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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: January 17, 2015

Transcripts and Videos of Arguments in the Court of Appeals for the Week of January 5, 2015, Now Available

On December 30, 2014, we noted two cases of interest from the oral arguments for the week of January 5, 2015:

  • No. 3: Elmaliach v. Bank of China Limited (considering whether plaintiffs’ claims against a Chinese bank for transferring funds used to finance terrorist attacks in Israel are governed by Israeli law, under which a bank can be liable for torts committed by its customers against non-customers, or New York or Chinese law, which recognizes no such liability). See the transcript and the video.
  • No. 5: BDC Finance L.L.C. v. Barclays Bank PLC (interpreting a Delivery of Collateral provision in contracts governing a derivatives transaction). See the transcript and the video.
Posted: January 16, 2015

Issues of Fact As To Whether Foreign Unlicensed Corporation Was Doing Business In New York Preclude Dismissal Under BCL § 1312

On January 7, 2015, Justice Kornreich of the New York County Commercial Division issued a decision in Skycom SRL v. F.A. & Partners, Inc., 2015 NY Slip Op. 30007(U), holding that issues of fact as to whether the plaintiff, a foreign unlicensed corporation, was “doing business in New York” precluded dismissal of the corporation’s claims under to Business Corporation Law Section 1312.

BCL § 1312 provides that an unlicensed foreign corporation doing business in New York “shall not maintain any action or special proceeding in this state unless and until such corporation has been authorized.” The Court explained the application of this rule as follows:

The purpose of the section is not to enable defendants to avoid contractual obligations but to regulate such foreign corporations which are in fact conducting business within the state.

However, the power of a state to regulate foreign corporations is limited. A state cannot interfere with a foreign corporation’s right to engage in purely interstate commerce, or in activities incidental to commerce between states. Therefore, a corporation of one state may enter into another, without obtaining a license of the latter, for all the legitimate purposes of such commerce; and any statute of the latter state which obstructs or lays a burden on the exercise of this privilege is void under the commerce clause.

As a result, there is a presumption in an action brought by a foreign corporation that it is doing business in the state of incorporation, rather than in New York. Hence, the party invoking BCL § 1312 bears the burden of proving that the corporation’s business activities in New York were not just casual or occasional but rather so systemic and regular as to manifest continuity of activity in the jurisdiction.

There is no precise measure of the nature or extent of activities necessary to find that a foreign corporation is “doing business” in New York; courts consider the facts of each case. To qualify as “doing business”, New York courts weigh several factors including: (1) the number of transactions the corporation entered into; (2) the services !he corporation provided; and (3) whether the corporation has an office, bank account, telephone number, employees, or property or advertised in New York. Where a company’s activities within New York are merely incidental to its business in interstate and international commerce, § 1312 is not applicable.

(Citations omitted). Justice Kornreich found that the evidence presented was not sufficient to determine whether the plaintiff’s New York contacts “were systematic and regular enough to warrant compliance with [BCL § 1312],” and a “question of fact” remained on this issue. Defendant’s motion to dismiss was therefore denied.

BCL § 1312 can be a stumbling block in the path of a foreign corporation seeking to file a lawsuit in New York. However, as Justice Kornreich pointed out, even if the foreign corporation is found to be “doing business in New York in violation of BCL § 1312, it could register with the state and pay all fees, taxes, penalties and interest charges during the pendency of the action, thereby avoiding dismissal.”

Posted: January 15, 2015

Recent Amendments to the Commercial Division Rules

Recently, the Chief Administrative Judge has adopted several changes to the Commercial Division Rules.

On December 23, 2014, the Chief Administrative Judge signed Administrative Order 336a/14, which effected rule changes relating to depositions effective April 1, 2015. The change added a new Rule 11-d, which provides:

Rule 11-d. Limitations on Depositions.
(a) Unless otherwise stipulated to by the parties or ordered by the court:
(1) the number of depositions taken by plaintiffs, or by defendants, or by third party defendants, shall be limited to 10; and
(2) depositions shall be limited to 7 hours per deponent.
(b) Notwithstanding subsection (a)(l) of this Rule, the propriety of and timing for depositions of non-parties shall be subject to any restrictions imposed by applicable law.
(c) For the purposes of subsection (a)(1) of this Rule. the deposition of an entity pursuant to CPLR 3106(d) shall be treated as a single deposition even though more than one person may be designated to testify on the entity’s behalf.
(d) For the purposes of this Rule, each deposition of an officer, director, principal or employee of an entity who is also a fact witness, as opposed to an entity representative pursuant to CPLR 3106(d), shall constitute a separate deposition.
(e) For good cause shown, the court may alter the limits on the number of depositions or the duration of an examination.
(f) Nothing in this Rule shall be construed to alter the right of any party to seek any relief that it deems appropriate under the CPLR or other applicable law.

Conforming changes were made to Rule 8, which was amended to add to the list of topics covered in a preliminary conference “(xii) the need to vary the presumptive number or duration of depositions set forth in Rule 11-d.” Similarly, Rule 11 was amended to provide, regarding the preliminary conference order: “Additionally, the court should consider the appropriateness of altering prospectively the presumptive limitations on depositions set forth in Rule 11-d.”

On January 6, 2015, the Chief Administrative Judge signed Administrative Order 05/15, which amended paragraph (g) of the preamble to the Commercial Division Rules effective April 1, 2015. The added provision provides:

Preamble. The Commercial Division understands that the businesses, individuals and attorneys who use this Court have expressed their frustration with adversaries who engage in dilatory tactics, fail to appear for hearings or depositions, unduly delay in producing relevant documents, or otherwise cause the other parties in a case to incur unnecessary costs. The Commercial Division will not tolerate such practices. The Commercial Division is mindful of the need to conserve client resources, promote efficient resolution of matters, and increase respect for the integrity of the judicial process. Litigants and counsel who appear in this Court are directed to review the Rules regarding sanctions, including the provisions in Rule 12 regarding failure to appear at a conference, Rule 13(a) regarding adherence to discovery schedules, and Rule 24(d) regarding the need for counsel to be fully familiar with the case when making appearances. Sanctions are also available in this Court under Rule 3126 of the Civil Practice Law and Rules and Part 130 of the Rules of the Chief Administrator of the Courts. The judges in the Commercial Division will impose appropriate sanctions and other remedies and orders as is warranted by the circumstances. Use of these enforcement mechanisms enables the Commercial Division to function efficiently and effectively. and with less wasted time and expense for the Court, parties and counsel. Nothing herein is intended to expand or alter the scope and/or remedies available under the above-cited sanction rules.

On January 9, 2015, the Chief Administrative Judge signed Administrative Order 33/15, which amended Rule 14, Discovery Disputes, effective April 1, 2015. The amended rule provides:

If the court’s Part Rules address discovery disputes, those Part Rules will govern discovery disputes in a pending case. If the court’s Part Rules are silent with respect to discovery disputes, the following Rule will apply. Discovery disputes are preferred to be resolved through court conference as opposed to motion practice. Counsel must consult with one another in a good faith effort to resolve all disputes about disclosure. See Section 202.7. If counsel are unable to resolve any disclosure dispute in this fashion, counsel for the moving party shall submit a letter to the court not exceeding three single-spaced pages outlining the nature of the dispute and requesting a telephone conference. Such a letter must include a representation that the party has conferred with opposing counsel in a good faith effort to resolve the issues raised in the letter or shall indicate good cause why no such consultation occurred. Not later than four business days after receiving such a letter, any affected opposing party or non-party shall submit a responsive letter not exceeding three single-spaced pages. After the submission of letters, the court will schedule a telephone or in-court conference with counsel. The court or the court’s law clerks will attempt to address the matter through a telephone conference where possible. The failure of counsel to comply with this rule may result in a motion being held in abeyance until the court has an opportunity to conference the matter. If the parties need to make a record, they will still have the opportunity to submit a formal motion.

Posted: January 14, 2015

Prospective Client Who Consults Attorney who Ultimately Represents Adverse Party Must Show Harm to Disqualify Counsel

On January 8, 2015, the First Department issued a decision in Mayers v. Stone Castle Partners, LLC, 2015 NY Slip Op. 00295, reversing an order disqualify litigation counsel.

In Mayers, Matthew R. Mayers (a defendant in one action and the plaintiff in another), moved to disqualify Quinn Emanuel Urquhart & Sullivan, LLP as counsel for his opponent in those actions, Stone Castle Partners, LLC, because before Stone Castle Quinn Emanuel, Mayers and a Quinn Emanuel lawyer spoke about Quinn Emanuel representing Mayers in a related lawsuit.

The First Department reversed the disqualification, explaining:

A movant seeking disqualification of an opponent’s counsel bears a heavy burden. A party has a right to be represented by counsel of its choice, and any restrictions on that right must be carefully scrutinized. This right is to be balanced against a potential client’s right to have confidential disclosures made to a prospective attorney subject to the protections afforded by an attorney’s fiduciary obligation to keep confidential information secret. Courts should also examine whether a motion to disqualify, made during ongoing litigation, is made for tactical purposes, such as to delay litigation and deprive an opponent of quality representation. The decision of whether to grant a motion to disqualify rests in the discretion of the motion court.

Issues relating to the prospective client relationship based on events that occurred after April 2009 are governed by Rule 1.18 of the Rules of Professional Conduct (22 NYCRR 1200.0), rather than the repealed DR 5-108 (22 NYCRR 1200.27). Cases from this Court addressing conduct that occurred prior to the April 2009 enactment of the new rules are not controlling here.

The former Code of Professional Responsibility did not have a specific rule that governed disclosures during a prospective client consultation. Rule 1.18 of the Rules of Professional Conduct fills that void. It provides:

(a) A person who discusses with a lawyer the possibility of forming a client-lawyer relationship with respect to a matter is a prospective client.

(b) Even when no client-lawyer relationship ensues, a lawyer who has had discussions with a prospective client shall not use or reveal information learned in the consultation, except as Rule 1.9 would permit with respect to information of a former client.

(c) A lawyer subject to paragraph (b) shall not represent a client with interests materially adverse to those of a prospective client in the same or substantially related matter if the lawyer received information from the prospective client that could be significantly harmful to that person in the matter, except as provided in paragraph (d). If a lawyer is disqualified from representation under this paragraph, no lawyer in a firm with which that lawyer is associated may knowingly undertake or continue representation in such a matter, except as provided in paragraph (d)” (emphasis added).

Thus, where a prospective client consults an attorney who ultimately represents a party adverse to the prospective client in matters that are substantially related to the consultation, the prospective client is entitled to obtain the attorney’s disqualification only if it is shown that the information related in the consultation could be significantly harmful to him or her in the same or substantially related matter.

. . . [D]isqualification is not warranted because the conveyed information did not have the potential to be significantly harmful to Mayers in the matter from which he seeks to disqualify counsel.

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

Posted: January 13, 2015

Quick Review of CPLR 207: Tolling of the Limitations Period for Out-of-State Defendants

CPLR 207 governs the calculation of time for statute of limitations purposes when a defendant cannot be served in New York. It provides:

If, when a cause of action accrues against a person, he is without the state, the time within which the action must be commenced shall be computed from the time he comes into or returns to the state. If, after a cause of action has accrued against a person, that person departs from the state and remains continuously absent therefrom for four months or more, or that person resides within the state under a false name which is unknown to the person entitled to commence the action, the time of his absence or residence within the state under such a false name is not a part of the time within which the action must be commenced. If an action is commenced against a person described above, the time within which service must be made on such person in accordance with subdivisions (a) and (b) of section three hundred six-b of this chapter shall be computed in accordance with this section. This section does not apply: 1. while there is in force a designation, voluntary or involuntary, made pursuant to law, of a person to whom a summons may be delivered within the state with the same effect as if served personally within the state; or 2. while a foreign corporation has one or more officers or other persons in the state on whom a summons against such corporation may be served; or 3. while jurisdiction over the person of the defendant can be obtained without personal delivery of the summons to the defendant within the state.

As explained by the late Professor Siegel, CPLR 207 is of limited application.

If the defendant is subject to the jurisdiction of the New York courts without being personally served in the state, the toll for absence does not apply. So, when a basis of jurisdiction exists, such as under CPLR 301 or 302, on which service outside New York is authorized by CPLR 313, the toll of CPLR 207 does not apply, and this means that CPLR 207 and its absence toll does not apply in most cases. The advent of longarm jurisdiction, which is what CPLR 302 supplies, has reduced the utility of CPLR 207. . . .

It has been held that as long as service beyond the state is permissible, the absence toll is inapplicable even if service is difficult and the plaintiff has to move for an order for service as a last resort. If the defendant is regularly in New York, moreover, so that a diligent process server could get at him—as where the defendant was a New Jersey resident but worked in New York and was here daily—the purpose of this absence provision is not at hand and its toll does not apply.

Siegel, N.Y. Prac. § 53 (5th ed.) (emphasis added). Still, in a case where a defendant has been dismissed for lack of personal jurisdiction under CPLR 301 or 302, it stands to reason that the statute of limitations likely is tolled, meaning that if the defendant later takes acts subjecting it to jurisdiction in New York, a plaintiff should then be able to assert its claim even though the limitations period is (barring application of Section 207) long past.

Posted: January 12, 2015

Expert Opinion Without Basis in Evidence Cannot Serve as Basis for Damage Award

On January 8, 2015, the Third Department issued a decision in Latham Land I LLC v. TGI Friday’s Inc., 2015 NY Slip Op. 00264, modifying an award of damages.

In Latham Land, the Third Department examined whether a damages award had a proper basis in the evidence. It held that it did not, explaining:

[W]e . . . agree with [plaintiff] that Supreme Court’s award of damages cannot stand. . . . Setting the appropriate capitalization rate is a factual issue and, as such, Supreme Court’s findings in that regard are generally entitled to deference. Plaintiff asserts that such deference is not warranted here, inasmuch as [the defendant’s expert] testified in a conclusory fashion, relying solely on his background and experience, and offered no factual justification for his opinion.

We agree. [The defendant’s expert] premised his testimony upon the incorrect assumption that the agreement between the parties was not valid and, as such, conducted a comparable market analysis using sales of undeveloped land. He agreed with plaintiff’s appraiser, Bruce Bauer, that an income capitalization method would be the appropriate means of valuation if the agreement were valid and that comparable properties to be used in that analysis would not be undeveloped parcels, but rather those sold subject to triple net leases. [The defendant’s expert] did not agree with the capitalization rate that Bauer derived from his analysis of such sales, but failed to explain how he arrived at a different capitalization rate. Indeed, [the defendant’s expert] testified that he had done no research to locate relevant comparable sales, gave no details as to how he had derived an appropriate capitalization rate, and admitted that he would want to look at the issue again if the agreement between the parties was deemed to be valid. Rosenblatt’s opinion, in short, was not supported by facts in the record and is entitled to little weight. The competing opinion of Bauer, who found a 6.5% capitalization rate to be appropriate, was not above question. It was, however, the only detailed and factually supported opinion offered, and Supreme Court erred in failing to credit it. Thus, plaintiff is entitled to a damages award calculated using a 6.5% capitalization rate, which amounts to $1,528,886.

(Internal quotations and citations omitted). This decision illustrates the importance of a properly supported expert opinion.

Posted: January 11, 2015

Another Commercial Division Rejection of a Class Action Settlement

On January 7, 2015, Justice Kornreich of the New York County Commercial Division issued a decision in City Trading Fund v. Nye, 2015 NY Slip Op. 50008(U), refusing to approve a class action settlement.

In a decision reminiscent of Justice Schweitzer’s recent decision in Gordon v. Verizon Communications, Inc., 2014 NY Slip Op. 33367(U), the City Trading Fund court refused to approve the settlement of a class action challenging the disclosures made in connection with a merger.

The court’s lengthy decision should be read in its entirety. It thoughtfully (if forcefully) addresses systematic problems with merger-related class action litigation. We quote here only the decision’s conclusion:

In merger litigation — unlike other class action litigation (e.g., securities fraud) where, if the case is frivolous, the court can dispose of it on a motion to dismiss — the time crunch incentivizes a payout to plaintiffs to settle all cases, even frivolous ones. Thus, extra scrutiny is warranted when it appears that the incentives of the purported class representatives diverge from those of the shareholders. Such a divergence of incentives may exist, as is the case here, where it appears that the original plaintiff, CTF — essentially a fictitious entity — seeks to obfuscate what it really is. When a proposed class representative appears to be a fiction, there is the concern that it has no accountability, either to the class or to the court. As noted earlier, such entities have a troubling history of litigating deceptively. Additionally, when a plaintiff and its counsel have identical incentives, that is, litigation to obtain attorneys’ fees, such plaintiffs are improper class representatives because it is the function of the class action representative to act as a check on the attorneys in order to provide an additional assurance that in any settlement or other disposition the interests of the members of the class will take precedence over those of the attorneys.

Simply put, the secretive nature in which plaintiffs and their counsel choose to litigate, both here and in Delaware, along with the frivolity of their claims, is a strong indication that they are ill suited to represent the class. Given the inability of plaintiffs to identify any actual material omission in the definitive proxy, perhaps the only reasonable inference is that the defendant directors have, to their credit, lived up to the very aspirational fiduciary duties merger class actions are supposed to incentivize. It, therefore, is somewhat unfortunate that they still find themselves as defendants in a lawsuit. If all mergers will spawn disclosure lawsuits, regardless of the sufficiency of the actual disclosures, a board may well be incentivized not to care so much if the initial disclosures are adequate. This would be unfortunate. As some commentators have observed, if directors worry that plaintiffs will not settle unless they can proffer some additional, material disclosure, an even more perverse incentive may exist to intentionally withhold some material disclosure so the directors have a bone to throw plaintiffs’ counsel when it comes time to settle.

That being said, the incentives surrounding mergers can never be fully perfected, and mergers taxes may simply be a reality, an inevitable cost of doing business. However, even if that is the case, this court sees no reason to countenance frivolous litigation.

(Internal quotations and citations omitted).

Posted: January 10, 2015

Exercise of Right of First Refusal Must Be Unqualified to be Binding

On December 19, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Bond & Broadway, LLC v. Funding Exchange, Inc., 2014 NY Slip Op. 33359(U), examining the effectiveness of a qualified exercise of a right of first refusal.

In Bond & Broadway, LLC, the plaintiff brought an action seeking specific performance of a contract for sale of real property and one of the defendants, Froggy Associates, LLC (Froggy), argued that it had the right to buy the property under a contractual right of first refusal. Both the plaintiff and Froggy moved for summary judgment. The court denied both motions, explaining:

The only issue here is whether Froggy timely exercised its right of first refusal or, by its failure to do so, forfeited its rights in the Unit. The right of first refusal, as described in § 7.3 of the By-laws grants certain of the other unit owners of the building an option to step into the shoes of a prospective buyer and, to substitute the buyer: “The sending of the notice [of the Sale or Lease Agreement] . . . shall constitute an offer by the Offeree Unit Owner to sell its Unit, together with its Appurtenant Interests . . . to each Contiguous Owner . . . upon the same terms and conditions as are contained in such Sale or Lease Agreement . . . .”.

The holder of the right of first refusal is holder of an option to purchase the real property if and when the owner decides to sell to a third party at an agreed price.

Before a Unit owner fully executes a sale agreement to convey its property to a third party, notice must be given to the other owners in the condominium. As described in § 7.3(B) of the By-laws, the sending of the notice shall constitute an offer by the Offeree Unit Owner to sell its Unit, together with its appurtenant interest to each contiguous Owner and the Condominium Board upon the same terms and conditions as are contained in such Sale or Lease Agreement. Therefore, the election to purchase the property by one of the holders of the right of first refusal would constitute an acceptance of the offer (created by sending the notice).

It is a fundamental principle of contract law that a valid acceptance must comply with the terms of the offer and, if qualified with conditions it is equivalent to a rejection and
counteroffer
. In exercising its right of first refusal, the option holder steps into the shoes of the prospective buyer and has an obligation to strictly comply with the contract provisions.

The holder of an option, by placing a requirement that a building be vacant at the time of transfer, as a condition to his exercise of the option to purchase the building has accomplished
nothing more than making a counteroffer, which the current owner is free to accept or reject. In this case, the Contract between B&B and FE contained certain specific provisions. By exercising its right of first refusal, Froggy stepped into the shoes of B&B. As a consequence, it takes the Contract as it is and has to comply with all its terms.

(Internal citations and quotations omitted) (emphasis added). Because there was evidence that Froggy later made an unqualified offer to purchase, the court held that there were factual issues regarding whether it could exercise the right of first refusal.

Posted: January 9, 2015

Court of Appeals Arguments of Interest for the Week of January 12, 2015

Arguments the week of January 12, 2015 in the Court of Appeals that may be of interest to commercial litigators.

  • No. 14: Conason v. Megan Holding, LLC (to be argued Tuesday, January 13, 2015) (considering the reach of the doctrine of equitable tolling). The First Department decision is available here.
  • No. 19: Front, Inc. v. Khalil (to be argued Wednesday, January 14, 2015) (considering whether the absolute litigation privilege attaches to statements made in the context of prospective litigation). The First Department decision is available here.
Posted: January 8, 2015

At-Will Employee Can Assert Breach of Contract Claim for Wages Owed

On December 31, 2014, the Second Department issued a decision in Webb v. Greater N.Y. Auto. Dealers Assn., Inc., 2014 NY Slip Op. 09121, holding that an at-will employee could bring a breach of contract claim relating to her employment when the claim was for wages already earned.

In Webb, the Second Department reversed the trial court’s dismissal of the plaintiff’s breach of contract claim on the ground that as an at-will employee, she could not assert a claim for breach of an employment contract, explaining:

[T]he plaintiff sufficiently pleaded a cause of action sounding in breach of contract by alleging all of the essential elements of such a claim: the existence of a contract, the plaintiff’s performance pursuant to that contract, the defendant’s breach of its contractual obligations, and damages resulting from that breach. Although the plaintiff is presumed to be an at-will employee who may not maintain a breach of contract cause of action based on an alleged wrongful termination of employment, the plaintiff’s breach of contract cause of action is not based on her alleged constructive discharge from employment but, rather, seeks to recover unpaid, agreed-to compensation for services actually rendered. Her at-will status does not bar such a claim.

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