Complex Commercial Actions

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 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.

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.” 

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”).

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.

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,[1] 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.

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.

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.

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.

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 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.

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.[1]

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.

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.

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. 

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).

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 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.’”[1]  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.[2]

On January 6, 2017, Justice Charles E. Ramos of the Commercial Division issued an order enjoining two corporations from taking action in violation of a shareholders agreement of a third company.  The case, Ciment v. SpanTran, Inc.,[1] involves a contentious shareholder dispute in which it was alleged that the shareholders agreement of one company covered governance issues concerning two other companies.  Justice Ramos ruled that the third company’s shareholders agreement contemplated the acquisition of additional entities, and was thus likely to apply to the other two corporations—which had subsequently come under the ownership of the same shareholders.

On January 10, 2016, the New York Court of Appeals decided to hear a case that has significant consequence in the field of partnership dissolution.  The case, Congel v. Malfitano, concerns the allegedly wrongful dissolution of a shopping mall partnership under Partnership Law § 69.  In 2016, Justice Thomas A. Dickerson, writing for a unanimous Second Department panel, held that a former partner’s unilateral notice of dissolution was wrongful because under Partnership Law § 69(2)(1)(b) the partnership was not “at-will” given that the written agreement contained a “definite term.”  The Second Department also ruled that it is appropriate to apply minority and goodwill discounts in determining the value of a defendant’s interest in a partnership.  Finally, the Second Department concluded that an award of attorney’s fees was proper because the expenditures are only incurred because of the former partner’s wrongful conduct.   

In a recent decision, Justice Lawrence S. Knipel in the Commercial Division ordered an attorney to comply with a non-party subpoena and disqualified the same attorney from representing her client in the action pursuant to the Advocate-Witness Rule of the New York Rules of Professional Conduct due to the fact that the lawyer was likely to be a witness on a significant issue of fact in the case.  Vanderbilt Brookland LLC v. Vanderbilt Myrtle Inc., No. 500522/2014, 2016 BL 433294 (Sup. Ct. Dec. 23 2016).   

In Ace Decade Holdings Ltd. v. UBS AG, No. 653316/2015, 2016 BL 413780 (N.Y. Sup. Ct. Dec. 7, 2016), Justice Eileen Bransten of the Commercial Division dismissed a $500 million fraud suit brought by an investment holding company incorporated in the British Virgin Islands, Ace Decade Holdings Ltd. (“Ace Decade”), against the Swiss Bank UBS AG for lack of personal jurisdiction and inconvenient forum.  Justice Bransten found no basis to exercise jurisdiction over UBS for alleged fraud in connection with a financing deal negotiated in Hong Kong to purchase shares of a firm listed on the Hong Kong Stock Exchange.  Justice Bransten further held that, even if the court could exercise jurisdiction over UBS, the causes of action lack a substantial nexus with New York and, thus, dismissal is also warranted based upon the doctrine of forum non conveniens.

In GSMC II 2006-GC6 Bridgewater Hills Corporate Center, LLC v. Lexington Realty Trust, Case No. 653117/2015, 2016 BL 378261 (N.Y. Sup. Ct. Nov. 2, 2016), Justice Jeffrey K. Oing of the Commercial Division denied a motion to dismiss an action to recover a loan guaranty on a defaulted loan of $14,805,000.

Justice Jeffrey K. Oing in the Commercial Division handed down a decision recently that discusses frustration of the occurrence of a condition precedent by parties to commercial contracts.  Nesconset ZJ 1 v. Nesconset Acquisition, LLC, No. 652719/2015, 2016 BL 339908 (Sup. Ct. Oct. 4. 2016).  The dispute in Nesconset involved agreements between buyers and sellers of nursing homes and related health care facilities.  The main issue in the case was whether the buyers could seek specific performance of the sales contract when the sellers’ conduct allegedly frustrated the satisfaction of condition precedents to the contract.  Justice Oing held that a seller who frustrates the buyer’s ability to satisfy a condition precedent will be unable to rely on the failure to satisfy that condition as justification to avoid the contract and will be subject to a claim for breach of the implied covenant of good faith and fair dealing.