As litigators in the Commercial Division, everyone knows that discovery can be particularly burdensome and time consuming.  This is especially true when you have clients that are very protective of their information.  The Commercial Division already has anticipated this by offering attorneys a model confidentiality agreement, which in some cases can be further negotiated by the parties for their additional protection.

In Callsome Solutions Inc. v. Google Inc., the parties, as Google would come to regret, included an Attorneys’ Eyes Only (“AEO”) provision in their confidentiality agreement.  Manhattan Commercial Division Justice Andrea Masley scolded and sanctioned Google for its AEO designation of hundreds of documents and thousands of lines of deposition testimony.  The Court stated that the “AEO designation was reserved for truly secret documents” and that it should be used “as sparingly as possible.”  This is because “improper designations, not only delay, but also impact. . . the communications between [client] and its attorney.”   Therefore, in designating documents AEO, litigators must take careful consideration to limit the documents with that designation and make sure those documents are only designated in good faith.

In Callsome, the parties entered into stipulated confidentiality agreement that called for two tiers of confidentiality: (1) confidential; and (2) highly confidential – attorneys’ eyes only.   The latter designation was designed to protect confidential information that is “extremely sensitive.”  After Google designated hundreds of documents and thousands of lines of deposition testimony, the plaintiff requested that Google de-designate groups of documents and testimony, Google then engaged in a “slow trickle” of de-designation.

In issuing sanctions against Google, it was not just Google’s over-designations that irritated the court, it was also the “slow trickle” of corrections.  Specifically, the Court found that this “trickle” did not “rectify the initial improper designations.”  Further, Google even attempted to use the corrections as a negotiation tactic within the litigation, attempting to extract concessions from the plaintiff.  The Court found that “[n]o public policy is served by crediting Google’s purported offer to compromise. . .” because “AEO designations are not negotiable.”

A party cannot over designate documents then hold the improperly designated documents hostage until the adversary surrenders.  Such conduct will not be countenanced by this court.

The Court held that “Google’s conduct flouts widely accepted rules of civility embedded in New York litigation and in particular the Commercial Division,” and that it “effectively prevented the expeditious resolution of this litigation.”  The Court further held that Google engaged in frivolous conduct warranting sanctions under 22 NYCRR Section 130-1.1.

The first takeaway here is that confidential designations of any kind, particularly AEO designations should be made in good faith.  Second is that after designating documents AEO, when faced with a request to de-designate, you should ensure that you do not delay the litigation by refusing to do so or attempt to use your designations as a negotiating tactic.  Make sure you have a good faith basis for your designation, and stick to your guns.

 

However, if you believe that a document does not warrant such designation, but your client is still skittish, you can, as the Court suggested, amend (or draft) the confidentiality agreement to guarantee your client further protections such as providing for financial penalties in the event of a breach.  Over designation only delays litigation and shifts the burden to your opponent, which is never appropriate.

You’ve just represented a client in an arbitration proceeding…and lost. The client wants to “appeal” the decision. Now what? The only remedy your client has is to request that the court vacate or modify the arbitration award. However, this is no small task.

A recent decision by New York County Commercial Division Justice Charles E. Ramos (NSB Advisors, LLC v C.L. King & Assoc., Inc., 2018 NY Slip Op 32533 [Sup. Ct., NY County 2018]) serves as a reminder that a party seeking to vacate an arbitration award faces a heavy burden. Arbitration awards are almost always upheld by New York State courts because the standard of review is so high. An arbitration award must be upheld when the arbitrator offers “even a barely colorable justification for the outcome reached.”

The burden of proof lies with the party that is challenging the arbitration award to show the court why the award should be vacated. Pursuant to CPLR §7511, an application to vacate or modify an arbitration award may be made by a party within 90 days after the decision is rendered.

The only two instances when an arbitration award may be vacated include (1) instances involving fraud, corruption or misconduct of the arbitrators or (2) where an arbitration award exhibits “manifest disregard of the law”. To vacate an arbitration award on the latter ground, a court must find that the arbitration panel knew of a governing law yet refused to apply it or ignored it, and that the governing law was well defined, explicit and clearly applicable.

Examples of what could constitute a “manifest disregard of the law” include “an explicit rejection of controlling precedent” and “a decision that is logically impossible”. However, it is important to remember that the arbitration panel is entitled to make its own factual and legal findings, just like a judge or a jury. Alleging mere factual error by the arbitrator or misapplication of complex legal principals will not suffice.

A party seeking to vacate an arbitration award is best served by making every effort to obtain the reasoning behind the arbitration award. However, this must be requested prior the rendering of the award by the arbitrator. Moreover, arbitrators are not automatically required to explain their decision and Article 75 of the CPLR does not impose this requirement. Unfortunately, a failure to provide an explanation for the award is not grounds for vacating it.

However, in some instances, the parties can request that the arbitration panel issue an “explained decision.” Pursuant to FINRA Rule 13904(f), an arbitration panel may contain a rationale for the underlying award if the parties jointly request what is known as “an explained decision”. However, if only one party seeks this relief, the arbitrator is not required to honor the request. In this case, the arbitration was governed by FINRA, but the parties failed to request an explained decision. Justice Ramos reasoned that without an explanation behind the award, it would be next to impossible to determine whether the award was, in fact, a “manifest disregard of the law”.

Finally, a party seeking to vacate an arbitration award must provide the entire arbitration record to the court. Justice Ramos criticized Respondent in this case for not providing the court with a complete record of the arbitration materials despite acknowledging that the complete record included over 16,000 pages of transcripts and 800 exhibits. He reasoned that the court could not possibly have the opportunity to conclude that the arbitration panel “manifestly disregarded the law” with just “a mere snapshot of what occurred.”

Takeaway: Vacating an arbitration award is an uphill battle and attorneys seeking this relief from the court should avail their client to every procedural advantage, including seeking an explained decision from the arbitration panel and submitting the entire record for the court’s review.

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For those civil practitioners who don’t regularly practice in the Commercial Division – beware.  The Unified Court System’s Advisory Committee on Civil Practice (the “Committee”) has proposed that nine (9) Commercial Division Rules be broadly adopted by other, non-commercial civil courts.  These nine rules all have one common goal: to promote efficiency in New York courts.

Earlier this year, the Committee conducted a detailed evaluation of the Commercial Division Rules (22 NYCRR 202.70[g]) to determine which of those rules, if any, should be broadly adopted by non-commercial courts.  In a July 2018 report (the “Report”), the Committee recommended broader application of the following Commercial Division Rules:

Rule 3(a) – Appointment of a court-annexed mediator (as amended)

  • Rule 3(a) provides that a judge may direct, or counsel may seek, the appointment of an uncompensated mediator. This rule also allows counsel for all parties to stipulate having the case determined by a summary jury trial.  The Committee recommended statewide adoption of this rule, with a minor amendment stating that the court may advise (rather than direct) the appointment of a court-annexed mediator.  This rule will promote judicial efficiency and potentially result in the earlier resolution of cases through ADR.

Rule 3(b) – Settlement conference before a judge not assigned to the case

  • In addition to Rule 3(a), the Committee recommended adoption of paragraph (b), which provides that counsel can request a settlement conference before another judge who is not the judge assigned to the case.  The Committee noted, however, that it may be difficult to implement Rule 3(b) in some downstate counties where judicial resources may not be as readily available.

Rule 11-a – Limitations on interrogatories

  • The Committee also recommended statewide adoption of Rule 11-a, which, among other things, sets certain limitations on the use of interrogatories (i.e., interrogatories cannot exceed more than 25 in number, including subparts, and are limited to succinct categories). In the Committee’s view, this proposed amendment “would result in increased efficiency and streamlined litigation” and “serve as a useful guideline for limiting unnecessary, burdensome or abusive discovery practices.”

Rule 11-b – Privilege Logs (in part)

  • To reduce the time and costs associated with preparing document-by-document privilege logs, the Committee recommended the partial adoption of Rule 11-b, which permits the use of categorical privilege logs.  According to the Committee, the categorical approach “is more efficient and cost-effective for the parties, helps streamline litigation and facilitates expeditious court review.”  However, the Committee is not in favor of Rule 11-b’s provision regarding cost allocation, which permits a party required to produce a document-by-document privilege log to apply to the court for costs associated with that log.  Rather, the Committee recommends that, in cases where the parties disagree about which approach to follow, the court should determine whether the categorical approach or the document-by-document approach will be used.

Rule 11-d – Limitations on depositions

  • Similar to the statewide adoption of Rule 11-a (limitations on interrogatories), the Committee recommends that Rule 11-d’s limitations on depositions be broadly adopted. Under this rule, the number of depositions is presumptively limited to ten (10) per party, and each deposition will be limited to seven (7) hours per deponent.  These limits can be changed by stipulation or by court order upon a showing of good cause.

Rule 11-e – Responses and objections to document requests (as amended)

  • It is no mystery that boilerplate objections have become widely disfavored among judges, and are even sanctionable in some courts. Thus, the Committee proposed the broad adoption of Rule 11-e, which requires parties responding to discovery requests to either state that the production will be made as requested, or state with reasonable particularity the grounds for any objection.  The proposed rule will also require a responding party to state, at the time if disclosure, whether the production of documents is complete, that there are no responsive, non-privileged documents in its possession, or explain why the production is not complete.

Rule 19-a – Statement of material facts for summary judgment motions

  • The Committee recommended statewide adoption of Rule 19-a, “as it is likely to greatly assist in narrowing and clearly setting forth the material issues.” The Committee further recommended that a statement of material facts be required in all cases involving summary judgment, and not just in cases “where the court directs.”

Rule 20 – Temporary restraining orders

  • This Commercial Division Rule requires notice to an adverse party of any application for a temporary restraining order, unless the moving party can demonstrate that “significant prejudice” would result from such notice. The Committee recommended statewide adoption of this rule because it “advances a just result by giving all parties notice of the issues and an opportunity to comment.”

Rule 34 – Staggered court appearances

  • Most judges generally have specific motion and conference days and, most parties are directed to appear at a specific time on such day (for example, Tuesdays at 9:30 a.m.). The result is often a courtroom packed with attorneys waiting to be heard, sometimes for hours. Rule 34, however, is intended to encourage “court staggered appearances” by providing litigants specific time slots to appear, depending on the nature of the appearance.  The goal of this proposed rule is obvious: to reduce congestion in the courtrooms and eliminate the inordinate amount of time attorneys spend waiting to be heard, thus reducing client costs and increasing courtroom efficiency.

The Committee is now seeking public comment on the recommendations set forth above.  However, the Committee determined that wholesale adoption of the Commercial Division Rules statewide is not warranted.  Indeed, many of the commercial division rules already exist in one form or another (i.e., Rule 1 [appearance by counsel with knowledge and authority, which is already incorporated into most conference orders; Rule 11-f [deposition of entities, which is already adequately addressed in CPLR Articles 23 and 31, respectively]) and, some of the specific rules may actually add to the costs of litigation or place additional burdens on litigants (i.e., Rule 21 [providing courtesy copies in e-filed cases, which, according to the Committee, is “contrary to the goals of paperless electronic litigation”]).

So what does this mean for civil practitioners?  Whether you practice mainly in the Commercial Division or in other civil courts, the Office of Court Administration is seeking to streamline litigation in non-commercial cases and make civil practice in all courts more efficient and practical.  If these rules are ultimately adopted statewide, ADR will become more commonplace, abusive discovery practices, such as boilerplate objections and excessive interrogatories, will not be tolerated, discovery will become more streamlined and efficient, and hopefully, litigants won’t be waiting in court for hours until their case is finally called.

The Administrative Board is now seeking public comment on the recommendations set forth in the Advisory Committee’s Report.  Those wishing to comment on the Report should e-mail their submissions to rulecomments@nycourts.gov or write to: John W. McConnell, Esq., Counsel, Office of Court Administration, 25 Beaver Street, 11th Floor, New York, New York 10004.  Comments must be received no later than January 15, 2019.

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Perhaps it’s because I’ll be speaking on the topic later this week, or perhaps it’s because of a recent post on another one of our blogs, but shareholder rights of inspection have been on the mind of late.Shareholder inspection rights

While researching 2018 New York cases addressing inspection rights, particularly in the Commercial Division, I came across a Second Department decision from over the summer, which modified a post-trial judgment from Queens County Commercial Division Justice Marguerite A. Grays by ruling in favor of the individual defendant on his counterclaim for an accounting and directing the corporate plaintiff to permit an inspection of its books and records.

In World Ambulette Transp., Inc. v Lee, a corporate ambulance service sought to recover damages from a former driver/dispatcher who was terminated after allegedly charging the company’s debit card for various personal expenses. The defendant counterclaimed for breach of contract and an accounting, claiming not only that he was wrongfully discharged as an employee, but that he was denied certain rights as a minority owner under a shareholder’s agreement, including the right to continued employment, salary, dividends, and other company profits.

At trial, the parties offered conflicting testimony concerning the business arrangement between them, with the defendant claiming that he was a full-blown 49% owner in the company, and the plaintiff claiming that he was merely an employee entitled to 49% of the company’s profits.  Confident in its founder’s testimony in this regard, the plaintiff moved under CPLR 4401 for judgment during trial effectively to dismiss the defendant’s counterclaims, including his claim for an accounting — which, by its very nature, was contingent on the existence of a fiduciary relationship between the parties.  After all, if the defendant never was a shareholder and the requisite fiduciary relationship wasn’t there in the first place, how could he maintain a claim for an accounting against the plaintiff?

The trial court concurred, crediting the founder’s testimony and other “extrinsic evidence” relating to “the parties’ intent,” and found that the parties had “entered into nothing more than a profit sharing agreement,” which warranted dismissal of the defendant’s counterclaims.

The Second Department disagreed, in part anyway, finding that there was nothing ambiguous about an agreement, which on its face was denominated a “shareholder’s agreement,” and which contained a “Warranties” section designating a specific 51/49 percentage ownership of “Class A shares” among the parties.  There simply was no need to consider any extrinsic evidence concerning the parties’ intent when that intent was expressed unambiguously within the four corners of the agreement itself.

After citing section 624 of the Business Corporation Law (“Books and records; right of inspection”) and stating that “a shareholder has both statutory and common-law rights to inspect the books and records of a corporation if inspection is sought in good faith and for a valid purpose,” the Second Department ruled that the defendant was entitled to an accounting and that he should be permitted to examine the plaintiff’s books but otherwise affirmed the trial court’s findings with respect to the defendant’s unauthorized debit-card charges card and the propriety of his termination.

Pyrrhic victory, you say?  Maybe not.  Sure, the defendant in World Ambulette may not have a right to continued employment, or to a director’s meeting on notice prior to termination, or to any salary, dividends, or future profits from the company in which he is a 49% shareholder, but he still has his rights of inspection.  And given the recent expansion of those rights in New York case law (see, e.g., Retirement Plan for Gen. Empls. of City of N. Miami Beach v McGraw Hill Cos., Inc., 120 AD3d 1052 [1st Dept 2014]) — including the right to “investigate alleged misconduct by management and obtaining information that may aid legitimate litigation . . . even if the inspection ultimately establishes that the board engaged in no wrongdoing” — the defendant may eventually have his day in court after all.

** Nota Bene ** — As noted above, the topic of shareholder inspection rights (among others) will be the subject of a panel discussion at the Westchester County Bar Association this coming Thursday, November 1, 2018, at 6 p.m. at the WCBA Headquarters, 4 Westchester Park Drive, Suite 155, in White Plains.  The 1.5 credit CLE program will address the utility of the books-and-records proceeding in disputes among business owners in partnerships, corporations, and LLCs, and the ways in which such disputes might be avoided by having proper formation documents prepared and in place from the beginning.  The three-person panel will be addressing these topics from the perspective of a litigator, a forensic accountant, and a corporate attorney.  Registration and networking at 5:30 p.m.  Hope to see you there!

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Although we generally report on recent Commercial Division decisions, and sometimes commercial cases coming out of the Appellate Divisions, this time we go all the way to the top:  the Court of Appeals.  Not often do we see commercial cases with a procedural twist coming out of our High Court (of NY).  However, last week, the Court rendered a decision in Deutsche Bank Nat’l Bank Trust Co. v. Flagstar Capital Mkts, addressing a thorny statute of limitations issue in a breach of representations and warranties claim arising out of a residential mortgage-backed securities contract.  Even more interesting is that the decision was only a 4-2 vote, drawing two separate dissents from Judges Rivera and Wilson.  Judge Garcia took no part.

The case arose out of a series of mortgage loans originated by defendant Quicken Loans, Inc. that were initially sold to Morgan Stanley Mortgage Capital, Inc. and eventually sold to a trust for the purpose of issuing residential mortgage-backed securities. The document at issue, the Second Amended and Restated Mortgage Loan Purchase and Warranties Agreement (“MLPWA”), contained two provisions at issue. The first, the “Sole Remedy” provision, stated that the purchaser’s only remedy was seller’s obligation to sure or repurchase the nonconforming loan. The second, the so-called “accrual clause” provided that “[a]ny cause of action against the Seller . . . shall accrue . . . upon (i) discovery of such breach . . . (ii) failure by the Seller to cure such breach . . . and (iii) demand upon the Seller by the Purchaser for compliance.”

Against this backdrop, seven years after the loans were originated, plaintiff claimed breach. Defendants immediately moved to dismiss on statute of limitations grounds, relying on the Court of Appeals’ decision in ACE Sec. Corp. v. DB Structural Prods., Inc., which held that a cause of action for breach of representations and warranties accrues when the contract was executed.

The case was dismissed at the trial court level, on the statute of limitations defense. Affirmed by the Appellate Division, First Judicial Department (143 AD2d 15), the Court of Appeals granted leave to consider whether the statute of limitations could be extended beyond the Court’s decision in ACE.

In a split decision, the Court held that the “accrual clause” did not create a substantive condition precedent. In addition, the Court held that the accrual period could not be used to extend the statute of limitations. Rather, the Court distinguished NY General Obligations Law 17-103, which allows parties to extend a statute of limitation after the cause of action accrues. In rejecting plaintiff’s claims of “freedom of contract” the Court held that “[w]hen the public policy favoring freedom to contract and the public policy prohibiting extensions of the limitations period before accrual of the cause of action come into conflict, however, the latter must prevail.”

The dissents were strong. Judge Rivera, criticizing the majority for “misconstru[ing] decisional law” by departing from “our longstanding recognition of the freedom to contract,” found no statute or public policy to be a bar to the enforcement of the accrual. Judge Wilson, agreeing with Judge Rivera’s dissent, in even stronger language concludes the Court “created bad law” and “fundamentally misinterpreted the structure of RMBS agreements.”

The takeaway? Not sure, but at least for now, the drafters of agreements that contain clauses seeking to extend the period within which to assert a claim for breach of a representation and warranty — particularly in the RMBS arena — must take care in ensuring the “accrual” of the claim is not postponed, but rather the period within which to sue is extended.

A general release: the end of a litigation or relinquishment of a right? Every attorney and litigant often breathes a sigh of relief when a litigation comes to a conclusion. But is that always the case? Not when the release covers more than may have been intended.

In a recent decision by Commercial Division Justice Andrea Masley, the Court held that a general form release, which settled a dispute involving one piece of artwork within an allegedly stolen collection of several other pieces of artwork, barred Plaintiff from bringing a subsequent action to recover any other pieces within the collection.

In Frenk v. Solomon, Paul Westheim (“Westheim”), a famous Jewish art critic who specialized in German expressionist art, fled Nazi Germany in 1933 and entrusted his art collection with an art dealer in Berlin, Ms. Weidler (“Weidler”). Westheim later married Ms. Westheim-Frenk. After World War II, Weidler claimed that the art collection was destroyed in the war, but Plaintiff (Westheim-Frenk’s daughter) alleged that Weidler stole Westheim’s art collection and sold it in separate pieces.

In 1973, late Westheim’s wife (“Westheim-Frenk”) commenced an action against Weidler, because Weidler sold a paining from Westheim’s art collection (the “First Action”). That matter settled before discovery and was “discontinued ‘with prejudice.’” Westheim-Frenk, represented by New York counsel, executed a blanket release (the “Release”), discharging Weidler, her “heirs, executors, administrators, successors and assigns” from all claims that Westheim-Frenk “ever had, now have, or which [Ms. Wetheim-Frenk] or [her] heirs, executors, or administrators, hereafter can, shall or may have.” In consideration for the Release, Plaintiff’s mother received $7,500.00, which is equivalent to about $40,000.00 today.

In or about January of 2013, Plaintiff initiated the instant action against the executors of Weidler’s estate and her heirs, seeking to recover the valuable artwork from Westheim’s art collection, as well as damages and a judgment declaring that she was entitled to the artwork.

Following discovery, the defendants moved for summary judgment alleging that the Release and stipulation discontinuing the First Action barred Plaintiff’s claim under the doctrine of res judicata; and nothing in the broad Release was “intended to be narrowly applied to any one painting, but rather, to the entire collection.” The terms of the broad Release bar Plaintiff from bringing an action against Weidler, or her “heirs, executors, administrators, successors and assigns.” Because the defendants demonstrated the prima facie defense of release, the burden shifted to Plaintiff to evidence material issues of fact to defeat summary judgement. See Aoki v. Aoki.

In seeking to limit the broad Release, Plaintiff argues that the subject of the First Action was the artwork, entitled Portrait of Dr. Robert Freund, and, thus, that the Release applied only to that piece. Alternatively, Plaintiff argues that Westheim-Frenk was fraudulently induced by Weidler to execute the Release and, thus, the defendants should be estopped from using the Release. However, the defendants objected to Plaintiff’s use of parol evidence. Justice Masley held that because the Release contained a standardized form, the court “must be flexible in the application of the parol evidence rule.”

Plaintiff also attempted to identify a transaction between Ms. Weidler and Westheim-Frenk in support of her claim that the Release only pertained to the single painting. Plaintiff argued that in 1976, when Weidler attempted to sell another piece from Westheim’s collection, Weidler entered into an agreement to split the sale amount of the artwork—a deal which would clearly not make sense if the Release pertained to all the artwork in Westheim’s collection. On the other hand, the defendants identify a letter from Westheim-Frenk stating that she understood that nothing could be done regarding all future artwork that may turn up. Next, Plaintiff argued that it is inconceivable that the low settlement amount from the First Action ($7,500.00) would have covered all the other valuable artwork. Justice Masley, however, rejected these conclusory arguments, holding that Plaintiff’s “evidence of conduct and intent is inconclusive” in light of the clear and unambiguous language of the Release.

In that regard, the First Department has held that “to hold a release forever hostage to legal afterthoughts basically vitiates the nature of the release.” See Aoki v. Aoki. Although Plaintiff argued that the Release should be set aside because Weidler used fraud to obtain same, Justice Masley held that in order to set aside the Release on the ground of fraud, Plaintiff had to establish that the fraud was separate from the subject of the Release, in addition to all the basic elements of fraud. Plaintiff, however, failed to identify any of Weidler’s misrepresentations at the time the Release was executed. In fact, there was no support for a claim that Westheim-Frenk was defrauded when she signed the release. Interestingly, Justice Masley held that plaintiff’s mother “failed to condition the Release on the truth of the information . . . i.e. that there were no other artworks from Westheim’s collection.” The Court finally also determined that Weidler did not waive the Release and Plaintiff did not present any evidence demonstrating that Weidler “intentionally relinquish[ed] a known right.”

Accordingly, because the Release was clear and unambiguous, the Court granted the defendants’ motion for summary judgment and dismissed the action.

Takeaway: Be especially precautious when drafting a release for a client, making sure not to waive any of their rights. Here, Justice Masley recognized that Plaintiff’s mother was represented by counsel when entering into the general release. This could potentially open you to a malpractice lawsuit.

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It has been almost one year since the New York legislature amended CPLR 503(a) to provide for venue in “the county in which a substantial part of the events or omissions giving rise to the claim occurred.” Yet a recent decision by Commercial Division Justice Andrea Masley shows that some practitioners have either forgotten about the amendments or never got the memo. But have no fear—the court held that a plaintiff who fails to properly designate venue on the summons may nonetheless submit alternative grounds for the original venue designation in an affidavit responding to a demand to transfer venue.

In Faustino v. Amin, the plaintiff asserted derivative claims of theft and misallocation of inventory, including Kanye West’s Adidas Yeezys and Jeff Staple x Nike SB footwear, against co-owners of Lower East Side “sneaker destinationExtra Butter. The summons incorrectly alleged that venue was proper in New York County because the nominal defendant’s principal place of business was New York County. Although Extra Butter’s flagship retail store was in fact located in New York County, the nominal defendant’s articles of incorporation designated Suffolk County as the principal place of business. Accordingly, defendants filed and served a demand to change venue to Nassau County, where the defendants claimed was geographically convenient to the parties and material witnesses.

In response to this demand to transfer venue, the plaintiff filed an affidavit stating that the alleged theft and other relevant events occurred at Extra Butter’s Lower East Side location, and venue was therefore proper under CPLR 503(a). Defendants then moved to transfer venue, without addressing in their motion whether material events occurred in New York County (or even acknowledging the amended language in CPLR 503[a]). Defendants’ argued instead that the plaintiff had forfeited his right to select venue by falsely alleging in the summons that venue was proper based on residence, and that defendants were therefore entitled as of right to transfer venue to Nassau County.

The court rejected defendants’ arguments based on the parties’ residence. Pursuant to CPLR 503(a), as amended in 2017, the events giving rise to the parties’ dispute sufficiently conferred venue in New York County. The court further held that Plaintiff did not forfeit his right to designate venue in New York County by falsely alleging the nominal defendants’ New York County residence as the basis for venue, because Plaintiff’s complaint and affidavit responding to the demand to change venue set forth events giving rise to the claim in New York County. As for the convenience of the parties and witnesses, the Court held that geographic proximity to the parties was not, on its own, a sufficient basis to transfer venue.

The court further addressed inadequacies in defendants’ argument concerning the convenience to witnesses. Because defendants did not provide a detailed account of the proposed witnesses’ identities, the nature and materiality of their anticipated testimony, and the manner in which they would be inconvenienced, the court denied the discretionary request to transfer venue. The court held, citing the First Department’s decision in Hernandez v Rodriguez, 5 AD3d 269, 269-270 [1st Dept 2004], that such a showing was an essential prerequisite to change venue based on inconvenience to witnesses. Fatal to the Defendants’ motion with respect to the inconvenience of witnesses was that there was no evidence in the record that Defendants had ever contacted the witnesses to inquire as to the inconvenience of New York County.

The court’s decision in Faustino v. Amin thus serves as an important reminder to practitioners that parties who conduct business in a far-away county may be required to defend claims there arising out of such business, even if none of the parties or witnesses are residents of that county. To avoid venue based on inconvenience, the movant must offer detailed and compelling proof based on first-hand contact with potential witnesses.

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Generally speaking, most people want to avoid becoming entangled in litigation.  But what happens when an action is pending and, although your client is not a party, his or her interests may be adversely affected?  Move to intervene.

Intervention is a procedure whereby an outsider can become a party to a pending action on its own initiative.  Intervention is sometimes available as of right (see CPLR 1012), sometimes only in the court’s discretion (see CPLR 1013), but it must be brought by motion in all instances, accompanied by a proposed pleading setting forth the claim or defense for which intervention is sought (see CPLR 1014).

The Appellate Division, Second Department recently reiterated the principles governing motions for leave to intervene in Roman Catholic Diocese of Brooklyn, N.Y. v Christ the King Regional High Sch, 2018 NY Slip Op 06131.  In that case, the plaintiff agreed to convey title to a parcel of property to the defendant on the condition that the premises would not be used for any purpose other than for the operation of a Catholic high school.  But in 2002, the defendant leased a portion of the premises to a non-party (“Non-Party 1”), which, in 2013, sublet a portion of the premises to another non-party (“Non-Party 2”), who used the leased portion to operate a charter middle school.

The plaintiff sued the defendant seeking, among other things, an injunction prohibiting the defendant from using any portion of the property as a charter school.  After the plaintiff was awarded partial summary judgment, both non-parties (the “Non-Parties”) moved to intervene as defendants in the action.  The Commercial Division in Queens County (Hon. Marguerite A. Grays) denied the Non-Parties’ motions.

The Appellate Division, Second Department reversed, reasoning that the Non-Parties each “have a real and substantial interest in the outcome of the litigation and that, although their respective interests are aligned with those of [the defendant] and with each other, [the defendant] cannot fully represent those interests.”  The Court noted that although neither of the Non-Parties would be bound by a judgment in the action, if the plaintiff prevailed, the defendant would be forced to break its lease with Non-Party 1, which in turn would be forced to break its sublease with Non-Party 2.  The Court concluded that the Non-Parties should have been allowed to intervene under these circumstances.

So, if your client has a dog in someone else’s fight and wants to intervene, under which CPLR provision should you move? CPLR 1012 specifies three narrow grounds for intervention as a matter of right: (1)  where a statute expressly confers such right; (2) where the person seeking to intervene “is or may be bound by the judgment” and where representation of the person’s interest “is or may be inadequate”; and (3) when an action concerns property in which a nonparty has an interest and the nonparty may be adversely affected by the judgment.  By contrast, CPLR 1013 allows for intervention in the court’s discretion (i.e., permissive intervention), thereby providing an additional or alternative ground for intervention based simply on a showing that the intervenor’s claim or defense shares a common question of law or fact with a claim or defense in the pending action.

But, whether intervention is sought as a matter of right under CPLR 1012, or as a matter of discretion under CPLR 1013 is of “little practical significance” because intervention will be permitted where, as in the case above, the intervenor has “a real and substantial interest in the outcome of the proceedings.”

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Over the past year or so, we have made a point of highlighting in the “Check the Rules” series on this blog periodic updates to the individual practice rules of certain Commercial Division Justices, including Justice Eileen Bransten in New York County (twice, in fact), Justices Marguerite A. Grays and Leonard Livote in Queens County, and Justice Sylvia G. Ash in Kings County.

Continuing with this theme of local-rule vigilance, Commercial Division practitioners should take note some recent changes to the individual practice rules of Manhattan Commercial Division Justice O. Peter Sherwood.

Justice Sherwood’s Practices for Part 49, which were revised as of this month, provide some notable additions (and omissions) from his prior rules, which dated back to May 2014 before most of the Commercial Division Advisory Council’s new-rule proposals and amendments were adopted and implemented.

Be Prepared, Be Authorized. Justice Sherwood opens his practice rules with an express and emphatic reminder to attorneys practicing in his Part of the requirements under Rule 1 of the Commercial Division Rules that “counsel . . . must be fully familiar with the case . . . and fully authorized to enter into agreements, both substantive and procedural, on behalf of their clients.” In other words, appearing in Part 49 is no “cattle-call.” Attorneys should have factual command of their cases, as well as the requisite authority to bind their clients.

Separate and Describe Your Exhibits. Justice Sherwood now requires attorneys practicing in his Part who wish to annex exhibits to their correspondence or motion papers to separately e-file their exhibits and designate them with a “descriptive title.” In other words, a simple designation of “Exhibit A” won’t cut it. Attorneys must provide a description (e.g. “Operating Agreement, dated as of September 20, 2018”) so that adversaries and court personnel viewing the docket or other notice of filing can immediately understand what has been filed.

Get Advance Permission to Adjourn Appearances. Justice Sherwood now requires that requests for adjournment be submitted a full two business days in advance of the scheduled appearance. Justice Sherwood conferences his cases on Tuesdays, so that means attorneys must get their requests for adjournment in by no later than Thursday of the prior week.

Check Your E-Mail. Justice Sherwood’s new rules provide that the court may choose to communicate with counsel via e-mail “regarding scheduling matters or to make certain inquiries.” Note, however, that this line of communication only goes one way. It does not mean that attorneys practicing in Part 49 may “initiate communication with the court via email” or “use e-mail to make arguments.”

Complete Party Discovery Before Bothering Non-Parties. Justice Sherwood “strongly encourages” attorneys practicing in his Part to “attempt to confine their requests to parties to the action and resort to third-party disclosure only when it reasonably appears that the information being sought is otherwise unavailable.” Justice Sherwood also requires that all non-party subpoenas be “simultaneously served” on all parties, and that all documents and information produced in response be exchanged among all parties within five days of receipt.

Follow Instructions When Seeking to File Under Seal. Justice Sherwood’s updated practice rules provide specific instructions concerning the filing of documents under seal:

  • Applications to file under seal must be made by Order to Show Cause, which must be preceded by a meet-and-confer regarding the documents proposed for seal.
  • Motions will be considered in light of the limitations imposed under applicable case law, and the movant must propose redactions “as opposed to wholesale sealing.”
  • Any document proposed for seal must be filed in its original, un-redacted form as an exhibit, with the proposed redacted version filed “as a subset of that exhibit.”
  • All motions must be accompanied by a joint index of the documents proposed for seal, including the basis for sealing and any objection thereto.

Finally, as for notable omissions, Justice Sherwood appears to have dispensed with his former requirement – which, as far as I’m aware, was entirely unique to his Part – that  motion submissions also be provided to the court “in .rtf format on a computer disk.”

**Nota Bene** – Attention Kings County Commercial Division practitioners: How much is your case worth? The general practice rules for the Kings County Commercial Division also were updated this month to double the monetary threshold from $75,000 to $150,000.

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In Miller v. Brunner, the Appellate Division, Second Department spoke clearly (again) about how to move to dismiss on the defense of release.  In a case arising out of the Commercial Division in Kings County (Hon. Sylvia G. Ash), a question on appeal was whether the defense of release is considered “documentary evidence” under CPLR 3211(a)(1) or instead a motion that should be brought under CPLR 3211(a)(5).  The latter, of course, outlines a list of affirmative defenses, including release.  So in defending an action you believe is barred the release, under which section of 3211 do you move?  Either.

The case arose out of a contractual arrangement between plaintiffs and defendants entered in 2014, which restructured a previous agreement relating to development rights of property located in Greenpoint.  Later that year, plaintiffs lent defendants $4.7 million used as collateral for the issuance of three letters of credit by a lender.  A dispute arose over the use of the funds for collateral, and the parties agreed to an amount to be repaid by defendants in exchange for a release.  Plaintiffs later sued, alleging a variety of breaches and for a declaratory judgment.  (As an aside, see last week’s blog discussing pleading both breach of contract and declaratory judgment claims simultaneously.)

Defendants moved to dismiss under “CPLR 3211(a)”, claiming the release barred the claims.  In their moving brief, defendants relied specifically on CPLR 3211(a)(1), a defense based upon documentary evidence, and not CPLR 3211(a)(5), “release”.  The reply papers similarly relied on that section alone.  The motion court ultimately denied the motion to dismiss with leave to renew following discovery.  On appeal, plaintiffs argued that defendants’ failure to move under 3211(a)(5) was fatal on the defense of release.  The Appellate Division disagreed, modified the order below, and directed the dismissal of the first cause of action based upon the release.

The Appellate panel reasoned that even if the incorrect ground under 3211(a) is advanced, so long as one of the 3211(a) grounds apply, then dismissal is warranted, no matter how the motion is denominated.  The court “‘may treat the motion as having specified the right ground and grant relief, absent prejudice'”, citing Dean R. Pelton Co. v. Moundsville Shopping Plaza, Inc.  This follows what the Second Department did also in Alvarez v. Amicucci, where the court upheld dismissal based upon a release in a motion filed under CPLR 3211(a)(1), see also Marc v. Middle Country Center School Dist. (release may be raised by 3211(a)(1) or (5)).  For a good discussion of the history, development and application of CPLR 3211(a)(1), including the relation to CPLR 3211(a)(5), Fontanetta v. John Doe is a worthy read.

So, which ground under CPLR 3211(a) should one move under when raising the defense of release?  It appears either will work, but no harm in moving under both, although the more common seems to be 3211(a)(1).