Source: https://www.schlamstone.com/commercial/page/209/
Timestamp: 2019-04-26 01:39:25+00:00

Document:
On October 22, 2013, Justice Schweitzer of the New York County Commercial Division issued a decision in Gutstadt v. National Financial Partners Corp., 2013 NY Slip Op. 32733(U), illustrating the many hurdles that shareholders of foreign corporations face when they try to bring shareholder derivative suits against New York residents.
Gutstadt was brought by two minority shareholders on behalf of an Ontario corporation against the corporation’s majority shareholder and Board member, the corporation’s accountant, and a New York company and that company’s CFO. The derivative claims sounded in breach of fiduciary duty, fraud, conversion, and unjust enrichment and essentially alleged that the defendants had successfully conspired to fraudulently transfer the corporation’s assets and business to the New York company through a series of transactions, in violation of the Ontario Business Corporations Act (“OBCA”). One of those transactions was memorialized in a stock purchase agreement containing a New York choice-of-law clause and a forum selection clause requiring any disputes arising out of the agreement to be arbitrated in New York.
Justice Schweitzer dismissed the case on three independent grounds. First, Justice Schweitzer found that he lacked subject matter jurisdiction because New York’s internal affairs doctrine required him to apply the law of the jurisdiction where the corporation was incorporated to a shareholder derivative suit, and the OBCA required that a derivative plaintiff obtain leave from a Canadian court before bringing a derivative action, which plaintiffs admitted they had not obtained. Justice Schweitzer rejected plaintiffs’ argument that the choice-of-law provision in the stock purchase agreement trumped the internal affairs doctrine because that provision did not apply to plaintiffs’ tort claims “relating to the obligations of directors and controlling shareholders to minority shareholders” of the nominal defendant Ontario corporation.
Second, Justice Schweitzer found that all plaintiffs’ claims were time barred under Ontario’s two-year statute of limitations, which is shorter than New York’s, because CPLR 202 provides that an “action based upon a cause of action accruing without the state cannot be commenced after the expiration of the time limited by the laws of either the state or the place without the state where the cause of action accrued, except that where the cause of action accrued in favor of a resident of the state the time limited by the laws of the state shall apply.” Because the plaintiffs resided in Ontario and were suing derivatively on behalf of an Ontario corporation, Justice Schweitzer concluded that the plaintiffs’ tort claims accrued in Ontario where the alleged economic losses were sustained, and thus CPLR 202 required him to apply the shorter Ontario statute of limitations.
Third, Justice Schweitzer dismissed all the claims pursuant to CPLR 327(a) under the forum non conveniens doctrine after finding that most of the traditional factors he was required to apply under that doctrine favored the dismissal of the case in favor of an Ontario forum (plaintiffs were Canadian residents, nominal defendant was a Canadian corporation, the fraudulent transactions took place in Canada, most of the witnesses are in Canada and their court attendance on New York cannot be compelled, Canadian law applied, and Canada’s courts provided an available alternative forum, especially since plaintiffs had sued defendants in a prior pending action there for the same alleged misconduct).
In sum, before shareholders of foreign corporations decide to litigate their corporate governance disputes in New York, even where the relevant defendants reside in New York, they need to overcome the hurdles of the internal affairs doctrine, the potentially shorter statute of limitations that the CPLR often requires be applied, and the forum non conveniens doctrine.
On November 6, 2013, the Second Department issued a decision in Loaiza v. Guzman, 2013 NY Slip Op. 07159, illustrating that a failure to answer will not be excused without good reason.
The affidavits of the plaintiffs’ process server constituted prima facie evidence that the defendant Rene Guzman was validly served pursuant to CPLR 308(1) and that the defendant William Guzman was validly served pursuant to CPLR 308(2). The defendants did not deny receipt of process or swear to detailed and specific facts to rebut the statements in the process server’s affidavits. Therefore, the defendants were not entitled to relief pursuant to CPLR 5015(a)(4). Furthermore, to the extent that the defendants are arguing excusable default pursuant to CPLR 5015(a)(1), the defendants did not demonstrate a reasonable excuse for their failures to answer and oppose the plaintiffs’ initial motion for a default judgment, and for their delay of more than one year in appearing in this action. Accordingly, the plaintiffs’ motion for leave to enter a default judgment on the issue of liability against the defendants should have been granted and the defendants’ cross motion pursuant to CPLR 3012(d) for leave to serve a late answer and to compel the plaintiffs to accept service of that answer, should have been denied.
Loaiza presents a cautionary tale regarding the failure timely to answer a complaint. Courts are generally lenient in excusing a failure timely to answer, but as Loaiza shows, that leniency is not unlimited. The defendant must present the court with concrete and specific reasons for the default and any delay in dealing with it once the defendant became aware of the action.
On October 31, 2013, Justice Ramos of the New York County Commercial Division issued a decision in Moshe v. Charles Rutenberg LLC, 2013 NY Slip Op. 51813(U), denying the defendant’s summary judgment motion for dismissal of a fraudulent inducement cross-claim. The cross-claim defendant had argued that the reasonable reliance element of the fraud cross-claim had not been established as a matter of law because the cross-claimants were sophisticated parties who had failed to make use of the means of verification that were available to them. Justice Ramos denied summary judgment after finding that material questions of fact existed about whether the cross-claimants had failed to make use of the means of verification that were available to them.
This case is one of many cases that are currently being litigated in New York County and the First Department where courts are grappling with the issue of whether claims sounding in fraud can be dismissed on the pleadings or at the close of discovery based on the plaintiff’s failure to plead or raise a triable issue of fact with respect to his justifiable reliance on the defendant’s allege misrepresentations. The seminal case dealing with this issue is the Court of Appeals’ decision in DDJ Mgmt., LLC v. Rhone Group, 15 N.Y.3d 147, 2010 NY Slip Op 05603, where the court opined, despite reversing the First Department’s dismissal on the pleadings of plaintiff’s fraud claim for failing sufficiently to plead justifiable reliance, that it was still possible for New York courts to dismiss fraud claims on the pleadings for failure to plead justifiable reliance where the parties are sophisticated parties in an arm’s-length transaction. The court cautioned, however, that the “question of what constitutes reasonable reliance is always nettlesome because it is so fact intensive.” (internal quotation marks omitted).
Since DDJ Mgmt. was decided, the New York County Commercial Division Justices have usually denied motions to dismiss and for summary judgment in fraud cases, rejecting arguments from defendants that justifiable reliance was not sufficiently pled or that material issues of fact did not exist with respect to justifiable reliance, and the First Department usually reversed these decisions. See, e.g., HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 2012 NY Slip Op 02276 (Mar. 27, 2012); Sony Ericsson Mobile Communications USA, Inc. v. LSI Corp., 102 A.D.3d 565, 2013 NY Slip Op 00399 (Jan. 24, 2013); ACA Fin. Guaranty Corp. v. Goldman, Sachs & Co., 106 A.D.3d 494, 2013 NY Slip Op 03429 (May 14, 2013) (Friedman, J.P. and Renwick and Roman, JJ. reversing order denying motion to dismiss with Clark and Manzanet-Daniels, JJ. dissenting).
Notwithstanding the First Department’s decisions, the New York County Commercial Division Justices—as Justice Ramos did in Moshe—continue to deny these motions. See, e.g., MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 2013 NY Slip Op 50677(U) (Apr. 29, 2013) (Bransten, J.); AMBAC Assur. Corp. v. EMC Mortgage LLC, 2013 NY Slip Op 50954(U) (June 13, 2013) (Ramos, J.); Basis Pac-Rim Opportunity Fund (Master) v. TCW Asset Mgmt. Co., 2013 NY Slip Op 51494(U) (Sept. 10, 2013) (Kornreich, J.); Wyle Inc. v. ITT Corp., 2013 NY Slip Op 51707(U) (Oct. 21, 2013) (Ramos, J.). None of the First Department decisions have yet reached the Court of Appeals. Leave to appeal was not sought in HSH Nordbank AG, the Court of Appeals denied leave to appeal in Sony Ericsson (2013 NY Slip Op 69151 (Apr. 2, 2013)), and just last month the Court of Appeals sua sponte dismissed the appeal filed from the 3-2 decision in ACA for lack of finality (NY Slip Op 88246 (Oct. 15, 2013)). And appeals from the more recently-decided Commercial Division decisions have not yet been perfected. The MBIA case settled shortly after the notice of appeal was filed, the defendants did not appeal the denial of their motion to dismiss in AMBAC, a notice of appeal was filed last month in Basis Pac-Rim but that appeal has not yet been perfected, and the time to file a notice of appeal in Wyle and Moshe has not yet expired.
Thus, the issue of justifiable reliance continues to be hotly contested between the Manhattan Commercial Division and the First Department, with no definitive Court of Appeals decision in sight.
On October 28, 2013, Justice Whelan of the Suffolk County Commercial Division issued a decision in North Coast Outfitters, Ltd. v. Darling, 2013 NY Slip Op. 32731(U), declining to apply the doctrine of equitable estoppel to toll the statute of limitations in a shareholder dispute.
[T]he doctrine of equitable estoppel applies where plaintiff was induced by fraud, misrepresentations or deception to refrain from filing a timely action and the plaintiff demonstrates reasonable reliance on the defendant’s misrepresentations. To be successful, the party seeking to invoke the estoppel doctrine bears the burden of demonstrating that it was diligent in commencing the action within a reasonable time after the facts giving rise to the estoppel have ceased to be operational. Where concealment without actual misrepresentation is claimed to have prevented a plaintiff from commencing a timely action, the plaintiff must demonstrate a fiduciary relationship exists, out of which. an obligation arises to inform the plaintiff of facts material to the underlying claim. In cases like the instant one wherein a fiduciary duty is owing from the defendant, the plaintiff must establish that the defendant’s failure to inform the plaintiff of material facts contributed to the delay in bringing the action.
On October 24, 2013, Justice Friedman of the New York County Commercial Division issued a decision in Glanzer & Co., LLC v. Air Line Pilots Association, 2013 NY Slip Op. 32713(U), denying defendant’s motion for summary judgment dismissing plaintiff’s breach of contract claim after concluding that material issues of fact existed with respect to whether defendant had breached a “best efforts” clause in the parties’ contract.
The contract in Glanzer was between an investment bank and an airline pilot’s union that required the union to “use its reasonable best efforts to cause an entity or party other than [the union] . . . to pay . . . a customer investment banking fee,” i.e., a “success fee,” to the plaintiff in connection with labor contract negotiations between the union and U.S. Airways. The airline did not pay plaintiff a success fee, which resulted in the plaintiff suing the union for breaching the “best efforts” clause.
Justice Friedman concluded that, “at least where a material question of fact exists as to whether best efforts have been made, a best efforts provision may be enforced in the absence of contractually articulated criteria” and denied the union’s summary judgment motion after finding that such factual disputes existed.
Until New York’s conflicting “best efforts” jurisprudence is reconciled, parties who wish to put “best efforts” clauses in their commercial agreements would be well advised to include objective criteria for measuring the success of such efforts.
On October 29, 2013, Justice Kornreich of the New York County Commercial Division issued a decision in Saska v. Metropolitan Museum of Art, 2013 NY Slip Op. 23366, addressing, among other things, the law of third-party beneficiaries as applied to the Metropolitan Museum of Art’s “pay what you wish” admissions policy.
[A] third-party beneficiary has no greater rights or remedies than the direct parties to a contract. . . . Assuming, arguendo, that plaintiffs are intended beneficiaries of the Lease, they still cannot compel specific performance that differs from the remedy provided for in the Lease. Third-party beneficiaries do not have contractual rights that go beyond or contravene the explicit terms of the contract. To wit, if the City were before this court, it would not get the injunctive relief requested by plaintiffs. Rather, service of a proper Notice to Cure and, if no cure takes place, eviction, is the remedy under the lease. Plaintiffs’ rights as alleged third part beneficiaries are no greater than those of the City.
Further, on this record, there is little . . . doubt that the City has no desire to evict the Museum for the conduct alleged in this action. Plaintiffs should not be permitted to disregard the contracting party’s decision as to the benefits it seeks to gain from its contract and the enforcement benefits it negotiated to achieve those benefits. In other words, plaintiffs cannot force the Museum to abide by the terms of the Lease in a manner that contravenes the express wishes of its landlord.
On October 21, 2013, Justice Bransten of the New York County Commercial Division issued a decision in Gama Aviation Inc. v. Sandton Capital Partners, LP, 2013 NY Slip Op. 32648(U), showing the importance of dilligently identifying and raising discovery disputes.
Although CPLR 3122 does not impose a time limit upon a party seeking discovery to bring a motion to compel production, if a party fails to make a motion to compel within a reasonable time, she may forfeit the right to obtain the items sought. New York courts have consistently held that motions to compel that are filed late in a case, and long after the initial requests were made, are inappropriate and inexcusable, and should be denied without further consideration.
Here, having waited over two years from the issuance of their subpoenas to move to compel KEF to produce documents, and nearly a year after KEF provided documents seeking to cure the deficiencies alleged in plaintiffs’ January 2012 letter, plaintiffs cannot reasonably claim that their delay was excusable, particularly as KEF is not even a party to this litigation. Plaintiffs have had ample opportunity to take discovery from KEF, and as such, the motion to compel is denied.
(Citations and internal quotations omitted) (emphasis added).
The lesson here is plain. At the same time, the solution is not always simple. It can take time to identify the gaps in a document production and to make the record necessary to establish that the documents sought are relevant and that they exist but were not produced. And, of course, courts are justifiably impatient with litigants who do not try to resolve discovery disputes between themselves before raising them with the court. Still, as Gama Aviation illustrates, if you wait until the end of discovery to tee up your discovery disputes, you may have waited too long.
On October 23, 2013, Justice Ramos of the New York County Commercial Division issued a decision in Schoonover v. Massachusetts Mut. Life. Ins. Co., 2013 NY Slip Op. 32682(U), reminding insurance companies that they ignore the notice requirements of the Insurance Law at their peril.
[F]orfeiture of life insurance coverage for nonpayment of premiums is not favored in the law, and will not be enforced absent a clear intention to claim that right. . . . In the same vein, an insurer may not depend upon a default to which its own wrongful act or negligence contributed, and but for which a lapse might not have occurred.
Here, the Certificate and the Policy entitle the Insured to a billing notice after he retired from Skadden, and conditions cancellation of the Policy upon the giving of that notice to him, in addition to a pre-lapse or default notice to the owners of the Certificate, the plaintiffs.
On October 30, 2013, the Second Department issued a decision in Varveris v. Zacharakos, 2013 N.Y. Slip Op. 07028, examining when a corporate officer/director owes a fiduciary duty to the corporation’s shareholders.
Contrary to the plaintiff’s contention, [defendant]’s status as an officer, director, or shareholder of a close corporation does not, by itself, create a fiduciary relationship as to his individual purchase of another shareholder’s stock.
(Emphasis added) (citations and internal quotations omitted).
Varveris illustrates the importance of context in determining whether someone is a fiduciary.

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