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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: January 30, 2014

Court Allows Filing of Complaint Under Seal Along With Public Redacted Complaint

On January 23, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Shareholder Representative v. Sandoz Inc., 2014 NY Slip Op. 30200(U), granting a motion to file a sealed complaint.

This action arose out of the sale of a pharmaceutical company, which was developing a new drug, to the defendant. The plaintiff alleged that the defendant violated the agreement by failing to meet various “milestones” for the drug’s development.

The plaintiff filed a motion for leave to file the entire complaint under seal. At a hearing on that motion, the court directed the parties to meet and confer regarding how the complaint could be rewritten so that the entire complaint would not have to be sealed. The plaintiff subsequently filed a second motion for leave to file a redacted version of the complaint. The court reviewed the motion under 22 NYCRR 216.1(a), which requires “good cause” for sealing any court record in whole or in part, by balancing the plaintiff’s interest in secrecy with the public interest in access to court records:

Uniform Rule 216.1 further provides that in determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties. Although good cause is not defined in Section 216.1(a), a finding of good cause presupposes that public access to the documents at issue will likely result in harm to a compelling interest of the movant. The First Department has held that the presumption of the benefit of public access to court proceedings takes precedence, and sealing of court papers is permitted only to serve compelling objectives, such as when the need for secrecy outweighs the public’s right to access, e.g., in the case of trade secrets.

(Internal citations and quotations omitted).

The court found that the complaint contained “technical information about a pharmaceutical drug which is still in development,” meeting the definition of a trade secret, and that the redacted complaint “contains sufficient unredacted information, such that the broad contours of this action and the relief sought therein are publically available,” and granted the motion.

For practitioners wanting to file a complaint under seal, this opinion shows that they will have to convince the court of the existence of a trade secret or some comparable interest, and also reminds them that they can help their cause by drafting their complaint in such a way that as little as possible will have to be redacted and offering to file a redacted complaint.

Posted: January 29, 2014

Board Did Not Have Fiduciary Duty to Maximize Shareholder Benefit in Merger Where There was No Change of Control or Break-up

On January 13, 2014, Justice Friedman of the New York County Commercial Division issued a decision in Badowski v. Carrao, 2014 NY Slip Op. 50042(U), dismissing breach of fiduciary claims relating to a merger.

In Badowski, the class action plaintiff alleged that the

individual defendants, the former directors and officers of Vertro, Inc. (Vertro), breached their fiduciary duties to Vertro’s former shareholders by failing to maximize shareholder value, acting in their own interest, and failing to disclose material information in connection with Vertro’s merger with Inuvo, Inc. (Inuvo). Plaintiff further alleges that corporate defendants Vertro, Inuvo, and Anhinga Merger Subsidiary, Inc. (Anhinga) aided and abetted those breaches. Plaintiff seeks rescission of the merger of the two companies, which was completed on March 1, 2012, or, in the alternative, rescissory damages. Defendants move to dismiss the Second Amended Complaint in its entirety for failure to state a claim, pursuant to CPLR 3211(a)(7).

The Badowski decision addresses several interesting issues of Delaware corporate law; we suggest that you read the entire decision. This post addresses only the issue of the duty to maximize shareholder value.

The court held that the actions of the individual defendants were not subject to the heightened Revlon standard of maximizing shareholder value, and instead that it would examine their actions under the business judgment rule. The court explained:

In Revlon, a case involving a hostile take-over, the Court held that once it became apparent that the break-up of the company was inevitable or that the company was for sale, the duty of the board changed from the preservation of the company to the maximization of the company’s value at a sale for the stockholders’ benefit.

As subsequently refined by the Delaware Courts, the Revlon requirement that the directors seek the best value reasonably available to shareholders applies in at least the following three scenarios: (1) when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company; (2) where, in response to a bidder’s offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company; or (3) when approval of a transaction results in a sale or change of control. The Courts have further clarified that the Revlon duty of value maximization is triggered only when a company embarks on a transaction — on its own initiative or in response to an unsolicited offer — that will result in a change of control. In the context of a stock-for-stock merger, a change of control for Revlon purposes can be triggered if the target’s shareholders are relegated to a minority in the resulting entity, and the resulting entity has a controlling stockholder or stockholder group. Where, however, ownership of the merged company will remain in a large, fluid, changeable and changing market, Revlon is not implicated.

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

The court held that the Revlon factors had not been adequately alleged, including that there was no allegation that “the shares of the resulting entity will not be freely traded in the marketplace or that the former Vertro shareholders will be subjected to a controlling shareholder or block of shareholders,” that the sale would not result in a break-up of the company and that triggering “change-in-control provisions contained in contracts of Vertro’s officers and directors” did not “establish change of control for Revlon purposes.”

While there are many take-aways from this decision, one is the importance of transactional counsel to help guide a board through the myriad requirements of Delaware law affecting mergers.

Posted: January 28, 2014

Judicial Estoppel Does Not Apply When the Argument Made Does Not Lead to a Judgment

On January 23, 2014, the First Department issued a decision in Wells Fargo Bank N.A. v. Webster Business Credit Corp., 2014 NY Slip Op 00412, explaining the scope of the doctrine of judicial estoppel.

In Wells Fargo Bank, the trial court dismissed the defendant’s claim for “indemnification from plaintiffs for attorneys’ fees incurred in” defending the action. The First Department affirmed that decision, explaining that the plaintiffs were not estopped from opposing the defendant’s claim for indemnification even though they also had argued that indemnification was required under the contract at issue:

Contrary to defendant’s argument, plaintiffs’ previous assertion of their own claim for contractual indemnification does not judicially estop them from denying that defendant is entitled to indemnification of attorneys’ fees under the agreement. The doctrine of judicial estoppel precludes a party who assumed a certain position in a prior legal proceeding and who secured a judgment in his or her favor from assuming a contrary position in another action simply because his or her interests have changed. As plaintiffs did not prevail on their contractual indemnification claim, the doctrine of judicial estoppel does not apply.

Nor does plaintiffs’ prior claim for contractual indemnification, standing alone, constitute a judicial admission that attorneys’ fees are recoverable in inter-party disputes. On the contrary, plaintiffs’ former construction of the agreement was a legal argument, and not a fact amenable to treatment as a formal judicial admission.

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

Doctrines such as judicial estoppel and judicial admission can be useful tools.  However, this decision shows their limitations.

Posted: January 27, 2014

Ties to New York Bank Found Insufficient to Create General Jurisdiction

On January 14, 2014, Justice Kapnick of the New York County Commercial Division issued a decision in Industrias De Papel R. Remenzoni S.A. v. Banco De Investimentos Credit Suisse (Brasil) S.A., 2014 NY Slip Op. 30074(U), addressing a variety of jurisdictional and forum non conveniens arguments on a motion to dismiss.

In Industrias De Papel, the plaintiff, a Brazilian paper company, sued a number of defendants, including various US and Brazilian Credit Suisse entities, for causes of action arising out of bond purchases. The Credit Suisse entities moved to dismiss for lack of jurisdiction and forum non conveniens.

The plaintiff’s first alleged basis for jurisdiction—and the subject of this post—was under CPLR 301: “A court may exercise such jurisdiction over property, persons, or status as might have been exercised heretofore.” CPLR 301 is New York’s “general jurisdiction” statute, where a defendant who is “engaged in such a continuous and systematic course of doing business here as to warrant a finding of its presence in this jurisdiction,” may be sued on causes of action arising anywhere in the world.

In support of its claim of personal jurisdiction over Credit Suisse Brazil in New York, the plaintiff alleged:

  • The CEO of Credit Suisse Brazil works out of New York and controls Credit Suisse Brazil from New York;
  • Credit Suisse Brazil maintains bank accounts and brokerage accounts in New York;
  • Credit Suisse solicits business in New York through various websites; and
  • Credit Suisse New York serves as Credit Suisse Brazil’s agent by (a) supporting Credit Suisse Brazil’s CEO, and (b) pitching its clients investment opportunities from Credit Suisse Brazil.

The court ruled that factual questions existed regarding the scope of the CEO’s activity in New York, and whether they were sufficient to give rise to general jurisdiction, and rejected the other three asserted bases entirely.

A bank account in New York only gives rise to personal jurisdiction if the bank account is used “for the receipt of substantially all of the income of a foreign corporation and for the payment of substantially all of its business expenses,” and plaintiff’s allegations did not satisfy this standard. An interactive recruiting website or a website providing customers with worldwide access to account information can only give rise to general jurisdiction if “the website is purposefully directed towards New York.” And because merely providing office space and a phone line to another company does not create an agency relationship, and plaintiff’s factual basis for alleging that Credit Suisse New York marketed Credit Suisse Brazil’s products were similarly insufficient, no agency relationship had been asserted.

Accordingly, the court permitted jurisdictional discovery to be taken solely on the nature and scope of Credit Suisse Brazil’s CEO’s business activities in New York.

In this opinion, we can see that courts are reluctant to use incidental banking or marketing activities in New York to serve as a basis for general jurisdiction.

Posted: January 26, 2014

How Not to Get a Case Assigned to the Commercial Division

On January 23, 2014, the First Department issued a decision in BDO USA, LLP v. Phoenix Four, Inc., 2014 NY Slip Op. 00410, illustrating the wrong way to get a case assigned to the Commercial Division.

In this post, we focus on just one aspect of the BDO USA decision, plaintiff’s attempts to assign the action to the Commercial Division. The First Department explained:

[The plaintiff] commenced this action against [the defendants], asserting claims for breach of contract and promissory estoppel. . . Following [the plaintiff’s] filing of the complaint, [the defendants] requested an extension of time to respond, and the parties agreed to a December 24, 2012 response date. However, on December 21, 2012, [the defendants] separately moved to dismiss the complaint under CPLR 3211(a)(1) and (a)(7). [The plaintiff] also filed and served an RJI on the same day. The action was assigned to a non-Commercial Division part.

By letter dated January 3, 2013, [the plaintiff] requested that Supreme Court transfer the action to a Commercial Division part under 22 NYCRR § 202.70. In opposition, [the defendants] argued that [the plaintiff’s] request was untimely under 22 NYCRR § 202.70(e) because [it] had submitted the request more than 10 days after it had received the RJI on December 21, 2012. . . . The Administrative Judge denied [the plaintiff’s] request as untimely, noting that the 10-day time limit under 22 NYCRR § 202.70(e) is strictly construed.

[The plaintiff] then served a notice of voluntary discontinuance without prejudice under CPLR 3217(a)(1). . . . At the same time, [the plaintiff] initiated a new action in Supreme Court . . . and submitted a complaint that is essentially identical to the complaint in this action. [The plaintiff] intended to seek to have the new action transferred to a Commercial Division part once defendants re-filed their motions to dismiss.

In response to [the plaintiff’s] notice of discontinuance, [the defendants] moved under CPLR 3217(b) for an order discontinuing the action with prejudice. Both defendants argued that the motion court should deem [the plaintiff’s] notice with prejudice, because [it] filed the discontinuance for the sole purpose of circumventing the Administrative Judge’s final and non-appealable order. Defendants further argued that the notice of voluntary discontinuance was untimely under CPLR 3217(a)(1) because [the plaintiff] served it after defendants had filed a responsive pleading – that is, their motions to dismiss. Defendants sought, in the alternative, an order deeming [the plaintiff’s] notice of voluntary discontinuance a nullity.

The First Department held that the plaintiff’s notice of discontinuance “was untimely because [it] served it after defendants filed their motions to dismiss” and thus its “notice was ineffective and a nullity, and the motion court should not have deemed defendants’ motions withdrawn.”  That the plaintiff “served its notice of discontinuance in an attempt to circumvent the Administrative Judge’s order denying its request to have its action assigned to the Commercial Division may be a valid basis for granting a discontinuance with prejudice.”

The First Department gave the plaintiff some relief–it remanded to the trial court to consider the motions to dismiss. However, it seems to us that the plaintiff could have avoided all of the trials and tribulations described above simply by filing an RJI to have the action assigned to the Commercial Division as soon as it filed the complaint. There is no rule requiring a party to wait until an answer or motion to dismiss is filed to seek assignment to the Commercial Division. Indeed, it is often helpful to know at the very beginning of an action which justice it is assigned to.

Posted: January 25, 2014

Countersigned Letter is an Enforceable Contract Even Though Parties Contemplated Later Execution of a Formal Agreement

On January 16, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Noryb Ventures v. Mankovsky, 2014 NY Slip Op. 30087(U), finding a countersigned letter to be an enforceable contract notwithstanding that it explicitly envisioned a later, more formal, agreement.

In Noryb Ventures, the court denied the defendants’ motion for summary judgment on the plaintiff’s breach of contract claim, holding that a letter sent by the plaintiff and countersigned by the individual defendant was an enforceable agreement, notwithstanding that it expressly referenced the parties’ intention to enter into a formal Stock Purchase Agreement (which was never executed). The court explained:

a mere agreement to agree, in which a material term is left for future negotiations [would be] unenforceable. . . . [However], a purported contract that leaves items to be agreed in the future may still be given effect . . . where the parties have completed negotiations on sufficient essential elements of [the] contract.

The letter expressly stated that it was “binding” but the court found this fact alone not dispositive, since notwithstanding the parties’ “intention to be bound,” “a contract is nonetheless incomplete and unenforceable when, as to some essential term, there has been no agreement but only an agreement to agree in the future.” There were “no essential or significant elements missing” from the letter: it provided for “a price, a quantify of shares, a schedule for the timing of the transactions, conditions for the use of funds, and other obligations of the signatories.”

Whether a term sheet or other preliminary document in a negotiated transaction is an enforceable contract or merely an “agreement to agree” is a recurring issue in commercial litigation. Noryb Ventures serves as a reminder that the analysis is not driven by the formality of the writing but by whether all essential terms of the parties’ agreement are set forth.

Posted: January 24, 2014

Arbitral Award Confirmed Because it Was Not Irrational

On January 23, 2014, the First Department issued a decision in Ingham v. Thompson, 2014 NY Slip Op. 00436, reversing a trial court order rejecting an arbitral award.

The First Department made clear the deferential standard by which a court should review an arbitral award, explaining:

Respondents’ arguments that plaintiff should have been disqualified from maintaining the arbitration proceeding . . . because she initially asserted individual claims alongside the derivative claims on behalf of the limited partnership, and settled with one of the defendants on behalf of herself and the limited partnership, are unavailing. Arbitrators are not bound by the principles of substantive law and, short of complete irrationality, they may craft an award to reach a just result. Even mistakes of fact and law do not warrant vacatur of an otherwise rational award. Here, the parties extensively briefed and argued the issue of whether plaintiff could maintain the proceeding before the three-member panel, which unanimously ruled that plaintiff had cured any defect by withdrawing her individual claims, which the panel also dismissed. Moreover, the panel approved the settlement, and conditioned the award on plaintiff’s turning over the settlement funds to the limited partnership. It cannot be said that the panel’s determination concerning plaintiff’s purported conflict of interest evinced complete or total irrationality, and hence, the award should be confirmed.

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

The great deference that courts must show to arbitral awards is not just a concern for litigators. Before agreeing to an arbitration provision in a contract, transactional counsel should consider the risks, as well as the benefits, of arbitration.

Posted: January 23, 2014

Director Breaches Fiducary Duty in Selling Corporate Shares to Himself

On December 24, 2013, Justice Whelan of the Suffolk County Commercial Division issued a decision in KNET, Inc. v. Ruocco, 2013 NY Slip Op. 33543(U), addressing the propriety of a director’s sale of additional shares to himself.

In KNET, Inc., the court addressed a number of issues, including whether a corporate director breached his fiduciary duty by selling additional shares of the corporation to himself. The court held that in light of the facts of that action, he did, explaining:

As a general rule, directors of a corporation cannot issue or dispose of the corporate stock to themselves for an inadequate consideration. Directors owe a fiduciary responsibility to the shareholders in general and to individual shareholders in particular to treat all shareholders fairly and evenly. So, a breach of fiduciary duty is established by proof that the directors failed to treat all stockholders fairly and evenly. When issuing new stock, a director, such as [defendant], must treat existing shareholders fairly. It is an inflexible rule that directors cannot exercise the corporate powers for their private or personal advantage or gain. [A] director breaches his obligation to shareholders when he obtains stock at an inadequate price. [A] clearly inadequate consideration invokes the same principles as the absence of consideration.

[The defendant] is considered an interested director since he is receiving a direct financial benefit from the challenged transactions, that are different from the benefit received generally by all shareholders. Where directors have an interest in the challenged action, the burden of proof shifts to the interested director to establish that the actions involved were reasonable and fair. His testimony failed to satisfy that standard.

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

The interested share sale discussed above was just one of the defendant’s many improper acts addressed in the court’s opinion. Yet the particular point addressed above is something to which corporate directors and their counsel should be sensitive even in more innocent contexts. Controlling shareholders in close corporations that also control the company as directors need to remember that whatever their interests as a shareholder, their duties as a director run to all shareholders.

Posted: January 22, 2014

Law of the Case Doctrine Bars Evidence on Issue Decided in Earlier Appeal

On January 21, 2014, the First Department issued a decision in Gliklad v. Cherney, 2014 NY Slip Op. 00310, affirming the striking of an affirmative defense based on the law of the case doctrine.

“In a prior appeal,” the First Department held “that the promissory note” at issue in Gliklad “contained a clause selecting New York as the forum” for the litigation.  In subsequent proceedings, the trial court did not allow the defendant to put on an expert witness “in support of his claim that the note contained only a choice of law clause.” The First Department affirmed that decision, explaining that the expert’s testimony did “not constitute subsequent or new evidence that was previously unavailable for the purpose of avoiding the law of the case doctrine. Given the binding ruling as to the forum selection clause, the [trial] court correctly found that defendant was barred from asserting a defense based on lack of jurisdiction.” (Internal quotations and citations omitted) (emphasis added).

This decision is a reminder that the law of the case doctrine can be unforgiving, particularly because the availability of interlocutory appeals in New York means that issues are sometimes decided before the facts relating to them are fully developed.

Posted: January 21, 2014

Condominium Owners not Third-Party Beneficiaries of Contract Between Sponsor and Architect

On January 6, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Board of Managers of the 125 North 10th Condominium v. 125 North 10, LLC, 2014 NY Slip Op. 50035(U), dismissing a claim by condominium owners for breach of a contract between the building sponsor and an architect.

In Board of Managers of the 125 North 10th Condominium, the plaintiff board of managers of a condominium brought claims against a variety of defendants relating to the “design and construction of” a “luxury condominium” building in Brooklyn. Among the claims was a breach of contract claim against one of the building’s architects based on the theory that the condominium owners were third-party beneficiaries of the contract between the sponsor and the architect. The court dismissed the claim, explaining:

It is well established that if a party is not in privity with a defendant, a viable cause of action for breach of contract exists only if the party was an intended third-party beneficiary of the contract. Nonparty enforcement of a contractual promise is limited to an “intended” as contrasted with an “incidental” beneficiary. One is an intended beneficiary if one’s right to performance is appropriate to effectuate the intention of the parties’ to the contract and either the performance will satisfy a money debt obligation of the promisee to the beneficiary or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.

Absent evidence of an express intent to benefit a plaintiff, a plaintiff who purchases a condominium unit is merely an incidental third-party beneficiary to the contracts between the sponsor and service providers which participated in the development of the condominium and, thus, has no standing to bring a breach of contract claim against such contractors. As articulated in Lake Placid, that a developer had in mind the normal business motive to obtain a construction product of sufficient quality for ready marketability of the condominium units to potential customers is clearly not a basis from which to infer the requisite intent of the developer to bestow performance benefits upon the purchasers of the condominium units.

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

This decision highlights the distinction between persons who benefit–often in obvious and intended ways–from a contract and the persons who meet the narrow legal definition of third-party beneficiaries. This is a distinction counsel should keep in mind both in drafting contracts and in litigating contract claims.