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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: July 27, 2019

Court Explains Basis for Calculating Undertaking in Connection With An Injunction

On July 5, 2019, Justice Masley of the New York County Commercial Division issued a decision in Eastmore Mgt., LLC v. Gunta, 2019 NY Slip Op. 32040(U), illustrating the calculation of an undertaking in conjunction with an injunction:

CPLR 6312(b) provides that prior to the granting of a preliminary injunction, the plaintiff shall give an undertaking in an amount to be fixed by the court. The undertaking should reflect those damages defendant may incur if the court determines that the preliminary injunction was erroneously granted. Here, any damage that, Gunta might incur is connected to his inability to secure a position as a result of being restrained from speaking to the extent he wishes about Eastmore’s algorithm. Therefore, the effectuation of this preliminary injunction is conditioned upon Eastmore posting an undertaking for the amount equivalent to 10% of Gunta’s monthly salary at Eastmore at the time of Gunta’s termination multiplied by 13 months, the standard duration for a case commenced in the Commercial Division.

(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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Posted: July 26, 2019

Expert Report Excluded for Failure to Explain Basis for Opinions

On July 11, 2019, Justice Cohen of the New York County Commercial Division issued a decision in 30-32 W. 31st LLC v. Heena Hotel LLC, 2019 NY Slip Op. 32016(U), excluding an expert report because it failed to explain the basis for the expert’s opinions, explaining:

Defendants seek to strike the report on the grounds that: 1) The report is unsigned and inadmissible as a matter of law; 2) the report fails to comply with Commercial Division Rule 13; and 3) Plaintiffs failed to comply with controlling discovery orders. The Court will address each argument in turn.

First, Defendants are correct that the Chait Report is inadmissible because it is not signed or sworn.

In addition, the Chait Report does not comply with Commercial Division Rule 13 and the Court’s prior discovery order, which mandate that all expert reports contain, among other things: (A) a complete statement of all opinions the witness will express and the basis and the reasons for them; and (B) the data or other information considered by the witness in forming the opinions. Neither the Rule nor the Order sets a different standard for rebuttal reports, such as the Chait Report.

Mr. Chait’s report states that he disagrees with the report offered by Defendants expert, James Ashe, CPA, but does not offer a basis or reason for that conclusion. For instance, Mr. Chait writes, “At this time and on a preliminary basis I find that I do not concur with the conclusion reached by James Ashe, CPA (“Ashe”) of the Marcus firm. Additional forensic accounting work is required, and I reserve the right to amend and supplement this initial draft.” No supplemental report was provided and there is no indication that the “required” additional forensic accounting work was ever performed, let alone disclosed to Defendants. Mr. Chait also states summarily that the Ashe Report “presumes information as factual that is in dispute,” but then fails to identify those purportedly disputed factual assertions.

In page 2 of his 2-page report, Mr. Chait also states that there are “significant intercompany transactions that require a detailed forensic accounting review,” but does not identify any specific transactions at issue or provide opinions as to whether the intercompany transactions were proper. While he complains about Defendants’ general accounting practices – a central issue in this matter – Mr. Chait again states “additional forensic work is required to determine if the accounting records [of Defendants] were actually maintained on an accrual basis.” Again, such a disclosure (which was never amended) provides insufficient notice of any opinions Mr. Chait proposes to offer or the bases for those opinions. Finally, and in further violation of Rule 13 and the Court’s Order, the Chait Report fails to identify which documents he relied on in forming his opinion and generating the report.

The fact that Mr. Chait is being called as a rebuttal witness does not change the standard of specificity applicable to his report. In these circumstances, the Court concludes that it is appropriate to strike Mr. Chait’s report and proposed testimony.

(Internal quotations and citations omitted).

An issue that arises in almost all complex commercial litigation is the use of experts to explain evidence that is unfamiliar to a typical juror (or judge). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the admission of expert evidence.

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Posted: July 25, 2019

Movant’s Inability to Find Evidence in its Possession Insufficient Grounds for Renewal

On July 11, 2019, Justice Friedman of the New York County Commercial Division issued a decision in Trimarco v. Edwards, 2019 NY Slip Op. 32019(U), holding that a movant’s inability to find evidence in its possession was insufficient grounds for renewal, explaining:

Pursuant to CPLR 2221(e)(2) and (3), a motion for leave to renew shall be based upon new facts not offered in the prior motion that would change the prior determination and shall contain reasonable justification for the failure to present such facts on the prior motion. It is well settled that a motion for leave to renew must ordinarily be based upon additional material facts which existed at the time the prior motion was made, but were not then known to the party seeking leave to renew, and; therefore, not made known to the court. Renewal should ordinarily be denied where the party fails to offer a valid excuse for not submitting the additional facts upon the original application. A court may, however, in its discretion grant renewal, in the interest of justice, upon facts which were known to the movant at the time the original motion was made.

Like reargument, renewal should not be available where a party has proceeded on one legal theory and thereafter sought to move again on a different legal argument merely because he was unsuccessful upon the original application. Renewal is granted sparingly; it is not a second chance freely given to parties who have not exercised due diligence in making their first factual presentation. Nor is it available to argue new legal theories which could have been previously relied upon but were not on the assumption that what was submitted was adequate.

Plaintiffs proffered excuse for failing to submit the 2012 MOU with his opposition to the motion to dismiss is that he could not locate it at the time among the hundreds of thousands of emails and other documents on various computer hard drives and flash drives. The court does not find this justification to be reasonable. Further, this justification is belied by plaintiffs correspondence with the court in seeking an extension of time to respond to the initial motion. Plaintiffs correspondence with the court was silent as to any difficulties in locating crucial documents. Instead, Plaintiff noted that the issues raised by defendant in the motion are complex, especially in light of his newly filed action. in Switzerland, which requires Plaintiff to retain Swiss counsel and fully understand the ramifications of that action. Plaintiff also cited the fact that it was the middle of summer, people are on vacation.

Plaintiffs complaint predicated jurisdiction on the New York contacts established by the alleged negotiation and partial execution of the loan and settlement agreements in New York. In opposition to the motion to dismiss, plaintiff argued that the 2012 loan and settlement agreements arose out of the 2010 agreement. Plaintiff further argued that the forum selection clause in the 2010 agreement accordingly applied to the 2012 agreements. Plaintiff has failed to make any showing of due diligence in searching for the assertedly critical 2012 MOU that plaintiff himself executed.

Under these circumstances, plaintiff both fails to establish a reasonable justification for its failure to offer the 2012 MOU before the prior motion was briefed, and to establish that the interest of justice warrants renewal notwithstanding the absence of a reasonable justification.

(Internal quotations and citations omitted).

New York procedural law (including the special rules applying to litigation in the Commercial Division of the New York courts) is not particularly complex. Still, there are procedural rules and as this decision illustrates, if a litigant ignores them, it can pay a high price. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding New York practice, and particularly regarding the rules governing practice in the Commercial Division.

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Posted: July 24, 2019

Fraud Claim Not Duplicative of Contract Claim Because Alleged Misrepresentations Were Collateral to the Contract

On July 17, 2019, the Second Department issued a decision in Did-it.com, LLC v. Halo Group, Inc., 2019 NY Slip Op. 05644, holding that fraud claims were not duplicative of a contract claim because the alleged misrepresentations were collateral to the promises made in the contract, explaining:

The essential elements of a cause of action for fraud are representation of a material existing fact, falsity, scienter, deception and injury. Mere unfulfilled promissory statements as to what will be done in the future are not actionable as fraud and the injured party’s remedy is to sue for breach of contract. Where, however, it is alleged that the defendant made misrepresentations of present facts that were collateral to the contract and served as an inducement to enter into the contract, a cause of action alleging fraudulent inducement is not duplicative of a breach of contract cause of action.

Here, contrary to the Supreme Court’s conclusion, the cause of action alleging fraudulent inducement was not duplicative of the breach of contract cause of action. The first cause of action alleges that the defendants knowingly made false representations in Halo’s financial statements, which were collateral to the APA, that these false statements were made in order to induce the plaintiff to enter into the APA, that the plaintiff would not have entered into the APA but for these false statements, and that the plaintiff was injured by this fraudulent conduct. As the first cause of action alleges misrepresentations of present fact that were collateral to the APA and further alleges that these misrepresentations induced the plaintiff to enter into the APA, the court should have denied that branch of the defendants’ motion which was to dismiss the first cause of action.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules, including the rule discussed here that a fraudulent inducement claim cannot duplicate a claim for breach of contract. 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: July 23, 2019

Claim Dismissed as Derivative, Not Direct

On July 5, 2019, Justice Masley of the New York County Commercial Division issued a decision in 600-602 10th Ave. Realty Corp. v. Estate of HY Nusimow, 2019 NY Slip Op. 31993(U), dismissing a claim as derivative, not direct, explaining:

Pinchevsky asserts that the first counterclaim must be dismissed because Larissa lacks standing as she is not a shareholder and the allegations of Pinchevsky’s mismanagement or diversion of assets of ARC for her own enrichment can only be brought as derivative claims. Pinchevsky asserts that Larissa does not have any standing because the Estate has not distributed the stocks to her. Pinchevsky further asserts that this court’s order dated January 10, 2017 precludes the transfer of the stocks to Larissa. Furthermore, she purports that Larissa will not have any standing until a final disposition is rendered on the corporation’s causes of action against the Estate.

Even if Larissa is a valid shareholder, her direct claim for breach of fiduciary duty must be dismissed as the harm alleged is that of the corporation and not a direct harm her.

A plaintiff asserting a derivative claim seeks to recover for injury to the business entity. A plaintiff asserting a direct claim seeks redress for injury to him or herself individually. Sometimes whether the nature of the claim is direct or derivative is not readily apparent. New York does not have a clearly articulated test, but approaches the issue on a case by case basis depending on the nature of the allegations. For instance, where shareholders suffer solely through depreciation in the value of their stock, the claim is derivative, even if the diminution in value derives from a breach of fiduciary duty. Allegations of mismanagement or diversion of corporate assets also plead a wrong to the corporation corporate opportunity.

Using corporate funds to defray her personal expenses, failing to maintain the building in a commercially suitable manner, failing to conduct required corporate formalities such as organizing board meetings and recordkeeping are all alleged wrongs to ARC. The injuries inflicted by these activities may only give rise to a derivative action. Thus, the first counterclaim is dismissed.

(Internal quotations and citations omitted).

This decision relates to something common in complex commercial litigation–the question of whether a claim can be brought by an individual on his or her own behalf or must be brought on behalf of a corporation or other entity in which the plaintiff has an ownership stake (that is, derivatively). 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: July 22, 2019

Negligence Claim Cannot Be Based on Alleged Failure Adequately to Perform Contractual Duties

On July 9, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Cornice LLC v. 2LS Consul Ting Eng’g, D.P.C., 2019 NY Slip Op. 31964(U), holding that a negligence claim cannot be based on an alleged failure adequately to perform contractual duties, explaining:

However, the second cause of action grounded in negligence fails. Although defendant may be liable in tort when it has breached a duty of reasonable care distinct from its contractual obligations, or when it has engaged in tortious conduct separate and apart from its failure to fulfil its contractual obligations,, there are no such allegations in the Amended Complaint. Simply put, the gravamen of the allegations set forth in the Amended Complaint is that the defendant did not properly perform. Therefore, the second cause of action for negligence in the Amended Complaint is dismissed.

(Internal citations omitted).

Commercial disputes often concern contracts. However, disputes relating to commercial transactions also can give rise to tort claims, such as fraud, breach of fiduciary duty, tortious interference and, as here, negligence or gross negligence. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you have been injured in a commercial transaction but the injury did not involve a breach of a contract.

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Posted: July 21, 2019

Party Not Entitled to Fees on Fees

On July 8, 2019, Justice Scapulla of the New York County Commercial Division issued a decision in Park Union Condominium v. 910 Union St., LLC, 2019 NY Slip Op. 31994(U), holding that a prevailing party was not entitled to fees on fees, explaining:

Plaintiffs argue that the Referee Report’s award of $34,200 for Plaintiffs’ hearing preparation and the four-day hearing itself was proper and does not constitute fees on fees. Defendant counters that the $34,200 was an impermissible fees on fees award and should not be confirmed.

New York courts have generally held that a party is not entitled to recover attorneys’ fees that were incurred in prosecuting a claim to recover attorneys’ fees, so called fees on fees. There are two exceptions to this general rule, namely that fees on fees are allowed where such fees are explicitly provided for by either a statute or the parties’ agreement..

First, the cases cited by Plaintiffs in support of its position are inapposite. Second, as this Court previously stated in the November 2017 Decision, here the Agreement does not explicitly provide for an award of fees on fees and thus they are not recoverable. I find that the $34,200 award for the expenses that Plaintiffs incurred in connection with the referee proceeding was improper because it enables Plaintiffs, in contravention of caselaw and the law of the case, to recoup fees on fees. Accordingly, Plaintiffs are only entitled to recover attorneys’ fees and costs in the amount of $138,015.06 and I confirm the Referee Report, as modified, in that amount.

(Internal quotations and citations omitted).

Litigating for fees can be hard–both because of the high burden you sometimes must meet to be entitled to fees and because it is important to avoid the pitfall of getting an award of fees that is less than what it costs to move for fees. As this decision shows, generally, you are not entitled to recover the attorneys’ fees expended in moving for fees. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are litigating an attorney fee award.

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Posted: July 20, 2019

Shareholders Did Not Breach Duty to Company by Operating Competing Companies

On July 10, 2019, the Second Department issued a decision in Laffey v. Laffey, 2019 NY Slip Op. 05521, holding that shareholders did not breach a duty to their company by operating competing companies, explaining:

Under the unusual circumstances presented, we agree with the Supreme Court’s determination dismissing Emmett’s counterclaim and cause of action alleging breach of fiduciary duty. The evidence presented at trial showed that each brother owned and operated his own real estate company well before acquiring the jointly owned businesses from their father. Even after acquiring the jointly owned businesses, the brothers—who never entered into a shareholders’ agreement—openly continued for several years to own and operate their individual real estate businesses alongside the jointly owned businesses, often directly competing against one another and against the jointly owned businesses for listings and agents. In light of this history, the court dismissed the parties’ respective allegations of breach of fiduciary duty, finding that the open and continued competition among the brothers—both before and after Emmett’s purported removal from the jointly owned entities—did not amount to actionable misconduct.

(Internal citations omitted).

Fiduciaries have special duties, but the questions of whether a defendant is a fiduciary and what acts breach a fiduciary duty are sometimes complicated ones. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding such claims or appeals of relating to a fiduciary.

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Posted: July 17, 2019

Common Interest Privilege Does Not Apply to Merger Transaction

On July 9, 2019, the First Department issued a decision in Telx-New York, LLC v. 60 Hudson Owner LLC, 2019 NY Slip Op. 05484, holding that the common interest privilege did not apply to communications relating to a merger, explaining:

The common interest privilege does not apply to the communications at issue, in which plaintiff and a third party collaborated to promote their common interest in closing a merger transaction, because the communications do not relate to litigation, either pending or reasonably anticipated.

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: July 16, 2019

When There is Question Regarding Whether a Party Signed Agreement With Arbitration Clause, Question of Arbitrability is for Court, Not Arbitrator, to Decide

On June 27, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Suratwala v. Gandhi, 2019 NY Slip Op. 31859(U), holding that when there is a question regarding whether a party signed an agreement containing an arbitration clause, the question of arbitrability is for the court, not the arbitrator, to decide, explaining:

With respect to Om Vagzei LLC and Om Sidhdhy Vinayak LLC, amendment of the original operating agreements only required a majority of the LLC Interests to amend such operating agreements. Schedule A of the Original Om Vagzei Agreement indicated that Mr. Suratwala has no membership interest in that entity and the other petitioners Neha Suratwala and Trupti Saratwala, collectively, only had a 22% interest. Accordingly, even taking Mr. Surutwala’s forgery allegation as true and assuming that Neha Suratwala and Trupti Suratwala both did not consent to the amendment, there is no basis to stay the arbitration as it relates to Om Vagzei LLC or Om Sidhdhy Vinayak LLC because the petitioners have failed to allege a basis to find that the Amended and Restated Vagzei Agreement or the Amended and Restate Om Sidhdhy Agreement are not valid. In addition, with respect to Om Sidhdhy Vina yak LLC, Schedule A of the Original Om Sidhdhy Agreement does not indicate that Mr. Suratwala had a membership interest in that entity and none of the other petitioners are listed as members. Similarly, with respect to Om Viththal LLC, neither the Original Om Viththal Agreement, nor the Amended and Restated Om Viththal LLC Agreement list Mr. Tansukh Suratwala as a member. Accordingly, based on the submissions of the petitioners, there simply is no basis to understand how he has standing to challenge the Amended and Restated Viththal LLC Agreement. Furthermore, the Amended and Restated Om Viththal Agreement was signed by of the requisite 75% of its members so the consent of members holding 75% of the Membership Interests appears to have been met.

Finally, with respect to Aum Viththal LLC, Jai Ambe LLC, and Newberg Hotel Partners LLC, inasmuch as the Petitioners argue that the Aum Viththal Amended and Restated Agreement, the Jai Amended and Restated Agreement, and the Newberg Amended and Restated Agreement are invalid, at first blush, the petitioners’ application would seem to be governed by the United States Supreme Court analysis in Nitro-Lift Tech., LLC. v Howard (568 US 17 [2012]) and Prima Paint Corp. v Flood & Conklin Manufacturing Co. (388 US 395 [1967]). In Nitro-Lift, the Court wrote:

attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved by the arbitrator in the first instance, not by a federal or state court (568 US at 20-21 [quotation and citation omitted]).

In Prima Paint, the Court held that claims of fraud in the inducement of the contract generally are to be determined by the arbitrator. The Court explained that, if the claim is fraud in the inducement of the arbitration clause itself – an issue which goes to the ‘making’ of the agreement to arbitrate – the court may proceed to adjudicate it in the first instance.

However, a closer examination at the basis for the petitioners’ assertion that the Amended and Restated Agreements are invalid necessarily brings this case outside of this Prima Paint holding. The basis for the Court’s ruling in Prima Paint was that the arbitration clause was severable from the agreement at issue in that case. Unenforceability based on fraud in the factum is a question not squarely addressed by the Prima Paint Court. As the court in Kyung In Lee v Pacific Bullion (NY) Inc. (788 F Supp 155, 157 [ED NY 1992]) aptly observed:

if a party’s signature were forged on a contract, it would be absurd to require arbitration if the party attacking the contract as void failed to allege that the arbitration clause itself was fraudulently obtained. Therefore, arbitration is stayed solely with respect to Aum Viththal LLC, Jai Ambe LLC, and Newberg Hotel Partners LLC, and an evidentiary hearing is ordered to determine if the signature of Tansukh Suratwala on the Amended and Restated Agreements of those entities is a forgery, and the arbitration is stayed until such hearing occurs.

(Internal quotations 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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