Blogs

Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: December 11, 2018

Court Enforces Contract Clause Limiting Damages

On November 29, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Lam Platt St. Hotel LLC v. Golden Pearl Constr. LLC, 2018 NY Slip Op. 33018(U), enforcing a contract provision limiting damages, explaining:

The Contract contains a mutual waiver provision, in Rider 8.0A, which clearly limits the damages Lam Platt may seek for breach. Specifically, that provision prohibits recovery of consequential damages arising out of or related to the Contract, except for gross negligence or willful misconduct, which Lam Platt has not alleged. Moreover, the parties explicitly waived recovery of damages for profit. Similarly, Lam Platt’s claim for financing damages has also been waived. This clear agreement between the parties on the allocation of the risk of loss in the event of a breach must be honored. Accordingly, the first cause of action for breach of contract is dismissed to the extent that it asserts damages for lost profits and consequential damages.

(Internal quotations and citation omitted).

A key element in commercial litigation is calculating damages. Contract clauses limiting damages are common and how they are enforced can make a big difference in whether, and if so, how, you litigate an action. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a contractual damages limitation clause.

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Posted: December 10, 2018

Doctrine of Respondeat Superior Imposes Liability on Employer, Not Supervisor

On November 28, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Domus Arbiter Realty Corp. v. Bayrock Group LLC, 2018 NY Slip Op. 33021(U), holding that the doctrine of respondeat superior imposes liability on the employer, not the supervisor, explaining:

Plaintiff has alleged, however, an alternative theory that Defendant McGorty is personally liable pursuant to the doctrine of respondeat superior. It is undisputed that Defendant Zampolli was an employee of Paramount Realty Group of America Corp. Plaintiff alleges, however, that Defendant McGorty, rather than Paramount Realty Corp., held the broker’s license under which Defendant Zampolli is alleged to have operated, thus constituting an employer subject to vicarious liability.

While Defendant McGortv may hold the broker’s license under which Defendant Zampolli operated, the doctrine of respondeat superior does not impose liability on the individual supervisor, rather it serves to impose liability on the corporation. Absent a reason to pierce the corporate veil, New York’s law protects a corporate officer from individual liability. Therefore, the doctrine of respondeat superior, is a nonviable cause of action against Defendant McGorty.

(Internal citations omitted).

Respondeat superior is the legal doctrine under which an employer is responsible for an employee’s wrongdoing. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a situation where an employer may be liable for an employee’s actions.

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Posted: December 9, 2018

Fraud Claim Dismissed Because Plaintiff’s Alleged Reliance Was Not Reasonable

On November 28, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Tall Tower Capital LLC v. Stonepeak Partners, LP, 2018 NY Slip Op. 33024(U), dismissing a fraud claim because the plaintiff’s alleged reliance was not reasonable, explaining:

To allege a cause of action based on fraud, plaintiff must assert a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury. Whether a party’s reliance is justified is often a question of fact not amenable to resolution on a motion to dismiss. In certain situations, however, it is question of law that can be determined from the pleadings.

Stonepeak’s fraud claims are dismissed for lack of justifiable reliance. A sophisticated plaintiff cannot establish that it entered into an arm’s length transaction in justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means of verification that were available to it. This rule applies where the falsity of a representation could have been ascertained by reviewing publicly available information.

The status of the Florida injunction was a matter of public record and could have been independently ascertained by Stonepeak. Stonepeak does not contend otherwise. Stonepeak does not allege that it took any steps to verify whether Denton’s questionnaire response regarding the status of the lawsuit was accurate. Hence, Stonepeak’s claim to have been fraudulently induced to continue working on the Clear Channel deal in reliance on that representation must be dismissed because such reliance is not justifiable due to Stonepeak’s own lack of due diligence. Stonepeak’s negligent misrepresentation claims are dismissed for the same reason.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules, including the rule that a sophisticated businessperson’s reliance on a false statement must be reasonable. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.

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Posted: December 8, 2018

Court Refuses to Vacate Arbitral Award for Arbitrator Bias

On November 28, 2018, Justice Masley of the New York County Commercial Division issued a decision in Matter of Sayre v. Madison Hawk Partner, LLC, 2018 NY Slip Op. 33030(U), refusing to vacate an arbitral award for arbitrator bias, explaining:

As an initial matter, petitioners’ communication was not improper. Paragraph 19 of the Operating Agreement grants the arbitrator the power to award attorneys’ fees of a party if the arbitrator expressly determines that the party against whom such award is entered has caused the dispute, controversy or claim to be submitted to arbitration as a dilatory tactic or in bad faith. Indeed, respondents requested that the arbitrator award it legal fees. This is not a case of a secret communication with the arbitrator.

Respondents have a heavy burden of establishing arbitrator bias by clear and convincing evidence. Contrary to respondents’ argument, there is no per se rule that any communication with an arbitrator regarding payment of fees impairs the integrity of the arbitration process. Respondents’ reliance on Ament v Schubert Piano Co, 172 AD 423 (1st Dept 1916), for this proposition is misplaced since it was decided before the Federal Arbitration Act was enacted in 1925 and long before the public’s enthusiastic support for arbitration.

Courts have found an appearance of bias where there is evidence that a party was prejudiced or denied a fair hearing as a result of an arbitrator’s knowledge that the party failed to pay its portion of the arbitration fees. For example, where the arbitrator barred a party from participating in five days of a seven day hearing, the court found fundamental unfairness and vacated the award. Further, this is not a case where a party could not afford to pay the arbitral fees and is penalized for penurious. Otherwise, respondents’ reliance on cases involving improper arbitrator demands for payment is misplaced. There is no suggestion that respondents were denied a full and fair opportunity to be heard. Indeed, the decision is well drafted and well reasoned. The court declines respondents’ invitation to infer bias or a conflict of interest without any evidence.

(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: December 7, 2018

Defendants Cannot Avoid Summary Judgment on Contract Claim by Arguing Oral Modification

On November 27, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Schon Family Found. v. Brinkley Capital Ltd., 2018 NY Slip Op. 33027(U), holding that defendants could not avoid summary judgment on a breach of contract claim by arguing that there was an oral modification of the contract, explaining:

A written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms. The plain language of Section 4 of the Settlement Agreement clearly imposes an obligation on Defendants to make monthly payments to Plaintiffs in addition to the one-time payment to the Foundation. This obligation is also reiterated in Paragraph Seven of the Settlement Agreement, which defines an event of default as any failure to make any payment set forth in the Settlement Agreement. Therefore, the Settlement Agreement clearly creates an obligation for Defendants to make payments to Plaintiffs.

It is undisputed that Defendants failed to make the required monthly payments in May 2015 and failed to remit the onetime payment of $76,000 to the Foundation before April 30, 2015. Pursuant to the Settlement Agreement, in the event Defendants failed to make any payments, Plaintiffs were required to send Defendants a demand to cure within five business days. Then, if Defendants failed to cure, Defendants would be in default without any further right to cure and Plaintiffs had the right to commence an action to enforce the Settlement Agreement. Plaintiffs sent the Notice of Default on September 21, 2015. It is undisputed that Defendants failed to cure on or before September 28, 2015. Therefore, Plaintiffs have established that Defendants breached the Settlement Agreement.

Defendants argue there was no breach because Henry Schon modified the Settlement Agreement by entering into an oral forbearance agreement with Emanuel Wolff in the summer of 2015. Pursuant to the purported oral forbearance agreement, Mr. Schon allegedly agreed to forbear on any action relating to the Schon Loan amount until January, 2016.

General Obligations Law § 15-301(I) provides a written agreement which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought.

If the only proof of an alleged agreement to deviate from a written contract is the oral exchanges between the parties, the writing controls. Here, the Settlement Agreement provides the agreement may not be modified, altered or amended in any way, except by a writing executed by each of the parties affected by such modification, alteration or amendment.

However, General Obligations Law § 15-30 I(1) only prohibits executory oral modification of written contracts. Once executed, the oral modification may be proved. Where there is only partial performance of the oral modification sought to be enforced, a party claiming oral modification can only prevail upon proof that there was an oral modification and that the performance occurred in a manner that was unequivocally referable to that oral modification. See id. Here, the performance of the purported forbearance agreement was not completed because Plaintiffs served the Notice to Cure in September 2015 and brought this action to enforce the Settlement Agreement in November 2015. Thus, the Court must determine whether Defendants raise an issue of fact regarding the existence and partial performance of the purported oral forbearance agreement.

To establish the existence of an enforceable agreement, a party must establish an offer, acceptance of the offer, consideration, mutual assent, and an intent to be bound. The Court notes there is a dispute as to whether Mr. Schon ever agreed to forbear from taking action on Defendants’ default under the Settlement Agreement. Mr. Wolff attests that Mr. Schon agreed not to take any action and agreed to meet with Mr. Wolff in January 2016 to work out a resolution. On the other hand, Mr. Schon attests that he never agreed to forbear in July 2015, yet he unilaterally decided not to take action until after Rosh Hashana. Nevertheless, the Court finds this issue of fact insufficient to deny summary judgment, as Defendants fail to raise an issue of fact regarding the consideration for the forbearance agreement.

It is well settled that valuable consideration may consist of some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. Here, Defendants fail to allege or provide evidence that Mr. Schon received any consideration for his purported promise not to take action regarding the defaults under the Settlement Agreement. As noted above, Defendants were obligated to make payments to Plaintiffs pursuant to Paragraph Four. Yet, at the time Mr. Schon allegedly agreed to forbear, Defendants had already missed the required monthly payments since May 2015 and failed to make the one-time payment due to the Foundation in April 2015. Without an allegation or evidence regarding the consideration received for Mr. Schon’s promise, Defendants cannot raise a material issue of fact regarding the existence of the alleged oral forbearance agreement. Therefore, Defendants fail to raise a triable issue of fact regarding the purported modification.

Furthermore, while not addressed in the parties’ briefs, there is an additional exception to the writing requirement pursuant to Section 15-301 of the General Obligations Law. Once a party to a written agreement has induced another’s significant and substantial reliance upon an oral modification, the first party may be estopped from invoking the statute to bar proof of that oral modification. Nevertheless, the Court finds this exception does not apply, as Defendants fail to demonstrate any significant or substantial reliance upon Mr. Schon’s alleged promise to forbear on any action relating to the default. Defendants fail to allege or provide any evidence of a change in their course of conduct in reliance on the promise. Therefore, Defendants fail to raise an issue of fact regarding the estoppel exception to General Obligations Law § 15-30 I.

(Internal quotations and citations omitted).

Oral contracts are (usually) enforceable in New York, but as this decisions shows, once you have a written contract, there are hurdles to claiming that there was an oral modification to the contract. 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 an oral contract.

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Posted: December 6, 2018

Movant Need Not Prove Willful and Contumacious Conduct to Prevail on Civil Contempt Motion

On December 5, 2018, the Second Department issued a decision in Palmieri v. Town of Babylon, 2018 NY Slip Op. 08317, holding that a movant was not required to prove willful and contumacious conduct in order to prevail on a motion for civil contempt, explaining:

As an initial matter, the Supreme Court should not have required the plaintiff to prove willful and contumacious conduct on the part of the Town. In order to sustain a finding of civil contempt, it is not necessary that the disobedience be deliberate or willful; rather, the mere act of disobedience, regardless of its motive, is sufficient if such disobedience defeats, impairs, impedes or prejudices the rights of a party.

In order to adjudicate a party in civil contempt, a court must find: (1) that a lawful order of the court, clearly expressing an unequivocal mandate, was in effect, (2) that the party against whom contempt is sought disobeyed the order, (3) that the party who disobeyed the order had knowledge of its terms, and (4) that the movant was prejudiced by the offending conduct. The party seeking a finding of civil contempt must prove these elements by clear and convincing evidence.

Here, the plaintiff established by clear and convincing evidence that the so-ordered stipulation clearly expressed an unequivocal mandate to construct a fence at the Southern end of South Little East Neck Road extending across the entire width of the Town’s property at that location, that the Town had knowledge of the stipulation and nevertheless disobeyed it, and that the plaintiff was prejudiced by the offending conduct.

In opposition, the Town failed to refute the plaintiff’s showing or to offer evidence of a defense such as an inability to comply with the order. The Town, which offered no witnesses at the hearing, failed to establish that DEC approval is required to comply with the stipulation. The Town’s permit application for the construction of a fence extending into Great South Bay is entirely different from the fence contemplated under the parties’ stipulation, and the Town failed to establish that any regulation prevents it from constructing the fence it promised to erect in 2004, approximately 14 years ago. Accordingly, the Supreme Court should have granted that branch of the plaintiff’s motion which was to hold the Town in civil contempt for failing to comply with the stipulation, as well as that branch of the plaintiff’s motion which was for an award of costs and attorney’s fees incurred in connection with bringing the motion.

(Internal quotations and citations omitted).

No matter who you are (even a municipal government) or what kind of litigation you are involved in, you must obey the court’s orders. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have have been accused of violating a court order.

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Posted: December 5, 2018

Mere Theory as to the Board’s Misconduct Insufficient to Plead Demand Futility With Particularity

On November 15, 2018, Justice Ramos of the New York County Commercial Division issued a decision in Shields v. Murstein, 2018 NY Slip Op. 32964(U), holding that a “mere theory as to the Board’s misconduct is insufficient to meet” the demand particularity requirements for a derivative action under Delaware law, explaining:

In a final attempt to salvage his claims, Shields argues that demand was futile because the Board acted in bad faith in failing to timely and meaningfully address unlawful activity related to the Publications. Bad faith, and therefore demand futility, may be established where the complaint successfully alleges that directors failed to take adequate steps to remediate known compliance issues. But this is not the case here.

The Complaint fails to support its claims with requisite specificity. Shields makes sweeping statements that the Director Defendants engaged in a conspiracy without specifying who did what, never mind when, where or how. Shields’ basis for his allegations is again the Board’s lack of minutes, resolutions or presentations relating to Frigo in response to his Inspection Demand. A mere theory as to the Board’s misconduct is insufficient to meet the particularity requirements of Rule 23.1.

(Internal citations omitted).

This decision illustrates one of the special pleading requirements for derivative actions (where a shareholder brings an action on behalf of a corporation). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.

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Posted: December 4, 2018

Plaintiff Liable to Defendant on Defendant’s Counterclaim Based on Facts Pleaded in the Complaint

On November 26, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Tongyang, Inc. v. Tong Yang Am., Inc., 2018 NY Slip Op. 32959(U), holding that a plaintiff was liable on the defendant’s counterclaim based on facts pleaded in the Complaint, explaining:

TYA’s counterclaim for breach of contract arises out of plaintiffs failure to meet its obligations under the Guaranty. To sustain a cause of action for breach of contract, the proponent of the claim must prove the existence of a contract, plaintiffs performance, defendant’s breach, and damages. Absent evidence showing the existence of an enforceable agreement, a breach of contract claim shall be dismissed.

The statement in the complaint that plaintiff had “outstanding obligations” to TYA constitutes a judicial admission. It is well settled that facts appearing in the movant’s papers which the opposing party does not controvert, may be deemed admitted. In its response to the cross motion, plaintiff does not deny executing the Guaranty, nor does it dispute TY A’s contention that the TYI Debt has not been repaid.

To be sure, plaintiff argues granting summary judgment on TY A’s counterclaim and setoff defense would justify a fraudulent transfer. However, this argument relates to whether the doctrine of comity bars the counterclaim and setoff defense. As noted above, plaintiff offered no substantive defense to the assertion that it breached the Guaranty by failing to repay the TYI Debt. Plaintiff’s vague claim that it needs discovery on the circumstances surrounding TY A’s receipt of notice of the Rehabilitation Proceeding also fails to raise a triable issue.

(Internal quotations and citations omitted).

People sometimes forget that the facts they allege in a complaint will be taken as true, even if the plaintiff later finds those facts being used against them. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether and to what extent facts alleged in a pleading are binding on the pleader.

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Posted: December 3, 2018

Opportunity to Comment on Proposed Change to Commercial Division Rules

The Office of Court Administration has asked for public comment on a proposed rule “[e]nhanc[ing] attorney certification concerning mediation in the Commercial Division.” “[T]he proposal would require that the OCA” develop and implement a “form contain[ing] categories of information about the case prescribed by the Office of Court Administration which may assist the court, counsel and the parties in considering the roles mediation might play in the resolution of the case” that counsel would submit at court conferences.

E-mail comments on this proposal to rulecomments@nycourts.gov by January 18, 2019.

Posted: December 2, 2018

Labor Law Provision Allowing Employees to Sue General Contractor as Third-Party Beneficiaries Trumps Contract’s No Third-Party Beneficiary Clause

On November 27, 2018, the First Department issued a decision in Wroble v. Shaw Envtl. & Infrastructure Eng’g of N.Y., P.C., 2018 NY Slip Op. 08061, holding that the Labor Law provision allowing employees to sue a general contractor as third-party beneficiaries trumps a contract’s no third-party beneficiary clause, explaining:

Labor Law § 220(3) provides, in pertinent part, that wages paid to laborers, workers, or mechanics on a public works project shall be the prevailing rate of wages in that locality, and that the public works contracts, including subcontracts there under shall contain a provision that each laborer, workman or mechanic, employed by such contractor, subcontractor or other person about or upon such public work shall be paid the wages herein. This statute has as its entire aim the protection of workingmen against being induced, or obliged, to accept wages below the prevailing rate and must be construed with the liberality needed to carry out its beneficent purposes. In keeping with this liberal reading of the statute, the courts of this state have consistently held that, in public works contracts, a subcontractor’s employees have both an administrative remedy under the statute as well as a third-party right to make a breach of contract claim for underpayment against the general contractor. Given these precedents, the contract clause prohibiting third-party actions for violation of prevailing wage payments would be void as against public policy.

(Internal quotations and citations omitted).

Sometimes, statutes limit the things to which people can agree by contract. This decision is one example. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding the effect of a statute on contractual rights.

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