Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: September 21, 2018

Claims Barred by Release

On September 12, 2018, the Second Department issued a decision in Miller v. Brunner, 2018 NY Slip Op. 06008, holding that claims were barred by a release, explaining:

A release is a contract, and its construction is governed by contract law. A release that is complete, clear, and unambiguous on its face must be enforced according to the plain meaning of its terms. A valid general release will apply not only to known claims, but may encompass unknown claims, including unknown fraud claims, if the parties so intend and the agreement is fairly and knowingly made. A signed release shifts the burden of going forward to the plaintiff to show that there has been fraud, duress or some other fact which will be sufficient to void the release.

Here, the release broadly covers, inter alia, all claims by the plaintiffs against the defendants predating the release. Contrary to the plaintiffs’ contention, the terms of the release clearly and unambiguously bar the first cause of action in the amended complaint, which is asserted against Anmuth and alleges a breach of the January 28, 2014, agreement. In addition, the plaintiffs failed to sufficiently allege each of the elements of fraud in the inducement, which would be required in order to set aside the release. Accordingly, the Supreme Court should have granted that branch of the defendants’ motion which was, in effect, pursuant to CPLR 3211(a)(1), (5), and (7) to dismiss the first cause of action of the amended complaint insofar as asserted against them.

(Internal quotations and citations omitted).

Among the things people typically do to resolve a legal dispute is agree to release any legal claims they may have against each other. As this decision shows, a release is a contract like any other and will be enforced even if a party later comes to regret releasing its claims. Contact Schlam Stone & Dolan partner John Lundin at if you or a client face a situation where you are unsure whether you have released claims.

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Posted: September 20, 2018

Court Declines to Dismiss Double-Derivative Action

On September 4, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Simon v. French-American Surgery Ctr., Inc., 2018 NY Slip Op. 32184(U), refusing to dismiss a double-derivative action, explaining:

Under New York law, double derivative actions may be brought by a minority shareholder of a parent company for harm to a subsidiary of the parent. The action may be maintained where a stockholder controls a subsidiary such that there is no independence between the parent stockholder and the subsidiary, and it cannot be expected that the controlling stockholder will authorize a suit on behalf of the subsidiary against itself for harm to the subsidiary.

Here, plaintiff alleges that he is a minority shareholder of Franclnvest, and that Franclnvest controlled JSS as the subsidiary corporation that owns the claims. Therefore, plaintiffs double derivative claims are appropriate.

(Internal quotations and citations omitted).

This decision relates to something common in complex commercial litigation–the question of whether a claim can be brought by an individual on his or her own behalf or must be brought on behalf of a corporation or other entity in which the plaintiff has an ownership stake (that is, derivatively). Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.

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Posted: September 19, 2018

Court Grants Adverse Inference on Summary Judgment for Assertion of Fifth Amendment Rights

On September 5, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Knox, LLC v. Lakian, 2018 NY Slip Op. 32191(U), granting an adverse inference against a party that asserted its Fifth Amendment rights, explaining:

Plaintiffs also ask this Court to draw a negative inference against Mr, Lakian. During Mr. Lakian’s deposition on January 7, 2016, he invoked the Fifth Amendment in response to every question posed by Plaintiffs’ counsel. Mr. Lakian invoked the Fifth Amendment in response to general questions, such as his current home address and whether he is familiar with Capital L. Likewise, Mr. Lakian invoked the Fifth Amendment in response to specific questions regarding Plaintiffs’ investments and the purposes for which Plaintiffs’ investment funds were used.

When a party in a civil action, capable of testifying on the issues, refuses to testify by the claim of privilege, he must thereupon bear all of the legitimate inferences flowing from the adverse evidence against him, and this without regard to his reasons for silence. The Fifth Amendment does not forbid adverse inferences where the privilege is claimed by a party to a civil cause. Here, it is clear that Mr. Lakian refused to answer any questions at his deposition not only because it would have incriminated him, but also because it would have been unfavorable to him in this action. Accordingly, Plaintiffs are entitled to a negative inference against  Mr. Lakian regarding scienter.

(Internal quotations and citations omitted).

The assertion of the Fifth Amendment right against self-incrimination cannot be held against a defendant in a criminal trial. However, as this decision shows, such a refusal to testify in a civil lawsuit can be held against the witness. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions about asserting the Fifth Amendment right not to testify.

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Posted: September 18, 2018

No New York Personal Jurisdiction Over Student Loan Trust Trustee That Engaged New York Counsel

On September 4, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in National Coll. Master Student Loan Trust I v. Wilmington Trust Co.2018 NY Slip Op. 32194(U), holding that the court lacked personal jurisdiction over a the trustee of a student loan trust that engaged New York counsel, explaining:

Under CPLR 302(a)(l), jurisdiction may only be exercised over an out-of-state defendant if that defendant has purposefully transacted business within the state and there is a substantial relationship between the transaction and the claim asserted. Purposeful activities are those with which a defendant, through volitional acts, avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.

Plaintiffs assert that CPLR 302(a)(l) jurisdiction may be exercised over Wilmington because Wilmington transacted business in New York by signing a retainer agreement with a New York law firm on behalf of the Trusts, and the legal services were performed in New York. Plaintiffs maintain that Wilmington made innumerable telephone and e-mail communications to Chaitman in New York regarding Chaitman’s performance of legal services and payment for those services.

Wilmington executed the Retention Agreement in Delaware, solely in its representative capacity and at the direction of the Trusts’ Owners, to represent the Trusts. This action constitutes neither the performance of any act within the state nor the transaction of any business here giving jurisdiction pursuant to CPLR 302.

This situation is markedly different from other cases finding jurisdiction based on the engagement of a New York lawyer or law firm by an out-of-state entity.

Moreover, no allegation in the complaint supports Plaintiffs’ claim, which was asserted in the opposition memorandum, that Wilmington made innumerable communications via telephone and email to Chairman in New York with respect to Chaitman’s performance of legal services in the State of New York and concerning payment for those same services. These unspecified communications are not sufficient to confer CPLR 302(a)(l) jurisdiction.

At most, the allegations in the complaint regarding two communications between Chaitman and Wilmington show that Chaitman initiated communications with Wilmington to collect legal fees, to which Wilmington responded. Chaitman’s own New York activities cannot be attributed to defendants for purposes of establishing personal jurisdiction over an out-of-state defendant. Accordingly, there is an insufficient basis to exert CPLR 302(a)(l) jurisdiction over Wilmington.

(Internal quotations and citations omitted).

This decision illustrates an issue that often arises in commercial litigation in New York. Whether the defendant is located on the other side of the world or across the Hudson in New Jersey, a New York court cannot assert jurisdiction over the defendant (that is, hear a case against it) unless there is a proper connection between the defendant and New York. Contact Schlam Stone & Dolan partner John Lundin at if you or a client face a situation where you are unsure whether there is jurisdiction over you, or over a party with which you are having a dispute, in New York.

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Posted: September 17, 2018

Shareholder Need Not Hold Share Certificates to Have Right to Assert Derivative Claims

On September 5, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Lentini v. 219 W. 20th Str. Corp., 2018 NY Slip Op. 32181(U), holding that a plaintiff need not hold share certificates to have the right to assert derivative claims, explaining:

The mere fact that the corporation did not issue any stock certificates does not preclude a finding that a person has the rights of a shareholder. It is the payment, or the obligation to pay for shares of stock, accepted by the corporation, that creates both the shares and their ownership. Labor or services actually received by or performed for the corporation constitutes consideration for the issue of shares. However, a claimants’ failure to allege any basis upon which he might claim an actual, equitable or beneficial interest in any corporate shares will result in dismissal for lack of standing. . . .

Assuming the truth of Joseph Lentini’s allegations, he has standing to pursue derivative claims on WCA’s behalf. The second amended complaint alleges that Joseph Lentini owns 50% of the interest in WCA and that, as consideration for his ownership interest, he contributed his time and experience to WCA at a reduced salary. This constitutes consideration for the alleged issue of shares and, if true, creates both the shares and their ownership. Whether Joseph Lentini has an ownership interest in WCA is not before the court on the instant, pre-answer motion to dismiss. Joseph Lentini need only allege a basis upon which he may claim an actual, equitable or beneficial interest in any WCA shares, which he has done.

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

This decision touches on two areas of commercial litigation that are a significant part of our practice: derivative actions (where a shareholder brings an action on behalf of a corporation) and business divorce (a break-up between the owners of a closely-held business). Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding either of these issues.

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Posted: September 16, 2018

Motion for Reargument Denied for Failure to Attach Prior Order and Papers

On August 30, 2018, Justice Masley of the New York County Commercial Division issued a decision in Mayor Gallery Ltd v. Agnes Martin Catalogue Raisonne LLC, 2018 NY Slip Op. 32161(U), denying a motion for reargument because, among other reasons, the movant did not attach a copy of the prior papers to the motion, explaining:

As an initial matter, although defendants’ do not raise this issue in their opposition, plaintiff’s motion for leave to reargue is procedurally defective in that plaintiff failed to attach a copy of the Prior Order or the papers submitted in connection with the underlying motion (defendants’ motion to dismiss, motion sequence number 001). Indeed, plaintiff does not submit even a party affidavit or attorney affirmation with this motion to reargue. Accordingly, the court exercises its discretion to deny plaintiff’s motion to reargue on the basis that its supporting papers are insufficient, particularly because the underlying motion papers in this action were heavily redacted as electronically filed, and the court no longer retains the unredacted chamber’s copies.

(Citations omitted).

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

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Posted: September 15, 2018

Common Interest Privilege Covers Later Exchange of Privileged Documents Created Before the Privilege Existed

On August 30, 2018, Justice Schecter of the New York County Commercial Division issued a decision on PMC Aviation 2012-1 LLC v. Jet Midwest Group LLC, 2018 NY Slip Op. 32142(U), holding that the common interest privilege covers the later of exchange of privileged documents created before the common interest existed, explaining:

The Court of Appeals recently addressed the scope of the common interest exception in Ambac Assur. Corp. v Countrywide Home loans, Inc. (27 NY3d 616, 623-27 [2016]). Where two or more clients separately retain counsel to advise them on matters of common legal interest, the common interest exception allows them to shield from disclosure certain attorney-client communications that are revealed to one another for the purpose of furthering a common legal interest. The key holding of Ambac was that, unlike in other jurisdictions, application of the common interest exception requires that the communications were shared in connection with pending or anticipated litigation.

Here, Amur shared the subject documents with the Company during this litigation while united in interest against the JMG Parties. This litigation posture is obvious from the court’s prior decisions. The only wrinkle here is that the communications that were shared with the Company predate the litigation, and arguably, not all of them were made when litigation was anticipated. The parties agree that this is not the ordinary situation in which the common interest exception is invoked, as the exception usually implicates communications between co-litigants, not disclosure of one side’s pre-litigation privileged communications to a co-litigant. Nonetheless, it makes sense that co-litigants in an active litigation who share a common interest should be able to share their own prelitigation privileged communications if that disclosure furthers their common interest in the litigation without any fear of waiver. The JMG Parties have not cited any authority to the contrary. The court, therefore, finds that no waiver occurred.

(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 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: September 14, 2018

Plaintiff Allowed to Amend Complaint in Anticipation of Trial

On August 31, 2018, Justice Schecter of the New York Country Commercial Division issued a decision on Gottwald v. Sebert, 2018 NY Slip Op. 32141(U), allowing a plaintiff to amend his complaint in anticipation of trial, explaining:

Kesha moves to strike the Amended BOP, urging that plaintiffs are improperly seeking to enormously expand the case years after it was commenced. Plaintiffs oppose the motion and cross-move for leave to serve a proposed third amended complaint that includes the allegations in the Amended BOP. Because leave to amend is liberally granted and Kesha not only had notice of plaintiffs’ proposed amendments, she already obtained discovery relevant to them, plaintiffs’ cross motion is granted and Kesha’s motion is denied.

It is well established that leave to amend should be granted freely unless the proposed amendment is palpably devoid of merit or would cause undue prejudice. While unexplained delay in seeking leave to amend can, in certain circumstances, warrant denial of the motion, it is settled that a party may amend its pleadings to conform to the proof at any time–even during or after trial–provided that there is no prejudice.

Additionally, causes of action asserted in an amended complaint against a defendant who is already a party to the action, which would otherwise be time-barred, are deemed to relate back so long as the complaint gave defendant notice of the transactions or occurrences at issue and there is no undue prejudice. An amendment that merely adds a new theory of recovery arising out of a transaction or occurrence already in litigation is consistent with fairness concerns underlying CPLR 203(f) because a party is likely to have collected and preserved available evidence relating to the entire transaction or occurrence and the defendant’s sense of security has already been disturbed by the pending action.

Though defamation has a one-year statute of limitations and must be pleaded with particularity, the relation-back doctrine authorizes amendments that provide more specifics so long as they relate to the transactions on which the original defamation claim was based.

Here, it could not be clearer that the proposed new allegations merely expand on those already contained in the operative pleading. Significantly, the proposed amendments in no way change the theory of the case.

(Internal quotations and citations omitted).

In New York, the courts are very generous in allowing a party to amend its pleadings. However, there are limits to this generosity. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have a question regarding whether it is too late to amend your claims or answer.

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Posted: September 13, 2018

Failure to Pay Wages Cannot Be Basis of Labor Law Sec. 193 Claim for Improper Withholding of Wages

On August 22, 2018, Justice Friedman of the New York County Commercial Division issued a decision in Stec v. Passport Brands, Inc., 2018 NY Slip Op. 32052(U), holding that a failure to pay wages cannot be the basis for a Labor Law Section 193 claim for improperly withholding wages, explaining:

[T]he Labor Law does not provide a remedy for defendants’ nonpayment of these wages. Labor Law § 193, on which Stec relies, provides, in pertinent part, that no employer shall make any deduction from the wages of an employee, except those which, as relevant to this case, are expressly authorized in writing by the employee and are for the benefit of the employee. The statute sets forth a non-exclusive list of potential authorized deductions, which include payments for, among other things, insurance premiums; pension or health and welfare benefits; dues or assessments to a labor organization; fitness center, health club, and/or gym membership dues; day care expenses; and similar payments for the benefit of the employee.

Here, the issue is whether defendants’ withholding of and continuing failure to pay Stec his base salary constitutes an unauthorized deduction from wages within the meaning of section 193. In arguing that the withholding of wages is not a deduction, defendants principally rely on two recent federal decisions in a related Labor Law case, Goldberg v Jacquet. There, Goldberg, another Passport executive, sued Jacquet in federal court for, among other things, violation of the Labor Law after Passport began withholding a portion of Goldberg’s salary to cover general business and operating expenses. Jacquet moved for summary judgment dismissing the complaint, including Goldberg’s Labor Law § 193 claim. He argued, as he does here, that withheld salary payments do not constitute deductions and are instead a failure to pay wages not addressed by § 193. The District Court agreed, holding that the majority, and more persuasive, interpretation of § 193 is that it has nothing to do with failure to pay wages or severance benefits, governing instead the specific subject of making deductions from wages. As explained by the Court: A deduction is more targeted and direct than the wholesale withholding at issue here, and New York courts recognize that the purpose of section 193 is to place the risk of loss for such things as damaged or spoiled merchandise on the employer rather than the employee. The Court thus rejected Goldberg’s attempt to portray the withholding of his wages as a deduction, as this would sanction a skewed interpretation of § 193, which requires something more than the total withholding of wages; a specific instance of docking the employee’s pay.

The Second Circuit affirmed, expressly adopting the District Court’s holding that in order to state a claim for a violation of NYLL § 193, a plaintiff must allege a specific deduction from wages and not merely a failure to pay wages. According to the Court, the district court correctly ruled that although Goldberg did not receive wages to which he was entitled, his wages were not reduced in the manner prohibited by NYLL § 193. The Second Circuit also noted that wholesale withholding of wages is covered by NYLL § 191, which the parties agree does not apply to the plaintiff because he was an executive and therefore exempt from this provision.

Although the Goldberg decisions are not binding on this court, their reasoning was expressly adopted by the First Department in Perella Weinberg Partners LLC v Kramer, a decision issued shortly after the briefing of this motion. Citing Goldberg, numerous prior federal district court cases, and several New York cases, the Court held that a wholesale withholding of payment is not a deduction within the meaning of Labor Law § 193. The Court expressly stated that this issue was not addressed by the Court of Appeals in Ryan v Kellogg Partners Inst. Servs. or by this Court in Wachter v Kim.

The Perella Court’s characterization of Ryan and Wachter is significant because these, and other, cases have permitted recovery, under Labor Law § 193, of unpaid compensation, where the compensation was vested as opposed to discretionary. In Ryan, after holding that the employee’s bonus payment was due and vested, the Court of Appeals reasoned: Since the employee’s bonus therefore constitutes wages within the meaning of Labor Law § 190(1), the employer’s neglect to pay him the bonus violated Labor Law § 193, and entitles the employee to an award of attorney’s fees under Labor Law § 198 (1-a). In Wachter, which was decided before Ryan, an employee claimed aggregate cash compensation, which was comprised of a number of elements, including an annualized draw and a bonus. The Court held that to the extent such compensation was non-discretionary, it constituted wages that are protected by Labor Law § 193 (1) and § 198.

. . .

This court accordingly concludes that the issue of whether Labor Law § 193 permits a cause of action to be maintained for wholesale withholding of wages must await further clarification by the appellate courts, but that Perella remains viable and convincing law. Compelling reasons exist for rejecting a reading of Labor Law § 193 that would permit a cause of action to be maintained for wholesale withholding of, as opposed to specific deductions from, wages. As noted in recent federal court decisions, the total withholding of wages is the essence of a breach of contract claim. Moreover, a deduction is more targeted and direct than the wholesale withholding’ of wages. The extensive itemization of authorized deductions in section 193 supports the conclusion that a deduction is more targeted than a wholesale withholding.

In the instant action, Stec’s Labor Law § 193 claim is based on defendants’ wholesale withholding of his past due wages. Stec does not, either in his pleading or in opposition to this motion, identify any specific unauthorized deduction taken from his wages. Rather, the evidence in the record shows that defendants withheld Stec’s wages due to Passport’s financial problems and, arguably also, due to disagreements as to the terms of payment agreed to by the parties. This withholding is not the type of deduction Labor Law § 193 was designed to prevent.

In addition, it is undisputed that Labor Law § 191 authorizes a cause of action to be brought for nonpayment of wages by employees identified in that section (manual workers, railroad workers, commission salespersons, and clerical and other workers). It is settled that this section does not apply to executives. To permit Stec, a former executive of Passport, to recover unpaid wages under section 193 would create an exception that would effectively swallow the limitation in section 191 as to the categories of workers authorized to sue for unpaid wages.

(Internal quotations and citations omitted).

A significant part of our practice is negotiating and litigating disputes over employment contracts. These disputes often involve not just contract law, but also federal, state and local labor and employment law. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding an employment dispute.

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Posted: September 12, 2018

Unjust Enrichment Claim Survives Dismissal Because of Questions of Fact Regarding Whether Contract Covers Claims

On August 21, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Georgetown Co., LLC v. IAC/Interactive Corp., 2018 NY Slip Op. 32078(U), declining to dismiss an unjust enrichment claim because of questions of fact regarding whether there was a contract covering the plaintiff’s claims, explaining:

The elements of a cause of action to recover for unjust enrichment are (1) the defendant was enriched, (2) at the plaintiffs expense, and (3) that it is against equity and good conscience to permit the defendant to retain what is sought to be recovered. The essential inquiry in any action for unjust enrichment or restitution is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered. Notably, although the existence of a valid and enforceable contract generally precludes quasi-contractual recovery, where a bona fide dispute exists as to the existence, or applicability, of a contract, the plaintiff may proceed on both breach of contract and quasi-contract theories.

Defendants argue that this claim must be dismissed because all the work performed by plaintiffs was done pursuant to paragraph 2.10 of the Development Agreement, in which Georgetown 19th Street Development agreed, at HTRF’s request and expense, to provide it with assistance obtaining financing, and in securing any tax abatements or incentives, for the Headquarters Project. However, it is not clear how the Development Agreement, Which was entered into for the purposes of constructing IAC’s headquarters, covers the work performed by plaintiffs on the zoning changes. There is no dispute the zoning changes were not necessary for the Headquarters Project. As plaintiffs note, the terms of the Development Agreement specifically refer to the “Project,” meaning the construction of the IAC headquarters. Notably, recital E of the Development Agreement defines the word “Project” as the “demolition of the Existing Building,” and the “planning and construction” of the IAC headquarters. Accordingly, defendants’ documentary evidence does not utterly refute plaintiffs’ unjust enrichment allegations conclusively or as a matter of law.

Moreover, while there is no dispute regarding the validity of the Letter Agreement or the other various documents executed by the parties, there is a bona fide dispute regarding the applicability of the Letter Agreement to facts of this case. Should it be determined that the Letter Agreement does not apply, that does not necessarily preclude plaintiffs from seeking to recover damages under the theory ·of unjust enrichment.

(Internal quotations and citations omitted).

Unjust enrichment is a common claim in commercial litigation. It is used when there was not a contract between the litigants, but the defendant received an unfair benefit at the plaintiff’s expense. As this decision discusses, the viability of an unjust enrichment claim often turns on whether there was a contract between the parties. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding whether you have, or are the subject of, a claim for unjust enrichment.

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