Commercial Division Blog

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

Specific Indemnification Provision Trumps General One

On June 24, 2014, the First Department issued a decision in Plymouth Financial Co., Inc. v. Plymouth Park Tax Services LLC, 2014 NY Slip Op. 04686, interpreting conflicting indemnification provisions in an asset purchase agreement.

In Plymouth Financial, the parties disagreed on the distribution of a $1 million “hold-back payment” detailed in their asset purchase agreement based on differing interpretations of the APA’s indemnification provisions. At issue were payments for a litigation specifically identified in the APA: the “MRS Litigation”. The First Department explained:

Defendant contends that it is entitled to reduce the amount of its payment by the amount of an indemnification found in the APA’s section 8.1(a)(v), for costs associated with . . . the MRS Litigation. Plaintiff argues that defendant must pay the full $1 million and cannot deduct the indemnification, because its affiliate company acquired separate counsel in the MRS Litigation and, according to section 8.6 of the APA, this separate counsel was obtained at defendant’s expense.

The motion court correctly determined that section 8.6 was intended to apply only to future third-party claims, while the indemnification in section 8.1(a)(v) was intended to apply specifically to the then-pending MRS Litigation. However, the court incorrectly applied the provisions of section 8.6 to the MRS Litigation indemnification regardless of this distinction. Section 8.1(a)(v) evinces the parties’ clear intent to place the risk of “any and all losses” connected to the MRS Litigation, including legal fees, “whether arising before or after the Closing,” squarely on plaintiff. The provisions of section 8.6 cannot be read to limit the indemnification found in section 8.1(a)(v), as this interpretation would vitiate the language of section 8.1(a)(v), rendering it meaningless.

(Internal quotations and citations omitted).

Posted: July 3, 2014

Summary Judgment In Lieu of Complaint Available Even When There Are Conditions Beyond Failure to Pay

On June 19, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in CF Notes, LLC v. Johnson, 2014 NY Slip Op. 31598(U), granting summary judgment in lieu of complaint on a note.

In CF Notes, the plaintiff moved for summary judgment in lieu of complaint on a note signed by an employee that was made due on demand in the event of one of several conditions occurring and was only payable if the defendant failed to meet certain conditions. The court nonetheless granted summary judgment in lieu of complaint, explaining:

[The plaintiff] makes its prima facie showing that it is entitled to summary judgment on the note. To establish a prima facie case, plaintiff must present an instrument for the payment of money only and evidence of a failure to make the payment called for by its terms. [The plaintiff] submitted a copy of note annexed to its moving papers, which is for the payment of money only. Moreover, by its terms, [the defendant] acknowledges that this Note is an agreement for the payment of money only subject to enforcement pursuant to NY CPLR § 3213.

For evidence of [the defendant’s] failure to make the payment called for by the note, [the plaintiff] submits the Kofsky affidavit, in which Kofsky states that on or about May 17, 2013, [the defendant] resigned . . . . This, by the terms of the note, caused the sum owed under the note to become immediately due and payable. Kofsky further states that [the defendant] did not earn $5 million in gross revenue . . . , such that the Net Loan Amount would have been forgiven. Kofsky also states that [the defendant] has not made any payments against the sums due under the loan. [The plaintiff] therefore makes its prima facie showing that [the defendant]failed to repay the amounts owed under the note.

(Internal quotations and citations omitted).

This decision shows that summary judgment in lieu of complaint is not limited to simple promissory notes, where the only condition is timely payment.

Posted: July 2, 2014

Parties not Limited to Formal Discovery Process

On June 23, 2014, Justice Bransten of the New York County Commercial Division issued a decision in AMBAC Assurance Corp. v. Countrywide Home Loans, Inc., 2014 NY Slip Op. 31615(U), ruling that parties to a litigation may collect evidence from non-parties outside the formal discovery process.

In AMBAC Assurance Corp., the defendant raised a number of objections to fact gathering and analysis the plaintiff had conducted outside the formal discovery process. The court rejected the defendant’s arguments, and noted regarding the general permissibility of informal discovery:

[T]here are no statutes and no rules expressly authorizing-or forbidding-ex parte discussions with any non-party. Article 31 does not close off these avenues of informal discovery, and relegate litigants to the costlier and more cumbersome formal discovery devices. [T]he Court of Appeals [has] permitted an attorney to contact a doctor, ex parte, to conduct informal discovery. The primary concern was that the non-party must not be gulled into making an improper disclosure so it is important that attorneys would make their identity and interest known to interviewees and comport themselves ethically.

(Internal quotations and citations omitted).

There are often sound tactical reasons to gather evidence outside the formal discovery process. However, parties must still meet their own discovery obligations and keep and eye on the need to obtain evidence in a form and manner that will make it admissible at trial.

Posted: July 1, 2014

Pending Hourly Fee Matters are Not Partnership Property

On July 1, 2014, the Court of Appeals issued a decision in In re: Thelen LLP and In re: Coudert Brothers LLP, 2014 NY Slip Op. 04879, holding “that pending hourly fee matters are not partnership property or unfinished business within the meaning of New York’s Partnership Law.”

In In re: Thelen LLP and In re: Coudert Brothers LLP, the Second Circuit certified “two unresolved questions of New York law regarding the applicability and scope of the unfinished business doctrine:”

Under New York law, is a client matter that is billed on an hourly basis the property of a law firm, such that, upon dissolution and in related bankruptcy proceedings, the law firm is entitled to the profit earned on such matters as the ‘unfinished business’ of the firm?


If so, how does New York law define a client matter for purposes of the unfinished business doctrine and what proportion of the profit derived from an ongoing hourly matter may the new law firm retain?

The Court of Appeals answered the first question “no”, mooting the second question.

As to whether the Partnership Law made a pending hourly fee matter partnership property, the Court of Appeals held that:

In New York, clients have always enjoyed the unqualified right to terminate the attorney-client relationship at any time without any obligation other than to compensate the attorney for the fair and reasonable value of the completed services. In short, no law firm has a property interest in future hourly legal fees because they are too contingent in nature and speculative to create a present or future property interest, given the client’s unfettered right to hire and fire counsel.

(Internal quotations and citations omitted) (emphasis added). The court went on to explain the public policy ramifications of finding that a law firm has a property interest in unfinished hourly fee work, explaining:

Treating a dissolved firm’s pending hourly fee matters as partnership property, as the trustees urge, would have numerous perverse effects, and conflicts with basic principles that govern the attorney-client relationship under New York law and the Rules of Professional Conduct. By allowing former partners of a dissolved firm to profit from work they do not perform, all at the expense of a former partner and his new firm, the trustees’ approach creates an “unjust windfall” . . . .

Next, because the trustees disclaim any basis for recovery of profits from the pending client matters of a former partner who leaves a troubled law firm before dissolution, their approach would encourage partners to get out the door, with clients in tow, before it is too late, rather than remain and work to bolster the firm’s prospects. Obviously, this run-on-the-bank mentality makes the turnaround of a struggling firm less likely.

And attorneys who wait too long are placed in a very difficult position. They might advise their clients that they can no longer afford to represent them, a major inconvenience for the clients and a practical restriction on a client’s right to choose counsel. Or, more likely, these attorneys would simply find it difficult to secure a position in a new law firm because any profits from their work for existing clients would be due their old law firms, not their new employers.

. . .

Ultimately, what the trustees ask us to endorse conflicts with New York’s strong public policy encouraging client choice and, concomitantly, attorney mobility. . . .”

(Internal quotations and citations omitted)

Posted: July 1, 2014

Contract and Quasi-Contract Claims Based On Oral Modification to Contract Survive Despite “No Oral Modification” Clause

On June 25, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Laquila Group, Inc. v. Hunt Construction Group, Inc., 2014 NY Slip Op. 51007(U), refusing to dismiss claims based on alleged oral modifications to a contract that prohibited oral modifications.

The dispute in Laquila Group, related to construction work on the Barclays Center. Among the issues the court addressed in deciding the defendant’s motion to dismiss was whether the plaintiff’s contract and quasi-contract claims based on oral modifications to the parties’ written contract stated a claim in light of the contract’s no oral modification clause. The court held that they did, explaining:

Generally, a party may not maintain causes of action for quantum meruit or unjust enrichment if a valid, enforceable contract governs the same subject matter.

. . .

Quasi-contractual recovery may . . . be appropriate, however, in the face of a cardinal change, effecting an alteration to the essence of a contract sufficient to constitute an intentional abandonment of the original contract. Whether there has been a cardinal change sufficient to invalidate a contract is generally a question of fact, to be decided by the factfinder.

Here, plaintiff has pleaded that the scope and extent of changes made to the Project, resulting in additional costs of nearly half the Subcontract price, constituted a cardinal change to the contract that could justify treating it as abandoned and granting recovery in quasi contract. Although defendant has submitted evidence that many of the costs incurred by plaintiff were compensated in agreed change orders, plaintiff’s allegations are not conclusively refuted by documentary evidence sufficient to conclude that plaintiff has no claim as a matter of law. Accordingly, defendant’s motion must be denied as to the cardinal-change claim.

As the plaintiff’s surviving cardinal-change claim preserves the possibility of quasi-contractual recovery, dismissal must also be denied as to plaintiff’s quantum meruit and unjust-enrichment claims. Defendant’s reliance on a clause in the Subcontract specifically barring quantum meruit claims is misplaced, since the finding of an absence of a valid, enforceable contract, a prerequisite to quantum meruit recovery, would inherently render that clause unenforceable, along with the remainder of the Subcontract.

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

The court also upheld the plaintiff’s breach of contract claim based on the alleged oral modifications to the contract, explaining:

General Obligations Law § 15-301 (1) states, in relevant part, that “[a] written agreement . . . which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought.” Section 15-301 (1), however, nullifies only executory oral modification, and partial performance of an oral modification, inconsistent with other causes, may prove the modification’s validity. Furthermore, if a plaintiff has detrimentally relied on an oral modification, the doctrine of equitable estoppel will preclude a defendant from raising a clause barring oral modification and § 15-301 (1) in defense.

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

One of the reasons people choose New York law to govern their contracts is that in New York, contracts are generally enforced as written. As this decision shows, however, a contract provision prohibiting oral modifications to the contract might not be enforced when it appears that the parties chose to ignore it during the performance of the contract.

Posted: June 30, 2014

Insurance Policy Flood Damage Cap Applies to All Flood Damage, Even Categories of Damage With a Separate, Higher Cap

On June 27, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in El-Ad 250 W. LLC v. Zurich American Insurance Co., 2014 NY Slip Op. 24173, ruling that an insurance policy’s coverage limit for losses “arising during” a flood applied not only to property damage claims but also to “downstream” financial losses resulting from a flood.

In El-Ad, the plaintiff real estate developer made a claim under a Builders Risk Insurance Policy for delay-in-completion losses after a construction project was delayed by damage caused by Hurricane Sandy. The policy had a special limit for flood claims, which provided: “The maximum amount [Zurich] will pay for loss or damage in any one OCCURRENCE, and/or in the aggregate annually for loss or damage from all OCCURRENCES, shall not exceed [$5 million] by the period of FLOOD.” “As respects the peril of FLOOD,” the policy defined as a covered “OCCURRENCE” “all loss or damages arising during” a flood.

The plaintiff argued that the flood limit applied only to claims for property damage, not other more remote harms, such as delay-in-completion losses. Justice Kornreich rejected this narrow interpretation of the flood limit, explaining:

[A] loss that would not have occurred but for a flood is subject to a $5 million annual aggregate limit, without regard to the type of loss suffered since the expression “all losses or damages arising during [a flood]” clearly does not exclude non-physical losses. Moreover, the delay in completion endorsement clearly and unambiguously states that it does not alter the sublimits in the Policy. Nor does any portion of the endorsement state that the delay in completion’s $7 million sublimit is not subject to the flood loss $5 million aggregate limit, just as all of the Policy’s other sublimits are so limited.

Finally, it should be noted that it is of no moment that El-Ad paid an extra premium for delay in completion coverage. Had El-Ad not paid this extra amount, it would not have been entitled to such coverage under any circumstances. To be sure, there are myriad possible causes of delay in completion losses. If the cause is something other than a flood (i.e. a terrorist attack, which has a $108 million sublimit), the full $7 million would have been available. However, where, as here, the cause of the loss has its own, lower aggregate limit, that lower limit applies.

Special flood exclusions, caps and deductibles have figured prominently in insurance coverage litigation arising from Hurricane Sandy. This decision illustrates that such provisions are enforced even if they reduce (or eliminate) the insured’s recovery under the policy.

Posted: June 30, 2014

Plaintiff may Waive Statutory Damages and Bring a Class Action Despite CPLR § 901(b)

On June 30, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in Pires v. Bowery Presents, LLC, 2014 NY Slip Op. 24174, denying a motion to dismiss a proposed class action.

The plaintiff and proposed class representative alleged that she had purchased a ticket to attend a play, but that the seller, Bowery, never issued her a paper ticket and prevented her from transferring her ticket to a friend by only “admit[ing] people to the event by checking their identification cards at the door against a list of people who originally purchased tickets.” Plaintiff alleged that this admissions policy violated section 25.30(1)(c) of the New York Arts & Cultural Affairs Law, which prohibits “any operator of a place of entertainment, or its agent, from employing a paperless ticketing system ‘unless the consumer is given the option to purchase paperless tickets that the consumer can transfer at any price, and at any time, and without additional fees, independent of the operator or operator’s agent.’ A consumer injured by a violation . . . ‘may bring an action in his or her own name to enjoin such unlawful act, an action to recover his or her actual damages or fifty dollars, whichever is greater, or both such actions’ and may also be awarded reasonable attorney fees.”

Defendant objected that Plaintiff was ineligible to bring a class action for violations of the ACAL because CPLR § 901(b) prohibits class actions based upon any statute that “creates or imposes a penalty or minimum level of recovery, unless the statute specifically authorizes such recovery in a class action.”

Plaintiff responded by arguing that, because she had waived her claim for statutory damages, her case was outside the coverage of CPLR § 901(b).

The court agreed, following Cox v. Microsoft Corp., 8 A.D.3d 39, 40 (1st Dept. 2004), where the First Department held that a plaintiff who waived statutory damages in a GBL § 349 case could bring a class action because CPLR § 901(b) no longer applied. The court rejected Defendant’s argument that the statutory language allowing plaintiffs to “recover his or her actual damages or fifty dollars, whichever is greater,” made recovery of the statutory damages mandatory in any case where the $50 was greater than the actual damages, holding that this argument was foreclosed by Cox.

This case shows plaintiffs’ attorneys that a class action is possible even where consumer protection laws provide for statutory damages, as long as the proposed class representative is willing to waive that particular claim.

Posted: June 30, 2014

Litigation Trustee Denied Intervention in Lawsuit Between Insureds and Insurers

On June 18, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in American Casualty Co. of Reading, PA v. Gelb, 2014 NY Slip Op. 31597(U), denying a motion for intervention.

In American Casualty Co., the plaintiff insurers sought a declaration that the insurance policies they had issued to Lyondell Chemical Company and the defendants–Lyondell’s directors and officers–did not cover defense costs from a claim prosecuted by a litigation trust against the defendants in bankruptcy court. The trustee of the litigation trust moved to intervene. The court denied the motion, explaining:

Under New York law, a party may seek intervention as of right under CPLR 1012 (a) or permissive intervention under CPLR 1013 (McKinney). Whether a party seeks to intervene as of right or as a matter of discretion is of little practical significance since a timely motion for leave to intervene should be granted, in either event, where the intervenor has a real and substantial interest in the outcome of the proceedings.

A third party is not entitled to intervene in a pending action in which the rights of the prospective intervenors are already adequately represented, and there are substantial questions as to whether those seeking to intervene have any real present interest in the property which is the subject of the dispute. A non-direct or speculative interest is insufficient to satisfy this burden. Courts also deny intervention where parties in the case adequately represent the proposed intervenor’s interests.

[The] Litigation Trustee, cannot properly intervene in the coverage litigation because he does not have a real and substantial interest in the outcome of the proceedings. The Litigation Trustee’s claims for insurance coverage under the Policies are speculative and indirect. The Litigation Trustee argues he has a real and substantial interest in the outcome of the coverage litigation because the resolution of the matter against the directors and officers may effectively eliminate its ability to recover on its claims against the directors and officers in the Adversary Proceeding. However, the Litigation Trustee’s interest is·first conditioned upon succeeding in the Adversary Proceeding, then obtaining a recovery from the Insureds and, finally, establishing that funding for such a recovery will not exist absent insurance coverage. [The Litigation Trustee] has no legally recognized claim to assert against the Insureds: he has not obtained a judgment against the Insureds, and is not a party or third party beneficiary of the policies. [The Litigation Trustee] has a speculative interest that is not subject to a potential res judicata effect.

(Internal quotations and citations omitted) (emphasis added). The court also ruled that the defendants were adequately represented, and thus there was no basis upon which to grant intervention.

Intervention is liberally granted, but as this decision shows, it is by no means automatic.

Posted: June 29, 2014

Breach of Contract Claim Survives Because Nominal Damages Satisfy Damages Element of Claim

On June 19, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in 37 East 50th St. Corp. v. Restaurant Group Management Services, LLC, 2014 NY Slip Op. 31595(U), holding that nominal damages are sufficient to support a claim for breach of contract.

In 37 East 50th St. Corp., the parties brought claims and counterclaims regarding the defendants’ management of a restaurant.  Among the issues decided by the court was whether the defendants’ breach of contract counterclaim should be dismissed because the defendants’ claims for loss of future profits and reputational harm did not satisfy the damages element of a breach of contract claim. The court agreed that such damages were not recoverable, but nonetheless did not dismiss the claim, explaining:

Loss of future profits as damages for breach of contract under New York law requires that the following elements be shown: (1) it must be demonstrated with certainty that such damages have been caused by the breach; (2) the alleged loss must be capable of proof with reasonable certainty. In other words, the damages may not be merely speculative, possible or imaginary, but must be reasonably certain and directly traceable to the breach, not remote or a result of other intervening causes”; (3) there must be a showing that the particular damages were fairly within the contemplation of the parties to the contract when it was made. Any reputational harm that might result from [the plaintiff’s] termination of its agreements with [the defendants] (assuming they were in breach) is purely speculative, considering that [the defendants] rejected their notice of termination and continues to manage the restaurant. [The defendants have] not alleged that the harm was fairly within the contemplation of the parties at the time they entered into the Agremeents.

[The defendants are] not entitled to damages for reputational harm on the basis of [the plaintiff’s] commencement of this lawsuit. Commencement of a lawsuit is not a valid basis for reputational harm giving rise to damages, unless it is alleged that the lawsuit was initiated maliciously and/or constitutes abuse of process. [The defendants’] counterclaim does not allege that [the plaintiff] has abused process by bringing suit against them. Therefore, they are not entitled to damages on the basis of the fact of the lawsuit itself.

[The defendants are] entitled to bring a breach of contract claim in pursuit of nominal damages. Nominal damages are always available in breach of contract actions. Nominal damages are a way of recognizing the fact that harm is caused by the fact of one party’s breaking its contractual promise to another, apart from any measurable form of damages that might be alleged in a traditional breach of contract claim for monetary damages. A party’s rights in contract arise from the parties’ promises and exist independent of any breach. Nominal damages allow vindication of those rights. Therefore, a claimant need not allege damage in order to be entitled to nominal damages for breach of contract. . . . . Nominal damages satisfy the damages element of a breach of contract claim under New York law.

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

This decision is hard to reconcile with the New York County Commercial Division decision in Saxon Technologies, LLC v. Wesley Clover Solutions-North America, Inc., 2014 NY Slip Op. 30002(U), which dismissed a breach of contract claim for failure adequately to plead damages.  It is a rare situation where a plaintiff is willing to pay to litigate over nominal damages, so as a practical matter, not having a claim and having a claim for only nominal damages usually amounts to the same thing.