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For those unfamiliar with what today’s young kids are listening to, Aubrey “Drake” Graham is one of the most commercially-successful recording artists of all time, with multiple multiple-platinum records to his credit. For frame of reference, Drake’s recent album “Scorpion,” on its first day of release, was streamed over 300 million times on Apple Music and Spotify alone. In other words, Drake generates enough revenue to rap about his taxes: “Nowadays it’s six-figures when they tax me/ Oh well, guess you lose some and win some, long as the outcome is income.”

Aspire Music Group (“Aspire”) was the fortunate record label with the foresight to enter into an Exclusive Recording Artist Agreement with Drake in 2008, when he was still relatively unknown. In 2009, Aspire provided Drake’s services to a joint venture between Cash Money Records (“Cash Money”) and Dwayne Carter’s (aka rapper “Lil Wayne”) company Young Money Entertainment (“Young Money”), in exchange for a third of net profits from Drake’s albums and a third of the copyrights, and for monthly accounting statements.

The sordid history between Cash Money and Lil Wayne is a story for another blog, but suffice it to say that by 2015, Cash Money’s principals were short on both cash and money. Lil Wayne sued Cash Money and its principals for $51 million in January 2015. Universal Music Group (“Universal”) stepped in. Since its inception in 1998, Universal Music Group (“Universal”) had served as Cash Money’s music distributor. However, as alleged by Aspire, in 2015 Universal advanced large sums of money to Cash Money and agreed to take on certain of Cash Money’s liabilities in exchange for unfettered control over a significant portion of Cash Money’s business operations.

Aspire filed a lawsuit in New York County Supreme Court in April 2017 against Cash Money and its principals, Young Money, and Universal. According to Aspire, Cash Money and Young Money had failed to pay Enough Money to Aspire for Drake-related profits, and Universal was liable as Cash Money’s alter ego.

Universal moved to dismiss, arguing that (i) Universal did not own Cash Money, so could not be its alter ego; (ii) Universal was not alleged to be the alter ego of Young Money and therefore not responsible for Young Money’s actions; (iii) Aspire’s rights are governed by a contract to which Universal was not a party; and (iv) Aspire’s allegations of domination and control are conclusory.

In an Order entered on July 3, 2018, Justice Barry R. Ostrager denied Universal’s motion to dismiss. Although recognizing that New York courts do not apply alter-ego liability on non-owners, the court found that Aspire had sufficiently alleged facts suggesting that Universal had obtained “equitable ownership” over Cash Money. Aspire had alleged that, pursuant to contracts, Universal shared offices with Cash Money, operated its website, intermingled its business affairs, and kept Cash Money undercapitalized and entirely dependent on advances and direct payments from Universal. Citing the First Department’s 2000 decision in Trans. International Corp. v. Clear View Technologies, Ltd., the court found that such allegations were sufficient to confer equitable ownership, and thus alter-ego liability, on a non-owner.

It is not clear that the Clear View Technologies decision involved a non-owner, non-director defendant. In its reply brief, Universal cited allegations in the complaint that “each invidividual defendant is and at all relevant times, was an officer, director and shareholder of Clear View.” After acknowledging a long line of New York decisions declining to impose alter ego liability against non-owners, Justice Ostrager concluded that such liability was nonetheless permitted under New York law. However, the court cited only federal cases from the Second Circuit in support.

As for Universal’s other arguments, the court held that Cash Money was liable for Young Money’s acts in furtherance of their joint venture partnership, and therefore Universal need not be alleged to be Young Money’s alter-ego. And Universal’s absence from Aspire’s contract with the joint venture was irrelevant, because Universal did not become Cash Money’s alter ego until 2015. Aspire did not know of Universal’s role at the time it entered the contract with Cash Money.

It remains to be seen whether sufficient evidence exists of Universal’s alleged control over Cash Money. Either way, be forewarned: too much contractual control over a borrower can potentially give rise to liability for that borrower’s obligations.

In May 2013, professional golfer Vijay Singh (“Singh”) brought suit against PGA Tour, an organizer of the leading men’s professional golf tours and events in North America, in Vijay Singh v. PGA Tour, Inc. PGA Tour enacted an Anti-Doping Program, which prohibits golfers from using certain substances. The list of prohibited substances was adopted from the list maintained by the World Anti-Doping Agency (“WADA”). A few years after the Anti-Doping Program was enacted, Singh began using a performance-enhancing substance, deer antler spray, for his knee and back problems.

Although Singh tested negative for any banned substance, PGA Tour, which sent the spray for testing, determined that the spray contained prohibited substances. As a result, PGA Tour concluded that Singh violated the Anti-Doping Program and, as a result, suspended him from activities related to PGA Tour’s organization. PGA Tour subsequently dropped its disciplinary action and revoked Singh’s suspension after WADA announced that deer antler spray is not a prohibited substance.

Singh sued PGA Tour in the New York County Commercial Division for, among other things, breach of the implied covenant of good faith and fair dealing, and conversion. Nearly three years later, Singh moved for partial summary judgment on his breach of the implied covenant of good faith and fair dealing cause of action. PGA Tour moved for summary judgment on the causes of action for conversion and breach of the implied covenant of good faith and fair dealing.

In May 2017, Justice Eileen Bransten granted in part and denied in part PGA Tour’s motion for summary judgment. She dismissed Singh’s claim for breach of the implied covenant of good faith and fair dealing and denied in part Singh’s motion for partial summary judgment on that claim. The Court determined there were issues of fact regarding whether PGA Tour breached the implied covenant of good faith by failing to consult with the WADA, upon which PGA Tour clearly relied in issuing its list of prohibited substances, prior to suspending Singh. The Court also concluded there were issues of fact pertaining to what, if any, damage Singh suffered as a result of his suspension and PGA Tour’s making public statements regarding his use of the substance. Justice Bransten also dismissed Plaintiff’s cause of action for conversion on the basis that PGA Tour demonstrated compliance with the Anti-Doping Program, thus establishing that PGA Tour was entitled to escrow Plaintiff’s funds from the date of Singh’s alleged violation to the end of his suspension.

Recently, the Appellate Division, First Department affirmed Justice Bransten’s decision. PGA Tour’s motion for summary judgment dismissing Singh’s cause of action for breach of the implied covenant of good faith and fair dealing was denied. The Court held that the determination as to whether PGA Tour exercised discretion “arbitrarily, irrationally or in bad faith by failing to confer with or defer to” the WADA prior to suspending Singh and making public statements regarding his use of the deer antler spray is an issue of fact for the jury to determine. The First Department relied on Dalton v. Educational Testing Serv., which held that “[w]here a contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally.” Indeed, the Court went on to determine that within the obligation to exercise good faith are “promises which a reasonable person in the position of the promisee would be justified in understanding were included.” In that regard, the Court held that issues of fact exist on whether the public statements made by PGA Tour representatives implicating Singh’s substance use were a breach of the implied covenant of good faith and fair dealing, and whether and what damage Singh suffered as a result thereof. The Court also affirmed the earlier decision dismissing the claim to the extent it relied on Singh’s allegation that he was treated differently than other similarly situated professional golfers.

 Commercial Division litigators often hope that mediation will lead to a negotiated settlement, but their expectation – based on their prior experience –  is that it will not.  In this sense, mediation seems to have significant unrealized potential as a settlement tool in the Commercial Division.

 

A new proposal of the ADR Committee of the Commercial Division Advisory Council, put out for public comment on June 22nd by OCA, seeks to tap into some of that unrealized potential in a relatively simple way: by encouraging parties to Commercial Division litigation who are going to mediation to select jointly their preferred mediator.  Could this simple idea make a difference?  Evidence cited by the ADR Committee- both anecdotal and statistical – suggests that mediation is much more likely to be successful when the parties agree on their mediator.

 

In its proposal, the ADR Committee noted that joint selection of a mediator is a factor consistently cited by Bar Associations for enhancing the effectiveness of mediation in Commercial Division cases but noted that because of the current language of Commercial Division Rule 3(a) – that “[a]t any stage of the matter, the court may direct or counsel may seek the appointment of an uncompensated mediator” (emphasis added) – the process of some court annexed mediation programs is for a mediator to be appointed from a roster instead of first giving the parties the opportunity to agree upon their neutral.  The proposal quoted the analysis by the former Co-Chairs of the New York State Bar Association’s Dispute Resolution Section’s Committee on ADR in the Court on the benefit of party-appointed mediators, which explained that historically, settlement rates from the EDNY (67%) and WDNY (72%) mediation programs, which afford the parties the initial opportunity to jointly choose their mediator, are significantly higher than in the New York County Commercial Division (34%) where mediators are selected for the parties by the ADR Coordinator.

 

The ADR Committee proposal would modify Rule 3(a) to include the following sentence: “Counsel are encouraged to work together to select a mediator that is mutually acceptable, and may wish to consult any list of approved neutrals in the county where the case is pending.”  The ADR Committee also pointed out that Nassau and Westchester County Commercial Divisions currently give parties five business days to attempt to agree on a mediator before the process of appointment reverts to the court and suggested that including such a time period in Rule 3(a) “would be optimal.”  Recognizing that there are local rules governing ADR administration, the ADR Committee further recommended that instead of proposing an immediate change to the Commercial Division Rules, OCA and the Statewide ADR Coordinator consult with the ADR Administrators in each Commercial Division location to determine whether their ADR Rules can be revised to include an initial five-day period for the parties to jointly select a mediator.

 

For those interested, the public comment period is open until August 20, 2018, and comments are to either be: emailed to rulescomments@nycourts.gov; or sent to John W. McConnel, Esq., Counsel, Office of Court Administration, 25 Beaver Street, 11th Fl., New York, New York 10004.

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Several weeks ago we remarked on the Commercial Division’s renowned efficiency and innovativeness when it comes to proposing and adopting new and amended practice rules. But this isn’t the only area in which the Commercial Division is on the cutting edge of innovation.

Last week, members of the Commercial and Federal Litigation Section’s Committee on the Commercial Division, along with Westchester County Commercial Division Justices Linda S. Jamieson and Gretchen Walsh, presented a CLE program entitled “21st Century Courtroom: Using Integrated Courtroom Technology in the Commercial Division.” The program featured a mock traverse hearing during which the participating judges, lawyers, and witnesses showcased in “how-to” fashion the newly-implemented Integrated Courtroom Technology (ICT) in the Commercial Division courtroom, Courtroom 105, located in the Westchester County Courthouse Annex in White Plains.

As described in a recent NYSBA Journal article co-written by former Westchester County Commercial Division Justice Alan D. Scheinkman, in January of this year, the Westchester Commercial Division became the first civil court in the state to implement ICT, “enabling all courtroom participants – judges, clerks, attorneys, litigants, witnesses, jurors, and members of the public – to take fullest advantage of modern evidence presentation systems.” The stated goal of the ICT initiative “was to obtain the latest and best courtroom technology and to tailor it to fit the needs of the Commercial Division.”

Some of the hi-tech features showcased during last week’s mock hearing included:

  • High definition monitors for the bench, counsel tables, witnesses, jurors, and the gallery, which are controlled by the judge or clerk in terms of what is displayed, when, and on which monitors.
  • An “ELMO” document camera, fixed at the podium, which can be used to display evidence on all courtroom monitors.
  • Touch-screen witness monitors, on which witnesses can annotate evidence using their finger or a stylus.  Annotated evidence can then be captured, saved, and printed for consideration by the judge and/or jury.
  • Courtroom cameras, one facing the bench and another facing counsel tables and the gallery, can be utilized for remote appearances via Skype or other video-conferencing technologies.
  • Enhanced audio-conferencing integrated into the courtroom’s sound system, complete with a “white noise” function allowing for confidential, side-bar communications between attorney and client or attorney and judge.
  • Real-time transcription of court proceedings, which can be displayed on all courtroom monitors.
  • Charging stations available at counsel tables with standard AC outlets and wireless charging for compatible smart phones and tablets.

As advised by Justice Jamieson at the outset of the program, counsel need only bring with them to court their laptop or tablet, a USB flash drive, and their own HDMI cable.  Counsel must also schedule a dry-run and equipment test in advance of the proceedings to ensure compatibility and that everything is in working order.  In short, gone are the days of hauling in banker’s boxes of trial exhibits and binders duplicated multiple times over for the judge, witnesses, and opposing counsel — at least in the Westchester County Commercial Division.

Attention all current and future Westchester County Commercial Division practitioners: If you missed the program last week but want to familiarize yourself with the ICT features in Courtroom 105 in preparation for appearing before Justices Jamieson or Walsh, never fear. The Commercial and Federal Litigation Section’s Committee on Continuing Legal Education was on hand to film the presentation, which will be spliced and packaged for distribution on NYSBA’s “CLE Online and On-Demand” site later this year.

Failure to raise an issue at the trial court level is generally considered a waiver of that issue on appeal.  Notwithstanding, state courts recognize certain circumstances when raising an issue for the first time on appeal does not prejudice the adversary because the legal issue is “apparent on the face of the record.”  26th LS Series Ltd. v. Brooks.   Some defenses may be raised even though not raised below, such as where a contract is void against public policy, see 159 MP Corp. v. Redbridge Bedford, LLC.   There are others.  For example, the Second Department in Franklin v. Hafftka held that an issue of whether fiduciary tolling applied in that action could nevertheless be reached by the appellate court “since it involves a question of law which appears on the face of the record and which could not have been avoided”.  Similarly, in Glasheen v. Long Island Diagnostic Imaging, the Appellate Division there held that an issue of “proximate cause” under the circumstances of that case presented an unavoidable issue of law that could be raised even though not preserved.

Recently, the First Department considered an appeal from a Commercial Division order and had to determine whether the doctrine of in pari delicto is one of those defenses that could be raised on appeal even though not raised below.  The answer?  Yes.

In  Matter of Wimbledon Fin. Master Fund, Ltd. v. Wimbledon Fund SPC the court affirmed Justice Shirley Werner Kornreich’s decision denying the respondent’s motion to dismiss a petition to set aside a fraudulent conveyance.  Justice Kornreich ordered respondent to pay $700,000, plus attorney’s fees.  Many issues were presented on appeal.  Of note, however, was the one defense that was not raised below:  in pari delicto.  Recognizing that in pari delicto is a defense grounded in “unclean hands” the appellate panel concluded that indeed, this is one of those defenses that may be raised for the very first time on appeal.  However, in that case, the court considered the defense but ultimately concluded that the defense does not apply to a fraudulent conveyance claim.

Preservation of issues for appeal can be a minefield for the appellate practitioner.  If on appeal, you are faced with the “it wasn’t preserved below” argument, consider whether the issue (i) presents a legal issue “apparent on the face of the record”, (ii) is an “unavoidable issue of law” presented by the record, or (iii) falls within those categories of defenses that the courts have recognized cannot be waived (e.g., public policy, unclean hands, to name a few).

 

 

On June 5, 2018, in RKA Film Financing, LLC v. Kavanaugh et al., the First Department unanimously affirmed the Supreme Court, New York County’s decision absolving the United States Secretary of the Treasury, Steven Mnuchin, of fraud claims brought by RKA Film Financing LLC (“RKA”), a media financing company.

By way of background, in 2014, RKA, a media financing company, lent money to Relativity, a global media company. RKA alleged that it was misled into believing that it was investing in a low-risk lending facility and that the funds would be used for print and advertising expenses related to the release of motion picture films by special purpose entities (“SPE”). Specifically, RKA alleged that certain representatives of Relativity caused certain SPEs to enter into a print and advertising funding agreement with RKA (“Funding Agreement”). RKA alleged that the Funding Agreement contained misrepresentations, including that the funds would be used for print and advertising expenses for specific movies, to induce RKA to invest large sums of money. However, unbeknownst to RKA, Relativity used the funds to pay for general corporate expenses.

Mnuchin joined Relativity’s board as a non-executive director and chairman in October of 2014 after his private investment firm invested $104 million in Relativity. Mnuchin also served as the CEO and Chairman of OneWest, a commercial lender that lent millions to Relativity. RKA alleged that by way of Mnuchin’s position at OneWest, he was privy to the “inner-workings” of Relativity’s finances.

On April 10, 2015, in response to RKA’s request, members of Relativity informed RKA that only “$1.7 million had actually been spent” on print and advertising. On April 13, 2015, Relativity admitted that it misappropriated RKA’s funds.

Mnuchin, who did not participate in the execution or performance of the Funding Agreement, resigned from the Relativity board on May 29, 2015. Thereafter, on May 30, 2015, after Relativity defaulted on a loan from OneWest, Mnuchin began seizing $50 million from Relativity’s account to recoup OneWest’s loan.

RKA commenced suit against several defendants, including Mnuchin, alleging that they misled RKA into lending Relativity millions of dollars for print and advertising of major movie releases. Mnuchin moved to dismiss. The Supreme Court, New York County dismissed RKA’s claims against Mnuchin.

The Court held that RKA failed to establish its claim for fraud because “absent substantive allegations that Mnuchin was responsible for, aware of, or participated in the purported fraud surrounding the Funding Agreement, liability cannot attach.” Specifically, a plaintiff seeking to recover for fraud must “set forth specific and detailed factual allegations that the defendant personally participated in, or had knowledge of any alleged fraud.” To allege a cause of action for fraud, a plaintiff must also establish causation, showing that “defendant’s misrepresentations were the direct and proximate cause of the claimed losses.” Accordingly, Justice Charles E. Ramos concluded that despite allegations that Mnuchin had inside access to the way in which Relativity used the funds, that was insufficient to establish fraud absent evidence of representations made by Mnuchin.

Similarly, Justice Ramos held that RKA’s negligent misrepresentation claim fails because of an absence of a privity-like relationship between Mnuchin and RKA. To plead a claim for negligent misrepresentation, a plaintiff must show: “(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on such information.” In that regard, the Court also held that RKA failed to allege a relationship between RKA and Mnuchin or that Mnuchin owes a fiduciary duty to RKA.

Finally, Justice Ramos dismissed RKA’s fraudulent inducement claim because it was impossible for Mnuchin to have fraudulently induced RKA to enter into the Funding Agreement, as he had not joined Relativity’s board until months after RKA and Relativity entered into their agreement. To prevail on a fraudulent inducement claim, a plaintiff must establish: 1) a misrepresentation of material fact, 2) known to be false, 3) made with the intention of inducing reliance, 4) that is justifiably relied upon, and 5) results in damages. In light of that, Justice Ramos further held that the Complaint was silent as to any allegations that Mnuchin was involved in the execution of the Funding Agreement or made any representations to RKA.

The First Department came to the same conclusions as the lower court.

First, the Court held that the allegations that the board of directors of Relativity was involved in the financial transactions and the daily operations of the company are not enough to conclude that Mnuchin personally participated in, or had knowledge of, the fraud as a result of his position on Relativity’s board.

Second, the Court determined that the fact that Mnuchin became aware of the fact that RKA’s funds were used for working capital and not solely for print and advertising expenses was insufficient to establish that he was aware that misrepresentations were made by the other defendants or that the other defendants were part of the fraud scheme.

The First Department also affirmed the Supreme Court’s holding that RKA’s negligent misrepresentation claim against Mnuchin was insufficient, because RKA failed to allege any direct contact between Mnuchin and RKA, giving rise to the requisite special relationship.

 

In sum, mere knowledge or awareness of a company’s finances, without more information, is insufficient to establish that a company’s board member is liable for a fraud committed by the company.

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In the opening scene of the 2008 “stoner action comedy” Pineapple Express, as Eddy Grant’s “Electric Avenue” pumps out of the car’s stereo speakers, the film’s protagonist, Dale Denton (Seth Rogen), in various disguises serves subpoenas on unsuspecting defendants. A real-world outtake from this film recently played out in the New York County Supreme Court, Commercial Division, in Lenox NY LLC v. Goldman.

The defendant, James Goldman, was alleged to have defaulted on personal guarantees for the payment of rent due to the plaintiff landlord under two commercial leases. Plaintiff commenced the action by notice of motion for summary judgment pursuant to CPLR § 3213 and attempted to serve the defendant at the Pleasant Valley, New York address listed on the guarantees.

When the process server arrived at the Pleasant Valley address on September 29, 2017, the defendant did not answer the door. “Bill” did. According to the process server’s affidavit of service, “Bill” refused to provide his last name, but claimed to be a “friend” of the defendant. A short, slender middle-aged man whose hair color is best described as “shaved,” little else is known about Bill Doe.

The defendant filed an affidavit stating that he does “not know who ‘Bill Doe’ refers to, but it is certainly not me, a member of my family, nor any of my friends, nor anyone employed by me.” The defendant was “never contacted by a person named ‘Bill’ about this action.”

Was service proper?

CPLR 308(2) provides for service upon “a person of suitable age and discretion at the actual place of business, dwelling place or usual place of abode of the person to be served,” if followed by a mailing and filing of proof of service. A process server’s affidavit which attests to delivery to “a person of suitable age and discretion” is apparently sufficient to make a prima facie showing of proper service. The burden then shifts to the defendant to submit a “sworn denial of receipt of service” that contains “specific facts to rebut the statements in the process server affidavits.” See Indymac Federal Bank FSB v Quattrochi, 99 AD3d 763 (2d Dept 2012). The matter would then be referred for an evidentiary hearing. Id.

Applying this standard, the court (Sherwood, J.) held that the defendant had failed to rebut the process server’s affidavit of service because the defendant’s affidavit did not contain enough factual detail. In addition, the defendant’s affidavit did not address the process server’s affidavit, but instead focused on whether “Bill Doe” had ever forwarded the service to defendant. The final nail in the coffin was the defendant’s assertion that he was not at home on “August 29, 2017” (a month earlier than the process server’s visit).

Many other defendants have met with similar difficulty in refuting a process server’s affidavit. For example, in Indymac, the agent allegedly served with process swore that she did not recall being served and had no record of being served. However, the disorderly records of the agent’s “Subpoena Case Record” book negated her affidavit and no evidentiary hearing was required. The Second Department also took issue with the defendant’s affidavit in C&H Import & Export, Inc. v. MNA Global, Inc., 79 AD 3d 784, for failing to include an affidavit from the individual allegedly served or a denial that the individual was an agent of the defendant. Therefore, be forewarned—absent facts specifically refuting the process server’s affidavit, such efforts are likely to be futile.

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In a recent decision handed down just a couple of days ago, the Appellate Division, First Department affirmed Justice Kornreich’s denial of singer and songwriter Kesha Sebert’s (“Kesha”) motion for leave to file second amended counterclaims, meaning Kesha will not be released from her recording contracts with producer Lukasz Gottwald, also known as Dr. Luke (“Gottwald”), and his former label, Kemosabe Records.

In October 2014, Gottwald sued Kesha in the New York County Commercial Division for, among other things, defamation and breach of contract after the singer accused Gottwald of various forms of abuse.  Kesha asserted several counterclaims.  Nearly three years later, Kesha moved for leave to assert second amended counterclaims seeking, among other things, a declaration terminating the agreements on the grounds of impossibility and impracticability of performance, and on the ground that the agreements violate California Labor Code § 2855, a seven-year rule limiting personal service contracts.

In March 2017, Justice Kornreich of the New York County Commercial Division denied Kesha’s motion for leave to amend, finding that Gottwald’s alleged behavior was foreseeable at the time Kesha entered into the recording agreements. As Justice Kornreich noted “[t]he defense of impossibility or impracticability of performance is applied narrowly and excuses contractual performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible due to an unanticipated event that could not have been foreseen or guarded against in the contract.” Kesha appealed.

The Appellate Division, First Apartment affirmed Justice Kornreich’s decision, holding that Kesha’s counterclaim for a declaration terminating the agreements on the ground of impossibility and impracticability of performance was “speculative” and “contradicted by her own allegations that she had continued performing under the recording agreements.”

The First Department also rejected Kesha’s proposed declaratory judgment counterclaim based on California Labor Code § 2855 because it is barred by the choice of law provisions contained in the recording agreements. Based on the foregoing, the Court agreed with Justice Kornreich, finding Kesha’s proposed amendments were “palpably insufficient and devoid of merit.”

Finally, the First Department upheld Justice Kornreich’s decision compelling Kesha to produce documents held by her public relations firm and former attorney, holding that these communications “do not reflect a discussion of legal strategy relevant to the pending litigation but, rather, a discussion of public relations strategy, and are not protected under the attorney-client privilege.”

 

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Over eighty years after the end of World War II, crimes committed by the Nazis continue to be redressed, including in our very own Commercial Division. The Nazis are well known to have plundered with reckless abandon along the trail of their occupation. Beyond their theft of precious metals and currency, they also stole numerous famous paintings, with Hitler having a particular distaste for modern art, which he deemed “degenerate art.”

The 2014 film, The Monuments Men (starring Matt Damon), tells the story of the efforts of the Monuments, Fine Arts, and Archives program of the Allied armies to protect, and after World War II ended, to recover, cultural monuments, including fine art, plundered by the Nazis. The Monuments Men did not recover every piece of art stolen by the Nazis (the precise scope of their plunder being unknown). But even after their efforts ended, Nazi-looted art works have been returned to their rightful owners, or their heirs, including two in April of this year as a result of a landmark summary judgment decision issued by New York County Commercial Division Justice Charles E. Ramos, applying the Holocaust Expropriated Art Recovery Act.

This week’s post features an even more recent decision of the New York County Commercial Division, in which the court was faced with a motion to dismiss an action brought to recover a very valuable painting by the famous modern Italian, Jewish painter, Amadeo Clemente Modigliani (1884-1920). To set that decision in its proper context, we first need to examine the painting’s history.

The Painting and its History

At issue in Gowen v. Helly Nahmad Gallery, Inc., is the ownership of Modligliani’s “Seated Man with Cane, 1918” (the “Painting”). Oscar Stettiner (“Stettiner”), a Jewish art dealer who lived and worked in Paris during the 1930s, originally owned the Painting as part of his private collection. As the Nazi’s approached France in 1939, Stettiner was forced to flee Paris, leaving behind the Painting.

After being taken by the Nazi’s upon their occupation of France, the Painting was assigned to a Temporary Administrator and eventually auctioned off in July of 1944. Although this and all other forced sales of property by the Nazis were declared null and void in 1946, and despite Stettiner obtaining an order from the French courts in July of 1946 granting the Painting’s return to him, Stettiner and his family were unable to locate the painting prior to his death in 1948. Stettiner’s wife and two children were thereafter unable to locate the Painting despite continued efforts.

In 1996, the Painting finally resurfaced when it was misidentified as being a different painting and as having an owner other than Stettiner, when it sold at a Christie’s London auction for $3.2 million to the defendant, International Art Center, S. A. (“IAC”). In 2008, IAC attempted unsuccessfully to sell the Painting at Soethby’s New York. In 2011, Stettiner’s sole heir, Phillippe Maestracci, sent two lawyer’s letters to the defendants demanding the return of the Painting (the “Demand Letters”). The defendants never responded. The present action, seeking a declaration as to title of the Painting and asserting claims for conversion and replevin of the Painting, was commenced by George Gowen, as the Ancillary Administrator of Stettiner’s estate.

The Motion Before the Court

In a wide-ranging, eleven-part decision, Justice Eileen Bransten denied the defendants’ motion to dismiss on each of the grounds asserted: CPLR §§ 3211 (a) (1), (a) (2), (a) (3), (a) (4), (a) (5), (a) (7), (a) (8), (a) (10), 327, 1001, 1003, 3025, and 306-b.

The Court’s Personal Jurisdiction and Alter Ego Analysis

Though any one of the asserted grounds for dismissal could warrant a post on this blog, of particular interest is the court’s personal jurisdiction analysis regarding defendant David Nahmad (“Nahmad”), the billionaire patriarch of an internationally recognized art-dealing family. Specifically, the plaintiff relied on the difficult-to-establish alter ego theory; namely that Nahmad is the alter ego of IAC. In their motion to dismiss, IAC and Nahmad argued that neither is a resident or domiciliary of New York and that neither has conducted business in New York.

In analyzing the alter ego theory, the court first addressed its personal jurisdiction over IAC, a Panamanian corporation (that found itself in the Panama Papers leaks). The court held two such grounds existed. First, the court held that IAC had transacted business in New York by and through the acts of its agents, defendants Helly Nahmad (the son of David Nahmad, who pleaded guilty in 2013 to operating an illegal gambling ring) and Helly Nahmad Gallery (his famous eponymous New York City art gallery), who allegedly sold art to which IAC holds title. Second, the court held that IAC had committed tortious conduct in New York because a cause of action sounding in tort arose under New York law when Maestracci sent the Demand letters (see Solomon R. Guggenheim Foundation v Lubell, 77 NY2d 311, 316-317 [1991]).

The court then held that it acquired personal jurisdiction over Nahmad “by and through his conducting business vis-à-vis Defendant IAC and, in so doing, so perverting the corporate form such that this court cannot determine a substantial difference between the two Defendants.”  That is, the court held that Nahmad was the alter ego of IAC. In support of this holding, the court listed various factual allegations, a number of which were supported by documentary evidence, including:

  • that Nahmad is the principal of IAC;
  • that Nahmad holds all of IAC’s shares of stock;
  • that IAC was formed by a Panamanian law firm that has “garnered a reputation for creating ‘shell companies’”;
  • that Nahmad used IAC to conceal his name, and thus the owner of the Painting, to perpetuate a wrong (this allegation was supported by a New York Times article quoting Nahmad himself as saying “the International Art Center is me personally. . . . it’s David Nahmad”);
  • that IAC fails to adhere to corporate formalities such as keeping regular books and records, fails to generate income, and does not have an independent board of directors; and
  • that IAC is underfunded such that Plaintiff would not be able to recover reasonable costs if successful on its claim.

Take Away 

Aside from the fascinating history involved, this decision is particularly beneficial because it offers a specific list of factual allegations supporting a finding of the alter ego theory, a potentially powerful tool for plaintiffs that courts infrequently apply.

Interesting Side Note: On May 13, 2018, a separate Modigliani, the 1917 painting, “Nu Couché (Sur Le Côté Gauche), sold for $157.2 million with fees, making it the highest auction price ever for a work sold at Sotheby’s.

The New York Commercial Division was founded in 1993 “to test whether it would be possible, by concentrating on commercial litigation, to improve the efficiency with which such matters were addressed by the court and, at the same time, to enhance the quality of judicial treatment of those cases.” Among other things, its continual adoption of innovative new rules and amendments to existing rules has elevated the Commercial Division to being one of the world’s most efficient venues for the resolution of commercial disputes.

In our last installment of this blog’s Check the Rules series, we looked at the Commercial Division Advisory Council’s proposed amendment to Commercial Division Rule 17 concerning length of papers, along with some recent support from Commercial Division judges, including Justice Saliann Scarpulla of the Manhattan Commercial Division, whose decisions have taken lawyers to task for being long-winded.

It turns out that Justice Scarpulla also is an advocate of the efficiency associated with pretrial evidentiary hearings and immediate trials on material issues of fact under CPLR §§ 2218, 3211 (c), and 3212 (c), which, according to the Advisory Council in a recent new-rule proposal, are “significantly underutilized” and provide “yet another tool to help efficiently dispose of commercial disputes.”

Under the Advisory Council’s proposed new Rule 9-a, which essentially reinforces a court’s existing authority under the aforementioned CPLR provisions to direct evidentiary hearings, “parties are encouraged to demonstrate on a motion to the court when a pre-trial evidentiary hearing or immediate trial may be effective in resolving a factual issue sufficient to effect the disposition of a material fact of the case.” The proposed rule sets forth specific examples of such motions, including dispositive motions to dismiss and for summary judgment; preliminary-injunction motions; spoliation of evidence motions; jurisdictional motions; statute of limitations motions; and class action certification motions.

The idea behind proposed new Rule 9-a is to “expedite and streamline . . . questions of improper notice or other jurisdictional defects or dispositive defenses,” so as to avoid the kind of “litigation [that] continues for years through extensive discovery and other proceedings until trial where the fact issue is finally adjudicated and the case is resolved in a way that it might have been years ago.” In short, the proposed rule “is designed to reduce the waste of time and money which such situations create.”

As noted above, based on a couple recent decisions, it would appear that Manhattan Commercial Division Justice Saliann Scarpulla is on board with proposed Rule 9-a.

In January of this year, before Rule 9-a had even been proposed, Justice Scarpulla granted summary judgment for the plaintiff on a claim for breach of contract in a case called Seiko Iron Works, Inc. v Triton Bldrs. Inc. But because she was unable to “determine the total amount of damages to which [plaintiff w]as entitled based on the papers submitted,” Justice Scarpulla exercised her discretion under CPLR 3212 (c) to direct an evidentiary hearing on the material damages issues raised by the plaintiff’s dispositive motion.

Earlier this month, Justice Scarpulla expressly cited proposed Rule 9-a in a footnote to her post-hearing decision in Overtime Partners, Inc. v 320 W. 31st Assoc., LLC, a commercial landlord-tenant action seeking injunctive relief concerning the acceptance of a proposed sublessee under a master lease. After the tenant commenced the action by order to show cause, Justice Scarpulla “ordered a factual hearing to determine whether [the landlord] unreasonably withheld and delayed consent” to the proposed sublease. Citing CPLR 3212 (c) and footnoting proposed Rule 9-a, Justice Scarpulla expressly referenced her discretion thereunder to “order an immediate trial of an issue of fact raised by a motion when appropriate for the expeditious disposition of the controversy.”

Thus, it seems proposed Rule 9-a already is alive and well in the Manhattan Commercial Division, at least in spirit.  Look for its formal adoption in the near future.

As with all new-rule or rule-change proposals, anyone interested in commenting on proposed new Rule 9-a may do so by sending or emailing their comments to John W. McConnell, Esq. (rulecomments@nycourts.gov), Counsel, Office of Court Administration, 25 Beaver Street, 11th Floor, New York, NY 10004.