It works the same way in small businesses as it does in major investment firms: the executives reach agreement on the terms of a deal, then leave the lawyers to paper things accordingly.  But sometimes the papered deal differs from the agreement the parties actually reached, and neither side notices the differences until long after the papers are executed.  Or, one side notices the differences, but—realizing that they like the terms of the papered deal better than the one they had discussed—chooses to remain quiet.

In both cases, the aggrieved party is likely to claim mistake: that the parties’ had “a different understanding than the contract’s plain meaning.”  Chimart Assoc. v. Paul.  “The businesspeople reached deal X, but the lawyers papered deal Y.”  In these circumstances, the party claiming mistake must tread carefully: a claim of mistake easily can implicate privileged communications, resulting in an “at issue” waiver of the attorney-client privilege with respect to the negotiation and drafting of the written agreements.

In Securitized Asset Funding 2011-2, Ltd., v. Canadian Imperial Bank of Commerce, No. 653911/2015 (NY County March 3, 2020), Justice Scarpulla becomes the most recent Commercial Division Justice to consider the scope of the “at issue” waiver as it relates to a party claiming mistake in the terms of a contract.

Bonds, Swaps, and a Tangled Web of Cross-References

The dispute in Securitized Asset Funding centers on a $750 million loan from Cerberus Capital Management (“Cerberus”) to the Canadian Imperial Bank of Commerce (“CIBC”).  Because the deal was designed so that Cerburus would assume some of CIBC’s exposure to the U.S. residential mortgage market, the note was repayable from only two groups of securities: cash assets and “Synthetic Assets” (mostly derivative obligations).  The Synthetic Assets generated three income streams: Synthetic Principal, Synthetic Interest, and Synthetic LIBOR, all of which were carefully defined in the written agreements.

According to CIBC, the parties intended to define a portion of “Synthetic LIBOR” as a function of certain underlying assets, the Altius 4 Bonds, such that CIBC’s Synthetic LIBOR payments to Cerberus would gradually reduce as principal payments on the Altius 4 Bonds were made.  But the written agreements that CIBC drafted do not say that.  Rather, they employ a tangled knot of cross-references and defined terms that ultimately define “Synthetic LIBOR” by reference to the “Relevant Notional Amount” of the Altius 4 Swaps (derivatives of the Altius 4 Bonds).  Under ordinary circumstances, this would have been a workable shortcut to accomplish the CIBC’s intent; generally, the notional amount of a swap decreases as principal payments on the underlying bond are made, so tying Synthetic LIBOR to the notional amount of the swap makes abstract sense.  But here, the defined term, “Relevant Notional Amount” of the Altius 4 Swaps had a key feature: it would “freeze”—stop reducing—upon a physical settlement of the swaps.  As an unintended consequence, then, if the Altius 4 Swaps were physically settled, Synthetic LIBOR would also freeze.  This meant that CIBC would continue to owe Cerberus Synthetic LIBOR payments—in an amount fixed at the freeze date—even after the liquidation of the Altius 4 Swaps.

After physical settlement of the Altius 4 Swaps, Cerberus sued to enforce the deal as written: where the Synthetic LIBOR payment was frozen as of the physical settlement of the swaps and not further reduced in accordance with future principal payments on the bonds.  CIBC maintained that the parties never intended the Synthetic LIBOR to freeze, and “[i]f Cerberus’ new interpretation is accepted by the Court, then the agreements at issue were entered into under mutual mistake as they do reflect the meeting of the minds of the parties.”

CIBC Claims Mistake, Asserts Privilege Over Communications Regarding its “Business Understanding” of the Deal

CIBC argues that its executives reached a business understanding of the deal, but that through a mistake of its attorneys—the drafters of the deal documents—the papered deal was materially different than its “business understanding.”  Specifically, CIBC contends that its business understanding of the deal was that the Synthetic LIBOR was tied to the principal payments on the Altius 4 Bonds, which—unlike the notional amount on the swaps—would not freeze upon physical settlement of the swaps.  CIBC’s in-house attorney, the drafter of the Synthetic LIBOR definition, testified that the reference to notional amount (presumably, insofar as it incorporated the “freeze” provision of the swaps) was a “mistake,” and the parties had in fact intended to define Synthetic LIBOR by reference to the principal on the bonds.

Cerberus sought to explore CIBC’s claimed “business understanding” in discovery.  What about their “business understanding” of the deal did CIBC’s executives convey to its attorney drafters?  Was this “business understanding” ever conveyed to the drafters?  Did the drafters ever explain the terms (and all the cross references) they used to define Synthetic LIBOR?  Did anyone ever discuss the impact of physical settlement of the swaps on Synthetic LIBOR?  To all these questions, Cerberus was met with a claim of attorney-client privilege.

Cerberus Moves to Compel

Cerberus argued that by placing its “understanding” of the contracts that it drafted at issue, CIBC waived privilege over the communications between its executives and attorneys.  In other words, CIBC should not be able to both (i) assert a different understanding than the plain meaning of the written agreements that it prepared and (ii) assert privilege over discussions related to that “understanding.”

CIBC argued that it had not waived privilege because it does not intend to rely on privileged material to prove its defense of mistake.  Rather, CIBC would prove mistake by, inter alia, the course of performance of the parties (Cerberus accepted reduced Synthetic LIBOR for years after physical settlement of the swaps before claiming that the reductions had frozen), testimony from Cerberus’ executives who spotted the mistake before the deal was finalized but chose to remain quiet, and rational economics (too much of a tangent for this blog, but CIBC let a call option lapse—a decision that, had Synthetic LIBOR been frozen, made no economic sense).  CIBC maintained that because it expressly disclaimed its own reliance on any privileged communications to support its claim of mistake, no waiver could be found.

In reply, Cerberus argued that CIBC’s definition of wavier was far too narrow.  Waiver applies not only to circumstances where a party directly implicates privileged communications in its claim or defense, but also where “truth of the parties’ position can only be assessed by examination of a privileged communication.”   Tupi Cambios, S.A. v. Morgenthau.  In plain English, Cerberus argued: how could it possibly dispute CIBC’s contention that its executives’ business understanding differed from the terms CIBC’s lawyers put forth without the communications between the executives and the lawyers?

So, after a Masters-level course in derivative finance (and the peril of defined terms and layered cross-references), the question submitted to Court was straightforward: Can a party asserting mistake as a defense to a breach of contract action avoid waiver of attorney-client privilege by disclaiming its intent to rely on privileged materials?

The Court’s Decision

Justice Scarpulla sided with CIBC: because CIBC did not intend to rely on any privileged communications to establish its defense of mistake, and because Cerberus could not point to any testimony where CIBC had made a limited waiver of such privileged material, the Court denied Cerberus’ motion to compel.  In so doing, the Court rejected Cerberus’ contention that it could not test the veracity of CIBC’s “business understanding” of the agreements without seeing how that business understanding was conveyed (or whether it was ever conveyed at all) to the drafters of the deal documents.  The Court reasoned that because CIBC had not opened the door to privileged communications in its own case, Cerberus could not access those communications.

Practical Considerations

The Securitized Asset Funding decision casts serious doubt on whether there are any circumstances where a Court will find “at issue” waiver even though the party asserting the privilege does not intend to directly rely on the privileged communications in its own claims or defenses.  The decision follows several courts that have suggested (or outright held) that a party’s affirmative reliance on the privileged materials in its own claims or defenses is the sine qua non of an “at issue” waiver.  See Pivotal Payments, Inc. v. Phillips; Deutsche Bank Tr. Co. of Americas v. Tri-Links Inv. Tr.

This line of cases gives parties asserting mistake in a contract an easy roadmap to prevent waiver: avoid affirmative reliance on privileged material—and, if met with a motion to compel, disclaim such affirmative reliance—and the privilege will remain intact.  According to Securitized Asset Funding, this roadmap works even if the party asserting the mistake drafted the documents containing the terms it now denounces.

But also consider the possibility that these cases too narrowly construe the “at issue” waiver.  After all, waiver is a flexible doctrine rooted in fairness.  And it is not difficult to imagine a compelling fairness argument supporting a broader application of the doctrine.  Here, for example, should Cerberus be required to take CIBC at its word regarding the existence of CIBC’s “business understanding,” when there are privileged documents that potentially rebut that claim?  In MBIA Ins. Corp. v. Patriarch Partners VIII, LLC, a similar argument carried the day.  That Court (applying New York Law) found implied waiver even where the party asserting the privilege did not intend to rely on privileged communications in its own case because the parties made factual assertions about their “understanding” of the agreement, which differed from the agreement drafted.

Cerberus plans to appeal the Court’s denial of its motion to compel, so we may soon see some additional guidance from the First Department.  In the meantime, however, litigants should be keenly sensitive to the likelihood that claiming mistake in a breach of contract action invites argument on the complex and inconsistently applied “at issue” waiver.

 

Winning at the blame game is difficult to do.  This holds especially true where the “blame game” is actually a claim for legal malpractice.

In a recent decision, the First Department affirmed Justice Sherwood’s Orders, which granted defendants’ motions to dismiss the complaint against them.  In Binn v. Muchnick, Golieb & Golieb, P.C., plaintiffs filed legal malpractice claims against multiple law firms and their attorneys, alleging that defendants provided plaintiffs with poor advice in connection with numerous business transactions by failing to inform plaintiffs of the necessary information relevant to each transaction and without performing due diligence.

After defendants moved to dismiss the complaint, the lower Court considered the parties’ numerous email communications as documentary evidence.  After reviewing the email communications leading up to the transactions at issue, the Court determined that not only were plaintiffs fully informed as to the nature of each transaction, their conversations actually refuted the factual allegations which formed plaintiffs’ causes of action for legal malpractice.  Furthermore, even if defendants improperly advised plaintiffs, the attorneys’ advice was not a proximate cause of the alleged harm where plaintiffs were unable to demonstrate their own likelihood of success absent the defendants’ advice.  Lastly, one of plaintiffs’ four malpractice claims was barred by NY’s statute of limitations.

The lower Court noted that “a plaintiff alleging legal malpractice must allege ‘that counsel failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession and that ‘but for’ the attorney’s negligence the plaintiff would have prevailed in the matter or would have avoided damages” (Ulico Cas. Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker).  In that respect, a plaintiff’s allegations must show that damages attributable to the attorney’s conduct can be reasonably inferred.  However, even if an attorney improperly advised the plaintiff, if the client is, ultimately, unable to demonstrate its own likelihood of success absent the attorney’s advice, then the attorney’s advice is not the proximate cause of the harm.

Here, plaintiffs’ legal malpractice claims failed because their allegations that defendants failed to advise them as to parts of the transactions were refuted not only by the email communications between the parties but also by the expressly stated terms of the written agreements that plaintiffs executed.  Plaintiffs contentions that their attorneys advised them to execute signature pages separate from the body of the agreements also did not pass muster as the Court noted that ABC Rug & Carpet Cleaning Serv. Inc. v. ABC Rug Cleaners, Inc. plaintiffs were required to read and know what they signed.

Further, plaintiffs’ argument that they relied on their attorney’s advice when they voted in favor of an acquisition which, ultimately, led to the devaluation and dilution of their investment was meritless because plaintiffs could not demonstrate that but for their attorney’s allegedly deficient representation, there would have been a more favorable outcome.  Lastly, plaintiffs could not rely on tolling the statute of limitations based on the continuous representation doctrine where, even though defendants continued to provide plaintiffs with legal advice concerning their business, there was no mutual understanding on the need for further representation on the specific transactions underlying plaintiffs’ malpractice claims.  Thus, the three-year statute of limitations began to run when the malpractice was committed, not when plaintiffs discovered it.

Takeaway:  Counsel should be cognizant of the various nuances and possible repercussions of each transaction and ensure that their clients are properly advised with a record of such advisement, including email chains.  Clients, on the other hand, should be mindful to read and understand what they sign and not rely blindly on their attorney’s assurances.

 

 

 

 

 

 

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Generally speaking, a court does not have the discretion to extend a statute of limitations.  A court can, however, consistent with its inherent equitable powers, preclude a defendant from asserting a statute of limitations defense where the defendant’s own intentional misconduct prevented the plaintiff from timely filing suit.  This equitable doctrine, known as equitable estoppel – or, “equitable tolling” – is consistent with the principle that a wrongdoer should not be able to benefit from his own wrong, and is often raised by a plaintiff in response to a statute of limitations defense.  But, as recently illustrated by the Suffolk County Commercial Division in Shoreham Hills, LLC v Sagaponack Dream House, LLC (2020 NY Slip Op 50326[U] [Sup Ct, Suffolk County Mar. 4, 2020]),  its application is rare, and “estopping” a defendant from asserting a statute of limitations defense where it is otherwise appropriate is no simple feat.

In Shoreham Hills, the plaintiffs, Shoreham Hills, LLC (“Shoreham”) and Clinton Heights I, LLC (“Clinton”) (together, “Plaintiffs”), and the defendants, MP Sagaponack, LLC (“MP”) and DH Sagaponack, LLC (“DH”), formed the defendant Sagaponack Dream House, LLC (“SDH”) (collectively, “Defendants”) to purchase and develop 30 parcels of land located in Sagaponack, New York.  The parties’ membership interests were 40% each to MP and DH and 20% collectively to Shoreham and Clinton.  SDH’s operating agreement, which designated MP as the administrative member, required MP to make cash distributions to the members within 30 business days following the sale, disposition or refinance of any of the 30 parcels.

In 2008, SDH sold one of the parcels for $3.55 million and distributed $2 million from the proceeds of the sale to its members in proportion to each member’s percentage stake.  In July 2019, however, Plaintiffs commenced an action against Defendants, claiming that they never received their 20% distribution from the proceeds of the sale, and that they had no knowledge of the distribution until 2018, nearly ten years later.  Defendants moved to dismiss the complaint as, among other things, time-barred.  In response, Plaintiffs argued that the doctrine of equitable estoppel applied to toll the statute of limitations because Defendants allegedly concealed the 2008 distribution from them.

The Suffolk County Commercial Division (Emerson, J.) rejected Plaintiffs’ equitable estoppel argument and concluded that the claims were time-barred.   As the Court explained,

“To benefit from the equitable tolling doctrine under New York law, a plaintiff must establish that subsequent and specific actions were taken by the defendant, separate from those that provide the factual basis for the underlying cause of action, and that those subsequent actions by the defendant somehow kept the plaintiff from timely bringing suit . . . Moreover, when the alleged concealment consists of nothing but the defendant’s failure to disclose the wrong committed, New York courts have held that the defendant is not estopped from pleading the statute of limitations as a defense.”

In other words, equitable tolling is only triggered by some affirmative conduct on the part of the defendant after the initial wrongdoing – the mere failure to disclose the wrongdoing is insufficient.  The Plaintiffs in Shoreham Hills alleged that Defendants knew in 2008 that a distribution had not been made to Plaintiffs, failed to correct the problem, and failed to notify Plaintiffs that the distribution had not been made.  In the Court’s view, these allegations “amount[ed] to nothing more than a failure by the defendants to disclose their wrongdoing,” and did not allege any subsequent and specific conduct on the part of Defendants that prevented Plaintiffs from timely commencing their action.

The importance of the “subsequent and specific” requirement was emphasized by the Court of Appeals in Zumpano v Quinn (6 NY3d 666 [2006]).  In Zumpano, multiple plaintiffs sued several priests, a Monsignor and both the Bishop and the Roman Catholic Diocese of Brooklyn, alleging sexual abuse by the priests while they were children.  Although all of the claims were initiated after the statute of limitations had expired, the plaintiffs argued that the defendants should be equitably estopped from asserting a statute of limitations defense, since the defendants knew about the ongoing abuse and failed to notify or warn plaintiffs about it.

The Court of Appeals rejected this argument, finding that there was no subsequent and specific conduct on the part of the defendants that prevented plaintiffs from timely initiating suit.  Indeed, the plaintiffs knew that they had been abused, the identity of their abusers, and that the abusers were employed by the Diocese.  According to the Court, “[s]ubsequent conduct by the dioceses did not appear in any way to alter plaintiffs’ early awareness of the essential facts and circumstances underlying their causes of action or their ability to timely bring their claims.”  And so, because the plaintiffs could not demonstrate that the defendants’ actions contributed to the delay in bringing their claims, their claims were time-barred.

The Court of Appeals reached a different conclusion in Simcuski v Saeli (44 NY2d 442 [1978]) and General Stencils, Inc. v Chiappa (18 NY2d 125 [1966]), two of New York’s leading cases on equitable estoppel.  In Simcuski, the plaintiff alleged that the defendant negligently severed one of her nerves during an operation, and subsequently concealed his malpractice by falsely assuring the plaintiff that her postoperative pain would disappear if she continued her prescribed regimen of physical therapy.  In response to the defendant’s motion to dismiss based on the statute of limitations, the Court of Appeals applied the doctrine of equitable estoppel, reasoning that the defendant “intentionally concealed the alleged malpractice from plaintiff and falsely assured her of effective treatment, as a result of which plaintiff did not discover the injury” until after the statute of limitations had expired.

Similarly, in General Stencils, Inc., the defendant was plaintiff’s head bookkeeper who stole from her employer and concealed her theft for several years by misrepresenting the state of plaintiff’s finances.  The Court of Appeals held that the defendant was equitably estopped from asserting a statute of limitations defense as a result of her affirmative conduct in concealing the crime, which prevented plaintiff from timely bringing its action.

There are two common factors in Simcuski and General Stencils.  First, in each case, the defendant had control and superior (if not exclusive) knowledge of the facts necessary for the plaintiff to assert a claim.  Second, the defendant, by subsequent, affirmative actions or misrepresentations, concealed these essential facts from the plaintiff.  In Simcuski, the defendant’s false assurances regarding curative treatment precluded the plaintiff from earlier discovery of the defendant’s malpractice and, consequently, produced the delay in filing suit.  Similarly, in General Stencils, the defendant bookkeeper’s subsequent manipulation of the books concealed her conversion, thereby preventing the plaintiff from timely commencing an action.

Takeaway:

Equitable estoppel, or “equitable tolling,” may be raised by a plaintiff in opposition to a statute of limitations defense.  But,  for equitable estoppel to apply, there must be some conduct on the part of defendant after the initial wrongdoing:  mere silence or the failure to disclose the wrongdoing is insufficient.  The plaintiff has the burden of showing that subsequent and specific action by the defendant somehow prevented the commencement of the action in a timely manner.

As a result of the COVID-19 (Coronavirus) pandemic, court systems throughout the United States have had to rapidly adapt and issue temporary rules and procedures in order to keep court personnel, litigants and attorneys safe while continuing to serve their important societal function of administration of justice.

We wanted to provide a resource to readily access the various and ever-changing temporary rules and procedures of New York State’s Appellate and Commercial Divisions of the Supreme Court.  We will continue to monitor and post updates and other useful information at a time when policies are changing on a seemingly minute-by-minute basis.

New York State Executive Action

In keeping with Chief Administrative Judge of the Courts, Hon. Lawrence K. Marks, Memorandum of March 15, 2020, which postponed all non-essential court functions effective at 5:00 p.m. on March 16, 2020, Governor Andrew Cuomo signed Executive Order No. 202.8 on March 20, 2020 which, among other things, tolled until April 19, 2020 “any specific time limit for the commencement, filing, or service of any legal action, notice, motion, or other process or proceeding, as prescribed by the procedural laws of the state, including but not limited to . . . the civil practice law and rules, . . . and the uniform court acts, or by any other statute, local law, ordinance, order, rule, or regulation, or part thereof.” For other Executive Orders related to the Coronavirus, click here. Correspondingly, Judge Marks issued Administrative Order 78/20 on March 22, 2020, directing an immediate prohibition to filing any papers in any matter with any county clerk’s office until further notice. This directive applies to both hard copy and electronic filings. However, certain matters deemed essential are permitted and contained on the list annexed as Exhibit A to Administrative Order 78/20.

Additional pertinent Executive actions taken include allowing NY notaries to perform notarial services using video conferencing technology provided certain conditions are met, such as the person seeking the service must transmit a valid photo ID during the video conference, be on the video conference at the time of signing and affirmatively present themselves as being physically situated in NY. See Executive Order No. 202.7.

New York Court System Generally

On March 19, 2020, Judge Marks issued Administrative Order No. 71/20 strongly discouraging litigants engaged in pending civil matters from prosecuting such matters in a manner that would require appearing in-person or travel during this health crisis. See AO 71/20 (1). Additionally, this Order directs litigants (parties and attorneys) affected by COVID-19 to use best efforts to enter agreements to adjourn discovery-related matters for a period not exceeding ninety (90) days. See AO 71/20 (2). If litigants cannot reach an agreement, the court has the ability to review the matter and issue the appropriate order once court returns to normal operation. See id.

In keeping with Judge Marks’ Memorandum and Administrative Orders, most, if not all, courts of New York State implemented temporary policies and procedures (highlighted below) to handle essential court functions virtually.

Now in an effort to ease restrictions placed on non-essential court functions, on April 7, 2020, Judge Marks circulated a new Memorandum offering the Courts preliminary steps to transition non-essential court functions to a remote/virtual court system on an ongoing basis beginning on April 13, 2020, including Judges being available to conduct conferences to aid counsel with discovery disputes via Skype or telephone. Judge Marks then issued Administrative Order dated April 8, 2020 (AO/85/20) providing additional procedures and protocols concerning specific matters trial courts will address such as conferencing pending cases, deciding fully submitted motions, discovery, and video technology. Nevertheless, litigants are still unable to file new non-essential matters until further notice.

Appellate Division

Generally, on March 17, 2020, all the Appellate Divisions of New York’s four (4) Judicial Departments issued emergency Orders. While similar in substance, each Judicial Department’s temporary rules and procedures vary slightly. We urge you to review the particular rules and procedures pertinent to your matter.

First Department

On March 17, 2020, the First Department issued an Order temporarily suspending deadlines, with the exception of matters perfected for May 2020 and June 2020 terms, the Court suspended indefinitely deadlines for all perfection, filing and other deadlines set forth by court order, Parts 1240 and 1250 of the Rules of the Appellate Division, Parts 600 and 603 of the Rules of the Appellate Division First Department, or Part 1245 of the Electronic Filing Rules of the Appellate Division. Additionally, and again, with the exception of all matters perfected for the May 2020 and June 2020 term, the March 17th Order granted all motions or applications for extensions of time to perfect or file that were pending as of March 17, 2020. See Order. Contemporaneous to the March 17th Order, the First Department also issued emergency procedures. See Covid-19 Emergency Procedures as of March 17, 2020.

Second Department

Unlike the First Department’s March 17th Order, the Second Department’s March 17th Order did not place a limitation on when suspensions or extensions would commence and indefinitely suspended deadlines, granted pending motions or applications for extension of time until further order of the Court. All dates for perfecting, filing, motions or applications for extensions, and all other motions were suspended until further directive of the Court.

The Second Department also issued additional Notices regarding:

(i) Limitation of Court Operations – Presently, the Court is processing its calendars through April 2, 2020. But for appeals between March 17, 2020 and April 2, 2020, such appeals will be on submission only unless a request to hear such appeal via Skype is made to Court via email at ad2clerk@nycourts.gov. Also, for emergency applications and motions presently pending considered to be an emergency, you should contact the Court via email to ad2clerk@nycourts.gov indicating that the matter is urgent.

(ii) Hard copy filings at the Court’s Clerk’s Office – Hard copy filings are NOT permitted and e-filing is mandatory until further notice.

(iii) Oral arguments before the Court – Beginning on March 17, 2020, all matters are on submission but the Court will permit oral argument via Skype on request to the Court at ad2clerk@nycourts.gov to make arrangements.

Click here for all other Second Department Notices related to Covid-19.

Third Department

Similar to the Second Department, the Third Department’s March 17, 2020 Order indefinitely suspended deadlines, granted pending motions or applications for extension of time. However, the Third Department’s extension did not apply where a statute confers a deadline.

Beginning on March 17, 2020, the Third Department began only entertaining emergency matters. However, if you deem a matter an emergency, the Court requests that you notify it in writing, on notice to your adversaries, as a request that “the Court treat your matter as urgent” to ad3clerksoffice@nycourts.gov with the subject indicating that the matter is urgent. Also, calendared matters for the March term will be heard on submission and matters for the April term are adjourned to a date in a later term. See Third Department’s Covid-19 Emergency Procedures as of March 17, 2020. Click here for additional Third Department Covid-19 related updates.

Fourth Department

The Fourth Department’s March 17, 2020 Order substantially mirrors the Order issued by the Third Department. The Fourth Department also intends to only entertain matters on an emergency basis with staffing significantly reduced. Matters calendared for the March and April terms are being considered on submission only and matters scheduled for the May term are adjourned to be re-calendared for a later term. Requests for emergency relief should be made by email to ad4-clerk@nycourts.gov. For additional information, contact the Fourth Department Clerk’s office at (585) 530-3100.

Commercial Division

Presently, all of the Justices of the Commercial Division, New York County have issued temporary rules or procedures, including procedures for requesting remote conferences in keeping AO/85/20.

Given the rapid changes, we plan to maintain regular updates to this blog for the foreseeable future. For this reason, each Commercial Division of the New York Supreme Court is listed below. Please check back regularly for updates.

7th Judicial District – Cayuga, Livingston, Monroe, Ontario, Seneca, Steuben, Wayne, and Yates Counties

For essential and emergency court matters, contact court staff directly. Click here for a list of contact numbers and links to additional important information about the 7th Judicial District.

o Hon. J. Scott Odorisi

8th Judicial District – Erie County

o Hon. Deborah Chimes
o Hon. Emilio Colaiacovo
o Hon. Henry J. Nowak
o Hon. Timothy J. Walker

Albany County

o Hon. Richard Platkin

Kings County

o Hon. Lawrence Knipel
o Hon. Larry D. Martin
o Hon. Leon Ruchelsman

Nassau County

Supreme Court, Nassau County has implemented virtual chambers protocols and provided a list of virtual chambers contacts and conference request forms. For additional important information concerning Nassau County Courts operations during COVID-19, click here.

o Hon. Stephen A. Bucaria
o Hon. Vito M. DeStefano
o Hon. Timothy S. Driscoll
o Hon. Jerome Murphy

New York County

o Hon. Andrew Borrok – Requests for conferences in Part 53 may be made via email to sfc-part53@nycourts.gov.

o Hon. Joel M. Cohen – Requests for conferences in Part 3 may be made via email to sfc-part3@nycourts.gov.

o Hon. Marcy Friedman
o Hon. Andrea Masley

o Hon. Barry Ostranger – Requests for conferences in part 61 – sfc-part61@nycourts.gov.

o Hon. Saliann Scarpulla – Requests for conferences in Part 39 may be made via email to part-39@nycourts.gov.

o Hon. Jennifer G. Schecter
o Hon. O. Peter Sherwood

In addition, a party wishing to request a remote conference in all New York County Supreme Court Civil Parts can complete the request form found annexed to the below link and email the completed form to sfcconferencerequest@nycourts.gov. The completed form will be forwarded to the assigned judge. See https://www.nycourts.gov/legacypdfs/courts/1jd/supctmanh/PDF/Remote-Conference-Protocol.pdf for more information.

Onondaga County

o Hon. Deborah H. Karalunas
o Hon. Anthony J. Paris
o Hon. Donald A. Greenwood

Queens County

o Hon. Marguerite A. Grays
o Hon. Leonard Livote
o Hon. Joseph Risi

Suffolk County

o Hon. Jerry Garguilo
o Hon. Elizabeth H. Emerson
o Hon. James Hudson

Westchester County

o Hon. Linda S. Jamieson
o Hon. Gretchen Walsh

For general Coronavirus updates from the New York State Courts, visit https://www.nycourts.gov/ or call the Court’s Coronavirus Hotline at (833) 503-0447.

A life lesson you likely heard growing up applies to contracts: take a hard look at yourself before criticizing others. By the same token, a party who is in material breach of a contract cannot succeed on a claim alleging an anticipatory breach by the other party.

In Rapson Invs. LLC v 45 E. 22nd St. Prop. LLC, Plaintiffs – as Purchasers – entered into multiple Purchase Agreements with the Sponsor – the owner of the property and developer of the Condominium – for the purchase of certain condominium units at a property in New York City. However, Purchasers could not timely close on the sale even by exercising all their adjournment rights. Purchasers notified Sponsor of the fact that they were not prepared to pay the purchase price for the units by email, dated July 25, 2017. Although the Sponsor had the right to terminate the Purchase Agreements, the Sponsor nevertheless agreed to give the Purchasers additional time to close on the condition that they 1) waive all rights to the escrowed down payments, and 2) pay the carrying charges of the units until closing. Although Purchasers agreed, they failed to pay the carrying charges of the units. Notably, the Purchase Agreements contained a 30 day cure period in the event of default.

In response, on September 7, 2017, the Sponsor issued a Notice of Default. However, shortly before the 30 day period to cure had run, Sponsor issued a Notice of Termination. Purchasers then sent the Sponsor a letter advising that the termination was defective because the 30 day cure period had not run. Although the Sponsor did not rescind its termination notice, on October 7, 2017, after the 30 day cure period had run, Sponsor issued a second Notice of Termination.

Purchasers then filed an Amended Complaint alleging that the Sponsor anticipatorily breached the Purchase Agreement by sending the notice of default before the expiration of the 30 day cure period and failing to rescind the first termination notice. Purchasers alleged that they were relieved of all their obligations under the Purchase Agreements and were entitled to a return of the down payments. The Sponsor subsequently moved for summary judgment to dismiss the amended complaint.

In his Decision and Order, Justice Andrew S. Borrok held that Petitioner’s July 25th email advising the Sponsor that they are not prepared to timely close, constituted an anticipatory breach of contract.   The Purchasers were thus in default of the Purchase Agreements. The Commercial Division further noted that Purchasers never escrowed the carrying fees as they were required to do or, otherwise, indicated that they were ready, willing, and able to close before the 30 day cure period had run. Justice Borrok noted that the doctrine of anticipatory repudiation is intended to be a “shield, not a sword,” and that the Purchasers “cannot take advantage of this equitable doctrine to escape the fact that they were not ready to close” once the 30 day cure period had fun.

The First Department affirmed Justice Borrok’s Decision and Order, entered on March 11, 2019, granting the Sponsor’s motion for summary judgment dismissing Purchasers’ complaint and denying the Purchasers’ cross-motion for summary judgment.  The First Department held that

“Given that plaintiffs do not deny that they were in breach of their respective purchase agreements and the amendments thereto when defendant sent out premature notices of termination, plaintiffs’ cause of action for anticipatory breach must fail. By definition, an anticipatory breach cannot be committed where, as here, one party is already in material breach of the contract”

The First Department has held that “anticipatory breach cannot be committed by a party already in material breach of an executory contract” (Kaplan v Madison Park Group Owners, LLC).  In that regard, an anticipatory breach of a contract is one that occurs before performance by the breaching party is due (see id.)  Courts have held that the rationale behind the doctrine is it permits the nonrepudiating party an opportunity to “treat a repudiation as an anticipatory breach without having to futilely tender performance or wait for the other party’s time for performance to arrive” (see id.).  

In sum, when the non-repudiating party is confronted with an anticipatory repudiation, the non-repudiating party has two options. “He may (a) elect to treat the repudiation as an anticipatory breach and seek damages for breach of contract, thereby terminating the contractual relation between the parties, or (b) he may continue to treat the contract as valid and await the designated time for performance before bringing suit” (Lucente v Intl. Bus. Machines Corp.). 

Notably, you need to carefully evaluate your own actions if you are relying on anticipatory repudiation in filing suit. You will not be able to bring suit for anticipatory breach if you are already in breach of the contract.
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Ordinarily, a defendant will not actively try to help the plaintiff prove her case. But even this fundamental principle of the adversarial litigation process has limits. For example, in the criminal context, a defendant may cooperate with the prosecution in exchange for immunity or preferential sentencing. Thus, the internet’s recent fascination with the overeager Tekashi 6ix9ine.

Civil litigants also “snitch.” In an eponymous 1967 decision from the Florida District Court of Appeals (Booth v. Mary Carter Paint Company, 202 So. 2d 8), two co-defendants entered into a written agreement with the plaintiff whereby the plaintiff agreed to limit the co-defendants’ liability to $12,500. The plaintiff further agreed that in the event any of the co-defendants were found jointly liable with a third co-defendant, the Mary Carter Paint Company, then the plaintiff would satisfy the judgment solely from Mary Carter so long as the judgment was for an amount exceeding $37,500. The parties agreed to keep this arrangement secret. The court held that this agreement was not a release and upheld the lower court’s refusal to offset any judgment against Mary Carter Paint Company by the $12,500 figure. (The Florida Supreme Court subsequently rejected this holding and required that any such agreements be produced in discovery. See Ward v Ochoa (284 So 2d 385, 387 [Fla Sup Ct 1973].)

New York courts have taken a disfavorable view of these so-called “Mary Carter Agreements,” which the courts describe as:

“a contract by which one or more of the defendants in a multiparty case secretly conspires with the plaintiff to feign an active role in the litigation in exchange for assurances that its own liability will be diminished proportionately by increasing the liability of the nonagreeing defendant(s)” (Reutzel v. Hunter Yes, Inc., 135 AD 3d 1123 [1st Dept 2016]).

In Stiles v. Batavia Horseshoes, 174 AD 2d 287 (4th Dept 1992), the Fourth Department, citing an Oklahoma decision, noted that such agreements, if established, “may be void per se.”

The New York Supreme Court, Commercial Division (Cohen, J.), recently addressed the burden of proof associated with a motion to disqualify counsel for allegedly entering a “Mary Carter Agreement.” In Gerzog v. Goldfarb (Index No. 653432), a defendant sought to disqualify plaintiff’s counsel based on allegations that counsel had “effectively suggested to [co-defendant] that in return for false testimony favorable to [plaintiff], [plaintiff] would not continue to pursue his claims against [co-defendant].” In support of this motion, the movant’s counsel submitted an affirmation describing a conversation with the co-defendant’s counsel, in which co-defendant’s counsel in turn described a conversation he had had with plaintiff’s counsel.

The court denied the motion, holding that the proffered affirmation was inadmissible hearsay. Moreover, because the conversation between co-defendant’s counsel and plaintiff’s counsel had been disclosed to the movant, the court found that the essential element of “secrecy” was missing and thus defeated any claim of an impermissible “Mary Carter Agreement.” The court concluded by suggesting that “the parties focus more on litigating the merits of the case and less on flogging each other with tangential issues and ad hominem attacks.”

 

Looks like the United States Tennis Association (“USTA”) met its match, but this time not on its own court, but rather in another, the Appellate Division,  Second Department.   The court in Matter of Bravado Intl. Group Merchandising Servs., Inc. v United States Tennis Assn. Inc., recently affirmed the judgment of Westchester Commercial Division Justice Linda S. Jamieson which granted a petition in a CPLR Article 52 proceeding to recover damages for violation of a restraining notice served pursuant to CPLR 5222(b).

Once a judgment is obtained, among the available enforcement devices is the “restraining notice” authorized by CPLR 5222(b).  The procedure is explained well in Doubet, LLC v. The Trustees of Columbia Univ.:

“Although CPLR 5222(a) permits an attorney for the judgment creditor to issue a restraining notice without the court’s involvement, it is legal process nonetheless. In that circumstance, the restraining notice is issued by the attorney ‘as an officer of the court.’ CPLR 5222(a). Like any legal process, it is an assertion of the court’s, and the state’s, power. Although valid service is required, legal process is not effective, notwithstanding valid service, unless the state, and the court, has a sufficient jurisdictional basis over the person served. ‘The restraining notice operates like an injunction. Indeed, it is an injunction, issued by the attorney acting as an officer of the court.’ Siegel, Practice Commentaries, McKinney’s Cons Laws of NY, Book 7B, CPLR C5222:4. Thus, the effect of a restraining notice is in the nature of a provisional remedy, like an injunction or an attachment; it is an assertion of state court jurisdiction over the garnishee.”

That tool allows a judgment creditor to serve a restraining notice upon a third party effectively prohibiting the transfer of any property held by the third party in which the third party “knows or has reason to believe the judgment debtor . . . has an interest.”  The courts have long recognized that simply because the judgment debtor itself may not come into physical possession of the property does not vitiate the mandate of a restraining notice (Ray v. Jama Prods.).  That is, the third party served, must ensure funds are not transferred.  The key to the analysis is whether the judgment debtor will “directly benefit from the payment” of the funds (Id.).

So what happened in this case?  Bravado Int’l Group Merchandising Servs., Inc. (“Bravado”) obtained a judgment in the amount of $1,357,458.43 against Facility Merchandising, Inc. (“FMI”).  Bravado sold merchandise to FMI.  FMI sells the merchandise throughout the US at various arenas and sporting venues.  In short, FMI purchased goods from Bravado, for which it did not pay.  FMI had transacted business with the USTA.  Specifically, during the US Open in September 2014, FMI was selling goods through various concessions at the US Open.   FMI and the UTA’s agreement provided, however, that all funds received by FMI from the sale of goods would be placed into an account that FMI had no access.  USTA would, in turn, be responsible for paying FMI’s obligations.  This arrangement was done apparently because FMI had certain financial problems.

Armed with a $1.3 million judgment, Bravado then served a restraining notice upon USTA during the 2014 Open.  Notwithstanding the service of the restraining notice, USTA apparently transferred funds to vendors and licensees in which it was claimed that FMI had an interest.  Bravado then brought a CPLR Article 52 proceeding against USTA.

Although most of the court file is sealed,  Justice Jamieson’s decision and order on the petition is not. Reviewing the parties’ submissions, the court concluded that USTA transferred funds to vendors in violation of the restraining notice, thus obligating the USTA to pay the remaining judgment amount to Bravado.  The Appellate Division affirmed.

When a client is served with a restraining notice, care must be taken to determine whether any property within the possession of the third party (your client) is for the benefit of the judgment debtor or the judgment debtor will somehow obtain a direct benefit by the third party’s payment of the funds to another.  Remember, simply because the funds or property don’t pass through the hands of the judgment debtor doesn’t mean the funds are not subject to the mandate of a restraining notice.

 

 

 

Know the Rules

As readers of this blog know by now, we here at New York Commercial Division Practice frequently post on new, proposed, and/or amended rules of practice in the Commercial Division.  Just last month, for example, my colleague Viktoriya Liberchuk posted on the Advisory Council’s recent proposal to amend ComDiv Rule 6 (“Form of Papers”) to mandate hyperlinks in legal briefs, allowing adversaries, judges, and other court personnel immediate electronic access to cited cases, statutes, and other supporting documentary evidence.

We’ve also reported on ComDiv decisions taking lawyers to task for failing to comply with the particularities of practicing in the Commercial Division — both with respect to noncompliance with the Rules themselves, as well as noncompliance with the individual practice rules of this or that ComDiv judge.

In one of the first ComDiv decisions of 2020, Manhattan Commercial Division Justice Andrea Masley addressed the propriety of a post-argument submission by a defendant under ComDiv Rule 18 on a motion to dismiss.

Hawk Mtn. LLC v Ram Capital Group LLC involved statute-of-limitations issues vis-à-vis a promissory note and the validity of a related release.  Following oral argument on its dismissal motion, the defendant submitted a recent federal-court decision out of the Eastern District of Pennsylvania, apparently in an effort to resolve a dispute over whether the parties in the Hawk Mtn. case qualified as “affiliates” under, and therefore were covered by, the release in question.  Citing the exception to ComDiv Rule 18’s general prohibition against “sur-reply and post-submission papers” — namely, that “counsel may inform the court by letter of the citation of any post-submission court decision that is relevant to the pending issues, but there shall be no additional argument” — Judge Masley allowed the defendant to supplement the record on its dismissal motion but made perfectly clear that she would “disregard any arguments made in [the defendant’s] accompanying letter.”

Having seen the Hawk Mtn. decision, and given the recent turn of year, we thought it a worthwhile exercise to take a quick look back at 2019 for other decisions addressing issues of (non)compliance with the ComDiv Rules.  What follows are a couple of notable examples from the Manhattan Commercial Division last year — both from Justice Joel M. Cohen as it just so happens — addressing ComDiv Rules 13 and 14 concerning expert disclosure and pre-motion conferences respectively.

In 30-32 W. 31st LLC v Heena Hotel LLC, Judge Cohen granted the defendants’ motion to strike an expert rebuttal report submitted by the plaintiffs in a dispute over the development and sale of a hotel.  Judge Cohen found that the report did not comply with ComDiv Rule 13 in a number of important respects, including primarily the expert’s failure to provide a “complete” statement of his opinions and to identify any documentation he relied upon to support his opinions.  The incompleteness of the expert’s report was perhaps captured best in his own words — to wit:

At this time and on a preliminary basis I find that I do not concur with the conclusion reached by [the defendants’ expert].  Additional forensic accounting work is required, and I reserve the right to amend and supplement this draft.

The draft report also made repeated references to “disputed factual assertions” and “significant intercompany transactions” but altogether failed to specify the facts in dispute or the transactions at issue.  Such a report, according to Judge Cohen, “provides insufficient notice of any opinions [the expert] proposes to offer or the bases for those opinions” and thus offends the fundamental purpose behind expert disclosure — namely, “No Sandbaggers Allowed!”

In Village Green Mishawaka Holdings, LLC v Romanoff, Judge Cohen shot down a red-herring argument and related “barbed references” in an attorney affirmation when denying a non-party’s motion to quash a subpoena.  Judge Cohen attacked the motion as “procedurally improper” as well, citing ComDiv Rule 14’s prohibition on filing motions without first requesting a pre-motion conference and finding that “there [wa]s no indication that [the non-party] ever requested such a conference prior to filing this motion.”  Judge Cohen also took issue with the form of the attorney affirmation, citing his own practice rules prohibiting so-called “brief-irmations” and “brief-adavits” submitted in lieu of a proper memo of law:  “All motion papers … must include a Memorandum of Law,” and “Affidavits or Affirmations of counsel containing legal argument should not be submitted.”

Check the rules, folks.  Always check the rules.

As we continue to see increased litigation over electronic programs, apps, and algorithms, courts are increasingly called to consider discovery requests for the coding behind that technology.  These requests highlight the tension between the need for broad discovery and the litigant’s proprietary interest in secret, commercially valuable source code.  And as a recent First Department decision highlights, Courts are acutely protective of this source code.

The First Department, in BEC Capital v. Bistrovic, recently reversed the trial court’s ordering a coder to either produce his trading algorithm subject to the Commercial Division’s standard confidentiality order or abandon his claims, holding instead that the trial court should have ordered the algorithm produced “for Attorneys and Experts’ Eyes Only.”

The discovery dispute in BEC Capital arose from a failed high-frequency trading joint venture.  The defendant Bojan Bistrovic, through his company MCM, entered into an agreement with Plaintiff BEC where Bistrovic would integrate his proprietary trading algorithm into BEC’s trading platform, and he and BEC would share in the gains or losses of Bistrovic’s algorithm.  Bistrovic’s trading algorithm was built for speed: executing trades in a fraction of second to exploit fleeting market trends and inefficiencies.  Consequently, the algorithm required an efficient trading platform—every process, line of code, or mile of cable that a trade order had to traverse increased the time between when Bistrovic’s algorithm directed the trade and the time it was executed, and that lag gutted the efficiency of Bistrovic’s algorithm.

Less than six months into their agreement, the parties’ venture had performed so poorly that both effectively abandoned the agreement.  BEC pinned the poor performance on Bistrovic’s algorithm; Bistrovic blamed serious problems in BEC Capital’s trading platform.  When a dispute arose about the allocation of trading losses, Bistrovic allegedly told others in the high-frequency trading industry that Plaintiffs were fraudsters who had stolen money from him.

When BEC and its principals sued for defamation and breach of their NDA, Bistrovic brought counterclaims for breach of contract, alleging that BEC breached their agreement because they failed to provide Bistrovic with a satisfactory high-frequency trading platform into which his algorithm could have been properly integrated.

In light of Bistrovic’s counterclaims, Plaintiffs demanded the coding behind Bistrovic’s high-frequency trading algorithm in discovery.  The coding was necessary, Plaintiffs argued, to rebut Bistrovic’s counterclaims that the failure resulted from BEC’s platform—i.e., to show that the poor performance resulted from Bistrovic’s algorithm itself, not BEC’s platform.  When Bistrovic objected to the discovery of his trading algorithm, the trial court (Ramos, J.) held that Bistrovic must either (i) disclose the algorithm subject to the standard Commercial Division confidentiality order, or (ii) face the risk of having his counterclaims and defenses based on his algorithm stricken.

In November, the First Department reversed the trial court, holding that:

The production of defendants’ source code, which is a trade secret . . . should have been ordered to be produced for ‘attorneys and expert eyes only.’  Plaintiffs’ assertion that they have the expertise to review and opine on the source code and should not be subjected to retaining an expert, does not support unfettered access to defendants’ confidential algorithm.

The First Department’s ruling constitutes a rare reversal of the discretion afforded to the trial courts to oversee the discovery process.  See Don Buchwald & Assoc. v Marber.

In so holding, the First Department continues to show its interest in ensuring that confidential source code be produced according to appropriate terms and limitations, including, where necessary, an “attorneys and experts’ eyes only” designation.  See MSCI Inc. v. Jacob (reversing trial courts’ denial of discovery into confidential source code and ordering production “for attorneys’ eyes only”).  More generally, the First Department remains actively protective over confidential source code and—in this area more than others—willing to substitute its own discretion for the trial court’s, ensuring the deliberate development of legal authority over issues relating to confidential source code.  See also, e.g., People v. Aleynikov (reinstating the tossed conviction of the now-infamous Goldman Sachs programmer Sergey Aleynikov for uploading portions of Goldman’s high-frequency trading code to a German code repository).

Practical Considerations

BEC Capital provides some welcome guidance on how the First Department views the interplay between proprietary computer code and the need for “open and full disclosure as a matter of policy.”  MSCI.  Going forward, litigants can expect trial courts to take a thorough and critical look at requests for discovery into proprietary source code, including analysis of the following considerations:

  • How central is the source code to the claims? Not all requests for disclosure of proprietary code are created equal, and, of course, the more central the disputed source code is to the issues in the case, the more compelling the argument for disclosure.  For instance, a copyright case concerning the disputed code (where the party asserting the claim must prove the originality of the work) might favor disclosure, see Fonar Corp. v. Magnetic Resonance Plus, Inc., 93-cv-2220, 1997 WL 689462 (S.D.N.Y. Nov. 3, 1997), but only where the claim directly concerns the specific code requested, see Abarca Health, LLC v. PharmPix Corp. (denying discovery of portions of source code that were not at issue in infringement claims).  Likewise, a federal court has granted discovery of a carmaker’s proprietary code in a products liability action alleging harm directly caused by the code, Burnett v. Ford Motor Co., while another has denied discovery into proprietary source code in a false advertising case where plaintiffs claimed that the code created the misleading content, Congoo, LLC v. Revcontent LLC.
  • Is the code needed offensively or defensively? In Viacom Int’l Inc. v. YouTube Inc., the Court denied plaintiff’s request for discovery of defendants’ source code based in part upon the fact that Viacom sought YouTube’s source code offensively—to support its own claims.  The Court observed that defendant “should not be made to place this vital asset in hazard merely to allay speculation.”
  • What are the parties up to? Where the parties are in the same industry—such that the disclosure of the source code even subject to strict confidentiality restrictions may result in a competitive disadvantage—the case for non-disclosure or an “attorneys and experts’ eyes only” designation is stronger.  See MSCI (attorneys and experts’ eyes only designation appropriate where employee left plaintiff company to build a competing platform for defendant-company); ABC Rug & Carpet Cleaning Serv. Inc. v. ABC Rug Cleaners, Inc. (“Ample precedent exists for limiting disclosure of . . . proprietary information to attorneys and experts, particularly when there is some risk that a party might use the information . . . to gain a competitive advantage over the producing party.”).
  • Have other creative disclosure frameworks been considered? In addition to an “attorneys eyes only” designation, litigants should consider whether some other discovery framework is appropriate.  See RGIS, LLC v. A.S.T., Inc. (appointing special master to review confidential source code); Princeton Mgt. Corp. v. Assimakopoulos, 1992 WL 84552 (S.D.N.Y. April 10, 1992) (limiting disclosure to two designated individuals within plaintiff’s organization).
  • Is the code uniquely ill-suited to an “attorneys’ eyes only” designation? While the First Department in BEC Capital rejected the plaintiffs’ argument that BEC (and not its experts) needed to view the source code because they had the expertise to review it, other courts have favored this argument in holding that an “attorneys’ eyes only” designation was inappropriate.  See Metropolitan Life Ins. Co. v. Bancorp. Servs. LLC, 2000 WL 1644488 (S.D.N.Y. Nov. 2, 2000).  It remains to be seen how the First Department would view a case where the code sought is so particularized that an “attorneys eyes only” designation would be effectively useless.

While courts will continue to consider the discoverability of proprietary source code on a case-by-case basis (and subject to their broad discretion to oversee discovery), recent First Department guidance suggests that litigants would be well-advised to prepare for a deeply thorough, fact-specific inquiry focused not only on the necessity of the source code to the claims or defenses, but also on the commercial value of the source code and the appropriateness of alternative discovery frameworks.

 

Our parents taught us to think before we speak.  That lesson is especially important when words or conduct could cost you hundreds of thousands of dollars beyond what was previously agreed upon in a subcontract agreement.

In a recent case before Justice Andrea Masley, Corporate Electrical Technologies, Inc. v. Structure Tone, Inc. et al., Plaintiff Corporate Electrical Technologies, Inc. (“CET”), a subcontractor, was hired by Structure Tone, Inc. (“STI”), a general contractor, to perform electrical work on a multi-million dollar renovation project at a Macy’s flagship store in Herald Square, in anticipation of the holiday shopping season.

CET argued that soon after the renovation work commenced, the project was delayed to the point that Macy’s took over the day-to-day running of the renovation project. Once Macy’s took over, it directly negotiated with CET and requested that CET perform extra work beyond CET’s subcontractor agreement with STI. Based on the additional work performed, CET submitted numerous unpaid change orders and brought this action against STI and Macy’s, alleging that it was owed over a million dollars for the project.

With respect to CET’s cause of action for quantum meruit, Macy’s moved for summary judgment under the theory that Macy’s, as an owner, was not in contractual privity with CET, and therefore, could not be held liable to the subcontractor.

Typically, an owner is not liable to a subcontractor and the subcontractor’s quasi contract claims against a property owner are precluded where the owner contracts with a general contractor and does not expressly consent to pay for a subcontractor’s performance (DL Marble & Granite Inc. v. Madison Park Owner, LLC).

However, a property owner can be equitably bound to pay the reasonable value of the work it directed where, as in this case, Macy’s project manager emailed CET directly and seemed to implicate that Macy’s would pay costs that CET incurred as an incentive to completing the required work on time.

The Court noted that even where a contract provides that any extra work must be supported by a written authorization signed by the owner, an owner’s conduct can constitute a waiver of that requirement where the owner orally directs work and knowingly receives and accepts the benefits of that extra work.  In that instance, the owner can be found liable to pay the reasonable value of the extra work, notwithstanding the provisions of the subcontract.

CET also moved for spoliation sanctions against Macy’s, arguing that Macy’s should have reasonably anticipated litigation based on its disagreements with CET.  CET asserted that Macy’s neglected to place a hold on its automatic email destruction policy which resulted in the destruction of hundreds, and perhaps thousands, of critical internal emails related to CET’s work on the project during the time when the project was planned and constructed.  CET argued that these destroyed emails would have supported its theory that STI’s poor management caused the numerous project delays and would have disproved STI’s and Macy’s allegations that CET was to blame for the delays.

The Court held that CET failed to show that Macy’s had an obligation to preserve relevant emails because Macy’s could not reasonably anticipate litigation.  Mere delays of work, engagement of another subcontractor, and disagreements about the project could not have placed Macy’s on notice of a credible probability that it would become involved in litigation.  Rather, there needed to be something more amounting to repeated threats to terminate the agreement, transmissions of breach letters, or a formal termination of the agreement.

Takeaway:  (1) Property owners should be wary of solely relying on the explicit terms of a subcontract agreement when it comes to payment for a subcontractor’s work.  Ultimately, an owner’s words or actions can be interpreted as express consent to pay for a subcontractor’s performance; and (2) In the commercial context, run of the mill disagreements during construction are not enough to place a party on notice of a credible probability of litigation.  Even so, a company that routinely engages in business that has the potential of developing into litigation should review and be aware of its email retention/destruction policy in this new age of electronic discovery.