Header graphic for print

NY Commercial Case Compendium

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

Court Denies Motion to Dismiss, But Stays Action In Favor of Arbitration

Posted in Arbitration, CPLR 3211, CPLR 7503, Industry: entertainment, Justice Demarest, Carolyn E., Kings, Shareholder Dispute

In an August 6, 2014 Commercial Division decision by Justice Demarest the court denied a motion to dismiss, but stayed the action in favor of arbitration.  The suit was brought by two shareholders/officers/directors against another shareholder/officer/director, under BCL 706(d), 716(c) and 720.  The defendant sought dismissal arguing that the plaintiffs failed to plead demand futility.  The court found that a demand on the board of directors was not required when a director brings an action under BCL 720.  The court, however, agreed with the defendant that the subject disputes were covered by the shareholder’s agreement’s arbitration provision and therefore stayed the action.

Kotlyar et al. v Khlebopros et al., Sup Ct, Kings County, August 6, 2014, Demarest, J, Index No. 013582/13

Court Denies Plaintiff’s Motion to Substitute his Wholly Owned LLC as Plaintiff in Attorney Misconduct Suit against Greenberg Traurig

Posted in Industry: legal, Justice Sherwood, O. Peter, New York

In an August 19, 2014 Commercial Division decision by Justice Sherwood, the court denied the plaintiff’s motion, pursuant to CPLR 1018, to substitute his wholly owned limited liability company (the “LLC”) for himself as plaintiff. The plaintiff commenced the action against Greenberg Traurig (“GT”) alleging misconduct pursuant to New York Judiciary Law § 487. GT argued that the assignment was unnecessary and prejudicial. The court agreed with GT and denied the plaintiff’s motion. The court explained that if allowed, the substitution “would prejudice the defendants by shifting the risks of litigation to a shell entity, making plaintiff less accessible to discovery,” and would allow the plaintiff to continue as a non-party and direct the litigation through his alter ego, the LLC. The court further explained that the plaintiff’s rational for the substitution – to allow the litigation to continue seamlessly if he were to die during the pendency of the action – overlooked that the plaintiff was the sole owner and manager of the LLC.

Melcher v Greenberg Traurig LLP, Sup Ct, New York County, August 19, 2014, Sherwood, J, Index No. 650188/2007

Petitioner Fails to Rebut with Personal Knowledge Fact Issue Concerning Whether Real Estate Transaction Was at Arm’s Length

Posted in CPLR 3212, Erie, Industry: real estate, Justice Walker, Real Property Tax Law, Special Proceeding, Summary Judgment

In a July 24, 2014, Erie County Commercial Division decision by Justice Walker, the court denied Petitioner’s motion for summary judgment in connection with a special proceeding under Article 7 of the Real Property Tax Law in which Petitioner sought to reduce the tax assessment of certain commercial real property.  Petitioner moved on the basis of a recent foreclosure sale as the best evidence of the property’s value.  Respondents opposed, arguing that because the purchaser in the recent foreclosure auction was a subsidiary of Petitioner, the sale essentially was a short sale and by definition not at arm’s length.  Petitioner replied with an attorney affirmation and memorandum of law, contending that it was not related to the purchaser.  The court denied Petitioner’s motion because Petitioner failed to rebut the issues raised by Respondent concerning whether the sale was an arm’s length transaction.

Matter of CB Walden Vil. LLC v Board of Assessment Review, Sup Ct, Erie County, July 24, 2014, Walker, J, Index No. 800289/12

Partial Summary Judgment Granted, Dismissing 5 of 9 Investor Fraud Claims against MotherRock

Posted in Breach of Fiduciary Duty, Fraud, Industry: financial services, Justice Ramos, Charles E., Negligence, New York, Rescission

In a July 7, 2014 Commercial Division decision by Justice Ramos, the court granted in part and denied in part the defendants’ motion for summary judgment as to each of the plaintiffs’ causes of action. The plaintiffs sought to recover damages from losses allegedly suffered from their investments in the failed funds of the defendants, a group of entities comprising a hedge fund focusing on energy markets’ funds. The plaintiffs’ suit asserted nine causes of action for: common law fraud; fraud in the retention of securities; constructive fraud; constructive fraud in the retention of securities; negligent misrepresentation; gross negligence; breach of fiduciary duty; aiding and abetting breach of fiduciary duty; and rescission.

The court granted summary judgment with respect to the common law fraud and fraud in the retention of securties claims, holding that the plaintiffs failed to raise a triable issue of fact as to scienter element; finding the plaintiffs failed to establish the defendants knew the alleged statements were false, or that the defendants willfully made the alleged representations with intent to defraud.

Holding the plaintiffs raised triable issues of fact, the court denied summary judgment as to the constructive fraud claims, which don’t require scienter but rather the existence of a fiduciary or confidential relationship, and the claim for negligent misrepresentation.

The court granted summary judgment on the gross negligence claim, holding there was no evidence that the defendants made willful misrepresentations to induce the plaintiffs to invest in their funds, or that certain actions or omissions were recklessly made to cause the plaintiffs to lose their investments.

Finding issues of fact regarding the cause of the defendants’ funds failure, the court denied summary judgment on the breach of fiduciary duty claim. But the court granted summary judgment as to the aid and abetting claim, finding the plaintiffs failed to allege facts demonstrating that the charged defendants were aware or had knowledge of the alleged representation(s) made by the other defendants.

Finally, the court granted summary judgment as to all of the defendants with respect to the rescission claim, holding that the plaintiffs’ supporting memorandum of law lacked “both argument and authority as to why it is entitled to the remedy of rescission, and ultimately fail[ed]to raise any triable issues of fact with respect to the remedy of rescission.”

James Riv. Multi-Strategy Fund, L.P. v MotherRock, L.P., Supreme Court, New York County, July 7, 2014, Ramos, J., Index No. 601987/2009

 

General Release Bars Tenant’s Suit Against Seller of Building, Suit May Proceed Against Seller’s Managing Member

Posted in Breach of Contract, Industry: real estate, Justice Demarest, Carolyn E., Kings

In an August 7, 2014 Commercial Division decision by Justice Demarest, the court granted Defendants’ motion to dismiss as against Defendant Great Empire, but denied the motion as against Defendant Chen, the managing member of Great Empire.  Plaintiff was a tenant in a building owned by EEM Realty, who agreed to sell the building to Great Empire.  Plaintiff had commenced a prior action against EEM Realty, claiming it possessed a valid first option to purchase the building; this action was dismissed on summary judgment.  The parties later negotiated and agreed that EEM Realty would sell the building to Great Empire, subject to Great Empire’s: (i) payment of $230,000 to Plaintiff in exchange for Plaintiff’s surrender of its purchase option; and (ii) providing a general release from Plaintiff to EEM Realty.  At closing, Plaintiff refused to surrender its option; Plaintiff instead entered into a handwritten agreement with Chen under which Chen agreed to pay $500,000 to Plaintiff for its surrender of the option; and the closing proceeded.  Defendants later refused to pay the $500,000, and Plaintiff sued for  breach of contract.  The court granted summary judgment to Great Empire, holding that Plaintiff surrendered its lease in favor of Great Empire in the contract; its claim was barred by the General Release.  The court denied summary judgment to Chen, holding that the General Release does not protect him in his individual capacity.

833 Mgt., LLC v Great Empire 65 Realty, LLC, Sup Ct, Kings County, August 7, 2014, Bransten, J., Index No. 2141/2014.

JC Penney Tortiously Interfered with Martha Stewart’s Exclusive Contract With Macy’s

Posted in Industry: retail, Justice Oing, Jeffrey K., New York, Tortious Interference with Business Relations

In a June 16, 2014 Commercial Division decision by Justice Oing, the court found, post-trial, that JC Penney (“JCP”) caused Martha Stewart Living Omnimedia (“MS”) to breach its contract with Macy’s to provide certain housewares and other items for retail sale exclusively to Macy’s, and therefore tortiously interfered with that contract.

In April 2006, Macy’s (and an affiliate) and MS entered into a contract whereby MS would design and sell certain types of products exclusively through Macy’s (the “Exclusive Items”).  Macy’s expected to be the sole place customers could find the Exclusive Items, with Macy’s assisting in the design of the products, and having control over the manufacturing and marketing of the products.  Exclusivity was an important term for Macy’s because it would be spending a significant amount of money building up the MS business, which suffered after Martha Stewart’s stint in jail.

With knowledge of the exclusive contract, JCP aggressively courted MS to enter into an agreement whereby MS would sell certain of the Exclusive Items at JCP.  MS’s attorney reviewed the Macy’s/MS contract and concluded that an agreement between JCP and MS would not violate the Macy’s/MS agreement if MS were to open “Martha Stewart Shops” within existing JCP stores – or a “store within store.”  This interpretation was based on the Macy’s/MS contract allowing MS to operate its own retail establishments.

After the new business relationship was announced, Macy’s sued both MS and JCP.  Macy’s settled with MS post-trial.  Early in the case the court issued an injunction barring JCP from selling MS branded goods during the pendency of the suit, but allowed JCP to sell MS designed goods under its own private label.  At the time the court warned JCP that Macy’s damages, if Macy’s were successful, could be significant based upon those allowed sales.

The Court ultimately disagreed with MS’s counsel’s interpretation of the contract, finding that the MS store exception did not apply to the arrangement between MS and JCP, in part because JCP was running the store and not MS.  The court further found that the arrangement was virtually identical to the Macy’s/MS arrangement, showing that it was improper.  The court also found that Macy’s had a valid agreement with MS, MS breached that agreement when it entered into the MS/JCP contact, MS would not have breached the contract absent JCP’s conduct and that Macy’s sustained damages.  The court therefore found that JCP tortiously interfered with the Macy’s/MS contract.  The court referred the issue of damages to a special referee.  The court also referred to a special referee the question of whether Macy’s was entitled to the attorneys’ fees it expended suing MS, as a natural and necessary consequence of JCP’s conduct.  The court denied punitive damages, finding that the damages to JCP’s reputation, and the firing of its executive who was behind the MS/JCP transaction, would serve to deter other companies from engaging in similar conduct.

Macy’s, Inc. v. J.C. Penny Corp., Inc., 2014 NY Slip Op 24169 (Sup Ct, New York County, June 16, 2014, Oing, J).

Arbitrator’s Award Confirmed Over Objections of Sellers of Recycling Operation

Posted in Arbitration, Arbitration Award, Justice Bransten, Eileen, New York

In a January 2, 2013 Commercial Division decision by Justice Bransten, the court granted Defendant Greenstar’s motion to confirm an arbitration award and denied its motion for sanctions.  The case arose from an asset purchase agreement in which Greenstar agreed to purchase a corporation, and which “stressed the importance of a license and supply agreement.”  The sellers were unable to finalize the license and supply agreement before the APA was executed, so the parties amended the APA to add certain protections for Greenstar.  Greenstar was dissatisfied with the supply agreement eventually secured by sellers, and an arbitration began.  The arbitration panel awarded Greenstar approximately $4 million, and Greenstar moved to confirm the award.  The court granted the motion and rejected the sellers’ arguments that: (1) the arbitration was merely an appraisal of damages; (2) the damages awarded were invalid since the parties’ agreement limits defendant’s recovery to escrow funds; (3) that since defendant’s recovery is limited to escrow funds, the prior release of the escrow funds rendered the arbitration moot; (4) that the Panel made errors rendering the Award “irrational”; and, (5) that the panel did not have the authority to render damages against individual sellers.

Edgewater Growth Capital Partners, L.P. v Greenstar N. Am. Holdings, Inc., Sup Ct, New York County, January 2, 2013, Bransten, J., Index No. 10861/2008.

DHL’s Fraudulent Inducement Counterclaim against Worldwide Express Operations, LLC Franchisees Dismissed for Failure to State a Cause of Action

Posted in CPLR 3211, Failure to State a Claim, Fraud, Industry: Transportation, Justice Ramos, Charles E., Motion to Compel Discovery, Motion to Dismiss, New York

In a July 1, 2014 Commercial Division decision by Justice Ramos, the court granted the plaintiffs’ motion to dismiss the defendant DHL’s counterclaim for fraudulent inducement. The plaintiffs, all franchisees of Worldwide Express Operations, LLC (“Worldwide”), a former reseller of DHL’s shipping services, argued that DHL failed to state a cause of action. The plaintiffs had each entered into individual agreements with Worldwide to purchase DHL’s shipping services directly from Worldwide, based on rates that Worldwide had negotiated with DHL. DHL argued that each package shipped by the plaintiffs created an implied contract obligating DHL to ship the package and for the plaintiffs to pay DHL for its services, and that DHL was fraudulently induced to enter into numerous such implied contracts to continue providing shipping services to the plaintiffs because the plaintiffs misrepresented that they would pay any outstanding balances due on their accounts, but that they never intended to fulfill their obligations. The court explained that the statements relied upon by DHL were “merely representations that the Franchisees would pay any outstanding invoices, but not representations that the Franchisees would continue to pay for additional future invoices.” The court further explained that DHL failed to identify misrepresentations made by the majority of the plaintiffs and, notwithstanding the insufficiency of the purported misrepresentations, DHL’s “generic allegations” that the plaintiffs made a decision not to pay outstanding and future invoices and they concealed the decision from DHL, were insufficient as they lacked any factual allegations regarding the plaintiffs’ intention not to fulfill their obligations.

2470 Cadilac Resources, Inc. v DHL Express (USA), Inc., Sup Ct. New York County, July 1, 2014, Ramos, J., Index No. 603613/2008.

Resolution of Disagreement Over Purchase Price by Accounting Firm Instead of Court Wins the Day in Case Interpreting Competing Contractual Provisions

Posted in Collateral Estoppel, CPLR 7601, Justice Bransten, Eileen, Motion to Compel Valuation, Motion to Dismiss, New York, Res Judicata, Uncategorized, Valuation

In a July 24, 2014, New York County Commercial Division decision by Justice Bransten, the court denied Defendants’ motion to dismiss and granted Plaintiff’s motion to compel a valuation in connection with the purchase of two companies in the automation instrumentation and controls industry (the “Automation Companies”).

Background

Plaintiff’s breach of contract action primarily alleged that Defendants failed to disclose certain pre-closing liabilities of, and failed to jointly retain a particular accounting firm to resolve the parties’ dispute over the final purchase price for, the Automation Companies.

In a previous action brought in Delaware, two related companies owned by Defendants sued the Automation Companies for failure to make commission payments under certain termination agreements with Defendants’ related companies.  The Purchase Agreement at issue in the New York action required the Automation Companies to terminate their prior commission agreements before closing.  Accordingly, the Automation Companies entered into termination agreements with Defendants’ related companies under which the Automation Companies allegedly failed to make approximately $1.5 million in commission payments.  The Delaware court ultimately granted summary judgment in favor of Defendants’ related companies and dismissed with prejudice the Automation Companies’ fraud defense.

The allegations against the Automation Companies in the Delaware action concerning the unpaid commissions served as a basis for Plaintiff’s claims in the New York action that Defendants breached certain representations in the Purchase Agreement concerning the disclosure of pre-closing liabilities carried by the Automation Companies.  Defendants, for their part, pointed to the disposition of the Delaware action as forming the basis of their motion to dismiss Plaintiff’s claim in New York on grounds of res judicata and collateral estoppel.

The Court’s Determination of Defendants’ Motion to Dismiss

Because “New York courts apply the law of the rendering jurisdiction to determine the preclusive effect of the decisions of sister states,” the court applied Delaware law in analyzing Defendants’ motion to dismiss on the basis of res judicata and collateral estoppel.

Defendants primarily argued that Plaintiff’s claim regarding Defendants’ alleged misrepresentations in the Purchase Agreement should be dismissed on the basis of res judicata and collateral estoppel because the Delaware court previously had dismissed with prejudice the Automation Companies’ fraud defense.  In the Delaware action, the Automation Companies claimed in their defense that Defendants fraudulently failed to disclose the alleged commission liabilities in the Purchase Agreement.

The court rejected Defendants’ argument, in large part based on the Delaware court’s emphasis of the distinctions between the Purchase Agreement and the termination agreements.  The Delaware court specifically had rejected the argument that the agreements were “interrelated,” “interchangeable,” and “part and parcel” with each other, particularly as it related to the application of the Purchase Agreement’s New York forum-selection clause.  Because the Automation Companies’ fraud defense in the Delaware action was distinct from Plaintiff’s claim concerning Defendants’ breach of the representation provisions in the Purchase Agreement, which claim was in any event limited to New York under the forum selection clause, the court denied Defendants’ motion based on res judicata.

The court also noted that, despite having dismissed the defense with prejudice, the Delaware court did not make any factual determination concerning the Automation Companies’ allegations of fraud.  Thus, the court found that Defendants’ argument that the false-representation issue already had been litigated was “dubious.”

The Court’s Determination of Plaintiff’s Motion to Compel

In support of its motion to compel a valuation under CPLR 7601, Plaintiff argued that in light of the parties’ overarching disagreement as to price, the Purchase Agreement expressly required the parties to retain a particular accounting firm to resolve their differences.  Defendants countered that Plaintiff’s claim for breach of the representation provisions in the Purchase Agreement necessarily implicated the indemnification provisions in the Agreement, which prescribed judicial resolution in the event of disagreement among the parties.

Engaging in a detailed analysis of the apparently-competing contract provisions, the court ultimately sided with Plaintiff and compelled a valuation by the accounting firm identified in the Purchase Agreement.  The court cited certain other provisions in the Agreement supporting its decision – namely, that “nothing set forth in [the indemnification provisions] shall affect any party’s rights to specific performance or other equitable remedies with respect to the covenants referred to in this Agreement.”

Because the parties’ agreement to retain the accounting firm in the event of an unresolved purchase price constituted a “covenant” as that term is “plainly and ordinarily” understood, and because CPLR 7601 provides for the remedy of specific performance, the court found that “specific performance of the remedy of valuation is available to Plaintiff here.”  The court also noted the underlying policy considerations of CPLR 7601 and the practical implications of the Purchase Agreement in rendering its decision – namely, that the accounting firm’s valuation “in turn would lead to a determination which may resolve certain of the remaining issues in this litigation.”

Spectris Inc. v 1997 Milton B. Hollander Family Trust., Sup Ct, New York County, July 24, 2014, Bransten, J, Index No. 653706/13

Dungeons & Dragons Documentary Dispute leads to Preliminary Injunction

Posted in Justice Demarest, Carolyn E., Kings, Order to Show Cause, Preliminary Injunction

In an August 4, 2014 Commercial Division decision by Justice Demarest, the court granted the plaintiff’s motion, brought by order to show cause, for a preliminary injunction restraining the defendants from taking certain actions with respect to a documentary film about the fantasy role-playing game Dungeons & Dragons (“D & D”).

The plaintiff and the individual defendants, who later transferred their interests to their wholly owned LLC (“Iconoscope”), orally formed a partnership in 2011 to produce a documentary film about D & D (the “D & D Production”). Operating pursuant to an oral general agreement, the plaintiff was responsible for the creative aspects of the D &D Production and Iconoscope for financing, including running a Kickstarter campaign that generated substantial funds; marketing; and distribution. Ultimately, the partnership fizzled and the parties entered into a settlement agreement. During the settlement negotiations, the defendants began to develop and raise funds for their own D & D documentary, titled “The Great Kingdom,” and created and were using a competing website. The plaintiff’s motion was based, inter alia, upon the “chilling effect” of the defendants’ competitive activities in seeking to produce The Great Kingdom.

The court found that the “economic and artistic success of the D&D Production film” was being placed at risk by the defendants’ competitive activities, and that such risk was actual and imminent, and could be irreparable if the defendants were allowed to continue. The court also found that the equities “unquestionably” favored the plaintiff, explaining that it was the defendants “who embarked upon their project in competition with the interests of their partnership with the plaintiff.” Therefore, the court granted the preliminary injunction to the extent that the defendants were enjoined from having any contact with any of the parties or persons involved in the D & D Production, and from advertising for The Great Kingdom in any manner, or making efforts to solicit funding for The Great Kingdom or any other D & D-related film.

Westpaw Films Inc. v Sprattley, Sup Ct, Kings County, Aug 4, 2014, Demarest, J, Index No. 505665/2014