The CPLR 3123 notice to admit can be a useful device in litigation.  Its primary purpose is to expedite a trial by eliminating the necessity of proving a “readily admittable fact” or matter not in dispute.  But, as efficient as it sounds, the notice to admit is a limited device, and may only be used to elicit an admission of a fact which the seeking party “reasonably believes there can be no substantial dispute” – i.e., an easily provable, clear-cut matter of fact.

Despite this exacting standard, many litigants often find themselves on the receiving end of an improper notice to admit – that is, one that seeks to compel the admission of a fundamental or material fact in dispute.  It is risky to deny outright the matters in the notice, since the requesting party may be able to recover the costs (and attorneys’ fees) associated with proving the matter at trial (if the denial is found to be unreasonable).  Ignoring the notice entirely is even riskier.  Although the court may ultimately find the notice so unreasonable that the ignoring party will face no sanction, ignoring a notice to admit could be perilous, since “silence is deemed an admission” (CPLR 3123[a]).  So, if you are the recipient of an improper notice to admit, what should you do?

As Prof. Patrick Connors aptly states in the Practice Commentaries to CPLR 3123, “the wisest course” is to move for a protective order pursuant to CPLR 3103.

The New York County Commercial Division recently illustrated how a protective order may relieve a litigant from responding to an improper notice to admit.  In 470 4th Ave. Fee Owner, LLC v Adam Am. LLC (70 Misc 3d 1214[A], 2021 NY Slip Op 50090[U] [Sup Ct, NY County Feb. 4, 2021]), the defendants, Adam America LLC, 470 4th Avenue Investors, LLC, and Danya Cebus Construction, LLC (“Defendants”), served notices to admit on third-party defendants All About AC Corp. (“AC”) and Amra Electrical Corporation (“Amra”) (“3P Defendants”).  The 9-page notice to admit served on AC contained 38 separate matters for which Defendants sought admission.  Rather than respond to the notices, the 3P Defendants timely moved, pursuant to CPLR 3103, for protective orders relieving them from responding to the notices to admit.

Justice Robert R. Reed – a fairly recent addition to Manhattan’s Commercial Division – partially granted the motion.  Of the 38 matters contained in the notice served on AC, the Court found that only the first four requests – which sought admissions as to the existence and authenticity of the contract between AC and Danya – were proper.  This is consistent with the plain language of CPLR 3123, which permits requests for admission concerning “the genuineness of any papers or documents.”

As to the remaining 34 matters, the Court concluded they sought “admissions that go to the heart of the parties’ claims and defenses,” and were therefore improper.  Indeed, the central claim in the litigation concerned water intrusion and damages as a result of allegedly improperly installed packaged terminal air conditioner units.  AC denied it was responsible for the allegedly defective installation.  Nevertheless, the requests sought admissions from AC concerning the scope of AC’s work and AC’s understanding of its contractual obligations in connection with the project.  For example, one request sought an admission that “[p]ursuant to the Contract, it was [AC’s] responsibility to provide a complete, operational and approved HVAC system.”  And so, because the requests sought admissions from AC concerning disputed issues of fact in the litigation – namely, the scope of AC’s work at the project – a protective order was warranted.

Although some early cases denied the use of the protective orders to vacate or limit a notice to admit (Schwartz v Macrose Lumber & Trim Co., 46 Misc 2d 202 [Sup Ct, Queens County 1965]), protective orders are now commonly accepted devices for testing the validity of a notice to admit. Thus, a party may seek a protective order if the notice to admit requests admissions beyond the scope of CPLR 3123 (see e.g. Sagiv v Gamache, 26 AD3d 368 [2d Dept 2006]), such as where the notice seeks admissions on material issues in dispute in the action.

Courts in New York have also held that a protective order may be available where the notice to admit seeks to secure legal conclusions (Kimmel v Paul, Weiss, Rifkind, Wharton & Garrison, 214 AD2d 453 [1st Dept 1995]), or “highly technical, detailed and scientific information which is the subject for examination by an expert witness” (Berg v Flower Fifth Ave. Hospital, 102 AD2d 706 [1st Dept 1984]).  And, Courts have granted protective orders where the information sought in the notice to admit may be obtained through document discovery (Jet One Group, Inc. v Halcyon Jet Holdings, Inc., 111 AD3d 890 [2d Dept 2013]), or where the notice to admit is used to exact an admission from one party of “facts within the unique knowledge of other parties to the action” (Taylor v. Blair, 116 AD2d 204 [1st Dep’t 1986]).

The Upshot:

A notice of admit should be used only for disposing of uncontroverted questions of fact or those that are easily provable.  Indeed, a notice that seeks to compel the admission of material facts in dispute, legal conclusions, technical, detailed, or scientific information, or information within the unique knowledge of a third-party, may be improper.  But, no matter how unreasonable the notice of admit, a recipient who neither reasonably denies the matters nor promptly moves to test the validity of the notice is courting trouble.  If the recipient ignores the notice based on a mistaken assumption that the court will ultimately find the notice unreasonable, she will be held to the usual rule that silence is an admission.  And so, the safest course for a litigant on the receiving end of an unreasonable or improper notice to admit is to promptly move for a protective order.  

 

Pursuant to Part 130 , attorneys are obligated to undertake an investigation of a case.  But is an attorney responsible for ignorance of facts which the client neglected to disclose?  “No,” says the Commercial Division.

In a recent decision by Justice Andrew Borrok, the Commercial Division discussed this very issue. In Morgan and Mendel Genomics v Amster Rothstein & Ebenstein, LLP, Albert Einstein College of Medicine (“Einstein”) hired the law firm of Amster Rothstein & Ebenstein, LLP (“Defendant”) to assist Einstein in obtaining a patent for its new genetic testing technology, invented by Einstein employees, Dr. Ostrer and Mr. Loke.  By way of background, the publication date of the technology is critical because it starts the one-year clock for filing a patent application.

In Morgan and Mendel Genomics, Einstein advised Defendant that it first published an article (the “Article”) about its technology in March 2012—which would start the one-year timeframe by which Defendant would have to file a patent application.  In addition, Einstein submitted to Defendant an Invention Disclosure Form, which confirmed in writing that the technology was first published in March 2012.  However, Defendant learned, on its own, that the Article appeared online on January 11, 2012 and communicated that fact to Einstein. And so, Defendant filed a provisional patent application on January 8, 2013 and a non-provisional application on January 8, 2014.

On September 14, 2016, the United States Patent and Trademark Office (the “USPTO”) rejected the application as untimely because the Article was available online on December 15, 2011, more than a year before the provisional patent application was filed with the USPTO.

On November 22, 2019, plaintiff Morgan and Mendel Genomics (“Plaintiff”), who purports to have entered into an agreement with Einstein wherein Einstein assigned to Plaintiff its claim against Defendant, commenced an action for legal malpractice.

Defendant moved to dismiss the motion under CPLR § 3211(a)(7) arguing , among other things, that the law firm was retained solely to file a patent application – not to investigate whether the information provided to it by its client was not false. Justice Borrok concluded that “[a]lthough an attorney is responsible for investigating and preparing a client’s case, the attorney ‘should not be held liable for ignorance of facts which the client neglected to tell him or her.'”  To that end, the Court determined that “Plaintiff’s claim is doomed by the fact that the claim is premised on false information which the Defendant’s lawyers were allowed to rely on and for which they were not hired to investigate (i.e. that the article had in face been published earlier).”  

The Second Department in Green v Conciatori similarly dismissed a legal malpractice claim against attorneys who represented plaintiff in a personal injury action.  In Green,  plaintiff alleged that his lawyers were negligent in failing to discover certain facts about the plaintiff’s accident, which differed from the facts disclosed to them by their client, i.e., the plaintiff.  The Second Department held that “[w]hile an attorney has a responsibility to investigate and prepare every phase of a client’s case, an attorney should not be held liable for ignorance of facts which the client neglected to tell him or her.” In Green, the court further determined that plaintiff did not show that counsel “failed to exercise the ordinary reasonable skill and knowledge possessed by a member of the legal profession” in relying on the information provided by the client.

The Third Department in Parksville Mobile Modular, Inc. v Fabricant  also determined that although an attorney “has the responsibility to ‘investigate and prepare every phase’ of his client’s case,” “an attorney should not be held liable for his ignorance of facts which his client neglected to tell him” (73 AD2d 595, 598 [3d Dept 1979] [holding that the fact that the attorney did not develop as full record as was developed following a trial cannot be grounds for a legal malpractice claim]). In Thompson v Seligman, however, the Third Department denied defendant law firm’s motion for summary judgment on a legal malpractice claim where the plaintiff was under a mistaken belief as to an important fact regarding its worker’s compensation claim, and the attorney failed to review the record evidence, which would have shown plaintiff’s mistaken belief (Thompson vSeligman, 53 A.D.3d 1019 [3d Dept 2008]).  There, the court stated that the question becomes “whether, in the performance of that duty [to investigate and prepare for his client’s case], defendants “ ‘exercise[d] that degree of care, skill, and diligence commonly possessed and exercised by a member of the legal community’ ” (see id.).

Takeaway: 

Can you safely rely on facts provided to you by your clients? It depends.  The Commercial Division says: yes, you can and a client’s failure to provide his or her counsel with correct information is not a basis for a legal malpractice claim. However, the steps one takes to investigate will always, of course, be judged by whether they were consistent with the  care and diligence exercised by others in the field.

We all hoped ringing in the New Year would mean leaving some of the hardships from the COVID-19 pandemic behind in 2020. However, in just two short months, businesses struggling with rent and other financial obligations due to COVID-19 restrictions are getting little to no relief from the Commercial Division.

You first read Madeline Greenblatt’s post about Commercial Division Justice Andrew Borrok dismissing lingerie brand Victoria’s Secret’s lawsuit seeking to rescind its lease for its 20,000 square foot flagship store located in Herald Square, and avoid its $937,734.17 monthly rent obligation due to COVID-19 . In that case, the New York County Supreme Court rejected Victoria’s Secret’s argument that its lease agreement should be declared unenforceable under the common law doctrines of “frustration of purpose” and/or “impossibility of performance.”

Then, only two weeks ago, James Wicks and I wrote about a decision issued by Commercial Division Justice Timothy S. Driscoll in an insurance coverage dispute between a movie theater company and its insurance carriers over losses due to the forced shut down of the theater as a result of COVID restrictions. In a case of first impression in New York, Justice Driscoll followed the lead of a majority of courts across the nation finding that loss of use of the property as a result of the Executive Order did not constitute “direct physical loss or damage to the property” to trigger coverage under commercial liability insurance policies.

Adding another decision to the list,  in Valentino U.S.A, Inc. v 693 Fifth Owner LLC,   Justice Andrew Borrok rejected Valentino U.S.A, Inc.’s (“Valentino”) attempt to be relieved of its $18,975,000.00 yearly rent obligations due to COVID-19 shutdowns. In its complaint, luxury fashion company Valentino brought the following eight causes of action against its landlord Defendant 693 Fifth Owner LLC (“Landlord”) to avoid its obligations under its lease agreement (“Lease”) for its prestigious Fifth Avenue storefront in New York City: (i) declaratory judgment of frustration of purpose – lease termination; (ii) in the alternative, declaratory judgment of frustration of purpose – rent abatement; (iii) impossibility of performance – lease rescission; (iv) in the alternative, impossibility of performance – rent abatement; (v) rescission based on failure of consideration; (vii) constructive eviction; (vii) declaratory judgment; and (viii) injunctive relief. While Valentino unsurprisingly cited the series of executive orders issued by Andrew Cuomo limiting and/or prohibiting “non-essential” business operations, Valentino also argued that even in a “post-pandemic New York City (should such a day arrive)” the “social and economic landscapes have been radically altered in a way that has drastically, if not irreparably, hindered Valentino’s ability to conduct high-end retail business” from its storefront. Valentino further argued that factors such as unprecedented financial disruptions, decreases in consumer spending, and unparalleled unemployment would have long lasting effects on brick-and-mortar retail stores like Valentino’s.

The Landlord moved to dismiss under CPLR 3211(a)(1) (defense founded upon documentary evidence), 3211(a)(7)(failure to state a claim), and 3211(c) (motion treated as one for summary judgment) arguing the lease agreement itself allocates to Valentino the risk of its inability to operate the premises and that financial loss does not equate to frustration or impossibility.[1] The Landlord pointed to several significant portions of the Lease including:

  • Section 2.3: Valentino promises to pay its rent “without any abatement, set-off or deduction whatsoever….”
  • Section 22.11: In the event of a governmental closure order or cataclysm, Valentino must continue to pay its rent.
  • Section 9.1: Valentino is required to comply with present and future governmental orders, whether foreseen or unforeseen.
  • Section 4.1: Valentino is not entitled to any set-off in rent liability based upon condition of Premises.
  • Section 21.11: In the face of cataclysmic events such as “failure of power, restrictive governmental laws or regulations, riots, insurrection, war, acts of terrorism, acts of God, floods, hurricanes, windstorms, fire or other casualty, condemnation or other reason of a similar or dissimilar nature…nothing contained in this Section shall operate to excuse Tenant from the prompt payment of Rent or any other payments or charges required by the terms of this Lease.”

The Court held that pursuant to Section 21.11 of the Lease, the parties expressly allocated the risk that Valentino would not be able to operate its business and that Valentino is therefore not forgiven from its performance, including its obligation to pay rent by virtue of a state law. Because the provision was broadly drafted, it was of no consequence that the COVID-19 pandemic was not specifically enumerated in the Lease. The Court further held that because Valentino failed to plead that it moved out of the premises or that the landlord substantially interfered with its use and possession, its claim for constructive eviction could not succeed. Evidence that Valentino was open for curbside retail and by appointment, or that Valentino vacated the premises only after the filing of the action, only hurt Valentino’s claim for constructive eviction. Based on these findings, Valentino’s complaint was dismissed in its entirety.

Upshot:

Recent decisions in the Commercial Division demonstrate that New York businesses have an uphill battle when seeking relief from rent and other financial obligations due to COVID-19 losses. In terms of rent obligations, claims of frustration of purpose and/or impossibility of performance are proving unsuccessful. Tenants should review their lease agreements for provisions which allocate the risk to tenants in the event of cataclysmic events.

[1] See 407 East 61st Garage Inc. v Savoy Fifth Ave Corp

The legal industry has adapted rather quickly in order to minimize the pandemic’s impacts on the practice of litigation by enacting orders, rules, and practices to keep the wheels of justice turning.  This includes the now-widespread use of virtual platforms for appearances before the Court as well as conducting remote depositions as my colleagues blogged about at the outset of the pandemic.  Notably, some have adapted to the “new normal” of virtual practice, while others seem to still struggle as the world saw in the now-infamous “cat-man court appearance” video.  Have remote depositions become the “new norm”?  It appears that way, as U.S. Magistrate Judge Stewart D. Aaron aptly remarked back last June in Rouviere v. Depuy Orthopaedics, Inc. (S.D.N.Y.).  Indeed, some Judges have even provided templates or sample deposition protocol stipulations like this one by U.S. Magistrate Judge Robert W. Lehrburger or another by U.S. Magistrate Judge Sarah L. Cave.

Remote depositions are nothing new in New York state courts (see CPLR 3113(d); Rogovin v Rogovin, and Yu Hui Chen v Chen Li Zhi), as well as the federal courts (see Fed. R. Civ. P. 30(b)(4)).  The dramatic increase in use, comfort level, and apparent permanency is a direct result of the pandemic. Indeed, the vision of the Commercial Division Advisory Council (“CDAC”) is to ensure that the Commercial Division remains at the forefront of this trend.

In September 2020, the CDAC sought to adopt a new Commercial Division Rule that would expressly authorize and regulate the use of remote depositions (the “Remote Deposition Proposal”).  The Remote Deposition Proposal seeks to provide further guidance on what is considered undue hardship, a standardized remote deposition protocol form, the validity of an oath or affirmation administered during a remote deposition when the court reporter is not physically located where the witness is present, and protections for defending attorneys and their clients in the event of technical difficulties.  The Proposal went out for public comment in November 2020, which closed on January 19, 2021, and is still pending a final decision from Chief Administrative Judge Marks.

The Remote Deposition Proposal also points out the potential pitfalls to remote depositions including technical issues, security issues, exhibit sharing, and, of particular importance, private communications.  While certain private communications should be accommodated (e.g. – privilege discussions), virtual depositions do have the potential for increased abuse of other communications such as coaching and guiding the witness.  As the Remote Deposition Proposal notes and provides potential safeguards against, deponents may commit abuses by communicating via digital devices and any “chat” feature of the virtual platform, if available.

Despite the potential pitfalls, the CDAC is taking affirmative steps towards combatting the potential for abuse and capitalizing on the undeniable efficiencies of remote depositions. Pro se and indigent litigants can testify remotely without having to take off of work or find childcare.  Lawyers no longer need to bill clients for their travel time to and from a deposition, worry about traffic, or public transportation delays.  Even commencement and recess times can be greatly reduced.

In short, while some may still struggle to adapt to the new norm, and New York’s Commercial Division appears poised to find the efficient, silver-lining of the pandemic, don’t forget to dress for success (as a Florida Judge recently reminded), just as if the proceeding were in person. As for wearing shorts during a remote deposition?  Don’t do it, cautions the authors of a recent ABA article, as dressing professionally conveys “to the deponent of the seriousness of the proceeding.  In other words, dressing the part can lead to acting the part.”  Good, sound advice worth heeding!

COVID-19 continues to generate litigation in a variety of contexts in the Commercial Division.  Only two weeks ago did our colleague Madeline Greenblatt author a blog about COVID-19 not excusing commercial rental obligations.  Now, in what appears to be a case of first impression in New York at least, Justice Timothy S. Driscoll ruled in an insurance coverage dispute between a movie theater company and its insurance carriers over losses due to the forced shut down of the theater as a result of COVID restrictions. In so ruling in Soundview Cinemas Inc. v. Great Amer. Ins. Group, the Court followed the lead of a majority of courts across the nation that have decided business interruption coverage cases arising out of the COVID-19 pandemic.

Soundview Cinemas  operated a movie theater in Port Washington, New York.  The business was insured under a commercial general insurance policy issued by Great American Insurance, with limits of $1.15 million for business personal property and $600,000 for business income and extra expense — all defined terms in the policy.  In response to the onset of the COVID-19 pandemic, on March 7, 2020, Governor Andrew Cuomo issued Executive Order No. 202, which declared a disaster emergency for the entirety of New York State. The complaint alleges that the pandemic and ensuing Executive Orders forced its final curtain call: the curtains came down, the box office closed and the theater shuttered its doors.  Demand was made under the policy, to which Great American declined.

The complaint asserted a myriad of claims against the carrier and broker, ranging from negligence to breach of fiduciary duty.  The policy itself contained a “civil authority” clause (covering actual losses of income caused by edict of civil authority prohibiting access to the property), as well as a “virus exclusion” (excluding coverage for damages caused by viruses, bacteria, or microorganism).  The defendants immediately moved to dismiss under CPLR 3211(a)(1) (defense founded upon documentary evidence) and 3211(a)(7)(failure to state a claim).

As to the claims against the insurance brokers, the Court easily found that based upon the pleading, there were no allegations that the insured sought specific coverage that would apply to a pandemic, or that would support a claim that the broker should have procured additional insurance.  In fact, the Court noted that “Plaintiff does not even allege that any such insurance coverage for pandemic-related government closures existed prior to March 2020.”  Turning to the claims against the insurer, the Court concluded that under the “majority view,” loss of use of the property as a result of the Executive Order did not constitute “direct physical loss or damage to the property” to trigger coverage.

The Nassau County Commercial Division now joins the ranks of many courts nationwide that have addressed or are currently addressing claims for business interruption coverage arising out of the COVID-19 pandemic.[1] For instance, a District Court in Missouri held that policyholders adequately stated a claim for physical loss based on COVID-19 closures. In Studio 417 v. The Cincinnati Insurance Co., hair salons and restaurants in Springfield and Kansas City, Missouri, filed claims for losses due to COVID-19 closures under “all-risk” property insurance policies issued by The Cincinnati Insurance Co. Cincinnati denied the claims and the policyholders filed suit in the Western District of Missouri, asserting a right to payment under the policies’ coverages for business income, extra expense, dependent property, civil authority, extended business income, ingress and egress, and sue and labor. In its motion to dismiss, Cincinnati argued that the insureds failed to allege a “physical loss” and that this requirement can only be satisfied through “actual, tangible, permanent, physical alteration of property.” The court disagreed, finding that COVID-19 can constitute a “direct physical loss” to property sufficient to trigger coverage because “loss,” based on its plain and ordinary meaning, encompasses “the act of losing possession” and “deprivation” of property. Further, the court reasoned that the policy language extends coverage for direct physical loss or damage. Rejecting Cincinnati’s argument that both “loss” and “damage” require some form of tangible or physical alteration, the court held that pursuant to the rules of policy construction, “loss” and “damage” must have different meanings based on the use of the disjunctive word “or.” The Missouri court held, “[e]ven absent a physical alteration, a physical loss may occur when the property is uninhabitable or unusable for its intended purpose.”

Another recent decision, issued by a New Jersey district court on February 10, 2021, was not so favorable to the policyholder. In Causeway Automotive, LLC, et al. v Zurich American Insurance Co., plaintiffs sought coverage for losses sustained as a result of COVID-19 under business income and extra expense “caused by action of civil authority” provisions of their policy. Zurich maintained that it properly denied coverage based on a virus exclusion which states the insurer “will not pay for loss or damage caused by or resulting from any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness or disease.” In opposition to Zurich’s motion to dismiss, plaintiff insureds argued the virus exclusion was ambiguous and, therefore, should be interpreted in plaintiffs’ favor. Plaintiffs further argued that because the COVID-19 virus was but one cause in a sequence of events that led to their losses, the virus exclusion does not apply. The court disagreed, finding that plaintiffs’ potential interpretations of the virus exclusion did not render it ambiguous or otherwise unclear. The court was similarly unpersuaded by plaintiffs’ argument that the virus exclusion did not apply because their losses were not caused by COVID-19 but, rather, by the Governor’s Executive Orders requiring closure of certain aspects of Plaintiffs’ business. To determine whether the loss was “caused by” an excluded peril, the New Jersey court employed the efficient proximate cause test. The court found that the Governor’s orders were issued for the sole reason of reducing the spread of the virus that causes COVID-19 and would not have been issued but for the presence of the virus in the State of New Jersey. As a result, the New Jersey court granted the insurer’s motion to dismiss.

As one of the few cases getting past the motion to dismiss stage, on January 14, 2021, Cherokee County District Court Judge Douglas A. Kirkley granted partial summary judgment in favor of the insured on a claim for business interruption losses caused by COVID-19. In Cherokee Nation et al. v. Lexington Insurance Co. et al, plaintiffs argued that under their all-risk policy, a direct physical loss or damage occurs when a covered property is rendered unusable for its intended purpose. Plaintiffs maintained that COVID-19 caused the Nation to shut down covered properties, engage in disinfection efforts, and implement protective measures before reopening. The insurers argued that plaintiffs had not demonstrated a direct physical loss or damage and that contamination, pollution, and other similar exclusions applied. In granting summary judgment, the Oklahoma court found plaintiffs established a “plausible claim for a fortuitous ‘direct physical loss’” under their all-risk tribal property policy.

 

 

[1] University of Pennsylvania Carey Law School has created a “Covid Coverage Litigation Tracker” which compiles data from business interruption coverage cases across the nation and tracks judicial rulings. While the site’s organizers are transparent about limitations of the available data, the site can be an excellent resource for tracking COVID related insurance cases nationwide.

 

 

 

 

 

 

 

 

A quick timeout this week from some of our more substantive content here at NY ComDiv Practice to report on some upcoming events and happenings in and around the Commercial Division, particularly in Westchester County…

This past Monday, during her weekly message concerning the ongoing COVID-19 pandemic and its effect on the court system (see video version here), Chief Justice Janet DiFiore commented on the recent amendments to the Uniform Civil Rules for the Supreme Court and the County Court, which, as extensively reported by my colleague and fellow blogger Peter Sluka last month, effectively implemented the Commercial Division’s rules and procedures into all civil courts across the State of New York:

[The amendments] are designed to make case management and pretrial litigation more efficient and cost-effective for lawyers and litigants in our civil courts. A number of changes also serve the goal of limiting unnecessary personal appearances and foot traffic in our courthouses.

On February 23, the New York State Academy of Trial Lawyers is sponsoring a program entitled “New Uniform Rules for the Supreme and County Courts: The Implementation” during which Westchester County Commercial Division Justices Linda S. Jamieson and Gretchen Walsh will be presenting on these wholesale rule changes to the civil court system and discussing how the changes are being implemented statewide.

And speaking of unnecessary appearances and reduced foot traffic in the courthouse, Chief Judge DiFiore also reported this week on some specifics on court productivity in this new age of virtual or remote practice:

For the week of January 25th, our judges and staff conferenced and heard 24,309 matters; settled or disposed of 6,617 (or 27%) of those matters; and issued over 1,800 written decisions on motions and other undecided matters. In addition, 1,047 virtual bench trials and evidentiary and fact-finding hearings were commenced last week across the state.

As we reported late last year, recently-amended ComDiv Rule 1 (remote appearances) and Rule 6 (hyperlinking) represent quintessential examples of how the Commercial Division continues to be an adaptive and innovative leader in the world of specialized business courts.  The amendments were particularly apropos given the circumstances forced upon us all by COVID, including the judiciary.

On March 24, the WCBA Business & Commercial Law Committee is sponsoring a virtual town-hall program, featuring Justices Jamieson and Walsh and their Principal Court Attorneys, who will be offering their views on the implementation of and practical effect that these amended ComDiv rules have had in the Westchester County Commercial Division, particularly on the topic of administering justice remotely during the ongoing pandemic.  Also on hand for the lunchtime Zoom program will be a representative from Westchester and Long Island based Appellate Innovations, who will present on the nuts-and-bolts of bookmarking and hyperlinking legal documents in this virtual era.

Registration specifics for both programs can be found under “Events” on the WCBA website.  Hope to see you all there!

The lingerie brand Victoria’s Secret (“VS”) has struggled in recent years. VS’ overtly sexy aesthetic has failed to keep up with shifting consumer tastes towards comfort and gender and size inclusivity. In 2019, VS canceled its marquee fashion show, which had run annually for 23 years, showcasing supermodels in VS’ trademark angel wings strutting the runway with millions tuning in to watch. In addition, the long-standing relationship between founder Leslie Wexner and convicted sex offender/disgraced financier Jeffrey Epstein has been given renewed attention, eventually leading to claims of a toxic culture of misogyny within the company.

victoria's secret VS also has been no match for COVID-19. After experiencing sharply declining sales in recent years, VS has been forced to shutter approximately one-quarter of all its US and Canadian stores in 2020.

In May 2020, VS became one of the first major brands to try to legally break one of its leases due to the coronavirus pandemic. However, on January 7, 2021, it was further dealt a blow by Commercial Division Justice Andrew Borrok who dismissed VS’ lawsuit against Herald Square Owner LLC (“Landlord”) seeking to rescind the lease (the “Lease”) for its 20,000 square foot flagship store located in Manhattan’s heavily foot-trafficked Herald Square and avoid its $937,734.17 monthly rent obligation.

The Complaint

In its Complaint, VS alleged that its Herald Square location was forced to close in March 2020 due to the coronavirus pandemic and Governor Cuomo’s Executive Orders ordering a statewide lockdown to combat it.  It claimed that the Lease should be declared unenforceable under the common law doctrines of “frustration of purpose” and/or “impossibility of performance.” According to VS, the “purpose of tendering a monthly rent of $937,734.17 or more to operate a retail store is completely frustrated when that store cannot open . . . [or] can open at only a marginal capacity,” and the governmental actions prohibiting the operation of VS’ store during the pandemic render performance under the Lease to be impossible. It also alleged that COVID-19’s effect on retail could not have been foreseen by either party at the time the Lease was entered into.

Landlord’s Summary Judgment Motion

Landlord filed an Answer asserting two counterclaims against VS for breach of the Lease and breach of the Lease’s guaranty. On that same day, Landlord also filed a motion for summary judgment dismissing the Complaint, asserting that VS’ claims were defeated by Article 26 of the Lease, pursuant to which VS specifically anticipated a store closure in the event of a failure of the Landlord to perform any of its obligations due to “governmental preemption” or an “order” arising out of a “national emergency,” and that VS would still be required to pay rent under such circumstances. Therefore, Landlord argued that the doctrines of “frustration of purpose” and/or “impossibility of performance” are precluded when the risk was foreseeable, and when the Lease contemplated the precise risk in question and allocated that risk to VS.  Landlord also stressed the fact that the Lease did not contain a force majeure clause.

VS’ Opposition Papers

The thrust of VS’ opposition papers was that Article 26 of the Lease only contemplated a “temporary store closure” and not “a massive, government-shutdown of all non-essential commercial activity in New York City” due to COVID-19. In the opening paragraphs of its opposition brief, VS appealed to the court’s heartstrings:

At the outset, we recognize this motion’s significance. This Court will likely be the first to rule on the novel issues presented, and its ruling will have sweeping consequences reaching beyond this action to the many other suits mirroring the allegations of the Complaint. . .  But this case is about what happens when the unthinkable occurs; indeed, something so profound – so extraordinary – that it exceeds that which was reasonably possible or even perceivable when those “what ifs” were conjured. Where (as here) such an occurrence shatters the very core of a commercial deal, the frustration of purpose doctrine operates to rescind the contract. . . COVID-19 epitomizes such an event.

Landlord’s Reply Papers

In its reply papers, Landlord’s counsel reiterated that the issue is not whether the Lease specifically addresses a forced store closure as a result of COVID-19, but rather whether the Lease contemplated the risk of a forced store closure, and if so, how the Lease allocated that risk, which would be dispositive of VS’ claim.

Additionally, in a rather crafty maneuver, Landlord’s counsel submitted an affidavit in which he described visiting Herald Square in August 2020. Although VS’ store was boarded up, he visited the open neighboring stores and purchased various hipster items in those locations, submitting pictures and receipts from Macy’s (beard oil), H&M (socks), and Urban Outfitters (a waterproof earbud case). He also visited the fully-open VS’ West 125th Street store and purchased a fragrance called “Seduction.” The shopping excursion was done to show that “retail stores, and even a Victoria’s Secret store, can operate in Manhattan in the post-COVID-19 environment,” and that all VS was really arguing was that it could not operate its flagship store profitably.

The Decision

In the end, the Court was persuaded by Landlord’s arguments and granted summary judgment dismissing the Complaint in its entirety, stating succinctly:

The Complaint is premised on the mistaken theory that the parties did not allocate the risk of tenant not being able to operate its business and that tenant is therefore somehow forgiven from its performance by virtue of a state law. This is contrary to the express allocation of these risks set forth in Paragraph 26 of the Lease Agreement . . .  It is of no moment that the specific cause for the government law was not enumerated by the parties because the Lease as drafted is broad and encompasses what happened here — a state law that temporarily caused a closure of the tenant’s business. . . The parties agreed that this would not relieve the tenant’s obligation to pay rent.

The Takeaway

The COVID-19 pandemic and the governmental actions taken have caused numerous financially strapped commercial tenants to commence lawsuits against their landlords seeking to rescind their leases and/or avoid paying rent premised on a force majeure clause in the lease and/or under the doctrines of impossibility of performance and frustration of purpose. There will undoubtedly be more such lawsuits in 2021. Recent decisions by Commercial Division justices, including this most recent decision by Justice Borrok, demonstrate the high bar that commercial tenants will have to surmount to be excused from their lease obligations given the Court’s narrow application of common law defenses in the face of conflicting lease language.

 

The New York Commercial Division was created in 1993 “to test whether it would be possible, by concentrating on commercial litigation, to improve the efficiency with which such matters were addressed by the court and, at the same time, to enhance the quality of judicial treatment of those cases.”  By implementing rules and procedures developed with efficiency in mind and after careful consultation with Judges and practitioners alike, the Commercial Division has become a resounding success; it is one of the most efficient and effective forums in the world for the litigation of complex civil disputes.

It should therefore come as no surprise that other New York courts have taken notice of the innovative rule changes contributing to the success of the Commercial Division.  As Chief Administrative Judge Marks observes: “through the work of the Commercial Division Advisory Council – a committee of commercial practitioners, corporate in-house counsel and jurists devoted to the Division’ s excellence – the Commercial Division has functioned as an incubator, becoming a recognized leader in court system innovation, and demonstrating an unparalleled creativity and flexibility in development of rules and practices.”

Now, by Administrative Order effective February 1, 2021, the Uniform Civil Rules for the Supreme Court (the “Uniform Rules”) will incorporate, in whole or in part, nearly 30 Commercial Division Rules.  Some of these changes were foreshadowed by my colleague Paige Bartholomew in 2018 when the Unified Court System’s Advisory Committee on Civil Practice requested public comment on whether to adopt nine of the Commercial Division’s Rules.   Continue Reading Innovation Becomes the Norm: Commercial Division Rules Shape Revised Uniform Rules for the Supreme Court and County Court

“Successor liability”, is it a theory or distinct claim or cause of action?

In a recent decision, Justice Sherwood analyzed the applicability of successor liability as a distinct cause of action, rather than merely a theory of liability in New York.  In Meyer v Blue Sky Alternative Investments LLC, plaintiff Meyer moved to amend his complaint to add a new party, RBP Partners, LLC as successor to defendant Blue Sky Alternative Investments, LLC and to assert a new claim of successor liability against defendant RBP.

To demonstrate the merits of the successor liability claim, plaintiff argued that RBP is a “mere continuation” of Blue Sky, whereby all of Blue Sky’s assets had been stripped and transferred to RBP and although RBP is not owned by exactly the same individuals as Blue Sky, Plaintiff believed that he would be able to show a continuity of ownership after discovery.

In opposition, RBP argued that successor liability is not a cognizable claim under New York law, but merely a theory for imposing liability on a defendant based on a predecessor’s conduct and that plaintiff failed to allege a transaction between Blue Sky and RBP such as a stock or asset purchase agreement which, defendant argued, is a requisite predicate for its successor liability claim.  Further, RBP opposed the allegation of successor liability by arguing that Blue Sky still exists, RBP and Blue Sky did not share corporate officers or directors, and there was no proof of any transfer of assets from Blue Sky to RBP or continuation of the same business.

In New York, the general rule is that a purchaser of the assets of another corporation is not liable for the seller’s liabilities.  However, this rule is not without exceptions.

In a previous blog post I wrote about the exceptions to this general rule and analyzed that a purchaser can be held liable for liabilities of the seller in the following circumstances:  (1) the buyer expressly or impliedly assumed the predecessor’s tort liability; (2) there was a consolidation or merger of seller and purchaser; (3) the purchasing corporation was a “mere continuation” of the selling corporation; or (4) the transaction is entered into fraudulently to escape such obligations (Marcum LLP v Fazio, Mannuzza, Roche, Tankel, Lapilusa, LLC).  In Marcum, the Court analyzed whether a purchaser could be held liable for a seller’s liabilities under a theory of successor liability, not a separate cause of action.  Ultimately, the Court in Marcum found that, based on the parties’ Business Combination Agreement, the purchaser corporation only assumed liability for seller’s liabilities arising in the ordinary course of business and did not impose liability for seller’s litigations.

The Court considers a successor a “mere continuation” of its predecessor (under the third exception to the general rule) where:

(i) all of substantially all assets of the predecessor are transferred to the successor corporation;

(ii) only one corporation exists after the transfer,

(iii) assumption of an identical or nearly identical name,

(iv) retention of the same corporate officers or directors, and

(v) continuation of the same business

(Miot v Miot).

Here, the Court acknowledged the legitimacy of successor liability as a separate cause of action rather than a mere theory of liability and found that plaintiff’s proposed complaint successfully stated a claim of successor liability against RBP under a theory that RBP is a “mere continuation” of Blue Sky where plaintiff specifically alleged that Blue Sky ceased to exist and had its assets stripped and transferred to RBP, Blue Sky’s principals have become principals and corporate officers of RBP, RBP is located in the same building and office suite as Blue Sky, and RBP invests in the same sectors as Blue Sky.

Importantly, the Court also rejected RBP’s argument that plaintiff is required to allege a transaction between the successor and predecessor corporation as a necessary predicate to a finding of successor liability.

Ultimately, the Court’s decision further reinforces that “successor liability” as a separate and distinct cause of action, rather than a mere theory of liability, is here to stay (at least in New York County) as long as plaintiffs can meet their burden with respect to the “mere continuation” theory.

Recently, Justice James Hudson issued a decision testing the limits of New York’s Long Arm Statute. The Court was tasked with determining whether personal jurisdiction exists over an out-of-state defendant, based on a claim arising from an out-of-state contract, but where a portion of the work under the contract was performed in New York.

In Black Diamond Aviation Group LLC v Spirit Avionics, Ltd., plaintiff Black Diamond Aviation Group LLC (“Black Diamond”) brought a declaratory judgment action, asking the court to determine whether defendant Spirit Avionics, Ltd. (“Spirit) was obligated to pay non-party Aircraft Structures Engineering Solution (“ASES”) for work performed by ASES on Black Diamond’s aircraft.

Black Diamond, a company organized under Delaware Law with a principal place of business in Greenwich, Connecticut, offers airplanes for private charter. Spirit performs aircraft maintenance and refurbishment out of Ohio. ASES is an aerospace engineering service company domiciled and located in Illinois.

In 2018, Black Diamond contacted Spirit to perform work on its Dassault Falcon 7X Jet (“Falcon 7X”). In January, 2019, Black Diamond and Spirit signed a proposal for work to be performed on the Falcon 7X (i.e. installation of a speaker system, WIFI system, USB outlets, and modifications to windows and doors) which included a price estimate for work to be done by subcontractors–namely ASES. The agreement was modified in May, 2019, via email, which stated Spirit would perform a host of upgrades to the Falcon 7X for $91,000 (the “May 2019 Agreement”). Spirit then used ASES as the subcontractor to perform some of the work.

At first, work on the Falcon 7X took place in Columbus, Ohio. But it was soon after realized that some of the work would need to take place at Islip MacArthur Airport, in Suffolk County, New York. The Falcon 7X was transported to McArthur Airport under the condition that Black Diamond pay half of the $91,000 to Spirit at the time of transport, and the other half upon completion. Black Diamond paid half its balance to Spirit, the Falcon 7X was brought to McArthur Airport, and upon completion Black Diamond paid the remaining balance of the $91,000 to Spirit.

In October, 2019, Black Diamond requested Spirit perform additional work to the Falcon 7X, to which Spirit instructed Black Diamond to engage ASES directly. Black Diamond did so, and received a cost estimate invoice which included both the cost of the new work, as well as the cost of some of the work previously provided under the May 2019 Agreement. Black Diamond paid ASES an advance payment of $23,214 to cover the new work, but when ASES invoiced Black Diamond for the remaining $59,903, Black Diamond refused to pay. Black Diamond contends that Spirit is responsible for paying the balance to ASES, and brought the subject action seeking a declaratory judgment holding the same.

Spirit moved to dismiss, asserting, inter alia, lack of personal jurisdiction. In its complaint, Black Diamond alleged the court had jurisdiction over the matter because the action arose out of services performed in Ronkonkoma, New York, and because Spirit purposely availed itself of the privilege of transacting business in New York. In determining whether personal jurisdiction over Spirit existed, the Court looked to whether Black Diamond properly invoked New York’s Long Arm Statute under CPLR § 302.

Justice Hudson’s decision takes its reader through a history of the salient personal jurisdiction decisions and is likely reminiscent of your 1L civil procedure outline. The highlights are as follows:

  • World-Wide Volkswagen Corp v Woodson – a court may exercise jurisdiction over a defendant only where there are “sufficient contacts with the forum state and substantial evidence that the defendant purposely availed themselves of the protections of the forum state.”
  • Daimler AG v Bauman – a corporation’s association with the forum state must be “so continuous and systematic as to render the corporation at home in the state.” A court should consider the following factors: (i) burden on the defendant; (ii) the forum state interest; (iii) the plaintiff’s interest in litigating in the forum; (iv) efficient resolution of controversies; and (v) the shared interest of the several states in furthering fundamental substantive policies.
  • Bristol-Myers Squibb Co. v Superior Court– there must be a “strong affiliation” between the specific claim at issue in the case and the forum state.
  • Licci v Lebanese Canadian Bank – Although determining what facts constitute “purposeful availment” is an objective inquiry, it always requires a court to closely examine the defendant’s contacts for their quality.
  • Pichardo v Zayas – for personal jurisdiction to exist there must be an “articulable nexus” or “substantial relationship” in light of all the relevant circumstances. There must be some “relatedness between the transaction and the legal claim at issue.”

Under the facts alleged in Black Diamond’s complaint, the Court determined no specific jurisdiction exists over Spirit because it has “no strong affiliation” with New York. The work performed by Spirit was performed solely in Columbus, Ohio; Spirit did not send any staff to work in New York; and the only connection Spirit had to New York was they agreed to release the Falcon 7X from their care to MacArthur Airport to be worked done by ASES.

The court emphasized that when a contract is negotiated via e-mail, or telephone, as it was here, and no business is performed within the forum state, the foreign defendant is not subject to personal jurisdiction (see AM Pitt Hotel LL C v 400 5th Ave LP). Here, the entirety of the May 2019 Agreement was negotiated and agreed upon between Spirit’s office space in Ohio and Black Diamond’s office in Connecticut, and the bargained for work pursuant to that agreement did not take place in New York, but rather Ohio. The court found, relying on an affidavit from the CEO of Spirit, that Spirit does not have an office in New York State and does not have any employees or property in New York State. Only upon request from Black Diamond did Spirit release the Aircraft to New York where the work was completed. Thus, the Court found Spirit did not avail itself the protections of the New York nor does it have sufficient contacts within New York and therefore personal jurisdiction could not be properly asserted over Spirit.

Upshot: Work performed in the forum state in connection with an out-of-state contract may be insufficient to establish personal jurisdiction over a foreign defendant.