Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: February 4, 2014

Landlord’s Alleged Role in Frustrating Achievement of Contract’s Purpose Allows Claim for Breach of Duty of Good Faith and Fair Dealing to Survive Motion to Dismiss

On January 22, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Gelita, LLC v. 133 Second Ave., LLC, 2014 NY Slip Op. 50064(U), refusing to dismiss a claim for breach of the duty of good faith and fair dealing.

Among the many claims brought by the plaintiff that the defendants sought to dismiss was a claim for breach of the duty of good faith and fair dealing. The court declined to dismiss the claim, explaining:

The seven causes of action asserted against the Owner all attempt to arrive at the same legal conclusion — that, as a result of the Premises being unfit for its intended use, plaintiffs are absolved from paying the balance of rent due under the Lease. The Owner’s primary defense is that the Lease explicitly places the burden of building out the Premises and ensuring the suitability of its intended use on plaintiffs’ shoulders. Moreover, as discussed at length in the June Order, the Lease also explicitly disclaims any liability on the part of the Owner for problems arising from such build out or related legal issues, such as regulatory compliance. . . . .

The covenant of good faith and fair dealing in the course of performance is implied in every contract. This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. While the duties of good faith and fair dealing do not imply obligations inconsistent with other terms of the contractual relationship,’ they do encompass any promises which a reasonable person in the position of the promisee would be justified in understanding were included. The duty of good faith and fair dealing may be breached when a party to a contract acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party of the right to receive the benefits under their agreement. However, a claim for breach of the implied covenant of good faith and fair dealing cannot substitute for an unsustainable breach of contract claim. In other words, the covenant of good faith and fair dealing cannot be construed so broadly as to effectively nullify other express terms of the contract, or to create independent contractual rights. Simply put, a plaintiff cannot contend that a defendant has a good faith obligation under a contract when that obligation is expressly disclaimed in the contract itself.

(Internal quotations and citations omitted) (emphasis added).  The court went on to explain that there was a question of fact whether

the Owner [had] committed bad acts in connection with the construction job . . . . Had the Owner done nothing, and left plaintiffs to their own devices, there would be no breach. However, if the Owner had a role in the alleged shoddy construction, the Owner would have played a part in frustrating plaintiffs’ ability to use the Premises and hence would have prevented plaintiffs from reaping the fruits of the contract. . . . Discovery is needed to determine . . . the actual scope of the Owner’s involvement in and responsibility for the alleged shoddy construction.

It is rare to see a claim for the breach of the duty of good faith and fair dealing survive a motion to dismiss. This decision is an example of (alleged) facts establishing such a claim.

Posted: February 3, 2014

Transcripts and Videos of Arguments in the Court of Appeals for the Weeks of January 6 and January 13 Now Available

Transcripts and videos of arguments in the Court of Appeals for the weeks of January 6 and January 13 are now available on the Court of Appeals website.

On January 9, 2014, we noted three cases of interest from the oral arguments for the week of January 6:

  • Docket No. 2: Executive Plaza, LLC v. Peerless Insurance Company (addressing, on a certified question from the Second Circuit, whether a lawsuit under a fire insurance policy is barred by a policy provision that requires any lawsuit be brought within two years of the damage, when a contractual condition precedent to suit could not reasonably be accomplished within two years). The oral argument transcript and video for this case are not available due to “technical difficulties.”
  • Docket No. 8: Biotronik A.G. v. Conor Medsystems Ireland, Ltd. (examining whether the relief sought in an exclusive distributor’s breach of contract claim against a manufacturer for lost profits from sales to third parties constitutes “consequential damages,” and therefore barred under the terms of the distribution agreement, or instead “general damages” given that the distributor’s resale to third parties “was the very purpose of the Agreement”).  See the transcript and the video.
  • Docket No. 11: Voss v. The Netherlands Insurance Company (To be argued Thursday, January 9, 2014) (considering whether the doctrine that an insurance policyholder is “charged with conclusive presumption of knowledge of the terms and limits” of the policy can be invoked to defeat a claim against an insurance broker for negligence in advising the insured as to the adequate amount of insurance).  See the transcript and the video.

On January 14, 2014, we noted four cases of interest to Commercial Division practitioners from the oral arguments for the week of January 13:

  • Docket No. 21: Country-Wide Insurance Company v. Preferred Trucking Services Corp. (concerning the timeliness of a liability carrier’s disclaimer of coverage based on the insured’s non-cooperation in the defense).  See the transcript and the video.
  • 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).  Argument has been rescheduled to February 14, 2014.
  • Docket No. 25: QBE Insurance Corporation v. Jinx-Proof Inc. (concerning whether an insurance carrier’s reservation of rights letters served “as effective written notices of disclaimer” under New York law).  See the transcript and the video.
  • Docket No. 27: Landauer Limited v. Joe Monani Fish Co. (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 transcript and the video.
Posted: February 3, 2014

Arbitration Clause in E-Mailed Terms and Conditions to Trading Account Agreement Not Sufficient to Bind Parties to Arbitration

On January 30, 2014, the First Department issued a decision in Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc., 2014 NY Slip Op. 00587, affirming a trial court’s refusal to compel arbitration.

In Basis Yield Alpha Fund, the defendant moved to compel arbitration based on a “document entitled ‘General Terms and Conditions’ that was attached to a November 10, 2006 email” to the plaintiff. However, the attachment was never signed by the plaintiff. The First Department affirmed the trial court’s refusal to compel arbitration, explaining:

[The defendant] . . . fails to satisfy the heavy burden of demonstrating that arbitration should be compelled pursuant to CPLR Article 75. As the Court of Appeals has stated, a party will not be compelled to arbitrate absent evidence which affirmatively establishes that the parties expressly agreed to arbitrate their disputes. The agreement must be clear, explicit and unequivocal. An arbitration clause in an unsigned agreement may be enforceable but only when it is evident that the parties intended to be bound by the contract.

Here, there is a substantial question as to whether the parties agreed to arbitrate. In support of its motion to compel arbitration, [the defendant] relied on a mandatory arbitration clause set forth in a document entitled “General Terms and Conditions” that was attached to a November 10, 2006 email. [The defendant] claims to have sent the email to [the plaintiff] in connection with the latter’s opening of a trading account with [the defendant]. It is, however, undisputed that the document was never signed by anyone from [the plaintiff]. More importantly, the director of [the plaintiff’s] managing entity swore in an affidavit that [the plaintiff] never entered into the arbitration agreement [the defendant] proffers.

(Internal quotations and citations omitted).

This decision is a cautionary tale regarding the need to observe formalities in a world of e-mail and Internet communications. There is a substantial body of law regarding the binding effect of e-mail agreements, electronic agreements and the like. Still, when you need to be sure, get a signature.

Posted: February 2, 2014

RMBS Planitiff Moves for Leave to Appeal to Court of Appeals

On December 23, 2013, we blogged about the First Department’s decision in ACE Sec. Corp. v. DB Structured Prods., Inc., 2013 NY Slip Op. 08517, which dismissed a mortgage-backed securities lawsuit as barred by the failure both to give the contractually-required notice and an opportunity to cure and to bring suit before the end of the limitations period.  As reported by Reuter’s Allison Frankel, the plaintiff-appellant filed a motion for re-argument or, alternatively, leave to appeal to the Court of Appeals.  On the brief, a copy of which is available here, plaintiff-appellant’s counsel, Kasowitz, Benson, Torres & Friedman LLP, is joined by former U.S. Solicitor General Paul D. Clement.

Posted: February 1, 2014

Derivative Action Dismissed for Failure Adequately to Plead Demand Futility

On January 21, 2014, Justice Kapnick of the New York County Commercial Division issued a decision in Kebis v. Azzurro Capital Inc., 2014 NY Slip Op. 30171(U), dismissing a derivative action for failure adequately to plead demand futility.

In Kebis, the plaintiff brought a derivative action against a corporation’s board of directors alleging “breaches of fiduciary duties and unjust enrichment” in connection with the sale of a division of the corporation. The court granted the defendants’ motion to dismiss for failing to plead demand futility with particularity as required by Delaware law. The court explained: (more…)

Posted: January 31, 2014

Justice Saliann Scarpulla Appointed to New York County Commercial Division

On January 18, 2014, we posted that Governor Cuomo had announced the appointment of Justice Barbara R. Kapnick of the New York County Commercial Division to the First Department.  We have been informed that Justice Saliann Scarpulla of the New York County Supreme Court has been selected to replace Justice Kapnick as a Justice of the Commercial Division.

Justice Scarpulla currently is a Justice of the Supreme Court, New York County.  She was appointed as an Acting Justice 2009 and was elected in 2013.  Justice Scarpulla also served as Judge, Civil Court of the City of New York, New York County from 2002 to 2008 and as Justice Eileen Bransten’s Court Attorney from 1999 to 2001. From 1997 to 1999 she was Senior Vice President and Bank Counsel at Hudson United Bank and from 1993 to 1997 worked for the FDIC New York Legal Services Office as a Counsel/Senior Litigator. Prior to that she was a litigation associate with the firm of Proskauer Rose Goetz & Mendelsohn and a court attorney for Justice Alvin F. Klein’s. She is a graduate of Brooklyn Law School and Boston University.

Congratulations to Justice Scarpulla.

Posted: January 31, 2014

Appellate Divisions Announce Differing Choice-of-Law Analyses for Insurance Claims

On January 28, 2014, the First Department issued a decision in Davis & Partners, LLC v. QBE Ins. Corp., 2014 NY Slip Op. 00449, discussing which state’s law governed a liability policy covering multi-state risks.

Based on the “standard ‘grouping of contacts’ analysis,” the court found that New York law applied because

[t]he contract between contractor Jansons Associates, Inc. and the construction manager was related to a project located in New York. . . . It appears to have been executed in New York. It required Jansons to carry insurance and to name Davis & Partners and RFD 425 Fifth Avenue, both New York entities, as additional insureds under the policy. It contains a choice-of-law provision naming New York as the forum and the governing law of choice. The ‘occurrence’ under the policy and the ensuing litigation occurred in New York. These factors outweigh the fact that Janson’s principal place of business is in New Jersey. As the ‘principal location of the insured risk,’ New York has ‘the most significant relationship to the transaction and the parties.’

On December 16, 2013, we blogged about a recent Second Department decision, QBE Ins. Corp. v. Adjo Contracting Corp., 2013 NY Slip Op. 08238, which took at different approach to the same choice-of-law question, holding that “the state of the insured’s domicile should be regarded as a proxy for the principal location of the insured risk.” The additional insureds under the policy at issue in Davis & Partners were New York entities, but the court did not take that factor as dispositive and instead examined the totality of the circumstances to determine the forum with the “most significant relationship to the transaction and the parties.” These seemingly contradictory holdings illustrate the complexity of choice-of-law issues generally and in the context of insurance policies governing multi-state risks in particular.

Posted: January 30, 2014

Court Allows Filing of Complaint Under Seal Along With Public Redacted Complaint

On January 23, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Shareholder Representative v. Sandoz Inc., 2014 NY Slip Op. 30200(U), granting a motion to file a sealed complaint.

This action arose out of the sale of a pharmaceutical company, which was developing a new drug, to the defendant. The plaintiff alleged that the defendant violated the agreement by failing to meet various “milestones” for the drug’s development.

The plaintiff filed a motion for leave to file the entire complaint under seal. At a hearing on that motion, the court directed the parties to meet and confer regarding how the complaint could be rewritten so that the entire complaint would not have to be sealed. The plaintiff subsequently filed a second motion for leave to file a redacted version of the complaint. The court reviewed the motion under 22 NYCRR 216.1(a), which requires “good cause” for sealing any court record in whole or in part, by balancing the plaintiff’s interest in secrecy with the public interest in access to court records:

Uniform Rule 216.1 further provides that in determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties. Although good cause is not defined in Section 216.1(a), 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. The First Department has held that the presumption of the benefit of public access to court proceedings takes precedence, and sealing of court papers is permitted only to serve compelling objectives, such as when the need for secrecy outweighs the public’s right to access, e.g., in the case of trade secrets.

(Internal citations and quotations omitted).

The court found that the complaint contained “technical information about a pharmaceutical drug which is still in development,” meeting the definition of a trade secret, and that the redacted complaint “contains sufficient unredacted information, such that the broad contours of this action and the relief sought therein are publically available,” and granted the motion.

For practitioners wanting to file a complaint under seal, this opinion shows that they will have to convince the court of the existence of a trade secret or some comparable interest, and also reminds them that they can help their cause by drafting their complaint in such a way that as little as possible will have to be redacted and offering to file a redacted complaint.

Posted: January 29, 2014

Board Did Not Have Fiduciary Duty to Maximize Shareholder Benefit in Merger Where There was No Change of Control or Break-up

On January 13, 2014, Justice Friedman of the New York County Commercial Division issued a decision in Badowski v. Carrao, 2014 NY Slip Op. 50042(U), dismissing breach of fiduciary claims relating to a merger.

In Badowski, the class action plaintiff alleged that the

individual defendants, the former directors and officers of Vertro, Inc. (Vertro), breached their fiduciary duties to Vertro’s former shareholders by failing to maximize shareholder value, acting in their own interest, and failing to disclose material information in connection with Vertro’s merger with Inuvo, Inc. (Inuvo). Plaintiff further alleges that corporate defendants Vertro, Inuvo, and Anhinga Merger Subsidiary, Inc. (Anhinga) aided and abetted those breaches. Plaintiff seeks rescission of the merger of the two companies, which was completed on March 1, 2012, or, in the alternative, rescissory damages. Defendants move to dismiss the Second Amended Complaint in its entirety for failure to state a claim, pursuant to CPLR 3211(a)(7).

The Badowski decision addresses several interesting issues of Delaware corporate law; we suggest that you read the entire decision. This post addresses only the issue of the duty to maximize shareholder value.

The court held that the actions of the individual defendants were not subject to the heightened Revlon standard of maximizing shareholder value, and instead that it would examine their actions under the business judgment rule. The court explained:

In Revlon, a case involving a hostile take-over, the Court held that once it became apparent that the break-up of the company was inevitable or that the company was for sale, the duty of the board changed from the preservation of the company to the maximization of the company’s value at a sale for the stockholders’ benefit.

As subsequently refined by the Delaware Courts, the Revlon requirement that the directors seek the best value reasonably available to shareholders applies in at least the following three scenarios: (1) when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company; (2) where, in response to a bidder’s offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company; or (3) when approval of a transaction results in a sale or change of control. The Courts have further clarified that the Revlon duty of value maximization is triggered only when a company embarks on a transaction — on its own initiative or in response to an unsolicited offer — that will result in a change of control. In the context of a stock-for-stock merger, a change of control for Revlon purposes can be triggered if the target’s shareholders are relegated to a minority in the resulting entity, and the resulting entity has a controlling stockholder or stockholder group. Where, however, ownership of the merged company will remain in a large, fluid, changeable and changing market, Revlon is not implicated.

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

The court held that the Revlon factors had not been adequately alleged, including that there was no allegation that “the shares of the resulting entity will not be freely traded in the marketplace or that the former Vertro shareholders will be subjected to a controlling shareholder or block of shareholders,” that the sale would not result in a break-up of the company and that triggering “change-in-control provisions contained in contracts of Vertro’s officers and directors” did not “establish change of control for Revlon purposes.”

While there are many take-aways from this decision, one is the importance of transactional counsel to help guide a board through the myriad requirements of Delaware law affecting mergers.

Posted: January 28, 2014

Judicial Estoppel Does Not Apply When the Argument Made Does Not Lead to a Judgment

On January 23, 2014, the First Department issued a decision in Wells Fargo Bank N.A. v. Webster Business Credit Corp., 2014 NY Slip Op 00412, explaining the scope of the doctrine of judicial estoppel.

In Wells Fargo Bank, the trial court dismissed the defendant’s claim for “indemnification from plaintiffs for attorneys’ fees incurred in” defending the action. The First Department affirmed that decision, explaining that the plaintiffs were not estopped from opposing the defendant’s claim for indemnification even though they also had argued that indemnification was required under the contract at issue:

Contrary to defendant’s argument, plaintiffs’ previous assertion of their own claim for contractual indemnification does not judicially estop them from denying that defendant is entitled to indemnification of attorneys’ fees under the agreement. The doctrine of judicial estoppel precludes a party who assumed a certain position in a prior legal proceeding and who secured a judgment in his or her favor from assuming a contrary position in another action simply because his or her interests have changed. As plaintiffs did not prevail on their contractual indemnification claim, the doctrine of judicial estoppel does not apply.

Nor does plaintiffs’ prior claim for contractual indemnification, standing alone, constitute a judicial admission that attorneys’ fees are recoverable in inter-party disputes. On the contrary, plaintiffs’ former construction of the agreement was a legal argument, and not a fact amenable to treatment as a formal judicial admission.

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

Doctrines such as judicial estoppel and judicial admission can be useful tools.  However, this decision shows their limitations.