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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: November 26, 2014

Court Not Required to Apply Entire Fairness Standard to Going Private Transaction

On November 20, 2014, the First Department issued a decision in Matter of Kenneth Cole Products, Inc., 2014 NY Slip Op. 08105, holding that a going private transaction was subject only to business judgment rule.

In Matter of Kenneth Cole Products, the plaintiff challenged a transaction by which a public corporation went private. The First Department affirmed the trial court’s decision, rejecting the plaintiff’s argument that the trial court was

required to apply the “entire fairness” standard to the transaction by which Mr. Cole (the majority shareholder of former defendant Kenneth Cole Productions, Inc. [the Company], a New York corporation) took the Company private. Alpert v 28 Williams St. Corp. (63 NY2d 557 [1984]) — on which plaintiff principally relies — states, “Corporate freeze-outs of minority interests by mergers occur principally in three distinct manners: (1) two-step mergers, (2) parent/subsidiary mergers, and (3) going-private’ mergers where the majority shareholders seek to remove the public investors. This court does not now decide if the circumstances which will satisfy the fiduciary duties owed in a two-step merger will be the same for the other categories”. Alpert involved a two-step merger where the merger plan did not require approval by any of the minority shareholders. By contrast, the merger in the case at bar required the approval of the majority of the minority (i.e., non-Cole) shareholders.

Although Mr. Cole had a conflict of interest, he did not participate when the Company’s board of directors voted on the merger. Plaintiff has not alleged that the remaining members of the board (Blitzer, Grayson, Kelly, Peller, and Blum) were self-interested.

Plaintiff does contend that the members of the special committee which the Company established to evaluate Mr. Cole’s proposal (Blitzer, Grayson, Kelly, and Peller) were controlled by Mr. Cole. However, at least under Delaware law, which all parties urge us to consider, it is not enough to charge that a director was nominated by or elected at the behest of those controlling the outcome of a corporate election.

. . .

In this particular case, pre-discovery dismissal based on the business judgment rule was appropriate since there are no allegations sufficient to demonstrate that the members of the board or the special committee did not act in good faith or were otherwise interested.

(Internal quotations and citations omitted).

Posted: November 25, 2014

Fraud Claim Fails When Sophisticated investor Fails to Conduct Due Diligence

On November 20, 2014, the First Department issued a decision in MMCT, LLC v. JTR College Point, LLC, 2014 NY Slip Op. 08103, affirming the dismissal of a fraud claim.

In MMCT, the plaintiff brought suit based on three allegedly false pre-investment statements made to one of its members.

The first was that phases one and two of the construction project, and the environmental studies for the project, were already under way. Plaintiff alleges conclusorily that this statement was false but fails to allege any facts that would support an inference that the statement was false at the time it was made. Moreover, plaintiff cannot establish justifiable reliance on Halpern’s statement, since neither the complaint nor Gallin’s affidavit makes mention of whether plaintiff’s representatives or its members, who are sophisticated investors, inspected the project site or bookkeeping to ascertain the status of the project before investing in it.

The second alleged misrepresentation was that the project was in a “great area” and that Halpern would prefer to invest his own money rather than rely on his family. This statement is non-actionable opinion or puffery.

The third alleged misrepresentation was made in a “Confidential Information Memorandum” (CIM) which outlined the goals and structure of the project. Plaintiff alleges the CIM contains material misrepresentations of fact that were made with the knowledge that they were false when made. Among those misrepresentations are that the investment was a loan and that plaintiff was certain to recover its investment with a profit. The CIM states, however, that its sole purpose is to provide “general information” about the development project and that “nothing contained in this memorandum is or shall be relied upon as a promise or representation as to the past or future performance of the Property. The CIM also contains a disclaimer that “any estimates and projections have been prepared by, and based upon information that involves significant subjective judgments, assumptions and analyses of management, outside consultants and third parties which may or may not be accurate; Although plaintiff contends its investment was functionally a loan, the CIM provides that it is a preferred investment interest secured by a preferred equity interest combined with a 5% share of the project net profit, indicating that this was a performance based investment.

Plaintiff has not satisfied the heightened pleading standard for a fraud claim under CPLR § 3016(b) because it failed to identify any of the allegedly, false representations that Halpern made with the then present intent to induce plaintiff’s investment in the project.

(Internal quotations and citations omitted) (emphasis added).

Posted: November 23, 2014

Out-of-State Medical Practice not Subject to Personal Jurisdiction in New York Based on Passive Website and Communications Initiated by the Plaintiff

On November 20, 2014, the Court of Appeals issued a decision in Paterno v. Laser Spine Inst., 2014 NY Slip Op. 08054, analyzing whether contacts with New York via the Internet were sufficient to create personal jurisdiction.

In Paterno, the plaintiff brought a medical malpractice action against a Florida medical provider. The court described the facts relevant to the jurisdictional analysis as follows:

In May 2008, plaintiff was suffering from severe back pain. While on the homepage of a well-known internet service provider plaintiff discovered an advertisement for LSI, a surgical facility specializing in spine surgery, with its home facility and principal place of business in Tampa, Florida. Plaintiff clicked on the LSI advertisement, and viewed a 5-minute video presentation of a testimonial from a former LSI patient and professional golfer, extolling LSI’s medical services. The advertisement appeared to hold out the promise of relief for plaintiff’s back problems so he communicated with LSI by telephone and internet to inquire about possible surgical procedures to alleviate his pain. These would be the first of plaintiff’s several contacts with LSI, which led to his eventual decision to undergo surgical procedures by LSI medical professionals in Florida. Those surgeries are the underlying basis for plaintiff’s action against defendants.

After his initial inquiries in May 2008, plaintiff sought a medical assessment of his condition by LSI, and sent to LSI’s Florida facility certain magnetic resonance imaging (MRI) films of his back. LSI then sent plaintiff an e-mail letter, describing preliminary surgical treatment recommendations and orders, based on its doctors’ professional evaluation of the MRI. The letter made clear the recommendations and suggested procedures were not final, and that plaintiff would be “evaluated by [LSI] surgeons upon arrival so therefore these orders will be subject to change by the surgeon while in consultation.”

According to plaintiff, on May 30, 2008, the same day that he received the letter, LSI informed him that there had been a cancellation, and plaintiff could take the open spot and have the surgery performed at a significant discount due to the short notice. LSI offered a June 9, 2008 surgery date.

In preparation for his surgery plaintiff had several additional e-mail contacts with LSI from June 2nd through June 6th. These communications were intended to address registration and payment issues, and to generally facilitate plaintiff’s arrival at LSI’s Florida facility. For example, plaintiff sent his completed registration and private insurance forms, and engaged in correspondence with LSI related to payment arrangements to be made upon his arrival in Florida. LSI sent plaintiff a list of hotels in Tampa that offered discounted rates to LSI patients.
Apart from these administrative matters, plaintiff forwarded to LSI his blood [*3]work, which had been completed in New York. He also attempted to schedule a conference call between his New York-based doctor, Dr. Dimatteo, and LSI defendant Dr. Perry. After plaintiff was unable to reach Dr. Perry, an LSI doctor called Dr. Dimatteo the following day and briefly discussed plaintiff’s scheduled surgery.

The plaintiff subsequently travelled to Florida for surgery. “Plaintiff experienced extreme pain following the surgery and complained to LSI staff who advised him that this was due to the procedure and could last for two weeks. Plaintiff underwent a second surgical procedure at LSI . . . .” After he returned to New York, the plaintiff sought the advice of New York-based doctors and then continued to communicate with LSI from New York. Ultimately, the plaintiff sued LSI in New York. The trial court dismissed the suit for lack of personal jurisdiction. The Appellate Division affirmed. In affirming the holding of the two lower courts that the New York courts did not have jurisdiction over LSI in this action, the court of Appeals explained:

Plaintiff argues that New York courts have personal jurisdiction over defendants under CPLR 302 (a) (1), based on their purposeful activity, as demonstrated by LSI’s active solicitation of plaintiff to undergo surgery, and defendants’ pre and post surgery contacts related to plaintiff’s medical treatment, including e-mails, letters and the exchange of documents. Plaintiff also contends New York courts have personal jurisdiction over defendants under CPLR 302 (a) (3) because defendants committed a tortious act outside New York State which caused injury to him within New York.

Defendants argue that their contacts with plaintiff merely responded to his inquiries or constituted followup to the surgical procedures, and do not constitute transacting business in New York State within the meaning of the CPLR so as to confer personal jurisdiction over the defendants. Furthermore, they contend that because plaintiff’s injuries occurred in Florida, his reliance on CPLR 302 (3) as an alternative basis of jurisdiction is without merit. They also argue that plaintiff failed to effectuate proper service of process over all the LSI defendants.

CPLR 302 (a) (1) provides in relevant part:

(a) Acts which are the basis of jurisdiction. As to a cause of action arising from any of the acts enumerated in this section, a court may exercise personal jurisdiction over any non domiciliary, …, who in person or through an agent:

1. transacts any business within the state or contracts anywhere to supply goods or services in the state ….”

(CPLR 302[a][1]). Whether a non-domiciliary is transacting business within the meaning of 302(a)(1) is a fact based determination, and requires a finding that the non-domiciliary’s activities were purposeful and established a substantial relationship between the transaction and the claim asserted. Purposeful activities are volitional acts by which the non-domiciliary avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws. More than limited contacts are required for purposeful activities sufficient to establish that the non-domiciliary transacted business in New York.

The lack of an in-state physical presence is not dispositive of the question whether a non-domiciliary is transacting business in New York. For we have in the past recognized CPLR 302(a)(1) long-arm jurisdiction over commercial actors using electronic and telephonic means to project themselves into New York to conduct business transactions.

Regardless of whether by bricks and mortar structures, by conduct of individual actors, or by technological methods that permit business transactions and communications without the physical crossing of borders, a non-domiciliary transacts business when on his [or her] own initiative the non-domiciliary projects himself or herself into this state to engage in a sustained and substantial transaction of business. Thus, where the non-domiciliary seeks out and initiates contact with New York, solicits business in New York, and establishes a continuing relationship, a non-domiciliary can be said to transact business within the meaning of 302(a)(1).

Plaintiff contends that the totality of defendants’s contacts establish that it conducted business in New York through its solicitation and several communications related to LSI’s medical treatment of plaintiff. We disagree. In order to satisfy the overriding criterion necessary to establish a transaction of business within the meaning of CPLR 302(a)(1), a non-domiciliary must commit an act by which it purposefully avails itself of the privilege of conducting activities within New York. Plaintiff here admits that he was the party who sought out and initiated contact with defendants after viewing LSI’s website. According to plaintiff, that website informed viewers about LSI medical services and its professional staff. However, he has not asserted that it permitted direct interaction for online registration, or that it allowed for online purchase of LSI services. Passive websites, such as the LSI website, which merely impart information without permitting a business transaction, are generally insufficient to establish personal jurisdiction. Thus, as plaintiff concedes, the mere fact that he viewed LSI’s website in New York is insufficient to establish CPLR 302(a)(1) personal jurisdiction over defendants.

Plaintiff argues, however, that LSI did more than just post an online advertisement. He alleges that over months, there were several telephone calls and e-mail communications between plaintiff and LSI representatives, that he sent MRIs and blood work to LSI, and that LSI sent prescriptions to his New York-based pharmacies. To the extent plaintiff argues that by sheer volume of contacts, defendants are subject to personal jurisdiction in New York, we disagree. As we have stated it is not the quantity but the quality of the contacts that matters under our long-arm jurisdiction analysis.

Turning to the content and quality of defendants’ contacts with plaintiff, it is apparent that they were responsive in nature, and not the type of interactions that demonstrate the purposeful availment necessary to confer personal jurisdiction over these out-of-state defendants. After plaintiff initially sought out LSI, LSI responded with information designed to assist plaintiff in deciding whether to arrange for LSI medical services in Florida. For example, after plaintiff sent his MRI for evaluation, LSI sent him a letter setting forth a preliminary evaluation and treatment recommendations.

Once plaintiff confirmed his interest, and the June 9, 2008 surgery date was set, he fully engaged with defendants in order to ensure that all pre-surgical matters were completed. Plaintiff filled out and returned the insurance forms and attempted to negotiate payment arrangements; he arranged for his travel and lodging; he completed and sent LSI the necessary registration forms; he ensured that his bloodwork was sent to LSI before his arrival in Florida; and he requested that an LSI doctor speak with his New York-based doctors concerning the impending surgery at the LSI facility. As part of the preparation for plaintiff’s arrival, these communications served the convenience of plaintiff, and fail to establish that defendants availed themselves of the privilege of conducting activities within the forum State.

Plaintiff urges us to consider the contacts between plaintiff and LSI once he returned to New York on June 9th, after the first two Florida surgeries. Our long-arm statute requires that the cause of action arise from the non-domiciliary’s actions that constitute transaction of business. There must be a substantial relationship between the transaction and the claim asserted. Here, plaintiff’s claim is based on the June and August surgeries in Florida. Contacts after this date cannot be the basis to establish defendant’s relationship with New York because they do not serve as the basis for the underlying medical malpractice claim. Further, defendants’ contacts with New York at the behest of the plaintiff subsequent to the first two Florida surgeries but before the third cannot be used to demonstrate defendants actively projected themselves into New York. In any event, even considering the defendants’ contacts following the surgeries, they are similar in kind to the pre-surgery contacts and for the same reasons do not constitute the transaction of business required by CPLR 302(a)(1).

It is no longer unusual or difficult, as it may once have been, to travel across state lines in order to obtain health care from an out-of-state provider. It is also not unusual to expect follow up for out-of-state treatment. Given this reality, to find defendants’ conduct here constitutes transacting business within the meaning of CPLR 302(a)(1), based on contacts before and after the surgeries, would set a precedent for almost limitless jurisdiction over out-of-state medical providers in future cases. We do not interpret the expanse of CPLR 302(a)(1) to be boundless in application.

(Internal quotations and citations omitted).

Posted: November 22, 2014

Schlam Stone & Dolan Partner to be Panelist on ADR Ethics at NYSBA Meeting

On Thursday, January 29, 2015, Schlam Stone & Dolan LLP partner Erik S. Groothuis will be a panelist at the NYSBA Dispute Resolution Section & Corporate Counsel Section Annual Meeting. The title of the panel is “Nothing But the Truth? – Ethical Duties of Candor in ADR.” The “session will present an in-depth discussion of advocates’ and neutrals’ duty of candor in various ADR processes and when and how they apply in real life situations.”

Posted: November 22, 2014

Acceleration Clause Saves Oral Agreement for Payment Over Time from Invalidity Under the Statute of Frauds

On November 21, 2014, the Fourth Department issued a decision in Stevens v. Perrigo, 2014 NY Slip Op. 08195, affirming that provision for immediate payment under certain circumstances saved an oral agreement for payment over a five year period from being invalid under the statute of frauds.

In Stevens, the parties entered into an oral agreement for the purchase an accounting practice, with payments made over five years. When a dispute over the agreement arose, the defendant moved to dismiss on statute of frauds grounds. The Fourth Department affirmed the trial court’s refusal to dismiss on this ground, explaining:

As long as an agreement may be fairly and reasonably interpreted such that it may be performed within a year, the statute of frauds will not act as a bar to enforcing it however unexpected, unlikely, or even improbable that such performance will occur during that time frame. Here, although the parties’ original agreement provided that the purchase price would be paid in monthly installments over a period of five years, the agreement was revised to provide that if plaintiff, inter alia, transferred the accounting practice or ceased to practice for a period of 30 days, plaintiff would owe defendant the remainder of the purchase price in a lump sum. Thus, because plaintiff could have fully performed the alleged agreement within the first year by paying defendant such a lump sum, defendant did not meet her burden of establishing that the statute of frauds renders the agreement void and unenforceable.

(Internal quotations and citations omitted) (emphasis added).

Posted: November 21, 2014

Court of Appeals Accepts Certified Questions Regarding Fraud and Assignability of Fraud Claims

On November 20, 2014, the Court of Appeals accepted certified questions from the Second Circuit, in Commonwealth of Pennsylvania Public School Employees’ Retirement System v. Morgan Stanley & Co. Incorporated, on two issues: (1) the standard for determining whether the transfer of a note includes a transfer of the transferor’s right to sue for fraud; (2) whether a defendant can be liable for fraud based on a misrepresentation of a third party where the defendant knew about (and perhaps took steps to procure) the third party’s statement.

The lawsuit arose out of the collapse of an investment structured by Morgan Stanley. At issue on that portion of the appeal now before the Court of Appeals are the claims of Commerzbank AG, a subsequent holder of notes issued in connection with the investment. The federal district court ruled that Commerzbank lacked standing to bring a fraud claim, holding that “for a subsequent holder of a note to have standing to sue entities involved in the issuance of the note for torts committed in the issuance, the prior holder of a note must assign its tort claims at the time of the transfer, and that a simple transfer of the note did not assign those claims.” The Second Circuit found that there was no controlling precedent from the Court of Appeals on this issue, and lower court authority was inconclusive:

On the one hand, New York law is clear that specific incantations of “assignment” are unnecessary to perfect a transfer. Moreover, we have elsewhere noted a general trend in New York toward adopting principles of free assignability of claims, including those of fraud. However, there is also a strain of New York law that treats tort and contractual claims in a particular instrument separately.

We believe these jurisprudential trends present an as-yet unresolved issue when applied to this case. Specifically, it is unclear whether the intent of parties to transfer a whole interest, combined with the absence of limiting language, suffices to transfer an assignor’s tort claims, or whether an additional, more specific statement of an intent to transfer tort claims is required. We certify that issue to the New York Court of Appeals.

(Citations omitted.)

Another issue in the case concerned whether Morgan Stanley could be liable for fraud, given that the alleged misrepresentations were not made by Morgan Stanley, but by ratings agencies that gave the investment high ratings that were allegedly based on unreliable and outmoded data. The Second Circuit certified this issue to the Court of Appeals, as well:

The district court held that, as a matter of New York law, the allegedly fraudulent ratings could be attributed only to the ratings agencies themselves. Because Morgan Stanley did not issue the ratings, the district court held that it could not be directly liable and that there was no claim of aiding-and-abetting liability. Appellants argue that Morgan Stanley is nonetheless liable because it exerted pressure on the ratings agencies to obtain the fraudulently high ratings, even participating in a “scheme” to do so. Indeed, the district court noted that appellants had presented some evidence that Morgan Stanley had “manipulated the Cheyne SIV modeling process to create the ratings it desired,” and had otherwise influenced the process beyond simply hiring the agencies. This would suffice under some New York decisions to impose liability on parties who make, authorize or cause a fraudulent representation to be made. Other New York decisions, however, which were discussed extensively by the district court, seem to foreclose suits against third parties based on the misrepresentations of another, even where that party was alleged to have known about the misstatement.

(Citations omitted.)

Posted: November 20, 2014

Trial Court Rules Amended to Clarify Requirements for Redaction of Confidential Personal Information

On November 6, 2014, the Chief Administrative Judge signed an order adding subdivision (e) to Rule 202.5. the new rule clarifies counsel’s obligation to redact confidential personal information from court filings. The new rule provides:

(e) Omission or Redaction of Confidential Personal Information.
(1) Except in a matrimonial action, or a proceeding in surrogate’s court, or a proceeding pursuant to article 81 of the mental hygiene law, or as otherwise provided by rule or law or court order, and whether or not a sealing order is or has been sought, the parties shall omit or redact confidential personal information in papers submitted to the court for filing. For purposes of this rule, confidential personal information (“CPI”) means:
i. the taxpayer identification number of an individual or an entity, including a social security number, an employer identification number, and an individual taxpayer identification number, except the last four digits thereof;
ii. the date of an individual’s birth, except the year thereof;
iii. the full name of an individual known to be a minor, except the minor’s initials; and
iv. a financial account number, including a credit and/or debit card number, a bank account number, an investment account number, and/or an insurance account number, except the last four digits or letters thereof.
(2) The court sua sponte or on motion by any person may order a party to remove CPI from papers or to resubmit a paper with such information redacted; order the clerk to seal the papers or a portion thereof containing CPI in accordance with the requirement of 22NYCRR §216.1 that any sealing be no broader than necessary to protect the CPI; for good cause permit the inclusion of CPI in papers; order a party to file an unredacted copy under seal for in camera review; or determine that information in a particular action is not confidential. The court shall consider the pro se status of any party in granting relief pursuant to this provision.
(3) Where a person submitting a paper to a court for filing believes in good faith that the inclusion of the full confidential personal information described in subparagraphs (i) to (iv) of paragraph (1) of this subdivision is material and necessary to the adjudication of the action or proceeding before the court, he or she may apply to the court for leave to serve and file together with a paper in which such information has been set forth in abbreviated form a confidential affidavit or affirmation setting forth the same information in unabbreviated form, appropriately referenced to the page or pages of the paper at which the abbreviated form appears.
(4) The redaction requirement does not apply to the last four digits of the relevant account numbers, if any, in an action arising out of a consumer credit transaction, as defined in subdivision (f) of section one hundred five of the civil practice law and rules. In the event the defendant appears in such an action and denies responsibility for the identified account, the plaintiff may without leave of court amend his or her pleading to add full account or CPI by (i) submitting such amended paper to the court on written notice to defendant for in camera review or (ii) filing such full account or other CPI under seal in accordance with rules promulgated by the chief administrator of the courts.

Posted: November 19, 2014

Court Rejects Arbitral Award

On November 7, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Matter of Kleinbart (Build Green Solutions LLC), 2014 NY Slip Op. 51599(U), granting a motion to reject an arbitral decision.

In Matter of Kleinbart, the court denied a motion to confirm an arbitral award and instead granted a motion to reject the award. As an initial matter, the court rejected the argument that the arbitration agreement was not valid:

An arbitration award may be vacated only upon the grounds enumerated in CPLR 7511 (b). CPLR 7511 (b) (2) permits vacating an arbitration award if the party seeking vacatur did not participate in the arbitration or receive notice of the intention to arbitrate and, among other circumstances, no valid arbitration agreement existed. Respondents herein contend that Tombak received no proper summons and that both his execution of the Arbitration Agreement and purported participation in the Givas Hamorah proceeding resulted from fraud, coercion or duress.

To sustain a claim for fraudulent inducement, there must be a knowing misrepresentation of material fact, which is intended to deceive another party and to induce them to act upon it, causing injury. Here, respondents argue that the notice Givas Hamorah used to call Tombak before the tribunal and its general conduct led him to believe that he was present only as a witness, not a party. Although the contents of the notice can be read as implying that Givas Hamorah sought testimony from Tombak in an arbitral proceeding against Volkovitz and Kornitzer, the Arbitration Agreement made clear that Tombak was agreeing to submit to binding arbitration (individually, and on behalf of corporations, LLCs, and all other entities involving this matter) all the controversies (claims and counter claims) between the undersigned parties. Such language unambiguously conveyed that Tombak was agreeing to appear before Givas Hamorah as a party to arbitration, not merely as a witness. A person who signs a document, even if misled as to its contents, is under an obligation to read the document before signing it, and cannot generally avoid the effect of the document on the ground that he or she did not read it or know its contents.

Tombak further asserts that he signed the Arbitration Agreement only because the Givas Hamorah panel threatened to issue a siruv against him, thus rendering the agreement voidable as a product of coercion or duress. The Appellate Division, Second Department, has established, however, that a threat of a siruv will not be treated as duress. While the facts in these cases may differ somewhat from the facts that produced the Arbitration Agreement herein, the case law indicates that prior refusals to consider siruv threats as coercive reflected the inherent nature of a siruv, rather than the circumstances particular to those cases. Accordingly, the Arbitration Agreement must be treated as valid and binding upon respondents.

(Internal quotations and citations omitted). The court went on, however, to vacate the award:

Judicial review of an arbitrator’s award is very limited, and an arbitrator need not observe substantive law or evidentiary rules in issuing a decision. New York favors arbitration as a method of dispute resolution, but CPLR 7511 (b) (1) permits vacating an arbitration award if, among other circumstances, the arbitrator exceeded his power or so imperfectly executed it that a final determination and definite award upon the subject matter submitted was not made.

An award may be found to have exceeded the arbitrator’s powers if it violates a strong public policy, is totally irrational or breaches an explicit limitation on such power. On review, an award may be found to be rational if any basis for such a conclusion is apparent to the court based up on a reading of the record.

Here, no apparent rational basis exists to justify an award to petitioner of $150,000. Petitioner makes no attempt to refute, and submits evidence that seems to confirm, that his claim sought a 7.5% commission on a $24,700 sale, thus equal to $1852.50, of which BGS had already paid half. No party attempts to explain how a claim pursuing $926.25 resulted in an award of more than 160 times that amount.

Furthermore, no rational basis supports holding Tombak personally liable for any failure by BGS to pay petitioner a sales commission. Petitioner formed an agreement with Volkovitz to seek buyers of BGS equipment for a specified commission, and petitioner does not contend that he had any direct interaction whatsoever with Tombak before the arbitration process. Petitioner erroneously relies on the general precept of contract law that an agent who forms a contract on behalf of an undisclosed or partially disclosed principal may be held personally liable for obligations thereunder. Tombak, though an agent of BGS, was indisputably not the agent who formed any agreement with petitioner, and, therefore, could not be held personably liable even if petitioner successfully established that BGS was inadequately disclosed as the true party to the contract. As no plausible basis exists for the Arbitration Award, it must be vacated and the petition to confirm it must be denied.

(Internal quotations and citations omitted). As to a remedy, the court ruled that “[t]he Arbitration Agreement, however, remains binding, and the controversy must, therefore, be remanded for further proceedings in accordance with this decision and order and the requirements of CPLR article 75.”

Posted: November 18, 2014

Testimony Regarding Documents Precluded by Best Evidence Rule

On November 13, 2014, the First Department issued a decision in Shanmugam v. SCI Engineering, P.C., 2014 NY Slip Op. 07749, affirming a trial court’s exclusion of evidence under the best evidence rule.

In Shanmugam, the trial court precluded the defendant “from presenting testimony concerning the value of defendant company’s carry-forward contracts, accounts receivable, and monthly billings,” because it had not produced the underlying documents. The First Department affirmed, explaining that the preclusion was proper because

the best evidence rule requires production of those documents themselves, and since defendant did not proffer an adequate explanation for his failure to produce the documents. Because testimony on the value of the assets at issue would be based on the contents of the unproduced documents, any such testimony would also be inadmissible hearsay. Similarly, the court properly precluded any testimony concerning client dissatisfaction with defendant company, as such testimony would be based on the client’s out-of-court statements and would constitute inadmissible hearsay. The prelitigation letter by defendant to plaintiff explaining his refusal to pay on the notes at issue was also properly precluded as inadmissible hearsay. Defendant’s alleged availability to testify at trial about the contents of the letter does not, alone, render the letter admissible. Lastly, the court properly precluded defendant’s summary of customer revenues for 2012; even if relevant, the summary is inadmissible under the best evidence rule, as it is based on defendant company’s books and records, which defendant, without explanation, failed to produce during discovery.

(Internal citations omitted).

Posted: November 17, 2014

Court of Appeals Arguments of Interest for the Week of November 17, 2014

Arguments the week of November 17, 2014, in the Court of Appeals that may be of interest to commercial litigators.

  • No. 223: Rigano v. Vibar Construction, Inc. (Proceeding No. 1) and Vibar Construction Corp. v. Fawn Builders, Inc. (Proceeding No. 2) (To be argued Tuesday, November 18, 2014) (considering whether misidentification of the true owner on a mechanics lien is a jurisdictional defect which cannot be cured by an amendment). The Second Department decision is available here.
  • No. 228: 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Association, Inc. (To be argued Wednesday, November 19, 2014) (considering whether a lease’s acceleration clause constituted an unenforceable penalty). The First Department decision is available here.