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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: September 30, 2019

Defendant Fails to Provide Adequate Basis for Vacating Default

On September 25, 2019, the Second Department issued a decision in Redbridge Bedford, LLC v 159 N. 3rd St. Realty Holding Corp., 2019 NY Slip Op 06809, holding that a defendant had failed to provide an adequate basis for vacating its default, explaining:

In order to be entitled to enter a default judgment upon a defendant’s failure to appear or answer the complaint, a plaintiff must submit evidence of service of the summons and complaint upon the defendant, evidence of a viable cause of action, and evidence of the defendant’s default in answering or appearing. Here, the plaintiffs satisfied these requirements.

In order to avoid the entry of a default judgment, a defendant who has failed to appear or answer the complaint must provide a reasonable excuse for the default and demonstrate a potentially meritorious defense to the action. A defendant seeking to vacate a default in appearing or answering is required to make the same showing. The determination of what constitutes a reasonable excuse lies within the discretion of the trial court.

Here, the defendants’ proffered excuse of improper service did not constitute a reasonable excuse. In this regard, they did not contest that they were served with the summons and complaint by delivery to the Secretary of State. Rather, they maintain that such service was improper because proper service could only be made upon their counsel, who had appeared on their behalf in opposition to the plaintiffs’ application for a TRO. However, an attorney is not automatically considered the agent of his or her client for the purposes of the service of process. Moreover, absent proof that a defendant has designated his or her attorney as an agent for the acceptance of process, an attorney lacks the authority to accept service on the defendant’s behalf. The defendants did not provide any evidence that their counsel had the authority to accept service of process on their behalf. As the defendants were properly served, they failed to offer a reasonable excuse for their failure to appear or answer the complaint. The absence of a reasonable excuse for the defendants’ default renders it unnecessary to determine whether they demonstrated the existence of a potentially meritorious defense. Accordingly, we agree with the Supreme Court’s grant of the plaintiffs’ motion for leave to enter a default judgment and denial of those branches of the defendants’ cross motion which were to vacate their default in answering the complaint and to extend their time to answer.

(Internal quotations and citations omitted).

If you are served with a complaint and fail timely to answer, the court can enter judgment against you: a default judgment. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether you have been properly served or if a default judgment has been entered against you.

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Posted: September 28, 2019

Tenant Could Not Bring and Then Consolidate Two Actions to Avoid No Counterclaims Provision in Lease

On September 20, 2019, Justice Borrok of the New York County Commercial Division issued a decision in W.J. Enterprise, Inc. v. Nomad 28th St. LLC, 2019 NY Slip Op. 32761(U), holding that a tenant could not bring and then consolidate two actions to avoid a no counterclaims provision in a lease, explaining:

WJ argues that, by commencing the Second Action rather than asserting its claim as a counterclaim in the First action, Nomad is attempting an end run of the discovery process, and urges this court to consolidate the two actions. Nomad argues that the parties’ Lease precludes consolidation because it contains no set-off and waiver of counterclaims provisions that should not be circumvented by the consolidation of the two lawsuits.

Specifically, section 2(C) of the Lease provides:

Tenant shall pay all Fixed Rent and Additional Rent due hereunder … in advance, in equal monthly installments on the first day of every month, without any prior notice, demand, off-set, deduction or abatement whatsoever

Section 20(N) provides:

If Landlord commences any summary proceeding for nonpayment of rent, Tenant will not interpose any non-mandatory counterclaim of whatever nature or description in any such proceeding

Nomad argues that WJ is attempting to consolidate the Second Action with the [First Action] in an effort to, in effect, off-set its obligation to pay rent to Landlord in (violation of§ 2(C) of the Lease) and to interpose an unrelated counterclaim against Landlord in response to its claim for unpaid rent (in violation of§ 20(N) of the Lease). Generally, consolidation of two related actions would be appropriate where they involve the same parties and common questions of law and/or fact, and the latter filed action would be consolidated into the first filed action. However, where a lease contains a waiver of counterclaim provision, such provision may not be circumvented by consolidating the landlord’s summary proceeding with the Supreme Court action. Waiver of counterclaim provisions in a lease are enforceable and, where the parties have agreed to such waiver in a lease, they are bound by its terms. For the avoidance of doubt, and as discussed on the record, to the extent that the issues in this proceeding are materially related to the Second Action, WJ may always move for a stay of the Second Action in Part 52.

(Internal quotations and citations omitted).

We frequently litigate disputes over the sale or leasing of commercial property. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding a commercial real estate transaction.

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Posted: September 27, 2019

Yellowstone Injunction Denied Because Failure to Have Insurance Was Not Curable

On September 12, 2019. Justice Borrok of the New York County Commercial Division issued a decision in Booston LLC v. 35 W. Realty Co., LLC, 2019 NY Slip Op. 32716(U), denying a Yellowstone injunction because a failure to have insurance coverage was not curable, explaining:

In addition, putting aside the No Waiver clause that dictates the result herein, a necessary lynchpin of a Yellowstone injunction is that the claimed default is capable of cure. If the claimed default is not capable of cure, there is no basis for a Yellowstone injunction. The First Department has held that failure to procure insurance cannot be cured where the proposed cure does not involve any retroactive change in coverage, which means that the alleged defaults raised by the landlord are not susceptible to cure and, therefore, there is no basis for a Yellowstone injunction. The rationale for the First Department’s decisions is simple: a deficiency in past insurance coverage does not protect the landlord against the unknown universe of any claims arising during the period of no insurance coverage. This rationale squarely applies here and as there is no means for the Tenant to obtain retroactive insurance coverage, the Yellowstone injunction must be denied.

To the extent that the Tenant argues that the Landlord’s concerns are addressed by the Tenant’s posting of a $1 million indemnity bond and that such bond “cures” any alleged insurance coverage shortfall, the Tenant is incorrect. First, the Lease does not provide for alternatives to providing the requested insurance coverage set forth in the Lease. To wit, the Lease does not indicate that in lieu of the provided for insurance, the Tenant can substitute a bond. Second, even if it did, the Landlord maintains that $2,000,000 of coverage in a “single limit” means $2,000,000 “per occurrence.” A $1,000,000 bond (on top of Tenant’s $1,000,000 coverage for each occurrence) would not provide the coverage that Landlord claims is required, i.e., “in the amount of $2,000,000 in a single limit”. For the avoidance of doubt, inasmuch as the Tenant also argues that it never breached the Lease because it has always had a $2,000,000 policy in the aggregate, this is simply not a basis for a Yellowstone injunction, which requires a default capable of a cure.

(Internal quotations and citations omitted).

We litigate Yellowstone injunctions–a motion to prevent a landlord from evicting a commercial tenant for defaults under the lease–for both landlords and tenants. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding the termination of a commercial lease because of a default under the lease.

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Posted: September 26, 2019

Lender – Borrower Relationship Does Not Give Rise to Fiduciary Duty

On September 11, 2019, Justice Cohen of the New York County Commercial Division issued a decision in PDL Biopharma, Inc. v. Wohlstadter, 2019 NY Slip Op. 32693(U), holding that a lender – borrower relationship did not give rise to a fiduciary duty, explaining:

Defendants’ third and fourth counterclaims for breach of fiduciary duty and tortious interference with prospective economic advantage, respectively, are also without merit. Defendants have failed to show that PDL owed a fiduciary duty to Defendants. To state a claim for breach of fiduciary duty, plaintiffs must allege that (1) defendant owed them a fiduciary duty, (2) defendant committed misconduct, and (3) they suffered damages caused by that misconduct. An arm’s length borrower-lender relationship is not of a confidential or fiduciary nature. Defendants have not submitted evidence sufficient to state a viable claim that PDL was their fiduciary.

(Internal quotations and citations omitted).

Fiduciaries have special duties, but the question of whether a defendant is a fiduciary, and thus can be liable for a breach of fiduciary duty, is sometimes a complicated one. We both bring and defend breach of fiduciary duty and professional malpractice claims and other claims relating to the duties of trustees and professionals such as lawyers, accountants and architects to their clients. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding such claims or appeals of such claims.

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Posted: September 25, 2019

Corporate Officer Liable for Business Tort Only to Extent of Personal Participation in and Knowledge of It

On September 9, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Itria Ventures LLC v. Provident Bank, 2019 NY Slip Op. 32695(U), holding that a corporate officer could be held liable for a business tort only to the extent of the officer’s personal participation in, and knowledge of, the tort, explaining:

The Itria Defendants argue that Provident fails to state a counterclaim for conversion against Biz2Credit and Mr. Arora because there are no allegations that either party was specifically involved, in their individual capacity, with the inventory financing or accepted payments from Lotus Exim. The Itria Defendants assert that in New York, an officer or director is only liable when acting for personal, rather than corporate interests. In opposition, Provident argues that the position taken by the Itria Defendants contradicts established law, citing to the proposition that a corporate officer who commits a tort may be held individually liable, regardless of whether the officer acted on behalf of the corporation in the course of official duties and regardless of whether the corporate veil is pierced. In Rajeev, the Second Department upheld a jury’s verdict imposing personal liability against a corporate officer because, there, the evidence indicated that she was responsible for the determination to withhold the subject records from the plaintiff. The cases cited by the parties are not actually contradictory because both Hoag and Rajeev recognize that that there must be some element of personal responsibility by a corporate officer before liability may be imposed. This is consistent with the New York Court of Appeals’ decision in Hinkle Iron Co. v Kohn, where the Court held that a corporate officer must personally participate in the act of conversion and have knowledge of such an act before any liability may attach. Thus, as an initial matter, Mr. Arora and Biz2Credit may be liable for conversion if Provident can establish that they personally participated in the conversion. However, this issue is academic because Provident fails to allege the requisite elements of conversion.

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

As this decision shows, only if a corporate officer participates in the conversion may the officer be held liable for conversion. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding one person depriving another of her property, whether that property is tangible or intangible, or even involves a discrete fund of money.

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Posted: September 24, 2019

Additional Notices of Claim Related Back to Original Summons With Notice

On September 17, 2019, the First Department issued a decision in HSBC Bank USA v. Merrill Lynch Mtge. Lending, Inc., 2019 NY Slip Op. 06567, holding in an RMBS put-back action that additional notices of claim related back to the date the action was brought, explaining:

Contrary to the court’s conclusion, claims involving the loans referred to in the untimely breach notices relate back to the claims asserted in the summons with notice. Plaintiff sent two timely notices; the loans referred to in the other notices arose from the same transactions.

(Internal citations omitted).

Schlam Stone & Dolan represents investors in RMBS actions against underwriters and trustees and in related proceedings, such as trust instruction proceedings where an RMBS trustee seeks court guidance regarding the management of an RMBS trust. If you or a client are RMBS investors and have questions regarding potential claims against a trustee or how to influence the trustee’s prosecution of a put back action like the one at issue here, contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com.

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Posted: September 23, 2019

First Department Recognizes Narrow Exception to Rule that Privilege Rules Applied to Evidence Are Those of Forum in Which Evidence Will Be Used

On September 17, 2019, the First Department issued a decision in Ambac Assur. Corp. v. Nomura Credit & Capital, Inc., 2019 NY Slip Op. 06574, recognizing a narrow exception to the rule that the law regarding the attorney-client privilege applied to evidence is that of the forum in which the evidence will be used, explaining:

New York courts routinely apply the law of the place where the evidence in question will be introduced at trial or the location of the discovery proceeding when deciding privilege issues. However, there are circumstances in which an interest-balancing analysis is properly undertaken to decide whether another state’s law should govern the evidentiary privilege. This is a case that presents such circumstances.

Moreover, as in Bay Area Toll Auth., in this case, the balance of interests favors the application of the statutory privilege. Contrary to defendant’s argument, Supreme Court correctly found that, in these circumstances, New York’s interest in the full disclosure of information needed to allow a defendant to mount a defense in court is outweighed by Wisconsin’s interest, embodied in Wisconsin Statutes § 601.465, in its regulation of insurance. The communications at issue, while relevant to the underlying litigation to the extent they relate to the securitization trusts, certificates and insurances policies, were generated as part of OCI’s investigation, regulation, and rehabilitation of Ambac.

Contrary to defendant’s contentions, this Court’s decision in Matter of People v PriceWaterhouseCoopers, LLP (150 AD3d 578 [1st Dept 2017], lv denied 29 NY3d 1117 [2017]) should not be read as rejecting any requirement of an interest-balancing analysis in deciding which state’s law governs privilege issues where New York is the place of trial and the discovery proceeding. Further, it is distinguishable from the instant case in that it involved the interests of the New York State Attorney General but not those of a governmental agency of a different state, and thus did not implicate real issues of interstate comity.

(Internal quotations and citations omitted).

An issue that arises in almost all complex commercial litigation is identifying evidence that should be withheld from production in evidence because it is subject to the attorney-client or other privilege. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the attorney-client, common interest, work product or other privileges or exemptions from production of evidence.

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Posted: September 22, 2019

Senior Lender Did Not Have Special Duty to Subordinated Junior Lender

On September 9, 2019, Justice Emerson of the Suffolk County Commercial Division issued a decision in Saltini v. North Sea Dev. LLC, 2019 NY Slip Op. 51456(U), holding that a senior lender did not have a special duty to a subordinated lender, explaining:

In support of the ninth cause of action for breach of fiduciary duty, the plaintiff contends that, relying on promises by the Lender, he gave up a position of security and control over the project to become a mezzanine lender with no vote and no control whatsoever. The plaintiff contends that his reliance required the Lender to do whatever he would have done to supervise and manage the project so that the homes were completed properly, in a workmanlike manner, within budget, and on time. The plaintiff contends that both he and the Lender knew that, absent the Lender’s performance of these duties, there would not be sufficient funds from the sale of the homes to pay both the Lender and himself. The plaintiff contends that this created a fiduciary duty, which the Lender breached.

A contractual subordination agreement is simply a contractual arrangement whereby one creditor agrees to subordinate its claim against a debtor in favor of the claim of another. Under New York law, when a contractual subordination agreement is unambiguous, the parties’ rights are governed exclusively by that agreement and the words of that agreement are given their plain, ordinary, and usual meaning. The Intercreditor Agreement, which is the only contractual agreement between the plaintiff and the Lender, provides, “Mezzanine Lender agrees that Senior Lender owes no fiduciary duty to Mezzanine Lender in connection with the administration of the Senior Loan and the Senior Loan Documents and Mezzanine Lender agrees not to assert any such claim.” Acceptance of the plaintiff’s version of the transaction would require the improper consideration of parol evidence, contradicting the clear terms of the Intercreditor Agreement, which contains a merger clause, precluding any extrinsic proof to add or vary its terms.

In any event, it is well settled that parties engaged in an arms’ length business transaction are not fiduciaries, especially when, as here, they are sophisticated business people who were represented by counsel. Moreover, the plaintiff’s version of the transaction imputes to the Lender duties to supervise and manage the project that are not found in the record. The documentary evidence establishes that the Lender’s obligation was merely to provide financing. Other defendants, specifically North Sea and the Coast defendants, were responsible for construction of the homes.

Affording the complaint a liberal construction, accepting the facts alleged therein as true, and granting the plaintiff the benefit of every possible favorable inference, the complaint fails to allege special circumstances that could have transformed the business relationship between the plaintiff and the Lender into a fiduciary relationship, such as control by one party of the other for the good of the other or creation of an agency relationship. The plaintiff, an experienced architect, was not under the control of the Lender. That he was under financial pressure and had to give up certain things in order to obtain financing for the project does not create a fiduciary relationship. Accordingly, the ninth cause of action is dismissed.

The plaintiff contends that the Lender breached the duty of good faith and fair dealing implicit in all contracts. The plaintiff contends that the Lender furthered its own economic interest by making modifications to the Senior Loan, such as increasing the release price, thereby making it impossible for him to be repaid from the sale of the homes.

Courts have generally been reluctant to find a breach of the implied covenant of good faith when doing so reads so much into the contract that it creates a new term or when alleged misconduct is expressly allowed by the contract. The Intercreditor Agreement clearly provides that the Mezzanine Loan is subordinate to the Senior Loan and all of the terms, covenants, conditions, rights and remedies contained in the Senior Loan Documents, and no amendments or modifications to the Senior Loan Documents or waivers of any provisions thereof shall affect the subordination thereof. The court cannot employ the covenant of good faith and fair dealing to impose on the parties obligations that are inconsistent with the express terms of the Intercreditor Agreement. Unless a subordinated creditor can show some inequitable conduct which harmed the junior creditor, such as a subsequent fraudulent transfer or preference, the subordination agreement will be enforced, even if the senior creditor uses its bargaining position to improve the status of its existing claims.

Affording the complaint a liberal construction, accepting the facts alleged therein as true, and granting the plaintiff the benefit of every possible favorable inference, the plaintiff has failed to show that the Lender engaged in inequitable conduct that harmed him. The modifications to the Senior Loan were made after the Property LLCs defaulted to provide the Lender with additional security. While the Lender initially increased the release price to $6,000,000, it subsequently reduced it to $5,000,000. Moreover, the properties have not been sold yet, and two of the three are currently listed for sale at prices well above the reserve amount. The plaintiff’s contention that the Lender’s actions have made it impossible for him to be repaid are entirely speculative.Accordingly, the court finds that the plaintiff has failed to state a cause of action for breach of the covenant of good faith and fair dealing.

(Internal quotations and citations omitted).

Litigating contract disputes is a large part of our practice. Even parties that have no relationship to New York often choose to have their contracts interpreted under New York law because–with a few exceptions–an unambiguous contract between sophisticated business people will be enforced based solely on the terms of the contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a contract dispute.

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Posted: September 21, 2019

Court Erred in Vacating Default When There Was No Reasonable Excuse for the Default

On September 11, 2019, the Second Department issued a decision in EMC Mtge. Corp. v. Walker, 2019 NY Slip Op. 06474, holding that it was error to vacate a default when there was no reasonable excuse for the default, explaining:

In order to vacate a default in appearing at a scheduled court conference, a plaintiff must demonstrate both a reasonable excuse for the default and a potentially meritorious cause of action. A determination of whether an excuse is reasonable lies within the sound discretion of the court.

Here, when the plaintiff moved, in effect, to vacate the May 2013 order and to restore the action to the calendar, it failed to proffer a reasonable excuse for its default in appearing at the scheduled court conference, and merely alleged that there was no missed appearance, and as such 22 NYCRR 202.27 does not apply. Moreover, the plaintiff failed to articulate any basis for the more than 2½-year delay in moving to vacate the order of dismissal. In light of the lack of a reasonable excuse, it is unnecessary to determine whether the plaintiff demonstrated the existence of a potentially meritorious cause of action. Thus, we disagree with the Supreme Court’s decision to hold a traverse hearing on June 22, 2016, and its subsequent determination granting the plaintiff’s motion, in effect, pursuant to CPLR 5015(a)(1) to vacate the May 2013 order and to restore the action to the calendar, and that branch of the plaintiff’s separate motion which was to extend the time to serve Walker in the interest of justice.

(Internal quotations and citations omitted).

If you are served with a complaint (or counterclaims, as happened in this case) and fail timely to answer, the court can enter judgment against you: a default judgment. A plaintiff also can be found to have defaulted by failing to prosecute an action. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether you have been properly served or if a default judgment has been entered against you.

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Posted: September 20, 2019

Shareholder Agreement Provision Requiring Shareholders and Corporation to Agree on Shareholder’s Compensation Unenforceably Vague

On September 11, 2019, the Second Department issued a decision in Osborne v. Williamson Law Book Co., 2019 NY Slip Op. 06503, holding that a shareholder agreement provision requiring shareholders and the corporation to agree on the shareholder’s compensation for working for the corporation was unenforceably vague, explaining:

A contract is to be construed in accordance with the parties’ intent, which is generally discerned from the four corners of the document itself. Consequently, a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.

Here, the defendants demonstrated their prima facie entitlement to judgment as a matter of law dismissing the causes of action alleging breach of contract and tortious interference with contract, and the plaintiff failed to raise a triable issue of fact in opposition. Contrary to the plaintiff’s contention, the agreement cannot reasonably be interpreted as prohibiting reduction of his salary, or augmentation of Chwiecko’s salary, without the plaintiff’s consent. Regardless of what the parties’ practices may have been, there are simply no words to that effect contained in the agreement. To the extent that the plaintiff asserts that his consent was required because the agreement provided that the shareholders and the corporation would agree to each shareholder’s compensation, such an indefinite provision, absent some specified methodology for reaching an agreement, is not enforceable.

(Internal quotations and citations omitted).

Part of the reason parties to commercial contracts choose to have those contracts governed by New York law is that New York courts typically enforce contracts as written. However, this decision shows that where a contract term is vague, a court might not enforce it. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the interpretation of a contract under New York law.

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