Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
On January 23, 2014, the First Department issued a decision in Ingham v. Thompson, 2014 NY Slip Op. 00436, reversing a trial court order rejecting an arbitral award.
The First Department made clear the deferential standard by which a court should review an arbitral award, explaining:
Respondents’ arguments that plaintiff should have been disqualified from maintaining the arbitration proceeding . . . because she initially asserted individual claims alongside the derivative claims on behalf of the limited partnership, and settled with one of the defendants on behalf of herself and the limited partnership, are unavailing. Arbitrators are not bound by the principles of substantive law and, short of complete irrationality, they may craft an award to reach a just result. Even mistakes of fact and law do not warrant vacatur of an otherwise rational award. Here, the parties extensively briefed and argued the issue of whether plaintiff could maintain the proceeding before the three-member panel, which unanimously ruled that plaintiff had cured any defect by withdrawing her individual claims, which the panel also dismissed. Moreover, the panel approved the settlement, and conditioned the award on plaintiff’s turning over the settlement funds to the limited partnership. It cannot be said that the panel’s determination concerning plaintiff’s purported conflict of interest evinced complete or total irrationality, and hence, the award should be confirmed.
(Internal quotations and citations omitted) (emphasis added).
The great deference that courts must show to arbitral awards is not just a concern for litigators. Before agreeing to an arbitration provision in a contract, transactional counsel should consider the risks, as well as the benefits, of arbitration.
On December 24, 2013, Justice Whelan of the Suffolk County Commercial Division issued a decision in KNET, Inc. v. Ruocco, 2013 NY Slip Op. 33543(U), addressing the propriety of a director’s sale of additional shares to himself.
In KNET, Inc., the court addressed a number of issues, including whether a corporate director breached his fiduciary duty by selling additional shares of the corporation to himself. The court held that in light of the facts of that action, he did, explaining:
As a general rule, directors of a corporation cannot issue or dispose of the corporate stock to themselves for an inadequate consideration. Directors owe a fiduciary responsibility to the shareholders in general and to individual shareholders in particular to treat all shareholders fairly and evenly. So, a breach of fiduciary duty is established by proof that the directors failed to treat all stockholders fairly and evenly. When issuing new stock, a director, such as [defendant], must treat existing shareholders fairly. It is an inflexible rule that directors cannot exercise the corporate powers for their private or personal advantage or gain. [A] director breaches his obligation to shareholders when he obtains stock at an inadequate price. [A] clearly inadequate consideration invokes the same principles as the absence of consideration.
[The defendant] is considered an interested director since he is receiving a direct financial benefit from the challenged transactions, that are different from the benefit received generally by all shareholders. Where directors have an interest in the challenged action, the burden of proof shifts to the interested director to establish that the actions involved were reasonable and fair. His testimony failed to satisfy that standard.
(Internal quotations and citations omitted) (emphasis added).
The interested share sale discussed above was just one of the defendant’s many improper acts addressed in the court’s opinion. Yet the particular point addressed above is something to which corporate directors and their counsel should be sensitive even in more innocent contexts. Controlling shareholders in close corporations that also control the company as directors need to remember that whatever their interests as a shareholder, their duties as a director run to all shareholders.
On January 21, 2014, the First Department issued a decision in Gliklad v. Cherney, 2014 NY Slip Op. 00310, affirming the striking of an affirmative defense based on the law of the case doctrine.
“In a prior appeal,” the First Department held “that the promissory note” at issue in Gliklad “contained a clause selecting New York as the forum” for the litigation. In subsequent proceedings, the trial court did not allow the defendant to put on an expert witness “in support of his claim that the note contained only a choice of law clause.” The First Department affirmed that decision, explaining that the expert’s testimony did “not constitute subsequent or new evidence that was previously unavailable for the purpose of avoiding the law of the case doctrine. Given the binding ruling as to the forum selection clause, the [trial] court correctly found that defendant was barred from asserting a defense based on lack of jurisdiction.” (Internal quotations and citations omitted) (emphasis added).
This decision is a reminder that the law of the case doctrine can be unforgiving, particularly because the availability of interlocutory appeals in New York means that issues are sometimes decided before the facts relating to them are fully developed.
On January 6, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Board of Managers of the 125 North 10th Condominium v. 125 North 10, LLC, 2014 NY Slip Op. 50035(U), dismissing a claim by condominium owners for breach of a contract between the building sponsor and an architect.
In Board of Managers of the 125 North 10th Condominium, the plaintiff board of managers of a condominium brought claims against a variety of defendants relating to the “design and construction of” a “luxury condominium” building in Brooklyn. Among the claims was a breach of contract claim against one of the building’s architects based on the theory that the condominium owners were third-party beneficiaries of the contract between the sponsor and the architect. The court dismissed the claim, explaining:
It is well established that if a party is not in privity with a defendant, a viable cause of action for breach of contract exists only if the party was an intended third-party beneficiary of the contract. Nonparty enforcement of a contractual promise is limited to an “intended” as contrasted with an “incidental” beneficiary. One is an intended beneficiary if one’s right to performance is appropriate to effectuate the intention of the parties’ to the contract and either the performance will satisfy a money debt obligation of the promisee to the beneficiary or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.
Absent evidence of an express intent to benefit a plaintiff, a plaintiff who purchases a condominium unit is merely an incidental third-party beneficiary to the contracts between the sponsor and service providers which participated in the development of the condominium and, thus, has no standing to bring a breach of contract claim against such contractors. As articulated in Lake Placid, that a developer had in mind the normal business motive to obtain a construction product of sufficient quality for ready marketability of the condominium units to potential customers is clearly not a basis from which to infer the requisite intent of the developer to bestow performance benefits upon the purchasers of the condominium units.
(Internal quotations and citations omitted) (emphasis added).
This decision highlights the distinction between persons who benefit–often in obvious and intended ways–from a contract and the persons who meet the narrow legal definition of third-party beneficiaries. This is a distinction counsel should keep in mind both in drafting contracts and in litigating contract claims.
On January 15, 2014, Justice Bransten of the New York County Commercial Division issued a decision in U.S. Bank N.A. v. DLJ Mortgage Capital, Inc., 2014 NY Slip Op. 50029(U), enforcing the provisions of a commercial agreement that significantly limited the damages available under a breach of contract claim.
In U.S. Bank, the plaintiff was the trustee of a trust containing mortgage loans that had been securitized by the defendant. The operating agreement contained a series of representations and warranties about the mortgage loans and provided that the sole remedy for a breach of those representations and warranties was that the defendant would have to repurchase the breaching loans. The plaintiff sued the defendant, alleging (a) numerous breaches of the representations and warranties, and (b) that the defendant had also breached the sole-remedy clause by refusing to repurchase the loans. Accordingly, the plaintiff alleged, it was no longer restricted to the repurchase remedy and was eligible for the full range of contract remedies, including compensatory, consequential, and rescissory damages. In deciding the defendant’s motion to dismiss, the court held that the plaintiff was still restricted by the sole-remedy clause:
The language of the provision is clear and bars the recovery of the damages sought by Plaintiff . . . . To the extent that [the defendant] breaches its obligation to repurchase breaching loans . . . Plaintiff claims that it is entitled to the full panoply of contract remedies under New York law. However, the sole remedy contractual language agreed upon by the parties is not vitiated because [the defendant] allegedly breached its obligation to perform the remedy therein. Instead, the remedy in that instance is to direct [the defendant’s] performance of its repurchase obligation. Where a loan cannot be repurchased because, for example, it is no longer in the Trust, the remedy is an award of damages equal to the repurchase amount, consistent with the sole remedy provision.
(internal citations and quotations omitted).
The court also noted that even if the sole-remedy clause were unenforceable, the plaintiff still would not have been eligible for consequential damages, because there was no contract language conveying that the parties “intended consequential damages to be recoverable in the event of a breach.” Similarly, the court held that “rescissory damages are only applicable where rescission is impracticable and no alternative legal remedies are availing,” a situation that did not exist because of the availability of a remedy under the sole-remedy clause.
This opinion shows that New York courts will enforce sole-remedy clauses. Counsel should not assume that they can plead their way around them if a dispute arises.
On December 15, 2013, we posted that on December 12, 2013, the Court of Appeals had accepted certified questions of New York law regarding the unfinished business doctrine from the Second Circuit in In re: Thelen LLP. On January 14, 2014, the Court of Appeals accepted the same certified questions from the Second Circuit in In re: Coudert Bros. LLP, 2014 NY Slip Op. 60759.
On January 17, 2014, Governor Andrew M. Cuomo announced the appointment of Justice Barbara R. Kapnick of the New York County Commercial Division to the First Department.
Congratulations to Justice Kapnick.
On January 14, 2014, 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.
Under a long-standing judge-made rule, even if a foreign bank has a branch in New York (and is therefore subject to personal jurisdiction), other branches of the bank are “treated as separate entities for certain purposes, such as attachments, restraints, and turnover orders.” As a result, where the separate entity rule applies, “in order to reach a particular bank account, the branch of the bank where the account in maintained must be served.” The Court of Appeals has never decided whether this rule applies to post-judgment enforcement proceedings. However, in a 2009 decision, Koehler v. Bank of Bermuda Ltd., the Court, without expressly addressing the “separate entity rule,” held that “a New York court has authority to issue a turnover order pertaining to extraterritorial property [in that case a stock certificate], if it has personal jurisdiction over a judgment debtor in possession of the property.” Although some courts have concluded that Koehler “forecloses the application of the separate entity rule to post-judgment enforcement proceedings,” the Second Circuit, in Tire Engineering and Motorola, “decline[d] to reach the issue,” and instead certified the following two questions to the Court of Appeals:
- “First, whether the separate entity rule precludes a judgment creditor from ordering a garnishee bank operating branches in New York to turn over a debtor’s assets held in foreign branches of the bank”; and
- “Second, whether the separate entity rule precludes judgment creditor from ordering a garnishee bank operating branches in New York to restrain a debtor’s assets held in foreign branches of the bank.’
The answers to these questions will potentially have wide-ranging implications not only for New York civil procedure, but also for the international banking industry, since, as the Second Circuit notes in its decision, “international banks are subject to competing laws of multiple jurisdictions, and turnover or restraining orders by New York courts may cause conflicts with the regulations, laws and policies of other sovereign jurisdictions.”
On January 6, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Maesa LLC v. Jouer Cosmetics LLC, 2014 NY Slip Op. 30026(U), dismissing a counterclaim for fraudulent inducement to the extent it sought lost profits damages.
In Maesa, the parties entered into a contract under which the plaintiff manufactured vials in which the defendant packaged lip gloss. A dispute arose over the quality of the vials. In response to the plaintiff’s claims, the defendant asserted counterclaims, including a counterclaim for fraudulent inducement for which it sought lost profits damages. In response to the plaintiff’s motion to dismiss, the court dismissed the defendant’s counterclaim for fraudulent inducement to the extent it sought lost profits damages, explaining:
[The plaintiff] contends that New York’s “out-of-pocket” damages rule forecloses [the defendant’s] attempt to recover lost profits on its fraudulent inducement counterclaim. For a fraud claim, the true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong or what is known as the out-of-pocket rule. Under the rule, damages are to be calculated to compensate plaintiffs for what they lost because of the fraud, not to compensate them for what they might have gained.
. . . [R]ecovery of potential profits from these cancelled orders is squarely prohibited under the rule. The recovery of consequential damages naturally flowing from a fraud is limited to that which is necessary to restore a party to the position occupied before commission of the fraud. Thus, [the defendant’s] potential recovery is limited to damages that would restore to it to the position it occupied before [the plaintiff’s] purported misrepresentations, rendering lost profits inapplicable.
(Internal quotations and citations omitted).
Lawyers often plead fraud and contract claims simultaneously to cover all bases (such as, for example, the court finding that there was no contract or that it was not breached). They should remember, though, that the measure of damages is different for contract claims and fraud claims.
On January 2, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Saxon Technologies, LLC v. Wesley Clover Solutions-North America, Inc., 2014 NY Slip Op. 30002(U), dismissing a breach of contract claim for failure adequately to plead damages.
In Saxon Technologies, the plaintiff’s allegations included that the defendant had breached the “Non-Circumvention” clause in its vendor agreement with the plaintiff, which provided that the defendant would “not, directly or indirectly, contact, deal with or otherwise become involved with any entity introduced, directly or indirectly, by or through” plaintiff by entering into a contract directly with the plaintiff’s clients once the client’s contract with the plaintiff ended. The court dismissed the breach of contract claim, holding that:
[Plaintiff] alleges that [defendant] breached the . . . Contract by improperly negotiating with [the plaintiff’s client] to contract directly. For the purposes of this motion, the court assumes such conduct breached the . . . Contract’s Non-Circumvention clause. However, a breach alone does not entitle a plaintiff to recover; there must be non-speculative damages resulting from such breach.
Here, [the plaintiff’s client] was under no obligation to renew its contract with [the plaintiff]. This is undisputed. Rather, [the plaintiff] contends that, had [its client] not sought to contract with the defendant] directly, it would have renewed, thereby generating more fees for [the plaintiff]. This is speculative. Moreover, even if [the client’s] renewal was not speculative, the amount of damages is, since there is no way to know for how many more years [the client] would have renewed or what the fees would have been.
(Internal quotations and citations omitted).
This decision serves as a reminder that in New York, it is not just tort cases where damages are an element of the claim.