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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: September 4, 2019

Purchaser Had Constructive Notice of Easement Even Though Easement Was Not Indexed to Lot

On September 3, 2019, the First Department issued a decision in Akasa Holdings, LLC v. 214 Lafayette House, LLC, 2019 NY Slip Op. 06447, holding that the purchaser of a lot had constructive notice of an easement even though the easement was not indexed in connection with the lot, explaining:

A bona fide purchaser of real property — one who purchases land in good faith and for a valuable consideration — takes the property free and clear of any prior conveyance, encumbrance or servitude of which the purchaser did not have actual or constructive notice at the time of the purchase. The question presented by this appeal is whether plaintiff, in purchasing a parcel of land in Manhattan, had constructive notice that the property (57 Crosby Street, a vacant lot) was burdened by a prior express easement that had been granted for the benefit of the parcel (214 Lafayette Street) diagonally to its rear. This question arises because, although the easement had been properly recorded and indexed upon its creation in 1981, the process of finding it through a title search at the time of plaintiff’s purchase in 2011 was complicated by a change that had been [*2]made in 1984 to 57 Crosby’s lot number on the Tax Map of the City of New York.

. . .

[W]e conclude that plaintiff purchased 57 Crosby with constructive notice of the 1981 easement and, therefore, lacks standing as a bona fide purchaser to void that encumbrance. . . . .

We begin by observing that defendant, in support of its summary judgment motion, established, prima facie, that, as owner of 214 Lafayette, it holds title to the 1981 easement. Specifically, defendant made out a prima facie case that the 1981 easement, as set forth in the declaration creating it, is an easement appurtenant to its parcel at 214 Lafayette.

An easement appurtenant occurs when the easement (1) is conveyed in writing, (2) is subscribed by the creator, and (3) burdens the servient estate for the benefit of the dominant estate. The easement passes to subsequent owners of the dominant estate through appurtenance clauses, even if it is not specifically mentioned in the deed. Once created, the easement runs with the land and can only be extinguished by abandonment, conveyance, condemnation, or adverse possession.

Defendant also established — and plaintiff has not disputed — that the 1981 easement was properly recorded and indexed against Lot 30 — which then encompassed both the servient estate (57 Crosby) and the dominant estate (214 Lafayette) — upon its creation in 1981. The question presented, therefore, is whether plaintiff, when it purchased 57 Crosby in 2011, had constructive notice of the 1981 easement, notwithstanding that the indexing of the easement had not been changed by the City Register when 57 Crosby was subdivided from Lot 30 in 1984 and reassigned its previous designation of Lot 9.

At this point, it should be noted that the answer to the foregoing question does not turn on whether the 1981 easement would have been found in a search in 2011 of the direct chain of title to 57 Crosby. Almost 40 years ago, the Court of Appeals held that the rule limiting constructive notice to recorded conveyances that are within the purchaser’s direct chain of title does not apply to instances in which the purchaser had access to a block and lot or tract indexing system, such as the one in use in New York City. Pursuant to the holding of Andy Associates, in counties using a block and lot indexing system, a purchaser is charged with record notice of all matters indexed under the block and lot numbers corresponding to the purchaser’s property, regardless of whether such information also appears in his or her direct chain of title. Thus, although (contrary to defendant’s assertions) the 1981 easement was not recorded within plaintiff’s direct chain of title, that circumstance has no bearing on the outcome of this appeal.

The principle that is determinative of the resolution of this appeal is a familiar one:

The intended purchaser of real property must be presumed to have investigated the title, and to have examined every deed or instrument properly recorded, and to have known every fact disclosed or to which an inquiry suggested by the record would have led. If the purchaser fails to use due diligence in examining the title, he or she is chargeable, as a matter of law, with notice of the facts which a proper inquiry would have disclosed.

. . .

When the doctrine of inquiry notice is applied to the facts of this case, two questions emerge. First, would the results of a search for title records indexed against Lot 9 in March 2011 have indicated to a reasonably prudent purchaser that it was necessary to expand the inquiry beyond documents indexed against Lot 9 to locate the records of all conveyances affecting 57 Crosby over the previous 40 years? If this question is answered in the affirmative, the next question is, would the 1981 easement have been revealed by a further “reasonable inquiry, as suggested by the facts obtained from the initial search? As indicated at the outset of this opinion, we answer both questions in the affirmative.

(Internal quotations and citations omitted).

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

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Posted: September 2, 2019

Where Contract Has Choice of Law Provision, Substantive Law of Chosen Jurisdiction Controls Award of Prejudgment Interest

On August 21, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Cricket Stockholder Rep, LLC v. Project Cricket Acquisition, Inc., 2019 NY Slip Op. 32469(U), holding that where a contract has a choice of law provision, the substantive law of the chosen jurisdiction controls the award of prejudgment interest, explaining:

Project Cricket does not oppose the motion except to the extent CSR requests the application of New York’s statutory rate for prejudgment interest.

Review of the Report indicates that the record amply supports Referee Feinberg recommendation, and I confirm the Report. The Report does not specifically address the issue of whether New York or Delaware’s statutory interest rate applies to prejudgment interest because that is beyond the scope of the issue referred.

. . .

In any event, it is undisputed that the Agreement is governed by Delaware law. In a contract action with a choice of law provision, the substantive law of the chosen jurisdiction controls the award of prejudgment interest. Therefore, I direct plaintiff Cricket Stockholder Rep, LLC to submit a proposed judgment for the Tax Refund amount of $2,773,406.00 and also showing the calculation of prejudgment interest for each of the individual Tax Refunds and its corresponding accrual date as confirmed herein.

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

The New York statutory rate of prejudgment interest is 9 percent–several times the prevailing Federal Reserve funds rate. This means that, for an old claim (or a claim that has been litigated for a long time), the interest award can be as big as the base damages. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the statute of limitations or the calculation of interest on a damages award.

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Posted: September 1, 2019

That Deadlocked Corporation Continued to Operate at a Profit Not Grounds for Refusing to Dissolve Corporation

On August 22, 2019, the Fourth Department issued a decision in Matter of Cellino v Cellino & Barnes, P.C., 2019 NY Slip Op. 06365, holding that the fact that a deadlocked corporation continued to operate at a profit was not grounds for refusing to dissolve the corporation, explaining:

[W]e reject respondents’ contention that the court erred in denying their motion insofar as it sought summary dismissal of the amended petition on the ground that dissolution would not benefit the shareholders because the PC has continued to function effectively and prosperously. The determination whether a corporation should be dissolved is within the discretion of the court, and the benefit to the shareholders of a dissolution is of paramount importance in making that determination. Although respondents submitted evidence demonstrating that the PC has continued to conduct business at a profit, dissolution is not to be denied in a proceeding brought pursuant to Business Corporation Law § 1104 simply because the corporate business has been conducted at a profit or because the dissension has not yet had an appreciable impact on the profitability of the corporation.

Here, the record contains ample evidence of dissension and deadlock between petitioner and Barnes, and we conclude that, in opposition to respondents’ showing that the PC continues to operate profitably, petitioner raised issues of fact whether dissension and deadlock have so impeded the ability of the PC to function effectively that dissolution would benefit the shareholders. In a close corporation like the PC, the relationship between the shareholders is akin to that of partners and when the relationship begins to deteriorate, the ensuing deadlock and dissension can effectively destroy the orderly functioning of the corporation. When a point is reached at which the shareholders who are actively conducting the business of the corporation cannot agree, dissolution may be in the best interests of those shareholders, and we agree with the court’s determination that a hearing should be held to give the parties an opportunity to present their evidence on this controverted issue.

(Internal quotations and citations omitted).

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

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Posted: August 31, 2019

Filing Amended Complaint Did Not Moot Pending Motion to Dismiss

On August 22, 2019, the Fourth Department issued a decision in Paramax Corp. v. VoIP Supply, LLC, 2019 NY Slip Op. 06267, holding that filing an amended complaint did not moot a pending motion to dismiss, explaining:

Initially, we take judicial notice of an amended complaint filed by plaintiff after Supreme Court ruled on defendants’ motion, and incorporate its factual allegations into our CPLR 3211(a)(7) analysis, in which we accept the facts as alleged in the complaint as true, accord plaintiff the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory. We reject plaintiff’s contention that defendants’ appeal is rendered moot by the filing of an amended complaint. Although an appeal from an order denying a motion to dismiss a complaint may be moot when that complaint has been superseded by an amended complaint, such an appeal is not moot where, as here the new pleading does not substantively alter the existing causes of action.

(Internal quotations and citations omitted).

Because New York procedural rules give a litigant the right to amend its complaint (at least) once without the court’s permission, the situation described in this decision–an amended complaint being filed while a motion to dismiss is pending–is not all that rare. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where the plaintiff has amended its complaint while a motion to dismiss is pending.

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Posted: August 30, 2019

Tortious Interference Claim Dismissed on Summary Judgment for Lack of Evidence That Defendant Intended to Cause Breach

On August 22, 2019, the Fourth Department issued a decision in Transpo Bus Servs., LLC v. New York Bus Sales, L.L.C., 2019 NY Slip Op. 06289, holding that a claim for tortious interference with contract was properly dismissed on summary judgment for lack of evidence that the defendant intended to cause the breach, explaining:

Tortious interference with contract requires the existence of a valid contract between the plaintiff and a third party, defendant’s knowledge of that contract, defendant’s intentional procurement of the third-party’s breach of the contract without justification, actual breach of the contract, and damages resulting therefrom. We conclude that defendant established entitlement to judgment as a matter of law by submitting the affidavit of its owner stating that, in forwarding the email, defendant did not intend to induce a breach of the contract but instead intended to minimize any harm to defendant’s reputation and to encourage Brighton to persuade plaintiff to perform its obligations under the contract. In opposition, plaintiff failed to tender evidence raising a material question of fact whether defendant intended, by forwarding the email, to induce breach of the contract.

(Internal quotations and citations omitted).

In New York, there are circumstances where someone can be held liable for causing someone else to break their contract with you (tortious interference with contract), and they can even be held liable for causing someone not to enter into a contract with you in the first place (tortious interference with prospective economic advantage). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think someone has interfered with your rights relating to a contract.

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Posted: August 29, 2019

Breach of Oral Contract Claim Barred by Statute of Frauds

On August 21, 2019, the Second Department issued a decision in Martin Greenfield Clothiers, Ltd. v. Brooks Bros. Group, Inc., 2019 NY Slip Op. 06225, holding that a claim for breach of an oral contract was barred by the statute of frauds, explaining:

Pursuant to the terms of an alleged oral agreement, the plaintiff, a men’s tailored clothing manufacturer, was to be the exclusive manufacturer of certain custom suits for the defendant, a retail clothier. As per the terms of the alleged oral agreement, either party could terminate the agreement upon one-year notice. Allegedly, the defendant breached the oral agreement by terminating it without providing the requisite notice.

Based on the foregoing, the plaintiff, by its amended complaint, sought to recover damages for breach of contract and under the theory of promissory estoppel. The defendant made a pre-answer motion pursuant to CPLR 3211(a) to dismiss the amended complaint. The Supreme Court granted the motion, and the plaintiff appeals.

We agree with the Supreme Court’s determination directing dismissal of the plaintiff’s breach of contract cause of action pursuant to CPLR 3211(a)(5), since the alleged oral agreement is unenforceable as violative of the statute of frauds. The plaintiff’s contention that UCC 2-201(1) is not applicable to the alleged oral agreement is improperly raised for the first time in a reply brief on appeal. Further, contrary to the plaintiff’s contention, the alleged oral agreement does not fall within the exception to UCC 2-201(1) for specially manufactured goods. Moreover, the alleged oral agreement, which by its terms cannot be performed within one year, also is unenforceable under General Obligations Law § 5-701(a)(1).

(Internal quotations and citations omitted).

Contract law–usually straightforward–has traps for the unwary, like the requirement that some contracts be in writing (the statute of frauds). And as this decision shows, sometimes there are ways to escape from those traps, but the exceptions are narrow and, as shown here, 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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Posted: August 28, 2019

Corporate Parent Not Liable Under Plaintiff’s Employment Agreement With a Subsidiary

On August 16, 2019, Justice Schecter of the New York County Commercial Division issued a decision in Shapiro v. Ninah Consulting, Inc., 2019 NY Slip Op. 32443(U), holding that a corporate parent was not liable under the plaintiff’s employment agreement with a subsidiary, explaining:

It is axiomatic that only parties to a contract can be sued for breach. Because Publicis is not a party to the Agreements, it cannot be sued for breaching them. Plaintiffs’ contention that Publicis is a party simply because it is mentioned in the Agreements is baseless. Plaintiffs cite no authority for the proposition that an employment agreement that merely references the fact that an employee may be eligible to receive certain benefits from the parent company of the employer makes the parent company a party to the agreement. The Agreements clearly indicate that they are only between plaintiffs and Ninah; Publicis did not sign them.

That Publicis wholly owns Ninah is unavailing. Parent companies are distinct from their subsidiaries.

Thus, to hold a parent liable for the contractual liabilities of its subsidiary, there must be grounds for veil piercing. In order to pierce the corporate veil, a plaintiff must show that the dominant corporation exercised complete domination and control with respect to the transaction attacked, and that such domination was used to commit a fraud or wrong causing injury to the plaintiff. Domination alone, without the added allegation of wrongdoing, does not permit piercing the corporate veil . Notably, the allegation that the parent caused the subsidiary to breach a contract is insufficient to show the requisite wrongdoing.

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

Usually, the only parties who have rights or obligations under a contract are the parties to the contract. Here, a party tried–but failed–to sue the corporate parent of a company with which the plaintiff had an employment agreement. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether you have rights or obligations under a contract.

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Posted: August 27, 2019

Plaintiff That Did Not Sign Contract Lacked Standing to Bring Breach of Contract Claim

On August 12, 2019, Justice Cohen of the New York County Commercial Division issued a decision in Spinosa v Interpublick Group of Cos., Inc., 2019 NY Slip Op. 32406(U), holding that a plaintiff that did not sign a contract lacked standing to bring a claim for breach of that contract, explaining:

Here, it is undisputed that Spin and Mccann are the parties to the Vendor Agreement. Spinosa is not. It is well settled that in order to have standing to challenge a contract, a non-party to the contract must either suffer direct harm flowing from the contract or be a third party beneficiary thereof.

As a non-party to the agreement, Spinosa can maintain a claim only if her allegations, if true, show that she is a third-party beneficiary of the agreement. A third party may sue as a beneficiary on a contract made for its benefit. However, an intent to benefit the third party must be shown, and, absent such intent, the third party is merely an incidental beneficiary with no right to enforce the particular contracts.

To allege a viable claim as a third party beneficiary, Spinosa would have to show: (1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for her benefit, and (3) that the benefit to her is sufficiently immediate to indicate the assumption by the contracting parties of a duty to compensate it if the benefit is lost. She has made no such showing.

In short, there is no indication that Spin’s agreement with Mccann was created for Spinosa’s individual benefit. The Complaint asserts that Spin suffered substantial economic damages as well as future losses and irreparable harm to its business and reputation. In her second cause of action, Spinosa claims that Mccann breached Section 2 of the Agreement by failing to compensate Spin for its actual hours providing the Procurement Services and out-of-pocket expenses, and that, as a result, Spinosa herself is entitled to recover economic damages. Throughout her complaint, Spinosa alleges wrongs committed against Spin, not against herself directly. The complaint fails to allege how Spinosa was damaged by McCann’s alleged acts, other than perhaps indirectly through her ownership interest in Spin. Such a claim belongs to the Company (Spin), not to the shareholder (Spinosa).

(Internal quotations and citation omitted).

Usually, the only parties who have rights or obligations under a contract are the parties to the contract. Here, a party tried–but failed–to sue for breach of a contract she did not sign. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether you have rights or obligations under a contract.

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Posted: August 26, 2019

Court Denies Motion to Compel Because Discovery Sought Not Material and Necessary

On August 12, 2019, Justice Cohen of the New York County Commercial Division issued a decision in GCS Second Ave. Owner LLC v. Merchants Hospitality Inc., 2019 NY Slip Op. 32418(U), denying a motion to compel because the discovery sought was not material and necessary, explaining:

The documents belatedly requested by Defendants are not material and necessary in the prosecution or defense of this action. The Court of Appeals has explained that the words material and necessary are to be interpreted liberally. However, a party is not entitled to uncontrolled and unfettered disclosure. The proper test is one of usefulness and reason. The determination whether information is material and necessary hinges upon whether it will assist preparation for trial by sharpening the issues and reducing delay and prolixity. Additionally, the request for this information must be appropriately tailored and reasonably calculated to yield relevant information. In sum, the right to disclosure, although broad, is not unlimited.

The Court notes that Defendants have not complied with the letter (or spirit) of the Court’s discovery rules. As explained above, the Court granted two extensions of the discovery schedule, with the final end date for all discovery being February 15, 2019. Defendants had ample time to complete depositions and document discovery in advance of the deadline, but instead chose to wait until the deadline to serve follow-up demands after Mr. Duncan’s deposition. And then, it waited two weeks after a conference with the Court’s law clerk to narrow the request. And then, it filed the instant motion without giving the other side a chance to respond to the demands and failed to comply with dispute resolution procedure of Rule 14. In the circumstances, the Court finds that Defendants’ revised requests were untimely. However, as noted in the text, the motion would be denied even if the disclosure had been requested in a timely manner.

Defendant’s request for information about five unrelated loans and agreements with non-parties, which are not at issue in this case, will not sharpen the issues. The demands span the course of thirty-three years, and production of these documents will not reduce delay and prolixity, but rather increase it.

Defendants apparently seek to establish a pattern or standard of lending agreements that Peter Duncan and GCS have previously entered into to attempt to illustrate that the Agreement at issue has deviated from GCS’s usual pattern. However, Mr. Duncan’s and GCS’s dealings with non-parties in other transactions are not relevant to determining what the parties intended in the contract in this case. The point of this case is to determine the meaning of the contract between the parties to the case, not to probe into contracts one of the parties may have entered into with other parties in other transactions.

(Internal quotations and citations omitted).

A big part of complex commercial litigation is giving, receiving and evaluating evidence (this is called “discovery”). The scope of discovery in New York is broad, but as this decision shows, it is not unlimited. 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: August 25, 2019

Complaint Fails Because of Insufficient Affidavit of Service

On August 21, 2019, the Second Department issued a decision in Aurora Loan Servs., LLC v. Revivo, 2019 NY Slip Op. 06210, affirming the dismissal of a complaint because the affidavit of service failed sufficiently to show compliance with the CPLR, explaining:

At the hearing, a process server testified for the plaintiff that he served Revivo with a copy of the summons and complaint by leaving it with a woman at a particular address, who identified herself as Revivo’s wife. He also testified that within 20 days, he mailed a copy of the summons and complaint to Revivo. Revivo and his wife testified that neither of them had received copies of the summons and complaint, and they noted discrepancies between the description of the person allegedly served and Revivo’s wife. After the hearing, the Referee determined that Revivo had not been properly served. The Referee found that the plaintiff had failed to establish compliance with either the delivery or the mailing requirements of CPLR 308(2). As to the mailing requirement, the Referee found that the affidavit of service, which was affirmed by the process server who appeared at the hearing, did not indicate to what address the summons and complaint were mailed, and, therefore, the affidavit of service was deficient on its face. Upon the Referee’s decision, the Supreme Court denied the plaintiff’s motion and directed the dismissal of the complaint. The plaintiff appeals.

CPLR 308 sets forth the different ways by which service of process upon an individual can be effected in order for the court to obtain jurisdiction over that person. CPLR 308(2) provides, in pertinent part, that personal service upon a natural person may be made by delivering the summons within the state to a person of suitable age and discretion at the actual place of business, dwelling place or usual place of abode of the person to be served and by mailing the summons to the person to be served at his or her last known residence. Service in this manner is a two-step form of service in which a delivery and mailing are both essential. Jurisdiction is not acquired pursuant to CPLR 308(2) unless there is strict compliance with both steps. The plaintiff bears the ultimate burden of proving by a preponderance of the evidence that jurisdiction over the defendant was obtained by proper service of process.

We agree with the Supreme Court’s determination that the plaintiff failed to meet its burden of proving that jurisdiction over Revivo was obtained. The testimony of the process server and the only affidavit of service introduced into evidence at the hearing by the plaintiff, indicating that service of process was made pursuant to CPLR 308(2), failed to indicate the address to which the summons and the complaint were mailed. Inasmuch as the plaintiff did not proffer proof of service demonstrating that service of the summons and complaint had been properly effectuated in compliance with the statute, dismissal of the complaint was appropriate.

(Internal quotations and citations omitted).

The rules regarding how you start a lawsuit and bring the defendants into it can sometimes be esoteric. Failing properly to serve a defendant with the papers initiating an action can result in its dismissal, regardless of whether the defendant had actual notice of the lawsuit. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding the proper way to serve a defendant, bringing them into a lawsuit.

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