Commercial Lease

I think it’s fair to say that there’s been an uptick in litigation involving commercial lease disputes and retail property closings gone awry over the last 15 months.  And for obvious reasons.  The commercial real estate industry has taken a beating from COVID-19.

Some evidence of this of this uptick can be found in the decisions being handed down in the Commercial Division of late, which involve issues not exactly foreign to the forum but represent a bit of a departure from the more typical closely-held business disputes that, as Nassau County ComDiv Justice Timothy Driscoll once remarked, “are our bread-and-butter here in the Commercial Division.”

One reason for this, perhaps, is the subject-matter limitation found in Uniform Rule 202.70(b)(3), which expressly “exclud[es] actions for the payment of rent only” from commercial real estate disputes otherwise available for ComDiv adjudication.  After all, ComDiv cases are almost always all about money.  Not so in the context of commercial lease disputes, at least as concerns issues of rent.  Which means that commercial real estate litigators interested in taking advantage of the many benefits of having their clients’ disputes adjudicated in the the Commercial Division may need to get a little creative in their pleadings.

Last month, Manhattan ComDiv Justice Andrew Borrok issued a decision in Prada USA Corp. v 724 Fifth Fee Owner LLC involving certain suspension provisions in a commercial lease for high-end retail space in NYC.  The provisions gave the owner-landlord (Owner) the option to suspend the retail tenant’s (Prada’s) tenancy for up to three years for purposes of redeveloping its premises.  Upon exercise of the suspension option — which, by the way, Owner was permitted to do “from time to time” (more on that later) — Prada would be entitled to select a build-out model for its space in the redeveloped building and to receive liquidated damages in an amount up to $5 million “to compensate it for being displaced from its occupancy in the demised premises.”

In late 2018, Owner gave notice of its intent to exercise the suspension option, and in early 2019 Prada selected a layout for its new store, development of which was projected to begin by March 2020 and complete by March 2023.  In October 2019, however, Owner attempted to withdraw its notice “as if it was never given” because development of the building “was no longer feasible.”  Prada then sued for a declaration that Owner’s one-time suspension option was irrevocable and for $5 million in liquidated damages as a result of Owner’s anticipatory breach.  On summary judgment, Justice Borrok ultimately found that Owner could not revoke its option but that Prada was not entitled to liquidated damages because the suspension of its tenancy, which was premised on Owner’s redevelopment, never occurred.

Put another way, the approximately $5 million liquidated damages were meant to put the parties in as close a position as they could be notwithstanding a redevelopment-related suspension.  Neither party can profit from or arbitrate on a suspension notice that did not result in a surrender of occupancy or an actual renovation-related suspension or change to the premises.  The only potential issue for trial is whether, in the absence of a renovation, Prada [is entitled to] third-party costs or other foreseeable reasonable costs incurred prior to receiving notice from Owner of its intention not to proceed with the proposed building development.

Although Prada managed to obtain a declaration that Owner’s suspension notice was irrevocable, Justice Borrok declared in an earlier decision that Owner nonetheless retained the option to suspend Prada’s tenancy for future redevelopment purposes.  This ruling turned on a curious issue of contract construction involving the phrase “from time to time.”

In short, the lease’s suspension provisions expressly provided that “Owner shall have the option . . . , from time to time, . . . to suspend the possession of Tenant with respect to all of the Demised Premises.”  Prada contended that the phrase “from time to time” was synonymous with the phrase “at any time” and therefore should be “interpreted to confer a single one time only option.”

Now, I understand from my transactional real estate colleagues that use of the phrase “from time to time” is atypical in commercial leases, particularly as it relates to a party’s exercise of this or that right.  Confirmation of this fact was apparent in the parties’ underlying briefing — represented by Sullivan & Cromwell and Quinn Emanuel, no less — in which only one case was cited by Owner’s counsel for the proposition that “it is self-evident from the plain meaning of the phrase . . . that Owner has the right to exercise a Suspension Option more than once” (citing Sullivan v Harnisch, 96 AD3d 667 [1st Dept 2012]).  In fact, the First Department in Sullivan — a case involving an LLC member’s right to determine bonus compensation “from time to time” under an operating agreement — ruled that there was no limitation on when during the fiscal year the member could make such a determination, not how many times.

Given this paucity of practical and legal precedent, it comes as no surprise that Justice Borrok did not cite any authority to support his finding on the issue — which, as noted above, permitted Owner to retain the option.  Instead, the judge appeared to appeal to basic common sense when finding that:

These words mean exactly what they say and do not mean what they do not say — i.e., ‘from time to time’ necessarily means more than once. . . .   [T]he Lease does not provide any words of limitation limiting the Owner to a single option which is customary and necessary to include in these agreements when such limitation is intended.  And, ‘from time to time,’ can only mean more than one time.

As the title of this blog post suggests, the everyday usage of the phrase “from time to time” tends to mean more than once, confirming Justice Borrok’s finding in Prada USA Corp. v 724 Fifth Fee Owner LLC.  Still, its probably best to be a little less folksy when setting the specific parameters of a party’s material right in a commercial lease.

 

[I] irrevocably release and forever discharge [the Company] . . . from any and all actions, causes of action, suits, debts, claims, complaints, liabilities, obligations, charges, contracts, controversies, agreements, promises, damages, expenses, counterclaims, cross-claims, [etc.] whatsoever, in law or equity, known or unknown, [I] ever had, now have, or may have against the [Company] from the beginning of time to the date hereof.

When someone releases another from claims, he is relinquishing his right to sue in connection with the subject of the release.  So long as it is not procured by fraud, New York courts will generally enforce broad general releases, such as the one above, as a party’s waiver of future fraud and fiduciary duty claims even when such claims are not foreseeable at the time of contract execution.  In Chadha v Wahedna, 2021 NY Slip Op 50509(U), a June 2, 2021, decision by New York Commercial Division Justice Barry Ostrager, the plaintiff learned this lesson the hard way when his pleading was dismissed in its entirety due to his execution of a general release covering his claims.

Underlying Facts and the Amended Complaint

The dispute in Chadha involves a financial technology and services company that offers investment opportunities compliant with Islamic law (the “Company”) and its controlling shareholder, director, and CEO (“Wahedna,” together “Defendants”).

In his Amended Complaint, Nilish Chadha (“Chadha”), the former COO, board member, and shareholder of the Company, alleged that from October 2016 through January 2017, Defendants engaged in a fraudulent scheme to purchase 530 of Plaintiff’s shares in the Company at deeply discounted values by inducing Plaintiff to enter into a series of three Common Stock Repurchase Agreements (“CSRAs”). Plaintiff claimed that Defendants fraudulently misrepresented to Plaintiff the value of his shares, and, in breach of fiduciary duties owed to him, failed to disclose higher share prices that were being negotiated with third-party investors in order to buy out Plaintiff’s shares in the Company at lower prices.

In June 2020, more than three years after the sale of all his shares in the Company, Plaintiff filed this action seeking to recover damages arising from the alleged “surreptitious” purchase by Defendants of Plaintiff’s 530 shares through alleged fraud and failure to disclose the existence of the potential equity investors. Plaintiff asserted that knowledge of these discussions would have impacted his opinion of the value of his stock in the Company.

The Motion to Dismiss

Defendants pointed to a Settlement Agreement and Release (the “Settlement Agreement”), entered into between Plaintiff and Defendants in connection with the CSRAs, which included the general release language referenced above.  Relying on the Settlement Agreement, Defendants moved to dismiss the Amended Complaint on the basis that all of the causes of action were barred by the release, arguing that it broadly released all claims, whether known or unknown, and, as a consequence, the Settlement Agreement extinguished all of the Amended Complaint’s claims.  Defendants also argued that Plaintiff did not negotiate any specific limitations to the release that might preserve any of the claims, a fact which Plaintiff fully understood when he executed the Settlement Agreement.

The Court’s Analysis and Decision

In considering whether the general release at issue barred Plaintiff’s claims, the Court looked to guidance from the New York Court of Appeals.  In Centro Empresarial Cempresa S.A. v America Movil, S.A.B. de C.V., 17 NY3d 269 (2011), cited throughout the decision, the Court affirmed the First Department’s dismissal of a case brought by former owners of shares in a telecommunications company because the general release plaintiffs granted to defendants in connection with the sale of plaintiffs’ ownership interests encompassed unknown fraud claims, regardless of the fiduciary relationship between the parties.  The Court of Appeals held that, as sophisticated parties, plaintiffs negotiated and executed an “extraordinary release . . . [and] cannot now invalidate that release by claiming ignorance of the depth of their fiduciary’s misconduct.”

In Chadha, the Court held that Defendants met their burden of providing a release that encompassed unknown future fraud claims because the release unequivocally referred to “any and all actions” “whatsoever” “known or unknown,” thereby shifting the burden to Plaintiff to establish that the release was invalid due to contract defenses, such as fraud. Under the facts alleged in the Amended Complaint, however, the Court held that Plaintiff could not avoid dismissal for a number of reasons.

To begin with, the Court found dispositive the fact that Plaintiff did not allege a fraud separate from the subject of the release, stating that the allegation that Wahedna allegedly concealed the existence of a future investment by a third-party that would have been favorable to the Company was not “separate from the broad cover of the release which is ‘any and all claims [ ] the Investor Released Parties ever had, now have, or may have against the Company Released Parties from the beginning of time to the date hereof.’”

Next, the Court rejected Plaintiff’s argument that the fiduciary relationship between Plaintiff and Wahedna prevented the parties from being able to release fraud claims because Plaintiff signed the release after selling all his shares in the Company, so that a fiduciary relationship between the two of them no longer existed.  The Court also found that Plaintiff, as the COO of the Company at that time, had access to information relevant to the Company and did not exercise his own diligence in evaluating the value of his shares. The Court also rejected Plaintiff’s argument that he lacked sophistication to understand that he was releasing all future and unknown claims inasmuch as Plaintiff had “an undergraduate degree in Business Administration from The American University in Dubai and was sophisticated enough to serve as the Company’s COO which inherently involved an understanding of the Company’s financial status.”

In the end, the Court dismissed Plaintiff’s Amended Complaint with prejudice.

Takeaway

The Court’s recent holding in Chadha reinforces the fact that parties can contract away fraud and fiduciary duty claims with general releases. If a party wants to ensure that it is not waiving its right to bring such claims, then it should make sure to negotiate disclaimer language specifically indicating that it does not intend to waive such a claim. By including targeted and specific language, a party can rest easy that a court will enforce a disclaimer in the way in which it intended.

For more case law analysis concerning general releases, look to Peter A. Mahler’s post from the other week in Farrell Fritz’s New York Business Divorce blog.

 

Parties to a contract generally can include in their agreement a provision preventing assignment of the agreement’s rights and remedies without the consent of both parties.  Because a party’s assignment of rights under a contract to a third party may have serious implications for both sides in the performance of that agreement, anti-assignment clauses protect the contracting parties by ensuring that no transfer of the agreement’s rights occurs without the consent of all involved.  Dance with the date you brought.  And absent fraud, unconscionability, or some other reason to invalidate the contract, courts generally enforce those anti-assignment clauses.

In the insurance context, however, the enforcement of anti-assignment clauses is more complicated.  Because insurers—like any contractual party—have a legitimate interest in protecting themselves from insureds’ assignment of the insurance agreement to a different, perhaps more risky party, anti-assignment clauses in insurance agreements are enforceable against assignments that occur prior to a covered loss.  Arrowood Indem. Co. v. Atlantic Mut. Ins. Co., 96 AD3d 693, 694 [1st Dept 2012].  But in circumstances where the assignment occurs after the covered loss, New York courts are more critical of anti-assignment clauses.  In those circumstances, courts reason, there is no increased risk to the insured; the loss already occurred, and the only thing that changes as a result of the assignment is who the insurer will need to pay for that loss.

In Certain Underwriters At Lloyd’s, London v AT&T, Corp., 2021 N.Y. Slip Op. 31740[U], a recent decision by New York Commercial Division Justice Cohen, the Court explores the exceptions to the general rules regarding anti-assignment clauses in insurance policies.  Ultimately, the case underscores the difficulties insurers face in disclaiming coverage by enforcement of an anti-assignment clause in the policy.

Continue Reading Can You Assign Your Rights Under an Insurance Contract that Prohibits Assignment? Only for Prior, Fixed Losses

The Full Faith and Credit Clause of the United States Constitution provides that “Full Faith and Credit shall be given in each State to the public acts, records, and judicial proceedings of every other state.” In terms of stipulations of settlement, New York courts favor such stipulations and will rarely set them aside absent the presence of “fraud, collusion, mistake or such other factors as would undo a contract.” Heimuller v Amoco Oil Co., 92 AD2d 882, 884 (2d Dept 1983). Recently, Suffolk County Commercial Division Justice Elizabeth Hazlitt Emerson issued a decision in F.W. Sims, Inc. v Simonelli, which examined whether a stipulation of settlement entered into in a related federal action can be enforced in a separate action under the Full Faith and Credit Doctrine.

In F.W. Sims, Inc. plaintiffs Camile Shea (“Camile”), Patrick Simonelli (“Patrick”), Lilly Ann Wiswall (“Lilly Ann”), Arthur Seeberger (“Arthur”) and F.W. Sims, Inc. (“F.W. Sims”) (collectively, the “Plaintiffs”) commenced an action against Deborah Simonelli and Dana Grimaldi, as Executors of the Estate of Joseph Simonelli (“Joseph”) and several contractors, including Prospective, LLC (“Prospective”) and its principal Dorothy Covelli a/k/a Williams (“Dorothy”) (“State Court Action”). Plaintiffs alleged that Joseph embezzled approximately $25 million dollars from F.W. Sims, a family-owned heating, ventilation, and air-conditioning systems business, by directing the defendant contractors to submit fraudulent invoices for work that was never performed. On November 12, 2014, Joseph was arrested by the FBI for his involvement in the fraudulent billing scheme, which resulted in the government commencing an in-rem forfeiture action (the “EDNY Action”) against his property in the United States District Court for the Eastern District of New York. The EDNY Action was eventually settled pursuant to a “Stipulation and Order of Settlement and Discontinuance” (the “Stipulation”). The Stipulation provided that:

[F.W.] Sims, its officers and shareholders, [Deborah] Simonelli-Grimaldi, [Dana] Grimaldi, the Simonelli Estate, Serendipity [Farm LLC] and British Betty Racing Stables LLC agree to release each other for all claims made in or which could be made in or could arise from the State Court Action [this action] and agree to consent to the dismissal of the State Court Action by the filing, therein, of a Notice of a Stipulation of Discontinuance with Prejudice.

                                                                                                           * * *

This Stipulation, and the validity, performance, construction and enforceability thereof shall be governed, and construed, in accordance with the laws of the State of New York, without regard to its choice-of-law rules. The United States District Court for the Eastern District of New York shall retain exclusive jurisdiction and shall be the exclusive venue for the resolution of any dispute arising under, and concerning the interpretation and enforcement of, this Stipulation.

Following the execution of the Stipulation, defendants Dorothy and Prospective moved to dismiss Plaintiffs’ complaint in the State Court Action, arguing (1) dismissal was required pursuant to the terms of the Stipulation in the EDNY Action; and (2) the causes of action were barred by the statute of limitations. In opposition, Plaintiffs argued that defendants Dorothy and Prospective did not have standing to enforce the Stipulation since the defendants were neither parties to the EDNY Action nor signatories to the Stipulation itself.

In its decision, the Court denied the branch of Dorothy and Prospective’s motion for dismissal of the action pursuant to the terms of the Stipulation for three reasons. First, the Court clarified that “the Stipulation is not a judgment that is entitled to full faith and credit,” but rather, is governed by general contract principles for its interpretation. Second, the Court held that Dorothy and Prospective did not have standing to enforce the Stipulation because (a) neither Dorothy nor Prospective were parties to the Stipulation; and (b) the terms of the Stipulation did not contain any language to “evince an intent to permit enforcement” by Dorothy or Prospective. Third, the Court found that it did not have jurisdiction to resolve this issue, since the parties to the Stipulation agreed that all disputes concerning the interpretation and enforcement of the Stipulation were to be resolved by the United States District Court for the Eastern District of New York.

Takeaway:

This decision is a strong reminder of the distinctions between the enforcement of judgments and stipulations. In the case of non-parties and/or non-signatories, counselors should closely analyze the terms of a stipulation to determine whether their client has standing to enforce the stipulation in any future / related proceedings.

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Earlier this year, my colleague, Madeline Greenblatt, wrote about the emergence of a new body of case law emanating from the myriad effects the COVID-19 pandemic has had on the real estate industry.  In her blog, Madeline discussed a recent decision from the Manhattan Commercial Division (Borrok, J.), rejecting a commercial tenant’s argument that it should be excused from paying rent based upon the doctrines of impossibility and frustration of purpose.  Madeline aptly predicted we would see an uptick in COVID-19-related commercial lease disputes.  Right she was.

Just last week, the Manhattan Commercial Division in A/R Retail, LLC v Hugo Boss Retail, Inc. (2021 NY Slip Op 21139 [Sup Ct, NY County, May 19, 2021] [Cohen, J.]), yet again rejected a commercial tenant’s reliance on the doctrines of impossibility and frustration of purpose to excuse non-performance of its rent obligations.

Background of the Dispute

Located at the Shops in Columbus Circle (the “Shops”) in Manhattan – an upscale, highly trafficked shopping mall in Time Warner Center – the tenant, Hugo Boss, operates a two-story retail store (the “Store”) pursuant to a 13-year commercial lease (the “Lease”) with the landlord, A/R Retail, LLC (“A/R”). The Lease includes a force majeure clause excusing the non-performance of certain obligations based upon events beyond the non-performing party’s reasonable control, including, among other things, war, terrorism, acts of God, strikes, or any order or regulations of or by any governmental authority.

On March 7, 2020, as the COVID-19 pandemic swept through New York, Governor Cuomo signed Executive Order 202, declaring a State disaster emergency for the entire State of New York.  Executive Order 202 kicked off a series of related Executive Orders which, as relevant here, mandated commercial and retail store closures. Pursuant to the Executive Orders, A/R closed the Shops – including the Store – on March 17, 2020.

Hugo Boss paid rent under the Lease for the month of April 2020, but did not pay rent in full thereafter.  On September 9, 2020, the Shops reopened to the general public and, since then, the Store remains open for business (albeit at limited capacity).  Hugo Boss’ business at the Store, however, declined significantly since the pandemic.  Although Hugo Boss continued to operate the Store, it had not paid rent in full since April 2020.

A/R and Hugo Boss brought separate actions against each other based on overlapping theories of liability and defenses.  In the first action, A/R asserted claims against Hugo Boss for breach of the Lease, and for attorneys’ fees and costs.  Hugo Boss asserted defenses and counterclaims based upon the doctrines of impossibility and frustration of purpose.  Separately, Hugo Boss asserted claims against A/R for, among other things, rescission or reformation of the Lease based upon the doctrines of impossibility and frustration of purpose.

A/R moved for summary judgment on its causes of action for a money judgment against Hugo Boss for amounts due under the Lease, and sought dismissal of Hugo Boss’ affirmative defenses and counterclaims.

The Court’s Decision

The Court first determined that A/R established its prima facie entitlement to judgment of matter of law because it was “undisputed” that Hugo Boss failed to pay rent and other charges due under the Lease.  The Court then concluded that Hugo Boss failed to raise triable issues of fact sufficient to warrant rescinding or reforming the Lease based on the doctrines of frustration of purpose or impossibility of performance.

The Court began its analysis with a brief discussion of the “Coronation Cases” and the legal principles underlying the doctrine of frustration of purpose.  Describing the doctrine “as a narrow one,” the Court explained the doctrine is only applicable where the basis of the underlying contract has been completely destroyed.  Partial frustration – such as a diminution in business, where a tenant could continue to use the premises for an intended purpose – is not enough.  In addition, the doctrine is not available “where the event which prevented performance was foreseeable and provision could have been made for its occurrence,” or where the contract actually addresses the particular calamity that eventually befell the parties.

Applying these principals, the Court rejected Hugo Boss’ argument that pandemic-related restrictions “entirely frustrated” the purpose of the Lease.  Although the pandemic triggered several months of shutdown, the resulting set of capacity restrictions only reduced – and did not completely eliminate – Hugo Boss’ ability to generate revenue from its retail operation.  The Court acknowledged that, although the adverse economic effects of the pandemic undoubtedly are real and significant, the temporary closure of the Store, and resulting restrictions, did not “rise to the level of triggering an extra-contractual common law right to rescind a 13-year lease.”

The Court also concluded the force majeure clause – which specifically addressed the risk of government restriction on the use of the premises – undermined Hugo Boss’ frustration of purpose defense.  Even though the Lease did not explicitly mandate payment of rent in the event of a government shutdown or capacity limitation, the fact that the Lease addressed the risk of government orders or regulations – and stated the specific grounds on which the parties’ prompt performance of their obligations might be excused (or not) – was, in the Court’s view, sufficient to demonstrate that government closures and capacity restrictions were not “wholly unforeseeable.”

Finally, the Court rejected Hugo Boss’ impossibility of performance defense.  As the Court explained, impossibility excuses a party’s performance “only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible” and is produced by “an unanticipated event that could not have been foreseen or guarded against in the contract.”  Financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy, is insufficient.

To the extent Hugo Boss’ impossibility argument was predicated on government orders — both during the shutdown period and afterward — the Court concluded that the risk of such disruptions was not unforeseeable, as it was addressed in the Lease’s force majeure clause.  Furthermore, it was undisputed that Hugo Boss operated the Store during the reopening period (September 2020 to present).  And so, the Court concluded that Hugo Boss’ performance under the Lease was not “objectively impossible” even though its business was affected by the pandemic.

Collection of New York Cases Rejecting Impossibility and Frustration of Purpose Theories in the Wake of COVID-19

Since the pandemic hit, a number of New York cases assessing commercial lease disputes have held that the temporary and evolving restrictions on a commercial tenant’s business do not warrant rescission or other relief based on frustration of purpose or impossibility of performance.  Below is a non-exhaustive list of such cases:

Although an overwhelming number of New York courts have rejected commercial tenants’ frustration of purpose and impossibility theories, at least one New York court held that the tenant’s performance under the subject lease was made impossible by the COVID-19 pandemic (see 267 Development, LLC v. Brooklyn Babies and Toddlers, LLC, No. 510160/2020 [Sup Ct, Kings County, Mar. 15, 2021]).  However, the landlord has since filed a motion to reargue/renew, and a notice of appeal.  The motion to reargue is fully submitted and awaiting decision.

Takeaway

In recent cases where tenants have sought to avoid their rent obligations during the pandemic, New York courts have looked to the specific terms of each lease, rather than the highly unusual circumstances of the COVID-19 pandemic, to decide whether the tenant’s performance under the lease was excusable due to either frustration of purpose or impossibility.  A majority of New York courts that have addressed the issue seem to agree that the doctrines of impossibility or frustration of purpose are unavailable where (as in most cases) the lease addresses the possibility of a government-mandated shutdown, or the tenant’s business ultimately resumed operations (even at limited capacity).

A cause of action accrues, triggering the commencement of the statute of limitations period, when “all of the factual circumstances necessary to establish a right of action have occurred, so that the plaintiff would be entitled to relief” (Gaidon v. Guardian Life Ins. Co. of Am.).  The “continuing wrong” doctrine is an exception to the general rule that is usually employed “where there is a series of continuing wrongs and serves to toll the running of a period of limitations to the date of the commission of the last wrongful act” (Henry v. Bank of Am.).

The First Department in CWCapital Cobalt VR Ltd. v. CWCapaital Invs. LLC recently examined the “continuing wrong” doctrine as compared to a single breach in the context of the statute of limitations.

By way of background, in CWCapital Cobalt VR Ltd., plaintiff placed its investors’ money in 50 different trusts holding commercial mortgage-backed securities (CMBS). The investors received collateralized debt obligations (CDOs) – the collateral being the certificates issued to plaintiff by the CMBS trusts, which are structured as a series of classes (the most senior class having the first claim on revenues generated by the commercial loan).

Plaintiff entered into a collateral management agreement (“CMA”) with defendant CWCapital Investments LLC (“CWCI”) to act as controlling class representative with respect to the trusts in which plaintiff had control rights.  Under the CMA, CWCI was obligated to, inter alia, act with reasonable care and in good faith ensure that the value of plaintiff’s assets is maximized. CWCI was also responsible for appointing a special servicer, who would direct and supervise the disposition of loans to mitigate the losses suffered by the trust when the loans fail and do not generate principal and interest payments.

Plaintiff’s complaint alleges that CWCI breached the CMA and the common-law fiduciary duty it owed to plaintiff in its capacity as collateral manager.  CWCI’s purported wrongdoings included the actions of CWCI’s affiliate, CWCapital Asset Management LLC (CWCA), a special servicer appointed by CWCI on plaintiff’s behalf.

Underlying plaintiff’s claims for breach of contract, breach of fiduciary duty, and unjust enrichment are the following three types of alleged misconduct by defendants. First, plaintiff alleged that CWCA, as special servicer, failed to share the significant fees with plaintiff that are generated with every loan workout, which was allegedly the market standard since as far back as 2011. Second, plaintiff alleged that instead of hiring third-party vendors when its special servicing required the use of brokers and auction websites, CWCA “spun off” from itself a new entity called CWFS-REDS, LLC. CWFS-REDS, LLC negotiated with these vendors and insisted that the vendors pay it a “kickback,” thus harming plaintiff and its investors by inflating asset disposition costs. Third, plaintiff alleged that CWCI and CWCA failed to exercise fair value price options (“FVP Options”) to plaintiff and instead usurped these options, exercising them for their own benefit.

Defendants moved to dismiss the complaint in its entirety because, among other things, plaintiff’s complaint was time-barred by the statute of limitations.  Defendants argued that CWCA “had already begun to commit the acts involving fee sharing and FVP Options more than six years before the commencement of the action in 2018, thus placing the claims based on those acts outside of the limitations periods for both breach of fiduciary duty and breach of contract claims.”  Plaintiff, on the other hand, argued that defendants had a continuing duty to act in accordance with the CMA and not to breach their fiduciary duty. Plaintiff’s argument relied on the assumption that defendants’ activities “amounted to a series of wrongs, each of which gave rise to its own limitations period.”

In dismissing certain claims as untimely, Justice Andrea Masley held that certain of the claims alleged a “single breach” and held that the “continuing wrong” doctrine “may only be predicated on continuing unlawful acts and not the “continuing effects” of earlier unlawful conduct.”   In dismissing certain claims as untimely, the court held that “CWCI’s alleged failure to take appropriate action with respect to the special servicer did not renew the limitations period each time CWCA negotiated a transaction without a revenue sharing agreement, since each transaction after the breach first occurred only increased [plaintiff’s] potential damages.”

On appeal, plaintiff argued that the trial court erred in failing to apply the continuing wrong doctrine as defendant’s purported misfeasance gave rise to more than one claim. Plaintiff further argued that the allegations against CWCI constitute a series of individual wrongs, each subject to a new limitations period.  Defendants, on the other hand, argued that the “continuing wrong” doctrine is inapplicable because the alleged wrongs only occurred once, i.e., when CWCI failed to terminate CWCA for not arranging to share its fees, for using CWFS REDS LLC, and for failing to exercise the FVP Options for plaintiff’s benefit.

The First Department ultimately concluded that the continuing doctrine does apply. The majority reasoned that “[t]he explicit language of the CMA conferred on CWCI a continuing duty to manage [plaintiff’s] investment” and to prevent activities that could harm plaintiff. The Court opined that while “a claim accrued the first time CWCI failed to act upon CWCA’s engagement in behavior that allegedly diminished the value of its investment, there is no basis for the argument that each subsequent time CWCI failed to act did not constitute a separate, actionable, wrong.”  The Court relied on the New York Court of Appeals’ decision in Bulova Watch Co. v. Celotex Corp., where the Court concluded that a new claim, with a new limitations period, accrued each time the roofing material supplier failed to honor its promise to repair the roof.

In a 3-2 decision, Justice Saliann Scarpulla dissented from the majority.  In her dissent, Justice Scarpulla stated that plaintiff’s complaint alleged a single breach of the CMA due to “CSCI’s failure to terminate CWCA, which failure had continuing effects, i.e., increasing damages as a result of CWCA’s continued work as special servicer.” Justice Scarpulla reasoned that where, as here, “there was a one-time decision, on a specific contract date, to delegate management to CWCI, and [plaintiff’s] numerous claims concerning CWCI’s special services all arise from that one-time decision,” the continuing breach doctrine is inapplicable. Justice Scarpulla relied on the Second Circuit’s decision in Kahn v Kohlberg, Kravis, Roberts, & Co., where the court rejected plaintiff’s position that each time the defendant exercised its advisory function without being registered, it created a distinct claim for the violation of the Investment Advisors Act of 1940, in opining that where parties enter into a single, discrete contract, claims regarding performance under that contract only impact damages and do not create new claims.

Practice Tip 

When considering the applicability of the statute of limitations defense, you must first determine whether the wrongdoings constitute a single wrong or a continuous serious of wrongs.  This analysis will be instrumental in determining whether your client has a timely claim at the commencement of the litigation or whether your client can move to dismiss on statute of limitations grounds.

Under the Commercial Division Rules, a court may seal court records “upon a written finding of good cause.”[1] So, what led Justice Robert R. Reed to deny two unopposed motions to seal in a recent decision in the New York Commercial Division? Lack of specificity.

In Cortlandt St Recovery Corp v Bonderman, Plaintiffs Cortlandt Street Recovery Corp. (“Cortlandt”), and Wilmington Trust Company (“WTC”) sought the enforcement of a €268,000,000 judgment. Defendants, a series of firms, funds, partners, and individual members of private equity fund groups, moved to dismiss. In opposing Defendants’ motion, Plaintiffs redacted certain portions of its memorandum of law and used placeholder pages for over 60 documents and deposition transcripts filed as exhibits (“Exhibits”) on New York State Courts Electronic Filing System (“NYSCEF”) because the documents purportedly contained private, confidential financial information, and certain business and proprietary information.

WTC then moved to seal the Exhibits.[2] Defendants cross-moved, similarly seeking to seal six deposition transcripts attached as Exhibits to Plaintiffs’ opposition. Neither party opposed the other’s motion. Nevertheless, Justice Reed explained “the court is required to make its own inquiry to determine whether sealing is warranted.”

Many of the Exhibits WTC and Defendants sought to seal included reports prepared by Plaintiffs’ experts and transcripts of the deposition of those experts. However, in its moving brief, other than generally claiming that the Exhibits “cited to, relied on or disclosed ‘Confidential Information’” as defined by a confidentiality agreement entered into by the parties, WTC offered little, to no additional information as to the particular documents, and what portions of those documents were deemed sensitive and confidential.

The court denied WTC’s motion on the grounds that WTC’s assertions were vague and conclusory, and thus, “insufficient to meet a movant’s burden to demonstrate compelling circumstances to justify restricting public access.”  In commercial matters, the movant must demonstrate that the material it seeks to seal contains trade secrets, confidential business information, or proprietary information and that disclosure could be harmful to a party.[3] Specifically, the court found that WTC failed to address any particular document or transcript, or explain how or why public disclosure might cause potential harm. For example, concerning an Exhibit containing an expert’s opinion as to the alter ego status of certain entities, the Court found that WTC failed to indicate “what in the report requires sealing or why.” Similarly, WTC failed to address why certain Exhibits concerning foreign law and financial instruments from 2006 would need protection “so many years later.”

In their cross-motion, Defendants argued generally, that certain Exhibits contained confidential information concerning “business operations and internal practices and procedures” in which the public had no discernible interest in. The court denied Defendants’ cross-motion on the grounds it suffered similar conclusory infirmities as WTC’s motion. For example, certain deposition transcripts Defendants’ sought to seal involved transactions occurring prior to 2007 or other dated material and comments about general industry knowledge. The court found that Defendants did not sufficiently demonstrate what specific information was: (1) proprietary; (2) maintained in a confidential manner over the years; or (3) would lead to an unearned advantage for competitors if disclosed.

While Justice Reed denied WTC and Defendants’ motions in their entirety, he did so without prejudice, giving the parties an opportunity to make another motion to seal (which motion would concisely and specifically addresses each exhibit the party seeks to have sealed and/or redacted).

UPSHOT

Although the Commercial Division Rules permit the sealing of court records, motions to seal will not be granted based on conclusory or vague assertions of confidentiality. When asking the court to seal records, be ready to describe, with specificity, which documents need to be sealed and why.

[1] 22 NYCRR § 216.1(a).

[2] Prior to the Court’s decision, WTC reviewed the Exhibits further and eventually filed many, but not all, of the previously withheld Exhibits on NYSCEF.

[3] Vergara v Mission Capital Advisors, LLC, 187 AD3d 495, 496 (1st Dept 2020); Mancheski v Gabelli Group Capital Partners, 39 AD3d 499, 502 (2d Dept 2007).

A critical inquiry to be considered at the outset of any litigation is whether the party seeking relief is, in fact, a proper party to seek the court’s adjudication of the dispute.  This concept is known as “standing,” which is a threshold determination to be made by the court, the absence of which warrants dismissal of a pleading under CPLR 3211 (a)(3).

Last month, Albany Commercial Division Justice Richard M. Platkin issued a decision in Keach v BST & Co. CPAs, LLP confirming that in order for the plaintiff in a hacking/data breach action to survive a CPLR 3211 (a)(3) motion to dismiss predicated on standing grounds, the plaintiff must allege that “he or she has suffered, or will suffer, an actual [or imminent] injury-in-fact by reason of the [d]ata [b]reach.”

In Keach, each of the two plaintiffs and his putative class commenced an action against Community Care Physicians, P.C. (“CCP”), an Albany-based medical group, and BST & Co. CPAs, LLP (“BST”), an accounting and consulting firm servicing CCP, following a “ransomware” attack on BST’s computer systems.

Plaintiffs are CCP patients who provided certain information to CCP in the course of receiving health-related services.  In December 2019, BST had a data security incident whereby hackers obtained access to a portion of BST’s network on which client data, including member data provided by CCP, was hosted.  As a result of this data breach, the personal information of 170,000 current and former CCP patients was accessed, which included the patients’ names, dates of birth, medical record numbers, medical billing codes, and insurance descriptions, but did not include Social Security numbers, medical diagnoses, financial information, or bank account information.

Plaintiffs cumulatively asserted nine causes of action against the defendants based on the data breach: (1) negligence; (2) negligence per se; (3) violation of General Business Law 349; (4) breach of fiduciary duty; (5) breach of contract; (6) trespass to chattels; (7) bailment; (8) unjust enrichment; and (9) conversion. Thereafter, defendants jointly filed a single motion to dismiss applicable to the two actions, arguing, among other things, that plaintiffs did not, and cannot, allege that they have sustained an injury-in-fact from the data breach, and instead have relied exclusively on the speculative possibility of harm that could occur in the future. Defendants further noted that, at best, in their respective complaints, plaintiffs have merely alleged that they were “significantly injured” by the data breach and “now forever face an amplified risk of fraud and identity theft.”

The Court articulated and applied a five-factor test to determine whether the harm allegedly incurred by the plaintiffs was actual or imminent, namely: “(1) the type of personal information that was compromised; (2) whether hackers were involved in the data breach or personal information otherwise was targeted; (3) whether personal information was exfiltrated, published and/or otherwise disseminated; (4) whether there have been any incidents of, or attempts at, identity theft or fraud using the compromised personal information; and (5) the length of time that has passed since the data breach without incidents of identity theft or fraud.”

After application of these five factors, the Court held that the plaintiffs did not have the requisite standing and dismissed both complaints, noting as follows:

“Even assuming that the personal information of plaintiffs, which did not include social security numbers or financial account information, was exfiltrated from BST’s computer systems as part of the ransomware attack, plaintiffs have alleged no acts of identity theft, fraud or other suspicious activity involving their personal information. Nor have plaintiffs alleged any attempts to commit identity theft, fraud or other wrongdoing using their personal information … the passage of a lengthy period following the Data Breach with no suspicious activity weighs heavily against finding that the injuries claimed by the named plaintiffs are imminent or substantially likely to occur…”

The Court then recognized that courts in other jurisdictions, including jurisdictions in which New York courts shared co-equal jurisdiction, found plaintiffs to have standing under similar circumstances. Nevertheless, the Court found that the “ubiquitous nature of data breaches” weighs in favor of applying a “cautious approach to standing,” citing to the first sentence of a decision of the U.S. District Court for the Middle District of Pennsylvania, observing:

“There are only two types of companies left in the United States, according to data security experts: those that have been hacked and those that don’t know they’ve been hacked.”

This decision serves as a reminder that a fundamental element to any claim is damages, and, where the plaintiff has not sustained any damages, there are no claims for the court to adjudicate.

 

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In December 2020, the New York Law Journal commented on the measures the New York State court system would enact to handle the recent $300 million budget cut.  These measures included “adopting a strict hiring freeze, deferring raises, suspending countless programs, and declining to extend the judicial service of 46 retired trial and appellate judges.”  This was a difficult decision to be sure, but the alternative could have been catastrophic: the layoff of over 300 employees.

Given the combination of the court system’s shrinking workforce and the existing backlog of cases, New York’s Commercial Division is seeking to reduce its caseload through the expansion of ADR, both externally and internally.  In December 2020, the Commercial Division Advisory Council (“CDAC”) sought to adopt two new Commercial Division Rules that would expand the opportunities for litigants to settle out of or in court.

The first proposal seeks to “amend Commercial Division Rule 3(a) (22 NYCRR § 202.70(g), Rule 3(a)) ‘to permit the use of neutral evaluation as an ADR mechanism and to allow for the inclusion of neutral evaluators in rosters of court-approved neutrals'” (the “Roster Expansion Proposal“).  The CDAC’s Roster Expansion Proposal would reduce the 40-hour training requirement for mediators to allow neutral evaluators, “who only have to undergo six hours of training and have five years of training as per Part 146,” to be added to the roster of neutrals.  This change is sought not only to increase the number of neutrals, but also to increase the diversity of the roster.  Certification information as “mediator” or “neutral evaluator” would be available to both judges and litigants.  The Roster Expansion Proposal went out for public comment in December 2020, closed on January 29, 2021, and is still pending a final decision from Chief Administrative Judge Marks.

The CDAC’s second proposed Commercial Division Rule change, to amend Commercial Division Rule 30, would mandate client participation in settlement conferences (the “Settlement Conference Proposal“), as “the CDAC believes that business clients will find attractive the institutionalization of the settlement process.”  While the Settlement Conference Proposal offers parties many options to request different neutrals (the assigned judge, another judge in the Commercial Division, JHO, Special Referee, neutral, mediator from Part 146 roster, or a private neutral), the forced timing of the settlement conference after filing the Note of Issue is perhaps something to be desired.  The Commercial and Federal Litigation Section of the New York State Bar Association submitted its comments to the Settlement Conference Proposal noting that “many can debate when a mandatory settlement conference should be held, and that it perhaps should occur earlier than proposed by the CDAC,” such as before the time and expense of depositions.  The Settlement Conference Proposal also went out for public comment in December 2020, closed on February 12, 2021, and is still pending a final decision from Chief Administrative Judge Marks.

Both proposals would provide necessary relief to the Commercial Division’s workload, given the required staffing reductions of 2020.  And while litigants may initially be opposed to “mandatory” settlement, their control over the settlement process, the reduced time in waiting for a neutral from an expanded roster, and the reduced costs inherent in foregoing a trial, may be welcome news after a particularly volatile year.

The statute of limitations to recover on a breach of contract is six years.  Parties can extend that limitations periods by agreement, and New York General Obligations Law 17-101 governs the form of such agreements.  It provides that, “[a]n acknowledgment or promise contained in a writing signed by the party to be charged thereby is the only competent evidence of a new or continuing contract whereby to take an action out of the operation of the provisions of limitations of time for commencing actions under the civil practice law and rules. . . ”  Per GOL 17-101, only signed writings acknowledging the indebtedness and promising to pay are sufficient to extend the statute of limitations.

In considering whether a writing satisfies GOL 17-101 and extends a statute of limitations, Courts require three elements: Signature, Content, and Delivery.

First, the acknowledgement must be “signed by the party to be charged thereby.”  See 20 Plaza Hous. Corp. v. 20 Plaza E. Realty, 950 N.Y.S.2d 871, 874 (Sup. Ct. N.Y. Cty. Aug. 30, 2012) (Section 17-101 inapplicable because acknowledgment was “not signed by defendant”).

Second, the acknowledgment must convey “an intention to pay Plaintiff’s debt.”  See Knoll v. Datek Sec. Corp., 2 A.D.3d 594, 595 (2d Dep’t 2003) (“[T]he critical determination is whether the acknowledgment imports an intention to pay.”).  If the writing is at all inconsistent with an unequivocal intention to repay the debt, the writing fails the requirements of GOL 17-101.

Third, the acknowledgment “must have been communicated to the plaintiff or someone acting on his behalf, or intended to influence the plaintiff’s conduct.”  See Lynford v. Williams, 34 A.D.3d 761, 763 (2d Dep’t 2006) (Section 17-101 inapplicable where “plaintiff did not learn of the [purported acknowledgments] until after he commenced this action”).

In part because GOL 17-101 was intended to limit the instances in which an acknowledgment revives a cause of action, Courts strictly enforce each of the three requirements.  A writing failing any of the Signature, Content, or Delivery requirements is insufficient to restart the statute of limitations.  While the requirements of GOL 17-101 are strictly enforced, not every ambiguity in the acknowledgment will defeat its enforcement.  Recently, in Hawk Mtn. LLC v. RAM Capital Group LLC, 2021 NY Slip Op. 01349, the First Department held that an acknowledgement was sufficient to satisfy GOL 17-101 and restart the statute of limitations, despite its failure to specifically refer to the debt and inconsistencies between the acknowledgment and the underling note.

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