Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: December 4, 2013

Court of Appeals Clarifies Criteria for Giving Missing Witness Charge

On November 26, 2013, the Court of Appeals issued a decision in DeVito v. Feliciano, Docket No. 195, explaining the criteria for issuing a missing witness charge.

DeVito was personal injury litigation, but the Court of Appeals’ decision relates to an issue that affects commercial trials just as much as personal injury trials: the circumstances under which a jury should be instructed to draw a negative inference from a party’s failure to call a key witness at trial.

The Court of Appeals explained:

An “uncalled witness” or “missing witness” charge instructs a jury that it may draw an adverse inference based on the failure of a party to call a witness who would normally be expected to support that party’s version of events. The charge . . . advises a jury that if a party fails to offer a reasonable explanation for its failure to call a witness to testify on a question, then the jury may, although it is not required to, conclude that the testimony of the witness would not support that party’s position on the question and would not contradict the evidence offered by the opposing party on this question. The jury is instructed that it may draw the strongest inference that the opposing evidence permits against a witness who fails to testify in a civil proceeding.

The preconditions for this charge . . . may be set out as follows: (1) the witness’s knowledge is material to the trial; (2) the witness is expected to give noncumulative testimony; (3) the witness is under the control of the party against whom the charge is sought, so that the witness would be expected to testify in that party’s favor; and (4) the witness is available to that party.

. . . [A] person’s testimony properly may be considered cumulative of another’s only when both individuals are testifying in favor of the same party. . . . [T]o hold otherwise would lead to an anomalous result. Indeed, if the testimony of a defense physician who had examined a plaintiff and confirmed the plaintiff’s assertion of a serious injury were deemed to be cumulative to the evidence offered by the plaintiff, thereby precluding the missing witness charge, there would never be an occasion to invoke such charge. Accordingly, our holding is that an uncalled witness’s testimony may properly be considered cumulative only when it is cumulative of testimony or other evidence favoring the party controlling the uncalled witness. In short, a witness’s testimony may not be ruled cumulative simply on the ground that it would be cumulative of the opposing witness’s testimony.

(Internal quotations and citations omitted).

Posted: December 3, 2013

Motion to Seal Sensitive Commercial Document Granted

On November 6, 2013, Justice Ramos of the New York County Commercial Division issued a decision in Greystone Funding Corp. v. Kutner, 2013 NY Slip Op. 32980(U), sealing portions of the record in that action.

Unlike federal courts, New York state courts rarely seal court records. Because of the importance of this issue to commercial litigators, we have repeated below Justice Ramos’s analysis in granting a motion to seal:

Under New York law, there is a broad presumption that the public is entitled to access to judicial proceedings and court records. However, the right of access is not absolute.

To that extent, 22 NYCRR § 216.1 provides that:

[e]xcept where otherwise provided by statute or rule, a court shall not enter an order in any action or proceeding sealing the court records, whether in whole or in part, except upon a written finding of good cause, which shall specify the grounds thereof. In determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties.

Although the term good cause is not defined, a sealing order should clearly be predicated upon a sound basis or legitimate need to take judicial action. A finding of good cause presupposes that public access to the documents at issue will likely result in harm to a compelling interest of the movant.

Exhibit F conclusively contains impressions and contemporaneous notes that could harm Greystone’s competitive advantage by having access to a large compilation of their business leads and their internal and contemporaneous impressions.

In the business context, we have allowed for sealing where trade secrets are involved, or where the release of documents could threaten a business’s competitive advantage. Proprietary information, in the nature of current or future business strategies which are closely guarded by a private corporation, is akin to a trade secret, which, if disclosed, would give a competitor an unearned advantage.

(Internal quotations and citations omitted).

Posted: December 2, 2013

IRS Audit Put Taxpayer on Inquiry Notice of Possible Fraud Claim Against Tax Advisor

On November 19, 2013, Justice Friedman of the New York County Commercial Division issued a decision in Chlsea, LLC v. Gramercy Fin. Servs., LLC, 2013 NY Slip Op. 32946(U), dismissing fraud and related tort claims on statute of limitations grounds because the plaintiff was on inquiry notice.

In Chlsea, the plaintiff made a tax shelter investment that ultimately was disallowed by the IRS. Plaintiff sued its tax advisor for fraud. Justice Friedman ruled that the IRS’s audits of the plaintiff placed it on inquiry notice of a possible fraud claim, writing:

[I]n order to start the limitations period regarding discovery, a plaintiff need only be aware of enough operative facts so that, with reasonable diligence, it could have discovered the fraud. Where the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.

Here, the IRS’s commencement of the 2005 audit regarding the CHLSEA and BROMLI partnerships, and its specific inquiries regarding Gramercy’s pre-acquisition valuation of the distressed debt, were sufficient to give Kelly actual notice of potential problems with the DAD transaction and to trigger Kelly’s duty of inquiry as to the validity of the debt.

(Internal quotations and citations omitted).

In sum, plaintiffs considering suits against tax advisors and other professionals should be cognizant that the limitations period may be held to run once they receive a notice of a tax inquiry by regulatory authorities.

Posted: December 1, 2013

Real Property Law § 320 Limits Structuring Real Property Transactions as Sales

On November 27, 2013, the Second Department issued a decision in Bouffard v. Befese, LLC, 2013 NY Slip Op. 07925, interpreting Real Property Law § 320’s command that a “deed conveying real property, which, by any other written instrument, appears to be intended only as a security in the nature of a mortgage, although an absolute conveyance in terms, must be considered a mortgage.”

In Bouffard , a convoluted series of real estate transactions included one in August 2004 where defendant purchased a property for $200,000 and entered into an “option agreement permitting” plaintiff “to repurchase the property within 90 days at an option price of $220,000.” Defendant did not take possession of the property. In an action, “inter alia, to set aside the” deed, the trial court found that under Real Property Law § 320, the deed and option were only a mortgage and, moreover, that the mortgage loan “was usurious and void pursuant to Banking Law § 14—a and General Obligations Law § 5—501.” The Second Department Affirmed, writing:

In determining whether a deed was intended as security, examination may be made not only of the deed and a written agreement executed at the same time, but also of oral testimony bearing on the intent of the parties and to a consideration of the surrounding circumstances and acts of the parties. Thus, a court of equity will treat a deed, absolute in form, as a mortgage, when it is executed as a security for a loan of money. That court looks beyond the terms of the instrument to the real transaction; and when that is shown to be one of security, and not of sale, it will give effect to the actual contract of the parties.

(Internal quotations and citations omitted).

Bouffard serves as a reminder that the law places limits on creative structuring of transactions and if a party skirts too close to the edge, they can end up a big loser, like the defendant in Bouffard , who was left with a loan it could not collect.

Posted: November 30, 2013

Judiciary Law Section 478 Applies Only to Legal Services Provided in New York

On November 27, 2013, the Second Department issued a decision in Gover v. Savyon, 2013 NY Slip Op. 07934, interpreting Judiciary Law § 478 in a situation where an attorney who was not licensed to practice in New York provided legal services both in New York and in another jurisdiction.

In Gover, plaintiff, an Israeli attorney not licensed to practice in New York, sued defendant “to recover fees for legal services.”  Defendant argued that the complaint should be dismissed because plaintiff “was barred under Judiciary Law § 478 from recovering fees for such services” because he was not licensed in New York. The trial court granted defendant’s motion for summary judgment on this ground with respect to “legal services that the plaintiff undisputably rendered to the defendant in New York,” but “otherwise denied the motion.”

The Second Department affirmed, writing:

Judiciary Law § 478 makes it unlawful for anyone other than a person who has been admitted to practice law in New York and has taken the requisite oath, to practice as an attorney in this state. A contract to provide legal services rendered in violation of Judiciary Law § 478 is unenforceable as a matter of public policy. However, where an agreement consists in part of an unlawful objective and in part of lawful objectives, the court may sever the illegal aspects and enforce the legal ones, so long as the illegal aspects are incidental to the legal aspects and are not the main objective of the agreement.

. . . The legal services that the plaintiff provided to the defendant from outside of New York did not violate Judiciary Law § 478 and, thus, did not violate New York law. Furthermore, the main objective of the subject agreement, which was simply to provide legal services to the defendant, was not illegal. The defendant was aware, at all times, that the plaintiff was not licensed to practice law in New York, and the defendant would be unjustly enriched if allowed to avoid payment for legal services performed by the plaintiff for his benefit which were not in violation of Judiciary Law § 478.

(Internal quotations and citations omitted).

The real lesson here should go without saying–do not practice law where you are not licensed to do so.

Posted: November 29, 2013

Final Judgments Subject to Discretionary Review Under CPLR 5015

On October 7, 2013, we noted that on October 9, 2013, the Court of Appeals would hear argument in Nash v. The Port Authority of New York and New Jersey, Docket No. 238. On November 26, 2013, the Court of Appeals issued its decision in Nash, 2013 NY Slip Op. 07830, clarifying that even final judgments may be vacated under CPLR 5015.

On January 14, 2010, Nash received a judgment for $4.4 million against the Port Authority of New York and New Jersey for injuries she sustained in the 1993 World Trade Center bombing. The First Department affirmed the trial court’s decision on June 2, 2011. The judgment became final on July 13, 2011, “due to the failure of the Port Authority to appeal” the First Department’s affirmance to the Court of Appeals.

The Court of Appeals subsequently issued a decision in In Matter of World Trade Center Bombing Litig. (“Ruiz”), 17 NY3d 428 (2011), holding that “the governmental immunity doctrine insulated the Port Authority from tortious liability for injuries sustained in the” bombing. Four days later, the Port Authority moved to vacate Nash’s judgment against it based on the Ruiz decision. The trial court granted the motion in a decision that a divided First Department affirmed.

The Court of Appeals ruled that even though the first judgment against the Port Authority was final, the Port Authority could still move to vacate it under CPLR 5015, writing:

Section 5015 applies not only to judgments that are still in the appellate process, . . . but also to those in which appellate review has been exhausted. Save for the one-year requirement in section 5015(a)(1) concerning excusable defaults, motions made pursuant to subdivisions (2), (3) and (5) contain no limitation of time, only a requirement that the time within which the motion is made be reasonable. The determination as to whether such a motion has been made within a reasonable time is within the motion court’s discretion. Notably, section 5015 does not distinguish between final and non-final judgments, or those that have or have not exhausted the appeals process. . . .

[T]he motion court’s determination to vacate a judgment is a discretionary one. It may relieve a litigant from a judgment upon such terms as may be just. This language applies to all five of the enumerated CPLR 5015 (a) subdivisions, in addition to qualifying the court’s common law ability to grant relief from a judgment in the interests of justice. In exercising its discretion, the motion court should consider the facts of the particular case, the equities affecting each party and others affected by the judgment or order, and the grounds for the requested relief.

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

The Court of Appeals reversed the decision below on a different ground–the trial court’s ruling that it was compelled by Ruiz to vacate the judgment.  The Court of Appeals remanded so that the trial court could decide the motion to vacate using its discretion.

The lesson here is that if there is a sufficiently compelling reason, CPLR 5015 provides an avenue to get even a final judgment vacated.

Posted: November 28, 2013

Court of Appeals Enforces Lease as Written, Even Though it Leads to Harsh Result for Commercial Tenant

On October 7, 2013, we noted that on October 8, 2013, the Court of Appeals would hear argument in Eujoy Realty Corp. v. Van Wagner Communications, LLC, Docket No. 179. On November 26, 2013, the Court of Appeals issued its decision in Eujoy Realty Corp. v. Van Wagner Communications, LLC, 2013 NY Slip Op. 07823, strictly enforcing the written terms of a lease even though that resulted in a commercial tenant forfeiting almost a year’s rent.

The commercial lease at issue in Eujoy, provided that the yearly rent for a billboard was to be paid “in advance on January 1” and that if the lease were “terminated for any reason prior to the date of its expiration,” the tenant advertising company would “not be entitled to the return of . . . any basic rent paid in advance and covering a period beyond the date on which the Lease is terminated,” with exceptions not relevant here.

“In early January 2007,” the tenant sent the landlord a check for the “annual basic rent,” but soon thereafter stopped payment on the check. A few weeks later, the tenant termminated the lease. The landlord sued for the unpaid rent.

The Court of Appeals held that the tenant owed the annual rent, even though the year was only two weeks old when the tenant terminated the lease. The court explained:

Under the common law, rent is consideration for the right of use and possession of the leased property that a landlord does not earn until the end of the rental period. This presumption may be altered, however, by the express terms of the parties’ lease such that rent is to be paid at the beginning of the rental period rather than the end. When a lease sets a due date for rent, that date is the date on which the tenant’s debt accrues. These rules reflect the strong preference for freedom of contract in the creation of leases, and although it may seem harsh for tenants, the courts assume that the parties have knowingly bargained for the provisions of their agreement. This is especially true in the case of arms-length commercial contracts negotiated by sophisticated and counseled entities.

(Internal quotations and citations omitted).

As to the tenant’s argument that the landlord had orally agreed to return unused rent if the lease were terminated, the Court of Appeals held that the no oral modification clause in the lease prohibited the modification to the lease that the tenant alleged.

Eujoy provides a stark reminder that–for commercial contracts at least–New York’s courts will enforce contracts as written, even if that leads to a harsh result. Moreover, it illustrates the danger of making an oral amendment to a written contract, particularly a contract that prohibits such modifications. Negotiated resolutions of business problems are good; failing properly to document those resolutions is often bad business.

Posted: November 27, 2013

Arbitration Provisions in LLC Operating Agreements May Be Enforced by LLCs Even If LLCs Are Not Parties to the Agreements

On November 15, 2013, Justice Kapnick of the New York County Commercial Division issued a decision in Kellman v. Whyte, 2013 NY Slip Op. 32938(U), granting in part and denying in part the defendants’ motion to compel arbitration.

In Kellman, plaintiff asserted claims against her former employer, an affiliate of her former employer and the LLC for which she had served as an officer. Plaintiff’s employment was covered by an offer letter agreement that did not contain an arbitration clause, but which said that certain of its provisions were subject to the execution of an operating agreement for the LLC defendant, which had not been formed when the offer letter was signed.  Plaintiff later signed the operating agreement, which contained an arbitration clause.

Plaintiff eventually quit and sued the defendants for, inter alia, breach of the operating agreement and employment letter agreement. The defendants filed an Answer and then moved to compel arbitration of all claims under the Federal Arbitration Act.

Justice Kapnick granted the motion as to the claims for breach of the operating agreement. In doing so, Justice Kapnick rejected the plaintiff’s argument that the LLC could not compel arbitration because it was not actually a party to the operating agreement.  She held that LLCs have standing to sue to enforce provisions in their own operating agreements even though they are not always parties to those agreements (their members are). Justice Kapnick also held that plaintiff’s claim that the operating agreement had been fraudulently induced was a question for the arbitrator and could not be used as a basis to oppose the motion to compel arbitration.

Justice Kapnick denied the motion to compel arbitration of claims relating to the employment agreement on the grounds that it was signed by a different defendant and that it did not contain an arbitration clause. However, she stayed the action pending the outcome of the arbitration.

The lessons learned from Justice Kapnick’s decision are that parties who enter into multiple agreements with different entities in connection with a single transaction are expected to read and understand the differences between the parties to those agreements and the provisions in those agreements, because New York’s courts will strictly enforce them.

Posted: November 26, 2013

No Private Right of Action Against Banks Under the Exempt Income Protection Act

On October 26, 2013, we noted that on October 15, 2013, the Court of Appeals had heard argument in Cruz v. TD Bank, N.A., Docket No. 191, a matter considering two questions certified from the Second Circuit on whether there is a private right of action under the Exempt Income Protection Act of 2008 (“EIPA”). On November 21, 2013, the Court of Appeals issued its decision in Cruz v. TD Bank, N.A., 2013 NY Slip Op. 07762.

At issue were EIPA provisions that “compel[] banks served with restraining notices by judgment creditors to forward certain forms to judgment debtors intended to assist them in asserting potential claims that their accounts contain funds that are exempt from restraint or execution.” The federal cases raised the question of whether “plaintiffs may bring plenary actions in federal court against their banks seeking money damages allegedly arising from the banks’ failures to send the forms, among other deficiencies.” The Court of Appeals found that there was no private right of action under the EIPA. (more…)

Posted: November 25, 2013

Default Judgment Entered Against Defendant As Discovery Sanction

On November 8, 2013, Justice Schweitzer of the New York County Commercial Division issued a decision in Grober v. Bronson, 2013 NY Slip Op. 32935(U), granting a default judgment against the defendant as to liability on plaintiffs’ breach of contract and Labor Law claims based on defendant’s repeated failure to comply with discovery demands and appear at court conferences.

In granting this extreme remedy, Justice Schweitzer rejected the argument offered by defendant’s newly retained counsel that he had for five years been suffering from a medical condition that caused him to be bed ridden for most of the time. Justice Schweitzer found that, under the New York Rules of Professional Conduct, defendant’s counsel should not have agreed to represent defendant if he suffered from a physical condition that made it unreasonably difficult for him to represent his client. Justice Schweitzer could not have been more blunt when he wrote:

After more than a year of delays, failures to provide discovery and to appear in court, in violation of court orders, defendant now seeks to delay further because he has chosen, at the last minute, to retain a lawyer who is too ill to provide effective representation.

Reading between these lines, one cannot rule out the possibility that Justice Schweitzer believes that the defendant purposely retained counsel who he knew was too ill to represent him as a delaying tactic. In any event, this case provides a valuable lesson that clients may not be excused for the lapses of their ill attorneys and that attorneys should not accept engagements that they are too ill to perform.