On July 2, 2018, Justice Ostrager of the New York County Commercial Division issued a decision in Aspire Music Group, LLC v. Cash Money Records, Inc., 2018 NY Slip Op. 31444(U), refusing to dismiss a claim based on an alter ego theory of equitable ownership, explaining:

Aspire has adequately alleged that Universal is the equitable owner of Cash Money such as to survive Universal’s pre-answer motion to dismiss. The issue turns on whether, under New York law, Aspire has sufficiently alleged that Universal is the alter ego of Cash Money despite the fact that it is undisputed that Universal is a non-owner, non-director, and non-officer of Cash Money. The Court of Appeals found no definitive authority on the issue of whether a nonshareholder could be personally liable under a theory of piercing the corporate veil. Other New York courts have generally declined to extend alter ego liability to a non-owner defendant. Therefore, plaintiff has not adequately pied a jurisdictional basis for alter ego liability. However, New York courts have recognized for veil-piercing purposes the doctrine of equitable ownership, under which an individual who exercises sufficient control over the corporation may be deemed an equitable owner, notwithstanding the fact that the individual is not a shareholder of the corporation. Equitable ownership is determined by considering whether the defendant exercised considerable authority over the corporation and acted as though the assets were his alone to manage and distribute.

Here. Aspire alleges that Universal took advantage of Cash Money’s cash flow problems by satisfying millions of dollars of Cash Money’s debts in exchange for control over Cash Money’s finances and agreements, including the Aspire/YME Agreement. Aspire alleges that Cash Money is a mere corporate instrument of Universal, that Universal shares offices with Cash Money, that Universal operates Cash Money’s website, that the business affairs of the two entities are intermingled, that Cash Money itself remains undercapitalized in relation to its needs, and that Cash Money is entirely dependent on advances and direct payments from Universal. Allegations of this sort have been held sufficient on a pre-answer motion to dismiss.

Aspire’s allegations are not wholly conclusory such that dismissal on a pre-answer motion is warranted. As discussed above, Aspire’s amended complaint contains particularized examples of Cash Money ceding much of its business operation to Universal. Regardless of whether Cash Money’s purported relinquishment of its business to Universal is partially the result of freely executed contracts between the parties, the inquiry into whether, and to what extent, the contractual relationship between the two parties transformed over time into that resembling an alter ego relationship is necessarily fact intensive and requires discovery. Therefore, Aspire has sufficiently alleged that Universal is the equitable owner of Cash Money for purposes of this preanswer motion to dismiss.

(Internal quotations and citations omitted).

This decision discusses an issue that is common in complex commercial litigation: whether an individual or another company can be held liable for a company’s actions. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether a third-party can be held liable for a company’s misconduct.

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On July 5, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Kyowa Seni, Co., Ltd. v. ANA Aircraft Technics, Co., Ltd., 2018 NY Slip Op. 28211, sanctioning a plaintiff for relitigating an already-decided claim in New York against defendants not subject to jurisdiction here, explaining:

Pursuant to 22 NYCCR § 130-1.1,

(a) The court, in its discretion, may award to any party or attorney in any civil action or proceeding . . . costs in the form of reimbursement for actual expenses reasonably incurred and reasonable attorney’s fees, resulting from frivolous conduct.

For the purposes of the statute, conduct is deemed frivolous if: (1) it is completely without merit in law and cannot be supported by a reasonable argument for an extension, modification or reversal of existing law; (2) it is undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another; or (3) it asserts material factual statements that are false. The court has discretion as to both the imposition and amount of sanctions.

This action is meritless and without a good faith basis. There is simply no basis for a New York court to assert jurisdiction over a dispute between Japanese entities, a dispute which has no specific connection to New York or its citizens. Moreover, Kyowa commenced this second litigation in New York even though the dispute was already fully litigated in Japan. The allegations in this action are identical to the allegations in the Japanese Action, except that Kyowa states that it “discovered” the FAA letter after the Japanese Action. In fact, Kyowa’s fraud claims were rejected, on the merits, by the Japanese courts. And, the Tokyo High Court rejected Kyowa’s motion for retrial based on the FAA letter one year prior to Kyowa’s commencement of this New York action.

Because the claims asserted by Kyowa against the ANA Companies have been fully litigated in Japan, and because Kyowa’s arguments in support of personal jurisdiction in this action lack of merit, sanctions are warranted against Kyowa. Accordingly, I grant the ANA Companies’ sanctions motion to the extent that I award them attorney’s fees and costs reasonably incurred by them in litigating the action before me.

(Internal quotations and citations omitted).

Part of being a good litigator is thinking of winning arguments other lawyers miss. However, as this decision shows, courts have little patience for lawyers who cross the line from creative to making frivolous arguments. It is unusual for a party to be sanctioned like this, and we can only imagine that here the line was crossed by a significant margin. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has a question regarding whether an argument has crossed the line from creative to sanctionable.

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On July 5, 2018, the Second Department issued a decision in Ballan v. Sirota, 2018 NY Slip Op. 05014, affirming the dismissal of a claim to enforce an attorney fee-sharing agreement, explaining:

Judiciary Law § 491 prohibits any person, partnership, or corporation from sharing any fee or compensation charged or received by an attorney-at-law, in consideration of having placed in the hands of such attorney-at-law a claim or demand of any kind.

Under the purported fee-sharing agreement, the plaintiffs would provide the defendant attorneys with proprietary information regarding potential clients, investigate claims, interview potential plaintiffs, and otherwise assist with litigation. In exchange, the defendant attorneys would pay the plaintiffs 20% of their fee for each case. This purported fee-sharing agreement whereby the plaintiffs attempt to recover from the defendant attorneys is illegal, and the plaintiffs are proscribed from seeking the assistance of the courts in enforcing it. The plaintiffs’ contention that they are entitled to equitable relief is without merit, since the contract was criminal in nature and not merely prohibited by statute.

(Internal citations omitted).

We both bring and defend breach of fiduciary duty and professional malpractice claims and other claims relating to the duties of professionals such as lawyers, accountants and architects to their clients. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding such claims or appeals of such claims.

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On July 5, 2018, the Second Department issued a decision in 313 43rd St. Realty, LLC v. TMS Enterprises, LP, 2018 NY Slip Op. 05013, holding that a claim for the return of down payments was sufficient based on allegations htat the sellers were not ready, willing and able to close, explaining:

As a general rule, to prevail on a cause of action for the return of a down payment on a contract for the sale of real property, the evidence must demonstrate that the seller was not ready, willing, and able to perform on the law day.

Contrary to the sellers’ contention, the complaint contained sufficient factual allegations to state a cause of action to recover the disputed down payments. . . .

Here, the allegations in the complaint that the sellers unilaterally set an unreasonable closing date were inadequate to constitute a positive and unequivocal repudiation of the contracts of sale so as to form the basis for a cause of action premised on anticipatory breach of contract. Nevertheless, the complaint adequately alleged that the sellers were not ready, willing and able to close under the contracts of sale. Construed liberally, the complaint states a cause of action for the return of down payments on contracts for the sale of real property. Accordingly, we agree with the Supreme Court’s determination to deny that branch of the sellers’ motion which was pursuant to CPLR 3211(a)(7) to dismiss the complaint for failure to state a cause of action.

(Internal quotations and citations omitted).

We frequently litigate disputes over the purchase and sale of commercial property. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding a commercial real estate transaction.

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On July 3, 2018, the First Department issued a decision in Deutsche Bank AG v. Vik, 2018 NY Slip Op. 04958, holding that there was no personal jurisdiction over a defendant where the critical events of a claim did not take place in New York, explaining:

A plaintiff relying on CPLR 302(a)(3)(ii) must show that (1) the defendant committed a tortious act outside New York; (2) the cause of action arose from that act; (3) the tortious act caused an injury to a person or property in New York; (4) the defendant expected or should reasonably have expected the act to have consequences in New York; and (5) the defendant derived substantial revenue from interstate or international commerce. In New York, the situs of commercial injury is where the original critical events associated with the action or dispute took place, not where any financial loss or damages occurred.

Here, the original critical events giving rise to plaintiff’s injury were the 2012 and 2015 Transfers. As those transfers occurred outside of New York and did not involve New York assets, the situs of injury was not in New York. That plaintiff felt economic injury in New York, alone, is an insufficient basis to confer jurisdiction. To the extent plaintiff relies on Deutsche Bank, AG v Vik (2015 Slip Op 30163[U] [Sup Ct, NY County 2015]), that case relied on federal case law that did not apply the situs of injury test, and our decision affirming that order did not determine the issue of jurisdiction under CPLR 302(a)(3)(ii).

Furthermore, even if the elements of CPLR 302(a)(3)(ii) have been met, asserting personal jurisdiction would not comport with due process. To comport with due process, there must also be proof that the out-of-state defendant has the requisite minimum contacts with the forum state and that the prospect of defending a suit here comports with traditional notions of fair play and substantial justice. The minimum contacts requirement is satisfied where a defendant’s conduct and connection with the forum State are such that it should reasonably anticipate being haled into court there. Under the effects test theory of personal jurisdiction, where the conduct that forms the basis for the plaintiff’s claims takes place entirely out of forum, and the only relevant jurisdictional contacts with the forum are the harmful effects suffered by the plaintiff, a court must inquire whether the defendant expressly aimed its conduct at the forum. Here, defendants did not expressly aim their tortious conduct at New York, and the foreseeability that the alleged fraudulent conveyances would injure plaintiff in New York is insufficient.

(Internal quotations and citations omitted).

This decision illustrates an issue that often arises in commercial litigation in New York. Whether the defendant is located on the other side of the world or across the Hudson in New Jersey, a New York court cannot assert jurisdiction over the defendant (that is, hear a case against it) unless there is a proper connection between the defendant and New York. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether there is jurisdiction over you, or over a party with which you are having a dispute, in New York.

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On June 26, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Israel v. Signature Bank, 2018 NY Slip Op. 31370(U), holding that an integration clause barred a breach of contract claim based on an alleged oral modification to a term sheet, explaining:

Here, MSI’s claim for breach of contract is not legally cognizable because, on the facts alleged in the amended complaint, MSI cannot demonstrate the existence of a binding oral contract obligating Signature Bank to extend the Mortgage Loans’ maturity dates and to reduce the interest rates. The written Mortgage Loans expressly prohibit oral modification of their terms. A written contract, 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 or by his agent.

The Notes provide that they may not be changed or terminated orally, but only by an agreement in writing signed by the party against whom enforcement of such change or termination is sought. The Mortgages contain a provision entitled “No Oral Change” which provides that each “Mortgage may only be modified, amended or changed by an agreement in writing signed by the Mortgagor and the Mortgagee. No waiver of any term, covenant or provision of this Mortgage shall be effective unless given in writing by the Mortgagee.

Additionally, the alleged oral modification is barred by the statute of frauds applicable to interests in real property, including mortgages. The statute of frauds provides that mortgages and modifications to mortgages may only be created, granted, assigned, surrendered or declared by a deed or conveyance in writing. An agreement to provide mortgage financing is subject to the Statute of Frauds and thus there must be a specific signed writing pursuant to which a bank obligates itself to provide mortgage financing.

Contrary to MSI’s contention, the repayment of the $3 Million Loan and partial payment of the $5 Million is not sufficient to show unequivocal part performance of an alleged oral agreement to refinance and extend the terms of the Mortgage Loans. In certain narrow circumstances, part performance by one party of an alleged oral modification to a written agreement may be sufficient to demonstrate an enforceable oral modification, even where the original written agreement contains an express prohibition against such modification. Significantly, however, the part performance must be unequivocally referable to the alleged newly modified agreement. It is not sufficient that the oral agreement gives significance to plaintiffs actions. Rather, the actions alone must be unintelligible or at least extraordinary, explainable only with reference to the oral agreement.

Here, MSI’s tender and Signature’s acceptance of the payments of money indisputably owed by MSI under the Mortgage Loans demonstrate, at most, that MSI chose to early pay down the principal amount of the Mortgage Loans to induce MSI to agree to the possible future modification of the Mortgage Loans. Indeed, the Term Sheet, which was executed by both Signature and MSI, provides that Signature Bank is willing to consider your request to modify and extend its above referenced credit facilities on the following terms, including, among other, numerous conditions, a
paydown of the loans’ principal amounts. As expressly stated in the Term Sheet, the payments are readily explainable as preparatory steps taken with a view toward consummation of an agreement in the future, such that performance is not unequivocally referable to the new contract.

(Internal quotations and citations omitted).

New York contract law–usually straightforward–has traps for the unwary, like the effect of an integration clause, which disclaims prior discussions and agreements and states that the parties’ entire agreement is just the written 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 a contract.

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On June 27, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Miller v. Suky, 2018 NY Slip Op. 31374(U), finding claims timely under the fiduciary tolling doctrine, explaining:

Although plaintiff fails to establish equitable estoppel, the SAC sufficiently alleges a fiduciary relationship between plaintiff, 19 Hotel and Owners on the one hand and the Individual Defendants on the other, which persisted until at least May 2011 (initiation of the Bankruptcies). Under the fiduciary tolling doctrine, a fiduciary relationship tolls the statute of limitations on actions brought by the beneficiary of the relationship against the fiduciary until termination of that relationship. As May 2011 was less than six years prior to the July 2014 filing of plaintiffs initial complaint, the SAC sufficiently supports fiduciary tolling.

(Internal quotations and citations omitted). The court noted in a footnote that

The Appellate Division, First Department has held that fiduciary tolling applies to claims for accounting or equitable relief, but not monetary damages. Disgorgement, even if framed as equitable relief, may truly be categorized as monetary damages. Because plaintiff seeks an accounting in addition to other purportedly equitable reliefs, the court will not opine further on the limits of fiduciary tolling, an issue which the parties have not briefed.

(Internal quotations and citations omitted).

It is common for the statute of limitations to be an issue in complex commercial litigation. While statute of limitations questions often are straight-forward, this decision shows that there are special situations where the statute of limitations has special rules. 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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On July 5, 2018, the First Department issued a decision in Weksler v. Weksler, 2018 NY Slip Op. 04976, holding that the agreement to the terms of settlement on the record did not constitute a binding agreement, explaining:

On November 10, 2016, the parties put the broad outline of the terms of their settlement agreement on the record. The terms included the payment of a sum certain by defendants in exchange for plaintiff’s interest in defendant Bruce Supply Corp. and five other defendant entities, and would be structured with a lump sum down payment and 15 annual installment payments. When the motion court asked whether the parties intended to be bound by the settlement, counsel for both sides stated that the settlement was subject to the execution of a formal settlement agreement and corporate documents, and defendants’ counsel stated that it would be an extensive agreement because of the transfer of shares. In their ensuing attempts to consummate the settlement, the parties were not able to reach an agreement on certain terms, including when the installment payments would be made, when plaintiff’s corporate shares would be transferred, whether plaintiff would receive security during the 15-year payment period, and the default provisions that should be included.

Given the number of open terms not contemplated by the stipulation of settlement but customarily included in corporate buyout agreements and the parties’ understanding that the on-the-record stipulation was subject to further documents, the stipulation of settlement is an unenforceable agreement to agree.

(Internal quotations and citations omitted).

Under New York law, whether agreement to some, but not all, terms of an agreement creates a binding contract can be a close question, the answer to which can turn on whether all the key terms of a contract have been agreed to and whether the parties intended to be bound the initial agreement or whether it was only an agreement to reach an agreement in the future. 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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On July 5, 2018, the First Department issued a decision in Epstein v. Ruane, Cunniff & Goldfarb Inc., 2018 NY Slip Op. 04970, affirming the dismissal of a derivative action for failure adequately to plead demand futility, explaining:

Plaintiff failed to allege sufficient facts to establish that a pre-suit demand on the board of the nominal defendant (Sequoia) to prosecute the action would have been futile under applicable Maryland law. The allegations of the complaint do not clearly demonstrate, in a very particular manner, that a majority of the directors are so personally and directly conflicted or committed to the decision in dispute that they cannot reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule.

When this action was commenced, Sequoia’s board had five members. Defendants do not seriously dispute that defendants Robert D. Goldfarb and David Poppe (the Inside Directors) were conflicted. However, plaintiff failed to demonstrate that any of the Outside Directors (defendants Robert L. Swiggett, Roger Lowenstein, and Edward Lazarus), who are presumed to be disinterested, was also conflicted.

The complaint alleges no specific facts about Lazarus to rebut the presumption. It alleges that Lowenstein and Swiggett were conflicted due to their longstanding history as Sequoia board members and relationships with Goldfarb, Poppe, and defendant Ruane, Cunniff & Goldfarb Inc. (the Adviser). However, evidence of personal and/or business relationships is not sufficient to excuse a demand. Nor is it sufficient that Swiggett and Lowenstein were compensated for their services as board members.

The fact that Lowenstein and Swiggett approved or participated in some way in the challenged transaction or decision, and thus may be subject to liability therefor, is also insufficient to demonstrate demand futility.

Poppe’s purported admission in a New York Times article that he and Goldfarb made all investment decisions does not prove that the Outside Directors were under their domination or control, since they may have acquiesced in these decisions for legitimate business reasons. Moreover, Poppe also admitted that, although he and Goldfarb made the final decisions, they nonetheless listened to their [the Outside Directors’] input. This is consistent with Poppe’s and Goldfarb’s roles as portfolio managers and representatives of the Adviser, and typical of the role of an investment adviser to a mutual fund.

It is immaterial to the issue of demand futility that two former directors resigned in connection with the decisions at issue here.

(Internal quotations and 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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Justice Saliann Scarpulla of the New York County Commercial Division recently updated her individual practices.

Justice Linda S. Jamieson of the Westchester County Commercial Division also recently updated her individual practices.