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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: April 23, 2019

Contract With Specific Term Not Renewed by Course of Conduct

On March 27, 2019, Justice Masley of the New York County Commercial Division issued a decision in Mountain & Isles, LLC v. Gillz, LLC, 2019 NY Slip Op. 30872(U), holding that a contract with a specific term could not be renewed by a course of conduct, explaining:

The breach of contract claim against Gillz for improperly terminating the Agreement in violation of the renewal provision is not dismissed under MI’s theory that the Agreement renewed automatically due to sales goals being met, as supplemented by Mi’s submissions in support of its cross motion in Motion 001. Factual issues exist as to whether the sales goal was achieved, triggering the automatic renewal provision, and whether Gillz breached the Agreement by terminating early.

While a commercial contract can, in certain instances, be renewed by the parties’ conduct, it does not apply where the contract expressly provides that the parties intended to be bound for a certain term with explicit provisions for renewal of the contract. The parties here expressly contemplated the conditions under which the Agreement would automatically renew: if MI met certain sales goals during the first one-year term, the contract would automatically renew for a second, two-year term. The Agreement further provides unambiguous terms for future renewals, termination, and the parties’ obligations with respect to those contingencies/options.

Under its plain, unambiguous language, the Agreement would end after the initial one-year term unless it was automatically renewed by Mi’s satisfaction of the sales requirement. The Agreement does not provide for renewal for a second term by any other manner. If the automatic renewal provision was not triggered by MI’s sales, the parties’ continued course of conduct alone does not, without more, mean that all the terms of the expired formal contract continue to apply.

The authority cited by MI involves almost entirely employment law agreements involving individuals, not business entities. While course of conduct can, in certain instances, renew an annual contract in cases that do not involve employment agreements, the authority cited by MI does not compel an alternative result.

The automatic renewal doctrine was extended beyond ordinary employment contracts in Cinefot International Corp., which applied the doctrine to a contract for services between two business entities; however, that case contemplated an oral agreement that lacked any terms defining how, if at all, that contract’s one-year term could be renewed. Unlike Cinefot, the Agreement here is clear as to renewal and future terms. MI’s alternative allegation that the Agreement renewed by course of conduct is dismissed, as a matter of law, because the Agreement reflects the parties’ specific intent to renew under only the express terms in the Agreement. Here, there is no ambiguity.

(Internal citations and quotations 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. However, this decision illustrates one of the rules applied when an event not not covered by the contract occurs. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the interpretation of a contract under New York law.

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Posted: April 22, 2019

Partnership Tax Returns Were Not Dispositive Evidence of Plaintiff’s Status as a Partner

On April 2, 2019, Justice Masley of the New York County Commercial Division issued a decision in Barrison v. D’Amato and Lynch, LLP, 2019 NY Slip Op. 30905(U), holdiong that partnership tax returns were not dispositive evidence of a plaintiff’s status as a partner, explaining:

Whether partnership status is enjoyed turns on various factors, including sharing in profits and losses, exercising joint control over the business, and making capital investment and possessing an ownership interest in the partnership. Tax returns, without any other indicia of partnership, are insufficient.

Here, aside from the tax documents, plaintiff does not provide any evidence that he actually contributed capital to, possessed an ownership interest in or shared in the losses of the Firm. Nor does plaintiff offer any evidence of control over the Firm’s policies or hiring decisions. Therefore, plaintiff has failed to establish that he was an equity partner with the Firm.

(Internal citations omitted).

We often litigate employment disputes–both for employers and individuals. Sometime, those disputes turn on the plaintiff’s employment status. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether someone is a partner, employee or independent contractor.

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Posted: April 21, 2019

Anticipatory Repudiation Claim Dismissed For Failure Unequivocally to Allege a Refusal Further to Perform

On April 2, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Richman v. Reese, 2019 NY Slip Op. 30908(U), dismissing an anticipatory repudiation claim for failure unequivocally to allege a refusal further to perform the contract, explaining:

To plead a cause of action for anticipatory repudiation, the complaint must allege a definite and final communication by defendant of its intention to forgo its obligations under the contract, or that defendant attempted to avoid its obligations by advancing an untenable interpretation of the contract. Here, Richman failed to allege any definite and final, or positive and unequivocal, communication by Reese indicating that he intends to disregard Richman’s entitlement to the WF Fee Award.

Nor do Defendants’ assertions that they may ultimately be entitled to an offset of Richman’s portion of the WF Fee Award because of Richman’s purported breaches of the Agreement amount to an untenable interpretation of the Agreement sufficient to support an anticipatory repudiation cause of action. Therefore, Richman has failed to state that Reese anticipatorily repudiated his obligation under the Agreement to split the WF Fee Award, and this portion of the first and second cause of action is dismissed.

(Internal quotations and citations omitted).

Contract law–usually straightforward–has traps for the unwary, like the requirement that someone’s apparent repudiation of a contract be explicit and final before you can sue them for it. 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: April 20, 2019

Court Grants Default Judgment; No Good Cause Shown for Failure Timely to Answer

On March 25, 2019, Justice Schecter of the New York County Commercial Division issued a decision in Black Pearl Global Opportunity Fund v. Summit Equtites LLC, 2019 NY Slip Op. 30917(U), granting a default judgment because the defendant showed no good cause for failing timely to answer, explaining:

Where, as here, a defendant does not timely respond to the complaint and the plaintiff moves for a default judgment and proffers an affidavit of merit showing defendants’ liability, the burden shifts to defendants to proffer a justifiable excuse for default and a meritorious defense.

Summit does not proffer any excuse for failing to respond to the AC, Jet alone a reasonable one. Indeed, Summit’s only attempt at addressing the reasonableness of its failure to respond to the AC is the purported lack of proper service on Seiden. That issue, while dubious, is a red herring. Even if Seiden was not served, that fact has no bearing on whether a default judgment should be issued against Summit. There is no question that Summit was served with the original complaint, appeared in this action by counsel and responded to the original complaint. It was properly served with the AC bye-filing at a time when it was represented by counsel.

Summit’s failure to explain its failure to respond to the AC is unsurprising. As discussed, the record is clear that it willfully defaulted. It made the tactical decision that defending the breach of contract claim was not worth its time or money because it is judgment proof. The record is equally clear that Summit, from the outset, frustrated the discovery process and that it chose to default to forgo engaging in discovery on the claims against it, including the breach of contract cause of action. Excusing Summit’s default, under the circumstances, would allow Summit to achieve maximum delay by requiring the parties to altogether reopen the ESI process when, had it not affirmatively chosen to default, all of the discovery would have efficiently proceeded in tandem from the outset.

(Citations omitted).

If you are served with a complaint and fail timely to answer, the court can enter judgment against you: a default judgment. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether you have been properly served or if a default judgment has been entered against you.

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Posted: April 19, 2019

Court Cannot Rule on Whether Dispute is Arbitrable When Agreement Explicitly Assigns That Task to the Arbitrator

On March 26, 2019, Justice Ostrager of the New York County Commercial Division issued a decision in SM Sydell Hotels LLC v. Yucaipa U.S. Hospitality Partners Holdings, Inc., 2019 NY Slip Op. 30918(U), holding that a court cannot rule on whether a dispute is arbitrable when an agreement explicitly assigns that task to the arbitrator, explaining:

The central issues before the Court are: (1) whether the buyout procedures of Section 10.6 of the Agreement are subject to the broad arbitration provisions contained in Section 13 .4; and (2) whether such an issue should be determined in the California Arbitration or by this Court.

If the buyout procedures of Section 10.6-whereby the parties select a neutral arbitrator to determine the value of Yucaipa’s interests in the Company-are not further subject to Section 13.4’s broad, general arbitration provision purporting to govern all disputes arising under the Agreement, then Sydell’s motion to compel a closing should be granted. If, however, the broad arbitration provisions of Section 13.4 govern disputes arising out of Section 10.6’s potentially separate valuation arbitration, then a closing should be stayed and the parties compelled to participate in the California Arbitration.

Sydell argues that Section 10.6 of the Agreement provides a streamlined valuation arbitration procedure in the event that Sydell exercises its right to redeem Yucaipa’s interest in the Company and the parties disagree about the valuation. Thus, Sydell argues that Section 10.6 contains its own arbitration process that is not subject to further JAMS arbitration under the Agreement’s broader dispute resolution provisions in Section 13.4.

Yucaipa, in its opposition and cross motion, asserts that the issue of whether disputes arising from the valuation arbitration-specifically, Yucaipa’s allegation that Sydell corrupted the valuation proceeding-is an issue of arbitrability that the California arbitrator, and not this Court, must determine. Thus, Yucaipa argues that the threshold issue of arbitrability must be determined in the California Arbitration.

It is undisputed that Section 13.4 of the Agreement provides:

All disputes, claims and controversies arising out of or relating to this Agreement, including any and all disputes, claims or controversies arising out of or relating to (i) the Company, (ii) any Member’s rights and obligations hereunder, (iii) the validity or scope of any provision of this Agreement, (iv) whether a particular dispute, claim or controversy is subject to arbitration under this Section 13.4 and (v) the power and authority of any arbitrator selected hereunder, that are not resolved by mutual agreement shall be submitted to final and binding arbitration before JAMS pursuant to the Federal Arbitration Act.

Thus, as Yucaipa asserts, the threshold issue of arbitrability must be decided by the California arbitrator before this Court can resolve the issue of whether the valuation should be confirmed and Yucaipa compelled to close on the buyout.

Ordinarily, a gateway dispute about whether the parties are bound by a given arbitration clause raises a ‘question of arbitrability for a court to decide. However, a court must defer to an arbitrator’s arbitrability decision when the parties submitted that matter to arbitration. This exception to the rule applies only when the parties’ arbitration agreement clearly and unmistakably provides that the question of arbitrability is to be determined by the arbitrator. Thus, the Federal Arbitration Act allows parties to agree by contract that an arbitrator, rather than a court, will resolve threshold arbitrability questions as well as underlying merits disputes.

Here, it is clear that Section 13 .4 of the Agreement provides that any and all disputes, claims and controversies arising out of or relating to whether a particular dispute, claim or controversy is subject to arbitration must be determined by a JAMS arbitrator. Thus, the California Arbitration must determine whether Yucaipa’s claims are arbitrable.

(Internal quotations and citations omitted).

Complex 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: April 18, 2019

Non-Signatory Bound By Forum Selection Clause

On March 26, 2019, Justice Masley of the New York County Commercial Divsion issued a decision in Kluge v. Subotnick, 2019 NY Slip Op. 30919(U), holding that a non-signatory was bound by a contract’s forum selection clause, explaining:

Further, the cases cited by plaintiff are distinguishable. For example, Natl. Union Fire Ins. Co. v Williams (223 AD2d 395 [1st Dept 1996) involves a promissory note and an indemnity agreement both with competing forum selection clauses. In National Union Fire Ins. Co., the Court found that National Union’s claims under the indemnity agreement were so distinct and separate from any legal claims under the note that the indemnity agreement’s forum selection cause was operative, and the indemnity claims would be heard in New York. The court dismissed National Union’s claim under the note on the ground that it was not brought in the appropriate forum pursuant to the note’s forum selection clause. Here, plaintiff’s own pleadings intertwine the 2010 Trust Agreement and the Joseph Agreement by seeking a declaration as to both which require a simultaneous review, as discussed below, as well as an interpretation of an. Agreement with a Delaware forum selection clause.

In CooperVision, Inc. v lntek Integration Tech., Inc., plaintiff brought claims under a software implementation agreement, which did not have a forum selection clause. Defendant Intek Integration Technologies argued that a software licensing agreement with a Washington state forum selection clause was integrated into the .implementation agreement, and thus, Washington was the proper forum. The court disagreed and held that plaintiff only brought claims arising out of the implementation agreement which did not provided for a mandatory forum. Again, plaintiff here seeks a determination involving both Agreements.

Further, plaintiff’s reliance on L-3 Communications Corp. v. Channel Technologies, Inc. for the proposition that, under New) York law, a party will not be bound to a forum selection clause in an agreement he did not sign is also misplaced. The non-signatory in that case bore no relation to the signatory to be implicitly included within the agreement’s forum selection clause. Here, plaintiff is an express and intended third-party beneficiary to the 2010 Trust Agreement. Although plaintiff argues that the 2010 Trust Agreement is separate and distinct from the Joseph Agreement, he asks the court to interpret both and declare certain provisions of each of them unenforceable and inapplicable. Thus, the 2010 Trust Agreement is one of two contracts forming the basis for this action. Further, the Joseph Agreement In Terrorem Clause explicitly incorporates the 2010 Trust Agreement, precluding plaintiff from bringing an action setting aside any provision of the 2010 Trust Agreement or bringing an action against any fiduciary under the 2010 Trust Agreement without clear and convincing evidence that such fiduciary’s conduct was grossly negligent or constituted willful misconduct. The court cannot make a determination as to whether plaintiff’s challenge to certain investment choices by the Defendant Trustees will set aside any provision of the 2010 Trust Agreement without analyzing that Agreement, which is subject to the Delaware forum selection clause.

Finally, plaintiff has not sufficiently demonstrated that the forum selection cause should be set aside as unreasonable, unjust, or overreaching, or because of fraud. In New York, forum selection clauses are prima facie valid and enforceable, and are not to be set aside unless a party demonstrates that the enforcement of such would be unreasonable and unjust or that the clause is invalid because of fraud or overreaching, such that a trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court. Plaintiff’s contention that it is unreasonable and unjust to enforce the forum selection clause because Delaware courts view in terrorem provisions more favorably than New York courts is not sufficient. The 2010 Trust Agreement provides for the forum of Delaware. Nevertheless, both Agreements contain choice of law provisions regardless of the forum.

Plaintiff also opposes enforcement of the forum selection clause because the parties’ dispute lacks a sufficient nexus to Delaware. He argues that the decedent’s will was probated in New York, a trustee resides in New York, and all other related agreements and trusts were executed in New York and provide that New York law applies. However, the 2010 Trust Agreement is governed by Delaware law, appointed a Delaware entity as its initial Administrative Trustee, and designated Delaware as the intended initial situs of all trusts formed under it. Further, plaintiff, a Florida resident, provides no compelling reason why New York is a more convenient forum than Delaware.

(Internal quotations omitted).

New York generally enforces contracts as written, including contractual provisions specifying where a lawsuit may be brought. In exceptional circumstances, as this decision shows, even someone who is not a party to an agreement can be bound by the agreement’s forum selection clause. 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 contract limits where an action can be brought.

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Posted: April 16, 2019

Failure to Seek Default Judgment Within One Year of Default Results in Dismissal of Claims

On March 13, 2019, Justice Knipel of the Kings County Commercial Division issued a decision in Matter of Lev v. Rosenberg, 2019 NY Slip Op. 30824(U), holding that a defendant’s failure to seek a default judgment within one year of the plaintiff’s failure to respond to the defendant’s counterclaims was grounds for dismissal of those counterclaims, explaining:

CPLR 3215(c) provides that if the plaintiff fails to take proceedings for the entry of judgment within one year after the default, the court shall not enter judgment but shall dismiss the complaint as abandoned, without costs, upon its own initiative or on motion, unless sufficient cause is shown why the complaint should not be dismissed. Although counterclaims are not specifically mentioned in CPLR 3215, the legislative history reveals that it was intended to apply to counterclaims, in addition to claims pleaded in a complaint. Here, Rosenberg has failed to (1) seek leave to enter a default judgment on his counterclaims against Lev within one year after default, (2) establish a reasonable excuse for his delay in seeking a default judgment on his counterclaims, and (3) demonstrate that his counterclaims are potentially meritorious. Accordingly, all of Rosenberg’s counterclaims against Lev, as set forth in his and Noah’s joint answer, dated Oct. 24, 2016, are dismissed as abandoned, without costs, pursuant to CPLR 3215(c).

(Internal quotations and citations omitted) (emphasis added).

If you are served with a complaint (or counterclaims, as happened in this case) and fail timely to answer, the court can enter judgment against you: a default judgment. But as this decision shows, failing timely to seek such a judgment can result in the dismissal of the claims that were the subject of the default. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether you have been properly served or if a default judgment has been entered against you.

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Posted: April 15, 2019

Court Analyzes Application of Saving Statue to Case That had Been Transferred Multiple Times

On March 25, 2019, Justice Cohen of the New York County Commercial Division issued a decision in Federal Home Loan Bank of Boston v. Moody’s Corp., 2019 NY Slip Op. 30921(U), analyzing the application of New York’s saving statute (CPLR 205) to an action that had been transferred multiple times, explaining:

This case presents a vexing question regarding the application of CPLR § 205(a). The parties agree that the FHLBB’ s claim in this Court, viewed in isolation, would be time barred because the alleged fraud occurred more than six years before the case was filed on November 2, 2017. The FHLBB’s claim can be saved from dismissal only if its filing date is deemed to relate back to the timely filing date of Moody’s I (April 20, 2011), or at least to the removal date of Moody’s II (May 27, 2011). That is where section 205(a) comes in.

CPLR § 205(a), sometimes referred to as the “saving” statute, provides in relevant part that:

If an action is timely commenced and is terminated in any other manner than by a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, a dismissal of the complaint for neglect to prosecute the action, or a final judgment upon the merits, the plaintiff . . . may commence a new action upon the same transaction or occurrence or series of transactions or occurrences within six months after the termination provided that the new action would have been timely commenced at the time of commencement of the prior action.

As the Court of Appeals recently observed, section 205(a) implements the Legislature’s policy preference for the determination of actions on the merits. The statute is remedial in nature and, where applicable, allows plaintiffs to avoid the harsh consequences of the statute of limitations and have their claims determined on the merits where a prior action was commenced within the limitations period, thus putting defendants on notice of
the claims.

The Appellate Division has determined that an out-of-state action is not a prior action within the meaning of section 205(a). The rule appears to have been first announced in Baker v. Commercial Travelers Mutual Accident Ass’n of Am., 3 A.D.2d 265, 266 (4th Dep’t 1957), in which the Fourth Department, addressing a precursor to section 205(a), explained:

Limitations of actions are matters within the concern of the forum. Commencement of suit in another State will not toll or otherwise affect the provisions for limitation of actions in the State of the forum. It follows therefore that, assuming an action was commenced in the United States District Court in Florida where the cause of action arose within the contractual time limit, still that does not make available to the plaintiff the saving statute of New York.

This case presents the unusual (perhaps unique) situation in which the prior action was commenced outside of New York (Moody’s I) but terminated within New York (Moody’s IV). The parties have not cited, nor has the Court found, a case addressing the applicability of CPLR § 205(a) in that context. In the absence of binding authority on point, the Court finds that the most natural reading of the text of section 205(a) is that the FHLBB’s complaint in this case is timely because it was filed within six months of the termination of its prior action by a federal court sitting in New York. That conclusion is bolstered by the Court of Appeals’ admonition that the provision’s broad and liberal purpose is not to be frittered away by any narrow construction.

Here, there is a direct – albeit tumultuous – path from Moody’s I through Moody’s IV. Despite its travels between and among state and federal courts, it was one continuous action. Under federal law, the removal of the case from Massachusetts state court (Moody’s I) to Massachusetts federal court (Moody’s II) did not affect the filing date, which remains the time it was filed in state court.

In turn, after the transfer of the action from Massachusetts federal district court to the SDNY (Moody’s IV), 28 U.S.C. § 1631 provides that the action or appeal shall proceed as if it had been filed in or noticed for the court to which it is transferred on the date upon which it was actually filed in or noticed for the court from which it is transferred.

Although the Court is not bound to take account of federal court procedural rules in its application of CPLR § 205(a), doing so in this case is consistent with the overarching remedial purpose of the New York statute. The federal rules serve the same remedial purpose of avoiding the harsh application of the statute of limitations when the plaintiff is seeking to continue its timely-filed case in the proper forum. The Defendants here plainly have been on notice of the FHLBB’s claims since 2011. Moreover, the final resting place of the action immediately prior to the initiation of the instant case was a New York federal court, and thus applying section 205(a) is consistent with Baker and its progeny.

In sum, the Court finds that the FHLBB’s claim is timely, under CPLR § 205(a), because its prior action was timely commenced in 2011 and the instant case was initiated and served within six months of the termination of that action by the SDNY.

(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: April 14, 2019

First Department Affirms Order Remanding Arbitration to New Arbitrator

On April 11, 2019, the First Department issued a decision in Policy Admin. Solutions, Inc. v. QBE Holdings, Inc., 2019 NY Slip Op. 02818, affirming a lower court decision to remand an arbitration to a different arbitrator, explaining: “The court providently exercised its discretion in clarifying that the original arbitrator was not to hear the remanded arbitration. That ruling had been appealed and affirmed by this Court (160 AD3d 572, 573 [1st Dept 2018]).”

Complex 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: April 12, 2019

Contra Proferentem Doctrine Does Not Apply When Contract is Unambiguous and the Parties are Sophisticated

On April 2, 2019, the First Department issued a decision in Churchill Real Estate Holdings LLC v. CBCS Wash. St. LP, 2019 NY Slip Op. 02472, rejecting the application of the contra proferentem doctrine, explaining:

Contrary to defendants’ contention, the doctrine of contra proferentem is inapplicable here, because the language of the agreement is unambiguous, and because the parties are sophisticated.

(Internal citations omitted).

New York contract law–usually straightforward–has traps for the unwary, like the rule, which the court declined to apply here, that ambiguities in a contract are interpreted against the drafter. 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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