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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: January 9, 2014

Court of Appeals Arguments of Interest for the Week of January 6, 2014

Arguments this week in the Court of Appeals that may be of interest to Commercial Division practitioners include:

  • Docket No. 2: Executive Plaza, LLC v. Peerless Insurance Company (Argued on Monday, January 6, 2014) (addressing, on a certified question from the Second Circuit, whether a lawsuit under a fire insurance policy is barred by a policy provision that requires any lawsuit be brought within two years of the damage, when a contractual condition precedent to suit could not reasonably be accomplished within two years). See the Second Circuit decision here.
  • Docket No. 8: Biotronik A.G. v. Conor Medsystems Ireland, Ltd. (Argued on Tuesday, January 7, 2014) (examining whether the relief sought in an exclusive distributor’s breach of contract claim against a manufacturer for lost profits from sales to third parties constitutes “consequential damages,” and therefore barred under the terms of the distribution agreement, or instead “general damages” given that the distributor’s resale to third parties “was the very purpose of the Agreement”). See the First Department decision here.
  • Docket No. 11: Voss v. The Netherlands Insurance Company (To be argued Thursday, January 9, 2014) (considering whether the doctrine that an insurance policyholder is “charged with conclusive presumption of knowledge of the terms and limits” of the policy can be invoked to defeat a claim against an insurance broker for negligence in advising the insured as to the adequate amount of insurance). See the Fourth Department decision here.
Posted: January 8, 2014

Claim for Misappropriation of Ideas Dismissed on Summary Judgment Because Idea Not Novel

On December 23, 2013, Justice Kapnick of the New York County Commercial Division issued a decision in PSKW, LLC v. McKesson Specialty Arizona Inc., 2013 NY Slip Op. 33257(U), granting defendant summary judgment to the extent the plaintiff claimed misappropriation of ideas.

In PSKW, LLC, the plaintiff alleged that the defendant had misappropriated its ideas for a pharmaceutical marketing product in violation of the parties’ NDA. Justice Kapnick noted that a claim for misappropriation of ideas could sound in contract or tort, but regardless of which, it depended on the idea being novel and not derivative of another concept. In applying this principle to the facts, she held:

Based on all the evidence submitted, this Court finds that defendant has met its burden of showing that the New Co-Pay Method was not novel (in absolute terms) as a matter of law, and although it may have been a clever, useful idea, it was derivative of the various products that came before it. Indeed, plaintiff does not dispute that its idea was meant to address the problems or shortcomings of the earlier generation debit card programs. Accordingly, the Court finds that the New Co-Pay Method was an expansion and adaptation of existing knowledge, rather than the innovation of a new idea. Therefore, the third cause of action for misappropriation of ideas is dismissed.

Justice Kapnick declined to dismiss the other claims which characterized as being for misappropriation of confidential factual information and not of ideas.

One lesson here is the importance of written non-disclosure agreements. The NDA claim survived here even when the misappropriation of ideas claim was dismissed.

Posted: January 7, 2014

Failure To Comply With Pre-Suit Notice Requirement Nullifies Action

On January 3, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Home Equity Asset Trust 2006-5 (Heat 2006-5) v. DLJ Mortgage Capital, Inc., 2014 NY Slip Op. 50001(U), granting a motion to dismiss under the statute of limitations.

The court rejected the defendant’s first argument–that the summonses with notice were filed more than 6 years after the as-of dates of the contracts–because claims for breaches of representations and warranties do not accrue until the closing dates of the transactions.

However, defendants also claimed that plaintiffs’ failure to submit mandatory pre-suit cure notices 90 days before the summons with notices were filed rendered the summonses a nullity. The court agreed, holding that plaintiffs’ “failure to comply with a condition precedent to commencing suit rendered its summonses with notice a nullity.” (Emphasis added). And because the statute of limitations had since expired, the action was therefore barred by the statute of limitations.

Home Equity Asset Trust serves as yet another reminder to practitioners to read carefully the contracts under which they seek to bring an action and to ensure that all of the conditions precedent to the creation of a claim and bringing suit have been met.

Posted: January 6, 2014

Implied Commercial Contract Found to Exist, Preventing Termination Except by Terms of Original Contract

On December 20, 2013, Justice Walker of the 8th Judicial District Commercial Division issued a decision in Western N.Y. Immediate Med. Care, PLLC v. Healthnow N.Y., Inc., 2013 NY Slip Op. 52252(U), addressing a claim for breach of an implied contract.

In Western N.Y. Immediate Med. Care, plaintiff entered into a contract to be a participating provider with the defendant, a health insurer. The contract ended in 2011. The plaintiff continued to provide services and the defendant continued to pay for them. The “[d]efendant admits that . . . the parties agreed to retain the status quo pending negotiations of a new written agreement.” The defendant later sought to terminate its relationship with plaintiff. The plaintiff sought a preliminary injunction, preventing the defendant from terminating the relationship except pursuant to the notice provisions of the last written agreement between the parties–provisions that had not been met. The court granted the preliminary injunction, writing with respect to the plaintiff’s implied contract claim:

The parties agree that their original contract, the 2005 Agreement, expired . . . in August 2011. . . . When an agreement expires by its terms, if, without more, the parties continue to perform as theretofore, an implication arises that they have mutually assented to a new contract containing the same provisions as the old. Here, the . . . 2005 Agreement expired, but the parties continued to perform as before, with mutually agreed upon rates. Defendant relies heavily upon regulatory obligations that participating provider agreements be in writing. Nonetheless, it continues to categorize, and reimburse Plaintiff as a participating provider in the absence of a new writing.

It is rare to see a successful implied contract claim in commercial litigation. The (preliminary) success of plaintiff’s implied contract claim turns, no doubt, on the unique facts of this case. Still, it is worth noting that such claims can succeed.

Posted: January 5, 2014

Lack of Strict Compliance With Commercial Notice Provisions Can Be Excused Absent Prejudice

On December 23, 2013, Justice Kapnick of the New York County Commercial Division issued a decision in TLI Inv., LLC v. C-III Asset Mgt. LLC, 2013 NY Slip Op. 33328(U), addressing–among other things–the effect of a technical failure to comply with a commercial contract’s notice provisions.

In TLI Inv., the plaintiff shareholder claimed that it had properly replaced defendant as the servicer of a real estate investment trust. The defendant moved for summary judgment on the grounds that plaintiff, TLI Investments, had improperly sent termination notices in the name of TLI Investors, LLC, and that the notices were therefore ineffective. The court rejected this argument on the grounds that defendant knew full well that the notices had come from plaintiff and not from some other party, that defendant had suffered no prejudice from the typographical error, and that under settled law, “strict compliance with contract notice provisions is not required in commercial contracts when the contracting party receives actual notice and suffers no detriment or prejudice by the deviation.” (Emphasis added). The notices were therefore held not to have been defective.

Practitioners should contrast this ruling with Justice Kapnick’s second ruling, in which she refused to grant summary judgment excusing the plaintiff’s failure to comply with administrative prerequisites for replacing the servicer. The plaintiff claimed that the defendant’s obstruction relieved its obligation to obtain confirmations from rating agencies and opinion letters from counsel before replacing defendant, but the court found that factual questions remained to be answered and denied summary judgment to either party on that issue.

Posted: January 4, 2014

Appropriate Vehicle to Address Grievances In Two-Shareholder Corporations is Derivative Action

On December 20, 2013, Justice Demarest of the Kings County Commercial Division issued a decision in Machaneinu, Inc. v. Luria, 2013 NY Slip Op. 52197(U), concluding that a 50 percent shareholder of a not-for-profit corporation lacked authority to initiate a direct action on behalf of the corporation against the other 50 percent shareholder for breach of fiduciary duty, and instead, the lawsuit had to be maintained as a shareholder derivative action.

In Machaneinu, the court concluded that the 50 percent shareholder who initiated the direct action had authority as president of the corporation to cause the corporation to bring the lawsuit. However, a month after the lawsuit was filed, the corporation’s board of directors passed a valid resolution that the lawsuit should be withdrawn. The court, therefore, dismissed the action without prejudice to commencement of a shareholder’s derivative action. In its conclusion the court remarked:

[W]here, as in the instant case, a corporate entity is equally owned by two members or shareholders, and the suit is brought by one against the other claiming breaches of fiduciary duty and diversion of corporate assets, that the appropriate vehicle to address such grievances is not a direct action by the corporation against one of the 50% owners, but is a shareholder’s derivative action brought by one of the shareholders, and that a direct action by the corporation must be dismissed.

In the context of most closely-held corporations with two equal owners, the technical distinction between a direct claim by corporation and a shareholder derivative claim will be largely a formality, since demand futility should be a foregone conclusion where the two owners of the corporation are deadlocked. In the case of a not-for-profit or other entity with non-shareholder directors, however, the requirement to bring a derivative action may be dispositive.

Posted: January 3, 2014

Employee Promissory Notes to be Repaid from Earnings Not Amenable to Summary Judgment in Lieu of Complaint

On December 24, 2013, Justice Sherwood of the New York County Commercial Division issued a decision in Newmark & Co. Real Estate, Inc. v. Brennan, 2013 NY Slip Op. 33261(U), examining the standard for a motion for summary judgment in lieu of complaint pursuant to CPLR 3213.

In Newmark, the issues included that plaintiffs had made loans to defendant secured by promissory notes that defendant was to repay from commissions earned while working for plaintiffs. The notes provided that they became due if defendant left plaintiffs’ employ, which defendant did before the notes were paid off. Plaintiff sued for summary judgment in lieu of complaint on the notes. The court denied the motion, explaining:

CPLR 3213 provides for accelerated judgment where the instrument sued upon is for the payment of money only and where the right to payment can be ascertained from the face of the document without regard to extrinsic evidence, other than simple proof of nonpayment or a similar de minimis deviation from the face of the document. An action on a promissory note is an action for payment of money only. The usual standards for summary judgment apply to CPLR 3213 motions. The instrument and evidence of failure to make payments in accordance with its terms constitute a prima facie case for summary judgment.

The case of Tradition North America, Inc. v Sweeney (133 AD2d 53 [1st Dept 1987]) is controlling. In that case, an employee signed six promissory notes that held out the possibility of being repaid by bonuses. In order to determine the amount payable, the court was required to look beyond the notes to determine the employee’s entitlement to payments to offset the obligations evidenced by the notes. Even though the notes could have been satisfied by monetary payments, the employee did not make an unconditional promise to pay a sum certain at a given time or over stated period. Rather, he had the option of performing work for his employer to satisfy the debt. The court considered the notes alternatively as evidencing a loan obligation or an advance on bonus and indeed, nonbonus, compensation. The First Department concluded that when what purport to be notes have such a hybrid dimension they ought not to be considered instruments for the payment of money only.

(Internal quotation and citations omitted).

Newmark illustrates a (small) limitation to the use of promissory notes to secure obligations from employees of which counsel should be aware.

Posted: January 2, 2014

Decision Explores the Distinction Between Transaction Causation and Loss Causation

On December 24, 2013, Justice Kornreich of the New York County Commercial Division issued a decision in Loreley Fin. (Jersey) No. 4 Ltd. v. UBS Ltd., 2013 NY Slip Op. 33262(U), explaining the distinction between transaction causation and loss causation.

In Loreley Fin., the court decided a motion for reconsideration of a decision dismissing a complaint relating to the purchase of residential mortgage-backed securities. Part of that decision explained the distinction between transaction causation and loss causation, and how the failure to show loss causation was fatal to the plaintiff’s claim. We quote it at length because of the important distinction it draws, one to which counsel in complex ligitation often are not–but should be–sensitive. (more…)

Posted: January 1, 2014

Opportunity to Comment on Proposed Changes to Commercial Division Rules

The rules of the Commercial Division change from time-to-time. Currently, there are four proposed rule changes open for public comment.

Proposed creation of a pilot mandatory mediation program in the Commercial Division of the Supreme Court, New York County.
Email comments to CommDivMedPilot@nycourts.gov by February 11, 2014.

Proposed adoption of new Commercial Division Rule 9, relating to the use of accelerated adjudication procedures in the Commercial Division of the Supreme Court.
Email comments to CommDivAccelAdjud@nycourts.gov by February 6, 2014.

Proposed adoption of new Preliminary Conference Form for use in the Commercial Division of the Supreme Court.
Email comments to CommDivPCForm@nycourts.gov by February 3, 2014.

Proposed adoption of a new Rule of the Commercial Division (22 NYCRR § 202.70(g)), relating to use of interrogatories in the Commercial Division of the Supreme Court.
Email comments to CommDivInterrogs@nycourts.gov by January 29, 2014.

Posted: December 31, 2013

Default Judgment Against Corporation in Favor of its Sole Employee Vacated

On December 4, 2013, Justice Schweitzer of the New York County Commercial Division issued a decision in Karian v. Physician’s Choice, Inc., 2013 NY Slip Op. 33219(U), where the president and sole employee of a corporation sued the corporation and caused it to default.

In Karian, plaintiff was the “president and sole employee” of the defendant closely-held corporation. In 2010, three separate actions were filed in Nassau County relating to the corporation–two competing derivative claims and an action for dissolution. In 2012, plaintiff brought an action in New York County against the corporation for unpaid salary. Because plaintiff was the sole employee of defendant, he caused defendant to default and judgment was entered against the defendant. One of defendant’s other shareholders then moved to intervene and to vacate the default judgment. The court granted the motion, writing:

CPLR Rule 5015 provides the grounds upon which a court may grant relief from judgment. CPLR 5015(a)(l) allows relief from judgment because of excusable default. To vacate a default, a party must show that an excusable default and a meritorious claim or defense. Mr. Karian is the president and sole employee of PCI and, as such, only he can mount a defense for the corporation. Mr. Karian had the power to prevent the default, but chose to take no action in the corporation’s defense. Therefore, the court finds that the default is excusable because the failure of the corporation to proceed is wholly the fault of the Plaintiff himself.

We suppose that the idea of having the corporation’s sole employee sue the corporation and taking a default judgment seemed clever at the time, but surely one would be hard pressed to find a court that would let the plaintiff get away with it. Justice Schweitzer did not.