“The expert discovery rules are promulgated so no party will be ‘sandbagged’ or surprised by another expert’s opinion” – Manhattan Commercial Division Justice Eileen Bransten

Several weeks ago, we reviewed some of the newer Commercial Division Rules and reported on a couple of recent decisions from Justice Shirley Werner Korneich of the Manhattan Commercial Division applying one of those Rules, Rule 11-c, concerning nonparty electronic discovery.  We follow up this week as promised with a look at another recent new-rule application from the same court.

Earlier this year, Justice Eileen Bransten, whose similarly-insightful decisions also are regular fodder for this blog, addressed issues concerning expert disclosure under Commercial Division Rule 13(c) in Singh v PGA Tour, Inc.Sandbagger

In Singh, the plaintiff, a professional golfer and member of the defendant PGA Tour, sued the Tour alleging that he had been humiliated by an arbitrary administration of the Tour’s anti-doping program and that the Tour wrongfully withheld his prize monies.  Singh had used a product called “deer antler spray” between seasons to address knee and back problems.  Sports Illustrated later posted an article about the spray on its website, referencing Singh’s use and suggesting that he had used it in violation of the Tour’s drug policy.  Singh responded by providing the Tour with a bottle of the spray for testing.  The initial results were negative for steroids but positive for a separate prohibited substance called “IGF-1.”  The Tour suspended Singh and held his 2013 prize money in escrow.  Singh challenged the Tour’s determination in arbitration.

The World Anti-Doping Agency, from which the Tour adopted its list of prohibited substances, subsequently determined that deer-antler spray was not a prohibited substance.  As a result, the Tour dropped its disciplinary action against Singh, and the arbitration was discontinued on the eve of the hearing.  Singh then sued the Tour in the Manhattan Commercial Division.

In the course of expert discovery in the Supreme Court action, Singh submitted a second, expert “reply report,” which the Tour challenged under Commercial Division Rule 13(c) as “impermissibly including new opinions which were not included in the first report.”  Specifically, Singh’s expert reply contained certain newly-obtained “consumer data” leading Singh to conclude that the “Tour suspension reduced the favorable criteria that marketing executives would use in their decision-making process in evaluating Singh’s viability as a spokesperson/endorser/advocate.”

Rule 13(c) mandates that an expert report contain, among other things, “a complete statement of all opinions the witness will express and the basis and the reasons for them,” as well as “the data or other information considered by the witness in forming the opinion(s).”  Quoting from The Chief Judge’s Task Force on Commercial Litigation in the 21st Century, Justice Bransten noted in her decision that “this rule was promulgated in an effort to harmonize the disclosure rules of our state and federal courts,” and that the Commercial Division looks to the Federal Rules of Civil Procedure “for guidance on expert disclosure issues.”  Federal Rule 26(a)(2)(B) mandates that an expert report contain the same statement, data, and information cited above, and Federal Rule 37(c)(1) provides that if a party fails to do so, “the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at trial.”

Justice Bransten granted the Tour’s motion to strike Singh’s expert reply, finding that “the new analysis, information, opinion and data contained within Plaintiff’s Reply Expert Report violates Commercial Division Rule 13(c) and FRCP 26.”  Noting the “egregiousness of the belated disclosure,” Justice Bransten cautioned Commercial Division practitioners that Rule 13(c) does not provide for “an opportunity for a party to ‘correct’ the deficiencies and omissions made in an initial expert report — including addition of new data and opinions, particularly when that data was available to the expert at the time the initial report was issued” or for an expert “to say what he neglected to say in his opening report.”

The rules of golf prohibit a player from “sandbagging” or deceiving others about their knowledge, intentions, and abilities.  As Justice Bransten’s recent decision in Singh v PGA Tour, Inc. makes clear, the same goes for the Commercial Division Rules regarding expert disclosure.

**Nota Bene** – Readers interested in hearing from Commercial Division Justices directly on lessons to be drawn from the implementation of some of these new rules and rule-changes should register for the upcoming Bench & Bar Forum sponsored by the NYSBA Commercial & Federal Litigation Section.  The program, entitled “True Innovation and Efficiency: New York County Commercial Division Justices Discuss the Success of the New Commercial Division Rules,” is scheduled for the evening of November 27th at Foley & Lardner LLP.

Under Delaware law, the decision to commence litigation on behalf of a corporation is, of course,  a fundamental exercise of business judgment, which decision rests with the Board of Directors.  A shareholder, therefore, cannot bring a derivative action without pleading that a demand on the corporation to do so had been made, or that such demand would have been “futile.”  The shareholder, therefore, has an initial decision to make:  make the demand, or plead futility. 

Recently, in Reese v. Andreotti, Justice O. Peter Sherwood dismissed a derivative action brought by a shareholder who made the demand, which was rejected by the Board.    Relying on Delaware law, the court noted that the mere making of a demand is a tacit acknowledgment by the shareholder that there is an absence of facts that would support a “futility” argument (citing Spiegel v. Buntrock).  Mere disagreement with the Board’s conclusion is simply not sufficient to raise doubts about the Board’s good faith and whether it acted on an informed basis.  Similarly, the court held that by making a demand, a shareholder is effectively conceding that his demand can be fairly assessed and thereby waives any later claim that the Board members were conflicted.

How about the availability of discovery to determine the reasonableness of the Board’s rejection of the demand?  “No” says the court, relying on both Delaware law and New York law, which come to the same conclusion:  plaintiffs are not entitled to discovery to assess the reasonableness of the Board’s rejection.

Making a demand or pleading futility becomes an important, strategic first step in any derivative action.  There are presumptions and ramifications that must be considered before the chosen course is charted and demand is made.

 

 

Under what circumstances do customer information and business operations constitute “trade secrets” that may be enjoined from use by a former employee ? A recent decision by Justice Elizabeth H. Emerson on this issue serves as a stark reminder that a preliminary injunction requires “clear and convincing” proof that the information is truly a secret.

In Devos, Ltd v. United Returns, Inc., recently-troubled pharmaceutical-return company Devos sought to enjoin its former employees from operating a competitor, United Returns, pursuant to business tort law and non-compete/solicitation provisions contained in the former employees’ employment contracts. In August 2015, Devos obtained a temporary restraining order and sought a preliminary injunction, which United Returns subsequently moved to vacate. 

The court denied the preliminary injunction and vacated the temporary restraints. After finding that the non-compete provisions included in the restrictive covenants were overly broad, the court found that the restrictive covenants were unnecessary, as well. As for Devos’ business tort claims involving misappropriation of trade secrets, the court found that “clear and convincing evidence” of a trade secret was lacking. In particular, the court rejected Devos’ contention that its customer information and business operations were “trade secrets” that United Returns had unfairly exploited to obtain competitive advantages. Crucially, there was no evidence that Devos had taken measures to protect its customer lists from disclosure; in fact, United Returns submitted evidence that the names of Devos’ customers were publicly available and well known within the industry.

Nor did the manner in which Devos conducted its business constitute a “trade secret.” United Returns introduced evidence that Devos’ systems and processes were used throughout the pharmaceutical-return industry, and “an employee’s recollection of information pertaining to the specific needs and business habits of particular customers is not confidential.” Thus, the court reaffirmed and applied the elements of “secrecy”: (1) substantial exclusivity of knowledge of the process or compilation of information and (2) the employment of precautionary measures to preserve such exclusive knowledge by limiting legitimate access by others.

Devos’ failure to meet its evidentiary burden demonstrates how important it is for employers to restrict access to important customer records. But even where efforts have been made to maintain the secrecy of customers’ information, a former employee still cannot be prevented from using that information if it could be easily obtained from publicly available sources.  For example, in Sasqua Group v. Courtney, the Eastern District of New York dismissed a misappropriation action because the  plaintiff’s allegedly “confidential” customer information database could have been duplicated through simple (though lengthy) internet searches. By contrast, in Freedom Calls Foundation v. Bukstel, the Eastern District of New York held that it would be very difficult to duplicate the plaintiff’s efforts in compiling its list of non-profit donors and clients because their personal contact information was not publicly known outside of the industry.  

Merely because a well-trained former employee has successfully competed does not prove that confidential information was misappropriated–all the more reason to take care when drafting non-compete provisions. Absent such an effective provision, Devos serves as a cautionary tale that institutional knowledge sometimes must jump a high hurdle before it can be protected as a trade secret.

Two recent amendments to the Commercial Division Rules, designed to encourage alternative dispute resolution, will go into effect on January 1, 2018.

The amendment to Rule 10 requires counsel to certify that they have discussed with their clients the availability of alternative dispute resolution options in their case. Specifically, counsel will be required to submit a statement at the preliminary conference, and at each subsequent compliance or status conference, certifying that counsel has discussed the availability of ADR with the client and stating whether the client is “presently willing to pursue mediation at some point in the litigation.”

If the parties indicate their willingness to mediate, the Rule 11 amendment will require counsel to jointly propose in the preliminary conference order a date by which the mediator shall be selected.

The new amendments ensure that the option to pursue mediation is communicated to parties at a relatively early stage in the case, before substantial legal fees are incurred in discovery and motion practice, and before parties become too steadfast in their respective positions. Moreover, by requiring counsel to discuss with their clients the possibility of ADR, the amendments provide a mechanism by which counsel can candidly discuss with their clients the “pros and cons” of ADR in a way that does not signal weakness or lack of confidence in their position.

The amendments to Rules 10 and 11 are in line with federal court local rules which similarly require counsel to discuss the possibility of ADR with their clients and adversaries (see e.g. S.D.N.Y. Local Rule 83.9(d) [“In all cases . . . each party shall consider the use mediation . . . and shall report” to court]; W.D.N.Y. Local Rule 16(b)(3)(B).

The new amendments do not in any way alter Rule 3 of the Commercial Division Rules, which permits the court to direct, or counsel to seek, the appointment of a mediator at any stage of the action.

Personal jurisdiction analysis is often the enemy of 1L’s tackling that doozy of a CivPro exam. Outside of  that 10-page fact pattern requiring consideration of Helicopteros Nacionales de Colombia, SA v. Hall, International Shoe Co. v. Washington, and World-Wide Volkswagen Corp. v. Woodsonthis is normally a seamless endeavor for commercial litigators. But what happens when plaintiff’s counsel lacks sufficient information to adequately establish personal jurisdiction in opposition to a CPLR § 3211 (a) (8) motion?

The obvious answer is that the defendant’s motion will be granted. But that is not the only answer. In some cases, the court will deny the motion and grant the plaintiff jurisdictional discovery. In considering the New York County Commercial Division’s (Scarpulla, J.) grant of a CPLR § 3211 (a) (8) motion, the Appellate Division, First Department in Universal Inv. Advisory SA v. Bakrie Telecom PTE, Ltd., offered insight into when this relief is appropriate.

The relevant defendants were an Indonesian telecommunications company (“BTEL”), its parent company (“B & B”), and certain of its directors and commissioners (“Individual Defendants”). Under an indenture, a subsidiary of BTEL (the “Issuer”) issued on BTEL’s behalf $380 million of guaranteed senior notes (“Notes”) that were offered in international financial markets. BTEL then received the $380 million in proceeds from the offering through an intercompany loan from the Issuer, and issued an unconditional guarantee of the Issuer’s payment obligations under the Notes. Plaintiffs, holders of 25% of the Notes, commenced the underlying suit after BTEL defaulted in making the interest payments required under the indenture, which contained a New York forum selection clause. Of particular importance, neither the Individual Defendants nor B & B were signatories to the Indenture (“Non-Signatories”).

The Commercial Division held that the court lacked personal jurisdiction over the Non-Signatories for two reasons: 1) because as non-signatories to the indenture, they could not be bound by the forum selection clause; and 2) the plaintiffs failed to satisfy the “closely related theory,” (see Tate & Lyle Ingredients Ams., Inc. v. Whitefox Tech. USA, Inc.) under which a signatory to a contract may invoke a forum selection clause against a non-signatory if the non-signatory is so closely related to the signatory that enforcement of the forum selection clause against the non-signatory is foreseeable.

In addressing the closely related theory, the First Department explained further that a finding of personal jurisdiction based on a forum selection clause may be appropriate where the non-signatory has an ownership or controlling interest in the signatory, or where the signatory and non-signatory were jointly involved in the decision-making process. In ruling that the dismissal motion should have been denied without prejudice as to the Non-Signatories and that parties should have been permitted to conduct jurisdictional discovery, the First Department held that the plaintiffs demonstrated that facts may exist, which would satisfy the closely related theory. Specifically, the plaintiffs alleged that the Non-Signatories – the Individual Defendants through their senior management positions, power and decision-making authority, and B & B as BTEL’s parent company and principal shareholder – authorized, participated in, and promoted the offering and caused the offering memoranda to be distributed in the marketplace.

The key guidance from the First Department is that jurisdictional discovery is appropriate when information may exist to support a finding of jurisdiction, and where that information cannot without discovery be known by the plaintiff. Not surprisingly, this tracks nearly identically CPLR § 3211 (d), entitled “Facts unavailable to opposing party.” As the First Department explained, the plaintiff’s allegations in Universal Advisory SA warranted jurisdictional discovery regarding the Non-Signatories actual knowledge and role and responsibilities in the offering, because that information “may result in a determination that the nonsignatories are indeed ‘closely related’ to the signing parties, [and] is a fact that cannot be presently known to plaintiff, but rather is within the exclusive control of defendants.”

As we have come to expect, the Commercial Division Advisory Council periodically makes recommendations to amend and/or supplement the Rules of the Commercial Division, many of which are eventually adopted following a solicitation process for public comment by the Office of Court Administration.

In 2015, as a host of new Commercial Division rules and amendments were being rolled out, the NYSBA Commercial and Federal Litigation Section sponsored several panels throughout the metro-area to discuss the impact of the new rules on the various county bar associations.  At the time, Commercial Division practitioners and judges alike were still figuring out how and under what circumstances the new rules – concerning, among other things, interrogatory limitations, categorical privilege logs, nonparty electronic discovery, and expert disclosure – would be applied in their cases.  It’s been a couple years, so let’s take a look at some recent decisions to see how some of these rules are being applied.

Manhattan Commercial Division Justice Shirley Werner Kornreich, whose thoughtful decisions are no strangers to this blog, has at least twice this year addressed Commercial Division Rule 11-c concerning nonparty electronic discovery.  Under Rule 11-c and the corresponding guidelines found in Appendix A to the Rules of the Commercial Division, “[t]he requesting party shall defray the nonparty’s reasonable production expenses” – including, for example, “fees charged by outside counsel and e-discovery consultants” and “costs incurred in connection with the identification, preservation, collection, processing, hosting, use of advanced analytical software applications and other technologies, review for relevance and privilege, preparation of a privilege log . . . , and production.”

Recently, in Gottwald v Sebert, Justice Kornreich addressed Rule 11-c in the context of a motion to compel production of documents by a nonparty public-relations firm hired by pop star, “Kesha” Sebert, in connection with her allegations of sexual assault, battery, and harassment against her former manager and producer, “Dr. Luke” Gottwald.  Justice Kornreich granted Dr. Luke’s motion, assessing any burden on the PR firm as “minimal,” given that “hit count caps can be used to keep costs reasonable”; that hit counts for the limited time period in which the firm was involved “should be minimal or nonexistent”; and that Dr. Luke “must reimburse [the firm] for the reasonable costs of . . . review[ing] documents for responsiveness to the subpoena, and log[ging] those that are purportedly privileged.”

Earlier this year, in Bank of NY v WMC Mtge., LLC, Justice Kornreich addressed Rule 11-c in the context of motions to quash nonparty subpoenas in a RMBS put-back case.  In denying the motions, Justice Kornreich similarly assessed the burden on the nonparties as “relatively minimal,” given that the defendant serving the subpoenas “will have to defray the [nonparties’] reasonable document collection, review, and production costs, including certain legal fees.”

Justice Kornreich also addressed Rule 11-b (b) concerning the “categorical” versus “document-by-document” approach to logging of privileged materials in Bank of N.Y. Mellon.  Under Rule 11-b (b) (1), specifically, the Commercial Division had expressed a “preference . . . for the parties to use categorical designations, where appropriate, to reduce the time and costs associated with preparing privilege logs.”  Referencing the parties’ prior meet-and-confer on the subject, Justice Kornreich ruled that “a categorical privilege log, in the first instance, will be employed for the sake of cost efficiency,” and that once the defendant serving the subpoenas “is made aware of the hit count totals associated with the [nonparties’] privilege designations,” it may then “elect . . . to pursue such purportedly privileged documents in light of the legal fees necessary to do so.”

Be sure to check back in a few weeks when we take a look at a couple more recent decisions applying some of these newer Commercial Division rules.  In the meantime, Commercial Division practitioners, particularly those on the receiving end of a nonparty subpoena seeking ESI, should be mindful that the rules defraying the costs of e-discovery appear to have minimized the effect of the commonly-asserted “unduly burdensome” objection.

Can a claim for equitable or common-law indemnification co-exist with a claim for express or contractual indemnification?

In Live Invest, Inc. v. Morgan Justice Emerson says “no”, when the claim seeks to recover for the defendant’s wrongdoing (e.g., breach of contract) as opposed to simply trying to hold a defendant liable based on vicarious liability.

In Live Invest, the court was faced with a motion to dismiss  a third-party action brought by Jericho Capital Corp. (“Jericho”) against Gamma Enterprises, LLC (“Gamma”).  The main action alleged claims seeking to pierce the corporate veil against an individual and several entities, including Jericho.  On motions to dismiss the main action, the court dismissed all but Jericho, see Order, and Order 2, Live Invest v. Morgan (Jan. 13, 2017).   Jericho then pursued the third-party action against Gamma, asserting three causes of action, all premised on variations of indemnification.   The first claim, for express or contractual, based liability on a clause in the Purchase Agreement between Jericho and Gamma, stating that Gamma, “agrees to indemnity and hold harmless [Jericho]. . . from. . . any and all manner of loss, suits, claims,or causes of action. . . arising out of. . . Delta.”  The latter two claims were based on equitable and common-law indemnification.

Noting that equitable or common-law indemnification generally applies when one is held responsible by operation of law due to the relationship of the parties, such as vicarious liability, the dismissed the two equitable claims since the contract itself is claimed to have been breached.  Therefore, the court reasoned, the claim is properly premised for the breach, not by reason of the relationship of the parties.

Interestingly, as to the express or contractual indemnification claim, Gamma raised the threshold issues of whether that claim was “premature” and if the claim for indemnification was incompatible with plaintiff’s veil-piercing claim, see Gamma’s Memorandum of Law.  The Court rejected both arguments.  Finding first that although public policy will render unenforceable contracts that purport to indemnify one for conduct that involves an “intent to harm”, the court here found that nothing precludes indemnification for damages flowing from a mere “volitional act” where no finding of intent to harm has been made.  As to the incompatibility argument, Justice Emerson found that the indemnification and veil-piercing actions could co-exist.  The court reasoned that a claim based on an alter-ego theory is a “procedural device”, not a substantive remedy.  It “merely furnishes a means for a complainant to reach a second corporation or individual”.

 

If you live in the Western Hemisphere, then you already know that New York courts may exercise personal jurisdiction over a nondomiciliary who transacts business in New York if the plaintiff’s claim arises from the transaction of such business. But what does it mean to transact business in New York? Much ink has been spilled on this very question, and there is not room enough here to even begin to cover its scope. However, a recent decision by Justice Elizabeth Hazlitt Emerson (Supreme Court, Commercial Division – Suffolk County) sheds some light.

In Katherine Sales & Sourcing, Inc. v Fiorella, plaintiff Katherine Sales & Sourcing, Inc. (“Katherine”), a New York corporation, sued defendant Robert Fiorella (“Fiorella”) in New York Supreme Court, Suffolk County. Katherine’s complaint alleged that Fiorella had submitted $220,000 in fraudulently inflated invoices to a company co-owned by Katherine in connection with an oral consulting agreement.

Fiorella, a California resident, moved to dismiss for lack of personal jurisdiction. Fiorella argued that he did not enter the State of New York to negotiate his oral consulting agreement, to complete its performance, or for any reason other than to visit his family in Buffalo for Christmas in 2014. The only contact Fiorella had with anyone in New York consisted of telephone calls and emails that he had received and responded to.

Fiorella’s motion to dismiss was granted. Per the court (citing Biz2Credit, Inc., v Kular), jurisdiction is conferred where a defendant projects himself into New York to perform services and purposefully avails himself of the privileges and benefits of performing such services in the State.   In making this determination, the court in Kular noted that common factors to be considered include: 

(1) whether the defendant has an ongoing contractual relationship with a New York corporation;

(2) whether the defendant negotiated or executed a contract in New York and whether the defendant visited New York after executing the contract with the parties;

(3) whether there is a choice-of-law clause in any such contract; and

(4) whether the contract requires franchisees to send notices and payments into the forum state or subjects them to supervision by the corporation in the forum state.

While Justice Emerson did not reference these factors, much less individually address each of them, her opinion appeared to rely on the second factor—namely, that Fiorella had never entered New York nor performed any part of the agreement by means of purposeful contacts with New York. Other cases cited by the court, including Wego Chemical & Mineral Corp v. Magnablend Inc., support the supreme importance of this second factor: “Courts seem generally loath to uphold jurisdiction under the `transaction in New York’ prong of CPLR 302 if the contract at issue was negotiated solely by mail, telephone, and fax without any New York presence by the defendant.”

But didn’t Fiorella’s phone calls and emails with individuals in New York count as such a “New York presence”? Under different circumstances, they might have. For example, the New York Court of Appeals has held that telephonic participation in a New York auction is sufficient to confer jurisdiction. But Fiorella was not actively transacting business during his calls. To the court, it made all the difference that Fiorella had not initiated the telephone calls and emails with individuals in New York. Moreover, these communications were deemed “incidental” to work that Fiorella was performing outside of New York.

The takeaway from this latest decision appears to be that merely answering calls from area codes “212,” “516,” and “631” does not subject oneself to jurisdiction in New York. Something more is required from the communication—the recipient of such a call must “actively project[] himself into New York to conduct business transactions”—in order to confer jurisdiction.

CPLR 3211(a)(1) allows a defendant to seek dismissal of a complaint when the defense is “founded upon documentary evidence.” “Documentary evidence”, however, is not defined by the CPLR – leaving many practitioners in the dark as to what qualifies as a sufficient “document” under this paragraph.  Indeed, in a recent blog, we highlighted a case involving whether a termination letter sent by the lawyer was sufficient.

By its plain meaning, “documentary evidence” seems to suggest that any type of evidence that has been reduced to writing could qualify. In reality, however, “documentary evidence” only encompasses certain types of documents, making CPLR 3211(a)(1) a narrow, and sometimes risky, ground upon which to seek dismissal.

That begs the question – what qualifies as documentary evidence under CPLR 3211(a)(1)? New York courts have held that judicial records and documents such as notes, mortgages, and deeds rise to the level of “documentary.” But what about contracts? In Hoeg Corp. v Peebles Corp., the Second Department recently affirmed that contracts can indeed attain the rank of “documentary evidence” under certain circumstances.

In Hoeg, plaintiff and defendant entered into a joint venture and memorialized the terms of their relationship in a written retainer agreement. Specifically, the retainer agreement provided, among other things, that plaintiff would act as a consultant in order to facilitate defendant’s acquisition and development of real property in New York City. The retainer agreement also set forth varying commission structures for work performed by plaintiff in facilitating the defendant’s acquisition of such properties. Notwithstanding the written retainer agreement, plaintiff alleged that it had entered into a prior oral agreement with defendant whereby the parties agreed that plaintiff would retain 25% of the equity in the joint venture.

The plaintiff ultimately commenced an action against the defendant for breach of the oral agreement, alleging that the defendant had failed to honor the terms of the oral agreement after the defendant had sold development rights to a parcel of property in a multimillion dollar deal. The Kings County Supreme Court denied the defendant’s motion to dismiss, but the Second Department reversed, finding that the written retainer agreement qualified as documentary evidence under CPLR 3211(a)(1).

In reaching its conclusion, the Court examined the parties’ written retainer agreement and found that the agreement was “comprehensive in its scope and coverage” that constituted a complete written instrument. Accordingly, the Court held that the parol evidence rule bars any evidence concerning the alleged prior oral agreement. For this reason, the Court ruled that the parties’ contract “conclusively disposed of the plaintiff’s claim alleging breach of the purported oral joint venture agreement.”

This does not necessarily mean that every contract will qualify as documentary evidence under CPLR 3211(a)(1). A document will be considered “documentary evidence” within the meaning of CPLR 3211(a)(1) if it “utterly refutes the plaintiff’s allegations, conclusively establishing a defense as a matter of law” (see, e.g., Eisner v Cusumano Corp.) .  In addition, the documentary evidence must be “unambiguous, authentic, and essentially undeniable” (id.).  

The careful practitioner should be aware of the limited utility of CPLR 3211(a)(1) and be armed with the right evidence before relying solely on the “documentary evidence” ground. Otherwise, it might be wise for a practitioner to invoke CPLR 3211(a)(7) as a ground for dismissal as well.

 

Statutorily imposed deadlines are not optional for commercial litigants; this much should be obvious. Notwithstanding, and despite numerous technological calendaring options available to commercial litigators, deadlines are blown in the Commercial Division, including the mother of all deadlines: the defendant’s time to answer or otherwise move against a complaint (see CPLR 3012). As should also be obvious, the defaulting defendant’s request for a “Get out of Jail Free Card” – a motion to extend the time to appear or plead (see CPLR § 3012 [d]) – will not be taken lightly.

A recent ruling provides such a reminder.  In State Farm Mut. Auto Ins. Co. v. Austin Diagnostic Med., P.C., the Appellate Division, Second Department recently considered the Queen’s County Commercial Division’s (Dufficy, J.) denial of such a motion. State Farm commenced the action seeking a declaratory judgment that it was not obligated to pay certain no-fault insurance benefits to the defendant. The defendant blew its deadline and, three and a half months late, filed its answer. State Farm rejected the answer and the defendant moved to extend its time to answer, “or in the alternative, to compel the plaintiff to accept” it.

In affirming the Commercial Division’s denial of the motion, the Appellate Division offered a clear reminder of the defaulting defendant’s bright-line burden: in addition to providing a reasonable excuse for its delay, it must demonstrate that it has a potentially meritorious defense. The Appellate Division held that the documents offered in support of a potentially meritorious defense – the untimely answer, which was verified by the defendant’s attorney, and an affirmation of the defendant’s attorney – were insufficient because the attorney lacked personal knowledge of the facts.

The take-away here is fundamental, but critical: do what you must to avoid a default and, if you do miss your deadline, be sure your motion for an extension establishes a reasonable excuse for the delay and a potentially meritorious defense, both of which are attested to by someone having personal knowledge of those facts.