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By: Leo K. Barnes Jr.
Several weeks before then-President George W. Bush defeated presidential candidate John Kerry, CBS News correspondent Dan Rather narrated a “60 Minutes” piece assailing President Bush’s service in the Texas Air National Guard. According to Mr. Rather, subsequent to Mr. Bush’s re-election in November 2004, CBS reduced his role and visibility at the network. After the loss of his highly prized seat as anchor of the nationally broadcast “Evening News” program, followed by an acrimonious severance from CBS, Mr. Rather filed suit, with claims sounding in breach of contract and related torts.
The Appellate Division, First Department’s complete dismissal of Mr. Rather’s claims against CBS confirmed an important point for counsel litigating tortious interference claims: claims of malice must be articulated with particularity because generic, bare allegations of malice will not suffice to circumvent an economic interest defense to a tortious interference claim.
Economic Interest Rule
In Rather v. CBS Corporation,1 Mr. Rather alleged several causes of action including breach of contract, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and tortious interference with contract. The Supreme Court granted defendants’ motion to dismiss the claims for fraud, breach of the implied covenant of good faith and fair dealing and tortious interference with contract, but denied defendants’ motion with respect to the breach of contract and breach of fiduciary duty claims.
On appeal before the First Department, the Appellate Division held that the Supreme Court’s denial of the defendants’ motion to dismiss the breach of contract and breach of fiduciary duty claims was erroneous and, therefore, dismissed Mr. Rather’s complaint in its entirety.
In affirming that portion of the Supreme Court order which dismissed Mr. Rather’s tortious interference claim against CBS, the First Department cited the 2007 Court of Appeals decision in White Plains Coat and Apron Co., Inc. v. Cintas Corp.2 (holding that a generalized economic interest in soliciting business for profit does not constitute a defense to a claim of tortious interference with an existing contract for an alleged tortfeasor with no previous economic relationship with the breaching party), and ruled that the Supreme Court “correctly applied the economic interest doctrine to dismiss the claim against the corporate defendant [CBS].”
The White Plains Court explained the economic interest defense this way:
In response to such a [tortious interference] claim, a defendant may raise the economic interest defense—that it acted to protect its own legal or financial stake in the breaching party’s business. The defense has been applied, for example, where defendants were significant stockholders in the breaching party’s business; where defendant and the breaching party had a parent-subsidiary relationship; where defendant was the breaching party’s creditor; and where the defendant had a managerial contract with the breaching party at the time defendant induced the breach of contract with plaintiff [internal citations omitted].
Lack of Specificity
Mr. Rather attempted—unsuccessfully—to circumvent the economic interest defense by claiming that CBS was motivated by malice. The maxim that a sustained finding of malice serves as an exception to the economic interest defense has its genesis in decades-old precedent, e.g., Felsen v. Sol Cafe Mfg. Corp.3 In Foster v. Churchill,4 the Court of Appeals reiterated its rule of law, highlighted in Felsen, as follows:
The imposition of liability in spite of a defense of economic interest requires a showing of either malice on the one hand, or fraudulent or illegal means on the other [citing Felsen]. To defeat a claim of tortious interference under Felsen, respondents need to establish that their actions were taken to protect an economic interest. While the lower court found that respondents did not show good faith in their actions, and may have acted in bad faith, there was no evidence that independent torts were committed, nor were respondents’ actions advanced to serve some personal interest. Respondents were clearly acting in the economic interest of Microband, which was on the brink of insolvency. To the extent that respondents acted to preserve the financial health of an ailing Microband, their actions were economically justified.
Relying upon this rule, the First Department rejected Mr. Rather’s malice claim, emphasizing its lack of specificity: “Rather’s bare allegations of malice do not suffice to bring the claim under an exception to the economic interest rule.” Indeed, there is a long line of authority which confirms that sparsely detailed allegations of malice are insufficient to trigger the exception to the economic interest defense; the Rather court cited Ruha v. Guior5 for the proposition.
Federal Courts
Practitioners in federal district court pursuing claims premised upon malice have two obstacles to overcome. There are many instances where federal district courts dismiss claims premised upon malice: see, e.g., U.S. District Judge Loretta Preska’s December 2009 order which cited the First Department’s decision in Rather in rejecting a tortious interference claim because it merely characterized the alleged offensive conduct as “malicious” and “without justification.” Without more, Judge Preska ruled that the claim must be dismissed.6
The claimant’s pleading burden in federal district court has been reinforced, generally, with the U.S. Supreme Court’s decision in Ashcroft v. Iqbal.7 That ruling confirmed that the pleading standard is now more challenging than ever:
To survive a motion to dismiss, a counterclaim “must contain sufficient factual matter, accepted as true, to ’state a claim to relief that is plausible on its face.’ “Ashcroft v. Iqbal,—U.S.—,—, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). In making this determination here, this Court is mindful of two corollary rules. “First, the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” Id. In other words, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. (citing Twombly, 550 U.S. at 555). “Second, only a complaint that states a plausible claim for relief survives a motion to dismiss.” Id. at 1950 (citing Twombly, 550 U.S. at 556). The Supreme Court has noted that “[d]etermining whether a complaint states a plausible claim for relief will … be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. [citation omitted].8
In fact, in her recent order, Judge Preska additionally cited Iqbal in concluding that the tortious interference claim must be dismissed because the claimant’s “conclusory allegations do not meet the pleading standard set forth in Iqbal.”9 Thus, claims of malice are ripe for attack by the defense bar on two fronts: first, whether the claims meet common law standards constituting malice; second, whether the party claiming malice has likewise convinced the Court, at the pleading stage, that the claim is “plausible” in the corresponding “context-specific” environment.
Such a “context-specific” analysis served as a basis for dismissal of a tortious interference with prospective business advantage claim in Bayer Schera Pharma AG v. Sandoz, Inc.10 In Bayer, defendant Sandoz pursued a counterclaim against Bayer premised upon tortious interference; Sandoz alleged that it had “a continuing economic advantageous relationship with others for the supply of its generic products.” In response, Bayer urged that dismissal was appropriate because Sandoz had failed to identify a “particular, existing relationship” with which Bayer had interfered.
Southern District Judge Paul G. Gardephe, citing Iqbal, agreed with the defense.
Sandoz has not identified any specific business entities with which it had business relationships.11 “New York courts have dismissed complaints that failed to allege the specific business relationship that was interfered with.” Johnson & Johnson, 552 F.Supp.2d at 464-65 (collecting cases). Prior to Iqbal, New York district courts disagreed as to whether a plaintiff was required to identify specific business relationships in order to make out a claim for tortious interference with prospective economic advantage. See id. at 465 (collecting cases). After Iqbal, it is clear that a claim such as this-which merely “offers ‘labels and conclusions’ [and] ‘a formulaic recitation of the elements of a cause of action’ “-will not survive a motion to dismiss. See Iqbal, 129 S.Ct. at 1949. Although Sandoz has alleged that it has a “continuing economic advantageous relationship with others for the supply of its generic products,” and that Bayer has interfered with those relationships (Yasmin Cntrcl. ¶87; Yaz Cntrcl. ¶85), it is entirely unclear whether the “others” referenced are entities that purchase generic drugs from Sandoz, third-party business entities that market Sandoz’s products, business entities that supply the raw materials Sandoz uses to manufacture its products, or another type of business. Because Sandoz offers only “[t]hreadbare recitals of [an] element[ ] of a cause of action, supported by mere conclusory statements,” see Iqbal, 129 S.Ct. at 1949, its counterclaims for tortious interference with prospective economic advantage will be dismissed.
‘Sirius’ Case
Returning to state court, in the First Department’s Advanced Global Technology, LLC v. Sirius Satellite Radio, Inc.,12 plaintiff had alleged that Sirius had warned an electronics manufacturer that it was running the risk of losing Sirius’ business if the electronics manufacturers did business with plaintiff. As a result, the electronics manufacturer broke off negotiations with the plaintiff, which, in turn, sued Sirius, alleging tortious interference. The First Department, in affirming the CPLR 3211(a)(7) dismissal, confirmed that:
[T]he allegations, on their face, show that Sirius’s interference was neither wrongful nor motivated solely by malice, as opposed to its normal economic interest (see Carvel Corp. v. Noonan, 3 N.Y.3d 182, 190, 785 N.Y.S.2d 359, 818 N.E.2d 1100 [2004]), specifically, that a major facilitator of its business (KRI) not do any manner of business with a major facilitator (AGT) of its sole competitor’s (XM) business (see id. at 191-192, 785 N.Y.S.2d 359, 818 N.E.2d 1100 [so long as defendant is motivated by legitimate economic self-interest, it should not matter if the parties are, or are not, competitors in same marketplace]; cf. Sumitomo Bank of N.Y. Trust Co. v. DiBenedetto, 256 A.D.2d 89, 681 N.Y.S.2d 248 [1998], lv. denied 93 N.Y.2d 804, 689 N.Y.S.2d 17, 711 N.E.2d 202 [1999] [threats by defendants town attorneys that if a prospective vendor did not withdraw its proposal to town, "its ability to do business thereafter with the Town…would be severely compromised," insufficient to sustain claim for tortious interference by plaintiff Trustee of noteholders where town's liability on notes depended on whether it was unable to procure contract for type of services provided by vendor] ).
Conclusion
Despite the historical deference afforded to claimants at the initial pleading stage, it is apparent that specificity rules the day when litigating tortious interference claims.
Leo K. Barnes Jr. is a member of Barnes & Barnes. He can be reached at lkb@barnespc.com.
Endnotes:
1. 68 A.D.3d 49, 886 N.Y.S.2d 121 (1st Dept. 2009).
2. 8 N.Y.3d 422 (2007).
3. 24 N.Y.2d 682 (1969).
4. 87 N.Y.2d 744 (1996).
5. 277 A.D.2d 116, 717 N.Y.S.2d 35 (1st Dept. 2000).
6. IMG Fragrance Brands, LLC v. Houbigant, Inc., 679 F.Supp.2d 395 (SDNY 2009)
7. 129 S.Ct. 1937 (2009).
8. Bayer Schera Pharma AG v. Sandoz, Inc., 2010 WL 1222012 (SDNY 2010).
9. 679 F.Supp.2d 395, at 406 (SDNY 2009)
10. 2010 WL 1222012 (SDNY 2010).
11. Judge Gardephe made an interesting observation in response to Sandoz’ explanation for failing to specifically identify business relationships which were harmed by Bayer. Sandoz claimed that the failure to identify specific business relationship was not inadvertent but was due to the “strict confidentiality ascribed to contracts for the supply of API [active pharmaceutical ingredients] in the pharmaceutical industry [internal citations omitted].” The Court rejected the viability of any such excuse: “Protection of trade secrets or other proprietary information can, of course, be accomplished through entry of a protective order and/or a sealing order. In any event, confidentiality concerns do not excuse a failure to plead the elements of a cause of action.”
12. 44 A.D.3d 317, 843 N.Y.S.2d 220 (1st Dept. 2007).
By: Leo K. Barnes Jr.*
With Plaintiffs seeking to maximize a source of recovery and Defendants seeking to minimize the same, discovery in commercial matters may focus upon the liability of an individual shareholder for a claim asserted against a corporation. Plaintiffs are quick to name shareholders as defendants in their individual capacities and defense counsel rapidly characterize the same as an improper ploy to expand the asset pool for a potential recovery. The Court of Appeals was perfectly clear in Murtha v. Yonkers Child Care Association, 45 N.Y.2d 913, 411 N.Y.S.2d 219 (1978):
A “director of a corporation is not personally liable to one who has contracted with the corporation on the theory of inducing a breach of contract, merely due to the fact that, while acting for the corporation, he has made decisions and taken steps that resulted in the corporation’s promise being broken” []. “(A) corporate officer who is charged with inducing the breach of a contract between the corporation and a third party is immune from liability if it appears that he is acting in good faith as an officer * * * (and did not commit) independent torts or predatory acts directed at another”[internal citations omitted].
Nonetheless, one who dominates a corporation so to commit a fraud will not escape personal liability for acts performed as an officer or shareholder. Matter of Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 141, 603 N.Y.S.2 807 (1993) confirms that a party seeking to pierce the corporate veil, based upon allegations of shareholder fraud, must establish that “(1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in the plaintiff’s injury.”
Knowing that the Plaintiff, at the early stage of the litigation, may not have sufficient documented proof to substantiate a claim against an individual shareholder, defense counsel’s knee jerk reaction to a defendant named in his personal capacity may be to move to resolve the claim via CPLR 3211 or 3212. But in all but the most clear cut cases, Courts are not so accommodating because a Plaintiff’s theories of liability are premised upon factual allegations of the exercise of complete domination and control. “Veil-piercing is a fact-laden claim that is not well suited for resolution on a motion to dismiss.” First Bank of Americas v. Motor Car Funding, 257 A.D.2d 287, 690 N.Y.S.2d 17 (1st Dep’t 1999). Before dismissal can be granted, plaintiffs are entitled to obtain necessary discovery to ascertain whether grounds exist to pierce the corporate veil. Thus, a robust round of discovery is often necessary to determine whether a shareholder named as a defendant in his or her individual capacity so dominated the corporation so as to justify a piercing of the corporate veil.
Piercing may also occur absent fraud. “The corporate veil will be pierced to achieve equity, even absent fraud, when a corporation has been so dominated by an individual or another corporation and its separate entity so ignored that it primarily transacts the dominator’s business instead of its own and can be called the other’s alter ego.” John John LLC v. Exit 63 Dev. LLC, 35 A.D.3d 540, 826 N.Y.S. 2d 657 (2nd Dep’t 2006). In general, courts consider the following factors in determining whether a party’s domination and control of a corporation, and abuse of the privilege of doing business in the corporate form, warrants piercing the corporate veil:
(1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like, (2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common office space, address and telephone numbers of corporate entities, (6) the amount of business discretion displayed by the allegedly dominated corporation, (7) whether the related corporations deal with the dominated corporation at arms length, (8) whether the corporations are treated as independent profit centers, (9) the payment or guarantee of debts of the dominated corporation by other corporations in the group, and (10) whether the corporation in question had property that was used by other of the corporations as if it were its own.i
Mindful of the liberal scope of discovery,ii demands may be broad and, depending upon which side of the “v” you are on, intrusive. Of course, the demands must be tailored on a case- by-case basis, but a cursory review of the ten foregoing factors which may determine whether domination or alter ego liability exists directs counsel to a host of relevant discovery demands which may include personal and corporate banking information, corporate resolutions, meeting minutes, and the like.
The result of that investigation may yield significant leverage (or vulnerability). See, e.g., Fern Inc. v. Adjmi, 97 A.D.2d 444, 602 N.Y.S.2d 615, (1st Dep’t 1993)(Plaintiff established a cause of action for piercing the corporate veil so as to impose liability for the rent obligations of corporation upon the individual defendant where the corporation, as a mere alter ego of that defendant, had no assets, liabilities or income, no regularly elected officers or directors, and no bank accounts, and which had never transacted any business other than entering into the subject lease agreement) and Latham Sparrowbush Associates v. Shaker Estates, Inc., 153 A.D.2d 788, 545 N.Y.S.2d 219 (3rd Dep’t 1989)(corporation’s separate identity was properly disregarded to recover unpaid rent against an individual where the individual was the sole shareholder of the corporation, the corporation had existed for more than 20 years without holding a corporate meeting, and the individual repeatedly reported the profit or loss of the corporation as a sole proprietorship on his income tax return).
In light of the potential for personal exposure, shareholders must implement procedures for regular interaction with an accountant and counsel to confirm compliance with fundamental formalities; in addition to fostering peace of mind, the undertaking will go a long way toward limiting personal liability.
i Wm. Passalacqua Bldrs., Inc. v. Resnick Devs. S., Inc., 933 F.2d 131, 139 (2nd Cir. 1991).
ii CPLR 3101 mandates that there “shall be full disclosure of all matters material and necessary in the prosecution or defense of an action.” The Court of Appeals has explained that the words “material and necessary” are to be liberally construed “to require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial by sharpening the issues and reducing delay and prolixity.” Allen v. Crowell-Collier Pub. Co., 21 N.Y.2d 403, 406-07, 288 N.Y.S.2d 449 (1968). Thus, the CPLR “requires the disclosure of all evidence relevant to the case and all information reasonably calculated to lead to relevant evidence.” See also Siegel, New York Practice § 344, at 525 (3rd Ed. 1999).
By: Leo K. Barnes Jr.*
A recent mid-winter decision from Central Islip Eastern District Judge Sandra Feuerstein provides a stark reminder to counsel for Plaintiffs to scrutinize documentation annexed as exhibits to a Complaint as the same may later haunt the Plaintiff as a basis for dismissal.
In Levista Inc. v. Ranbaxy Pharmaceuticals Inc., 2010 WL 438393 (E.D.N.Y. 2010), Plaintiff Levista, based in Huntington, filed an action against Ranbaxy premised upon Ranbaxy’s alleged breach of an agreement to sell and deliver 25,008 bottles of Cephalexin at $19 per bottle. Plaintiff acknowledged that Ranbaxy sold and delivered 14,618 of the 25,008 bottles purchased, but asserted that instead of delivering the remainder, Defendant sold the 10,390 outstanding bottles to Plaintiff’s competitors at a higher price. On that basis, Plaintiff pursued a breach of contract claim and a tortious interference with business relations claim, claiming $1,000,000 in damages. Defendant filed a F.R.C.P. 12(b)(6) motion to dismiss for failure to state a claim.
The Standard of Review
In outlining the Standard of Review, the Court noted that it is required to “liberally construe the claims, accept all factual allegations in the complaint as true, and draw all reasonable inferences in favor of the Plaintiff.” But, citing the United States Supreme Court decisions in Twombly (2007) and Iqbal (2009), Judge Feuerstein also observed that a Complaint that merely offers “labels and conclusions” or a “formulaic recitation of the elements of a cause of action” is insufficient pursuant to the Supreme Court’s recent directives, and that corresponding factual allegations “must be enough to raise a right of relief above the speculative level”.
The Breach of Contract Claim
The Court evaluated the documentation annexed as exhibits to the Complaint, including purchase orders from Plaintiff to Defendant between May 21 and May 27, 2008, along with the related invoices that Defendant sent to Plaintiff upon shipment. It was the Court’s evaluation of the purchase orders annexed as exhibits to the Complaint which sounded the death knell for the Plaintiff’s breach claim. Specifically, the Court noted that the May 21st purchase order for 3,668 bottles of the Cephalexin, coupled with the Defendant’s corresponding invoice, confirmed that that the product was paid in advance by the Plaintiff and that the bottles were shipped by Defendant. Concluding that both parties fulfilled their obligations, Plaintiff could not premise a breach claim on that transaction. The Court reached the same conclusion on another series of transactions, all premised upon the documentation annexed to the Complaint, and universally concluded that all obligations to be performed were indeed met. Thereafter, one transaction remained in dispute.
On the disputed transaction, purchase order 242, Plaintiff claimed that it ordered an additional 10,590 bottles of Cephalexin and submitted the corresponding purchase order as an exhibit. However, unlike the previous transactions, Plaintiff failed to allege that it paid for this particular shipment, and Plaintiff was unable to document an invoice rendered by the Defendant, as it had been able to do on all prior transactions. In fact, Plaintiff did not even allege that the Defendant had accepted the order. The telling hole in Plaintiff’s claim for this particular transaction is that it did not allege that it performed its payment obligation under the contract, which it had done in each of the parties’ prior transactions. Rather, whereas the prior purchase orders indicated that an advance payment had been made, the purchase order for the disputed claim indicated that a 50% payment was required “upfront” with the remaining 50% “on the receipt of the goods.” The Court specifically highlighted this inconsistency and noted that all prior transactions required “advance payment” on its invoices, and rejected the Plaintiff’s contention that Plaintiff’s readiness to perform its payment obligation for that particular purchase order was sufficient to meet its obligations pursuant to the Contract (which, on its face, required a 50% advance payment). Accordingly, the Court dismissed the breach of contract claim.
The Tortious Interference Claim
Next, the Court addressed Plaintiff’s second cause of action, which it characterized as a claim for tortious interference with prospective business relations, premised upon the allegation that the Defendant, instead of selling the product to the Plaintiff, circumvented the Plaintiff and sold that same product to the Plaintiff’s customer.
An at-will relationship can support an action premised upon tortious interference with prospective business relations. Indeed, Judge Feuerstein, in analyzing the cause of action, cited Carvel Corp. v. Noonan, 3 N.Y.3d 182, 785 N.Y.S.2d 359 (2004), which authority highlighted the distinctions between the protection of rights granted in a contract and the protection of rights inferred from prospective, extra-contractual relationships such as an at-will employment agreement. Recovery is permissible for tortious interference with prospective business relations premised upon an at-will agreement, assuming Plaintiff can plead in accordance with its Twombly and Iqbal burdens.
To establish a claim for tortious interference with a prospective business relationship, New York Pattern Jury Instruction 3:57 provides that Plaintiff must satisfy five elements: (1) that the Defendant knew of the proposed contract between the Plaintiff and [a third party]; (2) that the Defendant intentionally interfered with that proposed contract; (3) that were it not for the Defendant’s interference, the proposed contract would have been entered into; (4) that the Defendant’s interference was done by wrongful means; and (5) that the Plaintiff suffered damages as a result.
As Judge Feuerstein concluded, to establish successfully element number four, wrongful means, Plaintiff bears the burden of demonstrating “culpable conduct” which essentially amounts to a crime or independent tort on the part of the Defendant. Premised upon the “wrongful means” element, the death knell for Plaintiff’s tortious interference claim was two-fold: first, there was no pleading to characterize conduct which constituted “wrongful means”; second, Plaintiff admitted that the Defendant’s motive was simply “normal economic self interest … to make itself more profitable.” On that two prong basis, Judge Feuerstein ruled that the Plaintiff’s claim in Levista was insufficient as a matter of law and the Court likewise dismissed the second cause of action as failing to state a claim.
*Mr. Barnes, a member of Barnes & Barnes, P.C., can be reached at LKB@BARNESPC.COM
By: Leo K. Barnes Jr.*
Many initial pleadings in the Commercial Division are accompanied by an Order to Show Cause seeking to enjoin something, by virtue of an application for a preliminary injunction and, possibly, a temporary restraining order until the preliminary injunction application is resolved. Ultimately an application is resolved either by a negotiated stipulation between counsel or a Court-imposed Order, and the litigation continues thereafter while the parties are subject to the Order. Assuming one party alleges that an adversary violated the Order, and notwithstanding whether the purported violation was procured by ignorance, honest mistake, or intentionally, a litigant faces potentially dire consequences for civil contempt.
Judiciary Law § 753
Applications for civil contempt are governed by Judiciary Law § 753 which provides, in pertinent part:
§ 753. Power of courts to punish for civil contempt
A. A court of record has power to punish, by fine and imprisonment, or either, a neglect or violation of duty, or other misconduct, by which a right or remedy of a party to a civil action or special proceeding, pending in the court may be defeated, impaired, impeded, or prejudiced, in any of the following cases: …
3. … or for any other disobedience to a lawful mandate of the court.
A request to punish for civil contempt is addressed to the sound discretion of the court. Matter of Fishel v. New York State Div. of Housing and Community Renewal, 172 A.D.2d 835, 569 N.Y.S.2d 201 (2nd Dept 1991). One asserting a civil contempt claim has the burden of establishing contempt by clear and convincing evidence. Romanello v. Davis, 49 A.D.3d 652, 856 N.Y.S.2d 128 (2nd Dep’t 2008). In order to obtain a civil contempt finding under Judiciary Law § 753(a), it is necessary to establish that: (1) there was an unequivocal and lawful mandate or order from the court in effect; (2) it is reasonably certain that the order has been disobeyed; (3) the party to be held in contempt had knowledge of the order even if it was not served upon him; and (4) the rights of a party to litigation have been prejudiced. Matter of McCormick v. Axelrod, 59 N.Y.2d 574, at 583 (1983).
Two of the four foregoing elements are rather perfunctory, requiring minimal analysis. First, the issue of whether there is an Order in effect requires little discussion since a stipulation which has been “So Ordered” by the Court constitutes a lawful Order of the Court. See, e.g., Fuerst v. Fuerst, 131 A.D.2d 426, 515 N.Y.S.2d 862 (2nd Dep’t 1987) (the court’s “So Ordering” of a stipulation avoided the necessity of a written order with notice of entry). The third prong, knowledge of the Order, may likewise warrant concession, resulting in the pursuit or defense of a contempt charge resting on elements two and four.
It is not necessary that the disobedience be deliberate to sustain a finding of civil contempt; rather, the mere act of disobedience, regardless of its motive, is sufficient if such disobedience defeats, impairs, impedes or prejudices the rights of a party. Incorporated Village of Plandome Manor v. Ioannou, 54 A.D.3d 365, 862 N.Y.S.2d 592 (2nd Dep’t 2008).
In most instances, a hearing is necessary to determine whether the Court Order has been disobeyed and likewise whether certain rights have been prejudiced. In that vein, an application to adjudicate a party in contempt is treated in the same fashion as motion, and a hearing must be held if issues of fact are raised; to the contrary, a hearing is not necessary when there is no factual dispute. Quantum Heating Services Inc. v. Austern, 100 A.D.2d 843, 474 N.Y.S.2d 81 (2nd Dep’t 1984).
Element Two: Disobedience of the Order
The bright-line issue for the Court will be whether an Order has been violated and the contempt proponent must confirm at the hearing, through testimony or documentary evidence, that the adversary indeed violated an explicit Court Order. In that realm, the Order must be unequivocal. See, e.g., Gerelli Ins. Agency, Inc. v. Gerelli, 23 A.D.3d 341, 806 N.Y.S.2d 71 (2nd Dep’t 2005)(defendants could not be held in contempt for allegedly violating a court order that failed to indicate clearly that preliminary injunction was being granted or to specify precisely what action or actions were being enjoined); see also Katz v. Katz, 55 A.D.3d 680, 867 N.Y.S.2d 100 (2nd Dep’t 2008)(husband did not demonstrate that wife should be held in contempt of a So-Ordered stipulation, the language of which was not a clear and unequivocal mandate directing her to vacate the marital residence; stipulation predicated wife’s obligation to vacate marital residence upon husband’s resolution of problems with replacement residence, and husband failed to demonstrate that he discharged that obligation). At this time, counsel’s initial investment of time with the client, prior to negotiating the So Ordered Stipulation, will bear fruit when the hearing confirms that the So Ordered Stipulation was sufficiently explicit and drafted with an eye on protecting the client from an adversary’s interference.
Element Four: Whether a Party’s Rights Have Been Impaired
Ideally, prior to the hearing, counsel will have an opportunity to conduct some limited pre-hearing discovery on the contempt allegation in order to flesh out the basis for the claim. The party asserting a contempt allegation must substantiate some prejudice or loss resulting from the contempt. Inasmuch as it is black letter law that Courts generally will not award damages for minimal losses,i any penalty imposed for contempt must be designed not to punish but to compensate the injured party, to coerce compliance with the court’s mandate, or both. In re Peer, 50 A.D.3d 1511, 856 N.Y.S.2d 385 (4th Dep’t 2008). It is imperative to substantiate the nexus between the alleged contempt and actual damages sustained. At this stage, savvy counsel will prepare the client to explicitly delineate all of the harm that he or she has incurred as a result of the contempt. Conversely, counsel for the party defending the contempt charge must explore, in detail, all of the areas of potential harm which the adversary claims from the contempt and will keep in mind that attorney fees awarded as sanction for civil contempt are limited to those incurred as result of allegedly contemptuous conduct. Clinton Corner H.D.F.C. v. Lavergne, 279 A.D.2d 339, 719 N.Y.S.2d 77 (1st Dep’t 2001).
*Leo K. Barnes Jr., a member of Barnes & Barnes, P.C., can be reached at lkb@barnespc.com
i Black’s Law Dictionary, 8th Edition, de minimis non curat lex (Latin for the proposition that “The law does not concern itself with trifles.”)
By: Leo K. Barnes Jr.*
In mid September, approximately 30 practitioners, several Justices and Court personnel participated in the inaugural training session for the Suffolk County’s Commercial Division Mediation Program. The training, which consisted of 24 hours over three days, was presented by Simeon Baum, Esq. and Stephen Hochman, Esq., conducted at the Suffolk County Bar Association, and provided an examination of mediation principles and techniques. The Program provided participants with an opportunity to “explore the differences between facilitative and evaluative or directive approaches in mediation, both from a practical and ethical perspective [and discussed] the advantages and disadvantages of these styles, [all the while permitting the participants to] focus on experimental learning through role plays and dialogue to help prepare [the participant] for the real world of commercial mediation.”i To supplement the lecture and program material, the training session was enhanced by a hands-on participation wherein each attendant, whether attorney, Justice or Court personnel, assumed the role of a Mediator, a plaintiff, a defendant and their respective counsel, at one of the role-playing sessions, thereby providing the opportunity to hone the recently acquired theory and skills. The program will be followed early next year with an additional 16 hours of Commercial Division topic specific training.
The Mediation Program
The Mediation Program was a natural corollary of the increasing caseload for the Suffolk Commercial Division, which Program has been present in other counties for quite some time. According to the official Program Overview:
Alternative Dispute Resolution (“ADR”) refers to a variety of processes other than litigation that parties use to resolve disputes. ADR offers the possibility of a settlement that is achieved sooner, at less expense, and with less inconvenience and acrimony than would be the case in the normal course of litigation. The principal forms of ADR include arbitration, neutral evaluation and mediation. The Suffolk County Commercial Division will initially focus upon mediation.
Highlights of the Program
In light of the Program’s goal, which is to find a mutually acceptable alternative to having a trial Justice make a determination after trial or hearing, cases may participate in the Program either upon request of the parties or at the Referring Justices’ discretion. The Administrative Judge maintains a panel of Mediators for the Mediation Program in accordance with Part 146 of the Rules of the Chief Administrative Judge.
At the Mediation session (which must be completed within 30 days of the date that the Order of Reference was issued, and can be as short as a few hours or as long as several sessions)ii all parties will have the opportunity to raise issues of concern and the Mediator will assist the parties to work collaboratively to develop and choose options which address the pertinent issues at bar. The Program Rules explicitly provide that the Mediator will not offer an opinion as to the likely Court outcome of any particular issue, and that the Mediator will not impose a solution on the parties or attempt to tell them what to do.
The hallmark of the Mediation Program is confidentiality, which permeates the proceedings. More specifically, while involved in a caucus, wherein a Mediator may meet separately with each party, the Program Rules mandate that the Mediator will not divulge any information discussed in the caucus without first obtaining a party’s permission to do so. Also, subject to very limited exceptions, all communications made during the course of the mediation, by any Party, Mediator or any other person present, shall not be disclosed (this includes documentation and information generated in or around the mediation, i.e., memoranda), with the expected caveat that the mediation confidentialty may not be used as a shield with respect to otherwise discoverable documentation and information. As for ongoing discovery, an Order of Reference from the Court to the Mediation Program does not stay court proceedings unless otherwise directed by the Justice; in the event of a Court-directed stay, the Referring Justice may nonetheless Order an informal exchange of information concerning the case if the same will enhance the mediation process. In the event that the parties do not reach a settlement during Mediation, the parties return to the Referring Justice.
According to Kathryn Coward, the Principal Court Attorney for the Suffolk County Commercial Division, the Program is already underway and several cases have participated in the Program. Ms. Coward reports that once counsel have been advised that the Program exists, the attorneys in the Commercial Division have been very responsive to the opportunities presented and an attorney’s role as conduit between the Court and the client will be the most valuable resource for encouraging participation.
In certain respects, the mediation process is the antithesis of counsel’s role in a standard litigation; yet, after 24 hours of training, the benefits of a successful mediation were patent: the parties were empowered to achieve a confidential, cost-effective and party-tailored resolution. Although not all cases will initially be ripe for mediation, many cases will be ripe for mediation at one time or another.
i Suffolk County Commercial Division Mediation Training Manual, An Overview of the Course, at 2.
ii Suffolk County Supreme Court Commercial Division Mediation Program, at II.
*Leo K. Barnes Jr., a member of Barnes & Barnes, P.C., can be reached at lkb@barnespc.com
By: Leo K. Barnes Jr.*
The Uniform Commercial Code’s section regarding Risk of Loss is a great example of why counsel’s periodic review of a client’s day-to-day operations may prove to be an excellent investment in light of the serious ramifications which can bind clients in seemingly benign transactions. Assume the rudimentary shipment of goods for a transaction which is governed by the Uniform Commercial Code. The pre-printed order form which the seller has utilized for years to document price and quantity fails to note whether the agreement between seller and buyer mandates that the goods must be delivered to a particular destination. Assume the seller duly delivers the goods to a common carrier for shipment to the buyer and that the goods are thereafter lost or damaged while in transit. Who bears the risk of that loss?
The Applicable Code Provision
UCC 2-509, entitled “Risk of Loss in the Absence of Breach” provides, in pertinent part:
(1) Where the contract requires or authorizes the seller to ship the goods by carrier
(a) if it does not require him to deliver them at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier even though the shipment is under reservation (Section 2-505); but
(b) if it does require him to deliver them at a particular destination and the goods are duly tendered while in the possession of the carrier, the risk of loss passes to the buyer when the goods are duly so tendered as to enable the buyer to take delivery.
The Official Commentary confirms that the scope of this section is expressly limited to scenarios where there has been no breach by the seller. In the alternative, if the delivery fails to comply with the contract specifications, UCC 2-509 does not apply and the situation is governed by the provisions on effect of breach on risk of loss. Accordingly, the analysis offered herein is limited to those situations where no breach has occurred.
A cursory reading of the provision confirms that if the seller is required to ship the goods by carrier, but not required to deliver the goods at a particular destination, the risk of loss passes to the buyer when the seller duly tenders them to the carrier. § 2-509(1)(a). To the contrary, when the seller is required to deliver the goods to a particular destination, the seller bears the risk of loss until tender of delivery at the destination. § 2-509(1)(b).
Shipment vs. Destination Contracts
Notwithstanding these bright-line rules, a determination of the parties’ rights and obligations must be made when ambiguity exists in the contract between them. The resolution of that ambiguity begins with a determination of whether the contract is a “shipment” or a “destination” contract. If the contract does not require the seller to deliver the goods at a particular destination, a “shipment” contract is presumed. On the other hand, a “destination” contract is characterized by a seller’s obligation to deliver at a particular destination.
Shipment Contracts Are Presumed
In Windows, Inc. v. Jordan Panel Systems Corp., 177 F.3d 114 (2nd Cir. 1999), the Second Circuit Court of Appeals ruled that:
Where the terms of an agreement are ambiguous, there is a strong presumption under the U.C.C. favoring shipment contracts. Unless the parties “expressly specify” that the contract requires the seller to deliver to a particular destination, the contract is generally construed as one for shipment. 3A Ronald A. Anderson Uniform Commercial Code §§ 2-503:24, 2-503:26; see also Dana Debs, Inc. v. Lady Rose Stores, Inc., 65 Misc.2d 697, 319 N.Y.S.2d 111, 112 (N.Y.City Civ.Ct.1970) (no destination contract absent “explicit written understanding” that goods will be delivered to buyer at a “particular destination”).
Indeed, New York Jurisprudence, at § 113, confirms that:
Under the Code, the “shipment” contract is regarded as the normal one, while the “destination” contract is regarded as the variant type, and the seller is not obligated to deliver at a named destination and bear the concurrent risk of loss until arrival, unless he has specifically agreed to so deliver, or the commercial understanding of the terms used by the parties contemplates such delivery.
Inasmuch as New York Jurisprudence confirms that the “commercial understanding of the terms used by the parties” may serve as a foundation to impose “destination” contract obligations upon a seller, it bears noting that the contention that the seller’s payment of freight expenses imputes a “destination” contract is expressly rejected in § 2-503. In regard to the term “F.O.B.” (which means “free on board”), an oft-used denotation on delivery of goods, the Uniform Commercial Code expressly provides that unless otherwise agreed, the term F.O.B. at a named place, even though used only in connection with the stated price, is a delivery term, not simply a price term. More specifically, § 2-319 provides that:
(a) when the term is F.O.B. the place of shipment, the seller must at that place ship the goods in the manner provided in this Article (Section 2-504) and bear the expense and risk of putting them into the possession of the carrier; or
(b) when the term is F.O.B. the place of destination, the seller must at his own expense and risk transport the goods to that place and there tender delivery of them in the manner provided in this Article (Section 2-503).
Of course, the burdens with respect to risk of loss may be varied by the contrary agreement of the parties.
The First Department’s Jordan v. Kentshire Galleries, Ltd.
282 A.D.2d 319, 723 N.Y.S.2d 456 (1st Dep’t 2001) provides a fairly typical example of the many parties which interact with a shipment. In Jordan, the Appellate Division described the scene where the buyer’s agent interacted with the carrier and the distinct cargo packer, yet unreasonably expected that the seller would bear the risk of loss until tender at the ultimate destination. The First Department disagreed:
The record is devoid of evidence that the seller agreed to ship the item to a particular destination (see, UCC 2-503, Official Comment 5). Indeed, since it is undisputed that the buyer’s decorator asked the seller to recommend a carrier, that the seller recommended the art packer, and that the buyer paid the shipping costs by check made out to the art packer, it is clear that the buyer expected the seller only to put the item in the possession of the art packer and make such contract for its transportation as was reasonable (UCC 2-504[a]). This being the parties’ understanding, i.e., a shipping, not a destination, contract, the seller did not bear the risk of loss once the item was picked up from its premises by the art packer (UCC 2-509 [1][a]).
Because a contract which contains no express mandate that the goods be delivered at a specifically delineated destination is not a “destination” contract, the buyer assumes the risk of loss, pursuant to the Code provisions, upon the delivery of the goods to the carrier. Caveat Emptor!
*Leo K. Barnes Jr., a member of Barnes & Barnes, P.C., can be reached at lkb@barnespc.com
By: Leo K. Barnes Jr.i
With subtle hints that the economy is finally turning from its free-fall, merger and acquisition transactions will begin to surface once again. The preamble of many transaction documents includes various “representations and warranties”, provisions which may provide the parties with a foundation to detail certain facts and circumstances which found a transaction. Typically, the representations and warranties are promised to be true and correct when made and as of the closing, and will survive the closing. For example, under a stock purchase agreement, a seller may represent that “there are no claims, legal actions, suits, arbitrations or governmental investigations in progress or pending”. Representations will have reach well after the final signature is notarized at closing.
The 1872 Court of Appeals decision in Hawkins v. Pemberton confirms long-standing, black letter, law that an unequivocal written representation of fact constitutes a warranty:
To constitute a warranty, it is not necessary that the word warranty should be used. It is a general rule that whatever a seller represents, at the time of a sale, is a warranty. (Wood v. Smith, 4 Car. & Payne, 45.)
In Stone v. Denny (4 Metcalf, 151) it is said that the courts in their later decisions “manifested a strong disposition to construe liberally, in favor of the vendee, the language used by the vendor in making any affirmation as to his goods, and have been disposed to treat such affirmations as warranties whenever the language would reasonably authorize the inference that the vendee so understood it.”
In Oneida Manufacturing Society v. Lawrence (4 Cowen, 440) Chief Justice Savage says: “There is no particular phraseology necessary to constitute a warranty. The assertion or affirmation of a vendor concerning the article sold must be positive and unequivocal. It must be a representation which the vendee relies on, and which is understood by the parties as an absolute assertion, and not the expression of an opinion”.ii
This common law principle is in accord with the Uniform Commercial Code:
§ 2-313. Express Warranties by Affirmation, Promise, Description, Sample
(1) Express warranties by the seller are created as follows:
(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.
(b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.
(c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.
(2) It is not necessary to the creation of an express warranty that the seller use formal words such as “warrant” or “guarantee” or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.
It is well settled that a warranty is “an assurance by one party to a contract of the existence of a fact upon which the other party may rely”iii and effectively constitutes a promise to indemnify the promisee for any loss it may suffer if the fact warranted proves untrue.iv The warranty serves to relieve the promisee of any duty to ascertain the warranted fact for himself;v the maxim “ignorance of the law is no excuse” may not be invoked to preclude one from relying upon a warranty.vi The risk of the fact being different from what is warranted is placed upon the party giving the warrantyvii and the warrantor’s good faith belief in the veracity of the representation is no defense to the breach of warranty claim.viii Once the express warranty is shown to be relied upon as part of the contract, the right to be indemnified in damages for its breach does not depend upon proof that the buyer believed the assurance of fact made in the warranty would be fulfilled – rather, the right to indemnification depends only upon establishing breach of the warranty.ix The warrantor is liable for damages if the fact or condition it warrants as true turns out false.x Inasmuch as a breach of contract occurs when a party to a valid contract commits an act in violation of its terms, a subsequent falsity of a warranty given at the time of a transaction constitutes such a violation.xi
In light of the long-term ramifications which result from representations and warranties, coupled with the fact that a good faith belief in the veracity of a representation is wholly irrelevant to defense of a breach of warranty claim, it is imperative that counsel work closely with clients to confirm the absolute accuracy of the same.
i Leo K. Barnes Jr., a member of Barnes & Barnes, P.C., can be reached at lkb@barnespc.com
ii 51 N.Y. 198, at 201-202 (1872).
iii Metropolitan Coal Co. v. Howard, 155 F.2d 780, at 784 (2nd Cir. 1946). See also New York Contract Law 19:1.
iv CBS Inc. v. Ziff-Davis Pub. Co., 75 N.Y.2d 496, at 503, 554 N.Y.S.2d 449, at 452 (1990); Metropolitan Coal Co. v. Howard, 155 F.2d 780, at 784 (2nd Cir. 1946).
v CBS Inc. v. Ziff-Davis Pub. Co., 75 N.Y.2d 496, at 503, 554 N.Y.S.2d 449, at 452 (1990).
vi Municipal Metallic Bed Mfg Corp v. Dobbs, 253 N.Y. 313 (1930).
vii Galli v. Metz, 973 F.2d 145, at 148 (2nd Cir. 1992)
viii Ainger v. Michigan General Corp., 476 F.Supp 1209, at 1223 (S.D.N.Y. 1979).
ix CBS Inc. v. Ziff-Davis Pub. Co., 75 N.Y.2d 496, at 503-04, 554 N.Y.S.2d 449, at 453 (1990).
x Wechsler v. Hunt Health Systems, Ltd., 198 F.Supp.2d 508, at 522 (S.D.N.Y. 2002).
xi New York Contract Law 17:2 citing Carlisle Ventures, Inc. v. Banco Espanol De Credito, S.A., 1996 W.L. 680265 (S.D.N.Y. 1996).
By: Leo K. Barnes Jr.i
The provisional remedies found a cornerstone of practice in the Commercial Division. This month we review the basic elements of the most commonly sought provisional remedy, the preliminary injunction.
It is well settled that an Article 63 preliminary injunction is not a mechanism for determining the ultimate rights of the parties; rather, the provisional remedy is utilized to maintain the status quo.ii
CPLR 6301 provides in pertinent part:
A preliminary injunction may be granted in any action where it appears that the defendant threatens or is about to do, or is doing or procuring or suffering to be done, an act in violation of the plaintiff’s rights respecting the subject of the action, and tending to render the judgment ineffectual …
The decision whether to grant a preliminary injunction lies within the sound discretion of the Court.iii In that regard, movant must satisfy a three prong test to establish it is entitled to preliminary injunctive relief: (1) a probability of success on the merits; (2) danger of irreparable injury absent the injunction; and (3) a balancing of the equities favors granting the injunction.iv
As for the first element, success on the merits, certainty of success is not the standard that a movant must satisfy to establish that it is likely to succeed on the merits of its claim; rather, it must make a prima facie showing of its right to the relief.v In this regard, CPLR 6312(c) is instructive: it provides that even issues of fact highlighted by opposition to the application are insufficient to defeat the motion and “shall not in itself be grounds for denial of the motion.”
Establishing the second prong of an injunction application can be difficult because the vast majority of cases seek monetary damages. The general rule is that one pursuing a money action is generally not entitled to a preliminary injunction because an adequate remedy at law exists.vi Two exceptions to the general rule warrant elaboration.
The first exception to this rule exists when movant’s cause of action is directed to a specific fund which is “the subject of the action.”vii A myriad of cases hold a monetary damages claim directed at a specific fund is viable as an irreparable injury worthy of an injunction because the property, not the value of the property, is the true subject of the action. See Societe Anonyme v. Pierre A. Fellerviii (Appellate Division rules that in an action disputing the ownership of shares of a cooperative apartment, plaintiff was entitled to pendente lite injunctive relief since irreparable injury may arise if the defendant was not enjoined from transferring the cooperative’s shares pending final resolution of the dispute); Rolnick v. Rolnickix (in an action to impose a constructive trust upon the stock of defendant corporations, the Court ruled that a disposition of the stock shares would render any judgment ineffectual, ruling that an injunction maintaining the status quo would not unduly burden the defendant, yet the denial of such relief could do irreparable harm and cause substantial prejudice to movant); Brennan v. Barnesx (Court grants temporary restraining order precluding defendants from transferring the subject stock shares, despite sharp factual differences in the parties’ respective affidavits, so to maintain status quo); and Bronx County Trust v. O’Connorxi (in a complaint seeking to impose a trust upon a sum generated by the sale of certain shares of a Tobacco Company, premised upon procurement of the shares through fraud and undue influence, the Appellate Division reversed the Supreme Court’s Order denying a motion to continue the pendente lite relief, restraining the defendants from disposing of such proceeds of sale).
Authority exists for a second exception and relates to injunctions which are authorized by statute and purport to be in the public interest. In Spitzer v. Lev,xii in an action against officers of not-for-profit corporation arising from amounts they allegedly received in violation of their fiduciary duties or by way of unjust enrichment, the Attorney General moved for injunctive relief suspending officers from exercising control. New York County Supreme Court Justice Ramos noted that:
However, the traditional concept of irreparable harm, which applies to private parties seeking injunctive relief, does not apply in the public interest field. Thus, when the Attorney General is authorized by statute to seek injunctive relief to enjoin fraudulent or illegal acts, no showing of irreparable harm is necessary. State of New York v. Terry Buick Inc., 137 Misc.2d 290, 520 N.Y.S.2d 497 (Sup Ct. 1987).
Accordingly, here where the Attorney General is authorized pursuant to NPCL § 112 to seek injunctive relief with respect to any acts which form a basis for the bringing of any action or proceeding by the Attorney General pursuant to the NPCL, no showing of irreparable harm is necessary.xiii
Third, as for balancing the equities, the Court must evaluate the harm that each party will suffer with and without the injunctive relief. Prevailing Second Department precedent requires that movant demonstrate that the harm which it would suffer from the denial of the motion is decidedly greater than the harm its opponent would suffer if the preliminary injunction were granted.xiv In this analysis, a thorough client affidavit is imperative to a successful application. The preliminary injunction application is not the time to be circumspect with respect to all of the facts which have influenced the client’s decision to seek provisional relief.
Finally, an analysis of the quantum of the undertaking is appropriate. It is clear that CPLR 6312(b) requires movant to furnish a bond contemporaneously with the effectuation of a preliminary injunction order. The undertaking is to secure the opposing party for actual losses and costs — not theoretical losses, “if it is later finally determined that the preliminary injunction was erroneously granted.”xv Indeed, the court’s discretion in setting the amount of the undertaking must be “rationally related” to the potential damages and costs that the enjoined entity may suffer.xvi In that regard, mere conclusory assertions of potential monetary loss are insufficient to justify anything more than a minimal bond.xvii
i Leo K. Barnes Jr. is a member of Barnes & Barnes, P.C. and can be reached at LKB@BARNESPC.COM
ii Hightower v. Reid, 5 A.D.3d 440, 772 N.Y.S.2d 575 (2nd Dep’t 2004).
iii Doe v. Axelrod, 73 N.Y.2d 748, 536 N.Y.S.2d 44 (1988).
iv Aetna Ins. Co. v. Capasso, 75 N.Y.2d 860, 552 N.Y.S.2d 918 (1990).
v Terrell v. Terrell, 279 A.D.2d 301, 719 N.Y.S.2d 41 (1st Dep’t 2001).
vi Walsh v. Design Concepts, Ltd., 221 A.D.2d 454, 633 N.Y.S.2d 579 (2nd Dep’t 1995).
vii Ma v. Lien, 198 A.D.2d 186, 604 N.Y.S.2d 84 (1st Dep’t 1993).
viii 112 A.D.2d 837,492 N.Y.S.2d 756 (1st Dep’t 1985).
ix 230 N.Y.S.2d 789 (Queens Sup. 1962).
x 232 N.Y.S. 112 (Albany Sup. 1928).
xi 220 A.D. 340, 221 N.Y.S. 414 (1st Dep’t 1927).
xii 2003 WL 21649444 (N.Y. Sup. Ct. 2003).
xiv Fischer v. Deitsch, 168 A.D.2d 599, 563 N.Y.S.2d 836 (2nd Dep’t 1990).
xv Margolies v. Encounter, Inc., 42 N.Y.2d 475, 398 N.Y.S.2d 877 (1977).
xvi Lelekakis v. Kamamis, 303 A.D.2d 380, 755 N.Y.S.2d 665 (2nd Dep’t 2003).
xvii 7th Sense, Inc. v. Liu, 220 A.D.2d 215, 631 N.Y.S.2d 835 (1st Dep’t 1995).
By Leo K. Barnes Jr.i
You are contacted by Vermont based counsel for a small business which recently entered Confessed Judgment in Vermont against a New York business for its failure to satisfy certain promissory notes. The Vermont client wants to quickly domesticate the judgment in light of rumors that the New York based business may shut down in short order. Mindful that Article 62 of the CPLR may apply to found an efficient attachment of the New York Corporation’s assets, you ask for more information and are advised as follows.
AA Corporation, a Vermont Corporation, sold its business to a New York entity, DD Corporation, resulting in an Asset Purchase Agreement which is secured by a Confessed Judgment Promissory Note. DD was represented by counsel during the negotiation, drafting and execution of the APA and, incident thereto, DD, for consideration, voluntarily and knowingly waived its right to prejudgment notice and hearing prior to the entry of a Confession of Judgment and likewise submitted to in personam jurisdiction in Vermont, irrevocably waiving any basis to dispute Vermont’s jurisdiction. After DD failed to make an installment payment due to AA, counsel for AA sent DD and its counsel a Notice to Cure, followed by a Notice of an Event of Default. After no payment was made, AA’s counsel confessed judgment against DD in AA’s favor in the Clerk’s Office of the local County in Vermont under the terms of the Confessed Judgment Provision of DD’s Confessed Judgment Promissory Note to AA.
In that light, AA may have a basis for seeking an immediate attachment. CPLR § 6211(a) permits plaintiff to proceed with an ex parte application for an order of attachment “before or after service of a summons and at any time prior to judgment.” CPLR § 6212(a) provides that plaintiff bears the burden of establishing four prongs to demonstrate entitlement to an order of attachment: (1) a cause of action exists against the defendants; (2) it is probable that plaintiff will succeed on the merits; (3) one of the five grounds for an attachment specified in CPLR § 6201 is applicable; and (4) the amount demanded from the defendants exceeds all counterclaims known to the plaintiff.
The Complaint against DD will undoubtedly allege breach of contract.ii To sustain an attachment, plaintiff in a breach of contract action must demonstrate evidentiary facts making out a prima facie case.iii In determining whether plaintiff has sustained the burden of stating a prima facie case in support of the complaint upon which the attachment is based, the court must give the plaintiff the benefit of all the legitimate inferences that can be drawn from the stated facts.iv A well crafted, detailed and documented client affidavit will serve as the keystone for a Court’s attachment order to the extent that the same will establish that DD failed to satisfy its payment obligations despite due notice of default, that the sums remain outstanding and that corresponding judgments have been entered in Vermont.
With the foregoing factual background, the plaintiff has established that a cause of action exists and it is probable that plaintiff will succeed on the merits. See Considar, Inc. v. Redi Corp. Establishmentv (evidence that principal terms of oral agreement were confirmed in signed memorandum, together with seller’s undisputed lack of performance, established probability of buyer’s success on merits of breach of contract claim, as required for buyer to obtain attachment order); Philipp Bros. Division of Engelhard Minerals & Chemicals Corp. v. El Salto, S.A.vi (in breach of contract action brought by sugar buyer against sugar seller wherein buyer sought to confirm ex parte attachment and sought preliminary injunction, record established that buyer sufficiently demonstrated its intention, willingness and ability to purchase the sugar it contracted to buy and that seller terminated agreement for reasons not authorized by written contract, thus establishing buyer’s likelihood of succeeding on merits as required to confirm the ex parte attachment and to issue the preliminary injunction).
Next, plaintiff must satisfy the third element necessary to demonstrate entitlement to an attachment. In that regard, CPLR § 6201 provides in pertinent part:
§ 6201. Grounds for attachment
An order of attachment may be granted in any action, except a matrimonial action, where the plaintiff has demanded and would be entitled, in whole or in part, or in the alternative, to a money judgment against one or more defendants, when: …
5. the cause of action is based on a judgment, decree or order of a court of the United States or of any other court which is entitled to full faith and credit in this state, or on a judgment which qualifies for recognition under the provisions of article 53.
Because the plaintiff’s New York action is based upon a judgment from Vermont it is per se entitled to found a New York action.
This subsection [CPLR § 6201(5)] is utilized by plaintiffs who want to commence an action to enforce a foreign judgment against a defendant in New York. Upon an application by the plaintiff, the Court will determine whether the foreign judgment that remains unsatisfied is likely to be recognized in New York.
Duplicating the language utilized in CPLR § 6201(5), CPLR § 5401 defines a “foreign judgment” as “any judgment, decree, or order of a court of the United States or of any other court which is entitled to full faith and credit in this state …”.
While a cognovit judgment may not be entitled to full faith and credit if it fails to satisfy due process considerations, a confession of judgment which satisfies due process standards is entitled to recognition and enforcement in New York.
While an outright “cognovit” instrument (not seen much today) may not be entitled to full faith and credit at all for example, and hence not entitled to New York recognition through any procedure (CPLR 5401 or otherwise), a confession of judgment not guilty of the cognovit’s offenses may satisfy due process and, while not being allowed mere registration under CPLR 5401, nevertheless be entitled to full faith and credit and hence New York enforcement through one of the other means.
It is important to bear in mind that the mere fact that a sister-state judgment was rendered “by default in appearance, or by confession of judgment” (the language of CPLR 5401) does not mean that it is not entitled to full faith and credit. Default judgments rendered with jurisdiction are surely so entitled (or every defendant could defeat full faith and credit merely by defaulting). The same goes for confessed judgments taken pursuant to procedures that satisfy due process. In this sense the practitioner should note the caption of Article 54, which in general terms applies to all “full faith and credit” judgments, and the specific language of CPLR 5401, which excludes default and confession judgments from use of the Article 54 registration procedure even though they may be entitled to full faith and credit. The specific language of CPLR 5401 of course controls whether the simple registration procedure is to be allowed.vii
AA will argue that a review of the Vermont Judgment, coupled with an understanding of the circumstances surrounding the execution of the same, confirms that the Vermont Judgment must be recognized in New York. The Court’s sole inquiry is whether Vermont possessed personal jurisdiction over DD. See Augusta Lumber v. Herbert H. Sabbeth Corp.viii (in a breach of contact action to enforce a Vermont default judgment, the Second Department affirmed a trial court finding that plaintiff established personal jurisdiction over the defendant, ceasing further analysis of the sister-state Judgment). In light of the fact that DD submitted to in personam jurisdiction, plaintiff will argue that it is beyond refute that DD specifically submitted to personal jurisdiction in Vermont and expressly waived any basis to dispute Vermont’s jurisdiction.ix Fiore v. Oakwood Plaza Shopping Center, Inc.x is instructive. In Fiore, the First Department went so far as to affirm a trial court ruling according full faith and credit to a cognovit judgment. The Fiore Court, after reviewing certain aspects of the judgment, concluded that it “cannot be said that the cognovit judgment amounted to a deprivation of property rights without due process.”
As for the fourth prong of whether an attachment is proper, plaintiff will assert that no known counterclaim exists, and the claim asserted herein exceeds any counterclaim that the defendants could conceivably assert, thereby establishing its right to an attachment pursuant to CPLR § 6201(5). But the analysis does not end with the statutory criteria.xi
Finally, because CPLR § 6212(b) mandates that plaintiff furnish an undertaking in an amount to be established by the Court, an analysis of the quantum of the undertaking is appropriate. Pursuant to CPLR § 6212(e), plaintiff’s liability to the defendants would be “for all costs and damages, including reasonable attorney’s fees, which may be sustained by reason of the attachment if the defendant recovers judgment, or if it is finally decided that the plaintiff was not entitled to an attachment of the defendant’s property.” With respect to provisional remedies generally, an undertaking is utilized to secure defendants for actual losses and costs — not theoretical losses, “if it is later finally determined that the [provisional remedy] was erroneously granted.”xii Indeed, the court’s discretion in setting the amount of the undertaking must be “rationally related” to the potential damages and costs that DD may suffer.xiii Conclusory assertions of potential monetary loss by DD are insufficient to justify anything more than a minimal bond. xiv
i Leo K. Barnes Jr., a member of Barnes & Barnes, P.C., can be reached at “lkb@barnespc.com”.
ii As an aside, CPLR § 5406 provides an unimpaired right for plaintiff to proceed pursuant to CPLR § 3213 to enforce the sister-state judgment.
vii Siegel, David D, Supplemental Practice Commentaries, C5406:1.
viii 101 A.D.2d 846, 475 N.Y.S.2d 878 (2nd Dep’t 1984).
ix See, e.g., National Union Fire Ins. Co. v. Worley, 257 A.D.2d 228, 231, 690 N.Y.S.2d 57, 59 (1st Dep’t 1999).
x 189 A.D.2d 703, 592 N.Y.S.2d 720 (1st Dep’t 1993).
xi Despite compliance with the foregoing statutory and common law criteria for an attachment, the decision whether to execute the Order still lies within the sound discretion of the Court. Because the provisional remedy is such a drastic measure, it is incumbent upon movant to demonstrate to the Court that equity warrants the Order of Attachment. Again, a detailed and well documented affidavit is imperative.
xii Margolies v. Encounter, Inc., 42 N.Y.2d 475, 398 N.Y.S.2d 877 (1977).
xiii Lelekakis v. Kamamis, 303 A.D.2d 380, 755 N.Y.S.2d 665 (2nd Dep’t 2003).
xiv 7th Sense, Inc. v. Liu, 220 A.D.2d 215, 631 N.Y.S.2d 835 (1st Dep’t 1995).
By Leo K. Barnes Jr.i
With the real estate sale and rental season well underway, and the brokerage community ecstatic to entertain any semblance of business after the drought that has plagued the industry for the past several years, it is an opportune moment to reiterate the premise that an enforceable brokerage commission contract must contain all material terms to avoid dismissal of a duly earned commission premised upon a Court’s characterization of the commission agreement as an unenforceable “agreement to agree”.
The underlying principle that governs a document’s characterization as an unenforceable agreement to agree stems from the absence of manifested mutual assent to the essential terms of a purported contract.
In order to create a binding contract, there must be a meeting of the minds as to the essentials of the agreement. There can be no legally enforceable contract unless the written agreement is reasonably certain or specific in its material terms. … While not all terms of a contract need be fixed with absolute certainty, a mere agreement to agree, in which a material term is left for future negotiations, is unenforceable. … In determining whether a contract is reasonably certain in its material terms, and therefore sufficiently definite as to be enforceable, a court must apply a standard that is necessarily flexible, varying with the subject of the agreement, its complexity, the purpose for which the contract was made, the circumstances under which it was made, and the relation of the parties. … Generally, compensation and manifestation of intent are deemed “material” terms. Additional terms are “material” when the parties consider them to be, such as the procurement of signatures [internal citations omitted].ii
In two decisions this Spring rendered by the Second Department and the Suffolk County Supreme Court’s Commercial Division, Zere Real Estate Services learned twice, the hard way, that a broker’s inability to document to the Court that “mutual assent” to the terms of an agreement exists renders a putative real estate commission agreement unenforceable.
First, in Zere Real Estate Services Inc. v. Adamag Realty Corp.,iii the commercial real estate agency sought to recover a brokerage commission incident to the sale of a commercial property. At trial on the claim before Justice Mayer, the plaintiff testified that the commission for a completed sale would be “no more than 5%” and that the plaintiff understood the agreement to mean that the defendant had agreed to pay a 5% commission. The defendant testified at trial that he understood that if a deal was completed, the parties would negotiate a commission rate of no more than 5% depending on the particulars of the sale actually consummated. Apparently, it was not in dispute that the commission “agreement” was nonexclusive and that there was no agreed upon duration to the purported “agreement”. After summations, the jury ruled that the parties did not enter into an express brokerage agreement. The Second Department, in affirming, ruled that the jury’s finding was not against the weight of the evidence since a fair interpretation of the evidence supported the conclusion that the parties merely reached an agreement to agree.
The following month, Zere Real Estate’s breach of contract cause of action was dismissed on summary judgment in an action pending in the Commercial Division. In Zere Real Estate Services, Inc. v. Parr,iv plaintiff moved for summary judgment on its brokerage commission claim sounding in breach of contract. Specifically, plaintiff claimed that it was entitled to a commission if defendant, or any of its affiliates, entered into a formal agreement with Touro Law School to function as Touro’s general contractor or construction manager in connection with the Law School’s construction of a new school in Central Islip. According to the Court, although the writing specified that a fee would be negotiated at a later date, plaintiff argued that in a subsequent recorded telephone conversation, defendant agreed that plaintiff’s fee would amount to 6% of the construction cost; the defendant, of course, denied that characterization.
In denying the plaintiff’s motion for summary judgment and granting the defendants’ cross motion for summary judgment dismissing the breach of contract cause of action, Justice Pines relied upon black letter law that absent a clear mutual assent to all terms of a purported agreement between two parties, the same will constitute an unenforceable agreement to agree. At bar, although it is well settled that a Court may impute a missing price term if it is readily ascertainable by reference to outside sources such as custom or trade usage, the Court ruled that the plaintiff failed to demonstrate that there existed a standard for the claimed broker’s fee premised upon the project’s cost of construction. Indeed, Second Department precedent is clear:
It is well settled that an agreement to agree, in which material terms are left for future negotiations, is unenforceable unless a methodology for determining the material terms can be found within the four corners of the agreement or the agreement refers to an objective extrinsic event, condition, or standard by which the material terms may be determined (see, Cobble Hill Nursing Home v. Henry & Warren Corp., 74 N.Y.2d 475, 548 N.Y.S.2d 920, 548 N.E.2d 203, cert. denied 498 U.S. 816, 111 S.Ct. 58, 112 L.Ed.2d 33; see also, Martin Delicatessen v. Schumacher, 52 N.Y.2d 105, 109, 436 N.Y.S.2d 247, 417 N.E.2d 541). Further, where an agreement contains open terms, calls for future approval, and expressly anticipates future preparation and execution of contract documents, there is a strong presumption against finding a binding and enforceable obligation (see, Teachers Ins. & Annuity Assn. of Am. v. Tribune Co., 670 F.Supp. 491, 499).v
Although all is not lost, the brokerage commission claim has been rendered exponentially more difficult to pursue successfully. As reiterated in the Comments which follow Pattern Jury Instruction 4:31, where the existence of a brokerage contract is in dispute, the broker may proceed on the theories of breach of contract and quantum meruit. See Breslin Realty Development Corp. v 112 Leaseholds, LLCvi and Curtis Properties Corp. v Greif Companies.vii Indeed, in the Zere Real Estate matter pending before Justice Pines, the Court permitted the plaintiff to proceed with its equitable claims despite the dismissal of the cause of action premised upon breach of an express contract. So although the claim is still viable, the plaintiff has been reduced to proceeding through the discovery process in its effort to establish liability and damages, from square one, instead of relying upon a single document which could have founded a successful summary judgment motion. Diligence in the drafting and execution of the commission agreement prior to the initiation of service by the broker avoids protracted litigation on the scope and value of services rendered by a broker.
i Leo K. Barnes Jr. is a member of Barnes & Barnes, P.C. and can be reached at LKB@BARNESPC.COM
ii N.Y. Jur.2d, Contracts, § 19
iii __ A.D.3d ___, 875 N.Y.S.2d 162 (2nd Dep’t 2009).
iv Suffolk Supreme Court Index Number 39680/2007 (Justice Emily Pines).
vi 270 A.D.2d 299, 704 N.Y.S.2d 861 (2nd Dep’t 2000).
vii 236 A.D.2d 237, 653 N.Y.S.2d 569 (1st Dep’t 1997).
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