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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: September 12, 2018

Unjust Enrichment Claim Survives Dismissal Because of Questions of Fact Regarding Whether Contract Covers Claims

On August 21, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Georgetown Co., LLC v. IAC/Interactive Corp., 2018 NY Slip Op. 32078(U), declining to dismiss an unjust enrichment claim because of questions of fact regarding whether there was a contract covering the plaintiff’s claims, explaining:

The elements of a cause of action to recover for unjust enrichment are (1) the defendant was enriched, (2) at the plaintiffs expense, and (3) that it is against equity and good conscience to permit the defendant to retain what is sought to be recovered. The essential inquiry in any action for unjust enrichment or restitution is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered. Notably, although the existence of a valid and enforceable contract generally precludes quasi-contractual recovery, where a bona fide dispute exists as to the existence, or applicability, of a contract, the plaintiff may proceed on both breach of contract and quasi-contract theories.

Defendants argue that this claim must be dismissed because all the work performed by plaintiffs was done pursuant to paragraph 2.10 of the Development Agreement, in which Georgetown 19th Street Development agreed, at HTRF’s request and expense, to provide it with assistance obtaining financing, and in securing any tax abatements or incentives, for the Headquarters Project. However, it is not clear how the Development Agreement, Which was entered into for the purposes of constructing IAC’s headquarters, covers the work performed by plaintiffs on the zoning changes. There is no dispute the zoning changes were not necessary for the Headquarters Project. As plaintiffs note, the terms of the Development Agreement specifically refer to the “Project,” meaning the construction of the IAC headquarters. Notably, recital E of the Development Agreement defines the word “Project” as the “demolition of the Existing Building,” and the “planning and construction” of the IAC headquarters. Accordingly, defendants’ documentary evidence does not utterly refute plaintiffs’ unjust enrichment allegations conclusively or as a matter of law.

Moreover, while there is no dispute regarding the validity of the Letter Agreement or the other various documents executed by the parties, there is a bona fide dispute regarding the applicability of the Letter Agreement to facts of this case. Should it be determined that the Letter Agreement does not apply, that does not necessarily preclude plaintiffs from seeking to recover damages under the theory ·of unjust enrichment.

(Internal quotations and 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. As this decision discusses, the viability of an unjust enrichment claim often turns on whether there was a contract between the parties. 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: September 11, 2018

Justices Masley, Sherwood and Paris Update Part Rules

Justice Andrea Masley of the New York County Commercial Division recently updated her individual practices and her trial rules.

Justice O. Peter Sherwood of the New York County Commercial Division also recently updated his individual practices.

Justice Anthony J. Paris of the Onondaga County Commercial Division also recently posted his part rules.

Posted: September 10, 2018

Court Threatens Contemnor With Arrest if He Does Not Purge the Contempt

On August 14, 2018, Justice Schecter of the New York County Commercial Division issued a decision in  Kadosh v. Kadosh, 2018 NY Slip Op. 31976(U), threatening a contemnor with arrest if he does not purge his contempt, explaining:

A litigant who knowingly causes a court order to be violated may be held in contempt.

David himself was present when the court announced that an order was being issued memorializing the terms of withdrawal of money that the receiver was holding in escrow. To be sure, he was also in court when those terms were agreed upon and initially set forth on the record. There can be no doubt that he was aware of the court order and its provisions. His knowledge, moreover, is confirmed by his behavior. He waited several months and then stealthily personally contacted the receiver without asking or informing DHC. David’s assertion that he knew nothing of any court order defies credulity.

The evidence also conclusively establishes that David caused the August 2016 Order to be violated by asking the receiver to send him money in contravention of the order and in violation of DHC’s rights thereunder. David’s justification for his misconduct–that he did not lie to or defraud the receiver and that he was wholly entitled to the money despite the order to the contrary–compels a finding of contempt under the circumstances.

Allowing David to escape the consequences of his defiance of the August 2016 Order would make a mockery of adherence to judicial mandates. Whether he intended to mislead or coerce the receiver is irrelevant. David’s contention that he did not intend to undermine anyone’s interests or responsibilities and that he was entitled to the escrowed funds is both astonishing and belied by the record. He knew about the August 2016 Order, the reasons for it and that his fee dispute with DHC affected his rights to the escrowed money. The only reason for him to have sought the. funds from the receiver was to undermine DHC’s secured claim in contravention of the court’s order.

Though David’s actions do not excuse the receiver’s gross negligence, that the receiver foolishly succumbed to David’s request does not cleanse the wrongful nature of David’s conduct. David knew a court order barred him from touching the money, yet asked an officer of the court to give it to him anyway. He intentionally caused this court’s order to be violated. That is contempt. David, therefore, is liable for all losses caused by his contempt under Judiciary Law § 773, which include the movants’ attorneys’ fees in connection with these motions.

Because the purpose of civil contempt is to induce compliance with court mandates, David may purge his contempt by paying the $2.7 million that he improperly obtained into court. After all, that is what would be required to restore the parties’ status to what it was before the August 2016 Order was violated. If David does so, he may avoid having to pay the attorneys’ fees. If he does not, the court will not hesitate to issue an arrest warrant to induce compliance . While David finds no shortage of blame on the part of everyone else in this action, he is entirely devoid of contrition or recognition of the seriousness of his offense. He induced an officer of the court to wrongfully give him $2.7 million. Such conduct must be treated with the severity it deserves.

(Internal quotations and citations omitted).

No matter who you are or what kind of litigation you are involved in, you must obey the court’s orders. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have have been accused of violating a court order.

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Posted: September 9, 2018

Court Refuses to Dismiss Common Law Dissolution Action Even Though Shareholder Lacked Standing to Bring Statutory Dissolution Action

On August 15, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Matter of Yu v. Bong Yu, 2018 NY Slip Op. 32009(U), refusing to dismiss an action for common law dissolution of a corporation even though the shareholder lacked standing to bring an action for statutory dissolution, explaining:

Business Corporation Law Section 1104-a provides, in relevant part:

(a) The holders of shares representing twenty percent or more of the votes of all outstanding shares of a corporation, other than a corporation registered as an investment company under an act of congress entitled “Investment Company Act of 1940”, no shares of which are listed on a national securities exchange or regularly quoted in an over-the-counter market by one or more members of a national or an affiliated securities association, entitled to vote in an election of directors may present a petition of dissolution on one or more of the following grounds:

(1) The directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders;
(2) The property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation.

Patrick has repaid the principal, interest, and collection charges on the 2005 loan and one of the two 2011 loans, but attorneys’ fees due on those notes are still in dispute, and the second 2011 loan is still owed in full. Therefore, Patrick’s Moklam shares remain pledged in accordance with the stock pledge agreement. As per the stock pledge agreement, Patrick is not entitled to exercise any voting rights at this time. As such, he lacks standing to pursue a dissolution of the corporation pursuant to BCL Section 1104-a. Patrick’s arguments in opposition are unavailing because they lack both legal and evidentiary support.

The remedy of common-law dissolution is available only to minority shareholders who accuse the majority shareholders and/or the corporate officers or directors of looting the corporation and violating their fiduciary duty..

Here, Patrick states in the petition that the Yu family was engaged in misconduct in its operation of Moklam, and that corporate assets are being wasted, looted, and/or diverted to the benefit of the Yu family and at Patrick’s expense, in breach of the fiduciary duty owed to him. He explains that the Yu family has repeatedly retaliated against Patrick for exercising his rights as a shareholder, has taken steps to put enormous financial pressure on him at a time when they knew very well he was under financial duress, and has denied him any meaningful access to the books and records of Moklam, Guard Hill, and East 38th Street. He alleges that respondents are pursuing a personal vendetta against [him], while at the same time enriching themselves through the acquisition of his shares at a cost far below their fair value, and sets forth specific facts to support his allegations.

At this point in the litigation, Patrick’s allegations set forth a reasonable basis to believe that further discovery may reveal further evidence of egregious conduct necessary to sustain the claim for common law dissolution. Accordingly, the claim for common law dissolution will not be dismissed at this time.

(Internal quotations and citations omitted).

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.

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Posted: September 8, 2018

BCL §1312 Does Not Bar Action By Foreign Corporation That Did Not Do Business in New York

On August 14, 2018, Justice Ash of the Kings County Commercial Division issued a decision in Radiance Capital Receivables Twelve LLC v. JPMorgan Chase Bank, N.A., 2018 NY Slip Op. 32092(U), holding that BCL 1312 does not bar an action by a foreign corporation that did not do business in New York, explaining:

[I]t is well established that BCL §1312[a) constitutes a bar to the maintenance of an action by a foreign corporation found to be doing business in New York without having obtained the required authorization to do business there. The purpose of section 1312 of the Business Corporation Law and its predecessor statutory provisions is not to enable defendants to avoid contractual obligations but to regulate such foreign corporations which are in fact conducting business within the State so that they shall not be doing business under more advantageous terms than those allowed a corporation of this State.

Absent proof establishing that the plaintiff is doing business in New York, it is presumed that the plaintiff is doing business in its State of incorporation and not in New York. The party invoking the statutory barrier bears the burden of proving that the corporation’s business activities in New York were not just casual or occasional, but so systematic and regular as to manifest continuity of activity in the jurisdiction.

Here, upon reargument, the Court finds that there is no basis to dismiss this proceeding pursuant to BCL §1312[a). Joseph failed to show that Petitioner’s activities in New York have been so systematic and regular as to manifest continuity of activity in the jurisdiction. Moreover, Petitioner represents that, at the present time, its only activity in New York relates to the enforcement of the judgment at issue here. Joseph fails to present any fact to the contrary.

(Internal quotations and citations omitted).

New York procedural law is relatively straightforward, but there are rules, like the rule discussed in this decision, that can be traps for the unwary. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding New York procedural law.

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Posted: September 7, 2018

Court Dismisses Action to Dissolve LLC in Light of High Burden for LLC Dissolution Actions

On August 15, 2018, Justice Scarpulla issued a decision in Yu v. Guard Hill Estates, LLC, 2018 NY Slip Op. 32008(U), dismissing an action to dissolve an LLC in light of the high burden for dissolving an LLC, explaining:

Limited Liability Company Law section 702 provides that dissolution of a limited liability corporation may be ordered when it has been proven that it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement. A party seeking dissolution must establish that the management of the equity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved or that continuing the entity is financially unfeasible.

Patrick argues that the actions taken by the defendants regarding Guard Hill and 33 East demonstrate the defendants’ unwillingness and failure to promote the purpose of the entities, and that the continued operation of Guard Hill and 33 East is financially unfeasible. He maintains that the LLCs have been used, instead, as tools to further the Yu family’s personal vendetta against Patrick.

The operating agreement for Guard Hill provides that the Company is formed for the purpose of acquiring a remainder interest in the premises located at 713 Guard Hill Road, Bedford, New York and engaging in any other lawful act or activity for which limited liability companies may be formed under the LLCL and engaging in any and all activities necessary or incidental to the foregoing. 33 East’s stated purpose is acquiring, owning, operating, financing, managing and developing the premises located at 33 East 38th Street, New York, New York and engaging in any other lawful act or activity for which LLCs may be formed under the LLCL and engaging in any and all activities necessary or incidental to the foregoing.

Given the broad language in the operating agreements, Patrick has failed sufficiently to plead the requisite grounds for dissolution of the LLCs in his complaint. He does not adequately allege that the LLCs are not operating in a manner within the contemplation of their purposes and objectives as defined in their respective operating agreements, or that continuing their operation would be financially unfeasible. He provides no factual support or basis which would support an allegation that the individual defendants are unable or unwilling to promote the purpose of the LLCs or that it is not reasonably practicable to carry on the business of the LLCs in conformity with the operating agreements.

While Patrick complains that his family members have been engaged in certain activities to further their personal “vendetta” against him, his unflattering characterization of his family’s actions is not sufficient to support a cause of action that his family has abandoned the purpose of the LLCs and/or rendered the operation of the LLCs financially unfeasible.

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

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.

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Posted: September 6, 2018

Action for Specific Performance of Real Estate Sales Contract Dismissed; Purchaser Was Not Ready, Willing and Able to Purchase on Closing Date

On August 22, 2018, the Second Department issued a decision in 130 Third St. Loft, LLC v. HKF, Inc., 2018 NY Slip Op. 05810, holding that an action for specific performance of a real estate contract should have been dismissed because the purchaser was not ready, willing and able to purchase on the closing date, explaining:

On the defendant’s motion, it had the burden of demonstrating its prima facie entitlement to judgment as a matter of law by showing that the plaintiff was not ready, willing, and able to close on the law date. Moreover, the defendant was required to demonstrate, prima facie, that the plaintiff was in default. The defendant established its prima facie entitlement to judgment as a matter of law by submitting evidence that the plaintiff, regardless of whether the operative law date was January 20, 2014, or January 21, 2014, could not take legal title to real property because it had not been formed as a corporate entity. The defendant also established, prima facie, that the plaintiff was in default by demonstrating that the plaintiff did not appear at the closing on either date.

(Internal citations omitted).

We frequently litigate disputes over the purchase and sale of commercial property. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding a commercial real estate transaction.

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Posted: September 5, 2018

Dismissal for Failure to Prosecute Vacated for Failure to Give Required Notice

On August 22, 2018, the Second Department issued a decision in Deutsche Bank Natl. Trust Co. v. Bastelli, 2018 NY Slip Op. 05822, vacating a dismissal for failure to prosecute for failure to give the required notice, explaining:

CPLR 3216 permits a court, on its own initiative, to dismiss an action for want of prosecution where certain conditions precedent have been complied with. As relevant here, an action cannot be dismissed pursuant to CPLR 3216(a) unless a written demand is served upon the party against whom such relief is sought in accordance with the statutory requirements, along with a statement that the default by the party upon whom such notice is served in complying with such demand within said ninety day period will serve as a basis for a motion by the party serving said demand for dismissal as against him for unreasonably neglecting to proceed. While a conditional order of dismissal may have the same effect as a valid 90-day notice pursuant to CPLR 3216, the conditional order here was defective in that it failed to state that the plaintiff’s failure to comply with the notice will serve as a basis for a motion by the court to dismiss the action for failure to prosecute. Moreover, the conditional order failed to satisfy the notice requirement on the additional ground that there was no indication that the plaintiff’s counsel was present at the status conference at which the court issued the conditional order of dismissal, nor was there evidence that the order was ever properly served upon the plaintiff. In the absence of proper notice, the court was without power to dismiss the action for the plaintiff’s failure to comply with the conditional order of dismissal. Lastly, the Supreme Court erred in administratively dismissing the action without further notice to the parties and without benefit of further judicial review. Accordingly, the Supreme Court should have granted the plaintiff’s motion to vacate the order dated October 3, 2013, and to restore the action to the active calendar.

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

It happens from time-to-time that a plaintiff will bring an action but then fail actively to pursue it. This decision is about the rules a defendant must follow to get such an action dismissed. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding what to do it a plaintiff has failed to prosecute a lawsuit.

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Posted: September 4, 2018

Documents Submitted by Law Firm to Show Lack of Relationship Not Documentary Evidence Sufficient to Justify Dismissal

On August 22, 2018, The Second Department issued a decision in First Choice Plumbing Corp. v. Miller Law Offs., PLLC, 2018 NY Slip Op. 05825, holding that documents submitted by a law firm to show that it had not been engaged by the plaintiff were not documentary evidence sufficient to justify dismissal, explaining:

The defendant made a pre-answer motion to dismiss the complaint pursuant to CPLR 3211(a)(1), (5), and (7). The defendant argued, among other things, that no attorney-client relationship existed with respect to the mechanic’s liens. In support of that contention, the defendant submitted copies of the lien extensions, which were filed by nonparty Speedy Lien; a copy of a contract between First Choice and nonparty Construction Lien Consultants, LLC, to investigate, recover, and/or settle the debts owed to First Choice, as reflected in one of the mechanic’s liens; and emails and a letter. In the order appealed from, the Supreme Court found that the defendant submitted documentary evidence which utterly refuted the plaintiffs’ allegation that there was an attorney-client relationship between them and the defendant with respect to the liens and their extensions. Accordingly, the court granted that branch of the defendant’s motion which was pursuant to CPLR 3211(a)(1) to dismiss the complaint on the ground that no attorney-client relationship existed, and denied, in effect, as academic, the remaining branches of the defendant’s motion. The plaintiffs appeal.

A motion pursuant to CPLR 3211(a)(1) to dismiss the complaint on the ground that the action is barred by documentary evidence may be appropriately granted only where the documentary evidence utterly refutes plaintiff’s factual allegations, conclusively establishing a defense as a matter of law. In order for evidence to qualify as documentary, it must be unambiguous, authentic, and undeniable. Judicial records, as well as documents reflecting out-of-court transactions such as mortgages, deeds, contracts, and any other papers, the contents of which are essentially undeniable, would qualify as documentary evidence in the proper case. Conversely, letters, emails, and affidavits fail to meet the requirements for documentary evidence.

Here, the emails and letters submitted in support of the defendant’s motion were not documentary evidence within the meaning of CPLR 3211(a)(1). To the extent that the other evidence submitted was documentary, that evidence did not conclusively establish the absence of an attorney-client relationship between the plaintiffs and the defendant with respect to the liens and their extensions. Thus, the Supreme Court should not have granted that branch of the defendant’s motion which was to dismiss the complaint on this ground.

(Internal quotations and citations omitted).

This decision relates to the New York procedural rules allowing a claim to be dismissed if it is refuted by documentary evidence (CPLR 3211(a)(1)). As this decision notes, documentary evidence does not mean just any kind of document. However, many decisions have held that the law is “fuzzy” on when a document can be used as documentary evidence under 3211(a)(1). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether a claim against you can be refuted at the pleadings stage by documentary evidence.

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Posted: September 3, 2018

Proposed Amendment Fails to Allege a Joint Venture

On August 16, 2018, Justice Masley of the New York County Commercial Division issued a decision in Washington Diamonds Corp. v. Diamonds by Israel Standard, Inc., 2018 NY Slip Op. 32030(U), denying a motion to amend because the proposed amendment failed to allege a joint venture, explaining:

Defendant acknowledges that the assessment of whether an amendment is palpably insufficient is based on affidavits of merit showing good ground for the proposed causes of action. In other words, the moving party must submit evidentiary proof in support of its proposed amendment.

Defendant’s allegations supporting its motion are insufficient to meet the requirements for alleging a joint venture. New York law makes clear that a joint venture agreement is not simply created when two parties have agreed together to act in concert to achieve some stated economic objective. Rather, a joint venture agreement arises upon the coagulation of property, profits or other interest which the parties can then be said to hold jointly and which are made accessible to each other in terms of the confidential relationship which exists between joint associates. Most significantly, an indispensable essential of a contract of partnership or joint venture, both under common law and statutory law, is a mutual promise or undertaking of the parties to share in the profits of the business and submit to the burden of making good the losses.

Defendant fails to allege in its proposed amended answer and counterclaims or supporting affidavits the key requirement of a joint venture: that it shared profits and losses with plaintiff. In fact, defendant asserts an arrangement antithetical to a joint venture, dispelling any notion that it shared in profits or losses, or made decisions regarding profits in concert with plaintiff.

Specifically, defendant asserts, both in its original answer and counterclaims and the proposed pleading that, with respect to the memo inventory provided by plaintiff to defendant, it had total and exclusive control over the prices it offered the Goods for sale to purchasers, and Defendant was free to seek such profit margins as it determined to be in its best interest. In addition, in a sworn statement filed with the court and dated December 19, 2016, Baruch stated that defendant was free to set any terms of sale it decided to apply, and to keep anything it received from a subsequent buyer. These sales did not involve a sharing of profits. Thus, defendant argues that it worked completely independently from plaintiff to make its own profits, thus eliminating any basis for the purported joint venture it now seeks to allege.

(Internal quotations and citations omitted).

In New York, the courts are very generous in allowing a party to amend its pleadings. However, as this decision shows, there are limits to this generosity. In particular, the amendment must state a valid claim, just as an initial complaint must do. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding whether it is too late to amend your claims or answer.

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