Source: https://www.schlamstone.com/commercial/page/185/
Timestamp: 2019-04-18 16:37:31+00:00

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On May 16, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in DSW Lenox, LLC v. Rosetree on Lenox Ave., LLC, 2014 NY Slip Op. 31311(U), dismissing a derivative action against a condominium’s board of directors.
The court’s opinion in DSW Lenox addresses several distinct legal questions. This post focuses on the board’s refusal to commence litigation as an alleged breach of fiduciary duty.
In DSW Lenox, the plaintiff—the owner of a condominium unit—brought a derivative claim against the board members of the condominium, alleging that, by refusing to sue the condominium’s sponsor and developers for construction defects, the board members had breached their fiduciary duties.
The court also rejected the argument that the board members had improperly relied on the advice of attorneys who had conflicted interests—to allege breach of fiduciary duty, the plaintiff was obliged to show that the board members themselves had conflicting interests or would profit personally from the decision, or that their reliance on the legal advice was “unreasonable,” and the plaintiff failed to meet that burden.
In light of the fact that a derivative action is intended to vindicate the rights of the shareholders from an overreaching board, a vote by the shareholders—here, the unit owners—authorizing the board’s decision logically precludes a derivative action.
On May 22, 2014, the First Department issued a decision in Theatre District Realty Corp. v. Appleby, 2014 NY Slip Op. 03749, holding that a realty company’s sale of its office building was not in the due course because the company was not in the business of selling property.
BCL § 909(a) governs the disposition of all or substantially all of a corporation’s assets, if not made in the usual or regular course of the business actually conducted by such corporation. Since plaintiff has never been engaged in the business of selling real estate, the sale of its building would not be made in the regular course of the business it actually conducts.
On May 16, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Antares Real Estate Services III, LLC v. 100 WP Property–DOF II, LLC, 2014 NY Slip Op. 31312(U), dismissing claims regarding alleged pre-contract promises based on a contract’s merger clause.
Moreover, [the plaintiff’s] fraud claims are little more than an attempt to enforce the alleged oral agreements preceding the PMLA. The express terms of the PMLA do not guarantee [the plaintiff] a promote, prohibit not-for-cause termination, or guarantee the use of office space even if [the plaintiff] is terminated (terms allegedly promised orally). [The plaintiff’s] attempt to enforce its prior contract or collateral agreement is barred by the merger clause that states “this Agreement continues the entire agreement between” the parties – this attempt cannot succeed when repackaged as a fraud claim. It is well settled that where a contract contains a merger clause, a court is obliged to require full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to vary or contradict the terms of the writing. If [the plaintiff] has a fraud claim in this case, merger clauses would be meaningless because every merger clause could be vitiated by a claim that, as [the plaintiff] alleges here, a prior oral agreement was in place that contradicts the terms of the written contract.
It should be noted that [the plaintiff] conflates the concept of merger clauses and warranty waivers. It is well settled that broad waivers generally disclaiming reliance on all of the parties pre-contract representations do not immunize specific instances of fraud. Only specific, itemized waivers disclaiming reliance on particular representations are valid. But waivers of representations are not the same – either conceptually or under the law – as written statements declaring that the written contract is the only enforceable agreement between the parties. Warranty waivers concern facts relied upon when entering into a contract; a merger clause disclaims the existence of other agreements. The rule requiring specificity of warranty waivers does not logically apply to merger clauses since a defendant has no way of knowing what purported oral agreement a plaintiff will allege existed of in subsequent litigation. If a specificity rule applied to merger clauses, merger clauses would be worthless.
Merger clauses are an essential tool for procuring certainty in complex commercial transactions. They prevent parties from being blindsided in litigation by attempts to change the terms of the deal with fraud claims or the pleading of collateral agreements. Allowing claims based on collateral agreements or fraud notwithstanding a merger clause compromises the integrity of commercial dealings and foments intolerable uncertainty into New York’s economy.
Merger clauses are ubiquitous in complex commercial transactions. As this decision shows, they may be boilerplate, but they nonetheless play an important role in creating certainty in a transaction.
On May 13, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in U.S. Corrugated, Inc. v. Scott, 2014 NY Slip Op. 31287(U), refusing to dismiss an action for lack of jurisdiction where the defendant agreed to the non-exclusive jurisdiction of the New York courts.
Guarantor hereby irrevocably submits to the non-exclusive jurisdiction of the courts located in the State of New York . . . and hereby irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any such suit . . . and any claim that any such suit . . . has been brought in an inconvenient forum.
Once suit was brought, the defendant moved to dismiss for lack of personal jurisdiction, arguing that the forum selection clause was unenforceable because the clause was the only connection between the guaranty and New York. The defendant also argued that the fact that the clause provided only “non-exclusive jurisdiction” meant that the court could rule that Ohio—where the contract was to be performed—was the more appropriate forum.
The court rejected the defendant’s arguments and denied the motion, explaining: In New York, a forum selection clause generally operates “as a waiver by the parties based on personal jurisdiction, improper venue, or forum non conveniens.” Forum selection clauses can only be set aside if “a party demonstrates that the enforcement of such would be unreasonable or unjust or that the clause is invalid because of fraud or overreaching, such that a trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court.” (Emphasis added).
The court distinguished the present case from cases where it was held that, although a forum selection clause was valid, under the doctrine of forum non conveniens the case should be litigated elsewhere, because the defense of forum non conveniens was explicitly waived by the Guaranty. The court also held that the fact that the clause provided for non-exclusive jurisdiction was irrelevant.
On May 22, 2014, the First Department issued a decision in Lerner v. Prince, 2014 NY Slip Op. 03763, holding in a derivative action, the law of the state of organization, not the forum state, determines whether the plaintiff is entitled to discovery on the basis for the refusal of its demand.
Because New York is the forum state, New York’s choice-of-law principles determine whether a particular issue — in this case, the availability of discovery — is substantive or procedural. Under New York choice-of-law rules, matters of procedure are governed by the law of the forum. On the other hand, New York choice-of-law rules provide that substantive issues such as issues of corporate governance, including the threshold demand issue, are governed by the law of the state in which the corporation is chartered — here, Delaware.
We find that plaintiff’s right to discovery in this demand-refused case is a substantive question, rather than a procedural one, and therefore is governed by Delaware law. Although New York courts have applied the law of the forum when deciding matters, such as discovery, affecting the conduct of the litigation, that this case is a purported derivative action places it into a different context. The demand requirement is based on the bedrock principle of Delaware law that a corporation’s directors, and not its shareholders, manage the corporation’s business. Thus, the Delaware law on discovery is an integral part of the legal framework governing derivative proceedings; indeed, it is inextricably intertwined with the decision to act or decline to act on a shareholder demand. Were Delaware law to permit discovery in a demand-refused derivative action, it would essentially obviate the directors’ authority to decide, under the business judgment rule, whether litigation was in the corporation’s best interests — the very reason underlying the demand requirement. The decision whether to permit discovery once directors have refused a demand is therefore a substantive question, going directly to the basis of the purported derivative suit.
Under Delaware law, plaintiffs in a derivative suit are not entitled to discovery to assist their compliance with the particularized pleading requirement of Delaware Chancery Court Rule 23.1 in a case of demand refusal.
We also note that, even assuming for the sake of argument that New York law applies, plaintiff would not be entitled to discovery in this demand-refused case. Courts applying New York law in demand-refused cases presume that a board of directors’ decision was the exercise of valid business judgment. Therefore, where, as here, a complaint fails to set forth allegations overcoming the presumption that the board’s decision resulted from that valid judgment, courts will properly deny a plaintiff’s discovery request. Indeed, the purpose of discovery is to find out additional facts about a well-pleaded claim, not to find out whether such a claim exists.
This decision illustrates the additional level of complexity to which litigators must be sensitive in derivative actions.
In this appeal, we must determine whether plaintiff broker has alleged facts sufficient to establish its entitlement to a commission on the sale of real estate, where it expended significant effort locating an apartment for buyers who abandoned the transaction and purchased another apartment in the same building 18 months later. In addition, we take this opportunity to clarify the standard by which a broker may be found to have been the “procuring cause” of a real estate transaction.
In the absence of an agreement to the contrary, a real estate broker will be deemed to have earned his commission when he or she; produces a buyer who is ready, willing and able to purchase at the terms set by the seller. A broker does not earn a commission merely by calling the property to the attention of the buyer. But this does not mean that the broker must have been the dominant force in the conduct of the ensuing negotiations or in the completion of the sale. Rather, the broker must be the procuring cause of the transaction, meaning that there must be a direct and proximate link, as distinguished from one that is indirect and remote, between the introduction by the broker and the consummation of the transaction.
The Departments of the Appellate Division, this Court being no exception, have applied varying language in elaborating on that standard. For example, the three other Departments have stated that if a broker does not participate in the negotiations, he must at least show that he created an amicable atmosphere in which negotiations went forward or that he generated a chain of circumstances which proximately led to the sale.
Although this Department has cited, and even quoted from, cases that have used the phrase “amicable atmosphere,” we have not gone so far as to adopt that specific standard. However, this Court has suggested that a broker can be the procuring cause if he or she brought the parties together in an amicable frame of mind, with an attitude toward each other and toward the transaction in hand which permits their working out the terms of their agreement. The use of th[is] language . . . appears to be an aberration in this Department, though, because we have more frequently and recently applied the “direct and proximate link” test.
The Court of Appeals has not sanctioned the “amicable atmosphere” or “amicable frame of mind” language. It has, however, affirmed without opinion a finding that a broker was the procuring cause where it generated a chain of circumstances which proximately led to a lease transaction. In any event, the Court has stated that however variable the judicial terminology employed to express the requirement that the broker must be the procuring cause, it has long been recognized that there must be a direct and proximate link, as distinguished from one that is indirect and remote, between the bare introduction and the consummation.
We regard the “amicable atmosphere” and “amicable frame of mind” standards as somewhat broader and more amorphous than the requirement of a “direct and proximate link,” or even a requirement that the broker “generated a chain of circumstances which proximately led” to a transaction’s consummation. Although courts have attempted to harmonize the continued use of the “amicable” phrases discussed above with Court of Appeals precedent articulating the “direct and proximate link” standard, the former phrases are not precise enough terms by which to determine whether a broker is the procuring cause of a transaction. Reliance on the creation of an “amicable atmosphere in which negotiations went forward” seems to ignore the proximity element of the “direct and proximate link” test. Furthermore, we think that this continued deviation from the standard set forth by the Court of Appeals . . . has led to some confusion. Yet litigants, and the bar, deserve a greater level of certainty.
Therefore, in order to reduce the confusion that has arisen from the more nebulous terminology heretofore employed by the Departments of the Appellate Division, we reiterate that the “direct and proximate link” standard . . . governs determinations of circumstances under which a broker constitutes a procuring cause within the First Department. This standard requires something beyond a broker’s mere creation of an “amicable atmosphere” or an “amicable frame of mind” that might have led to the ultimate transaction. At the same time, a broker need not negotiate the transaction’s final terms or be present at the closing.
(Internal quotations and citations omitted) (emphasis added). The First Department went on to agree with the trial court that the plaintiff had adequately met the “direct and proximate link” standard.
This decision provides useful clarity–although no bright-line rule–on what a broker must do to be entitled to a commission.
On May 8, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Aptuit, LLC v. Columbia Casualty Co., 2014 NY Slip Op. 31250(U), holding that the criminal acts exclusion to a pharmaceutical company’s professional liability policy applied to claims arising from criminal acts of an employee of the company, rejecting the insured’s arguments that the exclusion did not apply because the employee acted outside the scope of his authority and the company was unaware of his misconduct.
Coverage does not apply to any professional liability based on or arising out of a dishonest, fraudulent, criminal or malicious act by any Insured. The Company shall provide the Insured with a defense of such claim unless or until the dishonest, fraudulent, criminal or malicious act has been determined by any trial verdict, court ruling, regulatory ruling or legal admission, whether appealed or not. Such defense will not waive any of its rights under this Policy.
[T]his Court fails to find in the definitions of “Insured” and “Professional Services,” or within any other provision in the Policy, language specifying or inferring that criminal conduct does not constitute professional services or/and is outside the scope of employment. . . .
[I]f Aptuit’s contention is true then any criminal conduct committed by an “insured” would never be deemed a “professional service.” Such an interpretation would forego the need for the Criminal Acts Exclusion since hypothetically all criminal conduct could be deemed out of the realm of “professional services” and scope of employment. This is an unreasonable interpretation and likely not to be the intention of the parties at the time of contracting.
The court likewise rejected Aptuit’s argument that “the parties did not intend the scope of the Criminal Acts Exclusion to exclude coverage for the criminal acts of [an employee] without the actual knowledge of the criminal acts by Aptuit.” Again, the policy contained no language so limiting the exclusion, and the court declined to “infer ambiguity from such silence.” Justice Ramos did find a question of fact as to whether certain customer claims fell outside the exclusion because they “resulted from factual errors rather than exclusively [from the employee’s] fraudulent conduct.” He therefore denied the insurer’s motion for summary judgment and ordered a deposition on the factual issues.
This decision illustrates that the axiom that exclusionary clauses in insurance policies are narrowly construed in favor of coverage has its limits. To escape the exclusion, there must be a reasonable interpretation, grounded in the language of the policy, under which coverage is allowed.
On May 13, 2014, the First Department issued a decision in Shugrue v. Stahl, 2014 NY Slip Op. 03460, holding that a fraudulent inducement claim was not duplicative of a breach of contract claim.
Plaintiffs’ fraudulent inducement claim was not duplicative of their claim for breach of contract, since it was based on misrepresentations of then present facts that were collateral to the contract, and involved a breach of duty distinct from, or in addition to, the breach of contract. Indeed, the complaint alleged that . . . the chief executive officer and sole shareholder of the corporate defendants, misrepresented to plaintiffs that defendants had obtained all of the required permits and approvals and had completed the construction plans for their home renovation project, which induced plaintiffs to enter into the construction contract with defendants in October 2012.
This decision gives a roadmap to pleading a fraudulent inducement claim that can be made in tandem with a breach of contract claim and survive a motion to dismiss.
On May 13, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Board of Managers of the Chocolate Factory Condominium v. Chocolate Partners, LLC, 2014 NY Slip Op. 50754(U), refusing to dismiss a breach of contract claim because the best efforts clause upon which it relied did not contain guidelines for those efforts.
Defendants, in seeking dismissal of the Board’s first cause of action for Breach of Contract, point to the fact that the contractual provision in the Offering Plan upon which it is predicated requires that the Sponsor use its “best efforts” to obtain the J-51 benefits. They rely upon Strauss Paper Co. v RSA Exec. Search (260 AD2d 570, 571 [2d Dept 1999]), in which the Appellate Division, Second Department, held that where a clause in an agreement expressly provides that a party must use its best efforts, it is essential that the agreement also contain clear guidelines against which to measure such efforts in order for such clause to be enforced. Defendants argue that the Offering Plan does not contain any such guidelines against which to measure whether it used “best efforts” to obtain the J-51 tax benefits, and that this clause is, therefore, unenforceable.
Defendants’ argument, however, must be rejected. Initially, it is noted that, as recently observed in Cruz v FXDirectDealer, LLC (720 F3d 115, 124 [2d Cir 2013]), the New York Court of Appeals has not endorsed the requirement that the contract must contain clear guidelines before a best efforts clause can be enforced. Rather, numerous courts, including the New York Court of Appeals and the Second Department, have applied an express best efforts provision without articulated objective criteria. Noting that the cited cases appeared to conflict with the holding in Strauss Paper Co. (260 AD2d at 571) and other cases regarding the requirement for clear guidelines, Judge Battaglia observed that the cases can be reconciled by recognizing that there is no a priori rule precluding enforcement of a best efforts obligation even in the absence of articulated criteria, and that the obligation will be enforced where sufficient content may otherwise be read into it against which the promisor’s performance may be measured. This court concurs that the law does not require that best efforts criteria be defined by the contract. If external standards or circumstances impart a reasonable degree of certainty to the meaning of the phrase best efforts, the clause can be enforced.
While defendants rely upon language in the recent case of DirecTV Latin Am., LLC v RCTV Intl. Corp., 38 Misc 3d 1212[A] [Sup Ct, NY County 2013], affd 115 AD3d 539 [1st Dept 2014]) that for a promise to exert best efforts to be enforceable, there must be clear guidelines against which such efforts can be evaluated, such reliance is misplaced as the issue there was not best efforts, per se, but whether an enforceable agreement had been reached. Indeed, in affirming the dismissal of counterclaims in that case, the Appellate Division, First Department, found that the memorandum at issue lacked the definiteness as to material terms required in order to be a legally enforceable contract.
Under New York law, a best efforts clause imposes an obligation to act with good faith in light of one’s own capabilities, and apply such efforts as are reasonable in the light of that party’s ability and the means at its disposal and of the other party’s justifiable expectations. Best efforts can only be defined contextually. Thus, the court finds that a best efforts provision may be enforced even in the absence of contractually articulated criteria where the contractual language and the circumstances permit an inference as to the applicable criteria for performance.
This decision illustrates the fine line transactional counsel must walk. A too-well-defined best efforts clause defeats the purpose by limiting the scope of those efforts to specific items listed in the contract, eliminating flexibility; a too-broad definition will not be enforced.

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