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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: June 9, 2018

Civil Conspiracy Claim Survives When it is Tied to an Alleged Tort

On May 30, 2018, Justice Ostrager of the New York County Commercial Division issued a decision in Pastreich v. Pastreich, 2018 NY Slip Op. 31062(U), upholding a civil conspiracy claim tied to a claim for breach of fiduciary duty, explaining:

Defendants also seek dismissal of the Tenth Cause of Action alleging a conspiracy by defendant Aronson and Pastreich to breach fiduciary duty. It cannot be disputed that Defendant Aronson as a Trustee owed a fiduciary duty to the beneficiaries of the Aronson Trust. Plaintiffs allege that Aronson breached that duty by entering into an agreement with defendant Pastreich to improperly funnel Trust funds from Poughkeepsie Property profits under the pretense that Aronson was being paid a salary when she in fact provided no services. Citing Oparaji v Yablon and other First Department cases, defendants assert that New York Law does not recognize a civil claim for conspiracy. However, civil conspiracy is a cognizable tort when coupled with an underlying claim, which here is the unchallenged Ninth Cause of Action against Aronson for breach of fiduciary duty. Therefore, the Tenth Cause of Action survives dismissal.

(Internal citations omitted).

Fiduciaries have special duties, but the question of whether a defendant is a fiduciary, and thus can be liable for a breach of fiduciary duty, is sometimes a complicated one. And, as this decision shows, someone who is not a fiduciary can nonetheless be liable for conspiring with a fiduciary to facilitate the fiduciary’s breach of his or her duties. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding such claims or appeals of such claims.

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Posted: June 8, 2018

Fraud Claim Dismissed; Claim Was Derivative, Not Direct

On May 30, 2018, Justice Masley of the New York County Commercial Division issued a decision in Khan v. Garg, 2018 NY Slip Op. 31061(U), dismissing a fraud claim because it did not plead a direct claim for fraud, explaining:

With respect to Garg, defendants contend that the fraud claim inadequately pleads the elements of intent, reliance, and injury. A fraud claim must allege a misrepresentation or a material omission of fact which was false and known to be false by the defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.

. . .

Preliminarily, the court notes that Khan does not specify whether the fraud claim is direct or derivative; however, the allegations supporting the fraud claim indicate that it is intended to be direct.

A stockholder has no individual cause of action against a person or entity that has injured the corporation, even if the alleged wrongful acts diminished the value of the shares of the corporation or where a shareholder incurred personal liability. A shareholder may not obtain a recovery that otherwise duplicates or belongs to the corporation, except under the narrow exception applicable where the wrongdoer has breached a duty owed directly to the shareholder which is independent of any duty owing to the corporation.

As directed by the First Department in Yudell v Gilber, to determine whether a claim is direct or derivative, a court should consider (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually). Direct claims fail as as matter of law where the harm alleged is anything other than harm to the corporation alone: if the allegations confuse the complaining shareholder’s derivative and individual rights, even if some of the claims are direct in nature, the claims cannot stand.

Here, the allegations supporting Khan’s fraud claim confuse Khan’s direct and derivative rights; therefore, the claim must be dismissed. Khan alleges that Garg intentionally induced Khan to rely on the EIFC financial records falsified by Garg, and those records made it appear that EIFC owed Garg $1.6 million. Thus, though Khan seeks to plead a direct claim for fraud, there is no individual harm alleged in the amended complaint: Khan does not allege that he sustained any harm separate from that sustained by EIFC.

(Internal quotations and citations omitted).

This decision relates to something common in complex commercial litigation–the question of whether a claim can be brought by an individual on his or her own behalf or must be brought on behalf of a corporation or other entity in which the plaintiff has an ownership stake (that is, derivatively). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.

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Posted: June 7, 2018

Court Rejects 3211(a)(7) Motion That Relied on Documentary Evidence

On May 25, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Telx-New York LLC v. 60 Hudson Owner LLC, 2018 NY Slip Op. 31037(U), denying a 3211(a)(7) motion that relied on documentary evidence, explaining:

On a motion to dismiss a plaintiff’s claim pursuant to CPLR § 3211(a)(7) for failure to state a cause of action, the court is not called upon to determine the truth of the allegations. Rather, the court is required to afford the pleadings a liberal construction, take the allegations of the complaint as true and provide plaintiff the benefit of every possible inference. Whether a plaintiff can ultimately establish its allegations is not part of the calculus in determining a motion to dismiss. The court’s role is limited to determining whether the pleading states a cause of action, not whether there is evidentiary support to establish a meritorious cause of action.

Defendant moves to dismiss plaintiff’s breach of contract claim pursuant to 3211(a)(7) for failure to state a cause of action, but with the inclusion of evidence extrinsic to the complaint, it has made the question whether the petitioner indeed has a cause of action, not simply whether he or she has stated one in the complaint. This is effectively a pre-joinder motion for summary judgment and is improper. As Professor David Siegel states, the utility of the CPLR 3211(a)(7) motion was unfortunately reduced by the Court of Appeals decision in Rovello v Orofino Realty Co. Rovello held that as long as the complaint states a claim on its face, the plaintiff need not — in response to the defendant’s paragraph 7 objection — come forward with affidavits or other proof unless the court does in fact elect to treat the motion as one for summary judgment. This has resulted in holdings that the court cannot even consider the defendant’s affidavits on a CPLR 3211(a)(7) motion unless and until it has elected to exercise its treat-as-sun11nary-judgment power.

It appears that many courts handle this type of motion by converting it to a motion for summary judgment and allowing additional briefing.

(Internal quotations and citations omitted).

This decision relates to the New York procedural rules allowing a claim to be dismissed if it (1) does not state a claim on its face (3211(a)(7)) or (2) is refuted by documentary evidence (3211(a)(1)). As this decision notes, there can be a problem if you confuse the two rules. 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: June 6, 2018

Court Excuses Failure to Perform Condition Precedent to Bringing Suit

On June 5, 2018, the First Department issued a decision in Danco Electrical Contractors, Inc. v. Dormitory Authority of the State of N.Y., 2018 NY Slip Op. 03935, excusing the failure to perform a condition precedent to bringing suit, explaining:

It is undisputed that plaintiff failed to satisfy a condition precedent to recovering disputed costs for extra work on which defendant forced price reductions. Although plaintiff gave detailed written statements contesting defendant’s determinations of the fair and reasonable value of the extra work pursuant to section 8.01(B), it failed to give verified statements pursuant to section 11.03(A) of the contractual General Conditions.

Nevertheless, we conclude that plaintiff should be excused from the non-occurrence of that condition, because otherwise it would suffer a disproportionate forfeiture, and the occurrence of the condition was not a material part of the agreed exchange. Defendant does not argue that plaintiff failed to document the costs of the claimed extra work, to provide timely notice of its claims for extra work, or to provide timely notice of its objections to defendant’s rejections of and price reductions on the claimed extra work. Nor does it contend other than in conclusory terms that plaintiff’s failure to submit verified written statements was prejudicial to it. Moreover, the cases on which defendant relies did not consider whether the failure to strictly comply with a condition precedent should be excused to avoid a disproportionate forfeiture under the circumstances of a case such as this, where the noncompliance is de minimis and defendant has shown no prejudice whatsoever.

(Internal citations omitted) (emphasis added).

The general rule in New York is if a contract contains a pre-suit dispute resolution provision, the failure to comply with that provision likely will bar a claim for breach of the contract. As this decision shows, the courts have created a narrow exception to this rule. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the dispute resolution requirements of a contract.

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Posted: June 5, 2018

Party Cannot Enforce Estoppel Certificates it Accepted Knowing that the Representations Were Not True

On June 5, 2018, the First Department issued a decision in Aerotek, Inc. v. 757 3rd Ave. Associates, LLC, 2018 NY Slip Op. 03943, holding that a party could not rely on an estoppel certificate it accepted knowing that it was not true, explaining:

Plaintiffs seek to recover tenant improvement costs pursuant to two leases. Defendant landlord and seller, 757 3rd Avenue Associates, LLC, argues that plaintiffs are estopped to assert their right to reimbursement because they executed tenant estoppel certificates stating that defendant 757 was not in material default of the leases and that they had no further rights to receive landlord contributions for tenant improvements. Since the tenant estoppel certificates state that they are being made with the knowledge that defendant 757 (among others) will rely upon them, defendant 757 is an appropriate party to seek to enforce these certificates.

However, the complaint alleges that defendant 757 was aware of the reimbursement request beginning in December 2014, and that from that date until April 2015, when it received the tenant estoppel certificates, plaintiffs took no action to suggest that they were withdrawing their reimbursement request or that they were willing to forgo payment. Accepted as true for purposes of this motion to dismiss, the allegations of the complaint show that defendant 757 cannot enforce the estoppel certificates, because it accepted them knowing the contrary, and true, fact that plaintiffs were still seeking reimbursement for the improvement costs.

(Internal citations omitted) (emphasis added).

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: June 4, 2018

Insurance Broker Liable for Failure to Obtain Coverage

On May 17, 2018, Justice Knipel of the Kings County Commercial Division issued a decision in 1015 70th St., LLC v. M&S Ins. Agency, Inc., 2018 NY Slip Op. 30999(U), holding an insurance broker liable for failure to obtain coverage, explaining:

It is well established that an Insurance broker acting as an agent of its customer has a duty of reasonable care to the customer to obtain specifically requested coverage within a reasonable time after the request, or to inform the customer of the agent’s inability to do so. A broker may be held liable for negligence in failing to procure insurance where the broker failed to exercise due care in the transaction. Liability will also be found where the broker falsely informs the party seeking insurance that the insurance has been obtained. Lustigman explains, in paragraphs 6 and 7 of his affidavit, that plaintiff engaged M&S to procure insurance and that the closing was scheduled for the next day, i.e., October 17, 2013, and “thus, time was of the essence.” M&S did not inform plaintiff that it could not timely procure a policy, but accepted the assignment from plaintiff to timely procure an insurance policy by the date of the closing. The emails submitted show that Lustigman, on behalf of M&S, never indicated to plaintiff that he could not timely procure an insurance policy. Rather, M&S represented to plaintiff that M&S did obtain an insurance policy for plaintiff by October 17, 2013 by providing a binder to plaintiff that showed an effective date of October 17, 2013, when no policy was actually in place.

M&S argues that the presentation of a binder to plaintiff did not constitute a representation that it had procured an insurance policy for plaintiff. However, Insurance Law § 2118(f)(2)(B) defines a “binder” as “written evidence of a temporary insurance contract.” Thus, by providing a binder to plaintiff, M&S affinnatively represented to plaintiff that plaintiff had insurance coverage.

M&S further argues that the binder sent to plaintiff was merely a “sample binder” based on a quoted estimate, and that plaintiff knew that coverage was not yet bound at the time that it received the binder. M&S claims that “plaintiff was well aware that the policy was in the process of being bound, but not yet bound.” However, nowhere in the emails did Lustigman ever inform plaintiff that the insurance policy was not bound despite M&S’ providing of a binder to plaintiff or that the binder was just a “sample.” Lustigman admitted, at his deposition, that there was no email or other written document showing that he told plaintiff that the binder was a sample binder, or that insurance coverage was not bound. Lustigman even admitted, at his deposition, that an insurance binder demonstrates that insurance is in effect. There is no evidence which supports M&S’ argument that M&S informed plaintiff that the binder was a sample binder or that the binder did not evidence an actual insurance policy. Furthermore, it is noted, as plaintiff points out, that M&S’ claim that the binder was not an actual binder, but only a “sample binder,” would mean that M&S intended to defraud plaintiff and plaintiff’s lender by intentionally and falsely representing that there was insurance in place when there was no such insurance.

. . .

M&S, citing Springer v Allstate Life Ins. Co. of N. Y (94 NY2d 645, 649 [2000]), additionally contends that since a binder does not constitute part of an insurance policy, the binders given by it to plaintiff did not show that there was insurance coverage. M&S’ reliance upon Springer, however, is misplaced. In Springer (94 NY2d at 649), the Court of Appeals held that an insurance binder is a temporary or interim policy until a formal policy is issued, and that a binder provides interim insurance, usually effective as of the date of application, which terminates when a policy is either issued or refused. Springer (94 NY2d at 649-650) stands for the principle that a binder does not create rights that do not otherwise exist based on the common terms of an insurance policy. Here, in contrast, plaintiff is claiming that M&S provided a binder to it as evidence that M&S had timely procured an insurance policy for it when no insurance was bound.

. . .

Based on the above, the court finds that plaintiff has satisfied its burden of making a prima facie showing that M&S was negligent as a matter of law and M&S has failed to raise any bona fide triable issue of fact. Therefore, summary judgment in plaintiffs favor on the issue of liability with respect to plaintiffs negligence claim must be granted.

(Internal quotations and citations omitted).

If you have questions regarding an insurance coverage dispute, contact Schlam Stone & Dolan partner Bradley J. Nash, who heads the firm’s insurance recovery practice, at bnash@schlamstone.com.

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Posted: June 3, 2018

Plaintiff Survives Summary Judgment on Quantum Meruit Claims Relating to Chinese Arena Football

On May 23, 2018, Justice Kornreich of the New York County Commercial Division issued a decision in Yun Capital, LLC v. Judge, 2018 NY Slip Op. 31009(U), allowing quantum meruit claims relating to a Chinese arena football league to go forward to trial, explaining:

Alternatively, plaintiff is entitled to proceed with its quantum meruit claim. That the parties previously entered into the Letter Agreement does not bar plaintiffs quantum meruit claim. The scope of services governed by the Letter Agreement (raising capital) is different from those governed by the alleged oral agreement (Yun serving as CEO and plaintiffs 16,000 hours of work running the company). Defendants do not cite authority for the proposition that the existence of a prior written agreement governing a different subject matter bars a claim in quasi contract for different work. If the finder of fact concludes that there was no oral agreement, plaintiff may seek to prove the value of its work and recover accordingly. That said, since defendants dispute the scope and reasonableness of the invoiced work, plaintiff is not entitled to summary judgment on this claim.

(Internal citations omitted).

Quantum meruit is a claim to recover for work that was not done pursuant to a contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where there is a dispute over payment for work that was not covered by a contract.

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Posted: June 2, 2018

Plaintiff Cannot Avoid Arbitration Absent Allegations of Fraud Relating Specifically to Inclusion of Arbitration Clause

On May 25, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Curtis v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 2018 NY Slip Op. 31011(U), holding that a plaintiff could not avoid the effect of an arbitration clause without showing that the clause, not just the contract in which it was contained, was a result of fraud, explaining:

Turning to plaintiffs’ fraud-based arguments, all parties acknowledge that, under the doctrine of separability, plaintiffs’ allegations of fraud will not defeat the arbitration provisions in question unless the alleged fraud either goes to the arbitration provision itself or was part of a grand scheme that permeated the entire contract including the arbitration provision. With respect. to the latter, it must be established that the agreement was not the result of an arm’s length negotiation, or the arbitration clause was inserted into the contract to accomplish a fraudulent scheme. Plaintiffs do not dispute that the agreements were a result of an arm’s length negotiation, thus their argument that fraud permeated the entire agreements reduces to an argument that the arbitration clauses were inserted into the agreements to accomplish the purported fraudulent scheme.

Plaintiffs’ argument that the fraud went to the arbitration provision itself contravenes the allegations of the complaint, which relate to inducement to contract generally. Additionally, although plaintiffs argue the arbitration clauses will help defendant conceal its fraudulent scheme from the eyes of the public, and thus aid defendant in repeating this scheme, plaintiffs have made no allegations that the arbitration clauses were inserted in the contract to help accomplish the fraudulent scheme alleged in the complaint – that is, the fraudulent scheme perpetrated against them. Plaintiffs have cited no case in which a court found that the potential use of an arbitration clause in the ex post cover-up of a fraudulent scheme is sufficient to find that the arbitration clause was inserted into the contract to accomplish a fraudulent scheme. Indeed, if such an argument were sufficient, it would be difficult to imagine a scenario in which an allegation of fraud did not render an arbitration clause unenforceable.

(Internal quotations and citations omitted).

This decision illustrates the general rule that dispute resolution provisions in a contract, such as a waiver of a right to a jury trial or a requirement that a dispute be arbitrated, will be enforced even when there is a claim for breach of the contract or that the plaintiff was induced to enter into the contract (but not the dispute resolution provision itself) by fraud. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the enforceability of a contractual dispute resolution provision.

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Posted: June 1, 2018

Rejecting Official Exchange Rate, Court Finds That There is a Question of Fact Regarding Proper Exchange Rate Between Venezuelan Bolivars and US Dollars

On May 29, 2018, Justice Crane of the New York County Supreme Court issued a decision in Diaz v. Galopy Corporation International, N.V., Index No. 656721/2016, granting summary judgment in lieu of complaint recognizing a money judgment issued by a Venezuelan court, but finding that there was a question of fact regarding the exchange rate that should be used, explaining:

Plaintiffs motion presents the interesting question of what exchange rate the court should apply to the Venezuelan judgment. Plaintiff seeks recognition of the Venezuelan Judgment in US dollars, in the amount of one million, seven hundred nineteen thousand, five hundred sixty-one dollars and fifty-seven cents (US $1,719,561.57). Plaintiff argues that this sum is the equivalent amount of the Venezuelan Judgment expressed in US dollars at the rate of exchange prevailing on October 21, 2016, the date of entry of the Venezuelan Judgment. Plaintiff takes the position that the applicable rate of exchange is the “official” exchange rate that the government of Venezuela sets.

. . .

Defendant argues that should the court convert the Venezuelan Judgment into US dollars, the court should convert at the true market rate, rather than the so called “official” rates. Defendant contends that the “official rates” do not represent true rates of exchange because they are used for limited purposes and are inaccessible to the Venezuelan public generally. Defendant’s experts describe Venezuela’s “official” exchange rate as “blocked.” A blocked currency is a currency that cannot freely be converted to other currencies on the foreign exchange market as a result of exchange controls. It is mainly used for domestic transactions and does not freely trade on a forex market, usually due to government restrictions.” Both of defendant’s experts describe the realities of the legal and black market exchanges in Venezuela. They discuss how the DICOM exchange rate is effectively “blocked” because it is a rigged exchange rate set by a government they describe as corrupt. In reply, plaintiff argues that the court must look to Venezuela’s “official” rate of exchange because alternative rates of exchange that defendant proposes are illegal, other “black market” exchange rates are illegal, and would subject plaintiff to criminal charges.

Judiciary Law § 27 requires that: “(a) Except as provided in subdivision (b) of this section, judgments and accounts must be computed in dollars and cents.” In turn, subsection (b) states:

In any case in which the cause of action is based upon an obligation denominated in a currency other than currency of the United States, a court shall render or enter a judgment or decree in the foreign currency of the underlying obligation. Such judgment or decree shall be converted into currency of the United States at the rate of exchange prevailing on the date of entry of the judgment or decree.

Because recovery can be rendered only in the currency of the forum, courts are required to ascertain a figure in that currency representing the equivalent value of the amount of foreign funds in question.

Occasionally, determining the rate of exchange representing that equivalent value becomes problematic due to the political climate in the original jurisdiction. Where local currency restrictions would prevent a party from converting its money into dollars, New York courts have been disinclined to employ “official” exchange rates, seeking instead to appraise realistically the relative values of the currencies.

Like this case, Hughes involved a “blocked” currency (Hughes Tool Co., v United Artists Corp., 279 AD 417,421, 110 N.Y.S.2d 383 [1st Dept 1952]; ajf’d, 304 NY 942). Refusing to apply certain official exchange rates, the Hughes court reasoned that:

it will not do to sacrifice justice to the easy way of resorting, as a substitute for a free market, to an official rate of exchange that has been established for other purposes and does not apply to transactions in controversy.

The Hughes court noted that it was plaintiff’s burden to:

establish the application [sic] rates of exchange as much as it is to prove the other necessary elements of damage. Proof of the so called [sic] ‘official’ rate of exchange does not sustain the burden, where it also appears that the foreign currency is blocked for the purpose in suit.

Thus, the Hughes court ignored the official rate of exchange and remanded the case for a trial for plaintiff to demonstrate other methods of ascertaining the values here of these blocked foreign currencies.

Here, plaintiff has not met its burden to establish the applicable rate of exchange under Hughes merely by describing the “official” rates or by decrying unofficial rates as “illegal” in Venezuela. Defendant raises an issue of fact in opposition to plaintiff’s motion by its experts who describe the realities of the exchange markets in Venezuela. Indeed, defendant’s experts have made a prima facie showing that the Venezuelan currency is blocked, that plaintiff has failed to refute. Plaintiff’s expert does not dispute that the exchange rate defendant propounds reflects more accurately the true market rate for exchanging bolivars to dollars. Plaintiff also does not contest defendant’s showing that ordinary people cannot exchange bolivars for dollars at the DICOM rate.

Finally, the exchange rate in effect on the date of the New York judgment’s entry is the applicable rate. Section 27(b) states that “a court shall render or enter a judgment or decree in the foreign currency of the underlying obligation.” The statute then immediately follows with the words “Such judgment or decree shall be converted into currency of the United States at the rate of exchange prevailing on the date of entry of judgment or decree.” Given its placement, the term “Such judgment” refers back to the judgment in the immediately preceding sentence, (i.e. the New York judgment).

Accordingly, it is
ORDERED that plaintiffs motion for summary judgment in lieu of complaint against defendant is granted only to the extent of recognizing the Venezuelan Judgment, and is otherwise
denied without prejudice to bringing a new motion under the correct applicable exchange rate; . . . .

(Internal quotations and citations omitted).

A key element in commercial litigation is proving damages. As this decision shows, sometimes even seemingly simple damages issues, like currency exchange rates, can be complicated. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding proving damages.

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