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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: January 20, 2019

Appeal of Preliminary Injunction Moot Because Act Sought to be Enjoined Already Occurred

On January 17, 2019, the First Department issued a decision in AmBase Corp. v. Spruce Capital Partners LLC, 2019 NY Slip Op. 00352, holding that the appeal of the denial of a preliminary injunctyion was moot because the act sought to be enjoined already had occurred, explaining:

Insofar as plaintiffs seek a preliminary injunction, that remedy is a legal impossibility, and the appeal is moot. The strict foreclosure that plaintiffs sought to enjoin occurred more than a year ago, in late August or early September 2017, and we denied plaintiffs’ motion for a stay, pending this appeal, of so much of the order as dissolved the TRO that had been granted.

Plaintiffs’ request for a declaratory judgment is not moot, because plaintiff 111 West 57th Investment LLC (Investment) might be entitled to damages from defendant 111 W57 Mezz Investor LLC (Junior Mezz Lender) if it is judicially determined that Investment had the right to object to the strict foreclosure pursuant to Uniform Commercial Code (UCC) § 9-620(a)(2)(B). However, the complaint, as currently pleaded, mentions neither damages nor a constructive trust. Similarly, the complaint does not allege that the Spruce defendants acted in bad faith because they colluded with other defendants who are not party to this appeal or that Investment was entitled to object to the strict foreclosure under UCC 9-621(a)(1).

(Internal quotations and citations omitted).

It is common in commercial litigation that parties seek equitable relief such as injunctions, attachments or the appointment of a temporary receiver in order to preserve assets or maintain the status quo when money damages will not make them whole at the end of a litigation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding seeking–or opposing–such relief.

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Posted: January 19, 2019

Court Grants Extension of Time To Serve Defendant Even Though Plaintiff Did Not Provide Good Cause for Failure Timely to Serve

On November 5, 2018, Justice Livote of the Queens County Commercial Division issued a decision in FCS Group, LLC v. Chica, 2018 NY Slip Op. 33433(U), extending a plaintiff’s time to serve even though the plaintiff did not show good cause for failing timely to serve, explaining:

CPLR 32ll(a)(8) provides that a party may move the court to dismiss a cause of action against him where the court lacks personal jurisdiction over that defendant. For a Court to have personal jurisdiction over a corporate defendant, service of process must be made upon an officer, director, managing or general agent, or cashier or assistant cashier or to any other agent authorized by appointment or by law to receive service. Section 306(b) of the Business Corporation Law provides that service of process upon a corporate defendant may be completed by personally serving the secretary of state as agent for that defendant.

CPLR 306-b states in pertinent part that: if service is not made upon a defendant within the time provided in this section, the court, upon motion, shall dismiss the action without prejudice as to that defendant, or upon good cause shown or in the interest of justice, extend the time for service.

The time provided to effectuate service upon a defendant after commencement of an action is one hundred twenty days.

To establish good cause, a plaintiff must demonstrate reasonable diligence in attempting service . Good cause may also be found to exist where the plaintiff’s failure to timely serve process is a result of circumstances beyond the plaintiff’s control. However, good cause will not exist where a plaintiff fails to make any effort at service, or fails to make at least a reasonably diligent effort at service.

In the absence of good cause shown courts must consider the interest of justice standard of CPLR 306-b. The interest of justice standard does not require reasonably diligent efforts at service, but courts, may consider the presence or absence of diligence, along with other factors.

Additional factors to be considered include the expiration of the statute of limitations, the meritorious nature of the action, the length of delay in service, the promptness of a request by the plaintiff for an extension, and prejudice to the defendant.

Here, plaintiff has failed to demonstrate good cause for failing to serve defendant MAVI within 120 days after commencement of this action. While plaintiff has shown diligence in its attempts to serve defendant MAVI, as evidenced by the affidavit of plaintiff’s process server, plaintiff has failed to explain why it did not serve process on the secretary of state as agent for MAVI. Thus, plaintiff has failed to show good cause in its failure to serve defendant MAVI by serving process on the secretary of state within 120 days after commencement of this action.

Regarding the attempted service of defendant Chica, plaintiff explains, in its papers, that it attempted to serve defendant Chica by visiting the defendant’s last known address, but received no answer after ringing the doorbell. Plaintiff’s process server then conducted a database search and found a “David Chica” listed at 62-82 60th Drive; the same address listed on the New York State Department of State Division of Corporations website for MAVI. Plaintiff made several more attempts to serve defendant Chica at this 60th Drive address, but was unsuccessful. Plaintiff’s process server was unable to locate a forwarding address for defendant Chica. Accordingly, plaintiff has demonstrated good cause for its failure to serve defendant Chica through its diligence in attempting to effectuate service, which was unsuccessful due to circumstances outside the plaintiff’s control.

Although plaintiff has not demonstrated good cause in its attempts to serve defendant MAVI, it has demonstrated that, in the interest of justice, its service of defendant MAVI should be considered timely, nunc pro tunc.

To extend time of service in the interest of justice under CPLR 306-B, the court may weigh several factors. Here, the length in delay of service outside the 120-day time frame was minimal (seven days) and plaintiff has shown, in its papers, that defendant MAVI had actual notice of the suit according to defendant Haque’s deposition testimony. There is also an indication that defendant MAVI sought to avoid service by plaintiff because plaintiff’s process server called the number listed for MAVI, where a female answered the phone by saying “MAVI” and immediately hung up after the process server asked for MAVI’s location. This is not disputed in defendants’ reply. Furthermore, defendants have failed to demonstrate that they would be prejudiced.by granting of plaintiff’s cross-motion because defendants had notice of the underlying action, as evidenced by defendant Haque’s testimony explaining that he not only told defendants MAVI and Chica about the lawsuit, but also that defendant MAVI is paying for defendant Haque’s legal representation.

(Internal quotations and citations omitted).

The rules regarding how you start a lawsuit and bring the defendants into it can sometimes be esoteric. As shown here, there are rules regarding how long a plaintiff has to serve a defendant. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding the proper way to serve a defendant, bringing them into a lawsuit.

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Posted: January 18, 2019

Delay Not Fatal to Motion to Amend

On November 14, 2018, Justice Grays of the Queens County Commercial Division issued a decision in Energy Conservation Group, LLC v. Applied Underwriters, Inc., 2018 NY Slip Op. 33436(U), granting a motion to amend even though there was a delay in making the motion, explaining:

CPLR §3025(b) provides that leave to amend a pleading shall be freely given upon such terms as may be just. As a general rule, the amendment of a complaint will be permitted where there is no significant prejudice or surprise to the defendant. Prejudice in this context means that the nonmoving party has been hindered in the preparation of its case or has been prevented from taking some measure in support of its position.

In the case at bar, the amendment of the answer is warranted for several reasons. First, the Applied defendants’ extended delay in moving to amend their answer required them to offer a reasonable excuse for the delay, a requirement that they met by showing that they have been waiting for determinations to be made in other forums. While an earlier interposition of the counterclaims would have been much preferable, their excuse, coupled with other factors, is sufficiently, though barely, plausible. Second, tardiness does not bar the amendment of a pleading unless it resulted in significant prejudice to the other side. In the case at bar, the plaintiffs have been aware of the debts allegedly due to the Applied defendants for years, and the assertion of the counterclaims now should not take them by surprise, especially because of the reservation of rights in previous answers. Third, the claims asserted by the plaintiffs and the claims asserted by the Applied defendants share at least some issues in common, and judicial economy would be served by determining all of the claims in one action. In this complex dispute, the interest of judicial economy is the heaviest factor in allowing the amendment sought by the Applied defendants. Fourth, the assertion of the counterclaims should not unduly delay the trial of this action, since the parties have not concluded discovery, and the extensive discovery already conducted would be relevant tc the common issues raised by the parties. The plaintiffs did not persuade the court on this motion that sweeping additional discovery would be necessary. Moreover, in the case at bar, the need, if any, for additional discovery does not amount to prejudice sufficient to justify denial of an amendment. Fifth, a party seeking to amend his pleading has the burden of establishing that the proposed amendment has merit. But, the Court should not examine the merits or legal sufficiency of the proposed amendment beyond determining whether the amendment is palpably insufficient or patently devoid of merit on its face. The proposed counterclaims of the Applied defendants are not patently without merit.

(Internal quotations and citations omitted).

In New York, the courts are very generous in allowing a party to amend its pleadings. However, there are limits to this generosity. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding whether it is too late to amend your claims or answer.

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Posted: January 17, 2019

Court Rejects Defense That Arbitration Agreement Was Signed Under Duress

On January 4, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Kahan Jewelry Corp. v. First Class Trading, L.P., 2019 NY Slip Op. 30039(U), rejecting a defense that an arbitration agreement was signed under duress, explaining:

It is well settled that repudiation of an agreement on the ground that it was procured by duress requires a showing of both (1) a wrongful threat, and (2) the preclusion of the exercise of free will. An agreement procured under duress must be promptly disaffirmed, or otherwise deemed to have been ratified. Objections to the validity of an arbitration agreement allegedly entered into under duress are waived if the objecting party participates in the arbitration.

Here, Berkovits claims that he was coerced into signing the arbitration agreement on behalf of his companies at the Beit Din, and only did so under duress. However, Berkovits is a sophisticated business owner who executed the agreement, and he has submitted no objective evidence to show that he could not have declined to execute the agreement. Most importantly, Berkovits did not disaffirm the agreement at any time thereafter, and in fact, proceeded with and participated in the arbitration. Berkovits’ argument that he was denied the right to counsel is also without merit. After his Toen resigned, he had time to procure new counsel, however did not do so.

Even though the matter was closed, upon request by Berkovits for one more appearance, the Beit Din gave him the opportunity to appear once more on November 13, 2017. He appeared at the final hearing, presented evidence on his own and then told the arbitrators that he had no further evidence to introduce.

Further, his contention that the Beit Din improperly conditioned continued hearings on the execution of an arbitration agreement by Susan Berkovits is also meritless. Upon close examination of the email exchange from December 2017, as well as letters from petitioners’ counsel, it is clear that no one was attempting to coerce Susan Berkovits into attending the arbitration, or conditioning continued hearings on the execution of an arbitration agreement by Susan Berkovits. Rather, the correspondence simply explained that as someone who guaranteed the obligations at issue, she “may wish” to appear at the arbitration, and the later correspondence explained that if she did not appear, there would be no reason to have any further sessions because all the evidence had already been submitted.

(Internal quotations and citations omitted).

As this decisions discusses, a claim of duress can relate to economic duress, and not just the paradigm case of someone being forced to sign a contract with a gun to their head. But, as this decision also shows, the standards for pleading duress are demanding. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a contract entered into under duress.

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Posted: January 16, 2019

Subcontractor Prevails on Lien Law Claim

On January 9, 2019, the Second Department issued a decision in C.C.C. Renovations, Inc. v. Victoria Towers Dev. Corp., 2019 NY Slip Op. 00089, holding that a subcontractor should have prevailed on a Lien Law claim, explaining:

Lien Law § 3 provides that a contractor who performs labor or furnishes materials for the improvement of real property with the consent, or at the request of, the owner shall have a lien for the principal and interest, of the value, or the agreed price, of such labor or materials upon the real property improved or to be improved and upon such improvement, from the time of filing a notice of such lien. The lienor must establish the amount of the outstanding debt by submitting proof of either the price of its contract or the value of the labor and materials supplied. The amount of the lien is limited by the contract under which it is claimed, and ordinarily a lienor is bound by the price term contained in the contract to which it is a party.

The lienor’s right to recover is further limited by principles of subrogation. Thus, no individual mechanic’s lien can exceed the total amount owed by the owner to the general contractor at the time of the filing of the notice of lien. The subcontractor’s right to recover is derivative of the right of the general contractor to recover, and if the general contractor is not owed any amount under its contract with the owner at the time the subcontractor’s notice of lien is filed, then the subcontractor may not recover.

Here, the plaintiff established its prima facie entitlement to judgment as a matter of law on its causes of action to foreclose the mechanic’s liens it filed through evidence establishing, inter alia, the amounts owed for the services it provided at the property under the relevant subcontracts, and that those amounts did not exceed the amount owed by the owners to the general contractor, Blue Diamond. In opposition, Victoria Towers and Westchester Fire failed to raise a triable issue of fact.

(Internal quotations and citations omitted).

We frequently litigate disputes over the sale or leasing of, or construction relating to, commercial property. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding a commercial real estate transaction or construction.

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Posted: January 15, 2019

Court Grants Summary Judgment in Lieu of Complaint on Notes

On January 2, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Greenberg v. DeRosa, 2019 NY Slip Op. 30046(U), granting summary judgment in lieu of complaint on notes, explaining:

CPLR 3213 provides for accelerated judgment where the instrument sued upon is for the payment of money only and where the right to payment can be ascertained from the face of the document without regard to extrinsic evidence. An action on a promissory note is an action for payment of money only. The usual standards for summary judgment apply to CPLR 3213 motions. The instrument and evidence of failure to make payments in accordance with its terms constitute a prima facie case for summary judgment.

The debt and the defendant’s default are undisputed. It is undisputed the notes are an instrument for the payment of money only, and the proper subject for a motion for summary judgment in lieu of complaint.

According to General Obligations Law§ 15-301, a written agreement or other written instrument which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought or by his agent. The Notes at issue contain such a provision. There is no writing signed by Greenberg changing the maturity date of the notes or promising to forbear. Nor is there an admission by Greenberg of such a representation, other than the promise to forbear until March 19, 2018. As far as DeRosa claims they had an oral agreement to forbear, as the parties dispute the very terms and conditions of the alleged oral forbearance, their discussions do not qualify as a substitute for the required writing.

As far as DeRosa claims Greenberg breached the implied covenant of good faith and fair dealing, the implied covenant embraces a pledge that neither party shall do anything that will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. A breach of the covenant is a breach of the contract itself. The covenant of good faith and fair dealing is breached when a party acts in a manner that, although not expressly forbidden by the contractual provision, would deprive the other party of the benefits of the agreement.

The covenant encompasses any promises that a reasonable person in the position of the promisee would be justified in understanding were included. However, the obligations imposed by an implied covenant of good faith and fair dealing are limited to obligations in aid and furtherance of the explicit terms of the parties’ agreement. The covenant cannot be construed so broadly as to nullify the express terms of a contract, or to create independent contractual rights. To establish a breach of the implied covenant, the plaintiff must allege facts that tend to show that the defendants sought to prevent performance of the contract or to withhold its benefits from the plaintiff.

Greenberg’s forbearance to enforce the notes is not a term of the notes, nor does it have. the effect of destroying or injuring DeRosa’s right to receive the fruits of the contract or the benefits of the underlying agreement. In fact, as the covenant cannot be construed so broadly as to nullify the express terms of a contract, or to create independent contractual rights, the court cannot construe the failure to forbear to be a breach of the covenant, as that would effectively nullify the express terms of the contract. As the elements of the claim are undisputed, and De Rosa has failed to allege facts which could constitute a defense, let alone provide admissible evidence, the motion shall be granted.

(Internal quotations and citations omitted).

Cases in the Commercial Division of the New York courts usually involve a motion to dismiss at the outset and then a motion for summary judgment at the close of discovery, so such motions are a big part of our practice. The decision above is about a special procedure in New York for quickly resolving claims relating to unpaid notes or similar documents allowing the plaintiff to move for summary judgment at the beginning of an action. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions about seeking or opposing a motion for pre-trial dismissal or judgment of a commercial lawsuit.

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Posted: January 14, 2019

Contract Term Shortening Statute of Limitations Must Be Clear, Unambiguous, Reasonable and Fair

On December 13, 2017, Justice Paris of the Onondaga County Commercial Division issued a decision in Jesiolowski Enters., Inc. v. Data Key Holdings, LLC., 2017 NY Slip Op. 52025(U), holding that a contract term limiting the time in which to assert a claim was unenforceable because it was not clear, unambiguous, reasonable and fair, explaining:

Although parties to a contract may agree to limit the period of time within which an action must be commenced to a shorter period than that provided by the applicable statute of limitations, the intent to abbreviate the limitation period must be set forth in a clear and unambiguous manner. Moreover, the abbreviated period must not be unreasonably short or unfair.

Here the APA and the ICA must be read and interpreted together as they were executed contemporaneously and are both integral and non-dispensable instruments of the transaction. When doing so, the two year duration period set forth in the ICA renders the one year shortened limitation period provided for in the APA as ambiguous, unreasonably short, and, therefore, unenforceable.

(Internal citations omitted).

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

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Posted: January 13, 2019

Defendant Denied Dismissal of Tortious Interference Claim Based on Economic Interest Defense

On January 8, 2019, the First Department issued a decision in Normandy Real Estate Partners LLC v. 24 E. 12th St. Assoc. LLC, 2019 NY Slip Op. 00060, holding that a defendant was not entitled to dismissal of a tortious interference claim based on an economic interest defense, explaining:

The complaint states a cause of action for tortious interference with contract by alleging that plaintiff entered into a valid contract (the letter agreement) with Associates, that Tahari had knowledge of the letter agreement, that Tahari intentionally and improperly induced Associates to breach the enforceable provisions of the letter agreement by entering into an agreement with it to purchase the lease and purchase option during the exclusivity period, and that as a result plaintiff suffered damages. The allegations show that Tahari’s inducement of Associates to breach the enforceable provisions of the letter agreement exceeded a minimum level of ethical behavior in the marketplace.

Tahari failed to establish the economic interest defense to tortious interference with contract at this time. The complaint alleges that Tahari was effectively plaintiff’s competitor, that it did not appear to have a prior contractual or economic relationship with Associates, and that it had merely a generalized economic interest in soliciting Associates to sell the lease and the purchase option for profit.

(Internal quotations and citations omitted).

In New York, there are circumstances where someone can be held liable for causing someone else to break their contract with you (tortious interference with contract), and they can even be held liable for causing someone not to enter into a contract with you in the first place (tortious interference with prospective economic advantage). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think someone has interfered with your rights relating to a contract.

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Posted: January 12, 2019

Reassignment to Different Justice Does Not Affect Effect of Prior Justice’s Rulings

On January 8, 2019, the First Department issued a decision in R&R Capital LLC v. Merritt, 2019 NY Slip Op. 00067, holding that its reassignment of a case to a different trial judge did not affect the prior trial judge’s rulings, explaining:

The scope and import of this Court’s decision in R & R Capital LLC v Merritt (78 AD3d 533 [1st Dept 2010], lv dismissed 17 NY3d 769 [2011]) was to reassign trial of the counterclaims to another Justice. This Court did so to address plaintiffs’ concerns about the previous Justice’s impartiality, but such concerns did not arise from his rulings as to the nature of members’ obligation to fund the LLCs. His rulings during proceedings on December 11, 2007 were not only supported by the language of the LLC agreement, but also consistent with his previous day’s reciprocal rulings as to plaintiffs’ claims against Merritt — rulings that no one claims were within the scope of our November 2010 order. Supreme Court accordingly went too far in deeming the entirety of the December 11, 2007 proceedings irrelevant to what it was permitted to consider.

(Internal quotations and citations omitted).

Posted: January 11, 2019

Breach of Fiduciary Duty Claim Dismissed Under Business Judgment Rule

On December 26, 2018, Justice Bransten of the New York County Commercial Division issued a decision in IsZo Capital LLP. v. Bianco, 2018 NY Slip Op. 33384(U), dismissing a breach of fiduciary claim under the business judgment rule, explaining:

Plaintiffs allege Defendant Bianco failed to consent to refinancing the 111 W. 57th Street project, resulting in substantial litigation and loss to the company. Specifically, the Complaint alleges that there was no legitimate justification for Bianco’s linking acquiescence to the refinancing with obtaining documents which would settle litigation concerning the equity put right provision of the agreement between Ambase and the Sponsor. There is no underlying allegation of bad faith or self-dealing insofar as the failure to consent to refinancing is concerned, and the Plaintiff’s conclusory assertion that the failure to consent was a breach of fiduciary duty. In fact, there is nothing in the Complaint to indicate – and indeed the Plaintiff seems to concede – that this was nothing more than a business decision made by the board.

Because allegations consisting of bare legal conclusions, and factual claims which are inherently incredible, are not presumed to be true and are not accorded every favorable inference the Court disregards the allegation that the business decision was made in bad faith. Given that the court must conclude the allegations relate to a good faith business decision of the board, the Court applies the business judgment rule. Under the business judgment rule, the Court will not substitute its judgement for that of the board if the latter’s decision can be attributed to any rational business purpose.

(Internal quotations and citations omitted).

Fiduciaries have special duties. But as this decision shows, in normal circumstances, a court will show deference to a fiduciary’s business decisions. We both bring and defend breach of fiduciary duty and professional malpractice claims and other claims relating to the duties of trustees and professionals such as lawyers, accountants and architects to their clients. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding such claims or appeals of such claims.

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