Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: November 11, 2013

Statute of Frauds Does Not Bar Multi-Year Oral Agreement That Could Be Performed in One Year

On November 8, 2013, the Fourth Department issued a decision in DeJohn v. Speech, Language & Communication Assoc., SLP, OT, PT, PLLC, 2013 NY Slip Op. 07331, showing the narrow scope of the Statute of Frauds.

In DeJohn, the parties allegedly entered into an oral agreement providing that “defendants would purchase plaintiff’s business for $480,000 and make an initial payment of $10,000, followed by 23 monthly payments of $20,000 and a final payment of $10,000.” Defendants moved to dismiss, arguing that an oral agreement envisioning performance over a period of more than a year was not enforceable under the Statute of Frauds. The Fourth Department affirmed the trial court’s denial of that motion, holding:

As long as an agreement may be fairly and reasonably interpreted such that it may be performed within a year, the statute of frauds will not act as a bar to enforcing it however unexpected, unlikely, or even improbable that such performance will occur during that time frame. Here, the absence of a term prohibiting payment in full within the first year makes possible full performance of the alleged oral agreement within that year, and thus defendants did not meet their burden of establishing that the statute of frauds renders the alleged oral agreement void and unenforceable.

(Internal quotations and citations omitted).

DeJohn shows the narrow scope of the Statute of Frauds. However, that plaintiff in DeJohn had to defend this motion at all shows why it is best to memorialize commercial contracts in writing.

Posted: November 10, 2013

Extrinsic Evidence of Meaning of Contract Term Not Considered

On October 30, 2013, the Second Department issued a decision in Outstanding Transport, Inc. v. Interagency Council of Mental Retardation and Developmental Disabilities, Inc., 2013 N.Y. Slip Op. 07020, illustrating the broad scope of New York’s parol evidence rule.

In Outstanding Transport, the Second Department affirmed the trial court’s refusal to consider extrinsic evidence of an oral agreement to clarify the interpretation of a word in a written contract, holding:

When parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms. Evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing. Thus, before looking to evidence of what was in the parties’ minds, a court must give due weight to what was in their contract. A contract should be read as a whole to ensure that undue emphasis is not placed upon particular words and phrases. . . . [C]ourts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.

Here, the plaintiff failed to show any ambiguity in the subject contract that would permit consideration of the proferred extrinsic evidence of an alleged oral agreement to clarify the meaning of the term “preference” as used in the contract. Moreover, the interpretation advanced by the plaintiff would result in an unreasonable result, which should be avoided.

(Internal quotations and citations omitted).

Among the reasons that contracting parties choose to have their contracts interpreted under New York law is that New York courts generally enforce them as written. As Outstanding Transport shows, parties who attempt to modify the terms of a written contract orally may not have that oral modification enforced.

Posted: November 9, 2013

Foreign Derivative Claims Face Hurdles in NY Courts

On October 22, 2013, Justice Schweitzer of the New York County Commercial Division issued a decision in Gutstadt v. National Financial Partners Corp., 2013 NY Slip Op. 32733(U), illustrating the many hurdles that shareholders of foreign corporations face when they try to bring shareholder derivative suits against New York residents.

Gutstadt was brought by two minority shareholders on behalf of an Ontario corporation against the corporation’s majority shareholder and Board member, the corporation’s accountant, and a New York company and that company’s CFO. The derivative claims sounded in breach of fiduciary duty, fraud, conversion, and unjust enrichment and essentially alleged that the defendants had successfully conspired to fraudulently transfer the corporation’s assets and business to the New York company through a series of transactions, in violation of the Ontario Business Corporations Act (“OBCA”). One of those transactions was memorialized in a stock purchase agreement containing a New York choice-of-law clause and a forum selection clause requiring any disputes arising out of the agreement to be arbitrated in New York.

Justice Schweitzer dismissed the case on three independent grounds. First, Justice Schweitzer found that he lacked subject matter jurisdiction because New York’s internal affairs doctrine required him to apply the law of the jurisdiction where the corporation was incorporated to a shareholder derivative suit, and the OBCA required that a derivative plaintiff obtain leave from a Canadian court before bringing a derivative action, which plaintiffs admitted they had not obtained. Justice Schweitzer rejected plaintiffs’ argument that the choice-of-law provision in the stock purchase agreement trumped the internal affairs doctrine because that provision did not apply to plaintiffs’ tort claims “relating to the obligations of directors and controlling shareholders to minority shareholders” of the nominal defendant Ontario corporation.

Second, Justice Schweitzer found that all plaintiffs’ claims were time barred under Ontario’s two-year statute of limitations, which is shorter than New York’s, because CPLR 202 provides that an “action based upon a cause of action accruing without the state cannot be commenced after the expiration of the time limited by the laws of either the state or the place without the state where the cause of action accrued, except that where the cause of action accrued in favor of a resident of the state the time limited by the laws of the state shall apply.” Because the plaintiffs resided in Ontario and were suing derivatively on behalf of an Ontario corporation, Justice Schweitzer concluded that the plaintiffs’ tort claims accrued in Ontario where the alleged economic losses were sustained, and thus CPLR 202 required him to apply the shorter Ontario statute of limitations.

Third, Justice Schweitzer dismissed all the claims pursuant to CPLR 327(a) under the forum non conveniens doctrine after finding that most of the traditional factors he was required to apply under that doctrine favored the dismissal of the case in favor of an Ontario forum (plaintiffs were Canadian residents, nominal defendant was a Canadian corporation, the fraudulent transactions took place in Canada, most of the witnesses are in Canada and their court attendance on New York cannot be compelled, Canadian law applied, and Canada’s courts provided an available alternative forum, especially since plaintiffs had sued defendants in a prior pending action there for the same alleged misconduct).

In sum, before shareholders of foreign corporations decide to litigate their corporate governance disputes in New York, even where the relevant defendants reside in New York, they need to overcome the hurdles of the internal affairs doctrine, the potentially shorter statute of limitations that the CPLR often requires be applied, and the forum non conveniens doctrine.

For an illuminating discussion of three recent First Department cases dealing with demand futility in derivative lawsuits, see Peter Mahler’s New York Business Divorce Law blog post here

Posted: November 8, 2013

Default Judgment Should Be Entered Absent Specific Evidence of Lack of Service or Excuse for the Failure to Answer

On November 6, 2013, the Second Department issued a decision in Loaiza v. Guzman, 2013 NY Slip Op. 07159, illustrating that a failure to answer will not be excused without good reason.

The trial court in Loaiza refused to enter a default judgment against defendants who failed timely to answer and instead granted their motion to serve a late answer. The Second Department reversed, holding that the defendants had not justified the relief they had been granted:

The affidavits of the plaintiffs’ process server constituted prima facie evidence that the defendant Rene Guzman was validly served pursuant to CPLR 308(1) and that the defendant William Guzman was validly served pursuant to CPLR 308(2). The defendants did not deny receipt of process or swear to detailed and specific facts to rebut the statements in the process server’s affidavits. Therefore, the defendants were not entitled to relief pursuant to CPLR 5015(a)(4). Furthermore, to the extent that the defendants are arguing excusable default pursuant to CPLR 5015(a)(1), the defendants did not demonstrate a reasonable excuse for their failures to answer and oppose the plaintiffs’ initial motion for a default judgment, and for their delay of more than one year in appearing in this action. Accordingly, the plaintiffs’ motion for leave to enter a default judgment on the issue of liability against the defendants should have been granted and the defendants’ cross motion pursuant to CPLR 3012(d) for leave to serve a late answer and to compel the plaintiffs to accept service of that answer, should have been denied.

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

Loaiza presents a cautionary tale regarding the failure timely to answer a complaint. Courts are generally lenient in excusing a failure timely to answer, but as Loaiza shows, that leniency is not unlimited. The defendant must present the court with concrete and specific reasons for the default and any delay in dealing with it once the defendant became aware of the action.

Posted: November 5, 2013

Courts Continue to Wrestle with Standard for Reasonable Reliance in Commercial Contexts

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.

Posted: November 5, 2013

Statute of Limitations Not Tolled by Equitable Estoppel

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.”

Posted: November 4, 2013

“Best Efforts” Clause Enforced Notwithstanding Absence of Objective Criteria in Agreement Against Which Efforts Could Be Measured

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.

Posted: November 3, 2013

Public Not Third-Party Beneficiary of Lease Between City and Museum

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).

Posted: November 2, 2013

Failure to Timely Raise Discovery Disputes with the Court Waives Them

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.