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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: November 5, 2018

Court Enforces No Damages for Delay Clause in Construction Contract

On October 22, 2018, Justice Ostrager of the New York County Commercial Division issued a decision in Hailey Insulation Corp. v. WDF, Inc., 2018 NY Slip Op. 32717(U), enforcing a no damages for delay provision in a construction contract, explaining:

Finally, WDF moves to dismiss Hailey’s fourth cause of action seeking delay damages. The subcontract states: “The Subcontractor acknowledges that the Subcontract Price is based on the fact that the Contractor is not liable, absent actual fraud or intentional misconduct, for any damages or costs due to delays, accelerations, impact, non-performance, interferences with performance, suspension or change in the performance or the sequence of the Contractor’s Work.” The Court of Appeals has held that a clause which exculpates a contractee from liability to a contractor for damages resulting from delays in the performance of the latter’s work is valid and enforceable and is not contrary to public policy if the clause and the contract of which it is a part satisfy the requirements for the validity of contracts generally. The exception to the rule stated by the Court of Appeals allows for damages to be recovered for: (l) delays caused by the contractee’s bad faith or its willful, malicious, or grossly negligent conduct, (2) uncontemplated delays, (3) delays so unreasonable that they constitute an intentional abandonment of the contract by the contractee, and (4) delays resulting from the contractee’s breach of a fundamental obligation of the contract.

Here, the allegations that the delays were caused by WDF’s bad faith or grossly negligent conduct are entirely conclusory and are clearly intended to fit within the exceptions stated in Corinno. The delays are not so unreasonable as to constitute an intentional abandonment of the contract, nor do they result from a breach of the fundamental obligations of the contract. Further, the delays of a subcontractor on this type of construction project are reasonably foreseeable and thus cannot be said to be uncontemplated within the meaning of the Corinno exception. Therefore, Defendant’s motion to dismiss Plaintiffs fourth cause of action for delay damages is granted.

(Internal quotations and citations omitted).

One of the reasons parties often choose to have their contracts governed by New York law is that courts generally enforce agreements 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: November 4, 2018

Party Sanctioned for Excessive Attorneys’ Eyes Only Designations

On October 18, 2018, Justice Masley of the New York County Commercial Division issued a decision in Callsome Solutions Inc. v. Google, Inc., 2018 NY Slip Op. 32716(U), sanctioning a party for making excessive attorneys’ eyes only confidentiality designations, explaining:

Our court system is dependent on all parties engaged in litigation abiding by the rules of proper practice. Accordingly, 22 NYCRR Section 130-1.1 (a) empowers courts with discretionary authority to sanction attorneys or parties, in the form of costs and fees, for frivolous conduct. Conduct is frivolous if: (1) it is completely without merit in law and cannot be supported by a reasonable argument for an extension modification or reversal of existing law; (2) it is undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another, or (3) it asserts material factual statements that are false. To preserve the integrity of the court system, sanctions are imposed to deter future frivolous conduct and vexatious litigation and dilatory or malicious litigation tactics.

Various factors are considered to determine whether conduct is frivolous. First, and foremost is the broad pattern of conduct by the offending attorneys or parties. A corollary consideration is whether the conduct was continued when it became apparent, or should have been apparent, that the conduct was frivolous, or when such conduct was brought to the attention of the parties or to counsel.

Google contends that Callsome has failed to establish frivolous conduct as defined by Rule 130-1.1 (c). According to Google, its conduct here can hardly be frivolous because: (1) the designations were appropriately and thoughtfully applied to protect the confidentiality of the work of the Google Play security and policy enforcement teams; (2) Google has repeatedly accommodated Callsome’s demands for de-designations and its good faith efforts should not be construed as an admission of misconduct; and (3) a contrary finding would have a chilling effect on future offers to compromise.

AEO designations shall be made as sparingly as possible since they have severe consequences affecting the adversary’s investigation, attorney client communications, the search for truth, and the judicial system, which is inevitably drawn into the discovery process.

The court is hard pressed to see how Google’s voluminous AEO designations were appropriately applied. The large number of designations, reviews, re-reviews, trickle of de-designations, culminating in a wholesale de-designation on the eve of argument of this motion does not support Google’s assertion of appropriateness. Further, Google’s admitted use of AEO designations to punish Callsome for causing the enforcement action also evidences that the AEO designations were not appropriate. While using AEO designations as a litigation tactic certainly requires strategic thinking, it does not constitute the thoughtfulness contemplated.

While Google characterizes its de-designation of almost all of its previously designated AEO documents following the February 2018 court conference as good faith cooperation, the court sees a strategy to maliciously injure. Google’s wholesale de-designation confirms that Google’s initial designations were not made in good faith. That Google has de-designated on at least five occasions illustrates this point. Each time, Callsome was compelled to re-review.

Google’s actions appear to be an effort to thwart judicial scrutiny of its designations. Significantly, Google became noticeably proactive in its de-designation efforts only after the court became involved and the issue of sanctions was raised. Indeed, after the February 2018 court conference, the slow trickle of de-designated documents to Confidential quickened as Google de-designated nearly all its previously designated AEO documents. Submitting a box of 228 documents for the court’s review after Callsome’s effective argument for sanctions does not negate this appearance. Indeed, it exemplified Google’s strategy of document dumps and allowed the court to review and confirm Callsome’s allegations.

A slow trickle of corrections does not rectify initial improper designations. For instance, Google originally designated as AEO 32 documents because they allegedly contained the type of information that, as a matter of practice, Google considers highly sensitive and does not divulge publicly, particularly not to individuals who created the apps. However, the court reviewed the 32 documents Google referenced and found these documents contained correspondences sent by Callsome to Google describing certain suspension notices and the circumstances surrounding receipt of the suspension notices. They also included correspondences from Google to Callsome requesting additional information about the suspended apps. (Id.) Not only are these documents bereft of highly sensitive information, but there can be no argument that divulging them to Callsome posed some sort of risk because these correspondences were drafted by or sent to Callsome.

Google also originally designated AEO 36 documents that concern or otherwise reveal market share research conducted internally by Google personnel. However, Google’s categorization of these documents as market share research was disingenuous. The court reviewed the 36 documents and confirmed that these documents contain correspondences among Google personnel from 2013, who discuss a different app that allegedly fueled bad behavior on Google Play. They have nothing to do with market share research — assessment of the percentage of the market for a product or service that a company supplies. Google’s conduct demands attention if it is to be stopped.

Although Google justifies its bulk de-designation as due to the passage of time, Google rejected this exact reason for de-designating when Callsome raised this months before this motion was filed. Google offers no credible explanation for what changed in that short time. Recycling Callsome’s objection suggests that Google’s original justification was baseless.

Additionally, Google’s pattern of improper conduct continued even after the parties’ February 2018 conference with the court, as its attempt to extract concessions from Callsome was improper. Google’s March 6, 2018 offer to compromise was nothing of the sort. No public policy is served by crediting Google’s purported offer of compromise, the sincerity of which is belied by the impractical nature of its deadline: 24 hours. Before it could consider Google’s offer, Callsome had to cross-reference this latest batch of de-designated documents against earlier designations.

AEO designations are not negotiable. Discovery is either “extremely sensitive” technical data or commercially sensitive or strategic plans, or research and development or not. Either documents are truly secret and their disclosure will be harmful to the owner of the document or not. If not, then the discovery may be protected by a designation of confidential and the discovery remains unavailable to the public, but usable by the parties for the purposes of this litigation only. A party cannot over designate documents then hold the improperly designated documents hostage until the adversary surrenders. Such conduct will not be countenanced by this court. Google argues that its conduct is not egregious by comparison to others who were sanctioned for pursuing meritless claims, withholding relevant evidence and deliberately violating a court order to produce evidence.

However, Google is not immunized because other parties have done worse or because there were even more documents and depositions that could have been improperly AEO designated. There were serious consequences of Google’s improper designations, not only delay, but also the impact on the communications between Callsome and its attorney.

In sum; Google’s conduct flouts widely accepted rules of civility embedded in New York litigation, and in particular the Commercial Division. Google adopted a pattern of partially complying with demands for disclosure, resulting in a delay in the completion of discovery. By providing piecemeal de-designations, only when prompted, and dropping its designations, only when threatened with court review, Google effectively prevented the expeditious resolution of this litigation, as it was Google’s excessive AEO designations, not Callsome’s challenges of those designations, that caused the delay here. This pattern of dilatory conduct is precisely the type of chronic noncompliance that breeds disrespect in a culture in which cases can linger for years without resolution.

AEO designations seek to protect one party from injury – usually injury to the party’s business – that might occur if the information is revealed to the party’s competitor. If Google was concerned that Callsome might not protect Google’s secrets, then it could have amended the Confidentiality Agreement to add penalties for violation of the confidentiality designation e.g. financial; over designation is not the solution. As a result, Google successfully shifted the burden of reviewing its designations to Callsome. To allow such improper use of the Confidentiality Agreement is to reward that behavior.

(Internal quotations and citations omitted).

This decision is about a practice that may not be apparent to clients, but that can be a problem in litigation involving trade secrets and other highly-sensitive business information. Courts will allow very sensitive evidence to be disclosed only to counsel, and not to their clients, because of the danger of competitors getting each other’s trade secrets. This decision shows that abusing the right to designate highly sensitive documents as attorneys’ eyes only can get a litigant in trouble. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has a question regarding whether a litigant’s conduct has crossed the line from creative to sanctionable.

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Posted: November 3, 2018

Court Appoints Receiver Over Judgment Debtor’s Property

On October 15, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Herman v. Herman, 2018 NY Slip Op. 32652(U), appointing a receiver over a judgment debtor’s property, explaining:

CPLR 5228(a) provides that upon motion of a judgment creditor the court may appoint a receiver who may be authorized to administer, collect, improve, lease. repair or sell any real or personal property in which the judgment debtor has an interest or to do any other acts designed to satisfy the judgment. The appointment of a receiver pursuant to section 5228(a) is a matter within the court’s discretion. In deciding whether the appointment of a receiver is justified, courts have considered the (I) alternative remedies available to the creditor; (2) the degree to which receivership will increase the likelihood of satisfaction; and (3) the risk of fraud or insolvency if a receiver is not appointed. The court may appoint a receiver to sell real property to satisfy a judgment where, as here, the judgment-debtor owns the property as a tenant in common.

Maurice has taken various steps to frustrate plaintiffs’ ability to enforce the judgment, including encumbering his real property and filing a frivolous bankruptcy action. A receivership will indisputably increase the likelihood of satisfaction; nearly a quarter of the judgment will be satisfied by the transfer of Maurice’s interest in the Property. Aside from Maurice having tens of millions of dollars in liquid assets, the transfer is the only conceivable way to make a meaningful dent in the judgment. Indeed, Maurice’s counsel allegedly stated to one of Plaintiffs’ attorneys that Maurice has hidden his assets and Plaintiffs will never find them, and that Maurice also has a history of avoiding judgment enforcement. Finally, there is real risk of fraud absent appointment of a receiver as Maurice has already permitted the property to accrue substantial tax liabilities and caused Windsor to enter into a 99-year lease for a duplex apartment for no rent. The appointment of a receiver is necessary to stop Maurice’s improper frustration of collection of the judgment.

Maurice’s arguments in opposition are unpersuasive. That plaintiffs have alternative judgment enforcement remedies is not dispositive. Given the size of the judgment, such remedies will be cumulative, and not in the alternative to, the transfer of Maurice’s interest in the Property. Unless Maurice has more than $100 million of liquid assess, it is apparent that his interest in the Property will necessarily be a significant means of satisfying the judgment. It is illogical to force plaintiffs to wait years until some portion of the judgment is satisfied before seeking transfer of the Property. Indeed. if Maurice really has the means of satisfying the judgment and does not wish to part with the Property, he can, and has always been able to, simply voluntarily satisfy the judgment. He has chosen to avoid doing so, requiring the appointment of a receiver here. Maurice’s contention that the Property should be sold is once again rejected. Maurice, moreover, has already agreed that the property is worth $47.5 million– approximately $6 million more than his own appraiser said it is worth–and he is bound by his stipulation as to the Property’s value.

(Internal quotations and citations omitted).

We have substantial experience in helping judgment creditors collect on judgments and search for and attach assets worldwide. This decision discusses one rarely-ordered tool to help a judgment creditor collect on a judgment. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client need help collecting on a judgment.

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Posted: November 2, 2018

Defendants Estopped From Raising Usury Defense

On October 17, 2018, Justice Ash of the Kings County Commercial Division issued a decision in Sasidharan v. Piverger, 2018 NY Slip Op. 32669(U), holding that defendants that arranged the terms of an investment were estopped from asserting a usury defense, explaining:

Upon consideration of the foregoing, the Court finds that the Assoumou Defendants are estopped from raising usury as a defense as a matter of law. New York recognizes that a borrower may be estopped from interposing a usury defense when, through a special relationship with the lender, the borrower induces reliance on the legality of the transaction. Thus, where defendant attorney induced the plaintiff’s reliance, arranged the terms of the investment, and drafted the promissory note sued upon, defendant was estopped from asserting the defense of usury.

Here, it is undisputed that Assoumou approached Plaintiffs for the loan, the Assoumou Defendants’ representative, Njoku, drafted the Note and personal guaranties, and the Assoumou Defendants’ counsel provided Plaintiffs with the Enforceability Opinion, the express purpose of which was to induce reliance on the validity of the loan transaction. The Assoumou Defendants’ contention that Plaintiffs dictated the terms of the Note is conclusory and without any evidentiary support. Based upon this undisputed evidence, Plaintiffs are entitled to summary judgment against the Assoumou Defendants on their first cause of action. However, Plaintiffs are only entitled to recover the loan amount at a legal rate of interest.

(Internal citations omitted).

New York’s usury laws are subject to many limitations (this case discusses one). Still, there are circumstances where the interest rate in an agreement is so high that a court will not enforce it. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding whether the interest rate in an agreement or note is legal.

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Posted: November 1, 2018

Proceeding to Compel Arbitration Cannot be Initiated Until Opponent Begins Litigation

On October 16, 2018, Justice Ostrager of the New York County Commercial Division issued a decision in KPMG LLP v. Kirschner, 2018 NY Slip Op. 32661(U), holding that a plaintiff cannot bring a proceeding to compel arbitration until the defendant begins litigation, explaining:

CPLR § 7503(a) provides:

A party aggrieved by the failure of another to arbitrate may apply for an order compelling arbitration …. If an issue claimed to be arbitrable is involved in an action pending in a court having jurisdiction to hear a motion to compel arbitration, the application shall be made by motion in that action. If the application is granted, the order shall operate to stay a pending or subsequent action, or so much of it as is referable to arbitration.

Likewise, the FAA dictates: a party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition for an order compelling arbitration. The Appellate Division has stated that under CPLR § 7503(a) a party to an arbitration agreement is not aggrieved until litigation of an issue within the operation of the arbitration provision is attempted. Federal courts interpreting the FAA have come to the similar conclusion that unless the respondent has resisted arbitration, the petitioner has not been aggrieved by anything, and there is nothing for the court to compel. The Second Circuit has stated that a party has refused to arbitrate if it commences litigation or is ordered to arbitrate the dispute by the relevant arbitral authority and fails to do so. Thus, a party is considered aggrieved if the non-aggrieved party (1) commences litigation in lieu of arbitration, or (2) refuses to comply with an order of a relevant arbitral authority to arbitrate the dispute.

Here, it is undisputed that (1) the Trustee had not commenced litigation at the time KPMG’s petition was filed, and (2) no order had been issued by an arbitral authority. KPMG was thus not an aggrieved party at the time it commenced this special proceeding.

KPMG filed this petition before the Trustee commenced the California Action, and thus, the Court does not have jurisdiction to adjudicate such a petition from a non-aggrieved party even though the California Action has since been commenced. Further, courts have adhered to the time-of-filing rule regardless of the costs it imposes. Thus, the petition in this special proceeding must be dismissed for lack of subject matter jurisdiction and lack of standing.

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

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: October 31, 2018

Litigant Sanctioned for Seeking to Arbitrate Previously-Litigated Claims

On October 9, 2018, Justice Schecter issued a decision in Gladstein v. Keane, 2018 NY Slip Op. 32562(U), sanctioning a litigant for seeking to arbitrate previously-litigated claims, explaining:

It is well settled that the right to arbitration may be modified, waived or abandoned. The question of whether parties waived their right to arbitrate by their litigation-related conduct is for the court to decide. A litigant who fails to seek to arbitrate a claim and, instead, fully litigates a claim on the merits, cannot later change his mind and insist the claim be arbitrated. Once waived, the right to arbitrate cannot be regained. By raising issues related to compliance with the Purchase Agreement-including the amounts, if any, that Gladstein was obligated to pay Keane and the Firm–in this forum as opposed to proceeding with arbitration, Keane waived his right to arbitrate.

Additionally, Keane’s claim that he is entitled to value based on the artwork, which was raised before this court, is precluded by res judicata regardless of how Keane seeks to recast it. Under res judicata, or claim preclusion, a valid final judgment bars future actions between the same parties on the same cause of action. As a general rule, once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy. This rule applies not only to claims actually litigated but also to claims that could have been raised in the prior litigation.

It is clear that Keane’s artwork claim arises from the same transactions addressed at trial. Keane tried to attack the amount of the Note based on the artwork and was unable to do so not only because he waited too long but because his defense was decided to be without merit. If Keane wanted to make any affirmative claims related to the Purchase Agreement, he had plenty of time to properly raise them in advance of trial in this action in the forum that he chose to litigate other issues related to amounts Gladstein potentially owed pursuant to the Purchase Agreement. He did not do so. He cannot now litigate or relitigate issues that he either could have properly pursued or were rejected or that would effectively undermine determinations made after trial (namely, that Keane owed $174,000 on the Note and was not entitled to reduce that amount by the value of the, artwork and that Gladstein did not owe Keane any money based on the Purchase Agreement and the Employment Agreement). Thus, even though Keane may not have asserted the precise claim concerning the artwork that he now seeks to arbitrate, that such claim arises from the Purchase Agreement (and, moreover, according to defendants is related to the value of the Note) means that it is barred. To be sure, that Keane was denied leave to amend a related, meritless claim concerning the artwork is of no moment. Even if the denial was purely due to lack of timeliness, res judicata would still apply with equal force.

Consequently, the arbitration is frivolous and plaintiff is awarded reasonable attorneys’ fees incurred in responding to the arbitration demand and in making this motion.

(Internal quotations and citations omitted).

Part of being a good litigator is thinking of winning arguments other lawyers miss. However, as this decision shows, courts have little patience for lawyers who cross the line from creative to making frivolous arguments. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has a question regarding whether an argument has crossed the line from creative to sanctionable.

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Posted: October 30, 2018

Court Allows Defendant to File an Answer 600 Days Late

On October 10, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Iconic Home LLC v. Franco, 2018 NY Slip Op. 32597(U), allowing a defendant to file an answer 600 days late, explaining:

CPLR 3012(d) provides that upon the application of a party, the court may extend the time to appear or plead, or compel the acceptance of a pleading untimely served, upon such terms as may be just and upon a showing of reasonable excuse for delay or fault. CPLR 2004 allows the court to extend the time fixed by any statute, rule or order for doing any act, upon such terms as may be just and upon good cause shown. One way to demonstrate good cause is by making a factually detailed explanation of law office failure. While not every law office failure will satisfy the good cause requirement, a party should not be deprived of his or her day in court where the delay is attributable to plaintiffs prior counsel and there is no prejudice.

Defendant puts forth a number of excuses for his failure to file a timely answer and counterclaims, most notably that his former counsel failed to file a timely answer, and then withdrew for health reasons, leaving defendant no choice but to proceed as a pro se litigant due to his financial difficulties. Aside from referencing the length of the delay – 600 days – and defendant’s withdrawal of funds in violation of the Preliminary Injunction, plaintiff offers little else to support its argument that it will be prejudiced if this motion is granted. While the delay suffered-is not insignificant, plaintiff will not be as prejudiced by the granting of this motion than defendant would be by its denial, particularly now that it appears defendant is finally ready to proceed with the assistance of counsel.

In New York, the courts are very generous in excusing (most–NOT ALL) errors so cases can be decided on the merits. However, there are limits to this generosity. 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 file an answer.

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Posted: October 29, 2018

Complaint Withstands Motion to Dismiss Based on In Pari Delicto/Illegality Defense

On October 22, 2018, Justice Fisher of the Kings County Supreme Court issued a decision in Juan Carlos Nunez v. Athletes’ Careers Enhanced and Secured, Inc., No. 502950/2018 (Supreme Court, Kings County), declining to dismiss an action due to an in pari delicto/illegality defense, explaining:

In Nunez, the plaintiff, a former employee of a prominent sports agency in Brooklyn known as ACES, sued his past employer for unpaid commissions he earned when the agency signed baseball players from the Dominican Republic that plaintiff introduced. Some of those players were ultimately caught up in baseball’s steroids scandal, and plaintiff pleaded guilty in a federal criminal proceeding for his role in assisting certain ACES players obtain performance-enhancing drugs (PEDs).

ACES moved to dismiss the action on grounds of in pari delicto and illegality, asserting that plaintiff’s guilty plea prohibited him from seeking any relief against ACES from the court. Justice Fisher disagreed, upholding the complaint:

Here, plaintiff’s own allegations regarding his involvement in arranging for kickbacks, as well as the allegations in the complaint and admissions in the guilty plea regarding plaintiff’s involvement in steering players to Anthony Bosch and regarding his involvement in the attempted PED cover-up, all constitute illegal or immoral conduct that could bar contractual recovery (McConnell, 7 NY2d at 4 71). Nevertheless, the allegations of the complaint and the guilty plea do not show, as a matter of law, “that the illegality [was] central to or a dominant part of the plaintiff’s whole course of conduct in performance of the contract” (McConnell, 7 NY2d at 471; see Alpha Interiors, Inc. , 101 AD3d at 661; R.A.C. Group, Inc. v Board of Educ. of City of NY, 21 AD3d 243,249 [2005]).

The court held that because plaintiff’s contractual right to commissions attached when the players were signed, the later illegal conduct did not foreclose recovery as a matter of law.

NOTE: Schlam Stone & Dolan LLP represents plaintiff Juan Carlos Nunez in the case.

This does not come up often, but this case reminds us that the court’s will not enforce an illegal contract. 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: October 28, 2018

Compliance with No-Action Clauses Excused in Suit Against RMBS Trustee

On October 18, 2018, the First Department issued a decision in Blackrock Balanced Capital Portfolio (FI) v. U.S. Bank N.A., 2018 NY Slip Op. 06990, holding that the plaintiff’s compliance with no-action clauses was excused in a suit against an RMBS trustee, explaining:

We reject defendant’s argument that all of the breach of contract claims must be dismissed because plaintiffs have failed to assert that they have complied with all of the requirements of the no-action clauses in each of the PSAs. Compliance with the clauses was excused because it would be futile to demand that the trustee commence an action against itself for breaches of the PSA. Once performance of the demand requirement in the no-action clause is excused, performance of the entire provision is excused, including the requirement that demand be made by 25% of the certificate holders. Under the plain language of the no-action clause, there is no basis for requiring that the suit be supported by 25% of certificate holders.

(Internal citations omitted).

Schlam Stone & Dolan represents investors in RMBS actions against underwriters and trustees. If you or a client are RMBS investors and have questions regarding potential claims against a trustee, a trustee instruction proceeding or how to influence the trustee’s prosecution of a put back action, contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com.

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Posted: October 27, 2018

Plaintiff Denied Summary Judgment on Note Because of Question of Fact Regarding Whether Note Was Part of an Illegal Fee-Splitting Agreement

On October 17, 2018, the Second Department issued a decision in Linchitz Practice Mgt., Inc. v. Daat Med. Mgt., LLC, 2018 NY Slip Op. 06891, affirming the denial of summary judgment on a note because of questions of fact regarding whether the note was part of an illegal fee-splitting agreement, explaining:

We agree with the Supreme Court’s determination to deny those branches of the plaintiff’s motion which were for summary judgment on the causes of action to recover the balance due on the promissory note and for an award of costs and attorney’s fees, and, upon searching the record, to award the defendants summary judgment dismissing those causes of action. Contrary to the plaintiff’s contentions, the evidence submitted by the parties in connection with the motion for summary judgment established, prima facie, that the agreement and the promissory note were a pretext for an unlawful fee-splitting arrangement in violation of the Education Law because they circumvented New York’s prohibition on physicians splitting fees with nonphysicians. It is the settled law of this State (and probably of every other State) that a party to an illegal contract cannot ask a court of law to help him or her carry out his or her illegal object, nor can such a person plead or prove in any court a case in which he or she, as a basis for his or her claim, must show forth his or her illegal purpose. Where the parties’ arrangement is illegal the law will not extend its aid to either of the parties or listen to their complaints against each other, but will leave them where their own acts have placed them.

(Internal quotations and citations omitted).

This does not come up often, but this case reminds us that the court’s will not enforce an illegal contract. 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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