The Donald J. Trump Foundation, a private foundation incorporated in 1987, was formed “exclusively for charitable, religious, scientific, literary or educational purposes”,  and as stated in the Certificate of Incorporation, shall not be for propaganda or participating or intervening in “any political campaign.”  The Foundation’s president and founder, is Donald J. Trump.

Donald J. Trump Foundation logo.pngThe Attorney General of the State of New York filed suit against the Foundation, Mr. Trump and the Board members, alleging breaches of fiduciary duty, waste, wrongful party transactions and dissolution of the Foundation.  The basis?  The petition claims that the Foundation and Board members engaged in illegal and abusive transactions over the years, violated corporate and statutory rules for fiduciaries, and misuse of charitable assets including self-dealing.  Significantly, the petition alleges that Mr. Trump used donated money to purchase personal items, advance his presidential election campaign and settle certain legal obligations.  The petition attaches many emails, photos, contribution lists and other supporting documentation.

Respondents moved to dismiss the petition in its entirety, alleging a variety of defenses, ranging from lack of jurisdiction under the Supremacy Clause of the U.S. Constitution, statute of limitations,  and failure to state a claim.  Justice Saliann Scarpulla, in a well-reasoned decision, denied the motion to dismiss all of the claims, except for the sixth cause of action seeking injunctive relief.  As to that claim, the court held that the injunctive relief sought was moot in light of the Respondent’s attempt to voluntarily dissolve the Foundation.

A key ruling was on statute of limitations, specifically, Respondents argued that the transactions at issue occurred more than six years ago.  They also argued that inquiry into any of the transactions occurring more than three years before the petition was filed is barred since the relief sought for those was primarily monetary.  Noting that movant on a motion to dismiss bears the initial burden of establishing untimeliness,  that burden then shifts to plaintiff to establish timeliness or an applicable tolling.  Here, Justice Scarpulla found that since the claims arose out of a fiduciary relationship, the limitations period is tolled until the fiduciary “opening repudiated his or her obligation or the relationship has been otherwise terminated.”   The court also applied the “continuing wrong doctrine“, noting that it applies in many types of cases, namely, breach of contract, breach of fiduciary duty and statutory violations.  The petition itself alleges continuing, pervasive failure to manage and operate in accordance with applicable rules and law.  That, coupled with the mixed relief sought — injunctive and monetary — led the court to apply the six-year statute of limitations, finding that the conduct at issue was not barred “as a matter of law” at this threshold stage of the case.

When wrongs occur over a substantial period of time — like those alleged here — a detailed pleading, demonstrating the continuity, relatedness and pervasiveness is essential to survive dismissal.  The petition here lays out in detailed fashion a continuous timeline.  Such careful pleading makes it very difficult for a defendant to overcome the “continuing wrong” doctrine.  It remains to be seen, however, after discovery and a likely motion for summary judgment, whether the alleged acts of misconduct are indeed “continuous”  and sufficient to overcome the statute of limitations defense.  The court here made it clear in denying the dismissal motion based on statute of limitations that the Respondents could not demonstrate untimeliness “at this pre-answer stage of the proceedings.”  Stay tuned for future developments!

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Although we generally report on recent Commercial Division decisions, and sometimes commercial cases coming out of the Appellate Divisions, this time we go all the way to the top:  the Court of Appeals.  Not often do we see commercial cases with a procedural twist coming out of our High Court (of NY).  However, last week, the Court rendered a decision in Deutsche Bank Nat’l Bank Trust Co. v. Flagstar Capital Mkts, addressing a thorny statute of limitations issue in a breach of representations and warranties claim arising out of a residential mortgage-backed securities contract.  Even more interesting is that the decision was only a 4-2 vote, drawing two separate dissents from Judges Rivera and Wilson.  Judge Garcia took no part.

The case arose out of a series of mortgage loans originated by defendant Quicken Loans, Inc. that were initially sold to Morgan Stanley Mortgage Capital, Inc. and eventually sold to a trust for the purpose of issuing residential mortgage-backed securities. The document at issue, the Second Amended and Restated Mortgage Loan Purchase and Warranties Agreement (“MLPWA”), contained two provisions at issue. The first, the “Sole Remedy” provision, stated that the purchaser’s only remedy was seller’s obligation to sure or repurchase the nonconforming loan. The second, the so-called “accrual clause” provided that “[a]ny cause of action against the Seller . . . shall accrue . . . upon (i) discovery of such breach . . . (ii) failure by the Seller to cure such breach . . . and (iii) demand upon the Seller by the Purchaser for compliance.”

Against this backdrop, seven years after the loans were originated, plaintiff claimed breach. Defendants immediately moved to dismiss on statute of limitations grounds, relying on the Court of Appeals’ decision in ACE Sec. Corp. v. DB Structural Prods., Inc., which held that a cause of action for breach of representations and warranties accrues when the contract was executed.

The case was dismissed at the trial court level, on the statute of limitations defense. Affirmed by the Appellate Division, First Judicial Department (143 AD2d 15), the Court of Appeals granted leave to consider whether the statute of limitations could be extended beyond the Court’s decision in ACE.

In a split decision, the Court held that the “accrual clause” did not create a substantive condition precedent. In addition, the Court held that the accrual period could not be used to extend the statute of limitations. Rather, the Court distinguished NY General Obligations Law 17-103, which allows parties to extend a statute of limitation after the cause of action accrues. In rejecting plaintiff’s claims of “freedom of contract” the Court held that “[w]hen the public policy favoring freedom to contract and the public policy prohibiting extensions of the limitations period before accrual of the cause of action come into conflict, however, the latter must prevail.”

The dissents were strong. Judge Rivera, criticizing the majority for “misconstru[ing] decisional law” by departing from “our longstanding recognition of the freedom to contract,” found no statute or public policy to be a bar to the enforcement of the accrual. Judge Wilson, agreeing with Judge Rivera’s dissent, in even stronger language concludes the Court “created bad law” and “fundamentally misinterpreted the structure of RMBS agreements.”

The takeaway? Not sure, but at least for now, the drafters of agreements that contain clauses seeking to extend the period within which to assert a claim for breach of a representation and warranty — particularly in the RMBS arena — must take care in ensuring the “accrual” of the claim is not postponed, but rather the period within which to sue is extended.

Can substitution of a new plaintiff who has proper standing cause “surprise or prejudice” to a defendant after the statute of limitations would have expired, such that leave to file an amended complaint should be denied? Not if the two plaintiffs are the same person switching from their individual to representative capacity, held the Second Department on August 15, 2018 in D’Angelo v Kujawski.

Plaintiff, “as proposed Administrator [sic]” of her deceased son’s estate, retained Defendants, comprising a law firm, to commence an action against the U.S. Department of Veterans Affairs (“VA”) based on medical malpractice that allegedly resulted in her son’s wrongful death. According to Plaintiff’s complaint, in 2011 Defendants filed a Notice of Claim with the VA’s Office of Regional Counsel, but the Notice of Claim negligently failed to reference the VA’s administration of contraindicated medications. After Defendants withdrew from the representation on December 20, 2013, Plaintiff commenced an action with new counsel that was ultimately dismissed by the US District Court for the Eastern District of New York for failure to timely exhaust administrative remedies. Specifically, the court found that Plaintiff had possessed “vital information bearing on the existence of her claim” that was wrongfully excluded from the Notice of Claim.

On December 15, 2016, five days before the statute of limitations would have expired, Plaintiff commenced an action for legal malpractice against Defendants. However, Plaintiff mistakenly named herself individually as the plaintiff, instead of as Administratrix of the Estate. Defendants moved to dismiss the complaint for lack of an attorney-client relationship with the individual Plaintiff. In response, Plaintiff cross-moved for leave to file an amended complaint, thus setting the stage for the court to determine the applicability of CPLR §§ 305 and 3025 to a request to substitute plaintiffs, as well as whether Plaintiff’s delay in seeking leave past expiration of the statute of limitations would “prejudice or surprise” Defendants.

Relying on Caffaro v Trayna, a 1974 Court of Appeals decision purportedly allowing substitution of plaintiffs and subsequent interposition of time-barred claims in an amended pleading, Commercial Division Justice James Hudson held that Defendants would suffer no prejudice because the original complaint adequately put Defendants on notice of the nature of the claims and allowed the amendment. However, Justice Hudson did not analyze or discuss whether CPLR §§ 305 and 3025 authorized a party without standing to substitute an otherwise time-barred party. Nor did Caffaro, which substituted the estate’s Executrix for the decedent in the decedent’s pending medical malpractice action.

The Second Department affirmed:

“[A]n amendment which would shift a claim from a party without standing to another party who could have asserted that claim in the first instance is proper since such an amendment, by its nature, does not result in surprise or prejudice to the defendants who had prior knowledge of the claim and an opportunity to prepare a proper defense” (JCD Farms v Juul-Nielsen, 300 AD2d 446, 446 [internal quotation marks omitted]; see United Fairness, Inc. v Town of Woodbury, 113 AD3d 754, 755; Matter of Highland Hall Apts., LLC v New York State Div. of Hous. & Community Renewal, 66 AD3d 678, 682; Plotkin v New York City Tr. Auth., 220 AD2d 653, 654).

The Second Department appeared primarily concerned with protecting Defendants from new allegations or claims, rather than whether the “relation back” doctrine codified in CPLR § 203(f) applied in actions commenced by a party without standing. The Second Department did not address authority from the Court of Appeals and other Departments of the Appellate Division that appeared to hold otherwise, such as Nomura Asset Acceptance Corp. v Nomura Credit and Capital, Inc., 139 AD3d 519 (1st Dept 2016). There, the First Department held that an untimely claim could not relate back to a defective summons issued by a plaintiff without standing, “because no valid action was commenced by the filing of that summons.” The Fourth Department held the same in Truty v Fed. Bakers Supply Corp., 217 AD 2d 951 (4th Dept 1995). Both decisions cited Goldberg v Camp Mikan-Recro, 42 NY2d 1029 [1977], in which the Court of Appeals distinguished Caffaro based on the original plaintiff having standing to commence the action.

Practitioners are thus cautioned that between the First and Fourth Departments, on the one hand, and the Second Department, on the other, there appears to be a split as to whether an untimely amended pleading may “relate back” to an earlier action brought by a plaintiff who lacks standing.

In commercial litigation, it is not at all unusual for courts to be called upon to determine whether an unsigned agreement is binding.  The federal courts have a long line of cases dealing with this very issue, and perhaps the seminal one in this area is the Second Circuit’s decision in Winston v Mediafare Enter. Corp., a case considering whether an unsigned settlement agreement was enforceable.  The court there identified several factors to be considered in determining whether an agreement — in that case, a settlement — is binding:  “(1) whether there has been an express reservation of the right not to be bound in the absence of a writing; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to writing.”

New York courts take a similar approach.  They have long recognized that a binding agreement may be found, even though a contract was not signed, so long as it is not proscribed by New York’s statute of frauds, NY Gen. Obligs. L. 5-701.  In  Brown Bros. Elec. Contrs. v Beam Constr. Corp., for example, the Court of Appeals held that “[i]n determining whether the parties entered into a contractual agreement and what were its terms, it is necessary to look . . . to the objective manifestations of the intent of the parties as gathered by their expressed words and deeds.” See also Flores v. The Lower East Side Service Center, Inc.  Not exactly a recipe suitable for summary judgment.

Recently, in 223 Sam, LLC v. 223 15th Street, LLC, the Appellate Division, Second Department affirmed the trial court’s order denying defendants’ motion for summary judgment seeking to dismiss breach of contract claim.  The case arose out of plaintiff’s claim for breach of contract based upon an unexecuted amendment to an operating agreement.  The amendment added plaintiff as a 50% member of defendants, and also acknowledged plaintiff as a co-manager.  The damages sought reflect the management fees allegedly earned.

Defendants argument, made in the context of a motion for summary judgment was simple:  the amendment was never executed by the parties, and therefore is not binding.

In rejecting defendants’ argument, the court first noted that New York has long recognized the rule that parties will not be bound if  they state their intent not to be bound unless and until the agreement is signed by all.  However, if the parties reach agreement on “all the substantial terms” and nothing material is left for the future, then even if the parties intended to reduce the agreement but did not, this may nevertheless create a binding agreement between them.  Express reservation is the key.  The ultimate question of whether the parties intended to be bound is a question of fact.

In denying defendants’ motion, the court referred to emails exchanged between the parties which simply “failed to eliminate triable issues of fact as to whether the parties had agreed upon the major terms of the agreement and whether the parties began to perform . . . .”

The hard lesson:  be careful in exchanging drafts, revisions and amendments (1) without expressly reserving the right not to be bound unless and until signed by all, and (2) partially performing before the agreement is signed.  Otherwise, once all material terms are agreed upon, you may indeed have a binding agreement.

 

 

 

Ian Pai was an early participant in the Blue Man Group (“BMG”).  Between 1989 and 1991, he met and began collaborating with the founders of BMG, namely, Chris Wink, Phillip Stanton and Matt Goldman.  Pai claims to have made significant contributions to BMG’s creative and musical aspects over the decades-long relationship he had with the group, having ultimately assumed the duties of Music Director and Conductor.   In 2014, Pai’s royalty checks were abruptly cut in half without explanation.  Ultimately, Pai filed a  complaint against BMG and its founders, claiming breach of fiduciary duty, breach of contract, accounting, quantum meruit and unjust enrichment.  Following discovery, defendants moved for summary judgment on all counts.  Justice Barry Ostrager denied the motion in part, but granted summary judgment dismissing the two counts premised upon the existence of a fiduciary duty:  breach of fiduciary duty and accounting.  The remaining claims survived the motion, and trial is now scheduled for April 9, 2018.

Pai concedes that his fiduciary duty and accounting claims are not based upon a “formal” fiduciary relationship, but rather on his decades-old personal relationship with the three founders, and the founders’ alleged representations that they would “take care” of him.   In sum, his fiduciary duty claims were based solely upon the close relationship they developed over the years.  The defendants denied a fiduciary relationship ever existed, but did admit they had a long close-knit relationship with Pai.

So, can a mere close personal relationship create a fiduciary duty?   Maybe!  Indeed, as the Court recognized, citing Kohan v. Nehmadi, a fiduciary relationship can be found to exist between close friends under certain circumstances.   Here, the Court considered that “Pai’s age, lack of financial experience, and trust in the Individual Defendants to look out for him” may very well have given rise to a fiduciary relationship.  However, fatal to Pai’s claims was applicable six-year statute of limitations which barred any claims he may have had in the 1990s.  The Court reasoned that since 2009, Pai has been represented by counsel, negotiating agreements between Pai and BMG, all at arms-length.  The result is that the contract-based claims survive for trial, but the fiduciary relationship-based do not.

The concept of a close personal relationship giving rise to fiduciary duty is not new.    Whether a fiduciary relationship exists is, of course, a very fact-intensive inquiry.  The Court in the Pai case recognized this and, in the end, did not have to decide whether the early relationship in fact gave rise to a fiduciary one since it was time barred.  A good overview of this very issue — how New York courts determine the existence of a fiduciary duty — is found in an EDNY case, St. John’s Univ. v. Bolton (Garaufis, J., 2010) (“a fiduciary relationship embraces not only those the law has long adopted . . . but also more informal relationships where it can be readily seen that one party reasonably trusted another”).  The starting point (and maybe the ending one too) is whether there is an agreement between the parties governing their rights and obligations.  In the absence of such, a close personal relationship intertwined with a business one can very well create at least issues of fact whether a fiduciary relationship exists between them.