Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: December 20, 2014

Complaint Struck for Failure to Comply With Discovery Obligations

On December 11, 2014, the Third Department issued a decision in BDS Copy Inks, Inc. v. International Paper, 2014 NY Slip Op. 08692, affirming the striking of a plaintiff’s complaint as a sanction for failing to provide discovery.

In BDS Copy Inks, the plaintiffs sued the defendants in connection with a contract to “perform certain printing and copying services for the state.” However, the plaintiffs did not fully respond to the defendants’ discovery demands. The Third Department affirmed the trial court’s decision to sanction the plaintiffs by striking their complaint, explaining:

Where a trial court determines that a party has failed to comply with its discovery obligations, it has broad discretion to remedy the violation, and the sanction imposed is not disturbed in the absence of a clear abuse of discretion. Because the remedy of preclusion is drastic, especially where, as here, it has the effect of preventing a party from asserting its claim, it is reserved for those instances where the offending party’s lack of cooperation with disclosure was willful, deliberate, and contumacious.

In our view, Supreme Court did not abuse its discretion by striking plaintiffs’ complaint. The record confirms that from June 2010 until February 2012 the court met with counsel at least six times and issued at least two orders extending plaintiffs’ time to comply with their discovery obligations. During this time, the primary issue was the adequacy of plaintiffs’ response. Although plaintiffs now claim that defendants’ document demand was overly broad, no objection to the demand was ever made. Rather, plaintiffs maintained that responsive documents would be found if defendants searched through the 60 to 80 banker’s boxes stored in a warehouse. Plaintiffs remained steadfast with this response even after the court made it clear, following defendants’ first motion, that the court did not consider this to be reasonable compliance with plaintiffs’ discovery obligations.

We recognize that plaintiffs provided certain documents and that Maltz appeared at a deposition. This limited cooperation does not necessarily preclude a finding of willful and contumacious behavior. Plaintiffs had the burden to prove damages and defendants were entitled to review documents supporting the damages claim prior to trial. Notably, plaintiffs were able to create and provide annual sales summaries, but never provided the documents that were used to calculate the sales figures. The record confirms that despite Supreme Court’s frequent intervention and direction to produce the documents in a more organized fashion, plaintiffs continued to insist that their offer to have defendants sift through 60 to 80 boxes of miscellaneous business records was adequate. Indeed, plaintiffs refused to respond otherwise even after defendants narrowed their document request following Maltz’s deposition. Even if, as plaintiffs claim, Supreme Court overlooked Maltz’s affidavit in opposition to defendants’ motion, it is of no moment. Maltz did not offer to organize the documents. Rather, though he makes no claim that he went to the warehouse to inspect the documents held in the likely “well over 60 or could be up to, or more than, 80 boxes,” he continued to maintain that each document in each of the unspecified number of boxes was responsive to defendants’ demand.

In our view, the record demonstrates a pattern of noncompliance sufficient to support Supreme Court’s finding that plaintiffs’ conduct was willful.

(Internal quotations and citations omitted) (emphasis added). Sometimes parties who stonewall on discovery get away with it. This decision shows how badly things can go wrong when they do not.

Posted: December 19, 2014

Lease Acceleration Clause Not Per Se Unenforceable as Penalty

On December 18, 2014, the Court of Appeals issued a decision in 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Association, Inc., 2014 NY Slip Op. 08872, holding that a lease’s acceleration clause was not per se unenforceable as a penalty.

The issue before the Court of Appeals in 172 Van Duzer Realty Corp. involved “a dispute over future rental payments sought under an acceleration clause from an out-of-possession tenant after termination of the leasehold agreement.” The Court of Appeals rejected the argument that a lease provision that required a tenant that was ejected from the premises for breaching the lease nonetheless to pay all unpaid rent to the end of the lease term was not per se invalid. The court explained:

[The] defendants claim that [the plaintiff] is barred from collecting unpaid future rents pursuant to the acceleration clause because under this Court’s decision in Fifty States Management Corp v Pioneer Auto Parks, Inc. (46 NY2d 573 [1979]), a landowner cannot claim accelerated rental payments when the landlord terminates the lease and retakes possession. Defendants’ reliance on Fifty States is misplaced because the acceleration clause in that case was intended to secure the tenant’s obligation to pay rent in the context of an ongoing leasehold, and the clause set the damages for a breach of that obligation. The Court concluded that a lease term providing for accelerated rent upon a tenant’s default in rent payment, as a condition of the tenant’s continued possession of the property, is enforceable absent a claim of fraud, exploitative overreaching or unconscionable conduct. Here, defendants do not argue that they want to be put back in possession. Moreover, [the plaintiff] sought damages in accordance with the acceleration clause after terminating the lease, once defendants defaulted and breached their leasehold obligations to maintain the property and pay rent. Thus, unlike the landowner in Fifty States, [the plaintiff] is not seeking to deploy the acceleration clause in the course of a continuing leasehold for purposes of ensuring the tenant’s compliance with a material provision of the lease.

Nor can defendants challenge the validity of the acceleration clause based on this Court’s recognition in Fifty States that, where a lease provides for acceleration as a result of a breach of any of its terms, however trivial or inconsequential, such a provision is likely to be considered an unconscionable penalty and will not be enforced by a court of equity. That rule addresses, in part, the inequities of damages disproportionate to the losses incurred as a result of a tenant’s collateral or minor breach. That rule continues in force, but is inapplicable to defendants, who committed material breaches of the lease by ceasing all rental payments as of February 2008 and simultaneously abandoning the premises.

To the extent defendants suggest that a landowner should be subject to a duty to mitigate, we previously rejected this argument in Holy Properties Ltd., L.P. v Kenneth Cole. In that case the Court stated that once a tenant abandons the property prior to expiration of the lease, a landlord was within its rights under New York law to do nothing and collect the full rent due under the lease. The Court adhered to this established approach, and stated that parties in business transactions depend on the certainty of settled rules, in real property more than any other area of the law, where established precedents are not lightly to be set aside. We see no reason to reverse course in defendants’ case. In particular where, as in Holy Properties, the parties here freely agreed to bind defendants to pay rent after termination of the landlord-tenant relationship.

(Internal quotations and citations omitted). The court went on to hold that while the acceleration clause at issue was not per se unenforceable as a penalty, the trial court should have allowed the parties an opportunity to make a factual record on that question and remanded the matter for the purpose.

Posted: December 18, 2014

Court May not Review Arbitrator’s Interim Discovery Orders

On December 11, 2014, the First Department issued a decision in Kramer v. Geldwert, 2014 NY Slip Op. 08732, holding that a trial court could not review discovery rulings made by arbitrators.

In Kramer, the plaintiff sought a discovery order from a court in connection with an arbitration. The First Department affirmed the trial court’s refusal to provide the requested relief, explaining:

In exceptional circumstances, pre-hearing discovery pursuant to CPLR 3102(c) may be ordered after the demand for arbitration has been made. However, a court may not review the interim orders of an arbitrator. Thus, judicial review of procedural rulings made in this arbitration administered by the American Arbitration Association is barred.

(Internal citations omitted) (emphasis added).

Posted: December 17, 2014

Court of Appeals Grants Leave To Appeal In Case Involving Guarantor’s Liability When Amount Due Under a Note Is Modified By Agreement

On December 16, 2014, the Court of Appeals granted leave to appeal in PAF-PAR LLC v. Silberberg, 2014 NY Slip Op. 04049. In PAF-PAR LLC, the First Department, affirming the decision of New York County Commercial Division Justice Jeffrey K. Oing, held that a guarantor is not liable to guarantee the full amount of a note when the parties to the note modified the note to provide for a lower amount and that amount was paid. On June 8, 2014, we blogged about the First Department decision here.

Posted: December 16, 2014

Notice of Claim Sent To Insured’s Broker Does Not Constitute Notice To Insurance Carrier

On November 24, 2014, the Court of Appeals issued a decision in Strauss Painting, Inc. v. Mt. Hawley Ins. Co., 2014 NY Slip Op. 08214, ruling that “a policyholder’s timely notice to a broker does not constitute the notice contemplated by [an] insurance policy.”

Strauss Painting arose from an injury suffered by an employee of a subcontractor hired by Strauss (a general contractor) to perform work at the Metropolitan Opera House. Strauss’ liability carrier denied coverage based on late notice. In affirming the lower courts’ decision that the notice to Strauss’ insurance carrier was untimely as a matter of law, the Court of Appeals ruled that, in general, an insured does not satisfy an insurance policy’s notice requirement by notifying its insurance broker, “since a broker is normally the agent of the insured,” not the carrier. The Court distinguished its decision in Mighty Midgets v. Centennial Ins. Co., 47 N.Y.2d 12 (1979), which concluded, in a unique context, that an insured satisfied the notice requirement by giving notice to its broker. The Court explained that Mighty Midgets was driven by “unusual and extenuating facts,” including the insured’s lack of sophistication, and more importantly, the unusually close relationship between the broker and the insurance carrier, that did not apply in this case:

The record here does not support the proposition that the insurer and broker had a relationship sufficiently close to suggest that service to the broker was effectively service to the insurer. By contrast, in a situation more akin Mighty Midgets it might be possible for even a relatively sophisticated representative of an insured to have a good faith, reasonable belief that notice to the broker is sufficient if the insurer’s own actions hold the broker out to be its agent for the purpose of giving notice. In such a case, if the effect of the insurer’s representations is to lull the insured into a false belief that notice had been provided through the agent, the insurer should not be able to raise the insured’s failure to provide an earlier notice as a defense to coverage.

In another decision issued on November 24, Sierra v. 4401 Sunset Park, LLC, 2014 NY Slip Op 08216 (about which we previously have blogged), the Court of Appeals held that an insurance carrier did not satisfy its obligation to notify the insured of a disclaimer of coverage by sending notice to another insurance carrier for the insured, rather than the insured itself. Strauss Painting shows that the strict application of the notice obligations applies to insurance companies and insureds alike.

Posted: December 15, 2014

Party Sanctioned for Harassing Opponent

On December 8, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Morningside Translations, Inc. v. Tsaidi, 2014 NY Slip Op. 51710(U), sanctioning a plaintiff and one of its officers for harassing defendants.

In Morningside Translations, the plaintiff sued the defendants for allegedly explointing the plaintiff’s “confidential and proprietary information, improper use of resources to develop Defendants’ own competitive venture, and breach of duties of loyalty to the Plaintiffs and the express terms of employment agreements.” Eisen, an officer and shareholder of the plaintiff, repeatedly sent “inappropriate emails” to certain defendants and their counsel. The court sanctioned Eisen and the plaintiff for this conduct, explaining:

This Court has broad inherent equitable powers to fashion an appropriate remedy when equity so requires. Once equity is invoked, the court’s power is as broad as equity and justice require.

The nature of Eisen’s communications is disturbing and threatening. Eisen frequently contacted the Individual Defendants and Defendants’ counsel with inappropriate emails during the litigation despite the defendants’ counsel asking Eisen’s attorney to direct Eisen to cease his inappropriate communication. The communications became more frequent in the middle of September 2014. Eisen contacted not only the Individual Defendants and Defendants’ counsel but also the Individual Defendants’ family members directly. Moreover, Eisen called Defendants’ counsel’s home and spoke with his wife.

All the facts indicate that Eisen kept inappropriate communications with the Individual Defendants, the Individual Defendants’ family members and Defendants’ counsel even when Eisen was asked to cease the communications. It is foreseeable that Eisen would keep contacting the Individual Defendants, the Individual Defendants’ family members and Defendants’ counsel without an injunction by the Court under the Court’s broad equitable powers.

This Court may exercise discretion to impose costs and sanctions on an errant party under certain circumstances. The relief may include, inter alia, sanctions against the offending party or an amount to be determined by this Court, which would be payable to the Client Security Fund. Whether the court exercises discretion depends on whether Eisen’s conduct was frivolous which is defined to include conduct undertaken primarily to harass or maliciously injure another.

Eisen’s campaign of emails, telephone calls, and texts against the Individual Defendants, their family members and counsel was undertaken to harass since they were numerous in number, sent frequently, inappropriate, unsolicited, and sent after consistent warnings from defense counsel not to do so. Eisen should be compelled to pay the costs and attorney’s fees incurred by Defendants to make the instant motion.

(Internal quotations and citations omitted). In addition to ordering Eisen to pay the costs and fees associated with making the motion, the court enjoined him “from communicating by mechanical or electronic means, anonymously or otherwise, other than through his counsel, with the Individual Defendants or their immediate family members, significant others, in-laws, cousins, or counsel, from appearing at the homes or business of the Individual Defendants or their immediate family members, significant others, in-laws, cousins, or counsel, absent Defendants’ consent.”

Sometimes, clients are their own worst enemies.

Posted: December 14, 2014

Where Contract Calls for Continuing Performance, Breach of Contract Claim Accrues Continuously With Each Failure to Perform

On December 5, 2014, Justice Platkin of the Albany County Commercial Division issued a decision in NYAHSA Services, Inc. Self Insurance Trust v. People Care Inc., 2014 NY Slip Op. 51711(U), applying the statute of limitations for breach of a contract requiring repeated performance.

In NYAHSA Services, the plaintiff moved to dismiss counterclaims for, among other things, breach of contract, on statute of limitations grounds. The court explained in granting the motion only in part:

The statute of limitations for a breach of contract claim is six years. Under New York law, a breach of contract cause of action accrues at the time of the breach. The date of the breach is controlling even where damages from the breach are not sustained until later and even where the injured party may be ignorant of the existence of the wrong or injury.

. . .

Where, as here, a contract provides for continuing performance over a period of time, each breach may begin the running of the statute anew such that accrual occurs continuously and plaintiffs may assert claims for damages occurring up to six years prior to filing of the suit. However, so much of the causes of action asserted by plaintiff as accrued more than six years prior to the commencement of the instant action must be dismissed as time-barred.

Applying the foregoing principles, the Court concludes that [the defendant’s] claim for breach of contract was not time-barred when the [plaintiff] commenced this action on July 15, 2010 and, therefore, it may pursue this counterclaim for breaches of contract that occurred on and after July 15, 2004, six years prior to the commencement of Action No. 1. However, the counterclaim is time-barred insofar as it seeks recovery of damages flowing from any breaches of contract that occurred prior to July 15, 2004.

(Internal quotations and citations omitted).

Posted: December 13, 2014

First Department Rules that GBL 239-c, Relating to Appraisals, Must be Narrowly Construed

On December 9, 2014, the First Department issued a decision in TOV Manufacturing, Inc. v. Jaco Import Corp., 2014 NY Slip Op. 08566, holding that appraisals of loose gemstones are not covered by GBL 239-c.

In TOV Manufacturing, the trial court refused to dismiss a third party claim for violation of 239-c based on an allegedly misleading appraisal of an emerald. The First Department reversed, dismissing the claim, explaining:

[The defendant’s] General Business Law claim, alleging that [the third-party defendant’s] appraisal report for an emerald was misleading, deceptive or fraudulent, fails as a matter of law. Section 239-c of the General Business Law, upon which [the third-party defendant] relies and which provides that a person or entity may bring a civil action for damages arising from a misleading, deceptive or fraudulent appraisal, does not apply to appraisals of emeralds or other loose precious stones. Indeed, section 239 defines appraiser, as used in section 239-c, as a person or entity that purports to ascertain and state the true value of property, and property is defined as, in pertinent part, jewelry, watches, and objects made from or containing precious stones, including emeralds. Accordingly, section 239-c applies to jewelry, watches or objects made from precious stones, but not to loose stones such as emeralds. Legislative enactments in derogation of common law, and especially those creating liability where none previously existed, must be strictly construed.

(Internal quotations and citations omitted).

Posted: December 12, 2014

Foreign Communications Subject to New York Privilege Rules When Discovery Order Provides that Discovery Will be Conducted Under the CPLR

On December 4, 2014, the First Department issued a decision in Sebastian Holdings, Inc. v. Deutsche Bank AG, 2014 NY Slip Op. 08472, holding that where the parties agree to conduct discovery under the CPLR, US privilege rules apply.

In Sebastian Holdings, “the motion court, on consent of the parties, entered two orders” relating to the taking of discovery under the Hague Convention. One appointed “a Swiss attorney” to transmit documents to the parties’ counsel “in accordance with the New York Civil Practice Law and Rules.” The other required the defendant to “prepare a privilege log ‘in accordance with the standards of the New York Civil Practice Law and Rules for determination by the Court upon application as to such privilege designations and redactions.'” When a dispute arose over which law to apply to the privilege claims, the trial court ruled that New York law applied. The First Department agreed, explaining:

We agree with the motion court that the stipulated orders, directing that discovery is to proceed under the CPLR, are dispositive. Indeed, the Request specifically states that Deutsche Bank would prepare a privilege log “in accordance with the standards of the New York Civil Practice Law and Rules for determination by the Court upon application as to such privilege designations and redactions.” We reject plaintiff’s assertion that this language creates a reservation of rights on privilege challenges; on the contrary, the language merely allows plaintiff to challenge Deutsche Bank’s privilege designation and redactions. Accordingly, the motion court properly concluded that privilege determinations are governed by New York law, as the parties stipulated.

Posted: December 11, 2014

Sophisticated Party Fails to State Fraud Claim When it Cannot Show Due Diligence

On December 4, 2014, the First Department issued a decision in MAFG Art Fund, LLC v. Gagosian, 2014 NY Slip Op. 08499, affirming the dismissal of a fraud claim.

In MAFG Art Fund, the First Department affirmed the dismissal of a claim for fraud in connection with the sale of artwork, explaining:

The amended complaint alleges that defendants misrepresented the value of certain works of art and that the values were supported by market data, when they were not. As to the latter, the complaint fails to state a cause of action for fraud because plaintiffs did not allege justifiable reliance. As a matter of law, these sophisticated plaintiffs cannot demonstrate reasonable reliance because they conducted no due diligence; for example, they did not ask defendants, “Show us your market data.” As to the claim that defendants misrepresented the value of certain art works, statements about the value of art constitute nonactionable opinion that provides no basis for a fraud claim.

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