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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Patterson Belknap’s Commercial Division Blog covers developments related to practice and case law in the Commercial Division of the New York State Supreme Court. The Commercial Division was formed in 1993 to enhance the quality of judicial adjudication and to improve efficiency in the case management of commercial disputes that are litigated in New York State courts. Since then, the Division has become a leading venue for judicial resolution of high-stakes and every-day commercial disputes. This Blog reviews key developments in the Commercial Division, including important decisions handed down by the Commercial Division, appellate court decisions reviewing Commercial Division decisions, and changes and proposed changes to Commercial Division rules and practices. Our aim is to provide you with thoughtful and succinct analysis of these issues. The Blog is written by experienced commercial litigators who have substantial practices in the Commercial Division. It is edited and managed by Stephen P. Younger and Muhammad U. Faridi, who spearheaded the publication of the New York Commercial Division Practice Guide, which is part of Bloomberg Law's Litigation Practice Portfolio Series.
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.
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. 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.
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.
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.
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.
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.
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.
2019 was a momentous year for the Commercial Division. Below are the top developments related to the Commercial Division that our blog covered in 2019.
Patterson Belknap Publishes an Updated, Second Edition of the New York Commercial Division Practice Guide
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.
In Pozner v. Fox Broadcasting Co., Justice Saliann Scarpulla of the Commercial Division dismissed plaintiff Cliff Pozner’s (“Pozner”) retaliation claim, which alleged that counterclaims filed against him by defendant Fox Broadcasting Company’s (“Fox”) constituted unlawful retaliation in violation of the New York Executive Law and the New York City Administrative Code. The Court’s decision addressed an issue of first impression in New York: i.e., whether the Noerr-Pennington doctrine—which holds “‘that parties may not be subjected to liability for petitioning the government’ such as by filing litigation”—may be applied in the context of unlawful retaliation claims.
In Matter of GreenSky, Inc. Sec. Litig., Justice Jennifer G. Schecter of the Commercial Division denied defendants’ motion to stay the state court action pending resolution of a later-filed, federal action involving virtually identical claims made under the Securities Act of 1933 (“1933 Act”). Justice Schecter did grant defendants’ alternative request for a stay of discovery pending the court’s decision on their motion to dismiss. The court’s decision addressed: 1) whether state courts should stay 1933 Act cases in deference to federal cases involving similar claims; and 2) whether the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) requires a stay of discovery in state court pending the court’s decision on a motion to dismiss.
A corporation that acquires the assets of another is generally not liable for the pre-existing liabilities of the acquired corporation. However, as the Commercial Division’s recent decision in 47 East 34th Street (NY), L.P. v. BridgeStreet Worldwide, Inc. demonstrates, there is an exception to this rule when the successor is deemed to be a mere continuation of the acquired corporation. In 47 East 34th Street, Justice Andrew Borrok relied on the mere continuation doctrine to deny a motion to dismiss claims asserted against a successor guarantor to a lease that had acquired the assets of the original guarantor through a consensual foreclosure.
Commercial Division Rules that Arbitration Awardee Lacked Standing to Enforce Award Based on Collection Procedures Agreed to in the Underlying Contract
Arbitration is a creature of contract and, as such, enforcing an arbitral award requires strict adherence to the procedures set forth in the relevant agreements. This is true even where those procedures might preclude a party to the arbitration from taking steps to enforce its own award. In Zachariou v. Manios, Justice Andrea Masley of the Commercial Division dismissed an awardee’s enforcement action for lack of standing on the ground that the relevant arbitration agreement conferred exclusive authority over collecting and enforcing party distributions to a third-party trustee—and not to the plaintiff.
Commercial Division Prevents End-Run Around Rule Precluding Judicial Dissolution of Foreign Business Entities
In Matter of Raharney Capital, LLC v. Capital Stack LLC, the First Department held that New York courts lack subject matter jurisdiction over foreign company dissolution proceedings. Now, a recent Commercial Division decision rendered by Justice Saliann Scarpulla, Rosania v. Gluck, has clarified that the Raharney rule also applies to litigants’ attempts to obtain equitable relief associated with a judicial dissolution of a foreign business.
Last month, the First Department in Madison Sullivan Partners LLC v. PMG Sullivan St., LLC, 2019 N.Y. Slip Op. 04460 (June 6, 2019), affirmed the decision of former Commercial Division Justice Shirley Werner Kornreich that the Plaintiff in a LLC dispute failed to sufficiently allege a breach of fiduciary duty claim. The case concerned the parties’ relationship in a joint venture to develop Manhattan real estate as a mixed use project that was formed using several LLCs. In a detailed amended complaint, the Plaintiff alleged that Defendants collected monthly sums for work on a construction project for the venture, when Defendants were not actually working on the construction project but instead pursuing their own ventures.
Commercial Division Advisory Council Highlights the Benefits of the Commercial Division to the State of New York
The Commercial Division Advisory Council recently released a memorandum describing the benefits that the Commercial Division offers to the State of New York. The memorandum highlights the many advantages of having a dedicated business court for the state and business and legal communities. It is worth a read for any lawyer whose practice focuses on business disputes.
In Matter of Capital Enterprises Co. v. Dworman, the Appellate Division, the First Department held that an arbitrator has broad discretion to order the dissolution of a New York general partnership, so long as the issue of dissolution was within the scope of the arbitration clause and the question of whether to dissolve the partnership was properly before the arbitrator. In so doing, the First Department affirmed an order issued by Commercial Division Justice Jennifer G. Schecter which confirmed an arbitration award that had ordered a dissolution of a partnership.
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.
In a closely watched appeal, the Court of Appeals affirmed by a 4-3 vote that a waiver contained in a commercial lease of the right to bring a declaratory judgment action is enforceable and not contrary to public policy. The case, 159 MP Corp. v. Redbridge Bedford, LLC, No. 26, was not brought in the Commercial Division, but will have a significant impact on the drafting and enforcement of commercial leases.
On May 14, 2019, the New York State Unified Court System announced that it will begin rollout and implementation of a “presumptive” alternative dispute resolution (“ADR”) program. Under the new program, parties in civil cases will be referred to either mediation or some other form of ADR as an initial step for most lawsuits filed in New York State courts. The “presumptive” ADR program will apply to a broad range of civil cases, including commercial disputes.
In considering a motion to dismiss related to a real estate development joint-venture gone bad, a recent decision by Justice Andrea Masley in 3P-733, LLC v Davis (No. 650800/2018 [N.Y. Sup. Ct., N.Y. Cty., April 2, 2019]) highlights several issues that frequently arise at the motion to dismiss stage in the Commercial Division.
On April 11, 2019, the First Department unanimously affirmed a decision issued by Justice Shirley Werner Kornreich, formerly of the Commercial Division, which denied the plaintiffs’ motion for final approval of a class action settlement in City Trading Fund v. Nye (2019 NY Slip Op 02789). This was the second time the Appellate Division had considered Justice Kornreich’s denial of approval of a settlement in this case, having reversed her prior denial of preliminary approval of the settlement in November 2016 and remanding the case for a fairness hearing in order to review the settlement terms.
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.
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.
At her annual State of the Judiciary speech held on February 26, 2019 at Bronx County Supreme Court, Chief Judge Janet DiFiore announced that the Commercial Division will be expanding to Bronx County, effective April 1, 2019. The Chief Judge explained that this expansion was in recognition of the Bronx’s ongoing economic resurgence and the growing number of commercial cases being filed there. There has not yet been any announcement as to the jurisdiction of this new part or which judges will be assigned to it.
In Magomedov et al. v. Lebedev et al., an opinion dated February 19, 2019, Justice Saliann Scarpulla of the Commercial Division dismissed most claims related to a Russian oil joint venture as time-barred under the statute of limitations. The case also raises the issue of waiver of personal jurisdiction by bringing related lawsuits within New York.
Following Justice Charles Ramos’s retirement from the Commercial Division at the end of last year, commercial practitioners have awaited an announcement reallocating responsibility for the Division’s international arbitration matters. Since 2013, all international arbitration cases filed in the Commercial Division—including those arising under CPLR Article 75 and the Federal Arbitration Act, 9 U.S.C. § 1 et seq.—had been assigned to Justice Ramos as part of an effort to establish a dedicated part specializing in the international arbitration field.
The arrival of the new year is a bittersweet time for the Commercial Division as it bids farewell to two of its most senior judges: Justice Charles E. Ramos and Justice Eileen Bransten. Notably, both will be staying on to serve the Court as Judicial Hearing Officers.
A recent case out of the New York Commercial Division demonstrates that the remedy of an accounting can be confused with the right of a shareholder or LLC member to inspect books and records. In Atlantis Management Group II LLC v. Nabe, Index No. 651598/2017, 2018 BL 366555, at *4–5 (Sup. Ct., N.Y. Cty. Oct. 1, 2018), Justice Saliann Scarpulla granted partial summary judgment on the plaintiff’s claim for an accounting. Nonetheless, in accordance with the plaintiff’s request for relief, the Court only ordered that the defendants turn over existing books and records.
Commercial Division practitioners have had their eye on upcoming vacancies on the Division’s bench for some time. As we have reported in the past, two new justices, Hon. Andrea Masley and Hon. Jennifer G. Schecter, joined the Division in the last year. The Bar has been eagerly awaiting word as to who would fill two additional vacancies that will open up at the end of this year.
Commercial Division Holds that Failure to Request Rationale for Arbitration Award Makes It Virtually Unreviewable on Manifest Disregard Ground
Parties to arbitration proceedings at times decide to forego a written decision by the arbitration panel explaining the basis for their arbitration award. While doing so may reduce the costs of arbitration and can provide other strategic advantages, it also makes it more likely that the Commercial Division will find the award unreviewable. This point is exemplified by the recent decision by Justice Charles E. Ramos of the Commercial Division in NSB Advisors, LLC v. C.L. King & Associates, Inc.
As was recently reported in the New York Law Journal, New York is investing in courtroom technology for the Commercial Division in order to keep up with the demands of commercial trials. These efforts are designed to make trials more cost-effective and efficient for litigants, as well as easier for the judges and jurors to follow.
On October 16, 2018, the Appellate Division, First Department lifted several injunctions granted by the Commercial Division that had restrained a proposed merger deal between Xerox and Fujifilm (“Fuji”), and dismissed the Xerox shareholders’ actions against Fuji.
Commercial Division Holds That Fiduciary Duties Limit LLC Majority Members’ Ability to Adopt Amendments Aimed at Freezing Out Minority Members
Many LLC operating agreements expressly require the consent of all members to adopt or amend the operating agreement. However, some LLC operating agreements do not contain such provision, and instead simply require the consent of members holding a majority of the member interests. But such agreements do not simply allow majority members to make any amendments that they may see fit, as shown by the Commercial Division’s recent decision in Yu v. Guard Hill Estates, LLC. There, Justice Scarpulla explained that even amendments expressly authorized by an operating agreement can still give rise to breach of fiduciary duty claims if they are adopted for an illegitimate purpose.
First Department Rules that Arbitrators Did Not Manifestly Disregard the Law and Confirms Arbitration Award
On September 27, 2018, in a widely followed arbitration case, a unanimous panel of the Appellate Division, First Department concluded that the New York County, Commercial Division (Ramos, J.) erred when it partially vacated an arbitration award on the ground that the arbitrators’ disregarded the law. As a result, the Appellate Division confirmed the arbitration award. 
On September 17, 2018, new statewide appellate practice rules took effect in an effort to harmonize the procedures governing appeals to New York’s four Appellate Divisions. Prior to the adoption of these new rules, the procedural aspects of appeals were governed by individual rules unique to each Appellate Division, which resulted in some significant differences in practice between these appeals courts.
First Department Shifts Burden to Attorney Resisting A Deposition But Requires that Information Be Otherwise Unavailable
In an opinion in Liberty Petroleum Realty, LLC v. Gulf Oil, L.P., dated August 2, 2018, the Appellate Division, First Department reversed the Supreme Court’s protective order prohibiting the deposition of an attorney in a commercial case.[i]
Commercial Division Finds Foreign Corporations Lack Sufficient Contacts with New York for Personal Jurisdiction
On July 5, 2018, Justice Saliann Scarpulla of the Commercial Division granted a motion to dismiss by All Nippon Airways, Co. Ltd., ANA Aircraft Technics, Co., Ltd., ANA Base Maintenance Technics, Co., Ltd., ANA Holdings, Inc., and All Nippon Airways Co., Ltd. (collectively “ANA”) in Kyowa Seni, Co. v. ANA Aircraft Technics Co.[i], ruling that the Court lacked both general and specific jurisdiction over ANA.
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.
Patterson Belknap Hosts Conversation about Litigation Practice in New York Courts with Court of Appeals Judge Michael Garcia and New York Practice author Professor Patrick M. Connors
On Wednesday, June 20, 2018, Patterson Belknap Webb & Tyler LLP welcomed Associate Judge Michael Garcia of the New York Court of Appeals, and Professor Patrick M. Connors, author of the New York Practice treatise, for a continuing legal education program on litigation practice in New York courts. Patterson Belknap partners Stephen P. Younger and Muhammad U. Faridi, authors of the New York Commercial Division Practice Guide, also participated with Mr. Younger moderating a discussion of New York practice issues and Mr. Faridi serving as a panelist.
Commercial Division Allows Stockholder Challenge to Merger to Proceed Due to Allegations that the Special Committee Had a Conflict of Interest
On May 9, 2018, Judge Barry R. Ostrager of the Commercial Division denied a motion to dismiss a shareholder complaint in the Matter of Handy & Harman Ltd. Stockholder Litig., No. 654747/2017, 2018 BL 172083 (Sup. Ct. May 9, 2018), concluding that a plaintiff shareholder had sufficiently alleged that the Board’s Special Committee was conflicted when it recommended a merger transaction.[i]
On April 27, 2018, Justice Barry Ostrager of the Commercial Division enjoined a no-cash transaction that would have granted Fujifilm (“Fuji”) a 50.1% controlling interest in Xerox. Just days after the Court’s decision an agreement was reached whereby the CEO of Xerox, Jeff Jacobson, and six other current Xerox board members would step down from their positions, ceding control of the company to representatives of investors Carl Icahn and Darwin Deason. Shortly thereafter, Xerox reversed course, indicating publically that Jacobson would stay on as CEO. However, ultimately Xerox entered into a settlement agreement with Icahn and Deason resulting in the resignation of Jacobson and the scuttling of the Fuji Deal.
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.
On February 8, 2018, Justice Shirley Werner Kornreich of the Commercial Division rejected a disclosure-only class action settlement in City Trading Fund v. Nye, 2018 BL 44689 (Sup. Ct. Feb. 08, 2018). The settlement provided for additional disclosures to shareholders in a proxy statement plus $500,000 in attorneys’ fees and expenses for plaintiffs’ counsel. As discussed below, the Commercial Division’s rejection of this disclosure-only settlement is one of the first applications of the First Department’s new standard for reviewing such settlements of merger challenge litigations.
A unanimous panel of the Appellate Division, First Department recently affirmed a ruling by the Commercial Division dismissing causes of action against the ACE Group International LLC (“AGI”) brought by the estate of the deceased majority owner of AGI, Alexander Calderwood (the “Estate”). The decision in Estate of Alexander Calderwood v. ACE Group International LLC, No. 650150/15 (App. Div. 1st Dep’t Dec. 14, 2017), primarily rested on the principle of Delaware business law that parties are free to set the terms of a limited liability company’s operations through contract. As a result, the panel rejected the Estate’s arguments that provisions in Delaware’s Limited Liability Company Act (“LLC Act”) overrode contrary terms of AGI’s operating agreement (“LLC Agreement”), and affirmed the dismissal of the Estate’s claims.
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”).
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