Commercial Division Blog

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

Company Bound by Apparent Authority it Created in Former Officer

On August 8, 2014, the Fourth Department issued a decision in Pasquarella v. 1525 William St., LLC, 2014 NY Slip Op. 05745, holding that the defendant was bound by the apparent authority it created in its former president.

In Pasquarella, the trial court granted the plaintiff summary judgment on its cause of action for specific performance of a contract for the sale of real estate. In doing so, the court rejected the defendant’s argument that the person who signed the contract of sale–Sultan–lacked authority to do so, making the contract ineffective. The Fourth Department affirmed, explaining:

Essential to the creation of apparent authority are words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction. The agent cannot by his own acts imbue himself with apparent authority. Rather, the existence of apparent authority depends upon a factual showing that the third party relied upon the misrepresentation of the agent because of some misleading conduct on the part of the principal — not the agent. Here, we conclude that plaintiffs reasonably relied on, inter alia, their prior course of dealing with Sultan in his capacity as president, principal and manager of defendant. In addition, the record establishes that defendant allowed its attorney to act in a manner consistent with Sultan’s continued authority, and that defendant accepted the deposit that plaintiffs provided to that attorney in conjunction with the signing of the contract, thus giving rise to the appearance and belief that Sultan possessed authority to enter into the transaction. Defendant therefore allowed Sultan to represent that he had the requisite authority, and it may not now be denied.

(Internal quotations and citations omitted).

Posted: August 9, 2014

CPLR 205 Tolls Statute of Limitations for Special Proceeding Improperly Brought as a Plenary Action

On July 30, 2014, Justice Friedman of the New York County Commercial Division issued a decision in Weksler v. Weksler, 2014 NY Slip Op. 32024(U), explaining the application of CPLR 205.

In Weksler, the parties entered into an agreement that tolled the statute of limitations effective December 19, 2006. In 2007, the plaintiff brought a plenary action seeking damages and dissolution of a New York corporation based in conduct occurring in 2000. In 2009, the plaintiff moved “to amend for the purpose of complying with the pleading, service, and publication requirements of Business Corporation Law § 1106, and to sever the cause of action for statutory dissolution.” That motion was denied, a decision which was affirmed by the First Department in 2011. Within six month’s of the First Department’s decision, the plaintiff initiated a special proceeding for dissolution. The defendants then “move[d] to dismiss certain allegations on which the dissolution proceeding is based, on,” among other grounds, that they were “time-barred.” The court’s statute of limitations decision turned on the application of CPLR 205(a), which “provides, in relevant part:

If an action is timely commenced and is terminated in any other manner than by a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, a dismissal of the complaint for neglect to prosecute the action, or a final judgment upon the merits, the plaintiff, or, if the plaintiff dies, and the cause of action survives, his or her executor or administrator, may commence a new action upon the same transaction or occurrence or series of transactions or occurrences within six months after the termination provided that the new action would have been timely commenced at the time of commencement of the prior action and that service upon defendant is effected within such six-month period.

The court began its analysis by noting that “[a]ppeals as of right serve to delay the running of the six-month period under CPLR 205(a) until the appeals are exhausted” and that the plaintiff’s appeal of the 2009 decision had been as of right. The court went on to hold that allegations of conduct occurring in 2000 were not time-barred in the later-filed special proceeding because of CPLR 205(a), explaining:

The statute does not extend the statute of limitations to conduct that occurred prior to the statute of limitations for commencement of an action based on such conduct. It permits a new action to based on conduct that would otherwise be barred by the statute of limitations if, but only if, a prior action was timely commenced based on such conduct and was not terminated on any of the grounds specified in the statute. As the Court of Appeals has explained: The effect of the statute is quite simple: if a timely brought action has been terminated for any reason other than one of the three reasons specified in the statute, the plaintiff may commence another action based on the same transactions or occurrences within six months of the dismissal of the first action, even if the second action would otherwise be subject to a Statute of Limitations defense, so long as the second action would have been timely had it been commenced when the first action was brought.

Contrary to the brothers’ further contention, a claimant’s failure to comply with statutory pleading and other requirements does not in and of itself bar the application of CPLR 205(a). The brothers’ reliance on Hertz v Schiller (239 AD2d 240 [1st Dept 1997]) is unavailing. In Hertz, the Appellate Division rejected the application of CPLR 205(a) because the first action was never commenced as required by the plain language of the statute, and the second action therefore could not relate back to it. The holding was based on the fact that the Clerk of the Court did not accept the summons and complaint in the first action for filing because the plaintiff had already served it on the defendant in violation of CPLR 306-a(a).

In the instant matter, there is no contention that the first action was not properly commenced. Rather, the brothers contend that Lisa’s failure to comply with certain pleading and notice requirements of the Business Corporation Law – in particular, section 1105, requiring verification of the petition, and section 1106, requiring publication of the petition and service on the tax commission – rendered her cause of action for dissolution void ab initio. Significantly, however, the failure of a petitioner to comply with these Business Corporation Law provisions is not a jurisdictional defect, and the statute provides that such non-compliance may be cured through amendment by leave of the court.

(Internal quotations and citations omitted).

Posted: August 8, 2014

Prior Representation Not Grounds For Disqualification of Attorney Where Former Client Waived Conflict In Engagement Letter

On August 6, 2014, the Second Department issued a decision in Grovick Properties, LLC v. 83-10 Astoria Blvd., LLC, 2014 NY Slip Op. 05627, reversing the trial court’s disqualification of plaintiff’s attorney based on a prior related representation of the defendant, where the defendant had expressly waived the conflict.

In Grovick Properties, an attorney (Brooks) represented the buyer (Grovick) in a commercial real estate transaction in which Grovick purchased a property from Astoria that had previously been contaminated by petroleum. After the closing, Brooks was retained by Astoria to represent it in connection with ‘certain claims made by the State for reimbursement of the cleanup and removal costs.” The engagement letter contained the following language, disclosing the possibility of a potential conflict between Astoria and the attorney’s existing client, Grovick, and providing that in the event of such a conflict, Brooks could continue to represent Grovick:

Astoria now desires to engage this firm to represent it against potential claims made by the State arising from or relating to the discharge of petroleum at or from the [property]. Prior to accepting this engagement, we informed you that we continue to represent GROVICK with regard to the now-closed transaction between Astoria and GROVICK, as well as other matters. Notwithstanding this information, and the potential conflict contained therein, you requested and instructed this firm to proceed in its representation of Astoria and each of its members for the purposes stated in the letter of engagement.

In connection therewith, Astoria and each of its Members hereby waive any and all claims of conflict of interest or potential conflict of interest that may arise out of the [sic] our representation of Astoria on the one hand, and any work we have performed, now perform, or may perform for GROVICK or its principals (including Jeffrey Novick). Furthermore, in the event Astoria at any time for any reason elects to discontinue its engagement of this firm, or should an adverse relationship arise between ASTORIA and GROVICK, you acknowledge and agree that we may continue without restriction to represent GROVICK and its principals in any and all matters, including those that arise from or relate to the [property].

After Astoria terminated the representation, Brooks brought suit against Astoria on behalf of Grovick seeking to recover costs for remediating the property. Justice Driscoll of the Nassau County Commercial Division granted Astoria’s motion to disqualify Brooks as counsel for Grovick based on Brooks’ prior related representation of Astoria. The Second Department reversed, holding that Astoria had waived any objection to the representation in the engagement letter:

The disqualification of an attorney is a matter which rests within the sound discretion of the court. A party’s entitlement to be represented in ongoing litigation by counsel of his or her own choosing is a valued right which should not be abridged absent a clear showing that disqualification is warranted, and the movant bears the burden on the motion. Here, the Supreme Court improvidently exercised its discretion in granting the motion to disqualify Brooks and Phillip Nizer, LLP, as counsel for the plaintiff. Pursuant to the written waiver, the Astoria defendants specifically waived any conflict of interest that might arise from Brooks’s representation of the plaintiff. The waiver fully informed the Astoria defendants of the potential conflict of interest and, by executing the waiver, the Astoria defendants consented to have Brooks represent them notwithstanding that conflict. Under the facts of this case, the Astoria defendants should not be permitted to compel the disqualification of Brooks and Phillips Nizer, LLP, simply because the representation to which they consented now involves litigation.

(Citations omitted). This decision serves as a reminder to counsel representing multiple parties to consider potential conflicts issues in preparing engagement letters.

Posted: August 7, 2014

Trial Court Decision Denying Motion for Failure to Follow Part Rules Reversed

On August 6, 2014, the Second Department issued a decision in Middleton v. Russell, 2014 NY Slip Op. 05631, reversing a trial court’s denial of a motion for failure to follow part rules.

In Middleton, the trial court denied the defendants’ “motion to vacate the note of issue and to compel certain disclosure on the ground that the defendants did not request a conference before making the motion in accordance with the court’s part rules.” The Second Department reversed the decision, explaining:

The Supreme Court has broad discretion in supervising disclosure and in resolving discovery disputes. However, the Appellate Division is vested with its own discretion and corresponding power to substitute its own discretion for that of the trial court.

Here, the Supreme Court improvidently exercised its discretion by denying the defendants’ motion to compel certain disclosure, on the ground that the defendants neglected to comply with its part rules requiring advance notice of the motion so that the court could determine whether the matter should be conferenced. While such rules are permissible for the purpose of assisting the court in its supervision of disclosure, the application of the subject rule to the instant matter so as to deny the defendants’ motion was improper in view of the strong indication that the defendants are entitled to additional disclosure and the demonstrated inability of the parties to reach an agreement regarding the requested disclosure.

(Internal quotations and citations omitted). The defendants got a second chance from the Second Department here, but it is hard to see what reason there could have been for not following the part rules regarding pre-motion conferences in the first instance. The Commercial Division justices who have part rules post them on the Commercial Division website. And, of course, we link to them from this blog.

Posted: August 6, 2014

Fraud Claim Dismissed for Failure to Exercise Due Diligence

On July 25, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in Northern Group Inc. v. Merrill, Pierce, Fenner & Smith, 2014 NY Slip Op. 31986(U), dismissing a fraud claim because of, among other reasons, the plaintiff’s failure to exercise due diligence.

In Northern Group, the defendant moved for summary judgment on the plaintiff’s fraud claim relating to the sale of commercial mortgage-backed securities. The court granted the motion for several reasons, including the plaintiff’s failure to exercise due diligence, explaining:

Plaintiffs’ assertion that Boris’ knowledge was inadequate, and the attempt to portray [the plaintiff] as victimizing a naive elderly woman and her son, are unavailing. The record establishes that the corporate shareholders and officers were sophisticated real estate operators who controlled properties worth hundreds of millions of dollars. That being the case, they were not entitled to blindly accept [the defendant’s]generalities about CMBS safety. A sophisticated plaintiff cannot establish that it entered into an arm’s length transaction in justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means of verification that were available to it. New York law imposes an affirmative duty on sophisticated investors to protect themselves from misrepresentations by investigating the details of the transactions. If plaintiffs’ understanding of commercial mortgage securitization was imperfect, they could have retained qualified financial experts to evaluate their anticipated investments.

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

Posted: August 5, 2014

Corporate Officer Awarded Advancement of Fees

On July 24, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in General Plumbing Corp. v. Parklot Holding Co., 2014 NY Slip Op. 31961(U), awarding a corporate officer indemnification and advancement of legal expenses in an action against him by the corporation.

In General Plumbing Corp., a commercial landlord-tenant dispute, the defendant moved to dismiss and also moved “pursuant to BCL § 724(c), for an order directing [the plaintiff] to reimburse him for the attorney’s fees and costs he has already incurred defending himself in this action, and to advance him any attorney’s fees and costs he incurs for such defense in the future.” The court granted the indemnification motion, explaining:

[The defendant] moves for reimbursement and the advancement of attorney’s fees and costs in defending this action, pursuant to BCL §724(c), on the grounds that he is entitled to indemnification as a former officer and director of [the plaintiff]. Business Corporation Law § 724 states:

(a) Notwithstanding the failure of a corporation to provide indemnification, and despite any contrary resolution of the board or of the shareholders in the specific case under section 723 (Payment of indemnification other than by court award), indemnification shall be awarded by a court to the extent authorized under section 722 (Authorization for indemnification of directors and officers), and paragraph (a) of section 723. Application therefor may be made, in every case, either:
(1) In the civil action or proceeding in which the expenses were incurred or other amounts were paid . . .
(c) Where indemnification is sought by judicial action, the court may allow a person such reasonable expenses, including attorneys’ fees, during the pendency of the litigation as are necessary in connection with his defense therein, if the court shall find that the defendant has by his pleadings or during the course of the litigation raised genuine issues of fact or law.

It is important to note that if the action is not of the kind covered under section 722, then neither Business Corporation Law § 723 nor § 724 are applicable, and the court has no statutory basis to order such indemnification. Business Corporation’Law § 722(c) states:

A corporation may indemnify any person made, or threatened to be made, a party to an action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he, his testator or intestate, is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of any other corporation of any type or kind, domestic or foreign, of any partnership, joint venture, trust, employee benefit plan or other enterprise, against amounts paid in settlement and reasonable expenses, including attorneys’ fees, actually and necessarily incurred by him in connection with, the defense or settlement of such action, or in connection with an appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation, except that no indemnification under this paragraph shall be made in respect of (1) a threatened action, or a pending action which is settled or otherwise disposed of, or (2) any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such portion of the settlement amount and expenses as the court deems proper.

[The defendant] argues that, through his pleadings and submissions to the court, he has denied any wrongdoing and raised issues of fact regarding whether his actions as president of [the plaintiff] were in good faith pursuant to BCL 724(c). Plaintiff argues that [the defendant] is not entitled to indemnification and advanced legal fees because [the defendnat] admitted that his actions were not in the best interest of [the plaintiff] and that he was balancing the interests of [others] pursuant to his personal asset allocation plan. Accordingly, plaintiff argues that pursuant to BCL 722(c), his actions were not in good faith or in the best interests of the corporation.

Where there are issues of fact in a dispute over whether a director participated in alleged wrongful conduct and acted in good faith on behalf of the corporation, courts have generally permitted the relief of advanced litigation expenses, including attorney’s fees, subject to reallocation at the end of the action pursuant to BCL 725(a). [The defendant] has successfully defended this action and properly moved for the advancement of legal fees pursuant to BCL 724 as the action was pending against him at the time the motion was filed. Accordingly, [the defendant’s] motion for the advancement of attorney’s fees pursuant to BCL 724(C) is granted. Further, as [the defendant’s] motion to dismiss the causes of action against him has been granted, [the defendant] is entitled to indemnification, in the present action only, for reasonable legal fees, pursuant to BCL §723(a).

However, the first and second causes of action do not include allegations with respect to [the defendant] and the third and fourth causes of action only involve acts allegedly taken by [the defendant] in 2013. As none of the allegations in the original complaint included actions taken by [the defendant] while he was a director or officer of [the plaintiff], for the benefit of [the plaintiff], [the defendant] is not entitled to indemnification with respect to the costs and expenses of defending this case prior to October 17, 2013 when the plaintiff amended the complaint to include causes of action against [the defendant] for his breach of duty while president of [the plaintiff].

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

Posted: August 4, 2014

Insured Demanding Reinstatement Must Pay Premiums on Improperly Terminated Life Insurance Policy

On July 25, 2014, Justice Schmidt of the Kings County Commercial Division issued a decision in Rubenstein v. The Lincoln National Life Insurance Co., 2014 NY Slip Op. 31957(U), ruling that the holder of life insurance policy that was improperly terminated without the required statutory notice must pay premiums due for the period when the policy lapsed.

The court explained that the policyholder had to pay the premiums on the policy it sought to have the court reinstate:

Plaintiff cites Weld v MidAmerica Mutual Life Insurance Company, 385 N.W.2d 58 (Court of Appeals, Minnesota, 1986) to support the position that insurance premiums need not be paid during a period when no coverage was in effect. In Weld, the plaintiffs health insurance policy had lapsed for non-payment of premiums, however the defendant reinstated the policy by accepting subsequent premium payments. Unbeknownst to the plaintiff, the payments he made after the policy’s reinstatement were being applied by defendant retroactively to pay the prior defaults. When plaintiff suffered an injury a few months after the policy was reinstated, the carrier declined coverage as the insurance premiums were deemed two months overdue, beyond the 31 days grace period for making a claim after missing a premium payment. The court found that the language of the policy failed to give the plaintiff notice that his premium payments will be applied to prior defaults. Rather, the language of the policy implied that coverage would begin anew upon the reinstatement date. As such, the court found that the plaintiff had commenced a new term of insurance when his policy was reinstated, and that the defendant was obligated to pay plaintiff’s claim and it could not retroactively apply plaintiff’s premiums to a period during which he had no coverage.

The facts in Weld are completely distinguishable from the facts in this case. In Weld, the plaintiff was paying monthly premiums without any notice that his insurance company was accepting these payments while considering itself under no obligation to provide coverage to him. The court found that defendant was not entitled to claim that it was reinstating the plaintiff’s insurance policy without advising the plaintiff that he would be paying back past due premiums before his coverage would commence. The court found that coverage began anew on the reinstatement date and thus plaintiff was covered for his losses incurred during the period that he was paying premiums on the reinstated policy.

In the present case, the policy in question is a life insurance policy, and at the time the defendant declared it in lapse, it was actually in effect. Moreover, unlike Weld, once the policy is reinstated, plaintiff cannot claim that he was not covered for the entire time in question. Plaintiff has not demonstrated any legal or factual basis to find that defendant’s error in declaring the policy to have lapsed relieves the plaintiff of the obligation to pay the premiums for the coverage that he purchased for the entire time period that it is in effect. This would result in plaintiffs obtaining an unearned windfall of having a Five Million Dollars life insurance policy while not paying any premiums towards it for four years. Moreover, unlike Weld, the insurance contract here clearly states that to reinstate the policy, the holder must pay the amount of the debt.

This decision serves as a reminder that statutory notice requirement prior to the termination of an insurance policy are strictly enforced and if not complied with can give the insured another chance to reinstate coverage. Another take-away from this decision is that the courts are not inclined to give the insured a windfall, so back premiums will likely have to be paid.

Posted: August 3, 2014

Petition to Stay Mandatory Mediation Dismissed

On July 25, 2014, Justice Schmidt of the Kings County Commercial Division issued a decision in Matter of Albee Development LLC v. Casino Development Group, Inc., 2014 NY Slip Op. 31959(U), dismissing a petition to stay a mandatory mediation.

In Matter of Albee Development LLC, the respondent initiated an arbitration with the petitioner regarding a contract dispute. The petitioner petitioned to stay the arbitration because, among other grounds, the clause upon which the respondent relied in initiating the arbitration called for mandatory mediation, not arbitration. The court denied the petition, explaining:

[T]he court rejects as meritless petitioners’ assertion that [the petitioner] did not expressly agree to arbitration. Specifically, the contention that the subject agreements do not require [the petitioner] to submit to arbitration of disputes because the provisions specify “binding mediation” as the dispute resolution procedure instead of the word “arbitration” lacks merit. This distinction is not relevant for the purposes of CPLR Article 75; as respondent correctly observed, a trial court of this state has applied Article 75 to a “binding mediation” in confirming a mediation award. Moreover, given if this court were to find a meaningful distinction between the two expressions, in either situation, [the petitioner] has agreed to be bound by the decisions of a neutral third-party that, resolve disputed claims up to the applicable threshold-each contract provides that, unless a contrary agreement is made, “mediation shall be in accordance with Construction Industry Mediation Rules of the American Arbitration Association[.]” Given that the demands served by respondent appear to comply with the applicable rules of the subject organization, this court shall not interfere with the bargained-for alternative dispute resolution process based on the distinction between “binding mediation” and arbitration.

(Internal quotations and citations omitted).

Posted: August 2, 2014

No Personal Jurisdiction Based on Solicitation of Business in State Without More

On July 30, 2014, the Second Department issued a decision in Mejia-Haffner v. Killington, Ltd., 2014 NY Slip Op. 05522, affirming a dismissal for lack of personal jurisdiction.

In Mejia-Haffner, the plaintiffs sued a Vermont ski resort in Queens County. Even though the resort advertised in New York, the Second Department affirmed the dismissal for lack of personal jurisdiction, explaining:

A foreign corporation is amenable to suit in New York courts under CPLR 301 if it has engaged in such a continuous and systematic course of doing business here that a finding of its presence in this jurisdiction is warranted. Mere solicitation of business within New York will not subject a defendant to New York’s jurisdiction. Instead, a plaintiff asserting jurisdiction under CPLR 301 must satisfy the standard of solicitation plus, which requires a showing of activities of substance in addition to solicitation.

Even assuming that [the defendant] engaged in substantial advertising in New York, as the plaintiffs claim, the plaintiffs have not demonstrated that [the defendant] also engaged in substantial activity within this State sufficient to satisfy the solicitation-plus standard. Contrary to the plaintiffs’ contention, this Court’s decision in Grimaldi v Guinn (72 AD3d 37, 49-50) does not stand for the principle that a business’s interactive website, accessible in New York, subjects it to suit in this State for all purposes. Instead, the Grimaldi decision stands only for the more limited principle that a website may support specific jurisdiction in New York where the claim asserted has some relationship to the business transacted via the website. Here, even [the defendant’s] alleged substantial solicitation in New York constitutes no more than solicitation.

(Internal quotations and citations omitted) (emphasis added). The Second Department also affirmed the ruling that there was no jurisdiction under CPLR 302.

This decision illustrates the limits to asserting jurisdiction based on solicitation of business in New York.

Posted: August 1, 2014

Legal Argument to be in Memorandum of Law, Not Attorney Affirmation

On July 17, 2014, Justice Bransten of the New York County Commercial division issued a decision in Response Personnel, Inc. v. Aschenbrenner, 2014 NY Slip Op. 31948(U), reminding counsel to make legal argument in a memorandum of law, not an attorney affirmation.

In Response Personnel, the court decided a motion for summary judgment. In the decision, the court reminded counsel of the requirement to use a memorandum of law to make legal argument.

The Court notes that both Plaintiff and Defendants submitted affirmations to the Court in lieu of memoranda of law. As the attorneys for both Plaintiff and Defendants are no doubt aware, argument is to be presented in a memorandum of law. The affirmation is neither a replacement for a memorandum of law nor a place to submit additional argument. Both attorneys are directed to refrain from the submission of argumentative affirmations in the future.

(Internal quotations and citations omitted).

Notwithstanding the rules, what counsel did here is a common practice in regular court parts. However, it is not the standard of practice in the Commercial Division, as Justice Bransten points out.