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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: October 15, 2018

When Accounting Firm Agreed to Respond to Audit Letter, Continuous Representation Doctrine Preserved Professional Malpractice Claims Relating to Original Return

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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Posted: October 14, 2018

Contractual Right to Take Actions Cannot Shield Fiduciary From Breach of Fiduciary Duty Claim if Fiduciary Acted in Bad Faith

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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Posted: October 13, 2018

Fact Questions Regarding Whether Contract Breach Was So Material As to Justify Rescission Preclude Summary Judgment

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. Inc2018 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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Posted: October 12, 2018

Court Rejects Claims for Common Law Indemnification and Contribution

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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Posted: October 11, 2018

Intention Not to Perform Contract Cannot Be Basis of Fraudulent Inducement Claim

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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Posted: October 10, 2018

Shareholder Has Standing to Sue Corporation’s Counsel for Malpractice

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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Posted: October 9, 2018

Levy Does Not Expire After 90 Days if a Special Proceeding is Commenced Before the 90 Days Has Run

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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Posted: October 8, 2018

No Appeal From Default Judgment; Appellant Should Have Moved to Vacate and Appealed The Denial

On September 28, 2018, the Fourth Department issued a decision in Montanaro v. Weichert, 2018 NY Slip Op. 06354, holding that there is no appeal from a default judgment, explaining:

It is well settled that no appeal lies from an order or judgment entered on default, and thus the appeal must be dismissed.

Defendants’ remedy was to move to vacate the default judgment, then appeal from an order denying their motion to vacate the default judgment. It appears that at least one of the defendants moved to vacate the default judgment and the court denied that motion and, although an appeal from a judgment brings up for review any non-final judgment or order which necessarily affects the final judgment, no such non-final order is included in the record on appeal. Defendants, as the appellants, submitted this appeal on an incomplete record and must suffer the consequences.

(Internal quotations and citations omitted).

New York is very liberal in allowing the appeal of decisions made before a final judgment is entered. However, this decision shows that not everything is appealable. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether a decision can be appealed.

Posted: October 7, 2018

Upcoming Arguments in the Court of Appeals in October 2018

Upcoming argument in the Court of Appeals in October 2018 that may be of interest to commercial litigators:

  1. Capital One Taxi Medallion Finance v. Corrigan, APL 2017-00190 (to be argued Thursday, October 11, 2018 (“Suretyship and Guarantee–Action to recover on two guaranties–Line of credit secured by loans to Chicago taxi owners and drivers for the purchase of taxi medallions–whether defendants’ claim for negligent impairment of collateral, which remains pending in parallel litigation, barred summary judgment in plaintiff’s favor; lender’s alleged refusal to release liens to permit sale of taxi medallions while they had higher value, and alleged withdrawal from medallion lending market to pursue competing venture with a ride-sharing service.”)

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Posted: October 6, 2018

Transcripts and Videos of Arguments in the Court of Appeals for September 2018 Now Available

On August 25, 2018, we noted a case of interest from the oral arguments before the Court of Appeals in September 2018:

  1. Deutsche Bank National Trust Co. v. Flagstar Capital Markets Corp., APL-2016-00237 (argued Thursday, September 6, 2018) (“Contracts-Breach or performance of contract-Whether statute of limitations bars a breach of contract action brought more than six years after seller made allegedly false representations and warranties regarding loan underlying residential mortgage-backed securities—contract provision specifying set of conditions that would delay cause of action’s accrual—enforceability of accrual clause.”) See the transcript and the video.

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