Muhammad U. Faridi, Partner

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.

In Yakuel v. Gluck, Justice Joel M. Cohen of the New York County Commercial Division denied Petitioners’ application to confirm an appraisal award and denied Respondent Andrew Gluck’s (“Gluck”) cross-petition to vacate the same award in connection with the appraisal of Gluck’s ownership interest in Agency Within LLC (“Agency Within”), a digital marketing company.  The opinion addressed the legal standard for confirming or vacating an appraisal award pursuant to CPLR § 7601, as well as a party’s right to present evidence to an appraiser over the objection of a counterparty.

On May 20, 2020, Justice Lawrence Marks, the Chief Administrative Judge of the New York Unified Court System, issued a memorandum announcing that, effective May 25, 2020, “e-filing through the NYSCEF system – including the filing of new non-essential matters – will be restored in those counties of the state that have not yet met the benchmarks required to participate in the Governor’s regional reopening plan.”  Those counties include the five counties that comprise New York City, as well as Nassau, Suffolk, Dutchess, Orange, Putnam, Rockland, Sullivan, Ulster, and Westchester.

On Monday, May 11, 2020, three Commercial Division justices from across the state participated in a virtual panel to discuss the state of litigating in the Commercial Division during COVID-19.  Justices Saliann Scarpulla (New York County), Timothy Driscoll (Nassau County), and Deborah Karalunas (Onondaga County) discussed the ways in which litigation can move forward while the courts operate in a virtual format.  The panel was presented by the New York State Bar Association’s Commercial and Federal Litigation Section.

The issues related to the bringing of claims involving a cancelled LLC were addressed in the Commercial Division’s recent decision in Hopkins v. Ackerman.  In November 2019, Justice Saliann Scarpulla dismissed most of Hopkins’s and his co-plaintiffs’ claims as derivative, and therefore unable to be brought on behalf of a cancelled LLC.  We covered that decision here.  Following that decision, Hopkins sought leave to bring additional direct claims, but Justice Scarpulla’s recent decision rejected all but one of the proposed claims—a breach of fiduciary duty claim based on allegations that Hopkins was frozen out of decision-making and membership rights.  The other claims were rejected as derivative because they concerned the alleged failure to distribute the LLCs’ assets, a harm felt equally by all members.  Justice Scarpulla also reaffirmed her earlier ruling that a challenge to an LLC’s cancellation status (which could re-open the door to derivative claims) must be brought in Delaware, where the entities were established and cancelled.

In derivative shareholder actions, New York law requires a plaintiff-shareholder seeking to vindicate the rights of a corporation to plead, with particularity, either that before filing suit a request was made on the corporation’s board of directors to initiate the action or that any such demand, if made, would have been futile.[1]  This pre-suit demand requirement may seem straightforward in theory, but a March 19, 2020 Commercial Division decision by Justice Andrea Masley serves as a cautionary reminder of tricky nuances in its application. 

On April 17, 2020, Stephen Younger, Muhammad Faridi, and Timothy Smith presented a webinar for the Practicing Law Institute titled “COVID-19’s Impact on Commercial Transactions and Disputes.” This one-hour program addressed the legal challenges that many businesses may be facing in the wake of the pandemic.  Muhammad and Tim discussed...

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.