On October 30, 2019, the Second Department issued a decision in Galasso, Langione & Botter, LLP v. Galasso, 2019 NY Slip Op. 07769, upholding the imposition of a constructive trust, explaining:

We agree with the Supreme Court’s determination to grant that branch of the Barons’ motion which was for summary judgment on the eighth cause of action in Action No. 4, seeking the imposition of a constructive trust, insofar as asserted against GC Lawcondo, and to deny that branch of the motion of the moving defendants which was for summary judgment dismissing that cause of action insofar as asserted against GC Lawcondo. A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee. The elements of a constructive trust are: (1) a confidential or fiduciary relationship, (2) an express or implied promise, (3) a transfer in reliance thereon, and (4) unjust enrichment flowing from the breach of the promise. However, these elements serve only as a guideline, and a constructive trust may still be imposed even if all of the elements are not established. Here, the Barons demonstrated their prima facie entitlement to the remedy of a constructive trust by showing that escrow funds entrusted to Peter were used by GC Lawcondo, an entity wholly owned and controlled by the Firm, to purchase a commercial office condominium to be used as a law office. The moving defendants failed to raise a triable issue of fact in opposition.

(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 tool to help a judgment creditor collect on a judgment: the imposition of a constructive trust over the proceeds of wrongly-transferred funds. 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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On October 23, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Wells Fargo Bank, N.A. v. Andalex Aviation II, LLC, 2019 NY Slip Op. 33165(U), finding that a plaintiff had met the high burden for the appointment of a receiver, explaining:

Finally, the Plaintiff seeks to appoint an independent receiver pursuant to CPLR § 5228 to receive distributions of Allen Silverman’s membership interests in the Silverman LLCs. Under CPLR § 5228, 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.

There are three factors that a court will consider when deciding whether appointment of a receiver is justified: (1) 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. Appointment of a receiver is especially appropriate when the property interest involved is intangible, lacks a ready market, and presents nothing that a sheriff can work with at an auction, such as the interest of a psychiatrist/judgment debtor in a professional corporation of which he is a member.

Here, the Plaintiff argues that a receiver is appropriate because Allen Silverman has refused to be deposed due to illness, has not turned over any property to the NYC Sheriff’s Office, and there are significant concerns regarding the risk of fraud. The court agrees. Although alternate remedies may be available to the Plaintiff, such as a turnover proceeding, this option does not sufficiently protect the Plaintiff’s interests in the interim, in light of prior transfers allegedly made by Allen Silverman. The receivership will also increase the likelihood of satisfaction as a receiver ensures that Allen Silverman’s interests in the relevant property is preserved. The record further indicates that there is a risk of fraud absent the appointment of a receiver.

Under these circumstances, appointment of a receiver is appropriate, and especially so because Allen Silverman’s membership interests in the Silverman LLCs are intangible and lack a ready market. Accordingly, the Plaintiff’s motion to appoint a receiver is granted such that the receiver will receive potential distributions from the Silverman LLCs and the receiver will prevent the sale, pledge, hypothecation, or other voluntary encumbrance of his interest in such companies.

(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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Upcoming argument in the Court of Appeals in November 2019 that may be of interest to commercial litigators:

1. Centi v. McGillin, APL-2018-00114 (to be argued Wednesday, November 20) (“Contracts—Illegal Contracts—Dispute over money accumulated from illegal bookmaking business—whether loan agreement involving funds is enforceable.”)

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On October 11, 2019, Justice Schecter of the New York County Commercial Division issued a decision in Avnet, Inc. v. Deloitte Consulting LLP, 2019 NY Slip Op. 33026(U), holding that a claim was barred by a release, explaining:

It is well established that a valid release constitutes a complete bar to an action on a claim which is the subject of the release. If the language of a release is clear and unambiguous, the signing of a release is a jural act binding on the parties. A release should never be converted into a starting point for litigation except under circumstances and under rules which would render any other result a grave injustice. Significantly, a release may encompass unknown claims, including unknown fraud claims, if the parties so intend and the agreement is fairly and knowingly made.

The Settlement Agreement released Deloitte from any and all claims or actions or causes of action of every nature and description, including both known and unknown claims relating to Project Evolve. This includes an claims for breach of the MSA and the pre-settlement Work Orders and any related tort and statutory claims. Avnet’s contention that alleged fraud committed by Deloitte in conjunction with its presettlement work on Project Evolve is beyond the scope of the release is baseless. A release of all unknown claims includes fraud claims whose basis was not yet known to the plaintiff at the time of the release. That is the essence of a release of unknown claims.

The failure to uphold the release, which Avnet admits was not the product of duress, would foment commercial uncertainty by denying Deloitte the benefit of the bargain that these parties struck. Avnet, an extremely sophisticated party that was represented by counsel in connection with the Settlement Agreement, is bound by its explicit decision to release unknown claims. It was well aware of the serious problems with Project Evolve and their devastating effects on its business operations and adamantly believed that Deloitte was at fault. It could have sued or insisted on a more limited release, for instance, that carved out claims for gross negligence, intentional misconduct and fraud. It did not and must live with its own decision and the deal that it chose to make.

Nor can Avnet seek to vitiate the release by claiming fraudulent inducement. While a release may be set aside if it was procured by fraud, to do so, the plaintiff must plead, with specificity, a representation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury. Moreover, the fraud that allegedly induced the release must be a separate fraud from the subject of the release. ere this not the case, no party could ever settle a fraud claim with any finality.

Avnet has not pleaded any actionable fraud separate from the subject matter of the release. Virtually all of its complaints about how it was fraudulently induced into executing the release are based on Deloitte’s pre-Settlement Agreement conduct, including the alleged negligence and concealment that form the basis of Avnet’s underlying fraud claim. In any event, these allegations cannot support a fraud claim because the Settlement Agreement disclaims such collateral oral representations. Avnet’s contention that this disclaimer is not specific enough to be enforceable is wrong because the Settlement Agreement does not merely contain a general merger clause. Nor does the Settlement Agreement contain the. usual one-line, blanket disclaimer of collateral representations. Rather, paragraph seven of the Settlement Agreement is an extensive, single-spaced clause taking up half of a page. As the Court of Appeals long ago explained:

Were we dealing solely with a general and vague merger clause, our task would be simple. A reiteration of the fundamental principle that a general merger clause is ineffective to exclude parol evidence to show fraud in inducing the contract would then be dispositive of the issue. To put it another way, where the complaint states a cause of action for fraud, the parol evidence rule is of a bar to showing. the, fraud either in the inducement or in the execution despite an omnibus statement that the written instrument embodies the whole agreement, or that no representations have been made. Here, however, plaintiff has in the plainest language announced and stipulated that it is not relying on any representations· as to the very matter as to which it now claims it was defrauded. Such a specific disclaimer destroys the allegations in plaintiff’s complaint that the agreement was executed in reliance upon these contrary oral representations.

Paragraph seven, therefore, bars the fraud claim, as it negates any reliance.

Simply put, no sophisticated party agreeing to the terms of section seven could reasonably rely on collateral representations. Avnet was well aware of the mess that it believed Deloitte created. It chose to keep working with. Deloitte and to release it as opposed to cutting ties with Deloitte and holding it to account for the system’s problems. Having done so, it cannot reverse course or make a different choice now. Based on the release, the only potentially viable claims it has are those that accrued after the execution of the Settlement Agreement.

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

Settlement agreements are treated just like any other contract in New York, and as this decision shows, if you release all claims against a party, including claims of which you may be unaware, the court will enforce that promise. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a settlement agreement.

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On October 4, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Shandong Yuyuan Logistics Co., Ltd. v. Soleil Chartered Bank, 2019 NY Slip Op. 33033(U), holding that at the complaint stage, a plaintiff can plead both contract and quasi-contract claims, explaining:

To prevail on a cause of action for unjust enrichment, a plaintiff must establish (1) the other party was enriched, (2) at that party’s expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered. The Amended Complaint alleges that Shandong is the rightful owner of the urea, and that the defendants wrongfully used the Sale Documents to obtain the urea and then sold it to a third party and retained the proceeds. The Amended Complaint argues that the defendants have therefore been unjustly enriched at Shandong’s expense. Accordingly, the Amended Complaint states a cause of action for unjust enrichment.

To the extent that the defendants argue that the unjust enrichment cause of action must be dismissed because an express agreement governs the dispute, this argument is unpersuasive. At this stage of the proceedings, the plaintiffs are permitted to plead contract and quasi contract claims in the alternative. In any event, the cause of action for unjust enrichment is not premised on the alleged breach of the Letter Agreement, but rather it arises from facts wholly independent of any contract upon which plaintiff sues. The defendants’ alleged failure to remit payment to Shandong upon proper presentment of the Sale Documents or, in the alternative, to return the Sale Documents to Shandong constitute a breach of the Letter of Credit. The defendant’s alleged use of the Sale Documents to take possession of the urea and subsequent sale of the urea and retention of the profits constitute a factually distinct cause of action for unjust enrichment separate and apart from the cause of action for breach of contract.

(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. 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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On October 17, 2019, the First Department issued a decision in Federal Home Loan Bank of Boston v. Moody’s Corp., 2019 NY Slip Op. 07491, holding the CPLR 205 relation back applies to federal claims transferred to New York federal court, explaining:

CPLR 205(a) applies to prior actions commenced in a federal court within this state. Plaintiff’s prior action, which was removed to the U.S. District Court for the District of Massachusetts on May 27, 2011, was transferred from that court — which lacked general personal jurisdiction over defendants — to the Southern District of New York (SDNY). 28 USC § 1631 provides in pertinent part, Whenever a civil action is filed in a court and that court finds that there is a want of jurisdiction, the court shall transfer such action to any other such court in which the action could have been brought at the time it was filed, and the action shall proceed as if it had been filed in the court to which it is transferred on the date upon which it was actually filed in the court from which it is transferred. Hence, the motion court properly treated plaintiff’s prior action as if it had been filed in the SDNY as of May 2011.

(Internal quotations and citations omitted).

It is not unusual for the statute of limitations to be an issue in complex commercial litigation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether a claim is barred by the statute of limitations.

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On October 16, 2019, Justice Borrok of the New York County Commercial Division issued a decision in 388 Broadway Owners, LLC v. Mary MeGee, on Television, Ltd., 2019 NY Slip Op. 33074(U), holding that the Statute of Frauds bars a claim based on an alleged oral guarantee of rent obligations, explaining:

Pursuant to General Obligations Law § 5-701, a special promise to answer for the debt of another person is void unless it is in writing and signed by the party to be charged with the obligation arising thereunder. Here, there is no evidence of a writing in which Ms. Megee personally guaranteed OTL’s rent, and 388 Broadway admits that no such writing exists. In his deposition testimony, Barry Leon acknowledged that the alleged personal guaranty was based on an oral agreement and was not reduced to a writing. Without such a writing, any alleged oral agreement in which Ms. Megee personally guaranteed OTL’s rent obligations violates the statute of frauds and is therefore unenforceable. 388 Broadway has failed to come forward with evidence to raise an issue of fact as to the enforceability of the purported personal guaranty of OTL’s rent. Accordingly, the branch of the motion for partial summary judgment as to Ms. Megee’s personal liability for OIL’s rent obligations is granted.

(Internal quotations and citations omitted).

New York contract law–usually straightforward–has traps for the unwary, like the requirement that some contracts be in writing (the statute of frauds). There are ways to escape from those traps, but the exceptions are narrow and difficult to meet. 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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On October 15, 2019, Justice Borrok of the New York County Commercial Division issued a decision issued a decision in Mahar v General Elec. Co., 2019 NY Slip Op. 29322, staying a suit in favor of an earlier-filed federal action, explaining:

CPLR § 2201 provides that, the court in which an action is pending may grant a stay of proceedings in a proper case, upon such terms as may be just. New York courts generally follow the first in-time rule, which provides the court which has first taken jurisdiction is the one in which the matter should be determined and it is a violation of the rules of comity to interfere. Contrary to the plaintiffs’ argument in opposition to the stay, the First Department has held that the two actions need not be identical. Rather, a stay is warranted where there is a substantial identity of parties, and both actions arose out of the same subject matter or series of alleged wrongs. This standard is readily met here. The Federal Action, which was filed over eight months before this action, and the instant action (i) arise out of the same subject matter or series of alleged wrongs, (ii) involve substantially the same parties, and (iii) seek substantially the same relief. Comity, orderly procedure and judicial economy are all well served by a stay of the instant action as certain rulings in the Federal Action are likely to resolve (or at least streamline) the issues in this case. Staying this case based on the earlier-filed Federal Action, therefore, would avoid the risk of inconsistent rulings, ensure orderly proceedings (including coordinated discovery if the cases go forward) and preserve judicial resources. There is little to no risk of prejudice to the plaintiffs from the stay, nor have the plaintiffs articulated any. Simply put, neither party will suffer undue detriment or gain undue advantage by having the earlier-filed action determined first, particularly since the other action may well determine the underlying issues. Finally, the fact that this action involves claims under the 1933 Act and the Federal Action involves claims under the 1934 Act is not a reason to deny a stay motion: it is inconsequential that different legal theories or claims are set forth in the two actions. As noted, the hallmark for a stay under First Department law is that both actions seek to recover for the same alleged harm based on the same underlying events, and that is concededly the case here.

(Internal quotations and citations omitted).

This decision shows that sometimes (but not always) a court will dismiss a duplicative lawsuit. The question, of course, often turns on whether the lawsuit is truly duplicative. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question about whether one of multiple lawsuits should be dismissed as duplicative.

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On October 24, 2019, the First Department issued a decision in Matter of Nexia Health Tech., Inc. v. Miratech, Inc., 2019 NY Slip Op. 07701, holding that a court may not vacate an arbitral award because the arbitrator erred in interpreting or applying the law, explaining:

At issue is whether the arbitrator manifestly disregarded the law in failing to apply the limitations of liability clause of the MSA to the damages awarded for Phase 2.

It is undisputed that the Federal Arbitration Act (FAA) applies to this dispute. To modify or vacate an award on the ground of manifest disregard of the law, a court must find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case. Vacatur on the basis of manifest disregard of a contract is appropriate where the arbitral award contradicts an express and unambiguous term of the contract. Manifest disregard of the law is a doctrine of last resort limited to the rare occurrences of apparent egregious impropriety on the part of the arbitrators and is severely limited.

A party seeking to vacate an award pursuant to 9 USC § 10(a)(4) bears a heavy burden. It is not enough to show that the arbitrator committed an error — or even a serious error. Section 10(a)(4) permits courts to vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly. Courts are obligated to give deference to the decision of the arbitrator. This is true even if the arbitrator misapplied the substantive law in the area of the contract.

When the arbitrators give at least a barely colorable justification for the outcome reached, their finding stands. Mere error does not equate to a manifest disregard for the law.

Here, the arbitrator gave a colorable justification for the outcome reached. The arbitrator found that a correct reading of the clause assumes that invoices and amounts due must have been paid and the clause limits liability upon payment in the ordinary course. Since no invoices were paid for Phase 2, the arbitrator reasoned that the limitation of liability clause did not limit the damages awarded to respondent for work performed under Phase 2. In reaching his conclusion, the arbitrator did not contradict an express term of the contract, rather, he interpreted it. Even if the arbitrator’s interpretation was erroneous, it does not equate to manifest disregard of the law.

(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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On October 21, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Lynx Capital Partners of NJ, LLC v. Bardown Capital LLC, 2019 NY Slip Op. 33134(U), dismissing fraudulent conveyance claims for insufficient allegations of fraud, explaining:

Under Debtor & Creditor Law § 273, a plaintiff should plead that (1) the debtors made a conveyance, (2) they were insolvent before the conveyance or rendered insolvent, and (3) the conveyance was made without fair consideration. Under Debtor & Creditor Law § 275, a conveyance must also be incurred without fair consideration. Debtor and Creditor Law § 276 addresses actual fraud and requires that a conveyance be incurred with actual intent to hinder, delay, or defraud either present or future creditors. As it is difficult to prove actual intent of fraud, the plaintiff may rely on badges of fraud to support the case, including: (1) a close relationship between the parties to the alleged fraudulent transaction, (2) a questionable transfer not in the usual course of business, (3) inadequacy of the consideration, (4) the transferor’s knowledge of the creditor’s claim and the inability to pay it, and (5) and retention of control of the property by the transferor after the conveyance. A claim for fraud is also subject to the heightened pleading standard under CPLR § 3016 (b).

Here, the complaint fails to specify any factual allegations to support the requisite elements of fraudulent conveyance. Significantly, the Plaintiff is unable to identify with particularity what was transferred or when the transfer occurred. The Plaintiff also fails to plead that the alleged fraudulent conveyance under Debtor & Creditor Law §§ 273, 275, and 276 was made without fair consideration. During oral argument, the Plaintiff indicated it possessed facts to meet the heightened pleading standard (which alleged facts were not included in the complaint) and requested dismissal of the fraud claims be without prejudice. Accordingly, the Defendants’ motion to dismiss the sixth and seventh causes of action is granted without prejudice.

(Internal quotations and citations omitted).

We have substantial experience in helping judgment creditors collect on judgments and search for and attach assets worldwide. A big part of that effort is using the legal tools–such as claims for fraudulent conveyance discussed in this opinion–for recovering property that has been transferred to a third party to avoid its being seized to satisfy 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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