Complex Commercial Actions

In Morse v. LoveLive TV US, Inc., a recent decision by Justice Robert R. Reed of the New York County Commercial Division, the Court denied a defendant’s motion to dismiss, holding that where it is impossible or futile to obtain a judgment against a defunct corporation that has defaulted on debts by “informal dissolution,” creditors can maintain an action directly against the directors of that company.

On February 11, 2021, the New York State Unified Court System issued Virtual Bench Trial Protocols and Procedures (“Protocols and Procedures”) in light of the ongoing Covid-19 pandemic.  While “Virtual Bench Trials are, in all respects, identical to In-Person Courtroom Bench Trials[,]….certain modifications are necessary regarding the presentation of testimonial, documentary, and physical evidence in order to safeguard accuracy and ensure reliability.”

Last summer, we wrote about two principles of New York law that could provide a path to insurance coverage for businesses hit hard by the economic losses resulting from Governor Cuomo’s COVID-19-related shutdown orders.  Although we noted that businesses seeking such coverage would likely face an uphill battle, we proposed that recovery under certain business interruption policies might be available in New York because: 1) an insurable loss of use occurred even without physical damage to the covered property; and/or 2) the policy’s “civil authority” clause extended to closures resulting from Governor Cuomo’s orders.

In Farro v. Schochet, the Second Department recently held that §1002 of the NY LLC Law restricted a dissenting member’s remedy to an appraisal for the fair value of his interest in the business after a freeze-out merger.  Thus, the Court reduced the legal remedies for a minority LLC member that lacked protections in the operating agreement against the merger.

Good news for lawyers preparing for trial in New York’s Commercial Division—you can finally delete that old copy of WordPerfect.  An upcoming amendment to the rule governing pre-trial memoranda, exhibits, and requests to charge makes a few changes that trial-ready attorneys should note.

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.

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."

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.

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.”

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.

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 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.

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.

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, 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.

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. 

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.

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.

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.

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. 

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. 

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.

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.

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.