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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: November 17, 2018

Valuation Prepared as Part of Joint Venture’s Break Up Not Privileged

On November 9, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Noven Pharms., Inc. v. Novartis Pharms. Corp., 2018 NY Slip Op. 32851(U), holding that a valuation prepared as part of a joint venture’s break up was not privileged, explaining:

Novartis has the burden of establishing that the valuation report is privileged and, therefore, exempt from the disclosure. It failed to meet its burden here.

The exemption for attorney work product (CPLR 3101[c]) does not apply because the valuation was not prepared by counsel acting as such and does not otherwise uniquely reflect a lawyer’s learning and professional skills. Nor has Novartis sufficiently shown that the valuation is exempt from disclosure as material prepared in anticipation of litigation (CPLR 3101[d][2]) because it did not demonstrate that the report was created solely and exclusively in anticipation of litigation. Under the circumstances, a mixed purpose cannot be ruled out.

It is undisputed that a valuation by Deloitte was contemplated for business purposes before Novartis claims that it appreciated that litigation potentially lay ahead. The record establishes that Novartis first contacted Deloitte about performing a valuation in response to the HL valuation with which Novartis disagreed. Novartis explained to Noven that it would be procuring the valuation, which would then inform their discussions.

Though Novartis has shown that shortly thereafter it contemplated possible litigation, it has not established that the nature, character or scope of the valuation that had already been discussed with Deloitte changed in any way whatsoever or that Novartis was exclusively in litigation mode and not still desirous of arriving at a mutually agreeable business solution with Noven. Indeed, there is no evidence between September 2015–when Novartis maintains that it first contemplated potential litigation–and the commencement of this action, that Novartis ever explicitly committed to Noven that, contrary to its earlier position, it was not going forward with nor would it exchange or discuss the valuation that it had earlier committed to. Novartis has not shown any proof (in camera or otherwise) that after its business people chose Deloitte to prepare the valuation for business purposes, the actual scope or nature of the retention changed in any material way. In fact, even after the valuation was prepared, the parties were still on course for and engaged in business discussions to resolve the disputes between them.

It is clear, moreover, that both parties fully appreciated that litigation was a possibility before they officially commissioned their respective valuations. That does not alter the analysis nor does the involvement of attorneys or the parties’ own privilege designations (which were likely designed to afford the parties with maximum flexibility depending on the outcome of the valuation).

In the end, while Novartis’ lawyers formally retained the valuator selected by its business people, and one of the purposes of procuring the valuation may have been to prepare for litigation, Novartis has not convinced the court that litigation was the sole reason and that it had entirely abandoned its earlier commitment. On this record, where the parties continued in the same course of negotiations for which the Deloitte valuation had been contemplated, it is hard to believe that Novartis decided, in September 2015, that potential litigation justified an uncommunicated change in course with respect to the valuation and that, despite verily believing that a valuation was irrelevant, it continued to pursue the very same valuation that it had anticipated earlier, yet it was for a completely different purpose (and that Novartis did so, at this stage and with urgency, solely for litigation that had not even been commenced and not for use in its ongoing business negotiations). Because Novartis has not negated that the valuation, at the very least, had a dual purpose–that it still served the function originally contemplated–it is subject to disclosure and must be produced.

(Internal quotations and citations omitted).

An issue that arises in almost all complex commercial litigation is identifying evidence that should be withheld from production in evidence because it is subject to the attorney-client or other privilege. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the attorney-client, common interest, work product or other privileges or exemptions from production of evidence.

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Posted: November 16, 2018

City Department of Finance Not Entitled to Two Percent Payment Fee On Abandoned Funds Transferred to Comptroller

On October 25, 2018, Justice Ramos of the New York County Commercial Division issued a decision in Swezey v. Lynch, 2018 NY Slip Op. 32810(U), holding that the City Department of Finance was not entitled to a two percent fee on abandoned funds transferred to the City Comptroller, explaining:

The DOF is the custodian of court-deposited funds in New York City under Article 26 of the CPLR. When the DOF takes custody of court-deposited funds, it is entitled to two statutory fees, set forth in CPLR 8010: one fee for investing, and one fee for making payment. Specifically, sub-section (1) of CPLR 8010 entitles the DOF to receive two percent upon a sum of money paid of out court by him. Sub-section (2) entitles the DOF to one half of one percent upon a sum of money invested by him.

The term “paid out of court,” as used in CPLR 8010(1), has not been judicially construed. The Court of Appeals has stated that when the language of a statute is clear and unambiguous, the statute should be construed so as to give effect to the plain meaning of the words.

The plain meaning of the term “paid out of court,” which triggers the DOF’s entitlement to a two percent fee for its custodial services, is the payment of the money out of court, either an award of the court or other order of the court directing payment.

Considering the construction of CPLR 8010 with the Abandoned Property Law does not alter this Court’s conclusion. Abandoned Property Law §§ 600 and 602 directs the DOF to transfer dormant court-deposited funds to the comptroller without a court order, after five years. The substance of this transfer is a ministerial act triggered by the passage of time, which runs from the date the DOF takes custody of the money. The ministerial act of transferring abandoned funds to the comptroller does not entitle the DOF to a two percent fee under CPLR 8010 (1) because it is not money paid out of court to the party entitled to the money or other order directing payment.

This Court originally ordered the DOF to take custody of the Arelma assets, and neither this Court, nor any other court with competent jurisdiction, has awarded the Arelma assets or otherwise directed payment thereof out of the DOF’s custody. Thus, the only fee to be retained by the DOF for its services as custodian of the Arelma assets is the retention of one half of one percent of the sum initially received by him for its placement of the funds in an interest bearing account. There is no statutory authority for the DOF’s retention of two percent for transferring funds as abandoned property to the comptroller’s custody, by passage of time.

(Internal quotations and citations omitted).

It happens from time-to-time that money related to a court case must be paid into court (or, as this decision explains, if the court is in New York City, into the New York City Department of Finance). Getting that money back from the Department of Finance is time consuming and, as this decision shows, potentially expensive. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding the payment of funds into court.

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Posted: November 15, 2018

Award of Lost Profits Upheld

On November 9, 2018, the Fourth Department issued a decision in Henderson Harbor Mariners’ Mar., Inc. v. Upstate Natl. Bank, 2018 NY Slip Op. 07555,, upholding an award of lost profits, explaining:

We reject defendant’s contention that the trial court erred in denying its motion to set aside the verdict and for judgment in its favor on the issue of, inter alia, the damages awarded for plaintiffs’ lost profits. Contrary to defendant’s contention, we conclude that plaintiffs’ lost profits were within the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Although damages resulting from the loss of future profits are often an approximation, we further conclude that plaintiffs established their damages here with reasonable certainty and without undue speculation.

(Internal quotations and citations omitted).

A key element in commercial litigation is proving damages. As this decision shows, in some circumstances, those damages can include lost profits. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding proving damages.

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Posted: November 14, 2018

Because Court Allowed Plaintiff to Amend Complaint, Court Erred in Deciding Summary Judgment Motion Before Defendant Answered Amended Complaint

On November 7, 2018, the Second Department issued a decision in R&G Brenner Income Tax Consultants v. Gilmartin2018 NY Slip Op. 07470, holding that because the IAS court allowed the plaintiff to amend its complaint, the court erred in deciding the plaintiff’s summary judgment motion before the defendant had answered the amended complaint, explaining:

Here, contrary to the defendant’s contention, the Supreme Court providently exercised its discretion in allowing the plaintiff to amend its complaint. The defendant failed to show that he was prejudiced or surprised by the proposed amendments.

However, the Supreme Court should not have awarded the plaintiff summary judgment on the issue of liability on the first, third, and fourth causes of action in the amended complaint, while simultaneously allowing the plaintiff to serve the amended complaint. When an amended complaint has been served, it supersedes the original complaint and becomes the only complaint in the case. Since an amended complaint supplants the original complaint, it would unduly prejudice a defendant if it were bound by an original answer when the original complaint has no legal effect. As a result, an amended complaint should ordinarily be followed by an answer. Here, the court should not have awarded the plaintiff summary judgment on the issue of liability on the causes of action in the amended complaint before the defendant had answered the amended complaint.

(Internal quotations and citations omitted).

Cases in the Commercial Division of the New York courts usually involve a motion to dismiss at the outset and then a motion for summary judgment at the close of discovery, so such motions are a big part of our practice. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions about seeking or opposing a motion for pre-trial dismissal of a commercial lawsuit.

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Posted: November 13, 2018

Fraud Claim Dismissed Because of Sophisticated Investor’s Lack of Due Diligence

On October 29, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Unique Goals Intl., Ltd. v. Finskiy, 2018 NY Slip Op. 32788(U), dismissing a fraud claim because of the sophisticated plaintiff’s lack of due diligence, explaining:

The first cause of action for fraud is asserted by Faith Union and Unique Goals against all defendants. This claim is based upon misrepresentations by Finskiy upon which plaintiffs relied in making their investments. Essentially, plaintiffs contend Finskiy’s various misrepresentations fraudulently induced them to purchase stock in White Tiger.

The elements of a claim for fraud are an intentional misrepresentation of material fact, falsity, scienter, justifiable reliance and damages. In a fraudulent inducement claim, the alleged misrepresentation should be one of then-present fact, which would be extraneous to the contract and involve a duty separate from or in addition to that imposed by the contract and not merely a misrepresented intent to perform. In addition, claims of fraud must meet a heightened pleading standards requiring that the circumstances constituting the wrong be stated in detail.

Critically, reliance must be found to be justifiable under all the circumstances before a complaint can be found to state a cause of action in fraud. Sophisticated investors, like plaintiffs, must show they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time. Although the complaint here attempts to cast Yanchukov as a newcomer to the mining business who relied on his close, personal friend Finskiy to guide him, Yanchukov, plainly, is a sophisticated businessperson with access to plentiful resources to protect himself and his investments, to obtain the requisite inspections and perform the necessary due diligence. While he may have lacked experience in the mining industry, he clearly had the resources necessary to obtain expert advice or, indeed, do an investigation. Moreover, to the extent that plaintiffs argue they were forced to rely on Finskiy’s representations about, e.g., the amount of gold reserves because an independent study would have been time and cost prohibitive, they could have required warranties that these facts are true be included in their purchase documents. Further, where a sophisticated plaintiff conducts no due diligence, he cannot demonstrate reasonable reliance as a matter of law. Such is the case here. Accordingly, the fraud claim is dismissed.

(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: November 12, 2018

Dismissal With Prejudice of Federal Securities Law Claims Does Not Bar Common Law Fraud Claims

On October 30, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Brown v. Cerebus Capital Mgt., L.P., 2018 NY Slip Op. 32782(U), holding that the prior dismissal with prejudice of federal securities law claims does not bar new common law fraud claims, explaining:

In the first through eighth causes of action, plaintiffs bring claims for common law fraud and state blue-sky law claims. Specifically, plaintiffs allege that defendants fraudulently misrepresented that US Holdco and MIP II owned material, appreciable assets; and (2) that plaintiffs were entitled to 2.9% of the Covis Enterprise’s profits and a grossup (id. ~ 234). Plaintiffs also allege that defendants fraudulently set impossible and unreasonable performance targets in the 2012 and 2013 Award Agreements; fraudulently terminated plaintiffs in bad faith for pre-textual and false reasons when defendants anticipated a Winding Up Event; failed to disclose merger negotiations to Goeken; and fraudulently exercised MIP II’s call right.

Defendants argue that four of these claims (counts one, two, five and seven) are each barred by the doctrine of collateral estoppel because they all require scienter, and the federal court dismissed plaintiffs’ federal claims for lack of scienter. However, the federal dismissal of plaintiffs’ failed securities fraud claims for failure to allege a strong inference of scienter is not preclusive.

Collateral estoppel comes into play when four conditions are fulfilled: (1) the issues in both proceedings are identical, (2) the issue in the prior proceeding was actually litigated and decided, (3) there was a full and fair opportunity to litigate in the prior proceeding, and (4) the issue previously litigated was necessary to support a valid and final judgment on the merits. Collateral estoppel will bar claims over which a federal court declined to exercise supplemental jurisdiction if the federal court decided issues identical to those raised by the plaintiffs state claims.

Defendants cannot demonstrate that they have satisfied the elements of collateral estoppel because the federal court did not decide issues identical to those raised here. The federal securities claims brought in the federal action were subject to Rule 9(b) and the PSLRA, which require a plaintiff to allege facts giving rise to a strong inference that the defendant acted with the required state of mind. In contrast, the complaint’s fraud claims are subject to the CPLR and 3016(b) may be met when the facts are sufficient to permit a reasonable inference of the alleged conduct. New York courts have uniformly held that the federal strong inference standard is higher than New York’s reasonable inference standard.

Accordingly, because the federal court applied the strong inference standard to the federal action’s allegations of scienter, the federal dismissal is not preclusive of plaintiffs’ state law fraud claims. Indeed, a dismissal pursuant to the PSLRA cannot be preclusive because the district court rendered a decision on a claim rooted in federal statutory law, based on federal rules of pleading. Accordingly, defendants’ motion for dismissal of counts one, two, five and seven of the complaint is denied.

(Internal quotations and citations omitted).

Doctrines such as collateral estoppel and res judicata limit a plaintiff’s ability to litigate a dispute more than once. 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 an earlier action.

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Posted: November 11, 2018

Plaintiff Asserting Derivative Claims Must be Represented by Counsel

On November 1, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Park v. Song, 2018 NY Slip Op. 28343, holding that a plaintiff asserting derivative claims must be represented by counsel, explaining:

Whether a derivative plaintiff can maintain claims without being represented by counsel is a question of first impression under New York law. The answer is well settled in Delaware and in the Second Circuit; shareholders are required to have counsel. The rationale underlying those courts’ determinations applies with equal force in New York State; therefore, plaintiffs must retain counsel to prosecute their derivative claims.

In New York, as in Delaware, it is black letter law that a stockholder has no individual cause of action against a person or entity that has injured the corporation. Rather, if demand requirements have been satisfied (unless futile), a stockholder can assert a derivative claim to recover for injury to the business entity. Because a derivative plaintiff is really seeking to vindicate the rights of the corporation, and not simply its own rights, derivative claims are considered to belong to the corporation itself.

Additionally, in New York, like in Delaware, corporations and LLCs cannot be represented by individual shareholders or members; they must be represented by counsel. When the party to an action is a fictional person—a legal entity with limited liability—the general rule is that it cannot represent itself but must be represented by a licensed practitioner answerable to the court and other parties for his or her conduct in the matter.

The Delaware Court of Chancery has held that because a derivative plaintiff seeks to ‘enforce a right of a corporation, and corporations appearing in this Court may only do so through counsel the derivative plaintiff who asserts the rights of the corporation must also be represented by counsel. The Second Circuit concurs. There is no reason for a different conclusion here.

The concern, of course, is that a derivative action implicates the rights of all shareholders and members who will ultimately be bound by the findings made and the outcome reached in the litigation. It is therefore essential that one pursuing derivative claims be capable of doing so on behalf of all who would be affected. A plaintiff who is unfamiliar with corporate law and unrepresented by counsel runs the risk of losing an otherwise meritorious case due to lack of familiarity with well settled, yet complex rules applicable to derivative litigation, imperiling the rights of others with ownership in the entity.

Any inconvenience to the plaintiffs here is heavily outweighed by the general policy concerns requiring that a business organization be represented by counsel. A successful derivative plaintiff, moreover, is entitled to an award of attorneys’ fees. Thus, if plaintiffs’ derivative claims have merit—and many have already survived a motion to dismiss—and there is a possibility of collecting damages, there should be no shortage of lawyers in New York City willing and capable of representing them.

(Internal quotations and citations omitted).

This decision illustrates another of the special requirements for derivative actions (an action where a shareholder brings an action on behalf of a corporation or other business entity). Even though an individual may be bringing the claims, the claims belong to the corporation, and so the derivative action plaintiff must be represented by a lawyer, just like the corporation would have been required to do had it brought the claims directly. 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: November 10, 2018

Minority Shareholders Must Give Other Shareholders an Opportunity to Buy Their Shares

On October 24, 2018, Justice Emerson of the Suffolk County Commercial Division issued a decision in Matter of Marro (Marjod Realty Corp.), 2018 NY Slip Op. 51502(U), holding that minority shareholders were required to give other shareholders an opportunity to purchase their shares, explaining:

Business Corporation Law 1104-a provides that the holders of 20% or more of the outstanding shares of a closely held corporation have the right to petition for a judicial dissolution under special circumstances. Business Corporation Law § 1118 is a defensive mechanism for the nonpetitioning shareholders. It gives them the an absolute right to avoid the dissolution proceedings and any possibility of the corporation’s liquidation by electing to purchase the petitioners’ shares at their fair market value and upon terms and conditions approved by the court. The corporation and the remaining shareholders have the unconditioned right, within 90 days of the petition (and later within the court’s discretion), to avoid the potential drain and risk of dissolution proceedings by simply offering to buy out the minority’s interest, and the minority is protected by a court-approved determination of fair value and other terms and conditions of the purchase.

In a proceeding pursuant to Business Corporation Law 1104-a, the court has broad latitude in fashioning alternative relief. Before dissolution is ordered, the court is required to consider whether liquidation of the corporation is the only feasible means whereby the petitioning shareholders may obtain a fair return on their investment and whether it is reasonably necessary to protect the rights and interests of a substantial number of shareholders. Judicial dissolution is a remedy of last resort, and a buy-out pursuant to Business Corporation Law § 1118 is generally preferable to dissolution because it maintains the viability of the corporation. Absent exceptional circumstances, courts will ordinarily exercise their discretion to authorize a buy-out.

The petitioners’ only objection to Marjod Realty Corp.’s exercise of its right to purchase the petitioners’ shares pursuant to Business Corporation Law § 1118 is that it is untimely. The petitioners proffer no substantive reason why Marjod should not be allowed to purchase their shares. A buy-out of the petitioners’ shares is clearly preferable to liquidation of the corporation. It would allow the petitioners to obtain a fair return on their investment while protecting the rights and interests of the remaining shareholders. Accordingly, the motion is granted.

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

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: November 9, 2018

Corporate Officer May Be Held Liable for Corporation’s Conversion

On October 31, 2018, the Second Department issued a decision in Starr Indem. & Liab. Co. v. Global Warranty Group, LLC, 2018 NY Slip Op. 07346, holding that the plaintiff had sufficiently plead claims to hold corporate officers liable for the corporation’s conversion of the plaintiff’s property, explaining:

A corporate officer, although acting for the benefit of a corporation, may be held liable for conversion, if he or she participated in the commission of the tort. A claim can exist for aiding and abetting conversion if the aider-abettor has actual knowledge that the person who directly converted the plaintiff’s property did not own that property. Here, the complaint adequately stated causes of action alleging conversion and aiding and abetting conversion against Krantz and Schenker.

(Internal citations omitted).

Commercial litigation often involves conversion claims. As this decision shows, if a corporate officer participates in the conversion, the officer may be held liable for aiding and abetting that conversion. 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 a discrete fund of money.

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Posted: November 8, 2018

Waiver of Right to Proceed Against Debtor Did Not Waive Right to Enforce Guaranty

On October 31, 2018, the Second Department issued a decision in Pitsy, LLC v. Rindenow, 2018 NY Slip Op. 07340, holding that a plaintiff’s waiver of claims against a debtor did not waive the plaintiff’s claims to enforce a guaranty against the debtor’s guarantor, explaining:

[T]he plaintiff demonstrated its prima facie entitlement to judgment as a matter of law by producing the subject guaranty, an affidavit and documentary evidence establishing the amount owed, and the defendant’s refusal to pay. In opposition, the defendant failed to raise a triable issue of fact with respect to a bona fide defense to the claim. In this regard, the defendant’s assertion that the plaintiff waived the underlying debt in the stipulation of settlement in the nonpayment proceeding is without merit, as the clear and unequivocal language of the stipulation recited that the plaintiff was waiving only its right to recover the unpaid rent from the defendant’s mother, and the stipulation did not address the defendant’s liability under the guaranty. Since a release of the principal debtor with the surety’s consent does not discharge the surety, the plaintiff’s waiver of the right to recover from the defendant’s mother did not affect its right to recover pursuant to the unconditional and independent guaranty. Furthermore, contrary to the defendant’s contention, no determination rendered by the District Court during the nonpayment proceeding collaterally estopped the plaintiff from seeking recovery on the guaranty.

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

We have substantial experience in helping judgment creditors collect on judgments and search for and attach assets worldwide. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client need help collecting on a judgment.

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