Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
On January 15, 2014, Justice Bransten of the New York County Commercial Division issued a decision in U.S. Bank N.A. v. DLJ Mortgage Capital, Inc., 2014 NY Slip Op. 50029(U), enforcing the provisions of a commercial agreement that significantly limited the damages available under a breach of contract claim.
In U.S. Bank, the plaintiff was the trustee of a trust containing mortgage loans that had been securitized by the defendant. The operating agreement contained a series of representations and warranties about the mortgage loans and provided that the sole remedy for a breach of those representations and warranties was that the defendant would have to repurchase the breaching loans. The plaintiff sued the defendant, alleging (a) numerous breaches of the representations and warranties, and (b) that the defendant had also breached the sole-remedy clause by refusing to repurchase the loans. Accordingly, the plaintiff alleged, it was no longer restricted to the repurchase remedy and was eligible for the full range of contract remedies, including compensatory, consequential, and rescissory damages. In deciding the defendant’s motion to dismiss, the court held that the plaintiff was still restricted by the sole-remedy clause:
The language of the provision is clear and bars the recovery of the damages sought by Plaintiff . . . . To the extent that [the defendant] breaches its obligation to repurchase breaching loans . . . Plaintiff claims that it is entitled to the full panoply of contract remedies under New York law. However, the sole remedy contractual language agreed upon by the parties is not vitiated because [the defendant] allegedly breached its obligation to perform the remedy therein. Instead, the remedy in that instance is to direct [the defendant’s] performance of its repurchase obligation. Where a loan cannot be repurchased because, for example, it is no longer in the Trust, the remedy is an award of damages equal to the repurchase amount, consistent with the sole remedy provision.
(internal citations and quotations omitted).
The court also noted that even if the sole-remedy clause were unenforceable, the plaintiff still would not have been eligible for consequential damages, because there was no contract language conveying that the parties “intended consequential damages to be recoverable in the event of a breach.” Similarly, the court held that “rescissory damages are only applicable where rescission is impracticable and no alternative legal remedies are availing,” a situation that did not exist because of the availability of a remedy under the sole-remedy clause.
This opinion shows that New York courts will enforce sole-remedy clauses. Counsel should not assume that they can plead their way around them if a dispute arises.
On December 15, 2013, we posted that on December 12, 2013, the Court of Appeals had accepted certified questions of New York law regarding the unfinished business doctrine from the Second Circuit in In re: Thelen LLP. On January 14, 2014, the Court of Appeals accepted the same certified questions from the Second Circuit in In re: Coudert Bros. LLP, 2014 NY Slip Op. 60759.
On January 17, 2014, Governor Andrew M. Cuomo announced the appointment of Justice Barbara R. Kapnick of the New York County Commercial Division to the First Department.
Congratulations to Justice Kapnick.
On January 14, 2014, 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.
Under a long-standing judge-made rule, even if a foreign bank has a branch in New York (and is therefore subject to personal jurisdiction), other branches of the bank are “treated as separate entities for certain purposes, such as attachments, restraints, and turnover orders.” As a result, where the separate entity rule applies, “in order to reach a particular bank account, the branch of the bank where the account in maintained must be served.” The Court of Appeals has never decided whether this rule applies to post-judgment enforcement proceedings. However, in a 2009 decision, Koehler v. Bank of Bermuda Ltd., the Court, without expressly addressing the “separate entity rule,” held that “a New York court has authority to issue a turnover order pertaining to extraterritorial property [in that case a stock certificate], if it has personal jurisdiction over a judgment debtor in possession of the property.” Although some courts have concluded that Koehler “forecloses the application of the separate entity rule to post-judgment enforcement proceedings,” the Second Circuit, in Tire Engineering and Motorola, “decline[d] to reach the issue,” and instead certified the following two questions to the Court of Appeals:
- “First, whether the separate entity rule precludes a judgment creditor from ordering a garnishee bank operating branches in New York to turn over a debtor’s assets held in foreign branches of the bank”; and
- “Second, whether the separate entity rule precludes judgment creditor from ordering a garnishee bank operating branches in New York to restrain a debtor’s assets held in foreign branches of the bank.’
The answers to these questions will potentially have wide-ranging implications not only for New York civil procedure, but also for the international banking industry, since, as the Second Circuit notes in its decision, “international banks are subject to competing laws of multiple jurisdictions, and turnover or restraining orders by New York courts may cause conflicts with the regulations, laws and policies of other sovereign jurisdictions.”
On January 6, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Maesa LLC v. Jouer Cosmetics LLC, 2014 NY Slip Op. 30026(U), dismissing a counterclaim for fraudulent inducement to the extent it sought lost profits damages.
In Maesa, the parties entered into a contract under which the plaintiff manufactured vials in which the defendant packaged lip gloss. A dispute arose over the quality of the vials. In response to the plaintiff’s claims, the defendant asserted counterclaims, including a counterclaim for fraudulent inducement for which it sought lost profits damages. In response to the plaintiff’s motion to dismiss, the court dismissed the defendant’s counterclaim for fraudulent inducement to the extent it sought lost profits damages, explaining:
[The plaintiff] contends that New York’s “out-of-pocket” damages rule forecloses [the defendant’s] attempt to recover lost profits on its fraudulent inducement counterclaim. For a fraud claim, the true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong or what is known as the out-of-pocket rule. Under the rule, damages are to be calculated to compensate plaintiffs for what they lost because of the fraud, not to compensate them for what they might have gained.
. . . [R]ecovery of potential profits from these cancelled orders is squarely prohibited under the rule. The recovery of consequential damages naturally flowing from a fraud is limited to that which is necessary to restore a party to the position occupied before commission of the fraud. Thus, [the defendant’s] potential recovery is limited to damages that would restore to it to the position it occupied before [the plaintiff’s] purported misrepresentations, rendering lost profits inapplicable.
(Internal quotations and citations omitted).
Lawyers often plead fraud and contract claims simultaneously to cover all bases (such as, for example, the court finding that there was no contract or that it was not breached). They should remember, though, that the measure of damages is different for contract claims and fraud claims.
On January 2, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Saxon Technologies, LLC v. Wesley Clover Solutions-North America, Inc., 2014 NY Slip Op. 30002(U), dismissing a breach of contract claim for failure adequately to plead damages.
In Saxon Technologies, the plaintiff’s allegations included that the defendant had breached the “Non-Circumvention” clause in its vendor agreement with the plaintiff, which provided that the defendant would “not, directly or indirectly, contact, deal with or otherwise become involved with any entity introduced, directly or indirectly, by or through” plaintiff by entering into a contract directly with the plaintiff’s clients once the client’s contract with the plaintiff ended. The court dismissed the breach of contract claim, holding that:
[Plaintiff] alleges that [defendant] breached the . . . Contract by improperly negotiating with [the plaintiff’s client] to contract directly. For the purposes of this motion, the court assumes such conduct breached the . . . Contract’s Non-Circumvention clause. However, a breach alone does not entitle a plaintiff to recover; there must be non-speculative damages resulting from such breach.
Here, [the plaintiff’s client] was under no obligation to renew its contract with [the plaintiff]. This is undisputed. Rather, [the plaintiff] contends that, had [its client] not sought to contract with the defendant] directly, it would have renewed, thereby generating more fees for [the plaintiff]. This is speculative. Moreover, even if [the client’s] renewal was not speculative, the amount of damages is, since there is no way to know for how many more years [the client] would have renewed or what the fees would have been.
(Internal quotations and citations omitted).
This decision serves as a reminder that in New York, it is not just tort cases where damages are an element of the claim.
On January 29, 2014, Schlam Stone & Dolan partner Jeffrey M. Eilender will be a panelist in a CLE program hosted by the Commercial and Federal Litigation Section of the New York State Bar Association. The panel will be held in conjunction with the association’s annual meeting at the Hilton Hotel in Manhattan.
The topic of the panel is The Interplay of Delaware and New York Law in Resolving Corporate and Commercial Disputes. Other panel members will be Associate Justice David Friedman of the New York Supreme Court Appellate Division, First Department; Vice Chancellor Travis Laster of the Delaware Court of Chancery; Kurt Heyman of Proctor Heyman LLP and Peter Mahler of Farrell Fritz P.C. More information about the program can be found here.
On December 11, 2013, Justice Walker of the 8th Judicial District Commercial Division issued a decision in Melia v. Zenhire, Inc., 2013 NY Slip Op. 52254(U), addressing the intersection between a choice-of-law clause, a choice-of-forum clause, and a statutory cause of action.
In Melia, the plaintiff signed an employment agreement with defendants that provided for New York law to apply and for all actions to be venued in Erie County. However, during the entire term of the contract, the plaintiff lived and worked in Massachusetts.
The plaintiff sued the defendants in Massachusetts for violating the Massachusetts Wage Act. The Massachusetts court dismissed the plaintiff’s lawsuit due to the forum selection clause. The plaintiff then brought an action in Erie County for both breach of contract and the Massachusetts Wage Act claim. Facing opposing motions for summary judgment, the court granted summary judgment to the plaintiff on the Massachusetts Wage Act claim, holding:
- The Massachusetts Wage Act claim could proceed despite the existence of a viable New York breach-of-contract claim for the same conduct;
- Contractual choice-of-law provisions do not apply to non-contract causes of action; and
- Although there was no Court of Appeals case on point, if either New York’s tort or contracts conflicts-of-laws principles were applied, Massachusetts law would govern the wage claim, meaning that the Massachusetts Wage Act claim could proceed in Erie County.
From a procedural standpoint, Melia is interesting because it illustrates the varying scope of contract provisions that usually appear in tandem; the forum clause applied in non-contract causes of action, but the choice-of-law clause did not. And for labor-and-employment practitioners, Melia shows that if the work was done outside New York, New York courts will accept foreign statutory causes of action even if a choice-of-law provision calls for application of New York law.
Arguments this week in the Court of Appeals that may be of interest to Commercial Division practitioners include:
- Docket No. 21: Country-Wide Insurance Company v. Preferred Trucking Services Corp. (To be argued on Wednesday, January 15, 2014) (concerning the timeliness of a liability carrier’s disclaimer of coverage based on the insured’s non-cooperation in the defense). See the First Department decision here.
- Docket No. 24: Melcher v. Greenberg Traurig, LLP (To be argued Wednesday, January 15, 2014) (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 First Department decision here.
- Docket No. 25: QBE Insurance Corporation v. Jinx-Proof Inc. (To be argued Wednesday, January 15, 2014) (concerning whether an insurance carrier’s reservation of rights letters served “as effective written notices of disclaimer” under New York law). See the First Department decision here.
- Docket No. 27: Landauer Limited v. Joe Monani Fish Co. (To be argued Thursday, January 16, 2014) (addressing whether an English default judgment is enforceable in New York, despite technical deficiencies in service under CPLR 311, where the parties’ contract provided that any disputes would be litigated in English courts and the defendant had actual notice of the English action before the default judgment was entered). See the First Department decision here.
On December 19, 2013, Justice Bransten of the New York County Commercial Division issued a decision in Von Lavrinoff v. Laufer, 2013 NY Slip Op. 33447(U), dismissing a quantum meruit claim against an entity that allegedly benefited from the plaintiff’s services but did not induce plaintiff’s performance.
In Von Lavrinoff, the plaintiff alleged that he and the individual defendant formed a joint venture to prepare and submit a proposal to a public agency to develop a large “observation wheel.” After the plaintiff contributed $90,000 toward the joint venture and worked on the proposal, the individual defendant formed an LLC that submitted the proposal without the plaintiff, cutting him out of the project.
The plaintiff filed suit asserting, inter alia, a claim for quantum meruit against the LLC defendant. The court dismissed the quantum meruit claim, writing:
the fatal flaw in Plaintiffs’ quantum meruit argument is that [the LLC defendant] did not exist at the time the services were performed. The First Department has stated that a quantum meruit claim cannot exist solely because defendants may have profited, in one form or another, from plaintiffs work. Such a broad reading improperly expands the claim [of quantum meruit], absent any contention that defendants induced plaintiff to do the work.
This decision illustrates the limits of even broad equitable claims like quantum meruit. The decision did not leave the plaintiff without any potential remedy against the LLC defendant, however. The court sustained a claim for aiding and abetting a breach fiduciary duty against the LLC defendant.