This week we cover the Motion to Dismiss and affirming Appellate decisions decided in 2014 and 2016 in In re: Aluminum Warehousing Antitrust Litigation, 1:13-md-02481-KBF (SDNY), an action previously introduced in our September 24, 2018, post, where one can find a full account of the alleged collusion.

Brief Overview of the Alleged Collusion

Plaintiffs allege a conspiracy by the London Metal Exchange (“LME”), Glencore, Goldman Sachs and JP Morgan Chase & Co., among others, to restrain aluminum output and increase storage costs, both leading to an increase in price for, and injury to, Plaintiffs.

Claims Against the London Metal Exchange are Dismissed on Sovereign Immunity Grounds

In the summer of 2014, JudgeForrest of the Southern District granted defendant LME’s motion to dismiss brought under the Foreign Sovereign Immunities Act (“FSIA”) on the basis that LME was an organ of the United Kingdom (“UK”) Government, and was not engaged in commercial activity so as to fall into the commercial activity exception to the FSIA. See In re Aluminum Warehousing Antitrust Litig., No. 13-MD-2481 KBF, 2014 WL 4211353 (S.D.N.Y. Aug. 25, 2014). Judge Forrest found that LME was essentially a regulatory arm of the UK Government and was acting in an inherently regulatory capacity. LME’s load out rules and arrangements with reference to warehouses were both implemented to serve a regulatory purpose, and were not negotiated at arms-length but were mandatory and compulsory, establishing LME’s regulatory role. As such LME was a state organ and LME’s activity did not fall within the commercial activity exception to the FSIA. See id. at *11-15.

Plaintiffs’ Failed to Plead Allegations Sufficient to Support Antitrust Standing

At about the same time Judg eForrest issued a separate opinion dismissing the Plaintiffs’ claims, on a number of grounds. See In re Aluminum Warehousing Antitrust Litig., No. 13-MD-2481 KBF, 2014 WL 4277510 (S.D.N.Y. Aug. 29, 2014).
Among these included a lack of antitrust standing. Plaintiffs did not allege that they were competitors or consumers of the Defendants. Rather they alleged that Defendants’ independent actions had an effect which increased the Midwest Premium, thereby impacting the sales price in Plaintiffs’ independent trades. Because Plaintiffs’ did not allege that they were consumers or competitors of Defendants, they were forced to plead facts sufficient to show that their injury was “inextricably intertwined” as required under Blue Shield of Virginia v. McCready, 457 U.S. 465 (1982), Crimpers Promotions Inc. v. Home Box Office, Inc., 724 F.2d 290 (2d Cir.1983) and Province v. Cleveland Press Publ’g Co., 787 F.2d 1047, 1052 (6th Cir.1986). Because Plaintiffs failed to allege that they were “manipulated or utilized by [d]efendant[s] as a fulcrum, conduit or market force to injure competitors or participants,” that is to say they were manipulated “as a means to carry out the restraint of trade in the product market” within the language of Province, so as to support a claim that their injury was “inextricably intertwined” with that of consumers or competitors, the case was dismissed for lack of antitrust standing.

On appeal, the Second Circuit affirmed Judge Forrest’s reading under McCready, Crimpers and Province noting that because Defendants were not used as a “fulcrum, conduit or market force,” and they thus could not assert a claim under the “inextricably intertwined standard.” See In re Aluminum Warehousing Antitrust Litig., 833 F.3d 151, 161-163 (2d Cir. 2016).

Plaintiffs’ Failed to Plead Allegations Sufficient to Support Conspiracy

Additionally, in In re Aluminum, 2014 WL 4277510 at *24-34, per Judge Forrest, Plaintiffs failed to plausibly allege facts supporting either an agreement among the warehouse defendants to restrain load-outs of aluminum, or an agreement between the trader defendants and warehouse defendants to effectuate that conspiratorial scheme. They drew this conclusion, based on the fact that, given the allegations as pled, the story was consistent with the defendants acting in accordance with the market forces of supply and demand, rather than a conspiracy. Defendants were holding a cheap good now, as it was anticipated to become more expensive later, which is consistent with lawful competitive behavior. The court also noted that Defendants, who made money by trading warrants and selling storage space, were not competitors and did not directly gain from an increase in the Midwest premium, and as such lacked financial motive to act. The plaintiffs did not even allege a plausible market in which defendants restrained trade. As such, there was no conspiracy under either a per se or a rule of reason analysis.

Additionally, the Plaintiffs failed to plausibly allege the details of any conspiracy. The generalized allegations of defendants being on LME committees especially without allegations of how decision-making changed when the trader defendants acquired the warehouses, was wholly insufficient. The same can be said of the mere affiliation between individuals employed by Goldman Sachs and the warehouse defendants, in the absence of more particularized allegations. In light of this all, especially given that defendants’ conduct was self-interested, defendants alleged cancelling of warrants in parallel and delaying load-outs in parallel were not sufficient to satisfy the requirement that Plaintiffs plead parallel conduct to justify an inference of a conspiracy.

Plaintiffs’ Failed to Plead Allegations Sufficient to Support Monopolization Claims

Further, per Judge Forrest, Plaintiffs failed to allege facts sufficient to support their monopolization claims because they failed to fully define a relevant market, or assert that any of the defendants had the power to unilaterally effect the Midwest premium. The attempts to rely on the acts of multiple different actors was improper as the law does not recognize a “shared monopoly.” Metro’s control of a large percentage of the warehouses was not sufficient on its own to satisfy the test as they did not unilaterally control the warrants and futures contracts that determined the ingress and egress of aluminum to and from warehouses. Id. at*34-37.

Plaintiffs’ Failed to Plead Allegations Sufficient to Support State Law and Unjust Enrichment Claims

Finally, per Judge Forrest, the Plaintiffs various state law claims rely on the same antitrust, conspiracy, monopolization and unfair conduct allegations, and otherwise were not pled with particularity to allow the court to determine how the conduct violated each individual state statute. Id. at *37-38; In re Aluminum Warehousing Antitrust Litig., No. 13-MD-2481 KBF, 2014 WL 4743425 (S.D.N.Y. Sept. 15, 2014). On appeal this was affirmed on the same grounds. See In re Aluminum Warehousing Antitrust Litig., 833 F.3d at 163.

This post was written by Lee J. Rubin.

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On September 28, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Medallion Bank v. Mama of 5 Hacking Corp., 2018 NY Slip Op. 32461(U), holding that a levy can be extended if a motion to extend is made before the levy’s original expiration date, explaining:

CPLR 5232 (a) provides, in relevant part,

at the expiration of ninety days after a levy is made by service of the execution, or of such further time as the court, upon motion of the judgment creditor or support collection
unit has provided, the levy shall be void except as to property or debts which have been transferred or paid to the sheriff or to the support collection unit or as to which a proceeding under sections 5225 or 5227 has been brought.

The First and Second Departments have taken two different approaches to interpreting CPLR 5232(a). In Bank of New York, the First Department found that CPLR 5232(a) is facially unambiguous – a levy becomes void 90 days after service is made unless a special proceeding specified by the particular provision has been commenced or an order of extension has been obtained. The court then held that a second levy could be issued where the first had expired. Whereas the First Department requires that the party seeking to enforce the money judgment do so within the ninety-day period provided, the Second Department has held that there is no provision in the CPLR prohibiting an extension after the levy has expired; thus, the correct process is not to serve a second levy but to move to extend the time to perfect the original levy, even if the ninety day period has expired. But because Medallion filed their motion within the ninety-day period, this conflict is of no consequence, and because this court is situated within the First Department, Bank of New York applies.

In two decisions on similar proceedings recently resolved by the New York County Supreme Court, Commercial Division, the court read Bank of New York and CPLR 5232 (a) to provide for flexibility as to the means of enforcing a money judgment where a party makes a timely application. Specifically, the court found that although Medallion moved pursuant to CPLR 5232(a), instead of commencing a special proceeding pursuant to CPLR 5225 or 5227, all three of these statutes provide similar means to enforce money judgments, and it is reasonable to permit an extension where a motion for such relief was brought in a timely manner instead of a special proceeding. Therefore, because Medallion made its motion to extend within the ninety-day period, the levies are preserved and may be extended by court order.

The court notes a third similar proceeding, Medallion Financial Corp., et al. v Jeffery Hacking Corp., et al. The Supreme Court in that action held that under Bank of New York, because Medallion did not receive an extension order or commence a special proceeding under CLPR 5225 or CPLR 5227, its levy is void as a matter of law, and its motion for an extension of the 90-day period is denied. The court declines to adopt this reading of the statute for the reasons stated above.

(Internal quotations and citations omitted).

We have substantial experience in helping judgment creditors collect on judgments and search for and attach assets worldwide. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client need help collecting on a judgment.

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On October 2, 2018, the First Department issued a decision in Hyuncheol Hwang v. Mirae Asset Sec. (USA) Inc., 2018 NY Slip Op. 06485, holding that an arbitration provision in a later-signed Form U-4 supersedes the dispute resolution provision in an earlier-signed employment agreement, explaining:

This dispute is governed by state contract law principles. The first principle is that a subsequent contract regarding the same matter will supersede the prior contract. The determination whether a subsequent agreement is superseding is fact-driven. Plaintiff’s execution of a valid U-4 Form constituted an agreement to limit his contractual remedies when he signed the U-4 Form. The U-4 Form encompasses the same employment-related disputes as were addressed in the employment agreement. Thus, the forum selection clause was effectively extinguished.

(Internal quotations and citations omitted).

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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On October 2, 2018, the First Department issued a decision in Lemle v. Regen, Benz & MacKenzie, C.P.A’s, P.C., 2018 NY Slip Op. 06487, holding that when an accounting firm agreed to respond to an audit letter, the continuous representation doctrine preserved professional malpractice claims related to the audited return, explaining:

Without any new engagement by plaintiff, defendants undertook to respond to DTF’s audit letter, defending or at least explaining the treatment given the properties on the 2012 return. This service is sufficiently related to the specific subject matter of the alleged malpractice — the characterization of the transaction as a sale in 2012 — to support application of the continuous representation doctrine. By contrast, the otherwise broad and continuous range of services that defendants provided to plaintiff over the years that did not concern the specific subject matter of the alleged malpractice is insufficient to support application of the doctrine.

(Internal citations omitted).

We both bring and defend professional malpractice claims and other claims relating to the duties of professionals such as lawyers, accountants and architects to their clients. This decision is about a rule–the continuous representation doctrine–that sometimes can extend the statute of limitations to bring a malpractice claim. Contact us if you have questions regarding whether a legal malpractice claim is timely.

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On September 28, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Yu v. Guard Hill Estates, LLC, 2018 NY Slip Op. 32466(U), holding that a contractual right to take certain actions cannot shield a fiduciary from a breach of fiduciary duty claim if the fiduciary acted in bad faith, explaining:

Conduct is not a breach of fiduciary duty if there is a formal written agreement covering the precise subject matter of the alleged fiduciary duty, and no showing that defendant was seeking to advance its or a third party’s interests over plaintiffs. Where one has a right under a contract, that right may not be exercised solely for personal gain in such a way as to deprive the other party of the fruits of the contract. A fiduciary may breach his duties by exercising his contractual rights in an unfair or inequitable manner.

Here, affording the complaint liberal construction, accepting the facts alleged therein as true, and according the plaintiff the benefit of every possible favorable inference, I find that Patrick sufficiently alleged facts to support a cause of action for breach of fiduciary duty. Defendants argue that they properly exercised their contractual rights by initiating the capital call and effecting the promissory notes and pledge agreements. Patrick alleges that defendants’ actions were not taken in good faith and in legitimate furtherance of corporate purposes, rather, they were taken as part of a family vendetta to oust him from the family entities. He describes the history and background of the family dispute and describes how the actions taken by his siblings and Guard Hill were in furtherance of the family’s agenda, rather than to fulfill a need in the company. Because of the actions taken, he now owes $590,887 on the promissory notes executed by Raymond and Catherine on his behalf, and his shares in Guard Hill are pledged. While Raymond and Catherine did have certain rights under the Guard Hill operating agreement, whether they exercised those rights in good faith and in an equitable manner is disputed and must be determined through the course of litigation.

(Internal citations omitted).

As this decision shows, fiduciaries have special, extra-contractual duties. However, the question of whether a defendant is a fiduciary, and thus can be liable for a breach of fiduciary duty, is sometimes a complicated one. 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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On September 28, 2018, Justice Ostrager of the New York County Commercial Division issued a decision in Sabby Healthcare Master Fund Ltd. v. Microbot Med. Inc, 2018 NY Slip Op. 32429(U), holding that fact questions regarding whether a breach of contract was so material as to justify rescission precluded summary judgment, explaining:

Rescission should be granted only when a party’s breach is material and willful, or if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract. More specifically, to warrant rescission, a party must allege fraud in the inducement of the contract; failure of consideration; an ability to perform the contract after it is made; or a breach in the contract which substantially defeats the purpose thereof. Further, the equitable remedy is to be invoked only when there is lacking complete and adequate remedy at law.

Here, the record shows a material issue of fact as to whether the breach was so fundamental as to defeat the object of the SPA. Sabby submits testimony from its principals suggesting that they would not have entered the SPA, without additional lock-up restrictions on Alpha, but for the representation that Alpha was an affiliate and thus subject to certain other restrictions based on SEC rules. However, the record also contains email exchanges among Sabby principals that tend to suggest an awareness by Sabby that Alpha was not subject to any restrictions-including restrictions that an affiliate would be subject to under SEC rules. Further, while it is clear to the Court that the SPA’s Disclosure Schedule does represent that Alpha was an affiliate, it is unclear whether such a contractual representation-made in a footnote-was so central to the parties’ purpose in executing the SPA that a breach thereof warrants rescission.

Therefore, Microbot, as the moving party, has not met its burden of proving as a matter of law that the SPA’s representation of Alpha as a Micro bot affiliate was not central to Sabby’s decision to consummate the transaction. Further, Microbot has not established, and has submitted no evidence tending to show, that Sabby has an adequate remedy at law or that the parties cannot be restored to the status quo ante.

(Internal quotations and citations omitted).

Suits for breach of contract typically seek money damages. As this decision shows, there are other remedies available to a plaintiff, including rescission–that is, rescinding the contract and returning the parties to their positions before the contract was signed. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com 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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On September 25, 2018, Justice Friedman of the New York County Commercial Division issued a decision in Foremost Contr. & Bldg., LLC v. Go Cat Go, LLC, 2018 NY Slip Op. 32381(U), rejecting claims for common law indemnification and contribution, explaining:

In the amended third-party complaint, the developer defendants seek common law indemnification and common law contribution from German American Capital. In opposing German American Capital’s motion, the developer defendants argue that indemnification is an equitable remedy designed to prevent unjust enrichment. The developer defendants also contend that contribution is adequately pled where multiple alleged tortfeasors potentially are subject to liability.

As the Court of Appeals has explained, in the classic indemnification case, the one seeking indemnity had committed no wrong, but by virtue of some relationship with the tortfeasor or obligation imposed by law, was nevertheless held liable to the injured party. In indemnity, which arises commonly in cases involving vicarious liability a party held legally liable to plaintiff shifts the entire loss to another. The right to do so may be based upon an express contract, but more commonly the indemnity obligation is implied based upon the law’s notion of what is fair and proper as between the parties. The key element of a common-law cause of action for indemnification is not a duty running from the indemnitor to the injured party, but rather is a separate duty owed the indenmitee by the indemnitor. The duty that forms the basis for the liability arises from the principle that every one is responsible for the consequences of his own negligence, and if another person has been compelled to pay the damages which ought to have been paid by the wrongdoer, they may be recovered from him.

In contribution, the tort-feasors responsible for plaintiffs loss share liability for it. Their common liability to plaintiff is apportioned and each tort-feasor pays his ratable part of the loss. Under CPLR article 14, the critical requirement for apportionment by contribution is that the breach of duty by the contributing party must have had a part in causing or augmenting the injury for which contribution is sought.

Here, giving the developer defendants the benefit of all reasonable inferences, the allegations of the amended third-party complaint do not support a claim for common law indemnification. The developer defendants do not cite any authority on this motion that a lender is obligated by statute or common law to compensate a contractor for its work, after the lender forecloses on a loan made to finance a construction project.

The allegations of the amended third-party complaint also do not support a claim for common law contribution. The Foremost complaint does not allege a viable tort against the developer defendants. In opposing German American Capital’s motion, the developer defendants argued that Foremost pleaded tort causes of action against them for breach of trust, defrauding creditors, and breach of fiduciary duty, in connection with the sale of the Property. As the developer defendants acknowledged at the oral argument, Foremost’s pleading was predicated on the allegation that 87 Leonard Development was the owner of the premises at the time the Property was sold. This allegation was, however, based on a mistake of fact as to the ownership, as it was German American Capital that owned and sold the Property. (See Transcript of Oral Argument. Significantly also, the amended third-party complaint fails to plead a viable tort against German American Capital. As noted above, the decision of the prior action against German American Capital held that the foreclosure was not wrongful.

(Internal quotations and citations omitted).

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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On September 21, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Bryan v. Slothower, 2018 NY Slip Op. 32396(U), holding that an intention not to perform cannot be the basis of a fraudulent inducement claim, explaining:

Plaintiff argues that Slothower’s alleged preconceived intent not to perform is sufficient to sustain the fraud in the in the inducement claim, citing White v Davidson (150 AD3d 610, 611 [1st Dept 2017]). In White, the First Department held the plaintiff had pleaded a cognizable claim for fraudulent inducement based on misrepresentations that the defendant had promised or claim (1) their record label was highly successful and that they had previously successfully represented famous recording artist; (2) they would promote plaintiff’s single; (4) they would organize a radio tour; and (5) they would promote the re-release of the single around Valentine’s Day 2015. The court found that these misrepresentations were collateral to the agreement at issue and therefore could support the claim asserted. The representation at issue here, that defendant would pay plaintiff, is not collateral to the contract. It is a term of the agreement.

Plaintiff also relies on Neckles Builders, Inc. v Turner (117 AD3d 923, 924 [2d Dept 2014]). In that case, the Second Department stated that where the gravamen of the alleged fraud does not arise from the mere failure of a promisor harbored an undisclosed intention not to perform under the contract, a proper cause of action sounding in fraud may be stated. Here, the heart of the alleged fraud is defendant’s failure to perform while still obtaining a release. The alleged misrepresentation of Slothower’s intent to perform under the Settlement Agreement cannot sustain a fraudulent inducement claim.

(Internal quotations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements such as the rule discussed here that a fraud claim cannot be based on a breach of contract. 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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On September 20, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Reines v. Raoul Felder & Partners, P.C., 2018 NY Slip Op. 32332(U), holding that a shareholder had standing to sue the corporation’s counsel for malpractice, explaining:

It is well settled that a stockholder has no individual cause of action against a person or entity that has injured the corporation. It therefore follows that an individual shareholder lacks standing to sue for legal malpractice in his own name for a wrong committed against a corporation, consideration is warranted in this case because the substance of plaintiff’s claims is that defendants had a duty to represent him in his individual capacity, in addition to on behalf of the corporation, and that he suffered damages independent from those suffered by the corporation as a result of defendants’ negligence.

Defendants also ignore the fact they themselves filed pleadings on behalf on plaintiff in the underlying arbitration which state that they in fact represent plaintiff individually, and derivatively on behalf of the corporation. Regardless of whether the claims corresponding to plaintiff’s damages were brought individually or derivatively, the pleadings suggest that defendants had a contractual agreement with plaintiff to represent him on his capacity as an individual, and therefore a duty distinct from that to the corporation. Accordingly, the complaint may not be dismissed for lack of standing.

(Internal quotations and citations omitted).

We both bring and defend professional malpractice claims and other claims relating to the duties of professionals such as lawyers, accountants and architects to their clients. Contact us if you have questions regarding whether a legal malpractice claim is timely.

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On September 21, 2018, Justice Masley of the New York County Commercial Division issued a decision in Medallion Bank v. TLG Hacking Corp., 2018 NY Slip Op. 32397(U), holding that a levy does not expire if a special proceeding is commenced before the levy expires, explaining:

Garber and TLG argue that the motion must be denied since a levy expires and becomes void after 90 days unless an order of extension has been obtained before that time. They rely on New York State Commr. of Taxation and Fin. v Bank of New York, 275 AD2d 287(1st Dept 2000) in support of their contention. However, New York State Commr. of Taxation and Fin. v Bank of New York, does not hold that the extension must actually be obtained before the 90-day expiration period. In fact, the Appellate Division, First Department, holds that a levy becomes void 90 days after service unless either (1) a special proceeding specified by the particular provision has been commenced or (2) an order of extension has been obtained. Thus, a levy is not void if a special proceeding is commenced prior to the 90-day expiration.

Although Medallion moved pursuant to CPLR 5232(a), instead of commencing a special proceeding pursuant to CPLR 5225 or 5227, all three of these statutes provide similar means to enforce money judgments, and it is reasonable to permit an extension where a motion for such relief was brought in a timely manner instead of a special proceeding.

(Internal quotations and citations omitted).

We have substantial experience in helping judgment creditors collect on judgments and search for and attach assets worldwide. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client need help collecting on a judgment.

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