Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: October 17, 2013

Common Interest Privilege Limited to Litigation Context

On October 16, 2013, Justice Bransten of the New York County Commercial Division issued a decision in Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 2013 NY Slip Op. 51673(U), addressing the scope of the common interest privilege in the context of a corporate merger. Justice Bransten held that, contrary to rule applied by some federal courts, “New York law does not allow a privilege claim under the common-interest doctrine unless there is pending or reasonably anticipated litigation.”

Justice Bransten noted “that there is no litigation requirement when two parties consult with one attorney.” Thus, parties for whom it is important to create a common interest privilege outside of the litigation context should considering engaging joint counsel for that purpose.

Posted: October 16, 2013

A Formal, Written Litigation Hold Not Necessary To Trigger Requirement To Preserve Documents

On October 3, 2013, Justice Friedman of the New York County Commercial Division held in Roberts v. Korwin, 2013 N.Y. Slip Op. 51637(U), a legal malpractice action, that a written, formal litigation hold memo was not necessary to trigger the obligation to preserve documents once a party was on notice of a possible claim, writing:

Once a party reasonably anticipates litigation, it must, at a minimum, institute an appropriate litigation hold to prevent the routine destruction of electronic data. Greenberg Traurig submits no authority that the litigation hold must always be written and that the form of the litigation hold may not vary with the circumstances.

Posted: October 16, 2013

Court Orders Disclosure of Work Product When Counsel Creates the Appearance of Manipulating Witness Testimony

On October 3, 2013, Justice Kornreich of the New York County Commercial Division issued a decision in MBIA Ins. Corp. v Credit Suisse Sec.(USA) LLC, 2013 NY Slip Op 32404(U), addressing whether to order disclosure to defendant of “all communications between” certain key witnesses and plaintiff’s counsel, including “all versions, drafts, or iterations of the affidavits that formed the basis for the” complaint “and the witnesses’ deposition testimony.” The court’s recitation of the relevant facts shows the key issue—the apparent close involvement of plaintiff’s counsel in the witnesses’ testimony:

[Plaintiff] paid substantial sums of money (in certain cases, more than $10,000) to the witnesses and flew the witnesses from across the country to New York so that they could recount their knowledge of (and possible participation in) defendants’ fraudulent business practices. . . . Plaintiff’s counsel worked with these witnesses to draft affidavits detailing their knowledge of the fraud [and] . . . also extensively prepped them prior to deposition and defended their testimony against cross-examination by defendants. . . . Several of the witnesses began to recant their testimony or indicated that what was written in their affidavits was the work of [plaintiff’s] counsel and was not entirely an accurate description of their knowledge.

Justice Kornreich ordered the disclosure. In so doing, she acknowledged that:

The question before the court is not whether the use of confidential witness testimony in a complaint automatically entitles a defendant to obtain all documents and communications between the witnesses and plaintiff’s counsel. Rather, the issue is whether, once defendants have laid a foundation giving rise to a reasonable suspicion of a witness dissembling, fairness militates in favor of disclosure.

Justice Kornreich found that it did, and ordered the disclosure. The lesson here seems plain: there is nothing wrong with paying a reasonable rate for a witness’s time or discussing their testimony with them, but when counsel creates the appearance that it has crossed the line from gathering facts to manipulating them, trouble is bound to follow.

Posted: October 14, 2013

Court of Appeals Affirms The Use of Default Judgment as a Discovery Sanction

On October 7, 2013, we noted that on September 10, 2013, the Court of Appeals heard argument in Merrill Lynch, Pierce, Fenner & Smith Inc., v. Global Strat, Inc., Docket No. 160, a case examining the extent to which a sanction of default can be imposed for discovery violations. On October 10, 2013, the Court of Appeals issued its decision on that appeal.

In a brief, unsigned memorandum decision, the Court of Appeals reaffirmed the availability of sanctions for failing to comply with discovery obligations, including the entry of a default judgment against a non-complying party. However, the Court of Appeals held that the trial court abused its discretion in imposing such a sanction on the individual defendants-appellants because the sanction imposed—the entry of a default judgment—was disproportionately harsh compared to the alleged discovery abuse. Among the factors that the Court of Appeals considered were that the sanction was for the failure of the individual defendants to produce documents that related to businesses that the individual defendants controlled at a time when the individual defendants had yet to answer the complaint and against whom a discovery stay had been granted, that the plaintiff had not sought a default judgment, and that the report of the referee to whom the trial court had referred the discovery dispute did not contain the factual basis for the imposition of a default sanction. In light of all these factors, the Court of Appeals remanded the matter back to the trial court for the imposition of an appropriate sanction presumably upon a better record.

While this is a case in which a default sanction was vacated, it serves as a cautionary tale for parties that do not comply (or who create the appearance of not having complied) with their discovery obligations. Here, the individual defendants had to go all the way to the Court of Appeals to get a sanction (which included a huge money judgment) reversed that was imposed against them at a time when the case against them was stayed and where the referral to the referee did not even include the question of whether such a sanction should be imposed. Litigants with less compelling excuses should continue to beware the trial court’s broad discretion to impose sanctions—even a default sanction—for refusing to meet their discovery obligations.

Posted: October 11, 2013

Failure to Comply With Statute of Frauds Bars Any Kind of Action Based On The Alleged Promise

On October 4, 2013, Justice Emerson of the Suffolk County Commercial Division issued a decision in Saldano v. Precision CNC Corp., 2013 NY Slip Op. 51633(U), addressing whether parties which allegedly promised a co-tenant in the same commercial building (which was in default of its lease) that they would take over the lease and permit the co-tenant to continue its business in the same premises as a sub-tenant could be liable not only for breaching the promise but also fraud, for taking over the space and then using that as an opportunity to allegedly steal the co-tenant’s customer. In partially granting defendants motion to dismiss, Justice Emerson held that because the alleged promise concerning real property was unenforceable under the statute of frauds, it could not be the basis for either a breach of contract or fraud action:

An agreement that is unenforceable under the statute of frauds is unenforceable for all purposes and cannot be the basis of another action (61 NY Jur 2d Frauds, Statute of §312). Such a contract confers no rights and creates no obligations between the parties, and no claim can be founded on it against third persons (Id.) It cannot be enforced either directly or indirectly in an action for damages for breach, for specific performance, for fraud and deceit if that action depends on proof of the oral agreement, or for malicious interference therewith. (Id.) In short, the ban of the statute of frauds extends to any device calculated to evade the legislative mandate rendering unenforceable the original obligation. (Id.)

Posted: October 9, 2013

Court of Appeals Arguments of Interest for the Week of October 14, 2013

Upcoming arguments in the Court of Appeals that may be of interest to Commercial Division practitioners include:

Docket No. 191: Cruz v. TD Bank NA. (to be argued Tuesday, October 15, 2013)
Addresses two questions certified from the US Court of Appeals for the Second Circuit (see 2d Cir. order here:

first, whether judgment debtors have a private right of action for money damages and injunctive relief against banks that violate the Exempt Income Protection Act (EIPA)’s procedural requirements;
and second, whether judgment debtors can seek money damages and injunctive relief against banks that violate the EIPA in special proceedings prescribed by CPLR Article 52 and, if so, whether those special proceedings are the exclusive mechanism for such relief or whether judgment debtors may also seek relief in a plenary action.

Posted: October 8, 2013

A Borrower’s Subsequent Bankruptcy Frees Lender from its Election of Remedies

On October 7, 2013, Justice Kornreich of the New York County Commercial Division issued a decision in 172 Madison (NY) LLC v. NMP-Group, LLC, 2013 NY Slip Op. 51618(U), addressing whether a lender is bound by its election to foreclose on a mortgage rather than sue on the debt when the right to sue on the debt did not arise until after the election was made.  Justice Kornreich held that it was not, writing:

[W]here, as here, a lender has conditionally agreed to limit its remedies to foreclosure, subject to the borrowing parties’ compliance with certain loan covenants, and the borrowing parties breach those covenants only after the commencement of foreclosure proceedings, RPAPL 1301 does not preclude the lender from seeking alternative relief at that point, since such relief was unavailable at the time the foreclosure action was commenced (see Gameways, Inc., 101 AD2d at 888 [holding that commencement of suit did not bar pursuit of previously unavailable administrative remedy]). To hold otherwise would undermine the widespread and settled use of nonrecourse loans subject to guaranties triggered by certain springing recourse events.

Posted: October 7, 2013

A Cautionary Tale on Attorneys’ Fees

Fee shifting provisions requiring one party to a commercial agreement to pay the other side’s attorneys’ fees in the event of litigation over a breach of the agreement have become ubiquitous in New York commercial practice. Suffolk County Commercial Division Justice Thomas F. Whelan’s September 11, 2013, decision in RMP Capital, Corp. v. Victory Jet, LLC, 2013 NY Slip Op. 51543(U), provides a textbook example of what happens when a party wins the liability battle but loses the fee shifting war due to an insufficiently documented fee application, and provides commercial litigators in New York with a road map for submitting a properly documented fee application.

The plaintiff is a factoring company that obtained summary judgment against individuals who had guaranteed the debt of a corporation that filed for Chapter 7 bankruptcy protection. The guaranty instruments required the guarantors to pay the plaintiff’s attorneys’ fees in any successful litigation to enforce the guaranties. Plaintiff submitted a fee application for $68,389; Justice Whelan reduced the application by roughly 36%, to $43,563.

Justice Whelan identified several deficiencies in plaintiff’s fee application, which consisted of an affidavit from plaintiff’s counsel and counsel’s bills. First, because plaintiff failed to submit any documentation concerning the prevailing hourly rates of attorneys in the Suffolk County legal community, Justice Whelan reduced the hourly rates of two partners from $415 and $400 to $375 and $350, reduced the hourly rates of three associates from $385, $375, $350, to $280, $250, and $250, reduced the hourly rate of a newly admitted associate from $325 to $150, and reduced the hourly rate of a paralegal from $150 to $80. In making these reductions, Justice Whelan relied on federal cases from the Eastern District of New York discussing hourly rates for similarly situated attorneys. This should serve as a valuable reminder to attorneys based in New York County that the reasonable hourly rate applied by New York courts in deciding fee applications is not the prevailing rate in the county where the prevailing party’s counsel is located but the prevailing rate in the county where the case is venued.

Second, Justice Whelan directed an across-the-board 25% reduction in the amount of hours billed by plaintiff’s counsel. This reduction was attributed to the facts that (i) while plaintiff prevailed on liability, it was only partially successful in obtaining the damages it sought, (ii) plaintiff’s legal bills used “block billing,” i.e. the daily entries for each timekeeper that contained multiple tasks did not indicate how much time was spent on each task, (iii) travel time should be reimbursed at half of counsel’s normal billing rate, and (iv) several billing entries were so vague as to make it impossible to determine exactly what the timekeeper did or whether what was done was reasonable (e.g., “issues,” “work on case,” “litigation,” “e-mails,” “phone calls,” etc.).

In counsel’s defense, the bills submitted to Justice Whelan were apparently paid by plaintiff without objection. Indeed, the bills submitted were likely similar to the bills sent by most commercial litigators in New York. The valuable lesson to be learned from Justice Whelan’s decision is that when a New York commercial litigator knows that he will likely be seeking fees in a case based on a fee shifting provision, his or her bills will not only be reviewed by the client but will also be heavily scrutinized by the Court and opposing counsel. Under these circumstances, attorneys should avoid block billing, and instead provide written descriptions that are far more detailed than most clients require. In the absence of such prior planning, a commercial litigator risks the court issuing a decision like Justice Whelan’s, in which the court finds that a substantial portion of the fee claimed is unreasonable and in which the court repeatedly criticizes the reasonableness of the hourly rates and hours billed, which could in turn lead to the client requesting a refund of the disallowed fees. Indeed, before submitting a fee application, the attorney should decide whether the amount of time spent litigating the reasonableness of the fees sought may exceed the amount of fees ultimately recovered. In some cases, it may be more cost effective not to apply for the fees or to try to reach an agreement with opposing counsel on the amount of the fees even if doing so requires accepting a reduced fee amount.