Muhammad U. Faridi, Partner

Do the directors who oversaw the fraudulent conveyance of a corporation’s assets face direct liability for it?  Not unless the entities were shams and the directors exerted total dominion and control, according to Commercial Division Justice Andrew Borrok’s recent decision in Acacia Investments, B.S.C.(c) v. West End Equity I, Ltd.  In Acacia, Justice Borrok allowed fraudulent conveyance claims to proceed against the entities involved in an alleged transfer of judgment-debtors’ assets to a new family of companies, but did not allow direct claims against the directors of the entities.  He held that Delaware law does not create a claim for director liability, and that there was no factual basis for piercing the entities’ corporate veils to hold the directors liable for the alleged fraud.

A recent Commercial Division decision demonstrates the ability of partnership agreement provisions to limit the executors of the plaintiff-limited-partner from continuing a derivative lawsuit after that partner’s death.  In Weinstein v. RAS Prop. Mgmt. LLC, 2020 NY Slip Op 30311(U) (Sup. Ct., N.Y. Cnty. Feb.5, 2020), Justice Andrew Borrok denied a motion to substitute a deceased plaintiff with the plaintiff’s executors  The court reasoned that the plaintiff’s executors lacked standing under the applicable partnership agreement.

The Administrative Board of the Courts is seeking public comment on a proposal by the Commercial Division Advisory Council to amend Commercial Division Rule 6 to (i) require legal memoranda to include hyperlinks to cited documents that have already been filed on NYSCEF and (ii) give judges discretion to require that citations include hyperlinks to legal databases such as LexisNexis, Westlaw, or government websites. 

Patterson Belknap Webb & Tyler LLP is pleased to announce the publication of the second edition of its New York Commercial Division Practice Guide.  As with the first edition, the guide is organized into various chapters drafted by Patterson Belknap lawyers.  Each chapter contains useful information about litigating in the Commercial Division of the New York State Supreme Court, and an excerpt is available to download here.

The Commercial Division regularly hears suits involving foreign parties, in part because contract parties, anywhere in the world, can choose to have a dispute heard by the Commercial Division as long as the transaction at issue concerns $1 million or more. However, the Commercial Division’s rules sometimes provide for more extensive discovery than would be allowed in a foreign party’s home country.  And in some instances, the Commercial Division’s rules may even provide for discovery that would be illegal in the foreign party’s home country.  Justice Andrew Borrok’s recent decision in Starr Russia Investments III B.V. v. Deloitte Touche Tohmatsu Ltd. provides an illustration of how the Commercial Division may navigate this thorny issue.

There has been a new development in the Xerox and Fujifilm (“Fuji”) litigation:  Justice Ostrager of the New York Commercial Division declined to (i) certify the putative class, (ii) approve the proposed class settlement, and (iii) award the class attorney’s fees pursuant to a memorandum of understanding that was reached by defendant Xerox and putative class plaintiffs.  The material terms of this agreement—changes to the Xerox Board of Directors—already took effect prior to the Justice Ostrager ruling.

Before filing a shareholder derivative suit, the plaintiff must typically serve a pre-litigation demand upon the company’s Board of Directors, except in narrow circumstances where the demand may be futile.  In Gammel v. Immelt, Justice Andrea Masley of the New York Commercial Division dismissed the shareholder derivative suit because the plaintiff did not meet the pre-litigation demand requirement and failed to plead with particularity the circumstances establishing the futility exception.

On July 2, 2019, the First Department, in a unanimous decision written by Justice Dianne T. Renwick, reversed a decision of former Commercial Division Justice Eileen Bransten confirming an arbitration award.  The First Department concluded that the arbitrator’s award of attorney’s fees was not in manifest disregard of New York law, but that the arbitrator did not have jurisdiction over counterclaims brought by a related-third-party pursuant to an agreement that did not contain an arbitration clause.   The opinion provides a helpful review of New York law regarding both the award of attorney’s fees in arbitration and on jurisdictional objections to arbitration.

In High Street Capital Partners, LLC v. ICC Holdings, LLC, Justice Joel M. Cohen of the Commercial Division denied defendants ICC Holdings, LLC (“ICC”) and related entities’ (collectively, “Defendants”) motion to dismiss plaintiff High Street Capital Partners, LLC’s (“High Street”) action for breach of contract for lack of personal jurisdiction and forum non conveniens.  The court’s decision addressed issues of whether electronic communications between an out-of-state defendant and a New York-based company are sufficient to satisfy the requirements of New York’s long-arm statute and render New York a convenient forum.

Beginning in April 2019, the First Department has changed its practice to assign panels of four justices for oral argument, as opposed to five justices as has been the traditional practice of the court.  This change is the result of three ongoing vacancies on the First Department that have remained unfilled by Governor Cuomo.  The Presiding Justice of the First Department, Hon. Rolando Acosta, explained that the move to four justice panels is necessary because there are not enough judges to hear all the pending appeals.  Aware that four justice panels could create a two-to-two split, Presiding Justice Acosta explained that a fifth judge can be brought in to issue a decision if needed.  Parties can preserve their right to reargue or submit the case to a fifth justice by making a statement on the oral argument record.  This change will likely remain in place until new judges are appointed to the court. 

Arbitration is a matter of contract and, as such, non-parties generally cannot be compelled to arbitrate under agreements that they have not signed or agreed to.  In IQVIA RDS Inc. v. Eisai Co. Ltd., the Commercial Division recently highlighted two exceptions to this general rule.  Although the Court ultimately found neither exception to be applicable, the case raises important issues that merit attention.

Coast-to-Coast-Energy-Inc-v-Ga.pdfIn corporate fraud suits, it is common for plaintiffs to file claims against executives in their capacity as corporate officers.  However, to succeed on a corporate-capacity claim, a plaintiff must be able to show that the corporate veil should be pierced so as to hold an officer personally liable for the corporation’s legal obligations.  This issue is illustrated by the Commercial Division’s recent decision in Coast to Coast Energy, Inc. v. Gasarch.

Can a debtor obtain declaratory judgment shielding himself from liability to a creditor’s officers or associates personally and then use that judgment to preclude subsequent claims by the creditor itself?  Not in the First Department, following the recent decision in Avilon Automotive Group v. Leontiev.[i]  In Avilon, a unanimous panel reversed the res judicata-based dismissal of fraudulent transfer and other related claims arising from several Russian loan transactions because the claims by the creditors themselves were not the subject of a prior declaratory judgment concerning the debtor’s liability to the creditors’ representative.Avilon_Auto._Grp._v._Leontiev.pdf

To commence a special proceeding to compel arbitration in New York, pursuant to CPLR § 7503(a), a party must be “aggrieved by the failure of another to arbitrate.”  In KPMG LLP v. Kirschner, Justice Barry R. Ostrager recently ruled that to be “aggrieved,” and thereby have standing, a party must be subject to litigation before filing a special proceeding to compel arbitration.  According to the Court, a subsequently filed litigation or the risk of potential litigation is not sufficient to confer standing. 

In 2017, the New York legislature amended CPLR 503(a) to provide for venue in “[(1)] the county in which one of the parties resided when it was commenced; [(2)] the county in which a substantial part of the events or omissions giving rise to the claim occurred; or, [(3)] if none of the parties then resided in the state, in any county designated by the plaintiff.”   Before the amendment, CPLR 503(a) did not provide for venue based on where the events or omissions giving rise to the claim occurred.

On July 19, 2018, Chief Administrative Judge of the Courts, Lawrence K. Marks, issued an administrative order promulgating a new subdivision of Rule 11-e of the Commercial Division Rules. Rule 11-e governs Responses and Objections to Document Requests, and the newly added subdivision specifically addresses the use of technology-assisted review in the discovery process. 

In a decision issued last month in Gowen v. Helly Nahmad Gallery, Inc., No. 650646/2014, 2018 NY Slip Op 28142, 2018 BL 164601, Commercial Division Justice Eileen Bransten found personal jurisdiction over foreign defendants in an action brought by the estate of a Jewish art dealer to recover a valuable painting plundered by the Nazis in occupied Paris.  Justice Bransten further held that New York’s substantive law applies to the dispute over the painting’s ownership, proclaiming that “New York markets are not now, and shall not become, a safe harbor for the fruits of property pillaged during the course of the Nazi genocide.”  Beyond its compelling subject matter, the opinion provides useful guidance for plaintiffs considering pleading jurisdiction over non-domiciliary defendants on an alter ego theory.

When a defendant avoids the cost of developing its own technology by stealing proprietary information, can that defendant be required to re-pay the cost it saved as compensatory damages?  Not under New York trade secret or unfair competition law.  In E.J. Brooks Co. v. Cambridge Security Seals,[1] a divided New York Court of Appeals announced – over a lively dissent – that compensatory damages for misappropriation of trade secrets and unfair competition are limited to the plaintiff’s own losses, and may not include the development costs avoided by defendants.  The Court further held that an accompanying claim for unjust enrichment does not provide a basis to expand the recovery beyond the plaintiff’s own losses.

In a new, practical, on-demand CLE webcast from our partner Bloomberg BNA, Commercial Division Blog authors Stephen P. Younger, Muhammad U. Faridi, and Benjamin F. Jackson provide in-house counsel and litigators in private practice with advice on how to litigate commercial disputes in New York state court with an eye...

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.

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.

New York recognizes conversion claims based on intangible property, such as electronically stored information or trade secrets.[1]  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.[2]  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.

The decision to bring a lawsuit on behalf of a corporation is entrusted to the corporation’s board of directors.[1]  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.[2]  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).

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.