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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: November 4, 2014

Second Circuit Asks Court of Appeals to Clarify Power of New York City to Regulate Law Firms Engaged in Debt Collection

On October 29, 2014, in Eric M. Berman, P.C. v. City of New York, 13-CV‐598, the Second Circuit certified two questions to the Court of Appeals regarding the power of the City of New York to regulate law firms engaged in debt collection activities.

In Eric M. Berman, P.C., the plaintiff law firms, which “attempt to collect debts,” brought an action “seeking, among other remedies, a declaratory judgment that Local Law 15,” which regulates law firms that engage in debt collection, “violates Article IX of the New York Constitution, the New York Municipal Home Rule Law, the New York Judiciary Law, and the New York City Charter.” The EDNY granted the plaintiffs partial summary judgment, holding that “Local Law 15 conflicted with the State’s authority to regulate attorneys,” and “violated a provision of the New York City Charter by purporting to provide the City with the effective authority to grant or withhold licenses to practice law, which is a function reserved to the State.”

The Second Circuit reserved decision and certified the following questions to the Court of Appeals:

Does Local Law 15, insofar as it regulates attorney conduct, constitute an unlawful encroachment on the State’s authority to regulate attorneys, and is there a conflict between Local Law 15 and Sections 53 and 90 of the New York Judiciary Law?

If Local Law 15’s regulation of attorney conduct is not preempted, does Local Law 15, as applied to attorneys, violate Section 2203(c) of the New York City Charter?

Posted: November 4, 2014

Transcripts and Videos of Arguments in the Court of Appeals for the Week of October 20, 2014, Now Available

On October 20, 2014, we noted three cases of interest from the oral arguments for the week of October 20, 2014:

  • No. 197Kimso Apartments, LLC v. Gandhi (considering whether Supreme Court improvidently exercised its discretion in permitting the defendant to “conform the pleadings to the proof” by amending his answer to assert an “intrinsic,” but formally unasserted, counterclaim). See the transcript and the video.
  • No. 216: Sierra v. 4401 Sunset Park, LLC (considering whether insurance company complied with disclaimer requirements of Section 3420(d)(2) of the Insurance Law by providing notice of disclaimer of insurance to insured’s primary insurer, but not directly to the insured). See the transcript and the video.
  • No. 203: Strauss Painting, Inc. v. Mt. Hawley Insurance Company (considering whether an insured satisfied the policy’s notice requirement by notifying its broker of the claim with the expectation that the broker would notify the carrier). See the transcript and the video.
Posted: November 2, 2014

Court Denies Motion to Dismiss Based on Champerty

On October 28, 2014, Justice Friedman of the New York County Commercial Division issued a decision in IKB International S.A. in Liquidation v. Morgan Stanley, 2014 NY Slip Op. 51548(U), refusing to dismiss an action for lack of standing based on champerty.

In IKB International, the plaintiffs sued the defendants in connection with the defendants’ sale of residential mortgage backed securities. The court granted in part and denied in part the defendants’ motion to dismiss. This post looks at the court’s discussion of the defendants’ argument that the plaintiffs lacked standing.

The allegations of the complaint regarding the assignment of plaintiffs’ fraud claims are as follows: IKB SA purchased the 25 certificates at issue between June 2005 and April 2007, 22 directly from Morgan Stanley at the time of each securitization, and the remaining three certificates on the secondary market. On November 20, 2008, IKB SA sold 23 of the certificates to plaintiff IKB Deutsche Industriebank, AG (IKB AG), its parent company, and realized the losses at issue in this litigation. On December 4, 2008, both IKB AG and IKB SA expressly assigned all claims arising from the purchase of the Certificates, including claims against the issuers, underwriters and sellers of the Certificates, to Rio Debt Holdings (Ireland) Limited (Rio), concurrently with IKB AG’s sale of these certificates to Rio. Rio re-assigned all such claims to IKB AG, without transferring the related certificates, on May 9, 2012.

In moving to dismiss for lack of standing, defendants allege not that the complaint fails to plead an assignment of fraud claims from Rio to IKB AG but, rather, that the assignment is void as champertous. Morgan Stanley contends that the intent and purpose of the assignment of the claims, without the certificates themselves, was to bring suit, and that this purpose may be inferred from the timing of the assignment, which took place on May 9, 2012, after Morgan Stanley, IKB AG, IKB SA, and Rio entered into a tolling agreement on November 16, 2011, and seven days before the tolling agreement expired on May 16, 2012.

Section 489 (1) of the Judiciary Law provides that no corporation shall take an assignment of any claim with the intent and for the purpose of bringing an action or proceeding thereon. This statute is a codification of the champerty doctrine which developed to prevent or curtail the commercialization of or trading in litigation. As the Court of Appeals explained, the prohibition of champerty has always been limited in scope and largely directed toward preventing attorneys from filing suit merely as a vehicle for obtaining costs, although the prohibition has been extended to claims against non-attorneys. Moreover, it does not apply when the purpose of the assignment is the collection of a legitimate claim but, rather, bars the purchase of claims with the intent and for the purpose of bringing an action where such claims would not be prosecuted if not stirred up.

As the Court of Appeals also explained, in order for an assignment of rights to a claim to be champertous, the purchaser’s or assignee’s intent to sue on that claim must at least have been the primary purpose for, if not the sole motivation behind, entering into the transaction. The Court emphasized that the question of intent and purpose of the purchaser or assignee of a claim is usually a factual one to be decided by the trier of facts. Thus, consistent with the limited scope of the champerty doctrine, the Court has been hesitant to find that an action is champertous as a matter of law.

Here, the acquisition of the claims shortly before the expiration of the tolling agreement does not, without more, demonstrate that the claims were acquired for the primary purpose of commencing litigation. The acquisition of the claims without the certificates presents a more difficult question. Morgan Stanley has not, however, shown on this record that IKB AG’s primary or sole purpose was not to enforce a legitimate claim, or that the claim was not acquired as part of a larger transaction or for leverage in other disputes between the parties. Given that the question of intent and purpose of the purchaser or assignee of a claim is a factual one, the record must be factually developed as to IKB AG’s intent. This intent cannot be determined without evidence as to specific terms of the assignment, which has not been provided on the record, and the business dealings between the parties, including other RMBS purchases. Morgan Stanley must also address the relationship between IKB AG and Rio. Accordingly, Morgan Stanley’s motion to dismiss for lack of standing will be denied with respect to the fraud claims brought by IKB AG as the assignee of Rio, which relate to 23 of the 25 certificates at issue.

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

Posted: November 1, 2014

Litigation Counsel Disqualified Under Attorney-Witness Rule

On October 20, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Anderson & Anderson LLP-Guangzhou v. North American Foreign Trading Corp., 2014 NY Slip Op. 51530(U), disqualifying plaintiffs’ counsel under the attorney-witness rule and his firm under the former-client rule.

The plaintiffs, Chinese law firms and David Buxbaum of Anderson & Anderson LLP, were retained by the defendant, NAFT, to bring proceedings in China to enforce an arbitration award defendant had obtained in New York. The current action involves a dispute between plaintiffs and NAFT about whether the plaintiffs are entitled to a contingency fee based upon their legal work in China. Mr. Buxbaum was serving as the plaintiffs’ lead counsel, and when the plaintiffs moved for summary judgment, NAFT moved to disqualify him and Anderson & Anderson LLP under the attorney-witness rule and the former-client rule.

Justice Bransten disqualified Mr. Buxbaum as a “necessary witness” because he was the principal drafter of the retainer agreements at the heart of the dispute:

The complexity of this case arises from the interpretation of the Agreements that Buxbaum negotiated, drafted, and signed. Plaintiffs assert that they performed legal services under the Agreements; NAFT does not dispute the actions that Plaintiffs took. Rather, the dispute in this action is whether the work Plaintiffs performed entitles them to payment under the terms of the agreement. Buxbaum is the only individual identified by either party who has personal knowledge of the Agreements, and therefore his testimony is critical . . . . Buxbaum is more critical as a witness than as an advocate.

Justice Bransten rejected the plaintiffs’ argument that exceptions to the advocate-witness rule applied in this case, holding that the exception for testimony that relates “solely to the nature and value of legal services rendered” on the grounds that that exception applies only to services rendered in that particular action, and holding that plaintiffs had not established the “substantial hardship” exception, which applies “only in the most exceptional situations.”

Justice Bransten also disqualified Anderson & Anderson, on the grounds that, under the former-client rule, NAFT was Mr. Buxbaum’s former client any disqualification was automatically imputed to the attorney’s entire firm.

Finally, Justice Bransten rejected the plaintiffs’ argument that NAFT had waited too long to bring its motion, because “the need for disqualification became evident only after Buxbaum, and only Buxbaum, submitted an affidavit in support of summary judgment, showing his testimony to be ‘necessary.”

NOTE: The author of this post (and Schlam Stone & Dolan LLP) represent NAFT in this action.

Posted: October 31, 2014

Court of Appeals Holds That, Absent Express Language, “Affiliate” only Includes Existing Affiliates

On October 23, 2014, the Court of Appeals issued a decision in Ellington v. EMI Music, Inc., 2014 NY Slip Op. 07197, affirming a decision of the First Department affirming a Supreme Court dismissal of an action for breach of contract brought by a grandson of music legend Duke Ellington.

Ellington, presented a type of dispute apparently common in the entertainment industry—a creative artist suing a copyright holder/distributor for engaging in some form of self-dealing in order to reduce the amount of royalties to be paid.

Here, the plaintiff was a grandson of Duke Ellington, who, along with his heirs, was the First Party to a 1961 copyright renewal agreement. The agreement provided that the Second Parties—various music publishers, including EMI’s predecessor in interest as well as “any other affiliate of [the predecessor],” would pay the First Party royalties from the publication of Ellington’s works, including 50% “of the net revenue actually received by the Second Party from . . . foreign publication.” Plaintiff sued EMI for breach of contract, alleging that EMI had at some point begun distributing Ellington’s works through affiliated foreign subpublishers rather than independent foreign subpublishers (as was industry practice when the agreement was signed), thereby effectively increasing EMI’s share of the net revenues at plaintiff’s expense.

However, the foreign subpublishers were retaining the same 50% share of the overall royalties from foreign sales as the previous, unaffiliated subpublishers had. So, it appears that (although not stated explicitly in the opinion) at the time of the contract, the foreign subpublishers would retain 50% of the foreign royalties, with 25% going to EMI and 25% to Ellington. Under the new arrangement, Ellington is getting the same 25%, but EMI and its affiliates collectively get the entire remaining 75%.

In an opinion written by Judge Abdus-Salaam, the majority affirmed the lower courts’ dismissal.

The majority first held that “net revenue actually received” was clear and unambiguous, and that that term did not preclude the use of affiliated foreign subpublishers. The majority also found that the affiliated foreign subpublishers were not included in the term “any other affiliate” because they were not in existence at the time the contract was signed:

Absent explicit language demonstrating the parties’ intent to bind future affiliates of the contracting parties, the term “affiliate” includes only those affiliates in existence at the time the contract was executed. Furthermore, the parties did not include any forward-looking language. If the parties intended to bind future affiliates they would have included language expressing that intent. Absent such language, the named entities and other affiliated companies of EMI’s predecessor which existed at the time are bound by the provision, not entities that affiliated with EMI after execution of the agreement.

(Internal citations omitted.)

The majority dismissed the dissent’s criticism, stating that “the parties merely did not account for the possibility that the publisher would eventually affiliate with foreign subpublishers.”

Concurring, Judge Smith rejected the majority’s reasoning: “As a general proposition, it seems wrong to me that, when a contract is written to bind ‘any affiliate’ of a party, its effects should be limited to affiliates in existence at the time of contracting. That invites parties to create new affiliates, and to have them do what the old affiliates are prohibited by the contract from doing.” He also stated that, if the facts had been different and the foreign affiliates had been keeping a greater overall share of the total revenues, the majority would probably have interpreted the term “affiliate” differently.

Judge Smith concurred in the judgment based upon the plaintiff and his predecessors’ apparent acquiescence with the current scheme since 1994.

In dissent, Judge Rivera, joined by Chief Judge Lippman, thought that the term “affiliate” was not clear and unambiguous, and that EMI’s argument that foreign affiliates were not included “merely begs the question of what is an affiliate.” For the dissent, the majority holding excluding subsequently-created affiliates from the term was inconsistent with the purpose of the agreement and with then-prevailing industry practice, and that the plaintiff’s proposed interpretation of the term was “reasonable, or at least as reasonable as the one proposed by EMI.”

The dissent also shared Judge Smith’s policy concerns, stating that the majority interpretation was “troubling” and “sets the stage for the type of abuse alleged here, namely corporate reconfigurations that avoid the understanding of the parties.”

The most interesting question about this decision is whether Judge Smith is right—if under the new arrangement, if the heirs had been getting less than their previous 25%, would the final outcome have been different? On its face, it also appears to be a victory for the kind of prosy contract drafting that long since went out of favor in law schools and legal writing manuals: if the key provision had only included some phrase like “that now exist or ever have existed since the beginning of the world or ever will exist until the end of the world,” plaintiff would have prevailed.

Posted: October 30, 2014

Court Applies Pro Rata “Time on the Risk” Method to Allocate Loss From Environmental Damage Among Liability Insurance Policies

On October 14, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in Keyspan Gas East Corp. v. Munich Reinsurance America, Inc., 2014 NY Slip Op. 24306, applying a pro rata “time on the risk” allocation to determine damages in an insurance coverage matter arising from an environmental clean-up at two former manufactured gas plant sites located in Hempstead and Rockaway Park New York.

Where environmental damages occur over a period of years, triggering coverage under multiple insurance policies, allocating the losses has proved “a nettlesome problem.” As Justice Scarpulla explained, courts faced with this dilemma have allocated the loss among the carriers and the insured on a pro rata basis based on their respective “time on the risk”:

A pro rata “time on the risk” allocation requires costs to be allocated according to the number of years that the insurer was on the risk by multiplying the total loss by a fraction that has as its denominator the entire number of years of the claimant’s injury, and as its numerator the number of years within that period when the policy was in effect. Proration of liability among the insurers acknowledges the fact that there is uncertainty as to what actually transpired during any particular policy period.

For years where an insured has no insurance coverage, the insured generally bears its own pro rata share of the loss. Proration to the insured is appropriate for the years where the insured elected not to purchase insurance or purchased insufficient insurance. For those years, the insured is treated as self-insured and bears responsibility for its pro rata share of damages.  Proration to the insured is inappropriate, however, for those years where insurance was unavailable in the marketplace.

(Citations omitted).

In Keyspan, the court found issues of fact precluding summary judgment as to (1) the time period over which the damage occurred, and (2) when insurance coverage was available. The Court did find that Keyspan should be required to bear losses incurred during the period 1971 to 1982 when New York law precluded insurance coverage for “liability arising out of pollution.” The policy reason underlying the rule was “to prohibit commercial or industrial enterprises from buying insurance to protect themselves against liabilities arising out of their pollution of the environment.” Justice Scarpulla concluded: “Given the Legislature’s clear intent that companies such as Keyspan bear the full burden of their own actions affecting the environment, I decline to exclude the period between 1971 and 1982 from the allocation period when pollution insurance was prohibited.”

Posted: October 29, 2014

Appellant’s Arguments Rejected Based on Judicial Estoppel

On October 21, 2014, the First Department issued a decision in Bank Hapoalim B.M. v. Westlb AG, 2014 NY Slip Op. 07092, rejecting arguments made on appeal when the appellants had taken contrary positions at trial.

In Bank Hapoalim, the plaintiffs were “investors in a structured investment vehicle” who sued the defendant financial institutions regarding the investment. In reviewing the trial court’s decision the First Department noted as an initial matter that:

[O]n this appeal, plaintiffs are judicially estopped from asserting their position on choice of law, as they consistently argued to the motion court that New York law governed the case and that their arguments relied on New York law. A party may not adopt a position on appeal at odds with its arguments to the trial court, and plaintiffs cite no law to the contrary.

Similarly, plaintiffs are judicially estopped from arguing that the Income Notes should be treated as debt, since they argued repeatedly to the motion court that the Income Notes should be treated as equity. Indeed, plaintiffs concede that they previously argued in favor of the proposition that the notes were equity, but now assert that they may argue that the Income Notes are equity for some purposes and debt for others.

(Internal citations omitted).

Posted: October 28, 2014

No Claim for Breach of Covenant of Good Faith and Fair Dealing When Claim Has Same Basis as Breach of Contract Claim

On October 21, 2014, Justice Whelan of the Suffolk County Commercial Division issued a decision in J. Kokolakis Contracting Corp. v. Evolution Piping Corp., 2014 NY Slip Op. 24321, dismissing a claim for breach of the covenant of good faith and fair dealing.

In J. Kokolakis Contracting Corp., the plaintiff building contractor sued a subcontractor in connection with work the defendant did on a job site, as well as its insurer. The defendant insurer moved to dismiss the plaintiff’s causes of action against it for breach of the covenant of good faith and fair dealing and for attorney’s fees. In granting the motion, the court explained:

Distinguishable [from tort claims] are claims premised upon a breach of the covenant of good faith and fair dealing which the law of this state imposes upon all contracting parties. This covenant mandates that none of such parties shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. The covenant is breached when a party to a contract acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party of the right to receive the benefits under their agreement.

A claim for breach of the implied covenant of good faith and fair dealing is generally actionable only where wrongs independent of the express terms of the contract are asserted and demands for the recovery of separate damages not intertwined the damages resulting from a breach of a contractual are advanced. Where a contractual party is merely seeking to reap the benefits of its contractual bargain, the implied covenant breach claim will not lie, as it is considered duplicative of the breach of breach of contract claim.

Federal appellate authorities have long held that a breach of the implied duty of good faith is a breach of the underlying contract. There is however, recognition of authority to the contrary.

. . .

Here, the court finds merit in the moving defendant’s contention that the plaintiff’s claims for recovery of consequential damages arising from any breach of the implied covenant of good faith and fair dealing and its claims for recovery of litigation costs, including attorneys fees due to the moving defendant’s alleged bad faith denial of coverage are not actionable and are thus subject to dismissal pursuant to CPLR 3211(a)(7). Review of the allegations set forth in complaint reveal that the facts which underlie these claims are the same as those which underlie the plaintiff’s breach of contract claim. There are no allegations of independent breaches of tort duties such as fiduciary duties owing to the plaintiff from the moving defendant which would support a breach of fiduciary duties claim or other tort claim.

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

Posted: October 27, 2014

Account Stated Claim Survives Notwithstanding Plaintiff’s Inability Fully to Document All Charges

On October 23, 2014, the First Department issued a decision in Robson & Miller, LLP v. Sakow, 2014 NY Slip Op. 07263, affirming a grant of summary judgment on a claim for account stated.

In Robson & Miller, the plaintiff law firm sued its former client. In affirming the trial court’s grant of summary judgment to the plaintiff on its claim for account stated, the First Department explained:

The motion court properly concluded that the varying figures given by R & M during this litigation, as to the total outstanding fees due, did not undermine R & M’s prima facie case for an account stated, inasmuch as the discrepancies were plainly attributable to the incompetence of its original attorney in drafting the motion papers on its previous motions for summary judgment, which, inter alia, did not include R & M’s complete billing invoices from the past, and records of off-sets that the parties had agreed to. The monthly invoices and records – the timely receipt of which Sakow never disputed – were never challenged by Sakow as to accuracy or reasonableness until the instant litigation was commenced years later. Such circumstances, including that Sakow continued to make payments towards the total fees accrued and billed, without reservation, belie the belated challenges to the reasonableness of the invoiced fees. For similar reasons, Sakow’s argument that the initial invoice related to the 2002 to 2008 fee collection period in question, dated March 7, 2002, reflected a bare, balance forward figure of $81,484.75 without requisite supporting time sheet information, is unavailing. The record reflects that R & M represented Sakow on many legal matters since 1989, and that R & M would send regular, detailed monthly invoices to account for the fees claimed. The record also demonstrates that Sakow never denied receipt of invoices supporting the balance forward figure referenced in the March 7, 2002 invoice, that no objection was raised as to such invoices, and that Sakow continued to make regular payments towards the invoices.

(Internal quotations and citations omitted).  This decision shows the potential power of a claim for account stated and the principle upon which it is based, which is that if the recipient of the account does not challenge invoices, the court will not later make the plaintiff go back and prove their underlying basis.