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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: May 15, 2019

Joining Co-Defendants’ Motion to Dismiss Tolled Party’s Time to Answer

On May 2, 2019, the First Department issued a decision in Levine v Singal, 2019 NY Slip Op. 03438, holding that joining a co-defendant’s motion to dismiss tolled a party’s time to answer, explaining:

Defendant’s time to answer the complaint was extended by virtue of its serving a notice of motion, together with its co-defendants, seeking dismissal of the causes of action asserted against the co-defendants, pursuant to CPLR 3211(f). Generally, a CPLR 3211(a) motion to dismiss made against any part of a pleading extends the time to serve a responsive pleading to all of it. Here, Advisors did not default, but appeared by joining in defendants’ motion to dismiss the causes of action asserted against the individual named defendants, thereby extending its time to answer the complaint. Thus, Advisors had ten days from service upon it of notice of entry of the order deciding the partial motion to dismiss, to answer the causes of action against it, pursuant to CPLR 3211(f).

(Internal citations omitted).

The rules regarding when and how to respond to a complaint generally are clear, but as this decision shows, the nuances can confuse litigants. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding when and how you must respond to a complaint.

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Posted: May 14, 2019

Disclaimers Protect Publisher From Liability for Alleged Inaccuracies in Treatise

On May 2, 2019, the First Department issued a decision in Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v. Matthew Bender & Co., Inc., 2019 NY Slip Op. 03442, holding that a publisher’s disclaimer protected it from claims based on alleged inaccuracies in a treatise, explaining:

The breach of express warranty claim, based on the representations defendant made about the content of the Tanbook in the book’s “Overview” and on websites on which the book was sold, was correctly dismissed because the Terms and Conditions pursuant to which defendant sold the Tanbook to plaintiffs contain a merger clause and a disclaimer of warranties, which states, in bold type, “We do not warrant the accuracy, reliability or currentness of the materials contained in the publications”. Contrary to plaintiffs’ contention, this is a specific, not a general, disclaimer. In addition, the complaint fails to allege that plaintiffs relied on the statements that they contend constitute an express warranty. Although this defect was cured with respect to plaintiff law firm by Samuel J. Himmelstein’s affidavit in opposition, it was not cured with respect to the other plaintiffs.

(Internal citations omitted).

A common issue in disputes of the sale of goods is which warranties apply (or have sufficiently been disclaimed). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a disclaimer of a warranty.

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Posted: May 13, 2019

List of Witnesses to be Interviewed Not Privileged

On May 2, 2019, the First Department issued a decision in Gottwald v. Sebert, 2019 NY Slip Op. 03476, holding that a list of witnesses to be interviewed was not privileged, explaining:

The court providently granted Kesha’s motion to compel Sony to disclose its interview list. Although Sony’s outside counsel stated that he prepared the interview lists for Sony’s defense of Kesha’s allegations, there was no legal advice, no legal recommendations or attorney thought processes revealed in the interview lists. Nor do they appear to have been solely or primarily prepared for preparation of Sony’s defense to Kesha’s counterclaims against it.

(Internal citations omitted).

An issue that arises in almost all complex commercial litigation is identifying evidence that should be withheld from production in evidence because it is subject to the attorney-client or other privilege. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the attorney-client, common interest, work product or other privileges or exemptions from production of evidence.

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Posted: May 12, 2019

Fraud in the Inducement Claim Not Duplicative of Breach of Contract Claim

On May 1, 2019, the Second Department issued a decision in 260 Mamaroneck Ave., LLC v. Guaraglia, 2019 NY Slip Op. 03307, holding that a fraudulent inducement claim was not duplicative of a breach of contract claim, explaining:

The plaintiff alleged, inter alia, that the defendant falsely represented in the contract of sale that he had not granted any rent abatements or concessions to one of the building’s commercial tenants, and falsely represented that the tenant was current on its rent payments. In February 2018, prior to interposing an answer, the defendant moved pursuant to CPLR 3211(a) to dismiss the complaint. The Supreme Court granted those branches of the motion which were to dismiss the causes of action alleging breach of contract but, inter alia, denied those branches of the motion which were to dismiss the causes of action alleging fraudulent inducement and fraudulent concealment. The defendant appeals.

. . .

We agree with the Supreme Court’s determination denying those branches of the defendant’s motion which were to dismiss the causes of action alleging fraudulent inducement and fraudulent concealment. Contrary to the defendant’s contention, those causes of action are not duplicative of the breach of contract causes of action. The elements of a cause of action alleging fraud are representation of a material existing fact, falsity, scienter, deception and injury. Here, the complaint, as amplified by the contract of sale and rider, as well as the lease between the defendant and the commercial tenant, sets forth cognizable causes of action alleging fraud in the inducement and fraudulent concealment.

(Internal citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules, including the rule discussed here that a fraudulent inducement claim cannot duplicate a claim for breach of contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.

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Posted: May 11, 2019

Unjust Enrichment Claim Dismissed for Failure to Aledge How the Defendant Was Unjustly Enriched

On April 5, 2019, Justice Masley of the New York County Commercial Division issued a decision in Tapestry, Inc. v. Gibb, 2019 NY Slip Op, 31055(U), dismissing an unjust enrichment claim for failure to allege how the defendant was enriched, explaining:

In Count V, Tapestry alleges that Gibb and Tidal were unjustly enriched by their wrongful conduct. Unjust enrichment occurs when one person has obtained money or benefit because of the actions by another person, under such circumstances that, in fairness and good conscience, the benefit should not be retained. To state a claim for unjust enrichment, a plaintiff must allege that: (1) the defendant was enriched, (2) at plaintiff’s expense, and (3) that it is against equity and good conscience to permit the defendant to retain what is sought to be recovered. Tapestry alleges that Gibb impermissibly used his Tidal email account to send himself Tapestry’s proprietary footwear plans. There is no allegation that Tidal used the alleged purloined plans. Likewise, Tapestry fails to explain how Tidal benefitted from Gibb’s alleged disclosure to Tapestry customers of his connection to Tidal. The court agrees with Tapestry that evidentiary support is not required at this stage. However, stating that Tidal was unjustly enriched does not make it so. Tapestry must assert some facts, any facts, in support. Therefore, Tapestry fails to state how Tidal was enriched, let alone how it would be unjust.

(Internal citations omitted).

Unjust enrichment is a common claim in commercial litigation. It is used when there was not a contract between the litigants, but the defendant received an unfair benefit at the plaintiff’s expense. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether you have, or are the subject of, a claim for unjust enrichment.

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Posted: May 10, 2019

Justice Platkin Analyzes Enforcement of Forum Selection Clauses

On April 17, 2019, Justice Platkin of the Albany County Commercial division issued a decision in New York State Workers’ Compensation Bd. v. Episcopal Church Home & Affiliates, Inc., 2019 NY Slip Op. 29117, analyzing the law governing the enforcement of forum selection clauses:

CPLR 501 provides that a written agreement fixing place of trial, made before an action is commenced, shall be enforced upon a motion for change of place of trial.

A contractual forum selection clause is prima facie valid and enforceable unless it is shown by the challenging party to be unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching, or it is shown that a trial in the selected forum would be so gravely difficult that the challenging party would, for all practical purposes, be deprived of its day in court. Absent a strong showing that it should be set aside, a forum selection agreement will control.

A. “Arising Under”

As an initial matter, the Court must determine whether the forum selection clause was intended to cover the claims sued upon by the Board herein. It is the Board’s contention that this collection action does not fall within the scope of the forum selection clause, which governs any litigation arising under the terms of the participation agreements, including any lawsuits filed for the purpose of collecting premiums owed. More particularly, the Board argues that defendants’ joint and several liability for the accumulated deficit of the Trust is multi-faceted and exists independent of any participation agreement.

Even so, the fact remains that the defendants who executed participation agreements with forum selection clauses (“FSC Defendants”) bound themselves to the foundational documents of the Trust and the provisions of the WCL and attendant regulations through the execution of such participation agreements, and, in so doing, promised to assume all of the obligations set forth in the Trust’s foundational documents, including joint and several liability.

In this regard, the Moving Defendants assert, without contradiction, that the participation agreements were the only contracts they signed relative to membership in the Trust. Moreover, the Board’s Complaint is replete with references to the participation agreements in articulating the legal basis for defendants’ alleged joint and several liability. Thus, to the extent that joint and several liability is a product of contract, as consistently argued by the Board in GSIT litigation, the participation agreements represent the Trust members’ express agreement and assent to such contractual liability.

Given the role of the participation agreements in the multi-faceted legal relationship existing between the Trust and its members, the Court is satisfied that this collection action sufficiently arises under the participation agreements so as to trigger the mandatory forum selection clause.

. . .

C. Severance/Public Policy

Having concluded that some, but not all, of the Moving Defendants, are entitled to the benefit of the forum selection clause making Erie County the exclusive venue for the Trust’s collection litigation, the Court must determine the proper course of action.

It is the position of the Moving Defendants that honoring the forum selection clause requires the transfer of this entire action to Erie County. On the other hand, the Board will not consent to such a transfer, and it argues that to the extent that the forum selection clause is to be enforced, the claims against the FSC Defendants should be severed and transferred. At the same time, however, the Board argues that, given the inefficiencies, ineconomies and inconsistencies attendant to litigating this matter in two counties, considerations of public policy compel the outright denial of the Moving Defendants’ motion to enforce the forum selection clause.

The Board has not moved for severance, but the Court has the authority to order severance under CPLR 603 even in the absence of a motion. The severance of claims may be ordered in furtherance of convenience or to avoid prejudice, and the decision whether or not to sever is a matter of judicial discretion.

Neither side has briefed the issue of severance in the context in which it is presented here, and the Court’s research did not disclose any similar cases from the New York courts in which some, but not all, defendants were entitled to the benefit of a forum selection clause. In recent years, however, the federal courts have developed a fairly robust body of law on the issue, albeit under different rules of civil procedure.

Under the four-step approach adopted in 2017 by the United States Court of Appeals for the Third Circuit, which built on the Fifth Circuit’s earlier decision in Rolls Royce, a court first must recognize the forum selection clause and acknowledge that, in all but the most unusual cases, claims concerning those parties [subject to the forum-selection clause should be litigated in the fora designated by the clauses.

Second, the court performs an independent analysis of private and public interests relevant to non-contracting parties.

If the results in Steps 1 and 2 point to the same forum, then the court should allow the case to proceed in that forum. If not, the Court should go on to consider whether there are any jurisdictional or procedural defects affecting the severance calculus.

Finally, as the fourth step, the Court should exercise its discretion to choose the most appropriate course of action, considering (1) the efficiency interests in avoiding duplicative litigation as well as any other public interests that may weigh against enforcing a forum-selection clause; and (2) the non-contracting parties’ private interests and any prejudice that a particular transfer decision would cause with respect to those interests. In performing this analysis, the court considers the nature of any interests weighing against enforcement of any forum-selection clause; the relative number of non-contracting parties to contracting parties; and the non-contracting parties’ relative resources. Only if it determines that the strong public interest in upholding the contracting parties’ settled expectations is overwhelmingly outweighed by the countervailing interests can the court, at this fourth step, decline to enforce a valid forum-selection clause.

There are, of course, significant procedural differences between the statutes and rules at issue in the federal cases and the corresponding provisions of the CPLR. Nonetheless, the New York courts are vested with broad discretion to further convenience and avoid prejudice through [*8]severance, and this Court chooses to apply the federal framework as a vehicle to inform its discretion under CPLR 603 in the absence of any pertinent New York authorities.[FN11]

Thus, the Court begins with the Step 1 assumption that the FSC Defendants are entitled to defend against the Board’s claims in Erie County. Further, the Step 2 analysis is simplified here, since the Moving Defendants comprise eight of the 10 active defendants; one of the remaining two active defendants, Westgate Nursing Home, Inc., has a participation agreement with a forum selection clause; and the tenth active defendant, Wellsville Manor LLC, is located in Western New York. Thus, under the Third Circuit’s approach, the entire case should be litigated in Erie County.

And even if the Step 1 and Step 2 analyses were to point in different directions, the conclusion that severance is unwarranted would remain the same. There are no Step 3 issues of jurisdiction or procedure, so the Court must exercise its discretion under Step 4, considering efficiency interests in avoiding duplicative litigation, any other public interests that may weigh against enforcing a forum-selection clause and the non-contracting parties’ private interests and any prejudice that a particular transfer decision would cause with respect to those interests.

As the Board observes, it would be inefficient and uneconomical to litigate against some of the defendants in Albany County while litigating the same claims against other defendants in Erie County. Further, the Board’s claims against defendants in this case involve common factual and legal issues, and the interests of judicial economy and consistency of verdicts will be served by having a single place of trial. In addition, at least three of the eight Moving Defendants (and one active, non-Moving Defendant) can claim the benefit of the forum selection clause, and further proceedings in this Court, including a possible evidentiary hearing, would be required to determine whether the four other Moving Defendants can enforce the forum selection clause.

On the other hand, the Board identifies a countervailing interest that is said to outweigh the strong public interest in honoring the forum selection clause. Specifically, the Board argues that enforcement of the forum selection clause is designed to exploit what the Moving Defendants believe to be outcome-determinative precedent in Matter of Riccelli Enters., Inc. v State of NY Workers’ Compensation Bd., a decision in which the Appellate Division, Fourth Department sustained the grant of a preliminary injunction enjoining enforcement of a GSIT deficit assessment on the ground that the Board had failed to satisfy the 120-day time limit of WCL § 50(3-a)(7)(b).

The Moving Defendants acknowledge that the courts within the Third Judicial Department have declined to follow Riccelli and its interpretation of the 120-day rule.

Thus, the Board argues that the Moving Defendants should not be permitted to waste judicial resources in an attempt to game a home field ruling that would create inconsistent decisions on identical factual and legal issues. According to the Board, this is the veritable definition of in contravention of public policy.

While the Board’s arguments are not without some force, the Court is mindful that the policy of the New York State is to enforce forum selection clauses because they provide certainty and predictability in the resolution of disputes. Further, a desire to avoid inconsistency does not, standing alone, render a forum selection clause unreasonable or violative of public policy.

The Board responds by observing that this is not a case where enforcement of the forum selection clause merely would create a risk of inconsistent results. Rather, the Moving Defendants seek to transfer venue to Erie County for the very purpose of forcing inconsistent results among similarly-situated GSIT members.

Nonetheless, the conflicting authorities noted by the parties concerning the 120-day rule already exist. Moreover, the public policy of the State allows conflicts to exist among the Departments comprising the Appellate Division, pending final word from the Court of Appeals in a proper case (see Mountain View Coach Lines v Storms, 102 AD2d 663, 664 [2d Dept 1984] [Titone, J.]).[FN14] And to the extent that the determinations reached in Erie County may be inconsistent with the determinations of this Court in other collection actions brought by the Trust, the issue is one of legal inconsistency, rather than factual inconsistency, which can be addressed on appeal.[FN15] Indeed, further GSIT litigation in Erie County ultimately may well [*10]facilitate a reconciliation of the apparently conflicting case authorities concerning the 120-day rule.

At oral argument, the Board also emphasized that this collection action has little or no nexus to Erie County. However, at least one of the named defendants (Episcopal) is a resident of Erie County; the Trust’s long-time administrator was located in Erie County; and many of the Trust members were located in Western New York. In any event, although there is some older authority that the forum selection agreement need not be upheld if public policy is violated, as where the county selected is the residence of neither party nor otherwise connected with the subject of the suit, this older authority now is of questionable value.

Further, while Albany County may be a more convenient forum for the Board, which is headquartered in an adjacent county, there has been no showing that a trial in the contractual forum would be so gravely difficult and inconvenient that the Board would, for all practical purposes, be deprived of its day in court. Indeed, the Board maintains and staffs an office in Erie County.

Finally, while the Court is mindful of the Board’s role as the governmental agency charged with administration of the WCL, the Court is not persuaded that this provides a basis for avoiding the forum selection clause in an action commenced by the Board at least partly in its capacity as the successor to the Trust.

Based on the foregoing, the Court concludes, in the exercise of discretion, that the Board has failed to meet its heavy burden of demonstrating that enforcement of the forum selection clause would violate an established public policy of this State or is otherwise unreasonable or unjust, and the interests of the parties and judicial economy will best be served by transferring this entire action to Erie County.

(Internal quotations and citations omitted).

New York generally enforces contracts as written, including contractual provisions specifying where a lawsuit may be brought. There are exceptions, as this decision discussed, but they are limited and narrowly construed. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether a contract limits where an action can be brought.

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Posted: May 9, 2019

Contract Term Waiving Right to Seek Yellowstone Injunction Enforceable

On May 7, 2019, the Court of Appeals issued a decision in 159 MP Corp. v. Redbridge Bedford, LLC, 2019 NY Slip Op. 03526, holding that a contract term waiving the right to seek a Yellowstone injunction was enforceable, explaining:

We begin with the familiar and eminently sensible proposition of law that, when parties set down their agreements in a clear, complete document, their writing should be enforced according to its terms. As we noted in Vermont Teddy Bear, a seminal case involving a commercial lease, this rule has special import in the context of real property transactions, where commercial certainty is a paramount concern, and where the instrument was negotiated between sophisticated counseled business people negotiating at arms length. The lease provision at the center of this dispute could not be clearer. In it, plaintiffs waived the right to bring a declaratory judgment action with respect to any provision of this Lease or with respect to any notice sent pursuant to the provisions of this Lease. Applying our well-settled contract interpretation principles, this unambiguous waiver clause reflects the parties’ intent that plaintiffs be precluded from commencing precisely the type of suit they initiated here and, as such, this action was foreclosed by the plain language of the leases. Plaintiffs nonetheless ask us to relieve them of the consequences of their bargain, contending that the waiver clause violates a public policy strong enough to warrant a departure from the bedrock principle of freedom of contract. We reject that argument.

Freedom of contract is a deeply rooted public policy of this state and a right of constitutional dimension. In keeping with New York’s status as the preeminent commercial center in the United States, if not the world, our courts have long deemed the enforcement of commercial contracts according to the terms adopted by the parties to be a pillar of the common law. Thus, freedom of contract prevails in an arm’s length transaction between sophisticated parties, and in the absence of countervailing public policy concerns there is no reason to relieve them of the consequences of their bargain. We have cautioned that, when a court invalidates a contractual provision, one party is deprived of the benefit of the bargain. By disfavoring judicial upending of the balance struck at the conclusion of the parties’ negotiations, our public policy in favor of freedom of contract both promotes certainty and predictability and respects the autonomy of commercial parties in ordering their own business arrangements.

Of course, the public policy favoring freedom of contract does not mandate that the language of an agreement be enforced in all circumstances. Contractual provisions entered unknowingly or under duress or coercion may not be enforced. The doctrine of unconscionability also protects against unjust enforcement of onerous contractual terms which one party is able to impose upon the other because of a significant disparity in bargaining power. Plaintiffs raised none of these defenses.

Here, plaintiffs assert that the declaratory judgment waiver is unenforceable because it is void as against public policy. Thus, plaintiffs’ challenge is not predicated on the circumstances surrounding the making of this particular agreement, such as allegations of unequal bargaining power, coercive tactics or lack of counsel — claims pertinent to other well-established contract defenses. Rather, plaintiffs’ contention is that the right to bring a declaratory judgment action is so central and critical to the public policy of this state that it cannot be waived by even the most well-counseled, knowledgeable or sophisticated commercial tenant. We are unpersuaded.

We have deemed a contractual provision to be unenforceable where the public policy in favor of freedom of contract is overridden by another weighty and countervailing public policy. But, because freedom of contract is itself a strong public policy interest in New York, we may void an agreement only after balancing the public interests favoring invalidation of a term chosen by the parties against those served by enforcement of the clause and concluding that the interests favoring invalidation are stronger. Although we possess the power to set aside agreements on this basis, our usual and most important function is to enforce contracts rather than invalidate them on the pretext of public policy, unless they clearly contravene public right or the public welfare.

The fact that a contract term may be contrary to a policy reflected in the Constitution, a statute or a judicial decision does not render it unenforceable; that a public interest is present does not erect an inviolable shield to waiver. Indeed, we regularly uphold agreements waiving statutory or constitutional rights, indicating that we look for more than the impingement of a benefit provided by law before deeming a voluntary agreement void as against public policy. Many rights implicate societal interests and, yet, they have been determined to be waivable.

(Internal quotations and citations omitted).

One reason parties to commercial contracts worldwide choose to have them governed by New York law is that–with a few exceptions–under New York law, contracts are enforced as written. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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Posted: May 7, 2019

Fraudulent Inducement Counterclaim Dismissed for Failure to Allege Out-of-Pocket Damages

On April 12, 2019, Justice Ostrager of the New York County Commercial Division issued a decision in Madeof, LLC v Bronson, 2019 NY Slip Op. 31058(U), dismissing a fraudulent inducement claim for failure to allege out-of-pocket damages, explaining:

In Count IV Fraudulent Inducement, Bronson seeks damages for having divested herself from Bomganic via the Termination Agreement. Specifically, Bronson claims she was fraudulently induced by affirmative misrepresentations and omissions by Bekker and Bonifacino intended to induce Bronson to give up her rights to Bomganic and that she reasonably relied on those misrepresentations and omissions in deciding to sign the Termination Agreement. Although the pleaded damages are circumscribed, the claim has the potential for broad impact, as a finding of fraudulent inducement would invalidate the entire Termination Agreement, including the Release critical to the analysis of Count III Breach of Contract.

To state a legally cognizable claim of fraudulent inducement based on a misrepresentation or omission, the complaint or counterclaim must allege that Bonifacino and/or Bekker intentionally made a material misrepresentation of fact in order to defraud or mislead Bronson, and that Bronson reasonably relied on the misrepresentation and suffered damages as a result.

. . . Bronson has failed to allege compensable damages, which is also an essential element of the counterclaim for fraudulent inducement. As the Court of Appeals recently explained in Connaughton: The true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong or what is known as the out-of-pocket rule. Under that rule, damages are to be calculated to compensate plaintiffs for what they lost because of the fraud, not to compensate them for what they might have gained. There can be no recovery of profits which would have been realized in the absence of fraud. Moreover, this Court has consistently refused to allow damages for fraud based on the loss of a contractual bargain, the extent, and indeed the very existence of which is completely underminable and speculative.

The only damages alleged by Bronson are those related to her decision to divest from Bornganic pursuant to the Termination Agreement. Those damages are the quintessential lost opportunity to profit from Bornganic were the company able to proceed, and not a recoverable out-of-pocket loss. Such damages are not available here, just as the Connaughton Court found no compensable damages based on plaintiffs claim that he was fraudulently induced to work with defendant and abandon efforts to solicit others to purchase his restaurant concept on potentially better terms. For these reasons, Bronson cannot pursue Counterclaim IV that she was fraudulently induced to enter into the Termination Agreement.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules, including the rule discussed here that a fraud claim can seek only money lost through the fraud (out-of-pocket damages), not the profits the plaintiff hoped to have earned in the absence of the fraud. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.

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Posted: May 6, 2019

Arbitrator, Not Court, to Decide if Provision of Contract Unenforceable as a Matter of New York Public Policy

On April 22, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Selendy v. Quinn Emanuel Urquhart & Sullivan, LLP, 2019 NY Slip Op. 29119, holding that an arbitrator, not the court, should decide whether a contract provision was unenforceable as a matter of New York public policy, explaining:

When determining whether a particular dispute is arbitrable, a court must determine whether the dispute falls within the scope of the arbitration agreement, and whether the dispute is one that may be submitted to arbitration without violation of any law or public policy. Here, the Arbitration Provision is broad, unambiguous and requires arbitration of disputes related to the Partnership Agreement, including the arbitrability of any dispute. Petitioners argue, however, that the question of arbitrability in this context is not for the arbitrator in the first instance because it raises issues of public policy.

Petitioners contend that section 5.1(a)(ii) of the Partnership Agreement is a void forfeiture-for-competition provision in violation of rule 5.6 of the New York Rules of Professional Responsibility. That rule provides, in relevant part, that a lawyer shall not participate in offering or making a partnership agreement that restricts the right of a lawyer to practice after termination of the relationship. The rule prohibits restrictions on the practice of law, and courts apply the rule for purposes of assessing the availability of civil remedies for claims such as those Quinn Emanuel raises in the arbitration proceeding.

New York courts, for example, have denied enforcement of anticompetition clauses as violative of public policy. The issue then is whether the alleged violation of rule 5.6, which implicates New York public policy, should be determined preliminary by a New York court. Quinn Emanuel argues that such public policy concerns do not preempt the Arbitration Provision and cites Hackett v Milbank, Tweed, Hadley & McCloy, 80 NY2d 870 (1992) (hereinafter, “Hackett”) as support.

Hackett involved a dispute between a lawyer and his former law firm. The lawyer sought supplemental payments upon his withdrawal, but the law firm refused based on the terms of the partnership agreement. To resolve the dispute, the law firm demanded arbitration pursuant to the partnership agreement. The lawyer objected and filed a petition for a stay, arguing that public policy exempted the dispute from arbitration.

The trial court in Hackett granted the petition for a permanent stay. The Appellate Division, First Department affirmed, agreeing with the trial court that the partnership agreement incorporated a forfeiture-for-competition clause in violation of the lawyer code and therefore, required resolution by a court of law. The Court of Appeals, however, reversed and instead held that the controversy should be decided in these circumstances by an arbitrator in the first instance.

In a second proceeding challenging the arbitrator’s determination, the Court of Appeals confirmed its holding in Hackett, noting that petitioner’s argument that an arbitration decision denying him benefits would be contrary to public policy was insufficient to preempt the arbitration: the arbitrator’s decision, once made, could be subsequently challenged on a motion to vacate or confirm.

In accordance with Hackett and Hackett II, the public policy issue here, i.e., whether section 5.1(a)(ii) of the Partnership Agreement is prohibitively anticompetitive under New York law, does not overcome the broad Arbitration Provision, which must be given effect as overriding policy. Petitioners’ argument to the contrary — that the provision at issue here is facially anticompetitive and therefore, distinguishable from Hackett and Hackett II — is unpersuasive.

As the Court of Appeals noted in Hackett II, a contested competition provision must be assessed within its own particular litigation context. The provision in dispute here is neither identical to provisions previously determined as anticompetitive under New York law nor does it outright prohibit the practice of law. Although Petitioners submit competent proof supporting their argument that section 5.1(a)(ii) of the Partnership Agreement is anticompetitive under New York law, including John Quinn’s emails and Lieberman’s declaration, it is for the arbitrator in the first instance to consider these submissions when determining whether the provision at issue is an unenforceable forfeiture-for-competition clause. Any further inquiry on my part is precluded by the broad arbitration provision and the strong public policy compelling its enforcement.

Petitioners may also raise before the arbitrator the important issue of whether the Partnership Agreement’s choice of law provision, which provides that California law is applicable, should apply to determine the enforceability of section 5.1(a)(iii) against New York attorneys. As Petitioners note, unlike New York courts, California courts are more likely to enforce restrictive covenants in law firm agreements, despite the same prohibition in that state’s lawyer code.

However, it is for the arbitrator to pass upon whether to apply the choice of law provision in the context of resolving the parties’ payment dispute where, as here, a broad arbitration provision exists.

Moreover, resolution of the choice of law issue by an arbitrator would not impermissibly interfere with the New York judiciary’s ability to discipline New York attorneys.

For the foregoing reasons, I grant Quinn Emanuel’s motion to dismiss the petition and direct the parties to proceed with the Arbitration Proceeding.

(Internal quotations and citations omitted).

Complex commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.

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Posted: May 5, 2019

Defendant Waives Standing Defense By Failing to Raise it in Answer or Motion to Dismiss

On March 7, 2019, Justice Platkin of the Albany County Commercial Division issued a decision in Framan Mech., Inc. v. Dormitory Auth. of the State of N.Y., 2019 NY Slip Op. 50583(U), holding that a defendant waived its standing defense by failing to raise it in an answer or motion to dismiss, explaining:

As a threshold matter, Arch and Framan argue that DASNY waived the defense of lack of standing by failing to include it in a pre-answer motion to dismiss under CPLR 3211 or in its answer.

As held by the Court of Appeals and all four Departments of the Appellate Division, an argument that a plaintiff lacks standing, if not asserted in the defendant’s answer or in a pre-answer motion to dismiss the complaint, is waived pursuant to CPLR 3211 (e). DASNY concedes that it failed to preserve the defense of lack of standing, but it contends that Framan and Arch’s argument ignores settled case law establishing that the applicable defense in this case is failure to state a cause of action.

The Court does not find DASNY’s argument to be persuasive. In fact, DASNY’s own notice of motion frames the defense as one of lack of standing, not failure to state a cause of action, and this characterization is echoed in DASNY’s opening brief. Moreover, several of the cases relied upon by DASNY, both in its moving papers and in reply, describe the applicable defense as lack of standing.

Moreover, even if DASNY were free to re-characterize the grounds for the relief that it is seeking in response to Framan and Arch’s claim of waiver under CPLR 3211(e), the overwhelming weight of authority supports the conclusion that DASNY’s defense sounds in lack of standing.

(Internal quotations and citations omitted).

Under New York procedural rules, some defenses are waived if they are not timely brought. This is an example of one application of those rules. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether a defense has been waived because of a failure timely to assert it.

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