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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 10, 2019

Privilege Determined by Law of Location of Trial or of Proceeding Seeking Discovery

On November 27, 2019, the Second Department issued a decision in Askari v. McDermott, Will & Emery, LLP, 2019 NY Slip Op. 08547, holding that a question of privilege must be determined by the law of the location of trial or of the proceeding seeking the evidence, explaining:

Here, in the complaint, the plaintiffs seek the documents contained in McDermott’s file related to the transaction, which they allege included not only the execution of the MIPA, but also the reorganization of Sina and the employment agreement. While the MIPA provided that it and any disputes hereunder would be governed by and construed in accordance with the laws of Delaware, the reorganization plan only provided that this Plan would be governed by and construed in accordance with Delaware law. Moreover, the employment agreement stated that it would be governed by New York law. Similarly, the promissory notes, which were executed as part of the reorganization of Sina, stated that they would be governed by New York law. Consequently, the Supreme Court should not have held that the choice-of-law provision set forth in the MIPA governed the plaintiffs’ request for copies of McDermott’s files concerning the “transaction” as a whole when the transaction concerned multiple stages and documents.

Significantly, the issue at bar does not concern a dispute arising under the MIPA. While some of the documents in McDermott’s possession with respect to the MIPA may ultimately be relevant in potential subsequent litigation between the plaintiffs and Specialty concerning a dispute arising under the MIPA, the cause of action here pertains to the plaintiffs’ right to the documents in McDermott’s possession with respect to its representation of various individuals and/or entities. Consequently, the choice-of-law provision in the MIPA is not even implicated here. The gravamen of the plaintiffs’ claim sounds in replevin, not the interpretation or enforcement of the MIPA or any other agreement.

In a situation where documents are sought, New York will apply the law of the forum where the evidence will be introduced at trial or the location of the proceeding seeking discovery of those documents Here, the privileged communications being sought by the plaintiffs in this New York replevin action were made in New York between New York-based attorneys at McDermott and Sina, a New York corporation, involving its then-majority shareholder and president, Askari, a New York resident. The sole nexus that Delaware has to this action is that Specialty is a limited liability company formed under the laws of that state. Consequently, New York law applies in this action sounding in replevin seeking the disclosure of McDermott’s files.

It would indeed be incongruous to enforce a law which effectively forecloses New York corporations merging with foreign corporations from having the ability to pursue their claims against their counsel or the newly formed, post-merger entities based on the post-merger entities’ control of the documents needed by the former entities to prosecute potential claims. Here, Delaware law gives the new corporation, a putative defendant, sole access to and control of the merger-related documents by the exercise of the attorney-client privilege. This is contrary to New York public policy as enunciated in Tekni-Plex.

(Internal quotations and citations omitted).

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: December 9, 2019

Striking Answer and Dismissal of Counterclaims as Discovery Sanction Upheld

On November 27, 2019, the Second Department issued a decision in Sparakis v. Gozzer Corp., 2019 NY Slip Op. 08590, upholding striking an answer and dismissing counterclaims as a discovery sanction, explaining:

In July 2016, the plaintiffs served the defendants with a request for production of documents. The defendants did not respond to this demand within 20 days. On August 29, 2016, the parties appeared for a preliminary conference, and a preliminary conference order was issued, inter alia, directing the defendants to respond to the plaintiffs’ discovery demand by a date certain. The defendants had not yet responded to the plaintiffs’ discovery demand when the parties appeared for a compliance conference on March 7, 2017. In a compliance conference order dated March 7, 2017, the Supreme Court directed the defendants to respond to the plaintiffs’ discovery demand within 20 days. The defendants failed to respond by the deadline set forth in the compliance conference order. Thereafter, pursuant to a stipulation dated May 18, 2017, the defendants acknowledged that they failed to comply with the court-ordered disclosure set forth in the preliminary conference order and the compliance conference order, and agreed to produce the documents requested in the plaintiffs’ discovery demand by May 31, 2017. The stipulation further provided that in the event the defendants failed to produce the responsive documents by that date, the plaintiffs were permitted to move, without prior court approval, to strike the defendants’ answer and counterclaims and for leave to enter a default judgment.

On June 12, 2017, the plaintiffs moved pursuant to CPLR 3126 to strike the defendants’ answer and counterclaims and for leave to enter a default judgment against them. According to the plaintiffs, the defendants’ document production was incomplete because none of the documents requested from the defendant Aktor Corporation (hereinafter Aktor) were produced. In an affirmation in opposition, the defendants’ then counsel indicated that the documents requested from Aktor were inadvertently omitted from the defendants’ production and that Aktor was in the process of collecting responsive documents. The record demonstrates that, after the plaintiffs’ motion was fully submitted, the defendants retained new counsel, who submitted an affirmation in further opposition to the plaintiffs’ motion, indicating that the defendants had produced certain limited documents from Aktor. In response, the plaintiffs’ counsel asserted that the defendants’ belated document production was incomplete. By order entered January 18, 2018, the Supreme Court, inter alia, granted that branch of the plaintiffs’ motion which was to strike the answer and counterclaims insofar as asserted on behalf of Aktor. The defendants appeal.

The nature and degree of the penalty to be imposed pursuant to CPLR 3126 lies within the sound discretion of the Supreme Court. Although actions should be resolved on the merits where possible, a court may strike the answer of a defendant for failure to comply with court-ordered discovery where there is a clear showing that the noncompliance is willful and contumacious. Here, Aktor’s willful and contumacious conduct can be inferred from its repeated failure to timely and fully respond to the plaintiffs’ discovery demand, and the absence of an adequate explanation for its failure to comply with the deadlines set forth in the preliminary conference order, the compliance conference order, and the parties’ stipulation.

(Internal quotations and citations omitted).

A big part of complex commercial litigation is giving, receiving and evaluating evidence (this is called “discovery”). This decision discusses the problem of litigants not performing their discovery obligations and what can happen to them if they do not. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has a question regarding discovery obligations (and what to do if a litigant is not honoring those obligations).

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Posted: December 8, 2019

Plaintiff Prevails at Traverse Despite Process Server’s Absence

On November 21, 2019, Justice Cohen of the New York County Commercial Division issued a decision in Eros Intl. PLC v. Mangrove Partners, 2019 NY Slip Op. 33461(U), holding that a plaintiff had established proper service despite the process server’s absence from the traverse hearing, explaining:

At the traverse hearing, the burden fell on Eros to establish, by a preponderance of the evidence, that Asensio was properly served. .

When a process server cannot be compelled with due diligence to attend the traverse hearing, the process server’s affidavit of service can satisfy the plaintiffs evidentiary burden. Under CPLR. 4531, an affidavit by a person who served, posted or affixed a notice, showing such service, posting or affixing is prima facie evidence of the service, posting or affixing if the affiant is dead, mentally ill or cannot be compelled with due diligence to attend at the trial.

The evidence established that Guskin refused to testify at the traverse hearing despite Eros’s diligent efforts. Skye Gao, an associate at Kasowitz, described in detail the steps she took on behalf of Eros to secure Guskin’s attendance. First, Gao testified that she tried calling Guskin in November 2018. Though Guskin did not answer, he called her back shortly thereafter and informed her that he cannot, personally, attend the traverse hearing because he had retired and moved to Ecuador. Gao reached out to him again, by phone, in January 2019. This time, Gao hoped that Guskin might be willing to testify via video or telephone. But in March 2019, Guskin sent a WhatsApp message responding, very adamantly, that he refuses to come in – to either come in to testify or telephone remotely. Guskin also told Gao to never contact him again. As the Court stated on the record at the hearing, Gao’s testimony credibly and persuasively showed that reasonable and vigorous attempts were made to have the witness testify live or by phone or by video and he refused to do so.

Although Asensio insists that Eros did not satisfactorily demonstrate under CPLR 4531 that Mr. Guskin could not be compelled with due diligence to attend the trial, he provides no evidence to back that assertion. Indeed, his specific arguments – the claim, for example, that Guskin was available, at least remotely were specifically refuted by the credible testimony of Eros’s counsel. Further, Asensio’s so-called investigation into Guskin’s availability after the traverse hearing simply cements the conclusion that Guskin refused to participate in the traverse hearing in any manner. Notwithstanding Asensio’s conclusory objections, the Court finds that the process server could not be compelled with due diligence to attend the traverse hearing, as contemplated by CPLR 4531. The Affidavits of Service are thus admissible to prove that Asensio was served in accordance with CPLR 308(4) and 308(2).

(Internal quotations and citations omitted).

The rules regarding how you start a lawsuit and bring the defendants into it can sometimes be esoteric. Failing properly to serve a defendant with the papers initiating an action can result in its dismissal, regardless of whether the defendant had actual notice of the lawsuit. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding the proper way to serve a defendant, bringing them into a lawsuit.

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Posted: December 7, 2019

Counsel Disqualified from Representing LLC and its Members

On November 21, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in 1186 Broadway Tenant LLC v. Friedman, 2019 NY Slip Op. 33463(U), disqualifying counsel from representing both an LLC and its members, explaining:

It is well settled that a party has the right to representation by the attorney of its choice and any restrictions on that right must be carefully scrutinized. On a motion seeking to disqualify an adversary’s attorney, the court must consider the totality of the circumstances and carefully balance the right of a party to be represented by counsel of his or her choosing against the other party’s right to be free from possible prejudice due to the questioned representation. As such, the use of a motion to disqualify as an offensive measure to gain a tactical advantage or to delay active litigation is discouraged.

At issue is a perceived conflict of interest between plaintiffs and Friedfield based upon Rules of Professional Conduct, 22 NYCRR 1200.0 Rules 1.7, “Conflict of interest: current clients,” and 1.13, “Organization as client.” Rule l.7(a)(l) provides that, except as provided in paragraph (b), a lawyer shall not represent a client if a reasonable lawyer would conclude that the representation will involve the lawyer in representing differing interests. The term differing interests is defined as every interest that will adversely affect either the judgment or the loyalty of a lawyer to a client, whether it be a conflicting, inconsistent, diverse, or other interest.

Pursuant to Rule 1.7(b)(3), notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal. Comment 17 to Rule 1.7 (b)(3) reads, in pertinent part:

Paragraph (b) (3) describes conflicts that are nonconsentable because of the institutional interest in vigorous development of each client’s position when the clients are aligned directly against each other in the same litigation or other proceeding before a tribunal. Whether clients are aligned directly against each other within the meaning of this paragraph requires examination of the context of the proceeding.

Additionally, Rule 1.13( d) states that:

A lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, subject to the provisions of Rule 1.7. If the organization’s consent to the concurrent representation is required by Rule 1.7, the consent shall be given by an appropriate official of the organization other than the individual who is to be represented, or by the shareholders.

A corporation, or in this instance, a limited liability company, is customarily a passive litigant in a derivative action. A corporate defendant does not require separate, independent counsel because its appearance is nominal, and the appearance of the same attorney for the nominal corporate defendant does not prejudice a shareholder from pursuing the derivative claims.

Nevertheless, a corporate litigant should appear by independent counsel in certain instances. For instance, counsel may be disqualified from concurrently representing defendants sued in a derivative action where their interests conflict. Any doubts as to the existence of a conflict of interest must be resolved in favor of disqualification.

Here, defendants have met their burden on the disqualification motion with respect to representing third-party defendant Friedfield LLC. Despite plaintiffs’ characterization of Friedfield as a passive litigant, the fact that defendants have brought a third-party action against Friedfield for indemnification has required Friedfield to formally appear in this dispute. Indeed, as noted at oral argument, defendants have separately moved for an advancement of their fees, which is a motion that merits a response from Friedfield. Moreover, the potential for conflict is apparent. Significantly, LLC Agreement LLC Agreement§ 10.2 (a), reads in part:

To the fullest extent permitted by applicable law, each Member and each Covered Person of such Member shall be entitled to indemnification from the Company … for any loss, damage or claim incurred by such Member and each Covered Person of such Member by reason of any act or omission performed or omitted by such Member or Covered person in good faith on behalf of the Company . . . except that no Member or Covered Person shall be entitled to be indemnified in respect of any loss, damage or claim incurred by such Member or Covered Person by reason of gross negligence or willful misconduct with respect to such acts or omissions ….

Plaintiffs and defendants each allege that the other breached their fiduciary obligations owed to Friedfield, and a necessary element to prevail on that cause of action is misconduct. If it were ultimately established that defendants engaged in misconduct, sufficient to support the breach of fiduciary duty claim, then Friedfield would presumably object to defendants’ invocation of the contractual indemnification provision in the LLC Agreement because Friedfield may not be obligated to indemnify them. In that regard, Friedfield’s and plaintiffs’ interests are aligned and do not conflict.

Nevertheless, the potential for conflict exists where, in view of the derivative claims, the Firm may be placed in a situation where it may protect plaintiffs’ interests over those of Friedfield. At a minimum, if Broadway Restaurant were to prevail, it would be entitled to contractual indemnification from Friedfield. But, if it is subsequently determined that Broadway Restaurant engaged in misconduct related to Friedfield, then the Firm may be placed in an untenable situation where its clients’ interests would conflict, as discussed under Rule l.7(b)(3).

Plaintiffs’ contention that the present motion is a strategic delay tactic is unpersuasive. The motion was filed one month after the Firm’s appearance for Friedfield at a preliminary conference. Thus, there was no unnecessary delay. Therefore, the portion of the motion seeking to disqualify the Firm from representing Friedfield is granted.

(Internal quotations and citations omitted).

We both bring and defend motions relating to attorney conflicts and do appeals of the decisions on those motions. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you face a situation where counsel may be–or is accused of being–conflicted.

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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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