Category: Breach of Contract
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.
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.
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.
The Commercial Division recently ruled, in a case captioned as Hopkins v. Ackerman, that derivative claims on behalf of an LLC need to be brought before the LLC ceases to exist. In Hopkins, Justice Saliann Scarpulla granted a motion to dismiss several derivative claims involving now-cancelled Delaware LLCs because, under Delaware law, a cancelled LLC does not have the ability to bring legal claims. The Court also rejected the plaintiffs’ efforts to cast most of the claims as direct claims on behalf of a specific member in the LLCs.
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.
On Wednesday June 5, 2019, all eight of the New York County Commercial Division justices participated on a panel for the New York State Bar Association’s Commercial and Federal Litigation Section on “Motion Practice Before the Commercial Division.” Motion practice is one of the most frequently used aspects of practice in the Commercial Division. The format was an informal question and answer session on motion practice, moderated by the Section’s Past Chair, Robert Holtzman.
Commercial Division Decision Spotlights the Limits of the “Automatic Renewal Doctrine” for Contracts
In Mountain & Isles, LLC v. Gillz, LLC, Justice Masley of the Commercial Division provided a useful reminder of the continuing vitality of New York’s “automatic renewal doctrine” for contracts and its limitations.
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.
Since high net worth individuals often operate and own assets through LLCs and other business entities, including foreign corporate entities, a plaintiff must satisfy the requirements of a veil-piercing claim in order to attach assets owned by such entities. Failing to do so could frustrate a plaintiff’s ability to satisfy a judgment, as illustrated by Commercial Division Justice Barry Ostrager’s recent decision in Pacific Alliance Asia Opportunity Fund L.P. v. Kwok Ho Wan.
On July 2, 2018, Justice Barry R. Ostrager of the Commercial Division denied a motion to dismiss by UMG Recordings, Inc. (“Universal”), an alter ego theory of liability against it in Aspire Music Group, LLC v. Cash Money Records, Inc., concluding that Aspire sufficiently alleged that Universal was the equitable owner of Cash Money to survive the pre-answer motion to dismiss.
The Commercial Division Reaffirms that Permissive Forum Selection Clauses Do Not Preclude Litigating in a Different Court
Attorneys drafting forum selection clauses were reminded of the distinction between permissive and mandatory forum language in Justice Andrea Masley’s recent decision, Duncan-Watt et al. v. Rockefeller et al., No. 655538/2016, 2018 BL 138448 (Sup. Ct., N.Y. Cty. Apr. 13, 2018). In Duncan-Watt, the Commercial Division ruled on Defendants’ motion to dismiss by holding that the dispute resolution clause in the parties’ licensing agreement failed to select Australian courts as the exclusive forum in which to litigate any disputes. As a result, the Court concluded that the contractual language at issue only reflected the parties’ consent to jurisdiction in Australia—not that the dispute had to be litigated there.
Court of Appeals Rules: What the “Value of His Interest in the Partnership” Means under New York Partnership Law
The New York Court of Appeals, in Congel v. Malfitano, recently ruled that the “Poughkeepsie Galleria Company” (the “Partnership”) was not an at-will partnership and that therefore Defendant Marc Malfitano’s (the “Defendant”) unilateral dissolution of the partnership breached the partnership agreement. In addition, under Section 69 of the New York Partnership Law, the Court sustained the Appellate Division’s valuation of the Defendant’s partnership interest, including application of a minority discount. The Court modified the order on appeal, holding that the Second Department erred in awarding legal fees in contravention of the American Rule on attorneys’ fee awards.
Commercial Division Holds That Agreement That Specifies Dilution as Remedy for Failure to Make Capital Call Prohibits Plaintiff from Seeking Monetary Damages
Operating agreements often specify dilution as the remedy for a failure to make a capital contribution. But what if your business partner fails to make a contribution and you’d rather have the capital than an increased ownership share? If the agreement only provides for dilution as a remedy, can you still sue for monetary damages? In Oneiric Holdings LLC v. Leonelli, Justice Marcy Friedman held that under Delaware law, the answer to this question is an unambiguous “no.”
On January 31, 2018, the Appellate Division, Second Department affirmed, in a 3-1 decision, the Kings County Supreme Court Commercial Division’s decision, denying 159 MP Corp. and 240 Bedford Ave Realty Holding Corp.’s (collectively the “Tenants”) motion for a Yellowstone injunction. The case raised an issue of first impression for New York appellate courts: whether a written lease provision that expressly waives a commercial tenant’s right to declarative relief is enforceable at law and as a matter of public policy. The Second Department ruled in the affirmative for both.
In WL Ross & Co. v. Storper, a recent Commercial Division decision involving the private equity firm founded by U.S. Secretary of Commerce Wilbur Ross, Justice Andrea Masley suggested that New York courts can disregard choice-of-law provisions if the law of the state specified by the choice-of-law provision is “substantively similar” to that of New York on the topic at issue. Attorneys who routinely draft agreements that contain choice-of-law provisions would do well to take note of this decision, as it may imply that more careful attention should be paid to such provisions when New York law is best avoided for strategic reasons.
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?
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.
In two recent decisions, Justices Charles E. Ramos and Saliann Scarpulla of the New York Commercial Division ruled that term sheets were not binding agreements. Keitel v. E*Trade Fin. Corp., No. 652220/2015, 2017 BL 131532 (N.Y. Sup. Ct. Apr. 17, 2017); JTS Trading Ltd. v. Trinity White City Ventures Ltd., No. 651936/2015, 2017 BL 131820 (N.Y. Sup. Ct. Apr. 17, 2017). These cases serve as reminders to contracting parties to use unequivocal terms to reflect the creation of binding obligations when memorializing their agreements.
Commercial Division Compels Arbitration of a Contract Claim Based on an Arbitration Clause in a Related Agreement
In Fidilio v. Hoosick Falls Productions, Inc., No. 654066/2016, 2017 BL 107640 (Sup. Ct. Mar. 22, 2017), Justice Eileen Bransten of the New York County Commercial Division granted a motion to compel arbitration of a dispute relating to a short-lived reality TV show, Scrappers. Justice Bransten ruled that the arbitration clause in one agreement between Frank Fidilio, the show's creator, and Hoosick Falls Production, Inc. ("Hoosick"), the production company, required arbitration of Fidilio's claims against Hoosick brought under another agreement which was executed at the same time, by the same parties, governing the same subject matter. Fidilio's remaining claims for breach of contract as a third-party beneficiary, unjust enrichment, and an accounting against Viacom International Inc. and the show's distributor, New 38th Floor Productions, Inc. ("New 38th"), were dismissed for failure to state a claim. Fidilio provides important lessons for parties considering mandatory arbitration clauses in connection with transactions involving multiple agreements, as well as for litigants considering whether claims may be subject to mandatory arbitration under provisions of related agreements.
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.
Commercial Division Rejects Collateral Promise Argument as a Basis for a Fraudulent Inducement Claim
In a recent decision, Justice Anil Singh of the Commercial Division dismissed a counterclaim asserted by Visa against Wal-Mart for fraudulent inducement. According to Justice Singh, Visa’s allegations failed to satisfy the collateral promise rule as its fraud claim did not concern misrepresentations of present material fact that were collateral to the contract. Wal-Mart Stores, Inc. v. Visa U.S.A. Inc., No. 652530/2016, 2017 BL 65006 (Sup. Ct. Feb. 27, 2017).
Commercial Division Refuses to Disturb Judgment Based On “Newly Discovered” Evidence That Was Available in Russian Public Records Prior to Trial
What is the ability of a litigant in the Commercial Division to use evidence located in the public records outside of the United States to re-open a New York court judgment?
Justice Jeffrey K. Oing in the Commercial Division handed down a decision recently that discusses frustration of the occurrence of a condition precedent by parties to commercial contracts. Nesconset ZJ 1 v. Nesconset Acquisition, LLC, No. 652719/2015, 2016 BL 339908 (Sup. Ct. Oct. 4. 2016). The dispute in Nesconset involved agreements between buyers and sellers of nursing homes and related health care facilities. The main issue in the case was whether the buyers could seek specific performance of the sales contract when the sellers’ conduct allegedly frustrated the satisfaction of condition precedents to the contract. Justice Oing held that a seller who frustrates the buyer’s ability to satisfy a condition precedent will be unable to rely on the failure to satisfy that condition as justification to avoid the contract and will be subject to a claim for breach of the implied covenant of good faith and fair dealing.
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 her 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.
Although defenses based on antitrust law are usually disfavored in breach of contract actions, they are permitted when an agreement on its face would require actions violating antitrust law. On September 20, 2016, in Time Warner Cable Enters. LLC v. Universal Communications Network, Inc., 652407/2015, 2016 BL 316191 before Justice Oing the Commercial Division found that cable distribution agreements requiring a company to pay to have its channel carried in additional markets are not invalid on their face.
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).
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.