A recent decision from the Manhattan Commercial Division reminds us of the ramifications of non-compliance with discovery obligations. Although in my experience courts (especially the Commercial Division) typically do not like to get involved in discovery disputes (see, e.g., ComDiv Rule 14 requiring parties to meet and confer to resolve all discovery disputes); however, they will step in if a party is consistently refusing to participate in discovery and is delinquent in his or her discovery obligations, including by wielding the drastic remedy of striking a party’s pleadings.

In Tsung Tsin Association, Inc., v Tian Xiang Zhu et al., plaintiff Tsung Tsin Association, Inc., a New York not-for-profit corporation, commenced an action against its former officers and directors alleging, among other things, that they (i) engaged in a fraudulent scheme in which they purchased in bulk cemetery plots in the name of the corporation, illegally sold the plots to third parties, and illegally kept the sales proceeds for themselves; (ii) caused the corporation to enter below-market leases in exchange for bribes; and (iii) caused the corporation to re-finance its mortgages on its properties in excess of the existing debt and directed the excess loan proceeds to themselves. Plaintiff asserted causes of action for (i) an accounting; (ii) corporate waste and injury to property; and (iii) violations under the New York Not-for-Profit Corporation Law.  

Defendant Tian Xiang Zhu, a director and co-chair of the board, allegedly possessed critical documents concerning Plaintiff’s claims but routinely served late, deficient, and incomplete responses to Plaintiff’s demands. After months of delay, Manhattan Commercial Division Justice Jennifer G. Schecter ordered Zhu to meet and confer with plaintiff’s counsel regarding his discovery responses and to address any unresolved issues in a joint letter. After Zhu failed to comply, Justice Schecter demanded an explanation from Zhu’s counsel, who once again failed to comply with her directive. Having seen enough from Zhu and his counsel, Justice Schecter granted Plaintiff leave to file a motion to address Zhu’s misconduct, and Plaintiff filed a motion to strike Zhu’s answer.

In opposition to the motion, Zhu’s counsel stated that the motion was moot because Zhu had served updated discovery responses. Justice Schecter disagreed, finding that the updated discovery responses were insufficient, and issued an interim order, which recounted Zhu’s and his counsel’s repeated violations with court directives:

“Enough is Enough. No reasonable attorney should think this is an acceptable way to practice in the Commercial Division. The court cannot tolerate counsel that refuses to play by the rules and consequently wastes the resources of the parties and the court trying to compel compliance with the most basic litigation obligations”

Justice Schecter admonished Zhu’s counsel with what had to be done to comply with his client’s discovery obligations – i.e., serving supplemental discovery responses, producing all responsive documents, filing a detailed Jackson affidavit, etc. – but then conditioned her directives as follows:

“Given Zhu’s history of disregarding court orders, anything short of complete compliance with this order will result in the striking of his pleadings. For the avoidance of doubt, this is a conditional order–and counsel should explain to his client what that means.”  

And can you guess what happened next? That’s right, Zhu failed to comply. As a result, Justice Schecter not only made good on her promise to strike Zhu’s answer but also granted Plaintiff permission to file a motion for a default judgment as against Zhu based on his “willful and contumacious” conduct, reasoning that because Zhu and his counsel “ignored and violated virtually every one of the court’s discovery directives,” the court was left with “no confidence that a lesser sanction will impel compliance.”

In my experience, rare is the occasion on which a court will impose the harsh result of striking a party’s pleading. But as exemplified in Tsung Tsin Association, Inc., v Tian Xiang Zhu et al., when a party is given multiple opportunities to comply and even warned of the consequences of non-compliance, the court—in this case the Commercial Division—will bring down the remedial hammer.  Again, Justice Schecter: “[T]his order will make clear that further similar conduct will have serious consequences.” ComDiv practitioners, please be guided accordingly. 

Here at New York Commercial Division Practice, my colleagues and I have waxed poetic about New York’s Commercial Divisionthe nation’s first general trial court devoted exclusively to business litigation, by repeatedly extolling the benefits of practicing in a forum dedicated to and fully adept at adjudicating complex business disputes.  As such, we would be remiss if we did not give our plaudits to the Association of Corporate Counsel (“ACC”) for its 28-year history of contributing to the successful creation and implementation of business courts nationwide.

For those who are unaware, the ACC is a global legal association founded in 1982 that promotes the professional and business interests of in-house counsel through information, education, networking, and advocacy. The ACC has since grown to more than 47,000 in-house counsel members, employed by over 10,000 organizations, in more than 105 countries.  The ACC’s New York City Chapter, serving the five boroughs and Long Island, has over 1,600 in-house counsel members.

On October 16, 2023, the ACC’s Board of Directors, through its Advocacy Committee, endorsed a new business courts policy resolution (its third updated and expanded version) whereby the ACC reaffirmed its commitment to “urg[ing] national judiciaries to consider wherever appropriate the advantages of specialized procedures for resolution of business disputes,” and by encouraging them “to create commercial courts or specialized court divisions dedicated to business litigation.”  In large part due to ACC’s extraordinary advocacy efforts, business courts exist in more than half of the United States, and a number of other countries have similarly followed suit.

As set forth in the ACC’s policy resolution, “[c]ommercial courts result in more cost-effective and timely case processing and an improvement in the quality of dispositions.”  The policy resolution enumerates certain features that commercial courts may utilize to facilitate dispute resolution (some of which we have touched upon here), which include: 

  1. Advanced case management techniques, including close judicial oversight of each stage of litigation and case tracking by type and complexity.
  2. State of the art technology.
  3. Court-annexed alternative dispute resolution to encourage early case settlement.
  4. Cooperation among counsel and with the court in achieving a cost-effective resolution of the dispute.

The policy resolution also emphasizes that business courts “foster a more favorable environment for creating and maintaining businesses, and as a result enhance the economic well-being of their nation.”  

In an article entitled ACC’s Evolving Commercial Courts Leadership which was recently published in the publication “ACC Docket” on April 5, 2024, the ACC “spotlight[ed] as an example the many strides that have been achieved in the State of New York in developing one of the United States’ first business courts.”  In that connection, the article states that “ACC and its New York Chapter have advocated for and supported the Commercial Division of the New York State Supreme Court since its inception in 1995,” and that “[a]t every phase of the development of the Commercial Division, ACC is proud to have been at the forefront to advocate for and celebrate its impact.” 

Lest there be any doubt about the economic impact of the Commercial Division, on March 28, 2024, the NYSBA Committee on Continuing Legal Education, as well as the Business Law and General Practice Sections, sponsored a highly informative lunch-time webinar entitled, “The Economic Benefits of the Commercial Division to the State of New York and to the Success of Your Law Practice,” which explored how the Commercial Division helps New York State attract and retain businesses, thereby generating tax revenues and providing jobs, as well as how it enables New York businesses to operate more efficiently by reducing the amount of time and resources businesses are required to dedicate to dispute resolution.  A flyer circulated in connection with the webinar outlined the reasons why the Commercial Division is “renowned as one of the world’s most efficient venues for the resolution of commercial disputes.”

No doubt the Commercial Division has had an outsize impact on the New York business community, which once again brings to mind a common refrain around here at Farrell Fritz and on this blog, Get thee to the Commercial Division!

Arbitration can be an effective alternative for parties seeking to avoid drawn-out and costly litigation. As a result, it has become common practice for parties to negotiate arbitration clauses into their agreements. However, parties consenting to arbitration should be prepared to abide by an arbitrator’s discretion, especially regarding discovery. If not, parties might be left empty-handed realizing that New York courts are in no rush to entangle themselves in arbitration proceedings.

Background

In Matter of Investcloud Inc. v Siegal, Investcloud, Inc. (“Petitioner”) sought judicial intervention to compel third party discovery from Siegal and PricewaterhouseCoopers (“Respondents”) in an arbitration proceeding. The arbitration was governed by JAMS Comprehensive Arbitration Rules and Procedures (“JAMS Rules”) and the Federal Arbitration Act (“FAA”).

Before finding themselves in arbitration, Petitioner and Manning & Napier Advisors (“Manning”) had an agreement under which Petitioner would develop software for Manning. Petitioner was selected to provide such services through a request for information process (“RFI”). The RFI process was overseen by Respondents.

Since the RFI process was relevant to the parties’ dispute, Petitioner sought pre-hearing discovery from Respondents in the arbitration proceeding. In spite of multiple subpoenas, Petitioner claimed that Respondents were not fully complying with demands for all relevant discovery needed to arbitrate the dispute. Instead of raising this issue with the designated arbitrator, Petitioner decided to initiate a special proceeding with the court seeking an order compelling Respondents to comply with Petitioner’s discovery demands. The court stayed the arbitration proceeding until resolution of the issue.

Takeaway

Justice Daniel J. Doyle made it clear that New York courts should not inject themselves into arbitration proceedings, especially concerning issues around pre-hearing discovery. In coming to this conclusion, Justice Doyle first considered whether the FAA even allowed for non-party pre-hearing discovery. Noting a circuit split on this issue, Justice Doyle concluded that the court was bound by the Second Department and its holding that an arbitrator is “authorized to order non-party discovery (through subpoena) upon a showing of ‘special need or hardship.’”

However, Justice Doyle explicitly stated that the determination of “special need or hardship” should be made by the arbitrator and not by courts.  Justice Doyle noted that parties voluntarily consent to arbitration to avoid litigation, and “unnecessary entanglement” with courts would hinder that purpose. Further, since the rules of arbitration are “not arbitrary” and sufficiently protect due process, there was no reason for the court to intervene. Finally, Justice Doyle reasoned that arbitrators are in the best position to make these determinations, and any contrary rule from New York courts would act as impermissible entanglement in such proceedings.

Thus, Justice Doyle refused Petitioner’s invitation to get involved in the arbitration proceeding, and denied Petitioner’s request to compel third party discovery.

Conclusion

Arbitration acts as an avenue for parties to resolve their disputes privately and avoid litigation. With that, parties must be prepared to abide by an arbitrator’s rules and procedures. Otherwise, a party might find themselves without any back up, as New York courts are extremely hesitant to intervene in such proceedings.

On February 14, 2024, Chief Administrative Judge Joseph Zayas signed an Administrative Order amending Section 202.70(b)(1) of the Uniform Rules for the Supreme and County Courts (Rules of the Commercial Division of the Supreme Court), and adding a new Rule 9-b to Section 202.70(g). But rather than vest the Commercial Division with new powers, the amendments simply emphasize the capabilities it already has. Amended Section 202.70(b)(1) underscores the Commercial Division’s proficiency in adjudicating technology disputes, and new Rule 9-b reminds litigators of the CPLR’s existing framework for referees. Taken together, the amendments aim to embrace the rising prevalence of technology disputes in business courts, and prod litigators toward an underutilized method of dispute resolution.

Amended Rule 202.70(b)(1)

Rule 202.70(b)(1) lists the types of actions that qualify as “commercial” and may be litigated in the Commercial Division. Prior to the amendment, the rule encompassed actions in which the principal claims involved “breach of contract or fiduciary duty, fraud, misrepresentation, business tort (e.g., unfair competition), or statutory and /or common law violation where the breach or violation is alleged to arise out of business dealings.”

As amended, Rule 202.70(b)(1) now emphasizes that “commercial” cases include those resulting from “technology transactions and/or commercial disputes involving or arising out of technology . . ..” Significantly, the amendment appears within a clause that lists examples of commercial cases, such as “sales of assets or securities; corporate restructuring; partnership, shareholder, joint venture, and other business agreements . . ..” By including the amendment within this clause, the Rule signifies that it does not expand the Commercial Division’s jurisdiction to encompass a new category of cases. Instead, as the Commercial Division Advisory Council (“CDAC”) explains in its Memorandum, the amendment “amplif[ies] the Commercial Division’s capabilities” (Memorandum at 3).

Thus, the rule simply serves as a reminder that the Commercial Division, as “one of the world’s most sophisticated venues for the resolution of commercial disputes and located in the world’s leading financial center and serving as a technology hub,” is uniquely equipped to adjudicate disputes arising from technology (Memorandum at 2). The motivation for the amendment is to “communicate the Commercial Division’s receptivity to, and familiarity with, resolving technology disputes” in light of the “increasingly important role” technology plays in business operations (id.). Further, the amendment takes after the rules of other state business courts that have emphasized their jurisdiction over and experience with technology disputes—namely, Georgia, Iowa, Michigan, North Carolina, Tennessee, Utah, and West Virginia.

In short, the amendment invites attorneys litigating technology disputes to consider New York’s Commercial Division as a venue, and highlights the Commercial Division’s status as a leading business court.

New Rule 9-b

The Administrative Order also adds “Rule 9-b” to Section 202.70(g). The new rule, titled “Referees,” states: “Counsel should be aware that in accordance with CPLR 4301 and 4317(a), on consent of the parties, and with the agreement of the Court, any person may be appointed by the Court to act in place of the assigned Supreme Court Justice, to determine any or all issues or to perform any act, with all the powers of the Supreme Court.”

The Rule is meant to encourage use of referees. Like the amendment to Rule 202.70(b)(1), Rule 9-b does not add any new capabilities, but reiterates the options already available to litigators in the Commercial Division. As the CDAC explains in its Memorandum, this method of adjudication “operates completely within the existing judicial system. The CPLR expressly contemplates this procedure by authorizing, upon consent of the parties and the approval of the court, the appointment of a person to be substituted for the Supreme Court Justice to make all judicial determinations” (Memorandum at 1). Indeed, the text of the new rule points to CPLR 4301 and 4317(a), which provide for the appointment of a referee upon consent and approval.

Rule 9-b reflects the CDAC’s belief “that practitioners, as well as many judges, may not be aware of the availability of this alternative. The proposed rule would bring attention to its utility” (Memorandum at 3). The benefits of using a referee include streamlining the resolution of issues that otherwise would require a formal motion to be addressed through a lengthy and often arduous decision process. Beyond that, increased use of referees could alleviate the strain on Judges, allowing them to devote more attention to the cases on their dockets. 

The new Rule is, of course, voluntary. But the goal is clear: to elevate referee usage so it is on par with mediation and arbitration, both of which have enhanced efficiency in the disposition of cases.

Whether in employment agreements or business transactions, drafters often include certain clauses within these documents to protect their client if litigation arises (e.g., arbitration clauses, forum- selection clauses). However, when not clearly drafted, these clauses can lead to a battle over where the case may proceed. Recently, Manhattan Commercial Division Justice Joel M. Cohen handed down a decision emphasizing the importance of forum-selection clauses and reminding practitioners that an arbitration clause will not automatically be “construed to mean consent to jurisdiction in the courts of New York State.”

Background

In Dembicki v. Synergy Health Network, Inc. plaintiffs, both Florida residents, commenced suit against defendants, a Delaware company and Illinois resident, alleging a claim for breach of contract, retaliation in violation of New York Labor Law (“NYLL”) § 740, and for unlawful deductions from wages under NYLL § 193. According to the Complaint, Plaintiffs’ Executive Employment Agreements (the “Agreements”) with defendants contained the following arbitration clauses (i) “[a]ny controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association”; and (ii) the Agreements “shall be construed in accordance with the laws of New York without regard to conflicts of law principles,” and that “arbitration will be conducted in New York City, New York.”

According to the Complaint, the parties previously engaged in arbitration proceedings for one year until the arbitrator terminated the arbitration with leave for plaintiffs to pursue their claims “in another forum.” Defendants moved to dismiss the Complaint for lack of personal jurisdiction on the grounds that the “choice of an arbitral forum” within the Agreements “does not establish personal jurisdiction in new civil litigation.” In opposition, plaintiffs argued that defendants consented to personal jurisdiction when they selected (i) New York as the venue for dispute resolution; and (ii) New York law to cover any disputes under the Agreements. Justice Cohen rejected both of plaintiffs’ arguments.

First, the Court held “[t]he fact that the contract chooses New York law does not ‘constitute a voluntary submission to personal jurisdiction in New York.’” Second, the Court acknowledged that while “it is well-settled that an arbitration clause containing a forum selection will be upheld by courts, it is equally well-settled that such a clause will be enforced only insofar as it applies to arbitration proceedings and will not be construed to mean consent to jurisdiction in the courts of New York State.” Specifically, the Court found that (i) the parties “could have added a broader New York forum selection clause,” but chose not to do so; and (ii) plaintiffs’ failed to argue and/or demonstrate that there are no alternative forums in which to pursue their claims. Based on the foregoing, the Court granted defendants’ motion to dismiss.

Upshot

The Dembicki decision provides a significant reminder to practitioners that meticulous and attentive drafting is required on the front-end to avoid any potential problem in developing a litigation strategy should it arise.  Moreover, employers should take note of this decision and consider whether their arbitration or forum-selection clauses warrant additional review or revision.

On April 2, 2024, the New York State Bar Association’s (“NYSBA”) Task Force on Artificial Intelligence released a report concerning the use of artificial intelligence (“AI”) in the legal profession (“Report”). New York joins select states, such as Florida and California, whose bar associations have published recommendations on the use of AI. The nearly 90-page Report examined the (1) evolution of AI and generative AI; (2) benefits and risks of AI and generative AI use; (3) impact of the technology on the legal profession; (4) legislative overview and recommendations; and (5) proposed guidelines. To date, the Report is the most comprehensive document provided by a state bar association regarding AI use.

Continue Reading AI Etiquette: A User’s Manual Provided by the NYSBA

As one can easily glean, we here at the New York Commercial Division Practice Blog view New York’s Commercial Division as the heartbeat of business litigation in the United States.  So, we think getting your business litigation in front of the Commercial Division is a big deal.  But what happens when you have a case that meets the requirements for the Commercial Division, and you are not assigned to that Part? 

Generally, there are two ways to be assigned to the Commercial Division under § 202.70[d] of the New York Code of Rules and Regulation (the “Rules”).  The first is for any party to file an RJI with the accompanying Commercial Division Addendum 90 days following service of the complaint.  The second is by consent of the parties via a forum – selection clause in the parties’ contract. 

But what if a party files an RJI before the 90-day period runs without requesting assignment or submitting a Commercial Division Addendum?  The answer lies in § 202.70[e] of the Rules, which permits a party to apply via letter to the Administrative Judge within 10 days of the RJI for transfer to the Commercial Division. 

But what if the request is made outside the time limits in § 202.70[d] and [e] of the Rules? Again, § 202.70[e] of the Rules permits a letter application to the Administrative Judge showing “good cause” for the delay. 

While the timing provisions are relatively simple to work though, the “good cause” standard under CPLR 2004, which requires reasoning for the delay, is a bit more subjective, as a finding of good cause is within the discretion of the Administrative Judge.  It is imperative, therefore, to point the Administrative Judge to applications with analogous issues or facts to support your cause.  As for where to find those decisions, never fear, the Commercial Division itself provides some help in this regard. 

On the New York Courts webpage, the Commercial Division has a page titled Administrative Judge on Transfer Applications. That page provides a list of all the Administrative Judge’s decisions on transfer applications from prior to the effective date of the Commercial Division Rules on January 17, 2006, to the present.

 For example, what if a timely request for Commercial Division assignment was not filed, but you have a related case pending before a Commercial Division Judge?  The Administrative Order in ABG HMX LLC v. Alba Longa Concepts LLC provides precedent for the Administrative Judge granting a transfer for “good cause”, in this context.   And what if a request for Commercial Division assignment is rejected by the clerk’s office but was only a few days late?  Curtis v. Merrill Lynch, et al provides precedent for the Administrative Judge granting a transfer if the request was “untimely albeit only by a matter of days.”  But waiting years before filing a transfer application is not wise.  In ABL Advisor LLC, et al. v. Ian S. Peck, et al, the Administrative Judge denied a transfer application made two years into the litigation, finding that the “rules are designed to ensure that appropriate cases are assigned to the Commercial Division at the inception of the case, not two years into the litigation.”  Finally, what if you have a complex commercial case but one of the issues is arguably excluded from review by the Commercial Division?  In City of New York v. FC 42nd Street Associates, L.P., the Administrative Judge granted transfer of a generally excluded real property case that dealt with the determination of fair market value in relation to rental income, agreeing that while the case “is not an action for the payment of rent only, … the complaint raises complex questions of commercial and arbitration law and belongs in the Commercial Division.”  And there are many more helpful examples for litigators on the Commercial Division’s “Transfer Application” page.  

In short, the next time you find yourself in a position where leave to the Administrative Judge is required for assignment to the Commercial Division, remember the Commercial Division and its readily available resources has you covered. 

Continue Reading Help, I Need to Get My Case into the Commercial Division!! Transfer and Determinations by the Administrative Judge

As one might gather from the title of this blog, we here at New York Commercial Division Practice try to make a more-than-occasional point of extolling the virtues of the Commercial Division. From its well-established reputation as a sophisticated, cost-effective, predictable, and expeditious forum to its related ability to attract businesses nationwide to litigate their disputes in New York State, when it comes to litigating commercial cases in New York, the Commercial Division is the place to be.

Every year around this time, New York’s Chief Administrative Judge publishes an annual report, which “collect[s], compile[s] and publish[es] statistics and other data with respect to the unified court system and submit[s] annually, on or before the fifteenth day of March, to the legislature and governor a report of activities and the state of the unified court system during the preceding year.” The New York State Unified Court System’s 2023 Annual Report, which was just published last week, devoted a section to the Commercial Division under the heading “A Commitment to Society,” in which the Chief Administrator praised the work of the Commercial Division Advisory Council, which, under the leadership of Robert L. Haig, Esq., has helped develop the Commerical Division into becoming “a recognized leader in court system innovation, … demonstrating an unparalleled creativity and flexibility in [the] development of rules and practices.”

Continue Reading The Chief Administrative Judge’s 2023 Annual Report, the State of the Commercial Division, and Other ComDiv Goings-On

As of January 1, 2024, the amended CPLR 2106 concerning affirmations provides that

[t]he statement of any person wherever made, subscribed and affirmed by that person to be true under the penalties of perjury, may be used in an action in New York in lieu of and with the same force and effect as an affidavit.

Before this amendment, only certain non-party New York licensed professionals—namely, attorneys, and certain health-care professionals—and individuals physically located outside the United States could submit affirmations in lieu of affidavits. The new CPLR 2106 has removed these requirements. Any person—whether a party to the litigation or not—can now provide an affirmation in lieu of an affidavit so long as their affirmation contains the following language:

I affirm this ___ day of ______, ____, under the penalties of perjury under the laws of New York, which may include a fine or imprisonment, that the foregoing is true, and I understand that this document may be filed in an action or proceeding in a court of law.

This amendment allowing for affirmations in place of affidavits is like the federal statute, 28 U.S.C. 1746, which allows the use of unsworn declarations under the penalty of perjury. This is a welcome change to many, as it will spare your client the time, cost, and inconvenience of obtaining a notary.

But this rule change raises many other questions. For one, how does it impact the other sections of the CPLR that refer to affidavits? For example, certain CPLR sections authorize the use of affidavits to be submitted in support of pleadings (i.e. CPLR 403[b]) and motions (i.e. CPLR 2214[b], CPLR 3212[b], CPLR 3215). Can a party affirmation now be submitted in place of a fully-executed affidavit? A recent article by Professor Patrick M. Connors entitled CPLR 2106 Amended To Permit Any Person To Submit Affirmation in Lieu of Affidavit appears to answer that question in the affirmative.

Second, how does this rule change impact verifications of pleadings by affidavit? Under CPLR 3020(d) and 3021, a verification must be accompanied by affidavit of a party or nonparty. Professor Connors reasons that although, “one can reasonably conclude that, under the current CPLR 2106, verification can be performed via the affirmation of a party or nonparty . . ., there is disagreement on whether a verification must be performed before a notary.” Professor Connors advises that he has been informed that, while certain county clerks have rejected filings of pleadings that were verified pursuant to the CPLR 2106 affirmation, other clerks have accepted these pleadings. At this point, we can only hope to get more guidance on the use and applicability of CPLR 2106 and proceed with caution as we await decisions addressing the new amendment.

Third, how does this rule impact responses to interrogatories, which, under CPLR 3133, must be “answered in writing under oath by the party served”? Professor Connors concludes that it appears that the required “oath” can be performed by way of an affirmation.

Professor Connors also addressed in his article at least two circumstances that continue to require notarization. First, a notary is required to acknowledge a conveyance of real property under Section 298 of the Real Property Law. Second, under CPLR 3113(b), deposition testimony must be sworn to before a notary, and under CPLR 3116(a) any changes to a deposition transcript must be signed by the witness “before any officer authorized to administer an oath.”

Takeaway:

No doubt there are many questions that need to be answered about the impact of this amendment. And until we get further guidance, practitioners should proceed with caution. We expect that case law will soon address the impact of the new CPLR 2106, and we at the New York Commercial Division Practice will certainly be monitoring any guidance or decisions impacting this rule change.

Commercial litigants often seek the provisional and equitable remedy of a preliminary injunction under Article 63 of the CPLR to protect the client’s rights that are difficult to monetize and quantify. The relief sought typically involves a party restraining from certain conduct and maintaining the status quo where it “appears that the defendant threatens or is about to do, or is doing or procuring or suffering to be done, an act in violation of the plaintiff’s rights respecting the subject of the action” (see CPLR 6301).

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New York courts consider the issuance of a preliminary injunction to be an “extraordinary remedy” that should not be granted as a routine matter. Therefore, in order to meet the high burden for a preliminary injunction, the movant must satisfy the oft-cited tripartite test of (1) likelihood of ultimate success on the merits, (2) irreparable injury if the preliminary injunction is withheld, (3) and a balance of equities tips them in favor of the moving party.

A mandatory preliminary injunction (as opposed to a prohibitory preliminary injunction), is an application by which the movant does not seek to restrain the actions of the opposing party but instead seeks a court mandate that directs the opposing party to engage affirmative, specific conduct during the pendency of an action. As such, a mandatory injunction’s function is to actually disrupt the status quo, requiring the movant to show that the status quo is endangered by the opposing party’s failure to act. Therefore, it requires the movant to satisfy an even more rigorous standard than that of a prohibitory injunction and is only granted under extraordinary or unique circumstances.

In Sebco Dev. v Bldg. Mgmt. Assocs., Bronx County Commercial Division Justice Fidel E. Gomez found such clear-cut extraordinary circumstances to exist, treating the plaintiffs’ motion seeking a preliminary injunction as that which also sought a mandatory injunction and granted them both after finding that the plaintiffs had met both standards. As has come to be a trademark characteristic of his decisions, Justice Gomez in Sebco offered a thorough analysis of the preliminary injunction standard of review and the essential principles and caselaw governing its requirements.

Plaintiff Sebco is a not-for-profit organization that provides affordable housing in the Bronx and sponsored the development of properties for the co-plaintiff property owners, and provided oversight for such properties. Defendant served as property manager for the properties owned by the plaintiffs, which duties included leasing and maintaining the property owners’ properties, requiring that defendant maintain tenant data and tenant files to ensure compliance with city, state, and federal regulatory agreements, as well as hiring and overseeing maintenance staff. In January 2023, the plaintiffs terminated their relationship with the defendant and also appointed Sebco to assume the management of the properties.

A week after that decision was made, the defendant denied the plaintiffs the ability to access their own bank accounts, and despite being terminated, continued to draw management fees from bank accounts belonging to them. Defendant also impeded Sebco’s attempt to assume management functions for the property owners, by refusing to comply with requests that Sebco be provided with information regarding the property owners’ buildings and bank accounts, refusing to relinquish control of millions of dollars belonging to the property owners, and refusing to relinquish control over the plaintiffs’ data.
In their complaint, the plaintiffs asserted multiple causes of action against the defendant, including a cause of action for declaratory judgment wherein the plaintiffs sought a declaration that defendant had been relieved as the property manager and that, as such, they had the right to access to and control of their bank accounts and data. They also asserted a cause of action for conversion where they alleged that they have a possessory interest in their data and the funds in the accounts, which despite demand, the defendant refused to return.
Based on affidavit support and the legion of documents submitted by the plaintiffs, the court found that the plaintiffs clearly demonstrated entitlement to injunctive relief, enjoining the defendant from affirmatively interfering with Sebco’s management of the properties.

The plaintiffs established a likelihood of success on the merits by clear and convincing evidence that the defendant no longer managed the properties; that Sebco assumed that role; and therefore that the defendant had no right to prevent access to and could not control the plaintiffs’ bank accounts or data, to the exclusion of their rights. Regarding irreparable harm, the plaintiffs showed that without injunctive relief allowing Sebco to assume control of the bank accounts and data, Sebco would be unable to properly manage the plaintiffs’ properties and they would lose low-income rental subsidies as a result, forcing Sebco and the plaintiffs to cease operating. With respect to the balancing of the equities, the court surmised that if all defendant is being asked to do is relinquish control of information it can no longer legally control, injunctive relief would hardly prejudice defendant.

The court also founds that insofar as the plaintiffs also sought to compel the defendant to affirmatively take all steps required to allow Sebco to assume management of their properties, which would alter rather than preserve the status quo, a mandatory injunction was justified since preservation of the status quo would afford the plaintiffs insufficient relief.

Although sparingly granted, preliminary injunctions are commonly utilized and effective tools in the commercial litigator’s arsenal. Not only do they offer the remedy of immediately halting (or mandating) certain conduct of the opposing party pending the litigation, but they afford litigants the opportunity to make a good first impression with the court and set the tone for the life of the case.