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NY Lenders May Face Barriers In Real Estate Dispositions

As the country entered into an extended period of lockdowns this spring, there was widespread concern that the anticipated severe economic impact of the pandemic would lead to a wave of defaults and foreclosures in the commercial real estate market.
 

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Commercial Division Declines to Dismiss Claim Seeking to Invalidate Delaware LLC Member’s Exercise of a Put Option Amidst Allegations of Anticipated Insolvency

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.

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Commercial Division Renders a Split Decision on a Petition to Stay an Arbitration

Recently, the Commercial Division rendered a split decision on a petition to stay an arbitration in Gol v. TNJ Holdings, Inc., Index No. 652304/2020, Doc. No.  75 (Sup. Ct., NY Cnty. Aug. 13, 2020).  Based on an analysis of the relevant shareholder agreements and the positions taken by the parties in another litigation, Justice Joel M. Cohen denied the petition to stay arbitration as to the claims brought by the TNJ respondents, but granted the petition to stay arbitration as to the claims brought by the Kahlon respondents—the owners of TNJ.

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Commercial Division Sees Uptick, Followed by Flattening in Case Filings

The New York County Commercial Division saw a substantial increase in the number of new cases filed (i.e.,a total of 102 new cases) during the first four-week span after the New York courts re-opened for non-essential matters on May 25, 2020—as compared to both February 2020 (77 new cases), the last full month of filings prior to the crisis, and a comparable period between May 27 and June 23, 2019 (87 new cases).

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New Oral Argument Protocol at the First Department

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. 

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The Commission to Reimagine the Future of New York’s Courts Releases Goals for Restarting in-Person Juries

In mid-June, Chief Judge Janet DiFiore appointed the Commission to Reimagine the Future of New York’s Courts, and charged it with examining technological, regulatory, and other long-term innovations for New York Courts.  Additionally, in the short-term, it was to provide recommendations for resuming in-person court operations amid the COVID-19 pandemic. 

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Commercial Division Holds that Reliance and Inducement are Not Required Elements of Unjust Enrichment

When the funds invested by one victim of a Ponzi scheme are used to pay the scheme’s debts to an earlier investor, can the later investor recover those funds from the earlier investor through an unjust enrichment claim?  Yes, if there is a sufficient connection between the parties, according to Commercial Division Justice Andrea Masley’s recent decision in JHAC LLC v. Advance Entertainment LLC.  In JHAC, Justice Masley allowed unjust enrichment claims by one Ponzi scheme victim against other victims to proceed by holding that reliance and inducement are not elements of unjust enrichment in New York.  All that is required to sustain the claim is a “connection” between the victims, and Justice Masley held that JHAC adequately pled such a connection.

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Second Department to Allow Virtual Option for Oral Arguments

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.

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In a New York Debtor and Creditor Law Dispute, Commercial Division Clarifies Allegations Required to Pierce Corporate Veil

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.

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Appellate Division, First Department Expands Mandatory E-filing

The Appellate Division, First Department has expanded the categories of appeals subject to e-filing through the New York State Court Electronic Filing System (NYSCEF).  Effective July 27, 2020, e-filing is now mandatory for all matters originating in Supreme Court, Criminal Term; Family Court; Surrogate’s Court; and Court of Claims in Bronx and New York Counties.  With this expansion, e-filing is now mandatory for all matters before the First Department, except Original Special Proceedings and Attorney Matters.

The expansion applies to appeals that have already been perfected, and is required regardless of whether the matters were e-filed at trial level.  Attorneys in matters where notices of appeal have been filed are encouraged to immediately enter the initial information required for e-filing under 22 NYCRR § 1245.3.  There are separate 22 NYCRR § 1245.3. considerations for criminal and family matters with assigned counsel, and such practitioners should consult the notice to the bar.

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New York Court of Appeals Resumes In-person Filings

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.

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Justice Scarpulla Appointed to the Appellate Division, First Department

On July 13, 2020, Governor Cuomo appointed four Supreme Court Justices to fill vacancies on the Appellate Division, First Department.  The Governor elevated Justices Saliann Scarpulla, Manuel Jacobo Mendez Olivero, Martin Shulman and Tanya R. Kennedy, who represent the diversity of New York’s judicial system.

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Commercial Division Resolves Madoff-related Dispute Pursuant to LLC Law

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. 

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Business Interruption Recovery in New York—Two Cases Might Help

In the wake of punishing economic losses caused by Covid-19-related shutdown orders, business owners across New York have turned to their insurers for temporary relief in the form of business interruption coverage. If recent reports are any indication, however, New York businesses will face an uphill battle.

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Repeal of Rule 23: the 60-Day Rule

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. 

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Virtual Court May Be the New Normal in New York City, At Least For Now

Although New York City’s state court judges are now back in their chambers, in-person hearings have not yet commenced. 

Administrative Judge Deborah A. Kaplan reported that her division has had success using “video-linked ‘virtual’ hearings for a wide range of matters.” In-person hearings will still be available when truly necessary.  For example, this option may be available to self-represented litigants without access to the requisite technology. 

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Amendment to Rule 1 Allowing Video Appearances

On June 16, 2020, Chief Administrative Judge Marks approved an amendment to Rule 1 to the Commercial Division Rules.  The amendment is designed to allow counsel to request the court’s permission to appear though videoconferencing and other similar technology.

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Chief Judge DiFiore Announces Expanded In-Person Court Services in Five Upstate Regions

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.

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In a Valuation Dispute, Commercial Division Refuses to Credit “Unrealistic and Optimistic” Projections Made by a Corporation in Obtaining a Loan

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.

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Updates on COVID-19’s Impact on Commercial Appeals: New York Court of Appeals Expands Digital Filings, While the Appellate Division Lifts Moratorium on Filing Deadlines and Hears Skype Argument

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.

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Commercial Division Denies Cross-Petitions to Confirm and Vacate Appraisal Award Despite Strong Presumption in Favor of Summarily Confirming Such Awards

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.

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Presiding Justices of the Appellate Division Participate in Virtual Town Hall

The COVID-19 pandemic has had considerable effect on appellate practice in New York State’s intermediary appellate court, the Appellate Division.  The last months have seen historical firsts, such as all four appellate departments hosting virtual oral arguments on Zoom and Skype.  Many parties have not had the opportunity to take part in oral argument, as their cases have been decided on submission or adjourned.  The four departments have issued a flurry of notices to the bar revising their rules of practice and many of these changes could very well be permanent. 

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Five Upstate Judicial Districts Begin Phase II of In-Person Court Operations

Chief Judge Janet DiFiore and Chief Administrative Judge Lawrence K. Marks announced that courts in the Fifth Judicial District, Sixth Judicial District, and Seventh Judicial District will enter Phase II of re-opening on June 3, 2020, and it will expand to the Eighth Judicial District and Fourth Judicial District on June 5, 2020. 
 

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New York State Courts Begin Reopening Process As Some Upstate Regions Meet Initial State Reopening Criteria

Chief Judge Janet DiFiore recently announced that New York state courts have begun the process of re-opening the in-person court system and increasing the capacity of new matters that may be filed in New York state courts.  The courts that are beginning the physical reopening process are located within New York’s Third, Fourth, Fifth, Sixth, Seventh, and Eighth judicial districts.  Those districts roughly cover the regions of New York that do not include New York City and the surrounding suburbs.  Electronic filing of new non-essential cases also, to the extent permissible prior to the COVID-19 crisis, resumed on Memorial Day, May 25th, 2020.

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    E-Filing of New, Non-Essential Matters to Resume

    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.

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    First Department Holds That “Sole and Absolute Discretion” Clause Does Not Preclude Breach of Fiduciary Duty Claim

    In Shatz v. Chertok, the First Department affirmed in part and reversed in part a decision by Justice Jennifer G. Schechter of the Commercial Division. The key issue on appeal was whether a New York limited liability company’s operating agreement that provided the managing member “sole and absolute discretion” over investment decisions barred a derivative claim for breach of fiduciary duty.  The First Department held that this contractual language did not bar a breach of fiduciary duty claim against the company’s manager.

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    Commercial Division Justices Discuss Litigating During COVID-19

    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.

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    Phase One Re-Opening of In-Person Court Operations

    On May 13, 2020 the New York State Unified Court System announced a plan for the gradual return of judges, clerks, and court staff to courthouses in select upstate counties—with litigants being able to electronically file new cases in those counties.[1] 

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    Commercial Division Reiterates That Claims Based on Harm to All Members of LLC are Derivative

    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.

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    Governor Andrew Cuomo Extends Tolling of Statute-of-Limitations

    On May 7, 2020, New York Governor Andrew Cuomo issued Executive Order 202.28, which, among other things, “continue[d] the suspension and modifications of laws, and any directive, not superseded by a subsequent directive, made by Executive Order 202 and each successor Executive Order up to and including Executive Order 202.14, for thirty days until June 6, 2020, except as modified” in the May 7, 2020 Executive Order.

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    Commercial Division Dismisses Derivative Shareholder Suit for Failure to Provide New Allegations of Pre-Suit Demand in an Amended Complaint

    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. 

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    New York Courts Expand Virtual Operations Amid COVID-19 Emergency

    Updated

    May 4, 2020 - Update: On May 4, 2020 Chief Administrative Judge Marks promulgated an order that codifies the new policies delineated in his memorandum of April 30, 2020 and discussed in the below “Update” of May 1, 2020.

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    COVID-19 Webinars Presented by Editors of the Blog

    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...
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    Chief Judges Announce Plan for Virtual Court Proceedings and Resumption of Non-Essential Matters in the Commercial Division and Other Courts

    Updated

    Update: Chief Administrative Judge Marks has promulgated an order that makes the plans detailed below effective as of April 13, 2020.  The order also notes that video conferences will be administered exclusively through Skype for Business.

    As an update to our earlier post on COVID-19’s effect on the Commercial Division, Chief Judge Janet DiFiore and Chief Administrative Judge Lawrence K. Marks recently announced that as of April 6, 2020, all essential proceedings across New York State are now being handled by the New York courts virtually, with judges, attorneys, and most nonjudicial staff participating in those proceedings remotely.  Additionally, Chief Judge DiFiore and Chief Administrative Judge Marks announced their preliminary plans for handling non-essential matters, which are as follows:

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    Gov. Cuomo Tolls Procedural Laws Including Statutes of Limitations

    On March 20, 2020, in order to limit court operations in light of the evolving COVID-19 emergency, Governor Cuomo issued Executive Order 202.8.   That order, among other things, tolls through April 19, 2020 “any specific time limit for the commencement, filing, or service of any legal action, notice, motion, or other process or proceeding, as prescribed by the procedural laws of the state[.]”  This order means that parties who are facing a deadline to file a civil action have an extension up and until April 19, 2020 in order to do so, unless a further extension of this deadline is granted.

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    Failure to State the “Obvious” Does Not Give Rise to a Securities Violation

    Commercial Division Justice Andrew Borrok recently issued a decision in Lonny Matlick et al. v. AmTrust Financial Services, Inc., addressing the following question: 

    Can an issuer be held liable under the Securities and Exchange Act of 1933 for the failure to disclose the risk that certain securities could be delisted when the issuer never guaranteed the listing of such securities in the first instance? 

    The answer, as Justice Borrok explained, is no.

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    Commercial Division Holds that Imposition of Direct Liability on Directors Who Oversaw Fraudulent Conveyance Requires Piercing the Corporate Veil

    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.

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    COVID-19’s Effect on New York Commercial Division

    Over the last few days, Judge Lawrence K. Marks, the Chief Administrative Judge of the New York State Unified Court System, issued two memoranda bearing on COVID-19’s effect on the Commercial Division.

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    Second Department Affirms Decision Declaring Invalid an Assignment of an LLC Interest

    In Behrend v. New Windsor Group, LLC, the Second Department affirmed the denial of Plaintiff Julius Behrend’s (“Behrend”) motion for summary judgment in his action seeking a declaratory judgment that he held a membership interest in defendant New Windsor Group, LLC (“New Windsor”) or an interest in New Windsor’s assets.[1]  The Court’s decision affirmed a ruling by former Queens County Commercial Division Justice Martin E. Ritholtz. The opinion addressed the effect of a putative assignment of interest in New Windsor from Joseph Klein (“Klein”) to Behrend pursuant to a memorandum of understanding between them.  Behrend failed to seek consent to the assignment from New Windsor’s managing member, Andrew Perkal (“Perkal”), as was required by New Windsor’s operating agreement.

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    Commercial Division Holds that Representatives of a Deceased Limited Partner’s Estate Do Not Have Standing to Maintain a Derivative Lawsuit

    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.

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    Second Department Applies De Facto Merger Doctrine and Veil Piercing in Recent Appeal

    On January 29, 2020, the Second Department affirmed a Suffolk County Commercial Division decision applying both the de facto merger doctrine and the veil piercing doctrine.  Each doctrine often plays an important role in determining whether plaintiffs in business disputes can recover from certain entities and their owners who are not signatories to operative agreements.  The Second Department’s analysis in reviewing a decision by Justice Elizabeth Hazlitt Emerson of the Commercial Division provides a helpful review of these concepts.

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    Commercial Division Opinion Suggests that Subcontractor Can Potentially Recover From General Contractor and Property Owner for Work Outside Scope of Subcontract

    Suppose a property owner hires a general contractor for a time-sensitive project.  The general contractor in turn hires a subcontractor.  After the project hits some snags and delays, the property owner tries to move things along by assuring the subcontractor that it will get paid for certain additional tasks that the owner requests.  However, the subcontractor never enters into a formal written agreement covering the additional work.  If the subcontractor is not fully paid for the work, can it successfully sue the property owner, the general contractor, or both for contractual or quasi-contractual damages?  A recent decision by Justice Andrea Masley of the Commercial Division in Corporate Electrical Technologies, Inc. v. Structure Tone, Inc., suggests that in certain circumstances, the answer is yes: the subcontractor can recover from the property owner or the general contractor for the additional work, even absent a written contract covering that work, based on the parties’ course of conduct.

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    First Department Holds Source Code to Be a Trade Secret and Defines Bounds of Judicial Proceedings Privilege

    On November 12, 2019, in BEC Capital, LLC et al. v. Bistrovic et al., 177 A.D.3d 438 (1st Dep’t 2019), the Appellate Division, the First Department issued a decision reversing an order of the Commercial Division and holding that the Defendants’ source code is a trade secret, and therefore should have been ordered to be produced under an “attorneys and expert eyes only” form of review.  The First Department also held that an email produced prior to the litigation was not subject to privilege from defamation and thus could support Defendants’ counter-claim for defamation.

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    Seventh Judicial District Assigns New Justice

    Justice Craig Doran, the Administrative Judge of the Seventh Judicial District, assigned Justice J. Scott Odorisi to the Commercial Division.  Justice Odorisi replaces Justice Matthew Rosenbaum.  Justice Odorisi was elected to the New York State Supreme Court in 2013 and worked in private practice before going on the bench.

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    New York Amends Its Fraudulent Conveyance Law by Enacting the Uniform Voidable Transactions Act

    Last month, New York enacted the Uniform Voidable Transactions Act (“UVTA”), which seeks to modernize the state’s fraudulent conveyance law. 

    Since its introduction by the Uniform Law Commission in 2014, the UVTA has now been adopted by 21 states.  The UVTA was originally drafted by the Uniform Law Commission as an amendment to the 1984 Uniform Fraudulent Transfer Act (“UFTA”); New York was one of only seven states that did not adopt the original UFTA.

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    Commercial Division Advisory Council Proposes Requiring Briefs to Include Hyperlinks to NYSCEF Docket Entries

    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. 

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