Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: January 3, 2014

Employee Promissory Notes to be Repaid from Earnings Not Amenable to Summary Judgment in Lieu of Complaint

On December 24, 2013, Justice Sherwood of the New York County Commercial Division issued a decision in Newmark & Co. Real Estate, Inc. v. Brennan, 2013 NY Slip Op. 33261(U), examining the standard for a motion for summary judgment in lieu of complaint pursuant to CPLR 3213.

In Newmark, the issues included that plaintiffs had made loans to defendant secured by promissory notes that defendant was to repay from commissions earned while working for plaintiffs. The notes provided that they became due if defendant left plaintiffs’ employ, which defendant did before the notes were paid off. Plaintiff sued for summary judgment in lieu of complaint on the notes. The court denied the motion, explaining:

CPLR 3213 provides for accelerated judgment where the instrument sued upon is for the payment of money only and where the right to payment can be ascertained from the face of the document without regard to extrinsic evidence, other than simple proof of nonpayment or a similar de minimis deviation from the face of the document. An action on a promissory note is an action for payment of money only. The usual standards for summary judgment apply to CPLR 3213 motions. The instrument and evidence of failure to make payments in accordance with its terms constitute a prima facie case for summary judgment.

The case of Tradition North America, Inc. v Sweeney (133 AD2d 53 [1st Dept 1987]) is controlling. In that case, an employee signed six promissory notes that held out the possibility of being repaid by bonuses. In order to determine the amount payable, the court was required to look beyond the notes to determine the employee’s entitlement to payments to offset the obligations evidenced by the notes. Even though the notes could have been satisfied by monetary payments, the employee did not make an unconditional promise to pay a sum certain at a given time or over stated period. Rather, he had the option of performing work for his employer to satisfy the debt. The court considered the notes alternatively as evidencing a loan obligation or an advance on bonus and indeed, nonbonus, compensation. The First Department concluded that when what purport to be notes have such a hybrid dimension they ought not to be considered instruments for the payment of money only.

(Internal quotation and citations omitted).

Newmark illustrates a (small) limitation to the use of promissory notes to secure obligations from employees of which counsel should be aware.

Posted: January 2, 2014

Decision Explores the Distinction Between Transaction Causation and Loss Causation

On December 24, 2013, Justice Kornreich of the New York County Commercial Division issued a decision in Loreley Fin. (Jersey) No. 4 Ltd. v. UBS Ltd., 2013 NY Slip Op. 33262(U), explaining the distinction between transaction causation and loss causation.

In Loreley Fin., the court decided a motion for reconsideration of a decision dismissing a complaint relating to the purchase of residential mortgage-backed securities. Part of that decision explained the distinction between transaction causation and loss causation, and how the failure to show loss causation was fatal to the plaintiff’s claim. We quote it at length because of the important distinction it draws, one to which counsel in complex ligitation often are not–but should be–sensitive. (more…)

Posted: January 1, 2014

Opportunity to Comment on Proposed Changes to Commercial Division Rules

The rules of the Commercial Division change from time-to-time. Currently, there are four proposed rule changes open for public comment.

Proposed creation of a pilot mandatory mediation program in the Commercial Division of the Supreme Court, New York County.
Email comments to by February 11, 2014.

Proposed adoption of new Commercial Division Rule 9, relating to the use of accelerated adjudication procedures in the Commercial Division of the Supreme Court.
Email comments to by February 6, 2014.

Proposed adoption of new Preliminary Conference Form for use in the Commercial Division of the Supreme Court.
Email comments to by February 3, 2014.

Proposed adoption of a new Rule of the Commercial Division (22 NYCRR § 202.70(g)), relating to use of interrogatories in the Commercial Division of the Supreme Court.
Email comments to by January 29, 2014.

Posted: December 31, 2013

Default Judgment Against Corporation in Favor of its Sole Employee Vacated

On December 4, 2013, Justice Schweitzer of the New York County Commercial Division issued a decision in Karian v. Physician’s Choice, Inc., 2013 NY Slip Op. 33219(U), where the president and sole employee of a corporation sued the corporation and caused it to default.

In Karian, plaintiff was the “president and sole employee” of the defendant closely-held corporation. In 2010, three separate actions were filed in Nassau County relating to the corporation–two competing derivative claims and an action for dissolution. In 2012, plaintiff brought an action in New York County against the corporation for unpaid salary. Because plaintiff was the sole employee of defendant, he caused defendant to default and judgment was entered against the defendant. One of defendant’s other shareholders then moved to intervene and to vacate the default judgment. The court granted the motion, writing:

CPLR Rule 5015 provides the grounds upon which a court may grant relief from judgment. CPLR 5015(a)(l) allows relief from judgment because of excusable default. To vacate a default, a party must show that an excusable default and a meritorious claim or defense. Mr. Karian is the president and sole employee of PCI and, as such, only he can mount a defense for the corporation. Mr. Karian had the power to prevent the default, but chose to take no action in the corporation’s defense. Therefore, the court finds that the default is excusable because the failure of the corporation to proceed is wholly the fault of the Plaintiff himself.

We suppose that the idea of having the corporation’s sole employee sue the corporation and taking a default judgment seemed clever at the time, but surely one would be hard pressed to find a court that would let the plaintiff get away with it. Justice Schweitzer did not.

Posted: December 30, 2013

Unambiguous Commercial Contract Enforced As Written Despite Burden

On December 26, 2013, the Second Department issued a decision in Obstfeld v. Thermo Niton Analyzers, LLC, 2013 NY Slip Op. 08601, reaffirming the rule that unambiguous commercial contracts will be enforced as written, even if it results in possible unfairness to one of the parties.

In Obstfeld, plaintiff contracted in December 2001 to provide investment banking services to defendant’s predecessor-in-interest. The agreement was “cancelable on sixty days notice by either party after August 1, 2002. In September 2002, the parties entered into an addendum to the [a]greement” that granted plaintiff “the exclusive right to act as financial advisor for [defendant’s predecessor-in-interest] for the next two rounds of institutional fundraising following the present round, as well as for any investment or merger/acquisition transaction or IPO.” The addendum by its terms “supersede[ed] any inconsistencies between the addendum and the [original] agreement,” but it neither provided for the termination of the amended agreement nor referred to the cancellation provisions in the original agreement.

In June 2003, defendant’s predecessor-in-interest informed plaintiff that it was cancelling the agreement pursuant to the 60 day notice provision on the original agreement. In March 2005, defendant’s predecessor-in-interest was acquired by defendant. Plaintiff demanded, and ultimately sued for, its investment banking fees. The trial court denied the defendant’s motion for summary judgment on the breach of contract claims. The Second Department reversed, writing:

A contract is to be construed in accordance with the parties’ intent, which is generally discerned from the four corners of the document itself. Consequently, a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms. . . .

Contrary to the plaintiffs’ contention, the Agreement, as amended by the Addendum, was not ambiguous with respect to the issue of whether termination was permitted upon 60 days’ notice. Although the Addendum gave Morningside the exclusive right to act as . . . financial advisor for further fundraising, including a possible merger or acquisition, the Addendum in no way abrogated the provision in the Agreement that the parties could end their relationship upon 60 days’ written notice, and thus was not ambiguous. In addition, the terms of the Addendum were not inherently inconsistent with the cancellation provision of the Agreement such that there was need to rely upon the final provision in the Addendum, which stated that the Addendum would “supersede any inconsistencies between the Addendum and the Agreement.”

(Internal quotations and citations omitted).

It is not news that the parol evidence rule is alive and well in New York. It is a little surprising that there are so many decisions that have to remind us of that fact.

Posted: December 29, 2013

Seller Cannot Unilaterally Make Time of the Essence

On December 26, 2013, the Second Department issued a decision in Revital Realty Group, LLC v. Ulano Corp., 2013 NY Slip Op. 08607, illustrating the application of “time is of the essence” in real estate transactions.

In Revital Realty Group, the defendant entered into a contract to sell commercial real estate to plaintiff. “The contract did not make time of the essence regarding the closing date, and it did not contain any mortgage contingency clause.” Approximately two weeks before the closing date, defendant’s “attorney wrote [plaintiff’s] attorney, reminding him” of the closing date and “proclaiming that ‘such date is time of the essence to the Contract.'” Defendant’s attorney pointed out that there was no time is of the essence provision in the contract and proposed a later closing date. The transaction did not close. When plaintiff sued for specific performance of the contract, the defendant answered, asserted counterclaims and moved for summary judgment. The trial court not only denied the motion, it also dismissed defendant’s counterclaims. The Second Department affirmed, explaining:

When a contract for the sale of real property does not make time of the essence, the law permits a reasonable time in which to tender performance, regardless of whether the contract designates a specific date for performance. What constitutes a reasonable time to perform turns on the circumstances of the case. Time may be made of the essence by clear, distinct, and unequivocal notice to that effect giving the other party a reasonable time in which to act.

Here, the contract provided for a closing to take place on March 29, 2012, but did not make time of the essence. Further, as a matter of law, the seller’s attorney’s letter of March 13, 2012, proclaiming “time of the essence” with respect to the closing date was premature and failed to afford the buyer a reasonable time after the March 29, 2012, closing date set forth in the contract within which to perform. Accordingly, the seller failed to demonstrate that it effectively made the March 29, 2012, closing a time of the essence closing date, and the buyer was entitled to a reasonable adjournment of the closing date. Consequently, the buyer cannot be considered in default for failing to appear at the March 29, 2012, closing.

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

The term “time is of the essence” has great power in real estate sales contracts. However, as the decision in Revital Realty Group shows, it is, at the end of the day, a contract term (or not, as here), not magic words that can be invoked at any time for any purpose.

Posted: December 28, 2013

Non-Party Subpoenas Quashed For Failure to Justify the Need for Discovery

On December 5, 2013, Justice Sherwood of the New York County Commercial Division issued a decision in Hildene Capital Mgt., LLC v. Bank of N.Y. Mellon, 2013 NY Slip Op. 33181(U), explaining the standard for obtaining non-party discovery.

In Hildene Capital Mgt., plaintiffs issued deposition subpoenas to two non-parties who already had been “deposed at great length in a previous” action in federal court regarding “the facts and circumstances leading to the preparation of an October 2009 opinion letter concerning the transaction that underlies the” Hildene Capital Mgt. action. The court granted the non-parties’ motions to quash, holding that even though plaintiffs were not parties to the prior action and thus had never had an opportunity to depose the witnesses, plaintiffs had not sufficiently justified deposing the non-parties again. The court explained:

The threshold requirement for disclosure in New York civil actions is that the disclosure sought be material and necessary in the prosecution or defense of an action. This principle is applicable to non-parties as well as parties. However, a disclosure request directed to a nonparty is governed by principles in addition to those governing a party. CPLR § 3101(a)( 4) directs that a nonparty be given notice stating the circumstances or reasons such disclosure is sought or required so as to afford a nonparty who has no idea of the parties’ dispute or a party affected by such request an opportunity to decide how to respond. . . . [T]he determination of whether to quash a nonparty subpoena does not turn solely on whether the discovery sought is relevant. Rather, . . . more than relevance and materiality is necessary to warrant disclosure from a nonparty.

. . .

The court finds [plaintiffs’] proffer in opposition to the motion to quash insufficient in the context of this case to cure the facial deficiency of their subpoenas. It does little to clarify the nature of the inquiry or narrow the scope for the proposed depositions. Thus, [plaintiffs have] failed to meet [their] burden of demonstrating the circumstances and reasons additional testimony from the nonparties is warranted. Moreover, [plaintiffs have] failed to show that the disclosure sought cannot be obtained from other sources.

Litigants often take for granted the right to obtain discovery from third-parties. The court’s decision in Hildene Capital Mgt. illustrates the danger of such an approach; the better approach is to take the requirements of CPLR § 3101(a)(4) seriously and ensure that non-party discovery demands are properly justified (and justifiable).

Posted: December 27, 2013

No Part Performance Exception to Statute of Frauds for Obligations that Cannot be Performed Within a Year

On December 17, 2013, the First Department issued a decision in Gural v. Drasner, 2013 NY Slip Op. 08391, overruling earlier cases recognizing a part performance exception to the Statute of Frauds for contracts that are incapable of being performed within a year.

Plaintiff and defendant allegedly orally agreed that if plaintiff cleared defendant’s land, he could use it for pasturing and that defendant would reimburse plaintiff’s expenses when defendant sold the property. It took several years to clear and improve the land.  When defendant later sold his property, he refused to reimburse plaintiff’s expenses.

Plaintiff sued to recover his expenses. Defendant moved for summary judgment because it took more than one year for plaintiff to perform the alleged oral agreement. Plaintiff argued that part performance took his claim out of the Statute of Frauds. The First Department assumed for purposes of the appeal that the task performed by plaintiff could not possibly have been performed in a year (although it expressed doubts on that score in dicta, noting that “the determination of whether an alleged oral contract can possibly be performed within one year of its making is not conducted by looking back at the actual performance; it requires analysis of what was possible, looking forward from the day the contract was entered into.” (emphasis added)). The First Department then held that there was no part performance exception to the General Obligations Law’s Statute of Frauds for obligations that could not be performed within a year:

Analysis of the part performance exception must begin by emphasizing that General Obligations Law § 5-701 lacks any provision for a part performance exception such as that explicitly provided for by General Obligations Law § 5-703, which concerns contracts for the conveyance of an interest in real property. That is, while § 5-703(4) specifically provides, ‘Nothing contained in this section abridges the powers of courts of equity to compel the specific performance of agreements in cases of part performance,’ the broader statute of frauds provision of § 5-701 contains nothing of the sort —- although, notably, it contains other exceptions (see e.g., §5-701[10] (‘This provision … shall not apply to a contract to pay compensation to an auctioneer, an attorney at law, or a duly licensed real estate broker or real estate salesman’)).

Two relevant principles of statutory construction apply here. The first is that ‘a court cannot amend a statute by inserting words that are not there, nor will a court read into a statute a provision which the Legislature did not see fit to enact’ The second is that an “inference must be drawn that what is omitted or not included was intended to be omitted and excluded.’ Inferring that the Legislature authorized a part performance exception for an oral contract that is not capable of performance within one year violates these principles.

(Internal quotations and citations omitted).

Although Gural was not an appeal from a Commercial Division decision, the principle it announces is important in commercial litigation affected by the Statute of Frauds.

Posted: December 26, 2013

Late Motion for Summary Judgment Rejected, Even When Styled as a Cross-Motion to a Timely-Made Motion

On December 24, 2013, the First Department issued a decision in Kershaw v. Hospital for Special Surgery, 2013 NY Slip Op. 08548, clarifying that the CPLR-mandated deadline for filing a motion for summary judgment cannot be extended simply by styling the motion as a cross-motion to a timely made motion.

Kershaw involved an appeal from a medical malpractice action, not a commercial one, but the procedural point made by the decision applies to all litigation. In Kershaw, the plaintiff filed a Note of Issue on August 24, 2011; the trial court then ordered that summary judgment motions were to be made no later than November 14, 2011. On November 11, 2011, one defendant moved for summary judgment. On January 10, 2012–almost two months after the deadline for summary judgment motions–the other defendant “‘cross-moved’ for summary judgment without providing any explanation whatsoever for its delay.” The trial court denied the second motion as untimely, a decision that a divided panel of the First Department affirmed.

The majority of the panel explained: (more…)

Posted: December 25, 2013

Attorneys’ Fees Award Limited Because Plaintiff Did Not Prevail on All Arguments

On December 24, 2013, the First Department issued a decision in RSB Bedford Assoc. LLC v. Ricky’s Williamsburg, Inc., 2013 NY Slip Op. 08526, showing how a prevailing party’s right to recover its litigation expenses can be limited by the degree to which it prevails.

In RSB Bedford Assoc., the First Department affirmed a damages award for breach of a real estate purchase contract. The First Department’s decision on the damages point is interesting and we recommend that you read it in the linked decision. However, for this post we wish to focus on the First Department’s discussion at the end of the decision regarding plaintiff’s attorneys’ fees. The court held:

While recovery of attorneys’ fees by “the successful party” is provided for in the lease, the Referee properly reduced the amount sought by plaintiff to reflect that while it was the prevailing party, it did not prevail on all of its claims, particularly those seeking “expectancy” (extraordinary) damages.

The right of the prevailing party to recover its attorneys’ fees sometimes provides an incentive for aggressive litigation. RSB Bedford Assoc. reminds us, however, that courts may not allow a prevailing party to recovery fees for aspects of the litigation in which it did not prevail.