Over the past several months, many disputes have arisen over whether the COVID-19 pandemic or government responses to it provide, depending on the jurisdiction, an impossibility or impracticability defense for nonperformance under a contract. Now, we are beginning to see a flood of decisions addressing that defense.
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Patterson Belknap’s Commercial Division Blog covers developments related to practice and case law in the Commercial Division of the New York State Supreme Court. The Commercial Division was formed in 1993 to enhance the quality of judicial adjudication and to improve efficiency in the case management of commercial disputes that are litigated in New York State courts. Since then, the Division has become a leading venue for judicial resolution of high-stakes and every-day commercial disputes. This Blog reviews key developments in the Commercial Division, including important decisions handed down by the Commercial Division, appellate court decisions reviewing Commercial Division decisions, and changes and proposed changes to Commercial Division rules and practices. Our aim is to provide you with thoughtful and succinct analysis of these issues. The Blog is written by experienced commercial litigators who have substantial practices in the Commercial Division. It is edited and managed by Stephen P. Younger and Muhammad U. Faridi, who spearheaded the publication of the New York Commercial Division Practice Guide, which is part of Bloomberg Law's Litigation Practice Portfolio Series.
First Department Issues First Ruling Dismissing Securities Act Claims Following the U.S. Supreme Court’s Cyan Decision
As New York commercial practitioners will recall, the U.S. Supreme Court in Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund held that state and federal courts have concurrent jurisdiction over class actions alleging violations of only the Securities Act of 1933 (the “1933 Act”) and, further, that defendants in such suits filed in state court cannot remove those actions to federal court to avoid state-court jurisdiction. Not surprisingly, this development has led to an increase in the filing of securities claims in state courts.
Commercial Division Holds Personal Jurisdiction Is Not Proper Where Defendant’s Only Contact with New York Was Performance of Some Contracted Services at Plaintiff’s Request
In Black Diamond Aviation Group LLC v. Spirit Avionics, Ltd., the Commercial Division held that it would be inappropriate for a New York court to exercise personal jurisdiction over an aircraft maintenance and refurbishing company that had no presence or ties to New York other than turning over an aircraft to be serviced to the care of a New York airport at the plaintiff’s request.
Court of Appeals Holds Bankruptcy Law Does Not Preempt Lender’s Tortious Interference Claims Against Third-Party Non-Debtors
In Sutton 58 Associates LLC v. Pilevsky, the New York Court of Appeals recently held in a 4-3 split decision that, under certain circumstances, bankruptcy law does not preempt a lender’s state law claims against third-party non-debtors for tortious interference with a contract between the lender and the debtor. This decision preserves a state forum for lenders asserting claims that: 1) involved “wrongful conduct by non-debtor defendants that occurred prior to the bankruptcy proceeding,” and 2) are “grounded in independent contractual obligations."
Recently, Justice Andrew Borrok of the Commercial Division denied a summary judgment motion in a dispute involving what is colloquially referred to as a “shotgun” or a “buy-sell” clause in agreements governing joint ventures and partnerships. See Seokoh, Inc. v. Lard-PT, LLC, Index No. 650983/2020, 69 Misc. 3d 1207(A) (Sup. Ct., NY Cty. Oct. 20, 2020).
Commercial Division Confirms Arbitration Award Entered Against Party Who Objected to the Jurisdiction of the Arbitrators but Failed to Seek a Stay of the Arbitration
In Fava v. Morgan Stanley Smith Barney, Inc., Justice Barry R. Ostrager of the New York County Commercial Division denied Petitioner Frank Fava’s (“Fava”) motion to vacate an arbitration award issued by the Financial Industry Regulatory Authority (“FINRA”), and granted Respondent Morgan Stanley Smith Barney, Inc’s (“Morgan Stanley”) request to confirm the award. The opinion addresses whether a party who objects to an arbitration panel’s jurisdiction but participates in arbitration may vacate an arbitral award on the ground that the arbitrators exceeded the scope of their authority.
Judge Leslie Stein and Judge Eugene Fahey were confirmed together and will retire together. The two judges have been part of a group of judges who have cast the deciding votes in many of the Court’s cases.
New York Business Corporation Law § 1104-a empowers a holder of 20% or more of a closely held corporation’s stock to petition for that corporation’s dissolution on the grounds that, inter alia, the controlling shareholders have committed “illegal, fraudulent or oppressive actions toward the complaining shareholders.”
On Monday, Chief Judge Janet DiFiore issued a statement on the latest developments affecting jury trials in New York City.
In a recent order, Justice Andrea Masley assigned a special discovery master to supervise discovery in Hindlin v. Prescriptions Songs LLC, et al., a “complex commercial action” with a “multitude of discovery issues[.]” The decision underscores the constraints placed on the Commercial Division in light of the ongoing pandemic and cuts to the budget of the state’s judiciary.
On Monday, just days after Justice Peter Sherwood and Justice Marcy Friedman announced their upcoming retirements from the bench, the Chief Administrative Judge announced the news that Justice Robert Reed—currently a New York Supreme Court Justice—will start receiving Commercial Division cases in the next few weeks.
In Lazar v. Attena LLC, Justice Andrea Masley of the New York County Commercial Division granted Arik Mor and Uriel Zichron’s (together, “Respondents”) motion to dismiss a petition to dissolve three limited liability companies, Attena LLC, Hemera LLC, and Nessa LLC (collectively, the “LLCs”). The Court’s opinion addressed whether the LLCs should be dissolved on the ground that they were no longer functioning in accordance with their stated purpose, which was defined broadly to include “any lawful business purpose.”
On September 23, 2020, Chief Administrative Judge Marks amended Commercial Division Rule 11-g and the Division’s Standard Form Confidentiality Order (“SFO”) to allow parties to designate certain documents as highly confidential for attorney’s eyes only (“AEO”). Such a designation already exists in federal court, and it will be useful in the Commercial Division in matters involving particularly confidential issues such as the disclosure of confidential business information between competitors and disclosure of trade secrets.
Rule 6 Amendment Increases the Font Size of Footnotes and Requires Hyperlinking to the NYSECF Docket
On September 29, 2020, Chief Administrative Judge Marks amended Commercial Division Rule 6 to increase the font size of footnotes in briefs and affidavits from 10-point to 12-point. Additionally, it requires the use of a proportionally spaced serif typeface (e.g., Times New Roman, Baskerville, New Century Schoolbook) in all papers filed with the Court. With Commercial Division Rule 17 establishing a word limit rather than a page limit, increasing the font size of footnotes will have no impact on the length of briefs. Instead, a larger font size coupled with a proportionally spaced serif typeface will enhance readability and improve comprehension of long passages of text.
Commercial Division Considers Effects of COVID Executive Orders on Use and Occupancy Payments for Real Estate
A recent ruling by the Kings County Commercial Division offers a glimpse into how courts in New York may resolve COVID-19-related disputes regarding leases and real property, as well as how courts may handle situations in which the Governor’s executive orders, intended to stem the spread of COVID-19, have affected the abilities of parties to follow court orders issued prior to the pandemic.
A common question in the wake of the COVID-19 outbreak has been whether the pandemic or governmental responses to the pandemic provide, depending on the jurisdiction, an impossibility or impracticability defense for nonperformance under a contract.
The answer to that question will, of course, turn on the facts underlying the nonperformance, as well as the law of the jurisdiction. Two recent decisions from New York are instructive on the contours of the defense of impossibility — the relevant defense under New York law.
As the country entered into an extended period of lockdowns this spring, there was widespread concern that the anticipated severe economic impact of the pandemic would lead to a wave of defaults and foreclosures in the commercial real estate market.
Commercial Division Declines to Dismiss Claim Seeking to Invalidate Delaware LLC Member’s Exercise of a Put Option Amidst Allegations of Anticipated Insolvency
In GMX Technologies, LLC v. Pegasus Capital Advisors, L.P., Justice Andrea Masley of the New York County Commercial Division denied Defendants Pegasus Capital Advisors, L.P. (“Pegasus”) and The Leiber Group Inc.’s (“Leiber”) (collectively, “Defendants”) motion to dismiss a claim for declaratory judgment seeking to bar Leiber from exercising a put option in connection with its membership interest in Plaintiff GMX Technologies, LLC (“GMX”). The opinion addressed whether a Delaware LLC member may exercise a put option when doing so would force the LLC into insolvency.
Recently, the Commercial Division rendered a split decision on a petition to stay an arbitration in Gol v. TNJ Holdings, Inc., Index No. 652304/2020, Doc. No. 75 (Sup. Ct., NY Cnty. Aug. 13, 2020). Based on an analysis of the relevant shareholder agreements and the positions taken by the parties in another litigation, Justice Joel M. Cohen denied the petition to stay arbitration as to the claims brought by the TNJ respondents, but granted the petition to stay arbitration as to the claims brought by the Kahlon respondents—the owners of TNJ.
Commercial Division Rules that Personal Jurisdiction Over Defendant Is Relevant to Determining Whether to Grant Preliminary Injunction
Recently, in Setter Capital, Inc. v. Chateauvert. Justice Andrea Masley of the Commercial Division ruled that the issue of whether a court has personal jurisdiction over a defendant is relevant to determining whether to grant a motion for a preliminary injunction.
The New York County Commercial Division saw a substantial increase in the number of new cases filed (i.e.,a total of 102 new cases) during the first four-week span after the New York courts re-opened for non-essential matters on May 25, 2020—as compared to both February 2020 (77 new cases), the last full month of filings prior to the crisis, and a comparable period between May 27 and June 23, 2019 (87 new cases).
On August 17, 2020, the Appellate Division, First Department announced that starting in the September term, and continuing until further notice, it will hold oral arguments both in-person at the courthouse and remotely via Microsoft Teams. In-person oral arguments will be held on Wednesdays and remote oral arguments will be held on Tuesdays, Thursdays, and Fridays.
The Commission to Reimagine the Future of New York’s Courts Releases Goals for Restarting in-Person Juries
In mid-June, Chief Judge Janet DiFiore appointed the Commission to Reimagine the Future of New York’s Courts, and charged it with examining technological, regulatory, and other long-term innovations for New York Courts. Additionally, in the short-term, it was to provide recommendations for resuming in-person court operations amid the COVID-19 pandemic.
Starting on September 8, 2020 and continuing indefinitely, litigants eligible for oral argument in the Second Department will be given the option of arguing in person, via Microsoft Teams, or submitting. Notice must be sent to the court and other litigants no later than three days prior to the date on which the matter is calendared. If there is a divergence of opinion among litigants, the court will determine how oral argument will be heard or whether the matter will be marked submitted. Members of the public are still not permitted to attend oral argument at the courthouse.
Commercial Division Holds that Reliance and Inducement are Not Required Elements of Unjust Enrichment
When the funds invested by one victim of a Ponzi scheme are used to pay the scheme’s debts to an earlier investor, can the later investor recover those funds from the earlier investor through an unjust enrichment claim? Yes, if there is a sufficient connection between the parties, according to Commercial Division Justice Andrea Masley’s recent decision in JHAC LLC v. Advance Entertainment LLC. In JHAC, Justice Masley allowed unjust enrichment claims by one Ponzi scheme victim against other victims to proceed by holding that reliance and inducement are not elements of unjust enrichment in New York. All that is required to sustain the claim is a “connection” between the victims, and Justice Masley held that JHAC adequately pled such a connection.
In a New York Debtor and Creditor Law Dispute, Commercial Division Clarifies Allegations Required to Pierce Corporate Veil
In a recent decision in South College Street, LLC v. Ares Capital Corporation, Justice Schechter of the New York State Supreme Court, Commercial Division, dismissed petitioner’s New York Debtor and Creditor Law claims, which were premised on alter ego liability. The opinion addressed the types of allegations a plaintiff must make in order to successfully plead a veil-piercing claim.
The Appellate Division, First Department has expanded the categories of appeals subject to e-filing through the New York State Court Electronic Filing System (NYSCEF). Effective July 27, 2020, e-filing is now mandatory for all matters originating in Supreme Court, Criminal Term; Family Court; Surrogate’s Court; and Court of Claims in Bronx and New York Counties. With this expansion, e-filing is now mandatory for all matters before the First Department, except Original Special Proceedings and Attorney Matters.
The expansion applies to appeals that have already been perfected, and is required regardless of whether the matters were e-filed at trial level. Attorneys in matters where notices of appeal have been filed are encouraged to immediately enter the initial information required for e-filing under 22 NYCRR § 1245.3. There are separate 22 NYCRR § 1245.3. considerations for criminal and family matters with assigned counsel, and such practitioners should consult the notice to the bar.
On July 22, 2020, the New York Court of Appeals announced that the Court of Appeals Hall in Albany is now open for in-person filings. The Court will continue to accept mailed and electronic submissions as permitted by its rules. Those seeking to file papers in person will be screened at the Court’s Eagle Street entrance before entering in accordance with New York’s COVID screening protocol.
On July 13, 2020, Governor Cuomo appointed four Supreme Court Justices to fill vacancies on the Appellate Division, First Department. The Governor elevated Justices Saliann Scarpulla, Manuel Jacobo Mendez Olivero, Martin Shulman and Tanya R. Kennedy, who represent the diversity of New York’s judicial system.
The reverberations from the collapse of Bernie Madoff’s massive Ponzi scheme continue to be felt in Manhattan’s Commercial Division. On May 20, 2020, Judge Joel M. Cohen issued a decision in Matter of FGLS Equity LLC, No. 157170/2019, 2020 WL 2557877, 2020 NY Slip Op 31476(U) (Sup. Ct., N.Y. Ctny., May 20, 2020), approving the liquidation plan of FGLS Equity LLC, which was founded by accountant Steven Mendelow as a feeder fund to Bernard L. Madoff Investment Securities (BLMIS). Mendelow, who passed away in 2016, was allegedly instrumental in funneling investors to the scheme. The decision is notable, not least because it may be the first New York case in which a court has been asked to pass judgment on an LLC plan of liquidation proposed by a liquidator appointed by the LLC’s members pursuant to its operating agreement.
In the wake of punishing economic losses caused by Covid-19-related shutdown orders, business owners across New York have turned to their insurers for temporary relief in the form of business interruption coverage. If recent reports are any indication, however, New York businesses will face an uphill battle.
On June 23, 2020, Chief Administrative Judge Marks approved the repeal of Rule 23 of the Commercial Division Rules. Rule 23 (known as the “60-Day Rule”) required movant’s counsel to notify the court and other parties whenever a motion had not been decided within 60 days of its submission or oral argument.
Although New York City’s state court judges are now back in their chambers, in-person hearings have not yet commenced.
Administrative Judge Deborah A. Kaplan reported that her division has had success using “video-linked ‘virtual’ hearings for a wide range of matters.” In-person hearings will still be available when truly necessary. For example, this option may be available to self-represented litigants without access to the requisite technology.
On June 15, 2020, Chief Judge DiFiore announced that the five upstate regions—Finger Lakes, Central New York, Mohawk Valley, Southern Tier, and North Country—that began Phase III reopening last Friday, June 12, will expand the number of in-person functions in their courthouses beginning June 17. Accordingly, these regions will now handle in-person matters including a limited number of bench trials in civil matters.
On June 16, 2020, Chief Administrative Judge Marks approved an amendment to Rule 1 to the Commercial Division Rules. The amendment is designed to allow counsel to request the court’s permission to appear though videoconferencing and other similar technology.
In a Valuation Dispute, Commercial Division Refuses to Credit “Unrealistic and Optimistic” Projections Made by a Corporation in Obtaining a Loan
A recent Commercial Division decision provides an example of a court rejecting “unrealistic and optimistic” business projections in determining the valuation of a petitioner’s shares in a corporation. In Magarik v. Kraus USA, Inc., Index No. 606128/2015, Doc. No. 252 (Sup. Ct., Nassau Cnty. Apr. 28, 2020), Justice DeStefano refused to credit the valuation made by the petitioner’s expert, which depended heavily on a set of projections that the corporation at issue made in the process of obtaining a loan.
Modeling Agency’s Early Victory in Dispute Over Alleged Fashion Model Poaching Proves Pyrrhic Due to Failure to Commence Arbitration On Time
In the 2001 film Zoolander, male model Derek Zoolander mused, while giving the “eugoogly” at the funeral for three deceased model friends, that a “model’s life is a precious, precious commodity.”
Updates on COVID-19’s Impact on Commercial Appeals: New York Court of Appeals Expands Digital Filings, While the Appellate Division Lifts Moratorium on Filing Deadlines and Hears Skype Argument
Originally published May 21, 2020.
The progress of taking commercial appeals in New York has been impacted significantly by the onset of the COVID-19 pandemic. Deadlines for perfecting appeals were suspended and oral arguments were canceled. Although Skype conferences were being held in the trial level courts, such as the Commercial Division, arguments were not being scheduled on typical appeals. Recently, as Chief Judge Janet DiFiore has overseen a gradual re-opening of significant portions of the New York courts, there have been material developments in appellate practice which affect commercial litigators. These developments reflect a sense that appeals are starting to move forward again, albeit with the naturally attendant backlogs that the COVID-19 crisis has engendered.
Commercial Division Denies Cross-Petitions to Confirm and Vacate Appraisal Award Despite Strong Presumption in Favor of Summarily Confirming Such Awards
In Yakuel v. Gluck, Justice Joel M. Cohen of the New York County Commercial Division denied Petitioners’ application to confirm an appraisal award and denied Respondent Andrew Gluck’s (“Gluck”) cross-petition to vacate the same award in connection with the appraisal of Gluck’s ownership interest in Agency Within LLC (“Agency Within”), a digital marketing company. The opinion addressed the legal standard for confirming or vacating an appraisal award pursuant to CPLR § 7601, as well as a party’s right to present evidence to an appraiser over the objection of a counterparty.
The COVID-19 pandemic has had considerable effect on appellate practice in New York State’s intermediary appellate court, the Appellate Division. The last months have seen historical firsts, such as all four appellate departments hosting virtual oral arguments on Zoom and Skype. Many parties have not had the opportunity to take part in oral argument, as their cases have been decided on submission or adjourned. The four departments have issued a flurry of notices to the bar revising their rules of practice and many of these changes could very well be permanent.
On June 6, 2020, New York Governor Andrew Cuomo issued Executive Order 202.38, which, among other things, extends the tolling period contained Executive Order 202.8 until July 6, 2020.
Chief Judge Janet DiFiore and Chief Administrative Judge Lawrence K. Marks announced that courts in the Fifth Judicial District, Sixth Judicial District, and Seventh Judicial District will enter Phase II of re-opening on June 3, 2020, and it will expand to the Eighth Judicial District and Fourth Judicial District on June 5, 2020.
New York State Courts Begin Reopening Process As Some Upstate Regions Meet Initial State Reopening Criteria
Chief Judge Janet DiFiore recently announced that New York state courts have begun the process of re-opening the in-person court system and increasing the capacity of new matters that may be filed in New York state courts. The courts that are beginning the physical reopening process are located within New York’s Third, Fourth, Fifth, Sixth, Seventh, and Eighth judicial districts. Those districts roughly cover the regions of New York that do not include New York City and the surrounding suburbs. Electronic filing of new non-essential cases also, to the extent permissible prior to the COVID-19 crisis, resumed on Memorial Day, May 25th, 2020.
On May 20, 2020, Justice Lawrence Marks, the Chief Administrative Judge of the New York Unified Court System, issued a memorandum announcing that, effective May 25, 2020, “e-filing through the NYSCEF system – including the filing of new non-essential matters – will be restored in those counties of the state that have not yet met the benchmarks required to participate in the Governor’s regional reopening plan.” Those counties include the five counties that comprise New York City, as well as Nassau, Suffolk, Dutchess, Orange, Putnam, Rockland, Sullivan, Ulster, and Westchester.
First Department Holds That “Sole and Absolute Discretion” Clause Does Not Preclude Breach of Fiduciary Duty Claim
In Shatz v. Chertok, the First Department affirmed in part and reversed in part a decision by Justice Jennifer G. Schechter of the Commercial Division. The key issue on appeal was whether a New York limited liability company’s operating agreement that provided the managing member “sole and absolute discretion” over investment decisions barred a derivative claim for breach of fiduciary duty. The First Department held that this contractual language did not bar a breach of fiduciary duty claim against the company’s manager.
On Monday, May 11, 2020, three Commercial Division justices from across the state participated in a virtual panel to discuss the state of litigating in the Commercial Division during COVID-19. Justices Saliann Scarpulla (New York County), Timothy Driscoll (Nassau County), and Deborah Karalunas (Onondaga County) discussed the ways in which litigation can move forward while the courts operate in a virtual format. The panel was presented by the New York State Bar Association’s Commercial and Federal Litigation Section.
On May 13, 2020 the New York State Unified Court System announced a plan for the gradual return of judges, clerks, and court staff to courthouses in select upstate counties—with litigants being able to electronically file new cases in those counties.
The issues related to the bringing of claims involving a cancelled LLC were addressed in the Commercial Division’s recent decision in Hopkins v. Ackerman. In November 2019, Justice Saliann Scarpulla dismissed most of Hopkins’s and his co-plaintiffs’ claims as derivative, and therefore unable to be brought on behalf of a cancelled LLC. We covered that decision here. Following that decision, Hopkins sought leave to bring additional direct claims, but Justice Scarpulla’s recent decision rejected all but one of the proposed claims—a breach of fiduciary duty claim based on allegations that Hopkins was frozen out of decision-making and membership rights. The other claims were rejected as derivative because they concerned the alleged failure to distribute the LLCs’ assets, a harm felt equally by all members. Justice Scarpulla also reaffirmed her earlier ruling that a challenge to an LLC’s cancellation status (which could re-open the door to derivative claims) must be brought in Delaware, where the entities were established and cancelled.
On May 7, 2020, New York Governor Andrew Cuomo issued Executive Order 202.28, which, among other things, “continue[d] the suspension and modifications of laws, and any directive, not superseded by a subsequent directive, made by Executive Order 202 and each successor Executive Order up to and including Executive Order 202.14, for thirty days until June 6, 2020, except as modified” in the May 7, 2020 Executive Order.
Commercial Division Dismisses Derivative Shareholder Suit for Failure to Provide New Allegations of Pre-Suit Demand in an Amended Complaint
In derivative shareholder actions, New York law requires a plaintiff-shareholder seeking to vindicate the rights of a corporation to plead, with particularity, either that before filing suit a request was made on the corporation’s board of directors to initiate the action or that any such demand, if made, would have been futile. This pre-suit demand requirement may seem straightforward in theory, but a March 19, 2020 Commercial Division decision by Justice Andrea Masley serves as a cautionary reminder of tricky nuances in its application.
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