Minolta DSC

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.

In commercial litigation, it is not at all unusual for courts to be called upon to determine whether an unsigned agreement is binding.  The federal courts have a long line of cases dealing with this very issue, and perhaps the seminal one in this area is the Second Circuit’s decision in Winston v Mediafare Enter. Corp., a case considering whether an unsigned settlement agreement was enforceable.  The court there identified several factors to be considered in determining whether an agreement — in that case, a settlement — is binding:  “(1) whether there has been an express reservation of the right not to be bound in the absence of a writing; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to writing.”

New York courts take a similar approach.  They have long recognized that a binding agreement may be found, even though a contract was not signed, so long as it is not proscribed by New York’s statute of frauds, NY Gen. Obligs. L. 5-701.  In  Brown Bros. Elec. Contrs. v Beam Constr. Corp., for example, the Court of Appeals held that “[i]n determining whether the parties entered into a contractual agreement and what were its terms, it is necessary to look . . . to the objective manifestations of the intent of the parties as gathered by their expressed words and deeds.” See also Flores v. The Lower East Side Service Center, Inc.  Not exactly a recipe suitable for summary judgment.

Recently, in 223 Sam, LLC v. 223 15th Street, LLC, the Appellate Division, Second Department affirmed the trial court’s order denying defendants’ motion for summary judgment seeking to dismiss breach of contract claim.  The case arose out of plaintiff’s claim for breach of contract based upon an unexecuted amendment to an operating agreement.  The amendment added plaintiff as a 50% member of defendants, and also acknowledged plaintiff as a co-manager.  The damages sought reflect the management fees allegedly earned.

Defendants argument, made in the context of a motion for summary judgment was simple:  the amendment was never executed by the parties, and therefore is not binding.

In rejecting defendants’ argument, the court first noted that New York has long recognized the rule that parties will not be bound if  they state their intent not to be bound unless and until the agreement is signed by all.  However, if the parties reach agreement on “all the substantial terms” and nothing material is left for the future, then even if the parties intended to reduce the agreement but did not, this may nevertheless create a binding agreement between them.  Express reservation is the key.  The ultimate question of whether the parties intended to be bound is a question of fact.

In denying defendants’ motion, the court referred to emails exchanged between the parties which simply “failed to eliminate triable issues of fact as to whether the parties had agreed upon the major terms of the agreement and whether the parties began to perform . . . .”

The hard lesson:  be careful in exchanging drafts, revisions and amendments (1) without expressly reserving the right not to be bound unless and until signed by all, and (2) partially performing before the agreement is signed.  Otherwise, once all material terms are agreed upon, you may indeed have a binding agreement.

 

 

 

So a plaintiff obtains a default judgment against a defendant on a promissory note case.  Defendant fails to appear or defend.   On a motion to enter the default pursuant to CPLR 3215, one would assume that without opposition, judgment would be entered for the amount of the loans.  Interestingly, that’s not quite what happened in Power Up Lending Group, Ltd. v. Cardinal Resources, Inc., where a plaintiff lender sought entry of judgment on two loan agreements in the amount of $66,264.90.  So what did happen?

Justice Stephen A. Bucaria, sua sponte, examined the plaintiff’s submission (which the court must), but then determined that certain provisions in the agreements were illegal as violating New York’s criminal usury laws.   As a result, the Court calculated the amount due to the Plaintiff after severing the provisions deemed by the Court to be illegal, which was far less than that sought by plaintiff.  Plaintiff appealed.

The Second Department in Power Up Lending Group, Ltd. v Cardinal Resources, Inc. disagreed with Justice Bucaria’s approach and reversed, concluding that the court erred when it, sua sponte, severed certain provisions of the loan agreements, which it found on its own to be “illegal pursuant to the criminal usury statute.”   Since the defense of usury is an affirmative defense, it must be asserted by the Defendant affirmatively in its answer or as a ground to move to dismiss the complaint.  Otherwise, the defense is waived.  Here, because the Defendant failed to appear or answer or move, the defense was waived.

Two issues spring to mind.  First, the affirmative defense of criminal usury is far different than most affirmative defenses, which do not involve violations of criminal law (e.g., statute of frauds, statute of limitations and the like).  However, where an affirmative defense involves criminal activity, can a court as a matter of public policy have the power to raise the issue, sua sponte, even if it would otherwise be an affirmative defense?

Interestingly, in Youshah v. Staudinger, the defendant defaulted in an action brought by the plaintiff seeking to recover money owed to him by his former business partner for excluding him from an escort and dating service business, which fosters prostitution. The Court determined that although a party concedes liability by defaulting in an action, it would not, on public policy grounds, award judgment to the plaintiff as a result of an illegal enterprise. The Court held that it would not “enforce provisions of agreements which are patently illegal when public policy is at issue.”

Second, although the usury defense is waived if not raised, that very same defense could be advanced later by a defaulting defendant on a motion to vacate the default to establish a “meritorious defense.”   See, e.g., Blue Wolf Capital Fund II LP v. American Stevedoring, Inc. (citing cases).

In sum, in order to obtain a default judgment against an defaulting defendant, the moving party must submit sufficient proof to establish a viable cause of action.   Affirmative defenses, even if otherwise available to a defaulting defendant, should not stand in the way of entry of judgment.  However, on a later motion to vacate, those affirmative defenses can be used to re-open the case, assuming that an excuse for the default has been established.

In 2015, Guo Wengui, a/k/a Kwok Ho Wan, a Chinese citizen, billionaire investor and political provocateur, fled China for the United States amid reported investigations by the Chinese government involving several of his businesses and business partners. Mr. Guo reportedly left behind approximately $17 billion in Chinese assets, which have been frozen. Despite living an opulent lifestyle on the 18th floor of the Sherry Netherland hotel on Fifth Avenue, he is now facing some financial pressure.

Among Mr. Guo’s international creditors is Pacific Alliance Asia Opportunity Fund (“Pacific Alliance”), a Hong Kong investment fund formed under Cayman Islands law. In 2008, Pacific Alliance loaned $30 million to Mr. Guo’s Hong Kong company in connection with the development of Pangu Plaza, site of a “7 Star Hotel” in Beijing near the Olympic arenas. In connection with the loan, Mr. Guo signed a personal guarantee. All of the documents and transactions were executed in Hong Kong or China.

According to Pacific Alliance, Mr. Guo now owes approximately $88 million in principal and accrued interest on the loan. However, Pacific Alliance’s efforts over the years to collect against Mr. Guo have been unsuccessful. Accordingly, in April 2017, Pacific Alliance brought suit against Mr. Guo in the Commercial Division of New York County, where Mr. Guo now resides and is seeking asylum from the United States government. (Mr. Guo’s membership at President Trump’s Mar-a-Lago resort does not appear to have expedited his application. It’s complicated.)

Mr. Guo moved before Judge Barry Ostrager to dismiss the complaint on grounds of forum non conveniens (inconvenient forum) pursuant to CPLR 327. New York courts (e.g., Islamic Rep. of Iran v. Pahlavi, 62 NY2d 474, 479 [1984]; Shin-Etsu Chem. Co. v. ICICI Bank Ltd., 9 AD3d 171, 178 [1st Dept 2004]) generally consider the following factors: (i) the availability of an alternative forum; (ii) the burden on the New York courts; (iii) whether the transaction out of which the cause of action arose occurred primarily in a foreign jurisdiction; (iv) the applicability of foreign law; (v) the potential hardship to the defendant; and (vi) whether a foreign forum has a substantial interest in adjudicating the action.

Mr. Guo argued that New York was an inconvenient forum because the dispute involved contracts between a Hong Kong investment fund and a Chinese citizen that were governed by Hong Kong law and related to Chinese real estate. Moreover, all of the relevant evidence was located in China and Hong Kong. Pacific Alliance responded that Mr. Guo was a fugitive from China and would never appear there for a legal proceeding; therefore, New York was the only forum available for Pacific Alliance to pursue its claims.

Judge Ostrager granted Mr. Guo’s motion to dismiss. The court reasoned that the State of New York had no interest in resolving a breach of contract dispute between Hong Kong and Chinese parties involving a Hong Kong agreement relating to Chinese real estate. Notwithstanding Mr. Guo’s residence in New York, the foreign site of the disputed transaction was most important to determining the proper forum. As for Pacific Alliance’s argument that Mr. Guo would not appear at a proceeding in Hong Kong or China, the court found “that circumstance would likely benefit plaintiff rather than be a detriment to plaintiff,” presumably because it would be easier for Pacific Alliance to obtain a default judgment.

The Appellate Division, First Department reversed, noting Mr. Guo’s “heavy burden” of establishing that New York is an inconvenient forum. Contrary to Judge Ostrager, the First Department found that Hong Kong was “not a suitable or adequate alternative, because defendant cannot return there due to his pending asylum claim and fugitive status.” This concern for Mr. Guo is somewhat strange because Mr. Guo had explicitly endorsed Pacific Alliance pursuing a judgment in China or Hong Kong against Mr. Guo without Mr. Guo’s appearance. Perhaps Mr. Guo agrees with commenters in China who believe that Chinese judgments are more difficult to enforce in the United States due to fears that such judgments are politically motivated.

Ultimately, the First Department found that there was insufficient evidence that it would be a hardship for Mr. Guo to litigate in New York, especially because he previously had brought suit against others in New York. However, the First Department’s decision did not appear to state a clear reason why certain factors were being weighed more heavily than others. Future litigants confronting inconvenient forum issues should take note of the unpredictability of the multi-factor balancing test.

In a recent Commercial Division decision, Pozner v Fox Broadcasting Company, (2018 NY Slip Op 28102 [Sup Ct, NY County Apr. 2, 2018]), Justice Saliann Scarpulla declined to extend the application of the faithless servant doctrine to a circumstance where no New York court has applied it before.

Cliff Pozner (“Pozner”), a former Executive Vice President at Fox Broadcasting Company (“Fox”), was terminated from his employment based on sexual harassment complaints from several current and former Fox employees.  He then commenced an action against Fox for allegedly breaching his employment agreement and discriminating against him on the basis of his religion.  In response, Fox asserted two counterclaims against Pozner: breach of contract based on Pozner’s alleged failure to abide by the company’s policies regarding sexual harassment, and breach of fiduciary duty, which, according to Fox, included the duty to refrain from conduct inconsistent with Fox’s policies regarding a harassment-free workplace.

Pozner moved to dismiss the counterclaims.  With respect to Fox’s breach of fiduciary duty claim, Pozner argued that he did not violate any duty owed to Fox under the faithless servant doctrine or as a breach of fiduciary duty, since he did not unfairly compete, divert business opportunities, or accept improper kickbacks.

Justice Scarpulla sustained Fox’s first counterclaim for breach of contract, but held that Fox’s breach of fiduciary duty counterclaim was “not tenable.”  As the Court explained, although Pozner, as a Fox executive and employee, owed a duty of loyalty to Fox, that duty “has only been extended to cases where the employee ‘act[s] directly against the employer’s interests – as in embezzlement, improperly competing with the current employer, or usurping business opportunities.’”  Accordingly, the Court held that sexual harassment by an executive, without more, cannot form the basis of a breach of fiduciary duty claim resulting in the employer’s recovery of the employee’s salary under the faithless servant doctrine.

In reaching its conclusion, the Court noted the lack of New York case law on point and easily distinguished the cases relied upon by Fox.  For example, in Astra USA, Inc. v Bildman, (455 Mass 116 [2009]), which the Court acknowledged was not controlling, the Massachusetts court found that the CEO and President of plaintiff’s company had, in addition to engaging in sexual harassment, committed acts directly against the company’s interest, including stealing company funds, financial records and other documents, destroying company property, and erasing data from computers (id. at 123-124, & n 13).

Similarly, in Colliton v Cravath, Swaine & Moore, LLP (2008 WL 4386764, 2008 US Dist LEXIS 74388 [SD NY Sept. 24, 2008]), the Court found the plaintiff’s admitted criminal activity (which resulted in a plea allocution) constituted a violation of his ethical duties under the New York Rules of Professional Responsibility.  Given these ethical violations, the plaintiff in Colliton was not ethically permitted to work as an attorney and thus, “his employment was the product of fraudulent concealment” (id. at *15).

Recognizing Fox’s failure to plead allegations of fraud, financial waste, or embezzlement, Justice Scarpulla declined to extend the faithless servant doctrine to cover instances where the only wrongdoing alleged is sexual harassment.  While it is possible that Fox’s counsel was looking to extend the law in light of recent news events, Justice Scarpulla was not so inclined.

Ian Pai was an early participant in the Blue Man Group (“BMG”).  Between 1989 and 1991, he met and began collaborating with the founders of BMG, namely, Chris Wink, Phillip Stanton and Matt Goldman.  Pai claims to have made significant contributions to BMG’s creative and musical aspects over the decades-long relationship he had with the group, having ultimately assumed the duties of Music Director and Conductor.   In 2014, Pai’s royalty checks were abruptly cut in half without explanation.  Ultimately, Pai filed a  complaint against BMG and its founders, claiming breach of fiduciary duty, breach of contract, accounting, quantum meruit and unjust enrichment.  Following discovery, defendants moved for summary judgment on all counts.  Justice Barry Ostrager denied the motion in part, but granted summary judgment dismissing the two counts premised upon the existence of a fiduciary duty:  breach of fiduciary duty and accounting.  The remaining claims survived the motion, and trial is now scheduled for April 9, 2018.

Pai concedes that his fiduciary duty and accounting claims are not based upon a “formal” fiduciary relationship, but rather on his decades-old personal relationship with the three founders, and the founders’ alleged representations that they would “take care” of him.   In sum, his fiduciary duty claims were based solely upon the close relationship they developed over the years.  The defendants denied a fiduciary relationship ever existed, but did admit they had a long close-knit relationship with Pai.

So, can a mere close personal relationship create a fiduciary duty?   Maybe!  Indeed, as the Court recognized, citing Kohan v. Nehmadi, a fiduciary relationship can be found to exist between close friends under certain circumstances.   Here, the Court considered that “Pai’s age, lack of financial experience, and trust in the Individual Defendants to look out for him” may very well have given rise to a fiduciary relationship.  However, fatal to Pai’s claims was applicable six-year statute of limitations which barred any claims he may have had in the 1990s.  The Court reasoned that since 2009, Pai has been represented by counsel, negotiating agreements between Pai and BMG, all at arms-length.  The result is that the contract-based claims survive for trial, but the fiduciary relationship-based do not.

The concept of a close personal relationship giving rise to fiduciary duty is not new.    Whether a fiduciary relationship exists is, of course, a very fact-intensive inquiry.  The Court in the Pai case recognized this and, in the end, did not have to decide whether the early relationship in fact gave rise to a fiduciary one since it was time barred.  A good overview of this very issue — how New York courts determine the existence of a fiduciary duty — is found in an EDNY case, St. John’s Univ. v. Bolton (Garaufis, J., 2010) (“a fiduciary relationship embraces not only those the law has long adopted . . . but also more informal relationships where it can be readily seen that one party reasonably trusted another”).  The starting point (and maybe the ending one too) is whether there is an agreement between the parties governing their rights and obligations.  In the absence of such, a close personal relationship intertwined with a business one can very well create at least issues of fact whether a fiduciary relationship exists between them.

Perhaps I’m revealing too much about my abilities in a prior life to balance academic and social priorities, but does anyone else remember the “not less than X pages” page requirements for high-school and college term papers and the corresponding font, margin, and line-spacing tricks for getting the assignment over the finish line?

attorney competition

Well, it would appear that lawyers – being the “remarkably insecure and competitive group of people” that they are – suffer from the opposite affliction.  According to a recent proposal from the Commercial Division Advisory Council to amend Commercial Division Rule 17 concerning length of papers, “attorneys have incentives to unfairly squeeze additional content into the allotted pages” and “have developed techniques to ‘cheat’ the limit.”

The Advisory Council’s proposal to amend Rule 17 seeks to eliminate the unfair and disingenuous “incentives” and “techniques” currently utilized by attorneys through the implementation of word rather than page limits on their submissions to the court.

The current Rule 17 provides that “(i) briefs or memoranda of law shall be limited to 25 pages each; (ii) reply memoranda shall be no more than 15 pages and . . . ; (iii) affidavits and affirmations shall be limited to 25 pages each.”

The Advisory Council’s Rule 17 proposal “substitutes word limits in place of the page limits set forth in the current rule:  7000 words (currently 25 pages) in briefs, memoranda of law, affidavits and affirmations; and 4200 words (currently 15 pages) in reply memoranda.”

I’ve seen enough decisions expressly referencing Rule 17 over the years to suggest that the Justices of the Commercial Division would support the change.  Just two months ago, in Domingo v Bidkind, LLC, Manhattan Commercial Division Justice Saliann Scarpulla admonished the defendants’ counsel for “fail[ing] to adhere to the page limits provided in Commercial Division Rule 17 in this motion and in another related action.”  Others, like former Kings County Commercial Division Justice Carolyn E. Demarest, have instituted “appropriate penalties” for Rule 17 violations – including, for example, in her Aish Hatorah NY, Inc. v Fetman decision from 2015 where she flat-out “disregarded” the latter 27 pages of a 52-page brief in support of a motion to renew and reargue.  Former Westchester County and Manhattan Commercial Division Justices Alan D. Scheinkman and Richard B. Lowe, III issued similar penalties number of years ago in Reilly Green Mountain Platform Tennis v Cortese and LaRosa v Arbusman.

According to the Advisory Council, word limits, which are more precise and uniform in application, better serve the purpose and spirit of Rule 17 – namely, to “encourage attorneys to focus on strong, concise arguments, and ensure that judges and opposing counsel are not overwhelmed with meandering, repetitious briefs.”

Word limits on papers submitted in the Commercial Division also would conform to appellate brief-writing parameters currently operative in the First and Second Departments, which require parties to certify in writing that their submissions comply with the applicable word-count requirements.

Anyone interested in commenting on the proposed amendment to Rule 17 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.

In a legal malpractice claim brought by Plaintiff, an Australian investment bank against Morrison & Foester, claiming that the law firm did not conduct due diligence in uncovering material misrepresentations pertaining to Plaintiff’s underwriting of a public stock offering of Puda Coal, Inc., Justice Scarpulla, in the New York County Supreme Court (Index No.: 650988/15) dismissed the suit. Notably, the Supreme Court held that the Plaintiff in Macquarie Capital (USA) Inc. v. Morrison & Foerster LLP was in possession of the information at issue as it had an investigative report, prepared by a private international investigation firm that gave Plaintiff notice of the material misrepresentations. The report produced by the private firm disclosed information regarding the public offering, which contradicted public representations and reports. Upon receipt of the report, Plaintiff forwarded the report to Defendant, neither of which picked up on the misrepresentations in the report that Puda did not own a 90% interest in Shanxi Coal. Instead, the law firm issued an opinion confirming its due diligence and advising Plaintiff that nothing came to its attention that would lead to the conclusion that the offering documents contain false or misleading information. However, the Supreme Court, nevertheless, held that Plaintiff could not claim that the law firm’s representations caused damage to Plaintiff.

However, the Appellate Division, First Department unanimously reversed Justice Scarpulla’s decision and determined that Plaintiff sufficiently demonstrated the “but for” causation element necessary for its legal malpractice claim in defeating Defendant’s pre-answer motion to dismiss. Specifically, the Court held that Plaintiff demonstrated that but for the law firm’s negligence, Plaintiff would have abstained from its involvement in the public offering, thus preventing Plaintiff from acquiring fees, expenses, and other damages.

Further, the Court concluded that the law firm’s argument that Plaintiff possessed the information in an investigative report is unavailing because the information contained in the report cannot be described as explicitly putting Plaintiff on notice and not requiring counsel’s interpretation of the information. Contrarily, in Ableco Fin. LLC v. Hilson, 109 A.D.3d 438 (1st Dep’t 2013), lv denied 22 N.Y.3d 864 (2014) this Court granted defendant’s motion for summary judgment dismissing the legal malpractice claim on the basis that plaintiff indisputably possessed certain information prior to the closing and was aware that it would not receive first priority lien on the inventory and, as such, counsel’s legal interpretation was not required.

 Takeaway: In Macquarie Capital (USA) Inc, the law firm was specifically hired to conduct due diligence and investigate the company’s offering. Ultimately, the Court held that the law firm should not be able to shift legal responsibility it was hired to perform to the client. A law firm cannot release itself from liability by arguing that because its client possessed certain information, that the law firm need not conduct the due diligence it was retained to do in the first instance.

In a thorough opinion last week by Justice Marcy Friedman in Bank of N.Y. Mellon v WMC Mtge., LLC, the New York County Supreme Court upheld the timeliness of “Failure to Notify” claims arising from subprime mortgage-backed securities formed into a trust in 2007. To put it mildly, the mortgages were problematic (go see The Big Short if you have not already done so). The primary issue the court examined was the accrual date of causes of action asserting that the securitizer (Morgan Stanley) had breached its contractual duty to notify the Trustee of any breaches of representations and warranties that it discovered after closing. (Separate causes of action directly asserting breaches of the representations and warranties were previously dismissed as time-barred.)

Did these “Failure to Notify” claims accrue upon the closing of the securitization? Or did the claims accrue when Morgan Stanley discovered the breaches?

The issue was complicated by the Court of Appeals’ landmark decision in ACE Securities Corp. v. DB Structured Products Inc., 25 N.Y.3d 581 (2015), which held that a plaintiff cannot avoid the statute of limitations on a claim for breach of representations and warranties by pleading a separate claim based on the defendant’s failure to repurchase materially breaching loans. The Court in ACE reasoned that the repurchase provision in the parties’ contract was more akin to a remedy for the breach of representations and warranties, rather than a separate and continuing obligation. In addition, the Court in ACE was concerned by the prospect of “accrual dates that cannot be ascertained with any degree of certainty,” especially cumbersome in mortgage-backed securities cases involving representations and warranties relating to thousands of loans per securitization.

Justice Friedman also gave pause to consider New York’s policy against applying the “discovery rule” to statutes of limitations in contract actions. For example, in Deutsche Bank National Trust Co. v. Flagstar Capital Markets Corp., 143 A.D.3d 15 (1st Dept 2016), the First Department held an accrual clause in the governing agreement unenforceable as against public policy, where the clause purported to delay the accrual of claims until three conditions were satisfied: (i) discovery of a breach, (ii) failure to cure or repurchase, and (iii) demand upon the defendant for compliance with the agreement. The First Department held that such a clause “creates an imprecisely ascertainable accrual date—possibly occurring decades in the future, since some of the loans extend for 30 years.”

The court found these policy arguments “compelling,” but ultimately held that it could not impose the same accrual date as the underlying breach of warranty claims, because in Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc., 133 A.D.3d 96 (1st Dep’t 2015), Morgan Stanley Mortg. Loan Trust 2006-13ARX v. Morgan Stanley Mortg. Capital Holdings LLC, 143 A.D.3d 1 (1st Dep’t 2016), and Bank of NY Mellon v. WMC Mtge., LLC, 151 A.D.3d 72 (1st Dept 2017), the First Department held that a “duty to notify” accrued independent of the securitizers’ obligations with respect to representations and warranties and therefore gave rise to a separate cause of action for damages. Unlike in ACE, this duty to notify could not be characterized as a remedy for the breach, because it was entirely an obligation of the securitizer and did not depend on any prior action by the trustee.

The court limited its holding to only allow “Failure to Notify” claims involving breaches first discovered by Morgan Stanley within the six-year statute of limitations. In other words, Morgan Stanley had no “continuing obligation” to notify past the date of first discovery that would otherwise extend the statute of limitations indefinitely. Nonetheless, the possibility of revising otherwise time-barred claims makes it worthwhile for parties asserting claims based on breaches of representations and warranties in a securitization to carefully read the agreements to evaluate an independent duty to notify post closing.