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Commercial Division Denies Summary Judgment in a “Shotgun” Provision Matter

Recently, Justice Andrew Borrok of the Commercial Division denied a summary judgment motion in a dispute involving what is colloquially referred to as a “shotgun” or a “buy-sell” clause in agreements governing joint ventures and partnerships.  See Seokoh, Inc. v. Lard-PT, LLC, Index No. 650983/2020, 69 Misc. 3d 1207(A) (Sup. Ct., NY Cty. Oct. 20, 2020).

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Commercial Division Confirms Arbitration Award Entered Against Party Who Objected to the Jurisdiction of the Arbitrators but Failed to Seek a Stay of the Arbitration

In Fava v. Morgan Stanley Smith Barney, Inc., Justice Barry R. Ostrager of the New York County Commercial Division denied Petitioner Frank Fava’s (“Fava”) motion to vacate an arbitration award issued by the Financial Industry Regulatory Authority (“FINRA”), and granted Respondent Morgan Stanley Smith Barney, Inc’s (“Morgan Stanley”) request to confirm the award.  The opinion addresses whether a party who objects to an arbitration panel’s jurisdiction but participates in arbitration may vacate an arbitral award on the ground that the arbitrators exceeded the scope of their authority.

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Two Court of Appeals Judges to Retire in 2021

Judge Leslie Stein and Judge Eugene Fahey were confirmed together and will retire together.  The two judges have been part of a group of judges who have cast the deciding votes in many of the Court’s cases.

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Commercial Division Opts for Money Damages in Lieu of Dissolution in Oppressed Shareholder Suit

New York Business Corporation Law § 1104-a empowers a holder of 20% or more of a closely held corporation’s stock to petition for that corporation’s dissolution on the grounds that, inter alia, the controlling shareholders have committed “illegal, fraudulent or oppressive actions toward the complaining shareholders.”

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Commercial Division Appoints Special Discovery Master In Lieu of Judicial Hearing Officer

In a recent order, Justice Andrea Masley assigned a special discovery master to supervise discovery in Hindlin v. Prescriptions Songs LLC, et al., a “complex commercial action” with a “multitude of discovery issues[.]” The decision underscores the constraints placed on the Commercial Division in light of the ongoing pandemic and cuts to the budget of the state’s judiciary.

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Commercial Division Dismisses Petition to Dissolve LLCs Based on Broadly Stated Purpose Provision

In Lazar v. Attena LLC, Justice Andrea Masley of the New York County Commercial Division granted Arik Mor and Uriel Zichron’s (together, “Respondents”) motion to dismiss a petition to dissolve three limited liability companies, Attena LLC, Hemera LLC, and Nessa LLC (collectively, the “LLCs”).  The Court’s opinion addressed whether the LLCs should be dissolved on the ground that they were no longer functioning in accordance with their stated purpose, which was defined broadly to include “any lawful business purpose.”

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Justice Robert Reed Appointed to New York County Commercial Division

On Monday, just days after Justice Peter Sherwood and Justice Marcy Friedman announced their upcoming retirements from the bench, the Chief Administrative Judge announced the news that Justice Robert Reed—currently a New York Supreme Court Justice—will start receiving Commercial Division cases in the next few weeks. 

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Rule 11-g Amended to Include “Attorneys Eyes Only” Designation

On September 23, 2020, Chief Administrative Judge Marks amended Commercial Division Rule 11-g and the Division’s Standard Form Confidentiality Order (SFO”) to allow parties to designate certain documents as highly confidential for attorneys eyes only (AEO”). Such a designation already exists in federal court, and it will be useful in the Commercial Division in matters involving particularly confidential issues such as the disclosure of confidential business information between competitors and disclosure of trade secrets.

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Rule 6 Amendment Increases the Font Size of Footnotes and Requires Hyperlinking to the NYSECF Docket

On September 29, 2020, Chief Administrative Judge Marks amended Commercial Division Rule 6 to increase the font size of footnotes in briefs and affidavits from 10-point to 12-point.  Additionally, it requires the use of a proportionally spaced serif typeface (e.g., Times New Roman, Baskerville, New Century Schoolbook) in all papers filed with the Court.  With Commercial Division Rule 17 establishing a word limit rather than a page limit, increasing the font size of footnotes will have no impact on the length of briefs.  Instead, a larger font size coupled with a proportionally spaced serif typeface will enhance readability and improve comprehension of long passages of text.

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Commercial Division Considers Effects of COVID Executive Orders on Use and Occupancy Payments for Real Estate

A recent ruling by the Kings County Commercial Division offers a glimpse into how courts in New York may resolve COVID-19-related disputes regarding leases and real property, as well as how courts may handle situations in which the Governor’s executive orders, intended to stem the spread of COVID-19, have affected the abilities of parties to follow court orders issued prior to the pandemic. 

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2 NY Contract Cases Highlight Limits Of Impossibility Defense

A common question in the wake of the COVID-19 outbreak has been whether the pandemic or governmental responses to the pandemic provide, depending on the jurisdiction, an impossibility or impracticability defense for nonperformance under a contract.

The answer to that question will, of course, turn on the facts underlying the nonperformance, as well as the law of the jurisdiction. Two recent decisions from New York are instructive on the contours of the defense of impossibility — the relevant defense under New York law.

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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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