In the opening scene of the 2008 “stoner action comedy” Pineapple Express, as Eddy Grant’s “Electric Avenue” pumps out of the car’s stereo speakers, the film’s protagonist, Dale Denton (Seth Rogen), in various disguises serves subpoenas on unsuspecting defendants. A real-world outtake from this film recently played out in the New York County Supreme Court, Commercial Division, in Lenox NY LLC v. Goldman.

The defendant, James Goldman, was alleged to have defaulted on personal guarantees for the payment of rent due to the plaintiff landlord under two commercial leases. Plaintiff commenced the action by notice of motion for summary judgment pursuant to CPLR § 3213 and attempted to serve the defendant at the Pleasant Valley, New York address listed on the guarantees.

When the process server arrived at the Pleasant Valley address on September 29, 2017, the defendant did not answer the door. “Bill” did. According to the process server’s affidavit of service, “Bill” refused to provide his last name, but claimed to be a “friend” of the defendant. A short, slender middle-aged man whose hair color is best described as “shaved,” little else is known about Bill Doe.

The defendant filed an affidavit stating that he does “not know who ‘Bill Doe’ refers to, but it is certainly not me, a member of my family, nor any of my friends, nor anyone employed by me.” The defendant was “never contacted by a person named ‘Bill’ about this action.”

Was service proper?

CPLR 308(2) provides for service upon “a person of suitable age and discretion at the actual place of business, dwelling place or usual place of abode of the person to be served,” if followed by a mailing and filing of proof of service. A process server’s affidavit which attests to delivery to “a person of suitable age and discretion” is apparently sufficient to make a prima facie showing of proper service. The burden then shifts to the defendant to submit a “sworn denial of receipt of service” that contains “specific facts to rebut the statements in the process server affidavits.” See Indymac Federal Bank FSB v Quattrochi, 99 AD3d 763 (2d Dept 2012). The matter would then be referred for an evidentiary hearing. Id.

Applying this standard, the court (Sherwood, J.) held that the defendant had failed to rebut the process server’s affidavit of service because the defendant’s affidavit did not contain enough factual detail. In addition, the defendant’s affidavit did not address the process server’s affidavit, but instead focused on whether “Bill Doe” had ever forwarded the service to defendant. The final nail in the coffin was the defendant’s assertion that he was not at home on “August 29, 2017” (a month earlier than the process server’s visit).

Many other defendants have met with similar difficulty in refuting a process server’s affidavit. For example, in Indymac, the agent allegedly served with process swore that she did not recall being served and had no record of being served. However, the disorderly records of the agent’s “Subpoena Case Record” book negated her affidavit and no evidentiary hearing was required. The Second Department also took issue with the defendant’s affidavit in C&H Import & Export, Inc. v. MNA Global, Inc., 79 AD 3d 784, for failing to include an affidavit from the individual allegedly served or a denial that the individual was an agent of the defendant. Therefore, be forewarned—absent facts specifically refuting the process server’s affidavit, such efforts are likely to be futile.

Minolta DSC

Over eighty years after the end of World War II, crimes committed by the Nazis continue to be redressed, including in our very own Commercial Division. The Nazis are well known to have plundered with reckless abandon along the trail of their occupation. Beyond their theft of precious metals and currency, they also stole numerous famous paintings, with Hitler having a particular distaste for modern art, which he deemed “degenerate art.”

The 2014 film, The Monuments Men (starring Matt Damon), tells the story of the efforts of the Monuments, Fine Arts, and Archives program of the Allied armies to protect, and after World War II ended, to recover, cultural monuments, including fine art, plundered by the Nazis. The Monuments Men did not recover every piece of art stolen by the Nazis (the precise scope of their plunder being unknown). But even after their efforts ended, Nazi-looted art works have been returned to their rightful owners, or their heirs, including two in April of this year as a result of a landmark summary judgment decision issued by New York County Commercial Division Justice Charles E. Ramos, applying the Holocaust Expropriated Art Recovery Act.

This week’s post features an even more recent decision of the New York County Commercial Division, in which the court was faced with a motion to dismiss an action brought to recover a very valuable painting by the famous modern Italian, Jewish painter, Amadeo Clemente Modigliani (1884-1920). To set that decision in its proper context, we first need to examine the painting’s history.

The Painting and its History

At issue in Gowen v. Helly Nahmad Gallery, Inc., is the ownership of Modligliani’s “Seated Man with Cane, 1918” (the “Painting”). Oscar Stettiner (“Stettiner”), a Jewish art dealer who lived and worked in Paris during the 1930s, originally owned the Painting as part of his private collection. As the Nazi’s approached France in 1939, Stettiner was forced to flee Paris, leaving behind the Painting.

After being taken by the Nazi’s upon their occupation of France, the Painting was assigned to a Temporary Administrator and eventually auctioned off in July of 1944. Although this and all other forced sales of property by the Nazis were declared null and void in 1946, and despite Stettiner obtaining an order from the French courts in July of 1946 granting the Painting’s return to him, Stettiner and his family were unable to locate the painting prior to his death in 1948. Stettiner’s wife and two children were thereafter unable to locate the Painting despite continued efforts.

In 1996, the Painting finally resurfaced when it was misidentified as being a different painting and as having an owner other than Stettiner, when it sold at a Christie’s London auction for $3.2 million to the defendant, International Art Center, S. A. (“IAC”). In 2008, IAC attempted unsuccessfully to sell the Painting at Soethby’s New York. In 2011, Stettiner’s sole heir, Phillippe Maestracci, sent two lawyer’s letters to the defendants demanding the return of the Painting (the “Demand Letters”). The defendants never responded. The present action, seeking a declaration as to title of the Painting and asserting claims for conversion and replevin of the Painting, was commenced by George Gowen, as the Ancillary Administrator of Stettiner’s estate.

The Motion Before the Court

In a wide-ranging, eleven-part decision, Justice Eileen Bransten denied the defendants’ motion to dismiss on each of the grounds asserted: CPLR §§ 3211 (a) (1), (a) (2), (a) (3), (a) (4), (a) (5), (a) (7), (a) (8), (a) (10), 327, 1001, 1003, 3025, and 306-b.

The Court’s Personal Jurisdiction and Alter Ego Analysis

Though any one of the asserted grounds for dismissal could warrant a post on this blog, of particular interest is the court’s personal jurisdiction analysis regarding defendant David Nahmad (“Nahmad”), the billionaire patriarch of an internationally recognized art-dealing family. Specifically, the plaintiff relied on the difficult-to-establish alter ego theory; namely that Nahmad is the alter ego of IAC. In their motion to dismiss, IAC and Nahmad argued that neither is a resident or domiciliary of New York and that neither has conducted business in New York.

In analyzing the alter ego theory, the court first addressed its personal jurisdiction over IAC, a Panamanian corporation (that found itself in the Panama Papers leaks). The court held two such grounds existed. First, the court held that IAC had transacted business in New York by and through the acts of its agents, defendants Helly Nahmad (the son of David Nahmad, who pleaded guilty in 2013 to operating an illegal gambling ring) and Helly Nahmad Gallery (his famous eponymous New York City art gallery), who allegedly sold art to which IAC holds title. Second, the court held that IAC had committed tortious conduct in New York because a cause of action sounding in tort arose under New York law when Maestracci sent the Demand letters (see Solomon R. Guggenheim Foundation v Lubell, 77 NY2d 311, 316-317 [1991]).

The court then held that it acquired personal jurisdiction over Nahmad “by and through his conducting business vis-à-vis Defendant IAC and, in so doing, so perverting the corporate form such that this court cannot determine a substantial difference between the two Defendants.”  That is, the court held that Nahmad was the alter ego of IAC. In support of this holding, the court listed various factual allegations, a number of which were supported by documentary evidence, including:

  • that Nahmad is the principal of IAC;
  • that Nahmad holds all of IAC’s shares of stock;
  • that IAC was formed by a Panamanian law firm that has “garnered a reputation for creating ‘shell companies’”;
  • that Nahmad used IAC to conceal his name, and thus the owner of the Painting, to perpetuate a wrong (this allegation was supported by a New York Times article quoting Nahmad himself as saying “the International Art Center is me personally. . . . it’s David Nahmad”);
  • that IAC fails to adhere to corporate formalities such as keeping regular books and records, fails to generate income, and does not have an independent board of directors; and
  • that IAC is underfunded such that Plaintiff would not be able to recover reasonable costs if successful on its claim.

Take Away 

Aside from the fascinating history involved, this decision is particularly beneficial because it offers a specific list of factual allegations supporting a finding of the alter ego theory, a potentially powerful tool for plaintiffs that courts infrequently apply.

Interesting Side Note: On May 13, 2018, a separate Modigliani, the 1917 painting, “Nu Couché (Sur Le Côté Gauche), sold for $157.2 million with fees, making it the highest auction price ever for a work sold at Sotheby’s.

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.”

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.

ay a stranger to an arbitration agreement compel arbitration against its signatories? According to the Second Department in Degraw Construction Group v McGowan Builders, Inc., 2017 NY Slip Op 05580 (2nd Dept July 12, 2017), the answer is “sometimes”: a plaintiff cannot avoid arbitration with a company by substituting the company’s employees as defendants.

Our dispute began in the fair County of Queens, renowned for its spicy food and injury-prone athletes, when Degraw Construction Group, Inc. (“Degraw”) agreed to perform construction work for McGowan Builders, Inc. (“McGowan”). McGowan apparently did not pay what Degraw felt was owed, because Degraw brought suit in Supreme Court, Queens County, notwithstanding that the contract, signed by Degraw and McGowan, contained an arbitration clause covering “all disputes arising thereunder.” Degraw also brought causes of action for conversion, unfair competition, and tortious interference against McGowan and several of McGowan’s employees and officers (the “Individual Defendants”). The Supreme Court (Dufficy, J.) granted McGowan’s motion to compel arbitration. However, the Individual Defendants’ corresponding motion was denied because they were not parties to the Contract and therefore had no right to enforce its arbitration provisions.

The Second Department reversed, holding that the individual defendants, although not signatories to the agreement, had the right to enforce it. The Second Department noted first that because “a corporation can only act through its officers and employees […], any breach of the agreement would necessarily have to occur as a result of some action or inaction attributable to an officer or employee of [McGowan].”

This principle girded the Court of Appeals’ 1996 decision in Hirschfeld Prods. v. Mirvish, (cited in the Second Department’s Degraw decision), in which the president and chairman of a theatrical production company were sued in their individual capacities for their unprofitable 1993 production of Hair at the Old Vic Theatre in London (the Spectator’s review: “this was once a great and classic theatre, and what it is doing housing a shoddy, roadshow-like revival of breathtaking inadequacy remains something of a mystery”). As in Degraw, the officers were not signatories to the company’s arbitration agreement. Nevertheless, the Court of Appeal granted their motion to compel arbitration, noting that “a rule allowing corporate officers and employees to enforce arbitration agreements entered into by their corporation is necessary not only to prevent circumvention of arbitration agreements but also to effectuate the intent of the signatory parties to protect individuals acting on behalf of the principal in furtherance of the agreement.”

The Second Department also cited Highland HC, LLC v. Scott, in which the plaintiff sued an architectural and construction company, as well as individual officers of the defendant company, due to alleged “design flaws” and “substandard work.” The contract contained an arbitration provision, but was unsigned by the company’s officers or employees in their individual capacities. Despite this, the Second Department (citing Hirschfeld) compelled arbitration, affirming the rule that non-signatories to arbitration agreements “are entitled to enforce the arbitration clause to the extent that their alleged misconduct relates to their behavior as agents of the [signatory company].”

An important takeaway from these decisions is the close relation between the individual defendants’ alleged conduct and their employers’ performance under the contracts. In Hirschfeld, the individual defendants, as president and chairman, controlled and supervised the company’s role in the production. And in Highland, the individual defendants were charged with completing the architectural and construction work on the company’s behalf.   Thus, a key element of the rule affording non-signatory agents the benefit of arbitration agreements signed by their principals is that the non-signatory’s conduct must relate to the performance of its principal’s contractual obligations.

In light of the general policy favoring arbitration, the holding in Degraw should come as no surprise. Nonetheless, potential litigants should be aware that a clause providing that “all disputes” arising out of an agreement shall be resolved by arbitration cannot be circumvented simply by naming a counter-party’s employees as individual defendants.

* A special thanks to Farrell Fritz Summer Law Clerk Kyle Gruder for his research and drafting assistance with this post. Kyle is a student at Hofstra University School of Law and anticipates receiving his J.D. in 2018.