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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: March 4, 2014

Unjust Enrichment Claim Viable Even Though Defendant Committed No Wrongful Act Against the Defendant

On February 26, 2014, the Second Department issued a decision in Alan B. Greenfield, M.D., P.C. v. Beach Imaging Holdings, LLC, 2014 NY Slip Op. 01285, reversing the dismissal of an unjust enrichment claim.

In Greenfield, the trial court dismissed the plaintiff’s claim for unjust enrichment. The Second Department reversed, ruling that:

The essential inquiry in any action for unjust enrichment or restitution is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered. A plaintiff must show that (1) the other party was enriched, (2) at the plaintiff’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.

Unjust enrichment does not require the performance of any wrongful act by the one enriched. Innocent parties may frequently be unjustly enriched. What is required, generally, is that a party hold property under such circumstances that in equity and good conscience he ought not to retain it.

(Internal quotations and citations omitted) (emphasis added). Finding that the elements had been plead, the claim was allowed to proceed even though the plaintiff did not allege that the defendant committed any wrong directly against it.

Courts often dismiss unjust enrichment claims because they mirror valid breach of contract claims. This decision shows the power of a properly pleaded unjust enrichment claim to reach even innocent actions that have harmed the plaintiff.

Posted: March 3, 2014

Court of Appeals Rules That Issues of Fact Preclude Dismissal On Summary Judgment of Negligence Claim Against Insurance Broker

On February 25, 2014, the Court of Appeals issued a decision in Voss v. Netherlands Insurance Co., 2014 NY Slip Op. 01259, finding that a question of fact on the existence of a “special relationship” between insureds and their insurance broker precluded dismissal of a negligence claim against the broker for failure to advise the insureds to obtain additional business interruption coverage.

The individual plaintiff in Voss used defendant’s brokerage services in 2004 to obtain coverage for her plaintiff businesses. The brokerage provided advice on the appropriate amount of coverage and allegedly represented that it “would reassess and revisit the coverage needs as her business grew.” Despite that representation, the plaintiffs were never advised to increase the policy limit, and the coverage proved inadequate when the businesses suffered losses in 2007 and 2008, by which point the business had grown. The plaintiffs’ lawsuit alleged that the broker negligently secured inadequate levels of business interruption insurance. (more…)

Posted: March 2, 2014

Case Dismissed for Champerty

On February 24, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Justinian Capital SPC v. WestLB AG, 2014 NY Slip Op. 24046, granting a motion for summary judgment and dismissal on the grounds of champerty.

Justinian Capital arose from an investment portfolio that contained mortgage-backed securities that did not meet the portfolio’s investment guidelines. The defendant, WestLB, was the portfolio’s investment manager.  The original holder of the notes, non-party DPAG, is a non-party German bank that relies on the German government for funding. Because WestLB is partially owned by the German government, DPAG was unwilling to sue it.  Instead, DPAG agreed with the plaintiff, Justinian, that Justinian would sue WestLB and would remit the litigation recovery to DPAG minus a 15% cut.

When the Court learned of the arrangement, it directed the parties to conduct limited discovery on the issue of champerty. Although champerty has been abolished as a defense almost everywhere in the United States, it still exists in New York under Judiciary Law § 489:

No person shall solicit, by or take an assignment of, or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon.

In 2004, the Legislature added a safe harbor, § 489(2), which precludes a champerty defense when the securities being sold have an aggregate purchase price of at least $500,000.

In this case, the principal question to be decided by the Court was “whether such money must actually be paid,” because although the plaintiff’s agreement with DPAG recited a sale price of $1 million, the plaintiff did not pay the sale price, did not have the means to do so, and its failure to pay was not considered an event of default under the agreement between it and DPAG.

The Court held that the safe harbor required actual payment, and dismissed the action with prejudice:

If an investor buys worthless mortgage backed securities, it can sue the issuer for fraud and, if it wins, it can keep the money. Such a sale, according to the Court of Appeals, is not prohibited by § 489. Nonetheless, that is not the situation in the instant case because [the plaintiff], a shell formed exclusively for the purposes of litigating the instant action, did not buy the subject notes.

. . .

[The Plaintiff] paid nothing for the notes; 85% of any verdict or settlement goes back to DPAG; and DPAG still effectively controls the notes . . .

. . .

No reasonable finder of fact could conclude that Justinian was making a bona fide purchase of securities . . . . it is not champerty to sue on behalf of debt that you buy for yourself, but it is champerty to sue, on behalf of another and for a fee, for a debt that is not really your own.

The lesson here for practitioners is that although a champerty defense, which once prohibited buying a cause of action, can now be asserted only in rare circumstances, it still exists and counsel should ensure that the purchase of a claim or cause of action does not run afoul of it.

Posted: March 1, 2014

Settlement Term Sheet Enforceable Despite Statement That Formal Papers Would Be Executed

On February 27, 2014, the First Department issued a decision in Trolman v. Trolman, Glaser & Lichtman, P.C., 2014 NY Slip Op. 01396, affirming the enforcement of a settlement term sheet, explaining:

The motion court properly determined that the handwritten memorandum executed following mediation between the parties was a binding and enforceable settlement agreement, and not merely an agreement to agree. The memorandum’s plain language expressed the parties’ intention to be bound, and established a meeting of the minds regarding the material terms pertaining to the settlement of plaintiff’s claim . . . . The agreement was not rendered ineffective simply because certain non-material terms were left for future negotiation, or because it stated that the parties would promptly execute formal settlement papers.

(Internal citations omitted) (emphasis added).

The First Department also affirmed the trial court’s decision to dismiss all claims against the individual defendants, holding that “the record demonstrated that the entirety of the parties’ arbitration proceeding was subject to mediation and is therefore encompassed in the enforceable settlement agreement” and that the plaintiff had failed to make it clear that he intended to “carve out” certain claims against individual defendants from the settlement.

This decision is a reminder that courts treat settlements like any other commercial transaction and, for that reason, they enforce settlement term sheets that meet the criteria discussed above even if a formal settlement agreement was not executed.

Posted: February 28, 2014

Complaint Dismissed for Failure to Comply With Contract’s Mandatory Mediation Provisions

On February 20, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Key Restoration Corp. v. Union Theological Seminary, 2014 NY Slip Op. 30437(U), dismissing a lawsuit for failure to exhaust pre-litigation ADR obligations.

In Key Restoration Corp., the plaintiff brought claims of foreclosure on a mechanic’s lien, breach of contract and unjust enrichment relating to construction work it did for the defendant. The defendant moved to dismiss on the ground that the plaintiff had failed to comply with the pre-litigation dispute resolution provisions of the parties’ contract. The trial court agreed, dismissing the complaint.  The trial court found that the parties’ contract required that the parties mediate any dispute between them before litigating it and rejected the plaintiff’s arguments for not doing so, explaining:

[The plaintiff’s] causes of action, for foreclosure of a mechanic’s lien, breach of contract, and unjust enrichment, are based on contract. Therefore, the dispute is subject to the contractual provisions quoted above. As such, [the plaintiff] failed to satisfy the . . . contract’s conditions precedent to commencing litigation.

. . .

Moreover, the public policy of New York State favors and encourages arbitration and alternative dispute resolutions and these mechanisms are well recognized as an effective and expeditious means of resolving disputes between willing parties desirous of avoiding the expense and delay frequently attendant to the judicial process.

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

Mandatory mediation provisions have, over the past two decades, become increasingly common in commercial contracts. This decision shows that the New York courts will enforce them. And, as a practical matter, is it not better–as a general proposition–for the client to at least try to resolve a dispute by mediation before incurring the costs of litigation and risking getting a complaint dismissed for failing to comply with a contract’s mediation provisions?

Posted: February 27, 2014

Court of Appeals Agrees to Hear Certified Questions Regarding Application of “Separate Entity Rule” to Post-Judgment Enforcement Proceedings

On January 18, 2014, we posted that in Tire Engineering & Distribution, L.L.C., et al. v. Bank of China Ltd., and Motorola Credit Corp. v. Standard Chartered Bank, the Second Circuit certified questions to the New York Court of Appeals concerning the application of the “separate entity rule” to post-judgment enforcement proceedings under CPLR Article 52. On February 18, 2014, the Court of Appeals accepted the certified questions.

Posted: February 26, 2014

Court of Appeals Rules On Reargument That Liability Insurer’s Breach of Duty To Defend Did Not Preclude The Insurer From Relying On Policy Exclusions To Avoid Duty To Indemnify

On February 18, 2014, the Court of Appeals issued a decision in K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co., 2014 NY Slip Op. 01102, reversing on reargument a decision issued last year regarding the effect of a breach of an insurer’s duty to defend.

In its earlier decision, the court held that “when a liability insurer has breached its duty to defend its insured, the insurer may not later rely on policy exclusions to escape its duty to indemnify the insured for a judgment against him.”  (Emphasis added). The defendant insurance company moved for reargument on the ground that this holding was inconsistent with earlier precedent, Servidone Const. Corp. v. Security Ins. Co. of Hartford, 64 N.Y.2d 419 (1985), which held that an insurer that breached its duty to defend was not precluded from relying on policy exclusions that do not depend on facts established in the underlying litigation to avoid its duty to indemnify the insured for a settlement of the underlying claims.  Although K2 Investment Group involved a judgment against the insured rather than a settlement, the court found that this distinction was not dispositive:

A liability insurer’s duty to indemnify its insured does not depend on whether the insured settles or loses the case. It is true that a judgment, unlike most settlements, is a binding determination of the issues in the underlying litigation. Thus it can be said here, as it could not in Servidone, that the issues in the suit brought against the insured are now res judicata. But that is irrelevant, because [the insurance company] does not seek here, and the defendant in Servidone did not seek, to relitigate the issues in the underlying case. It is well established that such relitigation is not permitted after an insurer has breached its duty to defend. The issue in Servidone, as here, is whether the insurer may rely on policy exclusions that do not depend on facts established in the underlying litigation.

Finding that Servidone could not be distinguished, the court concluded that “to decide this case we must either overrule Servidone or follow it.”  The court concluded that there was “no justification for overruling Servidone“:

Plaintiffs have not presented any indication that the Servidone rule has proved unworkable, or caused significant injustice or hardship, since it was adopted in 1985. When our Court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the Legislature decides otherwise. In other words, the rule of stare decisis, while not inexorable, is strong enough to govern this case.

A dissenting opinion by Judge Graffeo (joined by Judge Pigott) argued that the court should have “adhere[d] to the general principle that a breach of liability insurer’s duty to defend prohibits it from subsequently invoking policy exclusions to escape its corollary duty to satisfy a judgment entered against the insured by a third party.”  According to the dissenters,

[t]his rule makes sense for several reasons. An insurer should be subjected to some legal consequence for breaching its duty to defend an insured. Prohibiting exclusions from being collaterally invoked provides an insurer with an incentive to appear on behalf of the policyholder in the underlying lawsuit, as it agreed to do in return for the payment of premiums. It also encourages the initiation of a declaratory judgment by an insurer that seeks judicial authorization to rely on a policy exclusion to avoid indemnification. Bringing all of the interested parties – injured plaintiffs; insured defendants; and insurance carriers – together in a judicial forum further contributes to the efficient resolution of factual issues for the benefit of litigants without unduly burdening the ability of injured parties to obtain recovery for covered losses.

This decision has important implications for New York insurance law and Court of Appeals practice generally.  As noted by the dissent, this decision eliminates one powerful incentive for insurance companies to err on the side of honoring the duty to defend, since a breach of the duty will not preclude the insurer from later invoking policy exclusions to disclaim coverage for a judgment entered against the insured.  On the procedural side, this decision evidences the increasing willingness of the Court of Appeals to grant reargument.  In its coverage of the decision, the New York Law Journal notes that the Court of Appeals “granted only one such motion between 2003 and 2011, but it reheard one previously decided case in 2012 and granted three reargument motions in 2013.”

Posted: February 25, 2014

Foreign Default Judgment Enforceable in New York Even if the Foreign Court Did Not Have Personal Jurisdiction over Defendant Where Defendant Consented to Jurisdiction

On February 25, 2014, the Court of Appeals issued a decision in Landauer Ltd. v. Joe Monani Fish Co., Inc., 2014 NY Slip Op. 01263, holding a foreign default judgment enforceable in New York even though the foreign court did not have personal jurisdiction over the defendant, because the defendant had consented to jurisdiction and had actual knowledge of the action.

In Landauer, the plaintiff “entered into a series of contracts with” the defendant that “included a clause granting the Courts of England exclusive jurisdiction over disputes arising from the transactions. After a controversy arose over the quality of the products [the plaintiff] supplied, [the defendant] refused payment, prompting [the plaintiff] to commence an action for breach of contract in the English High Court . . . . [The defendant] did not appear in the action and a default judgment was entered.” When the plaintiff sought to enforce the judgment in New York, the defendant claimed, and the trial court subsequently found, that the defendant had not been properly served and for that reason the judgment was not enforceable under CPLR Article 53, which requires that the foreign court have jurisdiction over the defendant for a foreign judgment to be enforceable in New York. The First Department affirmed the trial court, but the Court of Appeal reversed the decision, explaining:

Although CPLR article 53 generally provides that a foreign judgment will not be enforced in New York if the foreign court did not have personal jurisdiction over the defendant (CPLR 5304(a)(2)), an exception may be made if, prior to the commencement of the proceedings defendant had agreed to submit to the jurisdiction of the foreign court with respect to the subject matter involved (CPLR 5305(3)) and was afforded fair notice of the foreign court proceeding that gave rise to the judgment. We applied this principle in Galliano, where we explained that enforcement of a foreign judgment is not repugnant to our notion of fairness if defendant was a party to a contract in which the parties agreed that disputes would be resolved in the courts of a foreign jurisdiction and defendant was aware of the ongoing litigation in that jurisdiction but neglected to appear and defend. We clarified that, so long as the exercise of jurisdiction by the foreign court does not offend due process, the judgment should be enforced without microscopic analysis of the underlying proceedings (Galliano, 15 NY3d at 81).

(Internal quotations and citations omitted). Because the record showed that the defendant–while not properly served under the CPLR–nonetheless had actual knowledge of the English proceeding against it, the Court of Appeals found the default judgment against the defendant enforceable.

This decision illustrates the power and importance of contract provisions relating to jurisdiction. As a practical matter, it also shows how important it is that businesses have a process for identifying when they have been sued so that they can properly respond as well as the danger of relying on jurisdiction or service arguments rather than dealing with a dispute on the merits.

Posted: February 24, 2014

First Department Rules That Disgorgement May Be Available As An Equitable Remedy For Attorney General Claims Under Martin Act and Executive Law

On February 20, 2014, the First Department issued a decision in People v. Ernst & Young, LLP, 2014 NY Slip Op. 01257, reversing New York County Commercial Division Justice Jeffrey K. Oing’s dismissal of the New York Attorney General’s claims under the Martin Act and New York’s Executive Law for disgorgement of profits earned by Ernst & Young in allegedly facilitating an accounting fraud by its client Lehman Brothers.

In urging dismissal of the disgorgement claim, Ernst & Young argued that the Martin Act and the Executive Law provide for particular remedies—namely, injunctive relief, restitution and cancellation of a business certificate—and that disgorgement, which is not mentioned in the statutes, is not an available form a relief. It also argued that disgorgement could be duplicative of restitutionary relief that might be obtained in a class action settlement. The First Department rejected these arguments and concluded that:

where, as here, there is a claim based on fraudulent activity, disgorgement may be available as an equitable remedy, notwithstanding the absence of loss to individuals or independent claims for restitution . . . . Disgorgement is distinct from the remedy of restitution because it focuses on the gain to the wrongdoer as opposed to the loss to the victim. Thus, disgorgement aims to deter wrongdoing by preventing the wrongdoer from retaining ill-gotten gains from fraudulent conduct. Accordingly, the remedy of disgorgement does not require a showing or allegation of direct losses to consumers or the public; the source of the ill-gotten gains is “immaterial.” Therefore, while the Attorney General does not allege direct injury to the public or consumers as a result of defendant’s alleged collusion with Lehman Brothers in committing fraud, the equitable remedy of disgorgement is available in this action, and it was premature to categorically preclude it at the pleading stage. Nor would ordering disgorgement be tantamount to an impermissible penalty, since the “wrongdoer who is deprived of an illicit gain is ideally left in the position he would have occupied had there been no misconduct.” We further note that maintaining disgorgement as a remedy within the court’s equitable powers is crucial, particularly where the Attorney General may be precluded from seeking restitution and damages if defendant settled the private class action against it.

This decision gives the Attorney General another potent weapon in securities and other fraud-based enforcement actions. In an earlier decision, People v. Applied Card Systems, Inc., 11 N.Y.3d 105 (2008), the Court of Appeals suggested in dicta that the Attorney General “might be able to obtain disgorgement” in a claim under the Executive Law, relying on federal cases recognizing a district court’s authority to award disgorgement “[a]s an exercise of its equity powers” in SEC enforcement actions. Id. at 125-126 (citing SEC v. Fishbach Corp., 133 F.3d 170, 175 (2d Cir. 1997) & Official Comm. Of Unsecured Creditors of WorldCom, Inc. v. SEC, 467 F.3d 73, 81 (2d Cir. 2006)). However, there is apparently no other New York appellate authority expressly recognizing the remedy in this context.

Posted: February 23, 2014

Complaint to Reform Contract Dismissed for Failure to Join All Parties to Contract

On February 5, 2014, New York County Commercial Division Justice Bransten issued a decision in Oppenheimerfunds, Inc. v. TD Bank, N.A., 2014 NY Slip Op. 30379(U), granting a motion to dismiss for failure to join necessary parties.

Oppenheimerfunds arose from a liquidation relating to an ethanol plant, of which plaintiffs were subordinate bondholders. The plaintiffs alleged that when they purchased their bonds, they relied upon drafts of a Senior Intercreditor Agreement pursuant to which they would share pari passu with the defendants—the senior lenders—in available collateral security. However, when the Senior Intercreditor Agreement was ultimately signed, the pari passu provision had been removed and the Agreement now provided that the plaintiffs’ claim to the security would be subordinate to the defendants’.

The plaintiffs sued to have the Senior Intercreditor Agreement reformed or rescinded to comply with their understanding of what its provisions were intended to be or should have been. The defendants moved to dismiss on several grounds, among which was the plaintiffs’ failure to join necessary parties, namely Wells Fargo and its successor, U.S. Bank, because Wells Fargo also was a signatory of the Senior Intercreditor Agreement, as well as the Bond Trustee for the plaintiffs’ bonds, and the priority rank to which the plaintiffs objected was assigned to Wells Fargo in its capacity as Trustee, rather than to the plaintiffs.

The Court dismissed the action for failure to join Wells Fargo and U.S. Bank as necessary parties under CPLR 1003, explaining:

A necessary party is one whose interests may be adversely affected or prejudiced by a judgment in the action. New York courts have long held that in an action seeking rescission, cancellation or avoidance of an agreement, the parties to the agreement are indispensable . . . . Contrary to plaintiffs’ arguments, Wells Fargo and U.S. Bank are not mere ‘nominal participants.’ Rather, Wells Fargo was intimately involved in the relevant events at issue in this litigation. It was a party to the agreement in dispute here . . . and was the link between [plaintiffs] and the defendants . . . . Indeed, plaintiffs allege that Wells Fargo, and thus U.S. Bank, represented and protected plaintiffs’ interests by signing the Senior Intercreditor Agreement on their behalf. Therefore, the Senior Intercreditor Agreement cannot be reformed or rescinded without joining Wells Fargo and U.S. Bank as parties.

From this opinion, we can see that, if a contract is to be reformed or declared unenforceable, all parties to the contract must be joined. Even if the plaintiffs claim to stand in the shoes of the missing parties, or believe that the missing parties are merely “nominal” and have no substantial interest in the outcome of the action, this rule of pleading should not be overlooked.