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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: April 18, 2014

Insured Not Entitled To Attorneys’ Fee Incurred In Coverage Action

On April 8, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Madison 96th Associates, LLC v. 17 East Owners Corp., 2014 NY Slip Op. 50569(U), ruling that an insurance policyholder that successfully brought a declaratory judgment action establishing its right to coverage was not entitled to recover its attorneys’ fees incurred in the declaratory judgment action even though it would have been so entitled had its insurer brought the action.

Under the well-known American Rule, each party to a litigation incurs its own legal fees, unless a statute, court rule or agreement provides otherwise. In Mighty Midgets v Centennial Ins. Co., 47 N.Y.2d 12, 21 (1979), the Court of Appeals recognized a limited exception in the insurance context, allowing an insured to recover fees when it “has been cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations.” As Justice Kornreich explained:

In other words, when an insurance company brings a declaratory judgment action against its insured seeking to disclaim coverage, if the insured prevails, the insured is entitled to be reimbursed its legal fees spent defending the insurance company’s lawsuit. However, when an insured commences a declaratory judgment action against its insurer seeking coverage, the insured cannot recover its attorneys’ fees in such action, even if it prevails. The rationale for this distinction is that when an insurer casts an insured in a defensive posture the liability feature of the insurance is triggered and provides coverage for defense expenses incidental to the assertion of claims against the insured.

(Citations and internal quotation marks omitted) (emphasis added).

Recognizing the “perverse incentive” created by this rule (since fee-shifting is triggered only if the insurance company files suit, it is in the insurer’s interest to deny coverage and leave it to the insured to bring a coverage action), Justice Kornreich concluded that “public policy strongly militates in favor of forcing [the insurance company] to pay the [insured’s fees].” Nevertheless, the court concluded that it was “bound by the Mighty Midgets doctrine,” and accordingly, denied the insured’s claim for attorneys’ fee. Justice Kornreich took the unusual step of encouraging the plaintiff to appeal the decision. If the Court of Appeals were to revisit the Mighty Midgets rule, it could have a dramatic effect on insurance coverage litigation in New York.

Posted: April 17, 2014

Chinese Wall Does Not Prevent Law Firm From Being Disqualified

On April 4, 2014, Justice Friedman of the New York County Commercial Division issued a decision in Manus v. Family M. Foundation Ltd., 2014 NY Slip Op. 30921(U), disqualifying the defendants’ long-time law firm.

In Manus, the current plaintiff, Ninotchka Manus, was substituted in as plaintiff based on her acquisition of shares from a previous holder.  Among the issues in the action were the validity of the transfer to Manus as well as the validity of a prior transfer to her predecessor-in-interest.

Manus moved to disqualify the defendants’ law firm, which had represented them since 2004, because an attorney who previously had represented Manus’s predecessor in 2005 had joined the firm as a partner.

Justice Friedman granted the motion based upon the following rulings:

  • Manus had standing because the attorney had represented her predecessor on the issue of the validity of the share transfers, which is still a central issue in the case, and because Manus was the assignee of her predecessor’s legal claims. Justice Friedman distinguished this case from one involving “the mere assignment of property.”
  • Although the law firm had imposed a “Chinese Wall,” it must still be disqualified, because “the party seeking to avoid disqualification [of its law firm] must prove that any information acquired by the disqualified lawyer is unlikely to be significant or material in the litigation. Only in that factual scenario will an ethical screen be sufficient to avoid firm disqualification.”
  • Disqualification was warranted even though this was the fourth disqualification motion brought by Manus against the firm, and even though disqualification would “pose a hardship” for the defendants, because of “the critical nature of the confidences disclosed . . . and the firm’s resulting conflict of interest . . . . disqualification is mandated in order to avoid the appearance of impropriety and to protect the integrity of the judicial process.”

This opinion is consistent with other opinions discussed in this blog, in that although courts frown on tactical disqualification motions, and recognize the potential hardship to litigants, they will not hesitate to disqualify counsel if they see even the appearance of an ethical violation.

Posted: April 16, 2014

Insurance Broker Owes Non-Contractual Duty to Other Brokers

On April 8, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Rampart Brokerage Corp. v. RIBS NY LLC, 2014 NY Slip Op. 30938(U), addressing the duties owed by one insurance broker to another.

In Rampart Brokerage Corp., the plaintiff insurance broker brought tort and breach of contract claims against other brokers and several of their employees. In arguing that the plaintiff’s negligence claim should be dismissed, the moving defendants argued that insurance brokers do not owe each other duties other than contractual duties. The trial court disagreed, explaining:

The Court of Appeals has held, however, that insurance agents have a common-law duty to obtain requested coverage for their clients within a reasonable time, or inform the client of their inability to do so. While defendants assert that this common-law duty does not apply to a broker dealing with another broker, they have not offered any support for that proposition, nor have they made any convincing arguments as to why they should be permitted to mislead another broker about the coverage that they have obtained for a client. The same considerations that apply to a broker’s duty to a consumer would seem to apply with equal force to a broker obtaining insurance for another broker for that broker’s clients. The fact that [the plaintiff] is also a broker does not give [it] an advantage with respect to knowing whether the policy promised was actually procured. [The plaintiff] was working through defendants in order to be able to obtain policies from underwriters that it did not deal with directly. Consequently, it was dependent on defendants for accurate information regarding the procurement of the policies. Thus, defendants have failed to demonstrate that the fact that [the plaintiff] is a broker is an adequate basis for dismissing the negligence cause of action.

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

This decision extends duties owed by an insurance broker to insureds to brokers working for insureds. This likely is not the last word on this issue.

Posted: April 15, 2014

Court Will Not Examine Adequacy of Consideration Given for Guarantee Absent Fraud or Unconscionability

On April 8, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Pensmore Investments LLC v. Gruppo, Levey & Co., 2014 NY Slip Op. 30922(U), granting the plaintiff summary judgment as against defendant William Sprague on a guarantee notwithstanding the guarantor’s argument that the guarantee was not a binding contract because there the defendant received no consideration for entering into it. The court also granted a motion made by defendants related to Gruppo, Levey & Co. to dismiss causes of action alleging breaches of the covenant of good faith and fair dealing and granted in part a motion to dismiss causes of action based upon piercing the corporate veil.

In granting the summary judgment motion against defendant William Sprague, the court rejected the lack of consideration argument, explaining:

It is well settled that absent fraud or unconscionability, the adequacy of consideration is not a proper subject for judicial scrutiny. Where, as here, plaintiff established a prima facie entitlement to summary judgment on the enforceability of the contract, the defendant must do more than make conclusory allegations regarding lack of consideration to create a question of fact.

In any event, a settlement contingent on a guaranty constitutes valid consideration for the guaranty. The law presumes that a guarantor receives a benefit by guaranteeing a contract since, if there were no benefit to the guarantor, he would not execute the guaranty absent fraud or duress.

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

As this decision illustrates, consideration may be a required element of a binding contract, but courts are nonetheless reluctant to examine the adequacy of the consideration given.

Posted: April 14, 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. This is the fifth proposed Commercial Division rule change on which the court has sought comment in the past two weeks.

The proposed new rule would require Commercial Division justices to schedule “oral argument on a motion” for its own “time slot,” “[t]he length of” which would be “solely in the discretion of the court.” This would change the practice of some justices of scheduling arguments in multiple matters for the same time. “In order for the court to be able to address any and all matters of concern to the court and in order for the court to avoid the appearance of holding ex-parte communications with one or more parties in the case, even those parties who believe that they are not directly involved in the matter before the court” would be required to “appear at the appointed date and time . . . unless specifically excused by the court.”

E-mail comments to rulecomments@nycourts.gov by May 30, 2014.

Posted: April 13, 2014

Decision Analyzes Limits of Former Employee’s Common Law Obligations to Employer

On April 2, 2014, Justice Whelan of the Suffolk County Commercial Division issued a decision in Freed, Kleinberg, Nussbaum, Festa & Kronberg, MD., LLP v. Nastasi, 2014 NY Slip Op. 30879(U), discussing the duties of employees to their former employer.

In Freed, Kleinberg, the plaintiff medical practice sued “[t]he individual defendants” who “were employed by the plaintiff as staff physicians” and a “corporate defendant” that was “a competing medical practice established by” one of the individual defendants. In deciding the plaintiff’s motion for partial summary judgment, the court discussed the legal obligations of employees to their employers:

That employees owe fiduciary duties, including duties of loyalty and good faith, to their employer in the performance of their duties is well established. Actionable breaches of such duties usually result in a personal gain to the employee and losses to the employer and are generally premised upon conduct by which profits, business opportunities, the raiding of employees and other assets including confidential and proprietary information of the employer are lost or diverted. However, once the employment is terminated, the relationship between a former employee and employer does not give rise to a fiduciary relationship as a matter of law.

A cause of action based on unfair competition may be predicated upon trademark infringement or dilution in violation of General Business Law §§ 360- k and 360- 1, or upon the alleged bad faith misappropriation of a commercial advantage belonging to another by exploitation of proprietary information or trade secrets. The key to stating the non-statutory, common law claim of unfair competition is that the defendant charged actionable conduct displayed some element of bad faith in misappropriating the plaintiffs labor, skill, expenditures, proprietary information of trade secrets.

Appellate case authorities have nevertheless recognized that in the absence of a restrictive covenant not to compete, an employee is free to compete with his or her former employer where remembered information as to specific needs and business habits of particular customers is not confidential or otherwise proprietary in nature. Although an employee owes fiduciary duties of good faith and loyalty to an employer, the employee may incorporate a business prior to leaving the employer without breaching any fiduciary duty. The employee may not, however, solicit his or her employer’s customers or otherwise compete during the course of his or her employment by the use of the employer’s time, facilities or proprietary information. In such cases, it is the employee’s misuse of the employer’s resources to compete with the employer that is actionable as breach of fiduciary duty.

An employee not bound by a restrictive covenant not to compete who has left the employ of a former employer is also free to compete and he or she may solicit the former employer’s customers unless it is shown that customer lists or like material belonging to the employer constitute trade secrets or that there was other wrongful conduct including the employment of fraudulent methods or the engagement in a physical taking or copying of the employer’s customer lists or files.  Knowledge of the intricacies of a business operation does not necessarily constitute a trade secret and, absent any wrongdoing, it cannot be said that a former employee should be prohibited from utilizing his knowledge and talents in this area. Information that is garnered by the defendant’s casual memory and knowledge does not constitute actionable wrongdoing. Where the information at issue is public knowledge or could be acquired easily and duplicated, it is not a trade secret.

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

Posted: April 12, 2014

E-Mails Can Meet Signed Writing Requirement of Statute of Frauds

On March 31, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Rhodium Special Opportunity Fund, LLC v. Life Trading Holdco, LLC, 2014 NY Slip Op. 30840(U), addressing whether an exchange of emails created a binding contract under the statute of frauds.

In Rhodium Special Opportunity Fund, the plaintiff hedge fund sued a number of defendants in connection with the “unsuccessful negotiation for the purchase of a $44 million portfolio of forty-five life insurance policies.” The court addressed several issues in deciding the defendants’ motion to dismiss, including the question of whether e-mails could meet the statute of frauds’ requirement that a writing be “subscribed by the party to be charged therewith”:

The New York statute of frauds provides that: “Every agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent, if such agreement, promise or undertaking . . . is a contract to pay compensation for services rendered in negotiating a business opportunity . . . .” Courts in New York have held that an email may constitute a writing for the purpose of the statute of frauds. The courts have focused on the requirement of a signature to determine when emails meet the requirement. In Rosenfield v Zerneck, 776 NYS2d 458, 460 (Sup Ct 2004), the court held that typing a name on the bottom of an email indicated authentication in the way that a signature would on paper for the statute of frauds. The act of typing the name matters, as a preprinted signature in an email footer has been held to be insufficient as a signature for an email to meet the statute of frauds. In the instant case, the set of emails had typed signatures that met the signature requirement.

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

This decision shows that even an agreement that has to be written under the statute of frauds does not necessarily have to be in the form of a separate document with handwritten signatures.

Posted: April 11, 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. This is the fourth proposed Commercial Division rule change on which the court has sought comment in the past two weeks.

The proposed change would amend Commercial Division Rule 8(a) to add an additional topic on which parties must consult prior to a preliminary conference:

any voluntary and informal exchange of information that the parties agree would help aid early settlement of the case.

E-mail comments to rulecomments@nycourts.gov by May 28, 2014.

Posted: April 11, 2014

Settlement of Federal Derivative Action Bars State Court Plaintiff’s Derivative Action

On April 1, 2014, Justice Lowe (formerly of the New York County Commercial Division and now Presiding Justice of the Appellate Term, 1st Judicial District), issued a decision in Wexler v. KPMG LLP, 2014 NY Slip Op. 30825(U), granting a series of motions to dismiss in an action brought by an investor who allegedly lost money as a result of Bernard Madoff’s Ponzi scheme, when the “feeder fund” in which the plaintiff had invested collapsed.

Justice Lowe’s opinion addressed different motions made by several different institutional and individual defendants. Many of the claims asserted by the plaintiff were derivative of the claims of the Rye Select Fund, of which he was a limited partner and investor, and he alleged that Rye’s losses had been caused by the misconduct of the defendants. While the motions were pending, a federal action involving the Rye fund and its losses in the Madoff fraud was settled and dismissed. The federal action involved claims against many of the defendants appearing in the Wexler action, and several moving parties amended their motions to include the res judicata effect of the federal action.

The court granted their motion to dismiss the derivative claims on res judicata grounds. Although the plaintiff himself was not a party to the federal case, the Rye fund’s claims were adjudicated in the federal action, meaning that no other derivative plaintiff could assert those claims. The court recognized two exceptions to that rule: “that the judgment being raised as a bar not be the product or collusion or other fraud on the nonparty shareholders, and also . . . that the shareholder sought to be bound by the outcome in the prior action not have been frustrated in an attempt to join or intervene in the action that went to judgment.” Wexler’s allegations that he had vigorously prosecuted his action, and that he had been excluded from settlement negotiations in the federal action were insufficient to meet either exception.

Posted: April 10, 2014

Second Circuit Asks Court of Appeals to Clarify the Minimum Requirements Under Judiciary Law § 470

On April 8, 2014, in Schoenefeld v. State of New York, 11-4283-cv, the Second Circuit certified a question to the Court of Appeals regarding the “minimum requirements” of New York Judiciary Law 470, “which mandates that a nonresident attorney maintain an office for the transaction of law business within the state of New York.”

In Schoenefeld, the NDNY granted the plaintiff summary judgment declaring that “New York Judiciary Law § 470 unconstitutional as violative of the Privileges and Immunities Clause of Article IV, section 2 of the Constitution. Specifically, the district court held that Section 470, which requires nonresident attorneys to maintain an ‘office for the transaction of law business’ within the state of New York in order to practice in New York courts, places an impermissible burden on” the plaintiff’s “fundamental right to practice law and that the state ‘failed to establish either a substantial state interest advanced by [the statute], or a substantial relationship between the statute and that interest.'” In considering the defendants’ appeal, the Second Circuit reserved decision and certified the following question to the Court of Appeals:

Under New York Judiciary Law § 470, which mandates that a nonresident attorney maintain an “office for the transaction of law business” within the state of New York, what are the minimum requirements necessary to satisfy that mandate?