I made two observations coming out of Grand Central Station during my morning commute last week. First, the city really stinks after a string of oppressively hot and humid summer days. Second, there appears to be a temporary taxi stand, perhaps occasioned by the ongoing construction of the new One Vanderbilt building, just outside the south entrance of Grand Central Terminal on 42nd Street under the Park Avenue Viaduct.

This latter observation was rather rudely forced upon me when the precarious position of one such cab nearly caused me to traverse its front-end Bo and Luke Duke style. The site of the mangled NYC taxi medallion fastened to the cab’s dented hood was a striking metaphor for the current state of the taxi industry given the increasing popularity of ride-sharing services like Uber and Lyft.

The plight of the cabbie was on display in a recent decision from the Honorable O. Peter Sherwood of the Manhattan Commercial Division in a case called Capital One Equip. v Deus, in which the cabbie-defendants, after defaulting on a promissory note representing more than $400,000 borrowed to purchase a taxi medallion, attempted to rest on the traditional contractual defense of impracticability or impossibility of performance in a summary proceeding under CPLR 3213.

The essence of Defendants’ claim was that “due to the economic change in the medallion and taxi industry of New York by ride sharing applications like Uber and Lyft, there is an impossible hurdle for the defendants to overcome, making the repayment of the loan impossible.”

Readers may recall from their law-school hornbook days that the impossibility defense contemplates truly unexpected circumstances. As the plaintiff-lender in the Deus case put it, “the impossibility defense . . . only excuses a party’s contractual performance where there has been destruction or obstruction by God, a superior force, or by law.”

The cabbies, however, likened their situation to the kind of critical condition contemplated by the traditional defense, describing the industry as being “on life support with little to no chance for a reversal of its current dire situation.”

“At the heart of the problems facing the NYC Taxi industry,” cried the cabbies, “is the emergence of companies such as Uber and Lyft which are exempt from the regulatory framework burdening the medallion owners.” As a result, “ridership in New York City yellow taxi cabs has dropped almost 30%” and “NYC taxi medallions, which were selling for in excess of $1,000,000 as recently as 2013, have plummeted in market value” – all of which has led to a “collapse of unprecedented proportions.”

A creative argument to be sure, but the court wasn’t buying it. Citing New York case law going back to the late 1960’s, the court ultimately held for the plaintiff-lender, finding that “performance of a contract is not excused where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship. Economic hardship alone cannot excuse performance; the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.”

Coming on the heels of several driver suicides in recent months, the Deus decision is just more bad news for the NYC taxi industry. While market forces created by the advent of ride-sharing services may not be “superior” enough to satisfy the impossibility defense, one thing’s for sure: it’s a difficult time to be a taxi driver in New York City.

**UPDATE**  Perhaps the cabbies are seeing a little light after all. Around the time this post was published last week, news broke that the New York City Council had tugged the reigns of the Uber/Lyft ride-sharing industry by passing minimum-wage requirements for drivers, as well as a one-year freeze on the licensing of participating vehicles in the city. The first-of-their-kind bills, particularly the cap on e-hail cars, was driven in large part by increased problems related to city-street congestion. Today, Mayor de Blasio signed the bills into law.

 

In May 2013, professional golfer Vijay Singh (“Singh”) brought suit against PGA Tour, an organizer of the leading men’s professional golf tours and events in North America, in Vijay Singh v. PGA Tour, Inc. PGA Tour enacted an Anti-Doping Program, which prohibits golfers from using certain substances. The list of prohibited substances was adopted from the list maintained by the World Anti-Doping Agency (“WADA”). A few years after the Anti-Doping Program was enacted, Singh began using a performance-enhancing substance, deer antler spray, for his knee and back problems.

Although Singh tested negative for any banned substance, PGA Tour, which sent the spray for testing, determined that the spray contained prohibited substances. As a result, PGA Tour concluded that Singh violated the Anti-Doping Program and, as a result, suspended him from activities related to PGA Tour’s organization. PGA Tour subsequently dropped its disciplinary action and revoked Singh’s suspension after WADA announced that deer antler spray is not a prohibited substance.

Singh sued PGA Tour in the New York County Commercial Division for, among other things, breach of the implied covenant of good faith and fair dealing, and conversion. Nearly three years later, Singh moved for partial summary judgment on his breach of the implied covenant of good faith and fair dealing cause of action. PGA Tour moved for summary judgment on the causes of action for conversion and breach of the implied covenant of good faith and fair dealing.

In May 2017, Justice Eileen Bransten granted in part and denied in part PGA Tour’s motion for summary judgment. She dismissed Singh’s claim for breach of the implied covenant of good faith and fair dealing and denied in part Singh’s motion for partial summary judgment on that claim. The Court determined there were issues of fact regarding whether PGA Tour breached the implied covenant of good faith by failing to consult with the WADA, upon which PGA Tour clearly relied in issuing its list of prohibited substances, prior to suspending Singh. The Court also concluded there were issues of fact pertaining to what, if any, damage Singh suffered as a result of his suspension and PGA Tour’s making public statements regarding his use of the substance. Justice Bransten also dismissed Plaintiff’s cause of action for conversion on the basis that PGA Tour demonstrated compliance with the Anti-Doping Program, thus establishing that PGA Tour was entitled to escrow Plaintiff’s funds from the date of Singh’s alleged violation to the end of his suspension.

Recently, the Appellate Division, First Department affirmed Justice Bransten’s decision. PGA Tour’s motion for summary judgment dismissing Singh’s cause of action for breach of the implied covenant of good faith and fair dealing was denied. The Court held that the determination as to whether PGA Tour exercised discretion “arbitrarily, irrationally or in bad faith by failing to confer with or defer to” the WADA prior to suspending Singh and making public statements regarding his use of the deer antler spray is an issue of fact for the jury to determine. The First Department relied on Dalton v. Educational Testing Serv., which held that “[w]here a contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally.” Indeed, the Court went on to determine that within the obligation to exercise good faith are “promises which a reasonable person in the position of the promisee would be justified in understanding were included.” In that regard, the Court held that issues of fact exist on whether the public statements made by PGA Tour representatives implicating Singh’s substance use were a breach of the implied covenant of good faith and fair dealing, and whether and what damage Singh suffered as a result thereof. The Court also affirmed the earlier decision dismissing the claim to the extent it relied on Singh’s allegation that he was treated differently than other similarly situated professional golfers.

Failure to raise an issue at the trial court level is generally considered a waiver of that issue on appeal.  Notwithstanding, state courts recognize certain circumstances when raising an issue for the first time on appeal does not prejudice the adversary because the legal issue is “apparent on the face of the record.”  26th LS Series Ltd. v. Brooks.   Some defenses may be raised even though not raised below, such as where a contract is void against public policy, see 159 MP Corp. v. Redbridge Bedford, LLC.   There are others.  For example, the Second Department in Franklin v. Hafftka held that an issue of whether fiduciary tolling applied in that action could nevertheless be reached by the appellate court “since it involves a question of law which appears on the face of the record and which could not have been avoided”.  Similarly, in Glasheen v. Long Island Diagnostic Imaging, the Appellate Division there held that an issue of “proximate cause” under the circumstances of that case presented an unavoidable issue of law that could be raised even though not preserved.

Recently, the First Department considered an appeal from a Commercial Division order and had to determine whether the doctrine of in pari delicto is one of those defenses that could be raised on appeal even though not raised below.  The answer?  Yes.

In  Matter of Wimbledon Fin. Master Fund, Ltd. v. Wimbledon Fund SPC the court affirmed Justice Shirley Werner Kornreich’s decision denying the respondent’s motion to dismiss a petition to set aside a fraudulent conveyance.  Justice Kornreich ordered respondent to pay $700,000, plus attorney’s fees.  Many issues were presented on appeal.  Of note, however, was the one defense that was not raised below:  in pari delicto.  Recognizing that in pari delicto is a defense grounded in “unclean hands” the appellate panel concluded that indeed, this is one of those defenses that may be raised for the very first time on appeal.  However, in that case, the court considered the defense but ultimately concluded that the defense does not apply to a fraudulent conveyance claim.

Preservation of issues for appeal can be a minefield for the appellate practitioner.  If on appeal, you are faced with the “it wasn’t preserved below” argument, consider whether the issue (i) presents a legal issue “apparent on the face of the record”, (ii) is an “unavoidable issue of law” presented by the record, or (iii) falls within those categories of defenses that the courts have recognized cannot be waived (e.g., public policy, unclean hands, to name a few).

 

 

On June 5, 2018, in RKA Film Financing, LLC v. Kavanaugh et al., the First Department unanimously affirmed the Supreme Court, New York County’s decision absolving the United States Secretary of the Treasury, Steven Mnuchin, of fraud claims brought by RKA Film Financing LLC (“RKA”), a media financing company.

By way of background, in 2014, RKA, a media financing company, lent money to Relativity, a global media company. RKA alleged that it was misled into believing that it was investing in a low-risk lending facility and that the funds would be used for print and advertising expenses related to the release of motion picture films by special purpose entities (“SPE”). Specifically, RKA alleged that certain representatives of Relativity caused certain SPEs to enter into a print and advertising funding agreement with RKA (“Funding Agreement”). RKA alleged that the Funding Agreement contained misrepresentations, including that the funds would be used for print and advertising expenses for specific movies, to induce RKA to invest large sums of money. However, unbeknownst to RKA, Relativity used the funds to pay for general corporate expenses.

Mnuchin joined Relativity’s board as a non-executive director and chairman in October of 2014 after his private investment firm invested $104 million in Relativity. Mnuchin also served as the CEO and Chairman of OneWest, a commercial lender that lent millions to Relativity. RKA alleged that by way of Mnuchin’s position at OneWest, he was privy to the “inner-workings” of Relativity’s finances.

On April 10, 2015, in response to RKA’s request, members of Relativity informed RKA that only “$1.7 million had actually been spent” on print and advertising. On April 13, 2015, Relativity admitted that it misappropriated RKA’s funds.

Mnuchin, who did not participate in the execution or performance of the Funding Agreement, resigned from the Relativity board on May 29, 2015. Thereafter, on May 30, 2015, after Relativity defaulted on a loan from OneWest, Mnuchin began seizing $50 million from Relativity’s account to recoup OneWest’s loan.

RKA commenced suit against several defendants, including Mnuchin, alleging that they misled RKA into lending Relativity millions of dollars for print and advertising of major movie releases. Mnuchin moved to dismiss. The Supreme Court, New York County dismissed RKA’s claims against Mnuchin.

The Court held that RKA failed to establish its claim for fraud because “absent substantive allegations that Mnuchin was responsible for, aware of, or participated in the purported fraud surrounding the Funding Agreement, liability cannot attach.” Specifically, a plaintiff seeking to recover for fraud must “set forth specific and detailed factual allegations that the defendant personally participated in, or had knowledge of any alleged fraud.” To allege a cause of action for fraud, a plaintiff must also establish causation, showing that “defendant’s misrepresentations were the direct and proximate cause of the claimed losses.” Accordingly, Justice Charles E. Ramos concluded that despite allegations that Mnuchin had inside access to the way in which Relativity used the funds, that was insufficient to establish fraud absent evidence of representations made by Mnuchin.

Similarly, Justice Ramos held that RKA’s negligent misrepresentation claim fails because of an absence of a privity-like relationship between Mnuchin and RKA. To plead a claim for negligent misrepresentation, a plaintiff must show: “(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on such information.” In that regard, the Court also held that RKA failed to allege a relationship between RKA and Mnuchin or that Mnuchin owes a fiduciary duty to RKA.

Finally, Justice Ramos dismissed RKA’s fraudulent inducement claim because it was impossible for Mnuchin to have fraudulently induced RKA to enter into the Funding Agreement, as he had not joined Relativity’s board until months after RKA and Relativity entered into their agreement. To prevail on a fraudulent inducement claim, a plaintiff must establish: 1) a misrepresentation of material fact, 2) known to be false, 3) made with the intention of inducing reliance, 4) that is justifiably relied upon, and 5) results in damages. In light of that, Justice Ramos further held that the Complaint was silent as to any allegations that Mnuchin was involved in the execution of the Funding Agreement or made any representations to RKA.

The First Department came to the same conclusions as the lower court.

First, the Court held that the allegations that the board of directors of Relativity was involved in the financial transactions and the daily operations of the company are not enough to conclude that Mnuchin personally participated in, or had knowledge of, the fraud as a result of his position on Relativity’s board.

Second, the Court determined that the fact that Mnuchin became aware of the fact that RKA’s funds were used for working capital and not solely for print and advertising expenses was insufficient to establish that he was aware that misrepresentations were made by the other defendants or that the other defendants were part of the fraud scheme.

The First Department also affirmed the Supreme Court’s holding that RKA’s negligent misrepresentation claim against Mnuchin was insufficient, because RKA failed to allege any direct contact between Mnuchin and RKA, giving rise to the requisite special relationship.

 

In sum, mere knowledge or awareness of a company’s finances, without more information, is insufficient to establish that a company’s board member is liable for a fraud committed by the company.

So a plaintiff obtains a default judgment against a defendant on a promissory note case.  Defendant fails to appear or defend.   On a motion to enter the default pursuant to CPLR 3215, one would assume that without opposition, judgment would be entered for the amount of the loans.  Interestingly, that’s not quite what happened in Power Up Lending Group, Ltd. v. Cardinal Resources, Inc., where a plaintiff lender sought entry of judgment on two loan agreements in the amount of $66,264.90.  So what did happen?

Justice Stephen A. Bucaria, sua sponte, examined the plaintiff’s submission (which the court must), but then determined that certain provisions in the agreements were illegal as violating New York’s criminal usury laws.   As a result, the Court calculated the amount due to the Plaintiff after severing the provisions deemed by the Court to be illegal, which was far less than that sought by plaintiff.  Plaintiff appealed.

The Second Department in Power Up Lending Group, Ltd. v Cardinal Resources, Inc. disagreed with Justice Bucaria’s approach and reversed, concluding that the court erred when it, sua sponte, severed certain provisions of the loan agreements, which it found on its own to be “illegal pursuant to the criminal usury statute.”   Since the defense of usury is an affirmative defense, it must be asserted by the Defendant affirmatively in its answer or as a ground to move to dismiss the complaint.  Otherwise, the defense is waived.  Here, because the Defendant failed to appear or answer or move, the defense was waived.

Two issues spring to mind.  First, the affirmative defense of criminal usury is far different than most affirmative defenses, which do not involve violations of criminal law (e.g., statute of frauds, statute of limitations and the like).  However, where an affirmative defense involves criminal activity, can a court as a matter of public policy have the power to raise the issue, sua sponte, even if it would otherwise be an affirmative defense?

Interestingly, in Youshah v. Staudinger, the defendant defaulted in an action brought by the plaintiff seeking to recover money owed to him by his former business partner for excluding him from an escort and dating service business, which fosters prostitution. The Court determined that although a party concedes liability by defaulting in an action, it would not, on public policy grounds, award judgment to the plaintiff as a result of an illegal enterprise. The Court held that it would not “enforce provisions of agreements which are patently illegal when public policy is at issue.”

Second, although the usury defense is waived if not raised, that very same defense could be advanced later by a defaulting defendant on a motion to vacate the default to establish a “meritorious defense.”   See, e.g., Blue Wolf Capital Fund II LP v. American Stevedoring, Inc. (citing cases).

In sum, in order to obtain a default judgment against an defaulting defendant, the moving party must submit sufficient proof to establish a viable cause of action.   Affirmative defenses, even if otherwise available to a defaulting defendant, should not stand in the way of entry of judgment.  However, on a later motion to vacate, those affirmative defenses can be used to re-open the case, assuming that an excuse for the default has been established.

In a legal malpractice claim brought by Plaintiff, an Australian investment bank against Morrison & Foester, claiming that the law firm did not conduct due diligence in uncovering material misrepresentations pertaining to Plaintiff’s underwriting of a public stock offering of Puda Coal, Inc., Justice Scarpulla, in the New York County Supreme Court (Index No.: 650988/15) dismissed the suit. Notably, the Supreme Court held that the Plaintiff in Macquarie Capital (USA) Inc. v. Morrison & Foerster LLP was in possession of the information at issue as it had an investigative report, prepared by a private international investigation firm that gave Plaintiff notice of the material misrepresentations. The report produced by the private firm disclosed information regarding the public offering, which contradicted public representations and reports. Upon receipt of the report, Plaintiff forwarded the report to Defendant, neither of which picked up on the misrepresentations in the report that Puda did not own a 90% interest in Shanxi Coal. Instead, the law firm issued an opinion confirming its due diligence and advising Plaintiff that nothing came to its attention that would lead to the conclusion that the offering documents contain false or misleading information. However, the Supreme Court, nevertheless, held that Plaintiff could not claim that the law firm’s representations caused damage to Plaintiff.

However, the Appellate Division, First Department unanimously reversed Justice Scarpulla’s decision and determined that Plaintiff sufficiently demonstrated the “but for” causation element necessary for its legal malpractice claim in defeating Defendant’s pre-answer motion to dismiss. Specifically, the Court held that Plaintiff demonstrated that but for the law firm’s negligence, Plaintiff would have abstained from its involvement in the public offering, thus preventing Plaintiff from acquiring fees, expenses, and other damages.

Further, the Court concluded that the law firm’s argument that Plaintiff possessed the information in an investigative report is unavailing because the information contained in the report cannot be described as explicitly putting Plaintiff on notice and not requiring counsel’s interpretation of the information. Contrarily, in Ableco Fin. LLC v. Hilson, 109 A.D.3d 438 (1st Dep’t 2013), lv denied 22 N.Y.3d 864 (2014) this Court granted defendant’s motion for summary judgment dismissing the legal malpractice claim on the basis that plaintiff indisputably possessed certain information prior to the closing and was aware that it would not receive first priority lien on the inventory and, as such, counsel’s legal interpretation was not required.

 Takeaway: In Macquarie Capital (USA) Inc, the law firm was specifically hired to conduct due diligence and investigate the company’s offering. Ultimately, the Court held that the law firm should not be able to shift legal responsibility it was hired to perform to the client. A law firm cannot release itself from liability by arguing that because its client possessed certain information, that the law firm need not conduct the due diligence it was retained to do in the first instance.

In a thorough opinion last week by Justice Marcy Friedman in Bank of N.Y. Mellon v WMC Mtge., LLC, the New York County Supreme Court upheld the timeliness of “Failure to Notify” claims arising from subprime mortgage-backed securities formed into a trust in 2007. To put it mildly, the mortgages were problematic (go see The Big Short if you have not already done so). The primary issue the court examined was the accrual date of causes of action asserting that the securitizer (Morgan Stanley) had breached its contractual duty to notify the Trustee of any breaches of representations and warranties that it discovered after closing. (Separate causes of action directly asserting breaches of the representations and warranties were previously dismissed as time-barred.)

Did these “Failure to Notify” claims accrue upon the closing of the securitization? Or did the claims accrue when Morgan Stanley discovered the breaches?

The issue was complicated by the Court of Appeals’ landmark decision in ACE Securities Corp. v. DB Structured Products Inc., 25 N.Y.3d 581 (2015), which held that a plaintiff cannot avoid the statute of limitations on a claim for breach of representations and warranties by pleading a separate claim based on the defendant’s failure to repurchase materially breaching loans. The Court in ACE reasoned that the repurchase provision in the parties’ contract was more akin to a remedy for the breach of representations and warranties, rather than a separate and continuing obligation. In addition, the Court in ACE was concerned by the prospect of “accrual dates that cannot be ascertained with any degree of certainty,” especially cumbersome in mortgage-backed securities cases involving representations and warranties relating to thousands of loans per securitization.

Justice Friedman also gave pause to consider New York’s policy against applying the “discovery rule” to statutes of limitations in contract actions. For example, in Deutsche Bank National Trust Co. v. Flagstar Capital Markets Corp., 143 A.D.3d 15 (1st Dept 2016), the First Department held an accrual clause in the governing agreement unenforceable as against public policy, where the clause purported to delay the accrual of claims until three conditions were satisfied: (i) discovery of a breach, (ii) failure to cure or repurchase, and (iii) demand upon the defendant for compliance with the agreement. The First Department held that such a clause “creates an imprecisely ascertainable accrual date—possibly occurring decades in the future, since some of the loans extend for 30 years.”

The court found these policy arguments “compelling,” but ultimately held that it could not impose the same accrual date as the underlying breach of warranty claims, because in Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc., 133 A.D.3d 96 (1st Dep’t 2015), Morgan Stanley Mortg. Loan Trust 2006-13ARX v. Morgan Stanley Mortg. Capital Holdings LLC, 143 A.D.3d 1 (1st Dep’t 2016), and Bank of NY Mellon v. WMC Mtge., LLC, 151 A.D.3d 72 (1st Dept 2017), the First Department held that a “duty to notify” accrued independent of the securitizers’ obligations with respect to representations and warranties and therefore gave rise to a separate cause of action for damages. Unlike in ACE, this duty to notify could not be characterized as a remedy for the breach, because it was entirely an obligation of the securitizer and did not depend on any prior action by the trustee.

The court limited its holding to only allow “Failure to Notify” claims involving breaches first discovered by Morgan Stanley within the six-year statute of limitations. In other words, Morgan Stanley had no “continuing obligation” to notify past the date of first discovery that would otherwise extend the statute of limitations indefinitely. Nonetheless, the possibility of revising otherwise time-barred claims makes it worthwhile for parties asserting claims based on breaches of representations and warranties in a securitization to carefully read the agreements to evaluate an independent duty to notify post closing.

That was the issue presented to the Appellate Division, First Department in Electron Trading, LLC v. Morgan Stanley & Co. LLC, which was an appeal from the grant of defendant’s motion to dismiss a contractual claim seeking damages above the amount allowable under the contract’s limitation of liability clause.   Justice Saliann Scarpulla granted defendant’s motion to dismiss that portion of the breach of contract claim, notwithstanding plaintiff’s allegations in the complaint that the defendant engaged in wrongdoing and, as such,  could not avail itself of the limitation of liability clause.  Her decision and order was affirmed by the First Department.

The case involved a developer of an alternative trading system (“ATS”), designed to be operated through a “dark pool”, that is, a “private exchange where investors can make trades anonymously.”  Plaintiff and defendant entered into an exclusive licensing agreement (“ELA”) and a consulting services agreement (“CSA”).  Although neither agreement refers to “dark pools,” plaintiff later claimed defendant breached the ELA based upon defendant’s insistence that it would perform only if plaintiff modified the agreement to allow defendant’s high-frequency traders to use it with other customers.  Although defendant conceded breach for purposes of the motion to dismiss, the ELA provided a limitation of liability clause, limiting total liability to amounts paid under the agreement.

Generally, “limitation of liability” clauses are routinely enforced, letting the parties to such a clause, “lie on the bed they made”, says the Court of Appeals in Metropolitan Life Ins. Co. v. Noble Lowndes Invtl.  There are circumstances, however, when a court will ignore the limitation clause when, for example, there is misconduct that “smacks of intentional wrongdoing”, or involves “gross negligence” displaying a reckless indifference. Id. 

Because the complaint here did not detail factual allegations as to the misconduct and “[a]t most . . . support[ed] a claim of intentional breach”, the Appellate Division unanimously affirmed.   The court reasoned that the allegations did not meet the heightened standard of pleading for fraud claims under CPLR 3016(b).  An interesting side note is that the case decided defendant’s motion to dismiss the complaint, but in effect decided the viability of a “limitation of liability” clause — something that is ordinarily pleaded as an affirmative defense.  The First Department noted, however, that the courts can consider whether documentary evidence (here the clause contained in the contract at issue) establishes an asserted defense.

When faced with a “limitation of liability” clause, consider whether the breaching party’s conduct amounts to “wrongful conduct” sufficient to vitiate the clause.  However, a heightened pleading standard applies.  The courts appear to abide by parties’ agreed upon limitation clause, unless the conduct rises to a significant level of misconduct.  Courts are unlikely to set aside such limitations lightly.  Remember, a mere “intentional breach” is not enough.

 

 

 

So your client wants you to file a declaratory judgment action, but you are unsure of whether the applicable statute of limitations has expired.  But what is the applicable statute of limitations in a declaratory judgment action?  Since there is no limitations period specifically addressed to the declaratory judgment action, it generally falls under the “catch-all” provision of CPLR 213[1] and gets six years as “an action for which no limitation is specifically prescribed by law.”  That being the case, you assume your declaratory judgment cause of action is timely so long as it is filed within six years of its accrual.  Think again.

Declaratory judgment actions are unique, in that the Court will actually examine the substantive nature of the claims and the relief sought to determine which limitations period applies.  If the Court determines that the underlying dispute could have been resolved through another proceeding for which a specific limitations period is statutorily provided, the Court will apply that limitations period – even if it is much shorter than six years.

The Appellate Division, Second Department recently addressed this point in Save the View Now v Brooklyn Bridge Park Corp., 156 AD3d 928 (2d Dept 2017).

Save the View Now involved a challenge to the development of a hotel, restaurant, and residential units upland of Pier 1 in Brooklyn Bridge Park (the “Park”).  The overall plan and structure for the Park were set forth in a general project plan (“GPP”) first adopted by Defendants Brooklyn Bridge Park Development Corporation (“BBPDC”) and the Empire State Development Corporation (“ESD”) in July 2005.  The general project plan, as modified (“MGPP”), stated that “[t]he residential and hotel uses would be located in two buildings, one of approximately 55 feet and one of approximately 100 feet in height.”

Construction began in July 2013 and, on September 10, 2014, the northern hotel building had already reached its maximum height.  By this time, members of the community began objecting that the height of the northern hotel building violated the MGPP and was obstructing the view of the roadbed of the Brooklyn Bridge from the Brooklyn Promenade.

In April 2015, Plaintiffs, a group comprised of local members of the community, commenced an action against BBPDC and others seeking, among other things, a declaration that the buildings were being constructed in excess of their height limitation in violation of the MGPP.  The Kings County Supreme Court (Knipel, J.) granted Defendants’ motion to dismiss on the ground that the action was untimely.

The Second Department affirmed.  The Court noted that while an action for a declaratory judgment is generally governed by a six-year statute of limitations (see CPLR 213[1]), the applicable statute of limitations in a declaratory judgment action is determined by the substantive nature of the claim.  Thus, “where a declaratory judgment action involves claims that could have been made in another proceeding for which a specific limitation period is provided, the action is subject to the shorter limitations period.”

Because Plaintiffs’ declaratory judgment action could have been brought as an Article 78 proceeding (and indeed should have, since it involved a challenge to governmental conduct), the four-month statute of limitations governing Article 78 proceedings – rather than the six-year statute of limitations under CPLR 213[1] – applied.

So what’s the takeaway?  The nature of the relief sought in a declaratory judgment action dictates the applicable limitations period.  Thus, prior to relying on the catch-all provision in CPLR 213[1], a careful lawyer should analyze the substance of a complaint to determine if a shorter limitations period may apply.  However, a lawyer may not use a declaratory judgment action as a vehicle to circumvent the statute of limitations that applies to the substance of a complaint.

 

Diamonds are nothing more than chunks of coal that stuck to their jobs,” said Malcom Forbes.  An industry that generates over $13 billion annually, diamonds are considered one of the world’s major natural resources.  Critical to the integrity of the market are reports or certificates that grade the quality of the stones based upon the “four C’s”:  color, cut, clarity and carat.  These reports are issued by one of several grading entities.  One of them, the Gemological Institutes of America, Inc. (“GIA”), is considered to be one of the most well-respected and renowned.

Diamond purchasers and resellers, such as L.Y.E. Diamonds Ltd. (“LYE”) and E.G.S.D. Diamonds Ltd. (“EGSD”), contract with GIA in order for the formers’ diamonds to be analyzed and graded.  On May 15, 2015, GIA published an Alert, advising the diamond industry that it reasonably suspected that nearly 500 diamonds submitted to GIA’s laboratory in Israel might have been subjected to a “temporary treatment” that masks the inherent color of the stone, leading to an improper higher grading level.  In the Alert, which was published on its websites and mass email, LYE and EGSD, were identified.

As a result of the published Alerts, LYE and EGSD claim they were defamed and suffered significant losses.  They sued, filing a complaint for $180 million in compensatory and punitive damages, alleging defamation and trade libel.  At issue on the defendants’ motion to dismiss was whether GIA was entitled to qualified immunity, negating any presumption of implied malice.  Qualified immunity may exist when a statement is made by a person in the discharge of a duty — either private or public — in which another person relies as both have a common interest.

In ruling on the motion to dismiss in L.Y.E. Diamonds Ltd. v. Gemological Inst. of Am., Inc., at the outset, Justice Barry Ostrager rejected plaintiffs’ procedural argument that “qualified immunity” is an affirmative defense that could not be raised in a pre-answer motion.  Rather, the court relied on a series of First Department cases holding that a question of privilege could be determined at the pleading stage.  Turning to the merits of the application of the privilege, the court recognized that the Alerts served a “public function by warning interested parties of potentially treated diamonds, pursuant to GIA’s agreement with plaintiffs.”  Applying the privilege, the burden then shifted to plaintiffs to demonstrate that malice existed which would negate the privilege.   The court granted dismissal of the complaint, finding that the plaintiffs did not allege more than conclusory allegations of malice, with little or no detail that would support an inference that the statements were made out of spite or ill will.

Where allegations of actual malice are required to support a defamation claim, the courts appear to consistently uphold a heightened pleading standard, see, e.g., Themed Rests., Inc. v. Zagat Survey, LLC.  Remember, CPLR 3016(a) requires specificity when it comes to pleading defamation claims.  Thus, it behooves the drafter to allege facts surrounding the time, place, manner of publication, and the context of the statements made.