Sibling relationships are complicated.  All family relationships are.  Look at Hamlet.”  Maurice Saatchi.

 A recent decision in Greenhaus v. Gersh out of the Commercial Division, Suffolk County, is yet another example.  This time, the business is a summer day camp located on the north shore of Long Island in Huntington, New York.  Almost a year to the day following the death of dad — Edward Gersh — two siblings brought a derivative suit against their half-brother Kevin, claiming a variety of misdeeds.  Plaintiffs’ moving papers, reading like a law school exam, sought a bevy of provisional remedies:  receivership, preliminary injunction and pre-judgment attachment and a trial preference under CPLR 3403.   Kevin, in turn, moved for summary judgment to dismiss the complaint in its entirety.  As a threshold argument, he claimed plaintiffs failed to make the required BCL 626(c) demand on the Board and that futility had not been established.  He also challenged each of the claims — unjust enrichment, conversion, constructive trust, fraudulent concealment, “self dealing”, breach of fiduciary duty and an accounting — on the merits and on Statute of Limitations grounds.

   Noting preliminarily that “it is a rare case in which a plaintiff will be permitted to employ more than one provisional remedy”,  Justice Elizabeth H. Emerson ultimately concluded for each that no grounds existed for the extraordinary relief requested.  The complaint seeks essentially money damages, observed the Court, which undermines any claim of “irreparable harm” necessary to support the request for a preliminary injunction.  Similarly, the claim that “it is likely that Kevin is using [corporate] funds” to open new schools outside of New York State, is not enough to warrant attachment or the appointment of a receiver.  “[V]ague and conclusory assertions, without evidentiary facts indicating a fraudulent concealment of assets” simply “raise a suspicion of an intent to defraud”.  They don’t satisfy the burden by “clear and convincing” evidence to justify the provisional relief sought.

Considering the defendant’s motion for summary judgment, the Court granted it in part, paring down the claims remaining for trial by dismissing four of the causes of action—unjust enrichment, conversion, “self dealing” and receivership.  The later two, said the Court, are not recognized causes of action under New York law.  “The court is not aware that New York recognizes “self dealing” as a separate cause of action” (see also Richard Pu, Breach of Fiduciary Duty [self-dealing is a form of breach of fiduciary duty]) and receivership is a provisional remedy under CPLR 6401, not a “cause of action”.

So what’s left for trial?   The threshold issue of whether futility of demand existed, which the court has directed to a “framed-issue hearing” on day one of the trial.  If demand is excused, then the remaining fiduciary duty and accounting claims, along with application of the Business Judgment Rule defense are the issues to be tried.  Trial is currently set for October 15, 2019.

 

 

In a recent case, Gammel v Immelt (2019 NY Slip Op 32005[U]), shareholders of General Electric Company (GE), brought a derivative shareholder action against the members of GE’s board of directors and various committees charged with overseeing GE’s business operations. Plaintiffs alleged causes of action sounding in gross mismanagement and breach of fiduciary duty, among others.

Defendants moved to dismiss the complaint, arguing that plaintiffs failed to make a pre-litigation demand upon GE’s board of directors and to plead demand futility with particularity. The Court granted defendants’ motion and dismissed the derivative shareholder action.

In the decision, New York County Commercial Division Judge Andrea Masley outlined the specific procedures that must be followed in shareholder derivative actions. Specifically, Business Corporation Law § 626(c) provides that in a shareholder derivative action, “the complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort.” A plaintiff is excused from making this pre-litigation demand if doing so would be futile.

A court may excuse the required pre-litigation demand if plaintiff pleads, with particularity, one of the three tests outlined in Marx v Akers (88 NY2d 189 [1996]):

1.  A majority of the directors are interested in the transaction. “[A] director may be interested under either of two scenarios: self-interest in a transaction or loss of independence due to the control of an interested director” (Matter of Comverse Tech., Inc. Derivative Litig., 56 AD3d 49, 54 [1st Dept 2008]).

OR

2.  The directors failed to inform themselves to a degree reasonably necessary about the transaction. This test can be accomplished if a plaintiff pleads that the directors ignored red flag warnings (see Brewster v Lacy, 2004 WL 5487868 [Sup Ct, NY County, June 21, 2014, Moskowitz, J., index No. 603873/2002], affd 24 AD3d 136 [1st Dept 2005]).

OR

3.  The directors failed to exercise their business judgment in approving the transaction. Here, a plaintiff must show that the corporation’s directors engaged in self-dealing or fraud or acted in bad faith that amounts to a breach of their fiduciary duty (see Goldstein v Bass, 138 AD3d 556, 557 [1st Dept 2016]; see also Matter of Levandusky v One Fifth Ave. Apt. Corp., 75 NY2d 530, 538 [1990]).

 

If a commercial litigator fails to serve a pre-litigation demand and, thereafter, fails to plead any of these factors with particularity, they risk a dismissal of their complaint based on demand futility.

 

 

Much has been written about the pleading requirements unique to shareholder derivative lawsuits. For example, a derivative complaint must allege the plaintiff’s standing as a shareholder at all relevant times. Demand upon the board, or its futility, must also be pled with sufficient particularity. But fundamentally, a complaint may not assert direct claims derivatively, or vice versa. Thus, the Commercial Division recently held, as it has many times before, that where derivative and direct claims are asserted simultaneously by the same plaintiff, each cause of action in the complaint must clearly delineate whether it is being asserted directly or derivatively.

In Meshechok v Kaplan (NY County, Index No. 656337/2018), the plaintiff alleged on behalf of his former employer company (of which plaintiff claimed to be a co-owner with the defendant) that the defendant had misappropriated company trade secrets and funds and diverted business opportunities, among other things. Plaintiff also alleged that defendant had wrongfully suspended pro rata distributions in violation of the company’s operating agreement. Plaintiff sought damages, as well as injunctive relief. Defendant moved to dismiss.

The court granted defendant’s motion to dismiss the complaint in a decision entered July 10, 2019. As a threshold matter, the court noted that under Section 801 (a) of New York’s LLC Law and the company’s operating agreement the substantive law of Delaware governed the sufficiency of plaintiff’s allegations. By contrast, the procedure governing defendant’s motion to dismiss was governed by New York procedural law.

However, the court found it “impossible” to apply either procedural or substantive law to the complaint, because “[i]t is unclear which claims are being asserted directly, derivatively or perhaps both because [plaintiff] has not delineated any of the causes of action or specified which alleged facts apply to each cause of action.” Citing the Court of Appeals’ decision in Abrams v Donati (66 NY2d 951, 953 [1985]), the court held that “a complaint will be dismissed when the allegations confuse a shareholder’s derivative and individual rights, though leave to replead may be granted,” even though Delaware law (which allows for dual-nature claims) governed the substance of plaintiff’s claims.

Further exacerbating the deficiencies in the complaint, plaintiff did not clearly specify damages in such a way that the court could discern the derivative or direct nature of each claim under the Delaware standard set forth in Tooley v Donaldson, Lufkin & Jenrette, Inc. (845 A.2d 1031, 1036 [Del. 2004]). Instead, plaintiff asserted the same “vague” damages for each cause of action—namely, that “[b]y reason of the foregoing, the Companies have been damaged in an amount to be determined at trial” and that plaintiff is entitled to “specific performance restoring [plaintiff’s] full and fair ownership in the Companies.” Under these circumstances, the court found plaintiff’s “failure to articulate which [claims] are individual and which are derivative [to be] fatal.”

Savvy readers, do not allow this to happen to your derivative pleadings. Delineate, or this may be your fate.

“Should I stay or should I go”, queried the Clash.  Litigators are often faced with the same question, albeit in a far different context.  Most (but certainly not all!) Commercial Division practitioners try to move litigation with some degree of alacrity.  The quicker the litigation proceeds, the swifter the resolution.  Clients like quick resolutions. Therefore, it is not often that practitioners want to slow, or completely stop, a litigation. However, sometimes having a client that is sued in two different courts relating to the same subject matter may require a closer look at whether a stay of proceedings is appropriate or desirable.

CPLR 2201 states, “[e]xcept where otherwise prescribed by law, the court in which an action is pending may grant a stay of proceedings in a proper case, upon such terms as may be just.”

In a recent decision, Matter of PPDAI Group Sec. Litig. (2019 NY Slip Op 51075(U)), defendants moved to request an order staying discovery in the Commercial Division, state court action until the resolution of a pending motion to dismiss in the United States District Court in the Eastern District of New York (“EDNY”). The EDNY action made virtually the same allegations contained in the earlier-filed state court action.

New York County Commercial Division Judge Scarpulla reminded practitioners that the determination as to whether to grant a stay of proceedings pursuant to CPLR 2201 resides in the sole discretion of the Court. However courts consider six factors to help make such a determination (see Asher v. Abbott Laboratories, 307 AD2d 211, 211-212 [1st Dept. 2003]).

The first factor that courts consider is which forum will offer a more complete disposition of the issues presented in both actions. Whether the claims asserted in both actions are identical or whether any claims are time-barred in one court due to a later filing date strongly dictate which court will be able to offer “a more complete disposition”.

The second factor to consider is which forum has greater expertise in the type of matter. As noted in Judge Scarpula’s decision, “the Commercial Division is a long-standing, specialized business court which deals exclusively with complex commercial litigation.” It is therefore unlikely that any court will determine that the New York State Commercial Division courts are not equipped to handle a particular matter. Consideration should also be made that federal courts have general dockets of both criminal and civil actions which may limit their exposure to more business-related litigation.

The third factor is which action was commenced first and the stage of litigation of each . Although not dispositive on a motion to stay, Judge Scarpula noted that “the general rule in New York is that the court which has first taken jurisdiction is the one in which the matter should be determined and it is a violation of the rules of comity to interfere.”

The fourth factor that courts consider is whether there is substantial overlap of the issues asserted in both actions. This often times encompasses an analysis into the parties of both actions as well. Having “a majority” but not all of the parties overlapping in the actions may not be good enough to obtain a stay of proceedings.

The fifth factor to consider is whether a stay will avert duplication of effort and waste of judicial resources. Judge Scarupla commented that “[t]he possibility that at some point there might be two trials is not an appropriate basis for granting a stay.”

Finally, courts consider whether either party has demonstrated that they would be prejudiced by a stay.

New York Commercial Division practitioners should keep these factors in mind the next time they are faced with the possibility of making (or opposing) a motion to stay proceedings in order to have a better chance of predicting the outcome of the motion.

In a recent decision in Inferno Restaurant & Pizzeria, Inc. v SW Michaels Pizzeria, Inc., 2019 NY Slip Op 50995(U) (June 13, 2019), the Supreme Court, Albany County, found that where a defendant knew of a plaintiff’s material breaches of a contract and failed to timely notify the plaintiff of these material breaches, the defendant, thereby, lost its right to terminate the contract based on the alleged breaches.

The plaintiff, Inferno Restaurant and Pizzeria, Inc. (“Inferno”), owns and operates several pizzerias in New York. In April 2018, Inferno sold one of its pizzeria businesses to defendant, SW Michaels Pizzeria, Inc. (“Michaels”). According to a promissory note, Michaels paid Inferno one-half of the purchase price at the closing and agreed to pay the balance of the purchase price in monthly installments continuing until April 2023, at which point the note would become payable in full. Inferno also took a security interest in the assets sold to Michaels. After only six months, Michaels stopped making its monthly payments to Inferno. Accordingly, Inferno moved for summary judgment in lieu of complaint, seeking immediate payment of the remaining balance and interest of the note, and Michaels opposed the motion.

Michaels did not deny defaulting on the payments to Inferno but did claim that Inferno materially breached the parties’ agreement by: 1) failing to properly train Michaels’ staff in the operation of the business; 2) failing to provide Michaels with all of the pizzeria’s recipes; and 3) making false assurances that there were no violations pending against the pizzeria. Michaels further claimed that Inferno’s material breaches of the contract caused Michaels to incur $75,000 in expenses and, ultimately, resulted in the pizzeria’s closure. Inferno responded to Michaels’ accusations by noting that Michaels never complained to Inferno about the training, missing recipes, or any health code issues and, thereby, waived its claim for breach of contract. In fact, Michaels did not notify Inferno of the alleged breaches until it filed the opposition papers.

A waiver is a voluntary and intentional abandonment of a known right (Nassau Trust Co. v Montrose Concrete Prods. Corp., 56 NY2d 175 [1982]). The doctrine of “election of remedies,” requires a non-breaching party in a contract dispute to “choose between two remedies: it can elect to terminate the contract or continue it. If it chooses the latter course, it loses its right to terminate the contract because of the default” (Awards.com v Kinko’s, Inc., 42 AD3d 178, 188 [1st Dept 2007], affd 14 NY3d 791 [2010], citing Bigda v Fischbach Corp., 898 FSupp 1004, 1011 [SDNY 1995], affd 101 F3d 108 [2d Cir 1996]).

“But New York law does not treat as inconsistent the right to continue to perform and to accept performance under a contract (on the one hand) and the right to sue for damages based on a breach (on the other)” (Luitpold Pharm., Inc. v Ed. Geistlich Söhne A.G. Für Chemische Industrie, 784 F3d 78, 934 [2d Cir 2015]). “‘A party to an agreement [that] believes [the agreement] has been breached may elect to continue to perform the agreement’ and later sue for the alleged breach, so long as that party does not waive its right to sue by, inter alia, failing timely to notify its counterparty of the breach” (id., quoting Capital Med. Sys. Inc. v Fuji Med. Sys., U.S.A. Inc., 239 AD2d 743, 746 [3d Dept 1997]).

Here, the Court found that Michaels lost its right to terminate the contract based on the alleged breaches when it elected to operate the pizzeria and continue to make monthly payments to Inferno rather than notify Inferno of the material breaches. Ultimately, Michaels could not rely on the breaches as a basis for affirmative relief or as a defense for nonperformance when it failed to timely notify Inferno of the alleged material breaches.

Takeaway: If you believe that an agreement (which you are a party to) has been breached, make sure to timely notify the breaching party of the material breach. Don’t risk waiving your right to sue or losing your right to terminate the contract based on the material breach.

 

We all know that understanding the law is a first step to good lawyering. But understanding what the particular judge assigned to your case likes and dislikes, and her pet peeves is just as important for your success as an advocate for your client.

On June 14, 2019, the New York State Bar Association’s Commercial and Federal Litigation Section held a Bench-and-Bar program at the Westchester County Courthouse. This program, which was co-moderated by our very own Matt Donovan, featured Westchester Commercial Division Justices – Hon. Linda Jamieson and Hon. Gretchen Walsh. The format of the program was an informal question – and – answer session, including questions from the audience. Below is a summary of some of the topics discussed:

Junior Associates and/or Underrepresented Attorneys: I previously discussed the recent trend of federal and Commercial Division judges allowing oral argument, when they otherwise would not have, if a junior or underrepresented attorney would argue the motion. Both Justice Jamieson and Justice Walsh stated that they like to see young attorneys (especially young women attorneys) argue in their courtroom. Justice Walsh stated that she is contemplating amending her rules to include language reflecting the recent trend in the Commercial Division to permit oral argument if counsel identifies a lawyer out of law school five years or less who will argue the motion. Justice Jamieson took a similar stance and stated that senior attorneys should give junior attorneys a chance to speak in court. The justices stated that if they allow oral argument on a motion, which they usually do not, the decision will not be based solely on oral argument, thus alleviating any concern senior attorneys would have in permitting younger attorneys to argue in court.

Rule 19-a– Statements of Material Facts for Summary Judgment Motions: The consensus between the justices was that they generally like Rule 19-a statements, which should contain only undisputed facts. Both Justice Walsh and Justice Jamieson stated that Rule 19-a statements are important because the parties reference (or at least should reference) the record in support of each statement. This opinion is contrary to what certain New York County Commercial Division justices stated on June 5, 2019 at a NYSBA panel, entitled Motion Practice Before the Commercial Division. Interestingly, at that panel, certain justices stated that they prefer parties to submit joint (as opposed to separate) 19-a statements, indicating that if the parties cannot agree on “undisputed facts,” the 19-a statements are not helpful. On the other hand, other judges stated that they prefer separate Rule 19-a statements from each party.

Rule 17 – Length of Papers: As of October 1, 2018, Commercial Division Rule 17 changed the length guidelines of briefs from 25 pages to 7,000 words and reply briefs from 15 pages to 4,200 words. The rule states that every brief must include a “certification by the counsel who has filed the document describing the number of words in the document.” If a document has standard margins and font, 7,000 pages is approximately 22-23 pages. However, it appears that many lawyers are not abiding by this rule. Why is that? One theory is that judges are not enforcing it. Although, both Justice Walsh and Justice Jamieson emphasized that lawyers need to keep their briefs short and concise, they indicated that they will not be sticklers when it comes to the 7,000 word limit. Although lawyers tend to always include a legal standard section in briefs, the justices stated that lawyers need not do so. So… use your words wisely.

Presumptive ADR: My colleague discussed Presumptive, Early Alternative Dispute Resolution (“Presumptive ADR”) in an earlier post, which is expected to begin in September 2019. Both Justice Jamieson and Justice Walsh are in favor of Presumptive ADR, which encourages settlement at the outset of the case.  Justice Walsh stated that the Advisory Committee on ADR is still figuring out which types of cases should go to Presumptive ADR, e.g. matrimonial cases versus business dissolution matters, noting that it may be better suited for certain types of cases. Justice Jamieson is a big proponent of ADR and wants attorneys to consider ADR and to meet and confer about whether or not the case is good for ADR prior to coming to court.

Pet Peeves: Both justices emphasized the importance of being courteous and professional. Justice Jamieson stated that her biggest pet peeve is when the attorneys before her begin to speak to each other instead of addressing the court. Justice Walsh stated that if the attorneys are not being courteous and cannot agree on adjournments, she will require that they come to court and go on the record. Justice Walsh also noted that the Chief Judge DiFiore is coming out with new rules regarding adjournments … so stay tuned.

This was a great program that provided Commercial Division litigators insight into what they should expect when entering the respective judges’ courtrooms. Litigators should make every effort to attend programs where judges provide valuable information concerning their individual preferences and style.

In law, as in life, mistakes happen. Some are irreparable: Statute of repose expired? Too much denim? In these circumstances, the law affords the court no discretion for mercy. Other errors, however, must be forgiven. In a recent decision, Commercial Division Justice Andrew Borrok held that plaintiff’s inadvertent failure to file proof of substitute service within twenty days was a mere “procedural irregularity” that could be corrected.

In Furuya v. Parry (Index No. 158800/2018), plaintiff served defendant with a summons and complaint seeking funds pursuant to a holdover agreement. Service was effected pursuant to CPLR 308 [4] by affixing a true copy of the papers to the door of defendant’s residence and mailing a copy to the same address. However, plaintiff did not file proof of service until 50 days later—30 days too late.

Defendant moved to dismiss the complaint for lack of personal jurisdiction based on plaintiff’s failure to timely file proof of service. The motion was denied.

The court explained that mere delay in filing proof of service pursuant to CPLR 308 was not a jurisdictional defect, but a procedural irregularity that may be corrected by the court nunc pro tunc. See Lancaster v Kindor, 98 AD2d 300, 306 [1st Dept 1984]. As the First Department explained, “the purpose of requiring filing of proof of service, along with the 10-day grace period, pertains solely to the time within which the defendant must answer, and does not relate to the jurisdiction acquired by service of the summons.” The law is the same in the Second Department. See Weininger v Sassower, 204 AD2d 715, 716 (1994).

Under CPLR §§ 2001 and 2004, the court found good cause and no prejudice to Defendant by accepting the untimely proof of service. The court’s analysis of good cause did not place much scrutiny on plaintiff’s culpability—plaintiff’s attorney submitted an affidavit stating he had intended to file the proof of service along with the amended complaint, but “cannot explain” why the documents were not filed, “except to surmise that I neglected to attach the document when e-filing.”

The court instead emphasized plaintiff’s prompt correction of the defect and the lack of prejudice to defendant: “If the filing of the proof of service is deemed timely, [defendant] will be in the same position as he would have been had the proof of service been filed within 20 days.” Notably, plaintiff’s claims were brought well within the statute of limitations, so dismissal would result in plaintiff filing a new action.

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You may have recently read on this blog that “vacating an arbitration award is an uphill battle.”  As my colleague Hamutal G. Lieberman discussed, there are only two instances when an arbitration award may be vacated: (1) instances involving fraud, corruption or misconduct of the arbitrators or (2) where an arbitration award exhibits “manifest disregard of the law”.  While Hamutal discussed the latter ground, a recent opinion by the Honorable Andrew Borrok, addressed the former. 

In Sorghum Inv. Holdings Ltd. v China Commercial Credit, Inc., despite the uphill battle, the Court granted a motion to vacate an arbitration award because it was procured by fraudulent and undue means.

A petitioner seeking to vacate an arbitration award on the basis that it was procured by fraud must plead that (1) respondent engaged in fraudulent activity; (2) even with the exercise of due diligence, petitioner could not have discovered the fraud prior to the award issuing; and (3) the fraud materially related to an issue in the arbitration.

Also, an arbitration award may be vacated if it was procured by undue means.  Undue means is where the award is “the result of immoral, if not necessarily illegal conduct, which is underhanded or conniving but falls short of corruption or fraud.”

As the petitioner only must demonstrate that there is a nexus between the alleged fraud and the decision of the arbitrator, the Court in Sorghum found the arbitration award was procured by fraud or undue means because the arbitrator explicitly relied on respondent’s attorney’s false declaration.  The Petitioner was able to show, through discovery obtained in a related action after the award, that the attorney’s false statement that he had “no record of any escrow deposit” was critical in the arbitrator’s decision.  Because the statement was clearly false and the arbitrator relied on it, the Court found the award was procured by fraud or undue means.

 

The takeaway here is that even though vacating an arbitration award is an uphill battle, the Court can still provide a safety net if the other side doesn’t play by the rules.

New York is continuously working to advance the delivery and quality of civil justice in this state. We recently discussed the technological developments in New York State Commercial Division courtrooms and a few months ago we discussed the increasingly-codified perspective of Commercial Division Justices to encourage junior attorneys to play a larger role in the courtroom. Now it seems that New York State civil courts are catching up to the Commercial Division.

Last week, Chief Judge Janet DiFiore and Chef Administrative Judge Lawrence K. Marks announced the implementation of a statewide “Presumptive, Early Alternative Dispute Resolution” program for all civil cases. The recent press release can be found here. The program is expected to begin in September 2019.

The program, nicknamed “Presumptive ADR”, targets a broad range of civil cases ranging from commercial disputes to matrimonial and personal-injury matters. The program is directed at cases in their inception to encourage upfront settlements or the significant narrowing of disputes leading to speedier resolutions in the future.

Any litigator that regularly practices in New York State Court will tell you that the adjudication of a civil matter from start to finish can take some time. However, Chief Judge Janet DiFiore and Chief Administrative Judge Lawrence K. Marks are expecting that this program will significantly reduce delays as well as decrease costs to the parties and the judiciary. “Making ADR services widely available in civil courts throughout the State—and facilitating the use of such services as early as possible in the case—are major steps toward a more efficient, affordable and meaningful civil justice process,” said Chief Judge DiFiore.

This is not the first time that the New York State Court System has tried to implement ADR into its case management system. Effective January 1, 2018, Chief Administrative Judge Lawrence Marks amended Rules 10 and 11 of Section 202.70(g), known as the “Rules of Practice for the Commercial Division,” to require each party to certify that it has discussed with counsel the availability of ADR mechanisms provided by the Commercial Division and/or private ADR providers, and whether the party is presently willing to pursue mediation at some point during the litigation. We discussed this amendment here.

The New York court system plans to issue uniform rules to authorize, endorse and provide a framework for courts throughout the state to introduce “presumptive ADR” via automatic presumptive referrals in identified types of civil disputes, subject to appropriate opt-out limitations. While court-sponsored mediation  already is integrated into the New York State civil court system, it remains underutilized relying on the parties to opt in or, in rare cases, an individual judge to refer the matter to mediation in specific cases.

The new program mirrors the mediation program currently in place in the United States District Court for the Southern District of New York.  In the Southern District, the assigned District Judge or Magistrate Judge may determine that a case is appropriate for mediation and may order that case to mediation–with or without the consent of the parties–before, at, or after the initial case-management conference.

New York State litigators should keep the statewide “Presumptive ADR” program in mind when retaining clients in the upcoming months. Some cases may be ripe for presumptive ADR at the outset leading to a speedy resolution and happy clients.

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In a recent decision by the New York County Commercial Division (Borrok, J.), the Court held that New York law, not Swiss law, applies to a dispute involving the ownership of the storied Princie Diamond – an extremely rare and valuable 34.65 carat pink diamond quarried from the legendary Golconda mines of India.  In a wide-ranging, multi-part decision, Justice Borrok applied the “interest analysis” to determine that New York, not Switzerland, clearly has the greatest interest in the litigation.

The Plaintiffs in Angiolillo v Christie’s, Inc., et al.., 2019 NY Slip Op 29122 (Apr. 26, 2019) are the heirs of Renato Angiolillo (“Angiolillo”), an Italian Senator who purchased the Princie Diamond from Van Cleef & Arpels in 1960.  Under Italy’s inheritance laws, Angiolillo’s surviving spouse, Maria Girani Angiolillo (“Girani”) took custody, but not ownership, of the Princie Diamond when Angiolillo died in 1973.  After Girani’s death in 2009, Plaintiff Amedeo Angiolillo (Angiolillo’s eldest son) attempted to contact Girani’s son, Marco Bianchi Milella (“Milella”) for the return of the diamond.  But, Milella claimed he had never seen the Princie Diamond and had no knowledge of its whereabouts.  The Plaintiffs ultimately contacted the Italian authorities, and a criminal investigation of the missing Princie Diamond ensued.

Milella later admitted to taking the Princie Diamond, but maintained that he had lawfully inherited the diamond from his mother.  By this point, however, and unbeknownst to Plaintiffs, the diamond had already been transported from Italy to Switzerland on consignment, and then to New York, where it was consigned and transported to defendant Christie’s, Inc. (“Christie’s”).  Throughout August and September 2010, Christie’s attempted to privately sell the Princie Diamond to prospective buyers from around the world.

In October 2010, while Christie’s was still trying to privately sell the diamond, defendant Investel Finance, Ltd. (“Investel”) purchased the diamond from Milella by wiring $19.2 million into Milella’s Swiss bank account.  The Princie Diamond was located at the Geneva Freeport, a storage facility in Switzerland, at the time of its purchase. Investel then consigned the Princie Diamond to Christie’s for $40 million, and designated Christie’s as the exclusive seller of the diamond.  In 2013, after three years of unsuccessfully attempting to privately sell the Princie Diamond, Christie’s began negotiations to publicly auction the diamond in New York.

Christie’s apparently did not investigate the provenance of the Princie Diamond until March 2013, when it learned of the Italian news articles concerning the investigation of Milella.  In April 2013, Plaintiffs’ counsel contacted Christie’s advising that it was “a great likelihood, almost a certainty” that the diamond was stolen property, and requesting that Christie’s investigate and determine the proper title of the seller.  In response, Christie’s confirmed that the diamond was in fact the missing Princie Diamond, but advised that, under Swiss law, Investel had acquired full title and ownership of the Princie Diamond, including the right to consign the diamond to Christie’s for auction.  In 2013, Christie’s sold the Princie Diamond at an auction for nearly $40 million.  Plaintiffs thereafter sued Christie’s, Investel and others for, inter alia, conversion and replevin.

In August 2018, Plaintiffs moved for summary judgment on their claims.  Defendants cross-moved for summary judgment arguing, among other things, that they acquired good title to the gem as bona fide purchasers under Swiss law.  The issue before the Court was whether New York or Swiss law applied to the claims.

The Court’s Choice of Law Analysis 

Is There A Conflict Between the Two Laws? 

The Court first determined that there is a “well-recognized conflict” between New York and Swiss law with respect to issue of title.  Under New York law, “a thief cannot pass good title,” even if the chattel falls into the possession of a good-faith purchaser for value (Solomon R. Guggenheim Found. v Lubell, 77 NY2d 311, 317 [1991]).  Under Swiss law, however, a bona fide purchaser can become the owner even if the chattel was stolen or otherwise transferred without the authorization of its owner.

Given the Conflict, Which Law Applies? 

In determining which law applies, the Court conducted an “interest analysis,” which essentially asks: which jurisdiction has the greatest interest in the litigation?  Under this test, the Court determined that New York clearly has the greatest interest in the ligation because New York has an “overwhelming interest” in “preserving the integrity of transactions within its borders” and preventing the state from becoming “a marketplace for stolen goods” (Bakalar v Vavra, 619 F3d 136, 144 [2d Cir 2010]; Reif v Nagy, 61 Misc 3d 319, 323 (Sup Ct, NY County 2018]; Gowen v Helly Nahmad Gallery Inc., 60 Misc 3d 963 [Sup Ct, NY County 2018]).  This is particularly so given New York’s reputation as being a world-renowned center for art and culture.  As the Court explained:

“If the Plaintiffs’ claim to the Princie Diamond is credited, a stolen diamond was delivered in New York to a New York auction house, which for a number of years attempted to privately sell it to a buyer in New York and finally did sell it at a well-publicized and public New York auction.  In addition, the defendants availed themselves of New York law in their respective agreements (particularly, the Auction Agreement), brought the Princie Diamond to the Gemological Institute of America in New York for purposes of grading and elevation, and presented it to numerous private buyers in New York for over three years.”

The Court flatly rejected Defendants’ argument that Swiss law should apply since the Princie Diamond was located in Switzerland at the time it was purchased, noting that “New York courts do not concern themselves with the question of where the theft took place.”  In addition, the Court characterized as “inappropriate” what it considered to be Defendants’ “attempt to immunize an otherwise unlawful conversion by, essentially, passing the allegedly converted item through Switzerland.”  As the Court pointed out, “Christie’s was aware of the fact that [Milella] was being investigated in connection with the criminal conversion of the Princie Diamond and, in an attempt to avoid the issues of title and avoid litigation, Christie’s threatened litigation, including over $20 million in damages.  Now they try to claim the benefits of Swiss law under an essential restatement of the situs rule that New York courts have fully rejected.”

The Takeaway:  The traditional “situs” choice of law rule for torts, which applies the law of the jurisdiction where the tort was committed, has been repeatedly rejected by New York courts in favor of the more flexible “interest analysis.”  Under the interest analysis, the court must determine which jurisdiction has the greatest interest in the litigation.  In cases involving title to potentially stolen property, New York’s interest is “overwhelming”: To discourage the illicit trafficking of stolen goods and protect New York’s reputation as a preeminent cultural center.