Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: February 25, 2014

Foreign Default Judgment Enforceable in New York Even if the Foreign Court Did Not Have Personal Jurisdiction over Defendant Where Defendant Consented to Jurisdiction

On February 25, 2014, the Court of Appeals issued a decision in Landauer Ltd. v. Joe Monani Fish Co., Inc., 2014 NY Slip Op. 01263, holding a foreign default judgment enforceable in New York even though the foreign court did not have personal jurisdiction over the defendant, because the defendant had consented to jurisdiction and had actual knowledge of the action.

In Landauer, the plaintiff “entered into a series of contracts with” the defendant that “included a clause granting the Courts of England exclusive jurisdiction over disputes arising from the transactions. After a controversy arose over the quality of the products [the plaintiff] supplied, [the defendant] refused payment, prompting [the plaintiff] to commence an action for breach of contract in the English High Court . . . . [The defendant] did not appear in the action and a default judgment was entered.” When the plaintiff sought to enforce the judgment in New York, the defendant claimed, and the trial court subsequently found, that the defendant had not been properly served and for that reason the judgment was not enforceable under CPLR Article 53, which requires that the foreign court have jurisdiction over the defendant for a foreign judgment to be enforceable in New York. The First Department affirmed the trial court, but the Court of Appeal reversed the decision, explaining:

Although CPLR article 53 generally provides that a foreign judgment will not be enforced in New York if the foreign court did not have personal jurisdiction over the defendant (CPLR 5304(a)(2)), an exception may be made if, prior to the commencement of the proceedings defendant had agreed to submit to the jurisdiction of the foreign court with respect to the subject matter involved (CPLR 5305(3)) and was afforded fair notice of the foreign court proceeding that gave rise to the judgment. We applied this principle in Galliano, where we explained that enforcement of a foreign judgment is not repugnant to our notion of fairness if defendant was a party to a contract in which the parties agreed that disputes would be resolved in the courts of a foreign jurisdiction and defendant was aware of the ongoing litigation in that jurisdiction but neglected to appear and defend. We clarified that, so long as the exercise of jurisdiction by the foreign court does not offend due process, the judgment should be enforced without microscopic analysis of the underlying proceedings (Galliano, 15 NY3d at 81).

(Internal quotations and citations omitted). Because the record showed that the defendant–while not properly served under the CPLR–nonetheless had actual knowledge of the English proceeding against it, the Court of Appeals found the default judgment against the defendant enforceable.

This decision illustrates the power and importance of contract provisions relating to jurisdiction. As a practical matter, it also shows how important it is that businesses have a process for identifying when they have been sued so that they can properly respond as well as the danger of relying on jurisdiction or service arguments rather than dealing with a dispute on the merits.

Posted: February 24, 2014

First Department Rules That Disgorgement May Be Available As An Equitable Remedy For Attorney General Claims Under Martin Act and Executive Law

On February 20, 2014, the First Department issued a decision in People v. Ernst & Young, LLP, 2014 NY Slip Op. 01257, reversing New York County Commercial Division Justice Jeffrey K. Oing’s dismissal of the New York Attorney General’s claims under the Martin Act and New York’s Executive Law for disgorgement of profits earned by Ernst & Young in allegedly facilitating an accounting fraud by its client Lehman Brothers.

In urging dismissal of the disgorgement claim, Ernst & Young argued that the Martin Act and the Executive Law provide for particular remedies—namely, injunctive relief, restitution and cancellation of a business certificate—and that disgorgement, which is not mentioned in the statutes, is not an available form a relief. It also argued that disgorgement could be duplicative of restitutionary relief that might be obtained in a class action settlement. The First Department rejected these arguments and concluded that:

where, as here, there is a claim based on fraudulent activity, disgorgement may be available as an equitable remedy, notwithstanding the absence of loss to individuals or independent claims for restitution . . . . Disgorgement is distinct from the remedy of restitution because it focuses on the gain to the wrongdoer as opposed to the loss to the victim. Thus, disgorgement aims to deter wrongdoing by preventing the wrongdoer from retaining ill-gotten gains from fraudulent conduct. Accordingly, the remedy of disgorgement does not require a showing or allegation of direct losses to consumers or the public; the source of the ill-gotten gains is “immaterial.” Therefore, while the Attorney General does not allege direct injury to the public or consumers as a result of defendant’s alleged collusion with Lehman Brothers in committing fraud, the equitable remedy of disgorgement is available in this action, and it was premature to categorically preclude it at the pleading stage. Nor would ordering disgorgement be tantamount to an impermissible penalty, since the “wrongdoer who is deprived of an illicit gain is ideally left in the position he would have occupied had there been no misconduct.” We further note that maintaining disgorgement as a remedy within the court’s equitable powers is crucial, particularly where the Attorney General may be precluded from seeking restitution and damages if defendant settled the private class action against it.

This decision gives the Attorney General another potent weapon in securities and other fraud-based enforcement actions. In an earlier decision, People v. Applied Card Systems, Inc., 11 N.Y.3d 105 (2008), the Court of Appeals suggested in dicta that the Attorney General “might be able to obtain disgorgement” in a claim under the Executive Law, relying on federal cases recognizing a district court’s authority to award disgorgement “[a]s an exercise of its equity powers” in SEC enforcement actions. Id. at 125-126 (citing SEC v. Fishbach Corp., 133 F.3d 170, 175 (2d Cir. 1997) & Official Comm. Of Unsecured Creditors of WorldCom, Inc. v. SEC, 467 F.3d 73, 81 (2d Cir. 2006)). However, there is apparently no other New York appellate authority expressly recognizing the remedy in this context.

Posted: February 23, 2014

Complaint to Reform Contract Dismissed for Failure to Join All Parties to Contract

On February 5, 2014, New York County Commercial Division Justice Bransten issued a decision in Oppenheimerfunds, Inc. v. TD Bank, N.A., 2014 NY Slip Op. 30379(U), granting a motion to dismiss for failure to join necessary parties.

Oppenheimerfunds arose from a liquidation relating to an ethanol plant, of which plaintiffs were subordinate bondholders. The plaintiffs alleged that when they purchased their bonds, they relied upon drafts of a Senior Intercreditor Agreement pursuant to which they would share pari passu with the defendants—the senior lenders—in available collateral security. However, when the Senior Intercreditor Agreement was ultimately signed, the pari passu provision had been removed and the Agreement now provided that the plaintiffs’ claim to the security would be subordinate to the defendants’.

The plaintiffs sued to have the Senior Intercreditor Agreement reformed or rescinded to comply with their understanding of what its provisions were intended to be or should have been. The defendants moved to dismiss on several grounds, among which was the plaintiffs’ failure to join necessary parties, namely Wells Fargo and its successor, U.S. Bank, because Wells Fargo also was a signatory of the Senior Intercreditor Agreement, as well as the Bond Trustee for the plaintiffs’ bonds, and the priority rank to which the plaintiffs objected was assigned to Wells Fargo in its capacity as Trustee, rather than to the plaintiffs.

The Court dismissed the action for failure to join Wells Fargo and U.S. Bank as necessary parties under CPLR 1003, explaining:

A necessary party is one whose interests may be adversely affected or prejudiced by a judgment in the action. New York courts have long held that in an action seeking rescission, cancellation or avoidance of an agreement, the parties to the agreement are indispensable . . . . Contrary to plaintiffs’ arguments, Wells Fargo and U.S. Bank are not mere ‘nominal participants.’ Rather, Wells Fargo was intimately involved in the relevant events at issue in this litigation. It was a party to the agreement in dispute here . . . and was the link between [plaintiffs] and the defendants . . . . Indeed, plaintiffs allege that Wells Fargo, and thus U.S. Bank, represented and protected plaintiffs’ interests by signing the Senior Intercreditor Agreement on their behalf. Therefore, the Senior Intercreditor Agreement cannot be reformed or rescinded without joining Wells Fargo and U.S. Bank as parties.

From this opinion, we can see that, if a contract is to be reformed or declared unenforceable, all parties to the contract must be joined. Even if the plaintiffs claim to stand in the shoes of the missing parties, or believe that the missing parties are merely “nominal” and have no substantial interest in the outcome of the action, this rule of pleading should not be overlooked.

Posted: February 22, 2014

Whether Defendants Were “Sellers” Under UCC is Factual Question Precluding Dismissal on Statute of Limitations Grounds

On December 11, 2013, Justice Schmidt of the Kings County Commercial Division issued a decision in Corona Treasures LLC v. Star Home Designs, LLC, 2013 NY Slip Op. 52294(U), denying in part a motion to dismiss because of factual questions regarding whether some defendants were “sellers” for purposes of the UCC.

Corona Treasures arose from the breakdown of an agreement by the plaintiff to purchase merchandise from India. Some of the defendants (Universal, the Indian defendant who was the underlying seller, did not join them) moved to dismiss on the ground that because the agreement concerned the sale of goods, UCC § 2-725(1)’s 4-year statute of limitations applied instead of the 6-year limitations period for breach of contract actions. In opposition, the plaintiff asserted that the only “seller” in the relationship was Universal, and that the movants were intermediaries who were paid to facilitate or arrange the plaintiff’s relationship with Universal.

The court found that, because there were issues of fact as to whether the movants were “sellers,” they had not carried their initial burden of establishing that the statute of limitations had expired:

In the first instance, moving defendants rely too heavily on a single allegation in the complaint (paragraph 7) to claim the status of sellers, to the exclusion of other allegations that suggested that they acted in another capacity, i.e., as some kind of intermediary for the alleged seller. Tellingly, the moving defendants do not dispute [the plaintiff’s] assertion, supported by documentary evidence, that he purchased the goods directly from Universal and that the payments that were made to moving defendants were not for the goods themselves but were essentially a finder’s fee . . . . If anything, moving defendants appear to assiduously avoid describing the nature of their relationship with Universal.

The court did dismiss the plaintiff’s conversion claims—finding no factual issue that the three-year statute of limitations applied and had run—and fraud claims—because none of the alleged representations were “collateral or extraneous to the terms of the agreement.”

This opinion reminds practitioners that, even though an action may concern the “sale of goods,” the provisions of Article 2 of the UCC may not apply to every party or cause of action, and complaints should be drafted with this consideration in mind.

Posted: February 21, 2014

Transcripts and Videos of Arguments in the Court of Appeals for the Week of February 10, 2014, Now Available

Transcripts and videos of arguments in the Court of Appeals for the week of February 10, 2014, are now available on the Court of Appeals website.

On February 10, 2014, we noted one case of interest from the oral arguments for the week of February 10, 2014:

  • Docket No. 24: Melcher v. Greenberg Traurig, LLP (addressing when plaintiff’s claim for “attorney deceit” under Judiciary Law § 487 accrued and therefore whether the claim was timely under the applicable 3-year statute of limitations).  See the transcript and the video.
Posted: February 21, 2014

Unwritten Agreement to Arbitrate Enforceable, But Waived by Defendant’s Assertion of Claims in Lawsuit

On February 19, 2014, the Second Department issued a decision in Willer v. Kleinman, 2014 NY Slip Op. 01164, reversing a trial court order compelling arbitration and instead finding that while the parties were bound by their oral agreement to arbitrate, the defendant had waived its rights under that oral agreement. (more…)

Posted: February 20, 2014

First Department Reverses Grant of Renewal For Lack of Diligence in Seeking Evidence

On February 18, 2014, the First Department issued a decision in Orchard Hotel, LLC v. D.A.B. Group, LLC, 2014 NY Slip Op. 01107, reversing a trial court’s grant of a motion for renewal.

In Orchard Hotel, the trial court granted the defendant’s motion for renewal, reinstating its counterclaims. The First Department reversed, both because it found the defendant’s new evidence to be without merit and because the defendant should have offered it in the original motion, explaining:

CPLR 2221(e)(2) provides in pertinent part that a motion to renew “shall be based upon new facts not offered on the prior motion that would change the prior determination.” . . .

[U]nder CPLR 2221(e)(3), a motion to renew “shall contain reasonable justification for the failure to present such facts on the prior motion.” Here, [the defendant] made the discovery request that yielded the Action Plan only upon the motion court’s suggestion, and only after this Court affirmed the order dismissing [the defendant’s] counterclaims. The Action Plan was available at the time of the original motion—-indeed, numerous witnesses alluded to it during their depositions. Even so, [the defendant] did not provide a reasonable justification for its failure to serve a more exacting discovery demand that specifically requested Brooklyn Federal’s internal documents related to the loan extension issue. Thus, we find that [the defendant] failed to show that it exercised due diligence in obtaining the documentary evidence, and the motion court erred in granting leave to renew.

(internal quotations and citations omitted).

The First Department had a different view than the trial court on the substantive importance of the Action Plan. However, in its apparent effort to drive a stake through the heart of the defendant’s counterclaims, it could be viewed as setting a high bar for parties seeking renewal.

Posted: February 19, 2014

Court Grants Reargument When it Fails to Address Argument Made in Footnote

On February 6, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Eden Roc, LLLP v. Marriott International, Inc., 2014 NY Slip Op. 30377(U), granting a motion for reargument.

In Eden Roc, the trial court denied the defendants’ motion to dismiss with respect to the plaintiff’s cause of action for an accounting. The defendants moved for reargument on the ground that the court had not addressed their arguments on the accounting point. The court granted reargument, explaining:

The motion for reargument as to the accounting claim is granted because the court overlooked [the defendants’]argument as to this cause of action which was contained in [their] moving memorandum.

In the Prior Motion, [the defendants] moved for dismissal of the entire complaint. As for the thirteenth cause of action for an accounting, [the defendants] nestled [their] argument in footnote 9 in a memorandum of law consisting of 35 pages with 14 footnotes, and referenced this footnote 9 in footnote 6 in [their] reply memorandum. [The plaintiff] responded to it in footnote 10 in its opposition memorandum . . . .” Nevertheless, the argument was made, and, therefore, this situation comes within the parameters of the remedy afforded by CPLR 2221(d)(2).

[The plaintiff] asserts that a “motion for reargument ‘is not a vehicle permitting a previously unsuccessful party to once again argue the very questions previously decided or to assert new, never previously offered arguments,”‘ quoting Kent v 53 4 E. 11th St. (80 AD3d 106, 116 (1st Dept 2010). This assertion is without merit. The basis for the reargument motion is that the court overlooked [the defendants’] argument in support of dismissal of the accounting cause of action. Thus, [the defendants are] neither once again arguing the questions previously decided nor asserting new, never previously offered arguments.

(Internal quotations and citations omitted).

The court was generous in granting reargument based on arguments in footnotes that it missed the first time. This decision is helpful precedent for a party whose argument was overlooked by a court, but the better course, it seems to us, is that if you want to make an argument, do not run the risk of it getting lost in a footnote.

Posted: February 18, 2014

Case Against New Jersey Defendants Dismissed for Lack of Personal Jurisdiction

On February 18, 2014, the First Department issued a decision in SunLight General Capital LLC v. CJS Investments Inc., 2014 NY Slip Op. 01118, affirming a dismissal for lack of personal jurisdiction.

In SunLight General Capital, the defendants, “CJS” and “Clean Solar,” were “New Jersey entities, with offices and employees located solely within the State of New Jersey, and whose alleged actions herein occurred with the State of New Jersey.” The trial court dismissed the plaintiff’s claims for lack of personal jurisdiction. The First Department affirmed, explaining:

The contractual claims, as against CJS, arise out of CJS’s entry into a memorandum of understanding (MOU) with plaintiff which contemplated a joint venture whose business was to consist of the development of solar energy facilities on New Jersey properties owned by CJS. All of the meetings between plaintiff and CJS took place in New Jersey, and the MOU contained a New Jersey choice-of-law provision.

The fact that CJS negotiated the terms of the MOU and communicated with plaintiff via email and telephone, which communications do not serve as the basis for plaintiff’s claims, is insufficient to constitute the transaction of business within New York. Plaintiff’s actions within New York, including making presentations to potential investors and executing the MOU, cannot be imputed to CJS for jurisdictional purposes. Accordingly, plaintiff’s breach of contract and breach of duty of fair dealing claims were properly dismissed as against CJS.

Likewise, dismissal of the tortious interference claims asserted against CJS and Clean Solar was proper. Plaintiff cannot establish personal jurisdiction, pursuant to CPLR 302(a)(3)(ii), in the absence of evidence that these defendants derive substantial revenue from interstate or international commerce.

(Internal quotations and citations omitted).

Commercial litigation in New York County routinely involves parties from all over the world. This decision reminds us that plaintiffs bear the burden of establishing that the court has jurisdiction over the defendants even when they are located just across the Hudson, in New Jersey.