Recently in Litigation Category

Violating Confidentiality Agreements

October 23, 2014

Confidentiality provisions are common in many different settings, including settlements, business transactions and intellectual property agreements. The cost of violating a confidentiality provision often leads to litigation and damages, and significant aggravation. While a few months old, a recent article I read highlighted some real-life examples. Have a look here and here.

Before signing a confidentiality provision, non-compete, or any agreement, know what is being bound---many times the one agreeing is unaware of some of the sweeping terms of the agreement made. The wake-up can be painful.

Protective Order Renders Commercial Contract Impossible to Perform

September 15, 2014

Plaintiff Kolodin is a singer who lived with her agent, defendant Valenti. Despite the deterioration of their relationship the parties maintained a professional arrangement and Kolodin continued to sign with Valenti and his company, Jayarvee.

At some point, their relationship turned worse and Kolodin obtained an order of protection against Valenti, which prevented him from contacting her. This protective order was extended on consent a number of times. Kolodin then sued seeking recision of the last contract she signed with Jayarvee arguing that fulfilling the terms of that contract was impossible due to the order of protection signed by Kolodin and Valenti. The parties resolved the issues underlying the order of protection by signing a stipulation by which they agreed to have no further contact with each other. The draft of that stipulation had language allowing contact with employees of Jayarvee, but that language was dropped from the final version. Once this stipulation was in place, the court agreed that the parties' contract could not be fulfilled and should be terminated due to its impossibility of performance.

In affirming that decision, the First Department first discussed the narrow grounds for recision of a contract based upon of impossibility of its performance. Those grounds are where the "'the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against n the contract.'" Because the parties' stipulation "destroyed the means of performance by precluding all contact" between the parties, the First Department found that the parties' stipulation "rendered objectively impossible by law" the terms of the parties' contract. As such, the Appellate Division agreed that the contract could be rescinded and cancelled. The court went further and noted that this contract, by its nature, would not allow any relationship, finding that because Valenti had a "central role" in the performance of the Jayarvee contract, his input was material and necessary for the execution of the parties' responsibilities under the contract.

It is important to recognize this outcome because the contract was between Kolodin and Jayarvee, not between Kolodin and Valenti. The court disregarded this normally critical distinction because it recognized the underlying involvement of Valenti and essentially extended the Kolodin-Jayarvee contract to Valenti. And this outcome was not just a by-product of the core decision. The court specifically rejected Valenti's argument that because only he was party to the stipulation, but not Jayarvee, there was no reason why Kolodin could not perform for Jayarvee. The Court determined that "[p]ractically speaking [ ] Jayarvee's employees answer to Valenti, and the company's decisions are ultimately made by Valenti. It would be impossible for Jayarvee, without Valenti's input, to engage in communication with Kolodin. It is of no moment that Jayarvee could hypothetically perform the contract[ ] absent Valenti's involvement; to do so would require a sort of firewall, the very establishment of which would necessitate (direct or indirect) communication between Valenti and plaintiff. Valenti's own admissions as to his role managing Jayarvee compel the conclusion that the contracts could not be performed without his involvement and, thus, without violating the stipulation."

Finally, the appeals court noted that even if the breakdown of the relationship could have been a foreseeable act at the time the parties entered into the contract, so that impossibility could not be established, it was the parties signing the stipulation that was the trigger for creating impossibility of performance of the parties' contract. Thus, what was foreseeable at the time the contract was signed was not relevant.

Kolodin v. Valenti (1st Dept. 2004)

Board Member's Vote for Disputed Conduct Not Deemed Bias for Demand in Derivative Action

August 25, 2014

Often, litigation involving a corporation will be framed as a derivative action meaning, that the shareholder that is suing is doing so on behalf of the corporation but not individually. A prerequisite for a derivative action is the suing shareholder's demand on the board to act on behalf of the corporation. However, one way to avoid this demand, is to demonstrate to a judge that because the entity's board members are biased against the demand, any demand would be futile. Upon such a showing, the demand will be waived.

In a case involving Life Medical Technologies, Inc., Suffolk County commercial division judge, Elizabeth Emerson, held that a board member's vote for the conduct in question did not equate to bias so that a demand may not have been futile. That meant that just because the board member agreed to take the action that is now the subject of the lawsuit did not mean that a demand on that board member to sue would be useless. The court held that the board member, when faced with a demand, could change his or her mind.

I suppose.

The brief facts here involve the company's failure to take steps to recover certain stock grants to a consultant and company officer (both of whom sat on the company's board). There was no dispute that the other board members voted in favor of the grants and failed to take action to recover them.

When the shareholder commenced a derivative action against the company and board members, he alleged that any demand to the board to act on behalf of the company would have been futile and he was thus relieved from making the demand. The Court disagreed, finding that while the two that received the shares would be deemed interested and biased, the other board members, notwithstanding their votes in favor, would not be automatically biased against a demand to recover the grants. Therefore, the allegation that a demand would have been futile was denied, and the case was dismissed.

This decision highlights the fine line often present in derivative litigation, and whether or not to make a demand must be carefully considered. Do not act alone in making that decision, as the dismissal of an otherwise meritorious lawsuit may result.

New York State High Court Refuses to Force Parties to Negotiate Forever

July 14, 2014

Tyco and IDT entered into a joint venture agreement. Numerous litigations commenced, which were settled by a 2000 settlement agreement. That settlement agreement provided for IDT to use Tyco's yet unbuilt infrastructure, upon the parties' mutual agreement. As time went on, negotiations failed to produce mutually agreeable terms and conditions for IDT's use, and litigation followed.

The Court of Appeals agreed with IDT that the settlement agreement was enforceable, but refused to enforce Tyco's obligation to negotiate in good faith to mean that the parties were compelled to negotiate without end. The court stated that an "obligation [to negotiate] can come to an end without a breach by either party. There is such a thing as a good faith impasse; not every good faith negotiation bears fruit." The court extended that position to a case where market conditions made the proposed deal untenable or even uninteresting and one party walked away. As a result, the court dismissed IDT's case, finding that IDT stated no cause of action upon which relief could be granted.

The dissent would not have dismissed IDT's complaint because IDT's allegations did raise questions of Tyco's negotiation tactics. While the dissent addressed dismissal, it clearly disagreed with the majority's finding as to Tyco's conduct and questioned whether Tyco acted in good faith.

Often, preliminary agreements, which are often enforceable--to the surprise of a party--contain language similar to that which was under consideration here. Writing that protects the parties but also binds them, is critical to an enforceable agreement.

Failure to Verify Details of Disputed Credit Report Undermines Experian's Claims

January 8, 2014

Plaintiff Keisha James notified Experian that two items on her credit report were incorrect and were reported on her report as a result of identity theft. When Experian notified the companies that listed the debts of her dispute, those companies were only able to verify some of the information as being matching James's. Nonetheless, Experian refused to remove the disputed debts from her credit report. James sued Experian claiming that it failed to conduct a reasonable investigation into the disputed debts, as required by the Fair Credit Reporting Act. Experian responded by arguing that its investigation and verification complied with the Federal statute and asked that James's lawsuit be dismissed.

The court focused its decision on defining what would be deemed a"reasonable investigation" by Experian to satisfy its obligations under the law. Noting the absence of a clear definition, the court considered the totality of the circumstance. Observing that the companies reporting the debts to Experian were only able to verify some of the information, so that items like James's birth date, address and name were incorrect on those company reporting records, described by the court as "glaring discrepancies," coupled with Experian's failure to do anything more, compelled the court to deny dismissal of the complaint and allow James to proceed with her case.

Jones v. Experian Information Solutions, Inc.; Southern District of New York, Judge McMahon

Offering Plan for Condominium Building Deemed Contract with Unit Buyers

January 3, 2014

Plaintiff alleged that the sponsor of a condominium development breached the offering plan by converting the units to rentals from sales, and that the developer was therefore able to maintain control of the buildings board of directors.

Plaintiff, Bauer, alleged that she purchased multiple condominium units in a building newly constructed by defendant Beekman International Center, LLC. She alleged that Beekman's offering plan described its stated intent to sell the 65 units. Bauer claimed that such statement implied that the sales would be completed in a "reasonable time." Bauer further alleged that Beekeman's paperwork did not disclose that Beekman retained the option to rent any unit instead of selling it. Bauer claimed that Beekman's rentals breached the agreement in that it precluded the unit owners from taking over control over the building as owners. As a result, Bauer and other unit owners were unable to sell their units, the rentals caused the common charges to increase, and impeded the unit owners' ability from obtaining favorable refinancing rates from lenders. Bauer sought damages and the court's direction that the units be sold, in addition to forcing Beekman's principals from the board of directors. Beekman responded by stating that approximately half of the units had been sold and once the market was able to sustain the asking price, arrangements would be made to resume the unit sales. Beekman denied that the unit owners were having difficulty refinancing their respective units, but seemingly did not dispute all of Bauer's claims.

The court recited some of the legal history involving the relationship between sponsors and buyers. Citing case law and regulatory action, the court deemed a sponsor's offering plan to be an agreement which contained the implied promise to sell the units within a reasonable period of time. A sponsor's failure to do so supported a breach of contract claim. The court noted that the current regulatory scheme required a sponsor to specify the intended market for the units built. Those regulations further required a disclosure that once the sponsor sold the minimum 15% of the units necessary for the offering plan to become effective, its ability to rent rather then sell the units could result in the unit buyers never taking control of the condominium.

Beekman's claim that its offering plan stated that it held the right to rent and not sell the units was refused by the court, as it held that such rental was allowed only until a unit sale closed, implying that Beekman would in fact attempt to sell the units, and certainly fell short of the explicit statements required to maintain the units as rentals, indefinitely. Once Beekman stopped marketing the units for sale so that the offering plan lapsed, Beekman was in violation of the offering plan. However, the court held that because Bauer's claims of increased common costs and inability to obtain financing were usupported, and because Beekman held less than half of the units so that the unit owners could have formed a board to control the building, Bauer could not show the Beekman's conduct was damaging as alleged and the breach of contract claim was dismissed. The court held further that the claim of misuse of the common areas could not be maintained by the unit holders. Only the board could raise that claim.

Bauer v. Beekman Int'l Center, LLC; New York County, Judge Silver

Substituted Service of Process on Co-Defendant Ruled Insufficient

December 18, 2013

The plaintiff was a home health aide for Gilberto Rivas in Rivas's apartment, where she claims to have been injured by a defective window. The plaintiff sued the apartment's owner and Rivas. The plaintiff served the owner of the apartment by substituted service upon Rivas. Neither defendant responded and plaintiff obtained a default judgment. In seeking to vacate the default, the owner claimed that he was never served and that Rivas did not forward the litigation papers to him.

Putting aside the issue of whether the owner listed that apartment as his home address, the Court found it unreasonable and unreliable for the plaintiff to have served the owner by leaving the lawsuit papers with Rivas, who had interests that were adverse to the interest of the apartment's owner. In this setting, Rivas could not be relied upon to properly forward the papers to the owner. Therefore, the property owner was allowed to file his late answer and to defend the case.

Martinez v. McSweeny, Queens County - J. McDonald

Insurance Policy Applies Even With Wrong Party Named

November 11, 2013

A deli rented space from 137 Broadway Associates, located at 3379 Broadway. Prior to renting that space, the deli rented from Cromwell Associates, located at 3381 Broadway. The deli had purchased an insurance policy, which included the landlord as an additional insured. Mistakenly, although the deli was now renting from 137 Broadway, Cromwell was listed as the additional insured and not 137 Broadway. After being sued for a patron's fall, who named both the deli and 137 Broadway, the carrier refused to defend 137 Broadway, claiming that it was not listed as an insured party.

137 Broadway commenced a lawsuit against the carrier, seeking to compel the carrier to defend it in the lawsuit, claiming that it was the intended party to be insured. The carrier argued that the policy documents were clear and did not list 137 Broadway as an insured party. The court refused to accept that approach. After first reciting the principle that the written list of insured parties was not always exclusive as to which party was to be insured, the court determined that where the intent of the parties as to coverage is clear, mistakenly listing the wrong entity would not alone preclude coverage for the intended party. The court noted that the mistake was obvious because there was no way that Cromwell Associates could obtain any benefit by being listed as an additional insured.

137 Broadway Associates, LLC v. 602 West 137th Deli Corp.

Email Agreement Creates Enforceable Settlement

November 1, 2013

Plaintiff, John T. Forcelli, sued for injuries incurred in an auto accident. While motions to dismiss were pending, the parties mediated the claim. Although one of the defendant's insurance carriers discussed settlement, no agreement was reached. Shortly thereafter, settlement discussions were revived by email exchange. The carrier's representative offered $200,000, which was later raised to $230,000. That amount was agreed to orally by Mr. Forcelli's counsel. The carrier confirmed that amount in a subsequent email, which was signed "[t]hanks Brenda Green" (the carrier's representative). Settlement and release papers were exchanged and signed by Mr. Forcelli. A few days later, before the defendants had signed off, the court issued a decision granting dismissal of the lawsuit. Thus, the carriers refused to sign the settlement papers or pay any amount to Mr. Forcelli.

The parties went back to the judge. The issue was whether or not the email from Brenda Greene was to be deemed an enforceable, proper, settlement agreement under the law. The judge found that it was.

The carriers appealed but the Second Department affirmed. That court recited the requirements for finding an enforceable agreement--a written agreement signed by the party or his counsel, which includes all of the material terms of the agreement. The email contained the settlement amount and Mr. Forcelli's agreement to settle, the relevant terms. The fact that not all of the defendants or their counsel had signed off was not a bar, as Ms. Greene had apparent authority to bind all of the defendants. Recognizing that an email is not formally signed, the Second Department allowed this emails as they were clear to show the parties' intent to settle. That Ms. Greene wrote out her name at the end of the email was further proof of affirmative consent (differentiating from an auto-signature at the end of an email).

Forcelli v. Gelco Corp.

Corporation Permitted to Sell its Sole Real Estate Holding as Being in the Regular Course of Business

October 10, 2013

The stated purpose of the corporation, owned by two shareholders in a 55%-45% split, was to lease residential and commercial space. The corporation owned one building and the majority holder wanted to sell it as part of a ยง1031 Exchange. The expected return was expected to be 300% over a three year period. The minority shareholder refused, and claimed that a super-majority vote was required to allow the sale.

The court noted that under the Business Corporation Law a super-majority was not required if the corporation was making the sale in the ordinary course of its business as "actually conducted by the corporation in furtherance of the objectives of its existence." Because both parties agreed that the corporation's business was to lease property, the court had to determine how the proposed sale fit into the corporation's ordinary business.

The court held that the corporation was proposing a sale, not an exchange. The minority shareholder argued that the sale of the sole asset was not in the regular business of the corporation. The court disagreed. Because the purpose of the sale was not to liquidate the corporation but to reinvest the sale proceeds in a different property, and to then engage in the corporation's ordinary business with that new property, no super-majority consent was required.

Shareholder dispute's often arise over a large corporate transaction. While the corporate statutes are the baseline authority, where there is no shareholders' agreement among the shareholders, that agreement is really where this type of issue should be addressed. Shareholders can avoid substantial cost and aggravation by a executing a comprehensive shareholders' agreement.

Theatre District Realty Corp. v. Appleby (New York County)

New Jersey Court Creates Liability for Sending Text Message

September 9, 2013

A recent decision by a New Jersey appellate court has held that one sending a text to someone that is known or should be known to be driving, and in some way encourages a response to that message, may be liable for injuries sustained in a resulting accident. That said, the applicability of this rule seems rather limited.

In this case, Kyle Best hit and injured two bikers. During the resulting litigation, it became obvious that he was exchanging texts with Shannon Colonna immediately before the accident. Upon learning that, the plaintiffs included Colonna in the lawsuit. Colonna moved for dismissal arguing that she owed no duty to the plaintiffs and was in no way involved in the accident.

The court was clearly sympathetic to the plaintiffs, not surprising given the serious injuries, but refused to hold Colonna liable. However, the court did find that "a person sending text messages has a duty not to text someone who is driving if the texter knows, or has special reason to know, [that] the recipient will view the text while driving." The court explained that because "Colonna did not have a special relationship with Best by which she could control his conduct [... n]or is there evidence that she actively encouraged him to text her while he was driving," Colonna could not be found liable for Best's accident. The court added that despite what Colonna might have known, and "[e]ven if a reasonable inference can be drawn that she sent messages requiring responses, the act of sending such messages, by itself, is not active encouragement that the recipient read the text and respond immediately, that is, while driving and in violation of the law." Explaining that culpable conduct by the texter would involve something beyond sending the text, the court found that "[p]laintiffs produced no evidence tending to show that Colonna urged Best to read and respond to her text while he was driving."

Sensibly, the court stated that "one should not be held liable for sending a wireless transmission simply because some recipient might use his cell phone unlawfully and become distracted while driving." Even where someone may be driving, not "every recipient of a text message who is driving will neglect his obligation to obey the law and will be distracted by the text. Like a call to voicemail or an answering machine, the sending of a text message by itself does not demand that the recipient take any action. The sender should be able to assume that the recipient will read a text message only when it is safe and legal to do so, that is, when not operating a vehicle. However, if the sender knows that the recipient is both driving and will read the text immediately, then the sender has taken a foreseeable risk in sending a text at that time. The sender has knowingly engaged in distracting conduct, and it is not unfair also to hold the sender responsible for the distraction."

Despite the general holding of this decision, reading it indicates that actually finding liability for sending a text seems rather distant. That said, don't text and drive.

Is "Dirty" Defamatory?

September 3, 2013

The owner of "America's Dirtiest Restaurant" cannot recover on its claim that the restaurant was defamed. No surprise there. Have a read here.

Client Sues His Lawyer--for Copyright Infringement

August 27, 2013

This case presents an interesting discussion of copyright law, but not only based on a court decision, but on a disgruntled ex-client's claim against his lawyer.

Bernard Gelb and his company hired an attorney, Norman Kaplan, to file a class action lawsuit. After that lawsuit was dismissed, Gelb and Kaplan filed an appeal on behalf of the class members. Before that appeal was decided Gelb and Kaplan parted ways. However, the other members of the class kept Kaplan as counsel. Gelb withdrew from the appeal (he initially tried to withdraw the entire appeal, which he was not allowed to do, so he withdrew his participation in that appeal). Thereafter, Gelb, claiming that he had a role in drafting the initial court papers, filed for copyright protection of those court papers. After the appellate court reversed the dismissal and reinstated the case, Kaplan proceeded with the case on behalf of the remaining class, using and amending the initial court papers that had been filed before dismissal was ordered.

Gelb sued Kaplan claiming that Kaplan's continued use of the initial court papers, including the complaint, infringed on Gelb's copyright. Kaplan's motion to dismiss Gelb's claims was granted and Gelb appealed.

On appeal, the Second Circuit, after noting Gelb's "sharp litigation practices," upheld the dismissal of Gelb's claims. The court agreed with the lower court's reasoning and explained further that when Gelb directed Kaplan to file the complaint, Gelb issued to Kaplan an irrevocable implied license to use those papers in the lawsuit, without limitation. Key to that finding was the court's discussion that when a copyright holder allows another to use a document in a litigation, he knows or should know that the document may be necessary throughout the legal proceeding--even by a different attorney. The court also highlighted its concern that allowing Gelb to proceed on his claim would preclude a court from doing its business. A court could not adjudicate a case if it had to compete with the copyright considerations of the papers before it. Allowing this claim could also encourage attorneys to hold a case or client hostage by claiming ownership of a document. In sum, the court held:

Continue reading "Client Sues His Lawyer--for Copyright Infringement" »

Arbitrator's Application of Incorrect Law Basis for Vacatur of Arbitration Decision

July 8, 2013

While the misapplication of a law is ordinarily not a reason for a judge to throw out an arbitration award, a Civil Court judge has refused to confirm an arbitration award because it was contrary to established law.

In this case, the arbitrator was found to have acted contrary to established law in determining the proper standard for which party was obligated to prove its case. Upon application to the court for confirmation and enforcement of that arbitration award, the judge held that while the misapplication of a correct law would not lead to vacatur, here, because the arbitrator's decision was based on a wrong legal principal and thus contrary to established law, it was deemed irrational under Article 75 of the CPLR, and could not stand.

Interest Rate on $1.13 Million Secured Loan Deemed Usurious and Unenforceable

July 1, 2013

A few months ago, the First Department appellate court invalidated a $1.13 million loan because it found its charges and interest to violate New York's criminal usury laws. The interesting facts of this case are worthy of discussion.

In 2009, ASI, a corporation, needed an immediate cash infusion. Blue Wolf, an investment firm, agreed to lend ASI a sum of money while it conducted due diligence and decided whether it would make an equity investment in ASI. The loan documents, executed in January 2010, provided for Blue Wolf to loan ASI $1,130,000 with interest to accrue at 12% per annum. The loan was secured by ASI's assets. Although not completely clear from the decision, it seems that Blue Wolf could call the loan upon demand. At closing, ASI received only $805,000 because Blue Wolf kept $325,000 as fees and deposits. Those were broken down as a $50,000 commitment fee, a $75,000 deposit against Blue Wolf's costs and expenses incurred in connection with the loan, and $200,000 was retained by Blue Wolf as a "'deposit against future commitment fees'" in the event that ASI rolled over the loan into future financing. Even with this fee charged, Blue Wolf was not obligated to advance future funds or even roll over the loaned funds into a new note. Remarkably, the loan terms provided that if new financing was not arranged by March 31, 2010, Blue Wolf was permitted to keep all or part of the $200,000 as "'compensation for [Blue Wolf's] time and expenses, as determined by [Blue Wolf] in its sole discretion.'"

Blue Wolf admitted that by January 2010, it had decided that it would not purchase any portion of ASI and would not provide further financing. Blue Wolf called the loan in March 2010, claiming a loss of confidence in ASI, and informed ASI that it would keep half of the $200,000 it retained. ASI did not repay the loan, and in May 2010, Blue Wolf again demanded repayment, and informed ASI that it would now keep the entire $200,000. When ASI did not pay, Blue Wolf began the foreclosure process against ASI's assets, as a secured lender. Because of a defect in the March notice, Blue Wolf notified ASI in July 2010 that it would accept ASI's assets in lieu of repayment of the loan. In July and August 2010, ASI paid Blue Wolf $54,000. Blue Wolf rejected those payments claiming that it had foreclosed on ASI's assets, which ASI was then holding for Blue Wolf's benefit. Blue Wolf offered to sell those assets back to ASI for $1.3 million and apply the $54,000 toward that purchase price.

When ASI refused to accede to Blue Wolf's demands, Blue Wolf filed a lawsuit. ASI responded by asking the judge to find the loan usurious and void, which request the judge granted. The court held that when the $325,000 Blue Wolf retained from the loan proceeds was added to the interest rate and applied against the amount ASI received, the effective interest rate was 57.14%, violating the 25% criminal usury cap. As a result, the loan was void and unenforceable.

Arguing among other things, that the $325,000 should not be deemed an interest payment, Blue Wolf appealed. Alternatively, Blue Wolf claimed that even if usurious, the interest rate should be modified to be brought within the legal limit, and then enforced. Not surprisingly, Blue Wolf found the appeals court remarkably unsympathetic.

Addressing just the $200,000 deposit against future commitment fees, the appeals court stated that courts are "not to look to its form [of the transaction] but to its substance or real character." Because this "fee" was for payment of a contingency beyond the borrower's control, the appellate court found that fee to be a masked interest charge, bringing the actual rate to 36.9%. With this, the appellate court affirmed the court's decision and voided the entire transaction.

This issue was common in the early days of the mortgage/foreclosure mess, even in commercial foreclosures. Lenders stacked many fees and charges onto the loan proceeds which when challenged, were deemed additional interest and void. While the outcomes of those cases were not as dramatic as found here, principally because the amounts charged were far lower, this case is instructive as to the pitfalls of carelessly and greedily adding loan fees on top of interest charges. This practice is often found where high rate loans are made to desperate borrowers. While not encouraging default and cautioning that these facts were extreme, one must be aware that despite a lender's aggressive approach upon nonpayment, a borrower has remedies of which it can avail itself. Feel free to contact us if you find yourself in this kind of unfortunate situation.