Articles Posted in Litigation

The patient of a plastic surgeon posted negative reviews on multiple review sites. The doctor filed suit, alleging a number of claims. The poster moved to dismiss and sought damages under what is commonly called New York’s anti-SLAPP law. Before agreeing, the First Department provided some background to this law:

SLAPP suits—strategic lawsuits against public participation—[ ] are characterized as having little legal merit but are filed nonetheless to burden opponents with legal defense costs and the threat of liability and to discourage those who might wish to speak out in the future (600 W. 115th St. Corp. v Von Gutfeld, 80 NY2d 130, 137 n 1 [1992], cert denied 508 US 910 [1993]). In 1992, as a response to rising concern about the use of civil litigation, primarily defamation suits, to intimidate or silence those who speak out at public meetings against proposed land use development and other activities requiring approval of public boards, New York enacted legislation aimed at broadening the protection of citizens facing litigation arising from their public petition and participation. The New York anti-SLAPP statute initially limited its application to instances where speech was aimed toward “a public applicant or permittee,” i.e. an individual who applied for a permit, zoning change, lease, license, or other similar document from a government body (L 1992, ch 767, § 3). As applied, the statute was “strictly limited to cases initiated by persons or business entities [ ] embroiled in controversies over a public application or permit, usually in a real estate development situation” (Sponsor’s Mem, Bill Jacket, L 2020, ch 250).

In 2020, the legislature amended New York’s anti-SLAPP statute to “broaden the scope of the law and afford greater protections to citizens” beyond suits arising from applications to the government (Mable Assets, LLC v Rachmanov, 192 AD3d 998, 1000 [2d Dept 2021], citing L 2020, ch 250). Among other changes, Civil Rights Law § 76-a was amended to expand the definition of an “action involving public petition and participation” to include claims based upon “any communication in a place open to the public or a public forum in connection with an issue of public interest” (Civil Rights Law § 76-a[1][a][1]). The amended law further provides that “public interest” “shall be construed broadly, and shall mean any subject other than a purely private matter” (Civil Rights Law § 76-a[1][d]). Additionally, Civil Rights Law § 70-a was amended to mandate, rather than merely permit, the recovery of costs and attorneys’ fees upon demonstration “that the action involving public petition and participation was commenced or continued without a substantial basis in fact and law and could not be supported by a substantial argument for extension, modification or reversal of existing law” (Civil Rights Law § 70-a[1][a]).

As outlined by the United States Supreme Court, the petitioner, Robyn Morgan, worked at a Taco Bell franchise owned by respondent Sundance. When applying for a job, Morgan signed an agreement to arbitrate any employment dispute. Despite that agreement, Morgan filed a class action asserting that Sundance had violated federal law regarding overtime payment. Sundance initially defended against the lawsuit as if no arbitration agreement existed, filing a motion to dismiss and engaging in mediation. Some eight months after Morgan filed the lawsuit, Sundance moved to stay the litigation and compel arbitration under the Federal Arbitration Act (FAA). Morgan opposed, arguing that Sundance had waived its right to arbitrate by litigating for so long. “The courts below applied precedent, under which a party waives its right to arbitration if it knew of the right; ‘acted inconsistently with that right’; and ‘prejudiced the other party by its inconsistent actions.’”

The Supreme Court held that the FAA made no provision for prejudice. From the decision’s syllabus—“Section 6 of the FAA provides that any application under the statute—including an application to stay litigation or compel arbitration—“shall be made and heard in the manner provided by law for the making and hearing of motions” (unless the statute says otherwise). A directive to treat arbitration applications ‘in the manner provided by law’ for all other motions is simply a command to apply the usual federal procedural rules, including any rules relating to a motion’s timeliness. Because the usual federal rule of waiver does not include a prejudice requirement, Section 6 instructs that prejudice is not a condition of finding that a party waived its right to stay litigation or compel arbitration under the FAA.” Waiver is the “intentional relinquishment or abandonment of a known right” and in considering that, “the court focuses on the actions of the person who held the right” not the actions of the opposing party. As such, prejudice would be irrelevant. “Stripped of its prejudice requirement, the Eighth Circuit’s current waiver inquiry would focus on Sundance’s conduct. Did Sundance, as the rest of the Eighth Circuit’s test asks, knowingly relinquish the right to arbitrate by acting inconsistently with that right?”

Interestingly, when considering issues concerning arbitration, courts across the country routinely discuss how agreements to arbitrate, and arbitration, are favored. Yet, the court here noted that “federal policy is about treating arbitration contracts like all others, not about fostering arbitration.” In that light, contract or procedural rules are not to be modified for arbitrations.

A New York City Commercial Division judge refused to dismiss a host of claims, including unfair competition, alleged by a potential property buyer against a broker. The court held that the broker’s “longstanding business and personal relationship with FCC’s [buyer] principals, during which FCC provided use of its office space, internet, phones, real estate software to Mr. Schwartz [broker] in exchange for his consultation and brokering of various deals which extended up until 2021. Under these facts, it is clear that a special, continuous fiduciary relationship existed between Mr. Schwartz and FFC at the time the information including the price they were negotiating a contract for about the Property was conveyed to him. Instead of keeping this critically sensitive proprietary information private, Mr. Schwartz breached his fiduciary duty to FFC by giving this information to a competitor and encouraging them to purchase the Property for a few hundred thousand dollars more so that he would get paid a substantial commission.”

This case is a bit unusual in that fiduciary relationships are typically found in a special relationship based at least in part on one party’s superior knowledge and the other party’s reliance. Fiduciary duties are not found in run-of-the-mill relationships, including those concerning brokers (not always as we see here). Based on how this decision was written makes clear that the judge was offended by the broker’s conduct.

Four Five Capital LLC v. Schwartz

Private lender, in a series of loans, loaned an entity-borrower more than $6 million. The entity was comprised of a father, Michael Miller, and his son, Brandon Miller. While Michael borrowed the money, Michael had his secretary forge Brandon’s signature, which she then notarized. Michael died before the loans were repaid. Upon default, the lender sued the entity and Brandon.

Brandon argued, among other things, that he never signed the loan documents and his signatures were forged. Michael, claimed Brandon, was the responsible party. The court rejected that argument and held that the lender “had no obligation to perform due diligence so as to protect Brandon from the possibility that his father, Michael, and his assistant, Ms. Frangipane, were forging his name to certain loan documents and notarizing his signature and could rely on the facially valid documents, which were notarized and confirmed as validly executed by opinions of Defendants’ counsel.”

While the decision is intuitively logical, imagine the impact on business transactions had the court agreed with Brandon and required a lender to undertake due diligence for a notarized signature. The impact would be severe—every transaction would require insurance. Part of a court’s job is to create consistent and reliable outcomes among a discrete set of recurring circumstances so that businesses can rely on traditional practices.

Plaintiff, who lives in China, went into contract to purchase a new condominium and associated parking space in New York. The contract contained no financing contingency. Plaintiff made the required deposit but did not provide funds to close. After the contract was signed, China implemented restrictions on money flows out of China for real estate purchases abroad. Unable to locate alternative funding, plaintiff could not fund the closing. Plaintiff canceled the contract and demanded a return of the $162,000 downpayment, suing when the funds were not returned. In response, defendant moved to dismiss for failure to state a cause of action.

Plaintiff argued that its inability to close due to China’s laws made performance under the contract impossible. Defendant denied that and claimed that the terms of the contract permitted it to keep the downpayment. The court agreed with defendant, finding that plaintiff’s inability to close was not excused as impossible. Impossibility only applied where the subject matter of the contract was destroyed or performance became objectively impossible. More, under the terms of the contract, plaintiff waived any financing contingencies, without exception. Under the terms of the contract, therefore, the downpayment need not be returned.

Wang v. 44th Drive Owner LLC

“Questions of arbitrability” cover the scope of a dispute and address whether “parties are bound by a given arbitration clause,” and if an agreement to arbitrate “applies to a particular controversy.” The question of whether a matter is required to be arbitrated or whether a party is obligated to arbitrate a dispute, “is generally an issue for judicial determination.” However, “when the parties’ agreement specifically incorporates by reference the rules of” the arbitration panel and states that “all disputes” are to be decided by arbitration, “courts will leave the question of arbitrability to the arbitrators.” In this case, AAA was the denominated panel, and the parties’ agreement provided that any controversy or claim arising out of or relative to the agreement was to be submitted to the AAA. As such, the court determined that the questions or “issues of arbitrability” were for the arbitrators to decide.

Bromberg & Liebowitz v O’Brien

We have discussed cases where the costs of arbitrating a dispute were so prohibitive that the First Department voided the arbitration agreement.

In a recent Federal decision out of Texas, a court modified an arbitration agreement’s cost and venue provisions, relieving a party from some of the costs she would otherwise have been obligated to pay.

As part of her employment, plaintiff agreed to arbitrate any claims arising from her employ. She commenced suit against her employer alleging wage and labor claims. The employer sought to compel arbitration. There was no dispute that the employee signed an arbitration agreement that covered her asserted claims. Instead, the employee argued that the agreement was unenforceable because it’s cost-splitting and venue provisions rendered it “substantively unconscionable.” The employer countered that the provisions were reasonable but if they were not, the court could sever those provisions while still compelling arbitration.

Two years after commencing a personal injury accident, plaintiff settled. After counter executing the settlement documents, plaintiff’s counsel returned them to defendant’s counsel with a blank form W-9 for the payee’s information. The W-9 was never returned.

When the settlement payment was not paid in 21 days, under CPLR 5003-a, plaintiff’s counsel filed a judgment. Defendant moved to vacate the default, claiming that the IRS required the W-9 and the judgment was therefore improper. After the W-9 and settlement proceeds were exchanged, plaintiff still opposed vacatur. The lower court vacated.

Disagreeing with the First Department based on the underlying claims in this action, the Second Department held that because the W-9 was neither a release nor a stipulation of discontinuance discussed in CPLR 5003-a as the trigger for the deadline for a settling party to pay, the judgment was proper. Once plaintiff satisfied CPLR 5003-a, the clock began to tick, even without the W-9. “Granting settling defendants the unilateral right to withhold payment in these circumstances would significantly undercut the statutory goal of CPLR 5003-a to ensure the prompt payment of settlement proceeds upon tender of the statutorily prescribed documents. Accordingly, the defendants’ failure to timely pay the sum due under the settlement agreement entitled the plaintiff to enter judgment including interest, costs, and disbursements pursuant to CPLR 5003-a (e).”

Plaintiff borrowed more than a million dollars from defendant, in addition to using his funds, to form an LLC with which to buy a property. The LLC was in defendant’s name, however, pending plaintiff’s ability to obtain credit to hold the property on his own. When the time came for defendant to transfer the LLC and property to plaintiff, he refused, denying that there was any agreement between them. Defendant tried to explain away the loan proceeds and other indicia of plaintiff’s ownership and control. The lower court found that defendant’s notes that the funds he provided to plaintiff were loans led to the imposition of a constructive trust.

The Second Department affirmed. After finding that the arrangement was not defeated by the statute of frauds, because the parties’ conduct would be “extraordinary” absent their unwritten agreement, it refused to find that plaintiff’s conduct in seeking to avoid his creditors—which led to the arrangement in the first place—could be seen as unclean hands to defeat his claims. Because defendant assisted plaintiff and was not harmed by whatever conduct was alleged to be plaintiff’s unclean hands, the relief to defendant would be denied because: “‘relief is denied under the ‘clean hands’ doctrine, ‘not as a protection to defendant, but as a disability to the plaintiff’ and as a matter of public policy in order to protect the integrity of the court.’” In other words, generally speaking, the clean hands doctrine is a defect in a plaintiff’s claim; it is not a defense for the defendant.

Last, the court found the existence of a fiduciary relationship between the parties. While ordinary business relationships, including that of lender-borrower, do not usually rise to a fiduciary relationship, the details of the general relationship in this case satisfied the court that the parties had a “confidential or fiduciary” relationship.

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