Indemnification Under the BCL for Counsel Fees Incurred

By: Leo K. Barnes Jr.*

*Mr. Barnes, a member of Barnes & Barnes, P.C. in Melville, can be reached at LKB@BARNESPC.COM

 

This month we review an individual’s right to indemnification pursuant to the New York Business Corporation Law (“BCL”) for counsel fees incurred to defend a civil action or proceeding, other than a derivative suit.

 

In typical fashion, directors and officers are sued for conduct in the course of their duties  as directors or officers of a corporation.  Indemnification of expenses granted pursuant to, or provided by, the BCL is not to be deemed exclusive of any other rights to which a director or officer seeking indemnification may be entitled to, whether contained in the certificate of incorporation or the by-laws or, when authorized by such certificate of incorporation or by-laws, (i) a resolution of shareholders, (ii) a resolution of directors, or (iii) an agreement providing for such indemnification.  N.Y. BCL § 721.  However, no indemnification may be made to or on behalf of any director or officer if a judgment (or other final adjudication adverse to the director or officer) establishes that his acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled.  N.Y. BCL § 721.

 

Whether the Defendant is entitled to indemnification in defending such an action depends on the particular facts and circumstances of the case and whether those facts fit into the provisions of the BCL that allow for indemnification.  In that regard, the indemnification statutes under the BCL fall into two categories:  (1) those allowing for permissive indemnification by the corporation; and (2) those where a court will require mandatory indemnification.  Under the permissive indemnification framework, a corporation may indemnify any person made a party to a civil action (other than one by or in the right of the corporation to procure a judgment in its favor [a derivative suit]) against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys’ fees, if such director or officer acted in good faith, for a purpose which he reasonably believed to be in the best interests of the corporation.  N.Y. BCL § 722(a).

 

Permissive indemnification is allowed only if it is authorized by the corporation.   N.Y. BCL § 723(b).  Authorization under the BCL occurs:  (1) by the board of directors acting by a quorum consisting of directors who are not parties to the action or proceeding, upon a finding that the director or officer to be indemnified has met the standard of conduct set forth in BCL § 722 (that the person has acted in good faith, for a purpose which he reasonably believed to be in the best interests of the corporation), or established pursuant to BCL § 721 [N.Y. BCL §§ 723(b)(1)]; or (2) if such a quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs, by the board of directors upon the written opinion of independent legal counsel that indemnification is proper in the circumstances because the applicable standard of conduct has been met by such director or officer, or by the shareholders or members upon a similar finding [N.Y. BCL § 723(b)(2)].

 

If the corporation does not choose to indemnify the officer or director at its own volition (i.e., there is no permissive indemnification), a director or officer can still apply to the court for mandatory indemnification under BCL § 724.  BCL § 723(a) mandates indemnification of a person who has been completely successful, on the merits or otherwise, in the defense of a civil or criminal action or proceeding.  Pursuant to BCL § 724(a), notwithstanding the failure of a corporation to provide indemnification, and despite any contrary resolution of the board, indemnification shall be awarded by a court to the extent authorized by BCL sections 722 and 723(a). Consistent with BCL § 722(a) and § 723(a), the standard for indemnification under BCL § 724 is whether the officer or director acted in good faith, for a purpose believed to be in the best interests of the corporation. Note that the BCL statutes requiring a corporation to indemnify officers and directors who successfully defend non-derivative actions in which they are parties for both liability and litigation costs do not independently provide for the recovery of fees incurred by a corporate officer in obtaining indemnification.  Baker v. Health Management Systems, Inc., 98 N.Y.2d 80 (2002).

 

However, counsel must keep in mind that notwithstanding anything in the BCL sections set forth above, the BCL provides that no indemnification, advancement, or allowance can be made in any circumstance where it appears: (1) that the indemnification would be inconsistent with the law of the jurisdiction of incorporation of a foreign corporation which prohibits or otherwise limits such indemnification; (2) that the indemnification would be inconsistent with a provision of the certificate of incorporation, a bylaw, a resolution of the board of directors or of the shareholders or members, or an agreement or other proper corporate action, in effect at the time of the accrual of the alleged cause of action asserted in the threatened or pending action or proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (3) if there has been a settlement approved by the court, that the indemnification would be inconsistent with any condition with respect to indemnification expressly imposed by the court in approving the settlement.  N.Y. BCL § 725(b).

 

Recently, the right of an officer and fifty-percent shareholder to indemnification was addressed in Tulino v. Tulino (Nassau County Index No. 7081/09).  In Tulino, plaintiff Antonio Tulino entered into a written agreement to sell his 50% interest in Tulino Realty, in which the corporation’s main asset was a commercial building.  Plaintiff’s brother (Defendant Michele Tulino), who owned the other 50% of Tulino Realty, refused to consent to the sale.

 

Plaintiff brought an action both individually and on behalf of the corporation seeking an order compelling defendant Michele Tulino, as president of Tulino Realty, to issue a stock certificate representing Plaintiff’s 50% interest in the corporation.  In addition, Plaintiff alleged breach of fiduciary duty, and sought a declaratory judgment that Michele did not have a right of first refusal with regard to Antonio’s shares.  In the amended answer, defendants Michele Tulino and Tulino Realty asserted various counterclaims against Antonio.

 

After the action was filed, Plaintiff cancelled the contract to sell the 50% interest in Tulino Realty.  Thereafter, Plaintiff voluntarily discontinued the claims asserted in the complaint without prejudice.  However, the stipulation of voluntary discontinuance provided that the action was to continue as to defendants’ counterclaims.

 

Subsequently, defendant Michele Tulino moved for an order directing plaintiff Antonio Tulino and Tulino Realty to reimburse Michele for his attorneys fees incurred in defending the action pursuant to § 724 of the BCL.  The Court held that permissive indemnification was inapplicable because plaintiff Antonio, as a 50% shareholder, objected to the corporation’s reimbursement of defendant Michele’s legal fees.  With regard to defendant’s right to mandatory indemnification, the Court found “plaintiff’s voluntary discontinuance without prejudice as a ‘settlement’ of the main action, rather than a ‘completely successful’ disposition in favor of the defendant.”  Id., at 4.  As such, the Court held that Michele was not entitled to indemnification pursuant to BCL § 723.  Further, the Court held that there was no basis upon which the Court could determine that Michele’s actions were taken in the best interests of Tulino Realty, and thus it was not shown that defendant Michele Tulino was entitled to indemnification under BCL § 724.

The Latest Word From the Court of Appeals on the Scope of Duty Owed by a Realtor to a Seller

By: Leo K. Barnes Jr.*

*Mr. Barnes, a member of Barnes & Barnes, P.C. in Melville,

can be reached at LKB@BARNESPC.COM

 

In our June 2009 column entitled Caveat Broker: Avoiding Unenforceable Agreements to Agree, we reviewed the prerequisites to a viable and enforceable brokerage commission agreement. This month we explore the scope of exclusivity owed by a broker to a seller in light of the recent decision by the Court of Appeals  in Douglas Elliman LLC v. Tretter, 2012 WL 5833609 (2012).

 

In Douglas Elliman LLC v. Tretter, plaintiff Douglas Elliman Real Estate (Douglas Elliman) brought suit against defendants Franklin and Sheila Tretter (the Sellers) for failure to pay a broker commission on the sale of their cooperative apartment.  According the decision, the Sellers retained Prudential Douglas Elliman Real Estate to sell their apartment located in Manhattan, wherein Barbara Lockwood served as the broker for the listing.  The brokerage agreement stated that the Sellers would be required to pay a 6% commission on the sale of the apartment.  After the brokerage agreement was signed, Lockwood prepared the listing and began to show the apartment at open houses and by appointment.  In November 2008, a potential purchaser made an offer on the apartment, which was accepted by the Sellers, subject to the cooperative board’s approval.

 

During one of the open houses at the Seller’s apartment, Lockwood met Taurie Zeitzer.  After the initial bidder’s offer was accepted and while the bidder was providing the required information to secure the cooperative board’s approval, Lockwood communicated with Zeitzer and her husband via email and showed the Zeitzers five other properties, including four properties listed through other agencies.  In addition, Lockwood discussed twelve other apartments with the Zeitzers.

 

Ultimately, the Sellers deal with the initial bidder fell through in late November 2008.  A few weeks later, Lockwood again showed the apartment to the Zeitzers.  Subsequently, the Zeitzers made an offer of $1.4 million, and in December 2008 the Sellers accepted the offer and entered into a contract with the Zeitzers (the Buyers) for the purchase of the apartment.

 

Prior to the Sellers and the Buyers reaching an agreement, Lockwood sent the Sellers a deal sheet which listed a $70,000 brokerage commission (5% of the $1.4 million).  Douglas Elliman later confirmed in writing that the brokerage fee on the deal sheet was correct and that it would reduce its brokerage commission from 6% to 5% if the Sellers sold the apartment to the Buyers, which ultimately occurred.  Further, the contract between the Sellers and the Buyers listed “Prudential Douglas Elliman (Barbara Lockwood)” as the broker, and stated that it was the Sellers’ sole responsibility to pay the broker’s commission.

 

The $70,000 commission was due and payable at closing, however, Lockwood was unable to attend the closing and the $70,000 was placed in escrow.  After the $70,000 was not turned over, Douglas Elliman filed suit against the Sellers to recover its broker commission on the sale.  In their Answer, the Sellers alleged that Douglas Elliman was not entitled to a commission because Lockwood had breached her fiduciary duty to the Sellers by acting as a dual agent of the buyers.

 

The Sellers moved to dismiss the Complaint, and Douglas Elliman cross-moved for summary judgment on its claim to obtain the commission.  The trial court denied both motions finding that there were triable issues of fact whether Lockwood was acting as a dual agent for both the Buyers and Sellers.  Both parties appealed, and the Appellate Division, First Department modified the order by granting Douglas Elliman’s motion for summary judgment holding that “the evidence demonstrated ‘as a matter of law that Ms. Lockwood did not act as a dual agent’ with the concomitant ‘duty to disclose her divided loyalties and obtain the parties’ consent thereto’” because

 

Ms. Lockwood had a signed exclusive agency agreement with the [sellers]. She had no similar agreement with [the buyers], and she received no remuneration from them. Ms. Lockwood’s actions indicate that she wanted this transaction to close, and Douglas Elliman’s submissions support the conclusion that she ultimately obtained permission to reduce her own commission to bring the parties to an agreement. The negotiated contract was signed by both [parties], it listed Ms. Lockwood as the agent, and it explicitly stated that the sellers were exclusively responsible for her fee.[1]

 

On appeal, the Court rejected the Seller’s argument that Lockwood was not permitted to show the Buyers any other apartments because the parties entered into an exclusive seller’s agreement and affirmed, holding that absent a specific agreement to the contrary, Lockwood had no duty to refrain from offering other properties to the Buyers.  The Court elaborated that “A contrary holding would ‘unreasonably restrain’ brokers from cultivating potential clients at open houses for their principals.”  The Court found that such a narrow interpretation runs counter to the holding in Sonnenschein v. Douglas Elliman-Gibbons & Ives, 96 N.Y.2d 369 (2001) “which sought to formulate a rule consistent with the nature and fundamental requirements of the real estate marketplace in New York (internal quotations omitted).”  The Court concluded that Douglas Elliman established it entitlement to the commission as a matter of law, and the statements and conduct cited by the Sellers did not raise any triable issue of fact.


[1] Douglas Elliman LLC v. Tretter, 2012 WL 5833609 (2012), quoting Douglas Elliman LLC v. Tretter, 84 A.D.3d 446, 448-449, 922 N.Y.S.2d 74 (1st Dep’t 2011).

Aviation Related Themes in Breach of Contract Cases

By: Leo K. Barnes Jr.*

*Mr. Barnes, a member of Barnes & Barnes, P.C. in Melville,

can be reached at LKB@BARNESPC.COM

 

This month we review two recent decisions concerning commercial issues which touch the aviation industry.  In Wells Fargo Bank Northwest, N.A. v. U.S. Airways, Inc., 2012 WL 3288834 (1st Dep’t 2012), plaintiff Wells Fargo brought suit against defendant U.S. Airways for breach of contract relating to a lease agreement for three commercial aircraft.  According to the decision, U.S. Airways’ predecessor company acquired three 737-3G7 aircraft from Boeing.  At the time, although each aircraft had a maximum takeoff weight (MTOW) of 124,000 pounds, a special program offered by Boeing permitted each aircraft to operate at an increased MTOW of 138,500 pounds.

 

In 2005, Wells Fargo purchased the three aircraft from U.S. Airways and then leased the aircraft back to U.S. Airways for a three-year term.  Each purchase agreement specified that the MTOW of each aircraft was 138,500 pounds.  In addition, the purchase agreements set forth that Wells Fargo would provide U.S. Airways with a “Redelivery Certificate” acknowledging and confirming that U.S. Airways had redelivered the aircraft to Wells Fargo in accordance with the agreement after Wells Fargo completed its final inspection of each aircraft and its corresponding documents.

 

At the end of the lease term, Wells Fargo had a team of experts conduct the final inspection of each aircraft, and subsequently accepted the aircraft and executed Redelivery Certificates pursuant to the lease agreements.  However, it was later discovered that U.S. Airways redelivered each of the three aircraft back to Wells Fargo at a MTOW of 124,000 pounds, not 138,500 pounds, because the increased MTOW obtained from Boeing was not transferrable.  Subsequently, Wells Fargo filed suit against U.S. Airways alleging breach of contract and rescission of the Redelivery Certificates.

 

Wells Fargo moved for partial summary judgment on its breach of contract claim, which was granted by the trial court on the ground that U.S. Airways breached its contractual obligation to return the aircraft with a MTOW of 138,500 pounds.  On appeal, the Appellate Division, First Department reversed.  Although the First Department agreed with the trial court that the leases required U.S. Airways to return the aircraft with a MTOW of 138,500 pounds (the MTOW that the aircraft had at the time the leases commenced), the Court held “that Wells Fargo’s execution of the Redelivery Certificates without reference to the MTOW discrepancy preclude[d] it from raising or seeking relief for that breach.”  The Court noted that a section of the leases provided that upon execution of the Redelivery Certificates, the leases were deemed terminated, subject only to specific delineated circumstances.  The Court found that the MTOW discrepancy did not fall within those delineated circumstances, and as such the section of the lease mandating that the MTOW at redelivery be the same as that at commencement of the leases did not survive the termination of the leases once the Redelivery Certificates were executed.  Further, the First Department cited Jet Acceptance Corp. v. Quest Mexicana, 87 A.D.3d 850 (1st Dep’t 2011), for the proposition that by executing the Redelivery Certificates, Wells Fargo expressly confirmed that U.S. Airways had fully performed all of its obligations, and by doing so Wells Fargo effectively waived any claim that the aircraft were not in compliance with the return conditions of the lease.

 

In another recent commercial case involving the aviation industry, the U.S. District Court for the Southern District of New York in B/E Aerospace v. Jet Aviation St. Louis, 2012 WL 1577497, 11 Civ. 8569 (S.D.N.Y. 2012), addressed the validity of an arbitration award issued following a dispute between an aircraft interior manufacturer and an installer of aircraft interiors.

 

B/E Aerospace (B/E) is a developer and manufacturer of interior products for commercial aircraft and business jets.  Jet Aviation, formerly known as Midcoast Aviation, installs interiors on private jets.  In 2005, Midcoast and B/E entered into an agreement whereby Midcoast would pay B/E $1.4 million, and in exchange B/E would provide aircraft seating for installation in compliance with Federal Aviation Administration (FAA) regulations.

 

As a result of incorrect installation instructions provided by B/E along with the seating, the seating was not certifiable by the FAA, and as a result Midcoast incurred over $3.3 million in costs attributed to engineering and payments to its customers.  Thereafter, Midcoast initiated arbitration proceedings against B/E for breach of contract and negligent misrepresentation.  Following the arbitration, the arbitration panel issued an award of $3.3 million in Midcoast’s favor, including $84,543 in attorney’s fees.  Subsequently, B/E filed an action to vacate the award in the U.S. District Court for the Southern District of New York, and Midcoast filed a cross-motion to the confirm the award.

 

In seeking to vacate the arbitration award, B/E argued that the arbitration panel manifestly disregarded New York law and the parties agreement by awarding damages based on duplicative contract and tort claims in contravention of existing New York law.  In addition, B/E sought to vacate the award of attorney’s fees on the ground that the parties contract stated that “[e]ach party shall be solely responsible for its own attorneys fees.”  The Court rejected both of B/E’s arguments and confirmed the arbitration award in its entirety.  In doing so, the Court held that the award of damages based on both breach of contract and negligent misrepresentation was not a manifest disregard of New York law because the arbitration panel explicitly found that Midcoast reasonably relied on the specialized expertise of B/E (based on B/E’s presentations of its expertise prior to the parties entering into the contract), which thereby created an independent legal duty to Midcoast beyond the contractual relationship.  See also, Kimmel v. Schaefer, 89 N.Y.2d 257, 263 (1996)(liability for negligent misrepresentation arising from a commercial transaction is imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified).

 

Additionally, in rejecting B/E’s argument for the vacatur of the award of attorney’s fees, the Court found that the award was not a manifest disregard of New York law because the American Arbitration Association (AAA) rules were expressly incorporated into the parties’ agreement.  In so finding, the Court noted that AAA Rule 43(d) states that an arbitrator’s award may include attorneys fees if all parties have requested such an award.  In both Midcoast’s and B/E’s respective demand and answer, both parties sought an award of counsel fees.  As such, the Court found the arbitration panel’s award of counsel fees to be proper.

 

Top NY Court Affirms High Bar For Piercing Corporate Veil

New York’s highestNew York’s highestLaw360, New York (November 29, 2012, 6:58 PM ET) — New York’s highest court on Thursday backed a legal standard that makes it difficult for plaintiffs to hold individuals liable for alleged corporate abuses, nixing a personal injury plaintiff’s bid to recover damages from two property owners in a ruling experts say should protect businesses statewide.

New York’s highest court on Thursday backed a legal standard that makes it difficult for plaintiffs to hold individuals liable for alleged corporate abuses, nixing a personal injury plaintiff’s bid to recover damages from two property owners in a ruling experts say should protect businesses statewide.

The unanimous New York State Court of Appeals agreed with a lower appellate court, the First Department of the Supreme Court of New York’s Appellate Division, which in 2011 turned aside plaintiff Atara James’ effort to pierce the corporate veil of Loran Realty V Corp.

James appealed after losing on her veil-piercing claim in a 2009 Bronx County Supreme Court bench trial. She sued in 2002 on behalf of her infant daughter Kayla, seeking to win damages for lead-paint injuries from real estate investor Frank Palazzolo, as well as from former Loran Realty V owner Carmine Donadio.

Thursday’s decision beat back James’ challenge to a widely cited 1993 precedent, Morris v. New York State Department of Taxation and Finance, which holds that a plaintiff must show an individual “abused the privilege of doing business … to perpetrate a wrong or injustice.”

Like the First Department, the Court of Appeals said James bore that burden of proof and didn’t clear the hurdle of showing specific intent.

“Plaintiffs … failed to produce evidence that the individual defendants took steps to render the corporate defendant insolvent in order to avoid plaintiffs’ claim for damages or otherwise defraud plaintiffs,” the Court of Appeals wrote.

The appeal was a “tough road,” according to Scarsdale, N.Y.-based attorney Lawrence Gottlieb of Hass & Gottlieb, who represents Palazzolo.

“What they tried to do in the Court of Appeals was to overturn a long-standing precedent, which holds that in order to pierce the corporate veil you need to show that a person not only denuded a corporation of its assets but also did so to prevent a plaintiff from collecting,” Gottlieb said.

The decision should come as a relief to businesses across the Empire State, according to Melville, N.Y.-based commercial litigation defense attorney Leo K. Barnes Jr. of Barnes & Barnes PC.

“Thankfully, from the defense perspective, the courts rarely go as far as to pierce,” Barnes said. “Business owners are advised to incorporate for this purpose.”

Under the Morris precedent not only must a plaintiff show that an individual defendant dominated a corporate transaction — such as a move to strip a company of its assets — they must also show that such domination was used to commit a fraud, according to Barnes.

In any closely held business the shareholders will almost always “dominate and control” transactions, Barnes pointed out, making that part of the standard easy to clear.

But it’s far more difficult to show that the shareholders of the corporate defendant intentionally depleted corporate assets to render the corporate defendant judgment proof, Barnes said.

“The fraud or injustice element of the claim is often the turning point,” Barnes said.

The attorney who sought to overturn the Morris precedent, Brian J. Shoot of Sullivan Papain Block McGrath & Cannavo PC, had a different take, saying that “sham corporations” currently enjoy protection under the law that is too strong for legitimate plaintiffs to overcome.

It was not difficult to show that Loran Realty V had no assets, Shoot said, but it was a virtual impossibility to prove that the two individual defendants stripped it of assets it solely to dodge the plaintiffs’ claims.

With courts having refused to relax the standard, New York’s legislature should consider taking action to protect plaintiffs injured by corporations in similar ways, Shoot said, noting that the lower appellate court conceded Loran Realty V was a “judgment-proof shell.”

“The substantial corporations of this world — the IBMs, the Verizons — they don’t have a dog in the fight, so to speak,” Shoot said. “They’re not undercapitalized. It’s another class of defendant we’re talking about.”

While the James case dealt with lead paint injury, Shoot said many similar cases involve New York’s taxi cab companies, which are formed with such protections in mind.

“Cab companies have no idea who a cab might run over,” he said. “The corporations are set up to stop anyone who might want to pursue a claim beyond the corporate veil.”

The James plaintiffs also have a lead paint liability claim pending against the defendants but, without the ability to recover from either Palazzolo or Donadio directly it was unclear what the prospects of that part of the case would be. The liability claim was bifurcated from the corporate veil claim for purposes of trial. No trial has been set related to the other claim, still pending in Bronx County Supreme Court.

The plaintiffs are represented before the trial court by Gregory J. Cannata of Gregory J. Cannata & Associates. They are represented before the appellate court by Sullivan Papain Block McGrath & Cannavo PC.

Palazzolo is represented by Hass & Gottlieb.

Donadio is represented by attorney Daniel G. Heyman.

The appeal is James et al. v. Loran et al., case number 237, in the New York State Court of Appeals. court on Thursday backed a legal standard that makes it difficult for plaintiffs to hold individuals liable for alleged corporate abuses, nixing a personal injury plaintiff’s bid to recover damages from two property owners in a ruling experts say should protect businesses statewide.
The unanimous New York State Court of Appeals agreed with a lower appellate court, the First Department of the Supreme Court of New York’s Appellate Division, which in 2011 turned aside plaintiff Atara James’ effort to pierce the corporate veil of Loran Realty V Corp.
James appealed after losing on her veil-piercing claim in a 2009 Bronx County Supreme Court bench trial. She sued in 2002 on behalf of her infant daughter Kayla, seeking to win damages for lead-paint injuries from real estate investor Frank Palazzolo, as well as from former Loran Realty V owner Carmine Donadio.
Thursday’s decision beat back James’ challenge to a widely cited 1993 precedent, Morris v. New York State Department of Taxation and Finance, which holds that a plaintiff must show an individual “abused the privilege of doing business … to perpetrate a wrong or injustice.”
Like the First Department, the Court of Appeals said James bore that burden of proof and didn’t clear the hurdle of showing specific intent.
“Plaintiffs … failed to produce evidence that the individual defendants took steps to render the corporate defendant insolvent in order to avoid plaintiffs’ claim for damages or otherwise defraud plaintiffs,” the Court of Appeals wrote.
The appeal was a “tough road,” according to Scarsdale, N.Y.-based attorney Lawrence Gottlieb of Hass & Gottlieb, who represents Palazzolo.
“What they tried to do in the Court of Appeals was to overturn a long-standing precedent, which holds that in order to pierce the corporate veil you need to show that a person not only denuded a corporation of its assets but also did so to prevent a plaintiff from collecting,” Gottlieb said.
The decision should come as a relief to businesses across the Empire State, according to Melville, N.Y.-based commercial litigation defense attorney Leo K. Barnes Jr. of Barnes & Barnes PC.
“Thankfully, from the defense perspective, the courts rarely go as far as to pierce,” Barnes said. “Business owners are advised to incorporate for this purpose.”
Under the Morris precedent not only must a plaintiff show that an individual defendant dominated a corporate transaction — such as a move to strip a company of its assets — they must also show that such domination was used to commit a fraud, according to Barnes.
In any closely held business the shareholders will almost always “dominate and control” transactions, Barnes pointed out, making that part of the standard easy to clear.
But it’s far more difficult to show that the shareholders of the corporate defendant intentionally depleted corporate assets to render the corporate defendant judgment proof, Barnes said.
“The fraud or injustice element of the claim is often the turning point,” Barnes said.
The attorney who sought to overturn the Morris precedent, Brian J. Shoot of Sullivan Papain Block McGrath & Cannavo PC, had a different take, saying that “sham corporations” currently enjoy protection under the law that is too strong for legitimate plaintiffs to overcome.
It was not difficult to show that Loran Realty V had no assets, Shoot said, but it was a virtual impossibility to prove that the two individual defendants stripped it of assets it solely to dodge the plaintiffs’ claims.
With courts having refused to relax the standard, New York’s legislature should consider taking action to protect plaintiffs injured by corporations in similar ways, Shoot said, noting that the lower appellate court conceded Loran Realty V was a “judgment-proof shell.”
“The substantial corporations of this world — the IBMs, the Verizons — they don’t have a dog in the fight, so to speak,” Shoot said. “They’re not undercapitalized. It’s another class of defendant we’re talking about.”
While the James case dealt with lead paint injury, Shoot said many similar cases involve New York’s taxi cab companies, which are formed with such protections in mind.
“Cab companies have no idea who a cab might run over,” he said. “The corporations are set up to stop anyone who might want to pursue a claim beyond the corporate veil.”
The James plaintiffs also have a lead paint liability claim pending against the defendants but, without the ability to recover from either Palazzolo or Donadio directly it was unclear what the prospects of that part of the case would be. The liability claim was bifurcated from the corporate veil claim for purposes of trial. No trial has been set related to the other claim, still pending in Bronx County Supreme Court.
The plaintiffs are represented before the trial court by Gregory J. Cannata of Gregory J. Cannata & Associates. They are represented before the appellate court by Sullivan Papain Block McGrath & Cannavo PC.
Palazzolo is represented by Hass & Gottlieb.
Donadio is represented by attorney Daniel G. Heyman.
The appeal is James et al. v. Loran et al., case number 237, in the New York State Court of Appeals. court on Thursday backed a legal standard that makes it difficult for plaintiffs to hold individuals liable for alleged corporate abuses, nixing a personal injury plaintiff’s bid to recover damages from two property owners in a ruling experts say should protect businesses statewide.
The unanimous New York State Court of Appeals agreed with a lower appellate court, the First Department of the Supreme Court of New York’s Appellate Division, which in 2011 turned aside plaintiff Atara James’ effort to pierce the corporate veil of Loran Realty V Corp.
James appealed after losing on her veil-piercing claim in a 2009 Bronx County Supreme Court bench trial. She sued in 2002 on behalf of her infant daughter Kayla, seeking to win damages for lead-paint injuries from real estate investor Frank Palazzolo, as well as from former Loran Realty V owner Carmine Donadio.
Thursday’s decision beat back James’ challenge to a widely cited 1993 precedent, Morris v. New York State Department of Taxation and Finance, which holds that a plaintiff must show an individual “abused the privilege of doing business … to perpetrate a wrong or injustice.”
Like the First Department, the Court of Appeals said James bore that burden of proof and didn’t clear the hurdle of showing specific intent.
“Plaintiffs … failed to produce evidence that the individual defendants took steps to render the corporate defendant insolvent in order to avoid plaintiffs’ claim for damages or otherwise defraud plaintiffs,” the Court of Appeals wrote.
The appeal was a “tough road,” according to Scarsdale, N.Y.-based attorney Lawrence Gottlieb of Hass & Gottlieb, who represents Palazzolo.
“What they tried to do in the Court of Appeals was to overturn a long-standing precedent, which holds that in order to pierce the corporate veil you need to show that a person not only denuded a corporation of its assets but also did so to prevent a plaintiff from collecting,” Gottlieb said.
The decision should come as a relief to businesses across the Empire State, according to Melville, N.Y.-based commercial litigation defense attorney Leo K. Barnes Jr. of Barnes & Barnes PC.
“Thankfully, from the defense perspective, the courts rarely go as far as to pierce,” Barnes said. “Business owners are advised to incorporate for this purpose.”
Under the Morris precedent not only must a plaintiff show that an individual defendant dominated a corporate transaction — such as a move to strip a company of its assets — they must also show that such domination was used to commit a fraud, according to Barnes.
In any closely held business the shareholders will almost always “dominate and control” transactions, Barnes pointed out, making that part of the standard easy to clear.
But it’s far more difficult to show that the shareholders of the corporate defendant intentionally depleted corporate assets to render the corporate defendant judgment proof, Barnes said.
“The fraud or injustice element of the claim is often the turning point,” Barnes said.
The attorney who sought to overturn the Morris precedent, Brian J. Shoot of Sullivan Papain Block McGrath & Cannavo PC, had a different take, saying that “sham corporations” currently enjoy protection under the law that is too strong for legitimate plaintiffs to overcome.
It was not difficult to show that Loran Realty V had no assets, Shoot said, but it was a virtual impossibility to prove that the two individual defendants stripped it of assets it solely to dodge the plaintiffs’ claims.
With courts having refused to relax the standard, New York’s legislature should consider taking action to protect plaintiffs injured by corporations in similar ways, Shoot said, noting that the lower appellate court conceded Loran Realty V was a “judgment-proof shell.”
“The substantial corporations of this world — the IBMs, the Verizons — they don’t have a dog in the fight, so to speak,” Shoot said. “They’re not undercapitalized. It’s another class of defendant we’re talking about.”
While the James case dealt with lead paint injury, Shoot said many similar cases involve New York’s taxi cab companies, which are formed with such protections in mind.
“Cab companies have no idea who a cab might run over,” he said. “The corporations are set up to stop anyone who might want to pursue a claim beyond the corporate veil.”
The James plaintiffs also have a lead paint liability claim pending against the defendants but, without the ability to recover from either Palazzolo or Donadio directly it was unclear what the prospects of that part of the case would be. The liability claim was bifurcated from the corporate veil claim for purposes of trial. No trial has been set related to the other claim, still pending in Bronx County Supreme Court.
The plaintiffs are represented before the trial court by Gregory J. Cannata of Gregory J. Cannata & Associates. They are represented before the appellate court by Sullivan Papain Block McGrath & Cannavo PC.
Palazzolo is represented by Hass & Gottlieb.
Donadio is represented by attorney Daniel G. Heyman.
The appeal is James et al. v. Loran et al., case number 237, in the New York State Court of AppealsNew York’s highest court on Thursday backed a legal standard that makes it difficult for plaintiffs to hold individuals liable for alleged corporate abuses, nixing a personal injury plaintiff’s bid to recover damages from two property owners in a ruling experts say should protect businesses statewide.
The unanimous New York State Court of Appeals agreed with a lower appellate court, the First Department of the Supreme Court of New York’s Appellate Division, which in 2011 turned aside plaintiff Atara James’ effort to pierce the corporate veil of Loran Realty V Corp.
James appealed after losing on her veil-piercing claim in a 2009 Bronx County Supreme Court bench trial. She sued in 2002 on behalf of her infant daughter Kayla, seeking to win damages for lead-paint injuries from real estate investor Frank Palazzolo, as well as from former Loran Realty V owner Carmine Donadio.
Thursday’s decision beat back James’ challenge to a widely cited 1993 precedent, Morris v. New York State Department of Taxation and Finance, which holds that a plaintiff must show an individual “abused the privilege of doing business … to perpetrate a wrong or injustice.”
Like the First Department, the Court of Appeals said James bore that burden of proof and didn’t clear the hurdle of showing specific intent.
“Plaintiffs … failed to produce evidence that the individual defendants took steps to render the corporate defendant insolvent in order to avoid plaintiffs’ claim for damages or otherwise defraud plaintiffs,” the Court of Appeals wrote.
The appeal was a “tough road,” according to Scarsdale, N.Y.-based attorney Lawrence Gottlieb of Hass & Gottlieb, who represents Palazzolo.
“What they tried to do in the Court of Appeals was to overturn a long-standing precedent, which holds that in order to pierce the corporate veil you need to show that a person not only denuded a corporation of its assets but also did so to prevent a plaintiff from collecting,” Gottlieb said.
The decision should come as a relief to businesses across the Empire State, according to Melville, N.Y.-based commercial litigation defense attorney Leo K. Barnes Jr. of Barnes & Barnes PC.
“Thankfully, from the defense perspective, the courts rarely go as far as to pierce,” Barnes said. “Business owners are advised to incorporate for this purpose.”
Under the Morris precedent not only must a plaintiff show that an individual defendant dominated a corporate transaction — such as a move to strip a company of its assets — they must also show that such domination was used to commit a fraud, according to Barnes.
In any closely held business the shareholders will almost always “dominate and control” transactions, Barnes pointed out, making that part of the standard easy to clear.
But it’s far more difficult to show that the shareholders of the corporate defendant intentionally depleted corporate assets to render the corporate defendant judgment proof, Barnes said.
“The fraud or injustice element of the claim is often the turning point,” Barnes said.
The attorney who sought to overturn the Morris precedent, Brian J. Shoot of Sullivan Papain Block McGrath & Cannavo PC, had a different take, saying that “sham corporations” currently enjoy protection under the law that is too strong for legitimate plaintiffs to overcome.
It was not difficult to show that Loran Realty V had no assets, Shoot said, but it was a virtual impossibility to prove that the two individual defendants stripped it of assets it solely to dodge the plaintiffs’ claims.
With courts having refused to relax the standard, New York’s legislature should consider taking action to protect plaintiffs injured by corporations in similar ways, Shoot said, noting that the lower appellate court conceded Loran Realty V was a “judgment-proof shell.”
“The substantial corporations of this world — the IBMs, the Verizons — they don’t have a dog in the fight, so to speak,” Shoot said. “They’re not undercapitalized. It’s another class of defendant we’re talking about.”
While the James case dealt with lead paint injury, Shoot said many similar cases involve New York’s taxi cab companies, which are formed with such protections in mind.
“Cab companies have no idea who a cab might run over,” he said. “The corporations are set up to stop anyone who might want to pursue a claim beyond the corporate veil.”
The James plaintiffs also have a lead paint liability claim pending against the defendants but, without the ability to recover from either Palazzolo or Donadio directly it was unclear what the prospects of that part of the case would be. The liability claim was bifurcated from the corporate veil claim for purposes of trial. No trial has been set related to the other claim, still pending in Bronx County Supreme Court.
The plaintiffs are represented before the trial court by Gregory J. Cannata of Gregory J. Cannata & Associates. They are represented before the appellate court by Sullivan Papain Block McGrath & Cannavo PC.
Palazzolo is represented by Hass & Gottlieb.
Donadio is represented by attorney Daniel G. Heyman.
The appeal is James et al. v. Loran et al., case number 237, in the New York State Court of Appeals.

Further Refining Unjust Enrichment Claims

By: Leo K. Barnes Jr.*

*Mr. Barnes, a member of Barnes & Barnes, P.C. in Melville,

can be reached at lkb@barnespc.com

 

Approximately a year and a half after issuing Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173 (2011), the New York Court of Appeals has revisited the pleading requirements for unjust enrichment claims.  In Georgia Malone & Co. v. Rieder, 19 N.Y.3d 511 (2012), the Court of Appeals specifically addressed the requirement that a sufficiently close nexus exist between the parties to substantiate an unjust enrichment claim.

 

The litigation stemmed from plaintiff’s, Georgia Malone & Co., a licensed real estate broker and consulting firm, representation of defendant CenterRock Realty, LLC, a real estate developer.  Plaintiff introduced CenterRock to sellers of residential apartment properties in midtown Manhattan.  Soon thereafter, CenterRock and plaintiff entered into a contract where plaintiff agreed to produce due diligence reports relating to the residential apartment properties that CenterRock was interested in acquiring.  The contract provided that CenterRock would keep the due diligence reports confidential, and it was agreed that CenterRock would pay plaintiff a commission of 1.25% of the total purchase price of the properties in exchange for plaintiff’s brokerage services.

 

Plaintiff then prepared various due diligence reports relating the properties.  In December 2007, CenterRock executed a contract of sale to purchase the properties for $70 million.  However, CenterRock later validly terminated the contract of sale.  One week prior to CenterRock’s termination of the contract, CenterRock’s managing member Ralph Rieder sent an email to plaintiff stating:  “See what you can do about finding [another] buyer for [the properties]. If it falls flat I am prepared to do whatever you think is fair including making up your entire fee. Ideally, I would like to tack it on to our next deal.”   Thereafter, plaintiff demanded that CenterRock pay its $875,000 commission on the sale, but CenterRock refused.

 

After CenterRock terminated the contract of sale, plaintiff alleged that Elie Rieder (an officer of CenterRock) provided the due diligence reports to a third party for the purpose of selling the documentation to defendant Rosewood Realty Group Inc., another real estate brokerage firm.  In exchange for the reports, Rosewood paid Ralph and Elie Rieder $150,000.  Using the materials, Rosewood found another buyer for the properties and eventually received a $500,000 commission for brokering the sale.

 

Plaintiff filed suit alleging various causes of action, including an unjust enrichment claim against Rosewood, alleging that the rival brokerage firm, which obtained a commission from the sale of residential apartment properties, was unjustly enriched when it acquired due diligence reports prepared by plaintiff relating to the properties.  Upon motion, the Supreme Court dismissed all claims except those against CenterRock.  Plaintiff appealed and the Appellate Division, First Department modified the Supreme Court’s decision by reinstating the unjust enrichment claims against the Rieders.  Thereafter, the Appellate Division granted plaintiff’s motion for leave to appeal.

 

On appeal, plaintiff sought reinstatement of the unjust enrichment claim against Rosewood arguing that Rosewood unfairly profited and benefitted at plaintiff’s expense by collecting a commission on the sale of the properties, without any compensation to plaintiff, notwithstanding that Rosewood knew that plaintiff produced the reports.  In opposition, Rosewood argued (1) “that [plaintiff’s] complaint fails to make out an unjust enrichment claim against it because there was no business relationship or connection between them,” (2) that the complaint was inadequate because it did not assert that Rosewood was aware that the information was confidential, and (3) the complaint did not allege that Rosewood knew that CenterRock had not paid plaintiff for the due diligence reports.

 

Based on the allegations set forth in the complaint, the Court of Appeals held that the relationship between plaintiff and Rosewood was too attenuated, and thus plaintiff failed to state a cause of action for unjust enrichment against Rosewood.  Citing to Mandarin Trading Ltd., supra, and Sperry v. Crompton Corp., 8 N.Y.3d 204 (2007), the court found that plaintiff did not have a sufficient relationship with Rosewood because the two parties “simply had no dealings with each other.”  The court stated that Rosewood’s “mere knowledge that another entity created the documents is insufficient to support a claim for unjust enrichment under the facts of this case,” and that the court’s mention of “awareness” in Mandarin was meant to underscore the complete lack of a connection between the parties in that case.

 

In addition, the court specifically noted that:  (i) the complaint did not assert that Rosewood and plaintiff had any contact regarding the purchase transaction, (ii) the complaint did not state that Rosewood was aware that plaintiff and CenterRock had agreed to keep the due diligence reports confidential, (iii) the complaint did not allege that Rosewood knew that CenterRock had failed to pay plaintiff before the reports were conveyed to Rosewood, and (iv) contrary to plaintiff’s assertions, there was no “claim that Rosewood had anything other than arms-length business interactions with CenterRock or the Rieders.”  Furthermore, the court found plaintiff’s argument that Rosewood profited without doing any work was without merit because Rosewood in fact paid the Rieders $150,000 for the due diligence reports and plaintiff did not assert that Rosewood had anything to do with the Rieders’ alleged wrongdoing.

 

The Court of Appeals provided valuable insight:

 

The rule urged by [plaintiff] would require parties to probe the underlying relationships between the businesses with whom they contract and other entities tangentially involved but with whom they have no direct connection. This would impose a burdensome obligation in commercial transactions.

 

Despite the fact that the Court affirmed the dismissal of the plaintiff’s unjust enrichment claim against Rosewood, the Court observed that plaintiff was not without recourse in that it can still pursue its pending claims against CenterRock and the Rieders.  The Georgia Malone decision confirms that, to state a viable claim for unjust enrichment,  a claimant must allege a sufficient nexus between the parties in order to survive a motion to dismiss, requiring counsel to probe all aspects of the client’s transaction and analyze whether a sufficient nexus exists between the client and the target defendant.

Task Force Report & Recommendations for the Commercial Division

By: Leo K. Barnes Jr.*

*Mr. Barnes, a member of Barnes & Barnes, P.C. in Melville,

can be reached at LKB@BARNESPC.COM

 

In late June 2012, Chief Judge Jonathan Lippman’s Task Force on Commercial Litigation released its Report and Recommendations for the Commercial Division,[1] the culmination of the Task Force’s six-month exploration of how to better manage judicial resources of the Commercial Division by improving the Court’s operations for both the Bench and the Bar.  The Report contains widespread suggestions including procedural reforms, revising the Commercial Division’s docket, proposals to facilitate early case resolution and suggestions to provide more support to Commercial Division Justices.

 

Procedural Reforms

 

Many of the recommendations in the Report involve procedural reforms to the Commercial Division Rules, the most notable being an amendment of the expert disclosure process to mirror expert disclosure in the federal courts.  For example, the proposed rule would require depositions of all testifying expert witnesses and require that all expert disclosure (including identification of expert witnesses and written reports) be made no later than four months after completion of fact discovery.  In addition, the Task Force recommended a modification to Rule 8 of the Commercial Division Rules requiring the parties to discuss the scope and timing of expert disclosure both prior to and at the Preliminary Conference.

 

Reforms to enhance efficiency were recommended which included a modification to the Commercial Division Rules to restrict the number and scope of document demands,  interrogatories and the number and length of depositions (again, akin to the existing limitations in federal court).  Additionally, the Report proposed that an amendment be made to the Commercial Division Rules to offer an accelerated adjudication procedure available on consent of both parties, which would have highly truncated written discovery, narrowly tailored electronic discovery, limited depositions, and other accelerated procedures.

 

Other proposed procedural reforms in the Report include:

 

  • Imposing limitations to privilege logs, with recommendations of four different rubrics under which privilege logs can be limited as examples of the possible ways in which parties can stipulate to appropriate means of limiting privilege logs.

 

  • The creation of standard forms and procedures for optional use in Commercial Division litigation to promote greater efficiency.

 

  • Endorsement of two reforms proposed by the E-Discovery Working Group of the New York State Court System: (i) The recently adopted Rule 1(b) which requires parties to appear at the preliminary conference with counsel who have sufficient knowledge of the party’s computer systems to have a meaningful discussion of e-discovery issues, and (ii) The consideration of the use of internal experts to assist the court, lawyers, and parties with the newest opportunities and challenges presented by e-discovery.

 

  • Improvements to courtroom efficiency by: (i) urging Justices to schedule staggered court appearances (instead of asking all lawyers on all cases to appear on a given day at the same time); (ii) utilizing letter submissions for discovery motions, (iii) conducting discovery conferences via telephone, instead of requiring the attorneys to travel to court, and (iv) encouraging judges to preside over discovery conferences.

 

  • Encouraging an open dialogue between the Commercial Division and the Appellate Divisions, and providing appellate judges with additional exposure to commercial issues.

 

  • The use of recent technological advancements and tools to promote greater efficiency in the Commercial Division, including the continued expansion of mandatory Electronic Filing to other counties.

 

  • The recommendation that Commercial Division Justices be encouraged to consider monetary and non-monetary sanctions more often where parties fail to comply with case management orders and other deadlines.

 

Revisions to the Docket

 

Several recommendations were made to revise the Commercial Division docket in order to alleviate the growing number of cases and motions that the Commercial Division currently confronts.  The first is the revision of the Court of Claims Act to enable the Governor to designated qualified individuals as judges assigned to the Commercial Division (with a suggestion that six new judges be appointed to the Commercial Division).  The second recommendation was an increase in the monetary threshold.  For example, the Task Force urged that New York County’s threshold be increased from $150,000 to $500,000 and that proportionate increases should likewise be implemented on a county-by-county basis. In addition to the foregoing recommendations, the Task Force calls for periodic review of the cases eligible for Commercial Division designation (and adjustments as necessary).

 

Early Case Resolution Initiatives

 

Two initiatives were proposed which the Task Force believes will aid in the early resolution of cases.  The first initiative is the implementation of a Pilot Mandatory Mediation Program, which the Task Force proposed be first implemented in New York County.  The rule as proposed would require that every fifth newly assigned case to the New York County Commercial Division be required to be mediated within 180 days of assignment to the Commercial Division unless (a) all parties stipulate that they do not want the case mediated or (b) a party makes a showing of “good cause” as to why mediation would be ineffective or otherwise unjust. The second initiative proposes that Rules 7 and 8 of the Uniform Rules be amended to require the parties and the Court to address, at the Preliminary Conference, whether any particular limited disclosure would help facilitate settlement discussions or mediation.

 

Additional Judicial Support

 

The Task Force endorsed providing additional Law Clerks for all Commercial Division Justices, similar to the law clerks provided to federal judges.  The Report noted that New York County Justices currently have at least one long-term Law Clerk and have additional law clerks recruited and hired directly out of law school which serve for a shorter period of time.  It is suggested that this program, which is akin to the federal program, be expanded to other counties that have demanding caseloads.

 

Creation of a panel of “Special Masters” whom the Justices of the Commercial Division can appoint on consent of all parties to “hear and report” on discovery and other matters was also recommended.  It is proposed that the panel be drawn from seasoned New York commercial litigators. It was also recommended that the court system rehire Judicial Hearing Officers (JHOs) specifically assigned to the Commercial Division to assist the Justices with the Commercial Division’s growing docket.

 

In order to guide the implementation of the recommendations and to periodically review the long-term strategic goals of the Commercial Division, the Task Force proposes that the Chief Judge appoint a formal statewide Advisory Council on the Commercial Division. It is anticipated that many of the recommendations will be adopted in the near future.

 

 



[1] The Task Force’s 30+ page Report can be found on the New York Commercial Division website at http://www.nycourts.gov/courts/comdiv

 

Amendments to FRCP 56(c) Concerning the Authentication of Documents on Summary Judgment Motions

By Leo K. Barnes Jr.*

*Mr. Barnes, a member of Barnes & Barnes, P.C. in Melville,

can be reached at lkb@barnespc.com

 

New York courts mandate that the movant on a summary judgment motion authenticate exhibits or be subject to denial.  Thus, it is prudent that counsel devote sufficient time and energy during the discovery process addressing admissibility issues as a prelude to motion practice and trial.  Historically, federal courts likewise required that all documents submitted in support or in opposition to a summary judgment motion be authenticated. See, Major League Baseball Props., Inc. v. Salvino, Inc., 542 F.3d 290, 310 (2d Cir. 2008).  See also, Young v. Daughters of Jacob Nursing Home, 2011 WL 2714208, at *1, fn. 1 (S.D.N.Y. 2011) (“It is also settled that exhibits submitted in connection with a summary judgment motion must be authenticated and non-hearsay in order to be considered.”).  In sophisticated commercial practice, where document exchanges are often measured in Gigabytes, not pages, the dedication of highly coveted pages of moving papers to authenticate mainstream moving documents seems, at times, to be a waste of valuable resources.

 

In federal court (home of the seven hour limit on depositions [FRCP 30(d)], mandatory initial disclosure [FRCP 26(a)(1)] and discovery completion deadlines which subtly encourage counsel to sprint between depositions), the Federal Rules of Civil Procedure have been amended concerning the submission of unauthenticated documents concerning summary judgment motions.  In typical fashion, the Federal Rules of Civil Procedure elevate substance over form.

 

In ForeWord Magazine, Inc., v. OverDrive, Inc., 2011 U.S. Dist. Lexis 125373, Case No. 1:10-cv-1144 (W.D. Michigan 2011), the court specifically addressed the impact of the changes to the procedure governing the submission of unauthenticated evidence in support of a motion for summary judgment.  There, plaintiff ForeWord Magazine, Inc. (“ForeWord”) brought a trademark action against defendant OverDrive, Inc. (“OverDrive”), asserting, inter alia, a claim for cybersquatting under 15 U.S.C. § 1125(d), to which ForeWord thereafter moved for summary judgment on its cybersquatting claim.  In response, defendant OverDrive filed a motion to strike certain exhibits relied upon by plaintiff in its motion for, inter alia, not being authenticated.

 

In addressing the changes to Rule 56, the court noted that “In some respects, the 2010 amendment to Rule 56 works a sea of change in summary judgment procedures and introduces flexibility (and consequent uncertainty) in place of the bright-line rules…”  The court explained, however, that with the enactment of amendments to Rule 56, the “unequivocal requirement” that documents submitted in support of a summary judgment motion must be authenticated was removed, and now “allows a party…to cite to materials in the record including, among other things, ‘depositions, documents, electronically stored information, affidavits or declarations’ and the like.”  ForeWord Magazine, Inc., at *4-5, quoting FRCP 56(c)(1)(A).

 

Furthermore, subdivision (c)(2) of Rule 56 allows a party to make objections to unauthenticated documents contained in summary judgment papers, which does not have to be made by a separate motion to strike.  After an objection is made, the party proffering the documents would then be given an opportunity to show that the material is admissible or to explain the admissible form.

 

The court in ForeWord found that the amended rule distinguished between material that “has not” been submitted in admissible form, rather than material that “cannot” be submitted in admissible form.  Specifically, the court stated that “the objection contemplated by the amended Rule is not that the material ‘has not’ been submitted in admissible form, but that it ‘cannot’ be.”  From a practical point of view the difference is significant, as the rule seems preclude objections by an attorney as to unauthenticated evidence to which he or she knows could be submitted in admissible form.

 

In ForeWord, the court addressed the objections made by the defendant that certain exhibits were unauthenticated with the recent changes to Rule 56.  In analyzing the amended Rule 56, the court held that the “submission of unauthenticated exhibits is not a violation of any express obligation imposed by the rules.  Rather, it is grounds for objection, in which case the proponent has the burden to show that the material is admissible as presented or to explain the admissible form that is anticipated.”  According to the court, the exhibits that the defendant objected to were indeed unauthenticated, and “would have been condemnable as sloppy lawyering as late as November 30, 2010.”  However, under the new amended Rule 56 the court allowed plaintiff to come forward with supplemental affidavits authenticating the documents to which were the target of defendant’s objections.  After discussing whether the supplemental affidavits authenticated the exhibits objected to, the court concluded that the supplemental affidavits were sufficient to authenticate the exhibits under the Federal Rules of Evidence and applicable case law.

 

Assuming time and space permits, it is good practice to submit documents in admissible form in the first instance to safeguard against additional costly motion practice, notwithstanding that an attorney may be able to supplement his or her papers later due to the recent changes to the FRCP Rule 56.

 

A PRIMER ON INJUNCTIONS

 By: Leo K. Barnes Jr.[i]

            The provisional remedies found a cornerstone of practice in the Commercial Division.  This month we review the basic elements of the most commonly sought provisional remedy, the preliminary injunction.

            It is well settled that an Article 63 preliminary injunction is not a mechanism for determining the ultimate rights of the parties; rather, the provisional remedy is utilized to maintain the status quo.[ii]

CPLR 6301 provides in pertinent part:

 

A preliminary injunction may be granted in any action where it appears that the defendant threatens or is about to do, or is doing or procuring or suffering to be done, an act in violation of the plaintiff’s rights respecting the subject of the action, and tending to render the judgment ineffectual …

 

The decision whether to grant a preliminary injunction lies within the sound discretion of the Court.[iii]  In that regard, movant must satisfy a three prong test to establish it is entitled to preliminary injunctive relief: (1) a probability of success on the merits; (2) danger of irreparable injury absent the injunction; and (3) a balancing of the equities favors granting the injunction.[iv]

As for the first element, success on the merits, certainty of success is not the standard that a movant must satisfy to establish that it is likely to succeed on the merits of its claim; rather, it must make a prima facie showing of its right to the relief.[v]  In this regard, CPLR 6312(c) is instructive: it provides that even issues of fact highlighted by opposition to the application are insufficient to defeat the motion and “shall not in itself be grounds for denial of the motion.”

Establishing the second prong of an injunction application can be difficult because the vast majority of cases seek monetary damages.  The general rule is that one pursuing a money action is generally not entitled to a preliminary injunction because an adequate remedy at law exists.[vi]  Two exceptions to the general rule warrant elaboration.

The first exception to this rule exists when movant’s cause of action is directed to a specific fund which is “the subject of the action.”[vii]  A myriad of cases hold a monetary damages claim directed at a specific fund is viable as an irreparable injury worthy of an injunction because the property, not the value of the property, is the true subject of the action.  See Societe Anonyme v. Pierre A. Feller[viii] (Appellate Division rules that in an action disputing the ownership of shares of a cooperative apartment, plaintiff was entitled to pendente lite injunctive relief since irreparable injury may arise if the defendant was not enjoined from transferring the cooperative’s shares pending final resolution of the dispute); Rolnick v. Rolnick[ix] (in an action to impose a constructive trust upon the stock of defendant corporations, the Court ruled that a disposition of the stock shares would render any judgment ineffectual, ruling that an injunction maintaining the status quo would not unduly burden the defendant, yet the denial of such relief could do irreparable harm and cause substantial prejudice to movant); Brennan v. Barnes[x] (Court grants temporary restraining order precluding defendants from transferring the subject stock shares, despite sharp factual differences in the parties’ respective affidavits, so to maintain status quo); and Bronx County Trust v. O’Connor[xi] (in a complaint seeking to impose a trust upon a sum generated by the sale of certain shares of a Tobacco Company, premised upon procurement of the shares through fraud and undue influence, the Appellate Division reversed the Supreme Court’s Order denying a motion to continue the pendente lite relief, restraining the defendants from disposing of such proceeds of sale).

Authority exists for a second exception and relates to injunctions which are authorized by statute and purport to be in the public interest.   In Spitzer v. Lev,[xii] in an action against officers of not-for-profit corporation arising from amounts they allegedly received in violation of their fiduciary duties or by way of unjust enrichment, the Attorney General moved for injunctive relief suspending officers from exercising control.  New York County Supreme Court Justice Ramos noted that:

However, the traditional concept of irreparable harm, which applies to private parties seeking injunctive relief, does not apply in the public interest field. Thus, when the Attorney General is authorized by statute to seek injunctive relief to enjoin fraudulent or illegal acts, no showing of irreparable harm is necessary. State of New York v. Terry Buick Inc., 137 Misc.2d 290, 520 N.Y.S.2d 497 (Sup Ct. 1987).

 

Accordingly, here where the Attorney General is authorized pursuant to NPCL § 112 to seek injunctive relief with respect to any acts which form a basis for the bringing of any action or proceeding by the Attorney General pursuant to the NPCL, no showing of irreparable harm is necessary.[xiii]

 

Third, as for balancing the equities, the Court must evaluate the harm that each party will suffer with and without the injunctive relief.  Prevailing Second Department precedent requires that movant demonstrate that the harm which it would suffer from the denial of the motion is decidedly greater than the harm its opponent would suffer if the preliminary injunction were granted.[xiv]  In this analysis, a thorough client affidavit is imperative to a successful application.  The preliminary injunction application is not the time to be circumspect with respect to all of the facts which have influenced the client’s decision to seek provisional relief.

Finally, an analysis of the quantum of the undertaking is appropriate.  It is clear that CPLR 6312(b) requires movant to furnish a bond contemporaneously with the effectuation of a preliminary injunction order.  The undertaking is to secure the opposing party for actual losses and costs — not theoretical losses, “if it is later finally determined that the preliminary injunction was erroneously granted.”[xv]  Indeed, the court’s discretion in setting the amount of the undertaking must be “rationally related” to the potential damages and costs that the enjoined entity may suffer.[xvi]  In that regard, mere conclusory assertions of potential monetary loss are insufficient to justify anything more than a minimal bond.[xvii]

 


[i] Leo K. Barnes Jr. is a member of Barnes & Barnes, P.C. and can be reached at LKB@BARNESPC.COM

[ii] Hightower v. Reid, 5 A.D.3d 440, 772 N.Y.S.2d 575 (2ndDep’t 2004).

[iii] Doe v. Axelrod, 73 N.Y.2d 748, 536 N.Y.S.2d 44 (1988).

[iv] Aetna Ins. Co. v. Capasso, 75 N.Y.2d 860, 552 N.Y.S.2d 918 (1990).

[v] Terrell v. Terrell, 279 A.D.2d 301, 719 N.Y.S.2d 41 (1stDep’t 2001).

[vi] Walsh v. Design Concepts, Ltd., 221 A.D.2d 454, 633 N.Y.S.2d 579 (2ndDep’t 1995).

[vii] Ma v. Lien, 198 A.D.2d 186, 604 N.Y.S.2d 84 (1stDep’t 1993).

[viii] 112 A.D.2d 837,492 N.Y.S.2d 756 (1stDep’t 1985).

[ix] 230 N.Y.S.2d 789 (Queens Sup. 1962).

[x] 232 N.Y.S. 112 (Albany Sup. 1928).

[xi] 220 A.D. 340, 221 N.Y.S. 414 (1stDep’t 1927).

[xii] 2003 WL 21649444 (N.Y. Sup. Ct. 2003).

[xiii] Id., at 2.

[xiv] Fischer v. Deitsch, 168 A.D.2d 599, 563 N.Y.S.2d 836 (2nd Dep’t 1990).

[xv] Margolies v. Encounter, Inc., 42 N.Y.2d 475, 398 N.Y.S.2d 877 (1977).

[xvi] Lelekakis v. Kamamis, 303 A.D.2d 380, 755 N.Y.S.2d 665 (2ndDep’t 2003).

[xvii] 7th Sense, Inc. v. Liu, 220 A.D.2d 215, 631 N.Y.S.2d 835 (1stDep’t 1995).

 

Affiliate Relationship Insufficient to Found Economic Interest Defense

By: Leo K. Barnes Jr.*

*Mr. Barnes, a member of Barnes & Barnes P.C. in Melville,

 

In Due Pesci v. Sustainable (New York County Index No. 651879/10), plaintiff Due Pesci Inc. brought suit against defendants Threads for Thought, LLC (“TFT”) and Sustainable Apparel Group, LLC (“Sustainable”), asserting, inter alia, a cause of action against Sustainable for tortious interference with contract, which Sustainable moved to dismiss pursuant to CPLR § 3211.

 

According to the decision by New York County Commercial Division Justice Eileen Bransten, defendant TFT designs and distributes clothing apparel lines and Sustainable is an affiliated operating company that conducts the business operations related to the distribution of TFT’s apparel lines.  The court noted that both TFT and Sustainable were “affiliated entities with common ownership” due to the fact that Jonathan Wiesner (“Wiesner”) is a principal and member of both companies.  Specifically, Wiesner owned a fifty-percent interest in TFT and was the sole owner of Sustainable.

 

In October 2008, a contract was entered into between TFT and plaintiff, which is a sales agent for garment manufacturers, which provided that plaintiff would sell TFT’s clothing to retail outlets and department stores within a certain exclusive sales territory.  In exchange, TFT agreed to pay plaintiff commissions for orders placed through plaintiff’s customers for TFT clothing.  In addition, the agreement provided for an early termination provision, wherein either party could terminate the agreement “by giving the other party notice in writing of termination within ninety (90) days prior to the end of the current term.”

 

The relationship between the parties soured approximately two years later.  In the complaint, plaintiff alleged that during July 2010, TFT began selling its apparel within the plaintiff’s exclusive territory through Sustainable, rather than through plaintiff, and that such activity was in violation of the agreement between the parties.

 

In response to the motion to dismiss, Sustainable disputed plaintiff’s claim for tortious interference and argued that Sustainable could not have interfered because TFT had effectively terminated the contract between the parties pursuant to the early termination provision.  Sustainable specifically referenced an email sent out by Wiesner on August 30, 2010 to plaintiff, which stated:  “We have been informed by ENK/Coterie that you have told them that you are no longer representing Threads for Thought.  While this is a somewhat unusual method to submit your resignation as our sales agent…through a third party, we accept your resignation effective immediately.”  In addition, Sustainable argued that it was economically justified in interfering with plaintiff’s contract with TFT in that both TFT and Sustainable were affiliated entities with common ownership.

 

The court rejected Sustainable’s arguments and denied its motion to dismiss the tortious interference with contract cause of action.  In its analysis, the court addressed each element required for a cause of tortious interference with contract, which requires the plaintiff to sufficiently allege “the existence of a valid contract between the plaintiff and a third party, defendant’s knowledge of that contract, defendant’s intentional procurement of the third-party’s breach of contract without justification, actual breach of the contract, [] damages resulting therefrom” (Due Pesci, NYLJ 1202542251827 at *5-6, quoting Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 424 [1996]), and finally that the contract would not have been breached “but for” the defendant’s interference.

 

The court held that the plaintiff sufficiently plead all six elements to the cause of action, and focused the majority of the opinion discussing two elements in particular relating to Sustainable’s arguments: (1) intentional procurement of the breach, and (2) economic justification.

 

In addressing the intentional procurement of breach element, the court noted, after reviewing the affidavits of third party buyers submitted in opposition by the plaintiff, that although many of the instances where the third party buyers were contacted by Sustainable occurred prior to the contract between TFT and plaintiff, there were two instances (in September of 2010 and March 2011) where Sustainable allegedly contacted the stores after the contract was effective.  Sustainable argued that the email sent by Wiesner on August 30, 2010 terminated the agreement and therefore the two instances of alleged interference occurred after the contract’s termination.  The court, however, rejected this argument and held that the plaintiff sufficiently alleged that the contract was in effect at the time in which Sustainable contacted buyers within plaintiff’s exclusive territory because (i) TFT did not properly provide plaintiff notice of termination with 90 days notice under the terms of the agreement, and (ii) plaintiff responded to the Aug. 30, 2010 email on two separate occasions rejecting TFT’s termination of the contract.

 

Next, the court addressed Sustainable’s argument that TFT and Sustainable were affiliates of one another and thus Sustainable was economically justified in interfering with TFT’s contract.  Pattern Jury Instruction § 3:56 with respect to Tortious Interference with Contract provides:

 

The defendant CD has the burden of establishing that (he, she, it) was justified in causing the breach of contract. In order to decide whether the defendant CD’s conduct was justified, you should consider the nature of the rights interfered with, the relation between defendant CD and the parties to the contract, and the interests that the defendant CD sought to protect, in other words, whether defendant CD’s interest is equal to or superior to the plaintiff AB’s interest. [where appropriate, add:] and the social interests involved).

 

If you decide that defendant CD’s conduct was justified, as I have explained that term to you, then you must next consider whether plaintiff AB has established that the defendant acted with malice or used wrongful means. If you find that the defendant CD has acted with malice or used wrongful means, then you will find for the plaintiff on this issue. If you find that the defendant did not act with malice and that the defendant did not use wrongful means, then you will find for the defendant on this issue.

 

One factor which courts analyze in determining whether a defendant is entitled to assert an economic interest defense to a tortious interference cause of action is the nature of the relationship between the defendant and the party which had a contract with the Plaintiff.    “When defendant’s interest is equal or superior to that of plaintiff, defendant is privileged to interfere with plaintiff’s rights, provided defendant does so by lawful means, and does not act for the sole prupose of injuring plaintiff.” Id., at 571.

 

The Due Pesci court rejected the argument by the Defendant because Sustainable did not state that it was “reasonably concerned that allowing the Agreement to continue would damage its economic interest.”  Due Pesci, NYLJ 1202542251827 at *14.  Specifically, the court found that Sustainable did not conclusively establish that it interfered with the agreement based on its economic interest because plaintiff promptly refuted TFT’s claim that plaintiff held out that it was no longer TFT’s sales agent after plaintiff received the August 2010 email.  In addition, the court found that Sustainable did not establish that it interfered with the Agreement in order to protect the financial health of its affiliate TFT.  Because plaintiff alleged that TFT gained over $2 million from sales made by plaintiff, the court found that in fact Sustainable’s alleged interference appeared to harm, rather than help, TFT’s economic interest, thereby undermining the motion to dismiss.

 

Lawrence v. Kennedy — Lessons for the Unwary

By: Leo K. Barnes Jr.*

*Mr. Barnes, a member of Barnes & Barnes, P.C. in Melville, can be reached at lkb@barnespc.com

 

In Lawrence v. Kennedy, — N.Y.S.2d —-, 2011 WL 5107234, 2011 N.Y. Slip Op. 21377 (Nassau Sup. Ct. 2011), plaintiff Lawrence S. Lawrence, a New York attorney, moved for summary judgment in lieu of complaint against defendants Michael F. Kennedy and his former law firm Lawrence and Walsh, P.C.  In response both defendants moved to dismiss the complaint against them.

 

According to the decision, plaintiff, a New York attorney, was the founding partner of defendant law firm Lawrence and Walsh, P.C. (the “Firm”), which was established in 1972.  In 2008, an agreement was reached between the plaintiff and the Firm as follows:  (1) plaintiff would relinquish his status as a member of the Firm, and (2) in exchange for relinquishing his status, plaintiff would remain at the Firm as an employee acting in an “of counsel” capacity.

 

Two agreements were executed in January 2008 to effect this agreement between the parties, namely a “Stock and Related Asset Purchase Agreement” and an Employment Contract.  In these agreements plaintiff conveyed his 50% ownership interest in the Firm to the Firm itself, and in exchange plaintiff was offered a 4 ½ year term employment contract with the Firm, which would end in June 2012.

 

The employment contract set forth that the plaintiff would assume the “responsibilities, duties and authority” customarily associated with his “of counsel” position, and that he was to devote “substantially all of his business time, attention, expertise and efforts to the business and affairs of the Firm in the same manner as past practices”.  As compensation, plaintiff would be entitled to $418,300 in fixed salary to be spread evenly over the employment contract term, and was entitled to receive performance based salary amounts calculated in accordance with a pre-determined formula set forth in the agreement.  The agreement set forth, however, that the plaintiff “irrevocably waives” a right to enforce the agreement against any individual members of the firm and that plaintiff can look solely to the Firm for recovery.

 

In addition, the employment agreement contained a clause stating that the agreement “shall be deemed an instrument for the payment of money, provided, however, that this provision shall not constitute a waiver of any defenses or counterclaims the Firm may have to enforcement of this provision.”  It further provided that the Firm could terminate plaintiff “for cause” and that plaintiff could be terminated upon plaintiff’s death or disability for 90 days.  If the Firm were to terminate the plaintiff for death or disability, the Firm would remain responsible “for accrued, performance-based salary earned up to the date of termination,” and fixed salary amounts “for the remainder of the Term…”.  If the Firm were to default in paying plaintiff’s fixed salary and that default remained uncured for more than 30 days, then the entire unpaid, fixed salary amount would at plaintiff’s option become immediately due and owing.

 

After the agreements were executed, plaintiff continued to work for the Firm until September 2010 when plaintiff suffered a stroke.  Thereafter, plaintiff was unable to perform his employment duties under the contract due to neurological ailments the plaintiff suffered from.  Soon thereafter, plaintiff’s daughter informed defendant Michael Kennedy (“Kennedy”), the managing member of the Firm, that plaintiff could not return to the Firm due to medical issues associated with plaintiff’s stroke.

 

When plaintiff’s daughter asked about the Firm’s obligation under the employment contract, Kennedy stated to plaintiff’s daughter that the Firm had “some real concerns and issues with respect to …[the plaintiff’s] conduct” and that these concerns were “allegedly founded on ‘significant and serious claims’ which the Firm had against the plaintiff – in sums purportedly exceeding any salary amounts the Firm might owe the plaintiff under the 2008 employment agreement.”

 

According to plaintiff’s summary judgment papers, the Firm subsequently terminated him in January 2011 and failed to pay any remaining salary amounts.  Plaintiff claims that at the time he was terminated, there were amounts outstanding which were owed to him under  from February 2010.  Subsequent to his termination, plaintiff served a notice of default upon the Firm.  When the amounts claimed to be due and owing were not cured, plaintiff filed the instant action against the Firm and Michael Kennedy individually.

 

Plaintiff’s verified complaint contained three causes of action; two against both the Firm and Kennedy for gross negligence and willfully breaching their obligations under the contracts to pay plaintiff’s fixed and performance based salary, and the third cause of action for an accounting alleging that a fiduciary relationship existed wherein plaintiff would be entitled to an accounting.  At the same time as he served the verified complaint, plaintiff moved for summary judgment in lieu of complaint with respect to the fixed salary portion of the employment agreement under CPLR 3213.  Thereafter, each defendant separately moved to dismiss the complaint.

 

In making the motion to dismiss, defendants argued that: “(1) the power of attorney relied on by Sherry Lawrence is defective, and the plaintiff otherwise lacks capacity to commence and maintain the action; (2) [] the employment agreement precludes enforcement of the contract against individual firm members, including managing member, Michael F. Kennedy; (3) there exists no fiduciary relationship between the defendants and the plaintiff and thus no accounting is warranted; and (4) the employment contract does not constitute an instrument for the ‘payment of money only’ within the meaning of CPLR 3213 and, in any event, the Firm possesses a fraudulent inducement defense which warrants dismissal of the complaint as a matter of law.”  Lawrence, 2011 WL 5107234 at *3.

 

The court granted defendant Kennedy’s cross motion to dismiss the causes of action asserted against him, finding that it was undisputed that Kennedy did not execute the employment agreement in his individual capacity and thus he was not a party to the contract sued upon by the plaintiff.  Furthermore, the court found the exculpatory clause in the employment agreement to be important, wherein the plaintiff irrevocably waived the right to enforce the agreement against any individual members of the Firm and that he can only look to the Firm for recovery under the agreement.  The court noted that it will not “add or excise terms *** so as to make a new contract under the guise of interpreting the writing,” especially where the plaintiff is a sophisticated businessman and the agreement is negotiated by sophisticated and well-counseled parties.

 

The court then turned to defendants’ motion to dismiss the third cause of action for an accounting based on an alleged breach of a fiduciary duty.  In dismissing the cause of action, the court found that even interpreting the facts alleged in the complaint in a light favorable to the plaintiff, the complaint did not show an “arms-length, employer-employee relationship at issue here [giving] rise to a fiduciary between the parties.”  Upon review of the contract, the court merely found that after the conveyance of the stock to the Firm, the Firm’s obligation to pay plaintiff was merely “contractual and commercial” and not fiduciary in nature.

 

Next, the court analyzed plaintiff’s motion for summary judgment in lieu of complaint.  The court found that employment agreement concerning plaintiff’s right to fixed income was not an agreement for the payment of money only in which CPLR 3213 would apply.  Instead, the court found that the agreement was “an employment contract – one which contains a variety of interrelated provisions governing the parties’ respective rights, duties and obligations.”  Furthermore, the court reject plaintiff’s argument that the Firm had no defenses at this point in time and that the promise to pay is now unconditional due to the Firm’s default.  The court noted that a reading of the instrument in the first instance should be that of an unconditional promise to pay, not through a later performance by the parties, and that here the agreement between the parties at execution of the agreements was that of an employment contract and not an agreement for money only.

 

Lastly, the court denied the Firm’s motion to dismiss the first and second causes of action against the Firm.  The court found allegations in the complaint sufficiently plead the causes of action for breach of contract for failure to pay both fixed and performance based salary amounts under the employment agreement.

 

The decision is particularly important to attorneys who engage in transactional drafting practice and those who litigate the same.   First, it appears that the Plaintiff, by entering into an employment agreement with his former partner, lost any fiduciary benefit which ran between the partners, when the Court ruled that the employment agreement alone was insufficient to impute a fiduciary obligation upon the defendant sufficient to found an accounting claim.  Second, despite the Plaintiff’s effort to expedite a monetary damages claim by characterizing the agreement as an instrument for the payment of money only (thereby triggering expedited relief via CPLR 3213), the Court rejected the Plaintiff’s proposed use of CPLR 3213 to found his claim against the former partner.   Third, the Plaintiff lost the ability to pursue the Firm for claims premised upon the employment agreement.  These three strikes undermined the Plaintiff’s claims against the Defendants, rendering the claims more difficult to resolve.