Source: https://www.schlamstone.com/commercial/page/186/
Timestamp: 2019-04-18 17:10:44+00:00

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On May 13, 2014, the First Department issued a decision in Forty Central Park South, Inc. v. Anza, 2014 NY Slip Op. 03453, holding that disclaimers in performance reports that induced the plaintiffs to make further investments did not immunize the defendant from a fraud claim.
Plaintiffs allege that in the monthly reports, generated after the Operating Agreement was entered into, defendant misrepresented that the business venture had been profitable and that plaintiffs had been earning positive returns on their investment; that defendant in fact did not invest the funds as promised; and that they relied on the monthly reports in continuing their investment in the company. These allegations state a cause of action for fraud. The disclaimers set forth in each monthly report do not preclude a finding of justifiable reliance since the alleged misrepresentations in the reports concerned facts peculiarly within defendant’s knowledge.
On April 2, 2014, Justice Emerson of the Suffolk County Commercial Division issued a decision in Motherway v. Cartisano, 2014 NY Slip Op. 31215(U), holding that a prevailing plaintiff in a derivative action is not entitled to indemnification from the losing party under BCL § 626(e).
The general rule regarding attorney’s fees under New York law is that the prevailing party may not collect them from the loser unless such an award is authorized by an agreement between the parties or by a statute or court rule.
If the action on behalf of the corporation was successful, in whole or in part, or if anything was received by the plaintiff or plaintiffs or a claimant or claimants as the result of a judgment, compromise or settlement of an action or claim, the court may award the plaintiff or plaintiffs, claimant or claimants, reasonable expenses, including reasonable attorney’s fees, and shall direct him or them to account to the corporation for the remainder of the proceeds so received by him or them. This paragraph shall not apply to any judgment rendered for the benefit of injured shareholders only and limited to a recovery of the loss or damage sustained by them.
Although Business Corporation Law § 626(e) provides that a successful plaintiff in a shareholder derivative action may recoup legal expenses and attorney’s fees from the proceeds of any judgment, compromise, or settlement in favor of the corporation, it does not authorize the imposition of such expenses on the losing party. The basis for an award of attorney’s fees in a shareholder derivative suit is to reimburse the plaintiff for expenses incurred on behalf of the corporation. Those costs should be paid by the corporation, which has benefitted from the plaintiff’s efforts and which would have borne the costs had it sued in its own right. Thus, an award of legal expenses and attorney’s fees to the innocent shareholder who brought the action is payable out of the award to the corporation.
On May 14, 2014, Justice DeStefano of the Nassau County Commercial Division issued a decision in Schlossberg v. Schwartz, 2014 NY Slip Op. 50760(U), ruling that a corporation’s by-laws and New York’s Business Corporations Law (“BCL”) entitled the plaintiff in a shareholder derivative action to advancement of attorneys’ fees and costs incurred in defending counterclaims asserted against him. Schlossberg provides a careful reading of the relevant provisions of the BCL concerning indemnification and advancement of attorneys’ fees for corporate officers and directors.
In Schlossberg, the plaintiff, a shareholder, director and former officer of the defendant corporation, filed derivative claims on behalf of the company. In the answer, the company asserted counterclaims against the plaintiff, seeking damages for misappropriation of confidential information, unfair competition, unjust enrichment, conversion, breach of fiduciary duty, breach of the duty of loyalty, violation of BCL § 720 and corporate waste. Claiming that he was entitled to mandatory indemnification under the company’s by-laws, the plaintiff filed a motion, pursuant to the BCL and the company’s by-laws, seeking permissive advancement of his defense fees and expenses, during the pendency of the lawsuit.
Where a corporation is obligated to indemnify an officer or director but not to advance his litigation expenses, the BCL, although not New York’s LLC law, generally permits a court to exercise its discretion and order advancement of “reasonable expenses, including attorneys’ fees . . . necessary in connection with [the] defense,” BCL § 724(c), subject to the caveat that the officer or director may not retain the advanced funds if a judgment or other final adjudication establishes that his acts were committed in bad faith or were the result of deliberate dishonesty. BCL § 725. In Schlossberg, the company raised two defenses to the motion for advancement: (1) that the indemnification provisions of the by-laws apply but only to third-party claims; and (2) that the indemnification provision did not apply to the counterclaims because they were unrelated to the plaintiff’s “mere status as director or officer.” Justice DeStefano rejected these arguments and directed the Company to advance $54,477.72 for fees and expenses incurred to date, referring disputes concerning future advancement requests to a special referee.
A corporation may indemnify any person made . . . a party to an action or proceeding (other than one by or in the right of the corporation to procure a judgment in its favor), whether civil or criminal, including an action by or in the right of any other corporation of any type or kind . . . . by reason of the fact that he was a director or officer of the corporation.
BCL § 722(a) (emphasis added).
BCL § 722(c) (emphasis added).
The Corporation shall indemnify any person made, or threatened to be made, a party to any action, suit or proceeding by reason of the fact that he . . . is or was a director or officer of the Corporation, . . . against all judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys’ fees, actually and necessarily incurred by him in connection with the defense of such action, . . . to the fullest extent and in the manner set.
The company argued that Section 8.1 of the by-laws only provided indemnification for third-party claims—not claims asserted by the company itself. It compared the language of the by-laws to BCL § 722(c), noting that, unlike the statute, the by-laws did not refer to claims “by or in the right of the corporation.” It therefore asked the court to infer that the provision was enacted pursuant to BCL § 722(a), which is limited to third-party claims (i.e., an action “other than one by or in the right of the corporation”). Justice DeStefano disagreed, concluding that the by-law’s provision mirrors the language of BCL § 722(a), but omits the parenthetical phrase “other than one by or in the right of the corporation”), leading to the conclusion that it covers both third-party claims and claims by the corporation.
Recent Appellate Division decisions outside the context of director and officer liability, have construed indemnification provisions in commercial contracts narrowly to exclude the award of fees arising from disputes between the parties to the contract, as opposed to third-party claims. See, e.g., Gotham Partners, L.P. v. High River Ltd., 76 A.D.3d 203, 206 (1st Dep’t 2010) (“for an indemnification clause to cover claims between the contracting parties rather than third party claims, its language must unequivocally reflect that intent”). Although the decision does not expressly address that line of cases, Justice DeStefano effectively distinguished such precedent through his reading of the BCL.
With respect to the company’s argument that indemnification was not permitted because the counterclaims did not arise “by reason of the fact” that the plaintiff was a director of the company, the Court noted that there was little case law on the meaning of that phrase, but the Delaware Courts had adopted “a broad interpretation . . ., which would include a wide array of claims that might be asserted against a director or officer.” Under this interpretation, “if there is a nexus or causal connection between any of the underlying proceedings . . . and one’s official corporate capacity, those proceedings are ‘by reason of the fact’ that one was an officer or director.” In a leading case (in which Schlam Stone & Dolan represented certain parties), Ficus Invs., Inc. v. Private Capital Mgt., 61 A.D.3d 1 (1st Dep’t 2009), the First Department, applying Delaware law, noted the public policy advanced by such a broad interpretation—i.e., “to help attract capable individuals into corporate service by easing the burden of litigation related expenses.” In light of those principles, Justice DeStefano concluded that “as pleaded,” the counterclaims against [the plaintiff] appear to be indemnifiable, and he was therefore entitled to indemnification during the pendency of the action. It is also notable that Justice DeStefano permitted advances here even though they came up in the context of defending a counterclaim as opposed to an action brought by the corporation against the officer or director in the first instance. This is also consistent with Delaware case law.
This decision reflects a continuing trend of the New York Courts following the approach of the Delaware courts in construing the BCL and corporate by-laws broadly to provide officers and directors with indemnification and advancements of defense costs, even though New York law generally construes indemnification provisions narrowly in other commercial contexts.
Docket No. 121: Norex Petroleum Limited v. Blavatnik (addressing whether “CPLR 202, New York’s borrowing statute, which requires a nonresident plaintiff to satisfy the statute of limitations of New York and of the foreign jurisdiction where the claims accrued” trumps 28 USC § 1367(d) and CPLR 205(a), which toll the statute of limitations to allow plaintiffs to re-file dismissed federal suits in state court, in situations where the foreign jurisdiction has no analogous tolling statute). See the transcript and the video.
Docket No. 109: Morpheus Capital Advisors LLC v. UBS AG (considering the effect of an exclusive agency agreement where the buyer was procured by the seller, not a third-party). See the transcript and the video.
Docket No. 112: Quadrant Structured Products Co., Ltd. v. Vertin (addressing the following question certified from the Delaware Supreme Court: whether, under New York law, the absence of any reference in the no-action clause to the Securities precludes enforcement only of contractual claims arising under the Indenture, or whether the clause also precludes enforcement of all common law and statutory claims that security holders as a group may have). See the transcript and the video.
Docket No. 110: KeySpan Gas East Corporation v. Munich Reinsurance America, Inc. (considering whether insurers have a common law duty to make a coverage determination as soon as reasonably possible or forfeit their right to deny coverage). The transcript and video are not available due to technical difficulties.
Justice Sherwood of the New York County Commercial Division recently updated his Individual Practices.
On May 13, 2014, Justice Connolly of the Albany County Supreme Court issued a decision in Airbnb, Inc. v. Schneiderman, Index No. 5393-13, quashing a much-publicized subpoena by the State Attorney General’s Office on Airbnb, Inc. seeking information on its clients that rent apartments in New York state.
Justice Connolly rejected most of the arguments advanced by Airbnb, including that the subpoena was an “unfounded fishing expedition,” that the subpoena was being used to enforce “unconstitutionally vague” laws, that the subpoena was “burdensome,” and that the subpoena impermissibly sought “confidential, private information from” Airbnb’s users. Further, to the extent the subpoena related to Airbnb clients that rented apartments in New York City, the court found the subpoena appropriate. However, because, the subpoena was not limited to Airbnb hosts whose activities would be covered by the Multiple Dwelling Law or the New York City Hotel Occupancy Tax (potential violations of which the Attorney General was investigating), it was quashed as overbroad.
This decision–which is reported as an Airbnb victory in some press reports–stands more properly as an example of the large permissible breadth of Attorney General investigative subpoenas in the commercial context. Ultimately, all the court asked of the Attorney General was to limit the subpoena to exclude information about hosts that could not possibly have been breaking the laws at issue.
On May 1, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in New Hampshire Insurance Co. v. Fresh Direct Holdings, Inc., 2014 NY Slip Op. 31192(U), allowing a policyholder to amend its complaint to add a claim for “Negligence/Insurer’s Errors and Omissions” against an insurer that allegedly failed to tell the policyholder about a regulatory decision that would cause its premium to go up before the policyholder renewed the policy.
were issued upon a quoted estimated premium, with the final premium to be determined after the policy period, upon completion of an audit to determine if the assumptions upon which the estimated premium was based were borne out. Among the things that might vary from the assumptions on which the estimated premium was based, were the proper job codes assigned to [the defendant’s] workers. In 2002, the New York Compensation Insurance Rating Board (CIRB) assigned a particular job code to a certain class of [the defendant’s] employees.
The defendant gave this information to the plaintiff, which was told by the CIRB to change coverage accordingly–a change that would have increased the defendant’s premiums. The plaintiff did not change the coverage or inform the defendant of the increased premiums. Unaware of the CIRB-mandated coverage change, the defendant renewed its policies with the plaintiff. Only later did the plaintiff tell the defendant that it owed additional premiums because of the coverage change.
A tort obligation is a duty imposed by law to avoid causing injury to others. It is apart from and independent of promises made and therefore apart from the manifested intention of the parties to a contract. Thus, defendant may be liable in tort when it has breached a duty of reasonable care distinct from its contractual obligations, or when it has engaged in tortious conduct separate and apart from its failure to fulfill its contractual obligations. The very nature of a contractual obligation, and the public interest in seeing it performed with reasonable care, may give rise to a duty of reasonable care in performance of the contract obligations, and the breach of that independent duty will give rise to a tort claim.
A legal duty independent of contractual obligations may be imposed by law as an incident to the parties’ relationship. Where a party is essentially seeking enforcement of the bargain, the action should proceed under a contract theory.
compensation claims. Rather, it is seeking to avoid having to pay an increased premium for such insurance due to the alleged negligence of Chartis in failing to comply with specific directives of the CIRB, and the CIRB Manual in general, to timely issue an endorsement to the policies to change the job code for Fresh Direct’s employees. That this was also an alleged breach of provisions of the policies does not necessarily render the claim nonactionable under a negligence theory. Accordingly, since the counterclaim is not palpably insufficient and there is no claim of prejudice or surprise to Chartis, the motion is granted.
This decision shows that hidden in a contract-based claim can be claims based on tort.
On April 11, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in Maina v. Rapid Funding NYC, 2014 NY Slip Op. 30952(U), refusing to award damages provided by contract on the ground that they were penalties.
Defendants have established a prima facie case for summary judgment, at least as to liability. . . . As to damages, [the defendant] does not adequately explain its entitlement to the purported origination fees that it claims are customary in the industry. These fees are not reflected in the loan agreements, although checks in amounts claimed as origination fees are endorsed on the back by plaintiff as approved. Further, [the defendant] has not shown that the pre-payment fees charged on loans it refinanced are anything other than a penalty. New York condemns the contractural imposition of a penalty. Summary judgement will be granted as to liability.
Regarding defendant[‘s] claim for an award of attorneys’ fees, the Note provides that [the defendant] is entitled to recover attorney fees and expenses in connection with enforcement of any of its remedies equal to 20% of the outstanding principal and interest then due. [The defendant] is entitled to recover attorney fees of 20% only if it demonstrates that the quality and quantity of the legal services rendered were such to warrant, on a quantum meruit basis, that full percentage. Because [the defendant] has offered no evidence to support the reasonableness of the attorneys’ fees it seeks, this aspect of the motion must be denied. Moreover, where contractural attorneys’ fees are in the nature of a penalty, they should be disallowed. In this case, [the defendant] has imposed multiple contractural penalties on plaintiff. They include large origination fees, late payment penalties, and pre-payment penalties on loans refinanced by [the defendant]. Arbitrary imposition of a 20% attorney fee charge without any need to show that such fees are reasonable, is yet another penalty.
It is understandable that transactional counsel want to provide a contractual mechanism for ensuring that all of the damages flowing from a breach of contract are recovered by the non-breaching party. However, if that mechanism crosses the line to becoming a penalty, it will not be enforced at all, making it important that contract terms stay on the right side of the line.
Transcripts and audio/video recordings of arguments in the Court of Appeals for the week of April 28, 2014, are now available on the Court of Appeals website.
Docket No. 96: IDT Corp. v. Tyco Group, S.A.R.L. (addressing the duration of a party’s obligation to negotiate final terms of an agreement when they have contractually obligated themselves to negotiate such terms). See the transcript and listen to the recording of oral the argument.

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