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NY Commercial Case Compendium

Your resource for court decisions

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

Untimely Claims Dismissed and Remainder of Action Stayed In Favor of Arbitration

Posted in Accounting, Arbitration, Breach of Contract, Breach of Fiduciary Duty, Conversion, Fraud, Industry: entertainment, Justice Ramos, Charles E., New York, Statute of Limitations, Unjust Enrichment

In a December 2, 2013 Commercial Division decision by Justice Ramos, the court dismissed a number of claims and stayed the remaining claims so that the parties could arbitrate their dispute.  The parties’ dispute arose from the operation of a restaurant.  Certain of the defendants moved to dismiss based on the applicable statute of limitations.  The court ordered a hearing on the issue of timeliness and determined that certain of the claims were untimely.  The court dismissed those parties from the proceeding and stayed the remainder of the litigation in favor of arbitration.

 Diamond et al. v McDonald et al., Sup Ct, New York County, December 2, 2013, Ramos, J, Index No. 654151/12.

Summary Judgment in Lieu of Complaint Granted Based on Default Under Line of Credit Note

Posted in Industry: financial services, Justice Demarest, Carolyn E., Kings, Summary Judgment in lieu of Complaint

In a December 9, 2013 Commercial Division decision by Justice Demarest, the court granted the plaintiff’s CPLR 3213 motion for summary judgment in lieu of complaint. Plaintiff commenced the action to recover on a line of credit note issued to the defendant, alleging that the defendant defaulted under the note by failing to timely pay the first monthly installment after the note’s maturity date and by subsequently failing to make the payment after receiving written notice of its default. The court held that the plaintiff established its prima facie right to summary judgment by establishing the note is “an instrument for the payment of money only, as its terms and subsequent extensions contain an unconditional promise to pay a certain amount over a stated period of time.”  The court further held that the defendant failed to raise a triable issue of fact supporting a cognizable defense in that it failed to deny the plaintiff’s assertions and submitted only a “self-serving affidavit.”

First Natl. Bank of N.Y. v Schiff, Sup Ct, Kings County, December 9, 2013, Demarest, J, Index No. 503399/13

Breach of Contract Defense Defeats Motion for Summary Judgment in Lieu of Complaint Where Note Was Inextricably Intertwined with Underlying Contract of Sale and Related Leases

Posted in Breach of Contract, Co-operative, Collateral Estoppel, CPLR 3213, Industry: real estate, Justice Demarest, Carolyn E., Kings, Promissory Note, Res Judicata, Statute of Limitations, Summary Judgment in lieu of Complaint

In a January 21, 2014, Kings County Commercial Division decision by Justice Demarest, the court denied plaintiff’s motion for summary judgment in lieu of complaint under CPLR § 3213 based on an alleged default on a promissory note given in connection with the sale of a cooperative unit.  Because the promissory note was “inextricably intertwined” with the underlying contract of sale and related leases, which defendants allegedly had breached and/or acted in bad faith in connection with, the court held that defendants’ breach of contract defense defeated plaintiff’s motion.  On the basis of defendants’ specific request for permission to serve an answer and counterclaims, the court neglected to deem the moving and answering papers as the complaint and answer, respectively, and directed plaintiff to serve and file a formal complaint.

Zamore, Zamore & Zamore v Aloyts, Sup Ct, Kings County, January 21, 2014, Demarest, J, Index No. 502332/14

Court Explains Difference Between Transactional Causation and Loss Causation in Collateralized Debt Obligation Suit

Posted in Industry: banking, Industry: financial services, Justice Kornreich, Shirley Werner, Motion to Dismiss, Motion to Reargue, Motion to Renew, New York

In a December 24, 2013 Commercial Division decision by Justice Kornreich, the court considered a motion to reargue and renew and adhered to its original determination, dismissing plaintiffs’ complaint with prejudice.  The litigation is one of many which arose from the meltdown of the residential mortgage backed securities market.  Specifically, the case involved allegations of fraud relating to the issuance of approximately $331 million of collateralized debt obligations (CDOs) comprised of residential mortgage backed securities (RMBS) and credit default swaps (CDSs).  A CDO is a security collateralized by a variety of debt obligations.  RMBSs are securities which pool residential mortgages and use the monthly interest and principal payments to pay the security holders.

In this action the plaintiffs brought fraud claims against various parties involved in the transaction essentially alleging that certain of the CDOs it invested in were “designed to fail” and that it was fraudulently induced to invest in others based on various false statements made by some of the defendants.  The court analyzed one particular aspect of a fraud claim: the necessity of pleading causation with specificity.

The court held that to plead a viable fraud claim a plaintiff must allege both that the defendant’s misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentation directly caused the loss about which plaintiff complaints (loss causation).  In other words, plaintiff must allege that the misstatements were the reason the transaction turned out to be a losing one.  Therefore, if the investor lost his money for a wholly unrelated reason (e.g. the market crashing) the investor cannot bring a fraud claim. 

In this specific case, the court found that the plaintiffs could not plead loss causation because, while wrongdoing may have occurred, at bottom they “bet wrong on the housing market, and it cost them dearly.”  For that reason, among others, the court adhered to its original decision dismissing the plaintiffs’ complaint with prejudice.

Loreley Financing (Jersey) No. 4 Limited et al. v UBS Limited et al., Sup Ct, New York County, December 24, 2013, Kornreich, J, Index No. 651785/2012