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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: July 7, 2019

Court Grants Specific Performance of Contract Because of Difficulty in Enforcing Judgment on Defendants’ Foreign Assets

On June 19, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Crede CG III, Ltd. v. Tanzanian Gold Corp., 2019 NY Slip Op 31763(U), granting specific performance of a contract because of the difficulty of enforcing a money judgment on the foreign defendant’s assets, explaining:

The party seeking specific performance of a contract must show that it performed its contractual obligations, that the other party was was to perform its part, and that there is no adequate remedy at law. Money damages are regarded as an inadequate remedy at law when money cannot provide the benefits that the injured party expected to derive from the contract. This may occur where the subject matter of the particular contract is unique and has no established market value.

Crede claims the remedy at law, money damages, is insufficient, as it is undisputed that TGC’s assets are either ephemeral or located in Tanzania, which does not honor United States judgments. The decision whether or not to award specific performance is one that rests in the sound discretion of the trial court. In general, specific performance is appropriate when money damages would be inadequate to protect the expectation interest of the injured party and when performance will not impose a disproportionate or inequitable burden on the breaching party. Traditionally, specific performance has been held to be a proper remedy in actions for breach of contract for the sale of real property or when the uniqueness of the goods in question makes calculation of money damages too difficult or too uncertain. Similarly, agreements to convey shares of stock in a close corporation may be enforced by specific performance, as may an agreement to sell shares in a cooperative real estate corporation. The trial court must determine, in the first instance, whether money damages would be an adequate remedy by considering, among other factors, the difficulty of proving damages with reasonable certainty and of procuring a suitable substitute performance with a damages award.

Given the acknowledged ineffectiveness of this court’s judgment in obtaining relief in Tanzania. where TGC’s assets reside, the remedy at law of a money judgment will be inadequate. Specific performance, ordering TGC to provide the stock demanded pursuant to Crede’s exercise of the Warrants, is appropriate.

(Internal quotations and citations omitted).

We have substantial experience in helping judgment creditors collect on judgments and search for and attach assets worldwide. 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: July 6, 2019

Party Ordered to Pay Opponent’s Cost of Compelling Discovery As Sanction for Failing to Obey Discovery Orders

On June 14, 2019, Justice Masley of the New York County Commercial Division issued a decision in Borremans v. JG Worldwide LLC, 2019 NY Slip Op. 31772(U), ordering a party that failed to obey discovery orders to pay the costs of its opponent’s motions to compel, explaining:

If the credibility of court orders and the integrity of our judicial system are to be maintained, a litigant cannot ignore court orders with impunity. Indeed, a party that permits discovery to trickle in with a cavalier attitude should not escape adverse consequence. Accordingly, CPLR 3126 provides various sanctions for violations of discovery orders, the most serious of which are striking a party’s pleadings or outright dismissal of the action. The nature of the sanction for disobedience regarding court-ordered disclosure generally lies within the discretion of the IAS court. Any sanction levied by a court must be proportionate to the conduct at issue, and deterrence is an appropriate factor to consider.

Here, defendants have violated three successive court orders to produce discovery, and delayed the speedy resolution of this action at great personal cost to the plaintiff. Aside from defendants’ callous disregard for this court’s time and orders, what is particularly egregious is defendants’ use of dilatory tactics to ruin Borremans’ credit score. While defendants have attempted to hamper the fair adjudication of this matter, Borremans’ credit score has continued to plummet. Thus, in light of this egregious conduct, sanctions in the form of paying Borremans’ attorneys’ fees incurred to resolve these discovery disputes is appropriate here.

(Internal quotations and citations omitted).

A big part of complex commercial litigation is giving, receiving and evaluating evidence (this is called “discovery”). This decision discusses the problem of litigants not performing their discovery obligations and what can happen to them if they do not. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has a question regarding discovery obligations (and what to do if a litigant is not honoring those obligations).

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Posted: July 5, 2019

Commercial Division Justice Will Not Stay First-Filed Securities Act Case in Favor of Later-Filed Action in SDNY

On June 21, 2019, Justice Ostrager of the New York County Commercial Division issued a decision in Hoffman v. AT&T Inc., 2019 NY Slip Op. 31811(U), refusing to stay a first-filed Securities Act case in favor of a later-filed Securities Act action in federal court, explaining:

Prior to the creation of the Commercial Division of the New York State Supreme Court, and even thereafter, the general rule was that securities actions in this Court that were less comprehensive than related federal court actions, including actions first filed in this Court, should be stayed in favor of the more comprehensive federal court actions. The general rationale of Barron and its progeny is that where there is a substantial overlap between the parties and issues and relief sought in both state and federal courts, staying the state court case would avoid the waste of judicial resources, potential inconsistent rulings, and duplication of effort. And, federal courts have been perceived to have a greater familiarity with securities law.

Clearly, after the United States Supreme Court’s ruling in Cyan, Inc. v. Beaver Cnty. Emps. Ret. Fund, supra, and the creation of specialized commercial courts in New York, the reasoning of the Barron case cannot be mechanically applied. The circumstances present in this case do not lend themselves to the historical Barron analysis. Here, a New York plaintiff has initiated discrete claims on behalf of Time Warner shareholders that can be well on the way to judicial resolution while five sets of plaintiffs lawyers jockey for control of a federal court action that includes claims on behalf of individuals who are not members of the state court class as well as the members of the state court class. The liability issues in a 1933 Act case are, if anything, less complex than issues the Commercial Division resolves every week. Defendants are free to test the merits of plaintiffs claims before this Court, which is familiar with the issues in this case, and there is no reason to believe that the merits of plaintiffs claims cannot be resolved as efficiently and, perhaps, more expeditiously than the 1933 Act claims asserted in the federal action because the likelihood is that more than one set of counsel will be appointed to represent differently situated shareholders in the federal action and the pleadings in the federal court may not be fixed for an extended period of time. And, because the federal action involves broader issues and multiple classes of shareholders, the federal court may consider staying the 1933 Act claims in the federal action in favor of this earlier filed action. In short, the “first filed” rule must have some vitality in a post-Cyan world. Otherwise, 1933 Act cases could never proceed in state court whenever a subsequently filed federal court action asserts claims in addition to 1933 Act claims.

(Internal citations omitted).

We have substantial experience in litigation regarding securities, both in state and federal court. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client need help regarding a claim related to stocks, bonds or other financial instruments.

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Posted: July 4, 2019

Party’s Failure to State its Intent to Perform a Contract can Demonstrate Repudiation

On June 18, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Cooperstein v. Securewatch24 LLC, 2019 NY Slip Op. 31773(U), holding that a party’s refusal to confirm its intent to perform a contract can constitute repudiation of the contract, explaining:

The Defendants argue that the second cause of action for anticipatory repudiation should also be dismissed against Securewatch 24, LLC because the complaint does not allege a definite and final communication of an intention to forgo obligations under the relevant contracts. Mr. Cooperstein argues that its second cause of action remains viable because a party’s failure to state its intent to perform a contract can demonstrate repudiation. Mr. Cooperstein alleges that he e-mailed the Defendants on three occasions regarding payment of his unpaid commissions and each time, the Defendants did not respond. Affording the complaint every favorable inference, the Defendants’ failure to state its intent to perform under the Employment Agreement and Commission Agreement when such agreements required payment by a date certain is sufficient to state a cause of action for anticipatory repudiation. Accordingly, the Defendants’ motion to dismiss the second cause of action against Securewatch 24, LLC is denied.

(Internal citations omitted).

Contract law–usually straightforward–has traps for the unwary, like the rule discussed here that the failure to respond to a request for assurances that you will perform your contractual duties can be taken as a repudiation of the 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: July 3, 2019

Conviction Relating to Bribery of Defendant Does Not Bar Suit as a Matter of Law

On June 17, 2019, Justice Schecter of the New York County Commercial Division issued a decision in Adelhardt Constr. Corp. v. Citicorp N. Am., Inc., 2019 NY Slip Op. 31774(U), holding that a conviction relating to the bribery of the defendant did not bar a suit as a matter of law, explaining:

The seminal case governing when commercial bribery may be raised as an absolute defense to non-payment of a previously performed contract is McConnell v Commonwealth Pictures Corp. (7 NY2d 465 [ 1960]). McConnell begins with the premise, grounded in public policy, that a party to an illegal contract cannot ask a court of law to help carry out an illegal object and if the money plaintiff sues for was the fruit of an admitted crime no court should be required to serve as paymaster of the wages of crime. The Court of Appeals, however, was concerned that this rule could be used unjustly to allow a party to accept the fruits of a contract and then attempt to escape responsibility for payment based on any small illegality in the performance of an otherwise lawful contract, resulting in a windfall. The Court therefore emphasized that it is not every minor wrongdoing that will insulate the other party from liability for work done or good furnished. There must at least be a direct connection between the illegal transaction and the obligation sued upon.

Additionally, the Court held that the qualitative nature of the illegality must be sufficiently severe to warrant forfeiture, announcing that a party will be denied recovery even on a contract valid on its face, if it appears that it has resorted to gravely immoral and illegal conduct in accomplishing its performance. The and is critical. The Court of Appeals later explained that the gravely immoral prong is satisfied only when the illegality is inherently wrong, and not merely malum prohibitum by statute. These requirements exist to prevent parties from attempting to use the illegality defense as a sword for personal gain rather than a shield for the public good.

Citibank contends that ACC engaged in commercial bribery and that such illegal conduct definitively bars this action. It has not met its burden of demonstrating that dismissal is mandated by CPLR 321 l(a)(l) or (7) based on illegality. In the AC, ACC pleads that it performed millions of dollars worth of work for Citibank before it engaged in any illegal conduct. ACC further alleges that Cassisi, acting as Citibank’s agent, threatened to stiff ACC unless it performed additional work for him. ACC plausibly claims that it was extorted. While Citibank contends that ACC should have reported Cassisi to his superiors or called the police, it is understandable, under the facts pleaded, why rational commercial actors may not necessarily follow those aspirational courses of action. It is conceivable, under the facts alleged, that ACC was concerned that calling the police on Citibank would have a negative impact on a business relationship spanning more than half a century under circumstances where it was allegedly already owed millions of dollars that were unpaid.

Even considering the admissions in ACC’s plea agreement–in which the DA expressly contemplated that ACC may be owed money for legitimate construction services–and analyzing them along with the wrongs admitted by Citibank’s own employee, it is far from clear that ACC should be wholesale barred from any and all compensation for the entirety of the work it performed over years under the contracts. The issue is not whether ACC would be able to assert duress (and in fact it has no interest in invoking a doctrine that would allow it to avoid performing the contract), but rather, whether Citibank established that ACC’s conduct was sufficiently immoral to allow it to be entirely free of any payment obligation despite having obtained the benefit of ACC’s work. Here, Citibank did not conclusively establish as a matter of law (as it is required to do on a 3211 motion) that ACC’s conduct was gravely immoral so as to completely bar damages.

To be sure, ACC is not alleged to have bribed anyone to procure the initial contracts. ACC had been working with Citibank for more than half a century, long before Cassisi came into the picture in 2012. Nor is there any allegation that ACC ever provided substandard services but was given leeway because of bribes. The notion that ACC needed to bribe Citibank to procure work seems less likely than the need to get paid on millions of dollars of outstanding invoices and maintaining its decades-long relationship with Citibank. Citibank, which employed wrongdoers involved in the transactions, cannot take the moral high ground and escape paying for all services without any further inquiry.

Significantly, this case does not implicate concerns about public harm or the integrity of publicly-bid contracts, which would more readily justify automatic forfeiture even if inequitable.

Here, there was a private wrong that Cassisi inflicted on his in pari delicto employer and plaintiff played a part. Plaintiff pled guilty and admitted facts related to forging business records–not necessarily a malum in se offense. On this record, moreover, the extent of the wrong is uncertain. ACC’s forgery plea involved $442,000 of restitution; yet, it claims to be owed over $4 million for services accepted by Citibank. It is unclear that the bulk of the services provided bore any relationship to the forged documents. Additionally, Cassisi’s bribe-receiving plea and his admission that he accepted money from various contracting companies does not have any preclusive or binding effect on plaintiff. In the end, based on the documentary evidence, the court is not convinced that ACC engaged in the requisite grossly immoral conduct so as to bar any recovery. If discovery reveals that ACC was complicit in Cassisi’s wrongdoing in a manner involving far more moral turpitude than portrayed in the AC, it is possible that Citibank might be able to establish an illegality defense at summary judgment or trial. But on this motion to dismiss, there is insufficient documentary proof that the nature of ACC’s illegal conduct was so gravely immoral to justify precluding its ability to recover the millions of dollars it claims to be owed for the construction work it performed for Citibank.

(Internal quotations and citations omitted).

This decision relies on two common-sense propositions, although they are propositions that sometimes conflict: the courts will not enforce an illegal contract and the courts are reluctant to apply rules such as this one in ways that create an injustice. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether a contract is enforceable.

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Posted: July 2, 2019

Qui Tam Claim Not Subject to Particularity Requirements of CPLR 3106

On June 20, 2019, Justice Ostrager of the New York County Commercial Division issued a decision in State of New York v. Fieldturf USA Inc., 2019 NY Slip Op. 31726(U), holding that a qui tam claim was not subject to the particularity rules of CPLR 3106, explaining:

While fraud claims must be pled with particularity under the heightened pleading standard of CPLR § 3016, the qui tam plaintiff shall not be required to identify specific claims that result from an alleged course of misconduct, or any specific records or statements used, if the facts alleged in the complaint, if ultimately proven true, would provide a reasonable indication that one or more NYFCA violations are likely to have occurred. Thus, Relator need only allege facts that, if true, would reasonably indicate that FieldTurf likely violated the NYFCA at least once.

. . .

First, Relator’s allegations regarding FieldTurf’s affirmative misrepresentations are sufficiently pled under NYFCA’s more lenient pleading standard which does not require a qui tam relator to identify specific claims or specific records or statements used in connection with a false claim. Thus, it is sufficient that Relator alleges that each sale of Duraspine to the Government was caused by FieldTurf’s allegedly fraudulent sales literature and its agents’ knowing misrepresentations. Under the NYFCA pleading standard, Relator need not allege which specific records or statements used were relied upon by each Government entity in connection with each specific sale of Duraspine.

Second, Relator’s allegations that FieldTurf intentionally omitted significant information regarding the quality of Duraspine fields are sufficient to state a NYFCA violation. The United States Supreme Court has held that the False Claims Act encompasses claims that make fraudulent misrepresentations, which include certain misleading omissions. When a defendant makes representations in submitting a claim but omits its violations of statutory, regulatory, or contractual requirements, those omissions can be a basis for liability if they render the defendant’s representations misleading with respect to the goods or services provided.

Here, Relator alleges that the Government was fraudulently induced to purchase FieldTurf’s fields and that FieldTurf misleadingly omitted material information regarding the fields’ lack of durability when it sold the fields to the Government. In sum, Relator alleges that FieldTurf–despite a large-scale marketing campaign advertising its fields as having a ten-year lifespan-was entirely aware that its fields were failing after less than two years when it sold such fields to the Government. Based on the allegations that FieldTurf omitted material information regarding the defective nature of its products in connection with sales to the Government, Relator has pied one or more violations of the NYFCA sufficient to survive pre-answer dismissal.

(Internal quotations and citations omitted).

The New York False Claims Act (as well as the federal False Claims Act on which it is modeled) provides a way for private citizens to bring claims against those who defraud the government by making false claims to the government. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have non-public information about someone who has been cheating the government.

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Posted: July 1, 2019

Failure to Give Required Notice Doomed Indemnification Claim

On June 24, 2019, Justice Risi of the Queens County Commercial Division issued a decision in Quantum Servicing Corp. v. First Madison Servs. LLC, 2019 NY Slip Op. 51022(U), holding that the failure to give the required notice doomed a claim for contractual indemnification, explaining:

In Conergics Corp. v. Dearborn Mid-W. Conveyor Co., the seller of a corporation (Conergics) entered into a stock purchase agreement (SPA) with the buyer of the corporation (DMW) on November 3, 2007 and subsequently began an action against the latter for a judgment declaring that that it was not required to indemnify the buyer for certain tax losses. The buyer, alleging that the seller had breached the SPA by refusing to provide indemnification for the tax losses, counterclaimed for a declaratory judgment that the seller was obligated to provide it with indemnification. The dispute concerned a section of the SPA which provided in relevant part that “the Seller [Conergics] shall indemnify the Buyer [DMW] and hold the Buyer harmless from and against… all Taxes of the Company [Dearborn] for all taxable periods, or portions thereof, ending on or before the Closing Date in excess of the amount of Taxes reflected in the determination of Net Working Capital . . .”

In Conergics, Section 8.1(c) of the SPA required a party seeking indemnification with respect to a tax audit to give the other party “‘prompt[ ]’ written notice of the commencement of such an audit, but further provides that ‘a failure to give such notice will not affect’ the asserted indemnification right ‘except to the extent that [the indemnifying party] is actually prejudiced thereby.'” Section 8.5(b) of the SPA provided in substance that the seller would have the “the sole right” to represent the sold company’s interests in any audit, examination, or proceeding “by any Taxing Authority (‘Tax Audit’) with respect to taxable periods or portions thereof ending on or before the Closing Date.” Moreover, the SPA required the parties to “cooperate fully” with each other “in connection with any Tax Audit.”

On April 19, 2012, a Mexican tax authority (SAT) sent a letter to Dearborn announcing its determination to reopen the audit of Dearborn’s 2004 tax year (the second audit). Neither DMW nor Dearborn provided Conergics with written notice of the second audit in the manner specified by section 13.8 of the SPA until January 24, 2014, twenty-one months after the defendants had received notice of the second audit from the SAT in April of 2012. Instead, Dearborn assumed its own defense of the second audit in the proceedings before the SAT and in court by commencing a proceeding in a Mexican federal court to dispute whether the tax authority had the constitutional authority to conduct the second audit. On November 19, 2013, the SAT issued an adverse determination, but DMW waited two months before sending Conergics a letter, dated January 24, 2014, giving notice of the second audit and demanding indemnification pursuant to the SPA. By letter dated January 30, 2014, an attorney for Conergics rejected the indemnification demand and refused to assume the defense of the second audit on the grounds that defendants’ 21-month delay in giving notice had prejudiced Conergics by depriving it of its right to defend the audit under section 8.5(b) of the SPA. DMW continued the defense of the second audit, but without abandoning its claim for indemnification. The indemnification dispute was eventually added to others in a case already pending in the courts of New York State, and the indemnification dispute eventually reached the Appellate Division, First Department.

The Appellate Division stated early in its analysis of the case: “[D]efendants’ failure to notify plaintiffs of the second audit until 21 months after it was commenced—a breach of the SPA’s notice provision that, to reiterate, is not disputed on this appeal—relieves plaintiffs of their indemnity obligations with respect to the second audit only in the event plaintiffs establish that this breach caused them ‘actual[ ] prejudice[ ]’.” (Conergics Corp. v. Dearborn Mid-W. Conveyor Co., supra, 523,) “What we must determine,” the Appellate Court continued,” is the standard that plaintiffs must meet to demonstrate that the untimely notice of the second audit that they received caused them actual prejudice, and whether, on this record, that standard has been met.” (Conergics Corp. v. Dearborn Mid-W. Conveyor Co., supra, 523,) “We agree with plaintiffs” the Appellate Division stated further, “in view of their ‘sole right’ under the SPA to ‘control’ the defense of the second audit (expressly including the rights to choose counsel and to settle), plaintiffs need not establish ‘tangible economic injury’ to show that they have been actually prejudiced by the late notice. Rather, to establish actual prejudice due to late notice, it suffices for an indemnitor afforded the right to control the defense of an indemnifiable claim to show that it was deprived of its right to exercise that right for a material portion of the proceedings on the claim.” (Conergics Corp. v. Dearborn Mid-W. Conveyor Co., supra, 523—24.) “[W]e hold that such late notice actually prejudices the indemnitor when it results in a material deprivation of the indemnitor’s right to control the defense of the claim…” (Conergics Corp. v. Dearborn Mid-W. Conveyor Co., supra, 527,)

As a second reason for its decision, the Appellate Division added: “An additional ground for relieving plaintiffs of their indemnity obligations with respect to the second audit—independent of defendants’ failure to give timely notice—is that the deprivation of plaintiffs’ ‘sole right’ to defend the audit for 21 months, until after the SAT had completed its review and rendered an adverse assessment, constituted a sufficiently material breach of the indemnity provisions of the SPA to excuse plaintiffs’ duty to indemnify with respect to this audit.” (Conergics Corp. v. Dearborn Mid-W. Conveyor Co., supra, 530.)

The court agrees with the parties that Conergics is the controlling case although the wording of the Madison SPA, “except to the extent of any damage or liability caused or arising out of such delay,” is not the wording, “actually prejudiced, ” used in the Conergics SPA. As the attorney for Madison states in his memorandum of law dated August 7, 2018: ” There is no material difference between the ‘actual[ly] prejudice[d]’ language used in the Conergics SPA and the ‘any damage’ language used in the parties’ [to this action] SPA. Under both the Merriam-Webster dictionary and Black’s Law Dictionary, prejudice is defined respectively as ‘injury or damage resulting from judgment or action of another in disregard to one’s rights’ and ‘[d]amage or detriment to one’s legal rights.’ Also, as explained in Black’s Law Dictionary, the singular ‘damage’ (as used in the SPA) “is to be distinguished from its plural ‘damages’ which means a compensation of money.” “Moreover, the court notes that the Madison SPA expresses an intent to include both the impairment of legal rights and the obligation to pay compensation from the use of two words, “damage” and “liability.”

The attorney for Quantum argues that “Conergics while controlling is not dispositive.” This court finds Conergics both controlling and dispositive. It is true that the Appellate Division did not establish a definite, fixed threshold which must be crossed for prejudice to occur, but stated instead we need not define the lower limit of what would constitute a material deprivation of plaintiffs’ ‘sole right’ to control the defense of the second audit. The Appellate Division simply found that the threshold had been crossed under the facts and circumstances of the case. Similarly, this court finds that Quantum crossed the threshold under the facts and circumstances of this case. The court notes in particular that Quantum did not provide the defendants with notice of the claim in the manner required by the SPA until March 5, 2018, thirty-two months after Quantum first learned of the Trauts’ grievance. The Trauts began their federal action on September 21, 2015, and it remained pending until March 9, 2018, however, Quantum did not provide the defendants with notice of the claim in the manner required by the SPA until March 5, 2018, days before the case settled. Due to the long delay in providing Madison with notice of the Trauts’ claim, Quantum deprived Madison of the opportunity to obtain an earlier, possibly more favorable, settlement and left the defendant with the consequences of actions not taken by Quantum, including but not limited to incurring $162,839 in legal fees and costs in defense of the Traut claim. There is no issue of fact in this case concerning whether Madison suffered damage because Madison, an indemnifying party afforded the right to control the defense of an indemnifiable claim, established as a matter of law that it was deprived of its right to exercise that right for a material portion of the proceedings on the claim.

Quantum did not successfully distinguish Conergics and instead relies on cases that are inapposite. For example, CIH Int’l Holdings, LLC v. BT United States, LLC, (821 F. Supp. 2d 604[S.D.NY 2011]) decided approximately five years before Conergics , is inconsistent with the Appellate Division case, because it requires an allegation of tangible economic injury: CIH fails to allege that it suffered any tangible economic injury as a result of the allegedly delayed notice.

There are no issues of fact to be tried in this case, and Madison, not Quantum, successfully demonstrated its entitlement to summary judgment.

(Internal quotations and citations omitted).

We frequently litigate issues relating to the advancement or indemnification of litigation expenses such as attorneys’ fees to corporate officers, directors and employees. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding indemnification and advancement claims.

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Posted: June 29, 2019

Subsequent Agreement Reducing Tenant’s Rent Obligations Insufficient to Discharge Guarantor’s Obligations Under Initial Contract

On June 18, 2019, the First Department issued a decision in SpringPrince, LLC v. Elie Tahari, Ltd., 2019 NY Slip Op. 04885, holding that a subsequent agreement reducing a tenant’s rent obligations was insufficient to discharge a guarantor’s obligations under the initial contract, explaining:

Plaintiff’s motion for summary judgment in lieu of complaint was properly granted against defendant based on the guaranty in the lease. Here, there is no dispute that defendant guaranteed the payment of the tenant’s rent obligations, and that the tenant ceased making rent payments thereunder. Thus, defendant is obligated under the guaranty for the tenant’s default under the lease.

Defendant asserts that it is relieved of its obligations as guarantor under the lease based on the fact that subsequent to the signing of the lease and guaranty, the tenant and landlord signed an agreement to reduce the tenant’s rent obligations for a period of time, to which defendant alleges it did not consent. However, such assertion is unavailing. Under general contract rules, an obligation may not be altered without the consent of the party who assumed the obligation. Indeed, contracting parties may not alter the surety’s undertaking to cover a different obligation without the surety’s consent. An obligation is altered when the debtor is discharged from the original contract and a new contract is substituted in its place. The test is whether there is a new contract which will be enforced by the courts” (id.). However, “[i]ndulgence or leniency in enforcing a debt when due is not an alteration of the contract. The Court of Appeals has held that an agreement merely to remit part of the performance due from the principal without changing its character as by lessening the amount of rent to be paid under a guaranteed lease will not discharge the surety.

The subsequent agreement between the tenant and the landlord reducing the tenant’s rent obligations did not discharge defendant’s obligations under the guaranty as it merely constituted leniency on the part of the landlord and did not create a new contract between the parties.

(Internal quotations and citations omitted).

We have substantial experience in helping judgment creditors collect on judgments and search for and attach assets worldwide. 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: June 28, 2019

Protected Purchaser Provision of UCC 8-303 Does Not Defeat Claims

On June 18, 2019, the First Department issued a decision in Black Diamond Capital Mgt., LLC v. Oppenheimer Master Loan Fund, LLC, 2019 NY Slip Op. 04890, holding that the protected purchaser provision of UCC 8-303 did not defeat a plaintiff’s claims, explaining:

The “protected purchaser” provision of UCC 8-303 does not entitle Eaton to summary judgment. The three requirements for protected purchaser status are that the purchaser has (1) given value; (2) not had notice of any adverse claim to the security; and (3) obtained control of the security. The UCC 8—102(a)(1) definition of an adverse claim, as amended in the 1994 revisions to the UCC and adopted in New York in 1997, is a claim that a claimant has a property interest in a financial asset and that it is a violation of the rights of the claimant for another person to hold, transfer, or deal with the financial asset. As stated in the commentaries, this definition was intended to reject case law that might have been read to suggest that any wrongful action concerning a security, even a simple breach of contract, gave rise to an adverse claim. Absent unusual circumstances, an action for breach of contract would not give rise to a property interest in securities. However, where intentional or tortious conduct has resulted in a breach, the principles of equitable remedies dictate that a purchaser would not be able to avail itself of the protections of UCC 8-303. A different result would permit a party to knowingly induce the breach of an agreement to transfer a security and claim protected purchaser status, leaving the injured party with no recourse to obtain the actual security.

The present case involves more than a simple breach of contract. The securities at issue are unique as they are part of a closely held corporation and concern controlling rights. Additionally, the record does not establish, as a matter of law, that Eaton’s conduct in interfering with plaintiffs’ agreement to purchase the securities was unintentional and done without knowledge of plaintiffs’ rights. Issues of fact remain as to whether Eaton tortiously interfered with plaintiffs’ contractual rights.

(Internal quotations and citations omitted).

A significant part of our practice is representing buy-side financial institutions, often in disputes arising from the purchase or sale of securities. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a dispute over the purchase or sale of securities or other financial instruments.

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Posted: June 27, 2019

Communications Seeking Legal Advice Through Third-Parties Privileged

On June 18, 2019, the First Department issued a decision in Perella Weinberg Partners LLC v. Kramer, 2019 NY Slip Op. 04896, holding that communications seeking legal advice made through third parties nonetheless were privileged, explaining:

Nonparty respondents were seeking legal advice through third parties and had a reasonable expectation that their communications would remain confidential, as the communications set forth specific legal questions. That neither nonparty respondent had a retainer agreement is of no moment because, so long as the communications are for the purpose of rendering legal advice, the privilege applies even in the absence of a retainer agreement.

(Internal citations omitted).

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

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