On September 25, 2018, the First Department issued a decision in Wiener v. Weissman, 2018 NY Slip Op. 06205, holding that a partnership was not terminable at will if the partnership agreement provides otherwise, explaining:

The individual plaintiffs and the plaintiff trusts are partners of general partnership plaintiffs 5400 Co., Absar Realty Company, and Absar Gerard Associates, formed in 1982 as single-asset real estate holding companies for the purpose of owning and operating two residential apartment buildings and a shopping center in the Bronx. On October 15, 2015, two of the partners issued a notice purporting to withdraw from and dissolve the partnerships, pursuant to New York Partnership Law § 62(1)(b), which, the notice said, provides that a partnership is terminable at will on notice.

. . .

New York’s Partnership Law creates default provisions that fill gaps in partnership agreements, but where the agreement clearly states the means by which a partnership will dissolve, or other aspects of partnership dissolution, it is the agreement that governs the change in relations between partners and the future of the business. Where, as here, a partnership agreement contains provisions governing the dissolution of the partnership by the will of the partners, ordinary contract principles apply, and a notice by a partner or partners to dissolve a partnership in contravention of the partnership agreement’s dissolution provisions is a legal nullity and does not effect a dissolution of the partnership. We note that, unlike Congel, the defendants here assert that their notice of dissolution was a legal nullity.

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

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

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On September 27, 2018, the First Department issued a decision in FranPearl Equities Corp. v. 24 W. 23rd St., LLC, 2018 NY Slip Op. 06326, holding that a breach of contract claim was properly dismissed for lack of evidence of damages, explaining:

It is undisputed that, following the sale of a parcel of land by plaintiff to defendant’s assignor, defendant failed to construct a building on the property and obtain a temporary certificate of occupancy (TCO) for it by September 15, 2011, as the contract of sale required. It is further undisputed that defendant obtained a TCO on November 1, 2012, 13½ months after the deadline. In its case against defendant for breach of contract, plaintiff failed to show that it was harmed by defendant’s delay.

Plaintiff contends that, due to applicable zoning regulations, defendant’s delay prevented it from constructing a building on its own adjacent property for 13½ months. However, plaintiff failed to show that it would otherwise have started construction in September 2011; the evidence it submitted consists primarily of preliminary zoning calculations. Ultimately, plaintiff did not construct a building at all, and sold its property seven months after the TCO was obtained.

Plaintiff also failed to show that commencing construction in November 2012 would have been more costly, or otherwise less advantageous, than commencing in September 2011, or that defendant’s delay affected the price it received for the sale of its own property.

To the extent plaintiff tried to show lost profits during the 13½ month delay, its expert submissions were merely speculative, possible or imaginary rather than reasonably certain and directly traceable to the breach.

We reject plaintiff’s contention that damages should be presumed because the contract provides that if the TCO deadline is missed, plaintiff may have a claim for up to $2 million. Rather than guaranteeing plaintiff a monetary award for a missed deadline, this provision contemplates the possibility of a claim, and caps any resulting damages at $2 million. Further, given that the consequences of a timely obtained TCO are not known, this is not a case where it is reasonable to infer that there probably are damages from the breach.

(Internal quotations and citations omitted).

A key element in commercial litigation is proving damages. As this decision shows, the inability to show damages can be fatal to a claim. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding proving damages.

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On September 26, 2018, the Second Department issued a decision in Webster v. Forest Hills Care Ctr., LLC, 2018 NY Slip Op. 06289, holding that where there is a fiduciary relationship, the beneficiary has a right to an accounting, explaining:

The Supreme Court should have denied that branch of the defendants’ motion which was pursuant to CPLR 3211(a)(7) to dismiss the causes of action for an accounting. Generally, to be entitled to an equitable accounting, a plaintiff must demonstrate that he or she has no adequate remedy at law. However, where, as here, there is a fiduciary relationship between the parties, there is an absolute right to an accounting notwithstanding the existence of an adequate remedy at law.

(Internal citations omitted).

Fiduciaries have special duties, one of which is the obligation to account for assets they control for their beneficiaries. 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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On September 27, 2018, the First Department issued a decision in Matter of Daesang Corp. v. NutraSweet Co., 2018 NY Slip Op. 06331, holding that a motion court erred in vacating an arbitral award because the high standard for showing manifest disregard of the law had not been met, explaining:

An award may be vacated under federal law if it exhibits a manifest disregard of the law. But manifest disregard of the law is a severely limited doctrine. It is a doctrine of last resort limited to the rare occurrences of apparent egregious impropriety’ on the part of the arbitrators, where none of the provisions of the FAA apply. The doctrine of manifest disregard, therefore, gives extreme deference to arbitrators. The Second Circuit has also indicated that the doctrine requires more than a simple error in law or a failure by the arbitrators to understand or apply it; and, it is more than an erroneous interpretation of the law. We agree with that premise. To modify or vacate an award on the ground of manifest disregard of the law, a court must find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.

. . .

The resolution in the partial award of the issue of the viability of NutraSweet’s fraud counterclaims — whether or not that resolution was correct (a question on which we express no opinion) — does not meet the high standard required to establish manifest disregard of the law, namely, a showing that the arbitrators knew of the relevant principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it. On the contrary, the tribunal accepted the authority of the decision on which NutraSweet primarily relied (Merrill Lynch) and, after analyzing the case law offered by both sides, made a good-faith effort to apply to the facts of this case the Merrill Lynch standard proffered by NutraSweet. That the arbitrators did not accept NutraSweet’s view of how the relevant legal principle applies to the facts of this case does not amount to refusing to apply the principle or ignoring it altogether. The arbitrators’ ruling, whether or not we agree with it on the merits, more than meets the requirement that there be at least a barely colorable justification for the outcome reached. Even if a thorough analysis of the underlying legal issue (which we do not propose to undertake here) would lead us to conclude that NutraSweet was correct on the merits, a finding of manifest disregard of the law requires more than a simple error in law or a failure by the arbitrators to understand or apply it. On this record, NutraSweet can show nothing more than this.

Moreover, it cannot be said that the point of law at issue was sufficiently well defined to give rise to a claim that the award was rendered in manifest disregard of the law. The meaning of the rule that an alleged misrepresentation is actionable as fraud if it is collateral or extraneous to the contract — which NutraSweet unsuccessfully argued to the tribunal that its second and third counterclaims satisfied — is not necessarily transparent from the quoted words alone and must be drawn out through detailed analysis of cases in which the rule has been applied. Even if the arbitrators erred in concluding that NutraSweet’s fraud claims were not collateral or extraneous to the contractual representations in the APA and the Processing Agreement, the arbitrators did not manifestly disregard the law by according to the quoted decisional language what may have reasonably seemed to them its natural meaning. Certainly, any error by the arbitrators in deciding this issue (and, again, we make no determination as to whether they in fact erred) was far from obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator, which is the standard for a showing of manifest disregard of the law.

In its appellate brief, NutraSweet appears to defend the vacatur of the dismissal of its second counterclaim (based on the alleged falsity of the compliance-with-law warranty) on the ground that Daesang’s admissions of criminal wrongdoing in the aforementioned affidavit of its executive, Dae Yeob Park should have been of critical importance to the arbitrators deliberations. Any such argument, to the effect that the tribunal did not give sufficient weight to a part of the evidentiary record before it, is entirely without merit. Manifest disregard of the facts is not a permissible ground for vacatur of an award.

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

Commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. And as this decisions shows, the decisions of those arbitrators are subject to only very limited review by the courts. 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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On August 21, 2018, Justice Platkin of the Albany County Commercial Division issued a decision in Concord Dev. Co. LLC v. Amedore Concord, LLC, 2018 NY Slip Op. 51330(U), granting a plaintiff judgement on a breach of contract claim despite the plaintiff having no evidence of damages, explaining:

On its breach of contract claim, Concord bears the ultimate burden of establishing the existence of a valid contract, plaintiff’s performance pursuant to the contract, and defendants’ breach of their obligations under the contract. Here, Concord alleges that defendants’ sale of the Parcel to an Amedore entity for less than fair market value constitutes a breach of the covenant of good faith and fair dealing implicit in all contracts. Concord also argues that the same conduct constitutes a violation of Section 4.5 of the Operating Agreement, which requires the joint venture’s managers to act in good faith and in a manner they reasonably believe to be in the best interests of Amedore Concord.

Even crediting Paul Amedore’s testimony and assuming his subjective good faith in assigning an $880,000 price to the Parcel, the Court finds that defendants breached the covenant of good faith and fair dealing by selling the Parcel to a related entity for less than fair consideration. In this regard, the record shows that little or no diligence was conducted prior to the less-than-arm’s-length sale, and defendants did not obtain an independent appraisal of the Parcel. Moreover, while Amedore did obtain pricing information about three comparable parcels from a real estate appraiser, the value that ALD chose to assign to the Parcel, $20,000 per lot, is considerably lower than any of the comparables.

Moreover, both appraisers agree that the market value of the Parcel on the date of the related-party sale was substantially in excess of the value assigned by defendants. In particular, defendants’ own appraiser opined that the price per lot for comparable properties as of the valuation date was $25,909 (see Ex. 2, pp. 2, 41), which is almost 30% greater than the sale price of the Parcel.

Finally, as interested parties to the transaction, defendants had a special obligation to ensure the fairness of the sale to the joint venture. And given the interested nature of the transaction, no deference is due to defendants’ business judgment.

Based on the foregoing, the Court finds that defendants breached the obligation of good faith and fair dealing, as well as the express covenant of Section 4.5 of the Operating Agreement, in selling the Parcel to a related party for less than fair consideration.

B. Damages

Plaintiff seeks to recover monetary damages for the foregoing breach of contract. Specifically, plaintiff claims to have been damaged in the amount of one-half of the difference between the fair value of the Parcel on the date of the sale and the $880,000 contract price. For the reasons that follow, the Court concludes that Concord has failed to establish that it has sustained any monetary damages proximately caused by defendants’ breach.

Where corporate property is sold for less than fair value in an interested transaction, it is the corporation that suffers the injury. As the Delaware Chancery Court has stated: Sale of corporate assets to an interested party for an unfair price states perhaps the quintessential derivative claim. It is the corporation that loses the difference between the consideration paid by the corporate insider for the asset and the fair value of the asset at the time of sale.

In contrast, the shareholders of the corporation ordinarily do not suffer any direct pecuniary loss as the result of an interested transaction. A shareholder’s loss of the future distributions that it would have received had the corporate property been sold for its fair value is entirely derivative of the harm sustained by the corporation and would be fully remedied if the corporation were made whole. Thus, for example, in reversing the award of money damages to an individual shareholder alleging the conversion of corporate property, the Appellate Division, First Department explained: The conversion resulted in a corporate injury because it deprived the corporation of those funds. The injury to plaintiff was real but only derivative; therefore the funds should have been awarded to the corporation.

The Court sees no basis for departing from these well settled principles here. Having failed to receive fair consideration for the Parcel, Amedore Concord possesses a right of action against defendants, a claim that Concord could have sought to advance derivatively under Business Corporation Law § 626.

But plaintiff’s claim here is a direct claim, not a derivative claim. Concord sues for damages that it allegedly sustained in its own right. Under the Operating Agreement, however, Concord does not have a right to receive distributions or obtain the return of its capital absent a liquidation of the company. Thus, Concord has not yet sustained any monetary loss traceable to defendants’ breach of contract.

The only form of monetary damage alleged by Concord is a diminution in its expected distributions upon the liquidation of Amedore Concord. However, for a wrong against the corporation, a shareholder has no individual cause of action, even where the shareholder loses the value of the investment. Rather, any future right of Concord to receive distributions or obtain the return of its capital is limited to the relief available in a dissolution proceeding, but this is not such a proceeding. Moreover, if the Court were to award damages in the manner sought by Concord, it would, in effect, be according Concord the right to a priority distribution of capital that is not authorized by the parties’ agreements.

Contrary to Concord’s contention, the issue is not whether defendants waived any objection to its standing to maintain a derivative claim by failing to move on such defense or preserving the defense in their answer. As the proponent of the contractual claim, plaintiff has the burden of proving its claimed damages. Here, the liquidation damages requested by Concord is not an appropriate or legally permissible measure of damages, and Concord has otherwise failed to establish that it sustained any monetary damages in its own right.

That said, nominal damages are always available in breach of contract actions, as all of the elements necessary to maintain a lawsuit and obtain relief in court are present at the time of an alleged breach. Further, issuance of a declaratory judgment that will guide a future dissolution proceeding by fixing the fair value of the Parcel at the time of the related-party sale will accord Concord complete relief.

For all of the foregoing reasons, the Court finds that Concord has failed to demonstrate its entitlement to anything more than a nominal award of monetary damages.

(Internal quotations and citations omitted).

A key element in commercial litigation is proving damages. Many cases hold that this is true even for a claim of breach of contract. As this decision shows, not all courts follow this rule, and, in any event, the question of whether a plaintiff was damaged is not always straightforward. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding proving damages.

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On September 19, 2018, the Second Department issued a decision in Roman Catholic Diocese of Brooklyn, N.Y. v. Christ the King Regional High Sch., 2018 NY Slip Op. 06131, holding that third parties should have been allowed to intervene on the eve of summary judgment motions, explaining:

Upon a timely motion, a person is permitted to intervene in an action as of right when, among other things, the representation of the person’s interest by the parties is or may be inadequate and the person is or may be bound by the judgment. In addition, the court, in its discretion, may permit a person to intervene, inter alia, when the person’s claim or defense and the main action have a common question of law or fact. However, it has been held under liberal rules of construction that whether intervention is sought as a matter of right under CPLR 1012(a), or as a matter of discretion under CPLR 1013 is of little practical significance and that intervention should be permitted where the intervenor has a real and substantial interest in the outcome of the proceedings. In exercising its discretion, the court shall consider whether the intervention will unduly delay the determination of the action or prejudice the substantial rights of any party.

Here, both MVP and CTKCE demonstrated that they have a real and substantial interest in the outcome of the litigation and that, although their respective interests are aligned with those of CTK and with each other, CTK cannot fully represent those interests. Moreover, while MVP and CTKCE, as nonparties, would not be directly bound by a judgment in favor of the Diocese and against CTK, if the Diocese prevailed, CTK would be required to break its lease with CTKCE, which would in turn be forced to break its sublease with MVP. Under these circumstances, MVP and CTKCE should have been allowed to intervene.

Although approximately 3½ years had passed between the commencement of this action and the filing of MVP’s and CTKCE’s separate motions to intervene, the matter had proceeded only to the summary judgment stage. Furthermore, the Diocese failed to point to any substantial prejudice it would suffer if MVP and CTKCE were permitted to intervene, and it is unlikely that substantial additional disclosure will be required.

(Internal quotations and citations omitted).

Intervention is where a non-party asks to join an existing lawsuit. Intervention can be an important tool for ensuring that your rights are not prejudiced by a decision in a lawsuit to which you are not a party. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question about whether a lawsuit to which you are not a party will affect your rights.

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On September 19, 2018, the Second Department issued a decision in Rodrigues NBA, LLC v. Allied XV, LLC, 2018 NY Slip Op. 06129, holding that a time is of the essence letter was ineffective, explaining:

When, as here, a contract for the sale of real property does not make time of the essence, the law permits a reasonable time in which to tender performance, regardless of whether the contract designates a specific date for performance. Where there is an indefinite adjournment of the closing date specified in the contract of sale, some affirmative act has to be taken by one party before it can claim the other party is in default; that is, one party has to fix a time by which the other must perform, and it must inform the other that if it does not perform by that date, it will be considered in default.

In order to make time of the essence, there must be a clear, distinct, and unequivocal notice to that effect giving the other party a reasonable time in which to act. What constitutes a reasonable time for performance depends upon the facts and circumstances of the particular case. Included within a court’s determination of reasonableness are the nature and object of the contract, the previous conduct of the parties, the presence or absence of good faith, the experience of the parties and the possibility of prejudice or hardship to either one, as well as the specific number of days provided for performance. The determination of reasonableness must by its very nature be determined on a case-by-case basis. The question of what constitutes a reasonable time is usually a question of fact.

Here, the seller failed to establish, prima facie, that the time of the essence letter provided the buyer with a reasonable time within which to close. Furthermore, the seller’s submissions failed to eliminate triable issues of fact as to whether the property was the subject of ongoing administrative proceedings, in violation of the contract of sale, which could be completely resolved at the scheduled closing or within a reasonable time thereafter. Under these circumstances, the seller failed to sustain its burden of demonstrating that it was ready, willing, and able to convey title in accordance with the contract of sale. Since the seller failed to establish its prima facie entitlement to summary judgment on the complaint and dismissing the buyer’s counterclaims, we agree with the Supreme Court’s determination to deny those branches of its motion, without consideration of the sufficiency of the buyer’s opposing papers.

(Internal quotations and citations omitted).

We frequently litigate disputes over the purchase and sale 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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On September 13, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Level Group Inc. v. Smart Merchants Inc., 2018 NY Slip Op. 32259(U), holding that an officer was not personally bound by a contract he signed on behalf of his company, explaining:

In support of the cross-motion to dismiss the first cause of action against Kim, Defendants rely on the Letter Agreement and argue that Level cannot maintain this claim against Kim because there is no privity of contract between Level and Kim. Defendants argue that, because Kim only signed the Letter Agreement in his corporate capacity on behalf of SMI, he cannot be held personally liable for the purported breach of the Letter Agreement.

Officers or agents of a company are not personally liable on a contract if they do not purport to bind themselves individually, which must be shown by some direct and explicit evidence of actual intent.

The portion of the Letter Agreement that Kim signed is in the following form:

Accepted and agreed to,
Smart Merchants Incorporated
By:
Chung Chan Kim, President.

Kim’s signature follows the word “By.” This signature was made in Kim’s corporate, not individual, capacity. Defendants have thus established their entitlement to judgment as a matter of law on the portion of its cross-motion for summary judgment to dismiss Level’s breach of contract claim against Kim individually.

In opposition, Level argues that Kim may be personally liable for the breach of the Letter Agreement because, by signing the Letter Agreement – which defines SMI as “SMI and all entities which whether directly or indirectly, are controlled by SMI or any person or entity with a direct or indirect interest in any of the foregoing” – Kim clearly expressed his intent to be bound individually. This argument is meritless.

Level has not offered any direct and explicit evidence of actual intent of Kim’s intent to be bound in his individual capacity to the Letter Agreement. Therefore, Defendants’ cross-motion for summary judgment dismissing the first cause of action against Kim is granted, and Level’ s motion for summary judgment is denied.

(Internal quotations and citations omitted).

Usually, the only parties who have rights or obligations under a contract are the parties to the contract. Here, a party tried–but failed–to sue an individual who signed a contract on behalf of a company. 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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On September 17, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Milman v. Thrane, 2018 NY Slip Op. 32287(U), holding that the claims of the former manager of an LLC regarding his removal as manager must be arbitrated, explaining:

This case concerns the alleged wrongful removal of plaintiff as a manager and member of The Alldyn Group, LLC (the Company) and the events precipitating his removal. The Company is a New York LLC that is governed by an operating agreement dated October 10, 2017. Section 11.14 of the Operating Agreement provides that:

Any dispute between or among any of the Class A Members … relating to a Class A Member’s withdrawing from the Company or terminating his services for the Company for any reason, which cannot be resolved among the Class A Members (acting as the Executive Board of Managers or otherwise) after good-faith negotiation over a period of at least 15 business days, shall be referred to an independent legal expert selected and agreed upon by all parties, who shall act as sole arbiter to decide and settle the dispute, and whose determination shall be conclusive and binding upon the Class A Members and the Company.

While § l l.14 does not require the Company’s members to arbitrate any dispute arising under the Operating Agreement, it does require arbitration of all disputes relating to a member’s removal. Thus, the court held that the question of whether plaintiff was properly removed must be decided by an arbitrator. Section 11.14, however, does not -as it could have- merely limit arbitration to the sole question of whether removal was proper. Rather, it requires arbitration of all disputes relating to the removal. It is well settled that relating to signifies intent to be bound by a broad arbitration provision that covers all disputes that have any bearing on the subject matter.

All of plaintiffs causes of action contained in the complaint unmistakably relate to his withdrawal/removal. Plaintiff seeks recovery of his capital account and distribution of his share of a fee owed by one of the Company’s clients. Under § 6.9 of the Operating Agreement, upon removal for cause, plaintiff forfeits the right to his capital account and under § 4.1, only members are entitled to distributions. Thus is plaintiff was properly removed for cause, he has no claims. Even if he was not properly removed, because plaintiff himself alleges that his removal was motivated by a desire to wrongfully deprive him of his capital account and of his share of the subject client fee, his claim to such money is certainly related to his removal. Thus, all of plaintiff’s claims are subject to arbitration under § 11.14.

(Internal quotations and citations omitted).

This decision illustrates one the many rules for interpreting contracts: if a contract contains a pre-suit dispute resolution provision, the failure to comply with that provision likely will bar a claim for breach of the contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a dispute over the interpretation of a contract.

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On September 5, 2018, Justice Masley of the New York County Commercial Division issued a decision in Storper v. WL Ross & Co., LLC, 2018 NY Slip Op. 32235(U), dismissing a claim for equitable accounting, explaining:

Plaintiffs have failed to plead facts sufficient to support a legally viable claim for an equitable accounting. To be entitled to an equitable accounting, a claimant must demonstrate that he or she has no adequate remedy at law. The right to an accounting is premised upon the existence of a confidential or fiduciary relationship and a breach of the duty imposed by that relationship respecting property in which the party seeking the accounting has an interest.

In the amended complaint, plaintiffs allege that defendants breached certain fiduciary duties by improperly paying, causing to be paid, receiving, or retaining management fees and by not disclosing such fees to plaintiffs. Thus, the damages allegedly suffered by plaintiffs are clearly monetary. Therefore, plaintiffs could be made whole by an award of monetary damages. Where monetary damages are available and will make the plaintiff whole, the plaintiff has an adequate remedy at law. Thus, plaintiffs’ factual allegations, if proven, demonstrate that plaintiffs have an adequate remedy at law, and, therefore, are not entitled to an equitable accounting.

The court notes that plaintiffs are entitled by the terms of the amended and restated limited liability corporation agreement (LLCA) for each GP to fully inspect and audit the GP’s financial books and records, including its bank balances. Therefore, the financial information for each GP may be obtained through pre-trial discovery if not produced as required by the LLCA.

Contrary to plaintiffs’ contention, the mere allegation of the existence of a fiduciary duty, without more, does not entitle them to an equitable accounting. A plaintiff must also demonstrate that he or she has no adequate remedy at law before a court may award an equitable accounting.

(Internal quotations and citations omitted).

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

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