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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: November 16, 2019

Aiding and Abetting Fraud Claim Fails for Lack of Evidence of Substantial Assistance

On October 29, 2019, Justice Masley of the New York County Commercial Division issued a decision in Vincent V Hodes Family Irrevocable Trust v. Advance Entertainment LLC, 2019 NY Slip Op. 33233(U), holding that an aiding and abetting fraud claim failed for lack of evidence of substantial assistance in the alleged fraud, explaining:

In order to plead properly a claim for aiding and abetting fraud, the complaint must allege: (1) the existence of an underlying fraud; (2) knowledge of this fraud on the part of the aider and abettor; and (3) substantial assistance by the aider and abettor in achievement of the fraud. Actual knowledge of the fraud may be averred generally.

Substantial assistance exists where (1) a defendant affirmatively assists, helps conceal, or by virtue of failing to act when required to do so enables the fraud to proceed, and (2) the actions of the aider/abettor proximately caused the harm on which the primary liability is predicated. A plaintiff must plead a claim for aiding and abetting fraud with specificity pursuant to CPLR 3016 (b) and is not made out simply by allegations which would be sufficient to state a claim against the principal participants in the fraud. However, actual knowledge need only be pleaded generally, cognizant, particularly at the pre-discovery stage, that a plaintiff lacks access to the very discovery materials which would illuminate a defendant’s state of mind, and an intent to commit fraud is to be divined from surrounding circumstances.

Here, plaintiff asserts, in the affidavit of Vincent V. Hodes, grantor of the plaintiff-trust, that it was informed by counsel that Molner drafted the agreement underlying the fraud allegedly perpetrated by the Meli Defendants, a ticket purchase contract between defendant AE and nonparty Ambassador Theatre Group Ltd. (ATG).

While Mainer’s actual knowledge and substantial assistance may, perhaps, be inferred as to other transactions, the court declines to infer those elements on the basis of plaintiffs conclusory statements, lacking factual detail or other support relating to the fraud underlying this action, that Molner’ drafted the ATG agreement. Hodes’s statements that emails attached to the pleading in another action consolidated with this action for only the purposes of joint discovery and trial are not presently before the court and, in any event, those emails all pertain to other transactions and pre-date the underlying ATG transaction by six months to more than a year. Further, plaintiff makes no nonconclusory assertion that Molner was aware of the ATG transaction or substantially assisted the Meli Defendants in carrying out the ATG fraud., Accordingly, the motion is denied as to the aiding and abetting fraud cause of action without prejudice to a new motion.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. In New York, a defendant also can be held liable for aiding and abetting a fraud, which is what is at issue in this decision. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a fraud-based claim.

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Posted: November 15, 2019

CLE Program: Practicing in NYS Supreme Court (Part 2)

On November 20, 2019, Schlam Stone & Dolan partner John Lundin will co-chair a CLE program at the New York City Bar on Practicing in NYS Supreme Court. This is the second evening of a two-evening presentation. This panelists will be the Honorable Kelly O’Neill Levy of the New York County Supreme Court and Anna Mikhaleva, Esq., the Principal Law Clerk to Honorable Andrew Borrok of the New York County Commercial Division.

Posted: November 15, 2019

Non-Appealing Defendants Entitled to Benefit of Appealing Defendant’s Successful Appeal

On September 6, 2019, Justice Grays of the Queens County Commercial Division issued a decision in Glaubach v. Slifkin, 2019 NY Slip Op. 33242(U), holding that non-appealing defendants were entitled to the benefit of an appealing defendant’s successful appeal, explaining:

A non-appealing defendant may renew a motion to dismiss the complaint insofar as asserted against him because of an appellate court’s decision to grant dismissal of the complaint as to a co-defendant. The grant of a dismissal to a co-defendant at the appellate level may form the basis of a renewal motion (in the Court below) by a nonappealing defendant on the ground of law of the case. The employee defendants contend that they are so similarly situated that the Appellate Order with respect to one defendant directly impacts the other defendant. The Court agrees that the employee defendants are now entitled to the dismissal of the remaining causes of action against them on the same grounds that the appealing defendants prevailed upon.

(Internal quotations and citations omitted).

It is risky to depend on a co-defendant’s appeal to benefit your own defense, but as this decision shows, there are circumstances where a non-appealing defendant can get that benefit. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the effect of a co-party’s appeal.

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Posted: November 14, 2019

Conversion Claim Based on Alleged Right to Receive Shares Dismissed

On October 30, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Alrai Naked Opportunity, LLC v. Naked Brand Group Ltd., 2019 NY Slip Op. 33241(U), dismissing a conversion claim based on the alleged right to receive share, explaining:

Plaintiffs claim for conversion fails to state a claim, and is dismissed. A conversion takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person’s right of possession. To establish this claim, the plaintiff must show legal ownership or an immediate superior right of possession to a specific identifiable thing and must show that the defendant exercised an unauthorized dominion over the thing in question to the exclusion of the plaintiffs rights.

Generally, the conversion of intangible property is not actionable. Intangible property, however, may be considered tangible for purposes of a conversion claim where the plaintiff has a physical representation of it, i.e., stock certificates or the electronic record or registration of such stock certificates, and alleges the taking of that physical representation. Thus, to allege a claim for conversion of stock certificates, the plaintiff must allege that it was issued stock certificates, or that they were electronically recorded in plaintiffs name, and they were taken by defendant. The plaintiff must allege that the stock was issued to it, or that it had some other kind of possession of the shares, and that the defendant took the shares. The mere right to payment may not form the basis for a conversion claim.

Here, Alrai alleges an improper conversion of its right to receive additional shares in NBG based on Alrai’s beneficial interest in Bendon. Alrai fails to allege that it possessed the NBG share certificates, or any other physical manifestation of the allegedly converted shares. It also fails to allege that the shares were previously registered in its name. Alrai alleges merely a beneficial right, pursuant to its agreement with a third party, EJG, to additional NBG shares. This mere right to payment ofNBG shares is not sufficient to establish a present possessory interest for purposes of a conversion claim. Indeed, Alrai cannot even allege that it possessed the Bendon shares which it was to exchange for the NBG shares. The Bendon Final Share Register issued prior to the merger does not list Alrai as the owner or possessor of Bendon shares. While the Deeds gave Alrai a beneficial interest in certain Bendon shares, at no time prior to the closing of the merger did Alrai have a possessory interest in NBG shares. Further, under the Deeds, the number of NBG shares that Alrai ultimately was going to get upon the closing of the merger was not fixed. In fact, the Deeds at section 7.1(e) specifically disclosed to Alrai that, prior to the closing, NBG and/or Naked could issue further shares or other securities that may be convertible into share” or which could enable the holder to buy additional shares, which contingencies may be both material and adverse to the rights of a holder of the Sale Shares Alrai. The PIPE was precisely that type of contingency which diluted Alrai’s potential shares in NBG, and which was disclosed to Alrai in section 7.1 (e) of the Deeds.

Essentially, Alrai’s claim is a contract-based dispute over the number of shares that it was entitled to under the Deeds and the Merger Agreement. While Alrai may not pursue a contract claim under the Merger Agreement since it was not a party to that agreement, Alrai may pursue such a claim against EJG based on breach of the Deeds. Alrai’s conversion claim is insufficient as a matter of law.

(Internal quotations and citations omitted).

Commercial litigation often involves conversion claims. As this decision shows, conversion can involve not just physical objects, but also intangible property. However, as this decision also shows, there must be a physical representation of that property and that the claim must relate to the conversion of that physical representation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding one person depriving another of her property, whether that property is tangible or intangible, or even involves money or electronic files.

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Posted: November 13, 2019

CLE Program: Practicing in NYS Supreme Court

On November 13, 2019 , Schlam Stone & Dolan partner John Lundin will co-chair a CLE program at the New York City Bar on Practicing in NYS Supreme Court. This is the first evening of a two-evening presentation. This evening’s panelists will be Charles A. Small, the Chief Clerk for Civil Matters for the Kings County Supreme Court, and Jeffrey Carucci, a director in the New York Office of Court Administration and Statewide Coordinator for EFiling.

Posted: November 13, 2019

Allegations Fail to Establish that Plaintiff Was Third-Party Beneficiary of Contract

On October 30, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Marshall Broadcasting Group, Inc. v. Nexstar Broadcasting, Inc., 2019 NY Slip Op. 33240(U), holding that a plaintiff’s allegations failed to establish that the plaintiff was a third-party beneficiary of a contract, explaining:

Nexstar asserts the second count for breach of the GA should be dismissed because MBG is not a party, third-party beneficiary, or closely related party to that agreement. Accordingly, it lacks privity and cannot invoke any of its provisions. For a nonparty to recover as a third party beneficiary, it must establish the specific intent of the parties to benefit the nonparty. A beneficiary is intended when:

recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.

MBG cannot satisfy these requirements because no such intention is stated in either Guarantee Agreement. The January 2017 GA provides: “[t]his Agreement shall be binding upon each Grantor and its respective successors and assigns and shall inure to the benefit of the Collateral Agent and its successors and assigns…. ” Nexstar concedes there is no per se rule that a guarantee agreement always has a third-party beneficiary. Instead, it must appear the parties to the agreement intended to recognize the third party as the primary party in interest and a privy to the promise. Nexstar concludes that because the Guarantee Agreement do not provide for compensation to MBG from any of the parties, MBG is not a third-party beneficiary.

Nexstar also argues that should MBG’s allegations suggest the existence of an unreferenced agreement, such evidence is improper parol evidence and should not be considered. Nexstar further points to the January 2017 GA’s integration clause which states it, along with other loan documents, represent the final agreement between the parties and that it may not be contradicted by other agreements of the parties. Finally, where as here, plaintiffs bare assertions are contradicted by documentary evidence, the motion to dismiss should be granted. Accordingly, the second count for breach of the GA must be dismissed.

(Internal quotations and citations omitted).

Usually, the only parties who have rights under a contract are the parties that signed the contract. As discussed here, sometimes a person who did not sign a contract nonetheless has rights under a contract that it can sue to enforce. 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: November 12, 2019

Contract Claim Barred by Voluntary Payment Doctrine

On October 30, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Brooklyn Navy Yard Dev. Corp. v. TDX Constr. Corp., 2019 NY Slip Op. 33231(U), holding that a claim was barred by the voluntary payment docrtine, explaining:

The voluntary payment doctrine bars recovery of payments voluntarily made with full knowledge of the facts, and in the absence of fraud or mistake of material fact or law. TDX argues that because Navy Yard voluntarily undertook to provide SurroundArt with rent abatements (i.e., SurroundArt did not commence a legal action or even threaten to do so), it is not entitled to recover for the rent abatements from TDX. Navy Yard, in turn, claims that this common law doctrine is inapplicable to this action because it only applies where plaintiff voluntarily pays an amount directly to defendant which was not legally due, and subsequently seeks to recover said payment from said defendant.

Here, looking at the terms of the Lease, and as described above, nothing required Navy Yard to provide SurroundArt with a rent credit and indeed, the Lease, expressly provided that rent was due without offset. To wit, the Lease provides for two remedies in connection with any issues with the Navy Yard’s work. The first remedy addresses issues which prevent SurroundArt’s installation work. In this regard, as described above, the Lease provides for a delay in the Start Date (i.e., pushing out the first day when rent would otherwise be due). The second addresses issues which did not prevent SurroundArt’s installation work. In this regard, the Lease provides that for items identified during an inspection during the one year period following the Start Date (see § 8[d] of the Lease Declaration), Navy Yard shall make demand on the contractors to repair and replace in accordance with the Warranty Agreement. Here, looking at the timeline, attached as exhibit X to the Singh Affirm., it is undisputed that the issues did not impede SurroundArt’ s interior improvements. Therefore, Section 8(a) of the Lease Declaration does not apply, and the Start Date was not adjusted. A defect identified pursuant to Section 8(d) of the Lease Declaration did not entitle SurroundArt to a rent credit. And, in fact, as discussed above, Section 2.01 of the Lease confirms that SurroundArt is not entitled to a rent credit or an abatement under the Lease. Put another way, any rent abatement extended by Navy Yard was done voluntarily and without obligation under the Lease. The fact that Navy Yard voluntarily extended rent credits to SurroundArt, well after the “Start Date,” as an accommodation and without any obligation to do so does not make TDX, the Navy Yard’s construction manager, liable for those rent credits. Nor may it be said that such rent credits were the foreseeable and consequential damages of any breach of the Construction Management Contract. It is well settled law in this State that consequential damages are not recoverable in an action to recover damages for breach of contract in the absence of the plaintiffs showing that such damages were foreseeable and within the contemplation of the parties at the time the contract was made. Rather, damages for breach of contract are generally limited to general damages which are the natural and probable consequence of the breach. Here, it was neither foreseeable nor within the contemplation of the parties at the time of the contract that TDX could be liable for voluntary rent credits after the Lease start date for the Perry Building went into effect. And, finally, Navy Yard is not claiming that it extended the rent credits based on a mistake of material fact or law or upon any fraud. Nor does Navy Yard cite any facts to suggest that it was under economic duress and lacked a meaningful choice as alluded to in its brief. Simply put, Navy Yard did not have to incur these damages and could have pursued its rights under the Lease against SurroundArt in court. Having chosen to do otherwise, it cannot now recover its losses against TDX.

(Internal quotations and citations omitted).

As this decisions discusses, if you knowingly and voluntarily pay money to someone, you may not be able to get that money back. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the recovery of payments made under a contract.

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Posted: November 11, 2019

Plaintiff Cannot Sue for both Rescission and Damages for Breach of Contract

On October 21, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Bryan v. Slothower, 2019 NY Slip Op. 33200(U), holding that a plaintiff cannot sue both for rescission and damages for breach of contract, explaining:

In the original complaint, Bryan asserted a claim for breach of contract, seeking to enforce the Settlement Agreement. Since plaintiff elected to enforce the agreement, plaintiff may not now seek rescission. The filing of the original complaint served as Bryan’s election of remedies. As plaintiff elected the remedy of enforcement of the contract in the original complaint, the release in the Settlement Agreement is enforceable, and it clearly precludes the second, third, and fourth causes of action in the Amended Complaint.

(Internal citations omitted).

This decision ultimately rests on the simple proposition that you cannot have your cake and eat it, too. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the claims you are entitled to bring in a lawsuit.

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Posted: November 10, 2019

Constructive Trust Upheld

On October 30, 2019, the Second Department issued a decision in Galasso, Langione & Botter, LLP v. Galasso, 2019 NY Slip Op. 07769, upholding the imposition of a constructive trust, explaining:

We agree with the Supreme Court’s determination to grant that branch of the Barons’ motion which was for summary judgment on the eighth cause of action in Action No. 4, seeking the imposition of a constructive trust, insofar as asserted against GC Lawcondo, and to deny that branch of the motion of the moving defendants which was for summary judgment dismissing that cause of action insofar as asserted against GC Lawcondo. A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee. The elements of a constructive trust are: (1) a confidential or fiduciary relationship, (2) an express or implied promise, (3) a transfer in reliance thereon, and (4) unjust enrichment flowing from the breach of the promise. However, these elements serve only as a guideline, and a constructive trust may still be imposed even if all of the elements are not established. Here, the Barons demonstrated their prima facie entitlement to the remedy of a constructive trust by showing that escrow funds entrusted to Peter were used by GC Lawcondo, an entity wholly owned and controlled by the Firm, to purchase a commercial office condominium to be used as a law office. The moving defendants failed to raise a triable issue of fact in opposition.

(Internal quotations and citations omitted).

We have substantial experience in helping judgment creditors collect on judgments and search for and attach assets worldwide. This decision discusses one tool to help a judgment creditor collect on a judgment: the imposition of a constructive trust over the proceeds of wrongly-transferred funds. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client need help collecting on a judgment.

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Posted: November 9, 2019

Court Finds High Burden for Appointing Receiver Met

On October 23, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Wells Fargo Bank, N.A. v. Andalex Aviation II, LLC, 2019 NY Slip Op. 33165(U), finding that a plaintiff had met the high burden for the appointment of a receiver, explaining:

Finally, the Plaintiff seeks to appoint an independent receiver pursuant to CPLR § 5228 to receive distributions of Allen Silverman’s membership interests in the Silverman LLCs. Under CPLR § 5228, the court may appoint a receiver who may be authorized to administer, collect, improve, lease, repair or sell any real or personal property in which the judgment debtor has an interest or to do any other acts designed to satisfy the judgment.

There are three factors that a court will consider when deciding whether appointment of a receiver is justified: (1) alternative remedies available to the creditor, (2) the degree to which receivership will increase the likelihood of satisfaction, and (3) the risk of fraud or insolvency if a receiver is not appointed. Appointment of a receiver is especially appropriate when the property interest involved is intangible, lacks a ready market, and presents nothing that a sheriff can work with at an auction, such as the interest of a psychiatrist/judgment debtor in a professional corporation of which he is a member.

Here, the Plaintiff argues that a receiver is appropriate because Allen Silverman has refused to be deposed due to illness, has not turned over any property to the NYC Sheriff’s Office, and there are significant concerns regarding the risk of fraud. The court agrees. Although alternate remedies may be available to the Plaintiff, such as a turnover proceeding, this option does not sufficiently protect the Plaintiff’s interests in the interim, in light of prior transfers allegedly made by Allen Silverman. The receivership will also increase the likelihood of satisfaction as a receiver ensures that Allen Silverman’s interests in the relevant property is preserved. The record further indicates that there is a risk of fraud absent the appointment of a receiver.

Under these circumstances, appointment of a receiver is appropriate, and especially so because Allen Silverman’s membership interests in the Silverman LLCs are intangible and lack a ready market. Accordingly, the Plaintiff’s motion to appoint a receiver is granted such that the receiver will receive potential distributions from the Silverman LLCs and the receiver will prevent the sale, pledge, hypothecation, or other voluntary encumbrance of his interest in such companies.

(Internal quotations and citations omitted).

We have substantial experience in helping judgment creditors collect on judgments and search for and attach assets worldwide. This decision discusses one rarely-ordered tool to help a judgment creditor collect on a judgment. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client need help collecting on a judgment.

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