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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: July 21, 2019

Party Not Entitled to Fees on Fees

On July 8, 2019, Justice Scapulla of the New York County Commercial Division issued a decision in Park Union Condominium v. 910 Union St., LLC, 2019 NY Slip Op. 31994(U), holding that a prevailing party was not entitled to fees on fees, explaining:

Plaintiffs argue that the Referee Report’s award of $34,200 for Plaintiffs’ hearing preparation and the four-day hearing itself was proper and does not constitute fees on fees. Defendant counters that the $34,200 was an impermissible fees on fees award and should not be confirmed.

New York courts have generally held that a party is not entitled to recover attorneys’ fees that were incurred in prosecuting a claim to recover attorneys’ fees, so called fees on fees. There are two exceptions to this general rule, namely that fees on fees are allowed where such fees are explicitly provided for by either a statute or the parties’ agreement..

First, the cases cited by Plaintiffs in support of its position are inapposite. Second, as this Court previously stated in the November 2017 Decision, here the Agreement does not explicitly provide for an award of fees on fees and thus they are not recoverable. I find that the $34,200 award for the expenses that Plaintiffs incurred in connection with the referee proceeding was improper because it enables Plaintiffs, in contravention of caselaw and the law of the case, to recoup fees on fees. Accordingly, Plaintiffs are only entitled to recover attorneys’ fees and costs in the amount of $138,015.06 and I confirm the Referee Report, as modified, in that amount.

(Internal quotations and citations omitted).

Litigating for fees can be hard–both because of the high burden you sometimes must meet to be entitled to fees and because it is important to avoid the pitfall of getting an award of fees that is less than what it costs to move for fees. As this decision shows, generally, you are not entitled to recover the attorneys’ fees expended in moving for fees. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are litigating an attorney fee award.

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Posted: July 20, 2019

Shareholders Did Not Breach Duty to Company by Operating Competing Companies

On July 10, 2019, the Second Department issued a decision in Laffey v. Laffey, 2019 NY Slip Op. 05521, holding that shareholders did not breach a duty to their company by operating competing companies, explaining:

Under the unusual circumstances presented, we agree with the Supreme Court’s determination dismissing Emmett’s counterclaim and cause of action alleging breach of fiduciary duty. The evidence presented at trial showed that each brother owned and operated his own real estate company well before acquiring the jointly owned businesses from their father. Even after acquiring the jointly owned businesses, the brothers—who never entered into a shareholders’ agreement—openly continued for several years to own and operate their individual real estate businesses alongside the jointly owned businesses, often directly competing against one another and against the jointly owned businesses for listings and agents. In light of this history, the court dismissed the parties’ respective allegations of breach of fiduciary duty, finding that the open and continued competition among the brothers—both before and after Emmett’s purported removal from the jointly owned entities—did not amount to actionable misconduct.

(Internal citations omitted).

Fiduciaries have special duties, but the questions of whether a defendant is a fiduciary and what acts breach a fiduciary duty are sometimes complicated ones. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding such claims or appeals of relating to a fiduciary.

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Posted: July 17, 2019

Common Interest Privilege Does Not Apply to Merger Transaction

On July 9, 2019, the First Department issued a decision in Telx-New York, LLC v. 60 Hudson Owner LLC, 2019 NY Slip Op. 05484, holding that the common interest privilege did not apply to communications relating to a merger, explaining:

The common interest privilege does not apply to the communications at issue, in which plaintiff and a third party collaborated to promote their common interest in closing a merger transaction, because the communications do not relate to litigation, either pending or reasonably anticipated.

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 jlundin@schlamstone.com 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: July 16, 2019

When There is Question Regarding Whether a Party Signed Agreement With Arbitration Clause, Question of Arbitrability is for Court, Not Arbitrator, to Decide

On June 27, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Suratwala v. Gandhi, 2019 NY Slip Op. 31859(U), holding that when there is a question regarding whether a party signed an agreement containing an arbitration clause, the question of arbitrability is for the court, not the arbitrator, to decide, explaining:

With respect to Om Vagzei LLC and Om Sidhdhy Vinayak LLC, amendment of the original operating agreements only required a majority of the LLC Interests to amend such operating agreements. Schedule A of the Original Om Vagzei Agreement indicated that Mr. Suratwala has no membership interest in that entity and the other petitioners Neha Suratwala and Trupti Saratwala, collectively, only had a 22% interest. Accordingly, even taking Mr. Surutwala’s forgery allegation as true and assuming that Neha Suratwala and Trupti Suratwala both did not consent to the amendment, there is no basis to stay the arbitration as it relates to Om Vagzei LLC or Om Sidhdhy Vinayak LLC because the petitioners have failed to allege a basis to find that the Amended and Restated Vagzei Agreement or the Amended and Restate Om Sidhdhy Agreement are not valid. In addition, with respect to Om Sidhdhy Vina yak LLC, Schedule A of the Original Om Sidhdhy Agreement does not indicate that Mr. Suratwala had a membership interest in that entity and none of the other petitioners are listed as members. Similarly, with respect to Om Viththal LLC, neither the Original Om Viththal Agreement, nor the Amended and Restated Om Viththal LLC Agreement list Mr. Tansukh Suratwala as a member. Accordingly, based on the submissions of the petitioners, there simply is no basis to understand how he has standing to challenge the Amended and Restated Viththal LLC Agreement. Furthermore, the Amended and Restated Om Viththal Agreement was signed by of the requisite 75% of its members so the consent of members holding 75% of the Membership Interests appears to have been met.

Finally, with respect to Aum Viththal LLC, Jai Ambe LLC, and Newberg Hotel Partners LLC, inasmuch as the Petitioners argue that the Aum Viththal Amended and Restated Agreement, the Jai Amended and Restated Agreement, and the Newberg Amended and Restated Agreement are invalid, at first blush, the petitioners’ application would seem to be governed by the United States Supreme Court analysis in Nitro-Lift Tech., LLC. v Howard (568 US 17 [2012]) and Prima Paint Corp. v Flood & Conklin Manufacturing Co. (388 US 395 [1967]). In Nitro-Lift, the Court wrote:

attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved by the arbitrator in the first instance, not by a federal or state court (568 US at 20-21 [quotation and citation omitted]).

In Prima Paint, the Court held that claims of fraud in the inducement of the contract generally are to be determined by the arbitrator. The Court explained that, if the claim is fraud in the inducement of the arbitration clause itself – an issue which goes to the ‘making’ of the agreement to arbitrate – the court may proceed to adjudicate it in the first instance.

However, a closer examination at the basis for the petitioners’ assertion that the Amended and Restated Agreements are invalid necessarily brings this case outside of this Prima Paint holding. The basis for the Court’s ruling in Prima Paint was that the arbitration clause was severable from the agreement at issue in that case. Unenforceability based on fraud in the factum is a question not squarely addressed by the Prima Paint Court. As the court in Kyung In Lee v Pacific Bullion (NY) Inc. (788 F Supp 155, 157 [ED NY 1992]) aptly observed:

if a party’s signature were forged on a contract, it would be absurd to require arbitration if the party attacking the contract as void failed to allege that the arbitration clause itself was fraudulently obtained. Therefore, arbitration is stayed solely with respect to Aum Viththal LLC, Jai Ambe LLC, and Newberg Hotel Partners LLC, and an evidentiary hearing is ordered to determine if the signature of Tansukh Suratwala on the Amended and Restated Agreements of those entities is a forgery, and the arbitration is stayed until such hearing occurs.

(Internal quotations 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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Posted: July 15, 2019

Fraud Claims Not Duplicative of Malpractice Claims

On June 27, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Kislev Partners, LLP v. Sidley LLP, 2019 NY Slip Op. 31850(U), declining to dismiss fraud claims as duplicative of a malpractice claim, explaining:

Sidley argues that plaintiffs’ claims all essentially sound in professional malpractice and, therefore, have a three-year statute of limitations, which passed long before this action was commenced. In their reply, Sidley elaborates: plaintiffs’ claims must be treated as malpractice claims for timeliness purposes even if a potential malpractice claim might fail on the merits. The malpractice limitations period applies whenever the facts underlying a party’s claims are of the sort properly pursued as malpractice, i.e., are based on an ‘alleged failure to exercise due care or abide by general professional standards.

Plaintiffs argue in opposition that they have not pied a malpractice claim against Sidley, and that, instead, their claims are premised on intentional fraud, not simple professional negligence. Plaintiffs assert that their claims against Sidley cannot sound in malpractice because: 1) plaintiffs have never had an attorney client relationship with Sidley; (2) plaintiffs’ claims for fraud and aiding and abetting fraud each allege facts that go beyond legal malpractice and seek damages distinct from what is available for malpractice; and (3) plaintiffs’ unjust enrichment claim does not seek recovery of attorneys’ fees and is based on facts unrelated to legal representation.

In separating a malpractice claim from a fraud claim, the First Department, in Johnson v Proskauer Rose LLP (129 AD3d 59, 68 [1st Dept 2015]), recognized that a plaintiff may try to circumvent the three-year statute of limitations for professional malpractice by characterizing the defendants’ failure to meet professional standards as something else. In describing the distinction between a fraud claim and one for professional malpractice, the Court stated:

Thus, in Mitschele, the fraud claim was considered independent of the malpractice claim for statute of limitations purposes even though the harm arose out of the accountant’s failure to properly protect its client. The situation here is no different. Plaintiffs allege not only that defendants failed to adequately advise them with respect to the tax strategy. They also claim that Proskauer pressured them into the scheme because, at the outset, Proskauer’s paramount concern was preserving its lucrative arrangement with TDG, which presumably intended to continue to work with Proskauer to sell the scheme to other high net worth individuals and entities.

Like in Johnson v Proskauer Rose LLP, here plaintiffs’ fraud-based claims rely upon facts that go beyond professional negligence and include allegations that Sidley and the other defendants purposefully created and/or aided Valdez in creating an illegal scheme, which included the Opinion Letter, to market the allegedly criminal tax shelter to unwitting investors. Because plaintiffs’ fraud-based claims are not disguised claims for professional malpractice, the professional malpractice statute of limitations is inapplicable.

(Internal citations omitted).

We both bring and defend breach of fiduciary duty and professional malpractice claims and other claims relating to the duties of 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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Posted: July 14, 2019

Shareholders and Directors Not Liable for Breach of Company’s Contractual Obligations

On June 28, 2019, Justice Cohen of the New York County Commercial Division issued a decision in Town & Country Adult Living, Inc. v. Hearth at Mount Kisco, LLC, 2019 NY Slip Op. 31862(U), holding that a company’s shareholders and directors could not be held liable for the company’s breach of its contractual obligations, explaining:

Plaintiffs’ breach of contract claims against HSC, FMK, and the Fortus Companies fail because they seek to impose liability against the Company’s stakeholders for contractual obligations borne solely by the Company. Corporations are legal entities distinct from their managers and shareholders and have an independent legal existence.

The Formation Agreement recognized the Company as a distinct legal entity capable of amassing its own powers, obligations, and assets separate from those of HSC, FMK, and the Fortus Companies.

The specific contractual violations alleged by Plaintiffs under the Formation Agreement go directly to the Company’s rights and responsibilities. For example, Plaintiffs allege that Defendants breached Section 2.5 of the Formation Agreement by interfering with TCAL’s repurchase rights. But the repurchase right provides that TCAL may purchase the TCAL Property and the Lease, if not expired or terminated, and all Project Contracts and Project Approvals from the Company. Similarly, Plaintiffs allege that Defendants breached Section 4.3 of the Formation Agreement because having decided to acquire the Property, they failed to fulfill the obligations of the Lessee under the Ground Lease, including, but not limited to, the pursuit of site plan approval. But again, that part of the Formation Agreement concerns the obligations of the Company under the Lease, providing that if the Company makes the decision to acquire the Property, the Company agrees to fulfill the obligations of the Lessee as defined and set forth in the Lease.

Plaintiffs’ contract claims under the Fifth Amendment to the Ground Lease suffer from the same legal infirmity. In their Amended Complaint, Plaintiffs assert that Defendants breached Paragraph 7 of the Fifth Amendment because they failed to pay all real sic taxes that became due on 270 Kisco Ave even though it was Defendants’ responsibility to do so. That paragraph from the Fifth Amendment requires, among other things, that Tenant shall be responsible for payment of all outstanding real taxes for both the 53 Mountain Avenue and 270 Kisco Avenue properties to the date of closing. The key word there is Tenant, because under the Fifth Amendment, The Hearth at Mount Kisco, LLC assumed all obligations of Tenant hereunder and was the Tenant under the Lease. Thus, the Company-not HSC, FMK, or the Fortus Companies-agreed to accept the responsibilities that were allegedly flouted here.

In addition, HSC, FMK, and the Fortus Companies cannot be held liable for the company’s obligations by virtue of their status as a member thereof. Nor can these entities be held liable by virtue of their status as managers of the Company under New York Limited Liability Law §609: Neither a member of a limited liability company, nor a manager of a limited liability company managed by a manager or managers is liable for any debts, obligations or liabilities of the limited liability company or each other, whether arising in tort, contract or otherwise, solely by reason of being such member, manager or agent or acting (or omitting to act) in such capacities.

Broadly speaking, the law will disregard the corporate form in certain circumstances to prevent fraud or to achieve inequity. But to pierce the corporate veil or to establish an alter ego relationship, Plaintiffs must carry a heavy burden. In this case, Plaintiffs have not pleaded facts sufficient to show that the privilege of conducting business in the corporate form was abused so as to warrant piercing the corporate veil to impose personal liability on the corporate officers.

Therefore, Plaintiffs’ first, second, and third causes of action are dismissed as against HSC, FMK, and the Fortus Companies, but not as against the Company (which has not moved to dismiss those claims).

(Internal quotations and citations omitted).

Usually, the only parties who have rights or obligations under a contract are the parties to the contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether you have rights or obligations under a contract.

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Posted: July 13, 2019

Efforts to Mitigate Losses Did Not Affirm Contract After Breach

On July 2, 2019, the First Department issued a decision in Lantau Holdings Ltd. v. Orient Equal Intl. Group Ltd., 2019 NY Slip Op. 05328, holding that efforts to mitigate losses did not affirm a contract after it was breached, explaining:

The court correctly concluded that defendant did not affirm the contracts after discovering plaintiff’s breach. Defendant’s attempt to sell the non-conforming shares was not required by the contracts, but was an act in mitigation of its damages.

(Internal citations omitted).

Part of the reason parties to commercial contracts choose to have those contracts governed by New York law is that New York courts typically enforce contracts as written. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the breach of a contract under New York law.

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Posted: July 12, 2019

Legal Malpractice Claim Fails Without Allegations of Damages

On July 2, 2019, the First Department issued a decision in Miami Capital, LLC v. Hurwitz, 2019 NY Slip Op. 05332, dismissing a legal malpractice claim for lack of allegations of damages, explaining:

Since damages in a legal malpractice case are designed to make the injured client whole, having failed to plead actual damages, plaintiff’s complaint fails to state a claim.

(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. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you have questions regarding such claims or appeals of such claims.

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Posted: July 11, 2019

Court Refuses to Impose PSLRA Stay on Securities Act Action Pending in Commercial Division

On July 1, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Matter of PPDAI Group Sec. Litig., 2019 NY Slip Op. 51075(U), refusing to impose a PSLRA stay on a Securities Act action pending in the Commercial Division, explaining:

According to Moving Defendants, Plaintiffs should not be permitted to “skirt the PSLRA’s mandatory stay of discovery, which automatically stays all discovery until any motions to dismiss have been resolved.” Moving Defendants contend that the PSLRA’s discovery stay applies to all private actions including those in state court and that if Congress intended the stay to only apply to federal court actions, it would have said so.

Cyan did not address the applicability of the PSLRA’s automatic stay to state court ’33 Act cases. Nor do there appear to be any New York cases concerning this issue. States that have considered the relationship of the PSLRA discovery stay to state actions are divided.

Application of the federal PSLRA automatic discovery stay would undermine Cyan’s holding that ’33 Act cases may be heard in state courts. Accordingly, I am persuaded that the PSLRA’s automatic discovery stay is not applicable to an action brought in New York State court. Lastly, in the Commercial Division discovery generally continues during motion practice. I therefore decline to stay discovery in this action.

(Internal citations omitted).

We have substantial experience in litigation regarding securities, both in state and federal court. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client need help regarding a claim related to stocks, bonds or other financial instruments.

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Posted: July 10, 2019

Arbitrator Did Not Manifestly Disregard the Law in Awarding Prevailing Party Attorney’s Fees

On July 2, 2019, the First Department issued a decision in Matter of Steyn v. CRTV, LLC, 2019 NY Slip Op. 05341, holding that an arbitrator did not manifestly disreagard the law in awarding a prevailing party attorneys’ fees, explaining:

We are mindful that courts possess very limited authority to review an arbitration award. Indeed, the parties agree that manifest disregard of the law is the only appropriate ground to vacate the arbitrator’s award of attorneys’ fees.

For an award to be set aside for manifest disregard, the arbitrator must understand and correctly state the law, but proceed to disregard the same. Application of the manifest disregard of law standard requires the court to make, in essence, three inquiries: (1) whether the legal principle allegedly ignored by the arbitrator was well defined, explicit, and clearly applicable; (2) whether the arbitrators knew of the governing legal principle; and, (3) whether knowing that principle, the arbitrators refused to apply it or ignored it. A court may not vacate an arbitration award because it thinks the arbitrators made the wrong decision. Indeed, even if the court thinks that the arbitrator reached the wrong result or applied the law incorrectly, the court should nevertheless confirm the award, despite the court’s disagreement with it on the merits, if there is a barely colorable justification for the outcome reached.

Whether manifest disregard of the law occurred here depends on whether New York law on attorneys’ fees controlled the arbitration. It is well established under New York procedural rules and substantive law that arbitrators are not permitted to award attorneys’ fees in arbitration. New York courts only recognize three limited exceptions to New York’s special arbitration provision barring the award of attorneys’ fees: (1) where a statute provides for such an award, (2) where it was authorized by an express provision in the agreement; or (3) where it is unmistakably clear that both parties intended such an award.

In this case, Supreme Court found that the arbitrator was neither authorized to award attorneys’ fees by statute (first exception), nor by the parties’ agreement (second exception), but concluded that the third exception might apply. Supreme Court found, however, that it was not unmistakably clear that the parties intended that attorneys’ fees be awarded. Specifically, relying on this Court’s precedent, Supreme Court found that the parties’ requests for attorneys’ fees, in their respective pleadings, constituted mere boilerplate requests that did not satisfy an unmistakably clear intent to agree that attorneys’ fees be awarded.

We find, however, that the arbitrator did not manifestly disregard the law because it was not unreasonable for the arbitrator to conclude that the unmistakably clear intent requirement did not apply. It appears that the arbitrator believed the requirement did not apply because here the parties’ arbitration clause incorporated the rules of the AAA as controlling, and Rule 47(d) of the AAA explicitly provides that an award of attorneys’ fees may be made if all parties have requested such an award or it is authorized by law or the arbitration agreement. Rule 47(d) of the AAA does not require any specific language to be used in making a request for attorneys’ fees. Thus, under Rule 47(d) of the AAA, an arbitrator would be empowered to award attorneys’ fees provided, as here, all parties have requested it even if the unmistakably clear standard for requesting attorneys’ fees under New York law was not met.

The arbitrator’s conclusion under the AAA rules that a party may receive attorneys’ fees, although not otherwise entitled to attorneys’ fees under New York’s unmistakably clear standard, was not unreasonable. Therefore, it cannot be overturned by this Court under the manifest disregard of the law standard. In fact, there is support for the arbitrator’s conclusion in this Court’s prior holdings. We have held that the power to award attorneys’ fees can arise from the submission of the dispute under the rules of a given organization, like the AAA, if the rules themselves authorize the fees. For example, in Matter of Warner Bros. Records, this Court upheld the arbitrators’ award of attorneys’ fees because the arbitration in question was governed by the AAA, which permits an award of attorney fees and where, like here, both parties so requested it in their respective pleadings.

Even if this Court were of the view that the AAA rules did not grant the arbitrator broader authority to award attorneys’ fees than New York’s unmistakably clear standard, that the arbitrator gave the AAA Rule 47(a) a broader interpretation does not evidence a manifest disregard of the law. Indeed, this Court previously held in McLaughlin, Piven, Vogel Sec., Inc. v Ferrucci (67 AD3d at 405) that an arbitrator’s award of attorneys’ fees was not a manifest disregard of the law, even though the parties’ agreement was governed by New York law, because it did not appear that the arbitrators knew that New York law was controlling on the question of their authority to award attorneys’ fees. Similarly, here, just as Supreme Court initially held before changing its decision upon reargument, the arbitrator was under the impression that it is possible under the AAA rules for a party not otherwise entitled to attorneys’ fees under New York’s unmistakably clear intent standard, to be entitled to such fees under the AAA rules. This was a reasonable interpretation not based on manifest disregard of the law, and thus should not be vacated.

Finally, contrary to CRTV’s argument, a New York choice of law provision in the agreement to arbitrate, without greater specificity, does not bar damages permitted under the FAA and AAA rules, but barred by New York law. For example, an arbitrator is empowered to award punitive damages, in accordance with FAA rules, despite the fact that a contract contains a New York choice of law provision and punitive damages would be precluded under New York law. This Court has recognized that the FAA has a preemptive effect on New York’s restrictions on arbitral awards of punitive damages and attorneys’ fees. Thus, although attorneys’ fees are generally barred under New York law, pursuant to the “American Rule,” they are not barred in arbitration when the agreement contains a New York choice of law provision.

(Internal quotations and citations omitted).

Commercial litigation involves more than courts. Disputes often are–usually by agreement but sometimes by statute–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 or law.

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