Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: May 11, 2014

Contractually-Provided Damages Not Enforceable if They are Mere Penalties

On April 11, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in Maina v. Rapid Funding NYC, 2014 NY Slip Op. 30952(U), refusing to award damages provided by contract on the ground that they were penalties.

In Maina, the court found that the plaintiff had breached its contract with the defendant-counterclaimant. The court refused to grant the defendant all of the elements of damages provided in the parties’ agreement, explaining:

Defendants have established a prima facie case for summary judgment, at least as to liability. . . . As to damages, [the defendant] does not adequately explain its entitlement to the purported origination fees that it claims are customary in the industry. These fees are not reflected in the loan agreements, although checks in amounts claimed as origination fees are endorsed on the back by plaintiff as approved. Further, [the defendant] has not shown that the pre-payment fees charged on loans it refinanced are anything other than a penalty. New York condemns the contractural imposition of a penalty. Summary judgement will be granted as to liability.

Regarding defendant[‘s] claim for an award of attorneys’ fees, the Note provides that [the defendant] is entitled to recover attorney fees and expenses in connection with enforcement of any of its remedies equal to 20% of the outstanding principal and interest then due. [The defendant] is entitled to recover attorney fees of 20% only if it demonstrates that the quality and quantity of the legal services rendered were such to warrant, on a quantum meruit basis, that full percentage. Because [the defendant] has offered no evidence to support the reasonableness of the attorneys’ fees it seeks, this aspect of the motion must be denied. Moreover, where contractural attorneys’ fees are in the nature of a penalty, they should be disallowed. In this case, [the defendant] has imposed multiple contractural penalties on plaintiff. They include large origination fees, late payment penalties, and pre-payment penalties on loans refinanced by [the defendant]. Arbitrary imposition of a 20% attorney fee charge without any need to show that such fees are reasonable, is yet another penalty.

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

It is understandable that transactional counsel want to provide a contractual mechanism for ensuring that all of the damages flowing from a breach of contract are recovered by the non-breaching party. However, if that mechanism crosses the line to becoming a penalty, it will not be enforced at all, making it important that contract terms stay on the right side of the line.

Posted: May 10, 2014

Transcripts and Videos of Arguments in the Court of Appeals for the Week of April 28, 2014, Now Available

Transcripts and audio/video recordings of arguments in the Court of Appeals for the week of April 28, 2014, are now available on the Court of Appeals website.

On April 28, 2014, we noted one case of interest from the oral arguments for the week of April 28, 2014:

  • Docket No. 96: IDT Corp. v. Tyco Group, S.A.R.L. (addressing the duration of a party’s obligation to negotiate final terms of an agreement when they have contractually obligated themselves to negotiate such terms). See the transcript and listen to the recording of oral the argument.
Posted: May 10, 2014

Former Counsel for Business Associates Disqualified from Representing One Former Client Against Another

On May 7, 2014, the Second Department issued a decision in Gordon v. Ifeanyichukwu Chuba Orakwue Obiakor, 2014 NY Slip Op. 03232, disqualifying trial counsel because of a conflict.

In Gordon, the plaintiff moved to disqualify the defendants’ counsel on the ground that counsel previously had represented her. The trial court denied the plaintiff’s motion. The Second Department reversed, explaining:

Where the Rules of Professional Conduct (22 NYCRR 1200.0) are invoked in litigation, courts are not constrained to read the rules literally or effectuate the intent of the drafters, but look to the rules as guidelines to be applied with due regard for the broad range of interests at stake. It is the Supreme Court’s responsibility to balance the competing interests, and the disqualification of an attorney is a matter that rests within the sound discretion of the Supreme Court.

Here, prior to the commencement of this action, the defendant’s attorney had provided legal advice to both the appellant, Barbara Gordon, and the defendant in their capacity as business partners and members of several limited liability companies. There was a substantial relationship between the involvement of the defendants’ attorney in the formation of those limited liability companies, and his involvement as general counsel to those limited liability companies in connection with the instant action for an accounting. In his capacity as general counsel, the defendant’s attorney was in a position to receive relevant confidences regarding several of those limited liability companies, in which the plaintiff’s interests are now adverse to the defendant’s interests. Thus, under the circumstances of this case, the Supreme Court improvidently exercised its discretion in denying the appellant’s motion to disqualify the defendants’ attorney.

(Internal quotations and citations omitted).

In a divorce, a couple’s friends sometimes feel as if they must choose between the members of the couple. In a business divorce, as this decision shows, former counsel for all the parties may be asked to make such a choice. This decision shows the result.

Posted: May 9, 2014

Commercial Division Rules Amended to Add Rules for Accelerated Adjudication

The Chief Administrative Judge has signed an order amending the rules of the Commercial Division by adding a new rule relating to accelerated adjudication. The new rule, Rule 9, which takes effect on June 2, 2014, provides:

Rule 9. Accelerated Adjudication Actions.

(a) This rule is applicable to all actions, except to class actions brought under Article 9 of the CPLR, in which the court by written consent of the parties is authorized to apply the accelerated adjudication procedures of the Commercial Division of the Supreme Court. One way for parties to express their consent to this accelerated adjudication process is by using specific language in a contract, such as: “Subject to the requirements for a case to be heard in the Commercial Division, the parties agree to submit to the exclusive jurisdiction of the Commercial Division, New York State Supreme Court, and to the application of the Court’s accelerated procedures, in connection with any dispute, claim or controversy arising out of or relating to this agreement, or the breach, termination, enforcement or validity thereof.”

(b) In any matter proceeding through the accelerated process, all pre-trial proceedings, including all discovery, pre-trial motions and mandatory mediation, shall be completed and the parties shall be ready for trial within nine (9) months from the date of filing of a Request of Judicial Intervention (RJI).
(c) In any accelerated action, the court shall deem the parties to have irrevocably waived:

(1) any objections based on lack of personal jurisdiction or the doctrine of forum non conveniens;

(2) the right to trial by jury;

(3) the right to recover punitive or exemplary damages;

(4) the right to any interlocutory appeal; and

(5) the right to discovery, except to such discovery as the parties might otherwise agree or as follows:

(i) There shall be no more than seven (7) interrogatories and five (5) requests to admit;

(ii) Absent a showing of good cause, there shall be no more than seven (7) discovery depositions per side with no deposition to exceed seven (7) hours in length. Such depositions can be done either in person at the location of the deponent, a party or their counsel or in real time by any electronic video device; and

(iii) Documents requested by the parties shall be limited to those relevant to a claim or defense in the action and shall be restricted in terms of time frame, subject matter and persons or entities to which the requests pertain.

(d) In any accelerated action, electronic discovery shall proceed as follows unless the parties agree otherwise:

(i) the production of electronic documents shall normally be made in a searchable format that is usable by the party receiving the e-documents;

(ii) the description of custodians from whom electronic documents may be collected shall be narrowly tailored to include only those individuals whose electronic documents may reasonably be expected to contain evidence that is material to the dispute; and

(iii) where the costs and burdens of e-discovery are disproportionate to the nature of the dispute or to the amount in controversy, or to the relevance of the materials requested, the court will either deny such requests or order disclosure on condition that the requesting party advance the reasonable cost of production to the other side, subject to the allocation of costs in the final judgment.

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: May 9, 2014

Failure Timely to File for Class Certification Mandates Denial of Certification

On April 30, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Egan v. Telomerase Activation Sciences, Inc., 2014 NY Slip Op. 31176(U), denying a motion for class certification as untimely.

In Egan, the plaintiffs commenced an action on July 23, 2012. The defendants answered on October 3, 2012, asserting affirmative defenses. On October 21, 2013, the Court granted the defendants’ motion to file an Amended Answer, adding a counterclaim. On December 23, 2013, the plaintiffs moved for class certification. The court denied the motion with prejudice as untimely, explaining:

To maintain an action as a class action, a plaintiff is required to seek an order certifying the class within sixty days after the time to serve a responsive pleading has expired for all persons named as defendants in the action. Failure to seek class certification within this sixty-day period mandates denial of the class certification motion with prejudice. Plaintiffs filed the instant class certification on December 23, 2013, nearly a year and a half after the commencement of this action and fifteen months after the filing of Defendants’ Answer. While the parties do not specify exactly when Plaintiffs served the Complaint on Defendants – and accordingly when Defendants’ responsive pleadings were due – this motion is nonetheless clearly untimely under CPLR 902. Even assuming for the sake of argument that Defendants interposed their Answer on the day that the Complaint was served, Plaintiffs’ filing of the instant motion nearly fifteen months later was plainly more than sixty days after the time Defendants’ Answer was due. Plaintiffs have offered no justification for this late filing. Accordingly, Plaintiffs’ motion for class certification is denied with prejudice . . . .

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

This is yet another example of the importance of tracking the procedural rules relating to an action, lest, as here, a party lose a claim simply through inadvertence.

Posted: May 9, 2014

Fraud on the Court Must be Proved by Clear and Convincing Evidence

On May 8, 2014, the Court of Appeals issued a decision in CDR Creances S.A.S. v. Cohen, 2014 NY Slip Op. 03294, adopting a “clear and convincing evidence” standard for motions to strike an adversary’s pleadings under CPLR 3126.

CDR Creances S.A.S., concerned theft of loan funds by diverting them to fictitious entities. After two of the defendants were indicted in federal court in Florida for obstruction of justice and subornation of perjury, the plaintiffs moved to strike those defendants’ pleadings and for a default judgment. After finding that the defendants had, among other things “suborned perjury by providing [witnesses] with a ‘script’ containing false answers to be given to their attorneys and at their depositions; created . . . wholly fictitious individuals and intentionally implicated as controlling the defendant corporations; [and] forged the affidavits of others,” the Supreme Court granted the motion, struck the defendants’ answers, and granted default judgments.

The First Department affirmed. The Court of Appeals granted leave to appeal to address the proper evidentiary and legal standards for such a motion. The court reviewed a number of federal cases and imported the federal “clear and convincing evidence” standard into New York law:

The federal courts have applied the clear and convincing standard in determining whether the offending party’s actions constitute fraud on the court. Characteristic of federal cases finding such fraud is a systematic and pervasive scheme, designed to undermine the judicial process and thwart the non-offending party’s efforts to assert a claim or defense by the offending party’s repeated perjury or falsification of evidence . . . .

We adopt this standard and conclude that in order to demonstrate fraud on the court, the non-offending party must establish by clear and convincing evidence that the offending party has acted knowingly in an attempt to hinder the fact finder’s fair adjudication of the case and his adversary’s defense of the action. A court must be persuaded that the fraudulent conduct, which may include proof of fabrication of evidence, perjury, and falsification of documents concerns issues that are central to the truth-finding process. Essentially, fraud upon the court requires a showing that a party has sentiently set in motion some unconscionable scheme calculated to interfere with the judicial system’s ability impartially to adjudicate a matter by improperly influencing the trier or unfairly hampering the presentation of the opposing party’s claim or defense. A finding of fraud on the court may warrant termination of the proceedings in the non-offending party’s favor . . . . Therefore, once a court concludes that clear and convincing evidence establishes fraud on the court, it may strike a pleading and enter a default judgment.

We caution that dismissal is an extreme remedy that must be exercised with restraint and discretion. Dismissal is most appropriate in cases like this one, where the conduct is particularly egregious, characterized by lies and fabrications in furtherance of a scheme designed to conceal critical matters from the court and the nonoffending party; where the conduct is perpetrated repeatedly and wilfully, and established by clear and convincing evidence, such as the documentary and testimonial evidence found here. Dismissal is inappropriate where the fraud is not central to the substantive issues in the case or where the court is presented with an isolated instance of perjury, standing alone, which fails to constitute a fraud upon the court. In such instances, the court may impose other remedies including awarding attorney fees, awarding other reasonable costs incurred, or precluding testimony. In the rare case where a court finds that a party has committed fraud on the court warranting dismissal, the court should note why lesser sanctions would not suffice to correct the offending behavior.

(Internal citations and quotations omitted) (emphasis added).  The court rejected the defendants’ argument that it should apply a “conclusively demonstrated” standard, noting that “defendants’ standard would permit a party to escape a court’s consideration of claims of egregious acts of deceit by presenting bare denials of the truth of the allegations.”

Applying the “clear and convincing” standard to the facts of the case, the Court of Appeals then held that the lower courts correctly struck the principal defendants’ pleadings based upon the corroborated evidence and the pervasive nature of their deception.

Posted: May 8, 2014

Minor Amendment to a Complaint Proves Fatal to Plaintiff’s Case

On May 6, 2014, the First Department issued a decision in Healthcare I.Q., LLC v. Tsai Chung Chao, 2014 NY Slip Op. 03216, reversing a decision of the New York County Commercial Division and granting summary judgment to the defendant on a previsously-waived affirmative defense that the defendant had asserted in response to an amended complaint.

In Healthcare I.Q., the plaintiff contracted to provide the defendant, a doctor, with coding and billing services, pursuant to which the defendant’s patient and billing records were uploaded into the plaintiff’s proprietary management software program. The contract provided for an initial 36-month term, followed by automatic renewals for 18-month periods, unless either party provided written notice of non-renewal at least ninety days before the end of a renewal period.

After the expiration of the original 36-month period, the defendant ceased making payments. Although he and his staff continued to use the software to review previously-uploaded patient files, they did not upload any additional files. Neither party provided written notice of termination.

The plaintiff sued, alleging that the defendant’s failure to provide notice of termination, as well as his ongoing use of the software, entitled it to payment for two additional 18-month terms.

The defendant moved for summary judgment under General Obligations Law § 5-903(2), which provides that in any contract “for service, maintenance or repair to or for any real or personal property,” automatic renewal provisions may not be enforced by the service provider unless he or she provides the service recipient “written notice, served personally or by certified mail, calling the attention of that person to the existence of such provision in the contract” within a specified time period prior to the automatic renewal. The Supreme Court denied the defendant’s motion on the ground that GOL § 5-903 was an affirmative defense that had not been pled in the answer and had thereby been waived.

When the plaintiff later amended the complaint to increase the ad damnum clause, the defendant included GOL § 5-903 in his amended answer and moved for summary judgment a second time. The trial court both denied the motion and sanctioned the defendant for making a second motion on the same legal ground.

The First Department first vacated the award of sanctions, holding that:

the second summary judgment motion, brought after the pleadings were amended on a substantive issue not previously decided by the court, was procedurally proper. Once plaintiff served the amended complaint, the original complaint was superseded, and the amended complaint became the only complaint in the action. The action was then required to proceed as though the original pleading had never been served. Thus, defendant’s appeal from the prior order denying summary judgment became moot and sufficient cause existed for his motion for summary judgment dismissing the amended complaint.

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

On the merits of GOL § 5-903, the First Department rejected the plaintiff’s argument that the services provided were not “for . . . personal property,” but were instead of a merely “consulting, analytical or administrative nature,” which would take them outside the statute:

The services provided were directly and inextricably related to the billing and medical records of the practice, which are personal property . . . . Here the agreement provided for [plaintiff] to take dominion over the records, and to maintain and organize them on an ongoing basis for billing and reimbursement purposes. This was not merely incidental access to the records in the context of administrative or consulting services.

Accordingly, the plaintiff’s failure to provide timely written notice of the automatic renewal made the renewal provision unenforceable. The defendant’s continuing access to the previously-stored files was justified by necessity and by the plaintiff’s failure to return the files as requested.

This opinion is of interest both because it reminds practitioners that even a minor alteration to a complaint can open the door to new affirmative defenses—here, the plaintiff lost its entire case because of an increase in the ad damnum clause—and also because it calls attention to a little-known section of the GOL that is applicable to a great many contracts with automatic renewal provisions.

Posted: May 7, 2014

Bank Must Honor Cashier’s Check Absent Fraud or Check Being Lost, Stolen, or Destroyed

On May 6, 2014, the Court of Appeals issued a decision in Golden v. Citibank, N.A., 2014 NY Slip Op. 03192, holding that a bank must honor its cashier’s checks “unless there is evidence of fraud, or the check is lost, stolen, or destroyed.”

The background to the court’s brief opinion can be found in the Second Department’s decision appealed from:

On December 29, 2009, the defendant, Citibank, N.A. (hereinafter Citibank), issued a cashier’s check in the sum of $300,000, payable to “Richard Golden as attorney.” This check was deposited by the plaintiff, Richard N. Golden, into his attorney escrow account at JP Morgan Chase Bank hereinafter Chase). Subsequently, Citibank issued a stop payment order on the check, and Chase reversed the credit that had been posted to the plaintiff’s account. . . . Citibank did not submit any evidence that the check was fraudulently issued or obtained, [but rather argued] that the check was stopped because a customer of the bank informed the bank that “she made alternate arrangements to have the funds delivered.”

The Court of Appeals held that the bank was not excused from honoring the check, explaining:

A cashier’s check — essentially, a check drawn by a bank on itself — is presumed to have been issued for value, and the issuance of such a check constitutes an acceptance by the issuing bank, which gives rise to an obligation to pay. When a bank has issued a cashier’s check, it cannot stop payment, unless there is evidence of fraud, or the check is lost, stolen, or destroyed. To the extent Gates v Manufacturers Hanover Trust Co./Capital Region (98 AD2d 829 [3d Dept 1983]) holds otherwise, it was wrongly decided and should not be followed.

(Internal quotations and citations omitted).

Posted: May 6, 2014

Defamation Claim Dismissed Because Not Pled With Particularity

On April 23, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Patterson v. Wilhelmina Intl., Ltd., 2014 NY Slip Op. 31092(U), dismissing a defamation claim because it was not pled with particularity.

In Patterson, the defendant moved to dismiss the plaintiff’s defamation claim. The court granted the motion because the claim was not sufficiently specific, explaining:

CPLR 3016 (a) requires: In an action for libel or slander, the particular words complained of shall be set forth in the complaint, but their application to the plaintiff may be stated generally. Well-established case law has consistently interpreted this section to require that the alleged defamatory words be set forth in haec verba. This requirement is strictly enforced and the exact words must be set forth. Paraphrasing and other descriptions or summaries of the alleged defamatory words, without stating the words themselves, have been held insufficient to satisfy the particularity requirement of CPLR 3016(a).

Here, there is no doubt that [the plaintiff] did not meet the level of specificity required by CPLR 3016(a) as the complaint contains no in haec verba recitation of the challenged statements. The complaint includes various references to the defamatory statements, but never sets the words forth verbatim. . . . The complaint also fails to state the time, manner, and to whom the alleged defamatory statements were made, which is a further requirement to withstand a motion to dismiss. The complaint’s allegations that [the defendant] made unidentified comments to employees of Wilhelmina is plainly insufficient.

(Internal quotations and citation omitted) (emphasis added). However, the court went on to grant the plaintiff’s motion to amend the complaint to add the required specificity.

This decision is a reminder that it is not just fraud claims that must be pleaded with particularity.  Indeed, as the court noted, a defamation claim must contain the exact defamatory words said.