division issued a decision in Semsysco GMBH v. Global Foundreis Inc., 2019 NY Slip Op. 30664(U), holding that counsel waived the attorney-client privilege by forwarding an e-mail chain containing privileged conversations to an opponent, explaining:

CPLR 4503(a)(1) provides that unless the client waives the privilege, confidential attorney-client communications shall be protected from disclosure. As the Court of Appeals has explained, generally, communications between an attorney and a client that are made in the presence of or subsequently disclosed to third parties are not protected by the attorney-client. Thus, when a litigant or counsel voluntarily discloses privileged communications, by email or otherwise, a waiver will be found.

The general rule that a disclosure of a privileged communication will operate as a waiver of the attorney-client privilege is subject to an exception where it is shown that the client intended to maintain the confidentiality of the document, that reasonable steps were taken to prevent disclosure, that the party asserting the privilege acted promptly alter discovering the disclosure to remedy the situation, and that the parties who received the documents will not suffer undue prejudice if a protective order against use of the document is issued.

Although this rule has been articulated by the Appellate Division in the context of disclosures by attorneys, it has been persuasively applied by New York trial courts, and a substantially similar rule has been applied by federal courts, in the context of inadvertent disclosures by clients. The court follows this authority here.

It is further settled that the party who asserts the privilege has the burden of establishing that it has not waived the privilege.

Applying these standards, the court holds that plaintiffs have not met their burden of establishing that Mr, Otzlinger’s forwarding of the email chain did not result in a waiver of the attorney-client privilege. As a threshold matter, plaintiffs fail to meet their burden of showing that the disclosure of the email chain was inadvertent.

Mr. Otzlinger’s email to Mr, Ehvveiner inquired: “how do you see this?” The first email in the chain, beneath this email to Mr. Ehweiner, was an email from Mr. Otzlinger to, among others, Dr. Petra Wibbe, plaintiffs’ in-house counsel, agreeing that a settlement dialogue with GlobalFoundries should be undertaken and making suggestions about whom he could contact. Earlier emails in the chain by Dr, Wibbe and Richard Hegger, Semsysco’ s outside counsel, were also focused on the desirability of initiating settlement discussions before litigation was commenced. However, a still earlier email dated June 8, 2015, from Dr. Wibbe to Semsysco’s litigation counsel and others, on which Mr. Otzlinger was copied, discussed litigation strategy at length, including proposed changes to a draft “notice of breach” letter and possible damages claims. Mr, Ehweiner responded to Mr. Otzlinger’s email by suggesting a GlobalFoundries’ contact. His email stated: “I think Rutger would be an alternative.” Mr. Ehweiner’s responsive email also included the entire email chain.

Mr. Otzlinger acknowledges that he deliberately sent the “top email” (i.e., the first email in the chain beneath his email to Mr. Ehweiner) in order to facilitate settlement discussions. He asserts, however, that he inadvertently forwarded to Mr. Ehweiner certain emails involving privileged communications with Grunwald and Semsysco’s counsel. Mr. Otzlinger’s statement that he inadvertently forwarded the chain is wholly conclusory. He nowhere states that he was unaware that the email chain was attached. Nor does he address the fact that Mr. Ehweiner’s response also included the entire email chain, or claim that he was not put on notice by this responsive email that the entire chain had been forwarded. In addition, the top email expressly refers to statements by De Wibbe and Mr. Hegger, and cannot readily be understood without references to their underlying emails in the chain concerning settlement discussions.

In claiming that Mr. Otzlinger did not intentionally forward the entire email chain, plaintiffs argue that Mr. Otzlinger sent the email to Mr. Elnveiner after getting off a long flight to Taiwan and only one minute after sending the top email to Semsysco and Grunwald personnel and their counsel. Plaintiffs do not provide a meaningful explanation for the time difference between these emails. More important, Mr. Otzlinger himself does not make any claim that the circumstances under which he sent the email to Mr. Ehweiner caused him to inadvertently or unintentionally forward the entire email chain. For example, he does not claim in his affidavit that he erred in forwarding the chain because he acted so quickly-within one minute of his email to Dr. Wibbe — in sending the email to Mr. Ehweiner. Nor does he claim that the long flight caused him to inadvertently forward the chain.

Under these circumstances, the court does not find that plaintiffs have shown that the forwarding of the chain was inadvertent. Plaintiffs also fail to meet their burden of showing that they acted promptly after discovering the disclosure to remedy the situation. In claiming that they acted promptly, plaintiffs point to their counsel’s request for the return of the email chain in June 2018, within 48 hours of a letter from defendants’ counsel to plaintiffs’ counsel advising them that their client had waived its attorney-client privilege by disclosing the email chain to Mr. Ehweiner when he was an employee of GlobalFoundries. Plaintiffs do not, however, make any showing that they were unaware, prior to receipt of defendants’ counsel’s letter, that Mr. Otzlinger had forwarded the email chain. Mr. Otzlinger’s affidavit fails to address when he realized that he had forwarded the email chain. Plaintiffs also fail to clarify apparently inconsistent statements made on this motion as to when they first acquired knowledge that the email chain had been forwarded. In their memorandum in opposition, plaintiffs state that “Defendants incorrectly suggest that the Email Chain was not collected and that Plaintiffs ‘hid’ it from Defendants. In fact, the Email Chain was properly collected and later marked as privileged-unsurprising given the ubiquitous presence of attorneys on the Email Chain and the fact that it was forwarded to a personal, non-GlobalFoundries email address. In contrast, at oral argument of the motion, plaintiffs’ counsel appeared to state that plaintiffs did not know about the email chain. He apparently acknowledged that the computer review system failed to identify the chain, stating: “‘I freely admit my mistake, it should have been caught and we should have produced only the unredacted, the non-privilege part.”

As plaintiffs have not established the date of their discovery of the forwarding of the email chain, the court does not find that they have shown that their request for the return of the chain was prompt. The court accordingly holds, under the NY Times standard, that Mr. Otzlinger’s forwarding of the email chain resulted in waiver of the attorney-client privilege.

The court rejects plaintiffs’ contention that the waiver cannot extend to the Grunwald plaintiffs because Mr, Otzlinger has never been their officer or employee. The Appellate Division has held that a party who shares a common interest or counsel with another party cannot unilaterally waive the joint privilege on behalf of the other party. Plaintiffs fail to cite any authority that a waiver will not occur where the same counsel represents both parties, in this case related entities, and becomes aware of the disclosure but fails to timely assert the privilege on behalf of its clients.

(Internal quotations and citations omitted).

An issue that arises in almost all complex commercial litigation is identifying evidence that should be withheld from production in evidence because it is subject to the attorney-client or other privilege. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding the attorney-client, common interest, work product or other privileges or exemptions from production of evidence.

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Posted: April 10, 2019

Questions of Fact Preclude Dismissal of Criminal Usury Defense

On March 18, 2019, Justice Masley of the New York County Commercial Division issued a decision in Emigrant Bank Fine Art Fin., LLC v Kasmin Gallery Inc., 2019 NY Slip Op 30713(U), holding that questions of fact precluded dismissal of a defense of criminal usury, explaining:

Civil usury is not available to corporations and, in any event, may be asserted by individuals for only loans with principal values up to $250,000. The criminal usury defense may be interposed by an entity or its guarantor as an affirmative defense for loans bearing interest rates greater than 25% of the principal amount per annum, provided that the principal amount did not exceed $2.5 million. Corporations and their guarantors may invoke a criminal usury defense only to offset claims relating to nonpayment of a loan; it cannot be employed as a means to effect recovery by the corporate borrower.

Preliminarily, the criminal usury defense does not apply to claims relating to nonpayment of defendants’ obligations under the $3 million 2014. Additionally, the criminal usury defense applies only to loans or forbearances that are absolutely repayable: the 2017 Restated Agreement is not a loan or forbearance and is not, therefore, susceptible to the defense.

Thus, the only criminal usury issues before the court’ at this juncture concern whether the criminal usury defense can survive this motion to dismiss to the extent the defense is asserted as an offset to plaintiffs’ nonpayment claims arising from the $2 million 2012 Loan, the only loan for which the statutory defense can be invoked.

. . .

Usurious intent-that the lender had a general intent to take more than the lawful rate of interest, but not necessarily to violate Penal Law 190.40-is an essential element of a usury defense. Where loan documents reflect an unlawful rate of interest on their face, usurious intent is inferred. Usurious intent is an issue of fact where, as here, the loan documents have a stated interest rate below the lawful limit, but payment of other fees arising from or collateral to the loan, calculated together with the interest, may result in rates per annum exceeding the lawful limit. Here, the lawful limit is the statutory 25% rate per annum, annualized across the life of the transaction. The determination whether fees constitute.disguised interest must consider all of the circumstances surrounding the transaction.

The record on this CPLR 3211 motion is insufficient to eliminate those facts necessary to form the basis of defendants’ criminal usury defense, as a matter of law, with respect to the 2012 Loan. Viewing the evidence in the light most favorable to defendants, the documents submitted by plaintiffs are not adequate to eliminate the usury defense with respect to the 2012 Loan and the fees/charges imposed throughout the course of that transaction. Plaintiffs argue that the documentary evidence establishes that all the fees paid for the 2012 Loan-even if the challenged success fees are included in the calculation of interest for usury purposes, did not exceed the maximum lawful interest rate per annum. The documents, however, do not sufficiently demonstrate what, if any, fees of any kind were incurred for the· 2012 Loan in the period from the maturity date, July 31, 2014, through March 2017. This gap in the record would require the court to impermissibly speculate, or assume, facts entirely absent from the documents submitted here.

Further, the documents do not identify facts surrounding the composition of the Payoff Agreement calculation, what costs, fees, interest, or remaining principal the calculation encompasses, and the precise amounts paid for those categories for the 2012 Loan; similarly, other sums in the Payoff Agreement, such as a catch-up success fee balance, are not identified as relating to any particular loan. In the absence of these and other facts regarding the 2012 Loan and the correlated February 2014 Letter imposing success fees for certain artworks, the court cannot find that all necessary facts forming the basis of defendants’ criminal usury defense have been.eliminated by the documentary evidence or determine as a matter of law-that a lawful rate of interest per annum was taken for the 2012 Loan, with or without inclusion of success fees in the calculation.

While the court rejects defendants’ arguments that the 2017 Restated Agreement is, itself, a criminally usurious transaction-since the 2017 Restated Agreement is not a loan to begin with-. plaintiffs have also failed to eliminate factual issues pertaining to the effect upon the 2012 Loan that was caused by execution of the 2017 Debt Agreements. For instance, the 2017 Debt Agreements alone do not adequately establish either that delivery of the Payoff Sum and execution of the 2017 Debt Agreements terminated the 2012 Loan and, instead, incorporated the February 2014 Letter for success fees into a new instrument simply consolidating/restructuring preexisting success fee obligations. Alternatively, plaintiffs’ documents fail to establish that the 2012 Loan was not terminated upon payment of the Payoff Sum and execution of the 2017 Debt Agreements, which, instead, limited the parties’ obligations and rights under the 2012 Loan to those concerning only future success fees under the February 2014 Letter.

In any event, the documents before the court on this CPLR 3211 motion do not eliminate, as a matter of law, all necessary factual issues upon which the criminal usury defense, with respect to only the 2012 Loan, is based. The usury counterclaim/affirmative defense is otherwise dismissed as to the remaining agreements at issue here; the 2014 Loan and 2017 Restated Agreement are not, as a matter of law, loans for which the statutory defense can be invoked.

(Internal quotations and citations omitted).

New York’s usury laws can sometimes provide a defense to payment: the interest rate in an agreement can be so high that a court will not enforce it. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have a question regarding whether the interest rate in an agreement or note is legal.

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Posted: April 9, 2019

Oral Agreement to Sell Securities Enforceable Even if it Cannot Be Performed Within a Year

On March 19, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Hill v. Full 360 Inc., 2019 NY Slip Op. 30718(U), holding that an oral agreement to sell securities was enforceable even if it could not be performed within a year, explaining:

Defendants’ statute of frauds argument lacks merit. In arguing that a contract for the sale of securities must be in writing, defendants rely on case law citing to a former section 8-319 of the Uniform Commercial Code, which stated that a contract for the sale of securities is not enforceable unless there is some writing. That section was repealed, effective October 10, 1997, and was replaced by section 8-113, which provides: A contract or modification of a contract for the sale or purchase of a security is enforceable whether or not there is a writing signed or record authenticated by a party against whom enforcement is sought, even if the contract or modification is not capable of performance within one year of its making.

Here, the alleged agreement constitutes a contract for the sale or purchase of a security. Therefore, pursuant to UCC § 8-113, it is enforceable whether or not it is in writing.

Defendants also contend that General Obligations Law§ 5-701(a)(l) bars the enforcement of the alleged contract. That section provides that an agreement which by its terms is not to be performed within one year from the making thereof is not enforceable unless there is a written memorandum thereof signed by the party to be charged. However, UCC § 8-113 provides with respect to the sale of securities that such an agreement is enforceable whether or not it is in writing and even if it is not capable of performance within one year of its making.

Even assuming GOL, § 5-701 (a)(l) is applicable here, the Court of Appeals has long interpreted GOL, § 5-701 (a)(l) to encompass only those contracts which, by their terms, have absolutely no possibility in fact and law of full performance within one year. Here, the purported promise that Hill would be permitted to purchase a 30% equity stake in the company was capable of being fulfilled within one year. The purported agreement does not call for performance within any particular time span or schedule. Therefore, it is possible for the stocks to have been purchased/sold within one year.

In arguing that the promise is subject to the statute of frauds, defendants rely on D’Esposito v Gusrae, Kaplan & Bruno PLLC. In that case, the court found that plaintiffs causes of action for promissory estoppel, specific performance, and breach of contract, all based on a purported promise by defendants to make plaintiff a full partner/member of the defendant law firm, were barred by GOL, § 5-701 (a)(l). The court noted that irrespective of whether plaintiff might have become a partner within one year, he claimed that his right to a membership/partnership was to have continued indefinitely and even after he left the firm. The oral agreement he relied on thus called for performance of indefinite duration and was terminable within a year of its inception only by its breach and was thus barred by the statute of frauds. Defendants’ reliance on D’Esposito is misplaced because that case does not involve a promise to create a partnership, but rather a purported promise that plaintiff would have the right to acquire 30% of the shares in a corporation.

(Internal quotations and citations omitted).

Contract law–usually straightforward–has traps for the unwary, like the requirement that some contracts be in writing (the statute of frauds). And as this decision shows, there are ways to escape from those traps. Contact Schlam Stone & Dolan partner John Lundin at if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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Posted: April 8, 2019

Contractual Disclaimers Barred Fraud Claim

On March 21, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in 438 W. 20 St., LLC v. Bares, 2019 NY Slip Op. 30719(U), holding that contractual disclaimers barred a fraud claim, explaining:

A fraud claim requires proof by clear and convincing evidence as to each element of the claim. The convincing clarity requirement is relevant in a ruling on a motion for summary judgment land as such the judge must view the evidence presented through the prism of the substantive burden. A cause of action for fraud is comprised of [1] a representation of material fact, [2] the falsity of the representation, [3] knowledge by the party making the representation that it was false when made, [4] justifiable reliance by the plaintiff and resulting injury. To succeed on a summary judgment motion, defendants must do more than show that there arc gaps in plaintiffs proof- the defendant movant must make an affirmative showing that there is no triable issue of fact as to the merits.

As to the first and second elements of a fraud claim, defendants demonstrated that the contract bars the claim. The contract contains a purchaser representation, warranty and agreement that it has examined the Premises and is familiar with the physical condition thereof and that neither Seller nor the agents of Seller have made any verbal or written representations to Purchaser. Thus, plaintiff can neither show a misrepresentation nor refute defendants’ denial of any representation of a material facts or falsely of any representation. In fact, plaintiff admits defendants made no representations about any condition of the Premises. After plaintiffs inspection, Davis negotiated a reduction of the price and, in return, reaffirmed in a Supplemental Rider that Purchaser shall take title to the Premises in its as is condition. There can be no misrepresentation here because plaintiff entered into a contract with defendants that specifically disclaims liability for any representations made prior to closing (“[T}he acceptance of the Deed by Purchaser shall be deemed to be an acknowledgment by Purchaser that Seller has fully performed, discharged and complied with all of Seller’s obligations. representations. warranties, covenants and agreements hereunder, that Seller is discharged therefrom and that Seller shall have no further liability with respect thereto).

Defendants further argue, correctly, that the contract language in this case is specific enough to obviate any claim that misrepresentations were made. The contract states that: except as otherwise set forth in this contract, none of Seller’s covenants, representations. warranties or other obligations contained in this Contract shall survive Closing. It also contains a similarly worded merger clause.

Plaintiff however, argues that the allegedly misrepresented facts were peculiarly within the representors knowledge. Plaintiff’s claim arises out of representations of defendants and their agents that the Townhouse had been gut renovated with top of the line renovations.

None of these appear in the contract. As discussed above, representations of any kind are expressly disclaimed. Evidence of the misrepresentations alleged include disturbed asbestos in the walls. holes in the walls that were covered up with drywall and siding, carbon monoxide risks, air duel work that was cheaply done, joist defects in the roof, etc. Plaintiff argues that issues that are not easily verified without destructive testing may be found to be peculiarly within the representor’s knowledge, and as such, even a specific disclaimer in the contract would be insufficient to bar a fraud claim. Plaintiff cites Schooley v. Mannion (241 AD2d 677. 678 [3d Dept 1997]), where the court’s inquiry was limited to whether any viable cause of action can be gleaned from the complaint and Superior technical Resources Inc. v Lawson Software Inc., (17 Misc3d 1137[A], 851 NYS2d 74, 2007 NY Misc LEXIS 8053 [Sup Ct NY County 2007]). This is a motion for summary judgment and purchaser had the means available to him of knowing the truth or real quality of he representations. The CPLR 3211 (a)(7) standard applicable in Schooley and the exception discussed in Superior Technical Resources. Inc. do not apply.

The contract does not limit plaintiffs ability to inspect. Plaintiff does not put forth any evidence indicating that defendants refused more invasive inspection or made any affirmative representations about the structural health of the building. Plaintiff’s allegations do not reflect the convincing clarity required to avoid a grant of summary judgment. Moreover, the asserted misrepresentations are belied by the Contract, Rider and Supplemental Rider: The Rider states neither Seller nor the agents of Seller have made any representations to Purchaser: the Contract provides Purchaser represents it is fully aware of the physical condition and state of repair of the Premises and is entering into the contract based solely upon its inspection and not upon any representations given or made by Seller; and the Supplemental Rider recites Purchaser shall take title of the Premises in its as is condition.

Bares states, and David does not deny, that neither he nor anyone on his behalf interfered with the work of Davis’ inspector. The inspector did not report any restrictions on or interference with his work at the Premises. Additionally, Bares confirmed that he would have given his consent to have plaintiff perform whatever inspection Davis’ representatives might have chosen to perform at the Premises. Bares was never asked to give his consent to any further inspections.

As to the fourth element, defendants have shown that even if representations had been made. plaintiff could not have reasonably relied on them because the Supplemental Rider, as part of the contract, provides that the Purchaser has been provided access to conduct whatever inspections (both engineering and environmental) and other due diligence that the Purchaser deems necessary. Plaintiffs home inspector reported seventeen defects, including evidence of mold, moisture penetration, a need for exterior waterproofing. waterproofing, settlement that will cause deflections and floor sags, flame distortions and wall and ceiling cracks and concluded that it is not unusual for new purchasers to assume the risk of unknown, hidden defects in old buildings like this one. The Report also notes that the roof was poorly installed and will need to be re-sloped, that the rear extension is poorly heated, that the fireplaces with old brick flues arc considered unsafe, that the steel I-beam supporting the sidewalk is deteriorating and that walls have been, and walls were removed.

Armed with the Report, Davis was able to negotiate a $150,000 concession on the price of the Townhouse. Plaintiff was aware of all of the defects discovered by the home inspector and the risks it would be assuming when it determined to go through with the purchase. Further, plaintiff suspected that there may be underlying structural issues with the Townhouse, yet declined to investigate further as to those issues prior to closing. Under the doctrine of caveal emptor, the seller should not be responsible for the buyer’s failure to make use of the means of verification available to it.

Plaintiff attempts to avoid the risks he assumed by asserting that defendants actively concealed non-visible defects. As evidence, he submits two spreadsheets where defendant Kormilitsyna wrote, the building has to look like new construction and not show any structural issues. This statement is taken out of context.

The spreadsheets, labeled “Action Plan,” were prepared during a $1.3 million renovation project of the Premises in 2013. According to Ms. Kormilitsyna. the spreadsheets concerned priorities for performing certain work within the next week. The quoted statement not show any structural issues was intended to communicate to the contractor that she wasn’t going to take any shortcut. In her deposition, Ms. Kormilitsyna stated that the Townhouse was to be completely fixed given that she and Bares were spending more than a year of our lives and a small fortune to do if. Thomas Vail, the architect, confirmed that the Bares wanted the final product to be a new renovation and that he and the Bares wanted the house not to have structural issues.

Perri, plaintiffs inspector, when asked whether he saw any evidence of any concealed defects or other indiction that would suggest that the sellers, or any other entity, fraudulently tried to hide defects in the townhouse, replied simply “No.” The convincing clarity required to show active concealment simply is absent here.

Accordingly, plaintiffs cause of action alleging fraud must be dismissed as there are no material issues of fact sufficient to require a trial on the merits. Even if some such facts were shown. they do not rise to the clear and convincing evidence standard required.

(Internal quotations and 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 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: April 7, 2019

Claimed Deception Among Jewelry Wholesales Supported General Business Law 349 Claim Because Alleged Fraud Ultimately Harmed Public

On March 18, 2019, Justice Scarpulla of the New York County Commercial Divsion issued a decision in KS Trade LLC v. International Gemological Inst., Inc., 2019 NY Slip Op. 30728(U), holding that alleged deception among jewelry wholesalers supported a General Business Law Section 349 claim because the alleged fraud ultimately harmed the public, explaining:

General Business Law Section 349 provides that deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state are unlawful. This statute requires a showing that defendant is engaging in a consumer-oriented act or practice that is deceptive or misleading in a material way, and that plaintiff has been injured by reason thereof. In determining whether the act is consumer oriented, the question is whether the matter affects the public interest in New York, not whether the suit is brought by a consumer or a competitor. A deceptive act or practice has been defined as a representation or omission likely to mislead a reasonable consumer acting reasonably under the circumstances.

Here, this is not just a private commercial dispute between parties. Rather, the crux of this dispute is alleged conduct ultimately aimed at the public. Consumers are not just incidental parties — parties to whom the fraudulent certificates, appraisals and stones were passed on to – rather, the conduct was ultimately directed at misleading the consumers, in fraudulently grading and selling stones that consumers are buying at artificially inflated prices. The conduct, as alleged, is sufficiently stated as consumer oriented within the meaning of the statute.

Further, while the original deception is alleged to have occurred at the international level, the moving defendants’ conduct is sufficiently alleged as a deceptive act or practice resulting in injury Moving defendants are alleged to have sought a kickback or illicit fee in return for issuing a consistent grading to that of the allegedly fraudulent grading issued by the international IGI entities, in furtherance of the purported scheme. This conduct, as alleged, is sufficiently stated as a deceptive act or practice to mislead the public within the meaning of the statute.

As to the injury, KS alleges that when KS refused to pay the illicit fee, it was left with allegedly over-graded stones with no New York certificate, that its customer refused to buy. If others in the industry, as alleged, have been paying the illicit fee to IGI NY, consumers purchasing the end product jewelry have been receiving fraudulently graded stones at artificially inflated prices.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. This decision relates a statute-based fraud claim brought by under General Business Law Section 349. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have a question regarding a fraud-based claim, including one brought pursuant to a state or federal statute.

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Posted: April 6, 2019

Statute of Frauds Bars Claim for Fee in Connection with Finding a Business Opportunity

On March 27, 2019, the Second Department issued a decision in Best Global Alternative, Ltd. v. FCIC Constr. Servs., Inc., 2019 NY Slip Op. 02308, holding that the Statute of Frauds barred a claim for a fee in connection with finding a business opportunity, explaining:

Pursuant to General Obligations Law § 5-701(a)(10), an agreement or some note or memorandum thereof must be in writing and subscribed by the party to be charged therewith, where the agreement is to pay compensation for services rendered in negotiating a loan, or in negotiating the purchase, sale, exchange, renting or leasing of any real estate or interest therein, or of a business opportunity, business, its good will, inventory, fixtures or an interest therein. The statute defines negotiating to include the act of procuring an introduction to a party to the transaction or assisting in the negotiation or consummation of the transaction.

Here, the defendants established, prima facie, that the purported agreements were for the negotiation of a business opportunity. Accordingly, the agreement was required to be in writing and subscribed by the party to be charged. The defendants established that the alleged agreements failed to comply with these requirements.

In opposition, the plaintiff failed to raise a triable issue of fact. Contrary to the plaintiff’s contention, the exception to the statute of frauds for part performance has not been extended to General Obligations Law § 5-701. Therefore, any evidence tending to show partial performance would not obviate the requirement of a written agreement. The plaintiff also argues that the agreement was for a joint venture. The plaintiff improperly raises this contention for the first time on appeal. Contrary to the further contention of the plaintiff, the record does not show that the defendants made an admission to the existence of the purported agreement so as to take the agreement out of the statute of frauds.

The plaintiff failed to raise a triable issue of fact as to whether the alleged agreements satisfied the requirements of General Obligations Law § 5-701(a)(10). To satisfy the statute of frauds, a memorandum, subscribed by the party to be charged, must designate the parties, identify and describe the subject matter, and state all the essential terms of a complete agreement. Here, the plaintiff submitted a handwritten memorandum by Cristo. That memorandum merely set forth a list of payments or prospective payments to be made by the hospital to FCIC, on certain dates; the memorandum did not refer to any agreement between the plaintiff and FCIC, and the memorandum was not subscribed by Cristo or any representative of FCIC. The plaintiff also submitted a certain $50,000 check issued to it by FCIC. However, that check contained no notation referring to the subject project or purported agreement, and the mere fact that this check may have been issued after a payment was made by the hospital to FCIC does not demonstrate the existence of an agreement. Taken together, the handwritten memorandum and check fail to raise a triable issue of fact as to the existence of writings that would satisfy the statute of frauds.

(Internal quotations and citations omitted).

Contract law–usually straightforward–has traps for the unwary, like the requirement that some contracts be in writing (the statute of frauds). And as this decision shows, there are ways to escape from those traps, but the exceptions are narrow and, as shown here, difficult to meet. Contact Schlam Stone & Dolan partner John Lundin at if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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