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Current Developments in the Commercial Divisions of the
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Posted: June 4, 2014

Notwithstanding Internal Affairs Doctrine, Some Claims in Derivative Action Governed by New York Law

On June 3, 2014, the First Department issued a decision in Culligan Soft Water Co. v. Clayton Dubilier & Rice LLC, 2014 NY Slip Op. 03955, holding that notwithstanding the internal affairs doctrine, New York law applied to some of the derivative plaintiff’s claims.

In Culligan, the plaintiff brought a derivative action on behalf of Culligan, Ltd., a Bermuda company. The First Department reversed in part the trial court’s dismissal of the complaint, holding that notwithstanding the internal affairs doctrine, some of the plaintiff’s claims were governed by New York, not Bermuda, law, explaining:

[T]he internal affairs doctrine . . . recognizes that only one State should have the authority to regulate a corporation’s internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders. Since the internal affairs doctrine does not apply to those defendants who are not current officers, directors, and shareholders of Culligan Ltd., namely, Angelo, Gordon & Co., L.P., Silver Oak Capital, L.L.C., Centerbridge Special Credit Partners, L.P., CCP Credit Acquisition Holdings, L.L.C., CCP Acquisition Holding, L.L.C., and Clayton Dubilier & Rice LLC, Bermuda law does not apply to claims asserted against them.

Nor does the internal affairs doctrine apply to claims based on sections of the Business Corporation Law (BCL) enumerated in BCL §§ 1317 and 1319. BCL § 1319(a)(1) expressly provides that BCL § 626 (shareholders’ derivative action) shall apply to a foreign corporation doing business in New York. Thus, the issue of plaintiffs’ standing to bring a shareholder derivative action is governed by New York law, not Bermuda law. We note that Matter of CPF Acquisition Co. v. CPF Acquisition Co. (255 AD2d 200 [1st Dept 1998]) held that the plaintiff’s standing to sue was governed by Delaware law because Delaware was the State of the corporation’s incorporation. However, there is no indication that the plaintiff in that case raised BCL § 1319.

Pursuant to German-American Coffee Co. v. Diehl (216 NY 57, 62-64 [1915]) and BCL §§ 1319(a)(1), 719(a)(1), and 510, New York law applies to the second cause of action, which alleges that the directors of Culligan Ltd. declared illegal dividends.

To the extent plaintiffs allege violations of BCL § 720 (e.g. waste and unlawful conveyance), which is made applicable to foreign corporations doing business in New York by BCL § 1317(a)(2), those claims are also governed by New York law. However, to the extent plaintiffs allege a violation of a section of the Business Corporation Law not enumerated in BCL § 1317 (e.g. § 717, which is part of plaintiffs’ breach of fiduciary duty claim), New York law does not apply. Those claims are governed by Bermuda law and were thus correctly dismissed.

BCL § 1317 permits plaintiffs to sue Culligan Ltd.’s directors and officers. However, defendant Clayton Dubilier & Rice Fund VI Limited Partnership (CDR Fund VI) is neither a director nor an officer of Culligan Ltd.; it is Culligan Ltd.’s majority shareholder. Hence, there is no basis for applying New York law to the claims against CDR Fund VI. It is undisputed that, under Bermuda law, plaintiffs’ claims against CDR Fund VI, as currently pleaded, were correctly dismissed.

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

One of the challenges in a derivative action is the proper application of the law of the jurisdiction of incorporation, not New York, to claims under the internal affairs doctrine. As this decision illustrates, however, the internal affairs doctrine might not apply to all claims in an action. Thus, a plaintiff needs to do a claim-by-claim analysis to determine which law applies to which claim.

Posted: June 3, 2014

Guest Post: New York County Commercial Division Grants TRO Enforcing Restrictive Covenants Pending FINRA Arbitration with Departing Employees

This guest post was written by Isaac B. Zaur of Clarick Gueron Reisbaum LLP.

Last week saw rapid-fire briefing and argument before Justice Marcy Friedman of New York County’s Commercial Division over dueling requests for “emergency” interim relief in a dispute concerning the departure of a Deutsche Bank investment advisory team. Three days after the first action was commenced, the Court entered partial interim relief in favor of Deutsche Bank. The dispute sits at the intersection of the substantive law concerning the enforceability of restrictive covenants in employment agreements and the phenomenon of injunctive relief “in aid of arbitration.”

On Friday, May 16, 2014, ten New York-based members of Deutsche Bank’s “discretionary portfolio management” division, including that division’s two most senior members, handed in letters of resignation. Over the next several days, another eight Deutsche Bank employees resigned. The resigning personnel have indicated an intention to join an investment advisory and private wealth management firm named HPM Partners, but apparently are continuing to appear for work each day at Deutsche Bank. (more…)

Posted: June 2, 2014

Agreement Term Shortening Limitations Period Applies to Claims Arising From the Agreement

On May 27, 2014, the First Department issued a decision in Smile Train, Inc. v. Ferris Consulting Corp., 2014 NY Slip Op. 03785, enforcing an agreement term shortening the limitations period to bring a claim relating to the agreement.

In Smile Train, the defendants moved to dismiss the plaintiff’s claims based on a contract term shortening the limitations period in which to make a claim. The First Department affirmed the trial court’s decision granting the motion, explaining:

An agreement which modifies the Statute of Limitations by specifying a shorter, but reasonable, period within which to commence an action is enforceable provided it is in writing. In addition, it must not be so vague and ambiguous that it is unenforcible. . . . .

We . . . disagree with plaintiff’s contention that [the limitations provision in the parties’ contract] does not apply to its claim for breach of the implied covenant of good faith and fair dealing. It is true that I.C.C. Metals v Municipal Warehouse Co. (50 NY2d 657 [1980]) says that a party may not limit its liability for an intentional tort. However, breach of the implied covenant of good faith and fair dealing is not a tort; rather, it is a contract claim. A claim for breach of the implied covenant of good faith and fair dealing may not be used as a substitute for a nonviable claim of breach of contract. It would be anomalous if plaintiff’s contract claim were subject to a three-month statute of limitations but its claim for breach of the implied covenant were not.

(Internal quotations and citations omitted).

The decision to agree to a shortened limitations period might seem small when an agreement is signed, but transactional counsel should remember that such agreements will be enforced, sometimes with significant consequences.

Posted: June 1, 2014

Motion for Summary Judgment in Lieu of Complaint Denied Because Right to Payment Not Ascertainable from Document

On May 20, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in Goddard Investors II, LLC v. Goddard Development Partners II, LLC, 2014 NY Slip Op. 31335(U), denying a motion for summary judgment in lieu of complaint based on a guaranty because the plaintiff’s right to payment could not be ascertained from the face of the guaranty.

In Goddard Investors II, the plaintiff “move[d] pursuant to CPLR 3213 for summary judgment in lieu of complaint on a note and guaranty.” The court denied the motion with respect to the guaranty, explaining:

A claim on an instrument for the payment of money is established by proof of the instrument and a failure to make the payments called for by its terms. Proof of the fulfillment of the condition precedent to the obligation to repay, comes within this limited category of elements of proof which may be established by extrinsic evidence without rendering accelerated treatment unavailable.

The fact that defenses may be asserted against the instrument sued upon does not preclude the use of CPLR § 3213 as long as the right to payment can be ascertained from the face of the document without regard to extrinsic evidence, other than simple proof of nonpayment or a similar de minimis deviation from the face of the document. Determining the amount to be paid under the guaranty by reference to a note or a mortgage to which the Guaranty relates is a de minimis deviation in CPLR § 3213 actions for payment.

An unconditional guaranty is an instrument for the payment of money only. A guaranty is not an instrument for the payment of money only when it is relates to a stock purchase agreement which did not specify a sum certain or a series of purchase orders with separately issued invoices. The same result is reached when the guaranty is conditioned upon creditor refraining from disparaging comments about her former employer, because it requires investigation into whether the condition was respected or not.

The Note [is not] an instrument for the payment of money only because the right to payment cannot be ascertained from the face of the document. Although the Note reads that the GDP promises to pay the principal amount of $500,000 with an annual 8% interest, the payment is expressly conditional on the acquisition and sale of property. This is not the sort of de minimus deviation from the face of document that CPLR 3213 contemplates.

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

CPLR 3213 is a powerful tool for resolving commercial disputes. As this decision shows, however, its scope is limited.

Posted: May 31, 2014

Covenant of Good Faith and Fair Dealing Breached When Plaintiff’s Rights Under an Agreement are Frustrated

On May 29, 2014, the First Department issued a decision in Pleiades Publishing, Inc. v. Springer Science + Business Media LLC, 2014 NY Slip Op. 03917, affirming that the plaintiff had stated a claim for breach of the implied covenant of good faith and fair dealing.

In Pleiades Publishing, the plaintiff, “a publisher of English-language versions of Russian-language scientific, technical, and medical journals,” sued the defendant, the “plaintiff’s exclusive distributor pursuant to an agreement that required it to use ‘commercially reasonable efforts’ to promote the Russian-language journals and to market and promote them as ‘offerings in its online database,” alleging “that [the] defendant incorporated its journals into a bundle of available ‘non-subscribed’ journals, which disguised from customers the ‘separate identity, value proposition, and pricing approach for the” database. The First Department affirmed the trial court’s refusal to dismiss the plaintiff’s claim for breach of the implied covenant of good faith and fair dealing, explaining:

These allegations state a cause of action for breach of the implied covenant of good faith and fair dealing. While the agreement granted defendant the discretion to decide how to market and promote the [database], defendant did not have the right to exercise that discretion in such a way as to frustrate plaintiff’s rights under the agreement, deprive plaintiff of the value of its journals, or benefit itself at plaintiff’s expense.

(Internal quotations and citations omitted).

Claims for breach of the implied covenant of good faith and fair dealing are often dismissed because of the narrow circumstances in which the covenant applies. This decision illustrates how successfully to plead such a claim.

Posted: May 30, 2014

Lack of Personal Jurisdiction not a Defense to Domestication of a Foreign Judgment

On May 27, 2014, the First Department entered a decision in Abu Dhabi Commercial Bank PJSC v. Saad Trading, 2014 NY Slip Op. 03767, holding that lack of personal jurisdiction is not a defense to an action to domesticate a foreign judgment.

In Abu Dhabi Commercial Bank, the plaintiff sought to “domesticate and enforce” the judgment of an English court. The defendant moved to dismiss “on the grounds of lack of personal jurisdiction in New York and forum non conveniens.” The First Department affirmed the trial court’s denial of the motion, explaining:

New York has traditionally been a generous forum in which to enforce judgments for money damages rendered by foreign courts. Historically, New York courts have accorded recognition to the judgments rendered in a foreign country under the doctrine of comity absent some showing of fraud in the procurement of the foreign country judgment or that recognition of the judgment would do violence to some strong public policy of this State.

In accordance with this tradition, New York adopted the Uniform Foreign Country Money-Judgments Recognition Act as CPLR article 53, which was intended to codify and clarify existing case law applicable to the recognition of foreign country money judgments based on principles of international comity, and, more importantly, to promote the efficient enforcement of New York judgments abroad by assuring foreign jurisdictions that their judgments would receive streamlined enforcement here. (more…)

Posted: May 29, 2014

Court of Appeals Arguments of Interest for the Week of June 2, 2014

Arguments the week of June 2, 2014, in the Court of Appeals that may be of interest to commercial litigators.

  • No. 129: People v. John F. Haggerty, Jr. (To be argued Tuesday, June 3, 2014) (this is a criminal case addressing an evidentiary issue also relevant to commercial litigators—the best evidence rule: specifically, whether the testimony of the attorney who drafted a trust is admissible to prove the ownership of the trust assets when the trust agreement was available). See First Department decision here.
  • No. 136: In re: Thelen LLP (Geron v Seyfarth Shaw LLP) and No. 137: In re: Coudert Brothers, LLP (Development Specialists, Inc. v K&L Gates LLP) (To be argued Wednesday, June 4, 2014) (addressing certified questions from the Second Circuit: “Under New York law, is a client matter that is billed on an hourly basis the property of a law firm, such that, upon dissolution and in related bankruptcy proceedings, the law firm is entitled to the profit earned on such matters as the “unfinished business” of the firm?” and “If so, how does New York law define a ‘client matter’ for purposes of the unfinished business doctrine and what proportion of the profit derived from an ongoing hourly matter may the new law firm retain?). See Second Circuit decisions in In re: Thelen LLP here and In re: Coudert Bros. LLP here .
Posted: May 29, 2014

Unit Owners’ Vote Insulates Condominium Board from Derivative Action

On May 16, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in DSW Lenox, LLC v. Rosetree on Lenox Ave., LLC, 2014 NY Slip Op. 31311(U), dismissing a derivative action against a condominium’s board of directors.

The court’s opinion in DSW Lenox addresses several distinct legal questions. This post focuses on the board’s refusal to commence litigation as an alleged breach of fiduciary duty.

In DSW Lenox, the plaintiff—the owner of a condominium unit—brought a derivative claim against the board members of the condominium, alleging that, by refusing to sue the condominium’s sponsor and developers for construction defects, the board members had breached their fiduciary duties.

The court began its analysis by reciting the applicable standards: the business judgment rule usually “prohibits judicial inquiry into actions of corporate directors” unless the plaintiff can allege that the directors breached their fiduciary duty. In the context of a condominium board, “an aggrieved unit owner must make a showing that the board acted (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose or (3) in bad faith.”

In response to the plaintiff’s allegation that the board members failed to act in the unit holders’ best interests, the court held that “that claim is disproved by [the plaintiff’s] admission that the unit holders themselves voted against the lawsuit”—the complaint itself admitted that “the purported Board members decided to poll the unit owners to ask whether a complaint should be filed and all unit owners except DSW voted against the suit.” Accordingly, the plaintiff could not allege that the board’s decision was contrary to the “collective interests of the cooperative.”

The court also rejected the argument that the board members had improperly relied on the advice of attorneys who had conflicted interests—to allege breach of fiduciary duty, the plaintiff was obliged to show that the board members themselves had conflicting interests or would profit personally from the decision, or that their reliance on the legal advice was “unreasonable,” and the plaintiff failed to meet that burden.

In light of the fact that a derivative action is intended to vindicate the rights of the shareholders from an overreaching board, a vote by the shareholders—here, the unit owners—authorizing the board’s decision logically precludes a derivative action.

Posted: May 28, 2014

Unilateral Mistake Insufficient to Justifiy Reformation of Deed Without Clear and Convincing Evidence of Fraud

On May 22, 2014, the Third Department issued a decision in Timber Rattlesnake, LLC v. Devine, 2014 NY Slip Op. 03718, affirming the refusal to reform a deed.

In Timber Rattlesnake, the plaintiff was the assignee of a contract to purchase real estate. After the plaintiff discovered that “the deed contained a restrictive covenant that had not been referenced in the contract of sale, [the plaintiff] requested that decedent correct the deed. Decedent refused and plaintiff commenced this action seeking, among other things, reformation of the deed.” The trial court (Supreme Court, Sullivan County) held that the plaintiff had not established grounds for reformation of the deed. The Third Department affirmed, explaining:

A party seeking reformation must establish, by clear and convincing evidence, that the writing in question was executed under mutual mistake or unilateral mistake coupled with fraud. The burden is on the proponent of reformation to establish, by clear and convincing evidence, that the relief is warranted.

Here, it is undisputed that the deed’s restrictive covenant was not set forth in the contract of sale and [the plaintiffs assignor] testified that he first became aware of it when he received the deed after the closing. Thus, plaintiff established the existence of a unilateral mistake regarding whether the restrictive covenant was intended to be included as a condition of the sale. Nonetheless, plaintiff’s proof fell short of establishing fraud on decedent’s part, which requires a misrepresentation that is false and that the defendant knows is false, made to induce the other party to rely on it, justifiable reliance on the misrepresentation by the other party, and injury. Decedent’s attorney testified that he believed the parties had intended to include the restrictive covenant in the deed and that he added it to the proposed deed after he realized that it had been omitted therefrom. Prior to the closing, decedent’s attorney had his legal assistant send the deed containing the restrictive covenant to the title insurance company by facsimile and contact plaintiff’s attorney regarding the deed. Although some negative inferences could be drawn from the fact that decedent and his representatives failed to ensure that plaintiff’s attorney was actually informed of the addition to the deed before the closing, other credible evidence suggested that decedent’s counsel made efforts to so inform plaintiff. The attorney who appeared for decedent at the closing further provided the deed to plaintiff’s attorney at the closing. Notably, the restrictive covenant language is clearly evident on the face of the executed deed and would easily have been discovered with even a cursory examination. Decedent’s attorney testified that he had no intention of deceiving plaintiff. Under these circumstances, plaintiff failed to establish that decedent intended to induce its reliance on any misrepresentation.

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