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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 25, 2018

Court Erred in Vacating Order Discontinuing Action

On November 21, 2018, the Second Department issued an opinion in IndyMac Bank, FSB v. Izzo, 2018 NY Slip Op. 08014, holding that an IAS court erred in vacating an order discontinuing a foreclosure action, explaining:

In March 2008, the plaintiff commenced this action to foreclose a mortgage given by the defendants Teresa E. Izzo, also known as Theresa E. Izzo, and Robert G. Izzo (hereinafter together the defendants) to secure a note. After issue was joined with respect to the defendants, the plaintiff moved, inter alia, for summary judgment on the complaint, to strike the defendants’ answer, and for an order of reference. The Supreme Court granted the plaintiff’s motion, and, in July 2009, entered a judgment of foreclosure and sale, inter alia, directing the sale of the subject property.

In November 2013, the plaintiff’s former counsel moved, inter alia, to cancel the notice of pendency, to vacate the order awarding summary judgment and the judgment of foreclosure and sale, and to discontinue the action. By order entered January 27, 2014 (hereinafter the order of discontinuance), the Supreme Court granted the plaintiff’s motion, vacated the order granting summary judgment and the judgment of foreclosure and sale, and thereupon discontinued the action.

Approximately two years later, after a change of counsel, the plaintiff moved to vacate the order of discontinuance and to restore the action to the active calendar. The defendants opposed the motion and cross-moved to impose sanctions pursuant to 22 NYCRR 130-1.1. By order entered May 25, 2016, the Supreme Court granted the plaintiff’s motion and denied the defendants’ cross motion. In an order entered June 7, 2016, the court, inter alia, granted the same relief. The defendants appeal from the orders entered May 25, 2016, and June 7, 2016.

While courts have discretionary power to relieve a party from a judgment or order for sufficient reason and in the interest of substantial justice, a court’s inherent power to exercise control over its judgments is not plenary, and should be resorted to only to relieve a party from judgments taken through fraud, mistake, inadvertence, surprise or excusable neglect.

Here, the plaintiff asserted that the action was erroneously discontinued by prior counsel due to confusion generated by an impending substitution of counsel. Where a party asserts law office failure, it must provide a detailed and credible explanation of the default, and conclusory and unsubstantiated allegations of law office failure are insufficient. Contrary to the plaintiff’s contention, the uncorroborated representation by its current counsel that the action was erroneously discontinued by prior counsel did not constitute a detailed and credible explanation warranting vacatur of the order of discontinuance and restoration of the action. Accordingly, the Supreme Court should have denied the plaintiff’s motion to vacate the order of discontinuance and to restore the action to the active calendar.

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

This decision shows that sometimes (but not always) a court will excuse mistakes, but there must be a reasonable explanation for the failure. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have made a mistake that you want a court to fix.

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Posted: November 24, 2018

Plaintiff Without Interest in Land Cannot File Lis Pendens

On October 30, 2018, Justice Hudson of the Suffolk County Commercial Division issued a decision in Matter of 55 Wainscott Hollow, LLC v. Planning Bd. of the Town of E. Hampton, 2018 NY Slip Op. 32873(U), holding that a plaintiff without an interest in property cannot file a lis pendens relating to that property, explaining:

CPLR § 6501. Notice of Pcndency; Constructive Notice provides. in pertinent part:

A notice of pendency may be filed in any action in a court of the state in which the judgment demanded would affect the title to, or the possession, use or enjoyment of real property. A person whose conveyance or incumbrance is recorded after the filing of the notice is bound by all proceedings taken in the action after such filing to the same extent as a party.

The notice of pendency procedure replaces the common law lis pendens, an age-old doctrine pursuant to which the very existence of a suit asserting a right to defendant’s real property was constructive notice of plaintiff’s pre-existing rights. The notice of pendency statutes. which first appeared in New York in 1823, modified the common law by imposing on the plaintiff the burden of filing a notice of pendency in a central registry.

The principle is as old as the court of chancery itself. that the commencement of a suit there, which is duly prosecuted in good faith and followed by a decree, is constructive notice to every person who acquires an interest from the defendant in the subject matter of the suit pendente lite, of the legal and equitable rights of the complainant as charged in the bill and established by the decree.

Despite the potentially broad reading that might be given to the terms use and enjoyment of real property, the Court has confined the notice of pendency to cases in which the plaintiff claims an interest in the defendant’s land.

The cases hold that a notice of lis pendens cannot be filed where the party who has filed it claims no right, title or interest in or to the real estate against which it is filed and where the suit concerns simply some encroachment or wrong.

In the case at bar, intervenors do not assert a right, title or interest in or to Petitioner’s real property. Intervenors, by their Counsel, Christopher Kelly in paragraph 7 of his affirmation in opposition states: Intervenors were critical of the layout of Petitioner’s subdivision application for the property.

Notably, Intervenors fail to assert that they or any of them have any claim of right title or interest in or to the subject real property. Intervenors’ opposition to Petitioner’s instant motion for cancellation of the notice of pendency contains no such claim of ownership or dominion.

Although Intervenors have filed an impressive opposition to the motion, same is fatally deficient in its lack of proper justification for the filing, maintenance and continuation or its notice of pendency.

Intervenors filed notice of pendency is from its inception improper by law.

Intervenors are seeking to invoke the ancient and repudiated Doctrine of Ancient Lights. In principle, the Doctrine was pied by the landowner upon whose land the light had shone from time immemorial; in other words, don’t build near my place and disturb my vista.

English Courts later phrased it thus:

A proprietor of land has no right to erect an edifice on his own ground, interfering with the due enjoyment of adjoining premises, as by overhanging them, or by throwing water from the roof and eaves upon them, or by obstructing ancient lights and windows.

The doctrine of presumption of right by grant or otherwise as applied to the windows of one person overlooking the land of another, so that by an uninterrupted enjoyment for twenty years the owner acquires a right of action against his neighbor for stopping the lights by the erection of a building upon his own land, forms no part of our law; such a rule is not adapted to the circumstances or existing state of things in this country.

In the case at bar, the subdivision plans of Petitioner have been reviewed by this Court and approved by Respondent Town of East Hampton, New York, and the decisions have been served upon Intervenors. Intervenors claim that they are attempting to prevent a misuse of neighboring land is disingenuous at best and without legal claim at worst. The Court finds that Intervenors have failed to file their notice of pendency in good faith rather they filed to improperly delay the case.

(Internal quotations and citations omitted).

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

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Posted: November 23, 2018

Parties That Signed Agreement on Behalf of Non-Existent Entities Personally Bound By Contract

On October 30, 2018, Justice Hudson of the Suffolk County Commercial Division issued a decision in Olympus Am. Inc. v. Greene House Surgicare, 2018 NY Slip Op. 32874(U), holding that parties who signed an agreement on behalf of non-existent entities were personally bound by the agreement, explaining:

Under well-established agency law, a contract between individuals purporting to act on behalf of a nonexistent principal enter into a contract with a third party, the contract does not for that reason alone become void or voidable. Liability is based on the rule that one who assumes to act as agent for a nonexistent principal is himself or herself liable on the contract in the absence of an agreement to the contrary and on the theory of a breach of an implied warranty of authority. Thus, courts have determined that the individual who signed the contract may be liable where there was no existing corporation under any name because, under those circumstances, the Plaintiff has no remedy except against the individuals who acted as agents of those purported corporations. Applying these principles, the Court finds that Plaintiff demonstrated, prima facie, its entitlement to judgment as a matter of law that the individual Defendants were liable under this theory. The Court further finds that since Green House Surgicare had neither de facto nor de jure existence at the time the contract was entered into, it cannot he bound the terms thereof unless the obligation is assumed in some manner by the corporation after it comes into existence by adopting, ratifying or accepting it. Having submitted no facts which demonstrate that Greene House Surgicare had de facto nor de jure existence. Defendants foiled to meet their burden of raising a triable issue of fact.

(Internal quotations and citations omitted).

Usually, the only parties who have rights or obligations under a contract are the parties to the contract. Here, individuals who signed a contract on behalf of a company that did not exist were found to be bound by that contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether you have rights or obligations under a contract.

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Posted: November 22, 2018

Contractor Working for Tenant Allowed to Place a Lien on Landlord’s Property

On November 20, 2018, the Court of Appeals issued a decision in Ferrara v. Peaches Cafe LLC, 2018 NY Slip Op. 07925, allowing a contractor working for a tenant to place a lien on the landlord’s property, explaining:

COR urges that the Appellate Division erred because, as a matter of law, a contractor working for a tenant may not place a lien on a landlord’s property unless the landlord has expressly or directly consented to the performance of the work, which COR says it did not do. We reject that argument; our precedents establish that the Lien Law does not require any direct relationship between the property owner and the contractor for the contractor to be able to enforce a lien against the property owner. Lien Law § 3 provides:

A contractor, subcontractor, laborer, or materialman, who performs labor or furnishes materials for the improvement of real property with the consent or at the request of the owner thereof, or of the owner’s agent shall have a lien for the principal and interest, of the value, or the agreed price, of such labor from the time of filing a notice of such lien.

The impetus behind the law is to provide protection to those who furnish work, labor and services or provide materials for the improvement of real property. Accordingly, the law is to be construed liberally to secure the beneficial interests and purposes thereof.

To enforce a lien under Lien Law § 3, a contractor performing work for a tenant need not have any direct relationship with the property owner. Instead, to fall within that provision the owner must either be an affirmative factor in procuring the improvement to be made, or having possession and control of the premises assent to the improvement in the expectation that he will reap the benefit of it. We further explained that the owner’s consent or requirement that the improvement be made, rather than mere passive acquiescence in or knowledge of improvements being made, is contemplated by the statute. In Rice, we concluded that the landowner could not be held liable for the work contracted for by the tenant who had leased the land to build and maintain an athletic field. Although the landowner consented in a certain sense of the word because he must have known at the time the lease was executed that the tenant planned to make improvements in order to use the property for the purpose covenanted for in the lease, that knowledge alone was insufficient to show that the appellant consented to the performance by the plaintiff of the work for which her lien was filed.

However, we distinguished Rice from our prior cases in which the tenant covenanted by the lease to erect buildings or make improvements. In those cases the landlord was properly held liable because not only did the landlord require the improvement to be made, but the improvement inured to the landlord’s benefit, either because it reverted to the landlord at the expiration of the demised term or because rent proceeded from its use.

Jones, decided the year before Rice, reaffirmed the rule of that line of prior cases that certain lease provisions can establish consent for purposes of Lien Law § 3:

A requirement in a contract between landlord and tenant, that the tenant shall make certain improvements on the premises is a sufficient consent of the owner to charge the owner’s property with claims which accrue in making those improvements, though it would not render the property liable for improvements or alterations beyond those specified in the contract.

In Jones, we based the landlord’s consent on contractual provisions supporting the proposition that the landlord had consented to the improvements for purposes of Lien Law § 3. In particular, we noted the contractual requirement that the tenant convert the space to a first-class saloon, that the conversion be accomplished in a few months, and that failure to timely complete the conversion would terminate the lease and vest title to the improvements in the landlord. In that way, the owner sufficiently consented to the repairs and his property was chargeable with their value. A similar result obtained in McNulty Bros.

No material facts are in dispute here. The language of the lease agreement not only expressly authorized Peaches to undertake the electrical work, but also required it to do so to effectuate the purpose of the lease—that is, for Peaches to open the restaurant for business and operate it continuously, seven days a week, during hours specified by COR. Furthermore, the detailed language makes clear that COR was to retain close supervision over the work and authorized it to exercise at least some direction over the work by reviewing, commenting on, revising, and granting ultimate approval for the design drawings related to the electrical work. We therefore conclude that, under our prior precedents, the terms of the lease agreement between COR and Peaches, taken together, are sufficient to establish COR’s consent under Lien Law § 3.

COR relies on our decision in Delany & Co. v Duvoli (278 NY 328 [1938]) to argue that we should adopt the position taken by certain of the Appellate Division departments in several cases it interprets as rejecting a finding of consent under Lien Law § 3 when no direct relationship between a tenant’s contractor and the property owner is present. . . . Contrary to COR’s argument, Delany does not stand for the proposition that consent under Lien Law § 3 requires a direct relationship between the property owner and the lienor. Instead, Delany stands for the proposition that some affirmative act by the landowner is required to find consent for the purposes of Lien Law § 3. Our decisions make clear that that affirmative act can include lease terms requiring specific improvements to the property. When a lease does not require improvements, the owner’s overall course of conduct and the nature of the relationship between the owner and the lienor may demonstrate consent for purposes of Lien Law § 3. The decision in Paul Mock, when read properly, is consistent with our precedents, as are most of the Appellate Division cases relied on by COR. To the extent that certain Appellate Division decisions relying on Paul Mock suggest that Lien Law § 3 requires a direct relationship between the landlord and the contractor to establish consent, they are contrary to our precedents and should not be followed.

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

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

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Posted: November 21, 2018

Plaintiff Should Have Been Granted Yellowstone Injunction

On November 20, 2018, the First Department issued a decision in 106 Spring St. Owner LLC v. Workspace, Inc., 2018 NY Slip Op. 07951, holding that a plaintiff should have been granted a Yellowstone Injunction, explaining:

Plaintiff met all four of the required elements for a Yellowstone injunction, whose purpose is to toll the cure period pending resolution of the dispute over whether a commercial tenant breached its lease, and its motion for a Yellowstone injunction should have been granted. The nature of the “standstill” ordered by the court in lieu of a Yellowstone injunction may be, for all intents and purposes, equivalent to the requested relief, as defendants contend, but it is not clear, and plaintiff raises the reasonable concern that it omitted a key aspect of Yellowstone relief: tolling the time to cure; we resolve any ambiguity here by granting the Yellowstone injunction.

The court lacked adequate basis to assume, as it did, that any failure on plaintiff’s part to maintain the cooling tower meant it had jeopardized public health and safety in a manner which is incurable. Defendants’ October 2017 letter and December 2017 Notice of Default, demanding cure, belie the notion of incurability. The notices are, moreover, silent on the issue of public health and safety, as were defendants’ affidavits opposing the motion. The issue, raised only in their memorandum of law was, in any case, unsubstantiated. The record before us contains no evidence to support the claim, or the court’s conclusion that the violations at issue are incurable.

(Internal quotations and citation omitted).

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

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Posted: November 20, 2018

Court Finds Pooling and Servicing Agreement to be Ambiguous, Orders Discovery

On November 9, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Matter of U.S. Bank N.A., 2018 NY Slip Op. 32875(U), holding that a pooling and servicing agreement was ambiguous and ordering discovery, explaining:

Under New York law, 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, a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms. Extrinsic evidence may be used to interpret a contract only where it is ambiguous, and the determination as to ambiguity is a question of law to be answered by the court. A contract is ambiguous if on its face it is reasonably susceptible of more than one interpretation. There must be no reasonable basis for a difference of opinion, but ambiguity does not exist simply because one of the parties attaches a different, subjective meaning to one of its terms. Furthermore, the existence of ambiguity is determined by examining the entire contract and considering the relation of the parties and the circumstances under which it was executed — with the wording viewed in the light of the obligation as a whole and the intention of the parties as manifested thereby.

The petition is denied and the parties are directed proceed with discovery. As a preliminary matter, it is of some significance that the alleged error in allocation was not discovered by the Objectors for three years, and that US Bank then found the new interpretation to be sufficiently reasonable that it employed it for two years. Indeed, the bank was so persuaded that the new procedure was correct that it did not seek judicial instructions at that time. And even after reversing its conclusion, US Bank has asserted only that the original allocation procedure was the best reading. Assuming that that is so, it still does not mean that it is the only reasonable reading. The case thus presents something more than merely one of the parties attaching a subjective meaning to the language of a contract; rather, it is a case of a third party, disinterested sophisticated financial institution attaching conflicting meanings to the same language on three different occasions. The court finds this confusion to be understandable and holds that the PSA is ambiguous regarding the proper allocation of the lost interest.

Read in context with sections 6.5, 6.6(a) and the later passages of 6.6(f), the PSA can reasonably be construed as either permitting, or prohibiting, application of the interest losses to the Certificate Balances. The parties have attempted to support their positions by applying competing axioms of contractual construction to selected passages of the PSA. However, those tools are too blunt to be applied to such a complex financial transaction and do not meaningfully resolve the conflict And even if the language were sufficiently clear to permit the court to commit to one interpretation or the other, the parties’ submissions have failed to provide an easily comprehensible explanation (if one is possible) of how the payments are calculated and distributed to the various classes of Certificates, The mechanism is apparently something to be pieced together from the 300-
page PSA’s Preliminary Statement, the Definition section and the schedules contained therein, and the various paragraphs of section 6.

In this connection, the court notes that the status of the Class A-JFX Certificates is unclear, counsel having stipulated at oral argument as to the seniority of the Class A-J Certificates hut indicated that Class A-JFK was a different story. Those Certificates are mentioned in footnote (c) of the schedule of REMIC III Class designations, which indicates that they represent the Class JFX Percentage Interests of the Class JFL Regular Interests. Later in that footnote, it is stated that following the Second Restatement Date the Aggregate Certificate Balances of the Class JFX Certificates and three other classes will be subject to further re-designations as between such Classes pursuant to Section 3, 10. Expert affidavits or testimony may thus be required to clarify this and other issues, especially because apart from appeals to common sense and contractual construction, some of parties’ arguments center around the financial purposes, tax policies and other considerations underlying the complicated structure of the Trust Their resolution may implicate business judgments rather than legal considerations.

Finally, the court concurs that the ProSupp may have some evidentiary value, in that it provides a clear sequence to the allocation of Realized Losses among the items in 6.6(f)(A), (B) and (C). But that also raises the question of why the clarifying language was not incorporated into the PSA itself resort to the intent of the drafters, and witnesses with expertise in REMIC structured trusts will be needed. Similarly, their assistance would be helpful in explaining the relevance and import of the guidance provided the Commercial Real Estate Finance Council with respect to the reporting of a modification resulting in a permanent rate reduction.

(Internal quotations and citations omitted).

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: November 19, 2018

Allegations of Duress Insufficient to Overcome Voluntary Payment Doctrine

On November 15, 2018, the First Department issued a decision in Beltway 7 & Props., Ltd. v. Blackrock Realty Advisers, Inc., 2018 NY Slip Op. 07844, holding that allegations of duress were insufficient to overcome the voluntary payment doctrine, explaining:

In seeking to avoid application of the voluntary payment doctrine, plaintiff first contends on appeal that it made clear to Blackrock that its payment was not voluntary at all. The doctrine bars recovery of payments voluntarily made with full knowledge of the facts, in the absence of fraud or mistake of material fact or law. The onus is on a party that receives what it perceives as an improper demand for money to take its position at the time of the demand, and litigate the issue before, rather than after, payment is made.

. . .

Plaintiff asserts that, even if it did not lodge a proper protest at the time of the payment, it can still recover the payment if it can establish that it was made under economic duress or as the result of a mistake. . . . .

The relative sophistication of the parties is not a factor to be considered in assessing a claim of economic duress. Economic duress exists where a party is compelled to agree to terms set by another party because of a wrongful threat by the other party that prevents it from exercising its free will. Accordingly, our analysis consists of two prongs: first, whether Blackrock’s decision to demand the late charge and extra interest payment was lawful, that is, based on rights enumerated in the agreement; and second, if it was not, whether the demand placed plaintiff in a position such that it had no other choice but to accede. With respect to the first prong, Blackrock relies on M.W. Realty in arguing that, because the mezzanine loan agreement is part of the record, we can decide, even at this procedural posture, that, as a matter of law, the charges were not wrongful. In that case, plaintiff, a developer, claimed duress when the defendant, from which the plaintiff had contracted to purchase air rights so it could build a 31-story building, sought to extract more favorable terms from the plaintiff after the plaintiff had begun construction. The Court rejected the duress claim because after reviewing the contract, which was annexed to the complaint, it concluded that the defendant’s obligation to transfer the air rights had not yet been triggered when it sought the modification. The Court affirmed dismissal of the complaint because a party cannot be guilty of economic duress for refusing to do that which it is not legally required to do. Defendant argues that, here too, the agreement plainly establishes that it had the right to make the demand it did. Plaintiff, in contrast, asserts that the late charge provision is, at the very least, ambiguous with respect to how Blackrock was to calculate the charge, and that, even if the calculation was correct, it constitutes an unenforceable penalty.

We agree that the relevant contractual provisions are ambiguous, as they are each susceptible to more than one reasonable interpretation. As plaintiff notes, the 5% rate is expressly stated to apply to the unpaid sum. However, whether the Maximum Legal Rate is to be applied to the unpaid sum or something else is unclear. Plaintiff suggests that it was intended to apply to the length of time that payment was outstanding, which was seven days. Blackrock counters by, inter alia, characterizing the Maximum Legal Rate as a standard savings provision designed to ensure that it not be deprived of any recourse at all if payment is tardy. Each of these arguments has merit, and neither is susceptible of resolution at the pleading stage.

There is similar uncertainty concerning whether Blackrock was justified in charging interest for the November to December period. . . . Similarly, we are unwilling at this stage to declare that the amount charged by Blackrock was not an unenforceable penalty. . . . .

This is not to say that a garden variety dispute over the meaning of contractual terms will serve as the basis of a viable duress claim. It is necessary that the second prong of the duress analysis, which involves the deprivation of meaningful choice on the duress victim’s part, also be present. Thus, the possibility, or even the fear, of litigation is insufficient to establish duress. In Oleet, the defendant lender represented to the plaintiff borrowers, who were seeking a three-year loan, that it could only issue notes for 90 days at a time, but that it would continually extend such notes for the desired three years. However, when the first note became due, the lender told the plaintiffs that it would only extend the note if the plaintiffs, inter alia, paid certain charges to it. This Court rejected the plaintiffs’ duress claim, stating:

At the time the extension agreement was executed, the bank had no interest in or control over plaintiffs’ business or property. All the bank had was a claim for repayment of a loan, represented by ninety-day notes. Despite their financial distress, the borrowers could have refused to honor the fraudulently induced notes, thereby compelling the bank to institute suit, in which event the defense of fraud and, perhaps, equitable estoppel would have been available to them. Fear of financial embarrassment not created by the bank or the stress that might follow from a lawsuit brought to enforce the notes, is not sufficient to constitute such duress as will excuse or invalidate an agreement made to avoid such consequences. An impending suit, without more, does not create the cognizable impulsion of duress.

Here, plaintiff’s duress claim derives not from a fear it had that, should it demur from Blackrock’s insistence that it pay the late charges and extra interest, thus foregoing its ability to refinance, Blackrock would merely sue to recover the mezzanine loan. Rather, plaintiff claims that it feared that Blackrock would foreclose on plaintiff’s very valuable portfolio of properties. For this reason, it asserts, it was placed in a position where, even though it doubted Blackrock’s entitlement to the charges, it had no choice but to comply with Blackrock’s demand. Indeed, economic duress is established when the facts show that breach of a contractual obligation will result in an irreparable injury or harm. Furthermore, as this Court observed in Oleet, a demand can be characterized as improper when it is based on a claim insignificant when contrasted with the demands. Here, plaintiff contends that there is a gross disproportionality between the claim (a payment that was one week late) and the demand (nearly $850,000).

That plaintiff may have established a question whether Blackrock may have had a right to extract the late charge from it does not compel a decision upholding the complaint, for while there is a question whether Blackrock acted reasonably in imposing the penalty, we must also consider the consequence of plaintiff’s failure to seek recovery of the payment after the threat of foreclosure had passed. One who would recover moneys allegedly paid under duress must act promptly to make his claim known. That is because a contract procured by duress is not void, but merely voidable, such that the duress victim’s failure to act can be viewed as a ratification of the contract. Plaintiff dismisses this principle as inapplicable here because Blackrock did not procure a contract by duress, but rather a payment concomitant with an already existing contract. This appears to be a distinction without a difference. Plaintiff does not explain why a payment like the one at issue is void (not simply voidable), nor does it offer any authority to support that contention. Indeed, in Austin Instrument, a party was held to have procured price increases on an already existing contract through economic duress, and the Court still weighed whether the victim of that duress had ratified the price increase by waiting too long to seek recovery.

Plaintiff further asserts that the proper analysis where a party fails to promptly seek recovery of a payment made under duress is whether it is guilty of laches. It argues that because a showing of laches requires prejudice on the part of the party asserting the defense, it must prevail here, because Blackrock was not prejudiced. We disagree. Plaintiff has not cited any authority to support its theory that prejudice enters the analysis. Indeed, decisions by this Court declaring that a party has waived a duress claim have not even suggested that prejudice is a relevant factor. This is not to say that a lengthy wait to recover funds paid under duress bars the claim absolutely. In Austin Instrument, for example, the victim of the duress faced an imminent threat of wrongful compulsion long after it was placed in a position of duress, excusing its delay. Here, however, plaintiff fails to allege any set of facts justifying its decision to wait nearly two years to invoke duress, and then only after defendant invoked the voluntary payment doctrine. For that reason, its complaint was properly dismissed.

(Internal quotations and citations omitted).

As this decisions discusses, a claim of duress can relate to economic duress, and not just the paradigm case of someone being forced to sign a contract with a gun to their head. But, as this decision also shows, the standards for pleading duress are demanding. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a contract entered into under duress.

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Posted: November 18, 2018

General Release Bars Claim Relating to Settled Claims

On November 7, 2018, Justice Ostrager of the New York County Commercial Division issued a decision in Lam Pearl St. Hotel LLC v. Golden Pearl Constr. LLC, 2018 NY Slip Op. 32852(U), holding that a general release barred a claim regarding settled claims, explaining:

GPC argues that the implied covenant of good faith and fair dealing cannot be used to circumvent the clear and unambiguous terms of the Termination Agreement to require GPC to pay the alleged refund to Lam. The Termination Agreement does not explicitly mention anything regarding insurance premiums, however, it does contain a broad, general release of GPC”s liabilities as to Lam. The Termination Agreement states:

Lam Pearl releases GPC and its officers, directors, members, agents, affiliates and subsidiaries from and against any and all liabilities, damages, promises, covenants, agreements, causes of action, judgments, claims, or determinations, in law or in equity, or any costs or expenses, inclusive of legal fees, whether known or unknown arising out of or related to work performed under the Trade Contracts, responsibility for ongoing operations including conditions at the Project site, and any warranties or guarantees of GPC under the Contract.

(emphasis added).

Lam argues in opposition that it is not re-writing the Termination Agreement, but rather seeking the benefits to which it is entitled because GPC failed to disclose that it did not procure the legally required project-specific insurance.

When parties set down their agreement in a clear, complete document. their writing should as a rule be enforced according to its terms. The meaning and coverage of a general release depends on the controversy being settled and upon the purpose for which the release was actually given.

Here, Lam entered into the Termination Agreement and Settlement Agreement terminating the Pearl Street Contract and providing for a settlement payment to GPC-allegedly under the false belief that GPC had procured project-specific insurance in accordance with the Pearl Street Contract and applicable City of New York rules. Lam asserts that it pre-paid GPC for the purpose of purchasing project-specific insurance which would purportedly run with the life of the Project regardless of the general contractor working on the Project. There is evidence in the record indicating that Lam could have learned that GPC had used the pre-paid funds to cover GPC’s practice policy instead of a project-specific insurance premium, but Lam contends it took no notice of the single sheet of paper indicating the type of insurance GPC purchased. After the parties terminated their relationship, GPC allegedly received a premium refund of over $900,000. Lam, meanwhile, did not receive the project-specific insurance covering the life of the Project it claims it was led to believe GPC had procured before the parties entered into the Termination Agreement and Settlement Agreement. While these agreements do not explicitly address the insurance premium-and thus there is no breach of contract claim asserted-the agreements both contain broad releases of all claims, whether known or unknown. arising out of work performed for the Project. If the parties had intended to limit the scope of the release, particularly as to insurance related claims, the Termination Agreement would have stated such in explicit terms. Ultimately, however, the parties terminated their relationship and exchanged broad releases covering all claims related to the Project. For this reason, Plaintiff’s breach of the implied covenant claim is precluded by the release in the parties’ Termination Agreement and must therefore be dismissed.

(Internal quotations and citations omitted).

Settlement agreements are treated just like any other contract in New York, and as this decision shows, if you release all claims against a party, the court will enforce that promise. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a settlement agreement.

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Posted: November 17, 2018

Valuation Prepared as Part of Joint Venture’s Break Up Not Privileged

On November 9, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Noven Pharms., Inc. v. Novartis Pharms. Corp., 2018 NY Slip Op. 32851(U), holding that a valuation prepared as part of a joint venture’s break up was not privileged, explaining:

Novartis has the burden of establishing that the valuation report is privileged and, therefore, exempt from the disclosure. It failed to meet its burden here.

The exemption for attorney work product (CPLR 3101[c]) does not apply because the valuation was not prepared by counsel acting as such and does not otherwise uniquely reflect a lawyer’s learning and professional skills. Nor has Novartis sufficiently shown that the valuation is exempt from disclosure as material prepared in anticipation of litigation (CPLR 3101[d][2]) because it did not demonstrate that the report was created solely and exclusively in anticipation of litigation. Under the circumstances, a mixed purpose cannot be ruled out.

It is undisputed that a valuation by Deloitte was contemplated for business purposes before Novartis claims that it appreciated that litigation potentially lay ahead. The record establishes that Novartis first contacted Deloitte about performing a valuation in response to the HL valuation with which Novartis disagreed. Novartis explained to Noven that it would be procuring the valuation, which would then inform their discussions.

Though Novartis has shown that shortly thereafter it contemplated possible litigation, it has not established that the nature, character or scope of the valuation that had already been discussed with Deloitte changed in any way whatsoever or that Novartis was exclusively in litigation mode and not still desirous of arriving at a mutually agreeable business solution with Noven. Indeed, there is no evidence between September 2015–when Novartis maintains that it first contemplated potential litigation–and the commencement of this action, that Novartis ever explicitly committed to Noven that, contrary to its earlier position, it was not going forward with nor would it exchange or discuss the valuation that it had earlier committed to. Novartis has not shown any proof (in camera or otherwise) that after its business people chose Deloitte to prepare the valuation for business purposes, the actual scope or nature of the retention changed in any material way. In fact, even after the valuation was prepared, the parties were still on course for and engaged in business discussions to resolve the disputes between them.

It is clear, moreover, that both parties fully appreciated that litigation was a possibility before they officially commissioned their respective valuations. That does not alter the analysis nor does the involvement of attorneys or the parties’ own privilege designations (which were likely designed to afford the parties with maximum flexibility depending on the outcome of the valuation).

In the end, while Novartis’ lawyers formally retained the valuator selected by its business people, and one of the purposes of procuring the valuation may have been to prepare for litigation, Novartis has not convinced the court that litigation was the sole reason and that it had entirely abandoned its earlier commitment. On this record, where the parties continued in the same course of negotiations for which the Deloitte valuation had been contemplated, it is hard to believe that Novartis decided, in September 2015, that potential litigation justified an uncommunicated change in course with respect to the valuation and that, despite verily believing that a valuation was irrelevant, it continued to pursue the very same valuation that it had anticipated earlier, yet it was for a completely different purpose (and that Novartis did so, at this stage and with urgency, solely for litigation that had not even been commenced and not for use in its ongoing business negotiations). Because Novartis has not negated that the valuation, at the very least, had a dual purpose–that it still served the function originally contemplated–it is subject to disclosure and must be produced.

(Internal quotations and citations omitted).

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

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Posted: November 16, 2018

City Department of Finance Not Entitled to Two Percent Payment Fee On Abandoned Funds Transferred to Comptroller

On October 25, 2018, Justice Ramos of the New York County Commercial Division issued a decision in Swezey v. Lynch, 2018 NY Slip Op. 32810(U), holding that the City Department of Finance was not entitled to a two percent fee on abandoned funds transferred to the City Comptroller, explaining:

The DOF is the custodian of court-deposited funds in New York City under Article 26 of the CPLR. When the DOF takes custody of court-deposited funds, it is entitled to two statutory fees, set forth in CPLR 8010: one fee for investing, and one fee for making payment. Specifically, sub-section (1) of CPLR 8010 entitles the DOF to receive two percent upon a sum of money paid of out court by him. Sub-section (2) entitles the DOF to one half of one percent upon a sum of money invested by him.

The term “paid out of court,” as used in CPLR 8010(1), has not been judicially construed. The Court of Appeals has stated that when the language of a statute is clear and unambiguous, the statute should be construed so as to give effect to the plain meaning of the words.

The plain meaning of the term “paid out of court,” which triggers the DOF’s entitlement to a two percent fee for its custodial services, is the payment of the money out of court, either an award of the court or other order of the court directing payment.

Considering the construction of CPLR 8010 with the Abandoned Property Law does not alter this Court’s conclusion. Abandoned Property Law §§ 600 and 602 directs the DOF to transfer dormant court-deposited funds to the comptroller without a court order, after five years. The substance of this transfer is a ministerial act triggered by the passage of time, which runs from the date the DOF takes custody of the money. The ministerial act of transferring abandoned funds to the comptroller does not entitle the DOF to a two percent fee under CPLR 8010 (1) because it is not money paid out of court to the party entitled to the money or other order directing payment.

This Court originally ordered the DOF to take custody of the Arelma assets, and neither this Court, nor any other court with competent jurisdiction, has awarded the Arelma assets or otherwise directed payment thereof out of the DOF’s custody. Thus, the only fee to be retained by the DOF for its services as custodian of the Arelma assets is the retention of one half of one percent of the sum initially received by him for its placement of the funds in an interest bearing account. There is no statutory authority for the DOF’s retention of two percent for transferring funds as abandoned property to the comptroller’s custody, by passage of time.

(Internal quotations and citations omitted).

It happens from time-to-time that money related to a court case must be paid into court (or, as this decision explains, if the court is in New York City, into the New York City Department of Finance). Getting that money back from the Department of Finance is time consuming and, as this decision shows, potentially expensive. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding the payment of funds into court.

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