Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
On May 1, 2014, the First Department issued a decision in Mosaic Caribe, Ltd. v. AllSettled Group, Inc., 2014 NY Slip Op. 03024, dismissing a fraud claim because the alleged reliance was not justifiable.
In Mosaic Caribe, the First Department affirmed the denial of the plaintiff’s motion to amend. Among the issues the First Department addressed was whether the plaintiff had “sufficiently allege[d] justifiable reliance on [the defendant’s alleged] misrepresentation.” The First Department agreed that the plaintiff had not done so, explaining:
Plaintiff, who agreed to purchase the policy at issue at least a year after the alleged misrepresentation, should have sought verification of ownership of the policy before agreeing to purchase it for $3 million. Plaintiff cannot credibly claim that it had no available means of verification, as such information would have been available from defendant or the proposed defendants had plaintiff requested it.
(Internal quotations and citations omitted) (emphasis added).
This decision serves as a reminder that the justifiable reliance element of a fraud claim exists and–particularly for sophisticated commercial parties–the courts will not overlook it.
On April 30, 2014, the Second Department issued a decision in George Tsunis Real Estate, Inc. v. Benedict, 2014 NY Slip Op. 02899, discussing types of orders that are not interlocutorily appealable.
In George Tsunis Real Estate, the plaintiff and defendant both appealed the trial court’s denial of the plaintiff’s motion for summary judgment. The Second Department dismissed the defendant’s appeal, explaining:
The appeal from so much of the order as, in effect, denied the plaintiff’s motion for summary judgment on the issue of liability must be dismissed, as the defendants are not aggrieved by that portion of the order (see CPLR 5511). Contrary to the defendants’ contention, the order did not grant the plaintiff’s motion for summary judgment on the issue of liability, but determined that, although the plaintiff made a prima facie showing of its entitlement to judgment as a matter of law, the defendants raised a triable issue of fact as to whether the action is barred by the applicable statute of limitations. To the extent the defendants seek to appeal from the finding that the plaintiff made a prima facie showing of entitlement to judgment as a matter of law, merely because the order appealed from contains language or reasoning that a party deems adverse to its interests does not furnish a basis for standing to take an appeal.
The appeal from so much of the order as denied that branch of the defendants’ cross motion which was to preclude the plaintiff from offering certain evidence at the time of trial must be dismissed because it concerns an evidentiary ruling, which, even when made in advance of a hearing or trial on motion papers, is not appealable as of right or by permission.
(Internal quotations and citations omitted) (emphasis added).
This decision shows that, as broad as the right to take an interlocutory appeal is in New York, it is not unlimited.
Arguments the week of May 5, 2014, in the Court of Appeals that may be of interest to commercial litigators.
- Docket No. 121: Norex Petroleum Limited v. Blavatnik (To be argued Tuesday, May 6, 2014) (addressing whether “CPLR 202, New York’s borrowing statute, which requires a nonresident plaintiff to satisfy the statute of limitations of New York and of the foreign jurisdiction where the claims accrued” trumps 28 USC
§ 1367(d) and CPLR 205(a), which toll the statute of limitations to allow plaintiffs to re-file dismissed federal suits in state court, in situations where the foreign jurisdiction has no analogous tolling statute). See First Department decision here.
- Docket No. 109: Morpheus Capital Advisors LLC v. UBS AG (To be argued Tuesday, May 6, 2014) (considering the effect of an exclusive agency agreement where the buyer was procured by the seller, not a third-party). See First Department decision here.
- Docket No. 110: KeySpan Gas East Corporation v. Munich Reinsurance America, Inc. (To be argued Tuesday, May 6, 2014) (considering whether insurers have a common law duty to make a coverage determination as soon as reasonably possible or forfeit their right to deny coverage).
- Docket No. 112: Quadrant Structured Products Co., Ltd. v. Vertin (To be argued Wednesday, May 7, 2014) (addressing the following question certified from the Delaware Supreme Court: whether, under New York law, the absence of any reference in the no-action clause to the Securities precludes enforcement only of contractual claims arising under the Indenture, or whether the clause also precludes enforcement of all common law and statutory claims that security holders as a group may have).
On April 18, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Matter of Natanel v. Cohen, 2014 NY Slip Op. 50677(U), granting a petition to dissolve an LLC.
In Matter of Natanel, the petitioner sought to dissolve an LLC of which he was a 50% owner. Because there was no operating agreement, the court had to analyze the standard for dissolution under the LLC Law. The court explained the standard:
LLCL § 702 provides for judicial dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement. In Matter of 1545 Ocean Avenue, LLC (72 AD3d 121), the Court examined the proper interpretation to be accorded the statutory standard “not reasonably practicable”. While cautioning that a limited liability company is to be distinguished from both a corporation and a partnership, the Court noted that the language is derived from Revised Partnership Law § 121-802 and Partnership Law § 63(1)(d). As no New York cases had interpreted the statutory standard, relying on the decision of the Delaware Chancery Court in Red Sail Easter Ltd. Partners, LP v. Radio City Music Hall Products, Inc, the Court noted that mere disagreements between partners regarding accounting are insufficient to warrant dissolution. Rejecting the applicability of the more flexible statutory standards for judicial dissolution of both corporations and partnerships, the Court cited Matter of Horning v Horning Construction, LLC (12 Misc 3d 402, 413 [Sup Ct, Monroe County 2006]), in which, in the absence of an operating agreement, the court dismissed the petition for dissolution brought primarily to provide an exit-strategy for the disenchanted member, holding that LLCL § 702 establishes a more stringent standard. Rejecting petitioner’s claim that dissolution was warranted by the parties’ deadlock, in 1545 Ocean, the Appellate Division, Second Department expressly held: for dissolution of a limited liability company pursuant to Limited Liability Company Law § 702, the petitioning member must establish, in the terms of the operating agreement or articles of incorporation, that (1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2) continuing the entity is financially unfeasible. Thus, a petitioner seeking dissolution must demonstrate that the limited liability company is unable to function as intended or that it is failing financially.
(Internal quotations and citations omitted) (emphasis added).
One important lesson in this decision is, as the court explained, “a member desirous of withdrawing from the LLC . . . may not do so just for the asking, especially if there is no operating agreement. Rather, the default provisions of LLCL § 701 require the continuation of the LLC upon the termination of any membership interest, leaving such member at the mercy of other members if the statutory standard of § 702 is not met.” (Emphasis added). The other key lesson, of course, is to have a written operating agreement designed to avoid this situation.
An argument on April 29, 2014, in the Court of Appeals that may be of interest to Commercial Division practitioners is:
- Docket No. 96: IDT Corp. v. Tyco Group, S.A.R.L. (To be argued April 29, 2014) (addressing the duration of a party’s obligation to negotiate final terms of an agreement when they have contractually obligated themselves to negotiate such terms). See First Department decision here.
On April 14, 2014, Justice Pines of the Suffolk County Commercial Division issued a decision in J. Petrocelli Contracting, Inc. v. The Morganti Group, Inc., 2014 NY Slip Op. 31024(U), dismissing a claim based on construction delays where the parties’ contract excluded such claims.
In J. Petrocelli Contracting, the plaintiff (as subcontractor) entered into a subcontract agreement with the defendant (as construction manager) in connection with a municipal construction project at the Kings County Criminal Court. The subcontract provided that the “Construction Manager shall not be liable to Subcontractor for any damages resulting from delays caused by any entity.” The court noted that such clauses are generally enforceable, unless the plaintiff can meet the “high burden” of establishing that one of four exceptions applies:
A clause which exculpates a contractee from liability to a contractor for damages resulting from delays in the performance of the latter’s work is valid and enforceable and is not contrary to public policy if the clause and the contract of which it is a part satisfy the requirements for the validity of contracts generally. . . . However, even with such a clause, damages may be recovered for: (1) delays caused by the contractee’s bad faith or its willful, malicious, or grossly negligent conduct, (2) uncontemplated delays, (3) delays so unreasonable that they constitute an intentional abandonment of the contract by the contractee, and (4) delays resulting from the contractee’s breach of a fundamental obligation of the contract. Plaintiffs seeking to invoke one of the exceptions to the enforceability of a no damages for delay clause face a heavy burden.
(Citations omitted) (emphasis added).
The court ruled that the alleged causes for the delay in this case at most showed “inept administration or poor planning, which does not negate application of the no damages for delay provision.” Concluding that the plaintiff’s “allegations regarding the applicability of one or more of the recognized exceptions to the enforcement of the no-damages-for-delay clause are conclusory and consist of bare legal conclusions,” the court granted the defendant’s CPLR 3211(a)(7) motion to dismiss the breach of contract cause of action.
This decision illustrates that contractual limitations on damages may be enforced, even if they have the effect of leaving the plaintiff without a remedy.
On April 15, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in J.P. Morgan Securities Inc. v. Ader, 2014 NY Slip Op. 31017(U), enforcing a contractual jury waiver.
In J.P. Morgan Securities, the plaintiff moved to strike the defendant’s jury demand based on a contractual jury waiver. The court granted the motion, explaining:
In both the RSA and an Investment Agreement, the parties expressly agreed to “waive all right to trial by jury in any action or proceeding to enforce or defend any rights under this Agreement.” . . .
A contractual jury waiver will be deemed inapplicable to a fraudulent inducement claim only where the validity of the transaction is challenged. Under New York law, a party alleging fraudulent inducement may elect to either disaffirm the contract by a prompt rescission or stand on the contract and thereafter maintain an action at law for damages attributable to the fraud. A party who has signed an agreement may not simultaneously rely upon it as the foundation of the claim for damages and repudiate a provision contained therein to the effect that the right to a trial by jury is waived.
[The defendant] contends that it challenges the validity of the RSA because it alleges the entire agreement itself was procured through fraud. But contrary to this assertion, [the defendant] seeks monetary damages and reformation of the RSA, not rescission. . . . While it may be true that the RSA was fraudulently induced, the form of relief sought by [the defendant] – reformation – clearly confirms that [the defendant] has since elected to stand on the contract and not challenge its validity. . . .
Asserting a claim for fraudulent inducement is insufficient to strike a contractual jury waiver unless the agreement containing the waiver is challenged as invalid. [The defendant] has not challenged the validity of the RSA but has instead elected to stand on the contract, seeking first an amendment in 2005, and now damages and reformation. For the foregoing reasons, the court finds that [the defendant] has waived its right to a jury trial with respect to its counterclaim for fraudulent inducement.
(Internal quotations and citations omitted) (emphasis added).
On April 15, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Josephberg v. Crede Capital Group, LLC, 2014 NY Slip Op. 31018(U), granting a motion to dismiss a complaint seeking unpaid commissions on Statute of Frauds grounds.
In Josephberg, the plaintiff alleged that he was employed as a commissioned salesman and that he was entitled to 15% of the profits generated by his employer from any transactions he initiated. However, there was no written agreement between the parties. The plaintiff further alleged that, although he was paid his commission on the profits from the first $35 million of business he originated, his employers refused to pay his commission on the next $50 million of business and instead terminated his employment. The defendant moved to dismiss the breach of contract claim, alleging that the Statute of Frauds barred the claim.
The court first noted that GOL 5-701(a)(1), the “one-year” provision of the Statute of Frauds, did not apply to at-will employment contracts.
However, GOL 5-701(a)(10) requires that a contract be in writing if it “is a contract to pay compensation for services rendered in negotiating . . . a business opportunity . . . . ‘Negotiating’ includes procuring an introduction to a party to the transaction or assisting in the negotiation or consummation of the transaction.” The court found that “business opportunity” is a term that is liberally construed, and that the provision applies to an “intermediary” who provides “know-how or know-who” in bringing about a transaction. The court thus held that:
it is clear that [the defendant] employed [the plaintiff] for his know-who, and to procure an introduction to a party to the transaction, which was unquestionably a business opportunity. This falls squarely within the plain meaning of the statute, requiring any contract to be enforceable between [the defendant] and [the plaintiff] to be in writing and subscribed by an agent of [the defendant].
The principal lesson to be taken from this decision is for employment attorneys, who should be aware that, without a written contract, commissioned employees can be deprived of commissions they have been promised.
On April 16, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Spectrum Origination LLC v. Hess, 2014 NY Slip Op. 31034(U), holding that the plaintiff was not a foreign LLC doing business in New York.
In Spectrum Origination, the plaintiff moved for summary judgment in lieu of complaint on a guarantee. Among the defendant’s arguments in opposition to the motion was that the plaintiff did “not have the authority to maintain” the “action under New York’s Limited Liability Company Law 808(a),” which provides:
A foreign limited liability company doing business in this state without having received a certificate of authority to do business in this state may not maintain any action, suit or special proceeding in any court of this state unless and until such limited liability company shall have received a certificate of authority in this state.
The court rejected that argument on the ground that the plaintiff did not do business in New York for purposes of Section 808, explaining:
The burden is on the party seeking to impose the barrier to show that the foreign LLC’s activities are permanent, continuous, and regular. To support his claim that [the plaintiff] does business in New York within the meaning of LLC 808(a), [the defendant] first cites the fact that [the plaintiff] has commenced six lawsuits in New York since 2001. Six lawsuits (including the instant action), over a span of thirteen years, does not constitute doing business in New York and [the plaintiff] has cited no authority that suggests that any number of lawsuits, standing alone, are sufficient to meet his burden. In fact, it is well settled that the mere maintenance of an action by a foreign corporation does not constitute doing business within the State.
[The defendant] also submitted documents that purportedly show regular financial dealings by [the plaintiff] within the state of New York, which [the defendant] claims satisfies his burden under
LLC 808(a). The documents show that on or around December 13, 2012, [the plaintiff] and 215 W. 28th Equities LLC entered into a mortgage agreement by which [the plaintiff] extended a loan to 215 W. 28th Equities LLC in exchange for a mortgage on a set of properties located within New York City and owned by 215 W. 281h Equities LLC. Furthermore, the documents show that on or around September 16, 2013, [the plaintiff] assigned its security interest in these properties to Middle Patent Capital, LLC. The mere fact that [the plaintiff] held a security interest in property located in New York City does not constitute permanent, continuous, and regular business contacts under LLC 808(a).
(Internal quotations and citations omitted).
This is yet another example of how the doing business in New York rules can complicate life for non-New York plaintiffs, even if they can be overcome in most circumstances.
We have added to our practice pages the biography and part rules of Justice Martin E. Ritholtz of the Queens County Commercial Division.