First Department Reverses Trial Court Discovery Order

On September 18, 2014, the First Department issued a decision in MSCI Inc. v. Jacob, 2014 NY Slip Op. 06239, reversing a trial court order limiting discovery.

In MSCI Inc., the First Department acknowledged that “[a] trial court is vested with broad discretion in its supervision of disclosure,” that “deference is afforded to the trial court’s discretionary determinations regarding disclosure,” and that the First Department “rarely and reluctantly invoke[s it] power to substitute [its] own discretion for that of the motion court.” (Internal quotations and citations omitted). However, it noted, the First Department “is vested with the power to substitute its own discretion for that of the motion court, even in the absence of abuse.”  (Internal quotations and citations omitted) (emphasis added).  That is what it did in MSCI Inc.

The details of the discovery dispute in MSCI Inc. (a dispute over trade secrets involving computer source code) are not relevant for this post. The point of this post is simply to note that while a long line of cases show great Appellate Division deference to trial court discovery rulings, the Appellate Division nonetheless continues to exercise its power to substitute its discretion for the trial court’s in discovery disputes.

Transcripts and Videos of Arguments in the Court of Appeals for the Week of September 8, 2014, Now Available

On September 8, 2014, we noted a case of interest from the oral arguments for the week of September 8, 2014:

  • No. 156Ellington v. EMI Music Inc. (regarding the interpretation of the provisions of a royalty agreement between the family of Duke Ellington and music publishers concerning the allocation of revenues from foreign publication of Ellington’s music). See the transcript and the video.

Enforcement of Judgment Not Stayed Pending Appeal When Undertaking Not Filed With County Clerk

On September 4, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Vintage Flooring & Tile, Inc. v DCM of NY LLC, 2014 NY Slip Op 51376(U), declining to recognize a stay of enforcement of a judgment under CPLR 5519(a)(2) where the defendant failed to comply with the formal requirements for an undertaking under Article 25 of the CPLR.

In Vintage Flooring, the defendant (the general contractor on a construction project at the Kings Plaza Mall in Brooklyn) brought an order to show cause seeking an automatic stay of a judgment pending appeal, under CPLR 5519(a)(2), based on a undertaking that was served on the plaintiff but never filed with the Clerk of the Court. Justice Demarest denied the motion, explaining:

Pursuant to CPLR 5519(a)(2), service upon the adverse party of a notice of appeal [for a money judgment] stays all proceedings to enforce the judgment or order appealed from where an undertaking for that sum is given. Pursuant to CPLR 2505, an undertaking together with any affidavit required by [Article 25 of the CPLR] shall be filed with the clerk of the court in which the action is triable, or, upon an appeal, in the office where the judgment or order of the court of original instance is entered, and a copy shall be served upon the adverse party. The undertaking is effective when so served and filed.

In opposition to the Order to Show Cause, petitioner argues that the respondent has not shown proof that it ever filed the Undertaking with the Kings County Clerk. The court takes judicial notice that the Undertaking was not filed with the Kings County Clerk under the present index number. As respondent has not demonstrated any proof that the Undertaking was ever filed with the clerk of the court pursuant to CPLR 2505, the Undertaking was never effective and, therefore, there was no automatic stay pursuant to CPLR 5519(a)(2).

(Internal quotations and citations omitted).

An appeal bond can buy a defendant a reprieve from enforcement of a judgment. However, as this case shows, to be effective, all the requirements of the CPLR must be satisfied.

Appeal Dismissed Due to Deficiencies in Record

On September 17, 2014, the Second Department entered a decision in Green Tree Credit, LLC v. Jelks, 2014 NY Slip Op. 06174, dismissing an action for failure to assemble a proper record on appeal.

In Green Tree Credit, the Second Department dismissed the appeal, writing:

It is the appellant’s obligation to assemble a proper record on appeal. Here, the record is inadequate because it does not include all of the relevant papers and documents that were before the Supreme Court. Since the record is inadequate to enable this Court to render an informed decision on the merits, the appeal must be dismissed.

(Internal citations omitted).

Getting a record printed can be expensive in a complicated commercial case. However, as this decision shows, if you do not prepare the record properly (Appellate Division rules offer alternatives ways of doing this), you may as well not appeal at all.

Customer Lists Readily Ascertainable from Sources Outside Employer’s Business not Trade Secrets

On August 21, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Chaos Commerce, Inc. v. Khaimov, 2014 NY Slip Op. 32377(U), refusing preliminary to enforce a non-compete clause.

In Chaos Commerce, the plaintiff sued the defendants for theft of trade secrets and breach of an employment agreement. The court denied the plaintiff’s motion for a preliminary injunction “to enforce non-competition, non-disclosure and non-solicitation covenants,” explaining:

Under New York law negative covenants restricting competition are enforceable only to the extent that they satisfy the overriding requirement of reasonableness. In order to be enforceable, a covenant’s terms must be reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee.

In Reed, Roberts Associates, Inc. (40 NY2d 303), the Court of Appeals interpreted the reasonableness standard, and determined that a restrictive covenant will only be enforceable if it serves a legitimate interest of the employer: (1) to the extent necessary to prevent the disclosure or use of trade secrets or confidential information, or (2) where an employee’s services are unique or extraordinary.

In Reed, Roberts Associates, Inc. (Id.), the Court denied injunctive relief to an employer complaining of the theft of a customer list because it failed to demonstrate that the restrictive covenant at issue served a legitimate interest of the employer. The Court reasoned that the contact information of current and potential customers that is easily ascertainable from public sources is not a protectable trade secret.

. . .

Defendants argue that the supplier list does not contain confidential information, and that [the plaintiff] has not demonstrated that Khaimov has or will use or disclose any information to his new employer []. Khaimov represents that the supplier list contains contact information that is readily available in public sources such as the internet.

According to Khaimov, the same information is obtainable by Googling various items to purchase, searching for potential sources for those respective items, and then contacting the various companies found in the search to inquire about the products offered that he can then sell on the website. Khaimov also states that the supplier list at issue only contains the name of the supplier without any contact information.

Customer lists that are readily ascertainable from sources outside an employer’s business do not qualify for trade secret protection, and thus, Khaimov’s forwarding of the list to his home email address likely does not constitute misappropriation of trade secrets. Under the first prong of the Reed standard, [the plaintiff] fails to persuade that the restrictive covenant serves any legitimate interest.

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

Plaintiff’s Concealment of Fact that Money Owed under a Note had been Repaid by a Third Party Justified Striking the Complaint as a Discovery Sanction

On September 2, 2014, Justice Schweitzer of the New York County Commercial Division issued a Decision and Order in People’s Capital & Leasing Corp. v. Color-Web, Inc., 2014 NY Slip Op. 32353(U), granting a CPLR 3126 motion to strike the complaint as a sanction for discovery abuses.

In People’s Capital & Leasing, the underlying dispute was an action to enforce a promissory note. Plaintiff PCL agreed to finance defendant Color-Web’s purchase of a printing press from third party Mitsubishi Lithographic Presses, Inc. PLC paid Mitsubishi $200,000 as a down payment on the press, and Color-Webb executed the Note—also for $200,000—in favor of PCL. The Note was guaranteed by the other defendants.

Although PLC did pay Mitsubishi the $200,000, Color-Web never took delivery of the printing press and asked Mitsubishi to cancel their sales agreement for the press due to its economic difficulties. After Color-Web missed a payment due under the Note, PLC alleged that it had defaulted and commenced action against Color-Web and its guarantors.

The motion to strike the complaint and for other discovery sanctions came about when the defendants’ subpoena to Mitsubishi revealed that Mitsubishi had returned the $200,000 to PCL eight months before the action began, and that PCL had been concealing that fact all along: “in response to discovery requests, PCL had intentionally withheld all documents revealing [Mitsubishi’s] return of the money.”

Mitsubishi’s documents revealed that Mitsubishi and PCL agreed that Mitsubishi would refund the $200,000 to PCL if the press was not delivered, that PLC apparently agreed in exchange to remit all payments it received under the Note back to Mitsubishi, and that “PLC asked [Mitsubishi] to confirm that nobody at [Mitsubishi] had told Color Web about [Mitsubishi's] return of the $200,000 to PCL because ‘legal counsel needs this confirmation so that [PCL] can pursue Color Web for reimbursement.'”

Although the terms of the side agreement between Mitsubishi and PCL were unclear, defendants’ theory was that Mitsubishi repaid the $200,000 in exchange for PCL suing on the Note for Mitsubishi’s benefit, and the reason the parties proceeded in this manner was because any direct action by Mitsubishi to enforce its sales agreement with Color-Web could not reach the guarantors, whereas an action on PCL’s Note could reach the guarantors.

The court found that the information withheld was highly relevant, and that PCL had no excuse for its failure to produce it. “PCL was at pains to hide the re-payment because it arguably satisfied defendants’ obligation under the Note (and Guarantees) to repay the $200,000.” The Court also largely accepted the defendants’ contention that this was part of a scheme by Mitsubishi to pursue the guarantors for damages under a different contract that they did not guarantee.

To choose a sanction, the court applied the Court of Appeals’ recent holding in CDR Creances S.A.S. v. Cohen (analyzed in this blog on May 9, 2014), and dismissed PCL’s complaint. The court found that:

PCL does not dispute that it withheld the documents and information in question, and offers no explanation, only a claim that the discovery is irrelevant. The court finds that claim to be disingenuous, in light of the concerted effort by PCL and [Mitsubishi] to hide their arrangement, and the repayment of the money, from defendants and the court. There is no reasonable justification for PCL’s actions, which were willful and intended to facilitate a recovery from defendants to which PCL was, arguably, no longer entitled. In fact, the court can only conclude that PCL and its attorney were hoping to win the case through the use of material omissions in the complaint, affirmations, affidavits and other legal papers filed with the court. The omission of key facts was also used to influence a settlement with Color Web, as President David Moyal describes in his Affidavit. Moyal explains that after [Mitsubishi] had already returned the money to PCL, of which he was unaware at the time, [Mitsubishi] offered to return the $200,000 to PCL if defendants dropped their counterclaims against PCL.

Defendants were also awarded the costs and fees incurred in connection with the motion.

Shareholders’ Right To Inspect Corporate Books And Records Properly Invoked To Aid Investigation of Misconduct By Management And To Obtain Information In Aid of Litigation

On September 11, 2014, the First Department issued a decision in Retirement Plan for General Employees of the City of North Miami Beach v. The McGraw-Hill Companies, Inc., 2014 NY Slip Op. 06154, reversing a trial court’s denial of a shareholder’s petition to inspect corporate books and records.

Under New York law, shareholders have a statutory right, under BCL 624, to inspect certain categories of corporate records—specifically, “a record of shareholders, shareholder meeting minutes, and profit and loss statements.” New York common law, however, also provides a broader inspection right, provided that “the shareholders seek the inspection in good faith and for a valid purpose.” In McGraw-Hill, shareholders of The McGraw-Hill Companies brought a petition seeking access to documents that the company’s board ‘received, prepared, reviewed or distributed . . . concerning the board knowledge about and oversight of [the ratings agency] S&P,” a wholly-owned subsidiary of McGraw-Hill, that had been accused of wrongdoing in connection with the rating of mortgage-backed securities. New York County Commercial Division Justice Jeffrey K. Oing denied the petition, and the First Department reversed, finding that the petition stated valid grounds for inspection, and remanded the case for a hearing on the proper scope of the inspection:

Under New York law, shareholders have both statutory and common-law rights to inspect a corporation’s books and records so long as the shareholders seek the inspection in good faith and for a valid purpose. The statutory right supplemented, but did not replace, the common-law right.

Here, petitioners sufficiently showed that they were acting in good faith and for a proper purpose in seeking to enforce their common-law right to inspect respondent’s books and records. Specifically, the petition alleges that petitioners seek to investigate alleged mismanagement and breaches of fiduciary duty by respondent’s board of directors in failing to oversee purported wrongdoing by S & P; this alleged wrongdoing, petitioners assert, exposed respondent to substantial potential liability in multiple civil actions and investigations. These allegations form a proper basis for petitioners’ request.

Contrary to respondent’s contentions, investigating alleged misconduct by management and obtaining information that may aid legitimate litigation are, in fact, proper purposes for a BCL § 624 request, even if the inspection ultimately establishes that the board had engaged in no wrongdoing. Indeed, petitioners identified several reasons for making their demand, including assessment of policies that the board had implemented when issuing credit ratings and investigation of possible wrongdoing by the respondent’s board of directors. Each of these purposes adequately justifies petitioners’ access to certain board documents. Moreover, because the common-law right of inspection is broader than the statutory right, petitioners are entitled to inspect books and records beyond the specific materials delineated in BCL § 624(b) and (e).

(Citations omitted.)

Claim Involving Mandatory Statutory Penalties Cannnot be Brought as a Class Action

On September 10, 2014, the Second Department issued a decision in County of Nassau v. Expedia, Inc., 2014 NY Slip Op. 06050, holding that a claim involving mandatory statutory penalties could not be brought as a class action under CPLR Article 9.

In County of Nassau, Nassau County brought a class action “on behalf of itself and 55 New York local governmental entities” against a number of “online sellers or resellers of hotel and motel accommodations” for underpayment of hotel and motel occupancy taxes. The Second Department reversed the trial court’s grant of class certification under CPLR Article 9, explaining:

Pursuant to CPLR 901(b), “Unless a statute creating or imposing a penalty, or a minimum measure of recovery specifically authorizes the recovery thereof in a class action, an action to recover a penalty, or minimum measure of recovery created or imposed by statute may not be maintained as a class action.” However, even where a statute creates or imposes a penalty, the restriction of CPLR 901(b) is inapplicable where the class representative seeks to recover only actual damages and waives the penalty on behalf of the class, and individual class members are allowed to opt out of the class to pursue their punitive damages claims. Nonetheless, the waiver exception to CPLR 901(b) does not apply where a penalty is mandatory and cannot be waived.

Here, the plaintiff cannot obtain class certification of this action because, under the plaintiff’s own Hotel Tax law, it is required to recover a penalty of 5% of the amount of the tax allegedly due from the appellants within the meaning of CPLR 901(b), the recovery of which in a class action is not specifically authorized in the Hotel Tax law, and the imposition of which cannot be waived, as conceded by the plaintiff’s representative during the deposition. Accordingly, the Supreme Court should have denied the plaintiff’s motion pursuant to CPLR article 9 for class certification of this action.

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

Air Rights Real Property That Cannot be Converted

On September 3, 2014, Justice Ramos of the New York County Commercial Division issued a decision in Harmit Realties LLC v. 835 Ave. of the Americas, L.P., 2014 NY Slip Op. 51349(U), holding that air rights were real property and thus not a permissible subject of a conversion claim.

In Harmit Realties, a dispute regarding air rights, the defendant moved to dismiss on statute of limitations grounds, arguing that notwithstanding how they were styled, the plaintiff’s claims were for conversion and for that reason were time barred. The court rejected the argument, explaining that air rights are real property, which is not subject to conversion:

Defendants move to dismiss the action on the ground that the causes of action sound in conversion and are time barred, because the statute of limitations for a conversion claim is three years which allegedly began to run from 2007.

The allegations are that the defendants misappropriated and used [the plaintiff's] air rights in connection with the Owner Parcel. It is undisputed between the parties that air rights fall within the definition of real property. Air rights have been recognized as an inherent attribute of ownership of land.

[The plaintiff] contends that under New York law there exists no cause of action for the conversion of real property. This Court agrees since an action sounding in conversion does not lie where the property involved is real property.

Defendants cite to Sporn v MCA Records, Inc. (58 NY2d 482, 488 [1983]), for the proposition that if the plaintiff seeks to recover for amounts to the destruction or taking of the property, then the action is properly deemed one for conversion. That case concerned the unauthorized commercial exploitation of a master phonograph record which is not real property, and is inapplicable to this matter.

Defendants also rely on the case of Goulian v Gramercy 29 Apartments, Inc. (199 AD2d 98 [1st Dept 1993]), which cites Sporn (58 NY2d at 488). The court in Goulian found that plaintiff’s complaint alleging appropriation of the right to build on their roof space does not state a cause of action for trespass. The conversion claim was barred by the statute of limitations but the court did not conduct an analysis as to why the claim for trespass fails and the claim for conversion upheld. In the instant matter the complaint does not specifically state a cause of action for conversion and as such Goulian does not apply.

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