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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: June 19, 2014

Opportunity to Comment on Proposed Change to Commercial Division Rules

The Office of Court Administration has asked for public comment on yet another proposed change to the rules of the Commercial Division.

The proposed new rule would “establish a presumptive limit of 10 depositions for each side and limit the duration of depositions to seven hours per witness.”

E-mail comments to rulecomments@nycourts.gov by August 19, 2014.

Posted: June 19, 2014

Action Against Referral Service Fails

On June 9, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in Vista Food Exchange, Inc. v. Benefitmall, 2014 NY Slip Op. 31491(U), dismissing an action against a referral/management service.

In Vista Food Exchange, the parties’ dispute began when the defendants allegedly referred the plaintiff, a small food wholesaler, to a third party for HR services. After the HR firm apparently collapsed, leaving the plaintiffs’ employees without health or workers’ compensation coverage, and the plaintiff’s tax obligations unpaid, the plaintiff sued the defendants under several legal theories.

The Court dismissed most of the plaintiff’s causes of action with prejudice. Negligent misrepresentation was dismissed because no special relationship existed that would create a duty independent of contract (the parties’ 20-year relationship was insufficient) and the economic loss rule also restricted the plaintiff to a contract remedy. Breach of fiduciary duty and professional malpractice claims were also dismissed because—absent facts not found here—a relationship with a management consultant is not of sufficient “trust and confidence” to elevate it beyond a “conventional business relationship.”

The breach of contract claim was more complicated. The defendants moved to dismiss for a number of different reasons, including: (1) that the plaintiff failed to specify which contract provisions were breached; (2) that to be enforceable, any contract to provide referrals must be in writing, pursuant to GBL § 5-701(a)(10); (3) the plaintiff’s allegation that the defendants’ duties extended beyond mere referral to due diligence and monitoring are purely conclusory; and (4) the plaintiff’s failure to allege actual damages—as opposed to possible future damages due to a double tax liability—makes their contract claim unripe. The contract claim was dismissed upon the court’s finding that the plaintiff had failed to allege the elements of a contract, including damages, but the plaintiff was given leave to replead that cause of action.

Posted: June 18, 2014

Fraud Claim Dismissed for Lack of Reasonable Reliance Where Sophisticated Plaintiff Failed to Conduct Due Diligence

On June 13, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Phoenix Light SF Ltd. v. Goldman Sachs Group, Inc., 2014 NY Slip Op. 50917(U), dismissing a fraud claim brought by sophisticated investors who alleged misrepresentations in the offering documents for a mortgage-backed securities investment.

In Phoenix Light, the court noted that “[u]nder New York law, there is an affirmative duty imposed on sophisticated investors, such as plaintiffs, to protect themselves from misrepresentations made during business acquisitions by investigating the details of the transactions”:

It has been held that as a matter of law, 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

Nonetheless, a fraud claim may proceed where a plaintiff has sufficiently alleged that defendant possessed peculiar knowledge of the facts underlying the fraud, and the circumstances present would preclude any investigation by plaintiff conducted with due diligence. Thus, if the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.

(Citations and internal quotation marks omitted.)

Justice Ramos found that the defendants in Phoenix Light did have “peculiar knowledge about the misrepresentations and omissions.” However, he nevertheless found that the complaint did not state a cause of action for fraud because “the allegations of the complaint, itself, actually establish that plaintiffs could have uncovered defendants’ alleged misrepresentations and omissions if they had exercised due diligence by asking for the loan files, which plaintiffs admit was information available at the time they bought the Certificates”:

[P]laintiffs and their external asset and investor managers reviewed only the data presented by defendants in the Offering Documents, despite having the ability to ask to review the loan files. The complaint alleges that defendants “did not share” the loan files, but there are no allegations that plaintiffs sought this pertinent information and that defendants denied access to it. It does not matter if the failure to seek this information was because of blind faith in the process of origination and/or securitization, or if it was attributable to the desire to quickly get on board of what the investors thought was a profitable bandwagon, the obligation of a sophisticated investor to inquire cannot be merely excused.

This decision illustrates the high burden that a sophisticated investor must satisfy to state a fraud claim arising from a commercial transaction. If the plaintiff could have availed itself of information from which it could reasonably have discovered the alleged misrepresentation, it will not be able to plead reasonable reliance, even if it did in fact rely on the misrepresentation.

Posted: June 17, 2014

Transcripts and Videos of Arguments in the Court of Appeals for the Week of June 2, 2014, Now Available

On May 29, 2014, we noted two cases of interest from the oral arguments for the week of June 2, 2014:

  • Docket No. 129: People v. John F. Haggerty, Jr. (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 the transcript and the video.
  • Docket 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) (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 the transcript and the video.
Posted: June 16, 2014

No-Action Clause Must Be Strictly Construed

On June 10, 2014, the Court of Appeals issued a decision in Quadrant Structured Products Co., Ltd. v. Vertin, 2014 NY Slip Op. 04114, construing the scope of a no-action clause in a securities litigation.

The underlying action in Quadrant Structured Products is taking place in the Delaware Chancery Court. The plaintiff, a noteholder, sued the issuer for breach of fiduciary duty, fraudulent transfer, and other claims. The issuer argued that the action was barred by a no-action clause in an indenture signed by the noteholders providing:

No holder of any Security shall have any right by virtue or by availing of any provision of this Indenture to institute any action . . . upon or under or with respect to this Indenture . . . unless such holder previously shall have given to the Trustee written notice of default in respect of the series of Securities held by such Security holder . . . and unless also the holders of not less than 50% of the aggregate principal amount of the relevant series of Securities at the time outstanding shall have made written requests upon the Trustee to institute such action . . . .

The plaintiff argued that, by its language, the no-action clause applied only to actions on the indenture, and not to actions brought on the securities themselves. After a number of conflicting decisions in the Delaware courts, and because the indenture was governed by New York law, the Supreme Court of Delaware certified the question to the Court of Appeals.

The Court of Appeals agreed with the plaintiff. Distinguishing this indenture from others where the no-action clause “specifically mentioned claims arising under both the indenture and ‘the Securities,’” (emphasis in the original) the Court found that the no-action clause “only extended to actions or proceedings where a securityholder claims a right by virtue or by availing of any provision of the indenture.”

The Court of Appeals based this holding upon the fundamental rules of contract interpretation:

As the case law further establishes, we read a no-action clause to give effect to the precise words and language used, for the clause must be ‘strictly construed’ . . . . Even where there is ambiguity, if parties to a contract omit terms—particularly, terms that are readily found in other, similar contracts—the inescapable conclusion is that the parties intended the omission . . . . where [a] sophisticated drafter omits a term, expressio unius precludes the court from implying it from the general language of the agreement.”

The court further rejected the defendant’s argument that such an interpretation would defeat the purpose of the no-action clause and the intent of the parties—which was allegedly to prohibit individual suits by securityholders without the consent of the majority—by pointing out that the no-action clause only permitted the Trustee to take action with respect to “default in respect to the series of Securities,” and no default had yet occurred. “Logically then, the no-action clause applies when the Trustee is authorized to decide whether to act; it cannot serve as an outright prohibition on a suit filed by a securityholder in the case where the Trustee is without authorization to act.” (The Court also noted that the language was unambiguous, and that the intention of the parties could be determined from the four corners of the agreement.)

It appears therefore that this case turned on two drafting omissions in the no-action clause: (1) failing to restrict actions on the indenture and the securities; and (2) failing to explicitly bar all suits in the absence of a default.  From the perspective of a commercial litigator in a dispute where “form language” is commonly used, the case also shows that courts can be persuaded to give substantial weight to any particular deviations from that “standard form.”

Posted: June 16, 2014

First Department Addresses Disclosure of Documents That Are Privileged as to Only Some Parties

On June 10, 2014, the First Department issued a decision in Arkin Kaplan Rice LLP v. Kaplan, 2014 NY Slip Op. 04154, addressing the disclosure of documents that were privileged as to some plaintiffs but not others.

Arkin Kaplan Rice, one of the plaintiffs moved “for, among other things, disclosure of a legal file maintained by a nonparty law firm . . . in connection with a prior joint representation of the individual defendants and” that plaintiff. The First Department affirmed, with modification, the trial court’s grant of that motion in a decision that addresses the sometimes complicated issue of documents that are privileged to some opposing parties but not others:

The parties agree that, to the extent the attorney-client privilege has not been waived, the documents in the joint-representation file are privileged with respect to persons other than [the moving plaintiff] and the individual defendants. . . . Accordingly, the IAS court erred in implicitly finding that defendants’ disclosure of the email waived the privilege with respect to any documents in the file pertaining to the specific subject matter addressed in the email. However, the email dated March 29, 2012, which revealed part of [the moving plaintiff’s] understanding of a call with the mediator and the information he relayed, was a privileged communication. Therefore, the IAS court correctly held (albeit implicitly) that defendants’ disclosure of that email waived the privilege with respect to any documents in the file pertaining to the subject matter of the email. Accordingly, [the moving plaintiff’s] coplaintiffs are entitled to only those documents in the file pertaining to the subject matter of the March 29, 2012 email.

This Court has already noted that the documents in the joint-representation file are not privileged as to [the moving plaintiff], and that she may use them in her litigation against the individual defendants. However, this Court also noted that the documents in the file are privileged as against [her] coplaintiffs, who were not jointly represented by the [the nonparty law] firm, and that she cannot unilaterally waive the privilege so as to benefit her coplaintiffs. Therefore, we remand to the IAS court to set forth guidelines and procedures for [the moving plaintiff’s] use in this litigation of the privileged documents in the file (i.e., those documents that do not pertain to the subject matter of the March 29, 2012 email) so as to protect the privilege.

Posted: June 15, 2014

Court Refuses to Enforce Alleged Parol Forum Selection Clause

On June 12, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Zucker v Ron Waldmann, Basel, LLC, 2014 NY Slip Op. 50914(U), rejecting an argument that a parol forum selection clause applied to an action on a written contract without a forum selection clause.

In Zucker, the defendant moved to dismiss on several grounds, including lack of personal jurisdiction. The trial court held that it lacked personal jurisdiction over the defendants, rejecting the plaintiff’s argument that the parties had agreed in a telephone call that any dispute would be litigated in New York. The court explained:

Plaintiff, in his affidavit, attests that [the defendants] specifically agreed with him that any and all disputes concerning his investment could be taken care of in a court action here in New York. He claims that this agreement as to New York jurisdiction was reached during a telephone call made to him in Brooklyn before he signed the Investment Agreement. He states that he accepted [the individual defendant’s] word on this, without insisting that he put it in writing. While conceding that the Investment Agreement does not mention this aspect of their agreement, plaintiff points to the fact that the Investment Agreement does not specifically state that it constitutes the entire agreement between him and [defendants]. He further states that he relied upon this representation . . . executing the Investment Agreement, and claims that since [the individual defendant] was also a New York City resident at that time, he thought that it made sense that they would have access to New York courts in the event of a dispute. He argues that there is an issue of fact as to whether [the parties] agreed that all disputes among them could be litigated in New York. . . . Here, there is no forum selection clause contained in the Investment Agreement. When parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms, and evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing. Thus, since the written Investment Agreement between the plaintiff and Basel was unambiguous, parol evidence to add terms to this agreement is inadmissible.

(Internal quotations and citations omitted).

Posted: June 14, 2014

Personal Guaranty Unenforceable Because Loan was Usurious

On June 3, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Sasidharan v. Piverger, 2014 NY Slip Op. 50890(U), refusing to enforce a personal guaranty because the loan it guaranteed was usurious.

In Sasidharan, the plaintiffs sued a guarantor for payment on a guaranty. The trial court granted the guarantor’s motion to dismiss, explaining:

Under New York law, usurious contracts are unenforceable. A usurious contract is void and relieves the obligor thereunder of the obligation to repay principal and interest thereon.

A transaction is usurious under civil law when it imposes an interest rate exceeding 16% per annum, and it is criminally usurious when it imposes an interest rate exceeding 25% per annum. While the defense of civil usury is unavailable to a corporation or an individual guarantor of a corporate obligation, a corporation or a guarantor of a corporation’s debt may assert a defense of criminal usury. Thus, Piverger, as a guarantor of ACI’s obligation, who was not involved in the drafting of the note, and did not obtain any direct benefit from the loan transaction, may raise the defense of criminal usury.

Here, since the note was extended to January 18, 2012, it was a one-year loan of $150,000 with interest of $32,000 (plus the $7,500 extension fee) resulting in interest of $39,500 for one year, which is in excess of 25% annual interest (which would be $37,500), rendering it criminally usurious. In addition, the sums retained by a lender are included as interest. Thus, since ACI never received the amount of $63,000 of the $150,000 loaned which was held in escrow and later released to plaintiffs, this effectively resulted in an annual interest of $39,500 on disbursed funds of $87,000, rendering it further in excess of the rate of 25% established for criminal usury.

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

This decision illustrates that in analyzing whether a loan is usurious–and thus unenforceable–courts look to the substance of the transaction, including all fees, and not simply whether a loan recites an interest rate above the legal maximum. It also shows the draconian penalty for making an usurious loan–not reformation to the maximum rate, but unenforceability. Given the stakes, counsel should take particular care not to cross the usury threshold.

Posted: June 13, 2014

Liability Insurer did not Waive Defense of Late Notice by Failing to Disclaim Coverage on this Ground “As Soon as Reasonably Possible”

On June 10, 2014, the Court of Appeals issued a decision in KeySpan Gas Electric Corp. v. Munich Reinsurance America, Inc., 2014 NY Slip Op. 04113, holding that the “mere passage of time” does not effect a waiver of a liability insurer’s right to disclaim coverage for untimely notice by the insured; rather the insurer’s delay must be assessed under the common law doctrines of waiver and estoppel.

In KeySpan, the plaintiff brought a declaratory judgment action seeking coverage for losses relating to environmental contamination at sites formerly owned by LILCO. The insurer asserted an affirmative defense based on LILCO’s failure to give timely notice of the claim, which was a condition precedent to coverage under the policy. On summary judgment, the Supreme Court rejected LILCO’s argument that the insurer waived the untimely notice by failing to disclaim coverage on that basis prior to the lawsuit. The Appellate Division reversed, finding that “issues of fact remain as to whether defendants waived their right to disclaim coverage based on late notice” by “failing to timely issue a disclaimer.” The Appellate Division held that, on remand, a jury should consider whether the insurance company “possessed sufficient knowledge to require that they meet the obligation to issue a written notice of disclaimer on the ground of late notice as soon as reasonably possible after first learning of the accident or of grounds for disclaimer of liability.”

The Court of Appeals held that the Appellate Division applied the wrong standard in evaluating the waiver argument. The Appellate Division’s “as soon as reasonably possible” standard derives from a provision of the New York Insurance Law (Section 3420(d)(2) that by its terms is limited to coverage for “death or bodily injury”:

If under a liability policy issued or delivered in this state, an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.

The Court of Appeals held that this standard did not apply in this case, where the coverage at issue concerned environmental harm rather than death or bodily injury:

The Legislature enacted section 3420(d)(2) to “aid injured parties” by encouraging the expeditious resolution of liability claims. To effect this goal, the statute establishes an absolute rule that unduly delayed disclaimer of liability or denial of coverage violates the rights of the insured or the injured party. Compared to traditional common-law waiver and estoppel defenses, section 3420 (d) (2) creates a heightened standard for disclaimer that “depends merely on the passage of time rather than on the insurer’s manifested intention to release a right as in waiver, or on prejudice to the insured as in estoppel.

By its plain terms, section 3420(d)(2) applies only in a particular context: insurance cases involving death and bodily injury claims arising out of a New York accident and brought under a New York liability policy. Where, as here, the underlying claim does not arise out of an accident involving bodily injury or death, the notice of disclaimer provisions set forth in Insurance Law § 3420 (d) are inapplicable. In such cases, the insurer will not be barred from disclaiming coverage simply as a result of the passage of time, and its delay in giving notice of disclaimer should be considered under common-law waiver and/or estoppel principles.

Here, the Appellate Division erred when it held that defendants had a duty to disclaim coverage “as soon as reasonably possible” after they learned that LILCO’s notice was untimely under the policies. The environmental contamination claims at issue in this case do not fall within the scope of Insurance Law § 3420 (d) (2), which the Legislature chose to limit to accidental death and bodily injury claims, and it is not for the courts to extend the statute’s prompt disclaimer requirement beyond its intended bounds. Indeed, Keyspan has never relied on section 3420 (d) (2) and instead asserts a common-law waiver defense. The Appellate Division must determine whether the evidence supporting this defense is sufficient to defeat defendants’ motion for summary judgment based on LILCO’s failure, as a matter of law, to give timely notice under the policies. Specifically, the Appellate Division must consider if, under common-law principles, triable issues of fact exist whether defendants clearly manifested an intent to abandon their late-notice defense. We therefore remit this matter to the Appellate Division to make these determinations.

(Citations omitted) (emphasis added).

The common law waiver standard is much more difficult to satisfy. One imagines it will be difficult to show that the insurer’s delay in disclaiming coverage for late notice “clearly manifested an intent to abandon” the defense where, as here, the insurance company expressly reserved the right to disclaim coverage on that ground.

Posted: June 12, 2014

Claim Dismissed Based on In Pari Delicto Doctrine

On June 4, 2014, the Second Department issued a decision in Burgers Bar Five Towns, LLC v. Burger Holdings Corp., 2014 NY Slip Op. 03970, affirming the dismissal of a Franchise Sales Act claim based on the doctrine of in pari delicto.

In Burgers Bar, the plaintiff sued the defendant “inter alia, to recover damages for violation of the Franchise Sales Act (General Business Law § 680 et seq.) and breach of contract.” The trial court found the defendant liable for breach of contract but dismissed the plaintiff’s Franchise Sales Act claim “based on the doctrine of in pari delicto.” The defendant appealed and the plaintiff cross-appealed. The Second Department affirmed the dismissal of the Franchise Sales Act claim, explaining:

Contrary to the plaintiff’s contention on its cross appeal, the Supreme Court correctly dismissed the cause of action alleging violation of the Franchise Sales Act, based on the doctrine of in pari delicto. The doctrine of in pari delicto mandates that the courts will not intercede to resolve a dispute between two wrongdoers. The doctrine survives because it serves important public policy purposes. First, denying judicial relief to an admitted wrongdoer deters illegality. Second, in pari delicto avoids entangling courts in disputes between wrongdoers. The evidence established that the plaintiff knew that the defendants were offering to sell what amounted to a franchise as defined by General Business Law § 681(3), to multiple persons at the same time that the plaintiff and the defendants entered into their agreement, and that the plaintiff was both aware of and complicit in the defendants’ violation of the Franchise Sales Act. Under the circumstances, the court properly applied the doctrine of in pari delicto, not to favor the defendant, but as a matter of public policy.

(Internal quotations and citations omitted).