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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: April 23, 2014

Acting as Sub-landlord Doing Business Within the Meaning of BCL Prohibition on Foreign Unregistered Business Lawsuits

On April 21, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in MKC-S, Inc. v. Laura Realty Co., 2014 NY Slip Op. 50650(U), analyzing whether the plaintiff was a foreign corporation not registered to do business in New York.

In MKC-S, the plaintiff moved for a Yellowstone injunction. The defendant, its landlord, argued “that the . . . motion should be denied, because [the plaintiff] lacks standing to bring this action pursuant to BCL §1312(a) as a foreign corporation not registered to do business in New York.” In deciding the motion, the Court had to evaluate whether the plaintiff was subject to the requirements of BCL §1312(a):

A foreign corporation doing business in this state without authority shall not maintain any action or special proceeding in this state unless and until such corporation has been authorized to do business in this state and it has paid to the state all fees and taxes imposed under the tax law or any related statute, as defined in section eighteen hundred of such law, as well as penalties and interest charges related thereto, accrued against the corporation.

While [the plaintiff] does not claim that it is authorized to do business in New York, it asserts that it is not doing business in New York within the meaning of the statute. [The plaintiff] correctly argues that BCL § 1312(a) acts as a bar to a foreign corporation bringing an action in this state only if the corporation is doing business in New York within the meaning of the statute. To come within BCL § 1312(a), a corporation must do more than make a single contact, engage in an isolated piece of business, or an occasional undertaking; it must maintain and carry on business with some continuity of act and purpose. The question of whether a foreign corporation is doing business in New York is approached on a case-by-case basis. The burden is on the defendant asserting the statutory bar to prove that plaintiff’s business in New York was so systematic and regular as to manifest continuity of activity in the jurisdiction. Absent sufficient evidence that the plaintiff is doing business in New York, the presumption is that the plaintiff does business in its state of incorporation, here Delaware.

Plaintiff argues that it is not doing business in New York because it has no place of business in New York; owns no property in New York; has no employees, officers or directors residing or working in New York; has no bank accounts, telephone numbers, or mailboxes in New York; does not solicit any business in New York, and does not physically occupy any portion of the Property. Defendant counters that Plaintiff has acted as sub-landlord for the Property for a number of years. . . .

The Court finds that acting continuously as the sub-landlord for commercial property is doing business within the meaning of BCL § 1312(a). [The plaintiff] has held the leasehold rights to the Property, directly or through a subsidiary, since 1993. It has subleased the property continuously since then. The Court finds that, upon the facts admitted, [the plaintiff’s] subleasing activity was wholly intrastate, systematic, and regular. Until it has registered with the State of New York and paid all applicable fees, taxes, and penalties, [the plaintiff] is precluded from maintaining this action in New York.

(Internal quotations and citations omitted) (emphasis added). Because “noncompliance with BCL § 1312(a) is curable during the pendency of an action,” the court gave the plaintiff time to cure the deficiency “by obtaining authority to do business in New York.”

This decision shows that, while a curable deficiency, BCL § 1312 can be a trap for an unwary plaintiff.

Posted: April 22, 2014

Website, Without More, Insufficient to Create Personal Jurisdiction in New York

On April 7, 2014, Justice Schmidt of the Kings County Commercial Division issued a decision in Steinmetz v. Energy Automation Systems, Inc., 2014 NY Slip Op. 50566(U), analyzing the jurisdictional implications of having a website.

In Steinmetz, the trial court decided motions to dismiss by two Better Business Bureau entities. Part of its analysis included whether having a website made an out-of-state defendant subject to personal jurisdiction in New York. The court explained:

In analyzing personal jurisdiction in the internet context, many New York courts have adopted the sliding scale of interactivity, formulated in Zippo Manuf. Co. v Zippo Dot Com, Inc. (952 F. Supp. 1119, 1125-26 [WD Pa 1997]), according to which websites are classified as (1) interactive a defendant provides goods and services over the internet or knowingly and repeatedly transmits computer files to customers in other states; (2) middle ground permits the exchange of information between users in another state and the defendant, and (3) passive makes information available to users. In this regard, it has been held that exercising personal jurisdiction over the owner of an internet website accessible in New York, required that the site be highly interactive and more than mere presence on the internet. Stated otherwise, personal jurisdiction cannot be based upon a website where it is informational only and, thus, passive in nature. When a website is passive plaintiffs may have to prove something more to justify the exercise of personal jurisdiction—that is, plaintiffs must show that defendant purposefully (albeit electronically) directed his activity in a substantial way to the forum state. Accordingly, such a passive website, without more, cannot be used as the basis for the assertion of long-arm personal jurisdiction. In fact, as the Paterno court pointed out, Grimaldi held that if the foreign corporation maintains an informational Web site accessible to the general public but which cannot be used for purchasing services or goods, then most courts would find it unreasonable to assert personal jurisdiction over that company.

The Paterno court also noted that while Grimaldi concluded that passive Web sites, when combined with other business activity, may provide a reasonable basis for the assertion of personal jurisdiction the other business activity must be substantial and connected to the claim asserted. Thus, the rulings of Paterno and Grimaldi recognize websites which are classified as either interactive or middle ground. As alluded to above, when websites are interactive, they knowingly transmit goods or services to users and if made available to New York residents, the activities can be sufficient for obtaining personal jurisdiction over a defendant. Middle ground websites, as noted above, exist where a user can exchange information with the host computer, and where the exercise of jurisdiction in these cases is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the Web site. In this regard, where a website falls somewhere in the middle ground, the jurisdictional inquiry requires closer evaluation of its contact with New York residents.

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

Posted: April 21, 2014

Use of New York Bank To Facilitate Dollar Transfers In a Foreign Exchange Transaction Not Sufficient to Avoid Forum Non Conveniens Dismissal

On April 8, 2014, the Court of Appeals issued a decision in Mashreqbank PSC v. Ahmed Hamad A1 Gosaibi & Brothers Co., 2014 NY Slip Op. 02381, dismissing, under the doctrine of forum non conveniens, a lawsuit arising from a foreign exchange transaction between foreign parties, where the claim had only a peripheral connection to New York—i.e., “the use of New York banks to facilitate dollar transfers.” Mashreqbank (based in the United Arab Emirates) entered into “a foreign exchange swap transaction of US Dollars for Saudi Arabian riyals” with the defendant AHAB, a Saudi partnership.

Pursuant to its agreement with AHAB, Mashreqbank transferred $150 million to AHAB’s account in New York. AHAB, however, did not transfer the equivalent value in Saudi riyals to Mashreqbank. Mashreqbank filed suit in New York Supreme Court. AHAB filed counterclaims, and a third-party complaint against one of its employees, alleging that the employee “had engaged in a massive scheme to loot AHAB; that the purported foreign exchange transaction on which Mashreq sued was part of that scheme; and that by participating in that and other corrupt transactions Mashreq had aided and abetted Al-Sanea’s fraud.”

The Court of Appeals, in a unanimous decision authored by Judge Smith, dismissed the entire action on forum non conveniens grounds. First, the Court found that the mere passage of funds through a New York bank does not automatically trigger “New York’s compelling interest in the protection of its banking system,” thus providing “a weighty argument against a forum non conveniens dismissal.” The Court noted that “as a practical matter, any dollar transaction comparable in size to the one now at issue must go through New York[,] . . . but [t]hat does not mean that every major fraud case in the world in which dollars are involved belongs in the New York courts. New York’s interest in its banking system is not a trump to be played whenever a party to such a transaction seeks to use our courts for a lawsuit with little or no apparent contact with New York.” (Citations omitted). Second, the Court of Appeals rejected the Appellate Division’s conclusion that New York law would govern the third-party claims, concluding that under New York’s “interest analysis,” Saudi Arabia’s law would apply. Thus, the Court ordered dismissal on forum non conveniens grounds:

Apart from the use of New York banks to facilitate dollar transfers — a fact which, as we have said, is of minor importance here — we see nothing in this case to justify resort to a New York forum. No party is a New York resident; no relevant conduct apart from the execution of fund transfers occurred in New York; no party has identified any important New York witnesses or New York documents; New York law does not apply; no property related to the dispute is located in New York; no related litigation is pending in New York; and no other circumstance supports an argument that New York is an appropriate forum. Alternatives to a New York forum are available; indeed, the parties’ briefs refer to a number of related investigations or litigations pending in several foreign countries. This is a classic case for the application of the forum non conveniens doctrine.

This case illustrates that, although in many financial transactions between foreign parties funds may at some stage pass through a New York bank, that may not be enough, standing on its own, to justify bringing suit in a New York court.

Posted: April 20, 2014

Malicious Prosecution and Abuse of Process Claims Dismissed for Failure to Meet Heavy Pleading Burden

On April 8, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Khandalavala v. Artsindia.com, LLC, 2014 NY Slip Op. 30939(U), explaining the legal standards applicable to counterclaims for malicious prosecution and abuse of process.

In an action brought by investors alleging mismanagement of an art investment fund, the defendants asserted counterclaims alleging that the action was defamatory and malicious, which the plaintiffs moved to dismiss.

The court first dismissed the malicious prosecution claim, stating that “the gravamen of a civil malicious prosecution case is the wrongful initiation, procurement or continuation of a legal proceeding. To succeed on a claim for malicious prosecution, a plaintiff must show that the defendant initiated a proceeding that terminated in favor of the plaintiff, an entire lack of probable cause in the prior proceeding, malice, and special injury.” (Emphasis in original.) The court held that, because some of the plaintiffs’ claims had not been dismissed, there was neither a final termination in defendants’ favor nor an entire lack of probable cause: “where, as here, there is potential merit in at least some of the causes of action, a malicious prosecution claim is not maintainable.”

The court similarly dismissed the abuse of process claim. “Abuse of process has three essential elements: (1) regularly issued process, either civil or criminal, (2) an intent to do harm without excuse or justification, and (3) use of the process in a perverted manner to obtain a collateral objective.” More specifically, “the gist of the action for abuse of process lies in the improper use of process after it is issued.” Defendants alleged that plaintiffs abused process when they instituted the action, and when they obtained a TRO against defendants. However, “the institution of a civil action by summons and complaint is not legally considered process capable of being abused,” and the TRO could only be the basis of a claim if “it actually was used in a manner inconsistent with the purpose for which it was designed.” Malicious intent, standing alone, cannot support an action for abuse of process. Defendants also failed to allege facts supporting their claim that the TRO caused them losses of $500,000.

The conclusions to be drawn from Justice Schweitzer’s opinion are first, that malicious prosecution should be alleged in a separate action—as a counterclaim, it will be dismissed if any part of the underlying action survives a motion to dismiss—and second, that abuse of process is applicable only under very specific circumstances, and should not be asserted as an alternative to malicious prosecution, but only when the necessary facts can be alleged with particularity.

Posted: April 19, 2014

Statute of Limitations for Common Law Copyright Infringement Six Years

On April 14, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Capitol Records, LLC v. Harrison Greenwich, LLC, 2014 NY Slip Op. 24101, discussing the statute of limitations for common law copyright infringement under New York law.

In Capitol Records, the plaintiff record company sued the defendant for copyright infringement based on the defendant’s unlicensed use of a song recorded in 1970. Because “federal copyright law does not cover sound recordings made prior to February 15, 1972,” such “recordings are protected by state common law on copyright infringement.” Thus, one question the court had to address was what the statute of limitations was for a common-law copyright claim. The court held that it was six years, explaining that:

since this controversy is governed by New York common law [] the CPLR, not federal law [applies]. Though the CPLR does not expressly set forth a statute of limitations for copyright infringement, CPLR 213(1) provides that the statue of limitations is 6 years for an action for which no limitation is specifically prescribed by law. The CPLR does not provide a statute of limitations for copyright infringement, nor does such claim appear to fall under the ambit of claims with set limitations periods, such as personal injury, breach of contract, and fraud.

Indeed, there is surprisingly scant case law addressing the accrual of New York common law claims that are predicated on an underlying copyright infringement. In Urbont [v. Sony Music Entm’t, 863 F. Supp. 2d 279, 281 (SDNY 2012)], Judge Buchwald held that plaintiff’s state law claims allege mere interference with his property and each alleged wrongful act gave rise to a separate common law cause of action. Judge Buchwald astutely observed that in Sporn, the Court of Appeals suggested that different statutes of limitation apply to different species of infringement. . . . Judge Buchwald concluded, however, that common law copyright claims are subject to a three-year statute of limitations because it would seem only logical for federal and state claims based on copyright infringement to accrue in a parallel manner. This, indeed, is logical. But logic, no matter how compelling, is not a basis to disregard the plain language of the CPLR. A straightforward reading of CPLR 213(1) militates in favor of a six-year statute of limitations. As the Court of Appeals recently held in Melcher v Greenberg Traurig, LLP, 2014 NY Slip Op 2213 (Apr. 1, 2014), when no explicit statute of limitation covers a cause of action, CPLR 213(1) applies.

(Internal quotations and citations omitted). The court went on to rule, however, that “given the novelty of this issue and the conflicting federal case-law, the court declines to rule without affording the parties an opportunity to brief this issue more substantively.”

Posted: April 18, 2014

Insured Not Entitled To Attorneys’ Fee Incurred In Coverage Action

On April 8, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Madison 96th Associates, LLC v. 17 East Owners Corp., 2014 NY Slip Op. 50569(U), ruling that an insurance policyholder that successfully brought a declaratory judgment action establishing its right to coverage was not entitled to recover its attorneys’ fees incurred in the declaratory judgment action even though it would have been so entitled had its insurer brought the action.

Under the well-known American Rule, each party to a litigation incurs its own legal fees, unless a statute, court rule or agreement provides otherwise. In Mighty Midgets v Centennial Ins. Co., 47 N.Y.2d 12, 21 (1979), the Court of Appeals recognized a limited exception in the insurance context, allowing an insured to recover fees when it “has been cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations.” As Justice Kornreich explained:

In other words, when an insurance company brings a declaratory judgment action against its insured seeking to disclaim coverage, if the insured prevails, the insured is entitled to be reimbursed its legal fees spent defending the insurance company’s lawsuit. However, when an insured commences a declaratory judgment action against its insurer seeking coverage, the insured cannot recover its attorneys’ fees in such action, even if it prevails. The rationale for this distinction is that when an insurer casts an insured in a defensive posture the liability feature of the insurance is triggered and provides coverage for defense expenses incidental to the assertion of claims against the insured.

(Citations and internal quotation marks omitted) (emphasis added).

Recognizing the “perverse incentive” created by this rule (since fee-shifting is triggered only if the insurance company files suit, it is in the insurer’s interest to deny coverage and leave it to the insured to bring a coverage action), Justice Kornreich concluded that “public policy strongly militates in favor of forcing [the insurance company] to pay the [insured’s fees].” Nevertheless, the court concluded that it was “bound by the Mighty Midgets doctrine,” and accordingly, denied the insured’s claim for attorneys’ fee. Justice Kornreich took the unusual step of encouraging the plaintiff to appeal the decision. If the Court of Appeals were to revisit the Mighty Midgets rule, it could have a dramatic effect on insurance coverage litigation in New York.

Posted: April 17, 2014

Chinese Wall Does Not Prevent Law Firm From Being Disqualified

On April 4, 2014, Justice Friedman of the New York County Commercial Division issued a decision in Manus v. Family M. Foundation Ltd., 2014 NY Slip Op. 30921(U), disqualifying the defendants’ long-time law firm.

In Manus, the current plaintiff, Ninotchka Manus, was substituted in as plaintiff based on her acquisition of shares from a previous holder.  Among the issues in the action were the validity of the transfer to Manus as well as the validity of a prior transfer to her predecessor-in-interest.

Manus moved to disqualify the defendants’ law firm, which had represented them since 2004, because an attorney who previously had represented Manus’s predecessor in 2005 had joined the firm as a partner.

Justice Friedman granted the motion based upon the following rulings:

  • Manus had standing because the attorney had represented her predecessor on the issue of the validity of the share transfers, which is still a central issue in the case, and because Manus was the assignee of her predecessor’s legal claims. Justice Friedman distinguished this case from one involving “the mere assignment of property.”
  • Although the law firm had imposed a “Chinese Wall,” it must still be disqualified, because “the party seeking to avoid disqualification [of its law firm] must prove that any information acquired by the disqualified lawyer is unlikely to be significant or material in the litigation. Only in that factual scenario will an ethical screen be sufficient to avoid firm disqualification.”
  • Disqualification was warranted even though this was the fourth disqualification motion brought by Manus against the firm, and even though disqualification would “pose a hardship” for the defendants, because of “the critical nature of the confidences disclosed . . . and the firm’s resulting conflict of interest . . . . disqualification is mandated in order to avoid the appearance of impropriety and to protect the integrity of the judicial process.”

This opinion is consistent with other opinions discussed in this blog, in that although courts frown on tactical disqualification motions, and recognize the potential hardship to litigants, they will not hesitate to disqualify counsel if they see even the appearance of an ethical violation.

Posted: April 16, 2014

Insurance Broker Owes Non-Contractual Duty to Other Brokers

On April 8, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Rampart Brokerage Corp. v. RIBS NY LLC, 2014 NY Slip Op. 30938(U), addressing the duties owed by one insurance broker to another.

In Rampart Brokerage Corp., the plaintiff insurance broker brought tort and breach of contract claims against other brokers and several of their employees. In arguing that the plaintiff’s negligence claim should be dismissed, the moving defendants argued that insurance brokers do not owe each other duties other than contractual duties. The trial court disagreed, explaining:

The Court of Appeals has held, however, that insurance agents have a common-law duty to obtain requested coverage for their clients within a reasonable time, or inform the client of their inability to do so. While defendants assert that this common-law duty does not apply to a broker dealing with another broker, they have not offered any support for that proposition, nor have they made any convincing arguments as to why they should be permitted to mislead another broker about the coverage that they have obtained for a client. The same considerations that apply to a broker’s duty to a consumer would seem to apply with equal force to a broker obtaining insurance for another broker for that broker’s clients. The fact that [the plaintiff] is also a broker does not give [it] an advantage with respect to knowing whether the policy promised was actually procured. [The plaintiff] was working through defendants in order to be able to obtain policies from underwriters that it did not deal with directly. Consequently, it was dependent on defendants for accurate information regarding the procurement of the policies. Thus, defendants have failed to demonstrate that the fact that [the plaintiff] is a broker is an adequate basis for dismissing the negligence cause of action.

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

This decision extends duties owed by an insurance broker to insureds to brokers working for insureds. This likely is not the last word on this issue.

Posted: April 15, 2014

Court Will Not Examine Adequacy of Consideration Given for Guarantee Absent Fraud or Unconscionability

On April 8, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Pensmore Investments LLC v. Gruppo, Levey & Co., 2014 NY Slip Op. 30922(U), granting the plaintiff summary judgment as against defendant William Sprague on a guarantee notwithstanding the guarantor’s argument that the guarantee was not a binding contract because there the defendant received no consideration for entering into it. The court also granted a motion made by defendants related to Gruppo, Levey & Co. to dismiss causes of action alleging breaches of the covenant of good faith and fair dealing and granted in part a motion to dismiss causes of action based upon piercing the corporate veil.

In granting the summary judgment motion against defendant William Sprague, the court rejected the lack of consideration argument, explaining:

It is well settled that absent fraud or unconscionability, the adequacy of consideration is not a proper subject for judicial scrutiny. Where, as here, plaintiff established a prima facie entitlement to summary judgment on the enforceability of the contract, the defendant must do more than make conclusory allegations regarding lack of consideration to create a question of fact.

In any event, a settlement contingent on a guaranty constitutes valid consideration for the guaranty. The law presumes that a guarantor receives a benefit by guaranteeing a contract since, if there were no benefit to the guarantor, he would not execute the guaranty absent fraud or duress.

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

As this decision illustrates, consideration may be a required element of a binding contract, but courts are nonetheless reluctant to examine the adequacy of the consideration given.