Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: February 28, 2014

Complaint Dismissed for Failure to Comply With Contract’s Mandatory Mediation Provisions

On February 20, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Key Restoration Corp. v. Union Theological Seminary, 2014 NY Slip Op. 30437(U), dismissing a lawsuit for failure to exhaust pre-litigation ADR obligations.

In Key Restoration Corp., the plaintiff brought claims of foreclosure on a mechanic’s lien, breach of contract and unjust enrichment relating to construction work it did for the defendant. The defendant moved to dismiss on the ground that the plaintiff had failed to comply with the pre-litigation dispute resolution provisions of the parties’ contract. The trial court agreed, dismissing the complaint.  The trial court found that the parties’ contract required that the parties mediate any dispute between them before litigating it and rejected the plaintiff’s arguments for not doing so, explaining:

[The plaintiff’s] causes of action, for foreclosure of a mechanic’s lien, breach of contract, and unjust enrichment, are based on contract. Therefore, the dispute is subject to the contractual provisions quoted above. As such, [the plaintiff] failed to satisfy the . . . contract’s conditions precedent to commencing litigation.

. . .

Moreover, the public policy of New York State favors and encourages arbitration and alternative dispute resolutions and these mechanisms are well recognized as an effective and expeditious means of resolving disputes between willing parties desirous of avoiding the expense and delay frequently attendant to the judicial process.

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

Mandatory mediation provisions have, over the past two decades, become increasingly common in commercial contracts. This decision shows that the New York courts will enforce them. And, as a practical matter, is it not better–as a general proposition–for the client to at least try to resolve a dispute by mediation before incurring the costs of litigation and risking getting a complaint dismissed for failing to comply with a contract’s mediation provisions?

Posted: February 27, 2014

Court of Appeals Agrees to Hear Certified Questions Regarding Application of “Separate Entity Rule” to Post-Judgment Enforcement Proceedings

On January 18, 2014, we posted that 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. On February 18, 2014, the Court of Appeals accepted the certified questions.

Posted: February 26, 2014

Court of Appeals Rules On Reargument That Liability Insurer’s Breach of Duty To Defend Did Not Preclude The Insurer From Relying On Policy Exclusions To Avoid Duty To Indemnify

On February 18, 2014, the Court of Appeals issued a decision in K2 Investment Group, LLC v. American Guarantee & Liability Ins. Co., 2014 NY Slip Op. 01102, reversing on reargument a decision issued last year regarding the effect of a breach of an insurer’s duty to defend.

In its earlier decision, the court held that “when a liability insurer has breached its duty to defend its insured, the insurer may not later rely on policy exclusions to escape its duty to indemnify the insured for a judgment against him.”  (Emphasis added). The defendant insurance company moved for reargument on the ground that this holding was inconsistent with earlier precedent, Servidone Const. Corp. v. Security Ins. Co. of Hartford, 64 N.Y.2d 419 (1985), which held that an insurer that breached its duty to defend was not precluded from relying on policy exclusions that do not depend on facts established in the underlying litigation to avoid its duty to indemnify the insured for a settlement of the underlying claims.  Although K2 Investment Group involved a judgment against the insured rather than a settlement, the court found that this distinction was not dispositive:

A liability insurer’s duty to indemnify its insured does not depend on whether the insured settles or loses the case. It is true that a judgment, unlike most settlements, is a binding determination of the issues in the underlying litigation. Thus it can be said here, as it could not in Servidone, that the issues in the suit brought against the insured are now res judicata. But that is irrelevant, because [the insurance company] does not seek here, and the defendant in Servidone did not seek, to relitigate the issues in the underlying case. It is well established that such relitigation is not permitted after an insurer has breached its duty to defend. The issue in Servidone, as here, is whether the insurer may rely on policy exclusions that do not depend on facts established in the underlying litigation.

Finding that Servidone could not be distinguished, the court concluded that “to decide this case we must either overrule Servidone or follow it.”  The court concluded that there was “no justification for overruling Servidone“:

Plaintiffs have not presented any indication that the Servidone rule has proved unworkable, or caused significant injustice or hardship, since it was adopted in 1985. When our Court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the Legislature decides otherwise. In other words, the rule of stare decisis, while not inexorable, is strong enough to govern this case.

A dissenting opinion by Judge Graffeo (joined by Judge Pigott) argued that the court should have “adhere[d] to the general principle that a breach of liability insurer’s duty to defend prohibits it from subsequently invoking policy exclusions to escape its corollary duty to satisfy a judgment entered against the insured by a third party.”  According to the dissenters,

[t]his rule makes sense for several reasons. An insurer should be subjected to some legal consequence for breaching its duty to defend an insured. Prohibiting exclusions from being collaterally invoked provides an insurer with an incentive to appear on behalf of the policyholder in the underlying lawsuit, as it agreed to do in return for the payment of premiums. It also encourages the initiation of a declaratory judgment by an insurer that seeks judicial authorization to rely on a policy exclusion to avoid indemnification. Bringing all of the interested parties – injured plaintiffs; insured defendants; and insurance carriers – together in a judicial forum further contributes to the efficient resolution of factual issues for the benefit of litigants without unduly burdening the ability of injured parties to obtain recovery for covered losses.

This decision has important implications for New York insurance law and Court of Appeals practice generally.  As noted by the dissent, this decision eliminates one powerful incentive for insurance companies to err on the side of honoring the duty to defend, since a breach of the duty will not preclude the insurer from later invoking policy exclusions to disclaim coverage for a judgment entered against the insured.  On the procedural side, this decision evidences the increasing willingness of the Court of Appeals to grant reargument.  In its coverage of the decision, the New York Law Journal notes that the Court of Appeals “granted only one such motion between 2003 and 2011, but it reheard one previously decided case in 2012 and granted three reargument motions in 2013.”

Posted: February 25, 2014

Foreign Default Judgment Enforceable in New York Even if the Foreign Court Did Not Have Personal Jurisdiction over Defendant Where Defendant Consented to Jurisdiction

On February 25, 2014, the Court of Appeals issued a decision in Landauer Ltd. v. Joe Monani Fish Co., Inc., 2014 NY Slip Op. 01263, holding a foreign default judgment enforceable in New York even though the foreign court did not have personal jurisdiction over the defendant, because the defendant had consented to jurisdiction and had actual knowledge of the action.

In Landauer, the plaintiff “entered into a series of contracts with” the defendant that “included a clause granting the Courts of England exclusive jurisdiction over disputes arising from the transactions. After a controversy arose over the quality of the products [the plaintiff] supplied, [the defendant] refused payment, prompting [the plaintiff] to commence an action for breach of contract in the English High Court . . . . [The defendant] did not appear in the action and a default judgment was entered.” When the plaintiff sought to enforce the judgment in New York, the defendant claimed, and the trial court subsequently found, that the defendant had not been properly served and for that reason the judgment was not enforceable under CPLR Article 53, which requires that the foreign court have jurisdiction over the defendant for a foreign judgment to be enforceable in New York. The First Department affirmed the trial court, but the Court of Appeal reversed the decision, explaining:

Although CPLR article 53 generally provides that a foreign judgment will not be enforced in New York if the foreign court did not have personal jurisdiction over the defendant (CPLR 5304(a)(2)), an exception may be made if, prior to the commencement of the proceedings defendant had agreed to submit to the jurisdiction of the foreign court with respect to the subject matter involved (CPLR 5305(3)) and was afforded fair notice of the foreign court proceeding that gave rise to the judgment. We applied this principle in Galliano, where we explained that enforcement of a foreign judgment is not repugnant to our notion of fairness if defendant was a party to a contract in which the parties agreed that disputes would be resolved in the courts of a foreign jurisdiction and defendant was aware of the ongoing litigation in that jurisdiction but neglected to appear and defend. We clarified that, so long as the exercise of jurisdiction by the foreign court does not offend due process, the judgment should be enforced without microscopic analysis of the underlying proceedings (Galliano, 15 NY3d at 81).

(Internal quotations and citations omitted). Because the record showed that the defendant–while not properly served under the CPLR–nonetheless had actual knowledge of the English proceeding against it, the Court of Appeals found the default judgment against the defendant enforceable.

This decision illustrates the power and importance of contract provisions relating to jurisdiction. As a practical matter, it also shows how important it is that businesses have a process for identifying when they have been sued so that they can properly respond as well as the danger of relying on jurisdiction or service arguments rather than dealing with a dispute on the merits.

Posted: February 24, 2014

First Department Rules That Disgorgement May Be Available As An Equitable Remedy For Attorney General Claims Under Martin Act and Executive Law

On February 20, 2014, the First Department issued a decision in People v. Ernst & Young, LLP, 2014 NY Slip Op. 01257, reversing New York County Commercial Division Justice Jeffrey K. Oing’s dismissal of the New York Attorney General’s claims under the Martin Act and New York’s Executive Law for disgorgement of profits earned by Ernst & Young in allegedly facilitating an accounting fraud by its client Lehman Brothers.

In urging dismissal of the disgorgement claim, Ernst & Young argued that the Martin Act and the Executive Law provide for particular remedies—namely, injunctive relief, restitution and cancellation of a business certificate—and that disgorgement, which is not mentioned in the statutes, is not an available form a relief. It also argued that disgorgement could be duplicative of restitutionary relief that might be obtained in a class action settlement. The First Department rejected these arguments and concluded that:

where, as here, there is a claim based on fraudulent activity, disgorgement may be available as an equitable remedy, notwithstanding the absence of loss to individuals or independent claims for restitution . . . . Disgorgement is distinct from the remedy of restitution because it focuses on the gain to the wrongdoer as opposed to the loss to the victim. Thus, disgorgement aims to deter wrongdoing by preventing the wrongdoer from retaining ill-gotten gains from fraudulent conduct. Accordingly, the remedy of disgorgement does not require a showing or allegation of direct losses to consumers or the public; the source of the ill-gotten gains is “immaterial.” Therefore, while the Attorney General does not allege direct injury to the public or consumers as a result of defendant’s alleged collusion with Lehman Brothers in committing fraud, the equitable remedy of disgorgement is available in this action, and it was premature to categorically preclude it at the pleading stage. Nor would ordering disgorgement be tantamount to an impermissible penalty, since the “wrongdoer who is deprived of an illicit gain is ideally left in the position he would have occupied had there been no misconduct.” We further note that maintaining disgorgement as a remedy within the court’s equitable powers is crucial, particularly where the Attorney General may be precluded from seeking restitution and damages if defendant settled the private class action against it.

This decision gives the Attorney General another potent weapon in securities and other fraud-based enforcement actions. In an earlier decision, People v. Applied Card Systems, Inc., 11 N.Y.3d 105 (2008), the Court of Appeals suggested in dicta that the Attorney General “might be able to obtain disgorgement” in a claim under the Executive Law, relying on federal cases recognizing a district court’s authority to award disgorgement “[a]s an exercise of its equity powers” in SEC enforcement actions. Id. at 125-126 (citing SEC v. Fishbach Corp., 133 F.3d 170, 175 (2d Cir. 1997) & Official Comm. Of Unsecured Creditors of WorldCom, Inc. v. SEC, 467 F.3d 73, 81 (2d Cir. 2006)). However, there is apparently no other New York appellate authority expressly recognizing the remedy in this context.

Posted: February 23, 2014

Complaint to Reform Contract Dismissed for Failure to Join All Parties to Contract

On February 5, 2014, New York County Commercial Division Justice Bransten issued a decision in Oppenheimerfunds, Inc. v. TD Bank, N.A., 2014 NY Slip Op. 30379(U), granting a motion to dismiss for failure to join necessary parties.

Oppenheimerfunds arose from a liquidation relating to an ethanol plant, of which plaintiffs were subordinate bondholders. The plaintiffs alleged that when they purchased their bonds, they relied upon drafts of a Senior Intercreditor Agreement pursuant to which they would share pari passu with the defendants—the senior lenders—in available collateral security. However, when the Senior Intercreditor Agreement was ultimately signed, the pari passu provision had been removed and the Agreement now provided that the plaintiffs’ claim to the security would be subordinate to the defendants’.

The plaintiffs sued to have the Senior Intercreditor Agreement reformed or rescinded to comply with their understanding of what its provisions were intended to be or should have been. The defendants moved to dismiss on several grounds, among which was the plaintiffs’ failure to join necessary parties, namely Wells Fargo and its successor, U.S. Bank, because Wells Fargo also was a signatory of the Senior Intercreditor Agreement, as well as the Bond Trustee for the plaintiffs’ bonds, and the priority rank to which the plaintiffs objected was assigned to Wells Fargo in its capacity as Trustee, rather than to the plaintiffs.

The Court dismissed the action for failure to join Wells Fargo and U.S. Bank as necessary parties under CPLR 1003, explaining:

A necessary party is one whose interests may be adversely affected or prejudiced by a judgment in the action. New York courts have long held that in an action seeking rescission, cancellation or avoidance of an agreement, the parties to the agreement are indispensable . . . . Contrary to plaintiffs’ arguments, Wells Fargo and U.S. Bank are not mere ‘nominal participants.’ Rather, Wells Fargo was intimately involved in the relevant events at issue in this litigation. It was a party to the agreement in dispute here . . . and was the link between [plaintiffs] and the defendants . . . . Indeed, plaintiffs allege that Wells Fargo, and thus U.S. Bank, represented and protected plaintiffs’ interests by signing the Senior Intercreditor Agreement on their behalf. Therefore, the Senior Intercreditor Agreement cannot be reformed or rescinded without joining Wells Fargo and U.S. Bank as parties.

From this opinion, we can see that, if a contract is to be reformed or declared unenforceable, all parties to the contract must be joined. Even if the plaintiffs claim to stand in the shoes of the missing parties, or believe that the missing parties are merely “nominal” and have no substantial interest in the outcome of the action, this rule of pleading should not be overlooked.

Posted: February 22, 2014

Whether Defendants Were “Sellers” Under UCC is Factual Question Precluding Dismissal on Statute of Limitations Grounds

On December 11, 2013, Justice Schmidt of the Kings County Commercial Division issued a decision in Corona Treasures LLC v. Star Home Designs, LLC, 2013 NY Slip Op. 52294(U), denying in part a motion to dismiss because of factual questions regarding whether some defendants were “sellers” for purposes of the UCC.

Corona Treasures arose from the breakdown of an agreement by the plaintiff to purchase merchandise from India. Some of the defendants (Universal, the Indian defendant who was the underlying seller, did not join them) moved to dismiss on the ground that because the agreement concerned the sale of goods, UCC § 2-725(1)’s 4-year statute of limitations applied instead of the 6-year limitations period for breach of contract actions. In opposition, the plaintiff asserted that the only “seller” in the relationship was Universal, and that the movants were intermediaries who were paid to facilitate or arrange the plaintiff’s relationship with Universal.

The court found that, because there were issues of fact as to whether the movants were “sellers,” they had not carried their initial burden of establishing that the statute of limitations had expired:

In the first instance, moving defendants rely too heavily on a single allegation in the complaint (paragraph 7) to claim the status of sellers, to the exclusion of other allegations that suggested that they acted in another capacity, i.e., as some kind of intermediary for the alleged seller. Tellingly, the moving defendants do not dispute [the plaintiff’s] assertion, supported by documentary evidence, that he purchased the goods directly from Universal and that the payments that were made to moving defendants were not for the goods themselves but were essentially a finder’s fee . . . . If anything, moving defendants appear to assiduously avoid describing the nature of their relationship with Universal.

The court did dismiss the plaintiff’s conversion claims—finding no factual issue that the three-year statute of limitations applied and had run—and fraud claims—because none of the alleged representations were “collateral or extraneous to the terms of the agreement.”

This opinion reminds practitioners that, even though an action may concern the “sale of goods,” the provisions of Article 2 of the UCC may not apply to every party or cause of action, and complaints should be drafted with this consideration in mind.

Posted: February 21, 2014

Transcripts and Videos of Arguments in the Court of Appeals for the Week of February 10, 2014, Now Available

Transcripts and videos of arguments in the Court of Appeals for the week of February 10, 2014, are now available on the Court of Appeals website.

On February 10, 2014, we noted one case of interest from the oral arguments for the week of February 10, 2014:

  • Docket No. 24: Melcher v. Greenberg Traurig, LLP (addressing when plaintiff’s claim for “attorney deceit” under Judiciary Law § 487 accrued and therefore whether the claim was timely under the applicable 3-year statute of limitations).  See the transcript and the video.
Posted: February 21, 2014

Unwritten Agreement to Arbitrate Enforceable, But Waived by Defendant’s Assertion of Claims in Lawsuit

On February 19, 2014, the Second Department issued a decision in Willer v. Kleinman, 2014 NY Slip Op. 01164, reversing a trial court order compelling arbitration and instead finding that while the parties were bound by their oral agreement to arbitrate, the defendant had waived its rights under that oral agreement. (more…)