Most litigators are familiar with the requirement that a summary motion be supported with “evidentiary proof in admissible form” establishing the merits of a cause of action or defense.  Nevertheless, many practitioners make the common mistake of submitting evidence in support of a summary judgment motion that would not be admissible at trial, resulting in swift denial of the motion.  In fact, the Appellate Division, Second Department recently reversed a decision by the Nassau County Commercial Division (Bucaria, J.), which granted summary judgment to the moving party, even though the evidence submitted in support of the motion was not in admissible form.

The plaintiff in GMP Fur Trade Fin., LLC v Brenner, 2019 NY Slip Op 00858 (2d Dept Feb. 6, 2019) commenced an action against defendant Dean Brenner (“Brenner”) and others seeking to recover damages for breach of fiduciary duty, breach of contract, conversion and fraud.  The plaintiff moved for summary judgment on the issue of liability as against Brenner, alleging that he had misappropriated funds and goods in connection with his servicing of four finance agreements plaintiff had entered into with certain non-parties.  Justice Bucaria granted plaintiff’s motion for summary judgment on the issue of liability on the breach of fiduciary duty claim.  The plaintiff thereafter moved for summary judgment on the issue of damages.  Again, Justice Bucaria granted the plaintiff’s motion and entered judgment against Brenner in the amount of $1,755,630.79.  Brenner appealed.

The Second Department reversed, finding that the evidence upon which plaintiff primarily relied was not in “admissible form.”  The Court stated:

“Here, in moving for summary judgment on the issue of liability insofar as asserted against Brenner, the plaintiff relied primarily on an affidavit of its managing member, in which the managing member stated that he was told by certain nonparties that Brenner had misappropriated funds and goods.  This hearsay evidence was insufficient to satisfy the plaintiff’s burden of establishing its prima facie entitlement to judgment as a matter of law on the breach of fiduciary duty cause of action insofar as asserted against Brenner.”

The Court also concluded that the plaintiff could not cure this defect by submitting unauthenticated, and therefore inadmissible, bank records for the first time on reply.   It is abundantly clear, then, from the Second Department’s decision in GMP Fur Trade that inadmissible hearsay does not have any probative value when submitted in support of a motion for summary judgment, and should not be considered.

However, the rigidity of this rule should be contrasted with the principle that, under certain circumstances, a party opposing summary judgment may rely on evidence that is not in admissible form, but only if the opposing party provides a reasonable excuse for its failure to submit evidence in admissible form (see e.g. Zuckerman v City of New York, 49 NY2d 557 [1980] [“The rule with respect to defeating a motion for summary judgment, however, is more flexible, for the opposing party, as contrasted with the movant, may be permitted to demonstrate an acceptable excuse for his failure to meet the strict requirement of tender in admissible form”]).  Indeed, a party opposing a motion for summary judgment may rely on hearsay, as long as it is not the only piece of evidence relied on by that party (Sumitomo Mitsui Banking Corp. v Credit Suisse, 89 AD3d 561 [1st Dept 2011]).

Takeaway:  The Second Department’s point was made clear in GMP Fur Trade, but it is worth repeating: counsel for the moving party should review each piece of evidence submitted in support of its summary judgment motion and ensure that it is admissible.  Indeed, affidavits must be signed and properly notarized, deposition transcripts must be certified by a court reporter and signed by the deponent, a proper foundation must be laid for each record relied upon in the motion, especially business and medical records, and importantly, hearsay statements must be qualified for the court’s consideration under one of the many hearsay exceptions.  By contrast, the “admissible form” requirement is more flexible with respect to an opposing party’s evidence, allowing an opposing party to rely on hearsay (as long as it is not the only piece of evidence relied upon by the opposing party), or other inadmissible evidence (if the opposing party offers a reasonable excuse for its failure to submit evidence in admissible form).

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Perhaps it’s because I’ll be speaking on the topic later this week, or perhaps it’s because of a recent post on another one of our blogs, but shareholder rights of inspection have been on the mind of late.Shareholder inspection rights

While researching 2018 New York cases addressing inspection rights, particularly in the Commercial Division, I came across a Second Department decision from over the summer, which modified a post-trial judgment from Queens County Commercial Division Justice Marguerite A. Grays by ruling in favor of the individual defendant on his counterclaim for an accounting and directing the corporate plaintiff to permit an inspection of its books and records.

In World Ambulette Transp., Inc. v Lee, a corporate ambulance service sought to recover damages from a former driver/dispatcher who was terminated after allegedly charging the company’s debit card for various personal expenses. The defendant counterclaimed for breach of contract and an accounting, claiming not only that he was wrongfully discharged as an employee, but that he was denied certain rights as a minority owner under a shareholder’s agreement, including the right to continued employment, salary, dividends, and other company profits.

At trial, the parties offered conflicting testimony concerning the business arrangement between them, with the defendant claiming that he was a full-blown 49% owner in the company, and the plaintiff claiming that he was merely an employee entitled to 49% of the company’s profits.  Confident in its founder’s testimony in this regard, the plaintiff moved under CPLR 4401 for judgment during trial effectively to dismiss the defendant’s counterclaims, including his claim for an accounting — which, by its very nature, was contingent on the existence of a fiduciary relationship between the parties.  After all, if the defendant never was a shareholder and the requisite fiduciary relationship wasn’t there in the first place, how could he maintain a claim for an accounting against the plaintiff?

The trial court concurred, crediting the founder’s testimony and other “extrinsic evidence” relating to “the parties’ intent,” and found that the parties had “entered into nothing more than a profit sharing agreement,” which warranted dismissal of the defendant’s counterclaims.

The Second Department disagreed, in part anyway, finding that there was nothing ambiguous about an agreement, which on its face was denominated a “shareholder’s agreement,” and which contained a “Warranties” section designating a specific 51/49 percentage ownership of “Class A shares” among the parties.  There simply was no need to consider any extrinsic evidence concerning the parties’ intent when that intent was expressed unambiguously within the four corners of the agreement itself.

After citing section 624 of the Business Corporation Law (“Books and records; right of inspection”) and stating that “a shareholder has both statutory and common-law rights to inspect the books and records of a corporation if inspection is sought in good faith and for a valid purpose,” the Second Department ruled that the defendant was entitled to an accounting and that he should be permitted to examine the plaintiff’s books but otherwise affirmed the trial court’s findings with respect to the defendant’s unauthorized debit-card charges card and the propriety of his termination.

Pyrrhic victory, you say?  Maybe not.  Sure, the defendant in World Ambulette may not have a right to continued employment, or to a director’s meeting on notice prior to termination, or to any salary, dividends, or future profits from the company in which he is a 49% shareholder, but he still has his rights of inspection.  And given the recent expansion of those rights in New York case law (see, e.g., Retirement Plan for Gen. Empls. of City of N. Miami Beach v McGraw Hill Cos., Inc., 120 AD3d 1052 [1st Dept 2014]) — including the right to “investigate alleged misconduct by management and obtaining information that may aid legitimate litigation . . . even if the inspection ultimately establishes that the board engaged in no wrongdoing” — the defendant may eventually have his day in court after all.

** Nota Bene ** — As noted above, the topic of shareholder inspection rights (among others) will be the subject of a panel discussion at the Westchester County Bar Association this coming Thursday, November 1, 2018, at 6 p.m. at the WCBA Headquarters, 4 Westchester Park Drive, Suite 155, in White Plains.  The 1.5 credit CLE program will address the utility of the books-and-records proceeding in disputes among business owners in partnerships, corporations, and LLCs, and the ways in which such disputes might be avoided by having proper formation documents prepared and in place from the beginning.  The three-person panel will be addressing these topics from the perspective of a litigator, a forensic accountant, and a corporate attorney.  Registration and networking at 5:30 p.m.  Hope to see you there!

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Generally speaking, most people want to avoid becoming entangled in litigation.  But what happens when an action is pending and, although your client is not a party, his or her interests may be adversely affected?  Move to intervene.

Intervention is a procedure whereby an outsider can become a party to a pending action on its own initiative.  Intervention is sometimes available as of right (see CPLR 1012), sometimes only in the court’s discretion (see CPLR 1013), but it must be brought by motion in all instances, accompanied by a proposed pleading setting forth the claim or defense for which intervention is sought (see CPLR 1014).

The Appellate Division, Second Department recently reiterated the principles governing motions for leave to intervene in Roman Catholic Diocese of Brooklyn, N.Y. v Christ the King Regional High Sch, 2018 NY Slip Op 06131.  In that case, the plaintiff agreed to convey title to a parcel of property to the defendant on the condition that the premises would not be used for any purpose other than for the operation of a Catholic high school.  But in 2002, the defendant leased a portion of the premises to a non-party (“Non-Party 1”), which, in 2013, sublet a portion of the premises to another non-party (“Non-Party 2”), who used the leased portion to operate a charter middle school.

The plaintiff sued the defendant seeking, among other things, an injunction prohibiting the defendant from using any portion of the property as a charter school.  After the plaintiff was awarded partial summary judgment, both non-parties (the “Non-Parties”) moved to intervene as defendants in the action.  The Commercial Division in Queens County (Hon. Marguerite A. Grays) denied the Non-Parties’ motions.

The Appellate Division, Second Department reversed, reasoning that the Non-Parties each “have a real and substantial interest in the outcome of the litigation and that, although their respective interests are aligned with those of [the defendant] and with each other, [the defendant] cannot fully represent those interests.”  The Court noted that although neither of the Non-Parties would be bound by a judgment in the action, if the plaintiff prevailed, the defendant would be forced to break its lease with Non-Party 1, which in turn would be forced to break its sublease with Non-Party 2.  The Court concluded that the Non-Parties should have been allowed to intervene under these circumstances.

So, if your client has a dog in someone else’s fight and wants to intervene, under which CPLR provision should you move? CPLR 1012 specifies three narrow grounds for intervention as a matter of right: (1)  where a statute expressly confers such right; (2) where the person seeking to intervene “is or may be bound by the judgment” and where representation of the person’s interest “is or may be inadequate”; and (3) when an action concerns property in which a nonparty has an interest and the nonparty may be adversely affected by the judgment.  By contrast, CPLR 1013 allows for intervention in the court’s discretion (i.e., permissive intervention), thereby providing an additional or alternative ground for intervention based simply on a showing that the intervenor’s claim or defense shares a common question of law or fact with a claim or defense in the pending action.

But, whether intervention is sought as a matter of right under CPLR 1012, or as a matter of discretion under CPLR 1013 is of “little practical significance” because intervention will be permitted where, as in the case above, the intervenor has “a real and substantial interest in the outcome of the proceedings.”

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Your client wants to recover damages for breach of contract and demands that you assert as many causes of action as possible.  In addition to the breach cause of action, you consider a declaratory judgment claim, right?  Wrong!   The Second Department has held time and time again that “[a] cause of action for a declaratory judgment is unnecessary and inappropriate when the plaintiff has an adequate, alternative remedy in another form of action, such as breach of contract” (see BGW v. Mount Kisco; Stuckey v Lutheran Care Found. Network, Inc.; and Alizio v Feldman).

Recently, the Second Department in Tiffany Tower Condominium, LLC, et al. v Insurance Company of the Greater New York reaffirmed this principle. There, Tiffany Tower Condominium, LLC (“Tiffany Tower”) sustained damage to its condominium during Superstorm Sandy. Insurance Company of the Greater New York (the “insurer”) paid Tiffany Tower’s original claim for the damage sustained to the condominium under Tiffany Tower’s insurance policy but when Tiffany Tower submitted a supplemental claim for the additional losses sustained to the condominium as a result of the storm, the insurer denied coverage. As a result, Tiffany Tower initiated a lawsuit seeking, among other things, to recover damages for breach of contract and for a judgment declaring that coverage for the supplemental claim was improperly denied.  The insurer moved to dismiss Tiffany Tower’s second, third, and fourth causes of action for breach of breach of contract, judgment declaring that coverage was improperly denied, and violation of General Business Law § 349, respectively. Justice Ash denied the insurer’s motion to dismiss these causes of action and the insurer appealed.

In its recent decision, the Second Department held that the Supreme Court erred and should have dismissed Tiffany Tower’s cause of action for a declaratory judgment. The Court held that where plaintiff has an “an adequate, alternative remedy in another form of action,” i.e., the breach of contract claim, the declaratory judgment cause of action is thus “unnecessary and inappropriate.”

Interestingly, the First and Fourth Departments have also dismissed declaratory judgment causes of action where plaintiff had an “adequate, alternative remedy in another form of action, such as breach of contract.”  (see Main Evaluations, Inc. v. State; Apple Records, Inc. v. Capital Records, Inc.) The Third Department, however, has had no similar holdings.