On October 9, 2013, we noted that on October 15, 2013, the Court of Appeals would be hearing argument in Cruz v. TD Bank NA., Docket No. 191, an appeal addressing two questions certified from the US Court of Appeals for the Second Circuit relating to a private right of action for money damages and injunctive relief against banks that violate the Exempt Income Protection Act (EIPA)’s procedural requirements. Both the hearing transcript and a video of oral argument are now available on the court’s website.
On October 24, 2013, the First Department, in a 3-2 decision, issued a decision in BDC Finance L.L.C. v. Barclays Bank PLC, 2013 NY Slip Op. 06963, enforcing a contract in a way that created a significant burden on one party but not the other. This apparent unfair result was due to a “notwithstanding” clause similar to the clause examined in the First Department decision that was a subject of our October 24, 2013 post: “Notwithstanding” Clause Controls Contract Even When It Reads Other Term Out of the Contract.”
The BDC Finance majority (Saxe, DeGrasse, and Richter, JJ.) held that Barclays breached its contract with the plaintiff hedge fund by not immediately complying with the hedge fund’s demand that Barclays return certain collateral pledged to secure a derivative transaction, even though Barclays disputed the amount of collateral that had to be returned. The majority held:
The plain and unambiguous language of the Delivery of Collateral clause requires Barclays to transfer any Return Amount demanded by BDC no later than the business day following the demand. This obligation is unconditional and absolute and exists “[n]otwithstanding anything in the [CSA] to the contrary.” Thus, the Delivery of Collateral clause expressly supercedes the form language in the CSA which would have otherwise permitted Barclays to dispute before paying.
Because this provision was part of a group of agreements that were “negotiated by two sophisticated commercial entities,” the majority would “not, in the guise of contractual interpretation, alter the plain language of the clause.”
The dissenters (Andrias and Gische, JJ.), however, disagreed, and interpreted the contracts as permitting Barclays to refuse to honor the hedge fund’s capital call while the parties made use of the contractually agreed-upon dispute resolution procedures: “[t]he court will endeavor to give the [contract] [the] construction most equitable to both parties instead of the construction which will give one of them an unfair and unreasonable advantage over the other” because “[i]t is highly unlikely that two sophisticated business entities, each represented by counsel, would have agreed to such a harshly uneven allocation of economic power under the Agreement” (citations omitted).
In conclusion, the First Department, albeit by a bare majority, has held sophisticated parties to the plain language of the “notwithstanding clauses” in their contracts, no matter how onerous the result. Lawyers should keep this in mind in drafting and performing contracts. Those who expect a court to ignore contract provisions that are unfair to their clients may be disappointed.
On October 21, 2013, Justice Ramos of the New York County Commercial Division issued a decision in Wyle Inc. v. ITT Corp., 2013 NY Slip Op. 51707(U), addressing the availability of a fraudulent inducement claim based on a breach of warranty.
In Wyle, defendant ITT argued that a fraud claim based on a warranty in an agremeent “must be dismissed as duplicative of Plaintiffs’ breach of contract claim.” Justice Ramos disagreed, writing that:
generally “a cause of action for fraud does not arise when the only fraud charged relates to a breach of contract.” However, “if a plaintiff alleges that it was induced to enter into a transaction because a defendant misrepresented material facts, the plaintiff has stated a claim for fraud even though the “same circumstances give rise to the plaintiff’s breach of contract claim.” “Unlike a misrepresentation of future intent to perform, a misrepresentation of present facts is collateral to the contract . . . and therefore involves a separate breach of duty.”
A warranty in a contract, Justice Ramos explained, “is a misrepresentation of present fact and cannot be characterized merely as an insincere promise to perform.” As far as the reasonableness of plaintiff’s reliance on the warranty, Justice Ramos noted that
The Court of Appeals has held that in contract negotiations between sophisticated entities, the justifiable reliance prong of a fraud claim can be sufficiently alleged where the plaintiff has gone to the trouble to insist on a written representation that certain facts are true, it will often be justified in accepting that representation rather than making its own inquiry.
The lesson is clear for both litigators and transactional lawyers. Warranties in a contract provide strong protection against unpleasant surprises after a deal is consummated and can be relied upon in subsequent litigation.
On October 22, 2013, the First Department issued a decision in Warburg Opportunistic Trading Fund, L.P. v. GeoResources, Inc., 2013 N.Y. Slip Op. 06826, holding that a “notwithstanding” clause trumps all other clauses in a contract, even when that clause would effectively read another clause out of the agreement.
The appeal arose out of seemingly inconsistent anti-dilution provisions in warrants issued by the defendant that gave the holder the right to purchase certain number of shares of defendant’s common stock at an exercise price of $32.43 per share. The anti-dilution provisions of the warrants contained formulae for adjustments of the exercise price, but also stated: “Notwithstanding any other provisions of Section 8(f) to the contrary, no adjustment provided for in Section 8(f) shall result in a reduction of the Exercise Price to an amount less than $32.43 per Warrant Share (as appropriately adjusted for the occurrence of any events listed in [other anti-dilution clauses of Section 8]).” This in effect read Section 8(f) out of the agreement. As the First Department noted:
Here, the “notwithstanding” provision in Section 8(h) clearly overrides any conflicting provisions in Section 8(f). To the extent that Section 8(h) sets the floor price of purchasable warrant shares at $32.43 — the initial exercise price listed in the warrant — it renders the adjustment formula in Section 8(f) impotent. To be sure, one is compelled to wonder how Section 8(f)’s formula could have any effect whatsoever if 8(h)’s “notwithstanding” clause prevents the reduction of the initial exercise price of $32.43 to a lower amount. Nonetheless, the “notwithstanding” clause governs the contract, despite the presence of conflicting provisions. Plaintiffs are sophisticated institutional investors, and they could have appreciated the effect of Section 8(h)’s trumping language.
The bottom line is that, absent sufficiently pled allegations of fraudulent inducement or mistake, the Commercial Division and First Department will hold sophisticated parties to their contracts, even a “notwithstanding” clause that reads an entire provision out of a contract.
In an effort to foster communication between the Commercial Division bench and bar, from time to time we will be posting interviews with sitting or retired Commercial Division justices and court staff. Retired Nassau County Commercial Division Justice Ira B. Warshawsky has graciously agreed to serve as our inaugural interviewee from his new home at Meyer Suozzi English & Klein, P.C.’s Litigation and Alternative Dispute Resolution Practice. Before retiring, Justice Warshawsky served as a Supreme Court Justice for fourteen years, the last ten of which were in the Commercial Division. In addition to his judicial duties, Justice Warshawsky has served as a director of the Nassau Bar, is the former Dean of the Nassau Academy of Law, is a frequent lecturer for the National Institute of Trial Advocacy, has served as a contributing editor of the Benchbook for New York Trial Judges, was the past-President and charter member of the American College of Business Court Judges, and is a member of the Advisory Board of the Sedona Conference.
With deep appreciation to the Justice, here are ten questions for Justice Warshawsky:
While we normally do not blog about Second Circuit decisions, that court’s decision in Licci v. Lebanese Canadian Bank, SAL, No. 10-1306-cv (October 18, 2013), shows the difficulties that can arise when state and federal appellate courts interpret New York law differently.
Licci involves claims by American, Canadian, and Israeli citizens who were killed in rocket attacks in Israel that were carried out by Hizballah (aka Hezbollah) in 2006. Instead of suing their attackers, the Licci plaintiffs sued the banks that their attackers used to facilitate the logistics of carrying out the attacks: Lebanese Canadian Bank (“LCB”), a Lebanese bank with no operations, employees, or branches in the United States, and American Express Bank Ltd. (“Amex”). LCB maintained a correspondent bank account with Amex in New York. According to plaintiffs, LCB used this correspondent account to wire millions of dollars on behalf of Hizballah knowing that these wire transfers would enable Hizballah to carry out its rocket attacks.
On October 17, 2013, Justice Bucaria of the Nassau County Commercial Division issued a decision in National Grid Corporate Services, LLC v. LeSchack & Grodensky, P.C., 2013 N.Y. Slip Op. 23354, highlighting a significant procedural difference between litigating commercial cases in New York’s state and federal courts: which claims can be tried by a judge versus a jury. Unlike federal courts, New York does not permit a jury trial where claims seeking legal relief and claims seeking equitable relief are alleged in the same complaint. Indeed, a jury trial can be lost even if a plaintiff’s initially-pled equitable claims are subsequently withdrawn or dismissed, leaving only the claims seeking money damages to be tried.
National Grid Corporate Services (actually two cases that were consolidated) involves a dispute between a law firm and its former client over unpaid legal fees. The claims asserted by the client included declaratory relief that the client had terminated the law firm for cause, a claim for disgorgement of legal fees, an alternative claim for quantum meruit if the client was found not to have terminated the law firm for cause, conversion, unjust enrichment, monies had and received, and breach of fiduciary duty, an accounting, a declaratory judgment for a retaining lien, and a breach of contract claim relating to a collection services agreement. The law firm initially filed a note of issue seeking a jury trial but subsequently moved to withdraw its jury demand, which it could do only if the former client consented or if it was not entitled to a jury trial in the first place. Justice Bucaria granted the motion to withdraw the jury demand on the ground that the former client’s unjust enrichment claim (even though it sought money damages) was an equitable claim and thus defeated the right to a jury trial.
The lesson to be learned from this decision is that, as tempting as it is to plead alternative causes of action in a complaint, sometimes plaintiff’s counsel can plead away the plaintiff’s right to a jury trial by including duplicative equitable claims along with legal claims for money damages. This may be an awfully high price to pay for the alternative relief requested.
On October 16, 2013, Justice Bransten of the New York County Commercial Division issued a decision in Dexia SA/NV v. Morgan Stanley, 2013 N.Y. Slip Op. 51696(U), dismissing on the pleadings causes of action sounding in common-law fraud brought against the underwriters and sponsors of residential mortgage-backed securities (“RMBS”) by both the entity that purchased the RMBS for $626 million and by the assignees to whom the RMBS were sold at face value via a put option transaction.
Justice Bransten dismissed the assignees’ claims for lack of standing because (a) the documentary evidence submitted by the defendants (the assignment documents) conclusively established that the purchaser of the RMBS had assigned only “all right, title and interest in the Put Settlement Assets,” and (b) under New York law, “absent language demonstrating an intent to do so, tort claims do not automatically pass to an assignee.” Here, Justice Bransten held that the assignment language did not demonstrate an intent to assign common-law fraud claims, and thus dismissed the assignees’ claims for lack of standing based on documentary evidence.
Turning to the fraud claims asserted by the purchaser, Justice Bransten dismissed those as well based on New York law limiting the damages recoverable by a fraud victim to its out-of-pocket losses and prohibiting a fraud plaintiff from recovering its expectation damages. Because the documentary evidence submitted by the defendants conclusively established that the purchaser of the RMBS had been paid by its assignees at least as much as the purchaser paid for them, Justice Bransten held that the purchaser could not, as a matter of law, plead fraud damages.
This case illustrates two important lessons for both the commercial transaction lawyer and the commercial litigator: (1) if you are negotiating the purchase of an asset on behalf of an assignee, make sure you include explicit language in the assignment that any tort claims held by the assignor are being assigned to the assignee, or those claims will not pass to your client; and (2) if you are a commercial litigator whose client has been the victim of an alleged fraud, make sure they suffered an out-of-pocket loss or they will be without a remedy. In that regard, however, be aware that New York courts do not always enforce the out-of-pocket fraud loss rule consistently or strictly. For example, in Roni LLC v. Arfa, 74 A.D.3d 442 (1st Dep’t 2010), aff’d, 18 N.Y.3d 846 (2011), the First Department affirmed New York County Commercial Division Justice Charles Ramos’ denial of a motion to dismiss a fraud claim on the pleadings in a case where real estate investors were suing the promoters of the real estate investments for failing to disclose (or affirmatively misrepresenting) certain commissions they received from the sellers of the real estate. The defendants had argued that the fraud claims should be dismissed because, when the real estate was later sold, the plaintiffs recouped more than they had initially invested, although not as much as they would have recovered had the commissions not been paid by the sellers to the defendants. Justice Ramos and the First Department disagreed. According to the First Department, “plaintiffs sufficiently alleged damages by asserting that they suffered actual pecuniary loss in the amount of the secret commissions that inflated the purchase prices of the properties that the LLCs acquired.”
On October 17, 2013, the Court of Appeals issued a decision in Matter of Belzberg v. Verus Invs. Holdings Inc., 2013 NY Slip Op. 06729, addressing the extent to which a person who is not a party to an agreement to arbitrate can nonetheless be required to arbitrate.
The Court of Appeals started with the general proposition that “nonsignatories are generally not subject to arbitration agreements,” but that courts have created an exception under the “direct benefits theory of estoppel,” where “a nonsignatory may be compelled to arbitrate where the nonsignatory ‘knowingly exploits’ the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement.”
In Matter of Belzberg, Belzberg, an investment advisor, opposed being brought into the arbitration because he was not a party to the contract containing the arbitration clause. The facts of the case show that Belzberg had benefited from the transaction to which the agreement related. Belzberg had directed a corporation owned by a trust he had established, and for which he served as an unpaid financial advisor, to transfer $5 million to Verus Investment Holdings, so that it could be invested. Verus invested that money, along with $1 million of its own funds, using Verus’ account at Jefferies & Co., Inc. After the investment gained in value, Jefferies returned both Belzberg’s original $5 million investment and the profits to Verus. Verus subsequently distributed those funds to a friend of Belzberg’s, at his direction. When a dispute subsequently arose about whether Jefferies owed the Canadian government withholding tax on the profits, Jefferies sought to bring Belzberg into an arbitration brought pursuant to the arbitration clause in the agreement between Jefferies and Verus.
Notwithstanding the clear benefit to Belzberg and to parties with which he was associated, the Court of Appeals ruled that he was not bound by the arbitration clause in the agreement between Verus and Jefferies because “[t]he guiding principle is whether the benefit gained by the nonsignatory is one that can be traced directly to the agreement containing the arbitration clause” (emphasis added). Thus,
[t]he mere existence of an agreement with attendant circumstances that prove advantageous to the nonsignatory would not constitute the type of direct benefits justifying compelling arbitration by a nonparty to the underlying contract. Also, absent the nonsignatory’s reliance on the agreement itself for the derived benefit, the theory would extend beyond those who gain something of value as a direct consequence of the agreement. (Emphasis added.)
This case illustrates how difficult it can be to bring a non-signatory to an agreement to arbitrate into an arbitration and suggests that litigants should, in the first instance, look for a forum into which all parties can be brought.
On October 16, 2013, Justice Bransten of the New York County Commercial Division issued a decision in Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 2013 NY Slip Op. 51673(U), addressing the scope of the common interest privilege in the context of a corporate merger. Justice Bransten held that, contrary to rule applied by some federal courts, “New York law does not allow a privilege claim under the common-interest doctrine unless there is pending or reasonably anticipated litigation.”
Justice Bransten noted “that there is no litigation requirement when two parties consult with one attorney.” Thus, parties for whom it is important to create a common interest privilege outside of the litigation context should considering engaging joint counsel for that purpose.