A few weeks ago, I blogged about the Arco Acquisitions, LLC, v Tiffany Plaza LLC et al. decision, in which Suffolk County Commercial Division Justice Elizabeth Hazlitt Emerson held that the plaintiff’s fraud claims were barred by the specific disclaimer provisions contained in the parties’ agreement to purchase commercial real property.

A recent decision from the First Department appears to follow suit, as it recently affirmed New York County Justice Andrew Borrok’s decision in Silver Point Capital Fund, L.P. v Riviera Resources, Inc., in which he also dismissed plaintiffs’ fraud claims because they were barred by the express language of the agreement between the parties.

In Silver Point, plaintiffs, highly sophisticated former minority shareholders (“Plaintiffs” or “Sellers”) of defendant Riviera Resources, Inc. (“Defendant” or “Buyer”) entered into a Stock Repurchase Agreement (“Repurchase Agreement”) with Buyer under which they agreed to sell their shares to Buyer at a discount. In connection with the Repurchase Agreement, the parties entered into a “big boy” letter (the “Letter Agreement”), which contained a number of disclaimer provisions.

For example, the Letter Agreement contained the following language:

The Seller hereby acknowledges that it is aware that the Buyer may have access to certain material, nonpublic information regarding the Buyer, its financial condition, results of operations, businesses, properties, assets, liabilities, management, projections, appraisals, plans and prospects (the “Information”).  Any such Information may be indicative of a value of the Common Stock that is substantially different than the purchase price reflected in the Purchase.

The Seller acknowledges that the Buyer is relying upon this letter in engaging in the Purchase and would not engage in the Purchase in the absence of this letter.

Notwithstanding the Buyer’s possession of the Information and the absence of disclosure thereof to the Seller, the Seller wishes to enter into the proposed transaction. The Seller, to the extent that it is acting as an agent and not as a principal, has fully advised its principal of the foregoing and the risks involved in participating in the proposed transaction.

The Letter Agreement also contained the following disclaimer provision  “[n]otwithstanding anything that may be expressed or implied in this letter, the Seller covenants, agrees and acknowledges that it shall have no recourse hereunder or under any documents or instruments delivered in connection herewith . . .”

In addition, the Seller waived

“all warranties, express or implied, arising by law, equity or otherwise, with respect to its sale of the Common Stock, and hereby forever releases, discharges and dismisses any and all claims, rights, causes of action, suits, obligations, debts, demands, liabilities, controversies, costs, expenses, fees, or damages of any kind . . . against the Buyer or any of its affiliates . . . which are based upon or arise from the existence or substance of the Information and the fact that the Information has not been disclosed to the Seller.”

Finally, and most pertinently, the Letter Agreement also contained the following disclaimer provision:

“Each of the Seller and the Buyer acknowledges and represents and warrants that (a) neither such party, nor any party acting on its behalf, has made any representation or warranty, whether express or implied, of any kind or character, regarding the sale and purchase of the Common Stock, except as expressly set forth in this letter; and (b) the assignment and transfer of the Common Stock by the Seller to the Buyer is irrevocable.”

In the case before Justice Borrok, Sellers alleged that Buyer fraudulently induced them to sell all of their shares in the corporation three weeks before it announced “an asset sale of its most valuable properties, after which share prices soared and defendant made a substantial distribution to shareholders.” Sellers further alleged that it would not have entered into the Repurchase Agreement or signed the Letter Agreement had it known that Buyer was negotiating the sale of the property, which resulted in the $295 million transaction and the resulting $260 million shareholder distribution at issue in the case.

In its defense, Buyer relied on the express release language contained in the Letter Agreement in which Sellers acknowledged that Buyer may have material nonpublic information regarding its properties and that such information “may be indicative of a value of the Common Stock that is substantially different than the purchase price reflected in the Purchase.”

Justice Borrok rejected Sellers’ argument, concluding that, Sellers’ claims were barred by the express terms of the Letter Agreement in which Seller acknowledged that the Buyer may have material nonpublic information concerning the properties, which included the subject property.

The court also rejected Buyers’ contention that the underlying real-estate transaction was not contemplated within the definition “Information” because “Information,” as defined in the Letter Agreement, expressly included “certain material, nonpublic information regarding the Buyer, its financial condition, results of operations, businesses, properties, assets, liabilities, management, projections, appraisals, plans and prospects.”  The court therefore determined that the definition of “Information” clearly encompassed the underlying transaction, and that nothing in the Letter Agreement served to carve out any sales of Defendant’s properties.

The court also reasoned that if the parties intended to include a carve-out exception for major sales of properties, they would have negotiated that exclusion. Justice Borrok ultimately held that Sellers cannot now, ask the court after the fact to rewrite the parties’ agreement.

The First Department agreed and held that the Letter Agreement clearly, and in sufficient detail, set forth the type of information that may not have be disclosed in the course of the share repurchase to enable the parties to make an informed decision as to whether or not to execute the Repurchase Agreement.

The holdings in the Arco Acquisitions and in Silver Point both bring home the recently emphasized rule that release language in contracts may bar certain claims.

In expensive lawsuits involving fraud claims, the temptation of a defendant to play hide and seek with its assets can be high. To prevent this result, CPLR § 6201 provides a mechanism (i.e., prejudgment attachment order) to preserve such assets. However, in a recent decision from the Suffolk County Commercial Division, Justice Elizabeth H. Emerson reminds us that a party seeking to obtain a prejudgment attachment order faces a heavy burden.

In Fritch v Bron, plaintiff Maureen Fitch (“Plaintiff”) and defendant Igor Bron (“Mr. Bron”) agreed to form an electrical construction contracting company, E. Electrical Contracting LLC (“EEC”). In or around 2004, Plaintiff and Mr. Bron signed an operating agreement for EEC, naming Plaintiff as the sole manager. As part of their duties, Plaintiff was responsible for contract administration and other administrative tasks at EEC, while Mr. Bron was responsible for EEC’s field operations. In or around 2016, Plaintiff and Mr. Bron signed an amended operating agreement (“Amended Operating Agreement”) for EEC, whereby the parties agreed that they would not perform any electrical contracting work outside of EEC, including for defendant Sajiun Electric, Inc. (“Sajiun Electric”). However, according to Plaintiff, since 2003, Mr. Bron, along with defendants Sajiun Electric, Richard Sajiun (“Mr. Sajiun”), and Rita Bron (“Mrs. Bron”), concocted an extensive scheme to divert EEC’s assets from Plaintiff, for the benefit of Sajiun Electric and other named defendants.

As a result, in March 2021, Plaintiff commenced an action to recover damages for fraud, aiding and abetting fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, constructive trust, and unjust enrichment. Thereafter, Plaintiff brought a motion for a prejudgment attachment order under CPLR §§ 6201 (1) and (3), arguing (a) Mr. Sajiun was a nondomiciliary who resided in Florida; (b) there was substantial evidence that Mr. Bron, Mrs. Bron, Mr. Sajiun, and Sajiun Electric were hiding assets for the purpose of defrauding creditors and frustrating the enforceability of a judgment; and (c) that she has shown a probability of success on the merits. Justice Emerson rejected each of Plaintiff’s arguments.

First, the Court addressed the applicable legal standard in determining whether to grant a prejudgment attachment order. Specifically, the Court stated that “[t]o obtain an order of attachment, the moving party must demonstrate through affidavit or other written evidence (1) the existence of a cause of action for a money judgment, (2) a probability of success on the merits, (3) the existence of one or more grounds enumerated in CPLR 6201 (e.g., the defendant is a nondomiciliary residing without the state, or the defendant with the intent to defraud his creditors or frustrate the enforcement of a judgment that might be rendered in plaintiff’s favor, disposes of secreted property), and (4) that the amount demanded from the defendant exceeds all counterclaims known to the plaintiff” (see CPLR 6212 (a); Ford Motor Credit Co. v Hickey Ford Sales, 62 NY2d 291, 301 [1984]). In addition, the Court noted that since attachment is a harsh remedy, CPLR § 6201 is strictly construed in favor of those against whom it may be employed (651 Bay St., LLC v Discenza, 189 AD3d 952, 953 [2d Dept 2020]).

Second, the Court rejected Plaintiff’s argument for a prejudgment attachment order against defendant Mr. Sajiun on the ground that he was a nondomiciliary residing in Florida because (a) Mr. Sajiun submitted an affidavit stating that he resided in Suffolk County and worked in New York City; and (b) the record reflected that Mr. Sajiun was served in Hampton Bays, New York. Moreover, the Court found that Plaintiff’s allegations that Mr. Sajiun sold his New York residence in June 2021 for the purpose of transferring the proceeds from New York to Florida, was not enough to support a prejudgment attachment order.

Third, the Court found that Plaintiff failed to establish her burden under CPLR § 6201 (3) that defendants Mr. Bron, Mrs. Bron, Mr. Sajiun and Sajiun Electric attempted to frustrate the enforcement of a judgment by disposing of secreted property. Indeed, the Court noted that the transfer of the Bron residence to a family trust was in 2017, long before the commencement of the action. In addition, the Court acknowledged that many of Plaintiff’s allegations involving fraudulent concealment of assets were based on “information and belief,” which is insufficient to support a prejudgment attachment order.

Fourth, the Court found that Plaintiff failed to establish a probability of success on the merits of her claims, which is a necessity to obtain a prejudgment attachment order. Accordingly, the Court denied Plaintiff’s motion for a prejudgment attachment order.

Upshot:

As pointed out by Justice Arlene P. Bluth in Erensel v Abitbol, the purpose of a prejudgment attachment order “is not merely to ensure a plaintiff can recover the amount sought if he or she prevails in a case. Otherwise, a plaintiff would be entitled to an attachment in nearly every case.”  Thus, this decision highlights that obtaining a prejudgment attachment order is an uphill battle and attorneys must educate their clients on the onerous burden needed to obtain such relief.

Nobody likes fraud claims asserted against them. Thankfully for defendants, fraud claims are notoriously difficult to prove, and defendants often try to have these claims dismissed at the pleading stage.

An express disclaimer in a contract is often a popular avenue for litigants facing a fraud claim to move for dismissal. A recent Commercial Division case, Arco Acquisitions, LLC, v Tiffany Plaza LLC et al. is a good example.

In Arco, plaintiff entered into an agreement to purchase commercial real property from defendants Tiffany Plaza LLC and 1075 Farmingville LLC (the “Defendants” or “Sellers”) (the “Agreement”). The Sellers of the property provided plaintiff with tenant-estoppel certificates and a certified rent roll detailing, inter alia, rents, taxes and arrears. The documents did not show that any  particular tenants were in arrears. After the parties’ closing, however, plaintiff discovered that two tenants were unable to pay their monthly rent. The lawsuit ensued.

In April 2021, plaintiff commenced this litigation for fraud, aiding and abetting fraud, and piercing the corporate veil.  Plaintiff alleged that that the rent roll and estoppel certificates were fraudulent and that the Sellers misrepresented the rent roll and obtained false estoppel certificates “to inflate the rent roll and increase the value of the property.”

Sellers moved to dismiss, relying for the most part on the express “As Is, Where Is, and With All Faults” provision of the parties’ Agreement. Under this provision, the parties agreed that plaintiff was purchasing the property in its existing condition,  and that the Seller had no obligation to determine or correct any facts, circumstances, conditions or defects, or to compensate the purchaser for such facts and circumstances. In fact, the Sellers specifically negotiated for the “assumption by Purchaser of all responsibility to investigate the Property, Laws and Regulations, Rights, Facts, Condition, Leases, Open Permits and Violations and of all risk of adverse conditions existing on the date of this Agreement,” and structured the Agreement in consideration of these assumptions.

Under this provision, the parties also agreed that:

 “Purchaser has, as of the date hereof, undertaken all such investigations and review of the Property, Laws and Regulations, Rights, Facts, Condition, Leases, Open Permits, Violations or Tenancies, as Purchaser deems necessary or appropriate under the circumstances as to the status of the Property and based upon this Agreement, Purchaser is and will be relying strictly and solely upon such inspections and examinations and the advice and counsel of its own consultants, agents, legal counsel and officers, and . . . Purchaser assumes the full risk of any loss or damage occasioned by any fact, circumstance, condition or defect existing on the date of this Agreement and pertaining to this Property.”

The Arco Court cited clear precedent on this topic. When a “party specifically disclaims reliance upon a representation in a contract, that party cannot, in a subsequent action for fraud, assert it was fraudulently induced to enter into the contract by the very representation it has disclaimed” (Grumman Allied Industries, Inc. and Grumman Corporation, v Rohr Industries, Inc., 748 F2d 729 [2d Cir 1984]; citing Danann Realty Corp. v Harris, 5 NY2d 317, 323 [1959]). In Grumman Allied, the Second Circuit held that the specific disclaimed provision barred plaintiff’s misrepresentation claim.

In Arco, Suffolk County Commercial Division Justice Elizabeth Hazlitt Emerson opined that fraud claims are dismissed when disclaimer provisions are “sufficiently specific” to match the substance of the alleged misrepresentation. Justice Emerson noted, however, that the specificity requirement is more relaxed when the agreement is entered into by sophisticated business parties.

In determining that plaintiff’s reliance was not justified, the court considered both the sophistication of the parties involved in the transaction and the fact that plaintiff’s allegations tracked the specific language used in the disclaimer, which included “leases” and “tenancies.” The court concluded that “to hold otherwise would be to say that it is impossible for two businessmen dealing at arm’s length to agree that the buyer is not buying in reliance on any representations of the seller as to a particular fact.”

Takeaway:

Litigants: when entering into a contract, carefully review the disclaimers container therein because they may preclude you from asserting certain claims in the future.

Practitioners: courts consider a large array of factors, including the sophistication and expertise of the parties, the arm’s-length nature of the negotiations, and the plain language of the agreement in determining motions to dismiss fraud claims based on various disclaimer provisions, such as the ones present in the Arco case. You must therefore carefully review these disclaimer provisions, assess your client’s likelihood of success on the motion, and advise your client accordingly.

 

In recent years, the New York court system has endorsed alternative dispute resolution (“ADR”) as a way to increase efficiency in the court system, making ADR presumptive in most civil cases.  As a pioneer of efficiency, the Commercial Division has reinforced – through the adoption of multiple ADR-related rules and rule amendments – its “strong commitment to early case disposition” through ADR.

Consistent with this commitment, Commercial Division Rule 3(a) was recently amended to permit as an ADR mechanism the use of a “neutral evaluator” (as an alternative to a mediator), and to allow for the inclusion of “neutral evaluators” in rosters of court-approved neutrals.  The amendment, effective December 20, 2021, provides:

At any stage of the matter, the court may direct or counsel may seek the appointment of an uncompensated mediator or neutral evaluator for the purpose of helping to achieve a resolution of all or some of the issues presented in the litigation. Counsel are encouraged to work together to select a mediator or neutral evaluator that is mutually acceptable and may wish to consult any list of approved neutrals in the county where the case is pending . . . .

The amendment to Rule 3(a) will enable the Commercial Division to use the full range of ADR services contemplated by Part 146 of the Rules of the Chief Administrative Judge, which includes both mediators and neutral evaluators, and describes the qualification requirements for each.

Under Part 146.4, a lawyer or judge seeking qualification as a neutral evaluator must be admitted to practice for at least five years, and have at least five years of substantial experience in the specific subject area of the cases over which he or she will serve as a neutral.  In addition, the candidate must complete six hours of approved training in procedural and ethical matters related to neutral evaluation (as opposed to the 40-hour training requirement to become a mediator).  Once trained and certified, the neutral evaluator may be added to rosters of neutrals and selected by judges or parties to help facilitate the resolution of complex commercial matters, alongside the mediators already available.

The amendment to Rule 3(a) will help address the need for expanded ADR services as the New York court system continues to implement the presumptive ADR system, particularly in light of the many challenges posed by the COVID-19 pandemic.  As the Commercial Division Advisory Council (“CDAC”) explained in its proposal to amend Rule 3(a), given the recent initiatives to encourage ADR and the effects on litigation resulting from the COVID-19 pandemic, the rule change would permit attorneys and judges – some with just as much practical experience as current mediators – to become neutral evaluators without being required to undergo the more extensive training required of mediators.

The rule change may also increase diversity of court-approved neutrals.  According to the CDAC, the challenges posed by a 40-hour mediation training requirement may have a disproportionate impact on women and minorities, who may feel that taking time away from client work and business development could put their career prospects at risk.

The pro-ADR initiative continues to be a priority for the New York Court system, especially in the Commercial Division. Indeed, several Commercial Division Rules address ADR.  Rule 3, as discussed above, permits courts in the Commercial Division to direct the appointment of a mediator – and now a neutral evaluator – to facilitate the resolution of a case, and expressly encourages counsel to “work together to select a mediator” or neutral evaluator mutually acceptable to the parties.  Rule 10 requires counsel to certify that he or she has discussed with the client the availability of ADR mechanisms in the Commercial Division.  And, Rule 11 requires that preliminary conference orders contain specific provisions for means of early disposition of the case through ADR.

In addition to these Rules, many of the Commercial Division justices encourage parties to explore ADR.  For example, in New York County, Justice Borrok’s individual rules explain that “the parties are encouraged to identify as early as possible any case where ADR would be appropriate” and “write a joint letter to the Court asking to be referred to ADR.”  Likewise, in New York County, Justice Cohen’s and Justice Reed’s individual part rules require the parties to report prior to the status conference whether they have attempted the ADR process offered by the Court.  In Suffolk County, Justice Emerson’s individual part rules address the procedure for seeking ADR and provide a link for more information on the Court’s ADR program.  And, in Queens County, Justice Grays’ individual rules expressly authorize the Court to refer matters to the Commercial Division ADR program without the parties’ request or consent.

Takeaway:

The recent amendment to Rule 3(a) will undoubtedly help facilitate access to the ADR programs already encouraged by the New York court system and Commercial Division justices.  By adding neutral evaluators to rosters of neutrals, the Commercial Division will enhance the options and solutions it provides to businesses that choose to bring their cases to New York courts, providing more diversity and experience in its neutrals and more types of ADR mechanisms.  This is especially true as litigants determine how to advance their cases in the aftermath of the COVID-19 pandemic.

Just like a bride and groom vow to join together for better or for worse, commercial parties joining together through a joint venture must make a similar promise to share in profits and losses. In a recent decision from the Suffolk County Commercial Division, Justice Elizabeth H. Emerson took a close look at the parties’ “vows” and determined that no joint venture agreement existed where one party did not truly agree to share in the venture’s losses.

In JRAP Enters., Inc. v Zuacro Constr., LLC, Plaintiffs JRAP Enterprises, Inc. and principal Joseph Rapaport alleged they entered into a joint venture agreement with Defendants Zucaro Construction, LLC and Zucaro House Lifters, Inc. to lift houses after Hurricane Sandy. Plaintiffs allege in their Complaint that Defendants engaged Plaintiffs to provide their expertise, time and skill to assist with preparing bids for contracts to lift homes under Long Island’s New York Rising and Recovery  and “Build it Back” programs.   

According to Plaintiffs, Defendants entered into several subcontracts with general contractors to perform work on lifted homes and agreed to pay Plaintiffs 10% of the gross payments received by Defendants for each subcontract. After not being compensated on more than 40 subcontracts, Plaintiffs commenced an action to recover damages for breach of contract, breach of fiduciary duty, an accounting, breach of the implied covenant of good faith and fair dealing, quantum meruit, and unjust enrichment. Defendants moved to dismiss the causes of action for breach of fiduciary duty, an accounting, and breach of the implied covenant of good faith and fair dealing. Plaintiffs opposed and cross moved to amend the Complaint.

The Court first addressed Plaintiffs’ second cause of action for breach of fiduciary duty which alleged that the Defendants’ failure to pay the agreed compensation to Plaintiffs was a breach of their fiduciary duty to Plaintiff. Recognizing that the cause of action was based on the alleged joint venture agreement, the Court looked to see if the essential elements of a joint venture had been properly alleged.

When seeking to establish a joint venture agreement, allegations of mere joint ownership, community of interest, joint interest in profitability, and acting in concert to achieve some stated economic objective are all insufficient. More than a simple contractual relationship is required. As the Court instructed,

“[a]n indispensable essential of a contract of joint venture is a mutual promise or undertaking of the parties to share in the profits of the business and submit to the burden of making good the losses.”

Here, the Court found Plaintiffs failed to allege a mutual promise to share in the “burden of the losses.” Plaintiffs alleged that the parties agreed “to accept the loss of being denied any compensation for the multitude of hours of uncompensated time and expenses incurred by them in performing the work . . . if the subcontracts, or any of them, were not awarded to Defendants or if Defendants were not paid for their work through no fault of their own.” In other words, Plaintiffs only agreed to risk losing their own expenses and the value of their own services, not the losses incurred by the venture, which was insufficient to establish a joint venture agreement.

What Plaintiffs actually alleged was a basic contractual relationship. Because it is well settled that parties engaged in an arms-length business transaction are not fiduciaries, and a breach of fiduciary duty cannot be based on the same facts and theories as a breach of contract claim, the Court dismissed the second cause of action for breach of fiduciary duty.

The Court went on to dismiss Plaintiffs’ third cause of action for an accounting because a cause of action for accounting cannot stand in the absence of a fiduciary relationship; the fourth cause of action for breach of the implied covenant of good faith and fair dealing as unopposed; and Plaintiffs’ cross-motion to amend the Complaint because Plaintiffs’ proposed amended complaint did not cure the pleading deficiencies of the original Complaint.

Upshot:

When alleging the existence of a joint venture agreement, it is crucial to allege a mutual promise or undertaking of the parties to share not only in the profits but also the losses of the joint venture. A party’s agreement to bear their own individual losses are insufficient.

As we all are acutely aware, during the last 21+ months, the normally slow-to-change practice of law has been thrust into overdrive, forcing lawyers and courts to quickly pivot from a largely in-person practice to virtual.

New York courts in particular have done an incredible job expanding access to litigants online by, among other things, expanding e-filing capabilities, conducting virtual appearances for conferences and oral arguments, encouraging remote depositions, and even conducting trials online. I’ve discussed with colleagues and adversaries alike the newfound efficiencies that have emerged out of the necessity caused by the COVID-19 pandemic.

New York’s Commercial Division, ever the agent of progress, keeps a good thing going with respect to virtual access. Just last week, on October 19, 2021, Chief Administrative Judge Lawrence K. Marks promulgated new Commercial Division Rule 36 (Administrative Order 299/2021), which will allow Commercial Division judges to conduct virtual evidentiary hearings and non-jury trials on consent of the parties.

In a memo published by the Commercial Division Advisory Council last June 2020, the Advisory Council advocated for this new rule (adopted in large part by AO/299/21). Among the benefits cited are the cost and time savings that virtual conference technology would bring. A global business hub, New York is the venue of choice for much commercial litigation around the country and around the world. Rule 36 will remove many of the obstacles in coordinating party, witness, lawyer, and court scheduling by largely reducing or eliminating the time and cost of necessary travel.

The public’s collective comfort with using video conferencing technology has only increased since the Advisory Council’s June 2020 memo. Having already incorporated such technologies into many other facets of the legal practice (i.e. “Zoom meetings”, remote depositions, etc.), expanding its use to evidentiary hearings and bench trials is not much of a stretch. Video conferencing technologies have only improved in efficiency and security after months of rapid development necessitated by stay-at-home orders, travel bans, and quarantine mandates from earlier in the pandemic (some of which still apply in certain jurisdictions).

It is important to note that Rule 36 requires the consent of all parties. Additionally, the Rule is permissive, not mandatory, meaning that even if all parties consent, ultimately the availability of virtual evidentiary hearings and non-jury trials lies within the Court’s discretion. This flexibility allows for the tailored application of video conferencing technologies to evidentiary hearings and/or bench trials where a virtual appearance would be appropriate.

Given the technological developments in this area over the past 21+ months, and given the encouragement by the judiciary, cost-savings to the client, and overall efficiencies promoted, I have no doubt that Rule 36 will be a welcome addition to practitioners who find themselves regularly practicing in the Commercial Division.

So, without further ado, we give you Commercial Division Rule 36:

Rule 36. Virtual Evidentiary Hearing or Non-jury Trial.

(a)        If the requirements of paragraph (c) of this Rule are met, the court may, with the consent of the parties, conduct an evidentiary hearing or a non-jury trial utilizing video technology.

(b)       If the requirements of paragraph (c) of this Rule are met, the court may, with the consent of the parties, permit a witness or party to participate in an evidentiary hearing or a non-jury trial utilizing video technology.

(c)        The video technology used must enable:

(i)        a party and the party’s counsel to communicate confidentially;

(ii)       documents, photos and other things that are delivered to the court to be delivered to the remote participants;

(iii)      interpretation for a person of limited English proficiency;

(iv)      a verbatim record of the trial; and

(v)       public access to remote proceedings.

(d)      This Rule does not address the issue of when all parties do not consent.

Rule 36 becomes effective as of December 13, 2021.

Aficionados of Commercial Division practice know that the ComDiv rules originally were — and, as evidenced by an Administrative Order earlier this month, continue to be — modeled after the federal rules.  Efficiency begets efficiency.

Earlier this month, on October 4, Chief Administrative Judge Lawrence K. Marks promulgated new ComDiv Rule 35, which, as of December 1 of this year, will require non-governmental corporate parties to file at the commencement of an action or proceeding a Commercial Division version of the disclosure statement required under FRCP 7.1.

Among the many checks and balances built into our adversarial system of justice are rules and procedures designed to root out conflicts of interest, including interests of an economic nature.  Such rules and procedures affect parties, lawyers, and judges alike.

The corporate disclosure requirement under FRCP 7.1 for example, allows a judge assigned to a new case to determine whether the judge has an economic interest in any corporate party or any of the party’s affiliated corporate entities.  Thus, counsel filing a new action in federal court on behalf of a corporate client must “identif[y] any parent corporation and any publicly held corporation owning 10% or more of its stock,” or otherwise “state[] that there is no such corporation.”

In September of last year, the Subcommittee on Procedural Rules to Promote Efficient Case Resolution sent the Commercial Division Advisory Council a memo proposing a rule requiring similar statements for cases filed in the Commercial Division, which would “require minimal financial information, but which [would] help protect the judge and the parties from litigating a case where the judge has or could be accused of having an improper interest or bias. ”

Flagging a certain tension between private interest and public disclosure, and perhaps anticipating some pushback from the bar in this regard, the Subcommittee looked to precedent to reiterate the purpose behind the rule and to support its promulgation in the Commercial Division:

Corporate disclosure statements exist to assist district judges in determining whether they might have a financial interest in a corporate entity that is related to a corporate party in a case before them and therefore requires their recusal. Recusal issues involve the operations of the courts and the judicial conduct of judges, and thus are matters of utmost public concern (citations and quotations omitted).

In particular, the Subcommittee cited a 2016 decision out of the Southern District of Georgia, Steel Erectors, Inc. v. AIM Steel Int’l, Inc., 312 F.R.D. 673, 676 (S.D. Ga. 2016), for the proposition that the public’s interest in a disclosure of this kind trumps a private corporation’s interest in concealing the identity of its parent, even if disclosure would mean a reduction in market share for the party corporation.

New ComDiv Rule 35 is virtually identical to FRCP 7.1:

Rule 35. Disclosure Statement.

(A) Who Must File: Contents. A non-governmental corporate party and a non-governmental corporation that seeks to intervene must file a disclosure statement that:

(1) identifies any parent corporation and any publicly held corporation owning 10% or more of its stock; or

(2) states that there is no such corporation.

(B) Time to File: Supplemental Filing. A party or a proposed intervenor must:

(1) file the disclosure statement with its first appearance, pleading, petition, motion, response, or other request addressed to the court; and

(2) promptly file a supplemental statement f any required information changes.

Again, the corporate disclosure requirement under new ComDiv Rule 35 goes into effect on December 1, 2021, a little under six weeks from the date of this post.

As we’ve mentioned time and again on this blog, since its inception in 1995, New York’s Commercial Division has continued to not only be a leader in developing and shaping commercial law, but it is also on the forefront of instituting rules with the goals of fostering litigation efficiency, cost reduction, and implementation of technology in the courtroom. The Commercial Division Advisory Council, which is tasked with keeping abreast of new developments relating to commercial litigation in New York and providing advice concerning important and cutting-edge issues of interest to practitioners, is instrumental in maintaining the Commercial Division’s national (and even international) reputation as a leading business court.

On September 14, 2021, the New York State Office of Court Administration issued a request for public comment by the Advisory Council to amend Commercial Division Rule 11 to include a preamble about proportionality and reasonableness and to add provisions allowing the Court to direct early case assessment disclosures and analysis prior to and after the Preliminary Conference. This recent request piggybacks off another, lengthier and robust set of proposed modifications to Rule 11, as recently reported by my colleague, James Maguire.

The preamble to Commercial Division Rule 11 proposed by the Advisory Council provides the following:

Acknowledging that discovery is one of the most expensive, time-consuming aspects of litigating a commercial case, the Commercial Division aims to provide practitioners with a mechanism for streamlining the discovery process to lessen the amount of time required to complete discovery and to reduce the cost of conducting discovery. It is important that counsel’s discovery requests are both proportional and reasonable in light of the complexity of the case and the amount of proof that is required for the cause of action.

The stated rationale behind the proposed preamble is to reaffirm or re-emphasize the guiding principles of proportionality and reasonableness in the pursuit of discovery in the Commercial Division which two concepts “must govern discovery in all cases, including the most intricate, difficult and complex Commercial Division case.” As further noted by the Advisory Council, proportionality and reasonableness are specifically included in the proposed preamble to Rule 11 so that “no party or counsel may argue that these concepts are modifying any legal standards or Rules that apply to the scope of discovery.”

The Advisory Council also recommended the inclusion of several additional provisions allowing the Court to direct early case assessment disclosures and analysis prior to and after the Preliminary Conference. One such proposed provision affords the Court the ability to direct the plaintiff to produce a document “stating clearly and concisely the issues in the case prior to the preliminary conference,” and to the extent that there are any counterclaims, to direct the counterclaimant to produce a document stating clearly and concisely the issues asserted in the counterclaims. The proposal also provides the Court with the discretion to direct both of the parties to produce a document stating each of the elements in the causes of action at issue and the facts needed to establish their case. The stated goal for this recommendation is to “streamline” the discovery process “so that that discovery is aligned with the needs of a case and not a search for each and every possible fact in the case.”

Although the suggested proposals are not earth-shattering, any proposal that purports to “streamline” the discovery process is welcome.

Persons wishing to comment on the proposal should e-mail their submissions to rulecomments@nycourts.gov or write to: Eileen D. Millett, Esq., Counsel, Office of Court Administration, 25 Beaver Street, 11th Fl., New York, New York, 10004. Comments must be received no later than November 15, 2021.

In March 2020, the New York State Courts and attorneys’ offices all over the state shut down as part of the public’s broad effort to slow the spread of the Coronavirus, and the legal profession quickly transitioned to remote operations.  Remote team meetings, court appearances, arbitration hearings, networking events, and depositions were all borne from the necessity imposed by closed offices and social distancing.

Despite the sometimes steep learning curve associated with the remote conferencing technology and systems, remote proceedings became surprisingly effective.  Lawyers who once swore that there was nothing like being in the same room as their adversary found that, in many cases, the Zoom or Teams suite works just fine.  As a consequence, one need not look beyond the pages of this blog to see that for many, remote practices are here to stay.  Commercial Division Rule 1 now allows attorneys to request to appear remotely, saving client costs and avoiding the unnecessary risk of infection.  In February, we wrote about the Commercial Division Advisory Committee’s proposed rule authorizing and regulating the use of remote depositions.  The proposed rule has received favorable comment.

Continue Reading Even as Pandemic Wanes, Remote Depositions Remain the New Normal

New York’s Commercial Division has continuously taken the lead as an innovative forum, proposing rule changes that are aimed at increasing efficiency and overall effectiveness of the litigation process.  In the past several years, discovery challenges surrounding electronically stored information (“ESI”) have taken center stage in a majority of cases before the Commercial Division. Understanding these challenges, on September 7, 2021, the Commercial Division Advisory Council (“CDAC”) published a proposal, that includes several new amendments to the current e-discovery rules.  Specifically, the CDAC advised that “[t]he goal of the revisions is to address e-discovery in a more consolidated way, modify the rules for clarity and consistency, expand the rules to address important ESI topics consistent with the CPLR and caselaw, and to provide further detail in Appendix A – Proposed ESI Guidelines than is practical in the Commercial Division Rules.”

One significant modification by the CDAC’s proposal revolves around several distinct changes to Rule 11-c concerning discovery of ESI.  First, the proposal seeks to consolidate all ESI discussion from the current version of Rule 8 into Rule 11-c, including directing parties to confer on electronic discovery topics prior to the Preliminary Conference.  Second, the proposed revisions entirely remove Rule 11-e(f), which discusses using efficient means to identify ESI for production, including technology-assisted review (“TAR”), and move the substance of the rule into Rule 11-c(e). Third, the proposal includes noteworthy additions to Rule 11-c on the issue of cost efficiency for parties and non-parties in producing ESI.  The proposed changes include cost-sharing directives requiring that (a) “[t]he costs and burdens of ESI shall not be disproportionate to its benefits;” and (b) “[t]he requesting party shall defray the reasonable expenses associated with a non-party’s production of ESI, in accordance with Rules 3111 and 3122 (d) of the CPLR.”  Fourth, the proposed revisions draw on rules / topics from the Nassau County Commercial Division ESI Guidelines, such as the inadvertent or unintentional production of ESI documents that are subject to attorney-client privilege, and a requirement that a party take reasonable steps to preserve ESI documents that it has a duty to preserve.

In addition, the CDAC’s proposal includes material changes to Appendix A to Commercial Division Rule 11-c.  For starters, the revised Appendix A would substitute the current non-party ESI Guidelines with “new guidelines to cover all aspects of ESI, from parties and non-parties alike.”  Further, the proposed ESI Guidelines, which the CDAC acknowledges are advisory rather than mandatory, include a comprehensive list of e-discovery topics that are not addressed by the current non-party ESI Guidelines, including but not limited to:

  • Reminding counsel of the importance of technical competence in handling e-discovery;
  • Guidance on the defensible preservation and collection of ESI sources;
  • Information on the selection of appropriate procedures and technologies for producing ESI, including TAR;
  • Setting forth a process for parties to address ESI that is not reasonably accessible due to undue burden or cost; and
  • Protection against waiver for privileged ESI that is inadvertently produced.

Recognizing that e-discovery law is constantly changing, the CDAC believes that the proposed ESI Guidelines can be updated on a continuing basis without requiring any amendments to the Commercial Division Rules themselves.  Persons who wish to comment on this proposal should e-mail their submissions to rulecomments@nycourts.gov or write to: Eileen D. Millett, Esq., Counsel, Office of Court Administration, 25 Beaver Street, 11th Floor, New York, NY 10004.  Comments must be received no later than November 8, 2021.