Commercial leases are not all boilerplate.  The nature and sophistication of the business or industry of the tenant can lead to lease terms, addenda, riders and exhibits that are complicated and in some cases contain what the parties believe to be sensitive or confidential information not for public consumption.  When a dispute arises between the landlord and tenant that lands in court, are these lease terms and conditions something the parties can shield from the public?  What if both agree the terms should be sealed from the public?

In New York, Judiciary Law § 4 makes clear that judicial proceedings “shall be public.”  That statutory mandate is grounded in the public’s First Amendment right of access to court records, Danco Laboratories, Ltd. v. Chemical Works of Gedeon Richter, Ltd.  In civil cases, Uniform Rules for Trial Courts, section 216.1, empowers the courts to seal documents, but only upon a showing of “good cause.”  A good resource for the standard applied and the mechanics of sealing in both civil and criminal proceedings is found in a guidance memo issued by the Office of Court Administration.   Indeed, earlier this year, we wrote about a decision rendered by Justice Andrea Masley in a breach of contract case where she sealed certain documents, finding good cause existed.  In that case, the motion to seal was opposed.

Now, six months later,  in an unrelated case Coresite 32 Ave. of the Americas LLC v. 32 Sixth Ave. Co. LLC, she was faced with yet another application to seal.  This time, however, the motion was unopposed.  Should that matter?  Not at all — the court must still make findings of good cause, and the application must be supported by an affidavit explaining why sealing is justified.

The case involved a dispute between a landlord and its tenant, CoreSite, which is a high-performance data center.  Notwithstanding that the parties agreed which terms and conditions of the lease should be filed under seal, the court, as it had to, engaged in the analysis of whether good cause existed.  So, what exactly did the court consider persuasive to show good cause to seal?  Recognizing that courts have sealed records in business disputes where trade secrets were involved or when disclosure could pose a threat to a competitive advantage, that’s precisely what was found here.  CoreSite’s competitive advantage would be threatened if the financial terms were not sealed.  CoreSite’s competitors could use the information contained in the financial provisions of the lease to undermine CoreSite.  In addition, the Court made a specific finding that building safety and security could be compromised by disclosure of equipment, access pints, floor plans and locations.

The takeaway?  Consider what you’re filing when it comes to business records and whether such a 216.1 application should be made.  Good cause can exist to seal beyond the classic “trade secrets”.  And even if all sides agree that sealing is warranted, a detailed showing must be made to the court as to “why” to overcome the presumption of public access to court records.

 

Lawyers often get phone calls from prospective clients seeking guidance on various issues – general legal inquiries, asking a variety of general questions about laws, codes, regulations, and statutes, or questions concerning a pending or anticipated litigation. But a brief introductory conversation with a prospective client regarding an issue cannot disqualify the attorney from representing another party in that litigation. Or can it? Stay tuned to see how Justice Andrea Masley recently ruled on this very issue.

In Pizzarotti, LLC v FPG Maiden Lane, LLC et al., plaintiff entered into an agreement with Fortis pursuant to which plaintiff would perform certain construction management services for Fortis for the construction of a high-rise residential building.  Due to plaintiff’s concerns for the safety of the property and for people, Plaintiff stopped performing certain work at the project and commenced an action against Fortis seeking 1) a declaratory judgment that it property terminated its agreement with Fortis; 2) to enjoin Fortis from using plaintiff’s subcontractors or equipment and indemnify plaintiff; 3) damages for breach of contract for payments due under the agreement; 4) fair compensation for additional work; 5) damages for breach of contract by Fortis’ interference with plaintiff’s performance, and relationship; 6) judgment on its lien; and 7) damages for wrongful termination.

Plaintiff moved pursuant to 22 NYCRR § 1200.00, Rules of Professional Conduct 1.18 to disqualify defendant’s counsel, Herrick Feinstein LLP (“Herrick”) based upon the fact that plaintiff had an initial consultation with Herrick, which consisted of two brief telephone calls and the exchange of documents, all of which were provided to the defendant by plaintiff .   Rule 1.18, entitled “duties to prospective clients” governs this initial interview process.  New York law requires disqualification for disclosure of information that “embrace[s] substantive issues related to the” action and that was “made in confidence” to facilitate the provision of legal services, as the Court of Appeals long held in Seeley v. Seeley.

By way of background, in March of 2019, the same month that plaintiff commenced suit, plaintiff’s general counsel emailed a Herrick partner to figure out if he can assist on a “legal matter regarding one of [plaintiff’s] projects.”  Notably, in the brief email exchange between plaintiff and the Herrick partner regarding the scheduling of a call, each of the Herrick partner’s emails contained the following legend: “[t]his email does not constitute a zoning opinion of Herrick, Feinstein LLP and should not be relied upon for investment, tax or real estate transaction purposes.”  During the initial introductory call, the Herrick partner and plaintiff briefly discussed a potential encroachment issue at one of plaintiff’s projects.  According to the Affidavit of the Herrick partner, no confidential information was exchanged during the call.

Following the brief introductory call, plaintiff sent the Herrick partner a follow up email containing information pertaining to the project and providing a list of potentially adverse parties so Herrick can run a conflict check. Plaintiff also attached a three page document, which consisted of a letter from plaintiff to defendant, enclosing surveys of the structure.

A further introductory call was held by plaintiff, the Herrick partner, and another Herrick partner, a commercial litigator with construction litigation experience. Both Herrick partners affirmed in affidavits that the only issues discussed during the call were the misalignment condition and encroachment issue, affirming that “claims against Fortis, the lien law, or a dispute with Fortis related to the development project” were not discussed during the call.  Further, despite plaintiff’s allegations that confidential information and documents were provided to the Herrick partners, both partners affirmed that no confidential information was discussed.  Indeed, this was Herrick’s last conversation with plaintiff and plaintiff did not engage Herrick in connection with either the encroachment issue or any other issue.

Months later, Herrick was retained by Fortis. And so, this motion to disqualify ensued.

In her Decision and Order, Justice Masley determined that plaintiff “has a heavy burden of showing that disqualification is warranted.”  Justice Masley determined that the documentary evidence corroborates the Court’s conclusion that plaintiff’s evidence was insufficient to warrant Herrick’s disqualification due to conflict. The Court held that plaintiff failed to establish that Herrick received any confidential information from plaintiff that could be significantly harmful to plaintiff in the pending litigation. In fact, the Court reasoned that the alleged documents that were provided to Herrick were not confidential because they were intended for and sent to Fortis by plaintiff.

The right to counsel is a “valued right and any restrictions must be carefully scrutinized.” Ullmann-Schneider v. Lacher & Lovell-Taylor PC.  “[W]here the rules relating to professional conduct are invoked not at a disciplinary proceeding but in the context of an ongoing lawsuit, disqualification can create a strategic advantage of one party over another” (id.).  As such, there is fear that parties will use disqualification as a litigation tactic.  As a result, the party seeking to disqualify counsel must meet a heavy burden to justify counsel’s disqualification.  Here, plaintiff did not meet its burden.

A class must satisfy the following prerequisites in order to be certified to proceed in the form of a class action: numerosity, commonality, typicality, adequacy and it must be demonstrated that a class action is superior to other available methods for adjudication of the controversy (see CPLR 901).

New York County Commercial Division Judge Ostrager recently reinforced the importance of the fourth requirement: Adequacy in the Matter of Xerox Corporation of Consolidated Shareholder Litigation. CPLR 901(a)(4) requires that “the representative parties will fairly and adequately protect the interests of the class.”

You may think, but wait a minute, wouldn’t the very nature of being a class representative compel the representative to act fairly to protect the interests of the class because he or she is in fact a class member that shares in the same injuries alleged by the class? Matter of Xerox Corporation of Consolidated Shareholder Litigation provides a reality check to those of us who are hopeless optimists while also exhibiting how the New York Commercial Division got involved to protect the interests of an entire class—while simultaneously blocking Xerox’s merger with Fujifilm.

Four putative class actions were consolidated, each of which sought to enjoin the Board of Directors of Fujifilm from entering into a transaction with Xerox that would, among other things, make Fujifilm a 50.1% owner of Xerox (the “Transaction”). In addition to the consolidated class actions, Mr. Darwin Deason, the second largest individual shareholder of Xerox, also initiated an action to enjoin the Transaction. The first largest individual shareholder of Xerox, Queens-native Mr. Carl Icahn, soon joined Deason’s position.

Judge Ostrager presided over three motions filed by counsel for the purported class: a motion to certify the class and appointment of class representatives, approval of a class settlement, and an award of attorneys’ fees of $7.5 million.

Following an evidentiary hearing, Judge Ostrager determined that the Xerox Board of Directors and its CEO, Jeff Jacobson, had breached their fiduciary duties in agreeing to the proposed Transaction with Fujifilm. After the decision, the Court was advised in open Court by counsel for one of the plaintiffs of a potential settlement between plaintiffs and Xerox. The Court was presented with a fully executed Memorandum of Understanding between the putative class plaintiffs, Darwin Deason and Xerox and was asked to approve a stipulation of discontinuance of the action initiated by Deason as well as the class actions.

In a nutshell, Deason sought to be appointed the class representative of the four class actions and to have the Court approve a settlement that he had allegedly negotiated on both his, and the purported class’ behalf. However, the Court declined to certify the class and to appoint Deason the class representative because Judge Ostrager determined Deason was not acting in the class’ best interest and that the record was devoid of CPLR 901(a)(4)’s requirement that “the representative parties will fairly and adequately protect the interests of the class.”

In a powerfully worded decision, Judge Ostrager reasoned that pursuant to the Memorandum of Understanding, Deason bound a class, that had not been certified, to major corporate actions such as requiring the resignation of a significant number of the Board of Directors, yet providing broad releases for these individuals which effectively shielded the directors from any potential liability for the claims of breach of fiduciary duties.

Judge Ostrager went on to reason that “the Court must consider whether the proposed settlement is in the best interests of the putative class as a while, and whether the settlement is in the best interest of the corporation.” See Gordon v. Verizon Communications, Inc., 148 Ad3d 146 (1st Dept. 2017).

Applying this test, the Court determined that the proposed settlement was not in the best interests of the shareholders “as it achieves no material benefit for shareholders other than Deason and Ichan. On the contrary, the proposed settlement releases any claims the shareholders may have concerning the change of control orchestrated by Deason and Ichan.” “The purported class members will ‘get’ no financial benefit, and they are being asked to ‘give’ broad releases of any derivative claims they may have . . . at a time when this Court held the directors to be faithless fiduciaries, largely in exchange for fees to the purported class counsel of $7.5 million.”

Judge Ostrager ultimately found that the “net result of the actions of the purported class representative and purported class counsel was to transfer control of a public corporation to Mr. Deason and Ichan via a private agreement that offered no tangible benefit to the interests of the class.” As a result, he disapproved the settlement, Deason and Ichan’s requests to be appointed class representatives and denied their counsel the $7.5 million attorneys fees they sought.

While this lawsuit had all the makings of a major motion pictures—money, greed, fame—as we have learned, commercial division practitioners should nevertheless remember that not even these elements will allow a party to skirt around CPLR 901(a)(4)’s requirement of adequate representation.

 

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The Commercial Division Advisory Council (the “Advisory Council”) has proposed three new amendments to the Commercial Division Rules: (1) a proposed amendment to Rule 1, which will allow counsel to participate in court conferences remotely, via Skype or other videoconferencing technology; (2) a proposed amendment to Rule 6, which will require proportionally spaced 12-point serif-type font in papers filed with the court; and (3) a proposed amendment to repeal Rule 23 (also known as, the “60-Day Rule”), which currently requires litigants to notify the court and other parties whenever a motion has not been decided within 60 days of its submission or oral argument.

The Proposed Amendment to Rule 1

The proposed amendment to Rule 1 will permit counsel to participate in court proceedings from remote locations via videoconference.  According to the Advisory Council, the proposed amendment “is consistent with the commercial division’s mission to improve efficiency and productivity, eliminate delays, and provide better service to the public” by, among other things, encouraging the avoidance of wasteful attorney travel.  The new proposed subsection (d) states:

Counsel may request the court’s permission to participate in court conferences and oral arguments of motions from remote locations through use of videoconferences or other technologies. Such requests will be granted in the court’s discretion for good cause shown; however, nothing contained in this subsection (d) is intended to limit any rights which counsel may otherwise have to participate in court proceedings by appearing in person.

The proposed amendment does not require counsel to participate in court proceedings from remote locations, and therefore avoids placing any burden on lawyers who lack the technical resources to participate from remote locations.  Moreover, the proposed amendment is limited to court conferences and oral arguments of motions, and is not intended to address the more complex subject of testimony by witnesses at trials or other evidentiary hearings.

Videoconferencing is not a novel concept in the Commercial Division.  Last year, my colleague Viktoriya Liberchuk reported on Justice Scarpulla’s implementation of videoconferencing technology in her courtroom, including the use of Skype for oral argument and other court conferences.  Videoconferencing is also frequently used in other courts, such as the United States circuit courts, and the First and Second Departments.  For example, the Second Department has installed Skype-equipped large screen computers in both its courtroom and consult room, and has started to use Skype for arguments of appeals and motions.

In fact, a Report of a Survey of Videoconferencing in the Courts of Appeals revealed that the benefits of videoconferencing may outweigh the disadvantages.  In that study, many of the appellate court judges who were interviewed cited the following advantages of videoconferencing:

  • Saves travel time and expense;
  • Allows for scheduling flexibility;
  • Reduces the administrative burden on the courts;
  • Decreases litigation costs;
  • Increases access to courts for marginalized litigants whose in-person appearance might otherwise be prohibitively expensive or constitute a hardship; and
  • Allows the court to make special accommodations for judges who may be ill or unable to travel.

Are there any disadvantages to videoconferencing?  Obviously some technical difficulties may occur.  But even so, technical difficulties are usually minor, easily resolved, and infrequent.  Other disadvantages may include decreased personal interactions and “quality of the argument experience.”  But, the judges who were interviewed indicated no difference in their understanding of the legal issues in arguments that were video conferenced.  In fact, one appellate judge even stated that “Videoconferencing is the wave of the future.”

Videoconferencing may prove to be convenient and cost-efficient for many litigators because it enables lawyers and their clients to save time and money.  In the words of the Advisory Council:

The proposed amendment presents an opportunity for the Commercial Division to continue its innovation and leadership in the smart adoption of technology in aid of the efficient administration of justice. The proposed rule confers sufficient discretion on individual Justices to permit participation in court proceedings from remote locations in a way that makes sense for their particular docket, and is calculated to avoid any burden or prejudice to the few lawyers who might not want to use this technology.

Proposed Amendment to Rule 6

A proposed amendment to Rule 6 of the Commercial Division Rules will require proportionally spaced 12-point serif type font in all papers filed with the court.  Rule 6 currently provides that all papers filed with the court shall comply with CPLR 2101 and 22 NYCRR 202.5(a), contain print no smaller than 12-point font, and footnotes no smaller than 10-point font.  But, like CPLR 2101 and 22 NYCRR 202.5(a), Rule 6 is silent as to the particular style of typeface.

Well, apparently some studies have shown that larger point typeface and use of proportionally spaced serif typeface enhances readability, improves comprehension and retention of long passages of text, and makes it easier for the eye to quickly and easily distinguish letters.  For those unfamiliar with typefaces, Serif typefaces are those that have little extensions, or “serifs” at the ends of the strokes of the letters.  By contrast, “sans-serifs” do not have the added stroke.  Some styles of proportionally spaced serif typeface include: Times New Roman, Century Schoolbook, Georgia, and Bookman.

According to the Advisory Council, larger point font and proportionally-spaced serif typeface “would assist the Commercial Division Justices and their staff in dealing with the arduous task of reading and retaining the content of tens of thousands of pages each year, which presumably would lead to greater efficiency.”

Proposed Amendment to Repeal Rule 23

The last proposed amendment to the Commercial Division Rules seeks to repeal Rule 23 in its entirety.  Rule 23, also known as, the “60-Day Rule,” currently requires movant’s counsel to notify the court and other parties whenever a motion has not been decided within 60 days of its submission or oral argument.  The Advisory Council proposes repealing this rule for three reasons:

  • First, the rule puts attorneys in the difficult and sometimes awkward position of reminding judges of their failure to render a decision and, therefore, is rarely followed;
  • Second, an analogous rule applicable more broadly in the Supreme and County court (see 22 NYCRR 202.8[h]) was rescinded in 2006; and
  • Third, most judges already receive notice of unresolved motions through other channels, such as the Office of Court Administration.

Those who wish to comment on these proposals 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, NY 10004.

Comments to the proposed amendment to Rule 1 must be received by September 30, 2019. Comments to the proposed amendment to Rule 6 must be received by October 25, 2019.  Comments to the proposed amendment to repeal Rule 23 must be received by November 1, 2019.

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As the name and subject matter of this blog would suggest, we here at Farrell Fritz are big fans of the Commercial Division. It’s where we practice. It’s what we know.

After all, we’ve been reporting on decisions coming out the Com Div on this and our other blogs for more than a decade – including in a post from way back in 2008, which urged New York commercial litigators to Get Thee to the Commercial Division!, in large part because of “the business-law expertise of its judges,” and because “the ability to tap such expertise, and to achieve a relatively fast resolution, is particularly useful to business owners.”

Last month, the Commercial Division Advisory Council issued a report entitled The Benefits of the Commercial Division to the State of New York, which, according to the Com Div’s What’s New news feed, explains how “the Commercial Division has made the business litigation process in New York more cost effective, predictable and expeditious, and has thereby provided a more hospitable and attractive environment for business litigation in New York State.”

The Advisory Council’s report, itself, highlights a number of benefits of the Com Div to New York and its business community, including but not limited to attracting and retaining businesses to the state; generating tax revenues; providing jobs; and … wait for it … generating revenue for the NY legal community and its supporting vendors and suppliers.

The report notes how the Com Div promotes efficiency and productivity by reducing the amount of time and resources NY businesses spend on resolving disputes, and – apropos of the case-reporting we do here at New York Commercial Division Practice – how the Com Div benefits the NY business community by “developing a body of New York commercial law which enables businesses to predict the legal consequences of their business decisions and to thereby avoid having to go to court in the first place.”

Business-court benefits such as these have led to widespread expansion of such courts across the United States, Europe, and beyond. The Advisory Council’s report notes that since the inception of such courts in only three U.S. states in the mid-1990’s, more than 25 states now boast specialized business tribunals. Countries like Canada, England, Ireland, France, and the Netherlands have followed suit, generating robust competition at both the national and international level to attract complex commercial litigation and, in turn, revenue-generating businesses to one’s own locale.

According to the Advisory Council, this courtroom competitiveness “confirms the need, importance, and urgency of a thriving Commercial Division within the New York State Court system.” Put another way, “New York needs to compete with these other governmental entities if it is to continue to attract and retain businesses in New York.”

To be sure, we here at Farrell Fritz and New York Commercial Division Practice will continue to do our part in singing the praises and promoting the bona fides of the Commercial Division.  We urge our fellow commercial practitioners to do the same.

And so we say again:  Get thee to the Commercial Division!

Consider this situation: You are a shareholder of a company who is about to enter into a contract with a third party. But you know that this is a bad deal that will negatively impact the company. Your immediate reaction is to stop this deal from materializing because you have a vested interest in the success of this company. But then you take a step back and consider your exposure to liability. Can you be sued based upon a tortious interference with contract claim? Stay tuned to see what transpired when a third party raised an economic interest defense to a claim for allegedly interfering with a contract between two parties.

In GCA Advisors v Onion, a case pending in the Commercial Division, New York County, plaintiff GCA Advisors, LLC (“GCA”), a financial advisor, brought suit against Univision Communications Inc. (“Univision”) for tortious interference with its contract with Onion, Inc. (“The Onion”), a corporation that publishes satirical news articles.

The Onion and GCA entered into an agreement, which terms included that GCA would act as The Onion’s financial advisor in connection with a possible transaction to sell substantially all of its assets or the majority of the shares. In exchange, The Onion would pay GCA a transaction fee for its advisory services, including a base fee of $2,000,000 if a transaction is completed within 12 months of the contract’s termination. GCA alleged that the Onion terminated the Agreement on April 4, 2015. Nine months after the termination, however, Univision acquired a 40.5% interest in The Onion.  GCA alleged that Univision obtained controlling interest in The Onion and decided not to pay the transactional fee to GCA, but rather, to a third party.

GCA commenced suit for 1) breach of contract against The Onion, alleging that it is owed the transaction fee in the amount of $2,000,000 because the transaction consummated, and 2) tortious interference with contract against Univision, alleging that it “knowingly and intentionally” caused The Onion to breach its contractual obligations under the agreement by deciding to pay the transaction fee to a third party instead of GCA.

Univision moved to dismiss the tortious interference claim for failure to state a cause of action, raising its economic interest in the Onion as a defense. Specifically, Univision argued that even if it engaged in the kinds of actions alleged by GCA in its complaint, because it possessed a financial interest in The Onion, as a stockholder, it was justified in intervening with GSA’s contract with The Onion.

The Court held that the economic interest defense applies in cases where “defendants were significant stockholders in the breaching party’s business.”  The Court opined that because Univision, who possesses a 40.5% interest in the Onion, has a significant economic interest in the Onion, it can successfully make out a defense of economic interest for allegedly interfering with the Onion’s obligation to pay GCA.

The Court determined that in order to overcome Univision’s economic interest defense, GCA must “allege facts showing that Univision acted with malice or employed illegal or fraudulent means.” However, Justice Saliann Scarpulla opined that Univision’s alleged interference with the contract fails to exceed a “minimum level of ethical behavior in the marketplace.”  Justice Scarpulla further stated that even if Univision directed The Onion not to pay GCA the transaction fee, “that conduct alone does not amount to malicious or fraudulent conduct.”

In sum, the economic interest defense may permit shareholders to protect their interests even if it means interfering with a contract.

The economic interest defense is a potential defense available to a tortious interference claim when the complaining conduct was done to protect a party’s own “legal or financial stake” in its business.  As the Court of Appeals recognized in White Plains Coat & Apron Co. v. Cintas Corp., the defense can apply in a wide array of situations — beyond merely shareholder status — “where the defendant and breaching party had a parent-subsidiary relationship, where defendant was the breaching party’s creditor, and where the defendant has a managerial contract with the breaching party at the time defendant induced the breach of contract with plaintiff.”

“Sibling relationships are complicated.  All family relationships are.  Look at Hamlet.”  Maurice Saatchi.

 A recent decision in Greenhaus v. Gersh out of the Commercial Division, Suffolk County, is yet another example.  This time, the business is a summer day camp located on the north shore of Long Island in Huntington, New York.  Almost a year to the day following the death of dad — Edward Gersh — two siblings brought a derivative suit against their half-brother Kevin, claiming a variety of misdeeds.  Plaintiffs’ moving papers, reading like a law school exam, sought a bevy of provisional remedies:  receivership, preliminary injunction and pre-judgment attachment and a trial preference under CPLR 3403.   Kevin, in turn, moved for summary judgment to dismiss the complaint in its entirety.  As a threshold argument, he claimed plaintiffs failed to make the required BCL 626(c) demand on the Board and that futility had not been established.  He also challenged each of the claims — unjust enrichment, conversion, constructive trust, fraudulent concealment, “self dealing”, breach of fiduciary duty and an accounting — on the merits and on Statute of Limitations grounds.

   Noting preliminarily that “it is a rare case in which a plaintiff will be permitted to employ more than one provisional remedy”,  Justice Elizabeth H. Emerson ultimately concluded for each that no grounds existed for the extraordinary relief requested.  The complaint seeks essentially money damages, observed the Court, which undermines any claim of “irreparable harm” necessary to support the request for a preliminary injunction.  Similarly, the claim that “it is likely that Kevin is using [corporate] funds” to open new schools outside of New York State, is not enough to warrant attachment or the appointment of a receiver.  “[V]ague and conclusory assertions, without evidentiary facts indicating a fraudulent concealment of assets” simply “raise a suspicion of an intent to defraud”.  They don’t satisfy the burden by “clear and convincing” evidence to justify the provisional relief sought.

Considering the defendant’s motion for summary judgment, the Court granted it in part, paring down the claims remaining for trial by dismissing four of the causes of action—unjust enrichment, conversion, “self dealing” and receivership.  The later two, said the Court, are not recognized causes of action under New York law.  “The court is not aware that New York recognizes “self dealing” as a separate cause of action” (see also Richard Pu, Breach of Fiduciary Duty [self-dealing is a form of breach of fiduciary duty]) and receivership is a provisional remedy under CPLR 6401, not a “cause of action”.

So what’s left for trial?   The threshold issue of whether futility of demand existed, which the court has directed to a “framed-issue hearing” on day one of the trial.  If demand is excused, then the remaining fiduciary duty and accounting claims, along with application of the Business Judgment Rule defense are the issues to be tried.  Trial is currently set for October 15, 2019.

 

 

In a recent case, Gammel v Immelt (2019 NY Slip Op 32005[U]), shareholders of General Electric Company (GE), brought a derivative shareholder action against the members of GE’s board of directors and various committees charged with overseeing GE’s business operations. Plaintiffs alleged causes of action sounding in gross mismanagement and breach of fiduciary duty, among others.

Defendants moved to dismiss the complaint, arguing that plaintiffs failed to make a pre-litigation demand upon GE’s board of directors and to plead demand futility with particularity. The Court granted defendants’ motion and dismissed the derivative shareholder action.

In the decision, New York County Commercial Division Judge Andrea Masley outlined the specific procedures that must be followed in shareholder derivative actions. Specifically, Business Corporation Law § 626(c) provides that in a shareholder derivative action, “the complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort.” A plaintiff is excused from making this pre-litigation demand if doing so would be futile.

A court may excuse the required pre-litigation demand if plaintiff pleads, with particularity, one of the three tests outlined in Marx v Akers (88 NY2d 189 [1996]):

1.  A majority of the directors are interested in the transaction. “[A] director may be interested under either of two scenarios: self-interest in a transaction or loss of independence due to the control of an interested director” (Matter of Comverse Tech., Inc. Derivative Litig., 56 AD3d 49, 54 [1st Dept 2008]).

OR

2.  The directors failed to inform themselves to a degree reasonably necessary about the transaction. This test can be accomplished if a plaintiff pleads that the directors ignored red flag warnings (see Brewster v Lacy, 2004 WL 5487868 [Sup Ct, NY County, June 21, 2014, Moskowitz, J., index No. 603873/2002], affd 24 AD3d 136 [1st Dept 2005]).

OR

3.  The directors failed to exercise their business judgment in approving the transaction. Here, a plaintiff must show that the corporation’s directors engaged in self-dealing or fraud or acted in bad faith that amounts to a breach of their fiduciary duty (see Goldstein v Bass, 138 AD3d 556, 557 [1st Dept 2016]; see also Matter of Levandusky v One Fifth Ave. Apt. Corp., 75 NY2d 530, 538 [1990]).

 

If a commercial litigator fails to serve a pre-litigation demand and, thereafter, fails to plead any of these factors with particularity, they risk a dismissal of their complaint based on demand futility.

 

 

Complaint dismissed

Much has been written about the pleading requirements unique to shareholder derivative lawsuits. For example, a derivative complaint must allege the plaintiff’s standing as a shareholder at all relevant times. Demand upon the board, or its futility, must also be pled with sufficient particularity. But fundamentally, a complaint may not assert direct claims derivatively, or vice versa. Thus, the Commercial Division recently held, as it has many times before, that where derivative and direct claims are asserted simultaneously by the same plaintiff, each cause of action in the complaint must clearly delineate whether it is being asserted directly or derivatively.

In Meshechok v Kaplan (NY County, Index No. 656337/2018), the plaintiff alleged on behalf of his former employer company (of which plaintiff claimed to be a co-owner with the defendant) that the defendant had misappropriated company trade secrets and funds and diverted business opportunities, among other things. Plaintiff also alleged that defendant had wrongfully suspended pro rata distributions in violation of the company’s operating agreement. Plaintiff sought damages, as well as injunctive relief. Defendant moved to dismiss.

The court granted defendant’s motion to dismiss the complaint in a decision entered July 10, 2019. As a threshold matter, the court noted that under Section 801 (a) of New York’s LLC Law and the company’s operating agreement the substantive law of Delaware governed the sufficiency of plaintiff’s allegations. By contrast, the procedure governing defendant’s motion to dismiss was governed by New York procedural law.

However, the court found it “impossible” to apply either procedural or substantive law to the complaint, because “[i]t is unclear which claims are being asserted directly, derivatively or perhaps both because [plaintiff] has not delineated any of the causes of action or specified which alleged facts apply to each cause of action.” Citing the Court of Appeals’ decision in Abrams v Donati (66 NY2d 951, 953 [1985]), the court held that “a complaint will be dismissed when the allegations confuse a shareholder’s derivative and individual rights, though leave to replead may be granted,” even though Delaware law (which allows for dual-nature claims) governed the substance of plaintiff’s claims.

Further exacerbating the deficiencies in the complaint, plaintiff did not clearly specify damages in such a way that the court could discern the derivative or direct nature of each claim under the Delaware standard set forth in Tooley v Donaldson, Lufkin & Jenrette, Inc. (845 A.2d 1031, 1036 [Del. 2004]). Instead, plaintiff asserted the same “vague” damages for each cause of action—namely, that “[b]y reason of the foregoing, the Companies have been damaged in an amount to be determined at trial” and that plaintiff is entitled to “specific performance restoring [plaintiff’s] full and fair ownership in the Companies.” Under these circumstances, the court found plaintiff’s “failure to articulate which [claims] are individual and which are derivative [to be] fatal.”

Savvy readers, do not allow this to happen to your derivative pleadings. Delineate, or this may be your fate.

“Should I stay or should I go”, queried the Clash.  Litigators are often faced with the same question, albeit in a far different context.  Most (but certainly not all!) Commercial Division practitioners try to move litigation with some degree of alacrity.  The quicker the litigation proceeds, the swifter the resolution.  Clients like quick resolutions. Therefore, it is not often that practitioners want to slow, or completely stop, a litigation. However, sometimes having a client that is sued in two different courts relating to the same subject matter may require a closer look at whether a stay of proceedings is appropriate or desirable.

CPLR 2201 states, “[e]xcept where otherwise prescribed by law, the court in which an action is pending may grant a stay of proceedings in a proper case, upon such terms as may be just.”

In a recent decision, Matter of PPDAI Group Sec. Litig. (2019 NY Slip Op 51075(U)), defendants moved to request an order staying discovery in the Commercial Division, state court action until the resolution of a pending motion to dismiss in the United States District Court in the Eastern District of New York (“EDNY”). The EDNY action made virtually the same allegations contained in the earlier-filed state court action.

New York County Commercial Division Judge Scarpulla reminded practitioners that the determination as to whether to grant a stay of proceedings pursuant to CPLR 2201 resides in the sole discretion of the Court. However courts consider six factors to help make such a determination (see Asher v. Abbott Laboratories, 307 AD2d 211, 211-212 [1st Dept. 2003]).

The first factor that courts consider is which forum will offer a more complete disposition of the issues presented in both actions. Whether the claims asserted in both actions are identical or whether any claims are time-barred in one court due to a later filing date strongly dictate which court will be able to offer “a more complete disposition”.

The second factor to consider is which forum has greater expertise in the type of matter. As noted in Judge Scarpula’s decision, “the Commercial Division is a long-standing, specialized business court which deals exclusively with complex commercial litigation.” It is therefore unlikely that any court will determine that the New York State Commercial Division courts are not equipped to handle a particular matter. Consideration should also be made that federal courts have general dockets of both criminal and civil actions which may limit their exposure to more business-related litigation.

The third factor is which action was commenced first and the stage of litigation of each . Although not dispositive on a motion to stay, Judge Scarpula noted that “the general rule in New York is that the court which has first taken jurisdiction is the one in which the matter should be determined and it is a violation of the rules of comity to interfere.”

The fourth factor that courts consider is whether there is substantial overlap of the issues asserted in both actions. This often times encompasses an analysis into the parties of both actions as well. Having “a majority” but not all of the parties overlapping in the actions may not be good enough to obtain a stay of proceedings.

The fifth factor to consider is whether a stay will avert duplication of effort and waste of judicial resources. Judge Scarupla commented that “[t]he possibility that at some point there might be two trials is not an appropriate basis for granting a stay.”

Finally, courts consider whether either party has demonstrated that they would be prejudiced by a stay.

New York Commercial Division practitioners should keep these factors in mind the next time they are faced with the possibility of making (or opposing) a motion to stay proceedings in order to have a better chance of predicting the outcome of the motion.