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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: December 6, 2019

Statue of Limitations for Action Brought by Trustee is Based on the Trustee’s Residence

On November 25, 2019, Justice Fahey of the Court of Appeals issued a decision in Deutsche Bank Natl. Trust Co. v. Barclays Bank PLC, 2019 NY Slip Op. 08519, holding that the statute of limitations for an action brought by a trustee is based on the trustee’s residence, explaining:

We reaffirm that a cause of action accrues at the time and in the place of the injury. Although courts may, in appropriate cases, conclude that an economic loss was sustained in a place other than where the plaintiff resides, we decline to apply the multi-factor analysis that plaintiff proposes.

We now turn to the issue of where the economic injury was sustained in this particular case. Our analysis is limited by the arguments the parties have raised.

All parties agreed below and continue to agree on this appeal that the residence of the certificateholders does not provide a workable basis for determining the place of economic injury, inasmuch as the certificateholders are geographically scattered. In light of that agreement, we do not consider whether the residence of the certificateholders is an appropriate basis for determining the place of economic injury here, or whether the residence of trust beneficiaries may be relevant to the place of economic injury in a different case. Furthermore, although the certificateholders may have suffered concrete economic injury due to defendants’ alleged breaches, here plaintiff is suing solely in its capacity as the trustee on behalf of the trusts for alleged breach of contract, and the parties agree that certificateholders may have their own, separate claims. Plaintiff also does not argue that the location of the trust property should determine the place of economic injury.

For these reasons, we conclude that plaintiff’s residence applies to determine the place of injury in this case. As trustee, plaintiff is authorized to enforce, on behalf of the certificateholders, the representations and warranties in the relevant agreements. Accordingly, it is appropriate for us to look to plaintiff’s residence as the place where the economic injury was sustained and, consequently, where plaintiff’s causes of action accrued for purposes of CPLR 202. Application of the plaintiff-residence rule here supports CPLR 202’s goal of predictability and certainty of uniform application to litigants. That is especially true when we consider that these are representative actions commenced by a trustee for the benefit of numerous, geographically-dispersed beneficiaries.

Plaintiff is a resident of California. To satisfy CPLR 202, plaintiff’s actions therefore must be timely under California’s statute of limitations.

Schlam Stone & Dolan represents investors in RMBS actions against underwriters and trustees and in related proceedings, such as trust instruction proceedings where an RMBS trustee seeks court guidance regarding the management of an RMBS trust. If you or a client are RMBS investors and have questions regarding potential claims against a trustee or how to influence the trustee’s prosecution of a put back action like the one at issue here, contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com.

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Posted: December 5, 2019

Directing RMBS Certificateholder Not “Effective” Plaintiff Causing Suit to Fail for Lack of Standing Under PSA’s No Action Clause

On November 21, 2019, Justice Friedman of the New York County Commercial Division issued a decision in Natixis Real Estate Capital Trust 2007-HE-2 v Natixis Real Estate Capital, Inc., 2019 NY Slip Op. 33438(U), holding that a directing RMBS certificateholder was not the “effective” plaintiff in an RMBS put-back action, which would cause the action to fail for lack of standing under the PSA’s no action clause, explaining:

Nataxis cites no authority in support of its contention that a certificateholder, or other trust beneficiary, may be considered the “effective” plaintiff in an action brought by a trust representative. Put another way, Nataxis fails to show how, in the event Computershare demonstrates that it was a duly appointed trust representative, and therefore authorized to prosecute this action, Computershare can be deprived of this status–i.e. its status as a plaintiff with standing–by virtue of communications with a directing certificateholder as to the conduct of the litigation. This contention not only is unsupported by any legal authority, but also ignores that a trustee or securities administrator acts on behalf of the trust and its beneficiaries and would reasonably be expected to communicate with them in order to insure the protection of their interests.

(Internal citations omitted).

Schlam Stone & Dolan represents investors in RMBS actions against underwriters and trustees and in related proceedings, such as trust instruction proceedings where an RMBS trustee seeks court guidance regarding the management of an RMBS trust. If you or a client are RMBS investors and have questions regarding potential claims against a trustee or how to influence the trustee’s prosecution of a put back action like the one at issue here, contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com.

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Posted in Commercial, Standing
Posted: December 4, 2019

Court Refuses to Consolidate Cases in Significantly Different Procedural Postures

On November 21, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Summit Rest. Repairs & Sales, Inc. v. New York City Dept. of Educ., 2019 NY Slip Op. 33457(U), refusing to consolidate cases in significantly different procedural postures, explaining:

CPLR 602(a) provides that:

When actions involving a common question of law or fact are pending before a court, the court, upon motion, may order a joint trial of any or all the matters in issue, may order the actions consolidated, and may make such other orders concerning proceedings therein as may tend to avoid unnecessary costs or delay.

A motion for consolidation is generally addressed to the sound discretion of the trial court and absent a showing of substantial prejudice to the non-moving party, a consolidation motion should be granted where common questions of law and fact exist. However, as the First Department has held, even where there are common questions of law or fact, consolidation is properly denied if the actions are at markedly different procedural stages and consolidation would result in undue delay in the resolution of either matter. Abrams is on point here: there, a motion was made to consolidate an action placed on the trial calendar with an action that had barely advanced to discovery. The trial court denied the motion and the First Department affirmed, reasoning that denial of consolidation was appropriate since consolidation would delay resolution of both actions. The same rationale applies here and is even more compelling as the instant action has been pending in this court since 2012. It should not be delayed any further. If the parties do timely complete discovery in the DOE action such that a note of issue is filed before trial in this case, the court will consider anew an application to consolidate the two actions for trial. The court simply cannot delay resolution of this 2012 action if that discovery cannot be quickly completed.

(Internal quotations and citations omitted).

Consolidation is a useful tool to avoid duplication of effort when there are similar lawsuits. As this decision shows, a court is not required to consolidate similar cases when they are in different procedural stages. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding whether two or more lawsuits can be consolidated.

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Posted: December 3, 2019

Court Grants Preliminary Injunction Enforcing Restrictive Covenants Pending Trial

On November 26, 2019, the First Department issued a decision in UAH-Mayfair Mgt. Group LLC v. Clark, 2019 NY Slip Op. 08536, affirming the grant of a preliminary injunction enforcing a restrictive covenant pending trial, explaining:

In order to obtain a preliminary injunction, movant must show (1) a likelihood of ultimate success on the merits; (2) the prospect of irreparable injury if the provisional relief is withheld; and (3) a balance of equities tipping in its favor.

The IAS court did not abuse its discretion in finding that defendants violated the restrictive covenants in their various agreements with plaintiffs. Defendants effectively admitted to a number of violations at the evidentiary hearing.

Because these covenants arose from the sale of defendants’ business, irreparable injury is presumed. In any event, the diversion of business from plaintiffs in this case would likely lead to damages that could not be calculated with reasonable certainty. For this reason also, plaintiffs are irreparably harmed.

The balance of equities favors plaintiffs. Defendants can pursue consulting work in the affordable housing field, but may not interfere with plaintiffs’ relationship with former customers. Moreover, defendants were paid millions of dollars in connection with the sale of the business, and cannot now clawback the good will they sold.

(Internal citations omitted).

Non-compete provisions are subject to a number of limitations, but as this decision discusses, courts will in appropriate circumstances enforce them through an injunction before trial. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the enforcement of an employment contract.

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Posted in Commercial, Contracts
Posted: December 2, 2019

Court Looks to Substance of Agreement, Not How it is Styled, in Upholding Usury Claim

On November 19, 2019, Justice Nowak of the Erie County Commercial Division issued a decision in McNider Mar., LLC v. Yellowstone Capital, LLC, 2019 NY Slip Op. 33418(U), holding that the court would look to the substance of an agreement, not how it was styled, in upholding a usury claim, explaining:

Defendants move this Court to dismiss all three causes of action contained in the amended complaint, all of which depend upon the allegation that the July and October agreements constituted criminally usurious loans instead of purchases of accounts receivables. If a transaction is not a Joan, there can be no usury, however unconscionable the contract may seem to be. Defendants contend that the documentary evidence demonstrates as a matter of law that the July and October agreements were purchases of accounts receivable and not loans. In determining whether a transaction is usurious, the law looks not to its form, but to its substance, or real character.

After analyzing specific MCA agreements, many New York courts have found that they constitute legitimate purchases of accounts receivables instead of loans with usurious interest rates. Courts that found otherwise, that MCA agreements were usurious loans disguised as purchases of accounts receivable, typically found no provisions for forgiveness or modification of the loans, such as viable and enforceable reconciliation provisions, in the event that the funding companies could not collect the daily amounts required.

In K9 Bytes, Inc. v Arch Capital Funding, LLC, 56 Misc 3d 807 (Sup Ct, Westchester County 2017), the court considered a series of merchant agreements. Several of them required that the funding company “shall, upon [the merchant’s] request,” reconcile the merchant’s account according to the specified percentage. As a result, the court found that such agreements did not create an unlawful debt. Another agreement, however, did not include a reconciliation provision, and the court held that it cannot find, as a matter of law, that the transaction is not a loan.

Focusing on the reconciliation provision in a given merchant agreement is appropriate because it often determines the risk to the funding company. If the funding company truly is collecting a specified percentage of accounts receivable, then the funding company bears the risk of a downturn in the merchant’s business. The specified percentage typically is replaced by a fixed payment (as it was here), but if that payment is reconciled when accounts receivable drop below the merchant’s original estimation, then it may take the merchant far longer to repay the amount advanced than the funding company had anticipated.

If, however, the merchant is unable to adjust fixed payments in the event of a reduction of its accounts receivable, and the funding company can collect the amount due and owing by way of a personal guarantee and confession of judgment, there is far less risk to the funding company. Therefore, whether the merchant may reconcile its fixed payment amount when there is a reduction of accounts receivable is often determinative of whether repayment is absolute or contingent. If repayment is absolute, then the arrangement must be considered a loan as opposed to a purchase of accounts receivable.

In this case, the court finds that plaintiffs have demonstrated that the reconciliation provisions contained in the addenda to the July and October agreements were illusory. First, the court cannot find from the language in the agreements that Yellowstone had any duty to reconcile. In fact, Yellowstone likely could refuse to even consider reconciliation if it contended that McNider Marine failed to sufficiently document a basis for it. Furthermore, even if Yellowstone was required to reconcile, there was no time to do so because McNider could request reconciliation only within five business days following the end of a calendar month. McNider Marine defaulted on December 16, 2016, so it could not request reconciliation until the first week of January 2017. Yellowstone filed for a judgment by confession on December 22, 2016 and obtained that judgment on December 28, 2016.

The notion of reconciliation for McNider Marine appears particularly futile because the fixed daily payment in the October agreement was not a good faith estimate of 15% of its receivables to begin with inasmuch as there was no evidence that the receivables had increased over 40% from the July estimate. Without the right to effectively reconcile the fixed dollar amount, the agreement resulted in a loan payable over a fixed term with a criminally usurious interest rate in excess of 285%.

(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 jlundin@schlamstone.com 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 in Commercial, Usury
Posted: December 1, 2019

Summons with Notice Provided Sufficient Notice to Satisfy Statute of Limitations

On November 19, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Razinski v. Katten Muchin Rosenman, LLP, 2019 NY Slip Op. 33422(U), holding that a Summons with Notice provided sufficient notice to satisfy the statute of limitations, explaining:

It is undisputed that the statute of limitations for legal malpractice is three years. Plaintiffs argue the period started running when KMR argued the appeal before the First Department on January 14, 2016. Three years later would be January 14, 2019. The Summons was filed on January 11, 2019, and the Complaint was filed on February 25, 2019. KMR argues the Summons is insufficient to start the action because it was not accompanied by a complaint and does not qualify as a summons with notice. A summons with notice shall contain or have attached thereto a notice stating the nature of the action and the relief sought, and the sum of money for which judgment may be taken in case of default. The notice portion of the Summons reads as follows:

Notice: The relief sought is money damages in legal malpractice, breach of contract and breach of fiduciary duty based upon representation in New York County and other court matters. Upon your failure to appear, judgment will be taken against you by default for a sum in excess of the jurisdiction of all lower courts, with interest and the costs of this action.

The naming of actual claims is sufficient to describe the nature of the action. The notice also states that the damages are at least $500,000, the jurisdictional requirement of this court (although not in so many words). A summons with notice is not jurisdictionally defective merely because it omitted a specific dollar amount of money damages sought. This provides sufficient notice to allow defendant to decide if it wishes to appear in response. This action is timely.

(Internal quotations and citations omitted).

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

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Posted: November 30, 2019

Trustee Cannot Rely on CPLR 205 Relation Back When Trust Beneficiary, Not Trustee, Initially Brought Suit

On November 19, 2019, the First Department issued a decision in US Bank N.A. v. UBS Real Estate Sec., Inc., 2019 NY Slip Op. 08355, holding that an RMBS trustee could not rely on CPLR 205 relation back when a trust beneficiary, not the trustee, initially brought suit, explaining:

The dispositive issue in both appeals is whether the trustee of a residential mortgage-backed securities trust is a plaintiff” within the meaning of CPLR 205(a) when the prior action was commenced by the trust’s certificateholders. In U.S. Bank N.A. v DLJ Mtge. Capital, Inc. (141 AD3d 431 [1st Dept 2016], affd 33 NY3d 84 [2019] [“HEAT”]), we concluded that the trustee was not entitled to refile the claims pursuant to CPLR 205(a), because it was not a plaintiff under that statute. Our decision could not have been clearer, and that decision is still good law and binding upon us under principles of stare decisis. Plaintiff Ace Securities Corp.’s attempt to distinguish HEAT is unavailing. Neither plaintiff has demonstrated the compelling circumstances required to depart from stare decisis.

(Internal quotations and citations omitted).

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

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Posted: November 29, 2019

Alleged Poor Administration or Planning Insufficient to Bar Defendant’s Reliance on No Damages for Delay Clause

On November 19, 2019, the First Department issued a decision in WDF Inc. v Turner Constr. Co., 2019 NY Slip Op. 08379, holding that alleged poor administration or planning was insufficient to overcome a construction contract’s no damages for delay clause, explaining:

This case is factually strikingly similar to another action brought by plaintiff seeking delay damages in connection with another construction project. In that case, we found that the allegations in plaintiff’s proposed amended complaint established nothing more than inept administration or poor planning, rather than the bad faith or willful, malicious, or grossly negligent conduct that brings a case within an exception to the rule that no-damages-for-delay clauses are enforceable.

In this case, plaintiff’s sole argument is that summary judgment is precluded by issues of fact raised by an internal Turner email assessing potential damages, which plaintiff contends constitutes a party admission of liability. It is apparent from the email that Turner was assessing the costs claimed by plaintiff, not the viability of plaintiff’s claims under the terms of the subcontract, and, being an internal document, the email did not waive any of Turner’s rights or raise any material issues of fact as to the viability of those claims. The fact that Turner evaluated whether plaintiff incurred delay damages is irrelevant to the enforceablity of the no-damages-for-delay clause. Plaintiff failed to present evidence that Turner engaged in bad faith or willful, malicious, or grossly negligent conduct or that any other exception to the rule applies to render the clause unenforceable.

(Internal quotations and citations omitted).

One of the reasons parties often choose to have their contracts governed by New York law is that courts generally enforce agreements as written. Here, the contract provided that the plaintiff was not entitled to damages caused by a construction delay. 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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Posted in Commercial, Damages
Posted: November 28, 2019

Liability for Aiding and Abetting Requires Affirmative Acts, Not Acquiescence

On November 20, 2019, the Second Department issued a decision in Land v. Forgione, 2019 NY Slip Op. 08396, holding that liability for aiding and abetting requires affirmative acts, not acquiescence to another’s misconduct, explaining:

To recover damages for aiding and abetting tortious conduct, a plaintiff must allege knowledge of the alleged tortious conduct by the aider and abettor, and substantial assistance by the aider and abettor in the achievement of the tortious conduct. Substantial assistance requires an affirmative act on the defendant’s part; mere inaction can constitute substantial assistance only if the defendant owes a fiduciary duty directly to the plaintiff. Here, the plaintiff’s proposed amendment was palpably insufficient and devoid of merit because the conduct alleged was insufficient to establish that Huntington substantially assisted the Stag defendants’ alleged tortious conduct or owed any fiduciary duty to the plaintiff. Rather, Huntington was protecting its own interests as landlord of the premises.

(Internal quotations and citations omitted).

In New York, a defendant also can be held liable for aiding and abetting a tort or other misconduct. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding aiding and abetting liablity.

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Posted in Commercial, Contempt
Posted: November 27, 2019

Retaliation Claims Barred by Noerr-Pennington Doctrine

On November 15, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Pozner v. Fox Broadcasting Co., 2019 NY Slip Op. 33415(U), holding that retaliation claims were barred by the Noerr-Pennington doctrine, explaining:

Pozner’s retaliation claim alleges that Fox’s counterclaims were brought solely as retaliation for Pozner’s claims of discrimination and are therefore actionable. Fox argues that the cause of action for retaliation must be dismissed under both the federal Noerr-Pennington doctrine and New York state law. The Noerr-Pennington doctrine holds that parties many not be subjected to liability for petitioning the government such as by filing litigation.

Further, the immunity provided by the Noerr-Pennington doctrine applies so long as the litigation is not a sham. Sham litigation in this context is defined as litigation that is both (1) objectively baseless and (2) not sincerely and honestly felt or experienced, i.e., brought in bad faith.

As Fox’s counterclaim is a petition that seeks redress from the court, pursuant to the Noerr-Pennington doctrine it cannot be the basis of a claim for retaliation. And, the exception to the doctrine for sham litigation is not applicable because I previously determined, in the July 2017 Decision, that Fox adequately pled a breach of contract claim, thus the counterclaim is not objectively baseless.

None of Pozner’s arguments in opposition to Fox’s motion to dismiss require a different conclusion. First, Pozner asserts that the Noerr-Pennington doctrine does not warrant dismissal of its retaliation claim but this argument is conclusory and fails to cite to any supporting cases. Pozner does attempt to distinguish Fox’s cases by stating that none of the cases pertained to discrimination or counter-claims based on retaliation for filing such claims.

Although the Noerr-Pennington doctrine initially arose in the antitrust field, the courts have expanded it to protect First Amendment petitioning of the government from claims brought under Federal and State law. There are no New York cases either applying or prohibiting the Noerr-Pennington doctrine in the context of retaliation claims. However, given other courts’ interpretations that the doctrine applies equally in all contexts, and the importance of the right to petition, I find that it applies here.

(Internal quotations and citations omitted).

Civil litigation can involve claims that cause real reputational harm, but not every statement can be the subject of a defamation claim. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions about whether statements about you or your business can be the basis for a claim for defamation.

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Posted in Commercial, Defamation