As readers of this blog are aware—click here, here, here, and here for related posts—the CPLR 3213 motion for summary judgment in lieu of complaint can be a powerful tool to secure an expedited judgment, “meld[ing] pleading and motion practice into one step, allowing a summary judgment motion to be made before issue [is] joined.”  Weissman v. Sinorm Deli, 669 NE 2d 242 (1996)

The New York legislature prescribes only a narrow set of circumstances under which CPLR 3213 may be applied.  When an action is based upon “an instrument for the payment of money only,” CPLR 3213 can save a plaintiff time and money by skipping past the pleadings and discovery stages of litigation, and barreling straight toward a judgment.

That said, Section 3213 of the CPLR is generally unavailable if the sued-upon instrument is ambiguous on the payment obligation and requires proof beyond the face of the instrument, as was recently discussed by the First Department in Talos Capital Designated Activity Co. v 257 Church Holdings LLC (2022 NY Slip Op 03186).

Talos involved a mezzanine lender who sought to collect, pursuant to CPLR 3213, money owed to the lender under certain loan guaranties and pledges following the borrower’s failure to meet its obligations at the “Five Year Paydown,” a five-year checkpoint of the loan.

In the guaranty context, in order to demonstrate entitlement to judgment under CPLR 3213, the plaintiff must show: (1) the existence of the guaranty; (2) the underlying debt; and (3) the guarantor’s failure to perform under the guaranty.

The First Department modified the judgment entered by the trial court in favor of the lender against all defendants, limited to just the judgment against the guarantor under the loan’s Payment Recourse Guaranty.

Rather than looking at the Payment Recourse Guaranty in isolation, the First Department held that when read together with the underlying loan agreement, the Payment Recourse Guaranty was ambiguous as to the triggering event of guarantor’s obligations. Therefore, the lender could not show that the guarantor actually defaulted on his obligations under the Payment Recourse Guaranty.

The underlying loan agreement provided that a nonpayment default by the borrower at the Five Year Paydown date was not considered a default under the loan agreement. Instead, upon a nonpayment default at the Five Year Paydown date, certain penalties were applied (calculated per the loan agreement) and the lender was entitled to exercise a series of elective remedies under certain specifically named guaranties and guaranty pledges. Any remaining deficiency after lender exercised its remedies under these guaranties and pledges would remain outstanding as part of the principal balance due upon the maturity date of the loan.

Critically, the loan agreement did not specifically name the Payment Recourse Guaranty as one of the guaranties and pledges that lender could exercise its remedies against. Thus, the First Department held that the instrument sued upon (the Payment Recourse Guaranty, as informed by the underlying loan agreement) was ambiguous as to whether the appellant-guarantor’s obligation was triggered upon a nonpayment default of the Five Year Paydown, or upon the maturity date of the loan when the borrower’s full obligation becomes due.

Given this material ambiguity, the First Department vacated that part of the judgment as to the guarantor and deemed the moving and answering papers to be the complaint and answer, respectively.

KEY TAKEAWAY

Section 3213 of the CPLR can be an efficient tool to streamline actions that fall within its ambit, but courts are careful to limit the motion’s applicability to only those instruments that are unambiguously clear as to a defendant’s payment obligation.

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The Commercial Division in Bronx County hasn’t been around all that long, opening its doors for adjudication in September 2019 with its very first case, Manhattan Beer Distributers LLC v Biagio Cru and Estate Wines, LLC.  Justice Eddie McShan was the first to preside over the ComDiv in Bronx County and remained in that position for more than two years.  Former Bronx County Civil Court Justice Fidel E. Gomez  took the ComDiv reigns in January of this year, after Justice McShan was appointed to the Appellate Division, Third Department.

According to various biographical accounts, including from the Dominican Bar Association, Justice Gomez emigrated to the United States from the Dominican Republic as a young boy and was raised in Manhattan’s Washington Heights neighborhood.  He is a two-time graduate of SUNY Buffalo, receiving both a B.A. in Legal Studies in 1996 and a J.D. from the University at Buffalo Law School in 1999.

Justice Gomez began his career as Assistant Corporation Counsel in the New York City Law Department where he tried more than 30 cases in five years.  After leaving Corp. Counsel’s office in 2004, Justice Gomez spent nearly a decade clerking for current SDNY District Judge Nelson S. Roman, both when Judge Roman was on the bench in Supreme Court, Bronx County (2004-09), as well as the Appellate Division, First Department (2009-13).  Justice Gomez then returned to Bronx County Supreme to clerk for Justices Mitchell J. Danziger, Betty Owen Stinson (Ret.), Barry Salman (Ret.), and Ben Barbado before being elected to the bench himself in November 2017.  Justice Gomez presided in Bronx County Civil Court until his ComDiv appointment January 2022.

By my count as of the day of this post, Justice Gomez has issued six officially-published decisions so far in 2022 — at least three of which involved commercial real property, Yellowstone injunctions, or other commercial lease disputes (see Section 202.70 (b) (3)) — which confirms a continued upward trend in this area over the last couple years, as we have reported here and here.  (More on the substance of Justice Gomez’s decisions in a future post).

Since taking the ComDiv bench, Justice Gomez has instituted a robust set of Part Rules, some of which are worth noting here, particularly for litigators with Bronx commercial practices.  To wit:

  • If you need to address a scheduling matter, email the Court; don’t call Chambers or e-file letter-requests.
  • Familiarize yourself with Microsoft Teams because all court conferences are held virtually.
  • If you’re not sufficiently briefed on your own case and the issues to be conferenced, you will be subject to default and/or sanctions.
  • Before filing a Note of Issue, you must request a settlement conference with the Court, at which you must be authorized to bind your client to a deal.
  • If you don’t provide the Court with a courtesy (hard)copy of your motion papers, your motion will be denied without prejudice.
  • If your motion papers lack proper form, etc., your motion will be denied without prejudice.
  • Your motion for summary judgment is due within 30 days of the filing of the Note of Issue.
  • Make your motions returnable any day of the week, except those brought by Order to Show Cause, which are returnable only on Mondays.
  • Don’t plan on oral argument for any of your motions, except those brought by Order to Show Cause for which appearances are required.
  • All trial-ready cases must go through the Special Trial Part, including ComDiv cases, so Justice Gomez may not be the judge to try your case.
  • If you want to make a motion in limine, you must do so orally before or during trial; ComDiv Rule 27 does not apply.

Finally, Justice Gomez closes out his Part Rules with the following omnibus admonition:

Be prepared and organized.  Be punctual and professionally attired.  Be civil to the Court and to one another.

Duly noted.

As we approach the 30th Anniversary of New York’s Commercial Division, it’s fair to say that over those 30 years, the Commercial Division has held true to its aim of improving the efficiency and judicial treatment of complex commercial matters.  One of the primary ways it does so is through its commitment to continually review and revise its Commercial Division Rules to better meet the needs of the parties and cases appearing before it.  Implementing and enforcing rules developed with efficiency in mind and after careful consultation with Judges and practitioners alike is no small contributor to the success of the Commercial Division.

The latest advancement of the Commercial Division Rules concerns the phase of litigation that has recently exploded in its importance and cost: the collection, review, and production of electronically stored information (“ESI”).

On March 7, 2022, Chief Administrative Judge Lawrence K. Marks signed an administrative order amending Rules 1, 8, 9, 11-c, 11-e 11-g and Appendices of section 202.7(g) of the uniform rules of practices for the Commercial Division of the Supreme Court and county courts.  These changes took effect on April 11, 2022.

The majority of these amendments to the Commercial Division Rules are aimed at modernizing and streamlining the rules concerning ESI.  Here are some notable highlights:

Continue Reading Updates to Commercial Division Rules Concerning Discovery of ESI

As mortgage loan transactions continue to become increasingly complex, lenders often worry about the remedies they have if borrowers fail to live up to their obligations. In the event of a default, lenders have the choice under New York’s election of remedies statute (RPAPL § 1301 (1)) to either (i) enforce the note and/or guaranty and obtain a money judgment, or (ii) pursue an action in equity to foreclose on the mortgage. However, because of New York’s one-action rule (RPAPL § 1301(3)), lenders are barred from bringing simultaneous actions to recover on the same mortgage debt.

In a recent decision from the Suffolk County Commercial Division, Justice Elizabeth H. Emerson  took a close look at New York’s one-action rule and determined that the rule did not apply where a pending lawsuit was not directly tied to collecting on the same mortgage debt.

In Nebari Natural Resources Credit Fund I, LP v Speyside Holdings LLC, et al, defendants, which consisted of multiple LLCs and their members (the “Individual Defendants”) (collectively, “Defendants”) owned two commercial properties consisting of certain parcels of vacant land in Yaphank, New York (the “Yaphank Property”) and Highland Mills, New York (the “Highland Property”). In or around February 2020, plaintiff Nebari Natural Resources Credit Fund I, LP (“Plaintiff”) and Defendants entered into a loan agreement (the “Loan Agreement”), whereby Plaintiff agreed to loan Defendants $ 17 million (the “Loan”) to pay off an existing $ 10 million loan and to provide working capital for the operation of a quarry at the Highland Property. The Loan was secured by, among other things, mortgages on both Properties, pledges by the Individual Defendants of their membership interests in Defendants, and “bad boy” guarantees by the Individual Defendants. However, the relationship between the parties quickly soured, with Plaintiff declaring Defendants in default as early as November 2020.

Following the default, Plaintiff exercised its rights under the Loan Agreement and sought to foreclose on the Individual Defendants’ membership interests, pursuant to UCC Article 9. In response, on or about March 17, 2021, Defendants commenced an action (the “Related Action”) seeking to enjoin the sales of the Individual Defendants’ membership interests.

While the Related Action was still pending, on or about September 1, 2021, Plaintiff commenced the Nebari action against Defendants, seeking to (i) foreclose the mortgages on the Highland and Yaphank Properties; (ii) foreclose its own security interests in the personal property on the Highland and Yaphank Properties; and (iii) recover any deficiency from the Individual Defendants under the “bad boy” guarantees. In response, Defendants filed a motion to dismiss the complaint, arguing that the Nebari action violated New York’s one-action rule under RPAPL § 1301 because (i) Plaintiff exhausted its remedy by pursuing a foreclosure of the Individual Defendants’ membership interests under UCC Article 9, and (ii) Plaintiff’s cause of action for a deficiency judgment constituted a separate action for a money judgment in violation of RPAPL 1301(1). Justice Emerson rejected both arguments.

First, the Court rejected the argument that RPAPL § 1301 barred Plaintiff from commencing the Nebari action, explaining that Plaintiff’s decision to foreclose on the Individual Defendants’ membership interests was “not an action on the note,” nor was it “even a judicial proceeding.”  In addition, the only judicial proceeding relating to UCC Article 9 was the Related Action, which was commenced by Defendants. Further, the Court highlighted that UCC 9-604(a)  provided Plaintiff the remedy of proceeding “against the personal property (the membership interests) without prejudicing any of its rights with respect to the real property.”

Second, the Court rejected the argument that Plaintiff’s cause of action for a deficiency judgment was in violation of RPAPL § 1301, based on the fact that (i) RPAPL § 1371(2) allows a plaintiff in a foreclosure action to make a motion for leave to enter a deficiency judgment, and (ii) New York courts consistently hold that a plaintiff has a right to seek a deficiency judgment against a guarantor in a foreclosure action (Libertypointe Bank v 7 Waterfront Prop., LLC, 94AD3d 1061, 1062 [2d Dept 2012]).

Upshot:

The Nebari decision serves as an important reminder that while RPAPL § 1301 provides lenders with a safety net of remedies, the decision of which remedy to pursue may not always be clear. Therefore, it is critical that counselors advise their clients on other claims and actions that can be pursued against debtors, without running afoul of New York’s one-action rule.

In Castle Restoration & Constr., Inc. v Castle Restoration, LLC, Suffolk County Commercial Division Justice Elizabeth H. Emerson refused to enforce an oral agreement that allegedly modified a prior written agreement between the parties. In this blog post, we see how the Court applied a variety of contractual principals to determine the validity of the oral agreement.

In the Castle litigation, , plaintiff Castle Restoration & Construction, Inc.  (“Castle Inc.”) entered into an asset-sale agreement with defendant Castle Restoration LLC (“Castle LLC”) that included the transfer of equipment and a list of clients from Castle Inc. to Castle LLC (the “Agreement”). The purchase price of the deal was $1.2 million.  Castle LLC paid Castle Inc. $100,000 at closing and gave Castle Inc. a promissory note for the remaining amount due under the Agreement (the “Note”). Castle LLC defaulted on the Note.

Prior Litigation by Castle Inc.

As a result of Castle LLC’s default, Castle Inc. commenced an action and moved for summary judgment in lieu of complaint. Nassau County Commercial Division Justice Stephen A. Bucaria denied Castle Inc.’s motion. On appeal, Castle LLC hung its hat on a subsequent oral agreement allegedly entered into by the parties in which Castle LLC agreed to provide Castle Inc. with labor and materials for additional construction projects, the value of which would be used to offset Castle LLC’s obligations under the Note (the “Oral Agreement”).

The Second Department reversed Justice Bucaria’s decision, granting Castle Inc.’s motion for summary judgment and holding that the “breach of a related contract cannot defeat a motion for summary judgment on instrument for the payment of money only” unless the two contracts are “inextricably intertwined.” The Second Department held that the Agreement and the subsequent Oral Agreement were not inextricably intertwined and reversed the lower court’s decision.

No-Oral Modification Provision

After its defeat in the Second Department, Castle LLC brought an action against Castle Inc. alleging claims for breach of contract, fraud in the inducement, and unjust enrichment. Castle Inc. moved for summary judgment. Justice Elizabeth H. Emerson granted the motion, dismissing all but two breach of contract claims against Castle Inc.

First, Castle LLC alleged that Castle Inc. breached the Agreement by failing to perform the work-in-progress, which remained unfinished at the time of the closing. Second, Castle LLC alleged that Castle Inc. breached the Oral Agreement in which Castle LLC agreed to complete Castle Inc.’s work-in-progress in exchange for a reduction in its obligation under the Note. Specifically, Castle LLC alleges that Castle Inc. failed to pay Castle LLC for the work it performed under the Oral Agreement.

Although it denied summary judgment on the breach of contract claims, the court noted that if the Oral Agreement was valid, it would have relieved Castle Inc.’s obligation under the Agreement to complete the work-in progress, thus precluding Castle LLC from prevailing on its breach of the Agreement claims against Castle Inc.

The case went to trial.  The court recognized that the Agreement contained a no-oral-modification provision. Contracts that contain such provisions are typically protected by the Statute of Frauds and therefore must be in writing (see General Obligations Law § 15-301[1] [“A written agreement or other written instrument which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought or by his agent”]). Accordingly, an oral agreement alone is not enough to modify the terms of an agreement.

“A party’s admission of the existence and essential terms of an oral agreement is sufficient to take the agreement out of the statute of frauds” (Camhi v Tedesco Realty, LLC, 105 AD3d 795 [2d Dept 2013]). However, the statute of frauds applies when the parties dispute the terms and conditions of the agreement (Komlossy v Faruqi & Faruqi, LLP, 714 Fed Appx 11, 14 [2nd Cir 2017]).  Although both Castle LLC and Castle Inc. acknowledged that they entered into the Oral Agreement by which Castle LLC agreed to complete Castle Inc.’s work-in progress, the parties disagreed as to the terms of the Oral Agreement, i.e., how Castle LLC was to be compensated for its work.  The court ultimately determined that the Oral Agreement was unenforceable.

Breach of Contract Claims

In analyzing the court’s decision with respect to Castle LLC’s breach of contract claims against Castle Inc., we must recall the essential elements of a breach of contract claim: (1) the existence of a contract; (2) the plaintiff’s performance pursuant to the contract; (3) the defendant’s breach of his or her contractual obligations; and (4) damages resulting from the breach (Canzona v Atanasio, 118 AD3d 837, 838 [2d Dept 2014]).  An element often overlooked is the plaintiff’s own performance under the contract.

“A party will not be able to prevail on a breach-of-contract claim unless it proves, by a preponderance of the evidence, that it performed its own obligations under the contract” (Innovative Biodefense, Inc. v VSP Tech., Inc., 176 F Supp 3d 305, 317 [SD NY 2016]). “Thus, a party is relieved of its duty to perform under a contract when the other party has committed a material breach” (Franklin Pavkov Constr. Co. v Ultra Roof, Inc., 51 F Supp 2d 204, 215 [ND NY]). A breach is considered “material” if it goes to the root of the agreement between the parties.  When, a party fails to make payment pursuant to the terms of a contract, the party is in material breach of the agreement, thus relieving the other party’s obligation to perform under the contract.

Because the court determined that the Oral Agreement was unenforceable, Castle LLC was unable to offset its obligations to Castle Inc. under the Agreement. Thus, since Castle LLC failed to make payment on the Note, the court determined that Castle LLC was in material breach of the Agreement. Castle Inc. was therefore discharged of its duty to perform under the Agreement. The Court ultimately found in favor of Castle Inc. with respect to both breach of contract claims.

Takeaway:

Although oral modifications to contracts are common, they may not always be enforced. When analyzing whether an oral modification is enforceable you have to consider, among other things, whether the written agreement has a no-oral-modification provision; whether the parties acknowledge that an oral agreement exists; and whether the parties agree with respect to the terms of the oral agreement. Otherwise, the oral agreement may be barred by the statute of frauds.

A recent decision from the First Department reminds us that New York courts are not sympathetic to duress claims when the alleged acts or threatened acts fall within the ambit of the defendant’s rights under a valid agreement.

In Zhang Chang v Phillips Auctioneers LLC, the First Department affirmed Manhattan Commercial Division Justice Jennifer G. Schecter’s Decision and Order dismissing plaintiff’s causes of action for breach of contract, unjust enrichment, and declaratory judgment.

Defendant Phillips is a world-renowned auction house, catering to international collectors for the purchase and sale of 20th-century and contemporary works of art, among other things. As taken from the Complaint, Phillips and the Plaintiff-art collector entered into a standard Guaranty Agreement, in which Plaintiff committed to a minimum bid guarantee in the amount of $27.13 million for the scheduled auction of a painting by Gerhard Richter entitled, “Düsenjäger.” Per the Guaranty Agreement, if no bid was received at auction in excess of the guaranteed minimum price, Plaintiff was required to purchase the painting for the $27.13 million guarantee amount.

Following the auction (in which the Düsenjäger received no higher bids), Phillips sought to enforce the terms of the Guaranty Agreement, but Plaintiff resisted. Ultimately, the parties settled their dispute, as captured by a Settlement Agreement requiring Plaintiff to pay $26 million in exchange for title to the Düsenjäger and to consign to Phillips a diptych (in which Plaintiff retained an interest) by the artist Francis Bacon as collateral for the settlement amount.

Plaintiff failed to make timely and complete settlement payments, with $23 million outstanding at the end of the payment term. Accordingly, Phillips listed the Düsenjäger for auction, with the proceeds to be applied to the outstanding sums owed by Plaintiff. Plaintiff was advised that he could either pay the entire outstanding amount under the settlement in exchange for title of the painting, or he would be permitted to participate in the auction in which, on top of any winning bid, he would be charged a standard “buyer’s premium” fee.

Plaintiff elected to bid on and acquire the painting at auction and signed an Acknowledgment stating the total amount of his remaining debt to defendant, including the buyer’s premium. Plaintiff paid the entire amounts acknowledged and took possession of both the Düsenjäger and the Bacon artwork.

Plaintiff then commenced litigation claiming that he overpaid the “buyer’s premium” in excess of the amounts owed under the Settlement Agreement, claiming that he only signed and ratified the Acknowledgment under duress for fear of losing the Düsenjäger and the Bacon artwork in a threatened “fire sale” by Phillips.

The First Department affirmed Justice Schecter’s decision and order granting dismissal of Plaintiff’s claims in their entirety. The Appellate Court held that that the parties’ agreements unambiguously provided that Phillips—not Plaintiff—retained title and possession of the Düsenjäger until Plaintiff paid off the debt by a certain specified date, which Plaintiff failed to do. Phillips was, therefore, entitled to list the artwork at auction for which Plaintiff was liable for the costs incurred and for the “buyer’s premium.” This act could not constitute duress as a matter of law, as Phillips was simply exercising its rights under the parties’ agreements.

Furthermore, the Appellate Court held that no further consideration was required in exchange for Plaintiff’s countersignature on the Acknowledgement because the Acknowledgement merely restated Plaintiff’s obligations under the parties’ prior agreements. Indeed, the Acknowledgment was ratified, not voided, by Plaintiff as Plaintiff countersigned the Acknowledgement, paid the entire amount listed in the Acknowledgment, and took possession of the artworks thus accepting the benefit of the bargain.

Finally, the Appellate Court held that the unjust enrichment claim was properly dismissed as duplicative of the breach of contract claim.

Key Takeaway

At the end of the day, Plaintiff’s own actions in defaulting under the Guaranty Agreement, defaulting under the Settlement Agreement, and countersigning and ratifying the Acknowledgement proved fatal to his duress claim. It goes without saying that litigants would be well advised to carefully consider the terms of any agreement they enter into before they sign; once you sign and act, it is hard to walk it back.

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It’s no secret to anyone litigating in the Commercial Division over the past couple years during the COVID era that the judges of the Commercial Division have been particularly keen on lightening their dockets by encouraging, and even participating in, the settlement of cases that come before them.  That trend is sure to continue in 2022 (and beyond) with a recent amendment to Commercial Division Rule 30 (“Settlement and Pretrial Conferences”), which provides for a mandatory settlement conference in every Commercial Division case that’s been certified ready for trial.  The amendment became effective earlier this month on February 1, 2022.

Subpart “a” of Rule 30 still allows ComDiv judges the discretion to schedule a settlement conference in a case anytime after the discovery cut-off date.  But new subpart “b” shifts from the permissive to the mandatory, requiring that “the parties in every case pending in the Commercial Division must participate in a court-ordered mandatory settlement conference (MSC) following the filing of a Note of Issue.”

The amended rule offers the parties four “tracks” on which they can put their case toward the prospect of settlement:

  1. They can have the judge already assigned to their case conduct the settlement conference, or they can request that another judge oversee the matter;
  2. they can have the court assign a Judicial Hearing Officer or Special Referee to conduct the settlement conference;
  3. they can have the court refer their case to the court’s ADR program for selection from the roster of neutrals; or
  4. they can hire a private neutral from JAMS, NAMS, AAA, etc.

As noted by the Commercial Division Advisory Council, which proposed the amendment back in September of 2020, “one of the principal goals of the Commercial Rules is to make the business litigation process in New York more cost-effective, predictable, and expeditious, and to thereby provide a more hospitable and attractive environment for business litigation in New York State.”  According to the Council, “business clients will find attractive the improvement, enhancement, and institutionalization of the settlement process.”

To be sure, incentives and opportunities for settlement already are baked into the ComDiv Rules.  For example, Rule 3 allows the court to direct the parties to mediation at any time during the case.  Rule 8 requires the parties to “meet and confer” about the prospects of settlement and/or ADR prior to the Preliminary Conference.  And Rule 10 requires counsel to submit a certification prior to every conference thereafter, certifying that they have discussed ADR with their respective clients.

But as the Advisory Council pointed out in its September 2020 proposal, parties may be reluctant to settle for any number of reasons.  They may believe that initiating or even engaging in settlement negotiations is a sign of weakness — an admission that their case has holes or that they are without the financial wherewithal to go the distance.  Others may believe that the process is a costly waste of time and distraction from having their case properly adjudicated.  Still others may be wary — despite the broad confidentiality provisions expressly set forth in the amended rule — of having a judge assess the merits of their claims or defenses before trial, particularly if it’s the judge assigned to their case.

Whether justified or not, these excuses no longer are available to litigants post-Note of Issue.  Hence, a new opportunity to settle your case quickly with your adversary on the way to court.

In an earlier post, I offered a broader-than-usual overview of certain key rights that a minority owner holds in a closely-held business: the right to vote on company action, the right to inspect books and records, the right to prosecute derivative actions, and the right to seek judicial dissolution, to name a few.

While those rights often provide minority owners with a valuable means to understand the condition of the company, influence company action, and protect their investment, they are subject to some substantial limitations.  Despite all the statutory and common law protection, minority owners remain, in many ways, subject to the whim of the majority.  Those considering investment in a closely-held business, negotiating an owners’ agreement, or contemplating litigation are wise to consider the impact of these notable limitations: Continue Reading Limitations on the Rights of Minority Owners in Closely-Held Businesses

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Commercial transactions often involve parties from different states.  When a dispute arises between diverse parties, the question of whether a party can obtain personal jurisdiction over a defendant becomes critical.  This issue becomes even more apparent when the defendant is a foreign corporation that conducts business across the world.  In a recent decision from the Manhattan Commercial Division, Justice Andrew Borrok reminds us that “[t]he hiring of New York based lawyers (and closing out of a firm’s New York office) and funding through New York banks” is simply not enough to obtain jurisdiction over a defendant in New York.

In Haussmann v Baumann, plaintiffs Rebecca R. Haussmann, Trustee of Konstantin S. Haussmann Trust, and Jack E. Cattan (collectively, “Plaintiffs”) are shareholders in defendant Bayer AG (“Bayer”), a German based pharmaceutical corporation, headquartered in Leverkusen, Germany.  In or around 2016, Bayer negotiated and agreed to acquire the Monsanto Company (“Monsanto”), an agricultural-products company incorporated in Delaware and headquartered in Missouri for $66 billion (the “Moonshot Transaction”).  During the due diligence period of the transaction, Bayer retained several banks, including Bank of America  and Credit Suisse Group AG  (collectively, the “Bank Defendants”).  In addition, Bayer hired New York based law firm Wachtell Lipton Rosen & Katz  to complete the transaction. Notably, neither Bayer nor the Bank Defendants were present at the closing, and none of Bayer’s board meetings took place in New York in connection with authorizing the transaction.

Following the completion of the Moonshot Transaction, Bayer was “crushed by a tsunami of Monsanto legacy tort suits and legacy liabilities” causing a loss of $12 billon.  As a result, on or about December 9, 2020, Plaintiffs filed a Second Amended Complaint (the “Complaint”) in the form of a shareholder derivative action in the Manhattan Commercial Division against Bayer, the Bank Defendants, and members of Bayer’s Board of Management or Supervisory Board (collectively, the “Individual Defendants”).  Plaintiffs alleged causes of action for breach of fiduciary duty under Section 117 of the German Stock Corporation Act (“GSCA”), aiding and abetting in the alleged breaches of fiduciary duties, and civil conspiracy in connection with the Moonshot Transaction.  In response, Bayer, the Bank Defendants, and the Individual Defendants, each filed three separate motions to dismiss, seeking to dismiss the Complaint on multiple grounds, including lack of personal jurisdiction, forum non conveniens, and lack of standing under German law.

First, on the issue of forum non conveniens, both the Individual Defendants and the Bank Defendants argued that Germany was a more appropriate forum for this lawsuit based on the fact that (a) Plaintiffs were pursuing claims under German law, not New York law; (b) the decisions leading to the alleged breaches of fiduciary duties took place in Germany; and (c) all of the Individual Defendants resided in Europe.  In opposition, Plaintiffs asserted that New York courts frequently adjudicate shareholder derivative lawsuits involving foreign corporations and foreign laws, and that Germany’s pre-suit court procedures would “create impossible pre-discovery proof barriers and expose plaintiffs to mandatory fee-shifting.”  In its decision, the Court held that although the Commercial Division was capable of handling this matter, Germany was a more suitable forum since it “has a significant interest in adjudicating a dispute involving an old and major German company, and the activities and judgments of individual directors all located in Germany and operating under German law.”

Second, on the issue of personal jurisdiction, the Individual Defendants argued that meager allegations that Bayer engaged advisors, such as banks and law firms, with New York offices to help close the Moonshot Transaction do not constitute the transaction of business under CPLR § 302(a)(1).  In support of their motion, the Individual Defendants relied on the fact that Plaintiffs failed to allege (a) that any members of the Board of Management or Supervisory Board made any business decision in New York; and (b) that Bayer has any employees or offices in New York.  In opposition, Plaintiffs argued that jurisdiction was proper here based on the fact that the heart of lawsuit surrounds Bayer and the Individual Defendants’ decision to engage New York law firms and banking institutions to help with the due diligence and closing of the Moonshot Transaction.  The Court rejected Plaintiffs’ arguments and dismissed the Complaint against the Individual Defendants for lack of personal jurisdiction, finding that engaging New York based attorneys and arranging funding through New York institutions was too tenuous of a connection to New York.

Third, the Court found that Plaintiffs lacked standing under GSCA § 148 to bring this lawsuit against Bayer, as Plaintiffs failed to allege that “they own a sufficient number of shares to assert their claims, that they made a demand upon the company to take legal action, or that they have sought permission from a German court to assert their claims.”

Upshot:

The Haussmann case is a helpful decision for foreign defendants that are forced to defend a lawsuit in New York where they have no connection to the state.  Further, this dismissal should serve as a cautionary tale to plaintiffs who rely on a party’s use of legal counsel and financial institutions as a ground for personal jurisdiction when the defendant has no other contacts or presence in New York.

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Most New York practitioners are aware that certain causes of action are triable by a jury, while other claims are triable only by the court.  For example, causes of action for money damages, such as tort claims, contract claims, and certain statutory claims, are triable by a jury, while equitable claims, such as claims for rescission or reformation of a contract, are triable by the court.

But what if a litigant defending an action for money damages asserts an equitable defense or counterclaim?  CPLR § 4101 specifically addresses that situation, providing that “equitable defenses and equitable counterclaims shall be tried by the court.” Consequently, where a plaintiff brings a legal claim triable by a jury and the defendant interposes equitable defenses or counterclaims arising from the same transaction, the defendant waives its right to a jury trial, even on the main, legal claim.

A defendant’s waiver of its right to a jury trial was recently addressed by the Albany County Commercial Division (Platkin, J.) in Real Estate Webmasters, Inc. v Rodeo Realty, Inc. (2022 NY Slip Op 50037(U) [Sup Ct, Albany County, Jan. 24, 2022]). In that case, plaintiff Real Estate Webmasters, Inc. (“REW”) commenced an action against defendant Rodeo Realty, Inc. (“Rodeo”), seeking damages for Rodeo’s alleged anticipatory breach of an agreement (“Service Agreement”), pursuant to which REW was to develop a custom website for Rodeo.  After issue was joined, REW moved for partial summary judgment on liability on its sole claim against Rodeo for anticipatory repudiation, and sought dismissal of Rodeo’s affirmative defenses and counterclaims (the “SJ Motion”).

The Court dismissed most of Rodeo’s affirmative defenses and counterclaims, but found triable issues of fact as to Rodeo’s counterclaim for fraudulent inducement and its affirmative defense alleging rescission and/or restitution based upon REW’s alleged fraud.  Following discovery, REW filed a note of issue requesting a trial without jury.  Rodeo responded by serving a jury demand.  REW moved to strike the demand.

Justice Richard M. Platkin of the Albany County Commercial Division struck Rodeo’s jury demand, concluding Rodeo was not entitled to a jury trial under CPLR § 4101 because its remaining affirmative defense and counterclaim alleging fraudulent inducement were equitable in nature.

The Court first explained that a defendant waives its right to a jury trial when it asserts an equitable counterclaim arising from the same set of facts as the plaintiff’s main claim – even if the plaintiff’s main claim is legal in nature.  The Court then noted that whether a fraudulent inducement counterclaim is “equitable” or “legal” depends on whether the defrauded party disaffirmed the contract by prompt rescission (thus giving rise to an equitable claim or defense), or affirmed the contract and later pursued a legal claim for damages arising from the fraud.

Based on the position taken by Rodeo in opposition to the SJ Motion, the Court concluded Rodeo “unequivocally elected to disaffirm the Service Agreement after allegedly learning of the falsity of certain pre-contractual representations made by REW.”  Specifically, the Court noted that:

  • Rodeo’s principal represented the Service Agreement “was rescinded” upon learning of REW’s allegedly false representations;
  • Rodeo’s principal stated he personally “terminated Rodeo’s relationship with [REW]” due to its “false representations” and “lying”;
  • Rodeo did not deny REW’s allegation that it had repudiated the Service Agreement. Rather, Rodeo argued the repudiation was “not wrongful” because it possessed “a valid rescission defense based on fraud”; and
  • Rodeo’s counsel affirmed Rodeo “justifiably rescinded the Service Agreement based upon fraudulent misrepresentations.”

Having elected to disaffirm the Service Agreement and defend against REW’s claim of anticipatory repudiation on the basis of the equitable defense of rescission, the Court concluded Rodeo’s counterclaim for fraudulent inducement was equitable, not legal, and Rodeo therefore waived its right to a jury trial.

Critically, the Court held that Rodeo’s fraudulent inducement counterclaim was equitable even though Rodeo expressly sought money damages in the counterclaim and in its prayer for relief.  According to the Court, “the only damages identified in Rodeo’s counterclaim is the sum of $21,160, which represents the initial payment made by Rodeo to REW under the Service Agreement.”  These alleged damages, in the Court’s view, were “restitutionary in nature” and “incidental to the equitable remedy of rescission” sought by Rodeo under its remaining affirmative defense.  As the Court explained,

[F]ollowing its binding election to disaffirm the Agreement, Rodeo is limited to pursuing damages incidental or collateral to its equitable defense of rescission, including the recovery of the funds necessary to unwind the transaction and restore the parties to the status quo.  This is a claim of an equitable nature.

The Court therefore concluded that Rodeo waived its right to a jury trial by interposing an equitable defense and counterclaim arising from the same transaction as REW’s claim of anticipatory repudiation.

Takeaways:

There are three main takeaways from the Court’s decision in Real Estate Webmasters:

  • First, equitable defenses and counterclaims (such as rescission or reformation of contract, or restitution) are triable by the court only – even if the plaintiff’s claim is legal in nature;
  • Second, a party who disaffirms a contract by seeking prompt rescission (as opposed to affirming the contract and later seeking damages) asserts an equitable – not a legal – claim; and
  • Third, an explicit demand for money damages will not transform an otherwise equitable counterclaim into a legal one, especially where, as in Real Estate Webmasters, the only damages alleged were “restitutionary” or incidental to the equitable relief.

Attorneys and their clients do not always determine at the outset of a litigation whether the case should be tried by a jury or a judge.  Indeed, that is often a determination made as the case progresses, discovery is obtained, and witness credibility is assessed.  However, litigants should be particularly mindful of the relief sought in their pleadings (i.e., whether it seeks equitable or legal relief), and strategic positions taken throughout the course of the litigation (including in motion practice), as these factors could later determine their right to a jury trial.