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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: January 30, 2019

Court Imposes Constructive Trust Over Proceeds of Fraud

On January 10, 2019, Justice Ash of the Kings County Commercial Division issued a decision in Kliban v. Vishnev, 2019 NY Slip Op. 30150(U), imposing a constructive trust over the proceeds of a fraud, explaining:

With regards to Plaintiffs claim for a constructive trust against Susanna, Atlantic Ocean, Kogan, and AGVD for the monies paid to them through VIP, the Court finds that Plaintiff has satisfied the elements to impose a constructive trust. The ultimate purpose of a constructive trust is to prevent unjust enrichment and, thus, a constructive trust may be imposed when property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest. The elements of a cause of action to impose a constructive trust are (1) the existence of a confidential or fiduciary relationship, (2) a promise, (3) a transfer in reliance thereon, and (4) unjust enrichment. However, these factors serve only as a guideline and should be applied flexibly. Thus, courts can and will impose constructive trusts whenever necessary to satisfy the demands of justice.

Here, Plaintiff established that, due to the misrepresentations by Vishnev and Shapiro, Plaintiff was induced to make checks directly payable to Atlantic Ocean in the amount of $41,500.00. Further, the evidence indicates that Atlantic Ocean received payments from VIP, during the relevant time period, totaling $145,830.00 and from New VIP totaling $11,000.00 despite Atlantic Ocean having no relation to VIP or New VIP’s business. Similarly, Plaintiff established that due to the misrepresentations by Vishnev and Shapiro, Plaintiff was induced to make checks directly payable to AGVD in the amount of $60,000.00. Further, the evidence indicates that AGVD received payments from VIP in the amount of $1,500.00 and from New VIP in the amount of $5,700.00 despite AGVD having no relation to VIP or New VIP’s business. Based on the foregoing, a constructive trust is imposed on the amount paid to Atlantic Ocean and Susanna in the amount of $69,729.40 plus interest thereon from the date of the last payment, October 16, 2012. And a constructive trust is imposed on the amount paid to AGVD and Kogan in the amount of $61,296.00 plus interest thereon from the date of the last payment, May 27, 2011.

(Internal citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements and rules, including the damages that are available. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.

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Posted: January 29, 2019

Party That Benefited from Agreement With Arbitration Provision Bound by That Provision

On January 18, 2019, Justice Schecter of the New York County Commercial Division issued a decision in Petrides & Co. LLC v. Yorktown Partners LLC, 2019 NY Slip Op. 30157(U), holding that a party that benefits from a contract iwth an arbitration provision was bound by that provision even though he did not sign the contract, explaining:

Under both the FAA and New York law, ordinarily, only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. There are, however, various exceptions to this rule. Only one exception applies here: the direct benefits theory of estoppel. Under this doctrine, a nonsignatory may be compelled to arbitrate where the nonsignatory knowingly exploits the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement. Where the benefits are merely indirect, a nonsignatory cannot be compelled to arbitrate a claim. A benefit is indirect where the nonsignatory exploits the contractual relation of the parties, but not the agreement itself.

. . .

On this record, Petrides demonstrated that Yorktown knowingly exploited the benefits of the Agreement, which contained the arbitration provision, and that it received the benefits of Petrides’ work under the Agreement. Petrides showed that benefits intentionally inured to Yorktown directly from Petrides’ performance under the Agreement and were not merely the byproduct of the relationship between Petrides and Yorktown. To be sure, while the Agreement indicates that Petrides and Yorktown had a broader business relationship, the undisputed facts show that the work perfonned by Petrides in connection with the Demick Dispute specifically benefited Yorktown and was done, as contemplated by paragraph 4(B)(l), specifically under the auspices of the Agreement. The court, therefore, finds that Yorktown received a direct benefit from the Agreement and, consequently, is subject to its arbitration clause.

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

Commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.

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Posted: January 27, 2019

Transcripts and Videos of Arguments in the Court of Appeals for January 2019 Now Available

On December 28, 2018, we noted a case of interest from the oral arguments before the Court of Appeals in January 2019:

  • Arrowhead Capital Finance, Ltd. v. Cheyne Specialty Finance Fund L.P. et al., APL-2018-00005 (argued Wednesday, January 9, 2019) (“Attorney and Client–Unauthorized Practice of Law–Whether failure of plaintiff’s counsel to maintain an in-state office at the time action was commenced, in violation of Judiciary Law § 470, renders the action a nullity and requires dismissal of the action without prejudice.”) See the transcript and the video.
  • U.S. National Bank Assoc. v DLJ Mortgage Capital, APL-2017-00115 (argued Wednesday, January 9, 2019) (“Limitation of Actions–Commencement of action after termination of prior action–Where complaint was dismissed because plaintiff failed to satisfy a condition precedent and plaintiff lacked standing to sue, whether CPLR 205(a) applies to allow trustee, which was substituted as plaintiff, to commence a new action; whether trustee may rely on relation-back doctrine of CPLR 203(f).”) See the transcript and the video.
  • U.S. National Bank Assoc. v DLJ Mortgage Capital, APL-2017-00116 (argued Wednesday, January 9, 2019) (“Contracts–Conditions Precedent–Where plaintiff trustee failed to comply with a contractual condition precedent to bringing suit, whether the timely claims were properly dismissed without prejudice to refiling pursuant to CPLR 205(a); limitation of action–commencement of action after termination of prior action.”) See the transcript and the video.
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    Posted: January 26, 2019

    Party Waived Right to Arbitrate By Suing Rather Than Moving to Compel Arbitration

    On January 11, 2019, Justice Schecter of the New York County Commercial Division issued a decision in OCS Dev. Group, LLC v. Midtown Four Stones LLC, 2019 NY Slip Op. 30129(U), holding that the right to arbitrate was waived by beginning a lawsuit rather than moving to compel arbitration, explaining: At the outset, there is no contractual basis for arbitration of the parties’ disputes. Even if there were, OCS waived the right to arbitrate by commencing this action and not seeking to compel arbitration. (Internal citations omitted).

    Commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.

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    Posted: January 25, 2019

    Disrespectful and Disproportionate Treatment of Female Shareholder Oppression Justifying Dissolution Under BCL

    On January 9, 2019, Justice Nowak of the Erie County Commercial Division issued a decision in Matter of Straka v. Arcara Zucarelli Lenda & Assoc. CPAs P.C., 2019 NY Slip Op. 29017, holding that disrespectful and disproportionate treatment of a female shareholder was oppression sufficient to justify a corporation’s dissolution, explaining:

    A minority shareholder may petition the Court for dissolution of the corporation in which he or she owns at least 20% of the outstanding shares, and where the majority shareholders have engaged in illegal, fraudulent, or oppressive actions towards the petitioning shareholder. The term “oppressive” has not been statutorily defined, but disappointment alone should not necessarily be equated with oppression. Instead, the Court of Appeals has held that oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture. A court considering a petition alleging oppressive conduct must investigate what the majority shareholders knew, or should have known, to be the petitioner’s expectations in entering the particular enterprise.

    This court finds that Arcara, Zucarelli and Lenda, and indeed, any shareholder of any corporation, should know that a female shareholder reasonably expects to be treated with equal dignity and respect as male shareholders forming the majority. Straka has demonstrated that she was not. The shareholders’ slow and inadequate response to Urbanek’s demeaning behavior marginalized Straka, as did the lack of respect provided to her as the head of IT at the corporation. Furthermore, Zucarelli and Lenda promised but failed to foster collaboration by the former staff members of Brody Weiss.

    This court also finds that Straka’s reasonable expectation for fair compensation was frustrated by the use of the earnings matrix, particularly by allocating expenses of Weiss and Urbanek to all four shareholders while allocating their revenues only to Zucarelli and Lenda. Also, Straka demonstrated that the earnings matrix was used to allocate corporate profits as salaries to the remaining shareholders as opposed to dividends. When the majority shareholders of a close corporation award de facto dividends to all shareholders except a class of minority shareholders, such a policy may constitute oppressive actions and serve as a basis for an order made pursuant to section 1104-a of the Business Corporation Law dissolving the corporation.

    Finally, the action taken to add Paul Eusanio as a shareholder in January 2017, without notice to Straka, constituted oppressive conduct by adversely affecting Straka’s share in the corporation without her knowledge or consent. The corporation had initially alleged that Eusanio was made a shareholder at the March 7, 2017 shareholders meeting that Straka failed to attend. The testimony at the hearing contradicted that claim, but even if true, the February 22, 2017 notice provided to Straka was sufficient only to elect Eusanio as a director, not to add him as a shareholder and dilute Straka’s interest in the corporation. Dilution of a minority shareholder’s interest is permissible only when the shareholder is given an opportunity to supply capital and thereby maintain her percentage interest in the corporation. Any special action taken at a shareholders meeting, such as the issuance of shares or possible dilution of another shareholder’s percentage of ownership in the corporation, that is not expressly stated in a notice to all shareholders, is null and void.

    The Court of Appeals has held:

    once oppressive conduct is found, consideration must be given to the totality of circumstances surrounding the current state of corporate affairs and relations to determine whether some remedy short of or other than dissolution constitutes a feasible means of satisfying both the petitioner’s expectations and the rights and interests of any other substantial group of shareholders.

    A court has broad latitude in fashioning alternative relief. Considering the size and nature of the business of the corporation, the court finds that a buyout of Straka’s shares would satisfy her expectations and the rights of the remaining shareholders.

    (Internal quotations and citations omitted).

    Posted: January 24, 2019

    Undertaking Related to Injunction Released Because There Was No Finding That Plaintiff Was Not Entitled to Injunction

    On January 16, 2019, the Second Department issued a decision in Candlewood Holdings, Inc. v. Valle, 2019 NY Slip Op. 00255, holding that an undertaking related to an injunction should have been released because there was no finding that the plaintiff was not entitled to the injunction, explaining:

    Before the Supreme Court directed the entry of a judgment declaring that Valle was entitled to the condemnation award, the court granted the plaintiffs a preliminary injunction restraining the defendant law firm Goldstein, Rikon & Rikon, P.C., from paying the proceeds of the condemnation award to the defendants, conditioned on the plaintiffs posting an undertaking in the sum of $250,000. At issue on this appeal is the denial of the defendants’ motion to recover damages resulting from the issuance of the preliminary injunction, and the grant of the plaintiffs’ cross motion for the release of the undertaking. We affirm.

    Pursuant to CPLR 6312[b], prior to the granting of a preliminary injunction, the plaintiff shall give an undertaking in an amount to be fixed by the court, that the plaintiff, if it is finally determined that he or she was not entitled to an injunction, will pay to the defendant all damages and costs which may be sustained by reason of the injunction. A defendant can only recover damages resulting from the issuance of a preliminary injunction if there has been a final determination, whether explicit or implicit, that the plaintiff was not entitled to the preliminary injunction. There has not been a final determination that the plaintiffs in this case were not entitled to the preliminary injunction. Rather, the Supreme Court directed the entry of a declaratory judgment in favor of Valle and the dismissal of the remainder of the complaint based on the court’s refusal to intercede to resolve a dispute between two wrongdoers. Accordingly, we agree with the court’s determination denying the defendants’ motion and granting the plaintiffs’ cross motion.

    (Internal citations omitted).

    It is common in commercial litigation that parties seek equitable relief such as injunctions, attachments or the appointment of a temporary receiver in order to preserve assets or maintain the status quo when money damages will not make them whole at the end of a litigation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding seeking–or opposing–such relief.

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    Posted: January 23, 2019

    New York Choice of Law Provision Enforceable Even Though Contract Not Connected to New York

    On January 9, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in ABB, Inc. v. Havtech, LLC, 2019 NY Slip Op. 30095(U), enforcing a New York choice of law provision even though the contract had no connection to New York, explaining:

    Havtech argues that the Agreement’s New York choice of law provision should not be enforced because the Agreement has no reasonable relationship to New York. However, pursuant to N.Y. General Obligations Law § 5-1401(1),

    The parties to any contract, agreement or undertaking, contingent or otherwise, in consideration of, or relating to any obligation arising out of a transaction covering in the aggregate not less than two hundred fifty thousand dollars … may agree that the law of this state shall govern their rights and duties in whole or in part, whether or not such contract, agreement or undertaking bears a reasonable relation to this state.

    Havtech alleges that it sells approximately three million dollars’ worth of Products yearly and is seeking millions of dollars per year in gross profit on sales of Products in damages, which Havtech was able to purchase and distribute pursuant to the Agreement. Therefore, the Agreement satisfies the requirements of General Obligations Law § 5-1401(1) and is not required to have a reasonable relation to New York for the choice of law provision to be enforceable.

    Although Havtech argues that the choice of law provision should be voided on public policy grounds, Havtech makes no showing that the application of New York law would violate any important public policy. The parties’ choice of New York law should be enforced, unless the public policy of another jurisdiction has an overriding concern so strong that it trumps New York’s strong public policy in maintaining and fostering its undisputed status as the preeminent commercial and financial nerve center of the world.

    That the Agreement may implicate Maryland’s Dealer Act is not sufficient grounds to override the parties’ choice of law provision here. The fact that a statute is a policy choice is not evidence of an interest materially greater than New York’s.

    When parties include a choice-of-law provision in a contract, they intend that the law of the chosen state-and no other state-will be applied. Consistent with the unambiguous terms of the Agreement, New York substantive law applies to the Agreement and Havtech may not assert the Maryland Counterclaims pursuant to the Dealer Act.

    (Internal quotations and citations omitted).

    The parties to commercial contracts often chose both the forum in which any dispute over the contract will heard and the law governing the interpretation of the contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding which law governs on contract and in which forum a dispute over the contract may be heard.

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    Posted: January 22, 2019

    Shareholder Fails to Meet Standard for Corporate Dissolution

    On January 10, 2019, Justice Friedman of the New York County Commercial Division issued a decision in Matter of Quazzo v. 9 Charlton St. Corp., 2019 NY Slip Op. 30098(U), holding that a shareholder had failed to meet the standard for corporate dissolution on summary judgment, explaining:

    Business Corporation Law § 1104-a (a) provides in pertinent part:

    The holders of shares representing twenty percent or more of the votes of all outstanding shares of a corporation … entitled to vote in an election of directors may present a petition of dissolution on one or more of the following grounds: (1) The directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders; (2) The property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation.

    Cristina fails on this record to demonstrate oppression as a matter of law. Oppressive actions have been defined to refer to conduct that substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the particular enterprise. A court considering a petition alleging oppressive conduct must investigate what the majority shareholders knew, or should have known, to be the petitioner’s expectations in entering the partcular enterprise. There is authority that where a party has contributed capital or services to a corporation, oppression may be based on the very denial of a party’s shareholder status. Here, in contrast, it is undisputed that Cristina did not commit capital to Charlton (or the other corporations), and did not have an active role in Charlton (or the other corporations). Cristina does not submit legal authority, and the court does not find, that under these circumstances, Ugo’s denial of her status as a shareholder of Charlton rises to the level of oppression warranting dissolution of the corporation.

    Nor does Cristina otherwise establish oppression on this record. As to her claim that she has been denied access to books and records of Charlton, it is undisputed that she did not demand such access until November 2010, after she requested a distribution from a family trust account and she rejected Ugo’s demand that she sign a general release as a condition of the distribution.

    Cristina also fails to demonstrate oppression based on denial to her of distributions for Charlton, It is undisputed that Stephen and Marco each received a distribution from Charlton for 2010 of approximately $6,800. There is no evidence, however, that any other distributions—let alone, substantial distributions—were made over the many years in which Cristina claims she has had an ownership interest in Charlton.

    To the extent that Cristina bases her oppression claim on forgery of her signature on corporate documents, she relies on the affidavit of Khody Detwiler, a forensic document examiner, opining that Cristina’s signature was forged on four corporate documents in 2003. Ugo and Stephen both deny any knowledge of: or involvement in, the alleged forgeries. Although their denials are conclusory, assessment of the expert’s opinion requires a credibility determination, which is not properly made on a motion for summary judgment.

    Finally, Cristina’s claim of financial mismanagement is based on the affidavit of James Donohue, Cristina’s forensic accountant, opining that rents have not been paid into the corporation’s accounts, funds have been transferred to third-party accounts (of Walter Gabutti and Fiorella Carli), and taxes have not been paid. Ugo opposes this claim, stating in conclusory fashion: “Insofar as I am concerned, nothing inappropriate has taken place.” Stephen denies ever having had any involvement in the management of Charlton or the other corporations, and states that Ugo alone managed the corporations. He further claims that, after he learned of Cristina’s allegations in these lawsuits, he urged his father to hire an independent third-party property management firm. Citing Cristina’s allegations of mismanagement, Stephen asserts that the only evidence of asset misuse, if any, points to Ugo. Neither Ugo nor Stephen submits evidence responding to the claims of Cristina’s forensic accountant. Nevertheless, Mr. Donohue forthrightly acknowledges that certain records regarding rents and deposits were unavailable to him, and that he made estimates or relied on evidence not in the record, in calculating the discrepancy between rents and tax returns and between loans to the corporations from third parties and transfers from the corporate accounts to third party accounts. The court accordingly holds that Mr. Donohue’s opinion cannot be adequately assessed on this record and that a triable issued of fact exists as to the alleged mismanagement.

    (Internal quotations and citations omitted).

    This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.

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    Posted: January 21, 2019

    Even Though Contract Gave the Defendant Discretion to Calculate Losses on Sale, it Was Required to Exercise That Discretion Reasonably

    On January 17, 2019, the First Department issued a decision in Lehman Bros. Intl. (Europe)(in administration) v. AG Fin. Prods., Inc., 2019 NY Slip Op. 00364, holding that even though a contract gave the defendant the discretion to take certain acts, it had to exercise that discretion reasonably, explaining:

    Despite the discretion afforded to defendant under the parties’ agreements to calculate its loss after the agreements had been terminated, plaintiff raised an issue of fact as to whether defendant’s loss calculation was reasonable and in good faith as required by the agreements. The court properly considered plaintiff’s evidence, including expert reports, in support of its claim that defendant’s calculations were not reasonable under the circumstances.

    (Citations omitted).

    The implied covenant of good faith and fair dealing is an important, if often misunderstood, part of New York law. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where a party is being deprived of the benefits of its contract, even if you cannot point to a specific contract term that is being breached.

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    Posted: January 20, 2019

    Appeal of Preliminary Injunction Moot Because Act Sought to be Enjoined Already Occurred

    On January 17, 2019, the First Department issued a decision in AmBase Corp. v. Spruce Capital Partners LLC, 2019 NY Slip Op. 00352, holding that the appeal of the denial of a preliminary injunctyion was moot because the act sought to be enjoined already had occurred, explaining:

    Insofar as plaintiffs seek a preliminary injunction, that remedy is a legal impossibility, and the appeal is moot. The strict foreclosure that plaintiffs sought to enjoin occurred more than a year ago, in late August or early September 2017, and we denied plaintiffs’ motion for a stay, pending this appeal, of so much of the order as dissolved the TRO that had been granted.

    Plaintiffs’ request for a declaratory judgment is not moot, because plaintiff 111 West 57th Investment LLC (Investment) might be entitled to damages from defendant 111 W57 Mezz Investor LLC (Junior Mezz Lender) if it is judicially determined that Investment had the right to object to the strict foreclosure pursuant to Uniform Commercial Code (UCC) § 9-620(a)(2)(B). However, the complaint, as currently pleaded, mentions neither damages nor a constructive trust. Similarly, the complaint does not allege that the Spruce defendants acted in bad faith because they colluded with other defendants who are not party to this appeal or that Investment was entitled to object to the strict foreclosure under UCC 9-621(a)(1).

    (Internal quotations and citations omitted).

    It is common in commercial litigation that parties seek equitable relief such as injunctions, attachments or the appointment of a temporary receiver in order to preserve assets or maintain the status quo when money damages will not make them whole at the end of a litigation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding seeking–or opposing–such relief.

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