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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: October 17, 2019

Upcoming Arguments in the Court of Appeals in October 2019

Upcoming argument in the Court of Appeals in October 2019 that may be of interest to commercial litigators:

  1. Deutsche Bank v Barclays Bank; Deutsche Bank v HSBC Bank USA APL-2018-00169 (Limitation of Actions—What Statute Governs–Whether plaintiff trustee’s breach of contract claims were barred by California’s four-year statute of limitations, pursuant to the borrowing statute of CPLR 202; defendant banks alleged to have breached representations and warranties made in connection with the sale of residential mortgage-backed securities pooled in trust; whether claim accrued in California or New York.

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Posted: October 17, 2019

Broad Arbitration Clause Covers Claims Arising in Contract, Quasi-Contract and Tort

On October 4, 2019, Justice Schecter of the New York County Commercial Division issued a decision in Broumand v. Abbot, 2019 NY Slip Op. 32938(U), holding that a broad arbitration clause covered claims arising in contract, quasi-contract and tort, explaining:

The Federal Arbitration Act (FAA) applies because Broumand’s claims involve interstate commerce. Matters concerning companies’ operation of nationwide marijuana businesses affect interstate commerce. Thus, gatekeeping statute of limitations rulings may not be made by the court.

Here, neither the operating agreements of Holdings or Columbia Care are governed by New York law, nor do the parties contend they contain the requisite language reserving statute of limitations issues for the court notwithstanding applicability of the FAA. In fact, the arbitration provision itself states that AAA rules will govern; thus, arbitrability and the statute of limitations are issues reserved for the arbitrator. So long; as any claim plausibly “relates” to the Holdings and Columbia Care Agreements, questions as to arbitrability of any claim are for the arbitrator, and not the court, to decide.

All of Broumand’s claims relate either to the Holdings or Columbia Care Agreements. The bulk of his claims are brought either derivatively on behalf of AVF or double derivatively on behalf of Holdings and concern Abbot and Vita taking virtually all of Holdings’ business and moving it under the auspices of Columbia Care. This, allegedly, amounts to a breach of their duty of loyalty as Holdings’ managers and breach of their non-compete obligations under the Holdings Agreement. These claims “relate” to the Holdings Agreement. LLCs are creatures of contract and their operating agreements govern their internal affairs. Thus, claims based on breach of fiduciary duty inherently relate to the operating agreement. And of course, a claim that the ·operating agreement was breached arises thereunder. Simply put, the Holdings Agreement’s broad arbitration clause covers all of these claims, whether grounded in contract, quasi contract, or tort.

The same is true of Broumand’s direct claims concerning his investment in A VF and the promises made to him concerning Columbia Care. AVF is the vehicle through which Broumand acquired his interest in Holdings. His personal claims concerning that investment relates to Holdings, especially since the alleged fraud was failure to disclose how Holdings would operate in relation to Columbia Care. Likewise, promises concerning Broumand’s relationship with Columbia Care relate to its operating agreement. To be sure, if the arbitration provisions were limited to claims arising under those agreements, these claims would not be subject to arbitration. But given the breadth of the arbitration provisions, it is clear that the parties have an unmistakable agreement to arbitrate and that the subject matter of the claims is fairly interpreted as falling within their scope. Thus, at most, Broumand’s contentions that his direct claims are not arbitrable may be raised with the arbitrator but are not grounds for precluding arbitration.

(Internal quotations and citations omitted).

Commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. As this decision shows, even though the agreement to arbitrate in contractual, the types of disputes covered by an agreement to arbitrate can be much broader that breach of contract claims. 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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Posted: October 16, 2019

Court Erred in Awarding Damages That Were Not Proved or Requested

On October 8, 2019, the First Department issued a decision in Pastreich v. Pastreich, 2019 NY Slip Op. 07215, holding that the trial court erred in awarding damages that were not proved or requested, explaining:

Further, as to the imposition of liability on Yitzhak, we decline to disturb that finding in light of the deference due to the court’s ability to see and hear the witnesses . However, the fact that liability can be imposed on Yitzhak does not mean that he must pay all the amounts listed in the judgment. First, he does not have to pay Lisa $100,000, because there was no evidence that she had incurred that amount in legal fees and because of the American Rule. Second, since Mark did not request punitive damages, the court should not have awarded them. Third, since both sides agreed that Yitzhak had taken only $330,873 — not $1.4 million — from the Trusts, he must repay only that amount.

(Internal citations omitted) (emphasis added).

A key element in commercial litigation is proving damages. 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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Posted: October 15, 2019

Plaintiff May Not Move to Amend Complaint After Complaint Has Been Dismissed

On October 1, 2019, the First Department issued a decision in Tanner v. Stack, 2019 NY Slip Op. 07039, holding that a plaintiff may not move to amend a complaint after that complaint has been dismissed, explaining:

By the time plaintiff moved for leave to amend, the original complaint had already been dismissed; hence, there was no complaint left before the court to amend.

(Internal quotations and citations omitted).

New York procedural rules give a litigant the right to amend its complaint (at least) once without the court’s permission, but as this decision shows, if the complaint has been dismissed in its entirety, there is nothing to amend. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where the plaintiff attempts to amend its complaint after it has been dismissed.

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Posted: October 14, 2019

Faithless Servant Claim Requires Defendant to Have Acted Directly Against Employer’s Interests as in Embezzlement, Improperly Competing or Usurping Business Opportunities

On October 1, 2019, the First Department issued a decision in Bluebanana Group v. Sargent, 2019 NY Slip Op. 07014, holding that a faithless servant claim requires that the employee-defendant acted directly against the employer’s interests, explaining:

Plaintiffs have failed to state a cognizable claim for breach of the duty of loyalty, which requires the employee to have acted directly against the employer’s interests – as in embezzlement, improperly competing with the current employer, or usurping business opportunities. Plaintiffs have not alleged that they were in any of the same businesses as Sargent. Plaintiffs do not claim any tangible expectancy in Sargent’s alleged side business activity, nor are there any well-pled allegations that Sargent stole or embezzled funds. The claim for breach of duty of loyalty/faithless servant was properly dismissed.

(Internal quotations and citations omitted).

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

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Posted: October 13, 2019

Fraud Claim Cannot be Based on Alleged Intention Not to Perform Contract

On September 25, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Roy Food & Wine LLC v. Meregalli, 2019 NY Slip Op. 32875(U), dismissing a fraud claim based on an alleged misrepresentation of an intention to perform a contract, explaining:

To state a cause of action for fraud, a plaintiff must allege a representation of material fact, the falsity of the representation, knowledge by the party making the representation that it was false when made, justifiable reliance by the plaintiff and resulting injury.

In the complaint, the alleged misrepresentation is Meregalli and the Company not informing plaintiffs of the true amount of Meregalli’s capital contribution (or the representation that the amount of contribution was higher than it really was). Defendants contend plaintiffs cannot show reasonable reliance because, due to their involvement in the business, they should have been aware of the state of things. Plaintiffs do not point to any actions they took in reliance on those representations. In their opposition, they claim the reliance was their decision to invest in the Company. That action was taken before Meregalli allegedly misrepresented his contributions, so statements about his having made those contributions could not have led to their investments.

If this claim is cast, instead, as a claim for fraud in the inducement, the alleged misrepresentation should be one of then-present fact, which would be extraneous to the contract and involve a duty separate from or in addition to that imposed by the contract and not merely a misrepresented intent to perform. Representations of opinion, even as to matters of fact, are not representations and are not actionable unless guaranteed. Plaintiffs have not alleged a misrepresentation of a then-present fact other than intent to perform, which could provide the basis for this claim. Accordingly, this claim shall be dismissed.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements such as the rule discussed here that a fraud claim cannot be based on a breach of contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a fraud-based claim.

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Posted: October 12, 2019

Court Dismisses Federal Securities Fraud Claims

On September 26, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Matter of Densply Sirona, Inc. v. XXX, 2019 NY Slip Op. 32849(U), dismissing federal securities fraud claims, explaining:

I find that Plaintiffs’ statements concerning competition and the scope and prospects of Dentsply’s and Sirona’s business are expressions of puffery and corporate optimism, and accordingly, do not give rise to securities violations. The cases Plaintiffs’ cite, in support of their argument that statements about competition are misleading absent disclosure of an existing anticompetitive scheme, are distinguishable in that those cases involved allegations that the defendant companies themselves participated in the anticompetitive schemes.

Here, in contrast, Plaintiffs allege that the Alleged Anticompetitive Scheme was perpetrated by Defendants’ customers, the Distributors; the CAC does not allege that Defendants were participants in the Alleged Anticompetitive Scheme. In these circumstances, Defendants’ failure to disclose the Distributors’ Alleged Anticompetitive Scheme did not cause their general statements about the state of market conditions to be misleading and Plaintiffs allegations therefore fail to state a claim under the ’33 Act.

Second, Plaintiffs allege that Defendants made misleading statements regarding existing and growing demand in the industry because the channel stuffing, which was allegedly known to Defendants’ leadership, meant that there wasn’t growth over all segments and that growth was actually stifled.

In essence, Plaintiffs assert that Defendants’ customers bought excess product and this fact rendered Defendants’ statements about existing and growing demand false. Defendants’ statements about growth are statements of opinion which are not actionable. Accordingly, Defendants’ statements about growth also do not give rise to a claim under the ’33 Act.

Last, Plaintiffs allege that Defendants made misleading statements concerning inventory because the Registration Statement did not disclose facts about the Distributors’ inventory stockpiling and the likelihood that such stockpiling would result in Patterson’s termination of the Exclusivity Agreement.

Again, the CAC does not demonstrate that the statements regarding inventory were misleading when made. Plaintiffs do not allege that at the time of the Registration Statement, Patterson had terminated its Exclusivity Agreement or notified Defendants of its intention to terminate. Where, as here, an outcome is merely speculative, the duty to disclose does not attach. Therefore, this category of alleged omissions also fails to state a claim. For the foregoing reasons, Plaintiffs fail to state a claim under Sections 11 and 12(a)(2) of the ’33 Act and I dismiss the aforementioned claims.

(Internal quotations and citations omitted).

We have substantial experience in litigation regarding securities, both in state and federal court. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client need help regarding a claim related to stocks, bonds or other financial instruments.

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Posted: October 11, 2019

Failure to Send Regular Invoices Defeats Account Stated Claim

On September 13, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Kasowitz, Benson, Torres LLP v. Cabrera, 2019 NY Slip Op. 32738(U), holding that the failure to send regular invoices defeated an account stated claim, explaining:

An account stated is an agreement between parties to an account based upon prior transactions between them with respect to the correctness of the account items and balance due. The agreement can be express, or may be implied where a defendant retains bills without objecting to them within a reasonable period of time, or makes partial payment on the account. Reciept and retention of plaintiff’s accounts, without objection within a reasonable time, and agreement to pay a portion of the indebtedness, gives rise to an actionable account stated, thereby entitling plaintiff to summary judgment in its favor.

Here, Kasowitz makes a prima facie case for entitlement to judgement on account stated as there is no dispute that the defendants received and retained the bills for the outstanding amount, nor do defendants deny that they have made payments on their balance over the course of the representation.

Defendant’s contention that plaintiff failed to provide regular invoices, however, is enough to raise a question of fact as to whether there was an account stated. During the course of Kasowitz’s representation of defendants, only one invoice was provided. The second and final invoice, which represented charges for the bulk of the work, was presented to defendants after Kasowitz had withdrawn and a dispute had arisen between the parties. Defendants also state in a supporting affidavit that they raised objections to the charges both orally and by letter on March 15, 2017, which also shows that the $50,000 payment made was to obtain the case file and not an acceptance of the account.

Summary judgement shall be denied as to the claim for an account stated.

(Internal quotations and citations omitted).

People sometimes are surprised to learn that if they do not complain about a bill they receive, they can be found to have agreed to it. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions about a claim based on un-objected-to invoices.

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Posted: October 10, 2019

Court Refuses to Apply Apex Doctrine to Quash Subpoena

On September 19, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Vestis Invs. II, LLC v. Sportsdirect.com Retail Ltd., 2019 NY Slip Op. 32810(U), refusing to apply the apex doctrine to quash a subpoena, explaining:

Sports Direct asserts that, pursuant to the “apex witness” rule, Vestis should not be permitted to take the deposition of a high-level corporate executive, absent a detailed showing that (a) Mr. Ashley has unique knowledge that is material and necessary to the prosecution or defense of this action and (b) that no less intrusive means of obtaining the information is available. The court disagrees.

The “apex witness” rule is a doctrine recognized by federal courts in New York which seeks to limit harassment and disruption to businesses by restricting requests to depose high-ranking corporate executives. Sports Direct fails to cite any authority demonstrating adoption of an “apex witness”rule under New York state law. The only case cited by Sports Direct is Daou v Huffington, 2013 WL 6162980, 2013 NY Slip Op. 30372 [U] [Sup Ct, NY County 2013]). Daou is inapposite, however, as the court in Daou merely held that a party cannot issue a subpoena to take the deposition of high-level corporate executive where the executive has no unique, relevant information. In fact, the court in Daou observed that high-level executives are not immune per se from discovery or from depositions. As discussed on the record, here, Vestis seeks to obtain crucial information that only Mr. Ashley can impart concerning the logic behind the $17 million offering price and what he understood to be included for that price as Additional Consideration in the LOI.

Sports Direct argues that Vestis should have to exhaust all other less intrusive means of gaining this information. It asserts that Mr. Ashley delegated the responsibility for the negotiation, documentation, and execution of the LOI transaction to a U.S.-based advisor, Howard Moher. It further asserts that Mr. Moher is the person who received the January 25 email from Lincoln that Vestis alleges reflects the actual terms of the parties’ agreement, and he is the one who reviewed and commented on drafts of the LOI. Sports Direct also asserts that a U.K.-based consultant, Justin Barnes, served as a conduit for Mr. Ashley in the negotiations and would have any relevant information that Vestis might hope to obtain from Mr. Ashely. Sports Direct argues that it would be less intrusive to depose Mr. Moher or Mr. Barnes than it would be to depose Mr. Ashley in the United Kingdom and that Vestis cannot take the deposition of Mr. Ashley without first exhausting those less intrusive options. These arguments are unpersuasive.

In Kapon v Koch, the Court of Appeals directly addressed the issue of whether a subpoenaing party must demonstrate that the information sought is not available from any other source. In Kapon, the petitioners commenced a special proceeding to quash non-party subpoenas served upon them in a fraud action filed in California by the respondent, William Koch, relating to the alleged sale of counterfeit wine. One of the petitioners, John Kapon, was the Chief Executive Officer of Acker, Merrall & Condit Company, a New York corporation operating in New York as a retailer and auctioneer of fine and rare wines. The petition in the special proceeding sought to quash the subpoenas pursuant to CPLR § 2304 and, in the alternative, sought the imposition of a protective order pursuant to CPLR § 3101 to, inter alia, stay the non-party depositions until the completion of party depositions in the California action and limit the scope of the depositions to matters material and necessary to the California action.

The Supreme Court denied the motions to quash and for a protective order and the Appellate Division unanimously affirmed. In affirming the order of the Appellate Division, the Court of Appeals observed: Section 3101(a)(4) imposes no requirement that the subpoenaing party demonstrate that it cannot obtain the requested disclosure from any other source. Thus so long as the disclosure sought is relevant to the prosecution or defense of an action, it must be provided by the nonparty.

In short, Vestis has met its burden in demonstrating that Mr. Ashley has information that is material and necessary to its claims in this action. Vestis seeks to question Mr. Ashley concerning, among other things, a specific conversation between Mr. Ashley and Mr. Moher in which Mr. Ashley allegedly agreed to include as additional consideration in the LOI exactly the assets that are at issue in this case. To the extent that Sports Direct claims that Mr. Moher may also have this information, Vestis asserts that Mr. Moher indicated in his deposition that he does not recall the conversation in question or the basis for the $17 million. Thus, Mr. Ashley is the only person who can speak to the nature of the conversation.

(Internal quotations and citations omitted).

A big part of complex commercial litigation is giving, receiving and evaluating evidence (this is called “discovery”). The scope of discovery in New York is broad, but as this decision shows, it is not unlimited. The question addressed here was whether one of a company’s senior executives could be deposed (the answer here was yes). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has a question regarding discovery obligations (and what to do if a litigant is not honoring those obligations).

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Posted: October 9, 2019

Derivative and Individual Claims Based on Same Facts Cannot be Brought in Same Action

On September 23, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Jobar Holding Corp. v. Halio, 2019 NY Slip Op. 32813(U), holding that derivative and direct claims based on the same facts cannot be brought in the same action, explaining:

Although the complaint is rife with allegations that a serious wrong was committed, the drafting of the pleading makes it difficult to determine the precise causes of action that are being pled. Plaintiffs state in their opposition papers that derivative claims are only being asserted against Halio, however, some of the allegations stated in the causes of action asserted against Turman support derivative causes of action as well. In addition, while the causes of action asserted against Turman are stated as being on behalf of Buck individually, some of those causes of action would be inappropriate or unsustainable as causes of action on behalf of an individual.

The theft of a corporation’s funds is a wrong against the corporation and a shareholder has no right to sue as an individual for a wrong committed against the corporation. This is so even if the wrongful act caused the shareholder’s holdings to decrease in value. A shareholder may not obtain a recovery that belongs to the corporation or duplicates it. To remedy an injury to a corporation, a shareholder must bring a derivative action on behalf of the corporation.

However, if the wrongdoer breaches a duty owed directly to the shareholder and the duty is independent of any duty owed to the corporation, the shareholder may bring an individual action against the wrongdoer. Where the shareholder, rather than the corporation, suffers the harm and would receive the benefit of any recovery, the shareholder may proceed with a direct action against the wrongdoer.

The causes of action asserted against Halio and against Turman consist of the same factual assertions and allege the same injury, the loss of $1.5 million. That loss was to Jo bar and most of the claims asserted against Turman allege a wrong done to Jo bar, not to Buck. Although the complaint explicitly sets forth a cause of action based on BCL § 626 (shareholders’ derivative action) against Halio and does not do the same against Turman, it is not clear from the complaint that derivative allegations are not also being asserted against Turman. For example, the aiding and abetting breach of fiduciary duty cause of action is based on the allegation that Turman aided and abetted Halio’s wrongs against Jobar, not against Buck individually.

Regarding plaintiffs’ allegations that Turman caused Buck individual harm, the complaint states that Turman consistently delayed delivery of K-ls to Buck and many times intentionally interfered with Buck’s attempts to obtain financial information for Jobar. The complaint alleges that Buck relied on the allegedly falsified tax forms prepared by Turman to prepare his own and his mother’s estate’s taxes. These are not derivative claims, as Buck, not Jobar, suffered the alleged harm and would receive the benefit of any recovery. However, plaintiffs do not allege a clear injury to Buck or damages sustained by him resulting from this alleged misconduct. In sum, the causes of action asserted against Turman are an unclear mix of Buck’s personal claims, derivative claims on behalf of Jo bar, and other claims that are not sustainable to any of the plaintiffs.

It is well settled that derivative and individual claims based on the same operative facts cannot be interspersed in the same action. Complaints that mingle derivative and individual claims are generally dismissed with leave given to replead. Because of the mixing of derivative and individual claims, and the unclear nature of the allegations being asserted against Turman, the complaint is dismissed insofar as asserted against Turman without prejudice to bring properly pled causes of action against this defendant.

(Internal citations omitted) (emphasis added).

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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