Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: December 10, 2013

Counsel and Client Sanctioned For Deposition Misconduct

On December 4, 2013, Justice Bransten of the New York County Commercial Division issued a decision in Freidman v. Fayenson, 2013 NY Slip Op. 52038(U), sanctioning counsel and his client for deposition misconduct.

The decision in Friedman involved several issues, including counsel conduct at depositions. The court stated the basic rule as follows:

Uniform Rule 221.2 addresses the limited context in which a deponent may refuse to answer a question posed at a deposition when an objection is made. It provides that a deponent shall answer all questions at a deposition, except (i) to preserve a privilege or right of confidentiality, (ii) to enforce a limitation set forth in an order of a court, or (iii) when the question is plainly improper and would, if answered, cause significant prejudice to any person. Attorneys may not instruct a deponent not to answer unless CPLR 3115 or 22 NYCRR 221.2 provides a basis for doing so. When a deponent refuses to answer a question, or an attorney instructs a deponent not to answer, such refusal or instruction shall be accompanied by a succinct and clear statement of the basis therefor. Also, where a deponent does not answer a question, the deposition proceeds, and the examining party shall have the right to complete the remainder of the deposition.

(Internal quotations and citations omitted).

The court then listed the alleged instances of misconduct and analyzed whether they were improper (they were) and for that reason sanctioned the offending counsel and his client. The discussion of the misconduct at issue is a long one, but it illustrates many different types of improper deposition conduct that likely will be familiar to most readers. In hopes that it will serve both as a reminder of the sort of conduct that is over the line and a reminder that Rule 221.2 can have teeth, we have repeated the relevant part of the decision below: (more…)

Posted: December 9, 2013

Failure to Give Required Notice of Termination a Failure to Perform a Condition Precedent to Entitlement to Termination Payments

On December 3, 2013, Justice Demarest of the Kings County Commercial Division issued a decision in Sutton v. E&B Giftware LLC, 2013 NY Slip Op. 33019(U), holding that the failure to give a contractually required notice of termination was a failure to perform a condition precedent to the plaintiff’s entitlement to post-termination payments.

In Sutton, the plaintiff alleged that the defendant breached the consulting agreement between them by failing to pay plaintiff “consulting fees and bonus payments . . . following his termination of his retention under the Agreement.” The court found that plaintiff was not entitled to those payments because he had failed to give the required sixty days’ notice required by the agreement. The court explained:

[T]he Agreement leaves no doubt that the provision of 60 days notice under section 5.2(c) is a condition precedent to [defendant] paying post-termination compensation under section 5.2(d). [Plaintiff] argues that the 60 day notice component of section 5.2(c) does not constitute a condition precedent because the mere lapse of time does not create a condition precedent. This case, however, does not involve the mere lapse of time, since section 5.2(d) requires compliance with section 5.2(c) before it becomes applicable. Further, the use of the language “in the event that Consultant terminates his retention hereunder pursuant to Section 5.2(c)” is a form of construction frequently used to establish a condition precedent.

(Internal quotations and citations omitted).

Notice provisions in contracts may look like boilerplate, but as Sutton shows, parties (and counsel) ignore them at their peril.

Posted: December 8, 2013

Agreement to Pay Bonus Unenforcable Without Formula for Computing the Amount of the Bonus

On November 27, 2013, Justice Kornreich of the New York County Commercial Division issued a decision in Gallotti v. Advance Watch Co. Ltd., 2013 NY Slip Op. 33009(U), dismissing a breach of contract claim because there was no standard for determining the amount the plaintiff was owed under the agreement.

The plaintiff in Gallotti entered into an employment agreement with defendant. The agreement provided that plaintiff was

eligible for a Medium Term Incentive based on the increase in the shareholder value of [the defendant]. The objectives and metrics used to define and measure the achievement under this plan will be defined within one month from the approval of the strategic business plan of [defendant].

Defendant “never defined any objectives and metrics, and” plaintiff “was never paid” a Medium Term incentive bonus, even though the required increase in shareholder value allegedly occurred. After defendant terminated plaintiff’s employment, plaintiff brought an action for, among other things, breach of contract for failure to pay the bonus. (more…)

Posted: December 7, 2013

First Department Applies De Facto Merger Doctrine in Reversing Grant of Motion to Dismiss

On November 14, 2013, the First Department issued a decision in ePlus Group Inc. v. SNR Denton LLP, 2013 N.Y. Slip Op. 07566, applying the de facto merger doctrine.

ePlus Group arose “out of the alleged breach of a lease for IT equipment and services entered into by plaintiff and the now defunct law firm of Thacher Profitt & Wood (Thacher) . . . against defendant law firm . . . alleging that it is Thacher’s successor in interest under the doctrine of de facto merger and is therefore liable for Thacher’s non-payment.” The First Department found that plaintiff had alleged a de facto merger, writing:

We find that under New York law, the complaint properly alleges the elements of a de facto merger, including continuity of ownership (equity partners of Thacher became SNR equity partners), Thacher’s cessation of business, and SNR’s opening up at the same location with the same people, clients, management and operations. We note that there is no basis to conclude that the law in this State with respect to de facto mergers does not apply to limited partnerships.

(Internal quotations and citations omitted).

Posted: December 6, 2013

No Negligent Misrepresentation Claim From Arm’s Length Transaction Between Sophisticated Parties

On November 26, 2013, the First Department issued a decision in Zohar CDO 2003-1 Ltd. v. Xinhua Sports & Entertainment Ltd., 2013 N.Y. Slip Op. 07860, affirming a decision finding that there was no “special relationship” between the parties in an arm’s length commercial transaction.

In Zohar, the trial court dismissed a negligent misrepresentation claim, holding that there was no special relationship between the parties. The First Department affirmed, writing:

Where, as here, sophisticated parties expressly state in their heavily negotiated agreement that they are dealing at arm’s-length, such a disclaimer bars a claim for negligent misrepresentation, because it precludes a finding of a special relationship. . . . That defendant had superior knowledge of her company’s business and finances is not the type of special knowledge or expertise that will support this claim.

(Internal quotations and citations omitted).

Zohar illustrates, among other things, the value of contract language relating to due dilligence and the arm’s length nature of a transaction.  Such language may often seem like boilerplate, but it exists just for situations such as this.

Posted: December 5, 2013

First Department Affirms Strict Reading of Rule Requiring Stay and Notice to Retain New Counsel

On November 26, 2013, the First Department issued a decision in Scirica v. Colantonio, 2013 N.Y. Slip Op. 07852, strictly enforcing CPLR 321(c), the rule that provides a thirty-day stay if an attorney is removed from a case.

CPLR 321(c) provides:

If an attorney dies, becomes physically or mentally incapacitated, or is removed, suspended or otherwise becomes disabled at any time before judgment, no further proceeding shall be taken in the action against the party for whom he appeared, without leave of the court, until thirty days after notice to appoint another attorney has been served upon that party either personally or in such manner as the court directs.

In Scirica, “defendants’ counsel was disbarred during the pendency of” the action. The trial court issued an order on October 25, 2012, “directing defendants to appear with or by counsel on December 6, 2012,” but the order did not explicitly “put defendants on notice that they were required to find new counsel.” “Accordingly, the statutory 30–day period never began to run and the automatic stay was in place when the December 6, 2012 conference was held, when the court dismissed defendants’ counterclaims, and when it struck defendant’s answer.” For that reason, the First Department held that the trial court “properly granted defendants'” subsequent “motion to vacate these orders.”

CPLR 321(c) rarely comes up in litigation. Practitioners should remember, however, that if it does, it will be strictly enforced.

Posted: December 4, 2013

Court of Appeals Clarifies Criteria for Giving Missing Witness Charge

On November 26, 2013, the Court of Appeals issued a decision in DeVito v. Feliciano, Docket No. 195, explaining the criteria for issuing a missing witness charge.

DeVito was personal injury litigation, but the Court of Appeals’ decision relates to an issue that affects commercial trials just as much as personal injury trials: the circumstances under which a jury should be instructed to draw a negative inference from a party’s failure to call a key witness at trial.

The Court of Appeals explained:

An “uncalled witness” or “missing witness” charge instructs a jury that it may draw an adverse inference based on the failure of a party to call a witness who would normally be expected to support that party’s version of events. The charge . . . advises a jury that if a party fails to offer a reasonable explanation for its failure to call a witness to testify on a question, then the jury may, although it is not required to, conclude that the testimony of the witness would not support that party’s position on the question and would not contradict the evidence offered by the opposing party on this question. The jury is instructed that it may draw the strongest inference that the opposing evidence permits against a witness who fails to testify in a civil proceeding.

The preconditions for this charge . . . may be set out as follows: (1) the witness’s knowledge is material to the trial; (2) the witness is expected to give noncumulative testimony; (3) the witness is under the control of the party against whom the charge is sought, so that the witness would be expected to testify in that party’s favor; and (4) the witness is available to that party.

. . . [A] person’s testimony properly may be considered cumulative of another’s only when both individuals are testifying in favor of the same party. . . . [T]o hold otherwise would lead to an anomalous result. Indeed, if the testimony of a defense physician who had examined a plaintiff and confirmed the plaintiff’s assertion of a serious injury were deemed to be cumulative to the evidence offered by the plaintiff, thereby precluding the missing witness charge, there would never be an occasion to invoke such charge. Accordingly, our holding is that an uncalled witness’s testimony may properly be considered cumulative only when it is cumulative of testimony or other evidence favoring the party controlling the uncalled witness. In short, a witness’s testimony may not be ruled cumulative simply on the ground that it would be cumulative of the opposing witness’s testimony.

(Internal quotations and citations omitted).

Posted: December 3, 2013

Motion to Seal Sensitive Commercial Document Granted

On November 6, 2013, Justice Ramos of the New York County Commercial Division issued a decision in Greystone Funding Corp. v. Kutner, 2013 NY Slip Op. 32980(U), sealing portions of the record in that action.

Unlike federal courts, New York state courts rarely seal court records. Because of the importance of this issue to commercial litigators, we have repeated below Justice Ramos’s analysis in granting a motion to seal:

Under New York law, there is a broad presumption that the public is entitled to access to judicial proceedings and court records. However, the right of access is not absolute.

To that extent, 22 NYCRR § 216.1 provides that:

[e]xcept where otherwise provided by statute or rule, a court shall not enter an order in any action or proceeding sealing the court records, whether in whole or in part, except upon a written finding of good cause, which shall specify the grounds thereof. In determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties.

Although the term good cause is not defined, a sealing order should clearly be predicated upon a sound basis or legitimate need to take judicial action. A finding of good cause presupposes that public access to the documents at issue will likely result in harm to a compelling interest of the movant.

Exhibit F conclusively contains impressions and contemporaneous notes that could harm Greystone’s competitive advantage by having access to a large compilation of their business leads and their internal and contemporaneous impressions.

In the business context, we have allowed for sealing where trade secrets are involved, or where the release of documents could threaten a business’s competitive advantage. Proprietary information, in the nature of current or future business strategies which are closely guarded by a private corporation, is akin to a trade secret, which, if disclosed, would give a competitor an unearned advantage.

(Internal quotations and citations omitted).

Posted: December 2, 2013

IRS Audit Put Taxpayer on Inquiry Notice of Possible Fraud Claim Against Tax Advisor

On November 19, 2013, Justice Friedman of the New York County Commercial Division issued a decision in Chlsea, LLC v. Gramercy Fin. Servs., LLC, 2013 NY Slip Op. 32946(U), dismissing fraud and related tort claims on statute of limitations grounds because the plaintiff was on inquiry notice.

In Chlsea, the plaintiff made a tax shelter investment that ultimately was disallowed by the IRS. Plaintiff sued its tax advisor for fraud. Justice Friedman ruled that the IRS’s audits of the plaintiff placed it on inquiry notice of a possible fraud claim, writing:

[I]n order to start the limitations period regarding discovery, a plaintiff need only be aware of enough operative facts so that, with reasonable diligence, it could have discovered the fraud. Where the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.

Here, the IRS’s commencement of the 2005 audit regarding the CHLSEA and BROMLI partnerships, and its specific inquiries regarding Gramercy’s pre-acquisition valuation of the distressed debt, were sufficient to give Kelly actual notice of potential problems with the DAD transaction and to trigger Kelly’s duty of inquiry as to the validity of the debt.

(Internal quotations and citations omitted).

In sum, plaintiffs considering suits against tax advisors and other professionals should be cognizant that the limitations period may be held to run once they receive a notice of a tax inquiry by regulatory authorities.