Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: March 8, 2014

Court Identifies Elements of Claim for Aiding and Abetting Undue Influence

On February 28, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in Goldberg v. HSBC Securities (USA), Inc., 2014 NY Slip Op. 30481(U), examining the elements of a claim of aiding and abetting undue influence.

In Goldberg, the executor of an estate brought claims related to alleged undue influence over the decedent, including a claim for aiding and abetting undue influence against two defendants. In deciding the motion to dismiss brought by those defendants, the court considered whether such a tort existed and, if so, what its elements were, explaining:

No authoritative New York case concludes that there exists in New York a cause of action for aiding and abetting undue influence. Plaintiff relies on Medeiros v. John Alden Life Ins. Co., 1990 U.S. Dist. LEXIS 10393, 1990 WL 115606 (S.D.N.Y. 1990) for the proposition that one may be held liable for aiding and abetting another’s undue influence. On a motion for summary judgment, the court in Medeiros found that “[u]nder New York law, however, a person may be liable for aiding and abetting the tortious act of another where plaintiff demonstrates: (1) that the principal/third party violated the law or engaged in tortious conduct; (2) that the defendant knew or should have known that the violation or conduct was occurring; and (3) that defendant’s conduct gave substantial assistance or encouragement to the principal to engage in the violation or tortious conduct.”

The standard articulated by the court in Medeiros is essentially that for aiding and abetting fraud. Critical to a claim for aiding and abetting fraud is that the plaintiff plead “substantial assistance.” In addition, aiding and abetting fraud must be pleaded with the specificity sufficient to satisfy CPLR 3016 (b). Substantial assistance exists where (1) a defendant affirmatively assists, helps conceal, or by virtue of failing to act when required to do so enables the fraud to proceed, and (2) the actions of the aider/abettor proximately caused the harm on which the primary liability is predicated.

(Internal quotations and citations omitted). The court went on to find that the plaintiff had failed “to allege substantial assistance with sufficient particularity to satisfy CPLR 3016(b).”

Posted: March 7, 2014

Standard for Pre-Award Attachment Under CPLR 7502(c) is that Award Must Otherwise Be “Rendered Ineffectual”

On March 6, 2014, the First Department issued a decision in Matter of Kadish v. First Midwest Securities, Inc., 2014 NY Slip Op. 01517, addressing the standard in deciding motions for CPLR 7502(c) attachments.

In Matter of Kadish, the First Department addressed whether, in addition to the grounds stated in CPLR 7502(c)–that without the attachment, the award will be rendered ineffectual–a petitioner seeking a pre-award attachment also must also demonstrate the traditional factors for injunctive relief under CPLR article 63.

Without making a clear statement, the court implied that the “rendered ineffectual” standard is the only one governing Article 75 attachments, writing:

CPLR 7502(c) provides, in pertinent part, that the court may

entertain an application for an order of attachment or for a preliminary injunction in connection with an arbitration . . . but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief. The provisions of articles 62 [attachment] and 63 [injunction] of this chapter shall apply to the application, including those relating to undertakings and to the time for commencement of an action (arbitration shall be deemed an action for this purpose), except that the sole ground for the granting of the remedy shall be as stated above”

(emphasis added).

Respondent FMSI disputes this standard, citing to multiple cases which involve injunctions under CPLR 7502(c), and clarify that, in addition to the usual three-prong test for preliminary injunctions under article 63 of the CPLR, a petitioner must demonstrate that a potential arbitral award could be rendered ineffectual (see Interoil LNG Holdings, Inc. v Merrill Lynch PNG LNG Corp., 60 AD3d 403, 404 [1st Dept 2009]; Founders Ins. Co. Ltd. v Everest Natl. Ins. Co., 41 AD3d 350, 351 [1st Dept 2007]; Erber v Catalyst Trading, 303 AD2d 165 [1st Dept 2003]; Matter of Cullman Ventures [Conk], 252 AD2d 222, 230 [1st Dept 1998]; Koob v IDS Fin. Servs., 213 AD2d 26 [1st Dept 1995]; see also SG Cowen Sec. Corp. v Messih, 224 F3d 79, 81-84 [2d Cir 2000] [detailed analysis of interplay between CPLR 7502 and CPLR article 63]).

Recent cases of this Court, however, continue to apply the “rendered ineffectual” standard with regard to a CPLR 7502(c) attachment in aid of arbitration (Matter of Sojitz Corp. v Prithvi Info. Solutions Ltd., 82 AD3d 89, 96 [1st Dept 2011] [citing Matter of H.I.G. Capital Mgt. v Ligator, 233 AD2d 270, 271 [1st Dept 1996]; Sullivan & Worcester LLP v Takieddine, 73 AD3d 442, 442 [1st Dept 2010]), and we agree with this interpretation.

The First Department went on to find that “under either standard, petitioner’s evidentiary showing was insufficient” to support the imposition of a pre-award attachment.

The implication of this decision is that the First Department will require only that an award be “rendered ineffectual” in order to grant a CPLR 7502(c) attachment. Hopefully, at some point the court will provide clearer guidance. Until then, litigators seeking an Article 75 attachment still must be prepared to address an argument that they must meet the traditional Article 63 standards for preliminary injunctive relief as well.

Posted: March 5, 2014

Buyer’s Broker Not Third-Party Beneficiary of Real Estate Sales Contract That Refers Only to Commission to Seller’s Broker

On February 20, 2014, Justice Pines of the Suffolk County Commercial Division issued a decision in Saunders Ventures, Inc. v. Morrow, 2014 NY Slip Op. 30455(U), holding that a buyer’s broker was not a third-party beneficiary of a real estate sales contract.

In Saunders Ventures, the plaintiffs, who alleged that they procured the buyer of real property sold by the trust of which the moving defendants’ were successor trustees, sued for unpaid real estate commissions. The moving defendants moved to dismiss on the ground that the only contract relating to commissions to which the trust was a party was the contract with the seller’s broker. The plaintiffs opposed the motion, arguing that they were third-party beneficiaries of the contract of sale for the property which referred to the selling broker’s commission. The trial court held that the plaintiffs were not third-party beneficiaries, explaining:

One who seeks to maintain an action for breach of contract as a third party beneficiary must establish that: 1) there is an existing and valid binding contract between the signatories; 2) the contract was intended for the third party’s benefit; and 3) the benefit to third party is clear and direct as opposed to incidental. It must be established that the language of the subject contract clearly evidences an intent to permit enforcement by the third party; therefore, courts are reluctant to construe an intent to benefit a third party in the absence of clear contractual language evincing such intent.

In the context of claims by an alleged procuring broker, there appears to be no basis for a claim against a seller that contracts solely with the listing broker and makes no commitment to the broker who assisted in procuring the sale. Thus, in Fischer v RSWP Realty LLC d/b/a Prudential Rand Realty et al, 19 AD 3d 540, 798 NYS 2d 72 (2d Dep’t 2005), the Second Department held that dismissal of a procuring broker’s claim against the vendor was warranted where no express nor implied contract (existed between such broker and the vendors, whose sole brokerage contract was the listing agreement with the listing broker. The same conclusion was reached in a procuring broker’s claim against seller in REMAX Homes and Estates, Inc. v Ivan Leist, 308 AD 2d 439, 764 NYS 2d 107 (2d Dep’t 2003).

(Internal quotations and citations omitted) (emphasis added). Finding no evidence supporting the plaintiffs’ argument that they had established the elements of being a third-party beneficiary, the court dismissed the plaintiffs’ claims against the moving defendants.

This decision illustrates the narrow scope of the third-party beneficiary doctrine in New York.

Posted: March 4, 2014

Unjust Enrichment Claim Viable Even Though Defendant Committed No Wrongful Act Against the Defendant

On February 26, 2014, the Second Department issued a decision in Alan B. Greenfield, M.D., P.C. v. Beach Imaging Holdings, LLC, 2014 NY Slip Op. 01285, reversing the dismissal of an unjust enrichment claim.

In Greenfield, the trial court dismissed the plaintiff’s claim for unjust enrichment. The Second Department reversed, ruling that:

The essential inquiry in any action for unjust enrichment or restitution is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered. A plaintiff must show that (1) the other party was enriched, (2) at the plaintiff’s expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered.

Unjust enrichment does not require the performance of any wrongful act by the one enriched. Innocent parties may frequently be unjustly enriched. What is required, generally, is that a party hold property under such circumstances that in equity and good conscience he ought not to retain it.

(Internal quotations and citations omitted) (emphasis added). Finding that the elements had been plead, the claim was allowed to proceed even though the plaintiff did not allege that the defendant committed any wrong directly against it.

Courts often dismiss unjust enrichment claims because they mirror valid breach of contract claims. This decision shows the power of a properly pleaded unjust enrichment claim to reach even innocent actions that have harmed the plaintiff.

Posted: March 3, 2014

Court of Appeals Rules That Issues of Fact Preclude Dismissal On Summary Judgment of Negligence Claim Against Insurance Broker

On February 25, 2014, the Court of Appeals issued a decision in Voss v. Netherlands Insurance Co., 2014 NY Slip Op. 01259, finding that a question of fact on the existence of a “special relationship” between insureds and their insurance broker precluded dismissal of a negligence claim against the broker for failure to advise the insureds to obtain additional business interruption coverage.

The individual plaintiff in Voss used defendant’s brokerage services in 2004 to obtain coverage for her plaintiff businesses. The brokerage provided advice on the appropriate amount of coverage and allegedly represented that it “would reassess and revisit the coverage needs as her business grew.” Despite that representation, the plaintiffs were never advised to increase the policy limit, and the coverage proved inadequate when the businesses suffered losses in 2007 and 2008, by which point the business had grown. The plaintiffs’ lawsuit alleged that the broker negligently secured inadequate levels of business interruption insurance. (more…)

Posted: March 2, 2014

Case Dismissed for Champerty

On February 24, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Justinian Capital SPC v. WestLB AG, 2014 NY Slip Op. 24046, granting a motion for summary judgment and dismissal on the grounds of champerty.

Justinian Capital arose from an investment portfolio that contained mortgage-backed securities that did not meet the portfolio’s investment guidelines. The defendant, WestLB, was the portfolio’s investment manager.  The original holder of the notes, non-party DPAG, is a non-party German bank that relies on the German government for funding. Because WestLB is partially owned by the German government, DPAG was unwilling to sue it.  Instead, DPAG agreed with the plaintiff, Justinian, that Justinian would sue WestLB and would remit the litigation recovery to DPAG minus a 15% cut.

When the Court learned of the arrangement, it directed the parties to conduct limited discovery on the issue of champerty. Although champerty has been abolished as a defense almost everywhere in the United States, it still exists in New York under Judiciary Law § 489:

No person shall solicit, by or take an assignment of, or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon.

In 2004, the Legislature added a safe harbor, § 489(2), which precludes a champerty defense when the securities being sold have an aggregate purchase price of at least $500,000.

In this case, the principal question to be decided by the Court was “whether such money must actually be paid,” because although the plaintiff’s agreement with DPAG recited a sale price of $1 million, the plaintiff did not pay the sale price, did not have the means to do so, and its failure to pay was not considered an event of default under the agreement between it and DPAG.

The Court held that the safe harbor required actual payment, and dismissed the action with prejudice:

If an investor buys worthless mortgage backed securities, it can sue the issuer for fraud and, if it wins, it can keep the money. Such a sale, according to the Court of Appeals, is not prohibited by § 489. Nonetheless, that is not the situation in the instant case because [the plaintiff], a shell formed exclusively for the purposes of litigating the instant action, did not buy the subject notes.

. . .

[The Plaintiff] paid nothing for the notes; 85% of any verdict or settlement goes back to DPAG; and DPAG still effectively controls the notes . . .

. . .

No reasonable finder of fact could conclude that Justinian was making a bona fide purchase of securities . . . . it is not champerty to sue on behalf of debt that you buy for yourself, but it is champerty to sue, on behalf of another and for a fee, for a debt that is not really your own.

The lesson here for practitioners is that although a champerty defense, which once prohibited buying a cause of action, can now be asserted only in rare circumstances, it still exists and counsel should ensure that the purchase of a claim or cause of action does not run afoul of it.

Posted: March 1, 2014

Settlement Term Sheet Enforceable Despite Statement That Formal Papers Would Be Executed

On February 27, 2014, the First Department issued a decision in Trolman v. Trolman, Glaser & Lichtman, P.C., 2014 NY Slip Op. 01396, affirming the enforcement of a settlement term sheet, explaining:

The motion court properly determined that the handwritten memorandum executed following mediation between the parties was a binding and enforceable settlement agreement, and not merely an agreement to agree. The memorandum’s plain language expressed the parties’ intention to be bound, and established a meeting of the minds regarding the material terms pertaining to the settlement of plaintiff’s claim . . . . The agreement was not rendered ineffective simply because certain non-material terms were left for future negotiation, or because it stated that the parties would promptly execute formal settlement papers.

(Internal citations omitted) (emphasis added).

The First Department also affirmed the trial court’s decision to dismiss all claims against the individual defendants, holding that “the record demonstrated that the entirety of the parties’ arbitration proceeding was subject to mediation and is therefore encompassed in the enforceable settlement agreement” and that the plaintiff had failed to make it clear that he intended to “carve out” certain claims against individual defendants from the settlement.

This decision is a reminder that courts treat settlements like any other commercial transaction and, for that reason, they enforce settlement term sheets that meet the criteria discussed above even if a formal settlement agreement was not executed.

Posted: February 28, 2014

Complaint Dismissed for Failure to Comply With Contract’s Mandatory Mediation Provisions

On February 20, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Key Restoration Corp. v. Union Theological Seminary, 2014 NY Slip Op. 30437(U), dismissing a lawsuit for failure to exhaust pre-litigation ADR obligations.

In Key Restoration Corp., the plaintiff brought claims of foreclosure on a mechanic’s lien, breach of contract and unjust enrichment relating to construction work it did for the defendant. The defendant moved to dismiss on the ground that the plaintiff had failed to comply with the pre-litigation dispute resolution provisions of the parties’ contract. The trial court agreed, dismissing the complaint.  The trial court found that the parties’ contract required that the parties mediate any dispute between them before litigating it and rejected the plaintiff’s arguments for not doing so, explaining:

[The plaintiff’s] causes of action, for foreclosure of a mechanic’s lien, breach of contract, and unjust enrichment, are based on contract. Therefore, the dispute is subject to the contractual provisions quoted above. As such, [the plaintiff] failed to satisfy the . . . contract’s conditions precedent to commencing litigation.

. . .

Moreover, the public policy of New York State favors and encourages arbitration and alternative dispute resolutions and these mechanisms are well recognized as an effective and expeditious means of resolving disputes between willing parties desirous of avoiding the expense and delay frequently attendant to the judicial process.

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

Mandatory mediation provisions have, over the past two decades, become increasingly common in commercial contracts. This decision shows that the New York courts will enforce them. And, as a practical matter, is it not better–as a general proposition–for the client to at least try to resolve a dispute by mediation before incurring the costs of litigation and risking getting a complaint dismissed for failing to comply with a contract’s mediation provisions?

Posted: February 27, 2014

Court of Appeals Agrees to Hear Certified Questions Regarding Application of “Separate Entity Rule” to Post-Judgment Enforcement Proceedings

On January 18, 2014, we posted that in Tire Engineering & Distribution, L.L.C., et al. v. Bank of China Ltd., and Motorola Credit Corp. v. Standard Chartered Bank, the Second Circuit certified questions to the New York Court of Appeals concerning the application of the “separate entity rule” to post-judgment enforcement proceedings under CPLR Article 52. On February 18, 2014, the Court of Appeals accepted the certified questions.