On October 23, 2013, Justice Schweitzer of the New York County Commercial Division issued a decision in Greenzweig v. Kenmare Mott Realty Assoc. Inc., 2013 NY Slip Op. 32735(U), illustrating the potential procedural complexities of lawsuits involving competing claims of ownership of a closely-held business. (more…)
On October 31, 2013, Justice Ramos of the New York County Commercial Division issued a decision in Moshe v. Charles Rutenberg LLC, 2013 NY Slip Op. 51813(U), denying the defendant’s summary judgment motion for dismissal of a fraudulent inducement cross-claim. The cross-claim defendant had argued that the reasonable reliance element of the fraud cross-claim had not been established as a matter of law because the cross-claimants were sophisticated parties who had failed to make use of the means of verification that were available to them. Justice Ramos denied summary judgment after finding that material questions of fact existed about whether the cross-claimants had failed to make use of the means of verification that were available to them.
This case is one of many cases that are currently being litigated in New York County and the First Department where courts are grappling with the issue of whether claims sounding in fraud can be dismissed on the pleadings or at the close of discovery based on the plaintiff’s failure to plead or raise a triable issue of fact with respect to his justifiable reliance on the defendant’s allege misrepresentations. The seminal case dealing with this issue is the Court of Appeals’ decision in DDJ Mgmt., LLC v. Rhone Group, 15 N.Y.3d 147, 2010 NY Slip Op 05603, where the court opined, despite reversing the First Department’s dismissal on the pleadings of plaintiff’s fraud claim for failing sufficiently to plead justifiable reliance, that it was still possible for New York courts to dismiss fraud claims on the pleadings for failure to plead justifiable reliance where the parties are sophisticated parties in an arm’s-length transaction. The court cautioned, however, that the “question of what constitutes reasonable reliance is always nettlesome because it is so fact intensive.” (internal quotation marks omitted).
Since DDJ Mgmt. was decided, the New York County Commercial Division Justices have usually denied motions to dismiss and for summary judgment in fraud cases, rejecting arguments from defendants that justifiable reliance was not sufficiently pled or that material issues of fact did not exist with respect to justifiable reliance, and the First Department usually reversed these decisions. See, e.g., HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 2012 NY Slip Op 02276 (Mar. 27, 2012); Sony Ericsson Mobile Communications USA, Inc. v. LSI Corp., 102 A.D.3d 565, 2013 NY Slip Op 00399 (Jan. 24, 2013); ACA Fin. Guaranty Corp. v. Goldman, Sachs & Co., 106 A.D.3d 494, 2013 NY Slip Op 03429 (May 14, 2013) (Friedman, J.P. and Renwick and Roman, JJ. reversing order denying motion to dismiss with Clark and Manzanet-Daniels, JJ. dissenting).
Notwithstanding the First Department’s decisions, the New York County Commercial Division Justices—as Justice Ramos did in Moshe—continue to deny these motions. See, e.g., MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 2013 NY Slip Op 50677(U) (Apr. 29, 2013) (Bransten, J.); AMBAC Assur. Corp. v. EMC Mortgage LLC, 2013 NY Slip Op 50954(U) (June 13, 2013) (Ramos, J.); Basis Pac-Rim Opportunity Fund (Master) v. TCW Asset Mgmt. Co., 2013 NY Slip Op 51494(U) (Sept. 10, 2013) (Kornreich, J.); Wyle Inc. v. ITT Corp., 2013 NY Slip Op 51707(U) (Oct. 21, 2013) (Ramos, J.). None of the First Department decisions have yet reached the Court of Appeals. Leave to appeal was not sought in HSH Nordbank AG, the Court of Appeals denied leave to appeal in Sony Ericsson (2013 NY Slip Op 69151 (Apr. 2, 2013)), and just last month the Court of Appeals sua sponte dismissed the appeal filed from the 3-2 decision in ACA for lack of finality (NY Slip Op 88246 (Oct. 15, 2013)). And appeals from the more recently-decided Commercial Division decisions have not yet been perfected. The MBIA case settled shortly after the notice of appeal was filed, the defendants did not appeal the denial of their motion to dismiss in AMBAC, a notice of appeal was filed last month in Basis Pac-Rim but that appeal has not yet been perfected, and the time to file a notice of appeal in Wyle and Moshe has not yet expired.
Thus, the issue of justifiable reliance continues to be hotly contested between the Manhattan Commercial Division and the First Department, with no definitive Court of Appeals decision in sight.
On October 28, 2013, Justice Whelan of the Suffolk County Commercial Division issued a decision in North Coast Outfitters, Ltd. v. Darling, 2013 NY Slip Op. 32731(U), declining to apply the doctrine of equitable estoppel to toll the statute of limitations in a shareholder dispute.
Justice Whelan explained:
[T]he doctrine of equitable estoppel applies where plaintiff was induced by fraud, misrepresentations or deception to refrain from filing a timely action and the plaintiff demonstrates reasonable reliance on the defendant’s misrepresentations. To be successful, the party seeking to invoke the estoppel doctrine bears the burden of demonstrating that it was diligent in commencing the action within a reasonable time after the facts giving rise to the estoppel have ceased to be operational. Where concealment without actual misrepresentation is claimed to have prevented a plaintiff from commencing a timely action, the plaintiff must demonstrate a fiduciary relationship exists, out of which. an obligation arises to inform the plaintiff of facts material to the underlying claim. In cases like the instant one wherein a fiduciary duty is owing from the defendant, the plaintiff must establish that the defendant’s failure to inform the plaintiff of material facts contributed to the delay in bringing the action.
Justice Whelan found that equitable estoppel did not apply because the plaintiff had not raised “a genuine issue of fact regarding the existence of any lack of knowledge of true facts on the part of the plaintiff or of any subsequent acts of concealment or other failure by [defendant] to disclose material facts he had a duty to disclose which caused the plaintiff’s failure to bring its claim in a timely manner.”
On October 24, 2013, Justice Friedman of the New York County Commercial Division issued a decision in Glanzer & Co., LLC v. Air Line Pilots Association, 2013 NY Slip Op. 32713(U), denying defendant’s motion for summary judgment dismissing plaintiff’s breach of contract claim after concluding that material issues of fact existed with respect to whether defendant had breached a “best efforts” clause in the parties’ contract.
The contract in Glanzer was between an investment bank and an airline pilot’s union that required the union to “use its reasonable best efforts to cause an entity or party other than [the union] . . . to pay . . . a customer investment banking fee,” i.e., a “success fee,” to the plaintiff in connection with labor contract negotiations between the union and U.S. Airways. The airline did not pay plaintiff a success fee, which resulted in the plaintiff suing the union for breaching the “best efforts” clause.
At the close of discovery, the union moved for summary judgment dismissing this claim on the ground that the parties’ agreement contained no objective criteria against which its efforts could be measured. In her decision, Justice Friedman acknowledged a division of authority among New York courts over how to interpret “best effort” clauses. On the one hand, she wrote, there is “substantial authority that for a contractual provision requiring a party to employ reasonable efforts or ‘best efforts’ to be enforceable, there must be objective criteria against which a party’s efforts can be measured, whether the requirement is deemed to be implicit or explicit,” and, “a clear set of guidelines against which to measure a party’s efforts is essential to its enforcement.” (Internal quotation marks and citations omitted). On the other hand, she wrote, “there is also substantial authority that a ‘best efforts’ provision may be enforceable, notwithstanding that the contract itself does not set forth objective criteria by which to measure the best efforts.” (Internal quotation marks and citations omitted). Indeed, Justice Friedman quoted several federal court cases characterizing New York’s best efforts jurisprudence as “murky” and “far from clear.”
Justice Friedman concluded that, “at least where a material question of fact exists as to whether best efforts have been made, a best efforts provision may be enforced in the absence of contractually articulated criteria” and denied the union’s summary judgment motion after finding that such factual disputes existed.
Until New York’s conflicting “best efforts” jurisprudence is reconciled, parties who wish to put “best efforts” clauses in their commercial agreements would be well advised to include objective criteria for measuring the success of such efforts.
On October 29, 2013, Justice Kornreich of the New York County Commercial Division issued a decision in Saska v. Metropolitan Museum of Art, 2013 NY Slip Op. 23366, addressing, among other things, the law of third-party beneficiaries as applied to the Metropolitan Museum of Art’s “pay what you wish” admissions policy.
In Saska, the plaintiffs alleged that they were third-party beneficiaries of the lease entered into by the City and the museum in 1878 that prohibited the museum from charging for admission. The museum, they argued, had violated the lease by charging admission under its “pay what you wish” admissions policy, because that policy required almost all visitors to pay something to enter the museum, even if only a penny. Justice Kornreich found that the plaintiffs were not third-party beneficiaries of the lease, even though they were members of the public that the museum was founded to serve, and even if they were, they were not entitled to the remedy they were seeking:
[A] third-party beneficiary has no greater rights or remedies than the direct parties to a contract. . . . Assuming, arguendo, that plaintiffs are intended beneficiaries of the Lease, they still cannot compel specific performance that differs from the remedy provided for in the Lease. Third-party beneficiaries do not have contractual rights that go beyond or contravene the explicit terms of the contract. To wit, if the City were before this court, it would not get the injunctive relief requested by plaintiffs. Rather, service of a proper Notice to Cure and, if no cure takes place, eviction, is the remedy under the lease. Plaintiffs’ rights as alleged third part beneficiaries are no greater than those of the City.
Further, on this record, there is little . . . doubt that the City has no desire to evict the Museum for the conduct alleged in this action. Plaintiffs should not be permitted to disregard the contracting party’s decision as to the benefits it seeks to gain from its contract and the enforcement benefits it negotiated to achieve those benefits. In other words, plaintiffs cannot force the Museum to abide by the terms of the Lease in a manner that contravenes the express wishes of its landlord.
(Citations and internal quotations omitted).
On October 21, 2013, Justice Bransten of the New York County Commercial Division issued a decision in Gama Aviation Inc. v. Sandton Capital Partners, LP, 2013 NY Slip Op. 32648(U), showing the importance of dilligently identifying and raising discovery disputes.
The Gama Aviation decision dealt with several issues, including two motions to compel the production of documents. Both were denied. Among the reasons for the denial was that the movants did not bring the motions until the close of discovery, as much as two years after document production began. As Justice Bransten held in connection with the motion to compel relating to a non-party:
Although CPLR 3122 does not impose a time limit upon a party seeking discovery to bring a motion to compel production, if a party fails to make a motion to compel within a reasonable time, she may forfeit the right to obtain the items sought. New York courts have consistently held that motions to compel that are filed late in a case, and long after the initial requests were made, are inappropriate and inexcusable, and should be denied without further consideration.
Here, having waited over two years from the issuance of their subpoenas to move to compel KEF to produce documents, and nearly a year after KEF provided documents seeking to cure the deficiencies alleged in plaintiffs’ January 2012 letter, plaintiffs cannot reasonably claim that their delay was excusable, particularly as KEF is not even a party to this litigation. Plaintiffs have had ample opportunity to take discovery from KEF, and as such, the motion to compel is denied.
(Citations and internal quotations omitted) (emphasis added).
The lesson here is plain. At the same time, the solution is not always simple. It can take time to identify the gaps in a document production and to make the record necessary to establish that the documents sought are relevant and that they exist but were not produced. And, of course, courts are justifiably impatient with litigants who do not try to resolve discovery disputes between themselves before raising them with the court. Still, as Gama Aviation illustrates, if you wait until the end of discovery to tee up your discovery disputes, you may have waited too long.
On October 23, 2013, Justice Ramos of the New York County Commercial Division issued a decision in Schoonover v. Massachusetts Mut. Life. Ins. Co., 2013 NY Slip Op. 32682(U), reminding insurance companies that they ignore the notice requirements of the Insurance Law at their peril.
In Schoonover, the plaintiffs, trustees of an insurance trust established by a now-deceased partner at Skadden Arps, purchased life insurance from defendant Mass Mutual through Skadden. From the date of issuance until the insured’s retirement, Skadden paid the monthly charges on the policy. Upon the insured’s retirement, Mass Mutual issued a letter of portability. When premiums had thereafter not been paid, Mass Mutual issued non-payment notices to Skadden and then ultimately notices of cancellation to Skadden as well. Justice Ramos granted summary judgment to the plaintiffs, ruling that the notices to Skadden were not sufficient and that the insurer was required to provide actual notice to the actual address of the insured:
[F]orfeiture of life insurance coverage for nonpayment of premiums is not favored in the law, and will not be enforced absent a clear intention to claim that right. . . . In the same vein, an insurer may not depend upon a default to which its own wrongful act or negligence contributed, and but for which a lapse might not have occurred.
Here, the Certificate and the Policy entitle the Insured to a billing notice after he retired from Skadden, and conditions cancellation of the Policy upon the giving of that notice to him, in addition to a pre-lapse or default notice to the owners of the Certificate, the plaintiffs.
(Internal quotations and citations omitted).
On October 30, 2013, the Second Department issued a decision in Varveris v. Zacharakos, 2013 N.Y. Slip Op. 07028, examining when a corporate officer/director owes a fiduciary duty to the corporation’s shareholders.
In Varveris, the defendant was “a director, officer, shareholder, and managing agent of” a close corporation of which plaintiff was a shareholder. Defendant purchased another shareholder’s shares in the corporation. Plaintiff sued defendant for breach of fiduciary duty in connection with the sale, claiming that defendant had a duty to allow plaintiff to participate in the purchase. The Second Department held that defendant had no fiduciary duty to plaintiff in this situation, writing:
Contrary to the plaintiff’s contention, [defendant]’s status as an officer, director, or shareholder of a close corporation does not, by itself, create a fiduciary relationship as to his individual purchase of another shareholder’s stock.
(Emphasis added) (citations and internal quotations omitted).
Varveris illustrates the importance of context in determining whether someone is a fiduciary.
On October 29, 2013, the First Department issued a decision in Jumax Assoc. v. 350 Cabrini Owners Corp., 2013 NY Slip Op. 06992, illustrating the scope of the doctrine of res judicata. Jumax had
previously commenced an action in 2002 seeking to recover fees that had been paid to defendant co-op pursuant to a license agreement defendant had entered into in or about 1995 with a third-party cellular telephone company, as well as fees that would be paid through the time of judgment. At the time the action was commenced, the license agreement had been amended and extended three times. During the pendency of the prior action, the license agreement was amended and extended two more times.
Jumax lost the 2002 action. Jumax then initiated a new lawsuit “to recover amounts paid pursuant to the amendments entered into during the pendency of the prior action.” The First Department held that such claims were “barred by the doctrine of res judicata.” As the First Department noted, res judicata “applies not only to claims actually litigated but also to claims that could have been raised in the prior litigation.” (Citations and internal quotations omitted) (emphasis added).
Jumax shows that if you have claims and do not bring them in a pending action, you risk losing them forever.
On October 16, 2013, the Second Department issued a decision in Kalmon Dolgin Affiliates, Inc. v. Tonacchio, 2013 NY Slip Op. 06660, illustrating the importance of the documentary evidence prong of a motion to dismiss and its usefulness in dismissing a claim at the beginning of an action. In Kalmon Dolgin, the Second Department partially reversed an opinion by Justice Schmidt of the Kings County Commercial Division, holding that he should have granted a motion to dismiss based on documentary evidence establishing that the signatory to the contract was not actually binding his corporate affiliates to the agreement upon which they were being sued. The Second Department wrote:
Where a party offers evidentiary proof on a motion pursuant to CPLR 3211(a)(7), the focus of the inquiry turns from whether the complaint states a cause of action to whether the plaintiff actually has one. Here, the Supreme Court should have granted that branch of the moving defendants’ motion which was pursuant to CPLR 3211(a)(7) to dismiss the first cause of action insofar as asserted against Katan and 267. The evidentiary material submitted by the moving defendants demonstrated that the plaintiff’s allegation that it had entered into the letter agreement with Katan was “not a fact at all.” Specifically, the moving defendants’ submissions conclusively demonstrated that Katan was not a signatory to the letter agreement, and that 267 was not referenced in that agreement. Since the moving defendants established that neither Katan nor 267 were signatories to the letter agreement, Katan and 267 cannot be bound by it. Although the plaintiff alleged in an affidavit submitted by its president in opposition to the moving defendants’ motion that it was led to believe that Tonacchio was a managing member of 267 and an officer, director, or shareholder of Noreast, and that Tonacchio was authorized to bind all parties to the letter agreement, there is nothing in the letter agreement to suggest that, in signing it, Tonacchio was also binding 267 or Katan to the terms of the letter agreement.
(Citations and internal quotations omitted).