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By: Leo K. Barnes Jr.*
Many initial pleadings in the Commercial Division are accompanied by an Order to Show Cause seeking to enjoin something, by virtue of an application for a preliminary injunction and, possibly, a temporary restraining order until the preliminary injunction application is resolved. Ultimately an application is resolved either by a negotiated stipulation between counsel or a Court-imposed Order, and the litigation continues thereafter while the parties are subject to the Order. Assuming one party alleges that an adversary violated the Order, and notwithstanding whether the purported violation was procured by ignorance, honest mistake, or intentionally, a litigant faces potentially dire consequences for civil contempt.
Judiciary Law § 753
Applications for civil contempt are governed by Judiciary Law § 753 which provides, in pertinent part:
§ 753. Power of courts to punish for civil contempt
A. A court of record has power to punish, by fine and imprisonment, or either, a neglect or violation of duty, or other misconduct, by which a right or remedy of a party to a civil action or special proceeding, pending in the court may be defeated, impaired, impeded, or prejudiced, in any of the following cases: …
3. … or for any other disobedience to a lawful mandate of the court.
A request to punish for civil contempt is addressed to the sound discretion of the court. Matter of Fishel v. New York State Div. of Housing and Community Renewal, 172 A.D.2d 835, 569 N.Y.S.2d 201 (2nd Dept 1991). One asserting a civil contempt claim has the burden of establishing contempt by clear and convincing evidence. Romanello v. Davis, 49 A.D.3d 652, 856 N.Y.S.2d 128 (2nd Dep’t 2008). In order to obtain a civil contempt finding under Judiciary Law § 753(a), it is necessary to establish that: (1) there was an unequivocal and lawful mandate or order from the court in effect; (2) it is reasonably certain that the order has been disobeyed; (3) the party to be held in contempt had knowledge of the order even if it was not served upon him; and (4) the rights of a party to litigation have been prejudiced. Matter of McCormick v. Axelrod, 59 N.Y.2d 574, at 583 (1983).
Two of the four foregoing elements are rather perfunctory, requiring minimal analysis. First, the issue of whether there is an Order in effect requires little discussion since a stipulation which has been “So Ordered” by the Court constitutes a lawful Order of the Court. See, e.g., Fuerst v. Fuerst, 131 A.D.2d 426, 515 N.Y.S.2d 862 (2nd Dep’t 1987) (the court’s “So Ordering” of a stipulation avoided the necessity of a written order with notice of entry). The third prong, knowledge of the Order, may likewise warrant concession, resulting in the pursuit or defense of a contempt charge resting on elements two and four.
It is not necessary that the disobedience be deliberate to sustain a finding of civil contempt; rather, the mere act of disobedience, regardless of its motive, is sufficient if such disobedience defeats, impairs, impedes or prejudices the rights of a party. Incorporated Village of Plandome Manor v. Ioannou, 54 A.D.3d 365, 862 N.Y.S.2d 592 (2nd Dep’t 2008).
In most instances, a hearing is necessary to determine whether the Court Order has been disobeyed and likewise whether certain rights have been prejudiced. In that vein, an application to adjudicate a party in contempt is treated in the same fashion as motion, and a hearing must be held if issues of fact are raised; to the contrary, a hearing is not necessary when there is no factual dispute. Quantum Heating Services Inc. v. Austern, 100 A.D.2d 843, 474 N.Y.S.2d 81 (2nd Dep’t 1984).
Element Two: Disobedience of the Order
The bright-line issue for the Court will be whether an Order has been violated and the contempt proponent must confirm at the hearing, through testimony or documentary evidence, that the adversary indeed violated an explicit Court Order. In that realm, the Order must be unequivocal. See, e.g., Gerelli Ins. Agency, Inc. v. Gerelli, 23 A.D.3d 341, 806 N.Y.S.2d 71 (2nd Dep’t 2005)(defendants could not be held in contempt for allegedly violating a court order that failed to indicate clearly that preliminary injunction was being granted or to specify precisely what action or actions were being enjoined); see also Katz v. Katz, 55 A.D.3d 680, 867 N.Y.S.2d 100 (2nd Dep’t 2008)(husband did not demonstrate that wife should be held in contempt of a So-Ordered stipulation, the language of which was not a clear and unequivocal mandate directing her to vacate the marital residence; stipulation predicated wife’s obligation to vacate marital residence upon husband’s resolution of problems with replacement residence, and husband failed to demonstrate that he discharged that obligation). At this time, counsel’s initial investment of time with the client, prior to negotiating the So Ordered Stipulation, will bear fruit when the hearing confirms that the So Ordered Stipulation was sufficiently explicit and drafted with an eye on protecting the client from an adversary’s interference.
Element Four: Whether a Party’s Rights Have Been Impaired
Ideally, prior to the hearing, counsel will have an opportunity to conduct some limited pre-hearing discovery on the contempt allegation in order to flesh out the basis for the claim. The party asserting a contempt allegation must substantiate some prejudice or loss resulting from the contempt. Inasmuch as it is black letter law that Courts generally will not award damages for minimal losses,i any penalty imposed for contempt must be designed not to punish but to compensate the injured party, to coerce compliance with the court’s mandate, or both. In re Peer, 50 A.D.3d 1511, 856 N.Y.S.2d 385 (4th Dep’t 2008). It is imperative to substantiate the nexus between the alleged contempt and actual damages sustained. At this stage, savvy counsel will prepare the client to explicitly delineate all of the harm that he or she has incurred as a result of the contempt. Conversely, counsel for the party defending the contempt charge must explore, in detail, all of the areas of potential harm which the adversary claims from the contempt and will keep in mind that attorney fees awarded as sanction for civil contempt are limited to those incurred as result of allegedly contemptuous conduct. Clinton Corner H.D.F.C. v. Lavergne, 279 A.D.2d 339, 719 N.Y.S.2d 77 (1st Dep’t 2001).
*Leo K. Barnes Jr., a member of Barnes & Barnes, P.C., can be reached at lkb@barnespc.com
i Black’s Law Dictionary, 8th Edition, de minimis non curat lex (Latin for the proposition that “The law does not concern itself with trifles.”)
By: Leo K. Barnes Jr.*
In mid September, approximately 30 practitioners, several Justices and Court personnel participated in the inaugural training session for the Suffolk County’s Commercial Division Mediation Program. The training, which consisted of 24 hours over three days, was presented by Simeon Baum, Esq. and Stephen Hochman, Esq., conducted at the Suffolk County Bar Association, and provided an examination of mediation principles and techniques. The Program provided participants with an opportunity to “explore the differences between facilitative and evaluative or directive approaches in mediation, both from a practical and ethical perspective [and discussed] the advantages and disadvantages of these styles, [all the while permitting the participants to] focus on experimental learning through role plays and dialogue to help prepare [the participant] for the real world of commercial mediation.”i To supplement the lecture and program material, the training session was enhanced by a hands-on participation wherein each attendant, whether attorney, Justice or Court personnel, assumed the role of a Mediator, a plaintiff, a defendant and their respective counsel, at one of the role-playing sessions, thereby providing the opportunity to hone the recently acquired theory and skills. The program will be followed early next year with an additional 16 hours of Commercial Division topic specific training.
The Mediation Program
The Mediation Program was a natural corollary of the increasing caseload for the Suffolk Commercial Division, which Program has been present in other counties for quite some time. According to the official Program Overview:
Alternative Dispute Resolution (“ADR”) refers to a variety of processes other than litigation that parties use to resolve disputes. ADR offers the possibility of a settlement that is achieved sooner, at less expense, and with less inconvenience and acrimony than would be the case in the normal course of litigation. The principal forms of ADR include arbitration, neutral evaluation and mediation. The Suffolk County Commercial Division will initially focus upon mediation.
Highlights of the Program
In light of the Program’s goal, which is to find a mutually acceptable alternative to having a trial Justice make a determination after trial or hearing, cases may participate in the Program either upon request of the parties or at the Referring Justices’ discretion. The Administrative Judge maintains a panel of Mediators for the Mediation Program in accordance with Part 146 of the Rules of the Chief Administrative Judge.
At the Mediation session (which must be completed within 30 days of the date that the Order of Reference was issued, and can be as short as a few hours or as long as several sessions)ii all parties will have the opportunity to raise issues of concern and the Mediator will assist the parties to work collaboratively to develop and choose options which address the pertinent issues at bar. The Program Rules explicitly provide that the Mediator will not offer an opinion as to the likely Court outcome of any particular issue, and that the Mediator will not impose a solution on the parties or attempt to tell them what to do.
The hallmark of the Mediation Program is confidentiality, which permeates the proceedings. More specifically, while involved in a caucus, wherein a Mediator may meet separately with each party, the Program Rules mandate that the Mediator will not divulge any information discussed in the caucus without first obtaining a party’s permission to do so. Also, subject to very limited exceptions, all communications made during the course of the mediation, by any Party, Mediator or any other person present, shall not be disclosed (this includes documentation and information generated in or around the mediation, i.e., memoranda), with the expected caveat that the mediation confidentialty may not be used as a shield with respect to otherwise discoverable documentation and information. As for ongoing discovery, an Order of Reference from the Court to the Mediation Program does not stay court proceedings unless otherwise directed by the Justice; in the event of a Court-directed stay, the Referring Justice may nonetheless Order an informal exchange of information concerning the case if the same will enhance the mediation process. In the event that the parties do not reach a settlement during Mediation, the parties return to the Referring Justice.
According to Kathryn Coward, the Principal Court Attorney for the Suffolk County Commercial Division, the Program is already underway and several cases have participated in the Program. Ms. Coward reports that once counsel have been advised that the Program exists, the attorneys in the Commercial Division have been very responsive to the opportunities presented and an attorney’s role as conduit between the Court and the client will be the most valuable resource for encouraging participation.
In certain respects, the mediation process is the antithesis of counsel’s role in a standard litigation; yet, after 24 hours of training, the benefits of a successful mediation were patent: the parties were empowered to achieve a confidential, cost-effective and party-tailored resolution. Although not all cases will initially be ripe for mediation, many cases will be ripe for mediation at one time or another.
i Suffolk County Commercial Division Mediation Training Manual, An Overview of the Course, at 2.
ii Suffolk County Supreme Court Commercial Division Mediation Program, at II.
*Leo K. Barnes Jr., a member of Barnes & Barnes, P.C., can be reached at lkb@barnespc.com
By: Leo K. Barnes Jr.*
The Uniform Commercial Code’s section regarding Risk of Loss is a great example of why counsel’s periodic review of a client’s day-to-day operations may prove to be an excellent investment in light of the serious ramifications which can bind clients in seemingly benign transactions. Assume the rudimentary shipment of goods for a transaction which is governed by the Uniform Commercial Code. The pre-printed order form which the seller has utilized for years to document price and quantity fails to note whether the agreement between seller and buyer mandates that the goods must be delivered to a particular destination. Assume the seller duly delivers the goods to a common carrier for shipment to the buyer and that the goods are thereafter lost or damaged while in transit. Who bears the risk of that loss?
The Applicable Code Provision
UCC 2-509, entitled “Risk of Loss in the Absence of Breach” provides, in pertinent part:
(1) Where the contract requires or authorizes the seller to ship the goods by carrier
(a) if it does not require him to deliver them at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier even though the shipment is under reservation (Section 2-505); but
(b) if it does require him to deliver them at a particular destination and the goods are duly tendered while in the possession of the carrier, the risk of loss passes to the buyer when the goods are duly so tendered as to enable the buyer to take delivery.
The Official Commentary confirms that the scope of this section is expressly limited to scenarios where there has been no breach by the seller. In the alternative, if the delivery fails to comply with the contract specifications, UCC 2-509 does not apply and the situation is governed by the provisions on effect of breach on risk of loss. Accordingly, the analysis offered herein is limited to those situations where no breach has occurred.
A cursory reading of the provision confirms that if the seller is required to ship the goods by carrier, but not required to deliver the goods at a particular destination, the risk of loss passes to the buyer when the seller duly tenders them to the carrier. § 2-509(1)(a). To the contrary, when the seller is required to deliver the goods to a particular destination, the seller bears the risk of loss until tender of delivery at the destination. § 2-509(1)(b).
Shipment vs. Destination Contracts
Notwithstanding these bright-line rules, a determination of the parties’ rights and obligations must be made when ambiguity exists in the contract between them. The resolution of that ambiguity begins with a determination of whether the contract is a “shipment” or a “destination” contract. If the contract does not require the seller to deliver the goods at a particular destination, a “shipment” contract is presumed. On the other hand, a “destination” contract is characterized by a seller’s obligation to deliver at a particular destination.
Shipment Contracts Are Presumed
In Windows, Inc. v. Jordan Panel Systems Corp., 177 F.3d 114 (2nd Cir. 1999), the Second Circuit Court of Appeals ruled that:
Where the terms of an agreement are ambiguous, there is a strong presumption under the U.C.C. favoring shipment contracts. Unless the parties “expressly specify” that the contract requires the seller to deliver to a particular destination, the contract is generally construed as one for shipment. 3A Ronald A. Anderson Uniform Commercial Code §§ 2-503:24, 2-503:26; see also Dana Debs, Inc. v. Lady Rose Stores, Inc., 65 Misc.2d 697, 319 N.Y.S.2d 111, 112 (N.Y.City Civ.Ct.1970) (no destination contract absent “explicit written understanding” that goods will be delivered to buyer at a “particular destination”).
Indeed, New York Jurisprudence, at § 113, confirms that:
Under the Code, the “shipment” contract is regarded as the normal one, while the “destination” contract is regarded as the variant type, and the seller is not obligated to deliver at a named destination and bear the concurrent risk of loss until arrival, unless he has specifically agreed to so deliver, or the commercial understanding of the terms used by the parties contemplates such delivery.
Inasmuch as New York Jurisprudence confirms that the “commercial understanding of the terms used by the parties” may serve as a foundation to impose “destination” contract obligations upon a seller, it bears noting that the contention that the seller’s payment of freight expenses imputes a “destination” contract is expressly rejected in § 2-503. In regard to the term “F.O.B.” (which means “free on board”), an oft-used denotation on delivery of goods, the Uniform Commercial Code expressly provides that unless otherwise agreed, the term F.O.B. at a named place, even though used only in connection with the stated price, is a delivery term, not simply a price term. More specifically, § 2-319 provides that:
(a) when the term is F.O.B. the place of shipment, the seller must at that place ship the goods in the manner provided in this Article (Section 2-504) and bear the expense and risk of putting them into the possession of the carrier; or
(b) when the term is F.O.B. the place of destination, the seller must at his own expense and risk transport the goods to that place and there tender delivery of them in the manner provided in this Article (Section 2-503).
Of course, the burdens with respect to risk of loss may be varied by the contrary agreement of the parties.
The First Department’s Jordan v. Kentshire Galleries, Ltd.
282 A.D.2d 319, 723 N.Y.S.2d 456 (1st Dep’t 2001) provides a fairly typical example of the many parties which interact with a shipment. In Jordan, the Appellate Division described the scene where the buyer’s agent interacted with the carrier and the distinct cargo packer, yet unreasonably expected that the seller would bear the risk of loss until tender at the ultimate destination. The First Department disagreed:
The record is devoid of evidence that the seller agreed to ship the item to a particular destination (see, UCC 2-503, Official Comment 5). Indeed, since it is undisputed that the buyer’s decorator asked the seller to recommend a carrier, that the seller recommended the art packer, and that the buyer paid the shipping costs by check made out to the art packer, it is clear that the buyer expected the seller only to put the item in the possession of the art packer and make such contract for its transportation as was reasonable (UCC 2-504[a]). This being the parties’ understanding, i.e., a shipping, not a destination, contract, the seller did not bear the risk of loss once the item was picked up from its premises by the art packer (UCC 2-509 [1][a]).
Because a contract which contains no express mandate that the goods be delivered at a specifically delineated destination is not a “destination” contract, the buyer assumes the risk of loss, pursuant to the Code provisions, upon the delivery of the goods to the carrier. Caveat Emptor!
*Leo K. Barnes Jr., a member of Barnes & Barnes, P.C., can be reached at lkb@barnespc.com
By: Leo K. Barnes Jr.i
With subtle hints that the economy is finally turning from its free-fall, merger and acquisition transactions will begin to surface once again. The preamble of many transaction documents includes various “representations and warranties”, provisions which may provide the parties with a foundation to detail certain facts and circumstances which found a transaction. Typically, the representations and warranties are promised to be true and correct when made and as of the closing, and will survive the closing. For example, under a stock purchase agreement, a seller may represent that “there are no claims, legal actions, suits, arbitrations or governmental investigations in progress or pending”. Representations will have reach well after the final signature is notarized at closing.
The 1872 Court of Appeals decision in Hawkins v. Pemberton confirms long-standing, black letter, law that an unequivocal written representation of fact constitutes a warranty:
To constitute a warranty, it is not necessary that the word warranty should be used. It is a general rule that whatever a seller represents, at the time of a sale, is a warranty. (Wood v. Smith, 4 Car. & Payne, 45.)
In Stone v. Denny (4 Metcalf, 151) it is said that the courts in their later decisions “manifested a strong disposition to construe liberally, in favor of the vendee, the language used by the vendor in making any affirmation as to his goods, and have been disposed to treat such affirmations as warranties whenever the language would reasonably authorize the inference that the vendee so understood it.”
In Oneida Manufacturing Society v. Lawrence (4 Cowen, 440) Chief Justice Savage says: “There is no particular phraseology necessary to constitute a warranty. The assertion or affirmation of a vendor concerning the article sold must be positive and unequivocal. It must be a representation which the vendee relies on, and which is understood by the parties as an absolute assertion, and not the expression of an opinion”.ii
This common law principle is in accord with the Uniform Commercial Code:
§ 2-313. Express Warranties by Affirmation, Promise, Description, Sample
(1) Express warranties by the seller are created as follows:
(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.
(b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.
(c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.
(2) It is not necessary to the creation of an express warranty that the seller use formal words such as “warrant” or “guarantee” or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.
It is well settled that a warranty is “an assurance by one party to a contract of the existence of a fact upon which the other party may rely”iii and effectively constitutes a promise to indemnify the promisee for any loss it may suffer if the fact warranted proves untrue.iv The warranty serves to relieve the promisee of any duty to ascertain the warranted fact for himself;v the maxim “ignorance of the law is no excuse” may not be invoked to preclude one from relying upon a warranty.vi The risk of the fact being different from what is warranted is placed upon the party giving the warrantyvii and the warrantor’s good faith belief in the veracity of the representation is no defense to the breach of warranty claim.viii Once the express warranty is shown to be relied upon as part of the contract, the right to be indemnified in damages for its breach does not depend upon proof that the buyer believed the assurance of fact made in the warranty would be fulfilled – rather, the right to indemnification depends only upon establishing breach of the warranty.ix The warrantor is liable for damages if the fact or condition it warrants as true turns out false.x Inasmuch as a breach of contract occurs when a party to a valid contract commits an act in violation of its terms, a subsequent falsity of a warranty given at the time of a transaction constitutes such a violation.xi
In light of the long-term ramifications which result from representations and warranties, coupled with the fact that a good faith belief in the veracity of a representation is wholly irrelevant to defense of a breach of warranty claim, it is imperative that counsel work closely with clients to confirm the absolute accuracy of the same.
i Leo K. Barnes Jr., a member of Barnes & Barnes, P.C., can be reached at lkb@barnespc.com
ii 51 N.Y. 198, at 201-202 (1872).
iii Metropolitan Coal Co. v. Howard, 155 F.2d 780, at 784 (2nd Cir. 1946). See also New York Contract Law 19:1.
iv CBS Inc. v. Ziff-Davis Pub. Co., 75 N.Y.2d 496, at 503, 554 N.Y.S.2d 449, at 452 (1990); Metropolitan Coal Co. v. Howard, 155 F.2d 780, at 784 (2nd Cir. 1946).
v CBS Inc. v. Ziff-Davis Pub. Co., 75 N.Y.2d 496, at 503, 554 N.Y.S.2d 449, at 452 (1990).
vi Municipal Metallic Bed Mfg Corp v. Dobbs, 253 N.Y. 313 (1930).
vii Galli v. Metz, 973 F.2d 145, at 148 (2nd Cir. 1992)
viii Ainger v. Michigan General Corp., 476 F.Supp 1209, at 1223 (S.D.N.Y. 1979).
ix CBS Inc. v. Ziff-Davis Pub. Co., 75 N.Y.2d 496, at 503-04, 554 N.Y.S.2d 449, at 453 (1990).
x Wechsler v. Hunt Health Systems, Ltd., 198 F.Supp.2d 508, at 522 (S.D.N.Y. 2002).
xi New York Contract Law 17:2 citing Carlisle Ventures, Inc. v. Banco Espanol De Credito, S.A., 1996 W.L. 680265 (S.D.N.Y. 1996).
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. Fellerviii (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. Rolnickix (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. Barnesx (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’Connorxi (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 (2nd Dep’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 (1st Dep’t 2001).
vi Walsh v. Design Concepts, Ltd., 221 A.D.2d 454, 633 N.Y.S.2d 579 (2nd Dep’t 1995).
vii Ma v. Lien, 198 A.D.2d 186, 604 N.Y.S.2d 84 (1st Dep’t 1993).
viii 112 A.D.2d 837,492 N.Y.S.2d 756 (1st Dep’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 (1st Dep’t 1927).
xii 2003 WL 21649444 (N.Y. Sup. Ct. 2003).
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 (2nd Dep’t 2003).
xvii 7th Sense, Inc. v. Liu, 220 A.D.2d 215, 631 N.Y.S.2d 835 (1st Dep’t 1995).
By Leo K. Barnes Jr.i
You are contacted by Vermont based counsel for a small business which recently entered Confessed Judgment in Vermont against a New York business for its failure to satisfy certain promissory notes. The Vermont client wants to quickly domesticate the judgment in light of rumors that the New York based business may shut down in short order. Mindful that Article 62 of the CPLR may apply to found an efficient attachment of the New York Corporation’s assets, you ask for more information and are advised as follows.
AA Corporation, a Vermont Corporation, sold its business to a New York entity, DD Corporation, resulting in an Asset Purchase Agreement which is secured by a Confessed Judgment Promissory Note. DD was represented by counsel during the negotiation, drafting and execution of the APA and, incident thereto, DD, for consideration, voluntarily and knowingly waived its right to prejudgment notice and hearing prior to the entry of a Confession of Judgment and likewise submitted to in personam jurisdiction in Vermont, irrevocably waiving any basis to dispute Vermont’s jurisdiction. After DD failed to make an installment payment due to AA, counsel for AA sent DD and its counsel a Notice to Cure, followed by a Notice of an Event of Default. After no payment was made, AA’s counsel confessed judgment against DD in AA’s favor in the Clerk’s Office of the local County in Vermont under the terms of the Confessed Judgment Provision of DD’s Confessed Judgment Promissory Note to AA.
In that light, AA may have a basis for seeking an immediate attachment. CPLR § 6211(a) permits plaintiff to proceed with an ex parte application for an order of attachment “before or after service of a summons and at any time prior to judgment.” CPLR § 6212(a) provides that plaintiff bears the burden of establishing four prongs to demonstrate entitlement to an order of attachment: (1) a cause of action exists against the defendants; (2) it is probable that plaintiff will succeed on the merits; (3) one of the five grounds for an attachment specified in CPLR § 6201 is applicable; and (4) the amount demanded from the defendants exceeds all counterclaims known to the plaintiff.
The Complaint against DD will undoubtedly allege breach of contract.ii To sustain an attachment, plaintiff in a breach of contract action must demonstrate evidentiary facts making out a prima facie case.iii In determining whether plaintiff has sustained the burden of stating a prima facie case in support of the complaint upon which the attachment is based, the court must give the plaintiff the benefit of all the legitimate inferences that can be drawn from the stated facts.iv A well crafted, detailed and documented client affidavit will serve as the keystone for a Court’s attachment order to the extent that the same will establish that DD failed to satisfy its payment obligations despite due notice of default, that the sums remain outstanding and that corresponding judgments have been entered in Vermont.
With the foregoing factual background, the plaintiff has established that a cause of action exists and it is probable that plaintiff will succeed on the merits. See Considar, Inc. v. Redi Corp. Establishmentv (evidence that principal terms of oral agreement were confirmed in signed memorandum, together with seller’s undisputed lack of performance, established probability of buyer’s success on merits of breach of contract claim, as required for buyer to obtain attachment order); Philipp Bros. Division of Engelhard Minerals & Chemicals Corp. v. El Salto, S.A.vi (in breach of contract action brought by sugar buyer against sugar seller wherein buyer sought to confirm ex parte attachment and sought preliminary injunction, record established that buyer sufficiently demonstrated its intention, willingness and ability to purchase the sugar it contracted to buy and that seller terminated agreement for reasons not authorized by written contract, thus establishing buyer’s likelihood of succeeding on merits as required to confirm the ex parte attachment and to issue the preliminary injunction).
Next, plaintiff must satisfy the third element necessary to demonstrate entitlement to an attachment. In that regard, CPLR § 6201 provides in pertinent part:
§ 6201. Grounds for attachment
An order of attachment may be granted in any action, except a matrimonial action, where the plaintiff has demanded and would be entitled, in whole or in part, or in the alternative, to a money judgment against one or more defendants, when: …
5. the cause of action is based on a judgment, decree or order of a court of the United States or of any other court which is entitled to full faith and credit in this state, or on a judgment which qualifies for recognition under the provisions of article 53.
Because the plaintiff’s New York action is based upon a judgment from Vermont it is per se entitled to found a New York action.
This subsection [CPLR § 6201(5)] is utilized by plaintiffs who want to commence an action to enforce a foreign judgment against a defendant in New York. Upon an application by the plaintiff, the Court will determine whether the foreign judgment that remains unsatisfied is likely to be recognized in New York.
Duplicating the language utilized in CPLR § 6201(5), CPLR § 5401 defines a “foreign judgment” as “any judgment, decree, or order of a court of the United States or of any other court which is entitled to full faith and credit in this state …”.
While a cognovit judgment may not be entitled to full faith and credit if it fails to satisfy due process considerations, a confession of judgment which satisfies due process standards is entitled to recognition and enforcement in New York.
While an outright “cognovit” instrument (not seen much today) may not be entitled to full faith and credit at all for example, and hence not entitled to New York recognition through any procedure (CPLR 5401 or otherwise), a confession of judgment not guilty of the cognovit’s offenses may satisfy due process and, while not being allowed mere registration under CPLR 5401, nevertheless be entitled to full faith and credit and hence New York enforcement through one of the other means.
It is important to bear in mind that the mere fact that a sister-state judgment was rendered “by default in appearance, or by confession of judgment” (the language of CPLR 5401) does not mean that it is not entitled to full faith and credit. Default judgments rendered with jurisdiction are surely so entitled (or every defendant could defeat full faith and credit merely by defaulting). The same goes for confessed judgments taken pursuant to procedures that satisfy due process. In this sense the practitioner should note the caption of Article 54, which in general terms applies to all “full faith and credit” judgments, and the specific language of CPLR 5401, which excludes default and confession judgments from use of the Article 54 registration procedure even though they may be entitled to full faith and credit. The specific language of CPLR 5401 of course controls whether the simple registration procedure is to be allowed.vii
AA will argue that a review of the Vermont Judgment, coupled with an understanding of the circumstances surrounding the execution of the same, confirms that the Vermont Judgment must be recognized in New York. The Court’s sole inquiry is whether Vermont possessed personal jurisdiction over DD. See Augusta Lumber v. Herbert H. Sabbeth Corp.viii (in a breach of contact action to enforce a Vermont default judgment, the Second Department affirmed a trial court finding that plaintiff established personal jurisdiction over the defendant, ceasing further analysis of the sister-state Judgment). In light of the fact that DD submitted to in personam jurisdiction, plaintiff will argue that it is beyond refute that DD specifically submitted to personal jurisdiction in Vermont and expressly waived any basis to dispute Vermont’s jurisdiction.ix Fiore v. Oakwood Plaza Shopping Center, Inc.x is instructive. In Fiore, the First Department went so far as to affirm a trial court ruling according full faith and credit to a cognovit judgment. The Fiore Court, after reviewing certain aspects of the judgment, concluded that it “cannot be said that the cognovit judgment amounted to a deprivation of property rights without due process.”
As for the fourth prong of whether an attachment is proper, plaintiff will assert that no known counterclaim exists, and the claim asserted herein exceeds any counterclaim that the defendants could conceivably assert, thereby establishing its right to an attachment pursuant to CPLR § 6201(5). But the analysis does not end with the statutory criteria.xi
Finally, because CPLR § 6212(b) mandates that plaintiff furnish an undertaking in an amount to be established by the Court, an analysis of the quantum of the undertaking is appropriate. Pursuant to CPLR § 6212(e), plaintiff’s liability to the defendants would be “for all costs and damages, including reasonable attorney’s fees, which may be sustained by reason of the attachment if the defendant recovers judgment, or if it is finally decided that the plaintiff was not entitled to an attachment of the defendant’s property.” With respect to provisional remedies generally, an undertaking is utilized to secure defendants for actual losses and costs — not theoretical losses, “if it is later finally determined that the [provisional remedy] was erroneously granted.”xii Indeed, the court’s discretion in setting the amount of the undertaking must be “rationally related” to the potential damages and costs that DD may suffer.xiii Conclusory assertions of potential monetary loss by DD are insufficient to justify anything more than a minimal bond. xiv
i Leo K. Barnes Jr., a member of Barnes & Barnes, P.C., can be reached at “lkb@barnespc.com”.
ii As an aside, CPLR § 5406 provides an unimpaired right for plaintiff to proceed pursuant to CPLR § 3213 to enforce the sister-state judgment.
vii Siegel, David D, Supplemental Practice Commentaries, C5406:1.
viii 101 A.D.2d 846, 475 N.Y.S.2d 878 (2nd Dep’t 1984).
ix See, e.g., National Union Fire Ins. Co. v. Worley, 257 A.D.2d 228, 231, 690 N.Y.S.2d 57, 59 (1st Dep’t 1999).
x 189 A.D.2d 703, 592 N.Y.S.2d 720 (1st Dep’t 1993).
xi Despite compliance with the foregoing statutory and common law criteria for an attachment, the decision whether to execute the Order still lies within the sound discretion of the Court. Because the provisional remedy is such a drastic measure, it is incumbent upon movant to demonstrate to the Court that equity warrants the Order of Attachment. Again, a detailed and well documented affidavit is imperative.
xii Margolies v. Encounter, Inc., 42 N.Y.2d 475, 398 N.Y.S.2d 877 (1977).
xiii Lelekakis v. Kamamis, 303 A.D.2d 380, 755 N.Y.S.2d 665 (2nd Dep’t 2003).
xiv 7th Sense, Inc. v. Liu, 220 A.D.2d 215, 631 N.Y.S.2d 835 (1st Dep’t 1995).
By Leo K. Barnes Jr.i
With the real estate sale and rental season well underway, and the brokerage community ecstatic to entertain any semblance of business after the drought that has plagued the industry for the past several years, it is an opportune moment to reiterate the premise that an enforceable brokerage commission contract must contain all material terms to avoid dismissal of a duly earned commission premised upon a Court’s characterization of the commission agreement as an unenforceable “agreement to agree”.
The underlying principle that governs a document’s characterization as an unenforceable agreement to agree stems from the absence of manifested mutual assent to the essential terms of a purported contract.
In order to create a binding contract, there must be a meeting of the minds as to the essentials of the agreement. There can be no legally enforceable contract unless the written agreement is reasonably certain or specific in its material terms. … While not all terms of a contract need be fixed with absolute certainty, a mere agreement to agree, in which a material term is left for future negotiations, is unenforceable. … In determining whether a contract is reasonably certain in its material terms, and therefore sufficiently definite as to be enforceable, a court must apply a standard that is necessarily flexible, varying with the subject of the agreement, its complexity, the purpose for which the contract was made, the circumstances under which it was made, and the relation of the parties. … Generally, compensation and manifestation of intent are deemed “material” terms. Additional terms are “material” when the parties consider them to be, such as the procurement of signatures [internal citations omitted].ii
In two decisions this Spring rendered by the Second Department and the Suffolk County Supreme Court’s Commercial Division, Zere Real Estate Services learned twice, the hard way, that a broker’s inability to document to the Court that “mutual assent” to the terms of an agreement exists renders a putative real estate commission agreement unenforceable.
First, in Zere Real Estate Services Inc. v. Adamag Realty Corp.,iii the commercial real estate agency sought to recover a brokerage commission incident to the sale of a commercial property. At trial on the claim before Justice Mayer, the plaintiff testified that the commission for a completed sale would be “no more than 5%” and that the plaintiff understood the agreement to mean that the defendant had agreed to pay a 5% commission. The defendant testified at trial that he understood that if a deal was completed, the parties would negotiate a commission rate of no more than 5% depending on the particulars of the sale actually consummated. Apparently, it was not in dispute that the commission “agreement” was nonexclusive and that there was no agreed upon duration to the purported “agreement”. After summations, the jury ruled that the parties did not enter into an express brokerage agreement. The Second Department, in affirming, ruled that the jury’s finding was not against the weight of the evidence since a fair interpretation of the evidence supported the conclusion that the parties merely reached an agreement to agree.
The following month, Zere Real Estate’s breach of contract cause of action was dismissed on summary judgment in an action pending in the Commercial Division. In Zere Real Estate Services, Inc. v. Parr,iv plaintiff moved for summary judgment on its brokerage commission claim sounding in breach of contract. Specifically, plaintiff claimed that it was entitled to a commission if defendant, or any of its affiliates, entered into a formal agreement with Touro Law School to function as Touro’s general contractor or construction manager in connection with the Law School’s construction of a new school in Central Islip. According to the Court, although the writing specified that a fee would be negotiated at a later date, plaintiff argued that in a subsequent recorded telephone conversation, defendant agreed that plaintiff’s fee would amount to 6% of the construction cost; the defendant, of course, denied that characterization.
In denying the plaintiff’s motion for summary judgment and granting the defendants’ cross motion for summary judgment dismissing the breach of contract cause of action, Justice Pines relied upon black letter law that absent a clear mutual assent to all terms of a purported agreement between two parties, the same will constitute an unenforceable agreement to agree. At bar, although it is well settled that a Court may impute a missing price term if it is readily ascertainable by reference to outside sources such as custom or trade usage, the Court ruled that the plaintiff failed to demonstrate that there existed a standard for the claimed broker’s fee premised upon the project’s cost of construction. Indeed, Second Department precedent is clear:
It is well settled that an agreement to agree, in which material terms are left for future negotiations, is unenforceable unless a methodology for determining the material terms can be found within the four corners of the agreement or the agreement refers to an objective extrinsic event, condition, or standard by which the material terms may be determined (see, Cobble Hill Nursing Home v. Henry & Warren Corp., 74 N.Y.2d 475, 548 N.Y.S.2d 920, 548 N.E.2d 203, cert. denied 498 U.S. 816, 111 S.Ct. 58, 112 L.Ed.2d 33; see also, Martin Delicatessen v. Schumacher, 52 N.Y.2d 105, 109, 436 N.Y.S.2d 247, 417 N.E.2d 541). Further, where an agreement contains open terms, calls for future approval, and expressly anticipates future preparation and execution of contract documents, there is a strong presumption against finding a binding and enforceable obligation (see, Teachers Ins. & Annuity Assn. of Am. v. Tribune Co., 670 F.Supp. 491, 499).v
Although all is not lost, the brokerage commission claim has been rendered exponentially more difficult to pursue successfully. As reiterated in the Comments which follow Pattern Jury Instruction 4:31, where the existence of a brokerage contract is in dispute, the broker may proceed on the theories of breach of contract and quantum meruit. See Breslin Realty Development Corp. v 112 Leaseholds, LLCvi and Curtis Properties Corp. v Greif Companies.vii Indeed, in the Zere Real Estate matter pending before Justice Pines, the Court permitted the plaintiff to proceed with its equitable claims despite the dismissal of the cause of action premised upon breach of an express contract. So although the claim is still viable, the plaintiff has been reduced to proceeding through the discovery process in its effort to establish liability and damages, from square one, instead of relying upon a single document which could have founded a successful summary judgment motion. Diligence in the drafting and execution of the commission agreement prior to the initiation of service by the broker avoids protracted litigation on the scope and value of services rendered by a broker.
i Leo K. Barnes Jr. is a member of Barnes & Barnes, P.C. and can be reached at LKB@BARNESPC.COM
ii N.Y. Jur.2d, Contracts, § 19
iii __ A.D.3d ___, 875 N.Y.S.2d 162 (2nd Dep’t 2009).
iv Suffolk Supreme Court Index Number 39680/2007 (Justice Emily Pines).
vi 270 A.D.2d 299, 704 N.Y.S.2d 861 (2nd Dep’t 2000).
vii 236 A.D.2d 237, 653 N.Y.S.2d 569 (1st Dep’t 1997).
By Leo K. Barnes Jr.i
An attorney’s conflict search incident to a potential new matter provides information which will assist counsel in determining whether engagement is appropriate. There are bright-line rules regarding entering an appearance in light of counsel’s obligation to avoid various conflicts of interest. In a recent decision from Suffolk’s Commercial Division by Justice Pines, the Court provides a review of the Lawyer as Witness rule codified in Disciplinary Rule 5-102(b),ii as well as the case law interpreting the same. The Order by Justice Pines is consistent with two recent decisions from the Second Department which likewise deny motions to disqualify counsel premised upon 5-102(b).
In Health Care Network Associates, LLC. v. Central Suffolk Hospital, Inc. and Peconic Bay Medical Center,iii Justice Pines was presented with a motion to disqualify defense counsel premised upon a purported violation of the lawyer as witness rule. According to the decision, plaintiff commenced an action against defendants for breach of contract arising out of a relationship between the parties wherein plaintiff was to procure tax-exempt bonds to facilitate financing efforts by the defendant Hospital. Pursuant to the terms of an unsigned proposal sent by plaintiff to the Hospital, plaintiff was to provide financial advisory services to the Hospital to further the Hospital’s plans to issue tax exempt bonds to refinance its outstanding tax-exempt debt and fund a number of new projects. “The submissions reflect that plaintiff was ultimately unable to secure the proposed financing for the Hospital and that the Hospital engaged another financial consultant to assist in the same, which efforts were successful.” Plaintiff thereafter filed the breach of contract and quantum meruit action to recover damages for services rendered.
Plaintiff sought to disqualify the defense firm on the ground that the defense firm was also the defendant’s counsel during the underlying transaction, and claimed that those same attorneys will be called as witnesses at trial. Plaintiff’s motion to disqualify was premised upon DR 5-102(b), which provides:
(b) Neither a lawyer nor the lawyer’s firm shall accept employment in contemplated or pending litigation if the lawyer knows or it is obvious that the lawyer or another lawyer in the lawyer’s firm may be called as a witness on a significant issue other than on behalf of the client, and it is apparent that the testimony would or might be prejudicial to the client.
Plaintiff argued that the existing defense firm worked so closely with plaintiff during the course of the underlying transaction that testimony from members of the defense firm would be necessary at trial. The defense firm submitted opposition arguing that disqualification was neither necessary nor appropriate (asserting that the motion to disqualify was simply a litigation tactic) because the vast majority of the transactional work performed by the defense firm was conducted by two attorneys who had already departed from the defense firm, and that the defense firm’s department head had rather nominal involvement in the matter. Defense counsel, although admittedly involved in the Hospital’s subsequent successful financial efforts, contended that he did not have any relevant, non-cumulative, and prejudicial information linking the successful transaction to plaintiff’s earlier unsuccessful attempts.
Before analyzing the contentions at bar, Justice Pines summarized the prevailing common law interpreting DR 5-102(b) and highlighted that:
The Courts have held that the mere fact that an attorney was involved in the transaction that is the subject of the litigation, or that his proposed testimony would be “relevant or highly useful” is insufficient to warrant disqualification. … The test rather is whether the subject testimony is necessary, “taking into account such factors as the significance of the matter, the availability of other evidence, and the weight of the testimony.” … Moreover, even if it can be demonstrated that the testimony is necessary, to warrant disqualification, such testimony must also be prejudicial to the client [internal citations omitted].
Justice Pines ruled that the plaintiff failed to carry its burden of demonstrating that disqualification of the defense firm was warranted because plaintiff failed to demonstrate that the testimony of any member of the defense firm was “necessary” in the action at bar. The defense firm’s department head affirmed that he was only minimally involved in the transaction at issue and was not expected to testify at trial on behalf of the defendant because any evidence would be elicited through testimony of the parties and/or documentary evidence. As for plaintiff’s contention that he expected the defense firm’s department head to be a witness at trial, plaintiff failed to demonstrate that even if such testimony were “necessary”, that the requisite prejudice would follow.
Subsequent to the decision by Justice Pines, the Second Department issued Hudson Valley Marine Inc. v. Town of Cortlandt,iv regarding attorney disqualification pursuant to 5-102(b). In Hudson Valley Marine, plaintiff initiated an action against the defendant municipality for, inter alia, malicious prosecution, asserting that the Town’s issuance of a stop-work order, and the Town’s prosecution of the charges that were ultimately dismissed, caused the plaintiff to sustain damages. Following depositions of the plaintiff’s principals and their nonparty son, it became apparent that certain advice allegedly given to the plaintiff by its attorney with respect to the stop-work order, as well as certain communications between the attorney and the nonparty son, might be material to the issue of the plaintiff’s damages. The defendant municipality moved to disqualify premised upon DR 5-102(b) on the ground that testimony was necessary on the issue of whether the plaintiff’s alleged damages were the result of the defendants’ actions or the attorney’s advice. The Second Department affirmed the Supreme Court’s denial of the defendants’ motion and noted that:
A party’s entitlement to be represented in ongoing litigation by counsel of its choice is a valued right. … Nevertheless, an attorney may be disqualified when, in the exercise of discretion, the court determines that the attorney’s testimony is necessary (citing, inter alia, Code of Professional Responsibility DR 5- 102) [other internal citations omitted].
The Second Department ruled that the defendant movant failed to carry its burden of establishing to the Court that the attorney’s testimony was “necessary” because “the persons who received the advice may testify about it and other persons who communicated with the attorney about matters relevant to the case may offer evidence regarding the content of those communications, thereby rendering the attorney’s own testimony unnecessary.”v The Hudson Valley Marine Court cited the Goldstein v. Heldvi (also cited by Justice Pines in the Health Care Network Associates decision) wherein the Second Department again affirmed the Supreme Court’s refusal to grant a disqualification motion because the movant there failed to establish the content or subject matter of testimony that might be elicited from the respondents’ attorney, and she also did not demonstrate how such testimony would be so adverse so to warrant disqualification.
These three recent decisions provide litigators with an excellent outline for the heavy burden that a movant must meet to disqualify counsel premised upon 5-102.
i Leo K. Barnes Jr. is a member of Barnes & Barnes, P.C. and can be reached at lkb@barnespc.com
ii See also 22 N.Y.C.R.R. § 1200.21
iii Suffolk County Index Number 5555-2008
iv ___ N.Y.S.2d ___, 54 A.D.3d 999 (2nd Dep’t 2008)
vi 52 A.D.3d 471, 859 N.Y.S.2d 707 (2nd Dep’t 2008).
By: Leo K. Barnes Jr.i
One of the cornerstone pleading tenets of commercial practice is that a plaintiff may not pursue a fraud cause of action simultaneously with a breach of contract cause of action as the fraud cause of action, when it is premised upon the same facts and circumstances as the breach cause of action, is simply duplicative. Clark-Fitzpatrick, Inc. v. Long Island R. Co., 70 N.Y.2d 382, at 389, 521 N.Y.S.2d 653, at 656 (1987) (a breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated). Merely alleging scienter in a cause of action to recover for breach of contract (unless the representations alleged to be false are collateral or extraneous to the agreement) does not convert a breach cause of action into one sounding in fraud. See Lo v. Curis, 29 A.D.3d 525, 815 N.Y.S.2d 131 (2nd Dep’t 2006). In that same vein, even an allegation that a defendant maintained an unexpressed intention not to perform a contract is per se insufficient to state a prima facie cause of action for fraud. See, e.g., Meehan v. Meehan, 227 A.D.2d 268, 642 N.Y.S.2d 664 (1st Dep’t 1996); Hudson v. Greenwich I Assocs., 226 A.D.2d 119, 640 N.Y.S.2d 46 (1st Dep’t 1996); Hadari v. Leshchinsky,
242 A.D.2d 557, 662 N.Y.S.2d 85 (2nd Dep’t 1997).
But it is equally well settled that “a misrepresentation of material fact, which is collateral to the contract and serves as an inducement for the contract, is sufficient to sustain a cause of action alleging fraud”. Deerfield Communications Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 956 (1986); First Bank of Americas v. Motor Car Funding, 257 A.D.2d 287, 690 N.Y.S.2d 17 (1st Dep’t 1999). Thus, a fraud claim may be based on allegations that the defendant fraudulently induced the plaintiff to enter into a contract and a party who is fraudulently induced to enter into a contract may join a cause of action for fraud with one for breach of the same contract where the misrepresentations alleged consist of more than mere promissory statements about what is to be done in the future. Where a plaintiff alleges misrepresentations of present facts, rather than merely of future intent, that were collateral to the contract and which induced the allegedly defrauded party to enter into the contract, a fraudulent inducement claim is not duplicative of a breach of contract claim (see W.I.T. Holding Corp. v. Klein, 282 A.D.2d 527, 724 N.Y.S.2d 66 (2nd Dep’t 2001)). The same set of circumstances giving rise to a breach of contract claim may also form the basis of a cause of action for this type of fraud and, thus, a fraud claim which is not duplicative of a contract claim may be maintained (see Fresh Direct v. Blue Martini Software, 7 A.D.3d 487, 776 N.Y.S.2d 301 (2nd Dep’t 2004).
The key to a concurrent successful pleading is an allegation that fraudulent misrepresentations were made by defendant prior to, and as an inducement for it to enter into the subject contract. Plaintiff’s fraudulent inducement claim is not premised upon the alleged breach of a duty arising under the contract, but, rather, is based upon representations that are extraneous to the terms of the parties’ Contract. The fraud allegedly perpetrated by defendant must have occurred prior to the plaintiff’s entering into the Contract, and must have arisen from circumstances separate and distinct from plaintiff’s breach of contract claim (see Deerfield Communications Corp., supra, at 956). In those circumstances, plaintiff’s claim is based upon a legal duty distinct from and independent of the privity claim which founds the breach of contract cause of action. But, absent such an independent duty, where the plaintiff is essentially looking to enforce the bargain, the remedy is in contract, not in tort. Sommer v. Federal Signal Corp., 79 N.Y.2d 540, at 551-552, 583 N.Y.S.2d 957 (1992).
New York County Supreme Court Justice Fried’s 2008 decision in Gotham Boxing v. Finkel, 2008 W.L. 104155 (N.Y. Sup. 2008) provides great guidance on the issue. In Gotham Boxing, the Court ruled that a fraud claim can stand, and is not duplicative of a breach of contract action, when the fraud claim is premised upon an additional representation, omission or conduct extraneous to the contract. Justice Fried noted insightful observations:
The critical factual distinction between Graubard, in which the Court of Appeals upheld a fraud claim that was related to a contract claim, and Coppola, in which the First Department dismissed a fraud claim as duplicative, seems to be that in Graubard, the fraud claim was based on a particular oral assurance offered by the defendant, in addition to the promises recorded in the written agreement, and the fraudulent intent “was not asserted in conclusory fashion but was evidenced by defendant’s conduct shortly after entering into the agreement.” Coppola, 288 A.D.2d at 42. In contrast, in Coppola, the plaintiff did not refer to any particular representation or conduct by the defendant other than that reflected in the terms of the agreement. …
So the rule, as I understand it, is that a cause of action for fraud will not arise if the alleged fraud restates the facts of the breach of contract claim; a fraud claim must be based on some additional representation, omission, or conduct, other than the contract itself, which was fraudulent when performed. To be sure, the distinction is a fine one. It seems to turn on whether the complaint alleges a particular statement, omission, or other conduct by the defendant, in addition to the text or statements that form the basis of the alleged contract. As Graubard shows, it does not seem to matter that the alleged fraudulent representation is virtually identical to the promise contained in the contract as long as it is made at a different time and place [emphasis added].
The lesson for plaintiffs while drafting a Complaint, or for defendants analyzing a CPLR 3211(a)(7) motion to dismiss a purportedly duplicative cause of action, is this: God is in the details. The detail a plaintiff provides (or fails to provide) regarding representations extraneous to a contract will serve as the keystone to pursue a fraud cause of action simultaneously with a breach of contract cause of action (or absent sufficient detail, found the defendant’s motion to dismiss). Drafting the factual background portion of the Complaint is not the time to be circumspect; rather, detailing all aspects of the fraud, and how the same was perpetrated upon a plaintiff by a defendant, is imperative to found a viable fraud cause of action.
i Leo K. Barnes Jr. is a member of Barnes & Barnes, P.C. and can be reached at LKB@BARNESPC.COM
By: Leo K. Barnes Jr.
With the New Year well underway, one resolution a litigator may have is to increase her active case load. But as we warn our children to “be careful what you wish for…”, a wise attorney knows that the maxim has a place in private practice, not just grammar school. What if your wish came true and tomorrow your best client calls to tell you that he has been served with a new complaint, and that there are more coming, 6 more, to be exact? Not only has the client been sued in seven related matters, but the matters are pending in four different counties: Suffolk; Kings; Erie; and Albany.
A week later, when your pulse returns to normal and you have been provided with a copy of the seven complaints, the anxiety begins to creep up again when you realize that despite the fact that you are thrilled to have the work, as a practical matter, defending seven related matters, in different counties, is a logistical nightmare. You do not want your client to be deposed on 7 occasions, nor do you want to respond to 7 Preliminary Conference Orders. If we assume that the plaintiffs will not consent to consolidation, and that the same may not be feasible pursuant to CPLR 602, how do you begin to get a handle on the matters before the 7 matters get a handle on you? Be careful what you wish for ….
The Unified Court System’s Litigation Coordinating Panel (“LCP”) may be the resource you need to regain control. Pursuant to 202.69 of the Uniform Civil Rules of the Supreme Court, this section applies when related actions are pending in more than one judicial district and it may be appropriate for the actions to be coordinated.i The LCP is composed of one Justice from each Department in the State,ii and maintains its office at 60 Centre Street, room 148, in Manhattan.
The standard for coordination is a broad one, and the Panel will consider:
the complexity of the actions; whether common questions of fact or law exist, and the importance of such questions to the determination of the issues; the risk that coordination may unreasonably delay the progress, increase the expense, or complicate the processing of any action or otherwise prejudice a party; the risk of duplicative or inconsistent rulings, orders or judgments; the convenience of the parties, witnesses and counsel; whether coordinated discovery would be advantageous; efficient utilization of judicial resources and the facilities and personnel of the court; the manageability of a coordinated litigation; whether issues of insurance, limits on assets and potential bankruptcy can be best addressed in coordinated proceedings; and the pendency of related matters in the federal courts and in the courts of other states. The Panel may exclude particular actions from an otherwise applicable order of coordination when necessary to protect the rights of parties.iii
Procedures Before the LCPiv
In order to trigger the LCP, an application may be made to the Panel for the issuance of an order of coordination. The Justice before whom a related action is pending or an Administrative Justice in whose district such an action is pending may raise the issue of coordination with the LCP; the LCP itself may raise the issue sua sponte by order requiring all parties to show cause why coordination should not be directed. In addition to Judicial-initiation of LCP review, a party may trigger LCP review by applying for coordination by notice of motion or, if exigent circumstances exist, by Order to Show Cause returnable before the LCP. Upon receipt of such an application, the LCP will issue a briefing schedule.
While the application before the LCP is pending, the LCP (or a single Justice thereof on the LCP’s behalf) may issue a stay of all proceedings in any or all of the actions for which coordination is sought.v Absent such a stay by the LCP, proceedings before the Panel does not affect the proceedings in the actions which are subject to the application.
Within 30 days from submission of reply or from oral argument, the LCP will issue a written decision granting or denying the application. In the event that the application is granted, an order of coordination is likewise issued, which identifies all matters which shall be coordinated, the number of coordinating justices and the county or counties wherein coordination proceedings shall take place. Thereafter, the LCP will provide a mechanism for the transfer of all to-be-coordinated matters. Since this is simply an administrative procedural issue, no appeal lies from the LCP ruling on the application.
Pursuant to subdivision F of the Procedures section, there are provisions governing subsequently filed actions as well as pending actions which were not included in the LCP’s Order. Finally, the Coordinating Justice, sua sponte, or upon motion of any party, may terminate coordination, in whole or in part, upon a determination that coordination has been completed or that the purposes of the coordination section can best be achieved by termination of the coordination. Interestingly, upon termination, the actions are remanded to their respective counties of origin for trial unless the parties to an action consent to trial of that action before the Coordinating Justice.vi
iv See www.nycourts.gov/supctmanh/lcp
v Procedures of the Litigation Coordination Panel, at §D.
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