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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: September 22, 2019

Senior Lender Did Not Have Special Duty to Subordinated Junior Lender

On September 9, 2019, Justice Emerson of the Suffolk County Commercial Division issued a decision in Saltini v. North Sea Dev. LLC, 2019 NY Slip Op. 51456(U), holding that a senior lender did not have a special duty to a subordinated lender, explaining:

In support of the ninth cause of action for breach of fiduciary duty, the plaintiff contends that, relying on promises by the Lender, he gave up a position of security and control over the project to become a mezzanine lender with no vote and no control whatsoever. The plaintiff contends that his reliance required the Lender to do whatever he would have done to supervise and manage the project so that the homes were completed properly, in a workmanlike manner, within budget, and on time. The plaintiff contends that both he and the Lender knew that, absent the Lender’s performance of these duties, there would not be sufficient funds from the sale of the homes to pay both the Lender and himself. The plaintiff contends that this created a fiduciary duty, which the Lender breached.

A contractual subordination agreement is simply a contractual arrangement whereby one creditor agrees to subordinate its claim against a debtor in favor of the claim of another. Under New York law, when a contractual subordination agreement is unambiguous, the parties’ rights are governed exclusively by that agreement and the words of that agreement are given their plain, ordinary, and usual meaning. The Intercreditor Agreement, which is the only contractual agreement between the plaintiff and the Lender, provides, “Mezzanine Lender agrees that Senior Lender owes no fiduciary duty to Mezzanine Lender in connection with the administration of the Senior Loan and the Senior Loan Documents and Mezzanine Lender agrees not to assert any such claim.” Acceptance of the plaintiff’s version of the transaction would require the improper consideration of parol evidence, contradicting the clear terms of the Intercreditor Agreement, which contains a merger clause, precluding any extrinsic proof to add or vary its terms.

In any event, it is well settled that parties engaged in an arms’ length business transaction are not fiduciaries, especially when, as here, they are sophisticated business people who were represented by counsel. Moreover, the plaintiff’s version of the transaction imputes to the Lender duties to supervise and manage the project that are not found in the record. The documentary evidence establishes that the Lender’s obligation was merely to provide financing. Other defendants, specifically North Sea and the Coast defendants, were responsible for construction of the homes.

Affording the complaint a liberal construction, accepting the facts alleged therein as true, and granting the plaintiff the benefit of every possible favorable inference, the complaint fails to allege special circumstances that could have transformed the business relationship between the plaintiff and the Lender into a fiduciary relationship, such as control by one party of the other for the good of the other or creation of an agency relationship. The plaintiff, an experienced architect, was not under the control of the Lender. That he was under financial pressure and had to give up certain things in order to obtain financing for the project does not create a fiduciary relationship. Accordingly, the ninth cause of action is dismissed.

The plaintiff contends that the Lender breached the duty of good faith and fair dealing implicit in all contracts. The plaintiff contends that the Lender furthered its own economic interest by making modifications to the Senior Loan, such as increasing the release price, thereby making it impossible for him to be repaid from the sale of the homes.

Courts have generally been reluctant to find a breach of the implied covenant of good faith when doing so reads so much into the contract that it creates a new term or when alleged misconduct is expressly allowed by the contract. The Intercreditor Agreement clearly provides that the Mezzanine Loan is subordinate to the Senior Loan and all of the terms, covenants, conditions, rights and remedies contained in the Senior Loan Documents, and no amendments or modifications to the Senior Loan Documents or waivers of any provisions thereof shall affect the subordination thereof. The court cannot employ the covenant of good faith and fair dealing to impose on the parties obligations that are inconsistent with the express terms of the Intercreditor Agreement. Unless a subordinated creditor can show some inequitable conduct which harmed the junior creditor, such as a subsequent fraudulent transfer or preference, the subordination agreement will be enforced, even if the senior creditor uses its bargaining position to improve the status of its existing claims.

Affording the complaint a liberal construction, accepting the facts alleged therein as true, and granting the plaintiff the benefit of every possible favorable inference, the plaintiff has failed to show that the Lender engaged in inequitable conduct that harmed him. The modifications to the Senior Loan were made after the Property LLCs defaulted to provide the Lender with additional security. While the Lender initially increased the release price to $6,000,000, it subsequently reduced it to $5,000,000. Moreover, the properties have not been sold yet, and two of the three are currently listed for sale at prices well above the reserve amount. The plaintiff’s contention that the Lender’s actions have made it impossible for him to be repaid are entirely speculative.Accordingly, the court finds that the plaintiff has failed to state a cause of action for breach of the covenant of good faith and fair dealing.

(Internal quotations and citations omitted).

Litigating contract disputes is a large part of our practice. Even parties that have no relationship to New York often choose to have their contracts interpreted under New York law because–with a few exceptions–an unambiguous contract between sophisticated business people will be enforced based solely on the terms of the contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a contract dispute.

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Posted: September 21, 2019

Court Erred in Vacating Default When There Was No Reasonable Excuse for the Default

On September 11, 2019, the Second Department issued a decision in EMC Mtge. Corp. v. Walker, 2019 NY Slip Op. 06474, holding that it was error to vacate a default when there was no reasonable excuse for the default, explaining:

In order to vacate a default in appearing at a scheduled court conference, a plaintiff must demonstrate both a reasonable excuse for the default and a potentially meritorious cause of action. A determination of whether an excuse is reasonable lies within the sound discretion of the court.

Here, when the plaintiff moved, in effect, to vacate the May 2013 order and to restore the action to the calendar, it failed to proffer a reasonable excuse for its default in appearing at the scheduled court conference, and merely alleged that there was no missed appearance, and as such 22 NYCRR 202.27 does not apply. Moreover, the plaintiff failed to articulate any basis for the more than 2½-year delay in moving to vacate the order of dismissal. In light of the lack of a reasonable excuse, it is unnecessary to determine whether the plaintiff demonstrated the existence of a potentially meritorious cause of action. Thus, we disagree with the Supreme Court’s decision to hold a traverse hearing on June 22, 2016, and its subsequent determination granting the plaintiff’s motion, in effect, pursuant to CPLR 5015(a)(1) to vacate the May 2013 order and to restore the action to the calendar, and that branch of the plaintiff’s separate motion which was to extend the time to serve Walker in the interest of justice.

(Internal quotations and citations omitted).

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. A plaintiff also can be found to have defaulted by failing to prosecute an action. 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: September 20, 2019

Shareholder Agreement Provision Requiring Shareholders and Corporation to Agree on Shareholder’s Compensation Unenforceably Vague

On September 11, 2019, the Second Department issued a decision in Osborne v. Williamson Law Book Co., 2019 NY Slip Op. 06503, holding that a shareholder agreement provision requiring shareholders and the corporation to agree on the shareholder’s compensation for working for the corporation was unenforceably vague, explaining:

A contract is to be construed in accordance with the parties’ intent, which is generally discerned from the four corners of the document itself. Consequently, a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.

Here, the defendants demonstrated their prima facie entitlement to judgment as a matter of law dismissing the causes of action alleging breach of contract and tortious interference with contract, and the plaintiff failed to raise a triable issue of fact in opposition. Contrary to the plaintiff’s contention, the agreement cannot reasonably be interpreted as prohibiting reduction of his salary, or augmentation of Chwiecko’s salary, without the plaintiff’s consent. Regardless of what the parties’ practices may have been, there are simply no words to that effect contained in the agreement. To the extent that the plaintiff asserts that his consent was required because the agreement provided that the shareholders and the corporation would agree to each shareholder’s compensation, such an indefinite provision, absent some specified methodology for reaching an agreement, is not enforceable.

(Internal quotations and citations omitted).

Part of the reason parties to commercial contracts choose to have those contracts governed by New York law is that New York courts typically enforce contracts as written. However, this decision shows that where a contract term is vague, a court might not enforce it. 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: September 19, 2019

First Department Approves Sampling in RMBS Actions

On September 17, 2019, the First Department issued a decision in Home Equity Mtge. Trust Series 2006-1 v DLJ Mtge. Capital, Inc., 2019 NY Slip Op 06576, holding that sampling was appropriate to determine both liability and damages in RMBS put-back actions, explaining:

The court correctly granted plaintiffs’ motion and denied defendant’s motion regarding the use of statistical sampling to prove plaintiffs’ breach of contract claims for both liability and damages. In 2013, the trustee sought approval from the court for the use of statistical sampling to prove liability and damages for its claims. On November 18, 2013, the court (Schweitzer, J.) ordered that the trustee may use statistical sampling to prove liability and damages, and ordered the parties to meet and confer as to the sample to be used. DLJ noticed an appeal from this order, but failed to withdraw or perfect the appeal. Thereafter, the parties spent four years agreeing on the correct loan files and underwriting guidelines for the sample loans, and engaged in extensive expert discovery. In light of DLJ’s failure to pursue an appeal from the court’s November 18, 2013 order, and given the extensive discovery already taken place on this issue, we find no reason in this case to disturb the court’s decision to permit the use of statistical sampling to prove liability and damages.

To the extent defendant challenges the sample size or the particular loans chosen to be included within the sample, defendant will have a further opportunity to raise those arguments, as the motion court noted that issues concerning the sufficiency of the sample itself will be addressed pre-trial in motions in limine.

The same day, the First Department issued a decision in Ambac Assur. Corp. v Countrywide Home Loans Inc., 2019 NY Slip Op 06570, making the same holding regarding RMBS monoline insurer actions, holding:

The court correctly denied the motion to preclude Ambac from using statistical sampling to prove its breach of contract claims in terms of both liability and damages. While the motion was not procedurally barred, we find that despite the language of the repurchase protocol, RMBS plaintiffs like Ambac are entitled to introduce sampling-related evidence to prove liability and damages in connection with repurchase claims.

(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: September 18, 2019

Dismissal of Foreclosure Action for Failure to Prosecute Vacated

On September 11, 2019, the Second Department issued a decision in U.S. Bank Natl. Assn. v. Spence, 2019 NY Slip Op. 06529, vacating the dismissal of a foreclosure action for failure to prosecute, explaining:

A pleading cannot be dismissed pursuant to CPLR 3216(a) unless a written demand is served upon the party against whom such relief is sought in accordance with the statutory requirements, along with a statement that the default by the party upon whom such notice is served in complying with such demand within said ninety day period will serve as a basis for a motion by the party serving said demand for dismissal as against him for unreasonably neglecting to proceed. While a conditional order of dismissal may have the same effect as a valid 90-day notice pursuant to CPLR 3216, the conditional order here was defective in that it did not state that the plaintiff’s failure to comply with the notice will serve as a basis for a motion by the court to dismiss the complaint for failure to prosecute. Additionally, it appears that the complaint was ministerially dismissed, without a motion, and without the entry of any formal order by the court dismissing the complaint.

Since the Supreme Court acknowledged in the order appealed from that issue was not joined in the action when it entered its conditional order pursuant to CPLR 3216, the court was without authority to issue the conditional order, and it should have granted the Bank’s motion to vacate the conditional order. However, considering the Bank’s prolonged delay of more than two years in moving to vacate the conditional order, and the fact that it failed to raise this issue in two prior motions to restore the action to the calendar, we find that the court should have granted the Bank’s motion on the condition that the Bank waive interest, late charges, and outstanding fees and costs on the loan, as well as attorney’s fees, commencing on February 20, 2014, the date of the conditional order, and running through the date of this decision and order.

(Internal quotations and citations omitted).

If you are served with a complaint and fail timely to answer, or if you answer and do not appear at schedule court appearances, 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: September 17, 2019

Account Stated Claim Cannot Create Liability Where None Exists

On September 10, 2019, the First Department issued a decision in Cushman & Wakefield, Inc. v. Kadmon Corp., LLC, 2019 NY Slip Op. 06456, holding that an account stated cannot create liability where none exists, explaining:

Plaintiff Cushman & Wakefield, Inc’s (Cushman) August 17, 2017 invoice, in addition to the September 14, 2017 demand letter, were sufficient to create an account stated. Nevertheless, a discrete invoice does not evidence a mutually agreed upon balanced account, as where an account is rendered showing a balance, the party receiving it must, within a reasonable time, examine it and object, if he disputes its correctness. If he omits to do so, he will be deemed by his silence to have acquiesced, and will be bound by it as an account stated, unless fraud, mistake or other equitable considerations are shown. The affidavit of Kadmon’s representative, in which he averred that after Cushman made a demand for commission, I gratuitously made a counter offer of $100,000 on behalf of Kadmon because of Kadmon’s relationship with the Landlord and Mr. Hartman, and in recognition of the time and effort expended, was sufficient to defeat summary judgment at this juncture.

Moreover, an account stated cannot be used to create liability where none otherwise exists. The circumstances here – where Kadmon denied that it should have to pay a commission because Cushman had nothing to do with the rental to a new tenant – indicate that the parties might not have reached a meeting of the minds on the final amount owed.

(Internal quotations and citations omitted).

People sometimes are surprised to learn that if they do not complain about a bill they receive, they can be found to have agreed to it. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions about a claim based on un-objected-to invoices.

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Posted: September 16, 2019

General Obligations Law 5-1402 Bars Forum Non Conveniens Motion

On September 5, 2019, Justice Borrok of the New York County Commercial Division issued a decision in HH Trinity Apex Invs. LLC v. Hendrickson Props. LLC, 2019 NY Slip Op. 32623(U), holding that GOL 5-1402 barred a forum non conveniens motion, explaining:

When the court finds that in the interest of substantial justice the action should be heard in another forum, the court, on the motion of any party, may stay or dismiss the action in whole or in part on any conditions that may be just. The domicile or residence in this state of any party to the action shall not preclude the court from staying or dismissing the action.

The question of whether to grant a motion brought pursuant to CPLR § 327 is left to the sound discretion of the trial court. A defendant challenging a forum on this basis bears the burden to demonstrate relevant private or public interest factors which militate against accepting the litigation. Importantly, a plaintiff’s choice of forum is generally entitled to deference and should not be disturbed unless the balance is strongly in favor of the defendant. Among the factors that a court must consider on forum non conveniens motion are: the residency of the parties, the potential hardship to proposed witnesses including, especially, nonparty witnesses, the availability of an alternative forum, the situs of the underlying actionable events, the location of evidence, and the burden that retention of the case will impose upon the New York courts. No one single factor is controlling.

Under CPLR § 327(b), however:

Notwithstanding the provisions of [CPLR 327(a)], the court shall not stay or dismiss any action on the ground of inconvenient forum, where the action arises out of or relates to a contract, agreement or undertaking to which section 5-1402 of the general obligations law [GOL] applies, and the parties to the contract have agreed that the law of this state shall govern their rights or duties in whole or in part.

As relevant, GOL § 5-1402 provides that a party may maintain an action in New York against a foreign defendant if the parties have entered into an agreement that: (i) contains a New York forum selection clause, (ii) contains a New York choice of law provision, and (iii) involves a transaction that in the aggregate is over $1 million.

Here, it is undisputed that the Note and Security Agreement contain New York choice of law provisions. The AMAs do as well. The Security Agreement also contains a clear and unequivocal New York forum selection clause, which not only submits to New York’s jurisdiction but specifically waives the argument the defendants are now making: i.e., PLEDGE OR HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO SUCH VENUE AS BEING AN INCONVENIENT FORUM. Although the loan was initially only $500,000, at present, the amount outstanding is alleged to be in excess of $1.3 million, and the parties’ business dealings, in the aggregate, totaled approximately $87 million. As such, New York is an appropriate and convenient forum for the determination of this dispute as a matter of law, because the loan agreement, of which the aggregate value is more than $1 million, contains a provision whereby defendants agreed that New York law would govern their rights and duties under the agreement and agreed to submitted to the jurisdiction of the New York courts.

In addition, and putting aside CPLR 327(b), which dictates the result here, the relevant forum non conveniens factors do not bode in favor of a North Carolina forum. The residency of the parties and the location of parties and witnesses are hardly dispositive factors here, particularly considering technological advances vis a vis video depositions and electronically stored/transmitted documents. In addition, to the extent that the location of documents and witnesses is a relevant factor, the court notes that, here, it is the evidentiary burden at trial of the Plaintiffs, not the defendants, of proving their case in this forum.

Significantly, all three of the Plaintiffs allege that they maintain their principal place of business in New York. Although the residence of a plaintiff is not the sole determining factor on a motion to dismiss on grounds of forum non conveniens, it is generally the most significant factor in the equation. Moreover, while the defendants are not New York residents, they executed a Note and Security Agreement with a New York-based company, containing New York choice of law and forum selection provisions. This case involves an integrated transaction. Among other things, the Plaintiffs allege that the loan would not have been made but for Mr. Hendrickson’s alleged extortion. Inasmuch as pursuant to the Security Agreement, the defendant Pledgors consented to the jurisdiction of the courts of the state of New York “over any suit, action or proceeding arising out of or relating to this Agreement and irrevocably waived, to the fullest extent permissible by law, any objection it may no or hereafter have to such venue as being an inconvenient forum, it was not only entirely foreseeable for the defendant Pledgors to have to defend a lawsuit in New York concerning the transaction, but they should have anticipated defending such lawsuit in New York.

Finally, there is no particular burden placed upon this court by the maintenance of this action in New York as New York courts routinely adjudicate commercial disputes of this nature. Certainly, the burden on this court is no greater than the burden would be on a North Carolina court to apply New York law in accordance with the choice of law provisions in the parties’ various agreements if this action were to be brought in North Carolina.

(Internal quotations and citations omitted).

Disputes regarding commercial contracts involving international parties end up being heard in New York courts. Even if the court has the power to assert jurisdiction of the parties, it can, under the forum non conveniens doctrine discussed above, dismiss the dispute so it can be heard in a forum that is more convenient for the parties. As this decision shows, however, the bar for dismissal on forum non conveniens grounds is a high one. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether New York is the appropriate forum in which a dispute should be heard.

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Posted: September 14, 2019

Initial Consultation Insufficient to Justify Counsel’s Disqualification on Conflict Grounds

On September 3, 2019, Justice Masley of the New York County Commercial Division issued a decision in Pizzarotti, LLC v. FPG Maiden Lane, LLC, 2019 NY Slip Op. 32645(U), holding that an initial consultation with a law firm was insufficient to justify that firm’s later disqualification on conflict grounds, explaining:

To be represented by counsel of one’s choosing is a valued right and any restrictions must be carefully scrutinized.. Pizzarotti has a heavy burden of showing that disqualification is warranted, but it has failed to offer any evidence that Herrick received information from the prospective client Pizzarotti that could be significantly harmful to that person in the matter. Rather, Cristanelli’s vague affidavit fails to establish that harmful information was disclosed. Cristanelli’s assertion that he relied on Herrick’s one-half hour of free advice, contrary to Korbey’s email legend that it does not constitute a zoning opinion, in filing this $33 million action for breach of contract does not make it so.

The time to remedy Pizzarotti’s inadequate motion papers was in a reply, which it failed to submit, not at argument on the motion. Pizzarotti’s repeated invitations to the court to interview Cristanelli off the record at the argument was untimely, unfair and would yield an unappealable record.

The documentary evidence corroborates this court’s conclusion. Documents exchanged with Herrick consist of a letter Pizzarotti sent to Fortis with two survey pages attached and some emails. The emails objectively demonstrate that Pizzarotti contacted Korbey for advice on land use and zoning, his specialty. Pizzarotti cannot seriously assert that the documents it sent to Fortis before it initiated this action against Fortis, and shared with Herrick, contain confidential information (i.e. information that Fortis does not know) or that the information disclosed therein to Herrick would be harmful to Pizzarotti in this action against Fortis.

Finally, while Pizzarotti fails to include a table of authorities, the court notes that all but one of its cited cases precede April 2009 when Rule 1.18 was enacted and are thus not controlling. Rather, Mayers, the only contemporary case Pizzarotti cites, is factually similar and controlling here.

(Internal 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: September 13, 2019

Bank Holding Company Not Liable for Acts of its Banking Subsidiary

On September 5, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Akhtar v. JPMorgan Chase & Co., 2019 NY Slip Op. 32646(U), holding that a bank holding company was not liable for the acts of its banking subsidiary, explaining:

There is no dispute that JP Morgan Chase is a holding company that does not provide banking services. There is also no dispute that Chase Bank provided banking services to Haddow and Bar Works, not JPMorgan Chase. JPMorgan Chase and Chase Bank are two separate corporate entities and therefore, JPMorgan Chase cannot be liable for the actions of Chase Bank simply because Chase Bank is JP Morgan Chase’s subsidiary.

Courts routinely have refused to impute the operating activities of a subsidiary to its holding company, and it is a well-settled principle of corporate law that parent and subsidiary or affiliated corporations are, as a rule, treated separately and independently. Further, plaintiffs’ claim, that Chase Bank is a really a division of JPMorgan Chase, is directly refuted by JPMorgan Chase’s Form 10K filing, which shows that Chase Bank is a subsidiary; an entire separate corporation. Finally, plaintiffs fail to allege any conduct upon which I can impute the actions of Chase Bank to JP Morgan Chase.

(Internal quotations and citations omitted).

In certain circumstances, discussed in this decision, you can attempt to pierce the corporate veil and recover from a business’s owner or operators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding whether you can seek to hold a business’s owner or operators liable for the business’s debts.

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Posted: September 11, 2019

Opportunity to Comment on Proposed Changes to Commercial Division Rules

The Office of Court Administration has asked for public comment on three proposed rule changes.

First, is a proposed amendment to Commercial Division Rule 1 to facilitate remote video appearances by counsel.

E-mail comments on this proposal to rulecomments@nycourts.gov by September 30, 2019.

Second, is a proposed amendment to Commercial Division Rule 6 to require proportionally-spaced 12-point serif type in papers filed with the court.

E-mail comments on this proposal to rulecomments@nycourts.gov by October 25, 2019.

Third, is a proposal to repeal Commercial Division Rule 23, which requires counsel to tell the court when a motion has been under submission for more than 60 days.

E-mail comments on this proposal to rulecomments@nycourts.gov by November 1, 2019.