Under the Commercial Division Rules, a court may seal court records “upon a written finding of good cause.”[1] So, what led Justice Robert R. Reed to deny two unopposed motions to seal in a recent decision in the New York Commercial Division? Lack of specificity.

In Cortlandt St Recovery Corp v Bonderman, Plaintiffs Cortlandt Street Recovery Corp. (“Cortlandt”), and Wilmington Trust Company (“WTC”) sought the enforcement of a €268,000,000 judgment. Defendants, a series of firms, funds, partners, and individual members of private equity fund groups, moved to dismiss. In opposing Defendants’ motion, Plaintiffs redacted certain portions of its memorandum of law and used placeholder pages for over 60 documents and deposition transcripts filed as exhibits (“Exhibits”) on New York State Courts Electronic Filing System (“NYSCEF”) because the documents purportedly contained private, confidential financial information, and certain business and proprietary information.

WTC then moved to seal the Exhibits.[2] Defendants cross-moved, similarly seeking to seal six deposition transcripts attached as Exhibits to Plaintiffs’ opposition. Neither party opposed the other’s motion. Nevertheless, Justice Reed explained “the court is required to make its own inquiry to determine whether sealing is warranted.”

Many of the Exhibits WTC and Defendants sought to seal included reports prepared by Plaintiffs’ experts and transcripts of the deposition of those experts. However, in its moving brief, other than generally claiming that the Exhibits “cited to, relied on or disclosed ‘Confidential Information’” as defined by a confidentiality agreement entered into by the parties, WTC offered little, to no additional information as to the particular documents, and what portions of those documents were deemed sensitive and confidential.

The court denied WTC’s motion on the grounds that WTC’s assertions were vague and conclusory, and thus, “insufficient to meet a movant’s burden to demonstrate compelling circumstances to justify restricting public access.”  In commercial matters, the movant must demonstrate that the material it seeks to seal contains trade secrets, confidential business information, or proprietary information and that disclosure could be harmful to a party.[3] Specifically, the court found that WTC failed to address any particular document or transcript, or explain how or why public disclosure might cause potential harm. For example, concerning an Exhibit containing an expert’s opinion as to the alter ego status of certain entities, the Court found that WTC failed to indicate “what in the report requires sealing or why.” Similarly, WTC failed to address why certain Exhibits concerning foreign law and financial instruments from 2006 would need protection “so many years later.”

In their cross-motion, Defendants argued generally, that certain Exhibits contained confidential information concerning “business operations and internal practices and procedures” in which the public had no discernible interest in. The court denied Defendants’ cross-motion on the grounds it suffered similar conclusory infirmities as WTC’s motion. For example, certain deposition transcripts Defendants’ sought to seal involved transactions occurring prior to 2007 or other dated material and comments about general industry knowledge. The court found that Defendants did not sufficiently demonstrate what specific information was: (1) proprietary; (2) maintained in a confidential manner over the years; or (3) would lead to an unearned advantage for competitors if disclosed.

While Justice Reed denied WTC and Defendants’ motions in their entirety, he did so without prejudice, giving the parties an opportunity to make another motion to seal (which motion would concisely and specifically addresses each exhibit the party seeks to have sealed and/or redacted).

UPSHOT

Although the Commercial Division Rules permit the sealing of court records, motions to seal will not be granted based on conclusory or vague assertions of confidentiality. When asking the court to seal records, be ready to describe, with specificity, which documents need to be sealed and why.

[1] 22 NYCRR § 216.1(a).

[2] Prior to the Court’s decision, WTC reviewed the Exhibits further and eventually filed many, but not all, of the previously withheld Exhibits on NYSCEF.

[3] Vergara v Mission Capital Advisors, LLC, 187 AD3d 495, 496 (1st Dept 2020); Mancheski v Gabelli Group Capital Partners, 39 AD3d 499, 502 (2d Dept 2007).

A critical inquiry to be considered at the outset of any litigation is whether the party seeking relief is, in fact, a proper party to seek the court’s adjudication of the dispute.  This concept is known as “standing,” which is a threshold determination to be made by the court, the absence of which warrants dismissal of a pleading under CPLR 3211 (a)(3).

Last month, Albany Commercial Division Justice Richard M. Platkin issued a decision in Keach v BST & Co. CPAs, LLP confirming that in order for the plaintiff in a hacking/data breach action to survive a CPLR 3211 (a)(3) motion to dismiss predicated on standing grounds, the plaintiff must allege that “he or she has suffered, or will suffer, an actual [or imminent] injury-in-fact by reason of the [d]ata [b]reach.”

In Keach, each of the two plaintiffs and his putative class commenced an action against Community Care Physicians, P.C. (“CCP”), an Albany-based medical group, and BST & Co. CPAs, LLP (“BST”), an accounting and consulting firm servicing CCP, following a “ransomware” attack on BST’s computer systems.

Plaintiffs are CCP patients who provided certain information to CCP in the course of receiving health-related services.  In December 2019, BST had a data security incident whereby hackers obtained access to a portion of BST’s network on which client data, including member data provided by CCP, was hosted.  As a result of this data breach, the personal information of 170,000 current and former CCP patients was accessed, which included the patients’ names, dates of birth, medical record numbers, medical billing codes, and insurance descriptions, but did not include Social Security numbers, medical diagnoses, financial information, or bank account information.

Plaintiffs cumulatively asserted nine causes of action against the defendants based on the data breach: (1) negligence; (2) negligence per se; (3) violation of General Business Law 349; (4) breach of fiduciary duty; (5) breach of contract; (6) trespass to chattels; (7) bailment; (8) unjust enrichment; and (9) conversion. Thereafter, defendants jointly filed a single motion to dismiss applicable to the two actions, arguing, among other things, that plaintiffs did not, and cannot, allege that they have sustained an injury-in-fact from the data breach, and instead have relied exclusively on the speculative possibility of harm that could occur in the future. Defendants further noted that, at best, in their respective complaints, plaintiffs have merely alleged that they were “significantly injured” by the data breach and “now forever face an amplified risk of fraud and identity theft.”

The Court articulated and applied a five-factor test to determine whether the harm allegedly incurred by the plaintiffs was actual or imminent, namely: “(1) the type of personal information that was compromised; (2) whether hackers were involved in the data breach or personal information otherwise was targeted; (3) whether personal information was exfiltrated, published and/or otherwise disseminated; (4) whether there have been any incidents of, or attempts at, identity theft or fraud using the compromised personal information; and (5) the length of time that has passed since the data breach without incidents of identity theft or fraud.”

After application of these five factors, the Court held that the plaintiffs did not have the requisite standing and dismissed both complaints, noting as follows:

“Even assuming that the personal information of plaintiffs, which did not include social security numbers or financial account information, was exfiltrated from BST’s computer systems as part of the ransomware attack, plaintiffs have alleged no acts of identity theft, fraud or other suspicious activity involving their personal information. Nor have plaintiffs alleged any attempts to commit identity theft, fraud or other wrongdoing using their personal information … the passage of a lengthy period following the Data Breach with no suspicious activity weighs heavily against finding that the injuries claimed by the named plaintiffs are imminent or substantially likely to occur…”

The Court then recognized that courts in other jurisdictions, including jurisdictions in which New York courts shared co-equal jurisdiction, found plaintiffs to have standing under similar circumstances. Nevertheless, the Court found that the “ubiquitous nature of data breaches” weighs in favor of applying a “cautious approach to standing,” citing to the first sentence of a decision of the U.S. District Court for the Middle District of Pennsylvania, observing:

“There are only two types of companies left in the United States, according to data security experts: those that have been hacked and those that don’t know they’ve been hacked.”

This decision serves as a reminder that a fundamental element to any claim is damages, and, where the plaintiff has not sustained any damages, there are no claims for the court to adjudicate.

 

In December 2020, the New York Law Journal commented on the measures the New York State court system would enact to handle the recent $300 million budget cut.  These measures included “adopting a strict hiring freeze, deferring raises, suspending countless programs, and declining to extend the judicial service of 46 retired trial and appellate judges.”  This was a difficult decision to be sure, but the alternative could have been catastrophic: the layoff of over 300 employees.

Given the combination of the court system’s shrinking workforce and the existing backlog of cases, New York’s Commercial Division is seeking to reduce its caseload through the expansion of ADR, both externally and internally.  In December 2020, the Commercial Division Advisory Council (“CDAC”) sought to adopt two new Commercial Division Rules that would expand the opportunities for litigants to settle out of or in court.

The first proposal seeks to “amend Commercial Division Rule 3(a) (22 NYCRR § 202.70(g), Rule 3(a)) ‘to permit the use of neutral evaluation as an ADR mechanism and to allow for the inclusion of neutral evaluators in rosters of court-approved neutrals'” (the “Roster Expansion Proposal“).  The CDAC’s Roster Expansion Proposal would reduce the 40-hour training requirement for mediators to allow neutral evaluators, “who only have to undergo six hours of training and have five years of training as per Part 146,” to be added to the roster of neutrals.  This change is sought not only to increase the number of neutrals, but also to increase the diversity of the roster.  Certification information as “mediator” or “neutral evaluator” would be available to both judges and litigants.  The Roster Expansion Proposal went out for public comment in December 2020, closed on January 29, 2021, and is still pending a final decision from Chief Administrative Judge Marks.

The CDAC’s second proposed Commercial Division Rule change, to amend Commercial Division Rule 30, would mandate client participation in settlement conferences (the “Settlement Conference Proposal“), as “the CDAC believes that business clients will find attractive the institutionalization of the settlement process.”  While the Settlement Conference Proposal offers parties many options to request different neutrals (the assigned judge, another judge in the Commercial Division, JHO, Special Referee, neutral, mediator from Part 146 roster, or a private neutral), the forced timing of the settlement conference after filing the Note of Issue is perhaps something to be desired.  The Commercial and Federal Litigation Section of the New York State Bar Association submitted its comments to the Settlement Conference Proposal noting that “many can debate when a mandatory settlement conference should be held, and that it perhaps should occur earlier than proposed by the CDAC,” such as before the time and expense of depositions.  The Settlement Conference Proposal also went out for public comment in December 2020, closed on February 12, 2021, and is still pending a final decision from Chief Administrative Judge Marks.

Both proposals would provide necessary relief to the Commercial Division’s workload, given the required staffing reductions of 2020.  And while litigants may initially be opposed to “mandatory” settlement, their control over the settlement process, the reduced time in waiting for a neutral from an expanded roster, and the reduced costs inherent in foregoing a trial, may be welcome news after a particularly volatile year.

The statute of limitations to recover on a breach of contract is six years.  Parties can extend that limitations periods by agreement, and New York General Obligations Law 17-101 governs the form of such agreements.  It provides that, “[a]n acknowledgment or promise contained in a writing signed by the party to be charged thereby is the only competent evidence of a new or continuing contract whereby to take an action out of the operation of the provisions of limitations of time for commencing actions under the civil practice law and rules. . . ”  Per GOL 17-101, only signed writings acknowledging the indebtedness and promising to pay are sufficient to extend the statute of limitations.

In considering whether a writing satisfies GOL 17-101 and extends a statute of limitations, Courts require three elements: Signature, Content, and Delivery.

First, the acknowledgement must be “signed by the party to be charged thereby.”  See 20 Plaza Hous. Corp. v. 20 Plaza E. Realty, 950 N.Y.S.2d 871, 874 (Sup. Ct. N.Y. Cty. Aug. 30, 2012) (Section 17-101 inapplicable because acknowledgment was “not signed by defendant”).

Second, the acknowledgment must convey “an intention to pay Plaintiff’s debt.”  See Knoll v. Datek Sec. Corp., 2 A.D.3d 594, 595 (2d Dep’t 2003) (“[T]he critical determination is whether the acknowledgment imports an intention to pay.”).  If the writing is at all inconsistent with an unequivocal intention to repay the debt, the writing fails the requirements of GOL 17-101.

Third, the acknowledgment “must have been communicated to the plaintiff or someone acting on his behalf, or intended to influence the plaintiff’s conduct.”  See Lynford v. Williams, 34 A.D.3d 761, 763 (2d Dep’t 2006) (Section 17-101 inapplicable where “plaintiff did not learn of the [purported acknowledgments] until after he commenced this action”).

In part because GOL 17-101 was intended to limit the instances in which an acknowledgment revives a cause of action, Courts strictly enforce each of the three requirements.  A writing failing any of the Signature, Content, or Delivery requirements is insufficient to restart the statute of limitations.  While the requirements of GOL 17-101 are strictly enforced, not every ambiguity in the acknowledgment will defeat its enforcement.  Recently, in Hawk Mtn. LLC v. RAM Capital Group LLC, 2021 NY Slip Op. 01349, the First Department held that an acknowledgement was sufficient to satisfy GOL 17-101 and restart the statute of limitations, despite its failure to specifically refer to the debt and inconsistencies between the acknowledgment and the underling note.

Continue Reading General Statement of Indebtedness is Sufficient to Restart Statute of Limitations Despite Ambiguities

Most commercial contracts contain a choice of law provision and/or forum-selection clause. Under New York law, it is well recognized “that parties to a contract may freely select a forum which will resolve any disputes over the interpretation or performance of the contract” (Brooke Group Ltd v JCH Syndicate 488 et al). Recently, Justice Elizabeth Hazlitt Emerson handed down a decision emphasizing that absent a strong showing, forum-selection clauses are generally considered valid.

In Stein v United Wind, Inc. , plaintiffs Howard and Cathy Stein (collectively, the “Steins”) and Jeremy Tark (“Tark”) (the Steins and Tark collectively, the “Plaintiffs”) brought a lawsuit in Suffolk County, New York against defendant United Wind, Inc. (“United Wind”), a Delaware corporation, and various related entities, including Eocycle Technologies (“Eocycle”) (collectively, the “Defendants”). In the complaint, Plaintiffs alleged that they were fraudulently induced to invest into United Wind to the tune of $175,000.00. In formalizing these investments, Plaintiffs entered into two  subscription agreements with United Wind and purchased convertible promissory notes in the amounts of $75,000.00 (the “Stein Note”) and $100,000.00 (the “Tark Note”) (collectively, the “Notes”). Specifically, the subscription agreements and the Notes provided that these devices shall be governed by Delaware law. Moreover, the Notes contained a forum-selection clause that provided that “the State of Delaware shall have exclusive jurisdiction over any dispute in connection with [these] Note[s].”

During the course of the investment relationship, United Wind entered into a term sheet with Eocycle, whereby, Eocycle agreed to provide United Wind with an operating loan in the amount of $100,000.00 and additional funding of $766,754.00 to a newly-formed Delaware corporation to purchase United Wind’s assets. Thereafter, United Wind contacted all of its shareholders and noteholders, including the plaintiffs, seeking their consent to the transaction and to enter into a waiver and amendment agreement (the “Waiver Agreement”). Notwithstanding the Plaintiffs refusing to consent and enter into the Waiver Agreement, United Wind was able to obtain approval of the majority holders of outstanding shares to complete this transaction. Subsequently, United Wind entered into an asset-purchase agreement (the “Asset Purchase Agreement” ) with the newly formed Delaware corporation, 18373510, Inc. (“18 Inc.”). The Asset Purchase Agreement provided that as a result of acquiring the assets of United Wind, 18 Inc. would (i) assume certain liabilities of United Wind; and (ii) be required to make payments to United Wind pursuant to an earn out schedule. However, Plaintiffs alleged that 18 Inc., failed to make any payments to United Wind pursuant to the terms of the Asset Purchase Agreement. As a result, Plaintiffs were never repaid any amounts in relation to their Notes.

Following the commencement of Plaintiffs’ lawsuit, the Defendants separately moved to dismiss the complaint, arguing that the forum-selection clause in the Notes required that the state of Delaware had exclusive jurisdiction in deciding any dispute in connection with the Notes. In opposition, the Plaintiffs argued that enforcement of the forum-selection clause would be unreasonable and unjust, based on the fact that: (i) the Plaintiffs never signed the Notes; (ii) there was no nexus between any of the parties and the state of Delaware; and (iii) the Notes were procured by United Wind’s fraud. Justice Emerson rejected each of Plaintiffs’ arguments.

First, the Court rejected Plaintiffs’ argument that they never signed the Notes, explaining that “the plaintiffs may not seek to enforce the notes against the defendants and, at the same time, argue that they did not agree to the terms contained therein.”  Moreover, the Court found that because the Plaintiffs had signed the subscription agreements and performed under the Notes, “it was not necessary for the plaintiffs to sign each individual note.”

Second, the Court rejected Plaintiffs’ argument that none of the parties had any significant connection to the state of Delaware, based on the fact that United Wind and 18 Inc., were both Delaware corporations.

Third, the Court rejected Plaintiffs’ argument that the forum-selection clause could not be enforced since the Notes were procured by United Wind’s fraud. The Court concluded that, while Plaintiffs alleged they were fraudulently induced to enter into the Notes, there was no allegation that “the forum-selection clauses themselves were procured by fraud.” In addition, the Court acknowledged that the plain language contained in the subscription agreements provided that Plaintiffs’ investment in United Wind involved a “high degree of risk and should be made only by persons of substantial means … who can bear the economic risk of a total loss of their investment.” Thus, the Court found such representations offered in the subscription agreements “rendered any reliance on alleged contradictory oral representations unjustifiable as a matter of law.”

Upshot:

As shrewdly noted in the dissenting opinion of Bowen v Massachusetts, “nothing is more wasteful than litigation about where to litigate.” These words symbolize the essence of the Stein decision and serve as a powerful reminder to litigators practicing in the Commercial Division that attempting to invalidate the enforcement of an already agreed upon forum-selection clause will be an uphill battle. And so, to avoid this losing crusade, drafters and parties should remain cognizant when choosing which jurisdiction is most appropriate in litigating a potential dispute and carefully review the forum-selection clause before executing any agreement.

 

The CPLR 3123 notice to admit can be a useful device in litigation.  Its primary purpose is to expedite a trial by eliminating the necessity of proving a “readily admittable fact” or matter not in dispute.  But, as efficient as it sounds, the notice to admit is a limited device, and may only be used to elicit an admission of a fact which the seeking party “reasonably believes there can be no substantial dispute” – i.e., an easily provable, clear-cut matter of fact.

Despite this exacting standard, many litigants often find themselves on the receiving end of an improper notice to admit – that is, one that seeks to compel the admission of a fundamental or material fact in dispute.  It is risky to deny outright the matters in the notice, since the requesting party may be able to recover the costs (and attorneys’ fees) associated with proving the matter at trial (if the denial is found to be unreasonable).  Ignoring the notice entirely is even riskier.  Although the court may ultimately find the notice so unreasonable that the ignoring party will face no sanction, ignoring a notice to admit could be perilous, since “silence is deemed an admission” (CPLR 3123[a]).  So, if you are the recipient of an improper notice to admit, what should you do?

As Prof. Patrick Connors aptly states in the Practice Commentaries to CPLR 3123, “the wisest course” is to move for a protective order pursuant to CPLR 3103.

The New York County Commercial Division recently illustrated how a protective order may relieve a litigant from responding to an improper notice to admit.  In 470 4th Ave. Fee Owner, LLC v Adam Am. LLC (70 Misc 3d 1214[A], 2021 NY Slip Op 50090[U] [Sup Ct, NY County Feb. 4, 2021]), the defendants, Adam America LLC, 470 4th Avenue Investors, LLC, and Danya Cebus Construction, LLC (“Defendants”), served notices to admit on third-party defendants All About AC Corp. (“AC”) and Amra Electrical Corporation (“Amra”) (“3P Defendants”).  The 9-page notice to admit served on AC contained 38 separate matters for which Defendants sought admission.  Rather than respond to the notices, the 3P Defendants timely moved, pursuant to CPLR 3103, for protective orders relieving them from responding to the notices to admit.

Justice Robert R. Reed – a fairly recent addition to Manhattan’s Commercial Division – partially granted the motion.  Of the 38 matters contained in the notice served on AC, the Court found that only the first four requests – which sought admissions as to the existence and authenticity of the contract between AC and Danya – were proper.  This is consistent with the plain language of CPLR 3123, which permits requests for admission concerning “the genuineness of any papers or documents.”

As to the remaining 34 matters, the Court concluded they sought “admissions that go to the heart of the parties’ claims and defenses,” and were therefore improper.  Indeed, the central claim in the litigation concerned water intrusion and damages as a result of allegedly improperly installed packaged terminal air conditioner units.  AC denied it was responsible for the allegedly defective installation.  Nevertheless, the requests sought admissions from AC concerning the scope of AC’s work and AC’s understanding of its contractual obligations in connection with the project.  For example, one request sought an admission that “[p]ursuant to the Contract, it was [AC’s] responsibility to provide a complete, operational and approved HVAC system.”  And so, because the requests sought admissions from AC concerning disputed issues of fact in the litigation – namely, the scope of AC’s work at the project – a protective order was warranted.

Although some early cases denied the use of the protective orders to vacate or limit a notice to admit (Schwartz v Macrose Lumber & Trim Co., 46 Misc 2d 202 [Sup Ct, Queens County 1965]), protective orders are now commonly accepted devices for testing the validity of a notice to admit. Thus, a party may seek a protective order if the notice to admit requests admissions beyond the scope of CPLR 3123 (see e.g. Sagiv v Gamache, 26 AD3d 368 [2d Dept 2006]), such as where the notice seeks admissions on material issues in dispute in the action.

Courts in New York have also held that a protective order may be available where the notice to admit seeks to secure legal conclusions (Kimmel v Paul, Weiss, Rifkind, Wharton & Garrison, 214 AD2d 453 [1st Dept 1995]), or “highly technical, detailed and scientific information which is the subject for examination by an expert witness” (Berg v Flower Fifth Ave. Hospital, 102 AD2d 706 [1st Dept 1984]).  And, Courts have granted protective orders where the information sought in the notice to admit may be obtained through document discovery (Jet One Group, Inc. v Halcyon Jet Holdings, Inc., 111 AD3d 890 [2d Dept 2013]), or where the notice to admit is used to exact an admission from one party of “facts within the unique knowledge of other parties to the action” (Taylor v. Blair, 116 AD2d 204 [1st Dep’t 1986]).

The Upshot:

A notice of admit should be used only for disposing of uncontroverted questions of fact or those that are easily provable.  Indeed, a notice that seeks to compel the admission of material facts in dispute, legal conclusions, technical, detailed, or scientific information, or information within the unique knowledge of a third-party, may be improper.  But, no matter how unreasonable the notice of admit, a recipient who neither reasonably denies the matters nor promptly moves to test the validity of the notice is courting trouble.  If the recipient ignores the notice based on a mistaken assumption that the court will ultimately find the notice unreasonable, she will be held to the usual rule that silence is an admission.  And so, the safest course for a litigant on the receiving end of an unreasonable or improper notice to admit is to promptly move for a protective order.  

 

Pursuant to Part 130 , attorneys are obligated to undertake an investigation of a case.  But is an attorney responsible for ignorance of facts which the client neglected to disclose?  “No,” says the Commercial Division.

In a recent decision by Justice Andrew Borrok, the Commercial Division discussed this very issue. In Morgan and Mendel Genomics v Amster Rothstein & Ebenstein, LLP, Albert Einstein College of Medicine (“Einstein”) hired the law firm of Amster Rothstein & Ebenstein, LLP (“Defendant”) to assist Einstein in obtaining a patent for its new genetic testing technology, invented by Einstein employees, Dr. Ostrer and Mr. Loke.  By way of background, the publication date of the technology is critical because it starts the one-year clock for filing a patent application.

In Morgan and Mendel Genomics, Einstein advised Defendant that it first published an article (the “Article”) about its technology in March 2012—which would start the one-year timeframe by which Defendant would have to file a patent application.  In addition, Einstein submitted to Defendant an Invention Disclosure Form, which confirmed in writing that the technology was first published in March 2012.  However, Defendant learned, on its own, that the Article appeared online on January 11, 2012 and communicated that fact to Einstein. And so, Defendant filed a provisional patent application on January 8, 2013 and a non-provisional application on January 8, 2014.

On September 14, 2016, the United States Patent and Trademark Office (the “USPTO”) rejected the application as untimely because the Article was available online on December 15, 2011, more than a year before the provisional patent application was filed with the USPTO.

On November 22, 2019, plaintiff Morgan and Mendel Genomics (“Plaintiff”), who purports to have entered into an agreement with Einstein wherein Einstein assigned to Plaintiff its claim against Defendant, commenced an action for legal malpractice.

Defendant moved to dismiss the motion under CPLR § 3211(a)(7) arguing , among other things, that the law firm was retained solely to file a patent application – not to investigate whether the information provided to it by its client was not false. Justice Borrok concluded that “[a]lthough an attorney is responsible for investigating and preparing a client’s case, the attorney ‘should not be held liable for ignorance of facts which the client neglected to tell him or her.'”  To that end, the Court determined that “Plaintiff’s claim is doomed by the fact that the claim is premised on false information which the Defendant’s lawyers were allowed to rely on and for which they were not hired to investigate (i.e. that the article had in face been published earlier).”  

The Second Department in Green v Conciatori similarly dismissed a legal malpractice claim against attorneys who represented plaintiff in a personal injury action.  In Green,  plaintiff alleged that his lawyers were negligent in failing to discover certain facts about the plaintiff’s accident, which differed from the facts disclosed to them by their client, i.e., the plaintiff.  The Second Department held that “[w]hile an attorney has a responsibility to investigate and prepare every phase of a client’s case, an attorney should not be held liable for ignorance of facts which the client neglected to tell him or her.” In Green, the court further determined that plaintiff did not show that counsel “failed to exercise the ordinary reasonable skill and knowledge possessed by a member of the legal profession” in relying on the information provided by the client.

The Third Department in Parksville Mobile Modular, Inc. v Fabricant  also determined that although an attorney “has the responsibility to ‘investigate and prepare every phase’ of his client’s case,” “an attorney should not be held liable for his ignorance of facts which his client neglected to tell him” (73 AD2d 595, 598 [3d Dept 1979] [holding that the fact that the attorney did not develop as full record as was developed following a trial cannot be grounds for a legal malpractice claim]). In Thompson v Seligman, however, the Third Department denied defendant law firm’s motion for summary judgment on a legal malpractice claim where the plaintiff was under a mistaken belief as to an important fact regarding its worker’s compensation claim, and the attorney failed to review the record evidence, which would have shown plaintiff’s mistaken belief (Thompson vSeligman, 53 A.D.3d 1019 [3d Dept 2008]).  There, the court stated that the question becomes “whether, in the performance of that duty [to investigate and prepare for his client’s case], defendants “ ‘exercise[d] that degree of care, skill, and diligence commonly possessed and exercised by a member of the legal community’ ” (see id.).

Takeaway: 

Can you safely rely on facts provided to you by your clients? It depends.  The Commercial Division says: yes, you can and a client’s failure to provide his or her counsel with correct information is not a basis for a legal malpractice claim. However, the steps one takes to investigate will always, of course, be judged by whether they were consistent with the  care and diligence exercised by others in the field.

We all hoped ringing in the New Year would mean leaving some of the hardships from the COVID-19 pandemic behind in 2020. However, in just two short months, businesses struggling with rent and other financial obligations due to COVID-19 restrictions are getting little to no relief from the Commercial Division.

You first read Madeline Greenblatt’s post about Commercial Division Justice Andrew Borrok dismissing lingerie brand Victoria’s Secret’s lawsuit seeking to rescind its lease for its 20,000 square foot flagship store located in Herald Square, and avoid its $937,734.17 monthly rent obligation due to COVID-19 . In that case, the New York County Supreme Court rejected Victoria’s Secret’s argument that its lease agreement should be declared unenforceable under the common law doctrines of “frustration of purpose” and/or “impossibility of performance.”

Then, only two weeks ago, James Wicks and I wrote about a decision issued by Commercial Division Justice Timothy S. Driscoll in an insurance coverage dispute between a movie theater company and its insurance carriers over losses due to the forced shut down of the theater as a result of COVID restrictions. In a case of first impression in New York, Justice Driscoll followed the lead of a majority of courts across the nation finding that loss of use of the property as a result of the Executive Order did not constitute “direct physical loss or damage to the property” to trigger coverage under commercial liability insurance policies.

Adding another decision to the list,  in Valentino U.S.A, Inc. v 693 Fifth Owner LLC,   Justice Andrew Borrok rejected Valentino U.S.A, Inc.’s (“Valentino”) attempt to be relieved of its $18,975,000.00 yearly rent obligations due to COVID-19 shutdowns. In its complaint, luxury fashion company Valentino brought the following eight causes of action against its landlord Defendant 693 Fifth Owner LLC (“Landlord”) to avoid its obligations under its lease agreement (“Lease”) for its prestigious Fifth Avenue storefront in New York City: (i) declaratory judgment of frustration of purpose – lease termination; (ii) in the alternative, declaratory judgment of frustration of purpose – rent abatement; (iii) impossibility of performance – lease rescission; (iv) in the alternative, impossibility of performance – rent abatement; (v) rescission based on failure of consideration; (vii) constructive eviction; (vii) declaratory judgment; and (viii) injunctive relief. While Valentino unsurprisingly cited the series of executive orders issued by Andrew Cuomo limiting and/or prohibiting “non-essential” business operations, Valentino also argued that even in a “post-pandemic New York City (should such a day arrive)” the “social and economic landscapes have been radically altered in a way that has drastically, if not irreparably, hindered Valentino’s ability to conduct high-end retail business” from its storefront. Valentino further argued that factors such as unprecedented financial disruptions, decreases in consumer spending, and unparalleled unemployment would have long lasting effects on brick-and-mortar retail stores like Valentino’s.

The Landlord moved to dismiss under CPLR 3211(a)(1) (defense founded upon documentary evidence), 3211(a)(7)(failure to state a claim), and 3211(c) (motion treated as one for summary judgment) arguing the lease agreement itself allocates to Valentino the risk of its inability to operate the premises and that financial loss does not equate to frustration or impossibility.[1] The Landlord pointed to several significant portions of the Lease including:

  • Section 2.3: Valentino promises to pay its rent “without any abatement, set-off or deduction whatsoever….”
  • Section 22.11: In the event of a governmental closure order or cataclysm, Valentino must continue to pay its rent.
  • Section 9.1: Valentino is required to comply with present and future governmental orders, whether foreseen or unforeseen.
  • Section 4.1: Valentino is not entitled to any set-off in rent liability based upon condition of Premises.
  • Section 21.11: In the face of cataclysmic events such as “failure of power, restrictive governmental laws or regulations, riots, insurrection, war, acts of terrorism, acts of God, floods, hurricanes, windstorms, fire or other casualty, condemnation or other reason of a similar or dissimilar nature…nothing contained in this Section shall operate to excuse Tenant from the prompt payment of Rent or any other payments or charges required by the terms of this Lease.”

The Court held that pursuant to Section 21.11 of the Lease, the parties expressly allocated the risk that Valentino would not be able to operate its business and that Valentino is therefore not forgiven from its performance, including its obligation to pay rent by virtue of a state law. Because the provision was broadly drafted, it was of no consequence that the COVID-19 pandemic was not specifically enumerated in the Lease. The Court further held that because Valentino failed to plead that it moved out of the premises or that the landlord substantially interfered with its use and possession, its claim for constructive eviction could not succeed. Evidence that Valentino was open for curbside retail and by appointment, or that Valentino vacated the premises only after the filing of the action, only hurt Valentino’s claim for constructive eviction. Based on these findings, Valentino’s complaint was dismissed in its entirety.

Upshot:

Recent decisions in the Commercial Division demonstrate that New York businesses have an uphill battle when seeking relief from rent and other financial obligations due to COVID-19 losses. In terms of rent obligations, claims of frustration of purpose and/or impossibility of performance are proving unsuccessful. Tenants should review their lease agreements for provisions which allocate the risk to tenants in the event of cataclysmic events.

[1] See 407 East 61st Garage Inc. v Savoy Fifth Ave Corp

The legal industry has adapted rather quickly in order to minimize the pandemic’s impacts on the practice of litigation by enacting orders, rules, and practices to keep the wheels of justice turning.  This includes the now-widespread use of virtual platforms for appearances before the Court as well as conducting remote depositions as my colleagues blogged about at the outset of the pandemic.  Notably, some have adapted to the “new normal” of virtual practice, while others seem to still struggle as the world saw in the now-infamous “cat-man court appearance” video.  Have remote depositions become the “new norm”?  It appears that way, as U.S. Magistrate Judge Stewart D. Aaron aptly remarked back last June in Rouviere v. Depuy Orthopaedics, Inc. (S.D.N.Y.).  Indeed, some Judges have even provided templates or sample deposition protocol stipulations like this one by U.S. Magistrate Judge Robert W. Lehrburger or another by U.S. Magistrate Judge Sarah L. Cave.

Remote depositions are nothing new in New York state courts (see CPLR 3113(d); Rogovin v Rogovin, and Yu Hui Chen v Chen Li Zhi), as well as the federal courts (see Fed. R. Civ. P. 30(b)(4)).  The dramatic increase in use, comfort level, and apparent permanency is a direct result of the pandemic. Indeed, the vision of the Commercial Division Advisory Council (“CDAC”) is to ensure that the Commercial Division remains at the forefront of this trend.

In September 2020, the CDAC sought to adopt a new Commercial Division Rule that would expressly authorize and regulate the use of remote depositions (the “Remote Deposition Proposal”).  The Remote Deposition Proposal seeks to provide further guidance on what is considered undue hardship, a standardized remote deposition protocol form, the validity of an oath or affirmation administered during a remote deposition when the court reporter is not physically located where the witness is present, and protections for defending attorneys and their clients in the event of technical difficulties.  The Proposal went out for public comment in November 2020, which closed on January 19, 2021, and is still pending a final decision from Chief Administrative Judge Marks.

The Remote Deposition Proposal also points out the potential pitfalls to remote depositions including technical issues, security issues, exhibit sharing, and, of particular importance, private communications.  While certain private communications should be accommodated (e.g. – privilege discussions), virtual depositions do have the potential for increased abuse of other communications such as coaching and guiding the witness.  As the Remote Deposition Proposal notes and provides potential safeguards against, deponents may commit abuses by communicating via digital devices and any “chat” feature of the virtual platform, if available.

Despite the potential pitfalls, the CDAC is taking affirmative steps towards combatting the potential for abuse and capitalizing on the undeniable efficiencies of remote depositions. Pro se and indigent litigants can testify remotely without having to take off of work or find childcare.  Lawyers no longer need to bill clients for their travel time to and from a deposition, worry about traffic, or public transportation delays.  Even commencement and recess times can be greatly reduced.

In short, while some may still struggle to adapt to the new norm, and New York’s Commercial Division appears poised to find the efficient, silver-lining of the pandemic, don’t forget to dress for success (as a Florida Judge recently reminded), just as if the proceeding were in person. As for wearing shorts during a remote deposition?  Don’t do it, cautions the authors of a recent ABA article, as dressing professionally conveys “to the deponent of the seriousness of the proceeding.  In other words, dressing the part can lead to acting the part.”  Good, sound advice worth heeding!

COVID-19 continues to generate litigation in a variety of contexts in the Commercial Division.  Only two weeks ago did our colleague Madeline Greenblatt author a blog about COVID-19 not excusing commercial rental obligations.  Now, in what appears to be a case of first impression in New York at least, Justice Timothy S. Driscoll ruled in an insurance coverage dispute between a movie theater company and its insurance carriers over losses due to the forced shut down of the theater as a result of COVID restrictions. In so ruling in Soundview Cinemas Inc. v. Great Amer. Ins. Group, the Court followed the lead of a majority of courts across the nation that have decided business interruption coverage cases arising out of the COVID-19 pandemic.

Soundview Cinemas  operated a movie theater in Port Washington, New York.  The business was insured under a commercial general insurance policy issued by Great American Insurance, with limits of $1.15 million for business personal property and $600,000 for business income and extra expense — all defined terms in the policy.  In response to the onset of the COVID-19 pandemic, on March 7, 2020, Governor Andrew Cuomo issued Executive Order No. 202, which declared a disaster emergency for the entirety of New York State. The complaint alleges that the pandemic and ensuing Executive Orders forced its final curtain call: the curtains came down, the box office closed and the theater shuttered its doors.  Demand was made under the policy, to which Great American declined.

The complaint asserted a myriad of claims against the carrier and broker, ranging from negligence to breach of fiduciary duty.  The policy itself contained a “civil authority” clause (covering actual losses of income caused by edict of civil authority prohibiting access to the property), as well as a “virus exclusion” (excluding coverage for damages caused by viruses, bacteria, or microorganism).  The defendants immediately moved to dismiss under CPLR 3211(a)(1) (defense founded upon documentary evidence) and 3211(a)(7)(failure to state a claim).

As to the claims against the insurance brokers, the Court easily found that based upon the pleading, there were no allegations that the insured sought specific coverage that would apply to a pandemic, or that would support a claim that the broker should have procured additional insurance.  In fact, the Court noted that “Plaintiff does not even allege that any such insurance coverage for pandemic-related government closures existed prior to March 2020.”  Turning to the claims against the insurer, the Court concluded that under the “majority view,” loss of use of the property as a result of the Executive Order did not constitute “direct physical loss or damage to the property” to trigger coverage.

The Nassau County Commercial Division now joins the ranks of many courts nationwide that have addressed or are currently addressing claims for business interruption coverage arising out of the COVID-19 pandemic.[1] For instance, a District Court in Missouri held that policyholders adequately stated a claim for physical loss based on COVID-19 closures. In Studio 417 v. The Cincinnati Insurance Co., hair salons and restaurants in Springfield and Kansas City, Missouri, filed claims for losses due to COVID-19 closures under “all-risk” property insurance policies issued by The Cincinnati Insurance Co. Cincinnati denied the claims and the policyholders filed suit in the Western District of Missouri, asserting a right to payment under the policies’ coverages for business income, extra expense, dependent property, civil authority, extended business income, ingress and egress, and sue and labor. In its motion to dismiss, Cincinnati argued that the insureds failed to allege a “physical loss” and that this requirement can only be satisfied through “actual, tangible, permanent, physical alteration of property.” The court disagreed, finding that COVID-19 can constitute a “direct physical loss” to property sufficient to trigger coverage because “loss,” based on its plain and ordinary meaning, encompasses “the act of losing possession” and “deprivation” of property. Further, the court reasoned that the policy language extends coverage for direct physical loss or damage. Rejecting Cincinnati’s argument that both “loss” and “damage” require some form of tangible or physical alteration, the court held that pursuant to the rules of policy construction, “loss” and “damage” must have different meanings based on the use of the disjunctive word “or.” The Missouri court held, “[e]ven absent a physical alteration, a physical loss may occur when the property is uninhabitable or unusable for its intended purpose.”

Another recent decision, issued by a New Jersey district court on February 10, 2021, was not so favorable to the policyholder. In Causeway Automotive, LLC, et al. v Zurich American Insurance Co., plaintiffs sought coverage for losses sustained as a result of COVID-19 under business income and extra expense “caused by action of civil authority” provisions of their policy. Zurich maintained that it properly denied coverage based on a virus exclusion which states the insurer “will not pay for loss or damage caused by or resulting from any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness or disease.” In opposition to Zurich’s motion to dismiss, plaintiff insureds argued the virus exclusion was ambiguous and, therefore, should be interpreted in plaintiffs’ favor. Plaintiffs further argued that because the COVID-19 virus was but one cause in a sequence of events that led to their losses, the virus exclusion does not apply. The court disagreed, finding that plaintiffs’ potential interpretations of the virus exclusion did not render it ambiguous or otherwise unclear. The court was similarly unpersuaded by plaintiffs’ argument that the virus exclusion did not apply because their losses were not caused by COVID-19 but, rather, by the Governor’s Executive Orders requiring closure of certain aspects of Plaintiffs’ business. To determine whether the loss was “caused by” an excluded peril, the New Jersey court employed the efficient proximate cause test. The court found that the Governor’s orders were issued for the sole reason of reducing the spread of the virus that causes COVID-19 and would not have been issued but for the presence of the virus in the State of New Jersey. As a result, the New Jersey court granted the insurer’s motion to dismiss.

As one of the few cases getting past the motion to dismiss stage, on January 14, 2021, Cherokee County District Court Judge Douglas A. Kirkley granted partial summary judgment in favor of the insured on a claim for business interruption losses caused by COVID-19. In Cherokee Nation et al. v. Lexington Insurance Co. et al, plaintiffs argued that under their all-risk policy, a direct physical loss or damage occurs when a covered property is rendered unusable for its intended purpose. Plaintiffs maintained that COVID-19 caused the Nation to shut down covered properties, engage in disinfection efforts, and implement protective measures before reopening. The insurers argued that plaintiffs had not demonstrated a direct physical loss or damage and that contamination, pollution, and other similar exclusions applied. In granting summary judgment, the Oklahoma court found plaintiffs established a “plausible claim for a fortuitous ‘direct physical loss’” under their all-risk tribal property policy.

 

 

[1] University of Pennsylvania Carey Law School has created a “Covid Coverage Litigation Tracker” which compiles data from business interruption coverage cases across the nation and tracks judicial rulings. While the site’s organizers are transparent about limitations of the available data, the site can be an excellent resource for tracking COVID related insurance cases nationwide.