Blogs

Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: May 26, 2014

Merger Clause Prevents Fraud Claim Based on Alleged Pre-Contract Promises

On May 16, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Antares Real Estate Services III, LLC v. 100 WP Property--DOF II, LLC, 2014 NY Slip Op. 31312(U), dismissing claims regarding alleged pre-contract promises based on a contract's merger clause. In Antares Real Estate Services III, the plaintiff sued the defendants for a "promote" payment in connection with the plaintiff's property management services. The defendants moved to dismiss, arguing that the oral agreement to pay the promote alleged in the complaint was unenforceable due to the merger clause in the parties' written agreement (the "PMLA").  The court agreed, explaining:

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Posted: May 25, 2014

Forum Selection Clause Enforceable Absent Fraud or Overreaching

On May 13, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in U.S. Corrugated, Inc. v. Scott, 2014 NY Slip Op. 31287(U), refusing to dismiss an action for lack of jurisdiction where the defendant agreed to the non-exclusive jurisdiction of the New York courts. In U.S. Corrugated, the defendant guaranteed payment to the plaintiff in a guaranty that included the following venue provision:

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Posted: May 23, 2014

Organization State Law Determines Whether Derivative Action Plaintiff is Entitled to Discovery on Demand Refusal

On May 22, 2014, the First Department issued a decision in Lerner v. Prince, 2014 NY Slip Op. 03763, holding in a derivative action, the law of the state of organization, not the forum state, determines whether the plaintiff is entitled to discovery on the basis for the refusal of its demand. In Lerner, the nominal-defendant corporation's directors denied the plaintiff's demand that it sue its "senior management, including present and former . . . officers and directors, for alleged mismanagement of the company's subprime assets." The plaintiff amended his complaint to add "causes of action including breach of fiduciary duty and aiding and abetting breaches of fiduciary duty" against the board and "also alleged that defendants had wasted corporate assets by causing" the corporation" to expend millions of dollars in an investigation that was allegedly a sham." The defendants moved to dismiss. The plaintiff then sought pre-answer discovery on the refusal of his demand. The trial court denied the plaintiff's motion to compel and granted the defendants' motion to dismiss. The First Department affirmed. It explained that the trial court properly denied the plaintiff pre-answer discovery, explaining:

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Posted: May 22, 2014

Broker Entitled to Commission When it has Direct and Proximate Link to the Transaction

On May 20, 2014, the First Department issued a decision in SPRE Realty, Ltd. v. Dienst, 2014 NY Slip Op. 03642, clarifying "the standard by which a broker may be found to have been the 'procuring cause' of a real estate transaction." In SPRE Realty, the plaintiff real estate broker sued the defendants alleging breach of implied contract and unjust enrichment because the defendants refused to pay a buyer's broker commission. The trial court denied the defendants' motion to dismiss. The First Department affirmed, explaining:

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Posted: May 21, 2014

Insurance Policy’s Criminal Acts Exclusion Applies To Claims Arising From Criminal Acts of Employee Of Which The Company Is Unaware

On May 8, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Aptuit, LLC v. Columbia Casualty Co., 2014 NY Slip Op. 31250(U), holding that the criminal acts exclusion to a pharmaceutical company’s professional liability policy applied to claims arising from criminal acts of an employee of the company, rejecting the insured’s arguments that the exclusion did not apply because the employee acted outside the scope of his authority and the company was unaware of his misconduct. The insured, Aptuit, was sued by certain of its clients for providing fabricated pre-clinical trial data created by Aptuit’s employee. Aptuit’s professional liability carrier assumed the defense of the claims, but reserved the right to disclaim coverage under the policy’s criminal acts exclusion, which provided:

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Posted in Commercial, Insurance
Posted: May 20, 2014

Fraudulent Inducement Claim Not Duplicative When Based on Misrepresentations of Present Facts Collateral to Contract

On May 13, 2014, the First Department issued a decision in Shugrue v. Stahl, 2014 NY Slip Op. 03460, holding that a fraudulent inducement claim was not duplicative of a breach of contract claim. In Shugrue, the First Department reversed the trial court's dismissal of a fraudulent inducement claim, explaining:

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Posted: May 19, 2014

Best Efforts Clause Enforceable if Criteria Can be Inferred From Circumstances

On May 13, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Board of Managers of the Chocolate Factory Condominium v. Chocolate Partners, LLC, 2014 NY Slip Op. 50754(U), refusing to dismiss a breach of contract claim because the best efforts clause upon which it relied did not contain guidelines for those efforts. In Board of Managers of the Chocolate Factory Condominium, the plaintiff sued the defendants in connection with a condominium conversion. The defendants moved to dismiss. One ground for dismissal was that the "best efforts" clause in the offering plan was unenforceable. The court disagreed, explaining:

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Posted in Commercial, Contracts
Posted: May 18, 2014

Reports Can Be Basis for Fraud Claim Despite Disclaimers When Facts Peculiarly within Defendant’s Knowledge

On May 13, 2014, the First Department issued a decision in Forty Central Park South, Inc. v. Anza, 2014 NY Slip Op. 03453, holding that disclaimers in performance reports that induced the plaintiffs to make further investments did not immunize the defendant from a fraud claim. In Forty Central Park South, the trial court granted the defendant's motion to dismiss the fraud claim against it. The First Department reversed, explaining:

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Posted: May 17, 2014

Prevailing Plaintiff in Derivative Action Entitled to Fees, But From Corporation, Not Defendant

On April 2, 2014, Justice Emerson of the Suffolk County Commercial Division issued a decision in Motherway v. Cartisano, 2014 NY Slip Op. 31215(U), holding that a prevailing plaintiff in a derivative action is not entitled to indemnification from the losing party under BCL § 626(e). In Motherway, the plaintiff prevailed on derivative claims against the defendants and sought "an award of attorney's fees pursuant to § 626(e) of the Business Corporation Law in the amount of $250,000" to be paid by the defendants. The court refused, explaining:

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Posted: May 16, 2014

Derivative Plaintiff Entitled to Advancement of Attorneys’ Fees to Defend Counterclaims Brought by Corporation

On May 14, 2014, Justice DeStefano of the Nassau County Commercial Division issued a decision in Schlossberg v. Schwartz, 2014 NY Slip Op. 50760(U), ruling that a corporation's by-laws and New York's Business Corporations Law ("BCL") entitled the plaintiff in a shareholder derivative action to advancement of attorneys' fees and costs incurred in defending counterclaims asserted against him.  Schlossberg provides a careful reading of the relevant provisions of the BCL concerning indemnification and advancement of attorneys' fees for corporate officers and directors. In Schlossberg, the plaintiff, a shareholder, director and former officer of the defendant corporation, filed derivative claims on behalf of the company. In the answer, the company asserted counterclaims against the plaintiff, seeking damages for misappropriation of confidential information, unfair competition, unjust enrichment, conversion, breach of fiduciary duty, breach of the duty of loyalty, violation of BCL § 720 and corporate waste. Claiming that he was entitled to mandatory indemnification under the company's by-laws, the plaintiff filed a motion, pursuant to the BCL and the company's by-laws, seeking permissive advancement of his defense fees and expenses, during the pendency of the lawsuit. Where a corporation is obligated to indemnify an officer or director but not to advance his litigation expenses, the BCL, although not New York's LLC law, generally permits a court to exercise its discretion and order advancement of "reasonable expenses, including attorneys' fees . . . necessary in connection with [the] defense," BCL § 724(c), subject to the caveat that the officer or director may not retain the advanced funds if a judgment or other final adjudication establishes that his acts were committed in bad faith or were the result of deliberate dishonesty. BCL § 725. In Schlossberg, the company raised two defenses to the motion for advancement: (1) that the indemnification provisions of the by-laws apply but only to third-party claims; and (2) that the indemnification provision did not apply to the counterclaims because they were unrelated to the plaintiff's "mere status as director or officer." Justice DeStefano rejected these arguments and directed the Company to advance $54,477.72 for fees and expenses incurred to date, referring disputes concerning future advancement requests to a special referee. Sections 722(a) and (c) of the BCL permit a corporation to agree to indemnify directors and officers:

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