As readers of this blog have come to appreciate, we here at New York Commercial DCheck the Rulesivision Practice tend to report on — among other things Commercial Division — the procedural particularities of litigating commercial matters before the various judges that have been assigned to the Commercial Division over the years.  Such particularities may arise from, say, a new or amended Commercial Division Rule, or from a new or amended Individual Practice or Part Rule.

For example, we repeatedly have reported on the particularities of the individual-practice rules of Manhattan Commercial Division Justice Eileen Bransten, who, along with her colleague Justice Charles E. Ramos (also no stranger to this blog), will be retiring this month and will be succeeded next year by incoming Justices Joel M. Cohen and Andrew S. Borrok.  In case you missed it, the New York Law Journal announced the appointments of Justices Cohen and Borrok to the Commercial Division just before Thanksgiving.

Speaking of procedural particularities and new Commercial Division judges, perhaps most particular of all are the Practices for Part 54 overseen by New York County’s most recent addition to the Commercial Division, Justice Jennifer G. Schecter, who was appointed in April 2018 and took over the docket of recently-retired Manhattan Commercial Division Justice Shirley Werner Kornreich.

Justice Schecter’s Part Rules are numerous and specific — 58 if you’re counting (not including subparts) — and cover everything from file to trial.  Her rules seemingly anticipate anything that can arise during the course of a complex commercial litigation in a way that only someone who spent more than a decade as Principal Law Secretary to former Chief Judge Judith Kaye of the New York Court of Appeals and the aforementioned Justice Bransten can appreciate.

To be sure, there is much to consider in Justice Schecter’s rules, but here are 10 or so important reminders for practitioners litigating in her Part:

Rule 21 Don’t ask your assistant or paralegal to call the court to confirm scheduling, etc.  “The court will only take calls from the parties’ attorneys of record.”

Rule 27 — Don’t dump documents on your adversary after hours.  “[W]hen a discovery deadline is set forth in a court order, that deadline is 5:00 pm, New York time.”

Rule 31 — Don’t withhold documents on the basis of privilege without serving a privilege log along with your production.  “Failure to serve a privilege log with the party’s production will, absent good cause, be deemed a waiver of the party’s objection on the ground of privilege.”

Rule 33 — Don’t send a colleague to a status conference without full knowledge of the case.  “Attorneys appearing for conferences must be fully familiar with the case [and] should be prepared to discuss the merits of their case at all conferences.”

Rule 34 — Bring everything with you to compliance conferences if you want the court to rule on a discovery dispute.  “Any party that wants to resolve a dispute about the sufficiency of a discovery response during a conference shall bring whatever will be needed to obtain a ruling, including copies of the disputed demands and responses.”

Rule 39 — Adhere to new Commercial Division Rule 17 concerning word limits and swear to it.  “Every brief, memorandum, affirmation, and affidavit shall include . . . a certification by the counsel who has filed the document describing the number of words in the document.”

Rules 40-41 — Don’t file an attorney “brief-irmation” or a party “brief-adavit” in support of a motion.  “Argument must be confined to the brief,” which “must accompany every motion.”

Rules 45 and 52 — Include complete copies of all contracts filed as exhibits to your motion papers.  “Excerpts of contracts may not be filed.”

Rule 54 — Agree with your adversary on a joint Rule 19-a statement of material facts or don’t bother.  “If the parties cannot agree on a joint statement, a Rule 19-a statement of facts is not permitted.”

Rule 55 — Obtain and file your oral-argument transcripts if you want a decision on your motion.  “Motions will not be marked fully submitted and the court will not issue a decision until the transcript is e-filed and the Part Clerk receives a hard copy of the transcript with the e-filing confirmation receipt.”

Be sure to check in early next year for future posts on the individual practices of incoming Manhattan Commercial Division Justices Cohen and Borrok.  In the meantime, a happy holiday season to all our readers!

Want more tips on New York practice and procedure? Subscribe to the New York Commercial Division Practice blog and receive an email notification when a new post is published.

 

 

Perhaps it’s because I’ll be speaking on the topic later this week, or perhaps it’s because of a recent post on another one of our blogs, but shareholder rights of inspection have been on the mind of late.Shareholder inspection rights

While researching 2018 New York cases addressing inspection rights, particularly in the Commercial Division, I came across a Second Department decision from over the summer, which modified a post-trial judgment from Queens County Commercial Division Justice Marguerite A. Grays by ruling in favor of the individual defendant on his counterclaim for an accounting and directing the corporate plaintiff to permit an inspection of its books and records.

In World Ambulette Transp., Inc. v Lee, a corporate ambulance service sought to recover damages from a former driver/dispatcher who was terminated after allegedly charging the company’s debit card for various personal expenses. The defendant counterclaimed for breach of contract and an accounting, claiming not only that he was wrongfully discharged as an employee, but that he was denied certain rights as a minority owner under a shareholder’s agreement, including the right to continued employment, salary, dividends, and other company profits.

At trial, the parties offered conflicting testimony concerning the business arrangement between them, with the defendant claiming that he was a full-blown 49% owner in the company, and the plaintiff claiming that he was merely an employee entitled to 49% of the company’s profits.  Confident in its founder’s testimony in this regard, the plaintiff moved under CPLR 4401 for judgment during trial effectively to dismiss the defendant’s counterclaims, including his claim for an accounting — which, by its very nature, was contingent on the existence of a fiduciary relationship between the parties.  After all, if the defendant never was a shareholder and the requisite fiduciary relationship wasn’t there in the first place, how could he maintain a claim for an accounting against the plaintiff?

The trial court concurred, crediting the founder’s testimony and other “extrinsic evidence” relating to “the parties’ intent,” and found that the parties had “entered into nothing more than a profit sharing agreement,” which warranted dismissal of the defendant’s counterclaims.

The Second Department disagreed, in part anyway, finding that there was nothing ambiguous about an agreement, which on its face was denominated a “shareholder’s agreement,” and which contained a “Warranties” section designating a specific 51/49 percentage ownership of “Class A shares” among the parties.  There simply was no need to consider any extrinsic evidence concerning the parties’ intent when that intent was expressed unambiguously within the four corners of the agreement itself.

After citing section 624 of the Business Corporation Law (“Books and records; right of inspection”) and stating that “a shareholder has both statutory and common-law rights to inspect the books and records of a corporation if inspection is sought in good faith and for a valid purpose,” the Second Department ruled that the defendant was entitled to an accounting and that he should be permitted to examine the plaintiff’s books but otherwise affirmed the trial court’s findings with respect to the defendant’s unauthorized debit-card charges card and the propriety of his termination.

Pyrrhic victory, you say?  Maybe not.  Sure, the defendant in World Ambulette may not have a right to continued employment, or to a director’s meeting on notice prior to termination, or to any salary, dividends, or future profits from the company in which he is a 49% shareholder, but he still has his rights of inspection.  And given the recent expansion of those rights in New York case law (see, e.g., Retirement Plan for Gen. Empls. of City of N. Miami Beach v McGraw Hill Cos., Inc., 120 AD3d 1052 [1st Dept 2014]) — including the right to “investigate alleged misconduct by management and obtaining information that may aid legitimate litigation . . . even if the inspection ultimately establishes that the board engaged in no wrongdoing” — the defendant may eventually have his day in court after all.

** Nota Bene ** — As noted above, the topic of shareholder inspection rights (among others) will be the subject of a panel discussion at the Westchester County Bar Association this coming Thursday, November 1, 2018, at 6 p.m. at the WCBA Headquarters, 4 Westchester Park Drive, Suite 155, in White Plains.  The 1.5 credit CLE program will address the utility of the books-and-records proceeding in disputes among business owners in partnerships, corporations, and LLCs, and the ways in which such disputes might be avoided by having proper formation documents prepared and in place from the beginning.  The three-person panel will be addressing these topics from the perspective of a litigator, a forensic accountant, and a corporate attorney.  Registration and networking at 5:30 p.m.  Hope to see you there!

Want more tips on New York practice and procedure? Subscribe to the New York Commercial Division Practice blog and receive an email notification when a new post is published.

 

A general release: the end of a litigation or relinquishment of a right? Every attorney and litigant often breathes a sigh of relief when a litigation comes to a conclusion. But is that always the case? Not when the release covers more than may have been intended.

In a recent decision by Commercial Division Justice Andrea Masley, the Court held that a general form release, which settled a dispute involving one piece of artwork within an allegedly stolen collection of several other pieces of artwork, barred Plaintiff from bringing a subsequent action to recover any other pieces within the collection.

In Frenk v. Solomon, Paul Westheim (“Westheim”), a famous Jewish art critic who specialized in German expressionist art, fled Nazi Germany in 1933 and entrusted his art collection with an art dealer in Berlin, Ms. Weidler (“Weidler”). Westheim later married Ms. Westheim-Frenk. After World War II, Weidler claimed that the art collection was destroyed in the war, but Plaintiff (Westheim-Frenk’s daughter) alleged that Weidler stole Westheim’s art collection and sold it in separate pieces.

In 1973, late Westheim’s wife (“Westheim-Frenk”) commenced an action against Weidler, because Weidler sold a paining from Westheim’s art collection (the “First Action”). That matter settled before discovery and was “discontinued ‘with prejudice.’” Westheim-Frenk, represented by New York counsel, executed a blanket release (the “Release”), discharging Weidler, her “heirs, executors, administrators, successors and assigns” from all claims that Westheim-Frenk “ever had, now have, or which [Ms. Wetheim-Frenk] or [her] heirs, executors, or administrators, hereafter can, shall or may have.” In consideration for the Release, Plaintiff’s mother received $7,500.00, which is equivalent to about $40,000.00 today.

In or about January of 2013, Plaintiff initiated the instant action against the executors of Weidler’s estate and her heirs, seeking to recover the valuable artwork from Westheim’s art collection, as well as damages and a judgment declaring that she was entitled to the artwork.

Following discovery, the defendants moved for summary judgment alleging that the Release and stipulation discontinuing the First Action barred Plaintiff’s claim under the doctrine of res judicata; and nothing in the broad Release was “intended to be narrowly applied to any one painting, but rather, to the entire collection.” The terms of the broad Release bar Plaintiff from bringing an action against Weidler, or her “heirs, executors, administrators, successors and assigns.” Because the defendants demonstrated the prima facie defense of release, the burden shifted to Plaintiff to evidence material issues of fact to defeat summary judgement. See Aoki v. Aoki.

In seeking to limit the broad Release, Plaintiff argues that the subject of the First Action was the artwork, entitled Portrait of Dr. Robert Freund, and, thus, that the Release applied only to that piece. Alternatively, Plaintiff argues that Westheim-Frenk was fraudulently induced by Weidler to execute the Release and, thus, the defendants should be estopped from using the Release. However, the defendants objected to Plaintiff’s use of parol evidence. Justice Masley held that because the Release contained a standardized form, the court “must be flexible in the application of the parol evidence rule.”

Plaintiff also attempted to identify a transaction between Ms. Weidler and Westheim-Frenk in support of her claim that the Release only pertained to the single painting. Plaintiff argued that in 1976, when Weidler attempted to sell another piece from Westheim’s collection, Weidler entered into an agreement to split the sale amount of the artwork—a deal which would clearly not make sense if the Release pertained to all the artwork in Westheim’s collection. On the other hand, the defendants identify a letter from Westheim-Frenk stating that she understood that nothing could be done regarding all future artwork that may turn up. Next, Plaintiff argued that it is inconceivable that the low settlement amount from the First Action ($7,500.00) would have covered all the other valuable artwork. Justice Masley, however, rejected these conclusory arguments, holding that Plaintiff’s “evidence of conduct and intent is inconclusive” in light of the clear and unambiguous language of the Release.

In that regard, the First Department has held that “to hold a release forever hostage to legal afterthoughts basically vitiates the nature of the release.” See Aoki v. Aoki. Although Plaintiff argued that the Release should be set aside because Weidler used fraud to obtain same, Justice Masley held that in order to set aside the Release on the ground of fraud, Plaintiff had to establish that the fraud was separate from the subject of the Release, in addition to all the basic elements of fraud. Plaintiff, however, failed to identify any of Weidler’s misrepresentations at the time the Release was executed. In fact, there was no support for a claim that Westheim-Frenk was defrauded when she signed the release. Interestingly, Justice Masley held that plaintiff’s mother “failed to condition the Release on the truth of the information . . . i.e. that there were no other artworks from Westheim’s collection.” The Court finally also determined that Weidler did not waive the Release and Plaintiff did not present any evidence demonstrating that Weidler “intentionally relinquish[ed] a known right.”

Accordingly, because the Release was clear and unambiguous, the Court granted the defendants’ motion for summary judgment and dismissed the action.

Takeaway: Be especially precautious when drafting a release for a client, making sure not to waive any of their rights. Here, Justice Masley recognized that Plaintiff’s mother was represented by counsel when entering into the general release. This could potentially open you to a malpractice lawsuit.

Want more tips on New York practice and procedure? Subscribe to the New York Commercial Division Practice blog and receive an email notification when a new post is published.

Generally speaking, most people want to avoid becoming entangled in litigation.  But what happens when an action is pending and, although your client is not a party, his or her interests may be adversely affected?  Move to intervene.

Intervention is a procedure whereby an outsider can become a party to a pending action on its own initiative.  Intervention is sometimes available as of right (see CPLR 1012), sometimes only in the court’s discretion (see CPLR 1013), but it must be brought by motion in all instances, accompanied by a proposed pleading setting forth the claim or defense for which intervention is sought (see CPLR 1014).

The Appellate Division, Second Department recently reiterated the principles governing motions for leave to intervene in Roman Catholic Diocese of Brooklyn, N.Y. v Christ the King Regional High Sch, 2018 NY Slip Op 06131.  In that case, the plaintiff agreed to convey title to a parcel of property to the defendant on the condition that the premises would not be used for any purpose other than for the operation of a Catholic high school.  But in 2002, the defendant leased a portion of the premises to a non-party (“Non-Party 1”), which, in 2013, sublet a portion of the premises to another non-party (“Non-Party 2”), who used the leased portion to operate a charter middle school.

The plaintiff sued the defendant seeking, among other things, an injunction prohibiting the defendant from using any portion of the property as a charter school.  After the plaintiff was awarded partial summary judgment, both non-parties (the “Non-Parties”) moved to intervene as defendants in the action.  The Commercial Division in Queens County (Hon. Marguerite A. Grays) denied the Non-Parties’ motions.

The Appellate Division, Second Department reversed, reasoning that the Non-Parties each “have a real and substantial interest in the outcome of the litigation and that, although their respective interests are aligned with those of [the defendant] and with each other, [the defendant] cannot fully represent those interests.”  The Court noted that although neither of the Non-Parties would be bound by a judgment in the action, if the plaintiff prevailed, the defendant would be forced to break its lease with Non-Party 1, which in turn would be forced to break its sublease with Non-Party 2.  The Court concluded that the Non-Parties should have been allowed to intervene under these circumstances.

So, if your client has a dog in someone else’s fight and wants to intervene, under which CPLR provision should you move? CPLR 1012 specifies three narrow grounds for intervention as a matter of right: (1)  where a statute expressly confers such right; (2) where the person seeking to intervene “is or may be bound by the judgment” and where representation of the person’s interest “is or may be inadequate”; and (3) when an action concerns property in which a nonparty has an interest and the nonparty may be adversely affected by the judgment.  By contrast, CPLR 1013 allows for intervention in the court’s discretion (i.e., permissive intervention), thereby providing an additional or alternative ground for intervention based simply on a showing that the intervenor’s claim or defense shares a common question of law or fact with a claim or defense in the pending action.

But, whether intervention is sought as a matter of right under CPLR 1012, or as a matter of discretion under CPLR 1013 is of “little practical significance” because intervention will be permitted where, as in the case above, the intervenor has “a real and substantial interest in the outcome of the proceedings.”

Want more tips on New York practice and procedure? Subscribe to the New York Commercial Division Practice blog and receive an email notification when a new post is published.

Over the past year or so, we have made a point of highlighting in the “Check the Rules” series on this blog periodic updates to the individual practice rules of certain Commercial Division Justices, including Justice Eileen Bransten in New York County (twice, in fact), Justices Marguerite A. Grays and Leonard Livote in Queens County, and Justice Sylvia G. Ash in Kings County.

Continuing with this theme of local-rule vigilance, Commercial Division practitioners should take note some recent changes to the individual practice rules of Manhattan Commercial Division Justice O. Peter Sherwood.

Justice Sherwood’s Practices for Part 49, which were revised as of this month, provide some notable additions (and omissions) from his prior rules, which dated back to May 2014 before most of the Commercial Division Advisory Council’s new-rule proposals and amendments were adopted and implemented.

Be Prepared, Be Authorized. Justice Sherwood opens his practice rules with an express and emphatic reminder to attorneys practicing in his Part of the requirements under Rule 1 of the Commercial Division Rules that “counsel . . . must be fully familiar with the case . . . and fully authorized to enter into agreements, both substantive and procedural, on behalf of their clients.” In other words, appearing in Part 49 is no “cattle-call.” Attorneys should have factual command of their cases, as well as the requisite authority to bind their clients.

Separate and Describe Your Exhibits. Justice Sherwood now requires attorneys practicing in his Part who wish to annex exhibits to their correspondence or motion papers to separately e-file their exhibits and designate them with a “descriptive title.” In other words, a simple designation of “Exhibit A” won’t cut it. Attorneys must provide a description (e.g. “Operating Agreement, dated as of September 20, 2018”) so that adversaries and court personnel viewing the docket or other notice of filing can immediately understand what has been filed.

Get Advance Permission to Adjourn Appearances. Justice Sherwood now requires that requests for adjournment be submitted a full two business days in advance of the scheduled appearance. Justice Sherwood conferences his cases on Tuesdays, so that means attorneys must get their requests for adjournment in by no later than Thursday of the prior week.

Check Your E-Mail. Justice Sherwood’s new rules provide that the court may choose to communicate with counsel via e-mail “regarding scheduling matters or to make certain inquiries.” Note, however, that this line of communication only goes one way. It does not mean that attorneys practicing in Part 49 may “initiate communication with the court via email” or “use e-mail to make arguments.”

Complete Party Discovery Before Bothering Non-Parties. Justice Sherwood “strongly encourages” attorneys practicing in his Part to “attempt to confine their requests to parties to the action and resort to third-party disclosure only when it reasonably appears that the information being sought is otherwise unavailable.” Justice Sherwood also requires that all non-party subpoenas be “simultaneously served” on all parties, and that all documents and information produced in response be exchanged among all parties within five days of receipt.

Follow Instructions When Seeking to File Under Seal. Justice Sherwood’s updated practice rules provide specific instructions concerning the filing of documents under seal:

  • Applications to file under seal must be made by Order to Show Cause, which must be preceded by a meet-and-confer regarding the documents proposed for seal.
  • Motions will be considered in light of the limitations imposed under applicable case law, and the movant must propose redactions “as opposed to wholesale sealing.”
  • Any document proposed for seal must be filed in its original, un-redacted form as an exhibit, with the proposed redacted version filed “as a subset of that exhibit.”
  • All motions must be accompanied by a joint index of the documents proposed for seal, including the basis for sealing and any objection thereto.

Finally, as for notable omissions, Justice Sherwood appears to have dispensed with his former requirement – which, as far as I’m aware, was entirely unique to his Part – that  motion submissions also be provided to the court “in .rtf format on a computer disk.”

**Nota Bene** – Attention Kings County Commercial Division practitioners: How much is your case worth? The general practice rules for the Kings County Commercial Division also were updated this month to double the monetary threshold from $75,000 to $150,000.

Find this information helpful? Subscribe to New York Commercial Division Practice for rule changes and other Commercial Division practice tips by clicking “Subscribe” on the upper right-hand side of this page.

Your client wants to recover damages for breach of contract and demands that you assert as many causes of action as possible.  In addition to the breach cause of action, you consider a declaratory judgment claim, right?  Wrong!   The Second Department has held time and time again that “[a] cause of action for a declaratory judgment is unnecessary and inappropriate when the plaintiff has an adequate, alternative remedy in another form of action, such as breach of contract” (see BGW v. Mount Kisco; Stuckey v Lutheran Care Found. Network, Inc.; and Alizio v Feldman).

Recently, the Second Department in Tiffany Tower Condominium, LLC, et al. v Insurance Company of the Greater New York reaffirmed this principle. There, Tiffany Tower Condominium, LLC (“Tiffany Tower”) sustained damage to its condominium during Superstorm Sandy. Insurance Company of the Greater New York (the “insurer”) paid Tiffany Tower’s original claim for the damage sustained to the condominium under Tiffany Tower’s insurance policy but when Tiffany Tower submitted a supplemental claim for the additional losses sustained to the condominium as a result of the storm, the insurer denied coverage. As a result, Tiffany Tower initiated a lawsuit seeking, among other things, to recover damages for breach of contract and for a judgment declaring that coverage for the supplemental claim was improperly denied.  The insurer moved to dismiss Tiffany Tower’s second, third, and fourth causes of action for breach of breach of contract, judgment declaring that coverage was improperly denied, and violation of General Business Law § 349, respectively. Justice Ash denied the insurer’s motion to dismiss these causes of action and the insurer appealed.

In its recent decision, the Second Department held that the Supreme Court erred and should have dismissed Tiffany Tower’s cause of action for a declaratory judgment. The Court held that where plaintiff has an “an adequate, alternative remedy in another form of action,” i.e., the breach of contract claim, the declaratory judgment cause of action is thus “unnecessary and inappropriate.”

Interestingly, the First and Fourth Departments have also dismissed declaratory judgment causes of action where plaintiff had an “adequate, alternative remedy in another form of action, such as breach of contract.”  (see Main Evaluations, Inc. v. State; Apple Records, Inc. v. Capital Records, Inc.) The Third Department, however, has had no similar holdings.

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.

 

The Appellate Division, in a short but direct ruling, reminds the bench and bar that courts cannot simply “search the record” and grant summary judgment on claims or defenses that are not the subject of the motion.  It did so this time in the context of an LLC judicial dissolution action pending in the Commercial Division of Nassau Supreme in Philogene v. Duckett.  This follows another recent decision by the same court two weeks earlier in  Singletary v. Alhalai Rest., Inc., a personal injury action.

The procedural setting in Philogene is somewhat unusual.  Plaintiff and defendant are 50/50 members of Verity Associates, LLC (“Verity”), which publishes cookbooks and recipes, such as America’s Most Wanted Recipes and Tried and True Recipe Secrets, through the internet.  Plaintiff commenced the action in his “individual” capacity, as well as “suing in the right” of Verity.  In his complaint, he asserted various claims, including breaches of fiduciary duty and contract, where he sought injunctive relief, damages and an accounting.  In turn, defendant counterclaimed for judicial dissolution and moved for summary judgment on that claim.  The motion court denied defendant’s motion for dissolution since it found that the stated purpose of the entity was being met and that it was financially feasible to continue Verity.  The court then “searched the record” concluding that “no further adjustment in their interests is necessary” and dismissed the complaint.

So what is the reach of a court’s authority to “search the record” and grant reverse summary judgment?

We’re all familiar with CPLR 3212(b) which empowers a court to “search the record” and award judgment to the non-movant.  In fact, if a court searches the record and concludes the non-movant should win, then the court has both the “power” and “responsibility” to render judgment accordingly, see Merritt Vineyards, Inc. v. Windy Heights Vineyard, Inc.  This authority, however, is not boundless.  The leading case from the Court of Appeals on the scope of this power is Dunham v. Hilco Constr. Co., where Chief Judge Kaye observed that, “[a]part from considerations of simple fairness, allowing a summary judgment motion by any party to bring up for review every claim and defense asserted by every other party would be tantamount to shifting the well-accepted burden of proof on summary judgment motions.”  Some courts have expressed  frustration with this limitation (e.g.,  “Although the Court would like nothing better than to put this case out of its misery, given Dunham . . . the Court will decline defendant’s invitation to search the record.”)  But by now, the law is clear that CPLR 3212(b) permits “searching the record” in the context of summary judgment is only appropriate on issues or claims raised by the motion, and nothing more.

Notwithstanding the narrow authority courts have to “search the record” in the context of a dispositive motion, this should not be confused with a court’s authority to decide non-dispositive motions (such as discovery related) on grounds other than those advanced by the parties in the motion papers, see, e.g., Tirado v. Miller (granting discovery related motion on grounds not argued by the parties).  For a good discussion of this distinction, the First Department’s ruling in Rosenblatt v. St. George Health and Racquetball Assocs., LLC is instructive.

 

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.

 

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.