Category: Remedies and Damages
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.
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.
Last summer, we discussed a decision by the Court of Appeals that upheld the use in commercial leases of waivers of declaratory relief. In response to that decision, the New York Legislature enacted Real Property Law Section 235-h, which now voids waivers of declaratory relief in commercial leases as against public policy.
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 Illustrates Potential Issues that May Arise in CPLR Article 52 Turnover Order Proceedings
A party seeking to enforce a judgment against an asset of a judgment debtor that is held by a third party may petition for a turnover order through a special proceeding provided for by CPLR Article 52. Justice Saliann Scarpulla’s recent decision in The Wimbledon Fund, SPC (Class TT) v. Weston Capital Partners Master Fund II, LTD (Wimbledon) illustrates several of the potential issues that may arise during such a proceeding.
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.
First Department Holds that Declaratory Judgment Against Creditor’s Principal Does not Preclude Claims By the Creditor Itself
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
In Rebecca Broadway LP v. Thibodeau, Justice Andrea Masley of the Commercial Division denied plaintiff Rebecca Broadway Limited Partnership’s (“RBLP”) motion to set aside a damages verdict after it prevailed at trial against Defendant Marc Thibodeau (“Thibodeau”) on claims for breach of contract and tortious interference with business relationships. The case raised issues of whether a jury’s damages verdict is supported by a rational interpretation of the trial evidence and the circumstances under which a retrial solely on the issue of damages is appropriate.
When a defendant avoids the cost of developing its own technology by stealing proprietary information, can that defendant be required to re-pay the cost it saved as compensatory damages? Not under New York trade secret or unfair competition law. In E.J. Brooks Co. v. Cambridge Security Seals, a divided New York Court of Appeals announced – over a lively dissent – that compensatory damages for misappropriation of trade secrets and unfair competition are limited to the plaintiff’s own losses, and may not include the development costs avoided by defendants. The Court further held that an accompanying claim for unjust enrichment does not provide a basis to expand the recovery beyond the plaintiff’s own losses.
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.”
In Advanced 23, LLC v. Chambers House Partners, LLC, No. 650025/2016, 2017 BL 462831 (NY. Sup. Ct. Dec. 15, 2017), Justice Saliann Scarpulla of the Commercial Division ruled that Advanced 23, LLC (“Advanced”) and David Shusterman’s (“Shusterman” and collectively, “Petitioners”) petition for judicial dissolution of Chambers House Partners, LLC (“CHP”) needed to be held in abeyance pending an evidentiary hearing on whether Shusterman had breached his duties under the Operating Agreement. Advanced 23 confirms that although a corporate deadlock is not an independent ground to dissolve an LLC, the court must still examine whether the managers’ disagreement breaches the managers’ obligations under the LLC operating agreement.
Second Department Affirms Commercial Division Decisions Leaving Withdrawing LLC Members Without Compensation for Their Membership Interests or Derivative Standing
In Matter of Jacobs v. Cartalemi, No. 2016-05041, 2017 BL 435890 (2d Dep’t Dec. 6, 2017) (“Jacobs I”), a unanimous Appellate Division, Second Department panel affirmed an order by Westchester County Commercial Division Justice Linda S. Jamieson denying compensation to a withdrawing LLC member. The court held that a provision of an LLC operating agreement governing the sale of membership interests superseded the default rule of New York Limited Liability Company (“LLC Law”) § 509, entitling a member to “the fair value of his or her membership interest” upon withdrawal from the LLC. Jacobs I was decided along with two related appeals in which the panel also dismissed various derivative claims brought by the former minority member of Westchester Industrial Complex, LLC against the company and its majority member, applying the continuous ownership rule to find that the minority member lost standing to bring derivative claims upon his withdrawal from the company. See Jacobs v. Cartalemi, No. 2016-07813, 2017 BL 436813 (2d Dep’t Dec. 6, 2017) (“Jacobs II”); Jacobs v. Westchester Indus. Complex, LLC, No. 2016-07817, 2017 BL 436677 (2d Dep’t Dec. 6, 2017) (“Jacobs III”).
Commercial Division Declines to Use New York Debtor and Creditor Law to Enjoin a Defendant’s Asset Sale Without Evidence of Inadequate Consideration
In Del Forte USA, Inc. v. Blue Beverage Group, Inc. et al., No. 518454/2016, 2017 BL 253248 (Sup. Ct. Jul. 17, 2017), New York Commercial Division Justice Sylvia G. Ash denied plaintiff Del Forte’s preliminary injunction motion that sought, pursuant to N.Y. Debtor and Creditor Law (“DCL”) § 279, to enjoin defendant Blue Beverage from selling 60% of Blue Beverage’s shares to co-defendant Kuzari Group for $5 million unless $500,000 is placed in escrow and a receiver is appointed. As an alternative form of relief, Del Forte sought, pursuant to CPLR § 6201, to attach at least $500,000 from the asset sale to satisfy a judgment that might be rendered in Del Forte’s favor.
Commercial Division Justice Eileen Bransten recently concluded that plaintiff bondholders lacked standing to bring fraud claims against the bond obligor and trustee after having sold their interests in the bonds. One William St. Capital Mgmt. L.P. v. U.S. Educ. Loan Tr. IV, LLC, No. 652274/2012, 2017 BL 1700030 (Sup. Ct. N.Y. Co. May 16, 2017), involved a group of investment firms that purchased $10 million in notes backed by government-guaranteed student loans from the U.S. Education Loan Trust IV (“ELT”). The notes were part of a larger $30 million package.
Justice Shirley Kornreich recently issued one of the few New York state court decisions that address the Computer Fraud and Abuse Act (“CFAA”). Spec Simple, Inc. v. Designer Pages Online LLC, No. 651860/2015, 2017 BL 160865 (N.Y. Sup. Ct. May 10, 2017). The CFAA criminalizes both accessing a computer without authorization and exceeding authorized access and thereby obtaining information from any protected computer. Id. at *3 (citing 18 U.S.C. § 1030(a)(2)(C)). The CFAA also provides a civil cause of action to any person who suffers damage or loss because of a violation of the CFAA. Id. at *4 (citing 18 U.S.C. § 1030(g)). As discussed below, the decision provides a helpful look into the interpretation of CFAA claims in the future.
Fraud and Fraudulent Conveyance Claims for $686 Million Allowed To Proceed Against Hedge Fund in Long-Running Dispute over Failed Securitization
On March 13, 2017, Justice Marcy Friedman of the New York Commercial Division denied a motion for summary judgment seeking to dismiss claims of fraud, breach of the covenant of good faith and fair dealing, and fraudulent conveyance brought against a hedge fund, Highland Capital Management, and related entities. The case, UBS Securities LLC v. Highland Capital Management, No. 6500097/09, 2017 BL 98450 (Sup. Ct. Mar. 13, 2017), is a long running dispute arising from a failed securitization of collateralized loan obligations (CLOs) and credit default swaps (CDS) that dates to the early days of the Great Recession. The denial of summary judgment means that the next step in this eight-year long saga will be a jury trial where $686 million in damages will be at stake.
In a pair of recent decisions, Justices Shirley W. Kornreich and Lawrence K. Marks of the Commercial Division ruled that creditors could proceed on their fraudulent conveyance claims seeking reversal of asset transfers made by debtors under New York’s Debtor and Creditor Law (“DCL”). The decisions highlight two basic theories of fraudulent conveyance claims permitted by the DCL: intentional fraud claims, which require a showing that the debtor made the transfer with the intent defrauding its creditor, and constructive fraud claims, which do not require a showing of fraudulent intent.