On October 30, 2019, Justice Masley of the New York County Commercial Division issued a decision in Satterfield v. Vstock Transfer, LLC, 2019 NY Slip Op. 33279(U), holding that moving to dismiss for failure to serve a complaint did not waive the right later to move to dismiss for lack of jurisdiction, explaining:

Preliminarily, Capital LLC did not waive its right to assert lack of personal jurisdiction as a defense. CPLR 320 (b) provides that an appearance of the defendant is equivalent to personal service of the summons upon him, unless an objection to jurisdiction is asserted by motion or in the answer as provided in rule 3211. Accordingly, a defendant waives lack of personal jurisdiction as a defense by failing to assert it in the answer or on a motion to dismiss. Once Satterfield filed the complaint in this action, Capital LLC moved to dismiss for lack of personal jurisdiction, and therefore did not waive the defense. Although Satterfield argues that Capital LLC waived the defense by demanding a complaint and moving to dismiss for failure to file a complaint, a demand or such motion does not of itself constitute an appearance in the action. Capital LLC has raised jurisdiction as a defense from the inception of this litigation, and consistently maintained that position in subsequent motion practice. Satterfield’s remaining arguments do not yield an alternative result, and therefore, the court will consider whether a basis for personal jurisdiction exists with respect to Capital LLC and the other moving defendants.

(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 October 30, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Hai Yang Liu v. 88 Harborview Realty, LLC, 2019 NY Slip Op. 33280(U), holding that a written contract’s merger clause did not bar parol evidence regarding an alleged agreement when the alleged agreement was collateral to the written contract, explaining:

There can be no dispute that Liu has legal title to five (5) units of 88 Harborview as is evidenced by the membership certificate that bears his name. This fact is not dispositive as the issue to be decided is whether there was an oral side agreement between Liu and Chen reserving beneficial ownership of the units to Chen and, if so, whether Liu is obliged to assign those units to Chen’s estate. The primary evidence of the oral agreement consists of the following: (i) deposition testimony and an affidavit from Cheung Yeung, a founder and managing member of 88 Harborview, that he knew the money for Liu’s shares came from Chen since he managed the company’s finances, that there were four other membership holders who assigned their interests to Chen’s estate once he died, and that plaintiff did not assert ownership over the units until a year after Chen’s death; (ii) deposition testimony from Chen’s wife Qian He that she knew plaintiff did not have the money to purchase the Property in 2002 or the membership stake in 88 Harborview in 2005; and (iii) testimony from the plaintiff regarding a loan to purchase the Property that is contradicted by the affidavit of Chen’s first wife, Chen Sai Zhu Chen.

The parol evidence rule does not bar extrinsic evidence concerning a collateral oral agreement where the written contract is not intended on its face to cover the collateral agreement. Evidence of an oral collateral contract is admissible, even in the face of a merger clause, where: a) the agreement is collateral in form, b) the oral agreement does not contradict the written contract and c) the oral agreement is an agreement that the parties would not ordinarily be expected to embody in the written contract. Cases in which an agreement was found to be wholly independent and collateral are relatively rare. Such may be the case here. First, the alleged agreement is collateral in form as it is an understanding between two individuals unrelated to the affairs of the company. Second, nothing in the alleged oral agreement contradicts the written agreement. Liu is the record owner of the units. However, under the terms of the side agreement, Liu purportedly held them for the benefit of Chen and has an independent obligation to assign the units to Chen’s estate. Indeed, this intention may be reflected on the face of the five certificates issued at the same time in the names of plaintiff Liu and non-parties Lu Tao Chen, Yuan Pan Zheng and Tian Ping Zhang. Each of these certificates contain the legend “Inherit You Liang Cheng.” Notably all of these certificate holders except Liu transferred his interest in 88 Harborview to Chen’s estate. Third, the collateral oral agreement at issue here would not be expected to be embodied in the operating agreement. If the agreement exists, it is between a member and a non-member for the non-member providing to be the member of record for the benefit of another. The existence or non-existence of the alleged collateral agreement cannot be decided on this motion. A trial to determine the facts is required unless the evidence to be considered is excludable as a matter of law.

Plaintiff asserts that any purported oral agreement for Liu to hold title to the Property for Chen’s benefit is barred by the statute of frauds as codified at General Obligations Law § 5-703(3). The statute states:

A Contract to devise real property or establish a trust of real property, or any interest therein or right with reference thereto, is void unless the contract or some note or memorandum thereof is in writing and subscribed by the party to be charged therewith.

This provision does not apply because this case concerns ownership of units in a limited liability company. Those units do not constitute interests in personal, not real property. The parol evidence rule does not apply because the alleged collateral oral agreement is separate from the 88 Harborview operating agreement. Defendants do not claim that the oral agreement alters the terms of the operating agreement in any way. The written contract is not intended on its face to cover the collateral oral agreement.

(Internal quotations and citations omitted).

This decision touches on issues we frequently encounter in commercial litigation: whether and to what extent an oral agreement or oral modification to a written agreement are enforceable. As this decision shows, the answer sometimes is not a simple one. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the enforceability of an oral agreement.

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On November 4, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Wimbledon Financing Master Fund, Ltd. v. Hallac, 2019 NY Slip Op. 33281(U), holding that plaintiffs could not save time-barred legal malpractice claims by recharacterizing them as fraud claims, explaining:

Katten argues that Wimbledon’s causes of action are actually mislabeled attorney malpractice claims and that Wimbledon’s nomenclature is an attempt to avoid the shorter statute of limitations for malpractice claims. In opposition, Wimbledon argues that New York lacks a per se rule that attorneys sued for malpractice cannot also be sued for intentional misconduct; and that the fraud allegations here are not only incidental to another cause of action.

The statute of limitations for claims of legal malpractice is three years. A legal malpractice cause of action accrues when the malpractice is committed, not when the client learns of it.

Notably, the New York legislature amended CPLR 214(6) in 1996 to make clear that where the underlying complaint is one which essentially claims that there was failure to utilize reasonable care or where acts of omission or negligence are alleged or claimed, the statute of limitations shall be three years if the case comes within the purview of CPLR Section 214(6), regardless of whether the theory is based in tort or in a breach of contract. Further, CPLR 214(6) was enacted to prevent plaintiffs from circumventing the three-year statute of limitations for professional malpractice claims by characterizing a defendant’s failure to meet professional standards as something else. To determine whether a claim is duplicative of a malpractice claim, a court must discern the essence of each claim.

Here, the essence of Wimbledon’s claims is that Katten should have disclosed information that it knew and should have given different advice. These are plain allegations of malpractice despite being labeled as claims for aiding and abetting fraud and aiding and abetting breach of fiduciary duty.4 Moreover, permitting these claims to go forward as claims for aiding and abetting fraud and aiding and abetting breach of fiduciary duty is contrary to the legislative intent of CPLR 214(6).

Courts frequently deem claims for fraud and breach of fiduciary duty duplicative of legal malpractice when the former claims are based upon the same facts as the malpractice claim.

In this case, the complaint lacks any facts other than those that support a malpractice claim i.e., facts pertaining to Katten’s failure to make disclosures, alleged bad legal advice and conflicts of interest.

Additionally, Wimbledon’s allegations that Katten engaged in continuing concealment by failing to disclose information about Gerova and Arius Libra to the board amount to allegations that Katten failed to disclose its own malpractice, and do not furnish support for fraud claims.

Katten also argues that Wimbledon’s damages theory is identical to that of a malpractice action, again demonstrating that this is truly a claim for malpractice. Wimbledon counters that even if the damages it seeks are the same as damages for an attorney malpractice claim, this is not determinative of whether Wimbledon’s aiding and abetting claims are duplicative of a malpractice claim.

Wimbledon’s complaint seeks judgment against Katten for forfeiture of fees and disgorgement of any ill-gotten gains. Wimbledon’s demand for the return of attorneys’ fees paid to Katten is fundamentally a claim for money damages. It does not seek separate damages from those stemming from malpractice. Furthermore, Wimbledon’s use of the word disgorgement cannot transmute the claim into one with a longer limitations period because purely semantic distinctions cannot control the application of the statute of limitations. Thus, even if Wimbledon’s claims were not merely mislabeled attorney malpractice claims, the claims would still be dismissible as duplicative.

Considering the foregoing, Wimbledon’s claims against Katten, though pled as fraud, are for attorney malpractice. Accordingly, the applicable statute of limitations period is three years.

(Internal quotations and citation 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 Erik Groothuis at egroothuis@schlamstone.com if you or a client have questions regarding such claims or appeals of such claims.

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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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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.

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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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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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.

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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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 doctrine, 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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