Practitioners often choose to practice in the Commercial Division because of its well-documented efficiencies.  Thus, many were happy to hear that Chief Administrative Judge Larry Marks issued Administrative Order 270/2020 (“AO 270/20”), which incorporated features of the Commercial Division into the Uniform Civil Rules for the Supreme and County Courts (the “Uniform Rules”).  My colleague addressed the highlights of AO 270/20 in a blog post back in January.  AO 270/20 went into effect as of February 1, 2021, and courts are now grappling with how to best handle the enforcement of the new rules and attorneys’ compliance with them.

One of the Commercial Division rules making its way over to the non-commercial part is Commercial Division Rule 19-a, which deals with statements of material facts.  However, the new rule (Section 202.8-g) as it applies to the non-commercial parts is different from its Commercial Division predecessor insofar as it mandates that there be “annexed to the notice of motion a separate, short and concise statement, in numbered paragraphs, of the material facts as to which the moving party contends there is no genuine issue to be tried.”  This new Rule is not unlike Commercial Division Rule 19-a, except that the Commercial Division leaves to the discretion of the court whether to require a Rule 19-a statement upon the filing of a summary judgment motion (Commercial Division Rule 19-a states that “the court may direct that there shall be annexed to the notice of motion a separate, short and concise statement, in numbered paragraphs, of the material facts as to which the moving party contends there is no genuine issue to be tried”).  The Uniform Rules do not.

The Supreme Court, Rockland County in Amos Fin. LLC v Crapanzano et al. recently took a harsh stance on a lawyer’s failure to comply with the new Section 202.8-g of the Uniform Rules.  On June 11, 2021, four months after AO 270/20 went into effect, plaintiff Amos Financial LLC (“Amos” or “Plaintiff”), brought a motion for summary judgment after allowing the case to linger for almost nine years.  Plaintiff’s motion papers did not include a “separate, short and concise statement” of the material facts as to which Plaintiff believed there were no genuine issues of fact, nor did Plaintiff offer an explanation for its failure to do so.

In determining that Plaintiff’s motion was “procedurally defective on its face,” Justice Robert M. Berliner held that Uniform Rule 202.8-g “is not precatory or discretionary in its application: it is a mandate on all summary judgment movants in this State.”

The court explained that a failure to submit a Uniform Rule 202.8-g Statement of Material Facts constitutes a violation that is neither “merely technical nor without prejudice,” nor is it a minor pleading error that courts can correct nunc pro tunc under CPLR 2101 (f) and/or CPLR 2001 (which permit certain minor defects and errors to be corrected).  The court opined that the CPLR provisions excusing minor defects cannot redeem a summary judgment movant’s violation of Uniform Rule 202.8-g.

The court further concluded that CPLR 2101 (f) is inapplicable because it applies where “a substantial right of a party is not prejudiced.”  In Amos, the court determined that Plaintiff’s failure to submit a Statement of Material Facts prejudiced the defendants by virtue of the fact that the motion papers effectively conceal, in an otherwise voluminous record, the relevant factual allegations and their evidentiary basis.  This decision was based, in part, on the fact that the case was not electronically filed, thus requiring respondent and the court to dig through a large paper record without the “substantial efficiency reforms” that Uniform Rule 202.8-g would achieve.

According to Justice Berliner, “[w]ere trial courts to ignore a wholesale Rule 202.8-g violation, courts thereby would peril not just that rule and its constitutional and statutory predicates, but also the other efficiency reforms that the Judiciary enacted with it.”

The Supreme Court ultimately took the hardline approach in denying Amos’ summary judgment motion for, among other things, its failure to comply with the new Uniform Rule 202.8-g.

What you need to know:  If you are in the Commercial Division, check the specific Judge’s rules to determine whether they require a Rule 19-A Statement.  For matters outside the Commercial Division (in the Supreme Court and County Court), you must include a Statement of Material Fact with your summary judgment motion.

Will the rest of the Supreme Court follow in Justice Berliner’s hard-line ruling in enforcing the new Uniform Rule 202.8-g? Stay tuned as we continue to monitor decisions concerning this new rule.

In a recent Commercial Division case, Justice Elizabeth H. Emerson was asked to determine whether certain parties were bound by an arbitration clause and whether that arbitration clause applied to a particular controversy—two questions typically determined by the court. Then why did Justice Emerson defer these questions to the arbitrator? The answer requires a close look at the language of the arbitration clause.

In Bromberg & Liebowitz v O’Brien, the plaintiff Bromberg & Liebowitz, CPA’s (“B&L”) entered into an agreement with defendant Patricia O’Brien (“Pat O’Brien”) to purchase Pat O’Brien’s local accounting practice (“Practice Purchase Agreement”). Pursuant to the Practice Purchase Agreement, Pat O’Brien agreed to provide consulting services to the practice throughout a certain transition period and defendant Jennifer O’Brien was to work for the practice for at least one year. Pat O’Brien signed the Practice Purchase Agreement but, despite a signature line for her to do so, Jennifer O’Brien did not.

On August 24, 2020, B&L commenced an action against Pat O’Brien, Jennifer O’Brien, and 328 Main LLC (“328 Main”) (an entity which received payments on behalf of Pat O’Brien), alleging that between September 2016 and June 2020 defendants diverted client fees from the practice to themselves.

Pat O’Brien and 328 Main moved, and Jennifer O’Brien cross-moved, to dismiss, or in the alternative, stay the action and compel B&L to proceed to arbitration based on an arbitration provision contained in the Practice Purchase Agreement. In pertinent part, the Practice Purchase Agreement provides:

Any controversy or claim arising out of or relative to this AGREEMENT, or the breach thereof, shall be submitted to arbitration before a single arbitrator, subject to the commercial arbitration rules of the American Arbitration Association . . . .

B&L opposed, arguing that (1) the arbitration clause did not include the misconduct alleged in the complaint and (2) that it cannot be compelled to arbitrate its claims against Jennifer O’Brien and 328 Main because they did not sign the Practice Purchase Agreement.

First, the court addressed the matter’s arbitrability. The court instructed that “questions of arbitrability,” as a term of art, covers disputes about whether parties are bound by an arbitration clause and whether an arbitration clause applies to a particular controversy.

While the court recognized that questions of arbitrability are typically for the court to decide, where, as here, the parties’ agreement specifically incorporates by reference the rules of the American Arbitration Association (“AAA”) and employs language referring “all disputes” to arbitration, courts will leave the question of arbitrability to the arbitrators. Indeed, the Commercial Arbitration Rules state, in pertinent part, “[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.” And so, the court held that the issue of whether the arbitration clause applied to B&L’s claims was to be resolved by the arbitrator, not the court.

The court further held that it was for the arbitrator to decide whether the non-signatory defendants, Jennifer O’Brien and 328 Main, may compel arbitration. The court reasoned that B&L, a signatory, cannot “disown its agreed-to obligation” to arbitrate “any controversy arising out of or relative to” the Practice Purchase Agreement. A signatory to an arbitration agreement, like B&L, is estopped from avoiding arbitration with a non-signatory when (i) there is a close relationship between the parties and controversies involved and (ii) the signatory’s claims against the non-signatory are intimately founded in and intertwined with the underlying agreement containing the arbitration clause. The court found both conditions to be met and instructed the parties to proceed to arbitration.

Upshot:

Questions of arbitrability are typically for the court to decide. However, where an arbitration clause specifically incorporates AAA rules by reference and employs language referring “all disputes” to arbitration, courts will leave the question of arbitrability to the arbitrators. In certain circumstances, this may include disputes over whether non-signatories can compel arbitration.

In recent news out of the world of Formula 1 racing, a tight battle between seven-time World Champion, Lewis Hamilton, and rival, Max Verstappen, came to a head at the first lap of the British Grand Prix at Silverstone. In fighting for dominant position over a high-speed corner, Hamilton’s car inadvertently clipped Verstappen’s, flinging Verstappen’s car across the track into the barriers at 51Gs, demolishing the car but miraculously leaving the driver battered but alive. Hamilton was given a 10-second penalty, and went on to win the race.

For weeks after the race, reporters, commentators, fans, and the teams themselves argued whether Hamilton’s penalty was too lenient. Was it fair that Hamilton took out his chief rival, only received a minor penalty, and went on to win the race? Yet, the race stewards stood by their decision. Why? Because when evaluating any incident, they are constrained to faithfully apply the language of the regulations and apply the prescribed penalty. Much to the dissatisfaction of Verstappen fans clamoring for a harsher penalty to Hamilton, the race stewards may not consider the impact of the incident—no matter how outsized—when considering fault or penalties.

Attorneys are all too familiar with this principle. Courts are constrained by the elements of the causes of action before them. This is all the more relevant when assessing business tort claims—wrongful acts against businesses that are not contract-based—as often times, “bad behavior” may simply not be enough. This was recently explored by the Second Department in Stuart’s LLC et al. v. Edelman et al, 2021 NY Slip Op 04569, in which the Second Department modified a $1,436,128 award against defendant-appellant Michael Hong by $1,262,753, a near 90% reduction.

This action involved a dispute between a clothing distributor and its remaining principal (the plaintiffs Stuart’s LLC and Wayne Galvin) against a rival clothing distributor (defendant Level 8 Apparel, LLC) formed by Galvin’s former partner (defendant Stuart Edelman) together with core employees formerly employed by, and/or associated with, Stuart’s LLC, including defendant-appellant Michael Hong. Hong was a creative designer for Stuart’s and later Level 8.

Plaintiffs claimed that, among other things, the defendants colluded to divert assets and business from Stuart’s to Level 8. Plaintiffs asserted 16 causes of action against the defendants, including a slew of business tort claims.

After a 16-day, bench trial before Judge Vito M. DeStefano of the Nassau County Commercial Division, the court issued a 48-page Opinion methodically going through findings of fact, chief arguments raised by each of the parties, and the court’s determination on the issues before it.

As is relevant to the appeal, the trial court rendered a judgment in favor of Plaintiffs and against Hong in the amount of $1,436,128 arising out of three causes of action: tortious interference with contract between Stuart’s and non-party Tumi, Inc. ($173,375); tortious interference with business relationship between Stuart’s and Aeropostale, Inc. ($543,689); and unfair competition ($719,064).

The Second Department affirmed that portion of the judgment against Hong for tortious interference with contract, holding that there was adequate evidence in the record warranting the trial court’s finding that Hong tortiously interfered with Stuart’s licensing agreement with Tumi.

However, the Second Department did not come to the same conclusion with respect to the tortious interference with business relationship claim.

The chief difference between tortious interference with contract and tortious interference with business relationship, the Second Department pointed out, is that while the former requires an intentional procurement of breach without justification, the latter raises the culpability bar. Tortious interference with business relationship requires that the interference must be accomplished by “wrongful means or where the offending party acted for the sole purpose of harming the other party.” The conduct must amount to a crime or independent tort; conduct motivated by economic self-interest cannot be characterized as “solely malicious” sufficient to meet this standard.

Thus, while there was certainly evidence in the record that Hong knew Stuart’s had an existing business relationship with non-party Aeropostale, Inc., and that his collusive actions with the defendants impacted the relationship between Stuart’s and Aeropostale, Hong’s actions did not rise to the level of “wrongful” conduct required by the claim. At best, Hong’s conduct might be characterized as motivated by economic self-interest, which cannot be deemed “solely malicious.”

As such, the Second Department reversed the judgment as against Hong for tortious interference with business relationship in the amount of $543,689, holding that the cause of action should have been dismissed as to Hong.

Likewise, the Second Department closely examined the trial court’s determination on the unfair competition claim. Here too, the Second Department found that the trial record did not demonstrate that Hong “acted wrongfully” in alleged diverting Stuart’s business (his former employer) to Level 8 (his new employer). In the absence of evidence that Hong removed proprietary information from Stuart’s, or that Hong directly participated in conversations with non-parties Tumi or Aeropostale concerning the transfer of any business from Stuart’s to Level 8, his alleged collusion with other defendants who had taken a more direct and active role was simply not culpable enough to sustain this claim.

As such, the Second Department reversed the judgment as against Hong for unfair competition in the amount of $719,064, holding that this cause of action should have been dismissed.

Several weeks back, we reported on an apparent uptick in commercial lease disputes over the last 18 months in this new COVID era.  It only follows that there would be a corresponding uptick in Yellowstone applications from commercial tenants embroiled in such disputes.

As most readers know, injunctive relief under Yellowstone preserves the “status quo” pending a dispute between a commercial landlord and tenant over this or that alleged event of default such that the landlord is prohibited, at least temporarily, from terminating the tenant’s tenancy until the court has an opportunity to hear and determine the nature of the dispute in due course.

The standard for relief under Yellowstone isn’t exactly a high bar, at least as far as injunctions go.  An applicant need only show that it holds a valid and enforceable commercial lease; received from the landlord a notice of default; made a timely application for relief within the corresponding cure period; and has the ability to cure the alleged default should the court decide in the landlord’s favor.  Yellowstone injunctions are even available when the alleged default is limited to the issue of nonpayment of rent — which, for reasons associated with the recent and ongoing pandemic, tends to be primary basis asserted of late.

Of course, a commercial tenant’s success under Yellowstone is made even easier if the landlord fails to give proper notice of default, which is precisely what happened earlier this year up in Buffalo in a case called Ronald Benderson 1995 Trust v Erie County Med. Ctr. Corp.

In Benderson, Erie County Commercial Division Justice Timothy J. Walker addressed a dispute involving an area hospital (landlord) and real-estate developer (tenant) under a commercial lease for certain retail space located in the lobby of the hospital.

The lease provided that, while in the process of leasing up the lobby retail space, the tenant-developer would be responsible for paying the landlord-hospital a “Partial Rent” amount…

determined by multiplying the Full Rent due for each month by a fraction the numerator of which is the total combined square footage of each subtenant open for business in the Demised Premises and the denominator of which is the total square footage of the Demised Premises.

That is, until such time as the “Full Rent” amount becomes due, which occurs…

once all the rentable space in the Demised Premises has been sublet and each subtenant is open for business (the ‘Full Rent Commencement Date’), [at which time] Lessee shall pay to Lessor an annual rental of $19,600.00 payable in equal monthly installments of $1,633.3 each for each year of the term (the ‘Full Rent’).

The initial lease term was for 10 years, with an option to renew for an additional 10 years at an increased “Full Rent” annual amount of $21,560.00 payable in equal monthly installments of $1,796.67.

The developer eventually exercised the renewal option for a second 10-year term beginning in the summer of 2013, at which time it began making pro-rated “Partial Rent” payments of $1,405.25 based on the 78% of the lobby it had leased up at the time.  The developer timely made such payments without any objection from the hospital over the next seven years through the fall of 2020.

In September 2020, after significantly expanding its footprint and patient-flow in the interim, and after determining that the fair market value of its lobby space had substantially increased, the hospital attempted to serve the developer with notice under the lease’s default provision, which provided that…

if Lessee defaults in the payment of rent . . . , Lessor shall give Lessee notice of such default and if Lessee does not  cure any default within thirty (30) days, after the giving of such notice . . . , then Lessor may terminate this Lease on not less than thirty (30) days’ notice to Lessee.

According to the court’s decision, the hospital’s notice “claimed for the first time that, six years earlier, on an unspecified date in 2014, the ‘Full Rent Commencement Date’ had occurred, . . . [and therefore] declared that ‘Lessee shall pay to Lessor an annual [as opposed to “Partial”] rental of $19,600 payable in equal monthly installments of $1,633.33 each for each year of the term.'”

The notice went on to state that “the renewal option . . . does not include a ‘Partial Rent’ period; it only permits for ‘new annual rent of $21,560.00 payable in equal monthly installments of $1,796.67′”; but that the developer “has continued to pay only ‘Partial Rent’ of $1,405.25/month for the space”; and that the hospital therefore was “providing notice of default.”

In November 2020, after attempts at resolution by the parties had broken down, the hospital demanded that the developer “quit and surrender” the entire lobby space, which prompted the developer to move for Yellowstone and other injunctive relief.

Justice Walker granted the relief requested, taking issue with the hospital’s default notice in at least three respects.

First, the court found the notice to be void because it conflicted with former Governor Cuomo’s statewide moratorium on commercial evictions in place at the time.

Second, the court found that the hospital’s notice “failed to trigger the commencement of the cure period” because it was sent to the wrong party at the wrong address, despite prior written notice to the hospital of a valid assignment of the lease by the original tenant-developer to the plaintiff.

Finally, and most substantively, the court found that the hospital’s notice was “so impermissibly vague that it was insufficient to commence a ‘cure’ period as a matter of law.”  For one, the hospital “identified two different and logically inconsistent rental rates” — $1,633.33/mo. and $1,796.67/mo. — in the same notice.  But the hospital also failed to explain how it was that the developer could even “cure” the alleged default in the first place.  To wit, “the notice letter was silent as to whether ‘cure’ meant paying increased rent moving forward, paying back-rent for years in the past, or which amount of rent would apply in either case.”

In short, the court found that “the ‘cure’ period could not have expired because it was never commenced,” effectively serving as a stark reminder to commercial landlords and their counsel to be sure to provide “clear, unambiguous, and unequivocal” notice of default to the proper party at the proper address.

 

A reminder to practitioners: when a contract is unambiguous, the submission of a hurricane of extrinsic evidence to “interpret” it on a pre-answer motion to dismiss won’t fly.

A breach of contract action brought against Robert Zimmerman a/k/a Bob Dylan and Universal Music seeking to capitalize on the widely-reported blockbuster sale of Dylan’s 600-song catalog to Universal for more than $300 million dollars in late 2020 (the “Catalog Sale”), was recently tossed out by Manhattan Commercial Division Justice Barry Ostrager.

In Levy v Zimmerman, the widow of Jacques Levy — Dylan’s co-writer of 10 tracks, including the famous song “Hurricane” (“the Compositions”) — claimed that Dylan failed to pay Levy’s estate its portion of the proceeds from the Catalog Sale in breach of a 1975 agreement between them (the “1975 Agreement”).  Although Levy and/or his estate had received almost a million dollars of royalty revenue from Dylan to date based on the 1975 Agreement, they now claimed that the Agreement also entitled Levy to 35% of the revenue received by Dylan in connection with the sale of the Compositions.

Emphasizing that the lawsuit was an “opportunistic attempt to rewrite a 45-year-old contract to obtain a windfall payment that the [1975 Agreement] does not allow,” and that the Plaintiffs “saw an opportunity to extract money from Dylan” after learning of the Catalog Sale,  the Defendants jointly filed a pre-answer motion to dismiss the Complaint under CPLR 3211 (a) (1) and (7) based on documentary evidence (i.e., the 1975 Agreement) and for failure to state a cause of action.

In their motion, the Defendants argued that the “plain language” of the 1975 Agreement, together with basic principles of contract interpretation, foreclosed the Plaintiffs’ claims in their entirety.  Citing to key provisions, the Defendants stated that the 1975 Agreement was a standard work-for-hire agreement between Dylan and Levy that granted Dylan full ownership of the copyrights in the Compositions, making them Dylan’s “sole property,” and giving him the exclusive right to sell them.  The Defendants noted that the 1975 Agreement repeatedly identified Levy as an “Employee” and specified his compensation as 35% of the royalty payments from licensing rights granted to third-parties for the performance and use of the Compositions, but said nothing about giving Levy a cut of the proceeds from the sale of Dylan’s copyrights in the songs.

In response, the Plaintiffs filed “voluminous opposition papers,” including a 35-page affidavit of a self-described music copyright expert, who, based on his analysis of copyright law, opined that the Compositions were “joint works” of Dylan and Levy entitling Levy to a percentage of the proceeds of the Catalog Sale, rejecting the “employee-for-hire” relationship designated in the 1975 Agreement.

Agreeing with the Defendants, the Court ultimately found that the 1975 Agreement unambiguously precluded the Plaintiffs’ claim to any portion of the proceeds of the Catalog Sale.  The Court noted that, consistent with the standards of review on a motion to dismiss under CPLR 3211 (a) (1) and (7), the Court could not consider extrinsic evidence — including the “expert” affidavit — to interpret or alter the meaning of the terms of an otherwise unambiguous agreement.  Justice Ostrager also rejected the expert’s analysis of the 1975 Agreement, as “improperly usurp[ing] the Court’s function to interpret the Agreement by cherry-picking words and phrases and assigning them meanings” and, in doing so, violating basic principles of contract interpretation:

“Particular words should be considered not as if isolated from the context but in the light of the obligation as a whole and the intention of the parties as manifested thereby”; and

“[W]hen a general phrase [such as “any and all”] follows a list of specific terms, the general phrase must be interpreted to refer to items of the same ilk as those specifically listed.”

In the end, the Court dismissed the Complaint in its entirety based on the express terms of the 1975 Agreement, which it stated provided a complete defense as a matter of law that demonstrated the Plaintiffs had not stated a viable cause of action.  The Court also denied the Plaintiffs the ability to replead their causes of action as “futile” given that the Complaint cited to key provisions of the 1975 Agreement that were briefed at length in the Plaintiffs’ opposition papers and presented at oral argument and which conclusively undermined the Plaintiffs’ claim to any of the proceeds from the Catalog Sale.

Commercial Division justices have been trailblazers in the bench’s efforts to improve the diversity and inclusiveness of the attorneys appearing before them.  For example, many Commercial Division justices include in their individual rules provisions specifying that oral argument is more likely to be granted in cases where women or attorneys from historically underrepresented groups have a speaking role.  Justice Jamieson of the Westchester Commercial Division recently emphasized to members of the New York State Bar Association at the Association’s Spring Meeting that she often insists on hearing from the women or diverse attorneys present, posing questions directly to them—sometimes to the chagrin of the “lead “ attorneys—during conferences and arguments.

These and other efforts of the Commercial Division justices have greatly contributed to the substantial improvement of the courts and the legal profession in its inclusion of women and attorneys from historically underrepresented backgrounds.  A recent survey published by the New York State Judicial Committee on Women in the Courts, however, found that “there still remains a significant strain of bias against female lawyers, litigants, and witnesses that adversely impacts the fairness of their treatment in the judicial process which must be vigorously addressed.”

Continue Reading Reminder to Practitioners: Gender Neutral Language Required

The principles of jurisdiction and venue are paramount when determining not only where a proceeding will be conducted, but also which particular laws will govern the proceeding. Typically, contracting parties attempt to resolve jurisdiction and venue issues by including an exclusive jurisdiction and/or forum selection clause within a contract.

In Meritage Hospitality Group, Inc. v North Am. Elite Ins. Co., 2021 NY Slip Op 50700(U) [Sup Ct, Albany County July 26, 2021]),  Justice Richard M. Platkin of the Albany County Commercial Division, analyzed the interesting question of what happens when contracting parties agree to submit to the jurisdiction of New York state courts, but fail to select a specific county as a venue. Justice Platkin held that in this scenario, the venue requirements under CPLR § 503 were required to be satisfied since the forum selection clause failed to designate a “specific venue.”

By way of background, Plaintiff Meritage Hospitality Group, Inc. (“Meritage”), is a Michigan based corporation that owns and operates over 346 restaurants, most of which are Wendy’s fast food restaurants, in 16 states.  Seeking to protect itself in the event that the operations of its restaurants were suspended or reduced, Meritage purchased an all risk insurance policy (the “Policy”) from Defendant North American Elite Insurance Company (“NAE”), a New Hampshire insurance company with a principal place of business in New York County.  Meritage’s Policy contained several coverage extensions, including coverage for (1) direct physical loss or damage related to orders of civil authority; (2) property damage coverage for “Communicable Disease Response”; and (3) property damage coverage for “Protection and Preservation of Property — Property Damage.”  In addition, the Policy contained the following forum selection clause:

Governing Law and Jurisdiction 

1. The laws of the State of New York, without regard to its conflict of laws rules, that would cause the application of the laws of any other jurisdiction, shall govern the construction and interpretation of this POLICY.

2. The parties hereto do irrevocably submit to the exclusive jurisdiction of the Courts of the State of New York, and to the extent permitted by law, the parties expressly waive all rights to challenge or otherwise limit such jurisdiction.

As a result of the COVID-19 pandemic, Meritage submitted a business interruption claim to NAE, citing the loss of income from state and local closure orders.  In response, NAE issued a letter to Meritage, stating that outside the possible exception for property damage coverage for “Communicable Disease Response,” the Policy would not provide coverage for other aspects of Meritage’s claim.  Subsequently, Meritage commenced an action against NAE in the Supreme Court, Albany County, alleging claims for breach of contract, unjust enrichment, and declaratory judgment.

Following the commencement of Meritage’s lawsuit, NAE made a demand that venue be transferred to the Supreme Court, New York County, under CPLR 511 because (i) Albany County was an improper venue since neither party resided there; and (ii) New York County was proper because NAE maintained a principal place of business there. In response, Meritage refused the demand, arguing that venue was proper based on the Policy’s forum selection clause.

Consequently, NAE filed a motion to transfer venue of the action to New York County.  As part of its motion, NAE argued that Meritage’s filing of the lawsuit in Albany County was in violation of CPLR § 503 , since the parties’ forum selection clause in the Policy only resolved the issue of jurisdiction, not venue.  In opposition, Meritage argued that the forum selection clause allowed the parties to have free rein over where they could file a lawsuit in New York. Specifically, Meritage argued that the term – “the Courts of the State of New York” – satisfied the requirements of CPLR § 501, and gave the parties carte blanche authority to choose any venue within New York.

Before analyzing the forum selection clause of the Policy, the Court noted that “jurisdiction and venue” are separate and distinct concepts, as jurisdiction concerned a court’s authority to hear and determine a dispute, whereas venue pertains to “the proper situs” (i.e., place of trial) of an action or proceeding within the court system (see Weingarten v Board of Educ. of City School Dist. of City of NY, 3 Misc 3d 418, 420 [Sup Ct, Bronx County 2004]).  With that in mind, the Court focused on whether the forum selection clause relied upon by Meritage authorized venue to be placed in Albany County (see CPLR § 501).  After assessing the Policy, the Court held that the forum selection clause did not specifically fix the place of trial and/or venue, since the language of “the Courts of the State of New York” only applied to the jurisdiction of a potential lawsuit.  In addition, the Court found that the Policy failed to include any language that waived a party’s right to challenge venue.  And so, the Court granted NAE’s motion to transfer the venue to New York County, as NAE established that it had a principal place of business in New York County and that Meritage was not a resident of New York (see CPLR §§ 503 (a) and (c)).

Takeaway:

This decision provides a strong reminder that when drafting forum selection clauses, lawyers should be as precise as possible.  Therefore, to avoid the default venue requirements of CPLR § 503, a forum selection clause must specify that any dispute between the parties shall be litigated in a particular designated venue.

 

In one of my previous posts, I discussed the basic requirements for bringing a CPLR 3213 motion for summary judgment in lieu of complaint.  One such requirement (and the one that generates the largest body of case law), is that the document upon which the motion is based qualify as either a “money instrument” or “judgment” within the meaning of CPLR 3213.  Where the movant satisfies this requirement, and proves non-payment on the part of the defendant, summary judgment pursuant to CPLR 3213 may be warranted.

But, what if the party opposing a CPLR 3213 motion interposes affirmative defenses or asserts possible counterclaims?  The CPLR makes no reference to the disposition of counterclaims asserted on a CPLR 3213 motion for summary judgment in lieu of complaint.  And so, under what circumstances will a defense or possible counterclaim raise a genuine issue of fact warranting denial of the motion?  This question was recently addressed by the First Department in Deka Immobilien Inv. GmbH v Lexington Ave. Hotel, L.P. (2021 NY Slip Op 04275 [1st Dept Jul. 8, 2021]).

There, the plaintiff, a German capital investment company acting for the benefit of the German open-end real estate fund Deka Immobilien Global (“Plaintiff”), entered into a partnership agreement with two affiliates of a New York-based real estate investment company, forming defendant partnership Lexington Avenue Hotel, L.P. (“Defendant”).  On July 31, 2015, Plaintiff issued a credit mandate, whereby it instructed German bank Bayerische Landesbank (“Bayern”) to loan $136 million to Defendant.  By operation of German law, Plaintiff became a guarantor under the loan.  That same day, Plaintiff, Defendant, and Bayern entered into a $136 million loan agreement, providing the loan would be repaid in one installment on June 30, 2020.

Between November 2019 and June 2020, Defendant tried to obtain an extension on the loan, but Bayern refused.  Ultimately, Defendant defaulted on the loan and Bayern demanded payment from Plaintiff, as guarantor.  Plaintiff paid Bayern the full principal and interest due on the loan and entered into an assignment agreement with Bayern, whereby Bayern assigned all of its claims and rights under the loan agreement to Plaintiff.  Plaintiff thereafter commenced an action against Defendant by way of a CPLR 3213 motion for summary judgment in lieu of complaint.

The Manhattan Commercial Division (Ostrager, J.) denied Plaintiff’s CPLR 3213 motion, finding issues of fact concerning Plaintiff’s standing and capacity to sue.  On appeal, the First Department reversed and granted Plaintiff’s motion, holding that Plaintiff established its prima facie entitlement to summary judgment.  With respect to Defendant’s set-off and recoupment defense – which was based upon fiduciary obligations Plaintiff allegedly owed Defendant – the First Department concluded the defense was “separate and severable from plaintiff’s claim under the loan agreement and does not defeat plaintiff’s motion for CPLR 3213 treatment.”

In New York, the assertion of defenses or possible counterclaims based on facts extrinsic to the money instrument are insufficient to defeat a CPLR 3213 motion.  Indeed, given the policy reasons underlying CPLR 3213, New York courts are generally hesitant to permit a defense or counterclaim to defeat an otherwise legitimate CPLR 3213 claim.  For instance, in Midtown Neon Sign Corp. v Miller, (196 AD2d 458, 459 [1st Dept 1993]), the First Department held summary judgment pursuant to CPLR 3213 was appropriate, despite defendant’s claims of breach of fiduciary duty, because those claims “[did] not involve the note; nor [did] they constitute either a defense to a claim for payment thereon or a basis for cancellation.”  By contrast, the Second Department in Lackmann Food Service, Inc. v E & S Vending Co., Inc. (125 AD2d 366 [2d Dept 1986]) held that the defendants’ counterclaim alleging failure of consideration and lack of mutuality, to plaintiffs’ action on promissory notes and guarantees of payment, presented a viable claim arising from the underlying transaction and was inseparable from the plaintiffs’ cause of action.

Takeaway

The question of whether a counterclaim may be entertained in a CPLR 3213 action – in view of the statute’s intention to summarily dispose of the main claim – is an interesting one.  New York courts are generally hesitant to permit a counterclaim to impede an otherwise legitimate CPLR 3213 claim.  The general rule is that, although a counterclaim should not be entertained where the plaintiff seeks summary judgment in lieu of complaint, interposition will be allowed when “it appears that the transactions upon which the counterclaim is based are inseparable from and may constitute a defense to the main claim.”  Otherwise, a court will likely grant the plaintiff’s CPLR 3213 motion, and sever the defendant’s defenses/claims from the main action.

*Last week, the Defendant in Deka Immobilien filed a motion to reargue the First Department’s decision.  In the motion, Defendant argues its breach of fiduciary duty defense/claim for set-off and recoupment is directly related to Plaintiff’s main claim because Plaintiff’s alleged breaches of their fiduciary duties are what ultimately caused Defendant’s inability to perform its obligations under the loan agreement – the same obligations Plaintiff seeks to enforce through its CPLR 3213 motion.  Stay tuned for updates on how the First Department rules.

“Relevant statements made in judicial or quasi-judicial proceedings are afforded absolute protection so that those discharging a public function may speak freely to zealously represent their clients without fear of reprisal or financial hazard.”

Professionals, including attorneys, and individuals may find themselves subject to a defamation lawsuit. Attorneys, however, may sometimes rely on absolute or qualified privileges to protect against a claim for defamation.

Last month, the First Department in Lewis v. Pierce Bainbridge Beck Price Hecht LLP affirmed Manhattan Commercial Division Justice Andrea Masley’s decision dismissing plaintiff’s defamation claim based on an absolute and qualified privilege. The Lewis court explored whether Defendant Sylvia Jeanine Conley’s (“Conley”) purported statements both in the course of litigation and pre-litigation were protected by a qualified privilege. Ultimately, the court determined that they were.

In Lewis, Plaintiff Donald Lewis (“Lewis” or “plaintiff”) worked as an attorney at Bainbridge Beck Price & Hecht LLP’s (“PB”) New York office. In October 2018, a PB employee accused plaintiff of sexual harassment. As a result, plaintiff was placed on administrative leave. Plaintiff was eventually terminated for violating the terms of his leave.

In March, 2019, plaintiff’s counsel sent PB a draft complaint that it intended to file in court, alleging, among other things, violations of plaintiff’s employment agreement. Between March and May 2019, Conley, a member of Littler Mendelson, P.C. (“Littler”), on behalf of PB, communicated with plaintiff’s counsel regarding the possible settlement of plaintiff’s claims.

On May 16, 2019, plaintiff filed the “First Lewis Complaint.” Littler, on behalf of PB, filed a motion to dismiss that action. On June 7, 2019, plaintiff commenced the instant defamation action against, among others, Littler, alleging: (i) aiding and abetting defamation; (ii) violation of Judiciary Law § 487; (iii) intentional infliction of emotional distress; and (iv) prima facie tort. The basis of plaintiff’s defamation claim was (1) Conley’s involvement in PB’s motion to dismiss the First Lewis Complaint; (2) Conley’s statements during the race to the court; and (3) Conley’s statements and conduct during settlement negotiations, prior to the commencement of any litigation.

Littler moved to dismiss the lawsuit as against it on the basis of absolute and qualified privilege. The Lewis court analyzed whether Conley’s statements were in fact privileged.

In New York, “statements made in the course of litigation are entitled to absolute privilege” (Front, Inc. v Khalil, 24 NY3d 713, 715 [2015]). New York courts have held that “[t]he principle underlying the absolute privilege for judicial proceedings is that the proper administration of justice depends upon freedom of conduct on the part of counsel and parties to litigation, which freedom tends to promote an intelligent administration of justice” (Sexter & Warmflash, P.C. v Margrabe, 38 AD3d 163, 171 [1st Dept 2007]). Such privilege applies “when such words and writings are material and pertinent to the questions involved” (see id.).  The test to determine whether a statement is pertinent is extremely liberal. “To be pertinent to the litigation ‘the barest rationality, divorced from any palpable or pragmatic degree of probability, suffices’” (Pomerance v McTieman, 51 AD3d 526, 528 [1st Dept 2008]). However, “where an attorney’s statements are so needlessly defamatory as to warrant the inference of express malice the privilege has been abused and protection is withdrawn” (Front, Inc., 24 NY3d at 718).

In Lewis, Justice Masley determined that Conley’s statements made after the commencement of the various lawsuits and her statements in the motion to dismiss the First Lewis Complaint were protected by absolute privilege.  Specifically, Justice Masley determined that Conley’s statements in her affirmation in support of the motion to dismiss the First Lewis Complaint were pertinent to that action and attached relevant documents.  Justice Masley also concluded that the supporting memorandum of law discussed case law pertinent to that action. The Court rejected plaintiff’s conclusory assertion that Littler’s motion to dismiss the First Lewis Complaint was frivolous.  The Court also noted that plaintiff failed to identify any actual statements made by Conley after the lawsuits were commenced.

The Commercial Division also concluded that Conley’s pre-litigation statements,  concerning plaintiff’s claims and the possible settlement thereof, were made in anticipation of litigation, were protected by a qualified privilege, rather than absolute privilege.  “If the statements are pertinent to a good faith anticipated litigation, no cause of action for defamation can be based on those statements” (Front, Inc., 24 NY3d at 715).  “This requirement ensures that privilege does not protect attorneys who are seeking to bully, harass, or intimidate their client’s adversaries by threatening baseless litigation or by asserting wholly unmeritorious claims, unsupported in law and fact, in violation of counsel’s ethical obligations” (see id.).  On the other hand, applying a privilege to pre-litigation communication encourages negotiation and “should be encouraged and not chilled by the possibility of being the basis for a defamation suit” (see id.).

Although Plaintiff attempted to argue that the privilege does not apply because he did not plead a direct defamation claim against Littler (having asserted only an aiding and abetting defamation claim and other non-defamation claims), the court rejected plaintiff’s argument and determined that plaintiff cannot avoid the privilege by repackaging a defamation claim.

The First Department affirmed the lower court’s decision, dismissing plaintiff’s aiding and abetting defamation claim and holding that defendant Conley’s purported statements in the course of litigation “are immune from liability for defamation based on an absolute privilege.” The Court explained that plaintiff failed to show that the statements made in the course of litigation were not “material and pertinent to the questions involved” in the litigation.  The First Department similarly held that Conley’s pre-litigation statements are protected by a qualified privilege.  The Court held that plaintiff failed to demonstrate that Conley “did not have a good faith basis for anticipating that litigation was bound to occur.”

Takeaway:

Attorneys should be reminded to refrain from making statements that could lead to a defamation claim and to use their best judgment in determining what information should be shared with others.

However, in the event an attorney is subject to a defamation suit, he/she must ask two main questions: (1) were the statements pertinent to the litigation; and (2) were the statements made in anticipation of litigation. If the answer to either question is “yes,” the defamation claim may be dismissed based on absolute or qualified privilege.

In one of my first posts, entitled Restrictive Covenants: The Importance of Understanding Their Contractual Limits, I wrote about a First Department decision upholding a portion of Justice Andrea Masley’s Order enjoining a defendant modeling agent and agency from unfairly competing, disclosing, or misappropriating the plaintiff’s confidential information and interfering with the plaintiff’s contractual relationship with its models but refusing to extend the terms of the employment agreement, which prohibited the agent from contacting and soliciting models throughout the pendency of the litigation.

In a recent decision, Justice Elizabeth Hazlitt Emerson of the Suffolk County Commercial Division was faced with similar non-solicitation and confidentiality issues, although not in the context of an employment agreement. In EVO Merchant Servs. v R.B.C.K. Enters., Inc., Justice Emerson denied the defendants’ request to be released from a preliminary injunction preventing them from soliciting the plaintiff’s customers because the parties expressly agreed to a non-solicitation provision and because the customer information was confidential.

In EVO Merchant Servs., Plaintiffs EVO Payments International, LLC, together with its wholly owned subsidiary EVO Merchant Services, LLC (collectively “EVO”), made up a global credit- and debit-card payment-processing company. In 2018, EVO entered into a Referral Agreement with the defendant R.B.C.K. Enterprises, Inc. (“RBCK”) wherein RBCK agreed to refer customers to EVO (many of which happened to be pool and spa merchants) for payment processing in exchange for a referral fee. The Referral Agreement contained two important provisions: (1) while the Referral Agreement was in effect, and for a period of three years after its termination, RBCK would not solicit EVO’s customers or take any action that would lead EVO’s customers to end their relationships with EVO; and (2) all data belonging to or relating to the business of the other party, including the list of merchants referred to EVO, was confidential. EVO and RBCK simultaneously entered into a Confidentiality Agreement in which they agreed not to use information about customers and business relationships for their own purposes.

By September 2019, approximately 688 pool and spa merchants from RBCK’s portfolio had accounts with EVO. But RBCK and EVO’s symbiotic relationship was short-lived. In October 2019, RBCK entered into an asset-purchase agreement with the defendants RB Retail & Services Software LLC (“RB”) and Fullsteam Operations LLC (“Fullsteam”), a direct competitor of EVO. Shortly thereafter, RBCK terminated the Referral Agreement. In the eight months following the merger, approximately 114 pool merchants closed their accounts with EVO and another 33 ceased all processing activity with EVO.

EVO commenced an action, inter alia, for breach of contract against RBCK, RB, and Fullsteam alleging that the defendants used EVO’s confidential information to solicit pool and spa merchants in violation of the Referral and Confidentiality Agreements, and that the sale of RBCK’s assets to RB was a de facto merger and a fraudulent attempt by RBCK to avoid its obligations under the Referral and Confidentiality Agreements.

EVO succeeded in obtaining a preliminary injunction with a temporary restraining order preventing RBCK, RB, and Fullsteam from soliciting customers of EVO who became customers of EVO or its affiliates under the terms of the Referral Agreement. RB and Fullsteam then moved under CPLR § 6314 to be released from the injunction.  RB and Fullsteam argued they were provided a list of customers from EVO in order to comply with the injunction and that the list only contained names and mailing addresses of EVO customers. According to RB and Fullsteam, because the list did not contain confidential or proprietary information, injunctive relief was unnecessary.

The Court first looked to the express terms of the Referral Agreement, which stated: “This Agreement, the list of persons constituting Referred Merchants hereunder, and all payments and reports delivered hereunder constitute the Confidential Information of EVO.” In light of this express provision, the Court found that the list of customers constituted confidential information.

RB and Fullsteam next argued that the non-solicitation provision of the Referral Agreement was unenforceable. Citing cases concerning restrictive covenants in the employment context, RB and Fullsteam argued that non-compete and non-solicit agreements should only be enforced to the extent that they are necessary to protect the legitimate interests of the party, i.e. not simply because a contract defines something like a customer list as confidential.

The Court distinguished the employment cases cited by RB and Fullsteam, stating “Restrictive covenants in employment contracts…are subject to more exacting scrutiny than are those in contracts for the sale of a business or ordinary commercial contracts because public policy favors economic competition and individual liberty and seeks to shield employees from the superior bargaining position of employers.”

The Court found the Referral Agreement to be more similar to a contract for the sale of a business. Just like a buyer of a business, EVO bargained for the good will of the customers referred by RBCK during the term of the Referral Agreement and for a period of three years after its termination. Therefore, the non-solicitation provision was part of the bargain and to permit RB and Fullsteam to solicit EVO customers would deprive EVO of the benefit of its bargain. And so, the Court denied RB and Fullsteam’s request to modify and release them from the injunction.

The Up-Shot

The enforceability of restrictive covenants—such as non-solicitation or non-compete provision—in the Commercial Division may differ depending on the subject matter of the contract. However, in the general commercial context, a court will enforce a non-solicitation provision when failing to do so would deprive a party the benefit of its bargain.