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NY Commercial Case Compendium

A Searchable Database of Court Decisions Issued by New York’s Commercial Division

Administrative Orders Not “Final Adjudications” for Purposes of Dishonest Acts Exclusion in Bear Stearns Professional Liability Insurance Policy

Posted in Industry: insurance, Justice Ramos, Charles E., New York, Settlement, Summary Judgment

In a February 28, 2014 Commercial Division decision by Justice Ramos, the court granted the plaintiffs’ motion for partial summary judgment and denied the defendants’ motion for partial summary judgment.

 The plaintiffs commenced this insurance coverage action seeking a declaratory judgment that its insurers, the defendants, were required to indemnify them against certain claims. The plaintiffs had previously achieved a monetary settlement of the claims, which were brought against Bear Stearns in administrative proceedings by the SEC and NYSE, and in related private ligation. The claims arose from allegations that Bear Stearns facilitated its customers’ practices of deceptive market timing and late trading. 

During the course of the SEC’s initial investigation into the allegations, it informed Bear Stearns that intended to commence a civil proceeding for violations of federal securities laws in which the SEC would seek injunctive relief and sanctions of $720 million. After disputing the charges, Bear Stearns reached similar settlements with the SEC and NYSE that led administrative orders being issued by both the SEC and NYSE, which detailed the findings against Bear Stearns and labeled Bear Stearns’s payment of $160 million as “disgorgement” and its payment of an additional $90 million as a civil penalty. Bear Stearns also agreed to pay $14 million to settle the 13 related civil class action suits that had been filed against it.

After settling the claims, Bear Stearns sought coverage from the defendants under its professional liability policies, which provided Bear Stearns with $200 million in coverage, above a $10 million retention.  Plaintiffs commenced this action after the defendants disclaimed on coverage on two grounds: (1) that the loss included disgorgement payments that are not insurable as a matter of law; and (2) that Bearn Stearns did not provide sufficient notice of the claim during the specified reporting period.  

The plaintiffs’ instant motion sought to dismiss the defendants’ affirmative defenses which were based on claims that: (1) the plaintiffs’ insurance-based claims were excluded by their policies’ Dishonest Acts Exclusion; and (2) that permitting the indemnity claim would violate public policy, which precludes coverage for intentional harmful conduct. The defendants simultaneously moved for partial summary judgment on the Dishonest Acts Exclusion. The Dishonest Acts Exclusion barred coverage for claims arising out of “any ‘deliberate, dishonest, fraudulent or criminal act or omission,’ but only if a ‘judgment or other final adjudication thereof’ in the underlying case establishe[d] that the insured was ‘guilty’ of the excluded conduct.”

Noting that exclusionary provisions are “generally accorded a strict and narrow construction,” the court explained that the settlements arising from the administrative orders issued by the SEC and the NYSE were “not final adjudications or judgments establishing Bearn Stearns’ guilt in the underlying proceedings that it engaged in the wrongful conduct covered by the Dishonest Acts Exclusion.” The court further explained that Bear Stearns neither admitted or denied the factual findings in the administrative orders – except with respect to the SEC’s jurisdiction and the subject matter of the proceedings – and that administrative orders’ factual findings were “not the subject of hearings or rulings on the merits by a trier of fact.”  Therefore, the court concluded, “[t]o infer, as the Insurers urge, that the term ‘final adjudication’ encompasses settlement of an administrative order, is to expand its reasonable interpretation beyond what is permitted under New York law.”

Based on these findings, the court also rejected the Insurers affirmative defense that the findings in the administrative orders conclusively established that Bear Stearns “acted with intent to injure mutual fund investors for which coverage is barred under New York public policy.”

J.P. Morgan Securities Inc., v Vigilant Insurance Company et al, Sup Ct, New York County, February 28, 2014, Ramos, J., index No. 600979/2009 .

Collateral Estoppel Bars Later Claim for Tortious Interfence of real Estate Contract of Sale: Revital Realty Group, LLC v Kalmon Dolgin Affiliates, Inc.

Posted in Breach of Contract, Collateral Estoppel, Conversion, CPLR 3211, Industry: real estate, Justice Demarest, Carolyn E., Kings, Tortious Interference with Business Relations, Unjust Enrichment

In a November 14, 2013 Commercial Division decision by Justice Demarest, the Court  granted defendants’ motion to dismiss the action in its entirety based on collateral estoppel.  The complaint alleged that defendants tortuously interfered with a contract for the sale of real property to plaintiff from a third party seller. Plaintiff alleged that performance of the contract was rendered impossible, and because of defendants’ tortious interference, plaintiff sustained damages and loss of opportunity for subsequent development of the property.  However, based upon a prior action tried between plaintiff and the third-party seller concerning breaches of the contract of sale, the Court  concluded that the elements of collateral estoppel were met, pursuant to CPLR §3211(a)(5), even though the defendants in the instant action were not parties to the earlier litigation.

  Revital Realty Group, LLC v Kalmon Dolgin Affiliates, Inc.,, Sup Ct, Kings County, November 14, 2013, Demarest, J., index No. 4942/2013 .

Surety Entitled to Most Payments Tendered to Project Owner on Summary Judgment Against Builder

Posted in Indemnification, Industry: construction, Justice Schmidt, David I., Kings, Summary Judgment

In a November 1, 2013 Commercial Division decision by Justice Schmidt, the Court granted in part Plaintiff’s motion for summary judgment pursuant to CPLR 3212, and denied Defendants’ cross-motion to dismiss pursuant to CPLR 3211.  SRC agreed with a nonparty (“Owner”) to construct a senior-assisted living city, and obtained a payment and performance bond from Plaintiff for the contract price, $5,185,000.  Defendants also agreed to indemnify Plaintiff.  Owner terminated the construction contract after experiencing numerous delays and asked Plaintiff to complete the project.  Plaintiff accepted the lowest bid for the job, agreed to tender funds to Owner necessary to complete the project, and sued Defendants under the indemnity agreement.  Defendants asserted counterclaims for breach of the bond agreement, alleging that Plaintiff’s payments to Owner were unreasonable and in bad faith.  Noting that “payments for which a plaintiff seeks reimbursement under an indemnity agreement executed in conjunction with a bond are scrutinized only for good faith and reasonableness,” the Court held that Plaintiff made the requisite prima facie showing by “submitting substantial evidence demonstrating . . . the payments made pursuant to” its contractual obligations and that it “had a good faith belief in its own liability under the bond . . . .”  Defendant failed to raise an factual issue whether the payments were made in bad faith.  However, Defendants did a factual issue as to the reasonableness of certain expenses including smoke detector installation, bathroom work, and roof repairs, and the Court Plaintiff’s motion as to those payments.

 Travelers Cas. & Sur. Co. of Am. v SRC Constr. Corp. of Monroe, Sup Ct, Kings County, November 1, 2013, Schmidt, J, Index No. 26926/2010.

Court Finds Irony in Mortgagee’s Motion to Set Aside Foreclosure Sale after Failing to Extend Notice of Pendency

Posted in Foreclosure, Industry: real estate, Justice Karalunas, Deborah H., Notice Of Pendency, Onondaga

In an February 24, 2014, Onondaga County Commercial Division decision by Justice Karalunas, the court denied plaintiff-mortgagee’s motion to set aside a foreclosure sale of a 15-story tower in Syracuse.  After failing to extend its notice of pendency on the subject property, and after a good-faith purchaser acquired the property at the foreclosure sale, plaintiff appealed to the court’s “inherent equitable power over a sale made pursuant to its judgment or decree” in an effort to unwind the sale.  Because plaintiff failed to allege any kind of oppression, fraud, collusion, or misconduct that would render the overall fairness of the sale suspect, the court denied the motion.

 Altschuler Shaham Provident Funds, LTD., Sup Ct, Onondaga County, February 24, 2014, Karalunas, J, Index No. 9348/08

Court Caps Damages But Allows Plaintiff to Seek Fees and Costs in RMBS “Put-Back” Action

Posted in Contract Interpretation, Indemnification, Industry: banking, Industry: financial services, Justice Kornreich, Shirley Werner, Motion to Dismiss, New York

In a November 21, 2013 Commercial Division decision by Justice Kornreich, the Court granted in part and denied in part Defendant’s motion to dismiss a Complaint pursuant to CPLR 3211.  In this residential mortgage-backed security “put-back” action, Defendant J.P. Morgan Mortgage Acquisition Corporation (“JPMMAC”) purchased loans from Defendant WMC Mortgage, LLC (“WMC”) pursuant to a Mortgage Loan Sale and Interim Servicing Agreement (the “MLSA”).  These loans were eventually transferred to a trust pursuant to a Pooling and Servicing Agreement (the “PSA”).  Certificate holders of this trust compelled Plaintiff Bank of New York Mellon to commence this action to enforce a Repurchase Protocol set forth in both the MLSA and PSA.  The Repurchase Protocol stated that when a loan in the trust failed to comply with one of many representations and warranties, the trust was entitled to a refund.  Defendant moved to dismiss Plaintiff’s Complaint, which included eight causes of action for breaches of contract and sought attorneys’ fees from WMC.

As a threshold issue, the Court first held that damages were “capped” at the total repurchase price of the trust’s non-conforming loans.  Though the parties disputed the amount of potential damages, the Court found the issue already settled by “this court and virtually all of the federal and state courts in New York” and therefore did “not merit further discussion.”  The Court turned to two remaining issues: (1) whether JPMMAC’s representations and warranties in the PSA applied to the alleged breaches, and (2) whether Plaintiff could recover costs and attorneys’ fees from WMC.

First, JPMMAC argued that its representations and warranties in the PSA did not apply to Plaintiff’s alleged breaches because they were temporally-limited by language in the relevant subsection stating an “applicable time period.”    In other words, JPMMAC argued it only represented certain facts about the loans to be true for a certain time.  The Court rejected this argument.  The actual representation stated: “The information set forth in the Mortgage Loan Schedule and the tape delivered . . . is true, correct and complete in all material respects.”  It did not itself explicitly reference any temporal limitation.  The Court further reasoned the accuracy of the loan tape could not change: “[e]ither the loan tape accurately reflected reality at origination, or it did not.”  So it made no sense to interpret the representation as applying only to a certain period of time.

Second, WMC argued that Plaintiff was not entitled to costs and attorneys’ fees under an indemnity provision in the MLSA  because the provision only covered third-party claims against Plaintiff, not Plaintiff’s first-party claims against WMC.  The Court noted that the District of Minnesota “considered this very issue” and denied costs and fees, because the indemnity provision did not “unmistakably” cover first-party claims, and a trustee’s “put-back” suit is a first-party claim despite the fact that it was acting “at the behest” of the trust’s certificate holders.  But the Court rejected this holding.  WMC agreed in the provision to indemnify “other costs resulting from any claim relating to …a breach of [WMC's] representations in [the MLSA].”  The Court found it “strain[ed] credulity” not to interpret this language to cover Plaintiff’s fees, which were “an expense related to WMC’s MLSA breaches.”

Bank of N.Y. Mellon v WMC Mtge., LLC, Sup Ct, New York County, November 21, 2013, Kornreich, J, Index No. 654464/2012.

Court Denies Motion for Summary Judgment in Lieu of Complaint Based on Breach of Fiduciary Duty Defense Raised in Opposition

Posted in Breach of Contract, Breach of Fiduciary Duty, CPLR 3213, CPLR 4519, Dead Man's Statute, Industry: legal, Industry: real estate, Justice Demarest, Carolyn E., Kings, Legal Malpractice, Promissory Note, Statute of Limitations, Summary Judgment in lieu of Complaint

In an October 29, 2014, Kings County Commercial Division decision by Justice Demarest, the court denied plaintiff’s motion for summary judgment in lieu of complaint based on an alleged default on a mortgage note.  Plaintiff-attorney made three loans to defendant-client in connection with the purchase and financing of a building.  The court denied plaintiff’s motion on the basis of a defense raised by defendant in opposition that plaintiff included prepayment penalties and loaned the money in self interest in breach of her fiduciary duty to defendant as his client.

Cohen v Gateway Bldrs. Realty, Inc., Sup Ct, Kings County, October 29, 2014, Demarest, J, Index No. 1134/13

Business Judgment Rule and Lack of Damages Preclude Claim for Grossly Negligent Management of Hedge Fund

Posted in Business Judgment Rule, Damages, Gross Negligence, Industry: financial services, Justice Bransten, Eileen, New York, Summary Judgment

In a November 12, 2013 Commercial Division decision by Justice Bransten, the court granted the defendants’ motion for summary judgment. The plaintiff alleged grossly negligent management of the defendant hedge fund in which the plaintiff had invested. The court held that summary judgment was warranted because: (1) the business judgment rule shielded the defendants’ management decisions with respect to the plaintiff’s investment; and (2) even assuming the plaintiff was able to overcome the business judgment rule, her claim failed because she had not suffered any damages and a claim for gross negligence cannot stand without damages.

Phillips v Hoffman, et al., Sup Ct, New York County, November 12, 2013, Bransten, J, Index No. 101277/11

Contract Claim Governed by UCC, Thus Shorter Statute of Limitations Leads to Dismissal: Corona Treasures LLC v Star Home Designs, LLC

Posted in Breach of Contract, Conversion, Fraud, Industry: manufacturing, Justice Schmidt, David I., Kings, Statute of Limitations, Unjust Enrichment

In a December 11, 2013 Commercial Division decision by Justice Schmidt, the Court dismissed claims for breach of contract, unjust enrichment, conversion, fraud and fraudulent concealment in an action brought by a buyer to recover damages for defective goods purchased.  The Court concluded that since the action was one for “goods sold and delivered,” it was governed by UCC Article 2, and therefore had a shorter (4-year, as opposed to 6-year) statute of limitations for the breach of contract claim.  The remaining claims were also either time barred or failed to state a claim.

 Corona Treasures LLC v Star Home Designs, LLC, Sup Ct, Kings County, December 11, 2013, Schmidt, J., index No. 502966/2012 .

Lessons in Discovery—from Directions Not To Answer in Depositions to Document Production: Freidman v Fayenson

Posted in Attorney-Client Privilege, Depositions, Discovery, Industry: real estate, Justice Bransten, Eileen, Motion to Compel Discovery, New York, Sanctions

In a December 4, 2013 decision by Justice Bransten, the Commercial Division was faced with myriad discovery disputes, ranging from the refusal to produce an insurance policy to directions not to answer questions posed at a deposition.  In a 29-page decision, Justice Bransten carefully navigated and decided each of the discovery issues presented, giving clear guidance to the bar of what is and is not acceptable in responding to discovery requests – be it document demands or deposition questions. This is a must-read on the parameters of 22 NYCRR 221.

The case stems from a dispute between the two 50% shareholders of Korm Realty, Inc. (“Korm”).  One faction contacted an outside law firm to commence eviction proceedings on behalf of Korm to evict three tenants.  A derivative action ensued, and shortly thereafter so did the discovery disputes.  Before the Court were motions to compel production of the law firm’s insurance policy and other documents, compel answers to deposition questions, and for sanctions.

The law firm objected to the production of its malpractice policy on several grounds, namely, that the firm was owed an indemnity from one of the parties, so no claim would be submitted to the carrier, and in any event, the direct claims against the firm had been previously dismissed.  In directing production of the policy, the Court reasoned that notwithstanding the indemnity owed, the policy could be viewed as “excess” coverage.  In addition, although the direct claims were dismissed, there were still derivative claims on behalf of Korm against the firm.

The Court next turned to consider the multiple directions not to answer deposition questions.  The defendants also claimed that there were multiple violations of Uniform Rule 221, based on improper speaking objections and inappropriate statements made during the course of the deposition.  Sanctions were sought.

In analyzing the challenged conduct, the Court reviewed CPLR 3115 as well as 22 NYCRR 221.  Overruling the deponent’s objections and directions not to answer, the Court rejected the many grounds offered by deponent’s counsel, namely,

  •  That “bickering is not an enumerated basis for directing a deponent not to answer”;
  •  Many of the questions did not involve inquiry into “legal strategy” which might otherwise be protected;
  •  “Uniform Rule 221 does not include fishing expeditions or relevance objections among the enumerated bases under which a deponent may refuse to answer or an    attorney may instruct a deponent not to answer”;
  • Posing hypotheticals or mischaracterizing testimony is not “plainly improper” to justify directions not to answer; and
  • Merely asking the witness what documents were used to prepare for the deposition was not privileged, even if there was a question as to the privileged status of the documents themselves.

As to the speaking objections, the Court found statements such as, “Objection, If you understand the question you can answer”, in direct violation of Rules 221.1 and 221.3 as a speaking objection and impermissible “coaching”.  The Court ultimately concluded that the attorney and the party engaged in frivolous conduct under Part 130-1.1, and imposed a sanctions award.  

Freidman v Fayenson, Sup Ct, New York County, December 4, 2013, Bransten, J, Index No. 650106/11

Notice Provision in Consulting Agreement a Condition Precedent to Company’s Obligation to Pay Contractual Bonus

Posted in Condition Precedent, Contract Interpretation, CPLR 3211, Justice Demarest, Carolyn E., Kings

In a December 3, 2013 Commercial Division decision by Justice Demarest, the Court granted in part and denied in part defendant E & B Giftware LLC’s (“E & B”) motion to dismiss under CPLR 3211 (a)(1) and (a)(7) plaintiff’s claims arising from a consulting between him and E & B.  The consulting agreement allowed plaintiff to terminate “upon sixty . . . days written notice to” E & B, after which plaintiff would be entitled to certain post-termination compensation.  Plaintiff sought to terminate the consulting agreement by hand-delivering a separation letter to E & B stating he was separating “effective today.”  The Court held plaintiff was not entitled to the post-termination compensation because the 60-day notice provision was a condition precedent to E & B’s obligation to pay the post-termination compensation, and that E & B’s allowing plaintiff to leave his position did not constitute a waiver or give rise to promissory estoppel.  Though the Court denied E & B’s motion to dismiss the causes of action for declaratory relief, it deemed E & B’s motion as a request for a declaration in its favor, and declared that plaintiff was not entitled to the post-termination compensation.

 Sutton v E & B Giftware LLC, Sup Ct, Kings County, December 3, 2013, Demarest, J, Index No. 503296/2013