Section 3101(a) of the CPLR provides for the “full disclosure of all matter material and necessary in the prosecution or defense of an action.” This standard requires the disclosure “of any facts which will assist preparation for trial by sharpening the issues and reducing delay and prolixity” (Madia v CBS Corp, 146 AD3d 424, 424-425 [1st Dept 2017]). Under CPLR 3124, a party making a motion to compel discovery must demonstrate that the discovery sought is “material and necessary” and must meet the test of “usefulness and reason.” But, parties are at liberty to narrow the, otherwise, broad statutory discovery guidelines provided by the CPLR. A recent decision from Justice Robert Reed of the Manhattan Commercial Division in Latin Mkts. Brazil, LLC v McArdle reminds us that the court will abide by the terms of a voluntary waiver of discoverable materials absent any mistake, fraud, collusion, or accident.

Continue Reading To Disclose or Not to Disclose: The Importance of Putting Everything in Writing

Section 3104 of the CPLR authorizes courts to appoint a judge or referee to supervise disclosure proceedings. The appointed referee enjoys “all the powers of the court” to resolve discovery disputes. A party seeking review of a referee’s order must, within five days after the order is made, file a motion in the court in which the action is pending. Lawyers involved in supervised disclosure proceedings should be familiar with the requirements for review contained in CPLR 3104(d). In a recent decision from New York County’s Commercial Division, Justice Robert R. Reed reminds us that only strict adherence to those requirements will suffice to obtain review.

Continue Reading “C’mon Ref!” – Right and Wrong Ways to Challenge the Call in a Supervised Disclosure Proceeding

Commercial Division Rule 11-f establishes that a party may serve a notice or subpoena on any legal or commercial entity. Upon receiving this notice, the responding party must then designate and produce a corporate representative for the deposition, who is prepared to testify about information known or reasonably available to the entity concerning topics listed in the deposition notice. While a corporate representative deposition may serve as a great discovery tool, it may also serve as a dangerous trap. In a recent decision from the Manhattan Commercial Division, Justice Andrea Masley reminds us that parties who attempt to depose an additional corporate representative of the same entity are fighting a losing battle.

Continue Reading Commercial Division Says “No Chance” on “Second Chance” Deposition of a Corporate Representative

Under Section 216.1(a) of the Uniform Rules for Trial Courts (“Section 216.1(a)”), courts are authorized to seal documents “upon a written finding of good cause, which shall specify the grounds thereof.” Section 216.1(a) states that “whether good cause has been shown, the court shall consider the interests of the public as well as of the parties.”  A recent decision from Justice Andrea Masley of the Manhattan Commercial Division in Aydus Worldwide DMCC v. Teva Pharmaceuticals Industries Ltd., serves as a gentle reminder that documents merely marked as “confidential,” “private,” or for “Attorneys’ Eyes Only” are not a sufficient to demonstrate “good cause,” triggering the court’s judicial discretion to seal the record.

Continue Reading Signed, Sealed, Delivered

Did you know that the New York State United Court System publishes an annual report covering the advances, challenges, and achievements in and by our New York State courts over the past year? If you did not, now is the time to head over to the NYCourts website and browse the recently released 45th Annual Report covering the 2022 calendar year.

The Annual Report is a visual reminder that we practice in “one of the largest, busiest, most complex court systems in the world,” as Acting Chief Administrative Judge Tamiko Amaker describes. Accompanied by vivid photos of some of the people and places involved with our courts, the 2022 Annual Report highlights the UCS’s initiatives toward equal justice within the courts (pgs. 15-23) and public access to justice (pgs. 25-39), as well as a fiscal overview of the UCS (pg. 55), and caseload statistics (pgs. 59-69).

Of particular interest to readers of this blog is the feature on the Commercial Division.

Since its creation in 1995, the Commercial Division of the New York State Supreme Court has transformed business litigation and made the State a preferred forum for complex business disputes. Renowned as one of the world’s most efficient venues for the resolution of commercial disputes and located in the world’s leading financial center, the Commercial Division is available to businesses of all sizes, both inside and outside the State of New York

Ever advancing the ball in substantive areas of the law and procedural rules and practices, the Commercial Division adopted and enacted 11 of the new procedural rules and amendments proposed by the Commercial Division Advisory Council in 2022 (which this blog has spotlighted), to wit:

As we move further into 2023, keep an eye on this blog for updates on developments in the Commercial Division’s rules and practices. As we’ve said before, always check the rules!

Hat tip to Chair of the Advisory Council and friend-of-the-blog, Robert L. Haig, for continuing to share with us the good work being done by the Advisory Council throughout the year.

As any practitioner litigating a case before the Commercial Division knows, and as we have mentioned time and again on this blog, it is critical to know the Part Rules of the particular judge assigned to your case.  But getting to know your judge – including the judge’s individual preferences and style – may be just as important.

On March 21, 2023, the Commercial & Federal Litigation Section of the New York State Bar Association hosted the latest in its series of virtual programs pairing young lawyers with Commercial Division judges. The programs are geared to addressing what young lawyers should know about appearing before the judges and providing some practice tips.  

The special guest for the March 21 event was Nassau County Commercial Division Justice Timothy S. Driscoll and was co-moderated in part by Farrell Fritz’s very own James Maguire, a frequent contributor to this blog.

In addition to letting the attendees get a glimpse into his background and some of his personal interests, as well as regaling them with colorful stories of his tenure as a practicing attorney and judge, Justice Driscoll provided very useful practice tips for practitioners who come before him. Below is a summary of some of the key takeaways from the conversation.

  • Get in the Courtroom and Know Your Case Through and Through

Justice Driscoll noted at the outset of the conversation that getting as much experience as you can in the courtroom – even if that just means carrying a senior lawyer’s litigation bag – is critical. As he noted, “the courtroom is the front row seat to the greatest show on earth, which is humanity.”

Justice Driscoll also stressed the importance of being well-prepared and understanding what your case is about and its inflection points of both strength and weakness. He mentioned specifically that lawyers in the Commercial Division are particularly adept at this, and the high-level intellectual stimulation is what gets him so excited about being a judge in the Commercial Division and coming to work every morning.

  • Understand the Principles of Civility

One of Justice Driscoll’s biggest pet peeves is when litigators do not respect their adversaries and do not understand the principles of civility. Justice Driscoll advised that ad hominem attacks and excessive adjectives and adverbs within your legal brief designed to diminish your opponent’s position, as well as interruptions during oral argument, are both unappreciated and a waste of time.  As Justice Driscoll stated, rather than addressing your adversary at oral argument, “you are talking to the Court, and the Court is talking to you.”  

  • Legal Writing: Get to the Point and Provide Binding Authority

Justice Driscoll emphasized that when it comes to legal writing, the most important thing to keep in mind is to get to the point! He stressed that many practitioners lose sight of the main goal of a legal brief, which is to tell the judge (1) what you want him to do, and (2) why he should do it.  For Justice Driscoll, the “why” should be supported by recent, binding, primary authority (no obscure cases from before he was born or from a trial court across the country) ideally from the New York Court of Appeals or the Appellate Division. He further advised that, while long string cites of authority might show off your research skills, they do not help a litigant’s cause in the same way that analogies to the facts of the binding precedential cases do. Justice Driscoll also emphasized the importance of a strong Preliminary Statement within a legal brief since that is the only place within which to make pure legal argument without the fear of citation. 

  • Justice Driscoll’s Method of Reviewing Legal Briefs

Justice Driscoll also shared invaluable insight into his brief-reviewing process.  He noted that he always starts by reviewing the papers in reverse chronological order: reply brief first, then the opposition, and then the opening brief.   For that reason, he cautioned that reply papers should not merely regurgitate arguments made in the opening brief since it is the ultimate opportunity to tell the Court point blank why your adversary is wrong and why you are right.  He stressed that because reply papers provide the benefit of the last word, the opportunity to submit reply papers should always be taken advantage of.

When reviewing a legal brief, Justice Driscoll advised that he scans the brief’s Table of Contents and point headings since those are the “skeleton” of the brief and assist him with easily navigating through thousands of words and getting to the bottom line.  For that reason, it is important that brief headings be made argumentative with the word “because” baked in (i.e., “The First Cause of Action Should Be Dismissed Because . . .”)

Finally, Justice Driscoll advised that since he reads so many sets of legal papers throughout the day, he appreciates when briefs are easy to read and “visually appealing.” To that end, he suggested that practitioners use a font that “jumps off the page” like Century Schoolbook or Georgia (rather than the default font of Times New Roman).

The Commercial Division’s recent conversation with Justice Driscoll reinforces the idea that getting to know the audience – i.e., your Judge – is an invaluable tool for legal advocacy that should always be taken advantage of.  Litigators should use their best efforts to learn about the judges of the Commercial Division and attend programs where they can gain insight into their likes and dislikes.  Whether legal briefs will eventually deviate from Times New Roman . . . well, that remains to be seen!

Commercial Division Rule 11-b governs a party’s obligation to produce a log of documents withheld on the basis of privilege.  Enacted in 2014, Rule 11-b substantially streamlines the privilege log process by encouraging parties, “where appropriate,” to exchange categorical privilege logs, rather than document-by-document logs.  Rule 11-b instructs the parties to meet-and-confer over the issue, and the parties may use “any reasoned method of organizing the documents” into categories, which are to be provided to the requesting party in lieu of a document-by-document log.

With the streamlined process of providing a categorical privilege log comes potentially severe penalties for failing to comply with Rule 11-b, as a recent decision from Manhattan Commercial Division Justice Melissa Crane, Lis v Lancaster, No. 650855/2019 (NY County January 12, 2023), demonstrates.

Lis v. Lancaster features a dispute concerning the ownership of an industrial recycling company with apparently scant observance of corporate formalities: Andrew Lis alleges that he is a 50% owner of the now-successful company, while Jason Lancaster maintains that he is the sole owner, and that Lis is merely an employee. 

Lis requested in discovery communications between Lancaster and a law firm that helped in the formation of the business, Liskow and Lewis (“L&L”).  Responding to those discovery demands, Lancaster advised Lis (and the Court) that he requested and received documents from L&L, and that he produced anything responsive to Lis’ demands.  Lancaster’s privilege log did not identify any documents from L&L being withheld on the grounds of privilege or attorney work product.

The Court later allowed Lis to pursue a third-party subpoena directly to L&L for discovery into the “limited to the issue of whether the parties were partners or employer/employee.”  In response to the subpoena, L&L produced—this time directly to Lis—more documents than Lancaster had previously produced to Lis. These documents included a L&L internal email indicating that Lancaster was referred to L&L “for a corporate attorney to assist with a partnership agreement and other business matters,” and an attorney’s handwritten notes possibly describing a joint venture or other business arrangement between Lis and Lancaster.

Upon the discovery of the withheld material, Lis moved to have Lancaster’s answer stricken for his non-compliance with his discovery obligations.  Lancaster argued that he had no obligation to produce the withheld material because they constituted attorney work product protected from disclosure.  But Lancaster could not explain why those materials were not included on its privilege log when he withheld them from his initial production of L&L materials. 

Justice Crane held that by withholding the responsive documents without including them on his privilege log, Lancaster engaged in willful and contumacious discovery misconduct:

Accordingly, defendants should have produced at least some of the documents in the L&L production, and if they wanted to protect other L&L documents under the attorney work product doctrine, they should have identified them in an updated privilege log.

While not shy in her criticism of Lancaster’s discovery tactics, Justice Crane declined to strike Lancaster’s answer, finding that such a penalty would be too severe.  Instead, she invited Lis to move for attorneys’ fees for having to make the motion:

Nevertheless, the court declines to strike defendants’ pleadings pursuant to CPLR 3126 for defendants’ failures regarding their L&L production.  Such a drastic remedy is not warranted here.  However, the court finds that it is appropriate to impose sanctions, in the form of costs and fees, for defendants’ frivolous L&L discovery conduct (see 22 NYCRR 130-1.1).  Because plaintiff did not seek or support this alternative relief in this motion, there is no basis in this record to now award plaintiff attorneys’ fees.  Accordingly, plaintiff is permitted to make a new motion for sanctions, in the form of its reasonable attorneys’ fees and costs for making Motion Seq. No. 09 and 10, in a new motion within 20 days of the date of this decision and order.

Lis subsequently sought more than $30,000 in attorneys’ fees and costs.

The takeaway: materials withheld on the grounds of privilege must be included on a privilege log.  Failure to do so may result not only in a waiver of any potentially applicable privilege, but also in costly discovery sanctions, as Lis v Lancaster demonstrates.

It is no secret that employees are often the most likely people to misappropriate an employer’s confidential information or valuable trade secrets. In this particular situation, employers have many options at their disposal, including asserting a claim under the faithless-servant doctrine. In a recent decision from the Manhattan Commercial Division, Justice Melissa A. Crane reminds us just how powerful the doctrines of faithless servant and res judicata can be against revenge-seeking faithless employees.

Background

In Nichtberger v Paramount Painting Group, LLC, et al., the plaintiff, a commercial-painting contractor in the New York City area (“Plaintiff”), was seeking to keep his company afloat following the 2008 Recession. In 2009, Plaintiff entered into an employment agreement (the “Employment Agreement”) with defendants, also a commercial-painting company (“Defendants”), whereby Plaintiff would serve as president of defendant Paramount Painting Group, LLC (“PPG”). As part of the Employment Agreement, Plaintiff was paid an annual salary of $208,000, and entitled to 50% of the first $3 million in PPG’s net profits, as well as 25% of net profit above $4 million. From 2009 to 2019, Defendants paid Plaintiff more than $2 million in salary.

In March 2019, Defendants discovered that Plaintiff was engaging in a diversion scheme, whereby Plaintiff deposited checks from certain PPG customers into a separate checking account. As a result, Plaintiff immediately resigned from PPG. Soon after, Plaintiff was forced to defend himself in both a criminal lawsuit brought by the New York District Attorney’s Office and a civil lawsuit brought by Defendants, seeking claims for conversion, constructive trust, and faithless-servant doctrine.

In May 2021, Plaintiff pleaded guilty to Grand Larceny in the Second Degree. Pursuant to the plea agreement, Plaintiff was ordered to pay $1.4 million in restitution to PPG. Thereafter, in October 2021, Plaintiff entered into a stipulation with Defendants for approximately $3 million, which included his $1.4 restitution payment from the criminal proceeding.

Faced with a $3 million judgment, in or around March 2022, Plaintiff commenced an action against Defendants, alleging that Defendants breached their contractual obligations to Plaintiff by failing to fully compensate him his salary and bonus between 2011 through 2019. In response, Defendants filed a motion to dismiss the complaint, arguing that Plaintiff’s plea agreement and previous admission that he acted as a “faithless servant” barred all claims for compensation in the form of salary, bonus, and/or profit sharing. In response, Plaintiff argued that his previous admission, along with the doctrine of res judicata, did not prevent him from his entitlement to compensation prior to his first disloyal act.

Justice Crane rejected Plaintiff’s argument for two reasons. First, the Court acknowledged that Plaintiff’s claims for compensation for previous unpaid salary and bonuses was barred by the doctrine of res judicata due to the court’s previous ruling that Plaintiff could not recover compensation under the faithless-servant doctrine. Second, the Court stated that insofar as its previous decision was not res judicata, Plaintiff’s claims would be time-barred, since Plaintiff admitted that he “systematically” stole from Defendants from 2012 to 2019.

Upshot

The Nichtberger decision serves as a reminder to litigators that the faithless-servant doctrine remains a potent weapon for employers faced with an employee who allegedly acts disloyally during his/her employment. Perhaps more importantly, Nichtberger may serve as valuable precedent for any “wayward and unruly agent” who seeks to take a second bite at victimizing their previous employer.

A recent decision from the Manhattan Commercial Division reminds us that although punitive damages are generally not recoverable in New York, certain circumstances require that they be awarded.

In Hall v Middleton, Manhattan Commercial Division Justice Jennifer G. Schecter granted a $1 million punitive-damages award against defendant Middleton due to the presence of such circumstances.

Veritaseum, Inc. (the “Company”) is a financial technology company that uses blockchain-based markets to permit transactions between individuals. During initial conversations between plaintiff Charles Hall (“Hall”) and the Company’s CEO, Reggie Middleton (“Middleton”), Middleton made representations to Hall concerning the Company’s pending patent applications for proprietary technology concerning the use of block-chain technology and cryptocurrencies for the execution of smart contracts, to entice Hall to invest in the Company. Middleton represented to investors that the Company had pending patent applications, causing them to believe that they would be investing in a company that would eventually own the patents.

Hall commenced the action derivatively on behalf of the Company against Middleton for breach of his fiduciary duties to the Company by misappropriating the Company’s assets, including its intellectual property.

After trial, the Court found that Middleton “breached his fiduciary duty of loyalty to the Company by diverting ownership of the patents to himself.” Justice Schecter further determined that the Company (and not Middleton) should have owned the patents and thus other entities’ use of the patents would entitle the Company (and not Middleton) to a licensing fee.

During trial, Middleton argued that, despite the fiduciary relationship between the parties, there need not be trust in cryptocurrency transactions because such transactions are inherently “unbreakable promises.” The Court disagreed, stating that there is a need for trust among fiduciaries. The Court further noted that when trust is flagrantly violated, “there must be real, meaningful consequences to ensure that it doesn’t happen again. Anything short of significant punitive damages would further, not thwart, duplicity.”

To be entitled to punitive damages, “a defendant’s conduct must be directed at the public generally” (see Sherry Assocs. v Sherry-Netherland, Inc., 273 A.D.2d 14, 15, 708 N.Y.S.2d 105 [1st Dept 2000]). Punitive damages are intended as punishment for gross misbehavior for the good of the public and to deter the defendant from repeating the wrongful act (see Le Mistral, Inc. v Columbia Broad. Sys., 61 AD2d 491, 494–95 [1st  Dept 1978]).

In Hall, the Court determined that because Middleton clearly breached his fiduciary duty of loyalty to the Company, he may be held liable for punitive damages “regardless of whether his conduct was aimed at the public generally.” The Court noted that Middleton’s behavior impacted the public because he solicited investments from the public based on his misrepresentations concerning the Company’s ownership of the patents as well as conducted an illegal initial coin offering that resulted in the SEC issuing a consent order, thus destroying the value of the Company.  Justice Schecter further determined that:

Punitive damages are warranted because Middleton’s diversion of assets in breach of his fiduciary duty to the Company was intentional and deliberate, the related securities-law violations constitute aggravating and outrageous circumstances and his attempted scheme to effectively steal the patents for himself was impelled by a fraudulent motive.

In ultimately deciding that the plaintiff was entitled to punitive damages, the Court considered that the SEC had ordered Middleton to pay more than $8 million in disgorgement and a $1 million penalty. Thus, the Court held that a $1 million punitive-damages award was “justified.”

Although punitive damages are rarely awarded in New York, practitioners should take note that the Commercial Division is not afraid to grant such remedies when circumstances, like those on display in Hall, require them to.

A recent decision from Justice Robert Reed of the Manhattan Commercial Division in J.P. Morgan Ventures Energy Corporation v. Miami Wind I, LLC, Goldthwaite Wind Energy LLC demonstrates how parties have the ability to excuse contractual non-performance in a well drafted force majeure clause.

Background

Plaintiff J.P. Morgan Ventures Energy Corporation (the “Buyer”) is an energy trading company. Defendants Miami Wind I, LLC (Miami Wind) and Goldthwaite Wind Energy LLC (Goldthwaite Wind) (collectively the “Sellers”) own windfarms in Texas. The Sellers executed hedge agreements (“Agreements”) with the Buyer. The Sellers were unable to sell and deliver the bargained for quantity of energy to the Buyer from February 13, 2021 through February 19, 2021, a period in which Winter Storm Uri caused below-freezing temperatures in Texas. As such, the issue before the court was “whether a winter storm…during that time period triggered the force majeure provisions in the hedge agreements, thereby excusing the Sellers’ non-performance.”

The Agreements

The Agreements defined “Force Majeure” as follows:

“an event or circumstance which prevents the Claiming Party from performing its obligations . . .  which event or circumstance was not anticipated as of the date the Power Transaction was agreed to, which is not within the reasonable control of, or the result of the negligence of, the Claiming Party, and which, by the exercise of due diligence, the Claiming Party is unable to overcome or avoid or cause to be avoided”.

Further, the Agreements explicitly excluded the following from the definition of “Force Majeure”:

“(i) the loss of Buyer’s markets; (ii) Buyer’s inability economically to use or resell the Product purchased hereunder; (iii) the loss or failure of Seller’s supply; or (iv) Seller’s ability to sell the Product at a price greater than the Contract Price”.

For purposes of force majeure clauses, the court agreed with the Buyer that the following are not sufficient to trigger the Agreements’ clause:

  • “Sellers’… inability to generate electricity at their respective windfarms during the storm” which is a term that was specifically excluded from the definition of the clause;
  • “An increase in the price of energy” which was not an unanticipated event because the parties anticipated price fluctuation as it is the underlying purpose of the contract. The court further reasoned that the financial considerations brought about by the storm were not bases for non-performance under a contract as financial hardships alone do not trigger force majeure clauses; and
  • “Impact of weather on the ability of a windfarm to produce electricity” which also was not considered as an unanticipated event because it was not specifically included within the definition of the clause.

While the court found that the windfarm’s ability to generate electricity during winter storm did not trigger the force majeure provisions in the Agreements, the court nonetheless denied Buyer’s motion for summary judgment. The court found that “as the Sellers point out in their opposition papers, “one potentially critical issue is whether the nonperforming party even could have delivered during the time period in which it was claiming force majeure”. The court further reasoned that the Buyer failed to submit evidence that it was, in fact, possible for the Seller to deliver the energy under the parties’ Agreements. As such, Buyer J.P. Morgan failed to satisfy its burden in demonstrating the absence of genuine issues of material fact.

Upshot

Whether an event will excuse non-performance under a force majeure clause depends on how such events are defined in a contract. The cases cited by the court stand for the proposition that where the parties themselves have explicitly outlined the force majeure clause in their agreement, that outline dictates the scope of the clause. As such, parties should cautiously draft force majeure clauses and carefully consider the kind of breach that a force majeure event may trigger.