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NY Commercial Case Compendium

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

Court Discerns the “Economic Reality” of Loan Distribution, Looks at “Substance” over “Form” on Summary Judgment

Posted in Breach of Contract, Industry: banking, Justice Sherwood, O. Peter, New York, Summary Judgment, Uncategorized

In an August 20, 2014 Commercial Division decision by Justice Sherwood, the court granted defendant and counterclaim plaintiff Credit Suisse’s motion for summary judgment, dismissing the claim against it.  Credit Suisse sold plaintiff Sumitomo Mitsui Banking Corporation (“Sumitomo”) an interest in a syndicated bridge loan in 2006.  It was restructured in May 2009.  At the “heart” of the dispute in this case is the May 2009 transaction, and whether a distribution received by Credit Suisse was “secured debt” or “cash.”

In March 2006, various banks, including Credit Suisse and Sumitomo, provided nonparty Capmark with a $5.5 billion unsecured term loan and revolving credit, set to mature in March 2011, and a $5.25 billion bridge loan, set to mature in March 2009.  Sumitomo did not originally participate in the bridge loan, but in March 2006 purchased from Credit Suisse a $200 million participation in the loan pursuant to a Participation Agreement.  Under the Participation Agreement, Credit Suisse was to pay Sumitomo its pro rata share of any distribution it received under the bridge loan.  These distributions would consist of “cash” and “non-cash” proceeds, and the Agreement provided for two different procedures for the two different distributions: Credit Suisse was obligated to distribute any “cash” distribution to Sumitomo within two business days of its receipt; it was obligated to distribute the “beneficial and record ownership of” any “non-cash” distribution “as soon as practicable.”

Capmark, the borrower, was “severely negatively impacted” by the 2008-2009 financial crisis, and negotiated with its lenders to restructure its bridge loan, which was due March 2009.  Capmark threatened to file bankruptcy if the lenders did not agree to restructure the debt.  The bridge loan lenders agreed, but only if Capmark gave them collateral to secure a “substantial portion” of the existing unsecured exposure.  Capmark and the lenders eventually agreed that: (i) Capmark would make a “Cash Repayment” of $75 million; (ii) Capmark allowed the lenders to swap most of the outstanding bridge loan exposure (70%) for a new secured term loan; and (iii) the maturity of the bridge loan would be extended to March 2011.  To obtain the securitization, the lenders advanced Capmark cash, secured by Capmark’s assets, to be used “solely” to make contemporaneous repayments of the existing bridge loan.

After the deal was reached and the transactions occurred, Credit Suisse transferred to Sumitomo its pro rata share of the Cash Repayment, and offered to transfer to Sumitomo its pro rata share of the new secured debt that was substituted for the unsecured bridge loan debt.  Sumitomo refused to accept the latter, claiming that it was entitled to repayment in cash.  Sumitomo brought this action and alleged that Credit Suisse breached the Participation Agreement.  Credit Suisse counterclaimed for declaratory judgment that it fully performed under the agreement.  Sumitomo’s principal argument was that the bridge loan was repaid in cash.  Credit Suisse argued that the distribution was not a true “cash” payment—rather, it was secured debt—and that Sumitomo “was improperly seeking to elevate the form of the 2009 transaction over its economic substance.”  Sumitomo argued that if the Court gave any credence to Credit Suisse’s argument, that it was entitled to discovery.

The parties cross-moved for summary judgment.  Justice Yates denied both motions.  The First Department affirmed, held it was the “the economic substance of a transaction that should determine the rights and obligations of the interested parties,” and remanded so that discovery could commence.  Following discovery, the parties again cross-moved for summary judgment.

Justice Sherwood determined that “evidence of ‘economic substance’” consisted of “objective evidence of the parties’ intentions, as shown by their statements and conduct contemporaneous with the negotiation and execution of the May 2009 refinancing agreements, as well as industry custom and usage.”  The court held discovery “yielded undisputed evidence that the economic substance” of the “May, 2009 restructuring was a substitution of secured debt for an equal amount of unsecured debt held by the very same lender parties.”  The record showed:

  • Capmark was in “dire financial      situation” in 2009 and therefore refused to repay the bridge loan;
  • Capmark threatened the lenders it      would file for bankruptcy if they did not agree to restructure the loan;
  • the lenders desired to improve      their position by obtaining security for the bridge loan;
  • no “new money” was loaned to Capmark;
  • the debt was “shifted      dollar-for-dollar” from unsecured to secured debt.

The court discussed how the relevant testimony and documentary evidence confirmed the “economic reality” that the distribution at issue was secured debt, not “cash,” as argued by Sumitomo.

Sumitomo Mitsui Banking Corp. v Credit Suisse, Sup Ct, New York County, August 20, 2014, Sherwood, J., Index No. 600898/2010.

Failure to File Undertaking with Kings County Clerk Precludes Automatic Stay Pursuant to CPLR 5519(a)(2)

Posted in Industry: construction, Justice Demarest, Carolyn E., Kings

In a September 5, 2014 Commercial Division decision by Justice Demarest, the court denied the respondent’s order to show cause seeking an order, pursuant to CPLR 5519, recognizing a purported automatic stay of the enforcement of a judgment. This action arose from the construction of a Best Buy store, for which the respondent (“DCM”) served as the general contractor and entered into a subcontract with, among others, the petitioner (“Vintage”). After the court granted Vintage’s motion to confirm an arbitration award in its favor against DCM, and a judgment (“Judgment”) was entered against DCM, DCM filed a notice of appeal. Thereafter, Best Buy Stores LP served an undertaking (“Undertaking”) upon Vintage, to which Vintage served a written notice of objection. DCM filed the present order to show cause arguing the Undertaking was timely under CPLR 5519(a)(2) and that it automatically stayed the enforcement of the Judgment pending DCM’s appeal. The court denied the order to show cause explaining that it took judicial notice of the fact that the Undertaking was not filed with the Kings County Clerk under the present case’s index number, and that DCM failed to provide proof to the contrary. The court held, therefore, that the Undertaking was never effective and that there was no automatic stay pursuant to CPLR 5519(a)(2).

Vintage Flooring and Tile, Inc. v DCM of NY LLC, Sup Ct, Kings County, September 5, 2014, Demarest, J, Index No. 19094/12.

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.