In Royal Wine Corp. v. Cognac Ferrand SAS, Justice Andrea Masley of the Commercial Division denied Plaintiff Royal Wine Corporation’s (“Royal”) motion for a preliminary injunction to enjoin arbitration that defendant Cognac Ferrand SAS (“Cognac”) initiated against Royal’s alleged alter ego, Mystique Brands, LLC (“Mystique”).[i] The case raised the issue of whether a non-party to an arbitration agreement has standing to assert defenses on behalf of an alleged alter ego while nevertheless denying the alter ego relationship.
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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.
Advisory Council Proposes a Series of Commercial Division Rule Changes Aimed at Enhancing the Efficiency of Commercial Litigation
In a wave of rulemaking activity over the past week, the Office of Court Administration opened public comment on three significant changes to the Commercial Division Rules proposed by the Commercial Division Advisory Council. The proposed rule changes would affect three major phases of commercial litigation: document discovery, evidentiary hearings, and motion practice. Each proposed rule change aims at enhancing the efficiency with which parties litigate in the Commercial Division.
On February 8, 2018, Justice Shirley Werner Kornreich of the Commercial Division rejected a disclosure-only class action settlement in City Trading Fund v. Nye, 2018 BL 44689 (Sup. Ct. Feb. 08, 2018). The settlement provided for additional disclosures to shareholders in a proxy statement plus $500,000 in attorneys’ fees and expenses for plaintiffs’ counsel. As discussed below, the Commercial Division’s rejection of this disclosure-only settlement is one of the first applications of the First Department’s new standard for reviewing such settlements of merger challenge litigations.
On January 31, 2018, the Appellate Division, Second Department affirmed, in a 3-1 decision, the Kings County Supreme Court Commercial Division’s decision, denying 159 MP Corp. and 240 Bedford Ave Realty Holding Corp.’s (collectively the “Tenants”) motion for a Yellowstone injunction. The case raised an issue of first impression for New York appellate courts: whether a written lease provision that expressly waives a commercial tenant’s right to declarative relief is enforceable at law and as a matter of public policy. The Second Department ruled in the affirmative for both.
Please be sure to check out Muhammad U. Faridi and Benjamin F. Jackson’s post on the Commercial Division as an alternative to private arbitration over at Harneys’ Offshore Litigation Blog: http://harneysoffshorelitigation.com/10-minutes-with-pbwt/. We’ll be covering this topic as part of our upcoming March 26, 2018 CLE program on Cost-Effective Commercial Litigation in New York’s Commercial Division, which will be presented as a webinar on Bloomberg Next.
In WL Ross & Co. v. Storper, a recent Commercial Division decision involving the private equity firm founded by U.S. Secretary of Commerce Wilbur Ross, Justice Andrea Masley suggested that New York courts can disregard choice-of-law provisions if the law of the state specified by the choice-of-law provision is “substantively similar” to that of New York on the topic at issue. Attorneys who routinely draft agreements that contain choice-of-law provisions would do well to take note of this decision, as it may imply that more careful attention should be paid to such provisions when New York law is best avoided for strategic reasons.
As we previously announced, on November 20, 2017, Patterson Belknap Webb & Tyler LLP published its New York Commercial Division Practice Guide, a treatise that provides practical advice and tips to attorneys litigating in the Commercial Division. The treatise was published by Bloomberg Law’s Litigation Practice Portfolio Series and is available on Bloomberg. Since its publishing, the treatise has received high praise. A book review authored by Mark A. Berman in the New York Law Journal calls the book a “must” have guide for litigators who practice in the Commercial Division. A copy of the book review can be accessed here.
New York recognizes conversion claims based on intangible property, such as electronically stored information or trade secrets. But does a conversion claim exist when the theft of the intangible property does not deprive the rightful owner of unfettered access to the property (i.e., when the owner retains an original or accurate duplicate of the information)? This was the question presented to the Commercial Division recently in MLB Advanced Media, L.P. v. Big League Analysis, LLC. In that case, Justice Shirley Werner Kornreich held that a conversion claim is not available unless the plaintiff’s use of or access to the property is disturbed.
A unanimous panel of the Appellate Division, First Department recently affirmed a ruling by the Commercial Division dismissing causes of action against the ACE Group International LLC (“AGI”) brought by the estate of the deceased majority owner of AGI, Alexander Calderwood (the “Estate”). The decision in Estate of Alexander Calderwood v. ACE Group International LLC, No. 650150/15 (App. Div. 1st Dep’t Dec. 14, 2017), primarily rested on the principle of Delaware business law that parties are free to set the terms of a limited liability company’s operations through contract. As a result, the panel rejected the Estate’s arguments that provisions in Delaware’s Limited Liability Company Act (“LLC Act”) overrode contrary terms of AGI’s operating agreement (“LLC Agreement”), and affirmed the dismissal of the Estate’s claims.
In Advanced 23, LLC v. Chambers House Partners, LLC, No. 650025/2016, 2017 BL 462831 (NY. Sup. Ct. Dec. 15, 2017), Justice Saliann Scarpulla of the Commercial Division ruled that Advanced 23, LLC (“Advanced”) and David Shusterman’s (“Shusterman” and collectively, “Petitioners”) petition for judicial dissolution of Chambers House Partners, LLC (“CHP”) needed to be held in abeyance pending an evidentiary hearing on whether Shusterman had breached his duties under the Operating Agreement. Advanced 23 confirms that although a corporate deadlock is not an independent ground to dissolve an LLC, the court must still examine whether the managers’ disagreement breaches the managers’ obligations under the LLC operating agreement.
Second Department Affirms Commercial Division Decisions Leaving Withdrawing LLC Members Without Compensation for Their Membership Interests or Derivative Standing
In Matter of Jacobs v. Cartalemi, No. 2016-05041, 2017 BL 435890 (2d Dep’t Dec. 6, 2017) (“Jacobs I”), a unanimous Appellate Division, Second Department panel affirmed an order by Westchester County Commercial Division Justice Linda S. Jamieson denying compensation to a withdrawing LLC member. The court held that a provision of an LLC operating agreement governing the sale of membership interests superseded the default rule of New York Limited Liability Company (“LLC Law”) § 509, entitling a member to “the fair value of his or her membership interest” upon withdrawal from the LLC. Jacobs I was decided along with two related appeals in which the panel also dismissed various derivative claims brought by the former minority member of Westchester Industrial Complex, LLC against the company and its majority member, applying the continuous ownership rule to find that the minority member lost standing to bring derivative claims upon his withdrawal from the company. See Jacobs v. Cartalemi, No. 2016-07813, 2017 BL 436813 (2d Dep’t Dec. 6, 2017) (“Jacobs II”); Jacobs v. Westchester Indus. Complex, LLC, No. 2016-07817, 2017 BL 436677 (2d Dep’t Dec. 6, 2017) (“Jacobs III”).
In 2017, the New York Commercial Division continued to implement new rules and refine existing rules in order to streamline litigation in the court. The year also saw some key decisions by the Commercial Division as well as appellate courts reviewing Commercial Division cases that developed an area of commercial law or applied existing law to a new or interesting set of facts. We covered all of these developments in this blog. We present here brief summaries of the most salient Commercial Division rule changes and cases from 2017 with links to our blog posts that provide more in-depth coverage.
The Westchester County Commercial Division has launched a new state-of-the-art courtroom at the White Plains Courthouse. The Integrated Courtroom Technology (ICT) part is outfitted with high-tech features designed to ease the handling of complex commercial cases and enhance the presentation of evidence.
Patterson Belknap Webb & Tyler LLP announced on November 20, 2017, the publication of its New York Commercial Division Practice Guide. This new publication is part of Bloomberg Law's Litigation Practice Portfolio Series, and an excerpt is available to download at: http://on.bna.com/H1KM30gCY7v. The guide is organized into various chapters drafted by Patterson Belknap lawyers, containing useful information about litigating in the Commercial Division of the New York State Supreme Court.
The decision to bring a lawsuit on behalf of a corporation is entrusted to the corporation’s board of directors. A shareholder may not maintain a derivative lawsuit on behalf of a corporation without first making a demand on the board to bring the suit or pleading that it would be futile to make such a demand. On October 18, 2017, Justice Shirley Werner Kornreich of the New York Commercial Division dismissed a derivative lawsuit because the shareholder failed to allege that the defendant corporation’s board of directors acted in bad faith or with gross negligence when it rejected the shareholder’s demand. Reese v. Andreotti, No. 654132/2016, 2017 BL 391404, at *10 (N.Y. Sup. Ct. Oct. 18, 2017).
A shareholder bringing a contested derivative claim in the Cayman Islands must seek leave from the court before proceeding. This litigation prerequisite -- imposed by Rule 12A of the Rules of the Grand Court of the Cayman Islands (“Rule 12A”) -- requires a prima facie factual showing, with the aim of protecting corporations from “vexatious or unfounded litigation.” But when a Cayman Islands-related derivative claim is brought in New York’s Commercial Division, does the same rule apply? The New York Court of Appeals recently answered “No,” holding in Davis v. Scottish Re Group Ltd. that Rule 12A is a procedural rule that does not apply to matters litigated in New York courts.
The advent of large electronic productions has propelled a proposal to adopt new language in the standard confidentiality order used in the Commercial Division. This proposal is designed to protect parties against inadvertent disclosure of privileged information. On November 15, 2017, the Administrative Board of the Courts issued a request for public comment on a proposal to amend Commercial Division Rule 11-g to include sample “privilege claw-back” language. The proposal was spearheaded by a Subcommittee of the Commercial Division Advisory Council. Comments on this proposal must be received by January 16, 2018.
The First and Second Departments Split on What is Considered "Documentary Evidence" on a Motion to Dismiss Under CPLR 3211(a)(1)
CPLR 3211(a)(1) allows a defendant to “move for judgment dismissing one or more causes of action asserted against him on the ground that . . . a defense is founded upon documentary evidence.”
As reported in this blog on July 24, 2017, the Administrative Board of the New York Unified Court System has been considering a proposal to pilot a “Large Complex Case List” in the New York County Commercial Division. On October 23, 2017, the Chief Administrative Judge of the Courts formally adopted the Large Complex Case List as a pilot program for the Commercial Division of the Supreme Court of New York County.
On October 11, 2017, Chief Administrative Judge Lawrence Marks amended Rules 10 and 11 of Section 202.70(g) (“Rules of Practice for the Commercial Division”) with respect to Alternative Dispute Resolution (“ADR”).
What does the contractual term “voting power” mean? Does it refer only to the power to elect corporate directors, or does it refer to the power to vote on any fundamental matter of corporate governance? Is voting power an attribute of stock, or is it something that shareholders possess? Commercial Division Justice Marcy Friedman’s recent decision in Special Situations Fund III QP, LP. v. Overland Storage, Inc.,suggests that the contractual term “voting power” could conceivably bear any of these meanings, depending on context and the parties’ intent—which suggests that leaving this term undefined in a contract could be risky business. Any attorney who regularly drafts stock purchase agreements, voting agreements, or other contracts that use the term “voting power” would do well to take note of this recent Commercial Division decision.
When Can an Outside Attorney Serve as a Special Litigation Committee in an LLC Derivative Suit? When the Parties’ Contract Says So, Says First Department
In a decision handed down on August 15, 2017, by the New York Appellate Division First Department, the court endorsed the practice of the appointment of a Special Litigation Committee (SLC) by a limited liability company (LLC) “at least where explicitly contemplated” by the LLC’s operating agreement. However, where the operating agreement does not explicitly provide for such an appointment or otherwise evince intent to delegate core governance functions to a nonmember, the LLC cannot appoint an SLC that has authority over a major decision of the LLC.
On August 25, 2017, Justice Shirley Werner Kornreich of the New York Commercial Division entered an order reprimanding a high-profile lawyer, Mark Geragos, for misconduct during a deposition, including refusing to answer questions in violation of the court’s explicit instructions. Gottwald v. Sebert, No. 653118/2014, 2017 BL 303419 (N.Y. Sup. Ct. Aug. 25, 2017).
The Second Department Suggests That “Any Lawful Business” Clauses May Be Effectively Meaningless in LLC Dissolution Cases
In actions brought by minority members to dissolve an LLC, a key inquiry is whether the LLC’s managers are unable or unwilling to permit or promote the LLC’s “stated purpose.” In many cases, an LLC’s operating agreement provides that the LLC’s “stated purpose” is “any lawful business.” As a result, one might think that the central question in many judicial dissolution cases would end up being whether the LLC is engaged in lawful business. Not necessarily. Recently, in Mace v. Tunick, the Second Department suggested that an “any lawful business” purposes clause is insufficient to conclusively refute an allegation that an LLC was formed for a particular purpose. Mace could therefore be read to eliminate some of the protections against litigation that would be provided for by an “any lawful business” clause.
Commercial Division Analyzes Choice-of-Law on an Element-by-Element Basis in Upholding Claim for Aiding and Abetting Breach of Fiduciary Duty
In Wantickets RDM, LLC v. Eventbrite, Inc., No. 654277/2016, 2017 BL 261099 (Sup. Ct. Jul. 21, 2017), New York Commercial Division Justice Shirley Werner Kornreich denied defendant Eventbrite’s motion to dismiss plaintiff Wantickets’ claims for aiding and abetting breach of fiduciary duty, among other claims. In doing so, she applied Delaware law to assess plaintiff’s allegations of an underlying breach of fiduciary duty and New York law to the remaining elements.
Commercial Division Declines to Use New York Debtor and Creditor Law to Enjoin a Defendant’s Asset Sale Without Evidence of Inadequate Consideration
In Del Forte USA, Inc. v. Blue Beverage Group, Inc. et al., No. 518454/2016, 2017 BL 253248 (Sup. Ct. Jul. 17, 2017), New York Commercial Division Justice Sylvia G. Ash denied plaintiff Del Forte’s preliminary injunction motion that sought, pursuant to N.Y. Debtor and Creditor Law (“DCL”) § 279, to enjoin defendant Blue Beverage from selling 60% of Blue Beverage’s shares to co-defendant Kuzari Group for $5 million unless $500,000 is placed in escrow and a receiver is appointed. As an alternative form of relief, Del Forte sought, pursuant to CPLR § 6201, to attach at least $500,000 from the asset sale to satisfy a judgment that might be rendered in Del Forte’s favor.
Unless the U.S. Supreme Court Rules Otherwise, Waivers of Collective Actions Are Not Enforceable in New York
On July 18, 2017, the First Department partially reversed the Commercial Division’s decision in Gold v. New York Life Insurance Company, No. 653923/12, 2017 BL 247192 (App. Div. 1st Dep’t July 18, 2017), a case that presented the issue of whether employees can be compelled to waive collective actions against their employers pursuant to an arbitration clause. In 2015, Justice O. Peter Sherwood of the New York Commercial Division had granted a motion to compel a former insurance agent to arbitrate his wage dispute with New York Life Insurance Co. (“N.Y. Life”). In a decision by Justice Karla Moskowitz (who was a member of the Commercial Division before being appointed to the Appellate Division), the First Department answered an open issue in New York, holding that employers cannot be required to arbitrate such disputes as it “would run afoul of the National Labor Relations Act.”
A specialized list for blockbuster commercial cases in New York’s Commercial Division is under consideration. If designated as a Large Complex Case on the “Large Complex Case List,” the case will be subject to enhanced case management procedures designed to efficiently handle the matter. The proposal is subject to public comment. The Administrative Board of the Courts has requested that comments be submitted by Tuesday, July 25, 2017. If the proposal is adopted, the Large Complex Case List will be piloted in New York County.
Commercial Division Rules that U.S. Treasury Secretary’s Access to a Company’s Detailed Financial Information in His Role as a Board Member Is Insufficient to Establish Liability for Fraud
Members of a company’s board who are also investors in the company often have access to detailed information about the company’s finances and its lending facilities. But what happens when an investor-board member could, through access to the company’s financial information, potentially determine that funds from a lending facility are not being used for the purpose that the company and its agents had previously represented that they would be used for? Is the investor-board member potentially liable for fraud merely on the basis of his access to or awareness of financial information about the company? Justice Charles E. Ramos’s recent decision in RKA Film Fin., LLC v. Kavanaugh, No. 652592/2015, 2017 BL 222658, 2017 N.Y. Misc. LEXIS 2459, 2017 NY Slip Op 50846(U) (Sup. Ct. June 27, 2017), suggests that the answer may be no. According to the Commercial Division, without personal involvement in the alleged fraud itself or a special duty to disclose to the plaintiff, an investor-board member is likely not liable for fraud to a plaintiff creditor.
In PMC Aviation 2012-1 LLC et al. v. Jet Midwest Group, LLC et al., No. 654047/2015, BL221447 (Sup. Ct. Jun. 21, 2017), Commercial Division Justice Shirley Kornreich denied a motion to dismiss a fraudulent inducement claim by an LLC member against its business partner. The court found that it could not find any “controlling, on-point authority” on the issue of reasonable reliance at issue in the case. The case relates to the scope of due-diligence obligations of LLC members when they rely upon the representations of business partners concerning the affairs of a jointly owned company.
Since its formation in 1995, the Commercial Division has seen an increase in the number and complexity of cases being filed. In response to this change, New York’s then Chief Judge created a Task Force on Commercial Litigation. In 2012, the Task Force issued a series of reform proposals aimed at better managing judicial resources, encouraging greater use of non-judicial personnel and alternative dispute resolution, and increasing engagement with the corporate and academic communities and the Bar. Thereafter, the Chief Judge formed a Commercial Division Advisory Council which has made various recommendations with respect to practice in the Commercial Division. From these recommendations, many new rules and amendments have been enacted.
Commercial Division Justice Eileen Bransten recently concluded that plaintiff bondholders lacked standing to bring fraud claims against the bond obligor and trustee after having sold their interests in the bonds. One William St. Capital Mgmt. L.P. v. U.S. Educ. Loan Tr. IV, LLC, No. 652274/2012, 2017 BL 1700030 (Sup. Ct. N.Y. Co. May 16, 2017), involved a group of investment firms that purchased $10 million in notes backed by government-guaranteed student loans from the U.S. Education Loan Trust IV (“ELT”). The notes were part of a larger $30 million package.
Justice Charles Ramos of the New York Commercial Division partially vacated an International Chamber of Commerce (“ICC”) arbitration award in a major legal battle between artificial sweetener giants NutraSweet and Daesang. Daesang Corp. v. The NutraSweet Co., et al., No. 655019/2016, 2017 BL 164971 (N.Y. Sup. Ct. May 15, 2017). The partial vacatur sends what was a $100,766,258 award in favor of Daesang back to the arbitral tribunal.
Justice Shirley Kornreich recently issued one of the few New York state court decisions that address the Computer Fraud and Abuse Act (“CFAA”). Spec Simple, Inc. v. Designer Pages Online LLC, No. 651860/2015, 2017 BL 160865 (N.Y. Sup. Ct. May 10, 2017). The CFAA criminalizes both accessing a computer without authorization and exceeding authorized access and thereby obtaining information from any protected computer. Id. at *3 (citing 18 U.S.C. § 1030(a)(2)(C)). The CFAA also provides a civil cause of action to any person who suffers damage or loss because of a violation of the CFAA. Id. at *4 (citing 18 U.S.C. § 1030(g)). As discussed below, the decision provides a helpful look into the interpretation of CFAA claims in the future.
Suppose you’ve entered into a financial arrangement that resembles a lending agreement, but it is not formally designated as such, and you think you’re paying too much. Do you (a) sue for misrepresentation, on the grounds that you thought you were entering into a lending agreement and not some other kind of an agreement, or (b) sue on the theory that the agreement is a lending agreement, but it is usurious and therefore unlawful?
Commercial Division Rejects Third-Party Claim as Derivative in Trusts’ Suit Concerning Upper West Side Beaux-Arts Building
Asserting a claim on behalf of a trust in the Commercial Division can be risky, as the party asserting the claim must establish that the claimed injury is independent of any injury to the trust, and that they are therefore not simply bringing a derivative claim. Recently, in 1993 Trust of Joan Cohen v. Baum, No. 150058/2015, 2017 NY Slip Op 30894(U), 2017 N.Y. Misc. LEXIS 1667 (May 2). Justice Shirley Werner Kornreich dismissed as derivative a third-party claim brought by a former trustee of two trusts against an individual who allegedly provided deficient tax advice to the trusts. The court ruled that the former trustee was owed no duty by the third-party defendant individually and could no longer prosecute claims that belonged to the trusts. Justice Kornreich also rejected the former trustee’s contribution claim against the tax adviser and another entity, explaining that those entities’ alleged wrongdoing was unrelated to the former trustee’s alleged wrongdoing, and thus did not make them subject to liability to the plaintiff for damages for the same injury.
Justice Anil Singh of the New York Commercial Division recently issued two decisions related to the long-running litigation between Russian businessmen Alexander Gliklad and Michael Cherney. Gliklad v. Deripaska, No. 652641/2015, 2017 BL 137121 (N.Y. Sup. Ct. Apr. 25, 2017); Moquinon Ltd. v. Gliklad, No. 650366/2017, 2017 BL 137162 (N.Y. Sup. Ct. Apr. 6, 2017). Both decisions dealt setbacks to Gliklad’s ability to collect after winning a $385 million judgment.
In two recent decisions, Justices Charles E. Ramos and Saliann Scarpulla of the New York Commercial Division ruled that term sheets were not binding agreements. Keitel v. E*Trade Fin. Corp., No. 652220/2015, 2017 BL 131532 (N.Y. Sup. Ct. Apr. 17, 2017); JTS Trading Ltd. v. Trinity White City Ventures Ltd., No. 651936/2015, 2017 BL 131820 (N.Y. Sup. Ct. Apr. 17, 2017). These cases serve as reminders to contracting parties to use unequivocal terms to reflect the creation of binding obligations when memorializing their agreements.
Claims Dismissed Against Successor Transfer Agent Where There Was No Showing Of A Duty Owed To The Investors
In Magna Equities II, LLC et al., v. Writ Media Group Inc., et al., No. 653808/2016, 2017 BL 115243 (N.Y. Sup. Ct March 30, 2017), Justice Peter Sherwood dismissed for lack of jurisdiction and failure to state a claim all claims brought by a group of investors against defendant Pacific Stock Transfer (“PST”). The case serves as a reminder that plaintiffs must plead sufficient allegations in order to persuade the Commercial Division to exercise its jurisdiction over a non-domiciliary, non-signatory of the agreement at issue.
Commercial Division Compels Arbitration of a Contract Claim Based on an Arbitration Clause in a Related Agreement
In Fidilio v. Hoosick Falls Productions, Inc., No. 654066/2016, 2017 BL 107640 (Sup. Ct. Mar. 22, 2017), Justice Eileen Bransten of the New York County Commercial Division granted a motion to compel arbitration of a dispute relating to a short-lived reality TV show, Scrappers. Justice Bransten ruled that the arbitration clause in one agreement between Frank Fidilio, the show's creator, and Hoosick Falls Production, Inc. ("Hoosick"), the production company, required arbitration of Fidilio's claims against Hoosick brought under another agreement which was executed at the same time, by the same parties, governing the same subject matter. Fidilio's remaining claims for breach of contract as a third-party beneficiary, unjust enrichment, and an accounting against Viacom International Inc. and the show's distributor, New 38th Floor Productions, Inc. ("New 38th"), were dismissed for failure to state a claim. Fidilio provides important lessons for parties considering mandatory arbitration clauses in connection with transactions involving multiple agreements, as well as for litigants considering whether claims may be subject to mandatory arbitration under provisions of related agreements.
Fraud and Fraudulent Conveyance Claims for $686 Million Allowed To Proceed Against Hedge Fund in Long-Running Dispute over Failed Securitization
On March 13, 2017, Justice Marcy Friedman of the New York Commercial Division denied a motion for summary judgment seeking to dismiss claims of fraud, breach of the covenant of good faith and fair dealing, and fraudulent conveyance brought against a hedge fund, Highland Capital Management, and related entities. The case, UBS Securities LLC v. Highland Capital Management, No. 6500097/09, 2017 BL 98450 (Sup. Ct. Mar. 13, 2017), is a long running dispute arising from a failed securitization of collateralized loan obligations (CLOs) and credit default swaps (CDS) that dates to the early days of the Great Recession. The denial of summary judgment means that the next step in this eight-year long saga will be a jury trial where $686 million in damages will be at stake.
Commercial Division Dismisses Claim Against Major Chinese Securities Firm Due to Lack of Personal Jurisdiction
In Lantau Holdings, Ltd. v. Orient Equal International Grp., No. 653920/2016, 2017 BL 77469 (Sup. Ct. Mar. 6, 2017), Judge Anil C. Singh of the New York County Commercial Division dismissed several claims by the plaintiff, Tarrytown-based lender Lantau Holdings, Ltd. (“Lantau”), against defendant Haitong International Securities Company Limited (“Haitong”), a member of the Haitong Group, one of China’s largest securities businesses.
Commercial Division Rejects Collateral Promise Argument as a Basis for a Fraudulent Inducement Claim
In a recent decision, Justice Anil Singh of the Commercial Division dismissed a counterclaim asserted by Visa against Wal-Mart for fraudulent inducement. According to Justice Singh, Visa’s allegations failed to satisfy the collateral promise rule as its fraud claim did not concern misrepresentations of present material fact that were collateral to the contract. Wal-Mart Stores, Inc. v. Visa U.S.A. Inc., No. 652530/2016, 2017 BL 65006 (Sup. Ct. Feb. 27, 2017).
In a pair of recent decisions, Justices Shirley W. Kornreich and Lawrence K. Marks of the Commercial Division ruled that creditors could proceed on their fraudulent conveyance claims seeking reversal of asset transfers made by debtors under New York’s Debtor and Creditor Law (“DCL”). The decisions highlight two basic theories of fraudulent conveyance claims permitted by the DCL: intentional fraud claims, which require a showing that the debtor made the transfer with the intent defrauding its creditor, and constructive fraud claims, which do not require a showing of fraudulent intent.
Justice Timothy J. Dufficy in the Queens County Commercial Division recently entered an order dissolving a limited liability company owned by two brothers whose disagreements regarding the management of the LLC culminated in a physical altercation. Matter of Dissolution of 47th Road LLC, No. 705060/16, 2017 BL 49187 (Sup. Ct. Feb. 16, 2017). The court applied an exception to the general rule that disputes between members are insufficient to warrant judicial dissolution, and found that the antagonism between the brothers made it impracticable for the business to carry on.
In Norddeutsche Landesbank Girozentrale v. Tilton, No. 651695/15, 2017 BL 55790 (App Div, 1st Dep’t Feb. 23, 2017), a divided panel of the Appellate Division, First Department, affirmed a Commercial Division order that denied a motion to dismiss a $45 million fraud claim against Lynn Tilton, Patriarch Partners LLC (“Patriarch”), and two Patriarch affiliates, stemming from their management of two collateralized debt obligation (“CDO”) funds. Justices Richard T. Andrias and David B. Saxe dissented in part, opining that the majority should have dismissed the fraud claim as time-barred because the plaintiffs-investors were on notice of the alleged fraud more than two years before they filed suit.
First Department Adds Two New Factors to New York’s Standard of Review for Non-Monetary Settlements of Shareholder Class Actions
On February 2, 2017, the Appellate Division, First Department issued a unanimous decision in Gordon v. Verizon Communications, Inc., No. 653084/13, 2017 BL 31251 (1st Dep’t Feb. 2, 2017) that may have significant consequences for non-monetary settlements of shareholder class actions in New York. Justice Melvin L. Schweitzer, then of the Commercial Division, rejected the putative settlement due to concerns about whether shareholders could benefit from the additional disclosures that were to be made. In an opinion by Justice Marcy L. Kahn, the First Department reversed and approved the proposed settlement. Justice Kahn applied the five-factor test that the First Department adopted in Matter of Colt Indus. Shareholders Litig. (Woodrow v. Colt Indus, Inc.), 155 AD2d 154, 160 (1st Dep’t 1990), and added two new factors to that test. However, the Court’s failure to clearly define which parties these two new factors are meant to protect—i.e., the shareholders or the corporation—may lead to confusion as future courts and parties seek to apply this revised standard.
First Department Affirms the Validity of an LLC Operating Agreement Adopted by Majority Members without Minority Consent: Takeaways for New York LLCs
In Shapiro v. Ettenson, No. 2849, 2017 BL 19404 (App. Div. 1st Dep’t Jan. 24, 2017), the Appellate Division, First Department recently affirmed a decision by Supreme Court Justice Kelly O’Neill Levy upholding an LLC operating agreement that was adopted by two of the LLC’s three co-equal members without the consent of the third member. The Appellate Division rejected Shapiro’s argument that the operating agreement was unenforceable because it was not adopted unanimously. The panel affirmed the lower court’s decision that LLC Law § 402(c) “provides that the operating agreement may be adopted by ‘the vote of a majority in interest of the members entitled to vote thereon.’” Because the First Department agreed that the operating agreement was enforceable, the court further affirmed the lower court’s ruling upholding the majority members’ reliance on a provision of the agreement to issue a capital call and reduce the voting interest of any member who fails to make the requested capital contribution.
First Department Confirms Hedge Funds Did Not Act in Bad Faith and Affirms Multi-Million Dollar Judgment Against CDS Counterpart
In Good Hill Master Fund L.P. v. Deutsche Bank AG, No. 600858/10-2188B, 2017 BL 19363 (App. Div. 1st Dep’t Jan. 24, 2017), the First Department unanimously affirmed a judgment entered in the Commercial Division of over $90 million, a large portion of which included prejudgment interest at 21%. The judgment followed a nonjury trial before Justice O. Peter Sherwood of the New York County Commercial Division. The case was brought by two hedge funds against Deutsche Bank in connection with Credit Default Swap (“CDS”) agreements. The First Department rejected the bank’s arguments that the hedge funds acted in bad faith by renegotiating the terms of the underlying securitized notes to the detriment of their CDS counterparty, Deutsche Bank.
In the past, a foreign bank’s use of correspondent bank accounts in the United States to facilitate wire transfers has not necessarily given New York courts a sufficient basis for jurisdiction over the bank. But a recent 4-3 Court of Appeals decision may change that. In Rushaid, et al. v. Pictet & Cie, et al., No. 180, 2016 BL 387923 (N.Y. Nov. 22, 2016), Judge Rivera writing for the four person majority (and overturning decisions of both the First Department and the Commercial Division) ruled that a foreign bank’s “repeated, deliberate” use of correspondent bank accounts in the United States is enough to establish New York jurisdiction.
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