Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: August 5, 2014

Corporate Officer Awarded Advancement of Fees

On July 24, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in General Plumbing Corp. v. Parklot Holding Co., 2014 NY Slip Op. 31961(U), awarding a corporate officer indemnification and advancement of legal expenses in an action against him by the corporation.

In General Plumbing Corp., a commercial landlord-tenant dispute, the defendant moved to dismiss and also moved “pursuant to BCL § 724(c), for an order directing [the plaintiff] to reimburse him for the attorney’s fees and costs he has already incurred defending himself in this action, and to advance him any attorney’s fees and costs he incurs for such defense in the future.” The court granted the indemnification motion, explaining:

[The defendant] moves for reimbursement and the advancement of attorney’s fees and costs in defending this action, pursuant to BCL §724(c), on the grounds that he is entitled to indemnification as a former officer and director of [the plaintiff]. Business Corporation Law § 724 states:

(a) Notwithstanding the failure of a corporation to provide indemnification, and despite any contrary resolution of the board or of the shareholders in the specific case under section 723 (Payment of indemnification other than by court award), indemnification shall be awarded by a court to the extent authorized under section 722 (Authorization for indemnification of directors and officers), and paragraph (a) of section 723. Application therefor may be made, in every case, either:
(1) In the civil action or proceeding in which the expenses were incurred or other amounts were paid . . .
(c) Where indemnification is sought by judicial action, the court may allow a person such reasonable expenses, including attorneys’ fees, during the pendency of the litigation as are necessary in connection with his defense therein, if the court shall find that the defendant has by his pleadings or during the course of the litigation raised genuine issues of fact or law.

It is important to note that if the action is not of the kind covered under section 722, then neither Business Corporation Law § 723 nor § 724 are applicable, and the court has no statutory basis to order such indemnification. Business Corporation’Law § 722(c) states:

A corporation may indemnify any person made, or threatened to be made, a party to an action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he, his testator or intestate, is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of any other corporation of any type or kind, domestic or foreign, of any partnership, joint venture, trust, employee benefit plan or other enterprise, against amounts paid in settlement and reasonable expenses, including attorneys’ fees, actually and necessarily incurred by him in connection with, the defense or settlement of such action, or in connection with an appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation, except that no indemnification under this paragraph shall be made in respect of (1) a threatened action, or a pending action which is settled or otherwise disposed of, or (2) any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such portion of the settlement amount and expenses as the court deems proper.

[The defendant] argues that, through his pleadings and submissions to the court, he has denied any wrongdoing and raised issues of fact regarding whether his actions as president of [the plaintiff] were in good faith pursuant to BCL 724(c). Plaintiff argues that [the defendant] is not entitled to indemnification and advanced legal fees because [the defendnat] admitted that his actions were not in the best interest of [the plaintiff] and that he was balancing the interests of [others] pursuant to his personal asset allocation plan. Accordingly, plaintiff argues that pursuant to BCL 722(c), his actions were not in good faith or in the best interests of the corporation.

Where there are issues of fact in a dispute over whether a director participated in alleged wrongful conduct and acted in good faith on behalf of the corporation, courts have generally permitted the relief of advanced litigation expenses, including attorney’s fees, subject to reallocation at the end of the action pursuant to BCL 725(a). [The defendant] has successfully defended this action and properly moved for the advancement of legal fees pursuant to BCL 724 as the action was pending against him at the time the motion was filed. Accordingly, [the defendant’s] motion for the advancement of attorney’s fees pursuant to BCL 724(C) is granted. Further, as [the defendant’s] motion to dismiss the causes of action against him has been granted, [the defendant] is entitled to indemnification, in the present action only, for reasonable legal fees, pursuant to BCL §723(a).

However, the first and second causes of action do not include allegations with respect to [the defendant] and the third and fourth causes of action only involve acts allegedly taken by [the defendant] in 2013. As none of the allegations in the original complaint included actions taken by [the defendant] while he was a director or officer of [the plaintiff], for the benefit of [the plaintiff], [the defendant] is not entitled to indemnification with respect to the costs and expenses of defending this case prior to October 17, 2013 when the plaintiff amended the complaint to include causes of action against [the defendant] for his breach of duty while president of [the plaintiff].

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

Posted: August 4, 2014

Insured Demanding Reinstatement Must Pay Premiums on Improperly Terminated Life Insurance Policy

On July 25, 2014, Justice Schmidt of the Kings County Commercial Division issued a decision in Rubenstein v. The Lincoln National Life Insurance Co., 2014 NY Slip Op. 31957(U), ruling that the holder of life insurance policy that was improperly terminated without the required statutory notice must pay premiums due for the period when the policy lapsed.

The court explained that the policyholder had to pay the premiums on the policy it sought to have the court reinstate:

Plaintiff cites Weld v MidAmerica Mutual Life Insurance Company, 385 N.W.2d 58 (Court of Appeals, Minnesota, 1986) to support the position that insurance premiums need not be paid during a period when no coverage was in effect. In Weld, the plaintiffs health insurance policy had lapsed for non-payment of premiums, however the defendant reinstated the policy by accepting subsequent premium payments. Unbeknownst to the plaintiff, the payments he made after the policy’s reinstatement were being applied by defendant retroactively to pay the prior defaults. When plaintiff suffered an injury a few months after the policy was reinstated, the carrier declined coverage as the insurance premiums were deemed two months overdue, beyond the 31 days grace period for making a claim after missing a premium payment. The court found that the language of the policy failed to give the plaintiff notice that his premium payments will be applied to prior defaults. Rather, the language of the policy implied that coverage would begin anew upon the reinstatement date. As such, the court found that the plaintiff had commenced a new term of insurance when his policy was reinstated, and that the defendant was obligated to pay plaintiff’s claim and it could not retroactively apply plaintiff’s premiums to a period during which he had no coverage.

The facts in Weld are completely distinguishable from the facts in this case. In Weld, the plaintiff was paying monthly premiums without any notice that his insurance company was accepting these payments while considering itself under no obligation to provide coverage to him. The court found that defendant was not entitled to claim that it was reinstating the plaintiff’s insurance policy without advising the plaintiff that he would be paying back past due premiums before his coverage would commence. The court found that coverage began anew on the reinstatement date and thus plaintiff was covered for his losses incurred during the period that he was paying premiums on the reinstated policy.

In the present case, the policy in question is a life insurance policy, and at the time the defendant declared it in lapse, it was actually in effect. Moreover, unlike Weld, once the policy is reinstated, plaintiff cannot claim that he was not covered for the entire time in question. Plaintiff has not demonstrated any legal or factual basis to find that defendant’s error in declaring the policy to have lapsed relieves the plaintiff of the obligation to pay the premiums for the coverage that he purchased for the entire time period that it is in effect. This would result in plaintiffs obtaining an unearned windfall of having a Five Million Dollars life insurance policy while not paying any premiums towards it for four years. Moreover, unlike Weld, the insurance contract here clearly states that to reinstate the policy, the holder must pay the amount of the debt.

This decision serves as a reminder that statutory notice requirement prior to the termination of an insurance policy are strictly enforced and if not complied with can give the insured another chance to reinstate coverage. Another take-away from this decision is that the courts are not inclined to give the insured a windfall, so back premiums will likely have to be paid.

Posted: August 3, 2014

Petition to Stay Mandatory Mediation Dismissed

On July 25, 2014, Justice Schmidt of the Kings County Commercial Division issued a decision in Matter of Albee Development LLC v. Casino Development Group, Inc., 2014 NY Slip Op. 31959(U), dismissing a petition to stay a mandatory mediation.

In Matter of Albee Development LLC, the respondent initiated an arbitration with the petitioner regarding a contract dispute. The petitioner petitioned to stay the arbitration because, among other grounds, the clause upon which the respondent relied in initiating the arbitration called for mandatory mediation, not arbitration. The court denied the petition, explaining:

[T]he court rejects as meritless petitioners’ assertion that [the petitioner] did not expressly agree to arbitration. Specifically, the contention that the subject agreements do not require [the petitioner] to submit to arbitration of disputes because the provisions specify “binding mediation” as the dispute resolution procedure instead of the word “arbitration” lacks merit. This distinction is not relevant for the purposes of CPLR Article 75; as respondent correctly observed, a trial court of this state has applied Article 75 to a “binding mediation” in confirming a mediation award. Moreover, given if this court were to find a meaningful distinction between the two expressions, in either situation, [the petitioner] has agreed to be bound by the decisions of a neutral third-party that, resolve disputed claims up to the applicable threshold-each contract provides that, unless a contrary agreement is made, “mediation shall be in accordance with Construction Industry Mediation Rules of the American Arbitration Association[.]” Given that the demands served by respondent appear to comply with the applicable rules of the subject organization, this court shall not interfere with the bargained-for alternative dispute resolution process based on the distinction between “binding mediation” and arbitration.

(Internal quotations and citations omitted).

Posted: August 2, 2014

No Personal Jurisdiction Based on Solicitation of Business in State Without More

On July 30, 2014, the Second Department issued a decision in Mejia-Haffner v. Killington, Ltd., 2014 NY Slip Op. 05522, affirming a dismissal for lack of personal jurisdiction.

In Mejia-Haffner, the plaintiffs sued a Vermont ski resort in Queens County. Even though the resort advertised in New York, the Second Department affirmed the dismissal for lack of personal jurisdiction, explaining:

A foreign corporation is amenable to suit in New York courts under CPLR 301 if it has engaged in such a continuous and systematic course of doing business here that a finding of its presence in this jurisdiction is warranted. Mere solicitation of business within New York will not subject a defendant to New York’s jurisdiction. Instead, a plaintiff asserting jurisdiction under CPLR 301 must satisfy the standard of solicitation plus, which requires a showing of activities of substance in addition to solicitation.

Even assuming that [the defendant] engaged in substantial advertising in New York, as the plaintiffs claim, the plaintiffs have not demonstrated that [the defendant] also engaged in substantial activity within this State sufficient to satisfy the solicitation-plus standard. Contrary to the plaintiffs’ contention, this Court’s decision in Grimaldi v Guinn (72 AD3d 37, 49-50) does not stand for the principle that a business’s interactive website, accessible in New York, subjects it to suit in this State for all purposes. Instead, the Grimaldi decision stands only for the more limited principle that a website may support specific jurisdiction in New York where the claim asserted has some relationship to the business transacted via the website. Here, even [the defendant’s] alleged substantial solicitation in New York constitutes no more than solicitation.

(Internal quotations and citations omitted) (emphasis added). The Second Department also affirmed the ruling that there was no jurisdiction under CPLR 302.

This decision illustrates the limits to asserting jurisdiction based on solicitation of business in New York.

Posted: August 1, 2014

Legal Argument to be in Memorandum of Law, Not Attorney Affirmation

On July 17, 2014, Justice Bransten of the New York County Commercial division issued a decision in Response Personnel, Inc. v. Aschenbrenner, 2014 NY Slip Op. 31948(U), reminding counsel to make legal argument in a memorandum of law, not an attorney affirmation.

In Response Personnel, the court decided a motion for summary judgment. In the decision, the court reminded counsel of the requirement to use a memorandum of law to make legal argument.

The Court notes that both Plaintiff and Defendants submitted affirmations to the Court in lieu of memoranda of law. As the attorneys for both Plaintiff and Defendants are no doubt aware, argument is to be presented in a memorandum of law. The affirmation is neither a replacement for a memorandum of law nor a place to submit additional argument. Both attorneys are directed to refrain from the submission of argumentative affirmations in the future.

(Internal quotations and citations omitted).

Notwithstanding the rules, what counsel did here is a common practice in regular court parts. However, it is not the standard of practice in the Commercial Division, as Justice Bransten points out.

Posted: July 31, 2014

Motion for Stay in Favor of Arbitration Denied When Complete Identity of Parties Lacking

On July 10, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Interventure 77 Hudson LLC v. Falcon Real Estate Investment Co., LP, 2014 NY Slip Op. 31878(U), denying motions to compel arbitration.

In Interventure 77 Hudson LLC, three defendants moved for a stay in favor of arbitration “on the grounds that there is a parallel proceeding filed in arbitration and the claims in the arbitration proceeding factually overlap the claims brought in this action.” The court denied all three motions. The court began by explaining the standard:

The court may grant a stay under CPLR 2201 in a proper case. When the decision in one action will determine all the questions in the other action, and the judgment in one trial will dispose of the controversy in both actions, a case for a stay is presented. Where a party seeks the stay of an action pending the outcome of another action, complete identity of parties, causes of action and judgment sought are required. Although these elements are not specifically set forth in CPLR 2201, they are generally adhered to.

(Internal quotations and citations omitted) (emphasis added). The court went on to deny all three motions, finding in each case that there was “not complete identity of the parties between the current action and the arbitration.”

Posted: July 30, 2014

When no Present Claim and a Subsequent Dispute Would be New and Distinct, Party not Necessary Under CPLR 1001

On July 15, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in 37 E. 50th St. Corp. v. Restaurant Group Management Services, L.L.C., 2014 NY Slip Op. 31876(U), granting a defendant’s motion to dismiss on the grounds that it was not a necessary party under CPLR 1001(a).

In 37 E. 50th St. Corp. , the owner (37 East) and manager (RGMS) of a restaurant agreed that RGMS would negotiate a lease extension with the landlord (Eurofinch) on behalf of both entities, but the new lease “cut 37 East out as a tenant” and named an affiliate of RGMS as the new tenant. 37 East sued RGMS for breach of contract and fiduciary duties, seeking injunctive relief requiring RGMS to assign the lease to 37 East. Because Eurofinch would be required to give its consent (not to be unreasonably withheld) to the assignment, 37 East also named Eurofinch as a defendant, although no direct claim was asserted against Eurofinch.

Eurofinch moved to dismiss on that basis, and 37 East opposed on the grounds that the landlord was a necessary party in a litigation concerning the assignment of a lease.

The court rejected all of 37 East’s arguments and dismissed Eurofinch.

First, the court noted that, as a general principle of law, “in order for an entity to be a necessary party, it must be one against whom plaintiff can assert a right to relief.” And in this case, 37 East had no present right to relief against Eurofinch, which would only become implicated in the dispute if it unreasonably withheld its consent to an assignment between 37 East and RGMS. The court held that any assertion that Eurofinch would breach its contractual obligations was highly speculative, and also noted that an entity that is merely “required to provide some cooperative acts if a judgment is adverse to the defendants” is not by law a necessary party.

Second, the court held that the general rule that “third parties with an interest in the property underlying the litigation between plaintiff and defendant [are] necessary parties” was inapplicable:

The cases cited by 37 East are distinguishable from the present case because Eurofinch has no material interests in the merits of the litigation. Unlike the property owners whose interests might be adversely affected by the litigation or whose property might be encumbered with mortgage, Eurofinch’s property rights in the Premises will not be abrogated regardless of the outcome of the litigation between 37 East and RGMS. Eurofinch retains the right to reasonably reject a proposed assignment no matter which party wins the lawsuit.

And third, there was no risk of duplicative litigation because the merits of the present dispute—RGMS’s alleged misconduct in negotiating the new lease—were completely independent of the merits of any subsequent dispute with Eurofinch, which “would focus on the reasonableness of withholding the assignment.” Joining Eurofinch as this time would only “impede and delay” the resolution of the main action between 37 East and RGMS.

As well as presenting an exception to the widely-held rule that the landlord is always a necessary party in a lease assignment case, this decision also shows the limits of the necessary party rule: if there is no present claim for relief against a party and if the legal issues in a subsequent dispute involving would be new and distinct, the party is not necessary under CPLR 1001(a).

Posted: July 29, 2014

Analyses Performed by Litigation Counsel Not Work Product When Done to Meet Contractual Obligation

On July 16, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Home Equity Mortgage Trust Series 2006-1 v. DLJ Mortgage Capital, Inc., 2014 NY Slip Op. 31923(U), granting a motion to compel the production of analyses performed by litigation counsel.

In Home Equity Mortgage Trust Series 2006-1, the plaintiff moved to compel the production of loan repurchase analyses performed for the defendant by Orrick, Herrington & Sutcliffe LLP, which was hired by the defendant not just to perform the analyses but also to “advise [the defendant] of any legal liability that may result.” Notwithstanding that the analyses were performed by litigation counsel, the court granted the motion to compel, explaining:

In order for the attorney-client privilege to apply, the document must be primarily prepared in anticipation oflitigation. The attorney work product doctrine applies only to documents prepared by counsel acting as such, and to materials uniquely the product of a lawyer’s learning and professional skills, such as those reflecting an attorney’s legal research, analysis, conclusions, legal theory or strategy. Documents prepared in the ordinary course of business are not privileged and are, therefore, discoverable.

. . .

The First Department has made clear that repurchase analyses are not privileged when they are conducted pursuant to a contractual obligation[, holding] that documents and information concerning defendants’ repurchase review, generated in response to plaintiffs repurchase requests, are discoverable. The Appellate Division noted that processing repurchase requests was an inherent part of defendants’ business because defendants were, and always had been contractually obligated to conduct repurchase reviews.

. . . Although [the defendant] anticipated litigation and retained counsel to perform the repurchase analysis, [the defendant] was still contractually obligated to conduct repurchase reviews and such analysis would have been performed even had there been no threat of litigation. Immunity does not attach to Orrick’s repurchase analysis merely because it anticipated litigation. It attaches only to analyses that were created primarily, if not solely, in anticipation of litigation. Defendants try to distinguish the instant action from MBIA by arguing the [the defendant] does not have a long-standing business unit to deal with repurchase demands. [The defendant] notes that prior to 2008, members of their due-diligence staff would be pulled to deal with the few repurchase demands it received. In 2008, when [the defendant] received its first large-scale repurchase demand, [the defendant] retained Orrick as legal counsel and gave Orrick independent discre!ion about how to handle the repurchase demands. Defendants maintain this shows that responding to repurchase demands is not an inherent part of defendants’ business and as such are not performed in the ordinary course of business.

Although defendants may not have a dedicated business unit to deal with repurchase demands that does not mean that repurchase demands are not a long-standing business practice. In fact, defendants admit that members of their staff had performed repurchase analyses prior to 2008. Additionally, the fact that members of defendants’ due diligence department, who are not attorneys, were capable of performing repurchase analyses highlights that these analyses are not legal in nature. Such analyses do not become privileged merely because an investigation was conducted by an attorney.

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

This decision illustrated that just as not every communication by a lawyer is an attorney-client communication, not all work done by a lawyer is attorney work product.

Posted: July 28, 2014

Court Refuses to Order Production of ESI, Finding Previous Productions Sufficient

On July 17, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 2014 NY Slip Op. 31871(U), denying the plaintiff’s motion to compel production of electronically stored information (ESI) that it claimed the defendant had improperly withheld as “non-responsive.” The court concluded that “based on the ESI produced to date, the parties have received all of the documents necessary, and more, to litigate the merits of their claims and defenses at trial and to ensure that any jury verdict is based on a reliable factual record”:

MBIA (or any plaintiff in complex litigation) cannot reasonably expect to uncover every single instance in which a Credit Suisse employee said something that makes its RMBS conduct, at a minimum, a public relations disaster. Again, the very reason that MBIA knows that so much inflammatory ESI exists is precisely because it has so much already. To be sure, in reviewing Credit’s Suisse’s itemized justifications as to what constitutes relevant ESI, it appears that Credit Suisse may well have been somewhat overaggressive in determining the scope of relevance. That being said, the handful of examples proffered by MBIA, many of which are emails that post-date the transaction or speak to practices employed with other securitizations or other types of collateral, do not give rise to a reasonable inference that Credit Suisse’s determinations as to what constitute responsive ESI were made in bad faith. Nor has MBIA convinced the court that Credit Suisse is hiding something materially worse than has already been produced that might tip the scales of this case in MBIA’s favor. Indeed, while nontransaction specific inflammatory emails do not speak well of Credit Suisse, Credit Suisse’s conduct with respect to the subject transaction is all that is at issue. This case is more likely to (and should) turn on the law (e.g., due diligence issues) and expert evidence (e.g., the nonconformance rate) rather than how many inflammatory emails MBIA can read to a jury.

This decision illustrates that although the New York Court permit broad discovery, there are limits to the scope of ESI that a party will be required to produce.

Posted: July 27, 2014

Class Not Certified When Plaintiff’s Evidence of Class Size is Insufficient

On June 24, 2014, Justice Platkin of the Albany County Commercial Division issued an opinion in Picard v. Bigsbee Enterprises, Inc., 2014 NY Slip Op. 51113(U), denying a motion for class certification for failure to establish numerosity.

In Picard, the plaintiff brought a class action “premised on alleged violations of New York Labor Law § 196-d.” The court denied the plaintiff’s motion for class certification on the ground that the plaintiff had not established the numerosity element for certification as a class action, explaining:

The first prerequisite to certification is that the class be so numerous that joinder of all members is impracticable. In seeking to establish this essential element, plaintiff offers the following averment: “Based on the number of servers employed, I believe it is probable that over the last six years, defendants employed more than 100 servers.”

Defendants recognize that it generally is accepted that a putative class of forty members is sufficiently numerous for certification. However, defendants assert that plaintiff has failed to come forward with an adequate evidentiary basis upon which to find numerosity.

The Court concludes that plaintiff has not met his burden of establishing numerosity on the present record. Plaintiff fails to offer a sufficient foundation for his belief as to the number of servers employed by defendants at pertinent times. Indeed, plaintiff was not employed by defendants during the first four years of the proposed class period, and plaintiff’s affidavit does not demonstrate personal knowledge of that period. Further, the equivocal nature of plaintiff’s averment — a mere belief regarding probability — is problematic. And contrary to the contention of plaintiff’s counsel, it is not defendants’ burden to establish the absence of numerosity, even if the relevant data may be within their possession. In fact, plaintiff was given the opportunity to take limited discovery on issues pertaining to class certification, but did not pursue data concerning numerosity. Finally, plaintiff may not offer new evidence for the first time in reply to meet his initial burden.

Accordingly, while it may well be that the proposed class is sufficiently numerous that the joinder of all members is impracticable, this essential prerequisite to certification has not been established on the present record.

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

This decision illustrates the importance of going beyond mere allegations and gathering (and presenting) factual support for any claim or relief, such as class certification.