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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: July 31, 2018

Court Erred in Granting Summary Judgment on Dismissing Plaintiff’s Claims Where Defendant Only Moved for Judgment on its Counterclaims

On July 25, 2018, the Second Department issued a decision in Philogene v. Duckett, 2018 NY Slip Op. 05507, holding that the trial court erred in granting summary judgment dismissing the plaintiff’s claims when the defendant had only moved for judgment on its counterclaims, explaining:

On a motion for summary judgment, the court is limited to the issues or defenses that are the subject of the motion before the court. Here, since the defendant moved for summary judgment only on his counterclaim for the judicial dissolution of Verity, the Supreme Court should not have searched the record and awarded summary judgment to the defendant dismissing the complaint.

(Internal citations omitted).

Cases in the Commercial Division of the New York courts usually involve a motion to dismiss at the outset and then a motion for summary judgment at the close of discovery, so such motions are a big part of our practice. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions about seeking or opposing a motion for pre-trial dismissal of a commercial lawsuit.

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Posted: July 30, 2018

Dissolution Under BCL 1104 Unavailable to Owner of 49 Percent of Voting Stock

On July 16, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Balkind v. Nickel, 2018 NY Slip Op. 31703(U), holding that a 49 percent shareholder in a New York corporation was not entitled to seek dissolution under BCL 1104, explaining:

Business Corporation Law provides that the holders of shares representing one half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors may present a petition for dissolution on one or more of the following grounds:

(1) That the directors are so divided respecting the management of the corporation’s affairs that the votes required for action by the board cannot be obtained.
(2) That the shareholders are so divided that the votes required for the election of directors cannot be obtained.
(3) That there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders.

Nickel opposes dissolution and seeks to dismiss the petition, arguing that Balkind does not have standing pursuant to BCL § 1104 because Balkind represents less than 50 percent of the Corporation’s total voting stock.

Balkind does not dispute that Aubrey Balkind, together with the trusts, only represent 49 percent of the Corporation’s total voting stock, but argues that the focus of BCL § 1104 is not equal ownership but equal power. According to Balkind, because the parties have equal power to elect directors under the terms of the Shareholder Agreement, Balkind has standing to seek judicial dissolution pursuant to BCL § 1104.

Contrary to Balkind’ s position, BCL § 1104 is clear – to petition for judicial dissolution, petitioners must be the holders of shares representing one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors. Under the plain meaning of the statute, Balkind, as the holder of 49% of the voting stock, does not have standing, and New York courts strictly interpret and apply the statute.

Neither does reference to the Shareholder Agreement confer standing under BCL § 1104. That agreement merely designates Aubrey Balkind and Nickel as the Corporation’s two directors irrespective of voting stock ownership, which is not the same as equal voting power to elect directors in the context of BCL § 1104’s standing requirement. Under these circumstances, Balkind is unable to invoke BCL § 1104 as a deadlock breaking device.

(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). Indeed, Schlam Stone & Dolan partner Jeffrey M. Eilender and associate Lee J. Rubin were contributors to the recently-released 2017 Supplement to Litigating the Business Divorce by Kurt Heyman and Melissa Donimirski. Contact Jeffrey Eilender at jeilender@schlamstone.com or 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: July 29, 2018

Court Refuses to Order Deposition of Trial Counsel

On July 23, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Carlton Group, Ltd. v. Property Markets Group, Inc., 2018 NY Slip Op. 31725(U), refusing to order the deposition of trial counsel, explaining:

Generally, an attorney should only be compelled to testify at an examination before trial when it is shown that (1) no other means exist to obtain the information than to depose opposing counsel; (2) the information sought is relevant and nonprivileged; and (3) the information is crucial to the preparation of the case. Cross movants have failed to make a showing that no other means exist to obtain the information other than to depose opposing counsel, as they have Zackson’s testimony on this issue. No evidence has been submitted on the cross motion to refute Zackson’s testimony at this time. In their moving or opposition papers, none of the parties refer to Maloney’s testimony on this issue, if any such testimony exists.

Cross movants also contend that Kaiman’s testimony is material and necessary because he wrote and sent many relevant emails and received responses, he drafted most of the organizational documents for the subject real estate project, caused the formation of corporate entities for the project, and negotiated and closed the acquisition of the real estate at issue. Merely because an attorney has relevant knowledge or was involved in the transaction at issue does not make that attorney’s testimony necessary. At this point, cross movants have failed to make an adequate showing that Kaiman’s testimony is crucial or that the relevant information may not be obtained from other sources.

(Internal citations omitted).

A big part of complex commercial litigation is giving, receiving and evaluating evidence (this is called “discovery”). The scope of discovery in New York is broad, but as this decision shows, it is not unlimited. Courts are very reluctant to allow a litigant to depose their opponent’s attorney. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has a question regarding discovery obligations (and what to do if a litigant is not honoring those obligations).

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Posted: July 28, 2018

Defense Waived Because Not Asserted in Answer

On July 16, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Bioenergy Life Science, Inc. v. RiboCor, Inc., 2018 NY Slip Op. 31672(U), holding that a defense was waived because it was not asserted in the Defendant’s Answer, explaining:

Next, RiboCor contends that Bioenergy waived its breaches. RiboCor did not plead this defense in its answer, which was filed more than three years ago. The only remotely similar affirmative defense pleaded in the answer is unclean hands, an equitable defense inapposite to a legal claim for breach of contract. Regardless, even if this defense were recast as “waiver” it would still be unavailing, as it has nothing to do with Bioenergy’s supposed wavier of RiboCor’s breaches. Instead of moving for leave to amend, RiboCor suggests that the court should reinterpret its unclean hands defense as the waiver defense articulated in its opposition brief. The court will not do so. RiboCor did not provide fair notice to Bioenergy that this defense was going to be part of the case; thus, Bioenergy was deprived of the opportunity to seek discovery on and strategize a response to such defense. Nor could Bioenergy have moved for judgement on the defense that it could not have anticipated. RiboCor does not proffer any good cause for its delay in asserting the defense or explain why material prejudice to Bioenergy should be overlooked.

(Internal citations omitted).

In New York, the courts usually are very generous in allowing a party to amend its pleadings. However, there are limits to this generosity, and that applies particularly to attempts to add affirmative defenses after the initial answer. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding whether it is too late to amend your claims and defenses.

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Posted: July 27, 2018

Provision Requiring Exercise of Reasonable Discretion Precludes Acting Arbitrarily, Irrationally, or Without Reasonable Basis

On July 18, 2018, the Second Department issued a decision in Grandfeld II, LLC v. Kohl’s Department Stores, Inc., 2018 NY Slip Op. 05289, holding that a contract provision requiring a party to use reasonable discretion prevented that party from acting arbitrarily, irrationally, or without a reasonable basis, explaining:

When parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms. This principle is particularly important in the context of real property transactions, where commercial certainty is a paramount concern, and where the instrument was negotiated between sophisticated, counseled business people negotiating at arm’s length. A contract provision requiring the exercise of reasonable discretion includes a promise not to act arbitrarily, irrationally, or without reasonable basis.

In this case, it was unreasonable for the defendants to consider the DOT permit a governmental approval that had to be obtained for construction to commence, as it was not necessary until the near completion of construction. The defendants’ contention that the DOT permit was a governmental approval within the meaning of the lease, since it was necessary for the operation of the building, would render meaningless the six-month time limitation to obtain such governmental approvals. A contract should be read as a whole, with every part interpreted with reference to the whole; if possible, the contract will be interpreted so as to give effect to its general purpose. Here, the general purpose of the lease was to set forth the chronological steps for the construction and operation of the store. Once the defendants obtained the governmental approvals necessary to commence construction, they could not terminate the lease on the ground that additional governmental approvals would be required in the future when construction was nearly complete. Thus, we agree with the Supreme Court’s finding that the defendants breached the lease. If we accepted the defendants’ contention that the governmental approvals necessary for construction and operation of the building include approvals that could be obtained at or near the time of an application for a certificate of occupancy, then the inability to obtain a certificate of occupancy—which can only be obtained after completion of construction—could be used as a basis for avoiding the defendants’ responsibility to commence construction. Such an interpretation of the contract would be a plainly unreasonable result.

(Internal quotations and citations omitted).

Contract provisions requiring a party to exercise its discretion “reasonably” are common in commercial contracts. As this decision shows, courts will enforce the obligation of reasonableness. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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Posted: July 26, 2018

No Waiver Clause Precludes Claim of Waiver Based on Prior Course of Conduct

On July 12, 2018, Justice Ostrager of the New York County Commercial Division issued a decision in MacArthur Properties I, LLC v. Galbraith, 2018 NY Slip Op. 31612(U), holding that a no waiver clause precludes a claim of waiver based on prior course of conduct, explaining:

Wholly without merit is plaintiff’s claim that the Condominium waived its right beginning in 2017 and going forward to calculate Common Charges based on Common Interest due to its course of conduct over the years which calculated the Charges based on usage. That argument is barred by Article IX of the By-Laws, which expressly protects the Condominium against waiver, stating in Section 5 that:

No restriction, condition, obligation, or provision contained in these By-laws shall be deemed to have been abrogated or waived by reason of any failure to enforce the same, irrespective of the number of violations or breaches thereof which may occur.

What is more, the First Department has rejected a claim of waiver based on a prior course of conduct where, as here, the relevant document contained an explicit no-waiver clause.

Plaintiff’s reliance on the Second Department’s decision in Dice is misplaced. The clause quoted by plaintiff was included in the court’s general discussion of the law on waiver and was not the holding. The holding was limited to the court’s denial of summary judgment based on issues of fact as to whether the Condominium could rely on a no-waiver provision in the By-Laws to enforce the no-pet provision in the Building’s Rules and Regulations. Dice is readily distinguishable from the instant case where the Condominium is relying on a no-waiver clause in the By-Laws to assert rights that are secured not only by the Condominium By-Laws and Declaration but also the Real Property Law.

Considering all the facts and circumstances presented here, including the language in RPL § 339-m and the various Condominium Documents, not the least of which is the language in the publicly recorded Second Amendment that expressly allows the Condominium to charge the Commercial Units 22% based on their Common Interest, the Court finds in favor of the movant Condominium in part. Specifically, the Court finds that the Condominium has the right if not the obligation, to charge the Commercial Unit Owners for Common Elements based on Common Interest beginning with the 2017/2018 budget and going forward so that the Residential Unit Owners pay no more than the Real Property Law and Condominium Documents require.

(Internal quotations and citations omitted).

A no-waiver clause protects a party’s right to have a contract interpreted according to its text, and without regard to accomodations it may have made in performing the contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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Posted: July 25, 2018

Questions of Fact Regarding Reasonableness of Calculations Under ISDA Master Agreement Preclude Summary Judgment

On July 2, 2018, Justice Friedman of the New York County Commercial Division issued a decision in Lehman Bros. Intl. (Europe) v. AG Financial Products, Inc., 2018 NY Slip Op. 51100(U), holding that questions of fact regarding the reasonableness of calculations under an ISDA master agreement precluded summary judgment, explaining:

In general, it is well settled under New York law that written agreements are construed in accordance with the parties’ intent and the best evidence of what parties to a written agreement intend is what they say in their writing. Thus, when parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms. Evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing. Extrinsic evidence may not be considered when the intent of the parties can be gleaned from the face of the instrument. Ambiguity in a contract arises when the contract, read as a whole, fails to disclose its purpose and the parties’ intent, or where its terms are subject to more than one reasonable interpretation. Extrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.

As to industry custom and usage, in particular, there is substantial federal authority that New York law permits consideration of such evidence in connection with the threshold determination of whether a contractual provision is ambiguous, at least where the contract uses specialized terms. The Second Circuit has repeatedly held that, under New York principles of contract interpretation, an ambiguity exists where the terms of the contract could suggest more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business. As further explained by the Second Circuit in Law Debenture, evidence as to custom and usage is to be considered by the court where necessary to understand the context in which the parties have used terms that are specialized.

In elucidating New York law, the Second Circuit has relied on the reasoning of Fox Film Corp. v Springer (273 NY 434), a 1937 decision of the Court of Appeals, which held that where the parties to a contract have employed terms in common use in a business or art and have a definite meaning understood by those who use them, but which convey no meaning to those who are not initiated into the mysteries of the craft, the court must be informed of the meaning of the language as generally understood in that business, in the light of the customs and practices of the business. It must be made literate in a language in which it is now unschooled.

Contemporary New York cases have rarely cited Fox Film Corp. and do not appear to have cited Law Debenture. This court finds, however, that Law Debenture is in fact consistent with, and acknowledges, the general New York precept that, even in the context of a contract that uses specialized terms, the court must undertake a threshold inquiry to determine whether the agreement on its face is reasonably susceptible of only one meaning or, put another way, whether the meaning of a particular clause is unambiguous when read in the context of the entire agreement—in which event, extrinsic evidence will be unavailable in interpreting the contract.

The New York Court of Appeals has recently held that an agreement made in the context of a highly technical industry, which employs distinct terminology used by those in the business—there, a lease for the production of oil and gas—must be construed with reference to both the intention of the parties and the known practices within the industry. Some intermediate appellate courts have also held, without always making an express prior finding of ambiguity, that undefined specialized terms may be construed in light of industry custom and usage.

There is also substantial authority that an objective standard of reasonableness applies to a contractual provision requiring performance of an obligation in a reasonable manner.

It is a basic tenet, applied across a wide range of legal issues, that the question of what is reasonable may require consideration of the facts and surrounding circumstances in the case.

Consistent with this extensive body of law, the Appellate Division has held that in determining whether conduct is objectively reasonable, industry norms may be appropriately considered. In undertaking such an analysis, the court considers evidence of industry practice not for the improper purpose of interpreting or varying an agreement without ambiguity, but for the permissible purpose of providing guidelines for an unexplained term—there, unreasonably withheld.

For the reasons discussed further below, the court holds that, under these principles of contract interpretation, the ISDA Master Agreement is not ambiguous to the extent that it provides that Loss need not be calculated using market quotations in every case, but is ambiguous as to whether Loss, under the circumstances of this case, was reasonably determined.

As Assured correctly argues, there is strong textual support for reading the definition of Loss as generally permitting non-defaulting parties to select any methodology for calculating Loss, so long as such methodology is reasonable and in good faith. As explained by the Intel Court, which construed the identical ISDA Loss provision:

The first sentence of the definition of Loss makes clear that Loss will be an amount that party i.e., the Non-Defaulting Party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions. Further, there is nothing in the text of the definition of Loss that explicitly mandates any particular calculation method or otherwise modifies the plain meaning of that first sentence of the definition—that the non-defaulting party is permitted to calculate its loss reasonably and in good faith.

As is pertinent to this motion, not only is there “nothing in the text of the definition of Loss that explicitly mandates any particular calculation method” (id.), but the Loss provision unambiguously states that the Non-Defaulting Party “may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets. Given this plain and unambiguous language, the court cannot find that the Loss provision categorically prohibits a Non-Defaulting Party, like Assured, from calculating its Loss without reference to market prices.

Put another way, the Loss provision could not be clearer in stating that a party “may (but need not)” calculate Loss using market quotations of rates or prices. The phrase “need not” is not a technical or specialized term which is, or could be, rendered ambiguous by evidence proferred by LBIE on this motion that parties to ISDA Master Agreements have consistently elected to calculate Loss using market prices. Even a reasonably intelligent person cognizant of such a custom or practice could not read the final sentence of the Loss provision as providing that a Non-Defaulting Party’s failure to calculate Loss based on market prices is a per se breach of contract. Rather, the ISDA Master Agreement must be read in light of its purpose, which is to promote legal certainty and predictability or market stability when applied to termination of a diverse array of derivative transactions in global markets. The last sentence of the Loss provision should be read as an acknowledgment that there may, within this broad universe of transactions, be situations in which calculation of Loss using market prices may not be possible or would be unreasonable. The Loss provision thus by its terms affords the Non-Defaulting Party the discretion to make the determination as to whether use of market prices to calculate Loss is appropriate in a particular case.

This is not to say, however, that evidence of market practice with respect to the calculation of Loss is irrelevant to the ultimate question before the court—that is, whether the methodology Assured actually used to calculate its Loss was reasonable and applied in good faith.

To hold, as this court does, that the Loss provision affords the Non-Defaulting Party discretion to calculate Loss without reference to market prices does not mean that the Non-Defaulting Party’s decision to ignore market prices can never be unreasonable or undertaken in bad faith. Discretion can, after all, be abused. Assured has not shown that the last sentence of the Loss provision must be read as effectively removing the issue of use of market prices from the analysis of a Non-Defaulting Party’s reasonableness and good faith. In contrast, LBIE has submitted evidence of market practice which raises a triable issue of fact as to whether Assured has reasonably determined its Loss.

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

Under New York law, the starting point of contract interpretation is the words of the contract. As this decision shows, sometimes those words, without context, may be insufficient to establish what the parties intended–if anything. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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Posted: July 24, 2018

Breach of Fiduciary Duty Claim Dismissed on Summary Judgment for Lack of Damages

On July 10, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Board of Directors of Windsor Owners Corp. v. Platt, 2018 NY Slip Op 31600(U), dismissing a breach of fiduciary duty claim on summary judgment for lack of damages, explaining:

Damages is an essential element of breach of fiduciary duty and a plaintiff must establish that the misconduct alleged was the direct and proximate cause of the losses claimed. In fact, a breach of fiduciary duty claim is not enforceable until the aggrieved party sustains actual damage. Plaintiff maintains that its damages fall into two categories:
a. “the attorneys’ fees incurred in having to defend against a new state court action that in part is based upon Platt’s improper disclosure of confidential communications. That same disclosure can also be used by the same plaintiff [Mazzocchi] in a pre-existing federal discrimination action. Plaintiff has already incurred attorneys’ fees directly related to the improper disclosure. While the full amount of the damages plaintiff may suffer is dependent upon the trial of that federal action, as this court has repeatedly held, and panels of the Appellate Division have also
held, that is a viable claim not dismissible on summary judgment; and
b. “Plaintiff’s right to seek sanctions against Platt for her entirely frivolous and baseless more than four year li tiga ti on onslaught in this court and on appeal. The second purported category of “damages” for breach of fiduciary duty can easily be dispensed with. This court already dismissed plaintiff’s independent cause of action for sanctions and, to the extent that plaintiff moved for sanctions, its motions have been addressed on a motion by motion basis. Sanctions for frivolous litigation, which are available by motion, are not recoverable under the guise of damages for breach of fiduciary duty.

Though in theory it is plausible that plaintiff could sustain damage as a result of Platt’s disclosure (which explains how the cause of action has survived to date), despite certifying its readiness for trial, Windsor has not shown that it actually sustained· any monetary damages resulting from Platt’s revelation of privileged information. Significantly, Windsor has not demonstrated that it incurred extra attorneys’ fees as a consequence of the disclosure that it would not have incurred in the absence of the disclosure. Nor has it shown that it is actually any worse off in the federal or state-court litigations because of what Platt revealed. Though plaintiff is certainly not required to show the full extent of its damages if they are ongoing, it has to show some actual damage that it sustained as a result of Platt’s alleged breach as opposed to costs that it would have expended anyway defending Mazzocchi’s cases even in the absence of Platt’s disclosures. This is particularly true where, as here, Windsor completed discovery, filed its NOI and certified that it is ready for trial.

(Internal 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. Further, as this decision shows, there is no claim if there have been no damages. 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: July 23, 2018

New Joint Appellate Division Practice Rules Change Time to Perfect Appeal in First Department From Nine Months to Six

The new Appellate Division Practice Rules (22 NYCRR Part 1250), which come into effect on September 17, 2018, change, among other things, the time to perfect an appeal in the First Department from nine months to “six months of the date of the notice of appeal or order granting leave to appeal.” (22 NYCRR 1250.9 Time, Number and Manner of Filing of Records, Appendices and Briefs; see also 22 NYCRR 1250.10 Dismissal of a Matter: “(a) Civil Matters. In the event that an appellant fails to perfect a civil matter within six months of the date of the notice of appeal, the order of transfer, or the order granting leave to appeal, as extended pursuant to section 1250.9(b) of this Part, the matter shall be deemed dismissed without further order.”) (emphasis added).)

Posted: July 22, 2018

Party’s Death Stays Action and Orders Issued When Stay Should Have Been in Effect Are Void

On June 28, 2018, Justice Ash of the Kings County Commercial Division issued a decision in Vizzini v. Vizzini-Oswald, 2018 NY Slip Op. 31529(U), holding that proceedings in an action should have been stayed once a party died and that all orders entered since the death were nullities, explaining:

The court recently discovered that defendant Charles Joseph Vizzini died on May 30, 2017, during the pendency of this action. According to the Kings County Surrogate’s Court, Tina M. Vizzini filed a petition for letters of administration for the Estate of Charles Joseph Vizzini on November 21, 2017 under File No. 2017-4958, and letters of administration have not yet been issued.

It is well settled that the death of a party stays the action as to him or her pending the substitution of a legal representative, and any determination rendered without such a substitution is generally deemed a nullity. Generally, the death of a party divests a court of jurisdiction to act, and automatically stays proceedings in the action pending the substitution of a legal representative for the decedent pursuant to CPLR 1015(a).

Thus, by operation of law, this action has been automatically stayed since the death of Charles Joseph on May 30, 2017. Consequently, all orders issued after the death of Charles Joseph including the court’s July 2017 Order and the October 2017 Stay are deemed to be nullities and are, therefore, vacated because the court lacked jurisdiction to issue those orders.

(Internal quotations and citations omitted).

This decision shows the serious consequences of not obeying court procedural rules. Here, all the court’s decisions entered since the defendant died were vacated because the court was not informed and a legal representative did not substitute for the deceased. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding procedure in the New York state courts, particularly in the courts’ Commercial Divisions.

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