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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: September 25, 2018

Time is of the Essence Letter Found Ineffective

On September 19, 2018, the Second Department issued a decision in Rodrigues NBA, LLC v. Allied XV, LLC, 2018 NY Slip Op. 06129, holding that a time is of the essence letter was ineffective, explaining:

When, as here, a contract for the sale of real property does not make time of the essence, the law permits a reasonable time in which to tender performance, regardless of whether the contract designates a specific date for performance. Where there is an indefinite adjournment of the closing date specified in the contract of sale, some affirmative act has to be taken by one party before it can claim the other party is in default; that is, one party has to fix a time by which the other must perform, and it must inform the other that if it does not perform by that date, it will be considered in default.

In order to make time of the essence, there must be a clear, distinct, and unequivocal notice to that effect giving the other party a reasonable time in which to act. What constitutes a reasonable time for performance depends upon the facts and circumstances of the particular case. Included within a court’s determination of reasonableness are the nature and object of the contract, the previous conduct of the parties, the presence or absence of good faith, the experience of the parties and the possibility of prejudice or hardship to either one, as well as the specific number of days provided for performance. The determination of reasonableness must by its very nature be determined on a case-by-case basis. The question of what constitutes a reasonable time is usually a question of fact.

Here, the seller failed to establish, prima facie, that the time of the essence letter provided the buyer with a reasonable time within which to close. Furthermore, the seller’s submissions failed to eliminate triable issues of fact as to whether the property was the subject of ongoing administrative proceedings, in violation of the contract of sale, which could be completely resolved at the scheduled closing or within a reasonable time thereafter. Under these circumstances, the seller failed to sustain its burden of demonstrating that it was ready, willing, and able to convey title in accordance with the contract of sale. Since the seller failed to establish its prima facie entitlement to summary judgment on the complaint and dismissing the buyer’s counterclaims, we agree with the Supreme Court’s determination to deny those branches of its motion, without consideration of the sufficiency of the buyer’s opposing papers.

(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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Posted: September 24, 2018

Officer Not Liable For Contract Signed on Behalf of Company

On September 13, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Level Group Inc. v. Smart Merchants Inc., 2018 NY Slip Op. 32259(U), holding that an officer was not personally bound by a contract he signed on behalf of his company, explaining:

In support of the cross-motion to dismiss the first cause of action against Kim, Defendants rely on the Letter Agreement and argue that Level cannot maintain this claim against Kim because there is no privity of contract between Level and Kim. Defendants argue that, because Kim only signed the Letter Agreement in his corporate capacity on behalf of SMI, he cannot be held personally liable for the purported breach of the Letter Agreement.

Officers or agents of a company are not personally liable on a contract if they do not purport to bind themselves individually, which must be shown by some direct and explicit evidence of actual intent.

The portion of the Letter Agreement that Kim signed is in the following form:

Accepted and agreed to,
Smart Merchants Incorporated
By:
Chung Chan Kim, President.

Kim’s signature follows the word “By.” This signature was made in Kim’s corporate, not individual, capacity. Defendants have thus established their entitlement to judgment as a matter of law on the portion of its cross-motion for summary judgment to dismiss Level’s breach of contract claim against Kim individually.

In opposition, Level argues that Kim may be personally liable for the breach of the Letter Agreement because, by signing the Letter Agreement – which defines SMI as “SMI and all entities which whether directly or indirectly, are controlled by SMI or any person or entity with a direct or indirect interest in any of the foregoing” – Kim clearly expressed his intent to be bound individually. This argument is meritless.

Level has not offered any direct and explicit evidence of actual intent of Kim’s intent to be bound in his individual capacity to the Letter Agreement. Therefore, Defendants’ cross-motion for summary judgment dismissing the first cause of action against Kim is granted, and Level’ s motion for summary judgment is denied.

(Internal quotations and citations omitted).

Usually, the only parties who have rights or obligations under a contract are the parties to the contract. Here, a party tried–but failed–to sue an individual who signed a contract on behalf of a company. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether you have rights or obligations under a contract.

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Posted: September 23, 2018

Former LLC Manager’s Claims Regarding His Removal Must be Arbitrated

On September 17, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Milman v. Thrane, 2018 NY Slip Op. 32287(U), holding that the claims of the former manager of an LLC regarding his removal as manager must be arbitrated, explaining:

This case concerns the alleged wrongful removal of plaintiff as a manager and member of The Alldyn Group, LLC (the Company) and the events precipitating his removal. The Company is a New York LLC that is governed by an operating agreement dated October 10, 2017. Section 11.14 of the Operating Agreement provides that:

Any dispute between or among any of the Class A Members … relating to a Class A Member’s withdrawing from the Company or terminating his services for the Company for any reason, which cannot be resolved among the Class A Members (acting as the Executive Board of Managers or otherwise) after good-faith negotiation over a period of at least 15 business days, shall be referred to an independent legal expert selected and agreed upon by all parties, who shall act as sole arbiter to decide and settle the dispute, and whose determination shall be conclusive and binding upon the Class A Members and the Company.

While § l l.14 does not require the Company’s members to arbitrate any dispute arising under the Operating Agreement, it does require arbitration of all disputes relating to a member’s removal. Thus, the court held that the question of whether plaintiff was properly removed must be decided by an arbitrator. Section 11.14, however, does not -as it could have- merely limit arbitration to the sole question of whether removal was proper. Rather, it requires arbitration of all disputes relating to the removal. It is well settled that relating to signifies intent to be bound by a broad arbitration provision that covers all disputes that have any bearing on the subject matter.

All of plaintiffs causes of action contained in the complaint unmistakably relate to his withdrawal/removal. Plaintiff seeks recovery of his capital account and distribution of his share of a fee owed by one of the Company’s clients. Under § 6.9 of the Operating Agreement, upon removal for cause, plaintiff forfeits the right to his capital account and under § 4.1, only members are entitled to distributions. Thus is plaintiff was properly removed for cause, he has no claims. Even if he was not properly removed, because plaintiff himself alleges that his removal was motivated by a desire to wrongfully deprive him of his capital account and of his share of the subject client fee, his claim to such money is certainly related to his removal. Thus, all of plaintiff’s claims are subject to arbitration under § 11.14.

(Internal quotations and citations omitted).

This decision illustrates one the many rules for interpreting contracts: if a contract contains a pre-suit dispute resolution provision, the failure to comply with that provision likely will bar a claim for breach of the contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a dispute over the interpretation of a contract.

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Posted: September 22, 2018

Court Dismisses Claim for Equitable Accounting

On September 5, 2018, Justice Masley of the New York County Commercial Division issued a decision in Storper v. WL Ross & Co., LLC, 2018 NY Slip Op. 32235(U), dismissing a claim for equitable accounting, explaining:

Plaintiffs have failed to plead facts sufficient to support a legally viable claim for an equitable accounting. To be entitled to an equitable accounting, a claimant must demonstrate that he or she has no adequate remedy at law. The right to an accounting is premised upon the existence of a confidential or fiduciary relationship and a breach of the duty imposed by that relationship respecting property in which the party seeking the accounting has an interest.

In the amended complaint, plaintiffs allege that defendants breached certain fiduciary duties by improperly paying, causing to be paid, receiving, or retaining management fees and by not disclosing such fees to plaintiffs. Thus, the damages allegedly suffered by plaintiffs are clearly monetary. Therefore, plaintiffs could be made whole by an award of monetary damages. Where monetary damages are available and will make the plaintiff whole, the plaintiff has an adequate remedy at law. Thus, plaintiffs’ factual allegations, if proven, demonstrate that plaintiffs have an adequate remedy at law, and, therefore, are not entitled to an equitable accounting.

The court notes that plaintiffs are entitled by the terms of the amended and restated limited liability corporation agreement (LLCA) for each GP to fully inspect and audit the GP’s financial books and records, including its bank balances. Therefore, the financial information for each GP may be obtained through pre-trial discovery if not produced as required by the LLCA.

Contrary to plaintiffs’ contention, the mere allegation of the existence of a fiduciary duty, without more, does not entitle them to an equitable accounting. A plaintiff must also demonstrate that he or she has no adequate remedy at law before a court may award an equitable accounting.

(Internal quotations and citations omitted).

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.

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Posted: September 21, 2018

Claims Barred by Release

On September 12, 2018, the Second Department issued a decision in Miller v. Brunner, 2018 NY Slip Op. 06008, holding that claims were barred by a release, explaining:

A release is a contract, and its construction is governed by contract law. A release that is complete, clear, and unambiguous on its face must be enforced according to the plain meaning of its terms. A valid general release will apply not only to known claims, but may encompass unknown claims, including unknown fraud claims, if the parties so intend and the agreement is fairly and knowingly made. A signed release shifts the burden of going forward to the plaintiff to show that there has been fraud, duress or some other fact which will be sufficient to void the release.

Here, the release broadly covers, inter alia, all claims by the plaintiffs against the defendants predating the release. Contrary to the plaintiffs’ contention, the terms of the release clearly and unambiguously bar the first cause of action in the amended complaint, which is asserted against Anmuth and alleges a breach of the January 28, 2014, agreement. In addition, the plaintiffs failed to sufficiently allege each of the elements of fraud in the inducement, which would be required in order to set aside the release. Accordingly, the Supreme Court should have granted that branch of the defendants’ motion which was, in effect, pursuant to CPLR 3211(a)(1), (5), and (7) to dismiss the first cause of action of the amended complaint insofar as asserted against them.

(Internal quotations and citations omitted).

Among the things people typically do to resolve a legal dispute is agree to release any legal claims they may have against each other. As this decision shows, a release is a contract like any other and will be enforced even if a party later comes to regret releasing its claims. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether you have released claims.

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Posted: September 20, 2018

Court Declines to Dismiss Double-Derivative Action

On September 4, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Simon v. French-American Surgery Ctr., Inc., 2018 NY Slip Op. 32184(U), refusing to dismiss a double-derivative action, explaining:

Under New York law, double derivative actions may be brought by a minority shareholder of a parent company for harm to a subsidiary of the parent. The action may be maintained where a stockholder controls a subsidiary such that there is no independence between the parent stockholder and the subsidiary, and it cannot be expected that the controlling stockholder will authorize a suit on behalf of the subsidiary against itself for harm to the subsidiary.

Here, plaintiff alleges that he is a minority shareholder of Franclnvest, and that Franclnvest controlled JSS as the subsidiary corporation that owns the claims. Therefore, plaintiffs double derivative claims are appropriate.

(Internal quotations and citations omitted).

This decision relates to something common in complex commercial litigation–the question of whether a claim can be brought by an individual on his or her own behalf or must be brought on behalf of a corporation or other entity in which the plaintiff has an ownership stake (that is, derivatively). 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: September 19, 2018

Court Grants Adverse Inference on Summary Judgment for Assertion of Fifth Amendment Rights

On September 5, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Knox, LLC v. Lakian, 2018 NY Slip Op. 32191(U), granting an adverse inference against a party that asserted its Fifth Amendment rights, explaining:

Plaintiffs also ask this Court to draw a negative inference against Mr, Lakian. During Mr. Lakian’s deposition on January 7, 2016, he invoked the Fifth Amendment in response to every question posed by Plaintiffs’ counsel. Mr. Lakian invoked the Fifth Amendment in response to general questions, such as his current home address and whether he is familiar with Capital L. Likewise, Mr. Lakian invoked the Fifth Amendment in response to specific questions regarding Plaintiffs’ investments and the purposes for which Plaintiffs’ investment funds were used.

When a party in a civil action, capable of testifying on the issues, refuses to testify by the claim of privilege, he must thereupon bear all of the legitimate inferences flowing from the adverse evidence against him, and this without regard to his reasons for silence. The Fifth Amendment does not forbid adverse inferences where the privilege is claimed by a party to a civil cause. Here, it is clear that Mr. Lakian refused to answer any questions at his deposition not only because it would have incriminated him, but also because it would have been unfavorable to him in this action. Accordingly, Plaintiffs are entitled to a negative inference against  Mr. Lakian regarding scienter.

(Internal quotations and citations omitted).

The assertion of the Fifth Amendment right against self-incrimination cannot be held against a defendant in a criminal trial. However, as this decision shows, such a refusal to testify in a civil lawsuit can be held against the witness. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions about asserting the Fifth Amendment right not to testify.

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Posted: September 18, 2018

No New York Personal Jurisdiction Over Student Loan Trust Trustee That Engaged New York Counsel

On September 4, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in National Coll. Master Student Loan Trust I v. Wilmington Trust Co.2018 NY Slip Op. 32194(U), holding that the court lacked personal jurisdiction over a the trustee of a student loan trust that engaged New York counsel, explaining:

Under CPLR 302(a)(l), jurisdiction may only be exercised over an out-of-state defendant if that defendant has purposefully transacted business within the state and there is a substantial relationship between the transaction and the claim asserted. Purposeful activities are those with which a defendant, through volitional acts, avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.

Plaintiffs assert that CPLR 302(a)(l) jurisdiction may be exercised over Wilmington because Wilmington transacted business in New York by signing a retainer agreement with a New York law firm on behalf of the Trusts, and the legal services were performed in New York. Plaintiffs maintain that Wilmington made innumerable telephone and e-mail communications to Chaitman in New York regarding Chaitman’s performance of legal services and payment for those services.

Wilmington executed the Retention Agreement in Delaware, solely in its representative capacity and at the direction of the Trusts’ Owners, to represent the Trusts. This action constitutes neither the performance of any act within the state nor the transaction of any business here giving jurisdiction pursuant to CPLR 302.

This situation is markedly different from other cases finding jurisdiction based on the engagement of a New York lawyer or law firm by an out-of-state entity.

Moreover, no allegation in the complaint supports Plaintiffs’ claim, which was asserted in the opposition memorandum, that Wilmington made innumerable communications via telephone and email to Chairman in New York with respect to Chaitman’s performance of legal services in the State of New York and concerning payment for those same services. These unspecified communications are not sufficient to confer CPLR 302(a)(l) jurisdiction.

At most, the allegations in the complaint regarding two communications between Chaitman and Wilmington show that Chaitman initiated communications with Wilmington to collect legal fees, to which Wilmington responded. Chaitman’s own New York activities cannot be attributed to defendants for purposes of establishing personal jurisdiction over an out-of-state defendant. Accordingly, there is an insufficient basis to exert CPLR 302(a)(l) jurisdiction over Wilmington.

(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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Posted: September 17, 2018

Shareholder Need Not Hold Share Certificates to Have Right to Assert Derivative Claims

On September 5, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Lentini v. 219 W. 20th Str. Corp., 2018 NY Slip Op. 32181(U), holding that a plaintiff need not hold share certificates to have the right to assert derivative claims, explaining:

The mere fact that the corporation did not issue any stock certificates does not preclude a finding that a person has the rights of a shareholder. It is the payment, or the obligation to pay for shares of stock, accepted by the corporation, that creates both the shares and their ownership. Labor or services actually received by or performed for the corporation constitutes consideration for the issue of shares. However, a claimants’ failure to allege any basis upon which he might claim an actual, equitable or beneficial interest in any corporate shares will result in dismissal for lack of standing. . . .

Assuming the truth of Joseph Lentini’s allegations, he has standing to pursue derivative claims on WCA’s behalf. The second amended complaint alleges that Joseph Lentini owns 50% of the interest in WCA and that, as consideration for his ownership interest, he contributed his time and experience to WCA at a reduced salary. This constitutes consideration for the alleged issue of shares and, if true, creates both the shares and their ownership. Whether Joseph Lentini has an ownership interest in WCA is not before the court on the instant, pre-answer motion to dismiss. Joseph Lentini need only allege a basis upon which he may claim an actual, equitable or beneficial interest in any WCA shares, which he has done.

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

This decision touches on two areas of commercial litigation that are a significant part of our practice: derivative actions (where a shareholder brings an action on behalf of a corporation) and business divorce (a break-up between the owners of a closely-held business). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding either of these issues.

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Posted: September 16, 2018

Motion for Reargument Denied for Failure to Attach Prior Order and Papers

On August 30, 2018, Justice Masley of the New York County Commercial Division issued a decision in Mayor Gallery Ltd v. Agnes Martin Catalogue Raisonne LLC, 2018 NY Slip Op. 32161(U), denying a motion for reargument because, among other reasons, the movant did not attach a copy of the prior papers to the motion, explaining:

As an initial matter, although defendants’ do not raise this issue in their opposition, plaintiff’s motion for leave to reargue is procedurally defective in that plaintiff failed to attach a copy of the Prior Order or the papers submitted in connection with the underlying motion (defendants’ motion to dismiss, motion sequence number 001). Indeed, plaintiff does not submit even a party affidavit or attorney affirmation with this motion to reargue. Accordingly, the court exercises its discretion to deny plaintiff’s motion to reargue on the basis that its supporting papers are insufficient, particularly because the underlying motion papers in this action were heavily redacted as electronically filed, and the court no longer retains the unredacted chamber’s copies.

(Citations omitted).

New York procedural law (including the special rules applying to litigation in the Commercial Division of the New York courts) is not particularly complex. Still, there are procedural rules and as this decision illustrates, if a litigant ignores them, it can pay a high price. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding New York practice, and particularly regarding the rules governing practice in the Commercial Division.

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