Motion for Stay in Favor of Arbitration Denied When Complete Identity of Parties Lacking

On July 10, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Interventure 77 Hudson LLC v. Falcon Real Estate Investment Co., LP, 2014 NY Slip Op. 31878(U), denying motions to compel arbitration.

In Interventure 77 Hudson LLC, three defendants moved for a stay in favor of arbitration “on the grounds that there is a parallel proceeding filed in arbitration and the claims in the arbitration proceeding factually overlap the claims brought in this action.” The court denied all three motions. The court began by explaining the standard:

The court may grant a stay under CPLR 2201 in a proper case. When the decision in one action will determine all the questions in the other action, and the judgment in one trial will dispose of the controversy in both actions, a case for a stay is presented. Where a party seeks the stay of an action pending the outcome of another action, complete identity of parties, causes of action and judgment sought are required. Although these elements are not specifically set forth in CPLR 2201, they are generally adhered to.

(Internal quotations and citations omitted) (emphasis added). The court went on to deny all three motions, finding in each case that there was “not complete identity of the parties between the current action and the arbitration.”

When no Present Claim and a Subsequent Dispute Would be New and Distinct, Party not Necessary Under CPLR 1001

On July 15, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in 37 E. 50th St. Corp. v. Restaurant Group Management Services, L.L.C., 2014 NY Slip Op. 31876(U), granting a defendant’s motion to dismiss on the grounds that it was not a necessary party under CPLR 1001(a).

In 37 E. 50th St. Corp. , the owner (37 East) and manager (RGMS) of a restaurant agreed that RGMS would negotiate a lease extension with the landlord (Eurofinch) on behalf of both entities, but the new lease “cut 37 East out as a tenant” and named an affiliate of RGMS as the new tenant. 37 East sued RGMS for breach of contract and fiduciary duties, seeking injunctive relief requiring RGMS to assign the lease to 37 East. Because Eurofinch would be required to give its consent (not to be unreasonably withheld) to the assignment, 37 East also named Eurofinch as a defendant, although no direct claim was asserted against Eurofinch.

Eurofinch moved to dismiss on that basis, and 37 East opposed on the grounds that the landlord was a necessary party in a litigation concerning the assignment of a lease.

The court rejected all of 37 East’s arguments and dismissed Eurofinch.

First, the court noted that, as a general principle of law, “in order for an entity to be a necessary party, it must be one against whom plaintiff can assert a right to relief.” And in this case, 37 East had no present right to relief against Eurofinch, which would only become implicated in the dispute if it unreasonably withheld its consent to an assignment between 37 East and RGMS. The court held that any assertion that Eurofinch would breach its contractual obligations was highly speculative, and also noted that an entity that is merely “required to provide some cooperative acts if a judgment is adverse to the defendants” is not by law a necessary party.

Second, the court held that the general rule that “third parties with an interest in the property underlying the litigation between plaintiff and defendant [are] necessary parties” was inapplicable:

The cases cited by 37 East are distinguishable from the present case because Eurofinch has no material interests in the merits of the litigation. Unlike the property owners whose interests might be adversely affected by the litigation or whose property might be encumbered with mortgage, Eurofinch’s property rights in the Premises will not be abrogated regardless of the outcome of the litigation between 37 East and RGMS. Eurofinch retains the right to reasonably reject a proposed assignment no matter which party wins the lawsuit.

And third, there was no risk of duplicative litigation because the merits of the present dispute—RGMS’s alleged misconduct in negotiating the new lease—were completely independent of the merits of any subsequent dispute with Eurofinch, which “would focus on the reasonableness of withholding the assignment.” Joining Eurofinch as this time would only “impede and delay” the resolution of the main action between 37 East and RGMS.

As well as presenting an exception to the widely-held rule that the landlord is always a necessary party in a lease assignment case, this decision also shows the limits of the necessary party rule: if there is no present claim for relief against a party and if the legal issues in a subsequent dispute involving would be new and distinct, the party is not necessary under CPLR 1001(a).

Analyses Performed by Litigation Counsel Not Work Product When Done to Meet Contractual Obligation

On July 16, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Home Equity Mortgage Trust Series 2006-1 v. DLJ Mortgage Capital, Inc., 2014 NY Slip Op. 31923(U), granting a motion to compel the production of analyses performed by litigation counsel.

In Home Equity Mortgage Trust Series 2006-1, the plaintiff moved to compel the production of loan repurchase analyses performed for the defendant by Orrick, Herrington & Sutcliffe LLP, which was hired by the defendant not just to perform the analyses but also to “advise [the defendant] of any legal liability that may result.” Notwithstanding that the analyses were performed by litigation counsel, the court granted the motion to compel, explaining:

In order for the attorney-client privilege to apply, the document must be primarily prepared in anticipation oflitigation. The attorney work product doctrine applies only to documents prepared by counsel acting as such, and to materials uniquely the product of a lawyer’s learning and professional skills, such as those reflecting an attorney’s legal research, analysis, conclusions, legal theory or strategy. Documents prepared in the ordinary course of business are not privileged and are, therefore, discoverable.

. . .

The First Department has made clear that repurchase analyses are not privileged when they are conducted pursuant to a contractual obligation[, holding] that documents and information concerning defendants’ repurchase review, generated in response to plaintiffs repurchase requests, are discoverable. The Appellate Division noted that processing repurchase requests was an inherent part of defendants’ business because defendants were, and always had been contractually obligated to conduct repurchase reviews.

. . . Although [the defendant] anticipated litigation and retained counsel to perform the repurchase analysis, [the defendant] was still contractually obligated to conduct repurchase reviews and such analysis would have been performed even had there been no threat of litigation. Immunity does not attach to Orrick’s repurchase analysis merely because it anticipated litigation. It attaches only to analyses that were created primarily, if not solely, in anticipation of litigation. Defendants try to distinguish the instant action from MBIA by arguing the [the defendant] does not have a long-standing business unit to deal with repurchase demands. [The defendant] notes that prior to 2008, members of their due-diligence staff would be pulled to deal with the few repurchase demands it received. In 2008, when [the defendant] received its first large-scale repurchase demand, [the defendant] retained Orrick as legal counsel and gave Orrick independent discre!ion about how to handle the repurchase demands. Defendants maintain this shows that responding to repurchase demands is not an inherent part of defendants’ business and as such are not performed in the ordinary course of business.

Although defendants may not have a dedicated business unit to deal with repurchase demands that does not mean that repurchase demands are not a long-standing business practice. In fact, defendants admit that members of their staff had performed repurchase analyses prior to 2008. Additionally, the fact that members of defendants’ due diligence department, who are not attorneys, were capable of performing repurchase analyses highlights that these analyses are not legal in nature. Such analyses do not become privileged merely because an investigation was conducted by an attorney.

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

This decision illustrated that just as not every communication by a lawyer is an attorney-client communication, not all work done by a lawyer is attorney work product.

Court Refuses to Order Production of ESI, Finding Previous Productions Sufficient

On July 17, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 2014 NY Slip Op. 31871(U), denying the plaintiff’s motion to compel production of electronically stored information (ESI) that it claimed the defendant had improperly withheld as “non-responsive.” The court concluded that “based on the ESI produced to date, the parties have received all of the documents necessary, and more, to litigate the merits of their claims and defenses at trial and to ensure that any jury verdict is based on a reliable factual record”:

MBIA (or any plaintiff in complex litigation) cannot reasonably expect to uncover every single instance in which a Credit Suisse employee said something that makes its RMBS conduct, at a minimum, a public relations disaster. Again, the very reason that MBIA knows that so much inflammatory ESI exists is precisely because it has so much already. To be sure, in reviewing Credit’s Suisse’s itemized justifications as to what constitutes relevant ESI, it appears that Credit Suisse may well have been somewhat overaggressive in determining the scope of relevance. That being said, the handful of examples proffered by MBIA, many of which are emails that post-date the transaction or speak to practices employed with other securitizations or other types of collateral, do not give rise to a reasonable inference that Credit Suisse’s determinations as to what constitute responsive ESI were made in bad faith. Nor has MBIA convinced the court that Credit Suisse is hiding something materially worse than has already been produced that might tip the scales of this case in MBIA’s favor. Indeed, while nontransaction specific inflammatory emails do not speak well of Credit Suisse, Credit Suisse’s conduct with respect to the subject transaction is all that is at issue. This case is more likely to (and should) turn on the law (e.g., due diligence issues) and expert evidence (e.g., the nonconformance rate) rather than how many inflammatory emails MBIA can read to a jury.

This decision illustrates that although the New York Court permit broad discovery, there are limits to the scope of ESI that a party will be required to produce.

Class Not Certified When Plaintiff’s Evidence of Class Size is Insufficient

On June 24, 2014, Justice Platkin of the Albany County Commercial Division issued an opinion in Picard v. Bigsbee Enterprises, Inc., 2014 NY Slip Op. 51113(U), denying a motion for class certification for failure to establish numerosity.

In Picard, the plaintiff brought a class action “premised on alleged violations of New York Labor Law § 196-d.” The court denied the plaintiff’s motion for class certification on the ground that the plaintiff had not established the numerosity element for certification as a class action, explaining:

The first prerequisite to certification is that the class be so numerous that joinder of all members is impracticable. In seeking to establish this essential element, plaintiff offers the following averment: “Based on the number of servers employed, I believe it is probable that over the last six years, defendants employed more than 100 servers.”

Defendants recognize that it generally is accepted that a putative class of forty members is sufficiently numerous for certification. However, defendants assert that plaintiff has failed to come forward with an adequate evidentiary basis upon which to find numerosity.

The Court concludes that plaintiff has not met his burden of establishing numerosity on the present record. Plaintiff fails to offer a sufficient foundation for his belief as to the number of servers employed by defendants at pertinent times. Indeed, plaintiff was not employed by defendants during the first four years of the proposed class period, and plaintiff’s affidavit does not demonstrate personal knowledge of that period. Further, the equivocal nature of plaintiff’s averment — a mere belief regarding probability — is problematic. And contrary to the contention of plaintiff’s counsel, it is not defendants’ burden to establish the absence of numerosity, even if the relevant data may be within their possession. In fact, plaintiff was given the opportunity to take limited discovery on issues pertaining to class certification, but did not pursue data concerning numerosity. Finally, plaintiff may not offer new evidence for the first time in reply to meet his initial burden.

Accordingly, while it may well be that the proposed class is sufficiently numerous that the joinder of all members is impracticable, this essential prerequisite to certification has not been established on the present record.

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

This decision illustrates the importance of going beyond mere allegations and gathering (and presenting) factual support for any claim or relief, such as class certification.

Commercial Division Rules Amended to Increase Monetary Thresholds and Encourage Early Exchange of Documents Facilitating Settlement

The Chief Administrative Judge has signed orders (1) raising most of the monetary thresholds for assignment of cases to the Commercial Division and (2) amending Rule 8 to provide for the voluntary exchange of documents that would facilitate early settlement.

The amended NYCRR § 202.70(a), which goes into effect on September 2, 2014, changes the monetary thresholds for assignment of cases to the Commercial Division. Here are the thresholds effective September 2, 2014:

County              Old Threshold      New Threshold
Albany County             $25,000            $50,000
Eighth Judicial District  $50,000           $100,000
Kings County              $75,000           $150,000
Nassau County            $100,000           $200,000
New York County          $500,000           $500,000 (no change)
Onondaga County           $25,000            $50,000
Queens County             $50,000           $100,000
Seventh Judicial District $50,000            $50,000 (no change)
Suffolk County            $50,000           $100,000
Westchester County       $100,000           $100,000 (no change)

The amended Commercial Division Rule 8(a), which goes into effect on September 2, 2014, provides for informal exchange of documents that would help aid early settlement. The text of the new Rule 8(a) provides:

(a) Counsel for all parties shall consult prior to a preliminary or compliance conference about (i) resolution of the case, in whole or in part; (ii) discovery and any other issues to be discussed at the conference, including the timing and scope of expert disclosure under Rule 13(c); (iii) the use of alternate dispute resolution to resolve all or some issues in the litigation; and (iv) any voluntary and informal exchange of information that the parties agree would help aid early settlement of the case. Counsel shall make a good faith effort to reach agreement on these matters in advance of the conference.

You can learn more about the background of this rule change by reading the request for comment that the Office of Court Administration posted earlier this year on the proposed rule.

Even Where CPLR 3211(a)(4) Does Not Require Dismissal, Cases Can be Consolidated

On July 10, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in 11 E. 68th St. LLC v. Madison 68 Realty LLC, 2014 NY Slip Op. 31872(U), analyzing the rules for dismissal or consolidation when there are two pending actions regarding similar subject matter.

In 11 E. 68th St. LLC, the defendant filed an action relating to a real estate deal done bad. The next day, the plaintiff filed a similar action. The defendant moved to dismiss the second-filed action pursuant to CPLR 3211(a)(4). The court ultimately decided to consolidate the actions, rather than dismiss the second-filed on, but in doing so, it explained a number of issues relevant to a motion to dismiss in favor of a prior pending proceeding:

Under the first-filed rule, the action that is commenced first is the action in which a complaint was first filed. A case in which a complaint is filed only a day before the filing of a complaint in another action is generally immune from dismissal based on CPLR 3211(a)(4) under the first-filed rule.

Pursuant to CPLR 3211(a)(4), a court has broad discretion as to the disposition of an action when another action is pending and may dismiss one of the actions where there is a substantial identity of the parties and causes of action. The critical element is that both suits arise out of the same subject matter or series of alleged wrongs. Courts must ultimately determine whether the relief sought is the same or substantially the same. If the court finds such symmetry in the parties’ claims, then it has wide discretion to decide whether to dismiss. stay, or consolidate the current suit. The critical issue in determining this motion is whether [the plaintiff's] claims in this action arise out of the same subject matter or alleged wrongs as [the defendant's] claims in the first-filed complaint. The fact that two lawsuits emanate from a common transaction or occurrence is not necessarily sufficient to warrant dismissal based upon CPLR 3211(a)(4). . . .

The assertion of claims in both actions by a party is not required for a finding of identity of issues under CPLR 3211(a)(4). The fact that [the defendant's] claim concerning the units in the first-filed action is for declaratory relief does not attenuate the court’s belief that a dismissal, stay, or consolidation may be warranted. The action for a declaratory judgment having been first commenced, this court is not ousted of its jurisdiction by the proceeding later brought and that the situation is an appropriate one for a declaratory judgment. If the court were to determine that dismissal of this action would be premature, then a stay of the instant case pending the outcome of the first-filed action might be appropriate  pursuant to the court’s powers under CPLR 3211(a)(4).

After reflecting on the options at its disposal, however, the court concludes that consolidating the instant action into the first action is the most equitable and rational outcome, and will avoid the waste of judicial resources and the risk of inconsistent verdicts. Under CPLR 602(a), a court . . . may order the actions consolidated, assuming both involve a common question of law or fact and are both pending before a court. The action that was commenced first is the action that should retain priority. The first-filed rule also typically applies to consolidation orders under CPLR 602(a). Even if the complaint in the first action was filed only a few days before a subsequent action, the first filed rule demands that consolidation be into the first-filed action.

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

BCL § 1112 is Controlling for Determining Venue In an Action Seeking Judicial Dissolution

On July 21, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Sicignano v. Hymowitz, 2014 NY Slip Op. 51100(U), refusing to change venue in an action seeking judicial dissolution.

In Sicignano, the defendants in an action seeking “judicial dissolution . . . pursuant to Business Corporation Law § 1104-a” and asserting claims for negligence and breach of fiduciary moved for a change of venue. The court denied the motion, explaining:

Venue may be changed as of right on the ground that the county designated is not a proper county (CPLR § 510[1]) or on the discretionary ground that the convenience of material witnesses and ends of justice will be promoted by the change (CPLR § 510[3]). Here, the defendants are not entitled to a change of venue as of right because Kings County is a proper venue, pursuant to Business Corporation Law § 1112. Further, the defendants are not entitled to a discretionary change of venue because they have not met the burden of demonstrating that the convenience of material witnesses and the ends of justice would be promoted by the change.

Defendants argued that Plaintiffs’ choice of venue was improper because CPLR § 503(a) is controlling and no parties resided in Kings County when this action was commenced. However, this argument is unavailing because, in an action seeking judicial dissolution, Business Corporation Law § 1112 is controlling for determining venue. Business Corporation Law § 1112 prescribes that an action or a special proceeding under this article shall be brought in the supreme court in the judicial district in which the office of the corporation is located at the time of the service on the corporation of a summons in such action or of the presentation to the court of the petition in such special proceeding. Office of a corporation means the office the location of which is stated in the certificate of incorporation of a domestic corporation. Here, the plaintiffs clearly seek judicial dissolution of the Corporation, pursuant to Business Corporation Law § 1104-a, and the Certificate of Incorporation states Kings County as the location of the office of the Corporation. Since the office of the corporation was located in Kings County at the time Defendants commenced this dissolution proceeding, Kings County is a proper venue. Plaintiffs assert that the Corporation has offices [in Manhattan]. However, the sole residence of a domestic corporation for venue purposes is the county designated in its certificate of incorporation, despite its maintenance of an office or facility in another county. The principal office of the corporation as stated in its certificate is conclusive evidence of its residence. Hence, Kings County is a proper venue for this action and the defendants are not entitled to a change of venue as of right.

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

This decision illustrates some of the many procedural rules governing dissolution proceedings with which counsel should be familiar.

Commercial Division Applies Delaware Demand Futility Pleading Rules

On July 3, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in David Shaev Profit Sharing Account v. Riggio, 2014 NY Slip Op. 31776(U), dismissing a derivative action for failure adequately to plead demand futility.

In David Shaev Profit Sharing Account, the plaintiff filed a derivative action against the individual directors of Barnes & Noble, accusing them of failing properly to oversee the company’s affairs. As evidence of this, the plaintiff pointed to errors in Barnes & Noble’s earnings reports and an SEC investigation arising from subsequent corrections. The defendants moved to dismiss on the grounds that the plaintiff had failed to plead demand futility with the necessary particularity.

Because Barnes & Noble is a Delaware corporation, the court applied Delaware law, specifically Delaware Chancery Court Rule 23.1, to the pleading question. Rule 23.1, like similar rules in New York and elsewhere, requires derivative plaintiffs claiming that pre-suit demand would have been futile to plead particularized facts, in a ‘director-by-director’ fashion, that would be sufficient to contradict the presumption that the directors were disinterested and independent when performing their duties.

Sorting through the many Delaware tests and precedents on the issue of demand futility, the court first determined that the Rales test applied to actions alleging a general failure of oversight rather than challenging specific business decisions. Under Rales,

A plaintiff must adequately plead that a majority of the company’s board of directors were incapable of objectively responding to a demand because they either (1) face a substantial threat of personal liability and are thus themselves interested, or (2) are compromised in their ability to act independently of the interested directors . . . . interestedness under Rales solely focuses on whether a director confronts a substantial likelihood of liability for Plaintiff’s proffered claims.

(Internal citations and quotations omitted.)

And because Barnes & Noble exculpates its directors from liability for breaches of the duty of care, the plaintiff was further restricted, having to show that the majority of the directors faced a substantial likelihood of personal liability for breach of their duty of good faith or loyalty to the corporation.

Claims that directors breached their duty of loyalty by failing to exercise oversight are known as Caremark claims, “which are recognized by Delaware courts as possibly the most difficult theory in corporate law upon which a plaintiff might hope to win judgment.” In essence, to prevail under a Caremark analysis, the plaintiff would have to show that the Barnes & Noble directors “consciously failed to put forth any control systems, or knowingly refused to monitor those systems already in existence.”

The court held that the plaintiff did not satisfy this demanding standard of pleading. Barnes & Noble’s audit committee met regularly, and the existence of errors in audit statements or an SEC investigation are insufficient to show a breach of the duty of loyalty. Plaintiff alleged that a whistleblower had identified many control issues, but could not allege that any individual board member had known of the problems and intentionally ignored them. And because none of the directors could be shown to be interested, allegations that the directors were unable to act independently of one another were also unavailing. The court also noted that, for demand futility purposes, Delaware does not apply SEC or NYSE rules to determine whether directors are independent of one another, placing a higher burden on plaintiffs.

Finally, the court ruled that a prior insufficient complaint and the plaintiff’s refusal to obtain pre-suit discovery of the corporate books and records under Delaware G.C.L. § 220—which the Delaware courts frequently emphasize as essential to a derivative action—warranted dismissal with prejudice.

This case is not interesting so much for the ultimate outcome—derivative actions are routinely dismissed for failure to plead demand futility—but for Justice Schweitzer’s comprehensive summary of Delaware’s demand futility precedents, which might be very useful to a practitioner unfamiliar with this area of the law.

Policy Exclusions Bar Coverage For Banks Sued By Investors Who Lost Funds In Madoff Ponzi Scheme

On June 24, 2014, the First Department issued a decision in Associated Community Bancorp, Inc. v. St. Paul Mercury Ins. Co., 2014 NY Slip Op. 04697, affirming the dismissal of insurance coverage claims by banks that were sued by customers who suffered losses as a result of investments in Bernard L. Madoff Investment Securities through custodial accounts managed by the banks.

In Associated Community Bancorp, the First Department found that several exclusions to the plaintiff banks’ “Bankers Professional Liability Insuring Agreements” barred coverage, including (1) an exclusion for claims arising from a loss of “money, securities, property or other items of value” in the possession of the bank, and (2) an exclusion for claims arising from the “insolvency” of any “investment company, investment bank or [] broker dealer”:

The Loss of Money Exclusion bars coverage for claims for “the actual loss of money, securities, property or other items of value in the custody or control of [the bank].” Contrary to plaintiffs’ contention, the investors’ allegation that the money in their accounts with Bernard L. Madoff Investment Securities (BLMIS) was stolen, unlawfully retained, or misappropriated is a claim for an actual loss of money (see Blenzak Black, LLC v Allied World Natl. Assur. Co., 2012 WL 1365973, *2-3 [NJ Super Ct App Div 2012]). Moreover, “[a]n insurance policy is not illusory if it provides coverage for some acts; it is not illusory simply because of a potentially wide exclusion'” (ACE Capital Ltd. v Morgan Waldon Ins. Mgt., LLC, 832 F. Supp. 2d 554, 572 [WD Pa 2011]). The subject policies provide a broad range of coverage for liability that may arise in connection with plaintiffs’ provision of ordinary banking services.

* * *

The Insolvency Exclusion bars coverage for loss “based upon, arising out of, or attributable to the insolvency . . . of . . . any . . . investment company, investment bank, or any broker or dealer in securities or commodities.” Insolvency exclusions have been held to apply despite the fact that the underlying claims are made against parties that are “independent of the insolvent entity” (Coregis Ins. Co. v American Health Found., Inc., 241 F3d 123, 130-131 [2d Cir 2001]). Further, the courts of Connecticut (whose law applies to this action) have interpreted broadly the term “arising out of” in insurance policies (see Board of Educ. of the City of Bridgeport v St. Paul Fire & Marine Ins. Co., 801 A2d 752, 758 [Conn 2002]). The investors’ claims certainly are “connected with,” “had [their] origins in,” “grew out of,” “flowed from” or “[were] incident to” Madoff’s Ponzi scheme and the insolvency of BLMIS (see id. [internal quotation marks omitted]). Thus, the Insolvency Exclusion bars coverage for those claims.

This decision illustrates that exclusions from coverage in an insurance policy that are not ambiguous will be enforced as written, even when they sharply limit the scope of coverage.