Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: April 15, 2014

Court Will Not Examine Adequacy of Consideration Given for Guarantee Absent Fraud or Unconscionability

On April 8, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Pensmore Investments LLC v. Gruppo, Levey & Co., 2014 NY Slip Op. 30922(U), granting the plaintiff summary judgment as against defendant William Sprague on a guarantee notwithstanding the guarantor’s argument that the guarantee was not a binding contract because there the defendant received no consideration for entering into it. The court also granted a motion made by defendants related to Gruppo, Levey & Co. to dismiss causes of action alleging breaches of the covenant of good faith and fair dealing and granted in part a motion to dismiss causes of action based upon piercing the corporate veil.

In granting the summary judgment motion against defendant William Sprague, the court rejected the lack of consideration argument, explaining:

It is well settled that absent fraud or unconscionability, the adequacy of consideration is not a proper subject for judicial scrutiny. Where, as here, plaintiff established a prima facie entitlement to summary judgment on the enforceability of the contract, the defendant must do more than make conclusory allegations regarding lack of consideration to create a question of fact.

In any event, a settlement contingent on a guaranty constitutes valid consideration for the guaranty. The law presumes that a guarantor receives a benefit by guaranteeing a contract since, if there were no benefit to the guarantor, he would not execute the guaranty absent fraud or duress.

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

As this decision illustrates, consideration may be a required element of a binding contract, but courts are nonetheless reluctant to examine the adequacy of the consideration given.

Posted: April 14, 2014

Opportunity to Comment on Proposed Change to Commercial Division Rules

The Office of Court Administration has asked for public comment on yet another proposed change to the rules of the Commercial Division. This is the fifth proposed Commercial Division rule change on which the court has sought comment in the past two weeks.

The proposed new rule would require Commercial Division justices to schedule “oral argument on a motion” for its own “time slot,” “[t]he length of” which would be “solely in the discretion of the court.” This would change the practice of some justices of scheduling arguments in multiple matters for the same time. “In order for the court to be able to address any and all matters of concern to the court and in order for the court to avoid the appearance of holding ex-parte communications with one or more parties in the case, even those parties who believe that they are not directly involved in the matter before the court” would be required to “appear at the appointed date and time . . . unless specifically excused by the court.”

E-mail comments to by May 30, 2014.

Posted: April 13, 2014

Decision Analyzes Limits of Former Employee’s Common Law Obligations to Employer

On April 2, 2014, Justice Whelan of the Suffolk County Commercial Division issued a decision in Freed, Kleinberg, Nussbaum, Festa & Kronberg, MD., LLP v. Nastasi, 2014 NY Slip Op. 30879(U), discussing the duties of employees to their former employer.

In Freed, Kleinberg, the plaintiff medical practice sued “[t]he individual defendants” who “were employed by the plaintiff as staff physicians” and a “corporate defendant” that was “a competing medical practice established by” one of the individual defendants. In deciding the plaintiff’s motion for partial summary judgment, the court discussed the legal obligations of employees to their employers:

That employees owe fiduciary duties, including duties of loyalty and good faith, to their employer in the performance of their duties is well established. Actionable breaches of such duties usually result in a personal gain to the employee and losses to the employer and are generally premised upon conduct by which profits, business opportunities, the raiding of employees and other assets including confidential and proprietary information of the employer are lost or diverted. However, once the employment is terminated, the relationship between a former employee and employer does not give rise to a fiduciary relationship as a matter of law.

A cause of action based on unfair competition may be predicated upon trademark infringement or dilution in violation of General Business Law §§ 360- k and 360- 1, or upon the alleged bad faith misappropriation of a commercial advantage belonging to another by exploitation of proprietary information or trade secrets. The key to stating the non-statutory, common law claim of unfair competition is that the defendant charged actionable conduct displayed some element of bad faith in misappropriating the plaintiffs labor, skill, expenditures, proprietary information of trade secrets.

Appellate case authorities have nevertheless recognized that in the absence of a restrictive covenant not to compete, an employee is free to compete with his or her former employer where remembered information as to specific needs and business habits of particular customers is not confidential or otherwise proprietary in nature. Although an employee owes fiduciary duties of good faith and loyalty to an employer, the employee may incorporate a business prior to leaving the employer without breaching any fiduciary duty. The employee may not, however, solicit his or her employer’s customers or otherwise compete during the course of his or her employment by the use of the employer’s time, facilities or proprietary information. In such cases, it is the employee’s misuse of the employer’s resources to compete with the employer that is actionable as breach of fiduciary duty.

An employee not bound by a restrictive covenant not to compete who has left the employ of a former employer is also free to compete and he or she may solicit the former employer’s customers unless it is shown that customer lists or like material belonging to the employer constitute trade secrets or that there was other wrongful conduct including the employment of fraudulent methods or the engagement in a physical taking or copying of the employer’s customer lists or files.  Knowledge of the intricacies of a business operation does not necessarily constitute a trade secret and, absent any wrongdoing, it cannot be said that a former employee should be prohibited from utilizing his knowledge and talents in this area. Information that is garnered by the defendant’s casual memory and knowledge does not constitute actionable wrongdoing. Where the information at issue is public knowledge or could be acquired easily and duplicated, it is not a trade secret.

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

Posted: April 12, 2014

E-Mails Can Meet Signed Writing Requirement of Statute of Frauds

On March 31, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Rhodium Special Opportunity Fund, LLC v. Life Trading Holdco, LLC, 2014 NY Slip Op. 30840(U), addressing whether an exchange of emails created a binding contract under the statute of frauds.

In Rhodium Special Opportunity Fund, the plaintiff hedge fund sued a number of defendants in connection with the “unsuccessful negotiation for the purchase of a $44 million portfolio of forty-five life insurance policies.” The court addressed several issues in deciding the defendants’ motion to dismiss, including the question of whether e-mails could meet the statute of frauds’ requirement that a writing be “subscribed by the party to be charged therewith”:

The New York statute of frauds provides that: “Every agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent, if such agreement, promise or undertaking . . . is a contract to pay compensation for services rendered in negotiating a business opportunity . . . .” Courts in New York have held that an email may constitute a writing for the purpose of the statute of frauds. The courts have focused on the requirement of a signature to determine when emails meet the requirement. In Rosenfield v Zerneck, 776 NYS2d 458, 460 (Sup Ct 2004), the court held that typing a name on the bottom of an email indicated authentication in the way that a signature would on paper for the statute of frauds. The act of typing the name matters, as a preprinted signature in an email footer has been held to be insufficient as a signature for an email to meet the statute of frauds. In the instant case, the set of emails had typed signatures that met the signature requirement.

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

This decision shows that even an agreement that has to be written under the statute of frauds does not necessarily have to be in the form of a separate document with handwritten signatures.

Posted: April 11, 2014

Opportunity to Comment on Proposed Change to Commercial Division Rules

The Office of Court Administration has asked for public comment on yet another proposed change to the rules of the Commercial Division. This is the fourth proposed Commercial Division rule change on which the court has sought comment in the past two weeks.

The proposed change would amend Commercial Division Rule 8(a) to add an additional topic on which parties must consult prior to a preliminary conference:

any voluntary and informal exchange of information that the parties agree would help aid early settlement of the case.

E-mail comments to by May 28, 2014.

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.