In a recent decision, Justice Scarpulla of the New York County Commercial Division declined to exercise personal jurisdiction over several Japanese entities, and even imposed sanctions on the plaintiff for attempting to relitigate its already-decided claims in New York.

Defendant ANA Aircraft Technics, Co., Ltd. (“ANA Technics”) maintained a fleet of airplanes owned and operated by its parent, All Nippon Airways, Co., Ltd. (“ANA”).  In early 2003, ANA Technics entered into a Memorandum of Understanding (“MOU”) with plaintiff Kyowa Seni, Co., Ltd. (“Kyowa”), pursuant to which Kyowa agreed, among other things, to manufacture seat covers for ANA Technics.

After Kyowa began manufacturing the seat covers, ANA Technics allegedly directed Kyowa to: (1) affix TSO C127a labels onto the seat covers, demonstrating that the seat covers had been flammability tested in accordance with U.S. Federal Aviation Administration (“FAA”) regulations, and (2) execute certificates affirming the seat covers had been flammability tested.

Kyowa alleged it initially executed the certificates because it believed the required testing was performed, but subsequently requested confirmation that ANA Technics had conducted all of the necessary fire tests and possessed the certifications necessary to obtain the FAA labels. When ANA Technics failed to respond to Kyowa’s requests, Kyowa informed ANA Technics that it would not execute any additional certificates until it received confirmation that the testing was performed.

On October 1, 2004, ANA Technics terminated the MOU, claiming that Kyowa’s work was “substandard.” Kyowa brought an action in Japan (the “Japanese Action”) alleging, among other things, that ANA Technics terminated the MOU to conceal the unlawful TSO C127a labeling. Ultimately, the Japanese Action was dismissed, and that dismissal was upheld on appeal.

Kyowa then brought an action against ANA Technics and other related entities (collectively, the “ANA Companies”) in New York Supreme Court for fraud based on the same acts and transactions set forth in the Japanese Action. The ANA Companies moved to dismiss arguing, among other things, lack of personal jurisdiction. The ANA Companies also moved for sanctions against Kyowa on the ground that Kyowa’s lawsuit was an attempt to relitigate the same claims which were dismissed in the Japanese Action.

First, Justice Scarpulla rejected Kyowa’s argument that the ANA Companies were subject to general jurisdiction merely because the defendant companies were registered in New York and appointed the Secretary of State as their agent for service of process. According to the Court, the ANA Companies’ “simple registration in New York is an insufficient ground for this Court to exercise general jurisdiction over them.” Moreover, the fact that the ANA Companies, which are all incorporated and headquartered in Japan, derive some revenue from their New York flight operations “is plainly insufficient to render the ANA Companies ‘essentially at home’ in New York”.

Second, the Court declined to exercise specific jurisdiction over the ANA Companies under either CPLR §§ 302(a)(1) (transaction of business) or 302(a)(2) (tortious acts committed within the state). Specifically, the Court held there was no “articulable nexus” or “substantial relationship” between New York and Kyowa’s claims arising out of ANA Technics’ termination of the MOU.  And, the Court noted that Kyowa failed to allege any tortious act that the ANA Companies committed in New York. Indeed, the MOU was executed in Japan, any alleged misrepresentations occurred in Japan, the seat covers were manufactured in Japan, and any alleged harm to Kyowa occurred in Japan.

Last, the Court agreed that sanctions were warranted under 22 NYCRR § 130-1.1 because the “action is meritless and without a good faith basis.” According to the Court, “there is simply no basis for a New York court to assert jurisdiction over a dispute between Japanese entities, a dispute which has no specific connection to New York or its citizens.” Importantly, the Court noted that Kyowa’s claims were already fully litigated and disposed of in the Japanese Action.

As demonstrated in Kyowa Seni, Justices in the Commercial Division have very little patience for litigants who assert frivolous arguments and attempt to relitigate previously decided claims.  While the result in this case may seem harsh to some, a full reading of the Court’s decision reveals that Justice Scarpulla gave plaintiff the opportunity to withdraw its action and avoid sanctions.  Despite fair warning, Plaintiff declined to do so.

 

On June 5, 2018, in RKA Film Financing, LLC v. Kavanaugh et al., the First Department unanimously affirmed the Supreme Court, New York County’s decision absolving the United States Secretary of the Treasury, Steven Mnuchin, of fraud claims brought by RKA Film Financing LLC (“RKA”), a media financing company.

By way of background, in 2014, RKA, a media financing company, lent money to Relativity, a global media company. RKA alleged that it was misled into believing that it was investing in a low-risk lending facility and that the funds would be used for print and advertising expenses related to the release of motion picture films by special purpose entities (“SPE”). Specifically, RKA alleged that certain representatives of Relativity caused certain SPEs to enter into a print and advertising funding agreement with RKA (“Funding Agreement”). RKA alleged that the Funding Agreement contained misrepresentations, including that the funds would be used for print and advertising expenses for specific movies, to induce RKA to invest large sums of money. However, unbeknownst to RKA, Relativity used the funds to pay for general corporate expenses.

Mnuchin joined Relativity’s board as a non-executive director and chairman in October of 2014 after his private investment firm invested $104 million in Relativity. Mnuchin also served as the CEO and Chairman of OneWest, a commercial lender that lent millions to Relativity. RKA alleged that by way of Mnuchin’s position at OneWest, he was privy to the “inner-workings” of Relativity’s finances.

On April 10, 2015, in response to RKA’s request, members of Relativity informed RKA that only “$1.7 million had actually been spent” on print and advertising. On April 13, 2015, Relativity admitted that it misappropriated RKA’s funds.

Mnuchin, who did not participate in the execution or performance of the Funding Agreement, resigned from the Relativity board on May 29, 2015. Thereafter, on May 30, 2015, after Relativity defaulted on a loan from OneWest, Mnuchin began seizing $50 million from Relativity’s account to recoup OneWest’s loan.

RKA commenced suit against several defendants, including Mnuchin, alleging that they misled RKA into lending Relativity millions of dollars for print and advertising of major movie releases. Mnuchin moved to dismiss. The Supreme Court, New York County dismissed RKA’s claims against Mnuchin.

The Court held that RKA failed to establish its claim for fraud because “absent substantive allegations that Mnuchin was responsible for, aware of, or participated in the purported fraud surrounding the Funding Agreement, liability cannot attach.” Specifically, a plaintiff seeking to recover for fraud must “set forth specific and detailed factual allegations that the defendant personally participated in, or had knowledge of any alleged fraud.” To allege a cause of action for fraud, a plaintiff must also establish causation, showing that “defendant’s misrepresentations were the direct and proximate cause of the claimed losses.” Accordingly, Justice Charles E. Ramos concluded that despite allegations that Mnuchin had inside access to the way in which Relativity used the funds, that was insufficient to establish fraud absent evidence of representations made by Mnuchin.

Similarly, Justice Ramos held that RKA’s negligent misrepresentation claim fails because of an absence of a privity-like relationship between Mnuchin and RKA. To plead a claim for negligent misrepresentation, a plaintiff must show: “(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on such information.” In that regard, the Court also held that RKA failed to allege a relationship between RKA and Mnuchin or that Mnuchin owes a fiduciary duty to RKA.

Finally, Justice Ramos dismissed RKA’s fraudulent inducement claim because it was impossible for Mnuchin to have fraudulently induced RKA to enter into the Funding Agreement, as he had not joined Relativity’s board until months after RKA and Relativity entered into their agreement. To prevail on a fraudulent inducement claim, a plaintiff must establish: 1) a misrepresentation of material fact, 2) known to be false, 3) made with the intention of inducing reliance, 4) that is justifiably relied upon, and 5) results in damages. In light of that, Justice Ramos further held that the Complaint was silent as to any allegations that Mnuchin was involved in the execution of the Funding Agreement or made any representations to RKA.

The First Department came to the same conclusions as the lower court.

First, the Court held that the allegations that the board of directors of Relativity was involved in the financial transactions and the daily operations of the company are not enough to conclude that Mnuchin personally participated in, or had knowledge of, the fraud as a result of his position on Relativity’s board.

Second, the Court determined that the fact that Mnuchin became aware of the fact that RKA’s funds were used for working capital and not solely for print and advertising expenses was insufficient to establish that he was aware that misrepresentations were made by the other defendants or that the other defendants were part of the fraud scheme.

The First Department also affirmed the Supreme Court’s holding that RKA’s negligent misrepresentation claim against Mnuchin was insufficient, because RKA failed to allege any direct contact between Mnuchin and RKA, giving rise to the requisite special relationship.

 

In sum, mere knowledge or awareness of a company’s finances, without more information, is insufficient to establish that a company’s board member is liable for a fraud committed by the company.

That was the issue presented to the Appellate Division, First Department in Electron Trading, LLC v. Morgan Stanley & Co. LLC, which was an appeal from the grant of defendant’s motion to dismiss a contractual claim seeking damages above the amount allowable under the contract’s limitation of liability clause.   Justice Saliann Scarpulla granted defendant’s motion to dismiss that portion of the breach of contract claim, notwithstanding plaintiff’s allegations in the complaint that the defendant engaged in wrongdoing and, as such,  could not avail itself of the limitation of liability clause.  Her decision and order was affirmed by the First Department.

The case involved a developer of an alternative trading system (“ATS”), designed to be operated through a “dark pool”, that is, a “private exchange where investors can make trades anonymously.”  Plaintiff and defendant entered into an exclusive licensing agreement (“ELA”) and a consulting services agreement (“CSA”).  Although neither agreement refers to “dark pools,” plaintiff later claimed defendant breached the ELA based upon defendant’s insistence that it would perform only if plaintiff modified the agreement to allow defendant’s high-frequency traders to use it with other customers.  Although defendant conceded breach for purposes of the motion to dismiss, the ELA provided a limitation of liability clause, limiting total liability to amounts paid under the agreement.

Generally, “limitation of liability” clauses are routinely enforced, letting the parties to such a clause, “lie on the bed they made”, says the Court of Appeals in Metropolitan Life Ins. Co. v. Noble Lowndes Invtl.  There are circumstances, however, when a court will ignore the limitation clause when, for example, there is misconduct that “smacks of intentional wrongdoing”, or involves “gross negligence” displaying a reckless indifference. Id. 

Because the complaint here did not detail factual allegations as to the misconduct and “[a]t most . . . support[ed] a claim of intentional breach”, the Appellate Division unanimously affirmed.   The court reasoned that the allegations did not meet the heightened standard of pleading for fraud claims under CPLR 3016(b).  An interesting side note is that the case decided defendant’s motion to dismiss the complaint, but in effect decided the viability of a “limitation of liability” clause — something that is ordinarily pleaded as an affirmative defense.  The First Department noted, however, that the courts can consider whether documentary evidence (here the clause contained in the contract at issue) establishes an asserted defense.

When faced with a “limitation of liability” clause, consider whether the breaching party’s conduct amounts to “wrongful conduct” sufficient to vitiate the clause.  However, a heightened pleading standard applies.  The courts appear to abide by parties’ agreed upon limitation clause, unless the conduct rises to a significant level of misconduct.  Courts are unlikely to set aside such limitations lightly.  Remember, a mere “intentional breach” is not enough.