Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: December 20, 2013

Legal Malpractice Claim Survives Despite No Allegation of Attorney-Client Relationship

On December 18, 2013, the Second Department issued a decision in Mr. San, LLC v. Zucker & Kwestel, LLP, 2013 NY Slip Op. 08416, holding that, in exceptional circumstances, a legal malpractice claim can survive a motion to dismiss despite the lack of an attorney-client relationship.

The Second Department’s opinion was brief:

While the complaint does not allege an attorney-client relationship between the plaintiffs and the defendants, it sets forth a claim which falls within “the narrow exception of fraud, collusion, malicious acts or other special circumstances” under which a cause of action alleging attorney malpractice may be asserted absent a showing of privity.

The trial court’s decision appealed from explained the basis for plaintiff’s claim:

This is an action for aiding and abetting fraud. Plaintiffs invested substantial amounts of money with Gershon Barkany who held himself out as a financial advisor and real estate investor. Plaintiffs allege that Barkany represented that the money was to be used to fund real estate loans and other investments but Barkany was actually running a Ponzi scheme. Plaintiffs further allege that Barkany presented defendants Zucker & Kwestel LLP and Steven Kwestel as his attorneys in connection with the sham real estate transactions, and the firm accepted wire transfers of plaintiffs’ funds into its escrow account.
. . .
Absent fraud, collusion, malicious acts, or other special circumstances, an attorney is not liable to third parties, for harm caused by professional negligence, unless there is a relationship sufficiently approaching privity between the attorney and the alleged client. This rule protects attorneys from legal malpractice suits by indeterminate classes of plaintiffs whose interests may be at odds with the interests of the acknowledged client

Since an attorney-client relationship does not depend upon a formal retainer agreement or upon payment of a fee, the court must look to the words and actions of the. The unilateral belief of a plaintiff alone does not confer upon him or her the status of a client

Plaintiffs allege that Barkany presented defendants as his attorneys, rather than the attorneys for the plaintiffs. An attorney for an organization is not the attorney for its members. However, it appears that no company had been formed at the time that plaintiffs made their investment. At the time that plaintiffs invested their funds, their interests seemed aligned with Barkany, at least as to the expected profitabilty of the venture. Moreover, the fact that Kwestel borrowed money from Barkany suggests that there may have been collusion between client and attorney and perhaps even knowledge on Kwestel’s part as to Barkany’s fraud upon the plaintiff. In these circumstances, the court must give plaintiffs the benefit of the possible favorable inference that an attorney-client relationship arose when defendants accepted plaintiffs’ money into their escrow account.

Lawyers should be aware of the rule that makes them potentially liable to parties who are not their clients in exceptional circumstances; it might be better to avoid such situations because of the potential conflict between the fiduciary obligation to a client and the concern for malpractice liability to a non-client.

Posted: December 19, 2013

Post-Judgment Interest Constitutes Covered Damages Under Excess Liability Policy

On December 17, 2013, the Court of Appeals issued a decision in Herzl Ragins, et al. v. Hospitals Insurance Company, Inc., Docket No. 234, holding that an excess liability carrier was required to pay post-judgment interest that exceeded the limit on the insured’s primary liability insurance.

In Ragins, the excess policy covered “all sums” that the insured was “legally obligated to pay as damages” in excess of the primary policy cap. The Court of Appeals held that interest on the underlying judgment was within the scope of coverage because the policy did not “limit the definition of ‘sums’ to any particular category of damages or liability, or otherwise exclude interest from its reach.” In reaching this conclusion, the Court of Appeals reiterated the well-established principle that insurance contracts are construed broadly in favor of coverage. Therefore, “even if there were any ambiguity as to whether the covered sums under the insurance policy include interest, that ambiguity must be construed against [the insurance company] and in favor of” the insured.

Attorneys dealing with liability insurance policies should bear in mind that, unless expressly limited, courts will interpret coverage broadly to include interest and other sums the insured is “legally obligated to pay.”

Posted: December 18, 2013

Settlement by Related Party In Earlier Action Does Not Bind Plaintiffs in New Action

On December 17, 2013, the First Department issued a decision in BDCM Opportunity Fund II, LP v. Yucaipa Am. Alliance Fund I, LP, 2013 NY Slip Op. 08387, addressing whether plaintiffs were bound by a settlement agreement entered into by a related party in another action.

The First Department agreed with the trial court that plaintiffs were not bound, writing:

Contrary to defendants’ contention, plaintiffs and nonparty (to this action) The CIT Group/Business Credit, Inc.—the defendant and counterclaim plaintiff in the Georgia action—were not privies. In the Georgia complaint, defendants—the plaintiffs in the Georgia action—alleged that CIT’s interests were adverse to those of the other lenders, such as plaintiffs. Nor was CIT acting as plaintiffs’ agent, which in general would make them privies. The settlement agreement between CIT and defendants makes it clear that CIT was acting only on its own behalf, not on plaintiffs’ behalf.

(Internal quotations and citations omitted).

Posted: December 17, 2013

Whether Liquidated Damages Clause is Unenforceable Penalty is Fact Question

On December 6, 2013, Justice Friedman of the New York County Commercial Division issued a decision in 412 W. 12th St. 1N LLC v. C and A Capital LLC, 2013 NY Slip Op. 33099(U), ruling that whether a liquidated damages clause was an unenforcable penalty was a fact question that could not be resolved on a motion to dismiss.

In 412 W. 12th St., the parties executed a mortgage providing that upon default, defendant was entitled to, among other things, default interest at “a rate of interest  equal to the lesser of 24% . . . per annum or the maximum legal rate at the time any such interest is to be calculated” plus a “late charge of 4¢ for each $1 so overdue.”  Plaintiff defaulted, subsequently paid default interest and liquidated damages, and then sued for their return, alleging that they constituted an unenforcable penalty. In response to defendant’s motion to dismiss, the court ruled that it could not determine on a motion to dismiss whether the late payment charge and default interest were unenforceable penalties, writing:

[A] contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. If, however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced. . . . As the Court of Appeals has noted, today the trend favors freedom of contract through the enforcement of stipulated damage provisions as long as they do not clearly disregard the principle of compensation.

On this motion, [defendant] fails to meet its burden of demonstrating both that the damages that would result from a default under the Mortgage Agreement were not readily ascertainable at the time the contract was entered into, and that the default interest rate provision, the late charge provision, or both in combination, are not grossly disproportionate to the probable damages. The issue of what the default interest rate and the late charge were intended to compensate [defendant] for, and what its probable losses were at the time of contracting, cannot be resolved on the record of this motion to dismiss.

(Internal quotations and citations omitted).

A lesson here for both transactional counsel and litigators is it is unwise to assume–even in a commercial transaction–that the courts will hold contracting parties to liquidated damages provisions that cannot be justified by the circumstances.

Posted: December 16, 2013

Insurance Policy Covering Multi-State Risks Governed by Law of State Where Insured is Domiciled

On December 11, 2013, the Second Department issued a decision in QBE Ins. Corp. v. Adjo Contracting Corp., 2013 NY Slip Op. 08238, discussing the choice of law rules determining which law governs the interpretation of a liability insurance policy.

The Second Department wrote:

In the context of liability insurance contracts, the jurisdiction with the most significant relationship to the transaction and the parties will generally be the jurisdiction which the parties understood was to be the principal location of the insured risk. However, where it is necessary to determine the law governing a liability insurance policy covering risks in multiple states, the state of the insured’s domicile should be regarded as a proxy for the principal location of the insured risk.

The rule that an insurance policy covering multi-state risks is governed by the law of the state where the insured is domiciled (as opposed, for example, to the location of the occurrence that triggers coverage) allowed two insurance companies in QBE Ins. Corp. to avoid the duty to defend. Attorneys and businesses should bear the choice of law rules in mind when negotiating, or preparing to assert claims under, insurance policies covering multi-state risks.

Posted: December 14, 2013

Lease Amendment Invalid Because Landlord’s President Lacked Authority to Amend Lease

On December 12, 2013, the First Department issued a decision in Site Five Hous. Dev. Fund Corp. v. Bullock, 2013 NY Slip Op. 08344, affirming a decision holding that a corporate landlord’s president lacked the authority to modify a lease, rendering the modification upon which the commercial tenant relied invalid.

In Five Site, the First Department explained that “a December 2001 amendment to a store lease” was “null and void, and awarded plaintiff possession of premises” because:

[Defendant] failed to prove that . . . plaintiff’s president . . . had authority as plaintiff’s agent to enter into the December 2001 amendment. It is undisputed that [plaintiff’s president] did not have express actual authority to enter into the amendment. Nor did he have implied actual authority, since there is no credible evidence in the record that plaintiff performed verbal or other acts that gave Bullock the reasonable impression that he had authority to enter into the amendment.

[Defendant] relies on Riverside Research Inst. v KMGA, Inc. . . . for the proposition that an agency may be implied from the parties’ words and conduct as construed in light of the surrounding circumstances. However, he fails to identify any words, conduct or circumstances from which an agency could be implied here. . . .

As for apparent authority, there is no credible evidence that plaintiff said anything to [defendant] or did anything that would cause [defendant] to believe that [plaintiff’s president] had authority to enter into the amendment.

(Internal quotations and citations omitted).

Five Site shows the importance of being sure that the person making an agreement on behalf of another has the authority to do so. It turns out that even a corporate landlord’s president might not have authority to enter into an agreement on behalf of the landlord.

Posted: December 13, 2013

Dispute Over Authentiticy Precludes Dismissal Based on Documentary Evidence

On December 12, 2013, the First Department issued a decision in Laurel Hill Advisory Group, LLC v. American Stock Transfer & Trust Co., LLC, 2013 NY Slip Op. 08351, illustrating one limit to a motion to dismiss based on documentary evidence: a dispute about the authenticity of the documents relied upon in the motion.

In Laurel Hill, the plaintiff moved to dismiss the counterclaims against it based on documentary evidence–a written operating agreement. The First Department reversed the trial court’s decision to the extent it dismissed the breach of contract counterclaim, writing:

According counterclaim plaintiff . . . the benefit of every favorable inference on the allegations, we find that he has not conceded that the written operating agreement establishing that he is not a member of Laurel Hill was executed before the alleged oral agreement pursuant to which he maintains he is entitled to a 10% membership interest in the company. Rather, he contests the validity of the document, argues that the counterclaim defendants failed to produce it despite his numerous requests for a written agreement, both prior to the commencement of this litigation as well as in his discovery requests in the main action, and only produced it in support of their motion to dismiss his counterclaims. The dispute over the validity of the written agreement and the inconsistent terms between that agreement and the alleged oral agreement raise factual issues that cannot be resolved at this juncture.

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

Posted: December 12, 2013

Motion to Compel Denied Because of Delay in Bringing It

On December 10, 2013, the First Department issued a decision in GoSMILE, Inc. v. Levine, 2013 NY Slip Op. 08215, affirming the denial of a motion to compel because of the movant’s delay in making the motion.

In GoSMILE, the plaintiff served a document demand on May 4, 2009. Defendant objected to producing documents generated after January 28, 2009, the date on which the action was commenced. Plaintiff “subsequently served new discovery demands, seeking documents generated before March 29, 2010.” Defendant once again objected to producing documents generated after January 28, 2009. On February 28, 2012–approximately two and a half years after defendant’s initial objection–plaintiff moved to compel the production of the documents withheld based on that objection. The trial court–based on a Special Referee’s recommendation–denied the motion. The First Department affirmed the denial, writing:

The record supports the Special Referee’s conclusion, adopted by Supreme Court, that the delay in seeking to compel, coupled with the absence of any rational reason or excuse, is nothing less than a constructive waiver to compel compliance of an original demand made in June 2009, and rejected by defendant.

(Internal quotations and citations omitted).

There are often good and reasonable reasons for litigators to delay making a motion to compel. As GoSMILE shows, however, without a sound justification, Commercial Division justices may have little patience for such delay.