NY Commercial Division Blog

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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.

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.

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Commercial Division Reprimands Lawyer for Misconduct in Deposition

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).

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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.[1]

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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.

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Commercial Division Considers Creating Large Complex Case List

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.

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Commercial Division Flags Novel Issue of Reasonable Reliance In LLC Member Battle

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.

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Commercial Division Partially Vacates ICC Arbitration Award in Artificial Sweetener Dispute

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.

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The Computer Fraud and Abuse Act Will Need To Wait Another Day In The Commercial Division

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.

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When is a Working Capital Agreement a Loan? It Depends on Your Claim.

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?

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Two Commercial Division Rulings Put Payday Further Out of Reach for Russian Businessman

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.

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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. 

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Commercial Division allows fraudulent conveyance claims to proceed in two separate cases

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.

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First Department Allows $45 Million Fraud Claim to Proceed Against Patriarch Partners

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. 

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Family Feud: Commercial Division Dissolves LLC Owned by Quarrelling Brothers

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.

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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.

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Commercial Division Disqualifies Attorney Acting in a Dual Role Pursuant to Advocate-Witness Rule

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).   

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Commercial Division Trial to Address Collateral Call and Dispute Resolution Provisions of ISDA Agreements

In a case with potentially broad implications for participants in the leveraged loan and derivatives markets, Justice Eileen Bransten will conduct a bench trial starting next week in the long-running dispute between a prominent Greenwich-based hedge fund, BDC Finance L.L.C. (“BDC”) and Barclays Bank PLC.  The case, BDC Finance LLC v. Barclays Bank PLC, Index No. 650375/2008, involves a derivatives transaction that—like more than 90% of derivative transactions around the world—is governed by the industry standard forms promulgated by the International Swaps and Derivatives Association (“ISDA”).  Following years of litigation and a trip to the New York Court of Appeals, the trial will focus, in large measure, on a relatively narrow question of contractual interpretation:  are parties to an ISDA agreement held to its literal terms?

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Investor’s Relocation to New York after Structuring a Financing Deal in Hong Kong Does Not Provide a Basis for Suit Against Swiss Bank UBS in New York, Holds Commercial Division

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.

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User’s Guide to Recent Revisions in the Commercial Division Rules

This User’s Guide contains a summary of new rules and amendments to existing rules that have been enacted since the original publication of this User’s Guide in January of 2015.  For a complete list of the rules of the Commercial Division of the Supreme Court, please follow the link found here.

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New York Court of Appeals Clarifies Champerty Safe Harbor Provision

On October 27, 2016, Chief Judge Janet DiFiore delivered a much awaited opinion in Justinian Capital SPC v. WestLB.[1]  Judge Leslie Stein wrote a dissenting opinion, which was joined by Judge Eugene Pigott, Jr.  Justinian involves the issue of champerty, which, as the Court describes, is “the purchase of notes, securities, or other instruments or claims with the intent and for the primary purpose of bringing a lawsuit.”[2]  Under New York law, champerty is prohibited.[3]  However, the New York champerty statute provides for a safe-harbor when the purchased asset has an “aggregate purchase price of at least five hundred thousand dollars.”[4]  Justinian clarifies that this safe harbor only applies when either the party pays “the purchase price or [has] a binding and bona fide obligation to pay the purchase price.”[5]  Put simply, at least $500,000 of the transaction must not be contingent on the litigation in order to fall within the safe harbor.

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A Party Can Be Compelled to Arbitrate a Dispute Pursuant to an Agreement It Did Not Sign

A recent decision from the New York Commercial Division decided whether arbitration could be avoided in an investment firm-employee dispute.  In CF Notes, LLC v. Weinstein, No. 652206/2015, 2016 BL 352970 (N.Y. Sup. Ct. Oct. 13, 2016), Justice Saliann Scarpulla, of the Commercial Division, compelled a nonsignatory to arbitrate pursuant to a FINRA arbitration agreement.  The decision relates to how financial securities firms structure bonuses to employees and to how nonsignatories may be compelled to arbitrate pursuant to arbitration agreements signed by their affiliates.

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Commercial Division Finds Restrictive Covenant Acceptable and Rejects Unpled Partnership Theory

On October 4, 2016, Justice Singh issued an order denying a defendant’s motion to dismiss a claim for breach of a restrictive covenant, finding that the covenant serves an acceptable purpose.  See Tarro v. McOsker, No. 653880/15, slip. op. (N.Y. Sup. Ct. Oct. 4, 2016).   The court also ruled that while it could not resolve a breach of fiduciary duty claim on a motion to dismiss, it would not entertain a new theory of duty that a plaintiff did not plead in his complaint.

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Rival Talent Managers’ Dispute Over American Idol Winner Phillip Phillips Stays “Home” at the California Labor Commission, Holds Commercial Division in Stay Decision

When the winner of the 11th season of American Idol, Phillip Phillips, sang “I’m going to make this place your home” on his 2012 breakout single, “Home,” he may have been predicting the petition that he would later file with the California Labor Commission (“CLC”).  In that petition, Phillips sought to void the talent management agreement that he was required to sign with 19 Entertainment, Inc. – one of the now-bankrupt companies behind production of American Idol – in order to participate as a semifinalist on the show.  Following a September 23, 2016 decision by Commercial Division Justice Salinan Scarpulla staying 19 Entertainment’s suit against Phillips’ new talent manager pending resolution of the California proceeding, the CLC may be “home” for 19 Entertainment’s fight over Phillips for the foreseeable future.

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Commercial Division Reaffirms Distinction Between Direct Versus Derivative Claims Under Delaware Law

When can a shareholder bring a direct claim in the Commercial Division against a corporate officer under Delaware law?  On September 29, 2016, in Southern Advanced Materials LLC v. Abrams, No. 650773/2015, 2016 BL 331371 (Sup. Ct. N.Y. Cnty.), Justice Saliann Scarpulla of the Commercial Division ruled on a corporate officer’s motion to dismiss breach of contract and fraudulent inducement claims brought by a plaintiff shareholder.  In his ruling, Justice Scarpulla articulated the distinction between direct and derivative claims under Delaware law, and applied that law to four contract and fraud claims brought by a shareholder against corporate officer.  Justice Scarpulla’s opinion provides guidance to litigants addressing shareholder claims against corporate officers in the Commercial Division.

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    Talking Shop in the Courtroom: Courts Set a High Bar for Using Industry Custom to Interpret Contracts

    Industry jargon becomes second nature to those in the industry.  Wall Street knows “poison pills” and Silicon Valley knows “burn rates.”  But what is second nature to industry insiders may be entirely foreign to others, and courts have set a high bar for allowing industry custom to color their interpretation of contracts.  Two recent decisions of the New York Commercial Division underscore the danger of relying on custom and usage to supply meaning to contract terms.  See Lehman Bros. Holdings Inc. v. IVC WH HG II, LLC, No. 652178/2012, 2016 N.Y. Misc. LEXIS 3215 (N.Y. Sup. Ct. Aug. 31, 2016) and IFC v. Carrera Holdings Inc., No. 601705/2007, 2016 N.Y. Misc. LEXIS 2640 (N.Y. Sup. Ct. June 29, 2016).

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    Costly Server Sale: Servers Erased In Asset Sale Lead To Adverse Inference for Spoilation

    On August 23, 2016, Justice Eileen Bransten of the New York Commercial Division issued a decision granting a motion for spoliation sanctions in a six-year-old dispute involving Covista Communications, Inc. and Oorah, Inc., two telecommunications companies.  Oorah, Inc. v Covista Communications, Inc., 2016 N.Y. Misc. LEXIS 3104 (N.Y. Sup. Ct. Aug. 23, 2016).   Justice Bransten’s opinion serves as an important reminder that parties must institute a litigation hold and exercise care when erasing documents, even as part of an unrelated transaction, when they are in litigation or reasonably anticipate litigation.

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    Commercial Division Rejects Attempt to Dismiss Two Alleged Verbal Agreements Despite Written Agreement’s Requirement that Contract Cannot Be Changed Except Upon Written Agreement of Parties

    On August 18, 2016, in Obsessive Compulsive Cosmetics, Inc. v. Sephora USA, Inc., No. 652074/2015, 2016 BL 307244 (N.Y. Sup. Ct. Aug. 18, 2016), Justice Ramos handed down an order that allowed a plaintiff to proceed with claims for breach of two verbal agreements that were purportedly made after the parties had executed a written agreement stating that the contract cannot be changed except by written agreement of both parties.  

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