Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: February 20, 2014

First Department Reverses Grant of Renewal For Lack of Diligence in Seeking Evidence

On February 18, 2014, the First Department issued a decision in Orchard Hotel, LLC v. D.A.B. Group, LLC, 2014 NY Slip Op. 01107, reversing a trial court’s grant of a motion for renewal.

In Orchard Hotel, the trial court granted the defendant’s motion for renewal, reinstating its counterclaims. The First Department reversed, both because it found the defendant’s new evidence to be without merit and because the defendant should have offered it in the original motion, explaining:

CPLR 2221(e)(2) provides in pertinent part that a motion to renew “shall be based upon new facts not offered on the prior motion that would change the prior determination.” . . .

[U]nder CPLR 2221(e)(3), a motion to renew “shall contain reasonable justification for the failure to present such facts on the prior motion.” Here, [the defendant] made the discovery request that yielded the Action Plan only upon the motion court’s suggestion, and only after this Court affirmed the order dismissing [the defendant’s] counterclaims. The Action Plan was available at the time of the original motion—-indeed, numerous witnesses alluded to it during their depositions. Even so, [the defendant] did not provide a reasonable justification for its failure to serve a more exacting discovery demand that specifically requested Brooklyn Federal’s internal documents related to the loan extension issue. Thus, we find that [the defendant] failed to show that it exercised due diligence in obtaining the documentary evidence, and the motion court erred in granting leave to renew.

(internal quotations and citations omitted).

The First Department had a different view than the trial court on the substantive importance of the Action Plan. However, in its apparent effort to drive a stake through the heart of the defendant’s counterclaims, it could be viewed as setting a high bar for parties seeking renewal.

Posted: February 19, 2014

Court Grants Reargument When it Fails to Address Argument Made in Footnote

On February 6, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Eden Roc, LLLP v. Marriott International, Inc., 2014 NY Slip Op. 30377(U), granting a motion for reargument.

In Eden Roc, the trial court denied the defendants’ motion to dismiss with respect to the plaintiff’s cause of action for an accounting. The defendants moved for reargument on the ground that the court had not addressed their arguments on the accounting point. The court granted reargument, explaining:

The motion for reargument as to the accounting claim is granted because the court overlooked [the defendants’]argument as to this cause of action which was contained in [their] moving memorandum.

In the Prior Motion, [the defendants] moved for dismissal of the entire complaint. As for the thirteenth cause of action for an accounting, [the defendants] nestled [their] argument in footnote 9 in a memorandum of law consisting of 35 pages with 14 footnotes, and referenced this footnote 9 in footnote 6 in [their] reply memorandum. [The plaintiff] responded to it in footnote 10 in its opposition memorandum . . . .” Nevertheless, the argument was made, and, therefore, this situation comes within the parameters of the remedy afforded by CPLR 2221(d)(2).

[The plaintiff] asserts that a “motion for reargument ‘is not a vehicle permitting a previously unsuccessful party to once again argue the very questions previously decided or to assert new, never previously offered arguments,”‘ quoting Kent v 53 4 E. 11th St. (80 AD3d 106, 116 (1st Dept 2010). This assertion is without merit. The basis for the reargument motion is that the court overlooked [the defendants’] argument in support of dismissal of the accounting cause of action. Thus, [the defendants are] neither once again arguing the questions previously decided nor asserting new, never previously offered arguments.

(Internal quotations and citations omitted).

The court was generous in granting reargument based on arguments in footnotes that it missed the first time. This decision is helpful precedent for a party whose argument was overlooked by a court, but the better course, it seems to us, is that if you want to make an argument, do not run the risk of it getting lost in a footnote.

Posted: February 18, 2014

Case Against New Jersey Defendants Dismissed for Lack of Personal Jurisdiction

On February 18, 2014, the First Department issued a decision in SunLight General Capital LLC v. CJS Investments Inc., 2014 NY Slip Op. 01118, affirming a dismissal for lack of personal jurisdiction.

In SunLight General Capital, the defendants, “CJS” and “Clean Solar,” were “New Jersey entities, with offices and employees located solely within the State of New Jersey, and whose alleged actions herein occurred with the State of New Jersey.” The trial court dismissed the plaintiff’s claims for lack of personal jurisdiction. The First Department affirmed, explaining:

The contractual claims, as against CJS, arise out of CJS’s entry into a memorandum of understanding (MOU) with plaintiff which contemplated a joint venture whose business was to consist of the development of solar energy facilities on New Jersey properties owned by CJS. All of the meetings between plaintiff and CJS took place in New Jersey, and the MOU contained a New Jersey choice-of-law provision.

The fact that CJS negotiated the terms of the MOU and communicated with plaintiff via email and telephone, which communications do not serve as the basis for plaintiff’s claims, is insufficient to constitute the transaction of business within New York. Plaintiff’s actions within New York, including making presentations to potential investors and executing the MOU, cannot be imputed to CJS for jurisdictional purposes. Accordingly, plaintiff’s breach of contract and breach of duty of fair dealing claims were properly dismissed as against CJS.

Likewise, dismissal of the tortious interference claims asserted against CJS and Clean Solar was proper. Plaintiff cannot establish personal jurisdiction, pursuant to CPLR 302(a)(3)(ii), in the absence of evidence that these defendants derive substantial revenue from interstate or international commerce.

(Internal quotations and citations omitted).

Commercial litigation in New York County routinely involves parties from all over the world. This decision reminds us that plaintiffs bear the burden of establishing that the court has jurisdiction over the defendants even when they are located just across the Hudson, in New Jersey.

Posted: February 17, 2014

Court Denies Motion for Permissive Venue Change from New York County to Nassau County

On February 5, 2014, New York County Commercial Division Justice Friedman issued a decision in W.S. Corp. v. Cullen and Dykman LLP, 2014 NY Slip Op. 30353(U), denying a motion for change of venue from New York County to Nassau County.

In W.S. Corp., the court granted in part a motion to dismiss former clients’ legal malpractice claims against a law firm. This post focuses on a separate, procedural issue: the defendant’s motion to change venue from New York County to Nassau County. The court denied the motion in an opinion that should be instructive to any counsel arguing for a change of venue of the approximately 20 miles between the New York County and Nassau County Courthouses:

Defendant seeks a discretionary change of venue to Nassau County, pursuant to CPLR 510(3), for the convenience of witnesses. Defendant fails to make any showing in support of its assertion that Jeffrey, who suffers from a physical disability, can travel from his home in Manhasset to a court in Nassau County, but cannot travel the slightly longer distance to Manhattan. Nor does defendant show that the other witnesses, most of whom reside in Nassau, will be materially inconvenienced by a trial in New York County. Based on defendant’s failure to make the detailed evidentiary showing that the convenience of non party witnesses would be served by the requested change of venue, such change should be denied.

(Internal quotations and citations omitted).

Posted: February 16, 2014

Legal Malpractice Claim Survives Summary Judgment Because of Potential Red Flag Requiring Law Firm to Investigate Client Representations

On February 13, 2014, the First Department issued a decision in Nomura Asset Capital Corp. v. Cadwalader, Wickersham & Taft LLP, 2014 NY Slip Op. 00954, affirming in part a trial court’s denial of the defendant law firm’s motion for summary judgment on a legal malpractice claim.

In Nomura Asset Capital Corp., the plaintiff sued the law firm that advised it “in connection with the securitization of a pool of commercial mortgage loans” for legal malpractice. The trial court denied the defendant’s motion for summary judgment. The First Department modified “to dismiss that part of plaintiffs’ claim alleging that the law firm failed to provide appropriate legal advice, and to limit plaintiff’s claim that the law firm did not perform the requisite due diligence before rendering its legal opinion on the securitization.” This post focuses on the due diligence part of the decision. (more…)

Posted: February 15, 2014

Alleged Breach of Disciplinary Rule Alone Does Not Create a Cause of Action for Legal Malpractice

On February 4, 2014, Justice Oing of the New York County Commercial Division issued a decision in Pope Investments II LLC v. Belmont Partners, LLC, 2014 NY Slip Op. 30349(U), dismissing a legal malpractice claim that was based on an alleged breach of a disciplinary rule.

In Pope Investments, two groups of plaintiffs sued a handful of defendants, including a law firm and one of its partners, in connection with a failed investment. The court addressed many issues in deciding the motions to dismiss. Here we focus on its dismissal of a malpractice claim based on an alleged breach of a disciplinary rule. The court explained that simply alleging a violation of a disciplinary rule was insufficient to state a claim for legal malpractice:

The Group plaintiffs allege that Guzov and Ofsink committed legal malpractice by violating New York Rules of Professional Conduct Rule 1. 7(b)(4). That Rule requires a lawyer who has decided to represent two clients, regardless of an apparent conflict of interest, obtain written consent from each affected client. The Group plaintiffs claim that defendants Guzov and Ofsink represented AAXT and Kamick for the SMT Transactions without their written consent.

In support of dismissal of this claim, defendants Guzov and Ofsink rely on William Kaufman Org., Ltd. v Graham & James LLP, 269 AD2d 171, 173 (1st Dept 2000) to argue that a violation of a disciplinary rule does not generate a cause of action. That reliance is misplaced. That case also stands for the proposition that some of the conduct constituting a violation of a disciplinary rule may also constitute evidence of malpractice. Nonetheless, a violation of a disciplinary rule, standing alone and without more, does not generate a cause of action. The issue, thus, is whether there is more than just a violation of the Rule.

(Internal quotations and citations omitted) (emphasis added). The court went on to hold that the complaint failed “sufficiently [to] plead what negligent conduct defendants Guzov and Ofsink allegedly perpetrated to support the legal malpractice claim.”

There is a certain appeal to a rule that, as the plaintiffs alleged here, violating a disciplinary rule gives rise to liability to the wronged client (assuming damages result). However, as this decision shows, that is not the law.

Posted: February 13, 2014

Court of Appeals Rules That Two-Year Statute of Limitations In Insurance Policy Is Unenforceable Where Contractual Condition Precedent To Suit Could Not Be Accomplished Within Two Years

The Court of Appeals issued a decision today in Executive Plaza, LLC v. Peerless Insurance Company, Docket No. 2, addressing, on a certified question from the Second Circuit, the interplay of two provisions of a fire insurance policy–one requiring the insured to bring claims under the policy within two years of the fire, and a second providing that the insured could not recover the cost of replacing damaged property until the repairs are complete. Since the repairs the Plaintiff needed to perform took more than two years to complete, a strict application of both provisions placed the insured in a paradoxical situation where its claim for replacement costs was “time-barred before it [came] into existence.”

The Court of Appeals noted that, in general, agreements providing “a shorter, but reasonable” limitations period are enforceable, and the Court has upheld limitations periods as short as one year. As applied in this case, however, the Court found that the two-year limitations period was “unreasonable and unenforceable”:

The problem with the limitation period in this case is not its duration, but its accrual date. It is neither fair nor reasonable to require a suit within two years from the date of the loss, while imposing a condition precedent to the suit — in this case, completion of replacement of the property — that cannot be met within that two-year period. A “limitation period” that expires before suit can be brought is not really a limitation period at all, but simply a nullification of the claim. It is true that nothing required defendant to insure plaintiff for replacement cost in excess of actual cash value, but having chosen to do so defendant may not insist on a “limitation period” that renders the coverage valueless when the repairs are time-consuming.

This decision demonstrates that although contractual limitations periods are generally enforced as written, such provisions must be reasonable, and courts will not enforce a limitations period that effectively nullifies the contract.

Posted: February 13, 2014

Agreement Not Unconscionable Because it Was Not One Only a Delusional Party Would Make

On February 11, 2014, the First Department issued a decision in B.D. Estate Planning Corp. v. Trachtenberg, 2014 NY Slip Op. 00889, granting the plaintiff summary judgment on the defendant’s defense that an agreement was unconscionable.

In B.D. Estate Planning Corp., the First Department affirmed the trial court’s dismissal of the defendant’s unconscionability defense, explaining:

At common law an unconscionable agreement was one that no promisor (absent delusion) would make on the one hand and no honest and fair promisee would accept on the other. If the Ellis Limquee Family Insurance Trust (by its trustee, defendant Marcy Trachtenberg) had not signed the promissory note on which plaintiff sues, the policy on Ellis’s life would have lapsed for nonpayment of premiums, and Carolyn (the trust’s beneficiary) would ultimately have received nothing. Since the trust executed the note, it received $4 million after Ellis died, but it will have to give plaintiff approximately half of that amount if the note is enforced. A decision to get $2 million, as opposed to nothing, is not a bargain that only a delusional trustee would make.

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

This decision illustrates the high standard a defendant must meet in order to assert an unconscionability defense.

Posted: February 12, 2014

Fourth Department Declares Florida Law Regarding the Enforcement of Non-Compete Agreements Unenforceable on Public Policy Grounds

On February 7, 2014, the Fourth Department issued a decision in Brown & Brown, Inc. v. Johnson, 2014 NY Slip Op. 00822, declaring unenforceable on public policy grounds a Florida statute providing that in determining the enforceability of a non-compete agreement, a court “shall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.”

In Brown & Brown, the plaintiff sued a former employee for breach of restrictive covenants in an employment agreement that prohibited her from soliciting customers or employees for a two-year period following the termination of her employment.  As the Fourth Department noted, under New York law, non-compete agreements are “almost uniformly disfavored and are sustained only to the extent that they are reasonably necessary to protect the legitimate interests of the employer and not unduly harsh or burdensome to the one restrained.”  The courts apply a three-part test to assess the reasonableness of a restrictive covenant under which the party moving to enforce the agreement must show that the restraint “(1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.”  The employment agreement at issue, however, was governed by Florida law, which “expressly forbids courts from considering the hardship imposed upon an employee in evaluating the reasonableness of a restrictive covenant.”  The Fourth Department found that Florida law conflicts with New York public policy and is therefore unenforceable:

[W]e conclude that Florida law prohibiting courts from considering the hardship imposed on the person against whom enforcement is sought is “truly obnoxious” to New York Public Policy, inasmuch as under New York law, a restrictive covenant that imposes an undue hardship on the employee is invalid and unenforceable for that reason. Furthermore, while New York judicially disfavors such restrictive covenants, and New York courts will carefully scrutinize such agreements and enforce them only to the extent that they are reasonably necessary to protect the legitimate interest of the employer and not unduly harsh or burdensome to the one restrained, Florida law requires courts to construe such restrictive covenants in favor of the party seeking to protect its legitimate business interests.

This decision demonstrates the strong New York public policy disfavoring non-compete agreements and the unwillingness of the New York courts to enforce foreign laws that contravene that policy.