The statutes of limitations set forth in the CPLR are default rules, and parties generally are free to modify default rules by agreement.  But statutes of limitations also further the important public interests, such as avoiding stale claims and giving repose to our affairs.  In light of the public interests involved, there are substantial limits on how much parties can agree to lengthen, shorten, or waive the limitations periods applicable to claims arising under New York law.

For example, while parties can agree to a shorter limitations period than prescribed by the CPLR, a recent case by Albany County Commercial Division Justice Richard Platkin serves as a sharp reminder that a contractually shortened limitations period must be reasonable under the circumstances and, in many cases, the reasonableness of such an agreement depends not only on the length of the limitations period itself, but also on the accrual date.

Continue Reading Expect Careful Scrutiny of Contractually Shortened Statutes of Limitations

“Reasonably anticipated litigation” is a necessary element you need to show to benefit from the common interest privilege in your attempt to withhold certain documents already shared with a third-party during a pending suit in New York – but, when does this privilege apply and what does “reasonably anticipated litigation” actually mean?

Recently, Justice Andrew Borrok issued a decision which analyzed the applicability of the “common interest privilege” and the need to prove the element of “reasonably anticipated” litigation when relying on this privilege in New York courts as a basis for withholding certain discovery.

In Starr Russia Investments III B.V. v Deloitte Touche Tohmatsu Ltd., Plaintiff Starr Russia Investments III B.V. (“Starr”) brought a fraud action against Deloitte Touche Tohmatsu Ltd. and various related entities, including ZAO Deloitte & Touche CIS (“D-ZAO”), claiming that Starr was fraudulently induced by Defendants to invest, between 2008 and 2010, approximately $110 million in Investment Trade Bank (“ITB”), a Russian joint stock company controlled by a Russian national, and that Starr lost the full value of its investment when, in 2015, the Central Bank of Russia revealed that ITB had amassed a huge capital deficit and was deemed insolvent.

Starr claimed that it engaged Allen and Overy (“A & O”) to represent it in its investment in the ITB transaction.  Shortly after, Starr approached FPK Capital/J.C. Flowers (“JC Flowers”) about becoming a co-investor.  JC Flowers engaged Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”) to represent it in the transaction.  Skadden commissioned the Risk Advisory Group (“RAG”) to produce a report as part of its due diligence (the “RAG Report”).  Skadden, in turn, shared the RAG Report, dated June 9, 2008, with Starr based on the parties’ agreement to share due diligence materials.

D-ZAO moved to compel Starr to produce the RAG Report and its communications discussing the report’s factual findings and responsive documents it shared with third-parties, including JC Flowers from 2007 to 2015.

Starr refused to produce the RAG Report, claiming that it was protected by the attorney-client privilege and the common interest privilege.

With respect to attorney-client privilege, the Court held that because there was neither a written expression of joint representation by Skadden and A & O as to both JC Flowers and Starr nor a written agreement indicating that the documents shared during the course of due diligence were privileged and could not be shared with others, the RAG Report was not protected by the attorney-client privilege.

With respect to Starr’s claim that the Rag Report was protected by the common interest privilege, the Court analyzed whether the report was prepared in anticipation of litigation, a necessary element in New York.

Under New York law, the common interest privilege is applicable to attorney-client communications disclosed to a third-party where

(1) the third-party shares a common legal interest;

(2) the confidential communication is made in furtherance of that common legal interest; and

(3) the confidential communication relates to pending or reasonably anticipated litigation.

These elements were articulated in the seminal case of Ambac Assurance Corporation v Countrywide, in which the New York Court of Appeals recognized the applicability of the common interest privilege to both criminal and civil matters and rejected expanding the privilege to commercial transactions in the antitrust context where communications do not concern pending or reasonably anticipated litigation.

The Court in Ambac recognized that on a public policy level, the common interest privilege promotes the exchange of privileged information and candor that may otherwise be inhibited by the threat of mandatory disclosure, thereby creating an environment which encourages the coordination of legal strategy where “parties are engaged in or reasonably anticipate litigation in which they share a common legal interest.”

The law in New York State, however, differs from the applicability of the common interest privilege in several federal courts.  For example, the Second, Third, Seventh and Federal Court of Appeals Circuits have rejected the “pending or reasonably anticipated litigation” requirement and applied the common interest privilege in purely transaction contexts.

Ultimately, relying on the precedence set in Ambac, the Court found that the common interest privilege was inapplicable where the RAG Report was prepared for transaction structuring purposes.  In fact, the Court noted that Starr began to “reasonably anticipate litigation” in 2011 when they began to hire outside counsel concerning potential contract claims arising from the shareholders’ agreement.  Although Starr attempted to argue that it already anticipated litigation in 2008, around the time that the RAG Report was prepared, based on an email from JC Flowers which described litigation risks associated with the transaction, the Court held that there was no evidence of a demand, or a refusal of a demand or any other indication that Starr would sue or be sued. Simply put, “[t]he fact that one evaluates litigation risk and or uses litigation risk as a negotiating tool does not mean that litigation is reasonably anticipated.”

Takeaway: New York transaction attorneys and litigators should be mindful of New York State’s restrictive applicability of the common interest privilege where they can expect that documents and communications exchanged with third-parties during a commercial transaction are likely discoverable during litigation.

Summons and Complaint  ✅

Service of Process ✅

Answer ✅

Discovery ☐

You now have to collect, review and produce documents pursuant to the preliminary conference order.  And so, in collecting documents from the various custodians, it appears some of the documents contain truly “irrelevant” material.  However, parts of the document are indeed responsive.  Can you legitimately redact that portion of the document you deem “irrelevant”?

On September 25, 2020, Justice Andrew Borrok issued a decision addressing this very topic i.e., whether a party may redact irrelevant information.

In Hansen Realty Development Corp. v Sapphire Realty Group LLC, a case involving a real estate development project,  Triple Star Realty LLC (“Triple Star”) purchased the property  for $91 million but, because it was unable to move past pre-construction activity, among other things, the parties abandoned the property and sold it in 2017.  Pursuant to Triple Star’s Operating Agreement, Hansen Realty Development Corp (“Hansen”) held a 75% interest in Triple Star and Sapphire Realty Group LLC (“Sapphire”), whose sole member and Chief Executive Officer is Yan Po Zhu (“Zhu”) (collectively with Sapphire, the “Zhu Defendants”), held the remaining 25% interest.

In November, 2017, Hansen commenced this derivate action on behalf of Triple Star alleging that the Zhu Defendants mismanaged the property’s development and misappropriated Triple Star’s account for personal use. In December, 2017, Sapphire commenced a third-party derivate action on behalf of Triple Star against Hansen, Triple Star’s Chief Operating Officer, Weiming Yin, and the sole shareholder of Hansen’s parent company, Shu Sen Jia for, inter alia, grossly mismanaging Triple Star, and causing Triple Star to pay for their personal expenses.

On September 15, 2018, Sapphire filed a motion to compel Hansen to respond to its discovery demands and to produce (i) Hansen’s financial documents, (ii) documents pertaining to Yin’s employment, (iii) documents and communication between Yin and Hansen, and (iv) email messages and WeChat messages from Hansen’s agents and representatives concerning the property. By order dated January 25, 2019, Hansen was directed to produce communications with Mr. Yin regarding the development and management of the property.  Although Hansen produced the WeChat messages, they contained significant redactions.

The Court noted that the WeChat messages were never downloaded into a database for preservation or searched pursuant to any search terms. However, Hansen’s counsel explained that its office in Shanghai used a “mobile forensic application to extract WeChat messages.”  Upon review of the messages for privilege, Hansen’s counsel in China redacted certain messages and the spreadsheet containing the WeChat messages was returned to Hansen’s counsel in the USA for production.

As with most productions, Hansen’s counsel produced a privilege log.  Unfortunately, here, the log stated that the WeChat messages were redacted on the basis that they were “either not relevant, subject to attorney-client privilege, or redacted according to the laws of the People’s Republic of China.” The deficient privilege log resulted in Sapphire’s instant motion to compel the production of the redacted WeChat messages.

In its motion to compel, the Zhu Defendants contest Hansen’s production in light of the fact that the production contains documents redacted solely for lack of relevance. Hansen, argues that the redacted WeChat messages “should be treated no differently than other documents that are not produced for lack of relevance.”  In support of its position that it can redact irrelevant information, Hansen relied on Ohnmacht v. State. However, the Ohnmacht Court conducted an in camera review of the unredacted version of the document and held that the redactions protect sensitive information that are also not relevant to the claim. Although the Court permitted the party to redact irrelevant information, the Ohnmacht Court did not conclude, as Hansen wrongly alleges, that a party can redact documents on the basis of relevance alone.  In other words, the Court did not set a blanket rule that redactions for relevance are valid.

Interestingly, the Court noted that the WeChat messages in question are not separate documents that can be withheld as “non-responsive” because they comprise of an entire conversation, some of which Hansen’s counsel seeks to redact on the basis of relevance.

Pursuant to CPLR § 3101 (a) “[t]here shall be full disclosure of all matter material and necessary in the prosecution or defense of an action.” To that end, the First Department has previously held that this provision should be interpreted liberally “to require disclosure of any facts which will assist the good faith preparation for trial,” but noting that documents that are either privileged, constitute attorney-work product, and/or contain materials in preparation of trial are not subject to disclosure ( Johnson v. Nat’l R.R. Passenger Corp., CPLR 2101[b]-[d]). Confidential personal information is also not subject to disclosure and should be redacted (22 NYCRR §202.5[e]).

The Court acknowledged that notwithstanding these rules, there ” is no guidance as to whether parties are permitted to redact materials on the basis of relevance alone.”   

The Court noted that Hansen failed to “provide a compelling reason why its unilateral relevance redactions should be accepted, given the existence of substantial authority to the contrary and given its repeated failure to set forth the basis for its blanket assertion for lack of relevance, particularly as there is a compelling reason to believe that the redactions may be relevant based on their time period.”  Justice Borrok ultimately directed the parties to agree to an ESI protocol with respect to the WeChat messages, including search terms.  In that regard, the Court required Hansen to have all the WeChat messages translated in English and uploaded to a searchable database, which shall be preserved in the event of a dispute, and to produce all responsive messages together with a detailed privilege log.  The Court held that in the event of a dispute, the parties can contact the Court, which will conduct an in camera review of the WeChat messages.

Although there is apparently a paucity of case law in state court on the issue of redactions, the question of the legitimacy of redacting on the grounds of relevancy alone is not new to the federal courts (see, e.g., New Falls Corp. v Soni; Durling v. Papa John’s Int’l, Inc.; Howell v. City of New York [“It is not the practice of this court to permit parties to selectively excise from otherwise discoverable documents those portions that they deem not to be relevant”]).  There does appear, however, to be authority both supporting and opposing the approach of redacting for relevance (compare for example, Brussels Lambert v. Chase Manhattan Bank [allowing redactions for “nonresponsive” information] with, John Wiley and Sons Inc. v. Book Dog Books LLC, [noting that redactions are generally impermissible, unless “based on a legal privilege”]).

Takeaway:

Do not be misled — relevance alone is not a basis for redacting documents. However, courts may be amenable to offer in camera review to avoid the discovery of irrelevant information. In that regard, be sure to provide the court with an explanation regarding the reason why the relevance redactions should be accepted.  Also, perhaps this is a good topic for discussion among counsel and the court in the initial or preliminary conference.

Trademark registration is essential for small business owners who are looking to build and protect the brand within their community. But when a competitor opens up down the street with the same or similar name, trademark registration may only be half the battle:  customer confusion is the other half. Justice Elizabeth Hazlitt Emerson’s ruling in the recent case out of Suffolk County, JJFM Corp v Mannino’s Bagel Bakery, emphasizes the importance of establishing consumer confusion when it comes to trademark disputes.

In JJFM Corp, the court denied plaintiff’s motion for summary judgment and granted defendants cross-motion for summary judgment, finding that two families operating food establishments in the same town under the Mannino’s name did not constitute trademark infringement, unfair competition, or a unfair business practices in violation of New York General Business Law (“GBL”) §§ 349 and 360-k.

Plaintiff operates three family-owned Italian restaurants in Suffolk County: Mannino’s Pizzeria Restaurant (Smithtown), Mannino’s Restaurant & Lounge (Oakdale), and Mannino’s Italian Kitchen & Lounge (Commack). If visiting one of the plaintiff’s restaurants, one can expect high-quality Italian food in an elegant setting. Needless to say, the plaintiff wasn’t thrilled when defendants opened Mannino’s Bagel Bakery only a few miles away from plaintiff’s Smithtown location, selling deli items like bagels and sandwiches.[1] Alleging defendants were capitalizing on the Mannino brand and good will, plaintiff brought suit for a permanent injunction and to recover damages.

While you may expect trademark infringement and unfair competition claims to be brought in Federal Court under the Lanham Act, rather than in State Court under the GBL, the elements required to prevail on trademark-infringement and unfair competition claims in New York mirror those required under the Lanham Act.  The choice to use one or the other likely comes down to strategy, rather than a substantive legal difference. Under both the Lanham Act and GBL 360-k, a plaintiff must prove the defendant’s mark is likely to cause confusion, mistake or deception. To make this determination, the court employed a two-prong test: (1) whether plaintiff’s mark is entitled to protection; and (2) whether the defendant’s use of the mark is likely to cause consumers confusion as to the origin or sponsorship of the defendant’s goods.[2]

Plaintiff easily satisfied the first prong because the logos for all three of its restaurants had been registered as service marks in New York since 2016, and two of the three were registered with the U.S. Patent and Trademark. Thus, the only issue for the court to determine was the likelihood of confusion. For this, the court employed an eight-factor test: (1) the strength of the plaintiff’s mark, (2) the similarity of the plaintiff’s and the defendant’s marks, (3) the proximity of the products, (4) the likelihood that the plaintiff will “bridge the gap,” (5) actual confusion between products, (6) the defendant’s good or bad faith in adopting the mark, (7) the quality of the defendant’s product, and (8) the sophistication of the buyers.[3]

The court instructed that just because two marks appear similar is not dispositive. Rather they need to be compared against each other as a whole to determine whether such similarity is more likely than not to cause consumer confusion. Here, the court found that beyond using the common word “Maninno’s,” the plaintiff’s mark and the defendants’ bakery sign had no similarity; plaintiff’s mark showed the Mannino’s restaurant name in stylized lettering with shaded shapes, whereas defendants’ sign did not use the stylized lettering, shaded shapes, or words like “Italian,” “Kitchen,” “Pizzeria,” “Restaurant,” or “Lounge.” While the court determined the marks were not similar, it continued its analysis because “the use of the word ‘Maninno’s’ may still have some effect.”

Although registered trademarks are typically afforded the utmost protection, the court in this case determined the strength of plaintiff’s mark to be weak. Noting that “Mannino” is a relativity common Sicilian name and the name itself did not necessarily identify the product (such as “Bacardi” for rum, “Ford” for automobiles, or “Smucker’s” for jam), the court determined that plaintiff’s existence in Suffolk County since 1996 and brand notoriety was insufficient to give the Mannino’s mark a high strength rating.

The court found that despite the fact that the parties were both in restaurant business, their businesses were vastly different; one serving high end food with the other selling deli items. There was no evidence that plaintiff had any intention of entering the bagel or the delicatessen business, and thus had no intention of “bridging the gap.” Although there had been one instance where a check meant for the defendants was mistakenly sent to the plaintiff, and defendants were occasionally asked by customers if they were affiliated with the plaintiff, these facts were insufficient to evidence actual confusion between the two. The court found no evidence of bad faith, especially because when the defendants were asked if they was affiliated with the plaintiff, they responded “no.” Plaintiff alleged the defendants were taking advantage of its reputation for high-quality Italian cuisine, however the court found that other than a few items, defendants did not even sell Italian food. Thus the relative quality of the products was not a significant factor and it was unlikely that even an unsophisticated buyer would be confused as to the source of the products.

In the end, the court held these facts factored the defendants, and thus dismissed plaintiff’s claims for trademark infringement and unfair competition. Unable to find evidence in the record suggesting risk of harm to the public, the court further dismissed plaintiff’s claim for unfair business practices.

Upshot: To be successful on trademark infringement and unfair competition claims, a plaintiff needs to show a defendant has more than a similar name and operating in the same general industry. Rather, a plaintiff needs to be ready to withstand the scrutiny of an eight-factored test to establish defendant’s use of the mark is likely to cause consumer confusion.

 

[1] Defendants are two corporations, RAGF Food Corp. (“RAGF”) who operate Mannino’s Bagel Bakery in Freeport, New York, and ARF Food Corp. (“ARF”) who operate Mannino’s Bagel Bakery in Smithtown, New York.

[2] The law of trademark infringement is part of the law of unfair competition and the same test is applied in determining each claim.

[3] These factors originate from Polaroid Corp v Polarad Elecs Corp.

Proximate cause is a necessary element in tort law, but also applies to claims of breach of commercial contract.  In a recent decision by Justice Barry R. Ostrager in MUFG Union Bank, N.A. v. Axos Bank et al., No. 652474/2019, 2020 N.Y. Slip Op. 51101(U) (Sup. Ct., New York County Sept. 25, 2020), the Commercial Division of the Supreme Court, New York County addressed, among other things, the issue of whether a defendant’s breach was a proximate cause of plaintiff’s damages in denying one defendant’s motion for summary judgment seeking to dismiss plaintiff’s breach of contract claim.

The parties to the action are MUFG Union Bank, N.A. (“Union”), Epiq Systems, Inc. (“Epiq”), and Axos Bank, Axos Fiduciary Services, Axos Nevada, LLC, and Seller Sub, LLC (collectively, “Axos”).

On or about September 27, 2012, Union and Epiq entered into a Joint Services Agreement (“JSA”), effective October 1, 2012, as amended. Pursuant to the JSA, Union and Epiq agreed, among other things, “to jointly promote their products and services to bankruptcy and insolvency professionals and also fiduciary types as may be agreed upon by the parties on a case-by-case basis,” which professional and fiduciary types were deemed “Joint Clients”. Specifically, Union provided deposit services to bankruptcy trustee customers and Epiq provided software services to bankruptcy trustee customers. The JSA expressly restricted Union and Epiq’s ability to assign the JSA or transfer Joint Client relationships or accounts without the other’s prior written consent. Notwithstanding this restriction, Epiq, without consent of Union, decided to sell its software business to Axos. In order to circumvent the anti-assignment provision in the JSA, Epiq established Seller Sub, LLC (“Seller Sub”), identified as “a special purpose entity wholly owned by Epiq and allegedly created for the sole purpose of effectuating the transfer of the JSA to Axos without Union’s consent.” Epiq formed Seller Sub one day before entering into a fifh amendment of the JSA with Union. Epiq then transferred the JSA to Seller Sub. Axos then acquired Seller Sub with the JSA. But Epiq directly transferred its software business to Axos. Thereafter, Axos terminated the JSA with Union and the action ensued. Continue Reading Proximate Cause In Breach Of Contract Actions: Is Loss A Foreseeable Consequence Of Circumstances Created By The Breaching Party?

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To be sure, much has been reported on here at New York Commercial Division Practice concerning Commercial Division innovation — including in the areas of courtroom technology and, more recently, in adapting to the “new norm” of virtual practice in the wake of the COVID-19 pandemic.  As we observed a few months back, the virtual practice of law in the Commercial Division is becoming more real than virtual.  A recent amendment to the Commercial Division Rules over the summer, particularly to Commercial Division Rule 1 (“Appearance by Counsel with Knowledge and Authority”), has arguably furthered the cause by expressly allowing lawyers to request permission from the court to appear remotely by videoconference.

ComDiv Rule 1 is your basic “Be Prepared!” reminder when practicing in the Commercial Division.  It specifically requires lawyers appearing before ComDiv judges to be “fully familiar” with their cases; “fully authorized” to enter into agreements; “sufficiently versed” in e-discovery matters; and promptly “on time” for scheduled appearances.  As of July 15, 2020, Rule 1 now also provides at subsection (d) that:

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

The language of Rule 1’s new subsection is both permissive and discretionary.  As the Commercial Division Advisory Council noted in its memorandum setting forth the reasons for the amendment, “Rule 1 enables any lawyer to decline to participate from remote locations … [and is not] intended to limit any rights which counsel may otherwise have … by appearing in court.”  As noted by the Council, “many lawyers feel that to serve their clients effectively, they must be able to make their presentations in person and see the judge in order to gauge his or her reactions to the arguments presented.”  The use of the permissive “may” in the new provision addresses that concern, among others.

The use of the phrase “in the court’s discretion” likewise addresses common concerns from the bench, including but not limited to the ability to “control overbearing or other inappropriate behavior by counsel more readily and more effectively by visual cues or otherwise.”  That said, the Advisory Council’s memo made specific reference to a videoconferencing survey circulated some years back among federal appeals judges in which the majority of the judges “indicated no difference in their understanding of the legal issues in arguments that were video-conferenced versus those that were not.”  After all, as the Council observed, “videoconferencing can replicate the experience of talking to a real person across the table, will all the nuances and body language that in-person conversations would convey.”

Notably, the amendment is limited to “court conferences and oral argument of motions and … not intended to address the more complex subject of testimony by witnesses at trials or other evidentiary hearings.”

Having been sent out for public comment over a year ago, there understandably is no mention of COVID-19 in the Advisory Council’s rationale for the amendment, which instead focused on efficiency and “obviat[ing] huge amounts of wasted time and money devoted to unnecessary travel by lawyers.”  Here’s the money quote (literally) from the Council on the topic:

A lawyer who travels from White Plains to Albany County to participate in a status conference will require a minimum of four hours of travel time and will incur out-of-pocket disbursements for travel by train or automobile. If that lawyer bills $600 per hour, the cost of the travel to the lawyer’s client would be $2,400 in attorney’s fees plus another $100 in disbursements.

In other words, a Westchester-based client may soon be pleasantly surprised to find a “.5” rather than a “5.5” next to a billing entry that says, “Travel to/from Albany County Supreme for status conference before Platkin, J.”

In short, there is much in the way of practical wisdom behind the new amendment to ComDiv Rule 1, even without consideration of the novel circumstances we’ve all been navigating over the last six months.  Add a pandemic to the mix, and the amendment couldn’t have come to us at a more perfect time.

In 2015, our colleagues in the white-collar criminal defense bar braced for the impact of a memorandum penned by then Deputy Attorney General Sally Yates.  The Yates Memo encouraged both federal prosecutors and civil enforcement attorneys to make increased efforts to hold culpable individuals accountable for corporate misconduct.

The Yates Memo embodied the precept that justice is better served when the responsible individuals are held accountable for corporate misconduct.  That precept plays a prominent role in a case recently decided by Justice Ostrager of the New York County Commercial Division.  In Kilgour Williams Group, Inc. v. Ben-Artzi, Justice Ostrager awarded the plaintiffs—accounting and financial experts Colin Kilgour and Daniel Williams—summary judgment on their breach of contract claims stemming from their assistance in securing an $8.25 million whistleblower award.

The case highlights the difficulty of avoiding an agreement based on unconsionability, finding no issues of fact concerning the enforceability of an eleventh-hour “letter agreement” that quadrupled plaintiffs’ consulting fee after their engagement was completed.  It also adds a chapter to the fascinating story of the Deutsche Bank executive who blew the whistle on accounting misconduct, then turned down a multi-million dollar award.

The Misconduct, the Experts, and the Agreements

Between 2010 and 2011, Eric Ben-Artzi was a risk officer at Deutsche Bank.  In that role, he discovered that during the financial crisis, Deutsche Bank concealed from its shareholders potentially massive credit-derivatives losses.  He reported that misconduct first internally, and then to the SEC.

In November 2011, Ben-Artzi and his attorneys commenced a proceeding for a whistleblower award before the SEC.  At the suggestion of his attorneys, Ben-Artzi retained Kilgour Williams Group (“KWG”)—the Plaintiffs in this action—to render expert consulting services in support of his whistleblower claim.  The relationship between KWG and Ben-Artzi evolved as his whistleblower proceeding unfolded, and KWG’s compensation was memorialized in several agreements:

First, in April 2013, Ben-Artzi’s company, Model Risk LLC, entered into an agreement with KWG where KWG agreed to provide expert consulting services in exchange for 3% of the gross value of any whistleblower award rendered by the SEC.

Second, in August 2014, Ben-Artzi’s Model Risk entered into a “Tri-Party Agreement” among (i) Model Risk, (ii) KWG and (iii) its principals Daniel Williams and Colin Kilgour.  This agreement increased KWG’s fee to 5% of the gross value of any award, and it transferred to KWG the rights to the intellectual property that it had developed while working on Ben-Artzi’s claim.  As consideration for the transfer of intellectual property, KWG agreed that it would submit its own whistleblower claim, and that Ben-Artzi would be entitled to 60% of the payout on that claim.

Ben-Artzi Turns Down the Award

In 2015 after many meetings between Ben-Artzi and the SEC, including one where Plaintiffs gave a thorough powerpoint presentation regarding Deutsche Bank’s alleged misconduct, the SEC reached a settlement with Deutsche Bank.  The settlement imposed civil penalties on Deutsche Bank of $55 million for violations of the Securities and Exchange Act, but it did not punish any of the responsible executives.

Members of the SEC’s enforcement division subsequently attested to helpfulness of both Ben-Artzi and KWG in providing information necessary to bring their action.  Accordingly, Ben-Artzi’s whistleblower claim was accepted, and he was awarded 15% of the $55 million penalty imposed on Deutsche Bank, or $8.25 million.  Accordingly, under the Tri-Party Agreement, KWG was entitled to receive approximately $412,500.  The SEC denied KWG’s independent whistleblower claim.

About a month after receiving notice of the award (and while the ink was still wet on the Yates Memo) Ben-Artzi published an editorial in the Financial Times announcing his decision to turn down his share of the award because the SEC did not fine the executives responsible for the wrongdoing:

But Deutsche did not commit this wrongdoing. Deutsche was the victim. To be precise, the bank’s shareholders and its rank-and-file employees who are now losing their jobs in droves are the primary victims. . . . Although I need the money now more than ever, I will not join the looting of the very people I was hired to protect. I never intended to turn a job in risk management into a crusade, but after suffering at the hands of the Deutsche executives I will not join them simply because I cannot beat them.

Ben-Artzi attributed the SEC’s failure to personal relationships and the “revolving door” of high-level executives between Deutsche Bank and the SEC.

The Letter Agreement

According to Ben-Artzi, his decision to repudiate the award led both his counsel and KWG to turn on him.  Shortly after the Financial Times published his editorial, KWG presented Ben-Artzi with a curious letter.  The letter accused Ben-Artzi of somehow impacting KWG’s own whistleblower claim and requested that Ben-Artzi agree to transfer $2.5 million to them, in addition to the amounts payable under their agreements:

We understand that you regard your share of the award as dirty money and have decided not to personally accept any portion of the award. Therefore, we request that you direct the SEC to direct $2,500,000 to us. This payment is in addition to the contracted amount payable to Kilgour Williams Group. Please sign below to indicate your agreement . . .

For some reason—though it’s not at all clear why—Ben-Artzi signed this “Letter Agreement.”  In his affidavit opposing Plaintiffs’ motion for summary judgment, Ben Artzi argues that he “most certainly never intended to create an obligation in that amount,” but he does not explain what else he thought signing the Letter Agreement would do.

Ultimately, Ben-Artzi did not instruct the SEC to disburse the award in accordance with the Letter Agreement.  Rather, he instructed the SEC to pay a portion of the award to his ex-wife (as ordered by a court overseeing his divorce proceedings), a portion to his attorneys, and the balance to a trust for his children.  The SEC disbursed the award as requested.  Ben-Artzi did not contest that KWG was owed their 5% fee under their earlier agreements, but he disputed the notion that the Letter Agreement entitled them to an additional $2.5 million.

Ben-Artzi’s Unconscionability Claim

Plaintiffs sued to enforce the Letter Agreement.  Opposing their motion for summary judgment on their breach of contract claim, Ben-Artzi argued that the Letter Agreement was both procedurally and substantively unconscionable.  It was procedurally unconscionable, Ben-Artzi argued, because after KWG learned of Ben-Artzi’s intention to reject the award, “Kilgour and Williams became aggressive and threatening, exerting tremendous pressure upon him to give to them whatever portion of the award he would otherwise have realized (but for his repudiation).”  The Letter Agreement was substantively unconscionable, Ben-Artzi argued, because it changed Plaintiffs’ fee from 5% of the gross award ($412,500) to more than $2.5 million after the work was complete and without any corresponding benefit to Ben-Artzi.

Plaintiffs countered that the Letter Agreement was neither procedurally nor substantively unconscionable.  The Letter Agreement was negotiated between sophisticated parties—Ben Artzi has a Ph.D. in mathematics and worked at some of the world’s most powerful financial institutions—and emails preceeding the Letter agreement do not show any high-pressure or deceptive tactics.  Substantively, the Letter Agreement reflected a bargained-for exchange: in exchange for the increased payments, Plaintiffs were releasing Ben-Artzi for claims they might have had against him arising out of his rejecting the award or compromising KWG’s own whistleblower application.

Justice Ostrager’s Decision, Practical Considerations

Ruling from the bench, Justice Ostrager granted Plaintiffs’ motion for summary judgment for breach of the Letter Agreement.  Although his written findings of fact do not say much about his reasoning and the transcript of oral argument is not filed, Justice Ostrager holds Ben-Artzi to the terms of his Letter Agreement.  In so doing, he highlights just how difficult it is for sophisticated parties to avoid a contract based on unconscionability: KWG’s last minute, $2.5 million increase did not even raise an issue of fact concerning whether the Letter Agreement was unconscionable.  As the Commercial Division occasionally reminds us: absent circumstances that truly are extreme, sophisticated parties will be held to the deal they struck, however one-sided.

As New York courts reopen and the mandatory stay-at-home order is lifted, what remains unclear is how the numerous Executive Orders issued by Governor Andrew M. Cuomo during the COVID-19 pandemic will affect individuals and businesses who, based on the economic effects of the crisis, may no longer be able to abide by previously issued court orders.

In a recent decision, Justice Lawrence Knipel addressed one of likely many present-day contractual issues brought on by the coronavirus pandemic.

In 538 Morgan Avenue Properties et al., v. 538 Morgan Realty LLC et al., Plaintiffs entered into a business sales contract with Defendants in 2015 whereby Plaintiff NY Stone purchased Defendant SD’s business.  At the same time, the parties entered into a separate real estate sales contract whereby Plaintiff 538 Morgan Avenue Properties purchased from Defendant the real property where SD’s business was located.  While Plaintiffs continued to make payments to Defendants under the contracts for the business and real property, Defendants cancelled the real estate contract, asserting a material breach by Plaintiffs based on their failure to pay a certain amount by the contract’s “as of date.”  In turn, Plaintiffs brought this action for breach of contract, claiming that all payments were made within a reasonable time and Defendants were in breach when they cancelled the real estate contract.

In 2017, the Court issued an order granting Plaintiffs’ motion for a preliminary injunction enjoining Defendants from interfering with their tenancy at the property under the condition that Plaintiffs pay a monthly use and occupancy fee in the amount of $22,986 along with a filing of an undertaking fee of $80,000.

Shortly before New York’s stay-at-home order was lifted in June 2020, Plaintiffs moved for an order modifying the preliminary injunction issued in the case concerning the use and occupancy payments due in light of the COVID-19 crisis.

In New York, although a landlord can recover use and occupancy costs for the reasonable value of the premises and use of those premises, the Court, ultimately, has broad discretion in awarding use and occupancy during the pendency of an action or proceeding (43rd St. Deli, Inc. v. Paramount Leasehold, L.P.).  When awarding use and occupancy, the Court takes into account the actual value of the property, whatever restrictions apply because of agreements between the parties, governmental decrees, and other factors (438 W. 19th St. Operating Corp. v. Metropolitan Oldsmobile, Inc.).

Here, to persuade the Court to modify the existing monthly use and occupancy payments due in light of the COVID-19 crisis, Plaintiff NY Stone argued that because it operates a stone fabrication store, which requires work to be done in person, the business was negatively affected by the government’s response to the COVID-19 pandemic through the Governor’s signing of numerous executive orders, including Executive Order 202.8, which forced Plaintiffs to first decrease their workforce and then completely forbid any of their employees from working on-site.  Accordingly, Plaintiffs asked the Court to waive any use and occupancy payments for the period from March 22, 2020 until such time as Plaintiffs are legally permitted to resume business operations.

Interestingly, Executive Order 202.8 (which Plaintiffs relied on in their motion) only prohibited “enforcement of either an eviction of any tenant residential or commercial, or a foreclosure of any residential or commercial property for a period of ninety days.”  The Executive Order, however, had no bearing on a commercial tenant’s obligations to pay rent nor did it mention forgiveness of a commercial tenant’s debt owed.

The Court recognized that because the Executive Order at issue was silent on use and occupancy fees, the Court had the power to modify use and occupancy upon a proper showing, leaving room for the possibility that a tenant’s use and occupancy could be modified or completely forgiven.

However, the Court, ultimately, denied Plaintiffs’ request for modification as Plaintiffs in this case failed to bring forth any competent evidence in the form of financial documentation or an accountant’s affidavit with supporting evidence to demonstrate that Plaintiffs could not actually pay for use and occupancy for the months during which they could not operate on-site.

Takeaway:  Courts have deference in issuing and modifying some court orders.  Even so, attorneys must make every effort to prove with the necessary evidence why a previously issued court order is entitled to and worthy of modification.

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Your client has just asked you to commence an action against a corporate entity in a New York state court.  But, the defendant is not incorporated in New York, and does not maintain a principal place of business in New York.  Further, the incident underlying your client’s claim did not occur in New York, nor is the claim connected to the defendant’s specific conduct in New York.  Obtaining specific personal jurisdiction over the foreign corporation is not an option.

The claims, then, may only be brought in New York if the court can exercise general personal jurisdiction over the foreign corporate entity.  But what is the standard for obtaining general personal jurisdiction in New York, and what must be shown?  The Appellate Division, Second Department recently answered these questions in Lowy v Chalkable, LLC (2020 NY Slip Op 04471 [2d Dept Aug. 12, 2020]).

The plaintiffs in Lowy had entered into a joint venture agreement with defendants to purchase and develop websites and web-based companies. Plaintiffs were to provide capital funding, and defendants were to develop and run the websites.  Plaintiffs allegedly provided the funding, but defendants did not perform their obligations under the contract, which included giving plaintiffs equity in the defendant Chalkable, LLC (the “LLC”), a Delaware web-based company allegedly controlled by defendants.

Sometime thereafter, defendant Chalkable, Inc. (the “Corporation”), purchased the LLC, and defendant PowerSchool Group, LLC (“PowerSchool”), purchased the Corporation. Both the Corporation and PowerSchool (the “PowerSchool Defendants”) were formed under the laws of Delaware and have their principal place of business in California.

Plaintiffs sued defendants, asserting claims for breach of contract, declaratory relief, and a constructive trust. The PowerSchool Defendants moved, among other things, pursuant to CPLR § 3211 (a)(8) to dismiss the complaint for lack of personal jurisdiction.  In October 2017, the Queens County Commercial Division (Grays, J.), granted the PowerSchool Defendants’ motion, and Plaintiffs appealed.

The Appellate Division, Second Department, affirmed Justice Grays’ decision, finding no basis to impose either general or specific personal jurisdiction over the PowerSchool Defendants.  With respect to the Court’s exercise of general personal jurisdiction, the Court reiterated the general rule that a corporation is subject to general jurisdiction only in the state of the company’s place of incorporation or principal place of business. Citing its prior decision in Aybar v Aybar, 169 AD3d 137 (2d Dept 2019), the Court noted that an exception exists in “an exceptional case” where the defendant’s contacts with New York are “so continuous and systematic, ‘judged against [its] national and global activities, that it is essentially at home’ in th[e] state.”  In the Court’s view, plaintiffs failed to make that showing.

Although the Second Department did not offer a lengthy analysis for its conclusion, its reasoning can be gleaned from the Court’s prior decision in Aybar, as well as the United States Supreme Court’s seminal decision in Daimler AG v Bauman (571 U.S. 117 [2014]).

Daimler

Prior to the Supreme Court’s decision in Daimler, a foreign corporation was amenable to suit in New York under CPLR § 301 only if it engaged in “such a continuous and systematic course of ‘doing business’ here that a finding of its ‘presence’ in this jurisdiction is warranted” (see e.g. Landoil Resources. Corp. v Alexander & Alexander Servs., 77 NY2d 28, 33 [1990], quoting Laufer v Ostrow, 55 NY2d 305, 309–310 [1982]).  Then, in Goodyear Dunlop Tires Operations, S.A. v Brown (564 US 915 [2011]), the Supreme Court addressed the distinction between general and specific jurisdiction, holding that a court is authorized to exercise general jurisdiction over a foreign corporation when the corporation’s affiliations with the state “are so ‘continuous and systematic’ as to render them essentially at home in the forum State” (id. at 919, quoting International Shoe Co. v Washington, 326 US 310, 317 [1945] [emphasis added]).

In Daimler, the Supreme Court limited the scope of general jurisdiction to that definition, explicitly rejecting a standard that would permit the exercise of general jurisdiction in every state in which a corporation is engaged in a “substantial, continuous, and systematic course of business” (571 US at 137). The Court instructed that the two main bases for exercising general jurisdiction are (i) the place of incorporation, and (ii) the principal place of business (see id.), but left open the possibility of an “exceptional case” where a corporate defendant’s presence in another state is “so substantial and of such a nature as to render the corporation at home in that State” (id. at 139, n. 19 [emphasis added]).

Aybar

After Daimler, the Second Department in Aybar considered whether to exercise general personal jurisdiction over a foreign corporation registered to do business in New York,  which had appointed a local agent for service of process.  The plaintiffs in Aybar argued that the defendant, Ford Motor Company (“Ford”), should be subject to the Court’s general jurisdiction because Ford (i) had been authorized to do business in New York since 1920, (ii) operated numerous facilities in New York, (iii) owned property in New York and spent at least $150 million to maintain that property, (iv) employed significant numbers of New York residents, (v) contracted with hundreds of dealerships in New York to sell its products under the Ford brand name, and (vi) had frequently been a litigant in New York courts.  Seems sufficient for a court to exercise general personal jurisdiction, right?

It wasn’t.

Although the plaintiffs pointed to Ford’s factory in New York, employing approximately 600 people, and Ford’s contracts with “hundreds” of dealerships in New York, Ford presented evidence that it had 62 plants, employing about 187,000 people, and 11,980 franchise agreements with dealerships worldwide.  In the Second Department’s view, “appraising the magnitude of Ford’s activities in New York in the context of the entirety of Ford’s activities worldwide, it cannot be said that Ford is at home in New York.”

This brings us back to the Second Department’s decision in Lowy.  There, the Court noted that the Corporation “owns and operates software that facilitates communication in schools and provides educational data management in schools in 50 states, while the education technology platform owned and operated by PowerSchool Group serves millions of users in more than 70 countries.”  As in Aybar, the Second Department considered the entirety of the PowerSchool Defendants’ nationwide and worldwide activities, ultimately concluding that the PowerSchool Defendants’ activities in New York were not so “continuous and systematic” so as to render them “at home” in New York.

Takeaway: 

The fact that a foreign corporation conducts business in New York, standing alone, is insufficient to permit the exercise of general jurisdiction over claims unrelated to any activity occurring in New York.  To determine whether a foreign corporate defendant’s affiliations with the state are so “continuous and systematic” so as to render it essentially “at home” in New York, courts will not focus solely on the defendant’s in-state contacts, but will undertake an appraisal of the defendant’s activities in their entirety, both nationwide and worldwide.   As the United States Supreme Court noted in Daimler, “a corporation that operates in many places can scarcely be deemed at home in all of them.”

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The Manhattan Commercial Division lost a gem of a jurist last month when Governor Cuomo appointed Justice Saliann Scarpulla to a seat on the bench of the Appellate Division, First Department.  Good for her, to be sure.  But many of us ComDiv practitioners will be sorry to see her go.

Justice Scarpulla, after all, was a natural for the Manhattan Commercial Division.  She began her legal career in the late 1980s as a Court Attorney to former Manhattan Supreme Court Justice Alvin Klein.  In 1999, after more than a decade in private practice – and within just a few years of the inception of the Commercial Division itself – she became Principal Court Attorney to former Manhattan ComDiv Justice Eileen Bransten.  Fifteen years later, after serving more than a decade on the bench of the Manhattan Civil and Supreme Courts, Justice Scarpulla was elevated to replace former Manhattan ComDiv Justice Barbara Kapnick – who, like Justice Scarpulla, was tapped in 2014 to join the ranks of the First Department.

Justice Scarpulla has contributed much to the Commercial Division in her 5-plus years on the bench, including her push for a “paperless part” in Part 39 and her implementation of the Integrated Courtroom Technology (ICT) program in her courtroom over the last couple of years.  After launching the program for the Manhattan ComDiv in October 2018, and proclaiming the primacy of “hav[ing] the right technology to give the business community in New York the sense that we [can] compete with the best courts in the world,” Justice Scarpulla twice hosted demonstrative presentations by members of ComFed’s Committee on the Commercial Division – first in April and again in October of last year – of all the hi-tech equipment in her courtroom.  The standing-room only programs were attended by lawyers, judges, and court personnel alike – all of them eager to learn how to implement ICT into their own day-to-day routines.

Justice Scarpulla also made headlines late last year when she ordered the President in Matter of People v Trump to pay $2 million to settle claims brought by the New York Attorney General, finding that he breached his fiduciary duty as a director of the Donald J. Trump Foundation by “allowing his [political] campaign to orchestrate [a] fundraiser, allowing his campaign, instead of the Foundation, to direct distribution of the funds [raised], and using the fundraiser and distribution of the funds to further Mr. Trump’s political campaign.”

We here at New York Commercial Division Practice, as well as our colleagues over at New York Business Divorce, have spilled much ink reporting on Justice Scarpulla’s thoughtful and sometimes novel decisions over the years.  In fact, we separately highlighted two cases of first impression adjudicated by Justice Scarpulla in our annual NYLJ column earlier this year.

In Advanced 23, LLC v Chambers House Partners, LLC, Justice Scarpulla applied for the first time in the context of an LLC dissolution proceeding the 35-year old “bad-faith petitioner” defense — found in the Court of Appeals’ 1984 decision in Kemp & Beatley — when she affirmed a special referee’s finding that the petitioning LLC member had “breached the [the LLC’s] Operating Agreement to attempt a forced dissolution of [the LLC].”  And in Rosania v Gluck, she extended the now-uniform rule found in the First Department’s 2016 Matter of Raharney decision, which prohibits New York courts from dissolving foreign entities, to a Delaware LLC member’s attempt to assert quasi-dissolution claims for a compelled buyout or other liquidation of the LLC’s assets.  The equitable claims asserted by the plaintiff-member in Rosania, she ruled, was simply “an ill-disguised attempt to make an end-run around the rule” and “would be tantamount to ordering the dissolution of the LLC.”

With these and countless other decisions issued over her 5-plus years on the ComDiv bench, Justice Scarpulla no doubt has made a unique and important contribution to the Commercial Division jurisprudence from which we ComDiv practitioners regularly draw.  We thank you for your service.