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

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

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

Governing Law and Jurisdiction 

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

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

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

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

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

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

Takeaway:

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

 

Inseparable,Word,In,A,Dictionary.,Inseparable,Concept.

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

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

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

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

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

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

Takeaway

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Takeaway:

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

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

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

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

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

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

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

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

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

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

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

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

The Up-Shot

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

Commercial,Lease

I think it’s fair to say that there’s been an uptick in litigation involving commercial lease disputes and retail property closings gone awry over the last 15 months.  And for obvious reasons.  The commercial real estate industry has taken a beating from COVID-19.

Some evidence of this of this uptick can be found in the decisions being handed down in the Commercial Division of late, which involve issues not exactly foreign to the forum but represent a bit of a departure from the more typical closely-held business disputes that, as Nassau County ComDiv Justice Timothy Driscoll once remarked, “are our bread-and-butter here in the Commercial Division.”

One reason for this, perhaps, is the subject-matter limitation found in Uniform Rule 202.70(b)(3), which expressly “exclud[es] actions for the payment of rent only” from commercial real estate disputes otherwise available for ComDiv adjudication.  After all, ComDiv cases are almost always all about money.  Not so in the context of commercial lease disputes, at least as concerns issues of rent.  Which means that commercial real estate litigators interested in taking advantage of the many benefits of having their clients’ disputes adjudicated in the the Commercial Division may need to get a little creative in their pleadings.

Last month, Manhattan ComDiv Justice Andrew Borrok issued a decision in Prada USA Corp. v 724 Fifth Fee Owner LLC involving certain suspension provisions in a commercial lease for high-end retail space in NYC.  The provisions gave the owner-landlord (Owner) the option to suspend the retail tenant’s (Prada’s) tenancy for up to three years for purposes of redeveloping its premises.  Upon exercise of the suspension option — which, by the way, Owner was permitted to do “from time to time” (more on that later) — Prada would be entitled to select a build-out model for its space in the redeveloped building and to receive liquidated damages in an amount up to $5 million “to compensate it for being displaced from its occupancy in the demised premises.”

In late 2018, Owner gave notice of its intent to exercise the suspension option, and in early 2019 Prada selected a layout for its new store, development of which was projected to begin by March 2020 and complete by March 2023.  In October 2019, however, Owner attempted to withdraw its notice “as if it was never given” because development of the building “was no longer feasible.”  Prada then sued for a declaration that Owner’s one-time suspension option was irrevocable and for $5 million in liquidated damages as a result of Owner’s anticipatory breach.  On summary judgment, Justice Borrok ultimately found that Owner could not revoke its option but that Prada was not entitled to liquidated damages because the suspension of its tenancy, which was premised on Owner’s redevelopment, never occurred.

Put another way, the approximately $5 million liquidated damages were meant to put the parties in as close a position as they could be notwithstanding a redevelopment-related suspension.  Neither party can profit from or arbitrate on a suspension notice that did not result in a surrender of occupancy or an actual renovation-related suspension or change to the premises.  The only potential issue for trial is whether, in the absence of a renovation, Prada [is entitled to] third-party costs or other foreseeable reasonable costs incurred prior to receiving notice from Owner of its intention not to proceed with the proposed building development.

Although Prada managed to obtain a declaration that Owner’s suspension notice was irrevocable, Justice Borrok declared in an earlier decision that Owner nonetheless retained the option to suspend Prada’s tenancy for future redevelopment purposes.  This ruling turned on a curious issue of contract construction involving the phrase “from time to time.”

In short, the lease’s suspension provisions expressly provided that “Owner shall have the option . . . , from time to time, . . . to suspend the possession of Tenant with respect to all of the Demised Premises.”  Prada contended that the phrase “from time to time” was synonymous with the phrase “at any time” and therefore should be “interpreted to confer a single one time only option.”

Now, I understand from my transactional real estate colleagues that use of the phrase “from time to time” is atypical in commercial leases, particularly as it relates to a party’s exercise of this or that right.  Confirmation of this fact was apparent in the parties’ underlying briefing — represented by Sullivan & Cromwell and Quinn Emanuel, no less — in which only one case was cited by Owner’s counsel for the proposition that “it is self-evident from the plain meaning of the phrase . . . that Owner has the right to exercise a Suspension Option more than once” (citing Sullivan v Harnisch, 96 AD3d 667 [1st Dept 2012]).  In fact, the First Department in Sullivan — a case involving an LLC member’s right to determine bonus compensation “from time to time” under an operating agreement — ruled that there was no limitation on when during the fiscal year the member could make such a determination, not how many times.

Given this paucity of practical and legal precedent, it comes as no surprise that Justice Borrok did not cite any authority to support his finding on the issue — which, as noted above, permitted Owner to retain the option.  Instead, the judge appeared to appeal to basic common sense when finding that:

These words mean exactly what they say and do not mean what they do not say — i.e., ‘from time to time’ necessarily means more than once. . . .   [T]he Lease does not provide any words of limitation limiting the Owner to a single option which is customary and necessary to include in these agreements when such limitation is intended.  And, ‘from time to time,’ can only mean more than one time.

As the title of this blog post suggests, the everyday usage of the phrase “from time to time” tends to mean more than once, confirming Justice Borrok’s finding in Prada USA Corp. v 724 Fifth Fee Owner LLC.  Still, its probably best to be a little less folksy when setting the specific parameters of a party’s material right in a commercial lease.

 

[I] irrevocably release and forever discharge [the Company] . . . from any and all actions, causes of action, suits, debts, claims, complaints, liabilities, obligations, charges, contracts, controversies, agreements, promises, damages, expenses, counterclaims, cross-claims, [etc.] whatsoever, in law or equity, known or unknown, [I] ever had, now have, or may have against the [Company] from the beginning of time to the date hereof.

When someone releases another from claims, he is relinquishing his right to sue in connection with the subject of the release.  So long as it is not procured by fraud, New York courts will generally enforce broad general releases, such as the one above, as a party’s waiver of future fraud and fiduciary duty claims even when such claims are not foreseeable at the time of contract execution.  In Chadha v Wahedna, 2021 NY Slip Op 50509(U), a June 2, 2021, decision by New York Commercial Division Justice Barry Ostrager, the plaintiff learned this lesson the hard way when his pleading was dismissed in its entirety due to his execution of a general release covering his claims.

Underlying Facts and the Amended Complaint

The dispute in Chadha involves a financial technology and services company that offers investment opportunities compliant with Islamic law (the “Company”) and its controlling shareholder, director, and CEO (“Wahedna,” together “Defendants”).

In his Amended Complaint, Nilish Chadha (“Chadha”), the former COO, board member, and shareholder of the Company, alleged that from October 2016 through January 2017, Defendants engaged in a fraudulent scheme to purchase 530 of Plaintiff’s shares in the Company at deeply discounted values by inducing Plaintiff to enter into a series of three Common Stock Repurchase Agreements (“CSRAs”). Plaintiff claimed that Defendants fraudulently misrepresented to Plaintiff the value of his shares, and, in breach of fiduciary duties owed to him, failed to disclose higher share prices that were being negotiated with third-party investors in order to buy out Plaintiff’s shares in the Company at lower prices.

In June 2020, more than three years after the sale of all his shares in the Company, Plaintiff filed this action seeking to recover damages arising from the alleged “surreptitious” purchase by Defendants of Plaintiff’s 530 shares through alleged fraud and failure to disclose the existence of the potential equity investors. Plaintiff asserted that knowledge of these discussions would have impacted his opinion of the value of his stock in the Company.

The Motion to Dismiss

Defendants pointed to a Settlement Agreement and Release (the “Settlement Agreement”), entered into between Plaintiff and Defendants in connection with the CSRAs, which included the general release language referenced above.  Relying on the Settlement Agreement, Defendants moved to dismiss the Amended Complaint on the basis that all of the causes of action were barred by the release, arguing that it broadly released all claims, whether known or unknown, and, as a consequence, the Settlement Agreement extinguished all of the Amended Complaint’s claims.  Defendants also argued that Plaintiff did not negotiate any specific limitations to the release that might preserve any of the claims, a fact which Plaintiff fully understood when he executed the Settlement Agreement.

The Court’s Analysis and Decision

In considering whether the general release at issue barred Plaintiff’s claims, the Court looked to guidance from the New York Court of Appeals.  In Centro Empresarial Cempresa S.A. v America Movil, S.A.B. de C.V., 17 NY3d 269 (2011), cited throughout the decision, the Court affirmed the First Department’s dismissal of a case brought by former owners of shares in a telecommunications company because the general release plaintiffs granted to defendants in connection with the sale of plaintiffs’ ownership interests encompassed unknown fraud claims, regardless of the fiduciary relationship between the parties.  The Court of Appeals held that, as sophisticated parties, plaintiffs negotiated and executed an “extraordinary release . . . [and] cannot now invalidate that release by claiming ignorance of the depth of their fiduciary’s misconduct.”

In Chadha, the Court held that Defendants met their burden of providing a release that encompassed unknown future fraud claims because the release unequivocally referred to “any and all actions” “whatsoever” “known or unknown,” thereby shifting the burden to Plaintiff to establish that the release was invalid due to contract defenses, such as fraud. Under the facts alleged in the Amended Complaint, however, the Court held that Plaintiff could not avoid dismissal for a number of reasons.

To begin with, the Court found dispositive the fact that Plaintiff did not allege a fraud separate from the subject of the release, stating that the allegation that Wahedna allegedly concealed the existence of a future investment by a third-party that would have been favorable to the Company was not “separate from the broad cover of the release which is ‘any and all claims [ ] the Investor Released Parties ever had, now have, or may have against the Company Released Parties from the beginning of time to the date hereof.’”

Next, the Court rejected Plaintiff’s argument that the fiduciary relationship between Plaintiff and Wahedna prevented the parties from being able to release fraud claims because Plaintiff signed the release after selling all his shares in the Company, so that a fiduciary relationship between the two of them no longer existed.  The Court also found that Plaintiff, as the COO of the Company at that time, had access to information relevant to the Company and did not exercise his own diligence in evaluating the value of his shares. The Court also rejected Plaintiff’s argument that he lacked sophistication to understand that he was releasing all future and unknown claims inasmuch as Plaintiff had “an undergraduate degree in Business Administration from The American University in Dubai and was sophisticated enough to serve as the Company’s COO which inherently involved an understanding of the Company’s financial status.”

In the end, the Court dismissed Plaintiff’s Amended Complaint with prejudice.

Takeaway

The Court’s recent holding in Chadha reinforces the fact that parties can contract away fraud and fiduciary duty claims with general releases. If a party wants to ensure that it is not waiving its right to bring such claims, then it should make sure to negotiate disclaimer language specifically indicating that it does not intend to waive such a claim. By including targeted and specific language, a party can rest easy that a court will enforce a disclaimer in the way in which it intended.

For more case law analysis concerning general releases, look to Peter A. Mahler’s post from the other week in Farrell Fritz’s New York Business Divorce blog.

 

Parties to a contract generally can include in their agreement a provision preventing assignment of the agreement’s rights and remedies without the consent of both parties.  Because a party’s assignment of rights under a contract to a third party may have serious implications for both sides in the performance of that agreement, anti-assignment clauses protect the contracting parties by ensuring that no transfer of the agreement’s rights occurs without the consent of all involved.  Dance with the date you brought.  And absent fraud, unconscionability, or some other reason to invalidate the contract, courts generally enforce those anti-assignment clauses.

In the insurance context, however, the enforcement of anti-assignment clauses is more complicated.  Because insurers—like any contractual party—have a legitimate interest in protecting themselves from insureds’ assignment of the insurance agreement to a different, perhaps more risky party, anti-assignment clauses in insurance agreements are enforceable against assignments that occur prior to a covered loss.  Arrowood Indem. Co. v. Atlantic Mut. Ins. Co., 96 AD3d 693, 694 [1st Dept 2012].  But in circumstances where the assignment occurs after the covered loss, New York courts are more critical of anti-assignment clauses.  In those circumstances, courts reason, there is no increased risk to the insured; the loss already occurred, and the only thing that changes as a result of the assignment is who the insurer will need to pay for that loss.

In Certain Underwriters At Lloyd’s, London v AT&T, Corp., 2021 N.Y. Slip Op. 31740[U], a recent decision by New York Commercial Division Justice Cohen, the Court explores the exceptions to the general rules regarding anti-assignment clauses in insurance policies.  Ultimately, the case underscores the difficulties insurers face in disclaiming coverage by enforcement of an anti-assignment clause in the policy.

Continue Reading Can You Assign Your Rights Under an Insurance Contract that Prohibits Assignment? Only for Prior, Fixed Losses

The Full Faith and Credit Clause of the United States Constitution provides that “Full Faith and Credit shall be given in each State to the public acts, records, and judicial proceedings of every other state.” In terms of stipulations of settlement, New York courts favor such stipulations and will rarely set them aside absent the presence of “fraud, collusion, mistake or such other factors as would undo a contract.” Heimuller v Amoco Oil Co., 92 AD2d 882, 884 (2d Dept 1983). Recently, Suffolk County Commercial Division Justice Elizabeth Hazlitt Emerson issued a decision in F.W. Sims, Inc. v Simonelli, which examined whether a stipulation of settlement entered into in a related federal action can be enforced in a separate action under the Full Faith and Credit Doctrine.

In F.W. Sims, Inc. plaintiffs Camile Shea (“Camile”), Patrick Simonelli (“Patrick”), Lilly Ann Wiswall (“Lilly Ann”), Arthur Seeberger (“Arthur”) and F.W. Sims, Inc. (“F.W. Sims”) (collectively, the “Plaintiffs”) commenced an action against Deborah Simonelli and Dana Grimaldi, as Executors of the Estate of Joseph Simonelli (“Joseph”) and several contractors, including Prospective, LLC (“Prospective”) and its principal Dorothy Covelli a/k/a Williams (“Dorothy”) (“State Court Action”). Plaintiffs alleged that Joseph embezzled approximately $25 million dollars from F.W. Sims, a family-owned heating, ventilation, and air-conditioning systems business, by directing the defendant contractors to submit fraudulent invoices for work that was never performed. On November 12, 2014, Joseph was arrested by the FBI for his involvement in the fraudulent billing scheme, which resulted in the government commencing an in-rem forfeiture action (the “EDNY Action”) against his property in the United States District Court for the Eastern District of New York. The EDNY Action was eventually settled pursuant to a “Stipulation and Order of Settlement and Discontinuance” (the “Stipulation”). The Stipulation provided that:

[F.W.] Sims, its officers and shareholders, [Deborah] Simonelli-Grimaldi, [Dana] Grimaldi, the Simonelli Estate, Serendipity [Farm LLC] and British Betty Racing Stables LLC agree to release each other for all claims made in or which could be made in or could arise from the State Court Action [this action] and agree to consent to the dismissal of the State Court Action by the filing, therein, of a Notice of a Stipulation of Discontinuance with Prejudice.

                                                                                                           * * *

This Stipulation, and the validity, performance, construction and enforceability thereof shall be governed, and construed, in accordance with the laws of the State of New York, without regard to its choice-of-law rules. The United States District Court for the Eastern District of New York shall retain exclusive jurisdiction and shall be the exclusive venue for the resolution of any dispute arising under, and concerning the interpretation and enforcement of, this Stipulation.

Following the execution of the Stipulation, defendants Dorothy and Prospective moved to dismiss Plaintiffs’ complaint in the State Court Action, arguing (1) dismissal was required pursuant to the terms of the Stipulation in the EDNY Action; and (2) the causes of action were barred by the statute of limitations. In opposition, Plaintiffs argued that defendants Dorothy and Prospective did not have standing to enforce the Stipulation since the defendants were neither parties to the EDNY Action nor signatories to the Stipulation itself.

In its decision, the Court denied the branch of Dorothy and Prospective’s motion for dismissal of the action pursuant to the terms of the Stipulation for three reasons. First, the Court clarified that “the Stipulation is not a judgment that is entitled to full faith and credit,” but rather, is governed by general contract principles for its interpretation. Second, the Court held that Dorothy and Prospective did not have standing to enforce the Stipulation because (a) neither Dorothy nor Prospective were parties to the Stipulation; and (b) the terms of the Stipulation did not contain any language to “evince an intent to permit enforcement” by Dorothy or Prospective. Third, the Court found that it did not have jurisdiction to resolve this issue, since the parties to the Stipulation agreed that all disputes concerning the interpretation and enforcement of the Stipulation were to be resolved by the United States District Court for the Eastern District of New York.

Takeaway:

This decision is a strong reminder of the distinctions between the enforcement of judgments and stipulations. In the case of non-parties and/or non-signatories, counselors should closely analyze the terms of a stipulation to determine whether their client has standing to enforce the stipulation in any future / related proceedings.

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Earlier this year, my colleague, Madeline Greenblatt, wrote about the emergence of a new body of case law emanating from the myriad effects the COVID-19 pandemic has had on the real estate industry.  In her blog, Madeline discussed a recent decision from the Manhattan Commercial Division (Borrok, J.), rejecting a commercial tenant’s argument that it should be excused from paying rent based upon the doctrines of impossibility and frustration of purpose.  Madeline aptly predicted we would see an uptick in COVID-19-related commercial lease disputes.  Right she was.

Just last week, the Manhattan Commercial Division in A/R Retail, LLC v Hugo Boss Retail, Inc. (2021 NY Slip Op 21139 [Sup Ct, NY County, May 19, 2021] [Cohen, J.]), yet again rejected a commercial tenant’s reliance on the doctrines of impossibility and frustration of purpose to excuse non-performance of its rent obligations.

Background of the Dispute

Located at the Shops in Columbus Circle (the “Shops”) in Manhattan – an upscale, highly trafficked shopping mall in Time Warner Center – the tenant, Hugo Boss, operates a two-story retail store (the “Store”) pursuant to a 13-year commercial lease (the “Lease”) with the landlord, A/R Retail, LLC (“A/R”). The Lease includes a force majeure clause excusing the non-performance of certain obligations based upon events beyond the non-performing party’s reasonable control, including, among other things, war, terrorism, acts of God, strikes, or any order or regulations of or by any governmental authority.

On March 7, 2020, as the COVID-19 pandemic swept through New York, Governor Cuomo signed Executive Order 202, declaring a State disaster emergency for the entire State of New York.  Executive Order 202 kicked off a series of related Executive Orders which, as relevant here, mandated commercial and retail store closures. Pursuant to the Executive Orders, A/R closed the Shops – including the Store – on March 17, 2020.

Hugo Boss paid rent under the Lease for the month of April 2020, but did not pay rent in full thereafter.  On September 9, 2020, the Shops reopened to the general public and, since then, the Store remains open for business (albeit at limited capacity).  Hugo Boss’ business at the Store, however, declined significantly since the pandemic.  Although Hugo Boss continued to operate the Store, it had not paid rent in full since April 2020.

A/R and Hugo Boss brought separate actions against each other based on overlapping theories of liability and defenses.  In the first action, A/R asserted claims against Hugo Boss for breach of the Lease, and for attorneys’ fees and costs.  Hugo Boss asserted defenses and counterclaims based upon the doctrines of impossibility and frustration of purpose.  Separately, Hugo Boss asserted claims against A/R for, among other things, rescission or reformation of the Lease based upon the doctrines of impossibility and frustration of purpose.

A/R moved for summary judgment on its causes of action for a money judgment against Hugo Boss for amounts due under the Lease, and sought dismissal of Hugo Boss’ affirmative defenses and counterclaims.

The Court’s Decision

The Court first determined that A/R established its prima facie entitlement to judgment of matter of law because it was “undisputed” that Hugo Boss failed to pay rent and other charges due under the Lease.  The Court then concluded that Hugo Boss failed to raise triable issues of fact sufficient to warrant rescinding or reforming the Lease based on the doctrines of frustration of purpose or impossibility of performance.

The Court began its analysis with a brief discussion of the “Coronation Cases” and the legal principles underlying the doctrine of frustration of purpose.  Describing the doctrine “as a narrow one,” the Court explained the doctrine is only applicable where the basis of the underlying contract has been completely destroyed.  Partial frustration – such as a diminution in business, where a tenant could continue to use the premises for an intended purpose – is not enough.  In addition, the doctrine is not available “where the event which prevented performance was foreseeable and provision could have been made for its occurrence,” or where the contract actually addresses the particular calamity that eventually befell the parties.

Applying these principals, the Court rejected Hugo Boss’ argument that pandemic-related restrictions “entirely frustrated” the purpose of the Lease.  Although the pandemic triggered several months of shutdown, the resulting set of capacity restrictions only reduced – and did not completely eliminate – Hugo Boss’ ability to generate revenue from its retail operation.  The Court acknowledged that, although the adverse economic effects of the pandemic undoubtedly are real and significant, the temporary closure of the Store, and resulting restrictions, did not “rise to the level of triggering an extra-contractual common law right to rescind a 13-year lease.”

The Court also concluded the force majeure clause – which specifically addressed the risk of government restriction on the use of the premises – undermined Hugo Boss’ frustration of purpose defense.  Even though the Lease did not explicitly mandate payment of rent in the event of a government shutdown or capacity limitation, the fact that the Lease addressed the risk of government orders or regulations – and stated the specific grounds on which the parties’ prompt performance of their obligations might be excused (or not) – was, in the Court’s view, sufficient to demonstrate that government closures and capacity restrictions were not “wholly unforeseeable.”

Finally, the Court rejected Hugo Boss’ impossibility of performance defense.  As the Court explained, impossibility excuses a party’s performance “only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible” and is produced by “an unanticipated event that could not have been foreseen or guarded against in the contract.”  Financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy, is insufficient.

To the extent Hugo Boss’ impossibility argument was predicated on government orders — both during the shutdown period and afterward — the Court concluded that the risk of such disruptions was not unforeseeable, as it was addressed in the Lease’s force majeure clause.  Furthermore, it was undisputed that Hugo Boss operated the Store during the reopening period (September 2020 to present).  And so, the Court concluded that Hugo Boss’ performance under the Lease was not “objectively impossible” even though its business was affected by the pandemic.

Collection of New York Cases Rejecting Impossibility and Frustration of Purpose Theories in the Wake of COVID-19

Since the pandemic hit, a number of New York cases assessing commercial lease disputes have held that the temporary and evolving restrictions on a commercial tenant’s business do not warrant rescission or other relief based on frustration of purpose or impossibility of performance.  Below is a non-exhaustive list of such cases:

Although an overwhelming number of New York courts have rejected commercial tenants’ frustration of purpose and impossibility theories, at least one New York court held that the tenant’s performance under the subject lease was made impossible by the COVID-19 pandemic (see 267 Development, LLC v. Brooklyn Babies and Toddlers, LLC, No. 510160/2020 [Sup Ct, Kings County, Mar. 15, 2021]).  However, the landlord has since filed a motion to reargue/renew, and a notice of appeal.  The motion to reargue is fully submitted and awaiting decision.

Takeaway

In recent cases where tenants have sought to avoid their rent obligations during the pandemic, New York courts have looked to the specific terms of each lease, rather than the highly unusual circumstances of the COVID-19 pandemic, to decide whether the tenant’s performance under the lease was excusable due to either frustration of purpose or impossibility.  A majority of New York courts that have addressed the issue seem to agree that the doctrines of impossibility or frustration of purpose are unavailable where (as in most cases) the lease addresses the possibility of a government-mandated shutdown, or the tenant’s business ultimately resumed operations (even at limited capacity).

A cause of action accrues, triggering the commencement of the statute of limitations period, when “all of the factual circumstances necessary to establish a right of action have occurred, so that the plaintiff would be entitled to relief” (Gaidon v. Guardian Life Ins. Co. of Am.).  The “continuing wrong” doctrine is an exception to the general rule that is usually employed “where there is a series of continuing wrongs and serves to toll the running of a period of limitations to the date of the commission of the last wrongful act” (Henry v. Bank of Am.).

The First Department in CWCapital Cobalt VR Ltd. v. CWCapaital Invs. LLC recently examined the “continuing wrong” doctrine as compared to a single breach in the context of the statute of limitations.

By way of background, in CWCapital Cobalt VR Ltd., plaintiff placed its investors’ money in 50 different trusts holding commercial mortgage-backed securities (CMBS). The investors received collateralized debt obligations (CDOs) – the collateral being the certificates issued to plaintiff by the CMBS trusts, which are structured as a series of classes (the most senior class having the first claim on revenues generated by the commercial loan).

Plaintiff entered into a collateral management agreement (“CMA”) with defendant CWCapital Investments LLC (“CWCI”) to act as controlling class representative with respect to the trusts in which plaintiff had control rights.  Under the CMA, CWCI was obligated to, inter alia, act with reasonable care and in good faith ensure that the value of plaintiff’s assets is maximized. CWCI was also responsible for appointing a special servicer, who would direct and supervise the disposition of loans to mitigate the losses suffered by the trust when the loans fail and do not generate principal and interest payments.

Plaintiff’s complaint alleges that CWCI breached the CMA and the common-law fiduciary duty it owed to plaintiff in its capacity as collateral manager.  CWCI’s purported wrongdoings included the actions of CWCI’s affiliate, CWCapital Asset Management LLC (CWCA), a special servicer appointed by CWCI on plaintiff’s behalf.

Underlying plaintiff’s claims for breach of contract, breach of fiduciary duty, and unjust enrichment are the following three types of alleged misconduct by defendants. First, plaintiff alleged that CWCA, as special servicer, failed to share the significant fees with plaintiff that are generated with every loan workout, which was allegedly the market standard since as far back as 2011. Second, plaintiff alleged that instead of hiring third-party vendors when its special servicing required the use of brokers and auction websites, CWCA “spun off” from itself a new entity called CWFS-REDS, LLC. CWFS-REDS, LLC negotiated with these vendors and insisted that the vendors pay it a “kickback,” thus harming plaintiff and its investors by inflating asset disposition costs. Third, plaintiff alleged that CWCI and CWCA failed to exercise fair value price options (“FVP Options”) to plaintiff and instead usurped these options, exercising them for their own benefit.

Defendants moved to dismiss the complaint in its entirety because, among other things, plaintiff’s complaint was time-barred by the statute of limitations.  Defendants argued that CWCA “had already begun to commit the acts involving fee sharing and FVP Options more than six years before the commencement of the action in 2018, thus placing the claims based on those acts outside of the limitations periods for both breach of fiduciary duty and breach of contract claims.”  Plaintiff, on the other hand, argued that defendants had a continuing duty to act in accordance with the CMA and not to breach their fiduciary duty. Plaintiff’s argument relied on the assumption that defendants’ activities “amounted to a series of wrongs, each of which gave rise to its own limitations period.”

In dismissing certain claims as untimely, Justice Andrea Masley held that certain of the claims alleged a “single breach” and held that the “continuing wrong” doctrine “may only be predicated on continuing unlawful acts and not the “continuing effects” of earlier unlawful conduct.”   In dismissing certain claims as untimely, the court held that “CWCI’s alleged failure to take appropriate action with respect to the special servicer did not renew the limitations period each time CWCA negotiated a transaction without a revenue sharing agreement, since each transaction after the breach first occurred only increased [plaintiff’s] potential damages.”

On appeal, plaintiff argued that the trial court erred in failing to apply the continuing wrong doctrine as defendant’s purported misfeasance gave rise to more than one claim. Plaintiff further argued that the allegations against CWCI constitute a series of individual wrongs, each subject to a new limitations period.  Defendants, on the other hand, argued that the “continuing wrong” doctrine is inapplicable because the alleged wrongs only occurred once, i.e., when CWCI failed to terminate CWCA for not arranging to share its fees, for using CWFS REDS LLC, and for failing to exercise the FVP Options for plaintiff’s benefit.

The First Department ultimately concluded that the continuing doctrine does apply. The majority reasoned that “[t]he explicit language of the CMA conferred on CWCI a continuing duty to manage [plaintiff’s] investment” and to prevent activities that could harm plaintiff. The Court opined that while “a claim accrued the first time CWCI failed to act upon CWCA’s engagement in behavior that allegedly diminished the value of its investment, there is no basis for the argument that each subsequent time CWCI failed to act did not constitute a separate, actionable, wrong.”  The Court relied on the New York Court of Appeals’ decision in Bulova Watch Co. v. Celotex Corp., where the Court concluded that a new claim, with a new limitations period, accrued each time the roofing material supplier failed to honor its promise to repair the roof.

In a 3-2 decision, Justice Saliann Scarpulla dissented from the majority.  In her dissent, Justice Scarpulla stated that plaintiff’s complaint alleged a single breach of the CMA due to “CSCI’s failure to terminate CWCA, which failure had continuing effects, i.e., increasing damages as a result of CWCA’s continued work as special servicer.” Justice Scarpulla reasoned that where, as here, “there was a one-time decision, on a specific contract date, to delegate management to CWCI, and [plaintiff’s] numerous claims concerning CWCI’s special services all arise from that one-time decision,” the continuing breach doctrine is inapplicable. Justice Scarpulla relied on the Second Circuit’s decision in Kahn v Kohlberg, Kravis, Roberts, & Co., where the court rejected plaintiff’s position that each time the defendant exercised its advisory function without being registered, it created a distinct claim for the violation of the Investment Advisors Act of 1940, in opining that where parties enter into a single, discrete contract, claims regarding performance under that contract only impact damages and do not create new claims.

Practice Tip 

When considering the applicability of the statute of limitations defense, you must first determine whether the wrongdoings constitute a single wrong or a continuous serious of wrongs.  This analysis will be instrumental in determining whether your client has a timely claim at the commencement of the litigation or whether your client can move to dismiss on statute of limitations grounds.