Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: April 11, 2014

Settlement of Federal Derivative Action Bars State Court Plaintiff’s Derivative Action

On April 1, 2014, Justice Lowe (formerly of the New York County Commercial Division and now Presiding Justice of the Appellate Term, 1st Judicial District), issued a decision in Wexler v. KPMG LLP, 2014 NY Slip Op. 30825(U), granting a series of motions to dismiss in an action brought by an investor who allegedly lost money as a result of Bernard Madoff’s Ponzi scheme, when the “feeder fund” in which the plaintiff had invested collapsed.

Justice Lowe’s opinion addressed different motions made by several different institutional and individual defendants. Many of the claims asserted by the plaintiff were derivative of the claims of the Rye Select Fund, of which he was a limited partner and investor, and he alleged that Rye’s losses had been caused by the misconduct of the defendants. While the motions were pending, a federal action involving the Rye fund and its losses in the Madoff fraud was settled and dismissed. The federal action involved claims against many of the defendants appearing in the Wexler action, and several moving parties amended their motions to include the res judicata effect of the federal action.

The court granted their motion to dismiss the derivative claims on res judicata grounds. Although the plaintiff himself was not a party to the federal case, the Rye fund’s claims were adjudicated in the federal action, meaning that no other derivative plaintiff could assert those claims. The court recognized two exceptions to that rule: “that the judgment being raised as a bar not be the product or collusion or other fraud on the nonparty shareholders, and also . . . that the shareholder sought to be bound by the outcome in the prior action not have been frustrated in an attempt to join or intervene in the action that went to judgment.” Wexler’s allegations that he had vigorously prosecuted his action, and that he had been excluded from settlement negotiations in the federal action were insufficient to meet either exception.

Posted: April 10, 2014

Second Circuit Asks Court of Appeals to Clarify the Minimum Requirements Under Judiciary Law § 470

On April 8, 2014, in Schoenefeld v. State of New York, 11-4283-cv, the Second Circuit certified a question to the Court of Appeals regarding the “minimum requirements” of New York Judiciary Law 470, “which mandates that a nonresident attorney maintain an office for the transaction of law business within the state of New York.”

In Schoenefeld, the NDNY granted the plaintiff summary judgment declaring that “New York Judiciary Law § 470 unconstitutional as violative of the Privileges and Immunities Clause of Article IV, section 2 of the Constitution. Specifically, the district court held that Section 470, which requires nonresident attorneys to maintain an ‘office for the transaction of law business’ within the state of New York in order to practice in New York courts, places an impermissible burden on” the plaintiff’s “fundamental right to practice law and that the state ‘failed to establish either a substantial state interest advanced by [the statute], or a substantial relationship between the statute and that interest.'” In considering the defendants’ appeal, the Second Circuit reserved decision and certified the following question to the Court of Appeals:

Under New York Judiciary Law § 470, which mandates that a nonresident attorney maintain an “office for the transaction of law business” within the state of New York, what are the minimum requirements necessary to satisfy that mandate?

Posted: April 9, 2014

Uploading of Incorrect Commencing Document In E-Filing System Was Correctable Error Under CPLR 2001

On March 28, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in McCord v. Ghazal, 2014 NY Slip Op. 24086, ruling that the plaintiffs’ mistaken uploading of the wrong complaint upon commencing an action through the New York State Courts Electronic Filing System could be corrected pursuant to CPLR 2001, and the proper pleading would be deemed filed nunc pro tunc as of the original commencement date.

In McCord, the plaintiffs commenced an action through the e-filing system and received a confirmation notice for the filing of a Summons With Notice. Although the notice gave the correct caption and index number, the actual commencing document the plaintiffs’ counsel had uploaded was a summons and complaint from another action against different defendants. The next day, the correct summons with notice was served on the defendant, and the plaintiffs subsequently filed an affidavit of service. A month later, upon recognizing their error, plaintiffs e-filed the correct summons with notice. However, by that point, the statute of limitations on the claim had apparently run. The defendant moved to dismiss the action, arguing that the filing of commencement papers is necessary to invoke the court’s jurisdiction, and because the summons and complaint that was initially filed did not identify the defendant, no action had been commenced against him, and the service of the summons with notice was therefore a nullity. The plaintiffs countered that “the defendant ha[d] not alleged any prejudice from the filing error, and it should be corrected or disregarded pursuant to CPLR 2001,” which provides:

At any stage of an action, including the filing of a summons with notice, summons and complaint or petition to commence an action, the court may permit a mistake, omission, defect or irregularity, including the failure to purchase or acquire an index number or other mistake in the filing process, to be corrected, upon such terms as may be just, or, if a substantial right of a party is not prejudiced, the mistake, omission, defect or irregularity shall be disregarded, provided that any applicable fees shall be paid.

To resolve the motion, Justice Demarest had to determine whether, in light of the improper commencement of the action, the court had subject matter jurisdiction to correct or disregard the error under CPLR 2001. She concluded that, under the circumstances of this case, the filing error did not deprive the court of jurisdiction:

Although the immediate issue of the court’s disputed subject matter jurisdiction, based upon the uploading of an incorrect commencing document in New York’s new e-filing system, does not appear to have been directly addressed by any court, the Appellate Division Second Department has recently articulated that the courts are permitted to correct a mistake caused in large part, by the glitches in the new e-filing system and counsel’s unfamiliarity with it. Upon review of the e-filed confirmation document issued to plaintiffs’ counsel on November 11, 2013, and the documents submitted in support of and in opposition to the motion, it is clear that on November 11, 2013, plaintiffs’ counsel electronically commenced a new action, properly identified [the defendant] in the e-filing system, paid the proper fee for an index number, uploaded a document identified as a “summons with notice” in the e-filing system, served [the defendant] with the proper Summons With Notice the following day, properly uploaded an affidavit of service for the Summons With Notice with the corresponding index number purchased, and promptly uploaded the correct Summons With Notice upon learning of the initial filing error. Further, even the Kings County Clerk, which reviewed the Initial Filing on November 11, 2013, did not notice the error or notify the plaintiffs that a correction was necessary as is their standard procedure pursuant to the Kings County Supreme Court Protocol on Courthouse Procedures for Electronically Filed Cases (Revised February 17, 2012). The only error in commencing this action was the selection of the wrong file on plaintiffs’ counsel’s computer when prompted by the e-filing system to select the file to be uploaded. Accordingly, the plaintiffs’ counsel’s uploading of the Summons With Notice was performed in a mistaken manner and method and, pursuant to CPLR 2001, the court may correct the mistake. Alternatively, since defendant has not articulated any prejudice that would result, the Court may be required to disregard the error court permitted to disregard plaintiff’s error.

Defendant’s contention that this court does not have subject matter jurisdiction to address the filing error, pursuant to CPLR 2001, is unavailing. In Goldenberg [v. Westchester County Health Care Corp., 16 N.Y.3d 323 (2011),] the Court of Appeals held that it was the plaintiff’s “complete failure to file within the statute of limitations” which prohibited the trial judge from correcting or disregarding an error pursuant to CPLR 2001. However, the Court specifically noted that it, “[did] not address whether the trial judge would have possessed discretion under CPLR 2001 to make allowances for or ignore the differences between the proposed and served complaints if a summons had, in fact, been filed” [Goldenberg, 16 N.Y.3d at 328 n.4]. Although defendant cites to Miller [v. Waters, 51 A.D.3d 113] for the assertion that, “[CPLR 2001] was not intended to allow courts to create subject matter jurisdiction where it does not exist,” [id. at 117], in Macleod [v. County of Nassau, 75 A.D.3d 57 (2d Dep’t 2010)], the Appellate Division, Second Department specifically noted the holding in Miller and found that where a plaintiff improperly filed a complaint in a separate proceeding, and failed to pay the filing fee or obtain an index number, as is required pursuant to CPLR 304, the court maintained subject matter jurisdiction. [See MacLeod, 75 A.D.3d at 65]. Further, the remaining cases cited by defendant, where it was determined that a court did not have subject matter jurisdiction, are distinguishable from the present action as those commencing parties completely failed to file a pleading, as opposed to the present action in which the plaintiffs mistakenly selected an incorrect file when uploading the pleading.

This case is a cautionary tale for all commercial litigators to exercise care in using the e-filing system. Counsel should not assume that the clerk’s office will correct mistakes, which, especially when made at the commencement stage, can have serious consequences.

Posted: April 8, 2014

Opportunity to Comment on Proposed Change to Commercial Division Rules

The Office of Court Administration has asked for public comment on another proposed change to the rules of the Commercial Division.

The proposed new rule states that parties and nonparties “should adhere to the Commercial Division’s Guidelines for Discovery of . . . ESI from Nonparties. Those

Guidelines were developed by the Advisory Council with input from, among others, the Chief Administrative Judge’s Working Group on Electronic Discovery, for the stated purpose of improving the efficiency of e-discovery and reducing the potential costs and burdens imposed on non-litigants. Under the proposed Guidelines, parties are encouraged to reasonably limit their e-discovery requests based on consideration of an enumerated list of proportionality factors; nonparties are encouraged to issue prompt litigation holds, state objections with reasonable particularity and resolve disputes over ESI through informal methods other than motion practice; and parties and nonpaities are expected to meet and confer about the timing, scope and form of ESI production, and the requesting party’s obligation to defray reasonable production expenses under the CPLR.

E-mail comments to by May 28, 2014.

Posted: April 8, 2014

Attorney may not Include Statutory Fee Award when Calculating Contingent Fee Unless Specifically Included by the Retainer Agreement

On April 3, 2014, the Court of Appeals issued a decision in Albunio v. City of New York, 2014 NY Slip Op. 02325, addressing the proper calculation of an attorney’s contingent fee award in an action under the New York City Human Rights Law.

In Albunio, the plaintiffs, who were former NYPD officers, were awarded $986,671 in compensatory damages in their civil rights action. The plaintiffs’ counsel was awarded a statutory fee of $296,826.04 for her trial work and an additional $233,965 for her successful appellate work. The issue presented by the Court of Appeals was how the fee awards would factor into the plaintiffs’ 1/3 contingent fee agreement with their counsel. Because the parties had separate retainer agreements for the trial and the appeal, the two awards are considered separately. The trial award discussion is of greater significance, and occupies the bulk of the opinion.

The trial retainer agreement provided only that the attorney would receive a contingent fee equal to 33% percent “of the sum recovered, whether recovered by suit, settlement, or otherwise.” The First Department agreed with the attorney, and found that the statutory fee awards constituted part of the “sum recovered,” and included them in its calculation of the fee. The Court of Appeals reversed:

The terms of the Trial Agreement do not unambiguously provide that any statutory fees are part of the ‘sum recovered’ and therefore subject to the one-third contingency fee. The subsequent phrase, ‘by suit, settlement or otherwise‘ (emphasis added), might support an interpretation that ‘sum recovered’ is broad enough to encompass a statutory award. However, in ordinary parlance, a plaintiff’s ‘recovery’ denotes the amount payable by the defendant as compensation for the plaintiff’s injury, that is, the damages award or settlement. Moreover, the Trial Agreement does not so much as mention the possibility of statutorily awarded fees, the existence of which the average client is presumably unaware. The general rule that ‘equivocal contracts will be construed against the drafters’ is subject to particularly rigorous enforcement in the context of attorney-client retainer agreements . . . .

(Internal citations omitted.)

After holding that the trial retainer agreement was ambiguous, the Court of Appeals determined that the extrinsic evidence submitted by the attorney in support of her interpretation was insufficient, and announced that New York would follow the prevailing rule that “absent a contractual provision to the contrary . . . . the attorney should be entitled to receive either the contingent fee calculated on the amount of the damage recovery exclusive of any court-awarded fees, or the amount of the court-awarded fee, whichever is greater.” (Emphasis added).

In light of this decision, litigators in an action where statutory fees may potentially be awarded should explicitly address whether any statutory fees awarded will be considered part of the “recovery.” The Court of Appeals noted in passing that they “need not decide whether a retainer agreement entitling an attorney to court-ordered counsel fees in addition to the full contingency fee would be enforceable [but] such an arrangement would be subject to requisite scrutiny under applicable law and rules controlling the reasonableness of attorney compensation,” suggesting that courts might take a dim view of attempts by attorneys to obtain both a contingent fee on the recovery and statutory fees in the same action.

Posted: April 7, 2014

Opportunity to Comment on Proposed Change to Commercial Division Rules

The Office of Court Administration has asked for public comment on another proposed change to the rules of the Commercial Division.

Generally, under the proposed new rule:

any party would be able to seek assignment of a case to the Commercial Division by filing, within 90 days of service of the complaint, a Commercial Division RJI certifying that the case meets the requisite jurisdictional requirements. Failure to file an RJI within 90 days would preclude the party from later seeking transfer of the case to the Commercial Division, except by written application to the Administrative Judge for “good cause shown.” If an RJI is filed within 90 days without seeking assignment to the Commercial Division, any other party would have ten days to apply to the Administrative Judge for a transfer of the case to the Commercial Division. In addition, a non-Commercial Division Justice may request transfer of a case to the Commercial Division where jurisdictional requirements are met.

E-mail comments to by June 2, 2014.

Posted: April 7, 2014

Court Addresses Remedies for Violation of Non-Compete, Non-Disclosure and Non-Solicitation Agreements

On March 28, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Admarketplace Inc. v. Salzman, 2014 NY Slip Op. 30813(U), regarding the enforcement of non-compete, non-disclosure and non-solicitation agreements.

In Admarketplace, “plaintiff adMarketplace Inc. (AMP) commenced [an] action to enjoin Salzman, a former employee, from working for VSW, a competitor. Salzman was accused of violating a contractual non-competition agreement, as well as misappropriating trade secrets and other confidential information that he allegedly was using to help VSW poach employees and clients from AMP.” The plaintiff sought an order “(1) compelling VSW to terminate AMP’s former employees; (2) enjoining defendants from using AMP’s confidential information; (3) enjoining defendants from soliciting AMP’s clients and employees; and (4) compensating it for the business AMP lost due to defendants’ unfair competition.” Among the points the court made in deciding the plaintiff’s motion were:

It is well settled that in order to be enforceable, an anticompetitive covenant ancillary to an employment agreement must be reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmtul to the public, and not unreasonably burdensome to the employee. The Court of Appeals has limited the cognizable employer interests under the reasonableness prong to the protection against misappropriation of the employer’s trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary. A restriction on a former employee’s ability to work for a competitor is invalid unless the employee’s services were unique or extraordinary or if the job is considered a learned profession (such as law or accounting).

First, it is clear that the NDA’s prohibition of Salzman and Carney working for a competitor is unenforceable. They work in the pay-per-click online marketing industry, which is not a learned profession, and their services are not unique. The law is well settled that agreements barring such employees from working for competitors are unenforceable.

. . .

As for the prohibition on soliciting former employees, this court recently observed that there is scant case law on the enforceability of non-recruitment clauses. This court, persuaded by the analysis in Renaissance Nutrition and Lazer, upheld a two year non-recruitment clause because such a restriction is inherently more reasonable and less restrictive than non-compete clauses since it does not impact the employee’s ability to procure employment. Here, the duration of the NDA’s non-recruitment clauses is shorter than in OTG. Additionally, AMP has a legitimate interest in the protection of client relationships developed at the employer’s expense. The gravamen of AMP’s allegations is that VSW has been poaching employees from AMP, inducing them to switch companies for greater compensation hoping that bring proprietary information with them. A non-recruitment prohibition directly guts this channel of wrongful competition. This is reasonable and, therefore, enforceable. . . . .

[T]he existence of actual monetary damages here is questionable. Though AMP has been in court to argue three motions in this case, it has yet to identify any actual lost business. Though such proof is not required at this juncture, absent lost business, there is little relief to be had by AMP. As explained to the parties on multiple occasions, no one’s employment will be terminated as a result of this case. For AMP to recover from defendants, it must prove a nexus between the alleged violations of the subject restrictive covenants and revenue generated by defendants using confidential information.

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

This decision provides a useful summary of what the courts will (and will not) do in enforcing employment agreements. Significantly, as this decision shows, employment agreements–unlike most other contracts–are not necessarily enforced as written and instead are interpreted and enforced by the courts based on the overlay of law discussed above.

Posted: April 5, 2014

Transcripts and Videos of Arguments in the Court of Appeals for the Week of March 24, 2014, Now Available

Transcripts and videos of arguments in the Court of Appeals for the week of March 24, 2014, are now available on the Court of Appeals website.

On March 22, 2014, we noted three cases of interest from the oral arguments for the week of March 24, 2014:

  • Docket No. 71: Golden v. Citibank, N.A. (concerning whether a bank may refuse payment on a cashier’s check on a showing that it received no consideration for issuing the check). See the transcript and the video.
  • Docket No. 64: Clemente Brothers Contracting Corp. v. Hafner-Milazzo (concerning whether parties may by contract reduce the statutory one-year limit on reporting forgeries in UCC 4-406 to 14 days). See the transcript and the video.
  • Docket No. 81: CDR Créances S.A.S. v. Maurice Cohen; CDR Créances S.A.S. v, Leon Cohen (concerning the proper burden of proof for striking a defendant’s pleadings and dismissing an action for fraud on the court). See the transcript and the video.
Posted: April 5, 2014

Compliance with Notice and Cure Provision Condition Precedent to Bringing Suit

On March 28, 2014, the Fourth Department issued a decision in Accadia Site Contracting, Inc. v. Erie County Water Authority, 2014 NY Slip Op. 02194, affirming the dismissal of a breach of contract claim for failure to provide notice and an opportunity to cure.

In Accadia Site Contracting, the plaintiff sought to excuse its failure to perform a condition precedent to bringing a lawsuit: notice of the breach and an opportunity to cure the breach. The Fourth Department affirmed the dismissal, explaining:

the court properly granted defendant’s motion on the ground that plaintiff failed to satisfy a condition precedent. A condition precedent is an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises. Here, paragraph 10.05 of the contract mandated that plaintiff provide the project engineer with “[w]ritten notice stating the general nature of each Claim, dispute, or other matter” within 20 days of the event giving rise to the claim. It is well settled that contract clauses that require the contractor to promptly notice and document its claims made under the provisions of the contract governing the substantive rights and liabilities of the parties are conditions precedent to suit or recovery. . . . .

Plaintiff further contends that it was excused from compliance with the notice and reporting requirements of paragraph 10.05 based on defendant’s breach of the contract; that such compliance was prevented or hindered because of misconduct by defendant; and that such compliance would have been futile. Those contentions are unavailing. First, it is well settled that a party’s obligation to perform under a contract is only excused where the other party’s breach of the contract is so substantial that it defeats the object of the parties in making the contract, and plaintiff failed to raise a triable issue of fact whether defendant’s actions defeated the parties’ objectives in entering into the contract. With respect to plaintiff’s remaining two contentions, we conclude that there is no evidence to support plaintiff’s contentions that defendant’s misconduct frustrated its ability to comply with the applicable notice provision or that notice to the engineer would have been futile. We note in any event with respect to plaintiff’s second contention that, although it is undisputedly the rule that one who frustrates another’s performance cannot hold that party in breach, plaintiff failed to raise a triable issue of fact whether its performance with the notice and reporting requirements was prevented or hindered by defendant’s alleged misconduct.

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

This decision not only shows the general enforceability of notice and cure provisions, it shows the unwillingness of courts to accept pro forma excuses for failure to comply with those provisions.

Posted: April 5, 2014

Agency Agreement Within the Statute of Frauds

On March 26, 2014, Justice Ramos of the New York County Commercial Division issued a decision in William Morris Endeavor Entertainment, LLC v. Rivera, 2014 NY Slip Op. 50458(U), dismissing claims against TV personality Geraldo Rivera on Statute of Fraud grounds.

In William Morris, the plaintiff, the well-known William Morris talent agency, sued its former client Geraldo Rivera for unpaid commissions. The complaint alleged that the parties entered into a series of three-year written contracts between 1985 and 1994, and that WME had continued to represent Rivera until he had stopped paying commissions in 2010. Rivera claimed that the last written contract stated that he was to be represented only by one particular agent, and when that agent left WME in 2010, Rivera went with him, continued paying him commissions, and had never been represented or advised by any other WME agent.

Rivera moved to dismiss on the grounds that WME had failed to allege the existence of a written agreement that satisfied the Statute of Frauds. The court agreed, rejecting WME’s argument that the parties’ course of conduct since the last written contract expired in 1997 created an enforceable agreement:

The alleged Agency Agreement is an oral agreement, a logical construct on behalf of WME’s position. The writings executed by the parties in 1985, 1988, 1991 and 1994 all specified a three-year term. After 1997, they followed a consistent course of conduct in their dealings, but no written agreement controlled their behavior. Undoubtedly, the alleged Agency Agreement is unenforceable by application of the statute of frauds, as well-illustrated by a case on point . . . . Therefore, the Court concludes that the parties had no enforceable commission agreement after October 1997, because the statute of frauds requires a written agreement.

(Internal citation and quotation omitted.)