Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: August 15, 2014

Commercial Division Rules Amended to Add Rule Regarding Discovery of Non-Party ESI

The Chief Administrative Judge has signed an order adding a new rule regarding the discovery of electronically-stored information from non-parties.

The new Commercial Division Rule 11-c and Appendix A, which goes into effect on September 2, 2014, provides:

Rule 11-c. Discovery of Electronically Stored Information from Nonparties.

Parties and nonparties should adhere to the Commercial Division’s Guidelines for Discovery of Electronically Stored Information (“ESI”) from nonparties, which can be found in Appendix A to these Rules of the Commercial Division.



The purpose of these Guidelines for Discovery of ESI from Nonparties (the “Guidelines”) is to:

Provide for the efficient discovery of ESI from nonparties in Commercial Division cases;

Encourage the early assessment and discussion of the potential costs and burdens to be imposed on nonparties in preserving, retrieving, reviewing and producing ESI given the nature of the litigation and the amount in controversy;

Identify the costs of nonparty ESI discovery that will require defrayal by the party requesting the discovery; and

Encourage the informal resolution of disputes between parties and nonparties regarding the production of ESI, without Court supervision or intervention whenever possible.

These Guidelines are not intended to modify governing case law or to replace any parts of the Rules of the Commercial Division of the Supreme Court (the “Commercial Division Rules”), the Uniform Civil Rules for the Supreme Court (the “Uniform Civil Rules”), the New York Civil Practice Law and Rules (the “CPLR”), or any other applicable rules or regulations pertaining to the New York State Unified Court System. These Guidelines should be construed in a manner that is consistent with governing case law and applicable sections and rules of the Commercial Division Rules, the Uniform Civil Rules, the CPLR, and any other applicable rules and regulations. Parties seeking ESI discovery from nonparties in Commercial Division cases are recommended to cite to or reference Rule 11-c of the Commercial Division Rules and these Guidelines in their requests for ESI discovery.

Definition of ESI

As used herein, “ESI” includes any electronically stored information stored in any medium from which such information can be obtained, either directly or after translation by the responding party into a reasonably usable form.


I. Subject to all applicable court rules regarding discovery, a party seeking ESI discovery from a nonparty and the nonparty receiving the request for ESI discovery are encouraged to engage in discussions regarding the ESI to be sought as early as permissible in an action.

II. Notwithstanding whether or when the legal duty to preserve ESI arises, which is governed by case law, a party seeking ESI discovery from a nonparty is encouraged to discuss with the nonparty any request that the nonparty implement a litigation hold.

III. A party seeking ESI discovery from a nonparty should reasonably limit its discovery requests, taking into consideration the following proportionality factors:

A. The importance of the issues at stake in the litigation;

B. The amount in controversy;

C. The expected importance of the requested ESI;

D. The availability of the ESI from another source, including a party;

E. The “accessibility” of the ESI, as defined in applicable case law; and

F. The expected burden and cost to the nonparty.

IV. The requesting party and the nonparty should seek to resolve disputes through informal mechanisms and should initiate motion practice only as a last resort. The requesting party and the nonparty should meet and confer concerning the scope of the ESI discovery, the timing and form of production, ways to reduce the cost and burden of the ESI discovery (including but not limited to: an agreement providing for the clawing-back of privileged ESI; and the use of advanced analytic software applications and other technologies that can screen for relevant and privileged ESI), and the requesting party’s defrayal of the nonparty’s reasonable production expenses. In connection with the meet and confer process, the requesting party and the nonparty should consider the proportionality factors set forth in paragraph III. In the event no agreement is reached through the meet and confer process, the requesting party and the nonparty are encouraged to seek resolution by availing themselves of the Court System’s resources, such as by requesting a telephonic conference with a law clerk or special referee or the appointment of an unpaid mediator in accordance with Rule 3 of the Commercial Division Rules.

V. The requesting party shall defray the nonparty’s reasonable production expenses in accordance with Rules 3111 and 3122(d) of the CPLR. Such reasonable production expenses may include the following:

A. Fees charged by outside counsel and e-discovery consultants;

B. The costs incurred in connection with the identification, preservation, collection, processing, hosting, use of advanced analytical software applications and other technologies, review for relevance and privilege, preparation of a privilege log (to the extent one is requested), and production;

C. The cost of disruption to the nonparty’s normal business operations to the extent such cost is quantifiable and warranted by the facts and circumstances; and

D. Other costs as may be identified by the nonparty.

You can learn more about the background of this rule change by reading the request for comment that the Office of Court Administration posted earlier this year on the proposed rule.

Posted: August 14, 2014

Plaintiff States Contract Claim Based on Two Separate, Contemporaneous Documents

On August 7, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in 833 Management, LLC v. Great Empire 65 Realty, LLC, 2014 NY Slip Op. 51189(U), finding that the plaintiff had stated a claim for breach of contract based on two contemporaneous documents.

In 833 Management, the defendants moved to dismiss the plaintiff’s cause of action for breach of contract. The court ultimately dismissed all but one defendant based on a release, but did find that the plaintiff had stated a cause of action for breach of contract that relied on two separate documents that were signed at the same time, explaining:

Agreements executed at substantially the same time and related to the same subject matter are regarded as contemporaneous writings and must be read together as one. Plaintiff asserts that the handwritten document was signed by Andy To and Chen at the same time as the parties signed the Contract of Purchase and Sale, and both documents are dated June 3, 2013. Defendants essentially do not dispute that this handwritten document was signed by Chen on June 3, 2013 and Chen’s affidavit provides no information regarding the circumstances under which it was signed. The two writings are also related to the same subject matter, specifically the closing of the sale of the Premises, and therefore must be read together as one agreement. The Court notes that while the signatories to the Contract of Purchase and Sale include EEM Realty, Henry Chen as a member of Great Empire, and Andy To as agent for 833 Management, the handwritten agreement is executed by Andy To as agent for 833 Management and individually by Chen. Although the signatories are not identical, both agreements appear to be part of the same transaction, and therefore must be read together. Taking plaintiff’s contentions as true, plaintiff has stated a cause of action for breach of contract by pleading that the handwritten agreement was additional consideration for 833 Management’s entering into the Contract of Purchase and Sale.

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

Posted: August 13, 2014

Supreme Court Decides Special Proceeding to Enjoin Trademark Violation Despite Co-Pending Federal Trademark Action

On August 4, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Matter of Explorers Club Inc. v. Diageo PLC, 2014 NY Slip Op. 24218, granting judgment and a permanent injunction to the plaintiff in a summary proceeding brought under GBL § 135.

Section 135 of the General Business Law permits a summary proceeding to obtain permanent injunctive relief:

No person, society or corporation shall . . . adopt or use the name of a benevolent, humane or charitable organization incorporated under the laws of this state, or a name so resembling it as to be calculated to deceive the public . . . . an application may be made to a court or justice having jurisdiction to issue an injunction, upon notice to the defendant of not less than five days, for an injunction to enjoin and restrain said actual or threatened violation . . . without requiring proof that any person has in fact been misled or deceived thereby.

The Explorers Club brought a GBL § 135 proceeding against Diageo—a large London-based alcohol distributor—alleging that Diageo had used its name in marketing its “Johnny Walker Explorer’s Club” brand.

Diageo moved to dismiss the petition on a number of grounds, one of which was that the petition should be stayed in light of a co-pending trademark infringement action in the Southern District of New York.

The court refused to stay the summary proceeding on the grounds that the relief available under GBL § 135 is “separate and not to be confused” with the relief sought in the federal action. “Special proceedings in the sense used in the CPLR are unknown in federal court [and are] designed to facilitate a summary disposition of the issues and [have] been described as a fast and cheap way to implement a right . . . . For these reasons federal courts often decline to exercise supplemental jurisdiction over summary proceedings.”

The court also found that, although the parties were the same and the facts undoubtedly overlapped, “the questions of law are separate and distinct.” Under the Lanham Act, the plaintiff is required to show that its mark has “acquired distinctiveness or a secondary meaning.” No such requirement exists in a GBL § 135 special proceeding.

Accordingly, the court refused to stay or dismiss the New York action in light of the federal action, and after a consideration of the merits awarded a permanent injunction to the Explorers Club against Diageo.

This ruling is interesting because a GBL § 135 special proceeding is a specific, seldom-utilized action which must be unfamiliar to many practitioners. It is also interesting on a more general level, in that it shows that a party litigating in federal court can also bring a New York law special proceeding. Given that the special proceeding will probably be decided first, it could have a decisive effect, perhaps mooting large portions of the federal action.

Posted: August 12, 2014

First Department Addresses Scope of Federal Arbitration Act

On August 7, 2014, the First Department issued a decision in Cusimano v. Schnurr, 2014 NY Slip Op. 05702, addressing two issues that arise frequently in the context of commercial arbitration: (1) whether the parties’ arbitration agreement is covered by the Federal Arbitration Act (FAA), in which case threshold issues, such as the timeliness of the claims, are determined in the first instance by the arbitrator; and (2) whether the claimant waived the right to arbitration by first pursuing litigation in court.

In Cusimano, the plaintiffs brought suit against their former accountants for allegedly conspiring with plaintiffs’ business partners to misappropriate distributions and assets from an entity, commit tax fraud, and fraudulently induce one of the plaintiffs to sell her interest in a property. Justice Ramos of the New York County Commercial Division dismissed plaintiffs’ fraud and breach of fiduciary duty claims for lack of specificity under CPLR 3016(b) with leave to replead. Rather than filing an amended complaint, however, the plaintiffs commenced an arbitration with the American Arbitration Association, asserting claims similar to those raised in the lawsuit, and moved, under CPLR 7503(a), for a stay of the lawsuit pending the arbitration. The defendant accountants cross-moved for a permanent stay of the arbitration, under CPLR 7503(b), on the ground that the arbitration claims were time-barred. Plaintiffs opposed the cross-motion, arguing that because the parties’ arbitration agreement was covered by the FAA, the issue of timeliness should be decided by the arbitrator, not the court. Justice Ramos found that the FAA was inapplicable because the agreements at issue “do not involve interstate commerce.” He proceeded to hold that many of the claims were time-barred, and that plaintiffs waived any right they may have had to arbitrate those claims by commencing, and participating in, the litigation in New York Supreme Court.

The First Department (in a decision by Justice Richter) reversed. First, the Court found that the FAA applied given the broad interpretation the courts apply to the term “involving commerce” as used in the statute:

The FAA governs agreements which “evidenc[e] a transaction involving commerce” (9 USC § 2). In determining if the FAA applies to a contract, the central question is whether the agreement is a contract evidencing a transaction involving commerce within the meaning of the FAA.

Courts have interpreted the term “involving commerce” broadly. In Allied-Bruce [Terminix Companies, Inc. v. Dobson, 513 US 265, 270 (1995)], the United States Supreme Court concluded that the purpose of the FAA — to reduce the amount of litigation through the enforcement of arbitration agreements — supports a broad interpretation of the term “involving commerce” (513 US at 275). The Court declined to restrict transactions involving commerce only to those “activities within the flow of commerce” (id. at 273 [internal quotation marks and emphasis omitted]). Rather, it found the phrase “involving commerce” to be the equivalent of “affecting commerce,” a term associated with the broad application of Congress’s power under the Commerce Clause (id. at 273-274).

. . .

Based on a broad application of the term “involving commerce,” we find that the FAA applies to the agreements at issue. Each of the agreements concerns transactions that affect commerce, and all of the entities are involved in the rental of commercial property. FLIP’s rental property, which is located in Florida, is leased by a CVS drug store; Berita owns an interest in an entity that in turn owns a Marriott Hotel; and Seaview owns two commercial buildings. Because commercial real estate can affect interstate commerce, the ownership of and investment in the commercial buildings here, one of which is occupied by an international chain hotel and another which houses a national chain drug store located out-of-state, renders the FAA applicable to these agreements.

We reject respondents’ claims that the FAA is inapplicable because, in their view, this is a dispute about the mismanagement of the family entities in New York State. The proper inquiry is whether the economic activity in question represents a general practice that bears on interstate commerce in a substantial way. This dispute not only involves substantial commercial transactions covering real properties, some of which are not in this state, but as plaintiffs note, the properties are part of national hotel and drug store chains.

Second, the Court found that the fact that plaintiffs filed a lawsuit in Supreme Court did not effect a waiver of the right to arbitrate, as the parties did not engage in “protracted litigation” prior to the commencement of the arbitration, and there was no prejudice to the defendants:

Although a party may have a right to arbitrate, the court may determine that a party has waived this right by having participated in litigation. There is a strong federal policy favoring arbitration, and waiver should not be lightly inferred under the FAA. A party does not waive the right to arbitrate simply by pursuing litigation, but by engaging in protracted litigation that results in prejudice to the opposing party.

In determining what constitutes protracted litigation for the purposes of waiver, there is no bright line rule. Rather, the court should consider three factors: (1) the amount of time between the commencement of the action and the request for arbitration; (2) the amount of litigation thus far; and (3) proof of prejudice to the opposing party Indeed, the key to a waiver analysis is prejudice. Prejudice may either be substantive prejudice or result from excessive delay or costs caused by the moving party’s pursuit of litigation prior to seeking arbitration, though cost alone is not sufficient to establish prejudice. A party may be substantively prejudiced when the other party is attempting to relitigate an issue through arbitration, has participated in substantial motion practice, or seeks arbitration after engaging in discovery that is unavailable in arbitration.

Applying these principles, we find that plaintiffs’ actions in this litigation have not prejudiced respondents such that the court must find waiver. Although plaintiffs commenced this action in court, they did not engage in aggressive litigation involving multiple motions addressed to the merits, nor did they pursue state court appeals. Importantly, the only substantive motion in this action was made by the accountants. Plaintiffs moved only to disqualify defense counsel, relief which could have been sought in arbitration. In any event, this type of motion would be insufficient to constitute waiver under the federal case law. Respondents point to the fact that plaintiffs requested subpoenas while the motion to dismiss was pending, but no actual discovery took place. Therefore, plaintiffs did not obtain any evidence that would not be available to them in arbitration.

Respondents assert that plaintiffs, by seeking arbitration, are attempting to relitigate the issues they lost before the motion court. However the motion court gave plaintiffs leave to replead with specificity, effectively giving plaintiffs “another bite at the apple,” at least as to the sufficiency of the pleadings. Thus, plaintiffs have not received any greater advantage by filing a statement of claim in an arbitration than they would have obtained had they filed an amended complaint. In any event, respondents point to no case finding waiver solely because a party filed an arbitration demand after limited motion practice, particularly where, as here, only one year had passed and no discovery had been exchanged.

The accountants argue that plaintiffs’ delay in seeking arbitration is prejudicial because it caused them to experience unnecessary delay and expenses. They stress the amount of time that passed between plaintiffs’ filing their complaint and pursuing arbitration and argue that they incurred legal fees in challenging plaintiffs’ subpoenas. A delay of one year does not, in itself, amount to protracted litigation, particularly where a delay was not accompanied by substantial motion practice or discovery. Further, the expense the accountants incurred in responding to plaintiffs’ procedural motion and subpoenas does not, by itself, establish waiver. Indeed, this Court has found that “pretrial expense and delay, without more, does not constitute prejudice sufficient to support” waiver.

Although plaintiffs could have sought arbitration sooner, the fact that they did not file a substantive motion or obtain discovery material that would not have been available in arbitration weighs in favor of allowing arbitration to proceed. Indeed, when assessing the question of waiver, any doubts concerning whether there has been a waiver are resolved in favor of arbitration. In light of the strong preference for arbitration and the lack of prejudice to respondents, we find that no waiver has occurred.

(Citations omitted).

Posted: August 11, 2014

Court Reminds Counsel of Procedure for Citing to Electronically-Filed Documents

On July 31, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in MBIA Insurance Corp. v. Credit Suisse Securities (USA) LLC, 2014 NY Slip Op. 32025(U), raising in a footnote the issue of citation to electronically-filed exhibits.

The decision in MBIA Insurance Corp. is about a discovery dispute. This post, however, takes as its starting point a footnote in the decision discussing citation to electronically-filed exhibits:

The court respectfully requests that when an attorney files all of its exhibits in a single pdf, as Mr. Slarskey did here, he should indicate in his affirmation the page number of the pdf where each exhibit begins. Citations to that pdf in the parties’ brief should then reference the relevant pdf page number. Moreover, if possible, pdfs should be searchable.

In a world of electronic filing, it is important for counsel to consider the needs of chambers in how they assemble and file documents. If you file a single document containing dozens of exhibits and give the court little help in figuring out where in that document the court should look, do not be surprised if the court does not find the facts upon which you would rely.

In addition to the citation and searchability points made in the footnote quoted above, you can also make things simpler by filing exhibits separately. Finally, counsel should start familiarizing themselves with the procedures for the use of hyperlinks in e-filed papers, a procedure being tested by New York County Commercial Division Justices Oing and Scarpulla.

Posted: August 10, 2014

Company Bound by Apparent Authority it Created in Former Officer

On August 8, 2014, the Fourth Department issued a decision in Pasquarella v. 1525 William St., LLC, 2014 NY Slip Op. 05745, holding that the defendant was bound by the apparent authority it created in its former president.

In Pasquarella, the trial court granted the plaintiff summary judgment on its cause of action for specific performance of a contract for the sale of real estate. In doing so, the court rejected the defendant’s argument that the person who signed the contract of sale–Sultan–lacked authority to do so, making the contract ineffective. The Fourth Department affirmed, explaining:

Essential to the creation of apparent authority are words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction. The agent cannot by his own acts imbue himself with apparent authority. Rather, the existence of apparent authority depends upon a factual showing that the third party relied upon the misrepresentation of the agent because of some misleading conduct on the part of the principal — not the agent. Here, we conclude that plaintiffs reasonably relied on, inter alia, their prior course of dealing with Sultan in his capacity as president, principal and manager of defendant. In addition, the record establishes that defendant allowed its attorney to act in a manner consistent with Sultan’s continued authority, and that defendant accepted the deposit that plaintiffs provided to that attorney in conjunction with the signing of the contract, thus giving rise to the appearance and belief that Sultan possessed authority to enter into the transaction. Defendant therefore allowed Sultan to represent that he had the requisite authority, and it may not now be denied.

(Internal quotations and citations omitted).

Posted: August 9, 2014

CPLR 205 Tolls Statute of Limitations for Special Proceeding Improperly Brought as a Plenary Action

On July 30, 2014, Justice Friedman of the New York County Commercial Division issued a decision in Weksler v. Weksler, 2014 NY Slip Op. 32024(U), explaining the application of CPLR 205.

In Weksler, the parties entered into an agreement that tolled the statute of limitations effective December 19, 2006. In 2007, the plaintiff brought a plenary action seeking damages and dissolution of a New York corporation based in conduct occurring in 2000. In 2009, the plaintiff moved “to amend for the purpose of complying with the pleading, service, and publication requirements of Business Corporation Law § 1106, and to sever the cause of action for statutory dissolution.” That motion was denied, a decision which was affirmed by the First Department in 2011. Within six month’s of the First Department’s decision, the plaintiff initiated a special proceeding for dissolution. The defendants then “move[d] to dismiss certain allegations on which the dissolution proceeding is based, on,” among other grounds, that they were “time-barred.” The court’s statute of limitations decision turned on the application of CPLR 205(a), which “provides, in relevant part:

If an action is timely commenced and is terminated in any other manner than by a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, a dismissal of the complaint for neglect to prosecute the action, or a final judgment upon the merits, the plaintiff, or, if the plaintiff dies, and the cause of action survives, his or her executor or administrator, may commence a new action upon the same transaction or occurrence or series of transactions or occurrences within six months after the termination provided that the new action would have been timely commenced at the time of commencement of the prior action and that service upon defendant is effected within such six-month period.

The court began its analysis by noting that “[a]ppeals as of right serve to delay the running of the six-month period under CPLR 205(a) until the appeals are exhausted” and that the plaintiff’s appeal of the 2009 decision had been as of right. The court went on to hold that allegations of conduct occurring in 2000 were not time-barred in the later-filed special proceeding because of CPLR 205(a), explaining:

The statute does not extend the statute of limitations to conduct that occurred prior to the statute of limitations for commencement of an action based on such conduct. It permits a new action to based on conduct that would otherwise be barred by the statute of limitations if, but only if, a prior action was timely commenced based on such conduct and was not terminated on any of the grounds specified in the statute. As the Court of Appeals has explained: The effect of the statute is quite simple: if a timely brought action has been terminated for any reason other than one of the three reasons specified in the statute, the plaintiff may commence another action based on the same transactions or occurrences within six months of the dismissal of the first action, even if the second action would otherwise be subject to a Statute of Limitations defense, so long as the second action would have been timely had it been commenced when the first action was brought.

Contrary to the brothers’ further contention, a claimant’s failure to comply with statutory pleading and other requirements does not in and of itself bar the application of CPLR 205(a). The brothers’ reliance on Hertz v Schiller (239 AD2d 240 [1st Dept 1997]) is unavailing. In Hertz, the Appellate Division rejected the application of CPLR 205(a) because the first action was never commenced as required by the plain language of the statute, and the second action therefore could not relate back to it. The holding was based on the fact that the Clerk of the Court did not accept the summons and complaint in the first action for filing because the plaintiff had already served it on the defendant in violation of CPLR 306-a(a).

In the instant matter, there is no contention that the first action was not properly commenced. Rather, the brothers contend that Lisa’s failure to comply with certain pleading and notice requirements of the Business Corporation Law – in particular, section 1105, requiring verification of the petition, and section 1106, requiring publication of the petition and service on the tax commission – rendered her cause of action for dissolution void ab initio. Significantly, however, the failure of a petitioner to comply with these Business Corporation Law provisions is not a jurisdictional defect, and the statute provides that such non-compliance may be cured through amendment by leave of the court.

(Internal quotations and citations omitted).

Posted: August 8, 2014

Prior Representation Not Grounds For Disqualification of Attorney Where Former Client Waived Conflict In Engagement Letter

On August 6, 2014, the Second Department issued a decision in Grovick Properties, LLC v. 83-10 Astoria Blvd., LLC, 2014 NY Slip Op. 05627, reversing the trial court’s disqualification of plaintiff’s attorney based on a prior related representation of the defendant, where the defendant had expressly waived the conflict.

In Grovick Properties, an attorney (Brooks) represented the buyer (Grovick) in a commercial real estate transaction in which Grovick purchased a property from Astoria that had previously been contaminated by petroleum. After the closing, Brooks was retained by Astoria to represent it in connection with ‘certain claims made by the State for reimbursement of the cleanup and removal costs.” The engagement letter contained the following language, disclosing the possibility of a potential conflict between Astoria and the attorney’s existing client, Grovick, and providing that in the event of such a conflict, Brooks could continue to represent Grovick:

Astoria now desires to engage this firm to represent it against potential claims made by the State arising from or relating to the discharge of petroleum at or from the [property]. Prior to accepting this engagement, we informed you that we continue to represent GROVICK with regard to the now-closed transaction between Astoria and GROVICK, as well as other matters. Notwithstanding this information, and the potential conflict contained therein, you requested and instructed this firm to proceed in its representation of Astoria and each of its members for the purposes stated in the letter of engagement.

In connection therewith, Astoria and each of its Members hereby waive any and all claims of conflict of interest or potential conflict of interest that may arise out of the [sic] our representation of Astoria on the one hand, and any work we have performed, now perform, or may perform for GROVICK or its principals (including Jeffrey Novick). Furthermore, in the event Astoria at any time for any reason elects to discontinue its engagement of this firm, or should an adverse relationship arise between ASTORIA and GROVICK, you acknowledge and agree that we may continue without restriction to represent GROVICK and its principals in any and all matters, including those that arise from or relate to the [property].

After Astoria terminated the representation, Brooks brought suit against Astoria on behalf of Grovick seeking to recover costs for remediating the property. Justice Driscoll of the Nassau County Commercial Division granted Astoria’s motion to disqualify Brooks as counsel for Grovick based on Brooks’ prior related representation of Astoria. The Second Department reversed, holding that Astoria had waived any objection to the representation in the engagement letter:

The disqualification of an attorney is a matter which rests within the sound discretion of the court. A party’s entitlement to be represented in ongoing litigation by counsel of his or her own choosing is a valued right which should not be abridged absent a clear showing that disqualification is warranted, and the movant bears the burden on the motion. Here, the Supreme Court improvidently exercised its discretion in granting the motion to disqualify Brooks and Phillip Nizer, LLP, as counsel for the plaintiff. Pursuant to the written waiver, the Astoria defendants specifically waived any conflict of interest that might arise from Brooks’s representation of the plaintiff. The waiver fully informed the Astoria defendants of the potential conflict of interest and, by executing the waiver, the Astoria defendants consented to have Brooks represent them notwithstanding that conflict. Under the facts of this case, the Astoria defendants should not be permitted to compel the disqualification of Brooks and Phillips Nizer, LLP, simply because the representation to which they consented now involves litigation.

(Citations omitted). This decision serves as a reminder to counsel representing multiple parties to consider potential conflicts issues in preparing engagement letters.

Posted: August 7, 2014

Trial Court Decision Denying Motion for Failure to Follow Part Rules Reversed

On August 6, 2014, the Second Department issued a decision in Middleton v. Russell, 2014 NY Slip Op. 05631, reversing a trial court’s denial of a motion for failure to follow part rules.

In Middleton, the trial court denied the defendants’ “motion to vacate the note of issue and to compel certain disclosure on the ground that the defendants did not request a conference before making the motion in accordance with the court’s part rules.” The Second Department reversed the decision, explaining:

The Supreme Court has broad discretion in supervising disclosure and in resolving discovery disputes. However, the Appellate Division is vested with its own discretion and corresponding power to substitute its own discretion for that of the trial court.

Here, the Supreme Court improvidently exercised its discretion by denying the defendants’ motion to compel certain disclosure, on the ground that the defendants neglected to comply with its part rules requiring advance notice of the motion so that the court could determine whether the matter should be conferenced. While such rules are permissible for the purpose of assisting the court in its supervision of disclosure, the application of the subject rule to the instant matter so as to deny the defendants’ motion was improper in view of the strong indication that the defendants are entitled to additional disclosure and the demonstrated inability of the parties to reach an agreement regarding the requested disclosure.

(Internal quotations and citations omitted). The defendants got a second chance from the Second Department here, but it is hard to see what reason there could have been for not following the part rules regarding pre-motion conferences in the first instance. The Commercial Division justices who have part rules post them on the Commercial Division website. And, of course, we link to them from this blog.

Posted: August 6, 2014

Fraud Claim Dismissed for Failure to Exercise Due Diligence

On July 25, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in Northern Group Inc. v. Merrill, Pierce, Fenner & Smith, 2014 NY Slip Op. 31986(U), dismissing a fraud claim because of, among other reasons, the plaintiff’s failure to exercise due diligence.

In Northern Group, the defendant moved for summary judgment on the plaintiff’s fraud claim relating to the sale of commercial mortgage-backed securities. The court granted the motion for several reasons, including the plaintiff’s failure to exercise due diligence, explaining:

Plaintiffs’ assertion that Boris’ knowledge was inadequate, and the attempt to portray [the plaintiff] as victimizing a naive elderly woman and her son, are unavailing. The record establishes that the corporate shareholders and officers were sophisticated real estate operators who controlled properties worth hundreds of millions of dollars. That being the case, they were not entitled to blindly accept [the defendant’s]generalities about CMBS safety. 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. New York law imposes an affirmative duty on sophisticated investors to protect themselves from misrepresentations by investigating the details of the transactions. If plaintiffs’ understanding of commercial mortgage securitization was imperfect, they could have retained qualified financial experts to evaluate their anticipated investments.

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