New York Commercial Division Round-Up

Commercial Division Rules on Enforceability of Liquidated Damages Clauses

Sheppard Mullin — Mon, 13 Feb 2012 11:41:27 -0500

In Wells Fargo Bank Northwest v. US Airways, Inc., 2011 NY Slip Op 52188(U) (Sup. Ct. N.Y. County Dec. 1, 2011), Justice Bernard J. Fried held that a liquidated damages provision requiring payment of a holdover fee equal to twice the monthly rent was reasonable and did not function as a penalty under New York contract law. The case arose from three aircraft sale and leaseback transactions, pursuant to which Defendant US Airways, Inc. (“US Airways”), sold to Plaintiff Wells Fargo Bank Northwest (“Wells Fargo”), and Wells Fargo leased back to US Airways, three Boeing 737 aircraft. The original lessee was America West, which merged into US Airways, and all of the agreements at issue were assigned to and assumed by US Airways.

In evaluating the liquidated damages provision at issue, Justice Fried explained that the contract provision stated that liquidated damages would apply until such time as the aircraft were returned in the condition required under the agreement, and that if Wells Fargo expended funds to make the necessary adjustments to have the aircraft meet the contract conditions, Wells Fargo would be entitled to those costs, and the liquidated damages provision would terminate at that point in time. The Court noted that contracts providing for liquidated damages for holdovers plus compensatory damages for repairs had been upheld as appropriate and enforceable in past cases. Further, the Court noted that past cases also upheld liquidated damages for rental holdovers in multiples of the monthly rent.

The Court stated that US Airways had failed to meet its burden to demonstrate that the liquidated damages provision acted as a penalty, that anticipated damages were easily ascertainable at the time of contracting, or that the liquidated damages amount was grossly disproportionate to the probable loss. Observing that the contracts in question were negotiated by sophisticated persons in the airline industry with experienced counsel, Justice Fried found nothing that would indicate that US Airways was unaware of what it was signing. The Court concluded that the liquidated damages provision of the agreements was valid and unenforceable, and denied US Airways motion for partial summary judgment.

Commercial Division Clarifies Limits of Choice of Law Provision in Indentures

Sheppard Mullin — Mon, 13 Feb 2012 11:40:17 -0500

By Sarah Aberg

In the recent matter Wilmington Trust Natl. Assn. v. Vitro Automotriz, Index No. 652303/11 (N.Y. Sup. Dec. 5, 2011), Justice Bernard J. Fried of the Commercial Division addressed the obligations of guarantors of indentured notes. Regardless that the issuer of the notes had declared bankruptcy in Mexico, the guarantors, none of whom were co-debtors, were not relieved of their obligations under the notes. Moreover, Justice Fried found that, while the notes and guaranties were governed by New York law, whether they could be ultimately set-aside in a Mexican bankruptcy proceeding was a decision for the Mexican courts, and not one that he could address.

Wilmington Trust National Association (Wilmington) is the successor indenture trustee with respect to certain senior notes issued by non-party Vitro SAB de C.V. (Vitro SAB) that are due February 1, 2012 and February 1, 2017. Vitro SAB is a Mexican holding company and one of Mexico’s largest glass manufacturers. The defendants are affiliates and subsidiaries of Vitro SAB, and are guarantors of its obligations under the notes, which were issued pursuant to two indentures. Vitro SAB defaulted on its payment obligations under the notes, totaling over $1.3 billion.

Vitro SAB filed for bankruptcy in Mexico in December 2010, and commenced a Chapter 15 case in the U.S. Bankruptcy Court in the Southern District of New York in April 2011, which was later transferred to the Northern District of Texas. Over the summer, both the US and Mexican bankruptcy courts issued injunctive relief in favor of Vitro SAB, but denied the same as to the non-debtor defendant guarantors.

Wilmington commenced the instant action on August 17, 2011, alleging breach of contract and seeking a declaratory judgment confirming the defendants’ obligations under the indentures, the notes, and the guaranties. The defendants, rather than rebutting Wilmington’s interpretation of the guaranties, instead argued that there was a question as to whether Mexican law governed the parties’ relationship. Justice Fried rejected this contention, as the indentures at issue explicitly state that New York law would govern, and that the laws of Mexico would not be applicable to the guaranties.

Wax This! NY Court Finds Restrictive Covenant In Hair Removal Specialist's Agreement Unenforceable

Sheppard Mullin — Thu, 13 Oct 2011 19:13:12 -0500

By Eric Raphan and Jonathan Sokolowski

In a recent decision outside the Commercial Division, Eyes of the World v. Boci, No. CV 46549/09 (N.Y. Civ. Ct. Aug. 19, 2011), Judge Margaret A. Chan held that a former employee’s restrictive covenant, prohibiting her from providing salon services to any client of her former employer for whom she provided such services during the last 12 months of her employment, was overly broad and, thus, unenforceable.

Plaintiff Eyes of the World (“Plaintiff”) employed Defendant Miranda Boci (“Boci”) to perform hair removal services until she resigned in early 2009 to work for NYC Waxing, LLC (“NYC Waxing”). Boci’s employment agreement with Plaintiff contained a 1-year restrictive covenant which barred Boci from providing “Salon Services” in New York City to any of Plaintiff’s clients for whom Boci provided such services during her last year of employment with Plaintiff. Plaintiff commenced the instant action against Boci and NYC Waxing alleging that that Boci breached her post-employment obligations to Plaintiff by servicing eighty-six of Plaintiff’s former clients once she began working for NYC Waxing.

Judge Chan reiterated that Boci’s restrictive covenant must be reasonable in temporal and geographic scope and then will be enforced only: (a) to the extent necessary to protect Plaintiff from unfair competition which stems from the Boci’s use or disclosure of trade secrets or confidential customer lists; or (b) if Boci’s services are unique or extraordinary. Judge Chan first concluded that Boci did not have access to trade secrets, client lists, or any other of Plaintiff’s proprietary information and, thus, the enforcement of the restrictive covenant was not necessary to protect Plaintiff from unfair competition by Boci or NYC Waxing. Judge Chan then held that despite Boci’s training, her job and the skills used for that job are not legally considered unique or extraordinary. Judge Chan further noted that the clients at issue opted to follow Boci to her new employer based upon their needs and her ability and not as a result of any unlawful conduct by Boci or NYC Waxing. Based upon these facts, Judge Chan dismissed Plaintiff’s complaint.

Judge Chan’s decision should serve as an important reminder to employers that drafting an enforceable restrictive covenant goes beyond simply ensuring that such covenant is reasonable in temporal and geographic scope. Employers must also keep in mind that in order for the covenant to be enforceable, it must be drafted to protect the employer’s legitimate business interests. Otherwise, an employer may find that, like Plaintiff in this case, its restrictive covenant is overly broad and, thus, unenforceable.

For further information, please contact Eric Raphan at (212) 634-3045 or Jonathan Sokolowski at (212) 634-3047.

Defraud A Court? Compensatory Damages Are Okay But Not Punitive Damages

Sheppard Mullin — Thu, 13 Oct 2011 18:21:20 -0500

By Mark E. McGrath

In CDR Créances S.A.S. v. Cohen, Index Nos. 109565/2003 and 600448/2006 (Sup. Ct., NY County, Aug. 25, 2011) (the “August Decision”), the Honorable O. Peter Sherwood granted the motions of plaintiff CDR Créances S.A.S. (“CDR”) for an order directing entry of judgment on CDR’s compensatory damages but refused to award CDR punitive damages, despite a January 25, 2011 decision (the “January Decision”) by former Justice James A. Yates that the defendants had repeatedly committed fraud upon the court.

The two actions arose out of CDR's claims that the defendants had defrauded CDR and disposed of and stole the assets of Euro-American Lodging Corporation ("EALC") and its corporate shareholders, all of which were the alleged alter egos of defendant Maurice Cohen and his son, defendant Leon Cohen. EALC borrowed more than $92 million from CDR to acquire and convert a building to a hotel operating as part of the Flatotel hotel franchise (the "New York Flatotel"), and EALC granted CDR a security interest in the shares of EALC. Approximately one year after the loan was made, CDR declared EALC in default. CDR and EALC became involved in long-drawn-out litigation that ultimately resulted in two judgment against EALC totaling more than $226 million.

On July 12, 2007, CDR assigned the EALC's debt to 135 West 52nd Street LLC in exchange for a partial payment on the debt in the amount of $105 million, but CDR reserved it rights and retained its tort claims against Maurice Cohen, his family members, and any companies in which he held a direct or indirect interest. That agreement was memorialized in a Debt Transfer Agreement.

After the January Decision, CDR subsequently filed a motion seeking entry of judgment. Defendants argued that the Debt Transfer Agreement released them from damages. Justice Sherwood rejected that argument and distinguished Bailon v. Guane Coach Corp., 78 A.D.3d 608 (1st Dep't 2010), because the Debt Transfer Agreement specifically carved-out the tort claims against the defendants. Defendants also argued the amount of damages should be reduced by $130 million, which was the amount that was paid to 135 West 52nd Street LLC in EALC's bankruptcy. Justice Sherwood held that CDR's damages would be reduced by the amount CDR received from 135 West 52nd Street LLC, not the amount its transferee received in EALC's bankruptcy.

CDR also sought an award of punitive damages. Justice Sherwood noted punitive damages serve two purposes -- punishment and deterrence. While punitive damages are not generally available for breach of contract, such damages are available "where the conduct constituting or associated with the breach of contract 'also involves a fraud evincing a high degree of moral turpitude and demonstrating such wanton dishonesty as to imply a criminal indifference to civil obligations' and such 'conduct was aimed at the public generally.'" August Decision, at 9 (quoting Rocanova v. Equitable Life Assurance Soc'y, 83 N.Y.2d 603 (1994) (further citations omitted)). Accordingly, Justice Sherwood noted that a plaintiff seeking punitive damages "must demonstrate: (1) the defendant's conduct is actionable as an independent tort for which compensatory damages are ordinarily available; (2) the tortious conduct is sufficiently egregious under the standard set forth in Walker v. Sheldon, 10 N.Y.2d 401 (1961); (3) plaintiff is aggrieved by such tortious conduct; and (4) such conduct was part of a pattern directed at the public generally." August Decision, at 9 (citing Rocanova, 83 N.Y.2d at 613; New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 316 (1995)).

Justice Sherwood found that the defendants' conduct satisfied the first two prongs, but the Court did not find that the defendants' conduct was "aimed at the public generally." August Decision, at 9 (quoting Walker, 10 N.Y.2d at 405). Justice Sherwood's decision hinged on the private nature of CDR's claims, namely, CDR's efforts to recover what it is owed. Even if punitive damages were available, Justice Sherwood refused to make such an award because the defendants had already been sanctioned for their conduct. Justice Sherwood noted that the striking the answers and entry of default judgment prevented the defendants from contesting liability, which resulted in an entry of a judgment in excess of $135 million. The Court found that the amount of that judgment, coupled with "the fact that Justice Yates indicated in his decision and order that an award of monetary sanctions was not warranted, the purpose to be served by punitive damages, to wit, to punish the wrongdoer and deter future wrongdoing, has already been achieved." August Decision, at 10.

For further information, please contact Mark McGrath at (212) 634-3056.

A New Weapon Against Debtors! Attachment In Aid Of International Arbitration Is Permitted Even Where The Court Lacks Personal Jurisdiction Over The Debtor

Sheppard Mullin — Thu, 13 Oct 2011 15:49:18 -0500

By Sean J. Kirby

In the matter of In re Sojitz Corporation v. Prithvi Information Solutions, Ltd, Index No. 602511/2009 (1st Dept. 2011) (“Sojitz Corp.”), the First Department, in a case of first impression, affirmed the decision of former Justice James A. Yates, and held that a creditor can attach assets in New York, for security purposes, in anticipation of an award that will be rendered in an international arbitration proceeding, even though the debtor has no connection to New York by way of personal jurisdiction.

In Sojitz Corp., petitioner ("Petitioner"), a Japanese company with its principal place of business in Tokyo, intended to commence an arbitration proceeding against respondent Prithvi Information Solutions, Ltd. ("Respondent"), an Indian company with its principal place of business in Hyderabad, India, to recover over $48 million in unpaid invoices. Pursuant to the parties' agreement, Petitioner was to provide telecommunications equipment that was produced in China to Respondent in India and, in exchange, Respondent would deposit its payments in an account at Punjab National Bank in India. The agreement also contained an arbitration clause which provided that the agreement was governed by the laws of England and that any disputes arising out of the agreement would be settled by arbitration in Singapore.

Prior to commencing its arbitration in Singapore, Petitioner filed a motion in the Commercial Division, New York County (the "Commercial Division") seeking a $40 million ex parte order of attachment against Respondent. In support of this motion, Petitioner asserted that it would be commencing the arbitration shortly and an attachment was warranted because Respondent may try to dissipate its assets while the arbitration is pending. After former Justice Yates granted the motion and ordered Petitioner to post a $2 million bond, Respondent moved to vacate the attachment arguing that the Court lacked personal jurisdiction over it. Based on the evidence submitted by Respondent, former Justice Yates vacated the $40 million attachment, confirmed an attachment of $18,480, reduced the $2 million bond to $900, and permitted Petitioner to move to attach additional assets of Respondent in New York.

The First Department affirmed the Commercial Division decision. As detailed in the First Department's decision, the New York State legislature has repeatedly amended CPLR § 7502 to expand the court's ability to issue attachments in aid of arbitration. In addition to reviewing the genesis of CPLR § 7502(c), and the legislature's apparent desire to expand the authority of New York courts to issue attachments in aid of arbitration, the First Department also looked to Shaffer v. Heitner, 433 U.S. 186 (1977), in which the United States Supreme Court "held out the possibility of a 'security' exception to the requirement of minimum contacts in quasi in rem jurisdiction, remarking in a dictum that a plaintiff might be entitled, without demonstrating minimum contacts of any kind, to attach property located in one state 'as security for a judgment being sought in [another] forum where the litigation can be maintained consistently with International Shoe.'" Sojitz Corp., at 11 (quoting Shaffer, 433 U.S. at 207, n. 22, 212).

Based on Shaffer, the First Department held that "New York's attachment statute does not run afoul of Shaffer when it is used for purposes of security rather than to confer in personam jurisdiction . . . [because] attachment for security pending litigation in a proper out-of-state forum does not raise the same due process concerns as are implicated by attachment for jurisdictional purposes." Sojitz Corp., at 12. This is because seeking an attachment pursuant to CPLR § 7502(c), is not the same "as compel[ling] a respondent to litigate in an improper forum to save her property; the petitioner merely seeks to have the property- attached for future execution in the event a recovery is ordered by the out-of-state forum." Id. In addition, the First Department found that there was nothing "fundamentally unfair" about security attachments in aid of arbitration especially given the procedural safeguards of CPLR § 7502(c), specifically, the required showing by the petitioner that an arbitration award would be rendered ineffectual absent the attachment and that the arbitration be commenced within 30 days after the attachment is granted, or else the attachment would be deemed null and void. Id. at 12-13. Given the procedural safeguards in CPLR § 7502(c), and the Supreme Court's decision in Shaffer v. Heitner, the First Department affirmed the Commercial Division's decision and concluded that "we perceive no reason why local assets belonging to a party should not also be attached prejudgment to secure payment of an eventual judgment against that party, provided that party seeking the attachment demonstrates its entitlement to the provisional relief." Id. at 13.

In light of the Sojitz Corp. decision, creditors should no longer be discouraged by a lack of personal jurisdiction over the debtor from seeking an attachment of the debtor's New York assets as a security for a potential award in an international arbitration.

NYC Condo Refinance Collapses Because There Was No "Meeting of the Minds"

Sheppard Mullin — Wed, 06 Jul 2011 15:53:14 -0500

By Eric OConnor

In Trief v. Wells Fargo Bank, N.A., Index No. 105280/09, — N.Y.S.2d — (Sup Ct, NY County, Apr. 4, 2011) (“Trief”), the plaintiffs sought damages arising out of their attempt to refinance a mortgage loan with the defendant bank (the “Bank”), for breach of contract and violation of New York’s Unfair and Deceptive Practices Act, N.Y. General Business Law (“NYGBL”) § 349. Justice Charles Edward Ramos granted the Bank’s motion for summary judgment on both counts. The parties actually proceeded to closing when plaintiff walked away from the refinancing of a luxury midtown condominium located at 15 West 53rd Street, New York, NY – seemingly over a $518.75 dispute.

The main lesson is that all parties, especially when communicating via more informal modes of communications like email, must clarify and confirm an “agreement on all essential terms” or else a valid contract will not be formed.

The facts – negotiation, informal communications, the exchange of standard loan forms, etc… – follow a seemingly common pattern. A mortgage consultant from the Bank filled out the refinance application on the Triefs’ behalf by telephone and then sent an e-mail attaching a Good Faith Estimate of Settlement Charges (the “GFE”). The GFE proposed a 5.125% interest rate and a standard provision indicating that the “fees listed are estimated - the actual charges may be more or less.” The cover email asked to “let me know if you would like me to lock you in for 60 days”, which Mr. Trief responded “sure.” After a small dispute about the rate, the Bank faxed a Conventional Commitment Letter (the “Letter”) to the Triefs confirming the rate and other details. Despite language in the Letter that “You must sign and return this commitment letter within that period to ensure receiving the terms specified”, neither party signed the Letter. At the scheduled closing, the Triefs refused to proceed because the Bank sought to charge them a rate lock extension fee of $518.75, which the Triefs claim was never negotiated or agreed to.

The main issue was whether a contract was formed. The Court explained the classic rules that a plaintiff must establish an offer, acceptance of the offer, consideration, mutual assent, and an intent to be bound. Kowalchuk v. Stroup, 61 A.D.3d 118, 121 (1st Dept 2009). Mutual assent means a “meeting of the minds” and must include agreement on all essential terms. Id. The Court held that there was not a meeting of the minds on all of the essential terms of a final contract for refinancing. The two key pieces of evidence – the email from the Bank asking to “let me know if you would like me to lock you in for 60 days” and the standard GFE language that terms were subject to change – were only seeking an acceptance to lock in the rate for a fixed period of time, rather than a final agreement to refinance. Further, the Real Estate Settlement Procedure Act (“RESPA”) shows that the legislature did not intend for the GFE to bind a lender to a final loan agreement. See 24 CFR § 3500.7 [a], [g] (the “GFE is not a loan commitment. Nothing in this section shall be interpreted to require a loan originator to make a loan to a particular borrower.”).

Finally, the Court also rejected the Triefs claim under NYGBL § 349. A claim for violation of GBL § 349 is based upon consumer-oriented conduct that is materially misleading, causing a plaintiff injury. The Court held that the Triefs failed to even identify consumer-oriented conduct on the part of the Bank because private contract disputes, unique to the parties, generally do not fall within the scope of the statute. The Triefs failed to demonstrate injury because they refused to close on the loan refinancing and did not pay any fees to the Bank.

For further information, please contact Eric O'Connor at (212) 634-3077.

Partnership Pitfalls -- Things to Keep in Mind When Filing a Notice of Pendency Involving Partnership Assets

Sheppard Mullin — Wed, 06 Jul 2011 15:47:14 -0500

By Sarah E. Aberg

In Ostad v. Nehmadi, No. 650460/2010 (Sup. Ct., N.Y. Co., Apr. 11, 2011) (“Ostad”), Justice Bernard J. Fried reiterated the rule that a notice of pendency cannot be based on a claim asserting an interest in personal property, even where that personal property is an interest in a partnership whose sole asset is real property. Ostad illustrates the less-than-straightforward procedures of filing a valid notice of pendency.

According to the complaint, plaintiff David Ostad and defendant Behzad Nehmadi agreed to form an “Enterprise” in 2003, in order to engage in various real estate ventures, including acquiring real property known as 227 East 45th Street, New York, New York (the “Premises”). Nehmadi formed defendant Benita Holdings, LLC (“Benita”) for the purpose of acquiring the Premises. Ostad contributed capital to Benita’s down payment in exchange for a 10% interest in the Premises. After Nehmadi and Benita refused to account for Ostad’s 10% interest in the Premises, Ostad filed a complaint seeking, inter alia, an accounting of all proceeds generated by the Premises, the formation of a constructive trust over the Premises and Benita.

Ostad filed a notice of pendency pursuant to CPLR § 6501 concurrently with the summons and complaint on the grounds that his request for relief implicated a 10% interest in the ownership of the Premises. Section 6501 is applicable only where the “judgment demanded would affect the title to, or the possession, use or enjoyment of, real property . . . .” The defendants moved to vacate and cancel the notice of pendency, claiming the complaint alleged interest in a partnership, not in real property.

Justice Fried limited his review to the face of the original complaint, without “inquiry . . . into the underlying transactions or the merits of the claim.” Ostad at 4. Moreover, his review was limited to the original complaint, despite that Ostad had filed an amended complaint after service of defendant’s motion to vacate, because “defects in the filing of the original notice of pendency cannot be cured based on the filing of an amended complaint.” Id.

Citing ample case law from the Second Circuit to the Appellate Division, Justice Fried found that “New York courts have confirmed the notice of pendency to cases in which the plaintiff claims a direct interest in the defendant’s real property and actions asserting an interest in personal property do not fall within the scope of CPLR § 6501. Ostad at 6. Therefore, “notices of pendency may not be used in actions where the relief sought is a declaration of ownership in a corporation, even where the sole corporate asset is real property.” Id. Justice Fried further found that Ostad’s complaint, which included an allegation that Nehmadi “formed Benita for the purpose of acquiring title to the premises on behalf of the ‘Enterprise,’” failed to allege that Ostad himself owned an interest in the Premises. Id. at 7. Further, Ostad’s complaint “clearly state[d] that the Plaintiff and Nehmadi acted as members of the ‘Enterprise,’ and that the Premises were acquired by Benita on behalf of the ‘Enterprise.’” Id. at 9. After extensive analysis, Justice Fried found that Ostad had in fact averred the existence of a partnership, and that his investment “appeared as a contribution to the purported ‘Enterprise’ for the purpose of purchasing and sharing in the profits of the real estate indirectly owned by the ‘Enterprise.’” Id. at 10. Thus, despite that Ostad’s complaint plainly sought to recover 10% of the Premises that Nehmadi allegedly promised to Ostad, the Court found that Ostad was in fact claiming an interest not in real property, but in personality, which fell outside the scope of CPLR § 6501.

Moreover, Ostad could not salvage the notice of pendency based on his request for a constructive trust. While Justice Fried acknowledged that “certain actions seeking to impose a constructive trust on real property have been deemed to affect title to real property . . . courts applying New York law have held that the requirements of CPLR § 6501 may be satisfied if a cause of action involves the imposition of a constructive trust on real property and the judgment demanded will affect the title to, or the possession, use or enjoyment of real property.” Ostad at 12. Because Ostad had not alleged a transfer of real property, the court could not justify the imposition of a constructive trust, and so could not further justify a notice of pendency on that basis.

Finally, Justice Fried refused to award the defendants the costs incurred in filing their motion to cancel the notice of pendency pursuant to CPLR § 6514(c). According to the court, it may cancel a notice of pendency for procedural reasons such as untimely service of process and has discretion to cancel a notice of pendency “if the plaintiff has not commenced or prosecuted the action in good faith.” Ostad at 16-17. Neither provision for cancellation “was applicable to the defendant’s request for cancellation of the notice of pendency,” and the defendants “eschewed their motion to cancel under CPLR § 6514, instead proceeding under CPLR § 6501 to vacate the Notice of Pendency.” Id. at 17. Instead, defendants had in fact moved to vacate the notice of pendency, a procedure distinct from moving to cancel a notice of pendency. Accordingly, Justice Fried refused to award any costs to defendants.

In light of Ostad, litigants should make careful note of the requirements for filing a notice of pendency. They must claim a direct interest in real property. An indirect interest through a partnership or other entity, will not suffice, even if the litigant requests the imposition of a constructive trust over the property.

For further information, please contact Sarah Aberg at (212) 634-3091.

Employers Cannot Bring Unjust Enrichment Claim For Unearned Pay Where Payments Are Governed By An Employment Contract

Sheppard Mullin — Mon, 04 Apr 2011 14:36:18 -0500

By Lisa Lewis

On December 14, 2010, Justice James A. Yates of the New York Commercial Division issued a decision on a motion to dismiss in Mount Sinai School of Medicine v. Konstadinos A. Plestis, M.D., Index No. 601314/2010 (Sup. Ct., NY County, December 14, 2010). The decision addresses the issue of whether an employer can bring an unjust enrichment claim for unearned pay against a former employee where the payments at issued were governed by an employment contract.

Factual Background

In June 2005, plaintiff Mount Sinai School of Medicine of New York University (“Mount Sinai”) employed defendant Konstadinos A. Plestis, M.D. (“Defendant” or “Dr. Plestis”) pursuant to a three-year employment contract (the “Employment Agreement”) as an Associate Director to one of its surgery programs at Mount Sinai Hospital (the “Hospital”) and as an Assistant Professor of Cardiothoracic Surgery at Mount Sinai. Under the terms of the Employment Agreement, Dr. Plestis received a base salary of $160,00 per year and an annual supplement of $590,000 for the first two years. Dr. Plestis was required to meet a Minimum Productivity Target (“MPT”) in order to receive the annual supplement from the third year of his employment onwards. The MPT required him to perform surgical services that grossed a target amount of $875,000 in receipts to the Hospital.

Mount Sinai alleges that it paid Dr. Plestis his full salary and annual supplement for his third year of employment and the pro-rated salary and annual supplement for his fourth years of employment up until the time of his resignation. Mount Sinai further alleges that Dr. Plestis failed to meet his productivity targets during his third and fourth years and, therefore, was not entitled to the full amount of the annual supplement.

Mount Sinai commenced an action against Dr. Plestis to recover $336,001.00 in overpaid compensation. The complaint contains two causes of action against Dr. Plestis. First, Mount Sinai claimed that Dr. Plestis breached the Employment Agreement by failing to return money that he did not earn under the Employment Agreement. Second, Mount Sinai claimed that Dr. Plestis was unjustly enriched by his failure to return the unearned funds.

Motion to Dismiss

Dr. Plestis filed a motion to dismiss the complaint on several grounds, including failure to adequately state facts supporting an unjust enrichment claim. Relying on case law setting forth the elements of a cause of action for unjust enrichment, Dr. Plestis argued that Mount Sinai “failed to allege that (1) equity and good conscience entitle plaintiff to the relief sought, (2) that defendant’s conduct was tortious or fraudulent, and (3) a benefit was conferred to defendant under mistakes of law and fact.” Mount Sinai, at p. 5. Mount Sinai responded arguing that equity and good conscience required Dr. Plestis to repay the money to Mount Sinai since Mount Sinai abided its contractual obligations and relied on promises made by Dr. Plestis to return portions of the supplemental pay that did not meet the MPT requirements.

In granting the motion to dismiss, Justice Yates noted that “[u]njust enrichment occurs where a defendant enjoys a benefit bestowed by plaintiff, but without adequate compensation to the plaintiff.” Mount Sinai, at p. 5 (citing Sergeants Benevolent Assn. Annuities Fund v. Renck, 19 A.D.3d 107, 111 (1st Dep’t 2005)). However, relying on The Limited, Inc. v. McCrory Corp., 169 A.D.2d 605, 607 (1st Dep’t 1992), Justice Yates explained that “a claim for unjust enrichment cannot stand when based on a subject matter governed by a contract.” Mount Sinai, at p. 5. The Employment Agreement between the parties specifically addressed the supplemental payments at issue. As a result, Justice Yates dismissed the unjust enrichment claim in favor of the claim for breach of contract brought by Mount Sinai.

Conclusion

This case serves as a reminder to employers of the general rule that “an enforceable written contract precludes recovery in quasi contract with respect to events arising from the same subject matter.” See Curtis Properties Corp. v. Greif Companies, 236 A.D.2d 237, 239 (1st Dep’t 1997). In particular,an employer cannot bring an unjust enrichment claim for unearned pay against an employee where the payments at issue are governed by an employment contract. Instead, where an employee or former employee improperly retains unearned payments made pursuant to the terms of an employment contract, the proper course of action for the employer is to bring a claim for breach of contract.

For further information, please contact Lisa M. Lewis at (212) 634-3046.

Are You A Foreign Company With A Relationship To A New York Company? It May Be Your Agent And Provide A Basis For Jurisdiction

Sheppard Mullin — Mon, 04 Apr 2011 14:26:03 -0500

By Kathryn J. Hines

In Arbeeny v. Kennedy Executive Search, Index No. 105733/2007 (Sup. Ct., NY County, Jan. 14, 2011) ("Arbeeny"), Defendants Jason Kennedy ("Kennedy") and Kennedy Associates ("Kennedy Associates ") (collectively the "Moving Defendants") moved to dismiss on the basis of Plaintiff Daniel Arbeeny’s failure to serve the complaint in a timely manner pursuant to CPLR § 306-b. Justice Eileen Bransten, of the New York Commercial Division, granted the Moving Defendants’ motion to dismiss as to Kennedy but denied it as to Kennedy Associates. In so doing, she addressed issues that may be important to United States-based companies that have a relationship with foreign corporations.

Background

Plaintiff was formerly employed by Kennedy Executive Search ("KES"). KES was a New York-based executive search firm and was affiliated with Kennedy Associates, a British executive search firm. The underlying suit arose when KES allegedly lowered Plaintiff’s salary and terminated him for refusing to accept the reduction, allegedly a violation of Plaintiff’s employment agreement. Plaintiff commenced the action seeking to recover outstanding salary and commission pay.

KES and Jack Kandy, the former president of KES, were the only defendants that Plaintiff served. These defendants moved to dismiss. The court granted their motion to dismiss in April of 2008, but the First Department reversed in part in January of 2010. After the case was remanded, Kennedy Associates and Kennedy, moved to dismiss on the ground that they had not been served.

"Mere Department" and Agency Theories

In opposing Kennedy Associates’ motion to dismiss, Plaintiff argued that service upon KES constituted service upon Kennedy Associates because KES was a "mere department" of Kennedy Associates. Plaintiff also argued that KES was Kennedy Associates’ agent.

New York courts have repeatedly held that where a subsidiary is shown to be a "mere department" of a parent corporation, service on the subsidiary will constitute service on the parent. Though she acknowledged this history, Justice Bransten ultimately held that Plaintiff failed to show that KES was a mere department of Kennedy Associates. In so doing, she relied on a number of factors identified by the Second Circuit in Volkswagenwerk Aktiengesellschaft v. Beech Aircraft Corp., 751 F.2d 117, 120-22 (2d Cir. 1984). These factors include (i) the financial dependency of the subsidiary on the parent, (ii) the degree to which the parent corporation interferes in the selection and assignment of the subsidiary’s executive personnel and fails to observe corporate formalities, and (iii) the degree of control over the marketing and operational policies of the subsidiary. See id. While Plaintiff alleged that these factors were present, Justice Bransten found that Plaintiff failed to submit evidence to support the allegations and, therefore, the Court held that KES was not a "mere department" of Kennedy Associates.

However, Justice Bransten found Plaintiff’s agency theory to be meritorious. Because KES and Kennedy Associates were commonly owned and KES was established to do all the business that the United Kingdom-based Kennedy Associates could do if it were present in New York, Justice Bransten held that KES was, for jurisdictional purposes, an agent of Kennedy Associates. Thus, service upon KES was sufficient for service upon Kennedy Associates.

The Moving Defendants asserted that the "mere department" and agency theories were inapplicable in actions where New York’s long-arm statute, CPLR § 302, is the alleged basis for personal jurisdiction. The Moving Defendants argued that because Plaintiff’s cause of action had a basis in New York, Plaintiff could not invoke the "presence doctrine" where another basis for jurisdiction existed. The presence doctrine provides that if an entity is doing business in New York, it is “present” in New York for jurisdictional purposes. Justice Bransten rejected Moving Defendants’ argument. The Court held that while there is no requirement that a court undertake the presence doctrine analysis when the long-arm statute provides a basis for personal jurisdiction over the parent corporation, this does not mean that the presence doctrine cannot be used when there is an alternative basis for personal jurisdiction. See Arbeeny, at pg. 6.

For further information, please contact Kathryn J. Hines at (212) 634-3054.

"I Quit," "No, You're Fired!" New York Supreme Court Tells Employer to Think Twice Before Terminating Employees Without Setting Forth a Reason

Sheppard Mullin — Thu, 27 Jan 2011 08:11:06 -0500

By: Eric Raphan and Jonathan Sokolowski*

Justice Melvin L. Schweitzer of the New York Commercial Division recently issued a decision in Greater Talent Network, Inc. v. Alec Melman, et. al., Index No. 650522/2010 (Sup. Ct., NY County, Dec. 22, 2010) that can have important ramifications for New York employers.

Background

The plaintiff, Greater Talent Network (“GTN”), acts as an agent for celebrity speakers in connection with their dealings with event organizers and sponsors. Defendants Alec Melman and Daniel Ymar were employed by GTN as account associates, responsible for developing leads on events for GTN’s clients, obtaining speaking engagements for GTN’s clients, and assisting event organizers and sponsors in preparing for speaking engagements. GTN provided Melman and Ymar with access to GTN’s deal structures and confidential information so that Defendants could effectively carry out their job responsibilities.

Both Melman and Ymar had employment contracts with GTN pursuant to which they were to receive commissions in the amount of 35% of the net proceeds that resulted from their efforts. Their employment contracts further provided that if their employment was terminated for reasons other than “for cause” (as such term is defined in their contracts), then they were to receive a percentage of the amount that had already accrued to them for services performed and not paid out during their employment with GTN. Both of their contracts contained non-compete, non-solicit and confidentiality clauses that extended for a period of one year following the termination of their employment.

In April 2009, Melman and Ymar informed GTN of their intent to resign from their employment. In response, GTN immediately terminated Melman and Ymar without stating a reason and sent them a letter detailing their post-employment obligations, including the obligations set forth in their restrictive covenants. Melman and Ymar assured GTN that they would not contact any former customers or use any confidential information during the period set forth in their restrictive covenants. Melman and Ymar then incorporated Gotham Artists LLC (“Gotham”) to perform services that compete with GTN (Melman, Ymar and Gotham are referred to herein collectively as “Defendants”).

Procedural History

GTN commenced an action against Defendants for breach of contract, breach of duty of loyalty, unfair competition, and misappropriation. GTN alleged that Defendants had misappropriated GTN’s confidential information and that Melman and Ymar violated their non-compete and non-solicit obligations to GTN. Melman and Ymar filed a counterclaim against GTN for breach of contract alleging that GTN failed to pay them certain commissions. GTN filed a motion to dismiss Melman’s and Ymar’s counterclaim. Defendants then filed a motion for partial summary arguing that the restrictive covenants set forth in their employment contracts with GTN are too broad in scope and, thus, invalid as a matter of law.

GTN’s Motion to Dismiss Melman’s and Ymar’s Counterclaim for Unpaid Commissions

In denying GTN’s motion to dismiss Melman’s and Ymar’s counterclaim for unpaid commissions, Justice Schweitzer explained that the relevant issue was whether Melman and Ymar were terminated “for cause” as such term is defined in their employment contracts. If Melman and Ymar were terminated “for cause” then GTN was under no obligation to pay Defendants any commissions following their termination. Justice Schweitzer held that neither Melman nor Ymar were terminated “for cause” because, after Melman and Ymar gave notice of their intent to resign from GTN, GTN immediately terminated their employment without setting forth a reason.

Defendants’ Motion for Partial Summary Judgment

Defendants first argued that the restrictions imposed on Melman and Ymar are broader than is required to protect GTN’s legitimate interests and are, thus, unenforceable as overbroad. GTN countered such argument by noting that New York courts have protected trade secrets and confidential information where the services performed by the employee are unique or special. GTN also argued that Melman and Ymar were in a unique position at GTN because of the access GTN gave them to GTN’s confidential information. Justice Schweitzer held that the “uniqueness” of Melman’s and Ymar’s job duties and the access that they had to confidential information are questions of fact that could not be resolved on summary judgment.

Defendants further argued that the restrictive covenants impose an undue hardship on Melman and Ymar because such covenants restrict them from working with persons and entities that GTN does not and has never represented. GTN argued that the reasonableness of the restrictions at issue should be examined in the context of its duration and geographical scope. Justice Schweitzer again agreed with GTN and held that such issues were questions of fact inappropriate for summary judgment.

Finally, Defendants argued that Melman’s and Ymar’s employment contracts were unenforceable because Melman and Ymar did not have equal bargaining power with GTN when negotiating their employment contracts. Once again, Justice Schweitzer held that issues regarding whether Melman and Ymar were sophisticated employees who had the opportunity to negotiate their employment contracts with GTN at arm’s length was an issue of fact and could not be decided on summary judgment.

Conclusion

New York employers can learn at least two valuable lessons from this decision. First, where, as here, the basis for an employee’s termination directly impacts whether the employee is entitled to certain post-termination payments, the employer must clearly set forth the basis of the employee’s termination in writing at the time of such termination. If an employer fails to provide the employee with a basis for his/her termination the employer may be held liable for failing to remit certain post-employment payments to the employee.

Second, Justice Schweitzer’s decision reiterates the fact that when determining whether a post-employment restrictive covenant is enforceable because the employee provided unique services, one must review all aspects of the former employee’s employment. More specifically, a fact-finder must not only look at the employee’s job duties and skills, but must also look at the types of information the employer provided to the employee so that the employee could perform his/her job duties.

For further information, please contact Eric Raphan at (212) 634-3045.

*Jonathan Sokolowski is a law clerk at Sheppard, Mullin, Richter & Hampton LLP currently admitted to the New Jersey Bar and awaiting admission to the Bar of the State of New York.

Holding A Note That References Another Document? It Still May Permit You To Obtain Summary Judgment in Lieu of Complaint

Sheppard Mullin — Thu, 27 Jan 2011 08:01:38 -0500

By Jane Qin

In Zyskind v. FaceCake Marketing Technologies, Inc., Index No. 651240/10 (Sup. Ct., NY County, Dec. 15, 2010) (“FaceCake Marketing”), Justice Bernard J. Fried granted summary judgment in lieu of complaint to plaintiffs Beryl Zyskind and Joel Gold, holding that ten notes issued to them (the "Notes") on account of investment loans they made to the defendant, FaceCake Marketing Technologies, Inc. ("FaceCake"), were instruments "for the payment of money only."

On September 28, 2004, Beryl Zyskind and Joel Gold (the "Plaintiffs") each executed separate, identical stock purchase agreements with FaceCake (the "Agreements"). Under the terms of the Agreements, Plaintiffs each promised to invest $625,000 in FaceCake. In exchange for each investment, Zyskind and Gold were to receive a corresponding note and FaceCake stock.

Pursuant to the Agreements and in exchange for each investment loan made by Zyskind and Gold, FaceCake issued the Notes to the Plaintiffs, totaling $650,000. Each Note recited a sum certain to be paid to the holder of the Note. Each Note also contained an unconditional promise to pay and a waiver of all defenses to enforcement of the Note, stating that "[t]he obligations to make the payments provided for in this Note are absolute and unconditional and not subject to any defense, set-off, counterclaim, rescission, recoupment, or adjustment whatsoever."

The Notes also referenced obligations – representations and warranties – Plaintiffs made under the Agreements, stating, "This Note was issued by [FaceCake] pursuant to the Agreement, dated as of September 28, 2004 between Holder and [FaceCake]. In connection with the Agreement, the Holder made representations and warranties to [FaceCake] upon which [FaceCake] is relying in connection with the Transaction evidence [by this note]."

Under CPLR 3213, to prevail on a motion for summary judgment in lieu of complaint, the plaintiff must submit proof of the agreement, its unconditional terms of repayment, and default by the defendant. The agreement sued upon must clearly be for the payment of money only, that is, it must contain the defendant's explicit acknowledgment of a debt and must suffice to prove the debt by itself. The instrument and evidence of failure to pay constitute a prima facie case of summary judgment in lieu of complaint. Once plaintiff has met its burden, it is incumbent upon defendant to establish, by admissible evidence, that a triable issue of fact exists. FaceCake Marketing at 3.

FaceCake argued that the Plaintiffs did not establish a prima facie case because the Notes referred to the obligations contained in the Agreements and therefore did not qualify as agreements or instruments for the payment of money only. FaceCake argued that the language in the Notes indicated that the Notes were issued to the Plaintiffs based upon obligations that are not clear from the face of the Notes and require reference to the Agreements.

Relying on First Interstate Credit Alliance, Inc. v. Sokol, 179 A.D.2d 583, 684 (1st Dep't 1992), Justice Fried held that an instrument that contains more than an unconditional promise to pay money is not necessarily disqualified as being for the payment of money only. The mere presence of additional provisions in the [note] does not constitute a bar to CPLR 3213 relief, provided that the provisions do not require additional performance as a condition precedent to repayment, or otherwise alter the defendant's promise of payment. FaceCake Marketing at 4.

Thus, the Court held, the Notes, even though they contained more than an unconditional promise to pay money, were nonetheless "for the payment of money only." Justice Fried noted that the Notes contained unconditional promises to pay a sum certain and there was no dispute that FaceCake defaulted on the Notes. The reference to the Agreements contained in the Notes did not add to or alter FaceCake's payment obligations. The Agreements merely provided background for the obligations described in the Note by referring to the holder's primary obligation. Therefore, the reference to the Agreements does not prevent the Notes from being enforceable for the payment of money only. Id. at 4-5.

This case demonstrates that summary judgment in lieu of complaint can be granted even if the obligations evidenced by an agreement or note which contains more than simply an unconditional promise to pay money, so long as the additional information in the agreement or note does not alter or impose additional obligations for repayment. Thus, holders and issuers of notes should be aware that so long as a note contains an unconditional promise to pay money and nothing in another agreement alters or adds to the repayment obligations, it will be an instrument for the "payment of money only" under CPLR 3213.

For further information, please contact Jane Qin at (212) 634-3093.

Untimely Filing Of Motion To Dismiss Does Not Warrant Automatic Dismissal Where Motion Is Meritorious And Opposing Party Will Not Be Prejudiced

Sheppard Mullin — Thu, 27 Jan 2011 07:07:02 -0500

By: Sean J. Kirby

In Brown, et al. v. Noble, Inc., et al., Index No. 600876/2010 (Sup. Ct., NY County, Dec. 2, 2010) (“Brown v. Noble”), Justice Bernard Fried granted defendant Thomas Caruso’s (“Caruso”) motion to dismiss plaintiffs Robert Brown and RB Group LLC’s (“Plaintiffs”) complaint, even though the Motion was filed approximately 1 week late.

In June 2009, in connection with a loan, defendant Noble, Inc. (“Noble”), executed a promissory note (the “Note”) in favor of plaintiff Robert Brown (“Brown”). Caruso was the signatory on the Note as the President of Noble, and the Note required Noble to make monthly interest payments to Brown from July 2009 through June 2010. In July 2009, Brown also entered into an accounts receivable purchase agreement (the “Purchase Agreement”) with Noble, which Caruso also signed as the President of Noble. While Caruso signed both the Note and the Purchase Agreement on behalf of Noble, neither the Note nor the Purchase Agreement imposed any obligations on Caruso. This action arose out of Noble’s alleged failure to make the requisite payments under the Note and the Purchase Agreement.

On April 7, 2010, Plaintiffs served their complaint upon defendants Noble and Caruso, asserting six causes of action: (i) breach of contract, (ii) unjust enrichment, (iii) breach of implied covenant of good faith and fair dealing, (iv) promissory estoppel, (v) fraudulent misrepresentation, and (vi) indemnity. The parties stipulated that defendants’ time to respond to the complaint was extended until May 31, 2010 which, by virtue of Memorial Day, meant that defendants’ response was due on June 1, 2010. However, Caruso did not serve the Motion until June 7, 2010, thereby making the Motion untimely.

While Justice Fried ultimately granted the Motion on all causes of action because Plaintiffs failed to plead and/or submit any evidence that Caruso had any individual obligations under either the Note or the Purchase Agreement, the Court first had to decide whether the late filing of the Motion mandated a denial of the Motion. In reaching the decision that the untimely filing of the Motion did not warrant automatic denial, Justice Fried relied on the First Department’s decision in Riddick v. City of New York, 4 A.D.3d 242, 245 (1st Dep’t 2004). In Riddick, the First Department affirmed a Supreme Court decision granting summary judgment, even though the motion for summary judgment was untimely filed, because the motion was meritorious and the opposing party did not suffer any prejudice from the late filing. Riddick, 4 A.D.3d at 245.

Applying Riddick, Justice Fried held that the untimely filing of the Motion did not warrant automatic dismissal because the Motion was meritorious (Caruso was not a party to the Note or the Purchase Agreement) and it would be “contrary to the interests of judicial economy to deny the [M]otion and allow meritless causes of action to continue, simply because Caruso served the motion several days after his time to respond expired.” Brown v. Noble at p. 4 (citing Riddick, 4 A.D.3d at 245). Justice Fried also found that Plaintiffs failed to identify any prejudice they would suffer as a result of the complaint being dismissed against Caruso because the action will continue against Noble, the party which is actually a signatory on the Note and Purchase Agreement. Finally, Justice Fried found that Plaintiffs’ argument that the late filing mandated denial of the Motion was unsupported by the case law cited by Plaintiffs’ because, in those cases, the motions were not denied solely on the bases of untimeliness. Brown v. Noble at p. 4 (citing Specht v. Lanzuter Benevolent Assoc., No. 105143/2008, 2010 WL 1047677 (Sup. Ct., NY County, Mar. 17, 2010); Manhattan Real Estate Equities Group LLC v. Pine Equity NY, Inc., No. 603259/2003, 2005 WL 5351322 (Sup. Ct., NY County, Apr. 4, 2005)).

For further information, please contact Sean J. Kirby at (212) 634-3023.

Bank of America Avoids Multiple Liability By Filing Interpleader Complaint

Sheppard Mullin — Tue, 21 Dec 2010 08:05:35 -0500

By Amanda Zablocki

On October 12, 2010, Judge Melvin L. Schweitzer held that Bank of America's filing of an interpleader complaint to resolve ambiguities in an indenture contract was in good faith, reasonable, and prudent, and therefore denied the defendant's motion to dismiss. Bank of America, N.A. v. Prima Capital Advisors LLC, Index No. 600740/10 (Sup. Ct., NY County Oct. 12, 2010). The Court further held that a material question of fact existed, weighing against summary judgment. Id.

Prima Capital Investors LLC ("Prima") is an advisory firm that, among other things, establishes investment vehicles through which its clients and other investors may purchase various types of assets. In May 2005, Prima created an investment vehicle that issued notes (the "2005 Notes") to various investors (the "2005 Note holders"). The 2005 investment vehicle is comprised of two companies: Prima Capital CDO 2005-1 Ltd. and Prima Capital CDO 2005-1 Corp (serving together as the "2005 Issuer"). The 2005 Issuer used funds paid by the 2005 Note holders as the purchase price for the 2005 Notes to purchase commercial mortgage assets. In November 2006, Prima created a second investment vehicle issuing notes (the "2006 Notes") to investors (the "2006 Note holders"). The 2006 investment vehicle is likewise comprised of two companies: Prima Capital CRE Securitization 2006-1 Ltd. and Prima Capital CRE Securitization Corp (the "2006 Issuers," and together with the 2005 Issuers, the "Issuers"). The 2006 Issuer used funds paid by the 2006 Note holders as the purchase price for the 2006 Notes to purchase commercial mortgage assets.

Pursuant to two indentures, issued in 2005 and 2006, Prima engaged LaSalle Bank N.A. to serve as Trustee with respect to the 2005 and 2006 Notes. In October 2007, Bank of America, N.A. purchased LaSalle and assumed all of the agreements entered into by LaSalle with respect to the Notes and Indentures. The 2005 Issuer issued nine classes of Notes under the 2005 indenture, designating classes A-1 through F as Senior Notes, and classes G and H as Junior Notes. Similarly, the 2006 Issuer issued eleven classes of Notes under the 2006 Indenture, designating classes A through G as Senior Notes, and classes H through K as Junior Notes. Each class of Notes is subordinated to the class(es) above it, and the income flows down sequentially to each class.

Pursuant to the 2005 Collateral Management Agreement ("CMA") and the 2006 CMA, Prima served as Collateral Manager for the 2005 Notes and the 2006 Notes, respectively. As Collateral Manager, Prima was tasked with "determining whether Collateral Interests have become Impaired Interests or Credit Risk Interests." Bank of America, N.A., p. 5. The Indentures define Impaired Interests as follows:

A Collateral Interest with respect to which foreclosure or default (whether or not declared) with respect to the underlying Commercial Mortgage Loan has occurred or, with respect to any Collateral Interest that is a CMBS, CRE CDO Security or a REIT Bond (i) the rating of such Collateral Interest has been reduced by at least three rating subcategories or withdrawn by any Rating Agency from the ratings that were in place as of the Closing Date (or, in the case of Substitute Collateral Interest, the date of substitution) or has been put on "credit watch" or similar status for possible downgrading, qualification or withdrawal or (ii) since the date such Collateral Interest is delivered to the Trustee, the principal amount thereof has been reduced without receipt of a corresponding principal distribution as a result of allocation to such Collateral Interest of a "realized loss," "collateral support deficit," "additional trust fund expense" or similar item.

Id. When Prima instructed Bank of America to declare certain Impaired Interests no longer impaired and to disburse the income from those interests accordingly Bank of America declined to do so, believing there was an ambiguity in the Indentures as to whether the Collateral Manager had the authority to declare Impaired Interests to be no longer impaired. Concerned about exposure to multiple liability, Bank of America issued a notice to the holders of the 2005 and 2006 Notes regarding the recharacterization of the Impaired Interests and inviting the Note holders' input and interpretation of the relevant provisions of the Indenture. Bank of America informed the Note holders that the interest payments on the relevant notes would be held in an escrow account pending resolution of the issue. Prima notified Bank of America of its position that Prima's order fell within its discretion and Bank of America's failure to honor the order was a breach of the Indenture. One group of Note holders, Oz Master Fund Ltd, et al. ("Oz"), notified Bank of America of its position that once the Collateral Interest was declared "Impaired," the recharacterization was permanent, claiming that neither the Indenture, CMA or related Offering Memorandum contemplated recharacterization, and market practice is consistent with its position.

On March 23, 2010, Bank of America initiated an Interpleader action pursuant to CPLR 1006. Both Oz and Prima answered and asserted counterclaims against Bank of America. Bank of America's moved to dismiss Prima's second affirmative defense and counterclaims. Prima opposed Bank of America's motion to dismiss and cross-moved for dismissal of the Interpleader and for summary judgment. Soon thereafter Oz also moved for summary judgment.

The Court found that the provision of the CMAs that afforded Prima the task of "determining whether Collateral Interests have become Impaired Interests or Credit Risk Interests" was "tellingly . . . silent" on the issue of whether Prima had the authority to declare the reverse. Id. at p. 12. The Court found in contrast that the CMAs provided Prima with "full power and authority 'to do any and all things in connection with its servicing and management duties which it may deem necessary or desirable and are permitted or not expressly prohibited by this Agreement or the Indenture." Id. at pp. 12-13. Finding neither Prima's nor Bank of America's contentions regarding the contradictory nature of these sections to be convincing, open questions remained as to a material fact, which rendered the Court unable to grant summary judgment.

Prima also argued that Bank of America could not bring an interpleader action where it could not establish that it was subject to multiple liability. Bank of America argued in response that New York courts have sanctioned the use of interpleader as an anticipatory action and that a stake holder is not required to objectively assess the validity of claims against it. Id. at pp. 13-14 (citing Fischbein, Badillo, Wagner v. Tora Realty Co., 193 A.D.2d 442 (1st Dept 1993); Bank of New York v. First Millennium, Inc., 607 F.3d 905, 922 (2d Cir. 2010); United States Trust v. Alpert, 10 F. Supp. 2d 290, 301 (S.D.N.Y. 1998); Viewhaven, Inc. v. Danan, No. 85 Civ. 9603 (LLS), 1986 WL 6779, at *2, 1986 U.S. Dist. LEXIS 24279 (S.D.N.Y. June 12, 1986)).

The Court held that the interpleader action was justified because: (1) Bank of America had been notified by Note holders holding opposing opinions with respect to Prima's authority to recharacterize the Interests; (2) the determination of this issue will result in an allocation of economic benefits favoring only one group of competing Note holders; (3) the opposing positions of the Note holders; and (4) Bank of America acted in good faith, reasonably and prudently when it filed the Interpleader.

Two distinct issues are therefore raised by this decision. First, Bank of America, N.A. appears to adopt a somewhat liberal view of the requirements that should be present in order to file a proper interpleader action. Justice Schweitzer seems to adopt the standard set forth in Viewhaven, Inc. — that the validity of an interpleader action rests on "whether 'the party requesting it has real and reasonable fear of double liability and vexatious, conflicting claims.'" Bank of America, N.A., at p. 14 (citing Viewhaven, Inc., 1986 WL 6779, at *2).

Second, Justice Schweitzer's decision left open the issue, at this time, whether Impaired Interests can be recharacterized to be no longer impaired. Since the Court found that the CMAs contained contradicting provisions regarding Impaired Interests, indenture trustees and collateral managers should carefully review similar agreements when requested to take action or requesting a party to take action.

Amanda Zablocki is a law clerk at Sheppard, Mullin, Richter & Hampton LLP and is currently awaiting admission to the Bars of the State of New York and New Jersey.

Court Refuses to Dismiss Tort and Defamation Claims Against Authors and Publisher of Book About Cryonics Organization

Sheppard Mullin — Tue, 21 Dec 2010 07:59:18 -0500

By Lisa Lewis

On October 29, 2010, Justice James A. Yates refused to dismiss tort and defamation claims, among other claims, against the authors and the publisher of a book about Alcor Life Extension Foundation, Inc. (“Alcor”). Alcor Life Extension Foundation, Inc. v. Larry Johnson, Vanguard Press, Inc. and Scott Baldyga, Index No. 113938/2009 (Sup. Ct., NY County, Nov. 3, 2010). Alcor is a not-for-profit organization in the field of cryonics, which is the practice of keeping a clinically dead human body or brain frozen in the hope of later restoring it to life with the help of future technologies. The book, called Frozen, was written by Larry Johnson (“Johnson”), a former employee of Alcor, and co-author Scott Baldyga (“Baldyga”) and published by Vanguard Press, Inc. (“Vanguard”). Alcor alleged in its Complaint that Frozen disclosed confidential and proprietary information about Alcor and its members, including information regarding baseball legend, and alleged Alcor member, Ted Williams.

Johnson was employed by Alcor for about seven months and, during his time at Alcor, he was promoted to the position of Chief Operating Officer (“COO”). Alcor alleged that, as the COO, Johnson had access to “patient records, case files, medical procedures, membership information, scientific research, developing technologies, methodologies and operations procedures of Alcor.” Alcor further alleged that, the day after his employment at Alcor ended, Johnson launched a website called www.FreeTed.com where the public could pay to view private and confidential information of Alcor, including alleged photographs of deceased baseball player Ted Williams.

After taking efforts to prevent Johnson from disclosing confidential information, including prior actions against Johnson and a default judgment barring Johnson from publishing or communicating any information about Alcor, Alcor learned in September 2009 that Johnson and Baldyga were planning to publish a book about Alcor through Vanguard. Despite Alcor’s efforts to prevent publication, Frozen was released to the public on October 4, 2009. In the Complaint, Alcor claims that Frozen disclosed confidential and proprietary information, member information and patient information, including information regarding Ted Williams. The Complaint asserted claims against Johnson for breach of contract, breach of fiduciary duty and conversion. The Court denied the motion to dismiss with regard to certain of the claims against Johnson, finding that Alcor had sufficiently plead claims for breach of contract and breach of fiduciary duty against Johnson.

Alcor also set forth several tort claims against Vanguard and Baldyga, including claims for tortious interference with contract, aiding and abetting trade secret misappropriation, aiding and abetting breach of fiduciary duty and aiding and abetting conversion. In support of these claims, Alcor alleged that Vanguard published Frozen despite being aware of agreements and duties that barred Johnson’s disclosure of Alcor’s confidential information. Vanguard, on the other hand, argued that the First Amendment shielded it from all tort claims because “a stranger’s illegal conduct” in obtaining information provided to a publisher “does not suffice to remove the First Amendment shield from speech about a matter of public concern.” Alcor at pg. 12 (citing Bartnicki v. Vopper, 532 U.S. 514, 535 (2001)). Looking to the Bartnicki case, the Court noted that First Amendment protection applies only “to publishers who play no role in the initial unlawful acquisition and where the subject of the publication is a public figure.” In determining whether First Amendment protection applied in this case, Justice Yates analyzed the question of whether Alcor was a public figure. The Court noted that, while the courts have sometimes decided the issue of whether someone is a public figure on the pleadings alone, this question “may be a mixed question of fact and law.” In this case, Alcor denied that it was a public figure, but the defendants argued that Alcor had been soliciting media attention and had thrust itself into the public eye. Justice Yates found that the evidence submitted by defendants, including evidence that Alcor maintains an informational website, puts out some paper publications for the benefit of its members and is occasionally interviewed by the media for articles discussing the cryogenics field, to be insufficient to support a determination of public figure status on a motion to dismiss. As a result, the Court declined to dismiss the tort claims against Vanguard on First Amendment grounds. The Court then went on to find that Alcor had sufficiently plead certain tort claims against both Vanguard and Baldyga.

Alcor also brought defamation claims against all defendants based upon 32 allegedly defamatory statements in the book. The defendants argued that a heightened standard of review requiring proof of malice applied to the defamation claims because Alcor is a public figure. However, as set forth in the First Amendment analysis on the tort claims, the Court found that the determination of whether Alcor is a public figure was premature at this stage of the proceedings. Accordingly, the Court rejected the argument that the defamation claims should be dismissed for failure to plead malice.

The defendants further argued that the defamation claims should be dismissed because the allegedly defamatory statements were non-actionable. For example, the authors refer to a group of individuals called “Alcorians” in the book and they make statements alleging that the Alcorians were involved in crimes such as kidnapping and murdering people in order to conduct experiments. A claim for defamation lies only where “the defendant has published the matter ‘of and concerning the plaintiff.’ Consequently an impersonal reproach of an indeterminate class is not actionable.” Alcor at pg. 18 (citing Gross v. Cantor, 270 N.Y. 93 (1936)). Johnson argued that statements referring to “Alcorians” are non-actionable descriptions of an indeterminate group. The Court rejected this argument, however, because “the so-called group allegedly being defamed (Alcorians) is derived from the plaintiff’s name,” and, therefore, “it is reasonable to conclude that a fact finder or jury could find the statements ‘are of and concerning Alcor.’” Additionally, the Court rejected an argument by the defendants that the statements contained in the book were non-actionable opinions or benign statements. A defamatory statement is libelous per se if the statement “tends to expose the plaintiff to public contempt, ridicule, aversion or disgrace, or induce and evil opinion of him the minds of right-thinking persons.” Alcor at pg. 17 (citing Rinaldi v. Hold, Rinehart & Winston, 42 N.Y.2d 369, 379 (1977)). Justice Yates concluded that statements regarding kidnapping and murder, among others, implied Alcor’s participation in crimes and reprehensible conduct and, as a result, sufficiently stated a cause of action for defamation per se. As a result, the defamation claims were not dismissed.

In this case, the Court could not determine whether Alcor was a public figure at the motion to dismiss stage of the proceedings because the question of whether Alcor is a public figure was in dispute. As a result, the First Amendment did not shield the publisher from tort claims. Likewise, because it was too early in the proceeding to determine whether Alcor is a public figure, neither the publisher nor the authors could benefit from the heightened standard of review requiring proof of malice for defamation claims. Thus, the defamation claims also survived the motion to dismiss. While there may be some circumstances in which a court can determine as a matter of law that a person is a public figure, this case demonstrates that the courts will be reluctant to make such a determination where a plaintiff denies being a public figure and there is little evidence to support such a finding. In other words, a public figure determination should only be made where the facts are not seriously in dispute. Thus, publishers and authors alike must be aware that merely alleging that someone is a public figure will not be sufficient to shield them from tort liability or create a heightened standard of review for defamation claims.

For further information, please contact Lisa M. Lewis at (212) 634-3046.

You Failed To Read An Agreement That You Executed? It Will Probably Be Enforceable

Sheppard Mullin — Tue, 21 Dec 2010 07:15:45 -0500

By Mark E. McGrath

In Vulcan Power Co. v. Munson, Index No. 600712/09 (Sup. Ct., NY County, Dec. 3, 2010), the Honorable Richard B. Lowe III granted summary judgment to Plaintiff Vulcan Power Company (“Vulcan”) against Defendants Soo Min Fay, Doug Frosh, George Marshall, Cal Mitchell and Tim Shea (collectively, the “Non-Munson Defendants”) on a declaratory judgment claim relating to an agreement that the Non-Munson Defendants executed but never reviewed.

Vulcan, a geothermal energy company, was seeking an investment of over $100 million (the “Investment”) from institutional investors (the “Investors”) in early 2008. Defendant Stephen M. Munson (“Munson”) was the President and Chief Executive Officer of Vulcan until his termination in late 2008. Munson was responsible for negotiating with the Investors and, in April of 2008, Munson and certain of the Investors executed a letter agreement containing a term sheet. The term sheet contemplated multiple agreements, three of which were at issue in Vulcan Power: a stock purchase agreement, an amended and restated stockholders agreement (the “Stockholders Agreement”), and a stock purchase agreement concerning the sale of stock by Munson (collectively, the “Agreements”).

Vulcan was going to use some of the proceeds from the Investment to purchase a drilling rig, which had a closing deadline of July 25, 2008 and was contingent on the closing of the Investment. Negotiations regarding the Investment continued through Spring of 2008 and into late July of 2008. On July 24, 2008, Munson believed that he, Vulcan, and the Investors had reached an agreement on final terms. Munson and the Investors then agreed that once documents reflecting the agreement were presented, Munson would execute and return them.

On July 25, 2008, Munson sent the signature pages for the Agreements to Vulcan via facsimile. Munson claims he did not review the Agreements prior to signing. Munson also contacted the Non-Munson Defendants and told them their signature were needed on the Stockholders Agreement in order to close the Investment. The Non-Munson Defendants admitted that they never reviewed the Stockholders Agreement before signing it. In fact, the Non-Munson Defendants only received their respective signature pages at the time each executed the Stockholders Agreement. The Investment subsequently closed and the drilling rig was purchased by Vulcan.

After Munson was terminated, he and the Non-Munson Defendants challenged the Agreements claiming that they were not binding because they do not reflect a meeting of the minds. Munson and the Non-Munson Defendants alleged that Vulcan fraudulently appended their signature pages to documents containing terms that were not agreed upon. Vulcan filed the action seeking a declaration that the Agreements were enforceable.

In the action, Justice Lowe previously granted a motion to strike Munson’s answer for failing to comply with court orders and a default judgment. However, Munson declared bankruptcy before the default judgment was entered. The court subsequently entered an order on October 19, 2010 striking Munson’s affidavit in opposition to Vulcan’s motion for summary judgment.

In granting summary judgment to Vulcan and against the Non-Munson Defendants, Justice Lowe cited to a number of cases for the proposition that a “party who signs a document without any valid excuse for having failed to read it is conclusively bound by its terms.” Vulcan Power, at pg. 6 (citing Sorenson v. Bridge Capital Corp., 52 A.D.3d 265 (1st Dep’t 2008); Dale Gale Assocs., Inc. v. Hillcrest Estates, Ltd., 283 A.D.2d 386, 387 (2d Dep’t 2001)) (internal quotations omitted) (further citations omitted). However, the Court noted that there are exceptions to this general rule, such an when the person executing the agreement is illiterate, blind, or “ignorant of the alien language of the writing, and the contents thereof are misread or misrepresented to him by the other party, or even a stranger,” Vulcan Power, at pg. 6 (quoting Cash v. Titan Fin. Servs., Inc., 2009 NY Slip Op 00493 (2d Dep’t Jan. 27, 2009), and the party executing the agreement is “not otherwise negligent.” Vulcan Power, at pg. 6. Failing to obtain a document before executing is “at least as negligent as not reading the document.” Vulcan Power, at pg. 6 (citing Pimpinello v. Swift & Co., 253 N.Y. 159, 162-63 (1930)).

Since the Non-Munson Defendants admitted that they did not read the Stockholders Agreement before executing it, the only issue was whether Vulcan was responsible for the failure of the Non-Munson Defendants for not receiving a copy of the Stockholders Agreement. The Non-Munson Defendants testified at their depositions that they did not request the Stockholders Agreement due to the impeding deadline to close on the purchase of the drilling rig. However, Justice Lowe found that the pressure to close was made by Munson, not Vulcan. The Court also found that three of the Non-Munson Defendants had access to a fax machine on the date the Investment closed and, thus, nothing prevented the Non-Munson Defendants from obtaining the Stockholders Agreement.

Vulcan Power is a reminder that parties should be careful to fully review any agreements before executing. As Justice Lowe noted, there are some exceptions to the general rule that agreements are binding, but these exceptions are narrow. Accordingly, a party seeking to avoid enforcement of an agreement under one of the exceptions should ensure that the exceptions apply before seeking to assert such a defense.

For further information, please contact Mark E. McGrath at (212) 634-3056.

Yelp! Wins Dismissal of Claims for New York Deceptive Acts and Practices and Defamation Based upon Alleged Manipulation of User Reviews

Sheppard Mullin — Mon, 29 Nov 2010 15:14:10 -0500

By Eric O’Connor

In Reit v. Yelp, Inc., Index No. 600555/10, — N.Y.S.2d —, 2010 WL 3490167 (Sup Ct, NY County, Sept. 2, 2010) (“Reit”), Plaintiff Reit, a dentist, sued Yelp!, Inc. (“Yelp”) and Michael S., an anonymous poster, for defamation, and Yelp alone for deceptive acts and practices under New York’s General Business Law (“NYGBL”) §§ 349 and 350. Justice Jane S. Solomon vacated a prior entry of a TRO and held that (i) plaintiff’s defamation claim against Yelp is barred by the Federal Communications Decency Act of 1996, 47 USC § 230 (the “CDA”), and (ii) plaintiff’s claims under NYGBL §§ 349 and 350 must also be dismissed because Yelp’s alleged manipulation of reviews was business conduct and not addressed to consumers and, thus, was not a deceptive act or practice.

The Court followed a line of cases holding that the CDA shields interactive computer service providers, like Yelp, from defamation claims. However, under New York’s deceptive acts or practices laws, the CDA does not shield Yelp’s use of speech as leverage in its business model. If an interactive computer service provider directed more of its alleged misconduct at consumers, as opposed to the business-directed communications here, a plaintiff may be able to state a claim under New York law.

The CDA Shielded Yelp from the Defamation Claim.

Section 230 of the CDA grants “interactive computer service” providers immunity from liability for publishing false or defamatory material provided by third parties. Thus, the exercise of traditional editorial functions – like whether to publish, withdraw, postpone or alter content – are immune. Reit, 2010 WL 3490167, at *1-2 (citation omitted). However, an internet computer service could become an “information content provider” and lose its immunity if it provides its own speech or develops information. Id.

Here, Reit claimed that after he complained to Yelp about one anonymous and allegedly defamatory review, Yelp removed the ten existing positive reviews of his dentist business, allegedly in an attempt to coerce businesses into paying for advertising on Yelp.com. Id. at *1. Reit claimed that Yelp should lose immunity because its removal of positive posts was beyond the normal editorial function of selecting material for publication. Justice Solomon disagreed and held that Reit’s defamation claims are barred by the CDA because (i) the information was supplied by a third party, (ii) Yelp allegedly using “bad” posts in marketing does not change the nature of the posted data, and (iii) “Yelp’s selection of the posts it maintains on Yelp.com can be considered the selection of material for publication, an action ‘quintessentially related to a publisher's role’” Id. at *2 (citation omitted).

New York Deceptive Acts and Practices Claims Dismissed Because Alleged Conduct Was Not Directed at Consumers.

Reit’s basic complaint was that Yelp encourages business and individual consumers to believe that the reviews they consume are not manipulated by Yelp, even though Yelp’s business model deliberately manipulates the consumer posts to gain business advertisers. Id. at *2. Reit alleged that Yelp’s Business Owner’s Guide represents that its review pages are ordered, reviewed and removed by a computer algorithm “to avoid human bias.” Id. at *3. However, Yelp’s sales force allegedly uses negative reviews on the website as leads for new advertising business and then tells prospective business advertisers that they will assist them in deleting a number of troubling negative reviews. If the costumer refuses, Yelp supposedly deletes positive reviews and retains negative reviews of that business owner.

To plead a deceptive act or practice, a plaintiff must allege (1) consumer-oriented conduct that is (2) materially misleading to a reasonable consumer and that (3) plaintiff suffered injury as a result of the allegedly deceptive act or practice. Id. (citation omitted). Justice Solomon held that Reit failed at least two and possibly all three elements. Reit cannot satisfy the first element because Yelp’s alleged deletion of postings for the purpose of selling advertising, if true, is business conduct, not consumer oriented conduct. Second, there was nothing misleading to a consumer because the text of Yelp’s Business Owner’s Guide is addressed to business owners, not consumers seeking dentists. And, although not clear, the third element also seemed to fail because Reit “does not allege that he was a victim of the conduct he complains about.” Id. at *3-4.

For further information, please contact Eric O'Connor at (212) 634-3077.

Commercial Division Applies New York Law to Contract Dispute Even Though The Contract At Issue Contained A Colorado Choice-Of-Law Clause

Sheppard Mullin — Mon, 29 Nov 2010 15:10:18 -0500

By Sean J. Kirby

In Transfirst EPayment Services, Inc. v. Advanced Marketing Research, Ltd., et al., Index No. 602536/2008 (Sup. Ct. N.Y. County Sept. 29, 2010) (“Transfirst EPayment”), Justice Eileen Bransten granted the motion of plaintiff Transfirst EPayment Services, Inc. (“Transfirst”) for summary judgment on its breach of contract cause of action against defendants Advanced Marketing Research, Ltd. (“AMR”) and the Estate of Albert Dweck. In doing so, Justice Bransten applied New York law to Transfirst’s claims even though both of the agreements at issue contained choice of law clauses which mandated the application of Colorado law.

In 2007, AMR, a online furniture retailer, entered into an Agreement and a Guaranty with Transfirst, for Transfirst to provide AMR with credit card processing services for its online retail sales. The Agreement obligated AMR to reimburse Transfirst for all charge-backs, while the Guaranty obligated Albert Dweck to reimburse Transfirst in the event of an AMR default. Both the Agreement and the Guaranty contained Colorado choice-of-law clauses. The action arose out of AMR’s failure to reimburse Transfirst for credit card charge backs as provided for in the Agreement and defendant Joseph Dweck’s allegedly fraudulent listing of his father, Albert Dweck, as the owner of AMR and the guarantor of the Agreement (Joseph Dweck contends that he signed the Agreement and Guaranty on his father’s behalf because he felt that he would by rejected for credit card services because his previous furniture company went bankrupt five years before).

While Justice Bransten ultimately granted Transfirst’s motion for summary judgment against AMR and Albert Dweck on its breach of contract claim, the Court first had to determine whether New York or Colorado law governed the dispute. In deciding which state’s law to apply, the Court noted that it is the general policy of New York court’s to enforce choice-of-law clauses and it is clear that both the Agreement and the Guaranty mandate that Colorado law controls. However, relying on the Court of Appeals decision in Welsbach Elec. Corp. v. MasTec North America, Inc., 7 N.Y.3d 624, 628 (2006), the Court noted that in order to construe a choice-of-law clause as valid and enforceable, the chosen law must have a “reasonable relationship to the parties or the transaction.” Transfirst Epayment at p. 5 (quoting Welsbach Elec., 7 N.Y.3d at 628).

In determining whether the Colorado choice-of-law clause would be enforced, the Court analyzed three (3) factors. First, the Court looked at the domiciles of the parties and found that neither party was domiciled in Colorado, as Transfirst is a Delaware corporation with its principal place of business in Nebraska and AMR is a New York corporation with its principal place of business in New York. Second, the Court analyzed the connections underlying the transaction. Justice Bransten found that the transaction underlying the breach of contract action had no connection to Colorado, as AMR filled out the credit processing application and signed the Agreement in Brooklyn, and the application and the Agreement each directed AMR to return the documents to Transfirst’s offices in Nebraska. Finally, the Court noted that neither of the contracting parties argued for the application of Colorado law. In fact, Transfirst argued New York law in its summary judgment motion and neither defendant disputed to the application of New York law. Thus, given that neither plaintiff nor the defendants expressed any desire to apply Colorado law, and Colorado had no apparent connection to the parties or transaction at issue, the Court applied New York in deciding the motion for summary judgment.

In light of the Transfirst EPayment decision, it is important for parties, when crafting a choice-of-law clause, to ensure that the law which is selected for the clause has some connection to either the parties or the contract at issue, or else the parties run the risk of the court deeming the choice-of-law clause unenforceable.

For further information, please contact Sean J. Kirby at (212) 634-3023.

Provision Of Services Through Third-Party Websites May Subject Non-Domiciliaries To Personal Jurisdiction In New York

Sheppard Mullin — Mon, 29 Nov 2010 15:03:44 -0500

By Sarah E. Aberg

In Robinson v. Intuit, Inc., et al., Index No. 101160/10 (Sup. Ct. NY County, Sept. 27, 2010) (“Intuit”), Justice Shirley Werner Kornreich held that a foreign corporation with no physical contacts with New York that had contracted to provide services in New York through the website of another party was nonetheless subject to personal jurisdiction in New York. Intuit sheds further light on the extent to which New York courts will exercise long-arm jurisdiction over non-domiciliaries through their “virtual” New York contacts.

Plaintiffs, New York residents, purchased the TurboTax program and a membership with the TurboTax Audit Defense program through the TurboTax website. The membership entitled plaintiffs to legal and accounting services provided by defendant Tax Resources, Inc. (“TRI”), a Florida corporation with its principle place of business in California, in the event plaintiffs were audited by the IRS.

Plaintiffs were audited in 2006. Pursuant to the audit service agreement, TRI assigned plaintiffs a certified public accountant (CPA) named Martin Solomon, also a New York resident, to handle their case. TRI informed plaintiffs not provide any information to the IRS because Solomon would be their “only point of contact with the IRS or state agency,” and further stated that TRI would pay Solomon’s fees. Unbeknownst to plaintiffs, however, Solomon’s CPA license had been revoked in 1998 after he was found guilty of professional misconduct for embezzling client funds. Solomon subsequently failed to forward plaintiffs’ relevent paperwork to the IRS or take any other action necessary to aid them in the auditing process. In January 2007, TRI notified plaintiffs that it was terminating their audit service because plaintiffs had failed to provide TRI with required documentation. Plaintiffs brought claims for breach of fiduciary duty and negligence against Intuit, Inc., TurboTax, TRI, and Solomon.

TRI moved to dismiss for, inter alia, lack of personal jurisdiction under CPLR 3211 (a)(8). In support of its motion, TRI asserted that it “maintains no office in New York, has no employees in New York, does not conduct any business from New York, has no bank accounts in New York, and maintains no New York phone lines.” TRI also argued that the court should not obtain jurisdiction over TRI through Solomon because Soloman was not an employee or agent of TRI, but rather was an independent contractor. TRI pointed to Soloman’s 1099 tax form indicating that the money he received from TRl for his services was listed as “[n]onemployee compensation.” Finally, TRI noted that “[n]one of the witnesses or records TRI would need to offer are located in New York.”

CPLR 302(a)(1) allows New York courts to assert personal jurisdiction over non-domiciliaries “who in person or through an agent . . . transact[] any business within the state or contract[] anywhere to supply goods or services in the state,” so long as the cause of action “arises out of” the transaction at issue. New York courts use the so-called “purposeful activities” test to determine whether a defendant “transacts business” within New York. According to the court, “[t]he test calls for a showing of conduct demonstrating the non-domiciliary projected him or herself into New York by knowingly initiating and pursuing a substantial transaction and, thereby, reasonably should have expected to defend himself in New York.” Intuit at 5.

The court found that plaintiffs had alleged sufficient facts to make a prima facie showing of personal jurisdiction under both prongs of CPLR 302(a)(1).

TRI was found to have transacted business in New York because Robinson purchased the service on TurboTax’s website while in New York. Relying upon Courtroom Television Network v. Focus Media, Inc., 264 A.D.2d 351, 353 (1st Dept. 1999), the court held that “[w]here an agreement is negotiated or executed by telephone, mail, or electronic communication, a defendant may be found to have transacted business due to additional substantive contacts with the state, such as where the agreement calls for complete or substantial performance in New York.” Justice Kornreich concluded that, despite the contract’s silence as to where TRI would provide the promised tax professional to plaintiffs, it was “logical for TRI to provide an accountant licensed in the jurisdiction in which plaintiffs lived and would be subject to investigation and possible legal action and since TRI, in fact, did provide them with an accountant located in New York, it can be inferred that the contract called for the provision of legal and accounting services to a New York resident.” Intuit at 7. The court found that provision of a New York accountant “constituted substantial performance of TRI’s obligation and a purposeful activity by which TRI availed itself of the privilege of carrying on activities within New York and invoked the benefits and protections of its laws.” Id.

The court likewise found that TRI had contracted to supply goods or services in New York because TRI had provided a letter to plaintiffs asserting that it would provide plaintiffs with legal and accounting services should they later be subject to an audit and, crucially, these services would be provided “until the time this membership expires as agreed upon by the payment amount.” Id. at 8.

The court rejected TRI’s argument that it had not contracted to supply services in New York, since Solomon, not TRI, had supplied all legal and accounting services in New York. The court, regarding the language in the agreement stating that TRI would provide a “professional tax representative” to plaintiff, and that Solomon was paid by TRI to perform these services, found that Solomon was “merely a conduit through which TRI was to perform services it had promised to plaintiffs.” Id. at 8. The court found TRI’s final letter to plaintiff “particularly telling,” because therein TRI stated that “we”would “cease providing audit representation services” and that the “letter is official notification of our complete withdrawal of audit representation services.” Id. (emphasis in original).

Based on the foregoing, the court matter-of-factly concluded that subjecting TRI to jurisdiction under CPLR 302(a)(1) does not offend “traditional notions of fair play and substantial justice,” because “it should have been reasonably foreseeable to TRI that it would be haled into a New York court.” Intuit at 9.

This case demonstrates the relative ease with which entities and individuals may become potential New York litigants. Despite that an entity’s contacts with New York are de minimis, and conducted strictly through informal agents, it still may subject to personal jurisdiction in New York. Corporations seeking to avoid being haled into New York Courts should therefore be mindful of agreements to provide services in New York, even if their role is merely to locate a local party to perform those services.

For further information, please contact Sarah Aberg at (212) 634-3091.

Brokerage Firm Can Recover $141 Million in Trading Losses from Insurers Because An "Associated Person" Is An Employee Under New York Law

Sheppard Mullin — Mon, 29 Nov 2010 14:45:44 -0500

By Jane Qin

In New Hampshire Insurance Co., et al., v. MF Global, Inc., Index No. 601621/09 (Sup Ct, NY County, Oct. 5, 2010), Justice Bernard J. Fried granted summary judgment to MF Global, Inc. (“MF Global”), formerly one of the world’s largest non-bank futures brokerages, paving the way for it to collect on an insurance claim covering a $141.5 million loss it suffered when a rogue broker made unauthorized overnight wheat trades in 2008. The court found that the broker, Evan Dooley (“Dooley”), was an “associated person” to MF Global, and, thus, was an employee of MF Global by law. Therefore, insurers could not refuse to cover MF Global’s loss based on the contention that Dooley was not actually an employee covered under the primary insurance policy (the “Policy”). The court further found the losses sustained by MF Global as a result of Dooley’s unauthorized trades were “direct losses” as required under the Policy.

The case stemmed from a situation that shook investor confidence in MF Global and resulted in heavy losses and an overhaul of management. Dooley executed large, unauthorized overnight trades on wheat futures contracts through the Chicago Mercantile Exchange (“CME”). During the evening of February 26, 2008, Dooley built up a large and unauthorized position in wheat commodities in anticipation of a fall in prices, trading well in excess of his margin. He entered into a large number of “sell contracts” for various commodities, thus creating an “open position” that could be liquidated by entering into corresponding “buy contracts.” If the market price for the commodity drops, Dooley could purchase the commodity for less than the price of the sell contracts and, thus, the difference would be booked as a trading gain.

The next day, when trading resumed, the price of wheat began to rise quickly and sharply, ultimately resulting in a total loss of $141,024,494. This loss was charged to MF Global, which, as a clearing house member of the CME, was primarily obligated to cover losses incurred on its accounts as a result of Dooley’s trades. In reaction to these heavy losses, MF Global’s share price fell 93%.

When MF Global sought indemnification for the trading loss through an insurance claim on the Policy, which had a total limit of $150 million, insurers resisted, and sought from the court a ruling that the loss was not covered because MF Global did not sustain a “direct loss” as required by the Policy, and because Dooley was not an employee of MF Global as the Policy required. The insurers moved for summary judgment.

The Policy required that the primary insurer:

indemnif[y Global] for their loss sustained at any time for: (i) any wrongful act committed by any employee, or (ii) any theft, fraudulent act or malicious act committed by any other person, which is committed with the intent to cause [Global] to sustain a loss or with the intent to obtain financial gain for themselves or another person or entity they intended to obtain such gain and is first discovered by [Global] during the bond period or the discovery period.

Policy § 1 (emphasis in original policy).

The court held that based on the plain language of the Policy, it was clear that Dooley, as a broker for MF Global, was a covered employee. The court reasoned that Dooley was clearly an “associated person” of MF Global. The New York Stock Exchange as well as the Financial Industry Regulatory Authority define an “associated person” as “any partner, or branch manager of such member, or any employee of such member.” Moreover, mere status as an “associated person” is deemed sufficient for courts to compel such persons to engage in mandatory employee arbitration. See, e.g., Steinberg v. W.J. Nolan & Co., 6 Misc 3d 1003(A), 2004 NY Slip Op 51709(U) (Sup Ct, NY County 2004), aff’d as mod, 18 AD 3d 244 (1st Dep’t 2005).

The Policy provided that an employee is a “natural person under an implied contract of employment or service.” Because “associated persons” have an implied contract with their applicable exchange member, and because Dooley was an “associated person”, the Court held that he was an employee of MF Global at the time of the trades and, thus, was covered under the Policy.

The court further found that the losses incurred by MF Global as a result of Dooley’s trades were “direct losses” such that they were covered under the Policy. The insurers attempted to analogize the losses incurred by MF Global to those in a series of cases in which the alleged loss incurred to another party first, and only subsequently, to the insured, thus making the insured’s loss indirect. In contrast, the court found that the exact opposite situation occurred here: MF Global incurred a direct loss, and Dooley incurred an indirect loss, because MF Global was primarily liable for the debt incurred. The court reasoned that because the CME went directly to MF Global to collect on the excessive open position, it would be inaccurate to attribute the debt directly to Dooley.

This case demonstrates that for the purposes of insurance claims of brokerage firms, or companies with similar organizational structures, where the relevant policy requires the covered action to be that of an “employee”, brokers who have implied contracts with their firms meet the requirements for an “employee” and are thus covered. This case further demonstrates brokerage firms that are members of an exchange that requires the members to be liable for any losses may recover losses attributed to unauthorized trading as a "direct loss" under an insurance policy.

For further information, please contact Jane Qin at (212) 634-3093.

Commercial Division Provides a Reminder to Practitioners that Failing to Plead All Elements of a Breach of Contact Action Will Result in Dismissal

Sheppard Mullin — Wed, 08 Sep 2010 16:41:26 -0500

By Sean Kirby

It is a basic rule of pleading that in order to state a cause of action, all elements of a cause of action must be pled in a complaint. However, because “notice pleading” is all that is required, the temptation exists to be overly vague when pleading causes of action. In GS Agrifuels Corp. v. Chaykin, Index No. 101401/2009 (Sup. Ct. N.Y. County August 3, 2010) (“Chaykin”), the Commercial Division provided practitioners with a reminder that failing to plead all elements of a claim will result in dismissal for failure to state a cause of action.

In Chaykin, Justice Richard B. Lowe III dismissed all six causes of action in plaintiff’s complaint pursuant to CPLR 3211(a)(7) finding that plaintiff failed to properly state any causes of action. Of particular note, Justice Lowe found that plaintiff failed to plead two of the four necessary elements for breach of contract. As discussed by the court, the elements of a breach of contract claim in New York are “formation of a contract between the parties, performance by the plaintiff, the defendant’s failure to perform, and resulting damage.” Chaykin, at pp. 4-5 (quoting Flomenbaum v. New York Univ., 71 A.D. 3d 80, 91 (1st Dept. 2009) (citing Clearmont Prop., LLC v. Eisner, 58 A.D.3d 1052, 1055 (1st Dept. 2009)).

First, the court found that plaintiff failed to plead the necessary element that it performed its own obligations under the agreement at issue. Indeed, the court noted that no-where in the complaint did plaintiff expressly state that it performed its own contractual obligations. This oversight alone made the breach of contract action improper as pled.

Second, the court found that plaintiff failed to properly allege that defendants breached the agreement at issue. In the complaint, plaintiff relied on three different sections of the agreement to support its breach of contract claim. However, the Court found that even though plaintiff listed the sections of the agreement allegedly breached by defendants, plaintiff failed to allege how defendants actually breached those provisions. For instance, one provision of the agreement states that the parties agreed to purchase and sell acquisition shares which would be free of all encumbrances. However, while purporting to allege that defendants breached this provision, plaintiff failed to allege that any encumbrances on the acquisition shares actually existed. Likewise, plaintiff alleged that the defendants breached sections of the agreement which provided for general warranties that the seller had the power to transfer shares and that the transfer of shares does not constitute a default of any agreement to which the seller is a party. The court found that plaintiff failed to properly allege breaches of these provisions because plaintiff never alleged that defendants did not have the power or authority to transfer the shares, and that defendants were a party to a related agreement. Since plaintiff failed to properly plead two of the four elements of a breach of contract claim, the Court dismissed the claim pursuant to CPLR 3211(a)(7) for failure to state a cause of action.

In light of the Chaykin decision, practitioners should be reminded that while pleadings need to be carefully crafted, at a minimum, care must be taken to ensure that each of the elements of the cause of action are asserted, or else the complaint will be ripe for dismissal for failure to state a cause of action.

For further information, please contact Sean J. Kirby at (212) 634-3023.