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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: November 23, 2019

Derivative Claims Allowed to go Forward; Demand Futility was Properly Alleged

On November 13, 2019, the Second Department issued a decision in Guzman v. Kordonsky, 2019 NY Slip Op. 08176, allowing derivative claims to go forward based on adequate allegations of demand futility, explaining:

[W]e agree with the Supreme Court’s denial of the Board members’ motion pursuant to CPLR 3211(a) and Business Corporation Law § 626(c) to dismiss the amended complaint insofar as asserted against them. In a shareholders’ derivative action a complaint must set forth with particularity the plaintiff’s efforts to secure the initiation of such action by the board of directors or the reasons for not making such effort. Demand is futile, and excused, when the directors are incapable of making an impartial decision as to whether to bring suit. Here, the amended complaint alleged with sufficient particularity that each Board member either had an interest in the challenged transactions or was controlled by a self-interested director.

(Internal quotations and citations omitted).

This decision illustrates one of the special pleading requirements for derivative actions (where a shareholder brings an action on behalf of a corporation). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.

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Posted: November 22, 2019

Court Should Have Granted Source Code Attorneys’ Eyes Only Protection

On November 12, 2019, the First Department issued a decision in BEC Capital, LLC v. Bistrovic, 2019 NY Slip Op. 08144, holding that a court should have granted source code attorneys’ eyes only protection, explaining:

The production of defendants’ source code, which is a trade secret, should have been ordered to be produced for “attorneys and expert eyes only”. Plaintiffs’ assertion that they have the expertise to review and opine on the source code and should not be subjected to retaining an expert, does not support unfettered access to defendants’ confidential algorithm.

(Internal citations omitted).

This decision is about a practice that may not be apparent to clients, but that can arise in litigation involving trade secrets and other highly-sensitive business information. Courts will allow very sensitive evidence to be disclosed only to counsel, and not to their clients, because of the danger of competitors getting each other’s trade secrets. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has a question regarding how to protect sensitive information in discovery.

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Posted: November 21, 2019

Open Repudiation Toll Doctrine Inapplicable to Claim for Money Damages for a Breach of Fiduciary Duty

On November 14, 2019, the First Department issued a decision in Matter of Yin Shin Leung Charitable Found. v. Seng, 2019 NY Slip Op. 08261, holding that the open repudiation toll doctrine was inapplicable to a claim for money damages for a breach of fiduciary duty, explaining:

The breach of fiduciary duty claims are barred by the applicable six-year statute of limitations, since respondents had openly repudiated all the fiduciary duties that petitioners allege they breached by no later than November 16, 2007, and petitioners did not commence this proceeding until December 2013. Moreover, the open repudiation toll doctrine does not apply to the claims asserted for money damages.

(Internal citations omitted).

It is not unusual for the statute of limitations to be an issue in complex commercial litigation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether a claim is barred by the statute of limitations.

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Posted: November 20, 2019

Contract Term Allowing Defendant to Act in its Reasonable Judgment Required Defendant to Have a Reasonable Basis for its Actions

On November 8, 2019, the Fourth Department issued a decision in Scheer v Elam Sand & Gravel Corp., 2019 NY Slip Op. 08037, holding that a contract term allowing a defendant to act in its reasonable judgment required the defendant to have a reasonable basis for its actions, explaining:

Plaintiff leased land to defendant, a mining company, for a term of 20 years, subject to defendant’s right to terminate the lease on six months’ written notice “should [it] determine that there are insufficient recoverable [m]inerals from the [p]remises to permit [it] to make a profit.” The lease also contained a provision allowing the prevailing party in any dispute to recover costs and attorney’s fees. Defendant terminated the lease approximately 16 months after it was executed, claiming that there were insufficient recoverable minerals for it to make a profit. Plaintiff requested documentation supporting defendant’s profitability determination. In response, defendant sent plaintiff a “resource evaluation” and the opinion of an accountant, both dated after defendant’s termination notice. Plaintiff thereafter commenced this action asserting a single cause of action based on a breach of the implied covenant of good faith and fair dealing. Plaintiff alleged that the minerals were sufficient for defendant to make a profit, that defendant made its decision to terminate the lease before obtaining an expert analysis, and that defendant’s experts ignored the presence of recoverable minerals on the premises.

Although a party has an absolute right to terminate a contract pursuant to an unconditional termination clause, the termination clause here was conditional inasmuch as defendant had the discretion to terminate the lease only if it made a determination prior to termination that there were insufficient minerals for it to make a profit. Because the lease contemplated an exercise of discretion, the implied covenant of good faith and fair dealing included a promise to exercise that discretion in good faith, not arbitrarily. The documentary evidence submitted by defendant did not conclusively establish that it acted in good faith when it terminated the lease.

We are mindful that the implied covenant of good faith and fair dealing is not without limits, and no obligation can be implied that would be inconsistent with other terms of the contractual relationship. Contrary to the court’s conclusion, however, defendant’s obligation to make a good faith profitability determination before terminating the lease is entirely consistent with the express language of the lease. The court accurately stated and defendant correctly asserts that the lease neither requires defendant to justify its profitability determination nor gives plaintiff the right to assess that determination and veto it. Nevertheless, the contract does require that defendant make a profitability determination in the first instance, which is consistent with an implied requirement that defendant make that determination in good faith.

(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. This decision shows that when a contract gives a party the right to act in its reasonable discretion, a court will enforce the requirement for reasonableness. 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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Posted in Commercial, Contracts
Posted: November 19, 2019

Moving to Dismiss for Failure to Serve Complaint Does Not Waive Right Later to Move to Dismiss for Lack of Jurisdiction

On October 30, 2019, Justice Masley of the New York County Commercial Division issued a decision in Satterfield v. Vstock Transfer, LLC, 2019 NY Slip Op. 33279(U), holding that moving to dismiss for failure to serve a complaint did not waive the right later to move to dismiss for lack of jurisdiction, explaining:

Preliminarily, Capital LLC did not waive its right to assert lack of personal jurisdiction as a defense. CPLR 320 (b) provides that an appearance of the defendant is equivalent to personal service of the summons upon him, unless an objection to jurisdiction is asserted by motion or in the answer as provided in rule 3211. Accordingly, a defendant waives lack of personal jurisdiction as a defense by failing to assert it in the answer or on a motion to dismiss. Once Satterfield filed the complaint in this action, Capital LLC moved to dismiss for lack of personal jurisdiction, and therefore did not waive the defense. Although Satterfield argues that Capital LLC waived the defense by demanding a complaint and moving to dismiss for failure to file a complaint, a demand or such motion does not of itself constitute an appearance in the action. Capital LLC has raised jurisdiction as a defense from the inception of this litigation, and consistently maintained that position in subsequent motion practice. Satterfield’s remaining arguments do not yield an alternative result, and therefore, the court will consider whether a basis for personal jurisdiction exists with respect to Capital LLC and the other moving defendants.

(Internal quotations and citations omitted).

This decision illustrates an issue that often arises in commercial litigation in New York. Whether the defendant is located on the other side of the world or across the Hudson in New Jersey, a New York court cannot assert jurisdiction over the defendant (that is, hear a case against it) unless there is a proper connection between the defendant and New York. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether there is jurisdiction over you, or over a party with which you are having a dispute, in New York.

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Posted: November 18, 2019

Written Contract’s Merger Clause Does Not Bar Parol Evidence Regarding an Alleged Agreement When Alleged Agreement was Collateral to the Written Contract

On October 30, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Hai Yang Liu v. 88 Harborview Realty, LLC, 2019 NY Slip Op. 33280(U), holding that a written contract’s merger clause did not bar parol evidence regarding an alleged agreement when the alleged agreement was collateral to the written contract, explaining:

There can be no dispute that Liu has legal title to five (5) units of 88 Harborview as is evidenced by the membership certificate that bears his name. This fact is not dispositive as the issue to be decided is whether there was an oral side agreement between Liu and Chen reserving beneficial ownership of the units to Chen and, if so, whether Liu is obliged to assign those units to Chen’s estate. The primary evidence of the oral agreement consists of the following: (i) deposition testimony and an affidavit from Cheung Yeung, a founder and managing member of 88 Harborview, that he knew the money for Liu’s shares came from Chen since he managed the company’s finances, that there were four other membership holders who assigned their interests to Chen’s estate once he died, and that plaintiff did not assert ownership over the units until a year after Chen’s death; (ii) deposition testimony from Chen’s wife Qian He that she knew plaintiff did not have the money to purchase the Property in 2002 or the membership stake in 88 Harborview in 2005; and (iii) testimony from the plaintiff regarding a loan to purchase the Property that is contradicted by the affidavit of Chen’s first wife, Chen Sai Zhu Chen.

The parol evidence rule does not bar extrinsic evidence concerning a collateral oral agreement where the written contract is not intended on its face to cover the collateral agreement. Evidence of an oral collateral contract is admissible, even in the face of a merger clause, where: a) the agreement is collateral in form, b) the oral agreement does not contradict the written contract and c) the oral agreement is an agreement that the parties would not ordinarily be expected to embody in the written contract. Cases in which an agreement was found to be wholly independent and collateral are relatively rare. Such may be the case here. First, the alleged agreement is collateral in form as it is an understanding between two individuals unrelated to the affairs of the company. Second, nothing in the alleged oral agreement contradicts the written agreement. Liu is the record owner of the units. However, under the terms of the side agreement, Liu purportedly held them for the benefit of Chen and has an independent obligation to assign the units to Chen’s estate. Indeed, this intention may be reflected on the face of the five certificates issued at the same time in the names of plaintiff Liu and non-parties Lu Tao Chen, Yuan Pan Zheng and Tian Ping Zhang. Each of these certificates contain the legend “Inherit You Liang Cheng.” Notably all of these certificate holders except Liu transferred his interest in 88 Harborview to Chen’s estate. Third, the collateral oral agreement at issue here would not be expected to be embodied in the operating agreement. If the agreement exists, it is between a member and a non-member for the non-member providing to be the member of record for the benefit of another. The existence or non-existence of the alleged collateral agreement cannot be decided on this motion. A trial to determine the facts is required unless the evidence to be considered is excludable as a matter of law.

Plaintiff asserts that any purported oral agreement for Liu to hold title to the Property for Chen’s benefit is barred by the statute of frauds as codified at General Obligations Law § 5-703(3). The statute states:

A Contract to devise real property or establish a trust of real property, or any interest therein or right with reference thereto, is void unless the contract or some note or memorandum thereof is in writing and subscribed by the party to be charged therewith.

This provision does not apply because this case concerns ownership of units in a limited liability company. Those units do not constitute interests in personal, not real property. The parol evidence rule does not apply because the alleged collateral oral agreement is separate from the 88 Harborview operating agreement. Defendants do not claim that the oral agreement alters the terms of the operating agreement in any way. The written contract is not intended on its face to cover the collateral oral agreement.

(Internal quotations and citations omitted).

This decision touches on issues we frequently encounter in commercial litigation: whether and to what extent an oral agreement or oral modification to a written agreement are enforceable. As this decision shows, the answer sometimes is not a simple one. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the enforceability of an oral agreement.

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Posted in Commercial, Contracts
Posted: November 17, 2019

Plaintiff Cannot Save Time-Barred Legal Malpractice Claims by Re-Characterizing Them as Fraud Claims

On November 4, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Wimbledon Financing Master Fund, Ltd. v. Hallac, 2019 NY Slip Op. 33281(U), holding that plaintiffs could not save time-barred legal malpractice claims by recharacterizing them as fraud claims, explaining:

Katten argues that Wimbledon’s causes of action are actually mislabeled attorney malpractice claims and that Wimbledon’s nomenclature is an attempt to avoid the shorter statute of limitations for malpractice claims. In opposition, Wimbledon argues that New York lacks a per se rule that attorneys sued for malpractice cannot also be sued for intentional misconduct; and that the fraud allegations here are not only incidental to another cause of action.

The statute of limitations for claims of legal malpractice is three years. A legal malpractice cause of action accrues when the malpractice is committed, not when the client learns of it.

Notably, the New York legislature amended CPLR 214(6) in 1996 to make clear that where the underlying complaint is one which essentially claims that there was failure to utilize reasonable care or where acts of omission or negligence are alleged or claimed, the statute of limitations shall be three years if the case comes within the purview of CPLR Section 214(6), regardless of whether the theory is based in tort or in a breach of contract. Further, CPLR 214(6) was enacted to prevent plaintiffs from circumventing the three-year statute of limitations for professional malpractice claims by characterizing a defendant’s failure to meet professional standards as something else. To determine whether a claim is duplicative of a malpractice claim, a court must discern the essence of each claim.

Here, the essence of Wimbledon’s claims is that Katten should have disclosed information that it knew and should have given different advice. These are plain allegations of malpractice despite being labeled as claims for aiding and abetting fraud and aiding and abetting breach of fiduciary duty.4 Moreover, permitting these claims to go forward as claims for aiding and abetting fraud and aiding and abetting breach of fiduciary duty is contrary to the legislative intent of CPLR 214(6).

Courts frequently deem claims for fraud and breach of fiduciary duty duplicative of legal malpractice when the former claims are based upon the same facts as the malpractice claim.

In this case, the complaint lacks any facts other than those that support a malpractice claim i.e., facts pertaining to Katten’s failure to make disclosures, alleged bad legal advice and conflicts of interest.

Additionally, Wimbledon’s allegations that Katten engaged in continuing concealment by failing to disclose information about Gerova and Arius Libra to the board amount to allegations that Katten failed to disclose its own malpractice, and do not furnish support for fraud claims.

Katten also argues that Wimbledon’s damages theory is identical to that of a malpractice action, again demonstrating that this is truly a claim for malpractice. Wimbledon counters that even if the damages it seeks are the same as damages for an attorney malpractice claim, this is not determinative of whether Wimbledon’s aiding and abetting claims are duplicative of a malpractice claim.

Wimbledon’s complaint seeks judgment against Katten for forfeiture of fees and disgorgement of any ill-gotten gains. Wimbledon’s demand for the return of attorneys’ fees paid to Katten is fundamentally a claim for money damages. It does not seek separate damages from those stemming from malpractice. Furthermore, Wimbledon’s use of the word disgorgement cannot transmute the claim into one with a longer limitations period because purely semantic distinctions cannot control the application of the statute of limitations. Thus, even if Wimbledon’s claims were not merely mislabeled attorney malpractice claims, the claims would still be dismissible as duplicative.

Considering the foregoing, Wimbledon’s claims against Katten, though pled as fraud, are for attorney malpractice. Accordingly, the applicable statute of limitations period is three years.

(Internal quotations and citation omitted).

We both bring and defend breach of fiduciary duty and professional malpractice claims and other claims relating to the duties of professionals such as lawyers, accountants and architects to their clients. Contact Schlam Stone & Dolan partner Erik Groothuis at egroothuis@schlamstone.com if you or a client have questions regarding such claims or appeals of such claims.

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Posted: November 16, 2019

Aiding and Abetting Fraud Claim Fails for Lack of Evidence of Substantial Assistance

On October 29, 2019, Justice Masley of the New York County Commercial Division issued a decision in Vincent V Hodes Family Irrevocable Trust v. Advance Entertainment LLC, 2019 NY Slip Op. 33233(U), holding that an aiding and abetting fraud claim failed for lack of evidence of substantial assistance in the alleged fraud, explaining:

In order to plead properly a claim for aiding and abetting fraud, the complaint must allege: (1) the existence of an underlying fraud; (2) knowledge of this fraud on the part of the aider and abettor; and (3) substantial assistance by the aider and abettor in achievement of the fraud. Actual knowledge of the fraud may be averred generally.

Substantial assistance exists where (1) a defendant affirmatively assists, helps conceal, or by virtue of failing to act when required to do so enables the fraud to proceed, and (2) the actions of the aider/abettor proximately caused the harm on which the primary liability is predicated. A plaintiff must plead a claim for aiding and abetting fraud with specificity pursuant to CPLR 3016 (b) and is not made out simply by allegations which would be sufficient to state a claim against the principal participants in the fraud. However, actual knowledge need only be pleaded generally, cognizant, particularly at the pre-discovery stage, that a plaintiff lacks access to the very discovery materials which would illuminate a defendant’s state of mind, and an intent to commit fraud is to be divined from surrounding circumstances.

Here, plaintiff asserts, in the affidavit of Vincent V. Hodes, grantor of the plaintiff-trust, that it was informed by counsel that Molner drafted the agreement underlying the fraud allegedly perpetrated by the Meli Defendants, a ticket purchase contract between defendant AE and nonparty Ambassador Theatre Group Ltd. (ATG).

While Mainer’s actual knowledge and substantial assistance may, perhaps, be inferred as to other transactions, the court declines to infer those elements on the basis of plaintiffs conclusory statements, lacking factual detail or other support relating to the fraud underlying this action, that Molner’ drafted the ATG agreement. Hodes’s statements that emails attached to the pleading in another action consolidated with this action for only the purposes of joint discovery and trial are not presently before the court and, in any event, those emails all pertain to other transactions and pre-date the underlying ATG transaction by six months to more than a year. Further, plaintiff makes no nonconclusory assertion that Molner was aware of the ATG transaction or substantially assisted the Meli Defendants in carrying out the ATG fraud., Accordingly, the motion is denied as to the aiding and abetting fraud cause of action without prejudice to a new motion.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. In New York, a defendant also can be held liable for aiding and abetting a fraud, which is what is at issue in this decision. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a fraud-based claim.

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Posted: November 15, 2019

CLE Program: Practicing in NYS Supreme Court (Part 2)

On November 20, 2019, Schlam Stone & Dolan partner John Lundin will co-chair a CLE program at the New York City Bar on Practicing in NYS Supreme Court. This is the second evening of a two-evening presentation. This panelists will be the Honorable Kelly O’Neill Levy of the New York County Supreme Court and Anna Mikhaleva, Esq., the Principal Law Clerk to Honorable Andrew Borrok of the New York County Commercial Division.

Posted in Commercial
Posted: November 15, 2019

Non-Appealing Defendants Entitled to Benefit of Appealing Defendant’s Successful Appeal

On September 6, 2019, Justice Grays of the Queens County Commercial Division issued a decision in Glaubach v. Slifkin, 2019 NY Slip Op. 33242(U), holding that non-appealing defendants were entitled to the benefit of an appealing defendant’s successful appeal, explaining:

A non-appealing defendant may renew a motion to dismiss the complaint insofar as asserted against him because of an appellate court’s decision to grant dismissal of the complaint as to a co-defendant. The grant of a dismissal to a co-defendant at the appellate level may form the basis of a renewal motion (in the Court below) by a nonappealing defendant on the ground of law of the case. The employee defendants contend that they are so similarly situated that the Appellate Order with respect to one defendant directly impacts the other defendant. The Court agrees that the employee defendants are now entitled to the dismissal of the remaining causes of action against them on the same grounds that the appealing defendants prevailed upon.

(Internal quotations and citations omitted).

It is risky to depend on a co-defendant’s appeal to benefit your own defense, but as this decision shows, there are circumstances where a non-appealing defendant can get that benefit. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the effect of a co-party’s appeal.

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Posted in Commercial, Appeals