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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: December 10, 2014

Subsequent Communications Do Not Create New Contract in Face of Merger Clause

On December 4, 2014, the First Department issued a decision in Global Events LLC v. Manhattan Center Studios, Inc., 2014 NY Slip Op. 08484, affirming the dismissal of a breach of contract claim.

In Global Events, the plaintiff’s breach of contract claim was a based on an alleged e-mail modification to the parties’ written agreement. The First Department affirmed the trial court’s dismissal of that claim, explaining:

The breach of contract claim was properly dismissed. The parties had an express written agreement with regard to booking dates at defendant’s venue. Defendant concededly was not in breach of that agreement. Plaintiff attempted to find among various subsequent emails between the parties a new agreement that materially modified the terms of the express agreement. This attempt failed in light of the merger clause in the express agreement, which precluded modification of its terms absent a writing signed by both parties. Given that the parties’ express, written agreement covered the same subject matter as the alleged subsequent agreement, plaintiff’s unjust enrichment claim was also properly dismissed.

(Internal quotations and citations omitted).

Posted: December 9, 2014

Joint Defense Privilege Can Exist in Absence of Threatened or Pending Litigation

On December 4, 2014, the First Department issued a decision in Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 2014 NY Slip Op. 08510, ruling that a party withholding documents from production based on the “common interest privilege” need not show that the communications at issue were made in the context of “pending or reasonably anticipated litigation.”

The common interest privilege is a “limited exception” to the general rule that the presence of a third-party waives the attorney-client privilege. The party invoking the privilege must establish that: (1) the communication qualify for protection under the attorney-client privilege, and (2) the communication be made for the purpose of furthering a legal interest or strategy common to the parties. Some New York courts, including the Second Department, had held that the common interest privilege is further limited to situations where there is actual or anticipated litigation. See, e.g., Hyatt v. State of Cal. Franchise Tax Bd., 105 A.D.3d 186, 205 (2d Dep’t 2013). In Ambac Assurance Corp., the First Department rejected this approach, holding that “in today’s business environment . . . business entities often have important legal interests to protect even without the looming specter of litigation.” The Court explained:

The attorney-client privilege is not tied to the contemplation of litigation, because advice is often sought, and rendered, precisely to avoid litigation, or facilitate compliance with the law, or simply to guide a client’s course of conduct. For that reason, and because of the vast and complicated array of regulatory legislation confronting the modern corporation, corporations, unlike most individuals, constantly go to lawyers to find out how to obey the law, particularly since compliance with the law in this area is hardly an instinctive matter.

Similarly, the Restatement of the Law Governing Lawyers notes that the common interest privilege is not tied to the contemplation of litigation, but rather that the privilege applies either to a “litigated or nonlitigated matter.” This conclusion flows logically from the attorney-client privilege, from which the common-interest privilege derives, and furthers its same basic purpose — namely, it encourages parties with a shared legal interest to seek legal assistance in order to meet legal requirements and to plan their conduct accordingly, and therefore serves the public interest by advancing compliance with the law,
facilitating the administration of justice and averting litigation.

Neither this Court nor the Court of Appeals has yet considered the propriety of a litigation requirement for the common-interest privilege. However, the federal courts that have addressed the issue have overwhelmingly rejected that requirement.

* * *

Accordingly, because the federal approach extends logically from the attorney-client privilege, we adopt this approach, the weight of which holds that litigation need not be actual or imminent for communications to be within the common interest doctrine So long as the primary or predominant purpose for the communication with counsel is for the parties to obtain legal advice or to further a legal interest common to the parties, and not to obtain advice of a predominately business nature, the communication will remain privileged.

We acknowledge that a line of New York cases requires pending or reasonably anticipated litigation for the common-interest privilege to apply. . . .

However, the better policy requires that we diverge from this approach. These cases provide that when two parties with a common legal interest seek advice from counsel together, the communication is not privileged unless litigation is within the parties’ contemplation; on the other hand, when a single party seeks advice from counsel, the communication is privileged regardless of whether litigation is within anyone’s contemplation. We cannot reconcile this contradiction, as it undermines the policy underlying that attorney-client privilege.

(Citations and internal quotation marks omitted.)

Posted: December 8, 2014

Conclusory Allegations of Law Office Failure Insufficient to Justify Vacating Default Judgment

On December 3, 2014, the Second Department issued a decision in Neilson v. 6D Farm Corp., 2014 NY Slip Op. 08409, affirming the denial of a motion to vacate a default judgment.

In Neilson, the Second Department affirmed, among other things, a trial court decision denying a motion for leave to file a late answer and counterclaims, explaining:

CPLR 3012(d) provides that, upon the application of a party, the court may extend the time to appear or plead, or compel the acceptance of a pleading untimely served, upon such terms as may be just and upon a showing of reasonable excuse for delay or default. Upon an application for an extension of time under CPLR 3012(d), the court may exercise “its discretion in the interests of justice to excuse delay or default resulting from law office failure. However, any claim of law office failure must be supported by a detailed and credible explanation of the default at issue. A conclusory, undetailed, and uncorroborated allegation of law office failure does not amount to a reasonable excuse.

Here, as the Supreme Court correctly noted, Carr provided no explanation as to why the appellants failed to serve and file a timely answer to the fifth cause of action or to move in a timely fashion to renew their prior motion for leave to serve and file a late answer. In fact, there was an unexplained delay of one year between the retransfer of the case to the Supreme Court and the motion for leave to serve and file a late answer on behalf of the appellants. Carr’s unsubstantiated and conclusory claims were insufficient to establish a reasonable excuse for the failure of BDF and the estate to serve and file an answer.

(Internal quotations and citations omitted) (emphasis added). The standard for vacating a default is not a high one. Still, as this decision shows, a defendant must make a real factual showing that meets that standard; a conclusory recitation of the standard will not do.

Posted: December 7, 2014

Plaintiff Likely to Succeed on Common Law Claim for Unfair Competition

On November 20, 2014, Justice Whelan of the Suffolk County Commercial Division issued a decision in Cold Spring Harbor Construction, Inc. v. Cold Spring Builders, Inc., 2014 NY Slip Op. 51688(U), preliminarily enjoining a defendant’s use of a tradename.

In Cold Spring Harbor Construction, the plaintiff, Cold Spring Harbor Construction, Inc., brought an action for unfair competition against the defendant, Cold Spring Builders, Inc., and sought an order preliminarily enjoining the defendants’ use of the name Cold Spring Builders. The court granted the motion for preliminary injunction, finding, among other things, that the plaintiff was likely to succeed on its claim for unfair competition, explaining:

[T]he plaintiff further established a likelihood of success on its common-law cause of action sounding in unfair competition by reason of the defendant’s conduct. The essence of an unfair competition claim under New York’s common law is that the defendant assembled a product or provides a service which bears a striking resemblance to the plaintiff’s product or service that the public will be confused as to the identity of the products. It is rooted in the bad faith misappropriation of the labors and expenditures of another, likely to cause confusion or to deceive purchasers as to the origin of the goods or services. To prevail in an unfair competition case, the plaintiff may prove either: (1) that the defendant’s activities have caused confusion with, or have been mistaken for, the plaintiff’s activities in the mind of the public, or are likely to cause such confusion or mistake; or (2) that the defendant has acted unfairly in some manner. The bad faith misappropriation of a commercial advantage belonging to the plaintiff by the infringement or dilution of a trademark or trade name or by the exploitation of proprietary information and/or trade secrets are both actionable.

Claims of unfair competition under New York’s common law may thus be premised upon claims that the defendant misappropriated a commercial advantage belonging exclusively to the plaintiff by the exploitation of proprietary information and/or trade secrets, or upon claims of trademark infringement or dilution. Where the unfair competition claim is grounded upon the defendant’s injurious use of the plaintiff’s trade mark or name, the defendant’s conduct must be found to have constituted an unfair appropriation or exploitation of a special quality attached to plaintiff’s name, thereby resulting in a misappropriation of a commercial advantage belonging exclusively to the plaintiff. Irrespective of the base predicate, the key to stating a non-statutory, common law claim of unfair competition is that the defendant charged with actionable conduct displayed some element of bad faith in misappropriating the plaintiff’s labor, skill, expenditures, proprietary information or trade secrets.

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

Posted: December 6, 2014

Lack of Standing Curable by Amendment

On November 20, 2014, Justice Friedman of the New York County Commercial Division issued a decision in Flintlock Construction Services, LLC v HPH Services, Inc., 2014 NY Slip Op. 33025(U), holding that a defect in standing was curable.

In Flintlock Construction Services, the plaintiff general contractor sued the defendant subcontractors for failing to pay suppliers. The defendants moved to dismiss the plaintiff’s Lien Law claim for, among other things, lack of standing. The defendants argued that at the time the compliant was filed, the plaintiff lacked standing because it had not made any payments to the defendants’ suppliers and that the plaintiff’s subsequent payments could did not cure the defect. The court disagreed and allowed the plaintiffs to file an amended complaint curing the defect, explaining:

Standing is an aspect of justiciability which, when challenged, must be considered at the outset of any litigation. In Cortlandt Street Recovery Corp. v. Hellas Telecommunications. S.A.R.L, 2014 NY Slip Op. 24268, 2014 WL 4650231 [Sept. 16, 2014], this court discussed the extensive conflicting appellate authority on the issue of whether a defect in standing is curable. The court incorporates that discussion here. The Cortlandt decision held, in accordance with the predominant and more persuasive authority, that a defect in standing is curable where it is not so
fundamental as to implicate the court’s subject matter jurisdiction or power to hear an action
.

[The moving defendant] does not argue that this court ever lacked subject matter jurisdiction to hear an action for breach of contract or diversion of trust assets. Nor could it persuasively do so. As this Department has reasoned: The question of subject matter jurisdiction is a question of judicial power: whether the court has the power conferred by the Constitution or statute, to entertain the case before it. Because New York’s Supreme Court is a court of original, unlimited and unqualified jurisdiction, it is competent to entertain all causes of action. The court accordingly holds that although Flintlock lacked standing to maintain the diversion cause of action at the time the action was commenced, this defect in standing was not so fundamental as to implicate the court’s subject matter jurisdiction to hear that cause of action.

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

Posted: December 5, 2014

Insurance Company Did Not Satisfy Obligation To Give “Written Notice to the Insured” of Disclaimer of Liability By Sending Notice to Another Carrier for The Insured

On November 24, 2014, the Court of Appeals issued a decision in Sierra v. 4401 Sunset Park, LLC, 2014 NY Slip Op. 08216, holding that an insurance company did not satisfy its obligation under Insurance Law § 3420(d)(2) to provide written notice of a disclaimer of coverage by sending the notice to another insurance carrier for the insured.

In Sierra, the defendants, who were the owner and managing agent of a building where the plaintiff was injured while performing construction work, submitted a claim for defense coverage to their liability carrier, GNY. Defendants were also additional insureds under a policy issued by Scottsdale Insurance Company to the subcontractor that performed the work. However, no notice was given to Scottsdale until GNY sent it the summons and complaint, approximately five months after the injury. Scottsdale, by letter sent to GNY – but not directly to the insureds – denied the claim based, in part, on the “insureds’ failure to comply with their obligation under the policy ‘to see to it that we are notified as soon as practicable of an “occurrence” which may result in a claim.'” The Court of Appeals held that Scottsdale’s letter disclaiming coverage did not comply with its notice obligation under the Insurance Law because the letter was not sent to the insureds themselves:

It is undisputed that Scottsdale did not give notice of its disclaimer directly to its additional insureds or to the lawyer who had been retained to represent them. Scottsdale argues that the disclaimer notice it sent to GNY was sufficient to satisfy the statute. We disagree.

GNY was not an insured under Scottsdale’s policy; it was another insurer. While GNY had acted on the insureds’ behalf in sending notice of the claim to Scottsdale, that did not make GNY the insureds’ agent for all purposes, or for the specific purpose that is relevant here: receipt of a notice of disclaimer. GNY’s interests were not necessarily the same as its insureds’ in this litigation. There might have been a coverage dispute between GNY and the insureds, or plaintiffs claim might have exceeded GNY’s policy limits. Because the insureds had their own interests at stake, separate from that of GNY, they were entitled to notice delivered to them, or at least to an agent – perhaps their attorney – who owed a duty ofioyalty in this matter to them only. As the Appellate Division correctly held in Greater N. Y, Mut. Ins. Co. v. Chubb Indem. Ins. Co. (105 AD3d 523, 524 [1st Dept 2013]), the obligation imposed by the Insurance Law is “to give timely notice of disclaimer to the mutual insureds . . . not to . . . another insurer.”

This decision illustrates the importance, both to insurance carriers and insureds, of complying with notice requirements. Notably, under a provision of New York Insurance Law applicable to policies “issued or delivered” in New York after January 17, 2009, the defendants’ late notice to Scottsdale would not constitute a waiver of coverage absent a showing of prejudice. See Insurance Law § 3420(a). However, as the policy at issue here pre-dated the effective date of this statute, New York’s harsher common law rule, which treated timely notice of a covered occurrence or lawsuit as a condition precedent to the insured’s right to coverage, applied.

Posted: December 4, 2014

Court Refuses to Quash Subpoena Under Common Law Doctrine of Legal Immunity from Service

On November 21, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Fund.com, Inc. v Advisorshares Inv., LLC, 2014 NY Slip Op. 33022(U), refusing to quash a subpoena under the doctrine of legal immunity from service.

In Fund.com, the plaintiff served its former CEO (Webster), a non-party, with a subpoena duces tecum. Because the plaintiff was unsuccessful in serving Webster at his home in New Jersey, it served him in New York at his deposition. Webster moved to quash, arguing, among other things, that service during his deposition was improper under the common law doctrine of legal immunity from service (the “Doctrine”).

CPLR 2303 and 2308 provide that a subpoena may be served by delivering it within the state to the person to be served. However, under the Doctrine, nonresidents may be protected from civil process when they voluntarily appear in New York to participate in legal proceedings, either as parties or witnesses.

The Doctrine encourages nonresidents to enter New York to participate in legal proceedings without fear that they will be served with process that would expose that person to new or additional liabilities. The privilege of immunity is not a privilege personal to the witness but a privilege belonging to the court. Its purpose is to arm the court with a tool to promote the swift and efficient administration of justice. The Doctrine applies to the service of summonses and complaints, not subpoenas.

The Doctrine does not apply when a person is served while attending a legal proceeding in New York, if the service concerns that very case. To qualify for immunity, three requirements must be met: (1) he or she is in fact a nonresident, (2) whose sole purpose in appearing in New York is to attend the judicial proceedings, and (3) there were no other means of acquiring jurisdiction over his or her person other than personal service in New York.

Mr. Webster was served with a subpoena in connection with the very case he was being deposed for. Mr. Webster cites Weichert v Kimber as standing for the proposition that nonresidents are immune to civil process when they voluntarily appear in New York to participate in legal proceedings, either as parties or witnesses. In Weichert, as the defendant was leaving a courtroom after an action against him was dismissed, he was served with a summons for another action. Not only was Mr. Webster served with a subpoena to produce documents, and not with a summons or complaint regarding another action, the documents requested are for the litigation in which he was deposed. Mr. Webster was not served with a summons or complaint at the EBT but with a subpoena duces tecum. When a person is served with a subpoena ad testificandum, immunity does not apply because the subpoena ad testificandum does not, in itself, subject a person to new or additional liabilities – it merely requires them to appear and testify. Just as a subpoena ad testificandum does not expose a person to new or additional liabilities, nor does a subpoena duces tecum. It only requires that Mr. Webster produce certain documents.

Mr. Webster can not establish all three requirements necessary to qualify for immunity. Mr. Webster could have been served at his residence in New Jersey, and so fails to meet the third prong, that there were no other means of acquiring jurisdiction over his or her person other than personal service in New York.

(Internal quotations and citations omitted)

Posted: December 3, 2014

Transcripts and Videos of Arguments in the Court of Appeals for the Week of November 17, 2014, Now Available

On November 17, 2014, we noted two cases of interest from the oral arguments for the week of November 17, 2014:

  • No. 223Rigano v. Vibar Construction, Inc. (Proceeding No. 1) and Vibar Construction Corp. v. Fawn Builders, Inc. (Proceeding No. 2) (considering whether misidentification of the true owner on a mechanics lien is a jurisdictional defect which cannot be cured by an amendment). See the transcript and the video.
  • No. 228: 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Association, Inc. (considering whether a lease’s acceleration clause constituted an unenforceable penalty). See the transcript and the video.
Posted: December 2, 2014

Arbitration Provision in One Agreement Found to Apply to Second, Related Agreement

On November 25, 2014, Justice Ritholtz of the Queens County Commercial Division issued a decision in Astoria Equities 200 LLC v. Halletts A Dev. Co., LLC, 2014 NY Slip Op. 24364, broadly interpreting an arbitration clause.

In Astoria Equities 200 LLC, the parties’ dispute related to the development of commercial real estate. The parties agreed that two of the plaintiff’s causes of action should be arbitrated, but disagreed about the application of the arbitration clause in one of the agreements governing their relationship to two other causes of action. The court ruled that those causes of action should be arbitrated as well, explaining that the two agreements should be read as one, with the arbitration provision applying to issues arising out of either agreement:

[T]he court is of the view that the letter agreement and the operating agreement may be treated as one instrument. The letter agreement containing the arbitration clause and the operating agreement are both dated August 15, 2008. Both documents govern, inter alia, the business relationship between the parties, and the letter agreement notes that “contemporaneously herewith Astoria Equities has become a member of Halletts A pursuant to that certain Operating Agreement dated of even date herewith ***.” Generally, the rule is that separate contracts relating to the same subject matter and executed simultaneously by the same parties may be construed as one agreement. In the absence of anything to indicate a contrary intention, instruments executed at the same time, by the same parties, for the same purpose, and in the course of the same transaction will be read and interpreted together, it being said that they are, in the eye of the law, one instrument. The issue whether separate documents executed simultaneously should be treated as a single contract is governed by the intent of the parties manifested at the time of contracting and viewed in the light of all the surrounding circumstances. If, as the plaintiff contends, the operating agreement sets out part of the consideration to be paid for the sale of its property, then the sale agreement and the operating agreement certainly relate to the same subject matter, and the court finds an intent that the two documents should be treated as a single contract.

The plaintiff’s attorney asserts: “Astoria Equities agreed to sell the Astoria Equities Property to the Company for two components of consideration: (1) $7.5 million in cash, and (2) as set forth under the Operating Agreement, an equity interest valued at $7.5 million, now worth approximately 8.4% of the Company in the entity that would acquire the Properties for future development.” (Memorandum of Law, p. 5 [emphasis added].) After taking the position that part of the consideration for the sale of the property is specified in the operating agreement, the plaintiff cannot successfully deny that the letter agreement and operating agreement should be treated as one instrument.

The plaintiff faced a dilemma. In order to avoid arbitration, it must treat the letter agreement and the operating agreement as separable contracts. In order to rescind the letter agreement, the plaintiff must treat it and the operating agreement as mutually dependent contracts, the breach of one undoing the obligations under the other. The plaintiff did not escape this dilemma.

In the case at bar, the arbitration clause entered into by the parties is very broad.: “Any dispute arising out of or in connection with this Letter Agreement or the Agreement dated June 26, 2007 shall be settled through arbitration.” The dispute concerning the defendant company’s compliance with the operating agreement is certainly connected to the letter agreement, the two contracts being treatable as one instrument or as mutually dependent contracts, the breach of one undoing the obligations under the other.

Any grounds based in the operating agreement which plaintiff Astoria purportedly has for refusing to comply with the Letter Agreement are certainly linked or related to the Letter Agreement.

A dispute over the consideration to be received by the plaintiff for the sale of its property, although the consideration be partly expressed in the operating agreement, goes to the heart of the sale agreement itself, and, thus, the court finds that there was a clear intent to arbitrate as expressed in the broad arbitration clause and as required by the law of this state.

(Internal quotations and citations omitted).

Posted: December 1, 2014

Court Refuses to Dismiss Unfair Competition Claim

On November 17, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Darcher LLC v. Dhar, 2014 NY Slip Op. 32975(U), refusing to dismiss an unfair competition claim.

In Darcher LLC, the defendants moved to dismiss, among other claims, a claim for unfair competition. The court refused to dismiss the claim, explaining:

New York law has long recognized two theories of common-law unfair competition: “palming off,” which is not at issue here, and misappropriation. An unfair competition claim involving misappropriation usually concerns the taking and use of the plaintiffs property to compete against the plaintiffs own use of the same property. . . .

[T]he existence of a trade secret is not a prerequisite to an unfair competition claim. Instead, to state such a claim a plaintiff must demonstrate that it had compiled information used in its business that provided an opportunity to obtain a competitive advantage and that a competitor misappropriated it. While a trade secret is an example of the type of misappropriated property that could give rise to an unfair competition claim, the existence of a trade secret is not an essential element of the claim.

. . .

To plead an unfair competition claim, Plaintiffs must allege the bad faith misappropriation of a commercial advantage which belonged exclusively to them.

(Internal quotations and citation omitted) (emphasis added). The court went on to hold that the plaintiff adequately had alleged unfair competition under these standards.