Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: June 24, 2014

Summary Judgment Granted Despite Request for More Discovery

On June 20, 2014, the Fourth Department issued a decision in Resetarits Construction Corp. v. Olmsted, 2014 NY Slip Op. 04633, granting a motion for summary judgment despite the plaintiff’s argument that the motion was premature because the plaintiff had not had an adequate opportunity to take discovery.

In Resetarits Construction Corp., the plaintiff sued the defendant “for, inter alia, breach of contract based on the alleged failure of defendant . . . to pay for work performed by plaintiff pursuant to a construction contract.” The trial court granted the plaintiff’s motion for summary judgment on its breach of contract claim, denying the defendant’s cross-motion compelling additional discovery. The Fourth Department affirmed, explaining that the plaintiff had established its entitlement to judgment and:

the [trial] court properly rejected defendants’ contention that plaintiff’s motion was premature because further discovery was necessary and thus properly denied the cross motion seeking that further discovery. In opposing a summary judgment motion as premature pursuant to CPLR 3212 (f), the opposing party must make an evidentiary showing supporting the conclusion that facts essential to justify opposition may exist but cannot then be stated, and mere speculation or conjecture is insufficient. The opposing party must show that the discovery sought would produce evidence sufficient to defeat the motion and that facts essential to oppose the motion were in the movant’s exclusive knowledge and possession and could be obtained by discovery. Defendants failed to make the requisite showing here.

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

Posted: June 23, 2014

Commercial Division Rules Amended to Add Rules Regarding Interrogatories

The Chief Administrative Judge has signed an order amending the rules of the Commercial Division by adding a new rule relating to interrogatories. The new rule, Rule 11-a, which took effect on June 2, 2014, provides:

Rule 11-a. Interrogatories.

(a) Interrogatories are limited to 25 in number, including subparts, unless another limit is specified in the preliminary conference order. This limit applies to consolidated actions as well.

(b) Unless otherwise ordered by the court, interrogatories are limited to the following topics: name of witnesses with knowledge of information material and necessary to the subject matter of the action, computation of each category of damage alleged, and the existence, custodian, location and general description of material and necessary documents, including pertinent insurance agreements, and other physical evidence.

(c) During discovery, interrogatories other than those seeking information described in paragraph (b) above may only be served (1) if the parties consent, or (2) if ordered by the court for good cause shown.

(d) At the conclusion of other discovery, and at least 30 days prior to the discovery cut-off date, interrogatories seeking the claims and contentions of the opposing party may be served unless the Court has ordered otherwise.

You can learn more about the background of the rule by reading the request for comment that the Office of Court Administration posted earlier this year on the proposed rule.

Posted: June 23, 2014

Theories of Damages in the Macy’s v. J.C. Penney Litigation

On June 16, 2014, Justice Oing of the New York County Commercial Division issued a decision in Macy’s, Inc. v. J.C. Penny Corporation Inc., Index No. 652861/2012, setting forth findings of law and fact after a non-jury trial.

The case’s history, and the contents of Justice Oing’s lengthy decision, have been widely reported elsewhere:  Macy’s sued J.C. Penney for inducing Martha Stewart Living Omnimedia, Inc., (MSLO) to breach its exclusive agreement with Macy’s; Justice Oing issued injunctions before trial, preventing J.C. Penney from selling Martha Stewart-branded products; Macy’s settled with MSLO; and, on the merits, the court ruled in favor of Macy’s against J.C. Penney.

Instead of re-hashing those well-examined issues, this blog post examines Justice Oing’s rulings on Macy’s possible remedies, which present some unique questions of fact and law.

Justice Oing first denied Macy’s claim for a permanent injunction on the grounds of mootness, because agreements between the parties have resolved any chance of future harm from infringement or unfair competition.

Because Justice Oing awarded Macy’s pre-trial injunctive relief prohibiting the sale of Martha Stewart-branded goods at J.C. Penney stores before any such goods were sold, Macy’s had no claim on its first lost profits theory.

Macy’s only viable claim for lost profits instead centers on 900 product designs that MSLO prepared for J.C. Penney, some of which J.C. Penney accepted and sold under its own brand names. To determine whether Macy’s lost any profits under this theory, Macy’s will have to prove that (a) a particular design or designs “rightfully belonged to Macy’s; (b) if that design were presented to Macy’s, Macy’s would have accepted it; (c) J.C. Penney manufactured and sold the design; and (d) J.C. Penney “realized a profit on such sales.” This question was referred to a Special Referee/JHO for determination, but given Justice Oing’s admonition that “speculative damages will not be considered,” Macy’s faces a high burden.

Macy’s also claimed attorneys’ fees—despite the absence of a contract provision or statute providing for that remedy—based upon a common-law rule that a party can recover attorneys’ fees if

through the wrongful act of his present adversary, a person is involved in earlier litigation with a third person . . . to protect his interests . . . he is entitled to recover the reasonable value of attorneys’ fees and other expenses thereby suffered or incurred. Such attorney fees should be reasonable and the natural and necessary consequences of the defendant’s tortious acts.

(Internal citations and quotation omitted.)

Here, Macy’s claimed that its action against MSLO was caused by J.C. Penney’s tortious actions, and that J.C. Penney should therefore be liable for Macy’s attorneys’ fees in that action. Justice Oing also referred this claim to a special referee to determine “whether JCP’s conduct was the proximate cause of the legal fees incurred by Macy’s in its action against MSLO.” However, Justice Oing warned that his finding that J.C. Penney tortuously interfered with the Macy’s/MSLO contract “may not amount to a finding of proximate cause” and that the Special Referee would have to make a deeper analysis of the parties’ actions and motivations. Any award of attorney’s fees would also have to be reduced if the Macy’s/MSLO settlement required MSLO to pay any of Macy’s attorneys’ fees.

Finally, Justice Oing addressed Macy’s claim for punitive damages. To decide whether to award punitive damages, the finder of fact was required to consider:

the nature and reprehensibility of what JCP did . . . the character of the wrongdoing, whether JCP’s conduct demonstrated an indifference to, or a reckless disregard of, the rights of others, whether the acts were done with an improper motive or vindictiveness, whether the acts constituted outrageous or oppressive intentional misconduct [etc.].

Justice Oing stated that this was a difficult decision, because an award of punitive damages against “a major domestic retailer . . . may have unintended and severe collateral economic consequences.” Then, despite an earlier finding that J.C. Penney had knowingly and intentionally interfered with Macy’s contract with MSLO, Justice Oing declined to award punitive damages. He pointed first to the fact that gaining a commercial advantage was the sole motivation for J.C. Penney’s actions, and to the severe consequences that J.C. Penney had already suffered:

If one were to say that a finding of no liability for punitive damages would be to condone such corporate behavior and let JCP get off easy, consider the following facts. [Macy’s], the loyal and unsuspecting partners, have been vindicated. JCP terminated [the executive responsible] on April 8, 2013, before this trial ended, a casualty of his own hubris. JCP, its board of directors, and its top executives were publically ridiculed and humiliated as a consequence of this trial. Their grand strategy was a colossal and abject retail failure . . . to the point where it placed JCP on the verge of financial collapse.

This ruling reminds us that the mere fact that an intentional tort has been committed does not automatically entitle a plaintiff to punitive damages. Here, punitive damages were refused because J.C. Penney acted to advance its own interests and not out of malice or vindictiveness towards Macy’s. It also highlights a seldom-used avenue to obtain common-law attorney fees. However, the most interesting thing about this ruling is that, despite J.C. Penney’s obvious wrongdoing, and its total defeat on the merits, Macy’s may be left with no remedy at all. Indeed, despite the trial and the lengthy decision on the merits, it appears as though this litigation was in effect decided at the preliminary injunction stage. Because Macy’s sought and received prompt injunctive relief, almost all of its potential damages were forestalled.

Posted: June 22, 2014

Class Counsel Awarded Reduced Fees

On June 13, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Schumacher v. NeoStem, Inc., 2014 NY Slip Op. 50919(U), awarding fees to class counsel in an amount significantly lower than that requested.

In Schumacher, the court was asked to certify a class, approve a class settlement and award class counsel attorneys’ fees. Class counsel represented to the court “that the total number of hours spent on” the “litigation was 455.25 and [sought] a multiplier of 1.75, totaling $477,817.16.” The court awarded only $125,000. It explained the factors it considered as follows:

Under CPLR 909, attorneys for a class that has been successful (through judgment or settlement) may be awarded reasonable attorneys’ fees. When granting fees, a trial judge has broad discretion in deciding whether, and in what amount attorneys’ fees should be awarded. Generally, the Lodestar” method is employed to calculate reasonable attorney’s fees, which is calculated by multiplying the reasonable hours expended on the action by a reasonable hourly rate.

Class counsel must establish through competent evidence that its fees were consistent with customary fees charged for similar services by lawyers in the community with like experience and of comparable reputation, or were reasonable.

In the event that the court finds that an attorney spent excessive or unreasonable hours, it may exclude that amount from the calculation.
. . .

Counsel for a prevailing party must exercise billing judgment, that is, act as he would under the ethical and market restraints that constrain a private sector attorney’s behavior in billing his own clients. From reviewing the billing records, is evident that a great deal of the expenses could have been avoided. Moreover, plaintiff’s counsel has not established by clear and convincing evidence that the time expended was necessary to achieve the results obtained. While it is widely acknowledged that a securities class action is by its very nature a complex animal, the complexity of the underlying issues of executive compensation do not appear extraordinary.

. . . A court may apply a multiplier to the lodestar figure to account for factors such as the risk of litigation and the performance of the attorneys.

Ultimately, the degree of a plaintiff’s success is the most critical factor in determining the reasonableness of a fee award.

Considering all of these factors, the court found that class counsel’s work was duplicative–both within the matter and between related matters–and that its success did not justify a multiplier.

It is often hard to have one’s work scrutinized after-the-fact. Perhaps the best lesson here is no matter how reasonable counsel might view its work when it is doing it, counsel seeking fees from an opponent should nonetheless expect that it will not recover for all of its billings.

Posted: June 21, 2014

Investment Bank Not Entitled To Transaction Fee For Acquisition Where Engagement Letter Applied To “Sale, Transfer or other Disposition” of the Company’s Assets

On June 17, 2014, the First Department issued a decision in Miller Tabak + Co., LLC v. Senetek PLC, 2014 NY Slip Op. 04418, reversing the trial court’s grant of summary judgment to an investment bank on a breach of claim, and, by a 4 to 1 majority, granting the defendant’s motion to dismiss the complaint for failure to state a cause of action. (Note: Schlam Stone & Dolan represents the Defendant-Appellant, Senetek PLC).

Senetek (now known as Independence Resources) retained a New York investment bank, Miller Tabak, as its exclusive financial advisor. In the engagement letter, Senetek agreed to pay Miller Tabak a transaction fee for any “Transaction” consummated during the term of the agreement. The engagement letter defined Transaction as: “The engagement may potentially result in a sale, transfer or other disposition . . . [of] a portion of the assets, businesses or securities” of the company. Miller Tabak sued Senetek in New York Supreme Court, seeking a transaction fee based on Senetek’s acquisition of a “participation interest” in the debt of a bankrupt gold mine in Nevada. Senetek argued that no fee was owed because (1) the deal was an acquisition, not a “sale, transfer or other disposition” of a Senetek asset; (2) the transaction was unwound before Senetek completed the acquisition of the mine; and (3) Miller Tabak played no role in the deal.

Justice Bransten of the New York County Commercial Division granted summary judgment to Miller Tabak, concluding that Senetek’s expenditure of cash in the acquisition was an “other disposition” of a Senetek asset (i.e., the cash). The First Department reversed the award of summary judgment, and a four-justice majority granted Senetek’s motion to dismiss the complaint, explaining:

In our view, the motion court unreasonably construed the parties’ agreement in arriving at the conclusion that plaintiff was entitled to a “transaction fee” in connection with defendant’s aborted acquisition of a participation interest in the notes. The letter agreement provides that plaintiff is entitled to a “transaction fee” following the consummation or closing of a “transaction,” which it defines as the “sale, transfer or other disposition . . . [of] a portion of the assets, businesses or securities of [defendant].” The acquisition in question was admittedly not a “sale” or “transfer.” Nor can it be considered a “disposition,” as plaintiff contends. The term “disposition” does not appear in isolation in the agreement, but as a catch-all at the end of the phrase “sale, transfer or other disposition.” Thus, under the principle of ejusdem generis, the general language “or other disposition” must be construed as limited in scope by the more specific words “sale” and “transfer” that preceded it . . . .

Other provisions of the engagement letter confirm that plaintiff was retained to assist defendant with potential sales of its assets, businesses or securities. In describing the “advice and assistance” plaintiff might provide, the agreement makes specific reference to the possible “sale of [defendant’s] biotech or other businesses,” and the “private placement of [defendant’s] securities.” The agreement also anticipates that plaintiff might render “assist[ance] . . . in the preparation of a memorandum describing the Company and its business operations for distribution to potential parties to a Transaction,” i.e., materials prepared for potential investors in defendant. The agreement also authorizes plaintiff to place “customary tombstone announcements or advertisements in financial newspapers and journals,” i.e., announcements apprising potential investors of a securities offering.

The more general language in the description of the scope of the “engagement,” i.e., “a review of strategic options and development of a business plan to evaluate and make recommendations for maximizing the assets of [defendant]” does not illuminate the question of what constitutes a “disposition.” In any event, assuming a conflict, the more specific provision concerning the definition of “transaction” would control over the general provisions in the agreement.

Further, as noted by the dissent, the acquisition of the gold mine was never completed or consummated, and the deal was unwound. Thus, the deal lacked the finality necessary to constitute a “disposition,” as that term is commonly understood.

(Citations omitted.) Justice Saxe dissented in part, concluding that there were material questions of fact as to the meaning of the parties’ engagement letter that, in his view, should have been remanded for trial.

Posted: June 20, 2014

Decision Illustrates Limits to the Scope of General Business Law Section 349

On June 12, 2014, the First Department issued a decision in Seller v. Citimortgage, Inc., 2014 NY Slip Op. 04243, affirming the dismissal of a cause of action alleging a violation of General Business Law § 349.

The First Department’s decision in Seller illustrates several of the limits to the scope of GBL § 349:

The complaint fails to allege any of the elements of a General Business Law § 349 claim in connection with defendant’s implementation of its private mortgage loan modification program. It alleges that defendant told plaintiffs that to qualify for a loan modification they had to be delinquent in their mortgage payments, and instructed them, since they were not at that time delinquent, to make four mortgage payments at a reduced rate. In so advising plaintiffs, defendant was not engaging in the requisite consumer-oriented conduct. The conduct was specific to them; it had no broader impact on consumers at large.

As to the element of a materially misleading act or practice, plaintiffs allege that defendant told them that to qualify for a loan modification they had to be delinquent, but they do not allege that this representation was false, nor did they submit documentary evidence refuting it. Plaintiffs also allege that defendant said it would block negative credit reporting, but they do not allege that defendant reported their delinquency during the private loan modification application period.

While the adverse consequences of a negative credit report could constitute the requisite injury for a cause of action under General Business Law § 349, as indicated, plaintiffs do not allege that a negative credit report was issued.

The complaint also alleges that defendant violated General Business Law § 349 in connection with its processing of plaintiffs’ application for a permanent loan modification under the federal Home Affordable Modification Program (HAMP). [A] cause of action under General Business Law § 349 alleging violations of HAMP rules and directives would constitute an impermissible end run around the absence of a private right of action under HAMP.

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

Posted: June 19, 2014

Opportunity to Comment on Proposed Change to Commercial Division Rules

The Office of Court Administration has asked for public comment on yet another proposed change to the rules of the Commercial Division.

The proposed new rule would “establish a presumptive limit of 10 depositions for each side and limit the duration of depositions to seven hours per witness.”

E-mail comments to by August 19, 2014.

Posted: June 19, 2014

Action Against Referral Service Fails

On June 9, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in Vista Food Exchange, Inc. v. Benefitmall, 2014 NY Slip Op. 31491(U), dismissing an action against a referral/management service.

In Vista Food Exchange, the parties’ dispute began when the defendants allegedly referred the plaintiff, a small food wholesaler, to a third party for HR services. After the HR firm apparently collapsed, leaving the plaintiffs’ employees without health or workers’ compensation coverage, and the plaintiff’s tax obligations unpaid, the plaintiff sued the defendants under several legal theories.

The Court dismissed most of the plaintiff’s causes of action with prejudice. Negligent misrepresentation was dismissed because no special relationship existed that would create a duty independent of contract (the parties’ 20-year relationship was insufficient) and the economic loss rule also restricted the plaintiff to a contract remedy. Breach of fiduciary duty and professional malpractice claims were also dismissed because—absent facts not found here—a relationship with a management consultant is not of sufficient “trust and confidence” to elevate it beyond a “conventional business relationship.”

The breach of contract claim was more complicated. The defendants moved to dismiss for a number of different reasons, including: (1) that the plaintiff failed to specify which contract provisions were breached; (2) that to be enforceable, any contract to provide referrals must be in writing, pursuant to GBL § 5-701(a)(10); (3) the plaintiff’s allegation that the defendants’ duties extended beyond mere referral to due diligence and monitoring are purely conclusory; and (4) the plaintiff’s failure to allege actual damages—as opposed to possible future damages due to a double tax liability—makes their contract claim unripe. The contract claim was dismissed upon the court’s finding that the plaintiff had failed to allege the elements of a contract, including damages, but the plaintiff was given leave to replead that cause of action.

Posted: June 18, 2014

Fraud Claim Dismissed for Lack of Reasonable Reliance Where Sophisticated Plaintiff Failed to Conduct Due Diligence

On June 13, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Phoenix Light SF Ltd. v. Goldman Sachs Group, Inc., 2014 NY Slip Op. 50917(U), dismissing a fraud claim brought by sophisticated investors who alleged misrepresentations in the offering documents for a mortgage-backed securities investment.

In Phoenix Light, the court noted that “[u]nder New York law, there is an affirmative duty imposed on sophisticated investors, such as plaintiffs, to protect themselves from misrepresentations made during business acquisitions by investigating the details of the transactions”:

It has been held that as a matter of law, a sophisticated plaintiff cannot establish that it entered into an arm’s length transaction in justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means of verification that were available to it

Nonetheless, a fraud claim may proceed where a plaintiff has sufficiently alleged that defendant possessed peculiar knowledge of the facts underlying the fraud, and the circumstances present would preclude any investigation by plaintiff conducted with due diligence. Thus, if the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.

(Citations and internal quotation marks omitted.)

Justice Ramos found that the defendants in Phoenix Light did have “peculiar knowledge about the misrepresentations and omissions.” However, he nevertheless found that the complaint did not state a cause of action for fraud because “the allegations of the complaint, itself, actually establish that plaintiffs could have uncovered defendants’ alleged misrepresentations and omissions if they had exercised due diligence by asking for the loan files, which plaintiffs admit was information available at the time they bought the Certificates”:

[P]laintiffs and their external asset and investor managers reviewed only the data presented by defendants in the Offering Documents, despite having the ability to ask to review the loan files. The complaint alleges that defendants “did not share” the loan files, but there are no allegations that plaintiffs sought this pertinent information and that defendants denied access to it. It does not matter if the failure to seek this information was because of blind faith in the process of origination and/or securitization, or if it was attributable to the desire to quickly get on board of what the investors thought was a profitable bandwagon, the obligation of a sophisticated investor to inquire cannot be merely excused.

This decision illustrates the high burden that a sophisticated investor must satisfy to state a fraud claim arising from a commercial transaction. If the plaintiff could have availed itself of information from which it could reasonably have discovered the alleged misrepresentation, it will not be able to plead reasonable reliance, even if it did in fact rely on the misrepresentation.

Posted: June 17, 2014

Transcripts and Videos of Arguments in the Court of Appeals for the Week of June 2, 2014, Now Available

On May 29, 2014, we noted two cases of interest from the oral arguments for the week of June 2, 2014:

  • Docket No. 129: People v. John F. Haggerty, Jr. (a criminal case addressing an evidentiary issue also relevant to commercial litigators—the best evidence rule: specifically, whether the testimony of the attorney who drafted a trust is admissible to prove the ownership of the trust assets when the trust agreement was available)). See the transcript and the video.
  • Docket No. 136: In re: Thelen LLP (Geron v Seyfarth Shaw LLP) and No. 137: In re: Coudert Brothers, LLP (Development Specialists, Inc. v K&L Gates LLP) (addressing certified questions from the Second Circuit: “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?” and “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?). See the transcript and the video.