Litigation

December 15, 2022

Did Bad Faith Vitiate Managing Member’s Absolute Discretion Under Parties’ Operating Agreement?

An LLC’s managing member, who had “absolute discretion” under its operating agreement to act for the LLC, was found not to have misappropriated the LLC’s corporate opportunities, to the detriment of the other member. The facts as recited by the court address the LLC’s earlier effort to invest in a target’s equity round, in which the members were to take part through the LLC, but when that target switched to a debt issuance, the managing member directed that opportunity to a different LLC. The managing member hid behind his “absolute discretion” to determine the LLC’s investments in claiming that he did nothing wrong. At the end, even though the court did not appreciate the managing member’s conduct, and found him to be less than truthful, it found that the managing member did nothing legally wrong.

The court reasoned that while the general principle that an ‘explicitly discretionary contract right’ cannot be ‘exercised in bad faith’ so as to deprive the other party of the benefit of the bargain, because the equity investment did not proceed, and was in any event an opportunity that became the LLC’s only because it was disclosed and where both members contributed, could not mean that a subsequent investment, even a similar investment, belonged to the LLC. One LLC opportunity did not compel a finding that all similar opportunities belonged to the LLC.

So while agreeing to invest in an equity raise but then failing to do so based on the lie that the opportunity to participate in the raise was no longer available and then diverting the opportunity to participate in that raise to another [LLC] would support a claim for diversion of a corporate opportunity, failing to present a new opportunity about which there was never an agreement to invest does not. Here, since the debt issuance was never an opportunity presented to plaintiff in the first place, that [the Managing Member] may have breached his duty of candor to plaintiff by failing to fully inform him of the full context of [the] changed funding plans … did not actually harm plaintiff or [the LLC]. There is no basis in logic or caselaw to deem an investment a corporate opportunity merely due to a fiduciary’s misrepresentation on which the plaintiff did not detrimentally rely.

September 28, 2022

Trivial Defect Doctrine in Trip and Fall Claim May Not Rest on Defect’s Size

by The Silber Law Firm LLC

Plaintiff sued Luna Park in Coney Island, alleging that she tripped and fell over a “height differential” and was injured. The park moved to dismiss arguing that the defect was trivial and created no risk to plaintiff. The Second Department affirmed the denial of that motion.

The court noted that the specifics of the situation drive the determination of plaintiff’s claim, including the time, place, and circumstances of her fall. The court noted that a “physically small defect” can be actionable “in an area ‘where pedestrians are naturally distracted from looking down at their feet.’” In this case, the park showed that “the alleged defect was ‘physically small,’ [but] it failed to demonstrate that the surrounding circumstances, including the location of the alleged defect in a crowded amusement park with distractions such as lights and noises, did not ‘magnify the dangers it pose[d].’”

In other words, “trivial” may not be so trivial when someone falls.

September 21, 2022

Strong-Arm Tactics in Threatening Litigation and Collection Precludes Injunctive Relief

by The Silber Law Firm LLC

In a surprising decision (to me), a Nassau County Supreme Court judge recently vacated a TRO and denied injunctive relief on an otherwise meritorious claim because plaintiff sent defendants “a series of threatening, offensive text messages which seem to imply that he was using the court to strong-arm [the defendants] into making payments.”

Briefly, in this merchant cash advance case, defendants reneged on repayment by cutting off plaintiff’s access to its bank account, from which plaintiff took repayment. Plaintiff obtained a TRO restraining the funds in defendants’ bank account and then moved for a preliminary injunction. The court’s colorful decision indicates that while plaintiff met the burden for the injunction, it would not get that relief. In the court’s words,

In opposition to the motion, Defendants make some valid arguments, but also see fit to lecture the court on the evils of the receivables purchase industry, an argument that at times seems contradictory when considering Lopes’ actions.

August 18, 2022

Being “Overwhelmed by Paperwork” Is Not Fraud

by The Silber Law Firm LLC

Plaintiffs sued alleging fraud in connection with a deed transfer. Plaintiffs claimed that defendant induced the deed transfer by misrepresenting the nature of the documents. Plaintiffs claimed that they thought they were undertaking a short sale when they actually transferred the property outright. The lower court agreed.

In reversing, the Second Department held that plaintiffs alleged no fraud or misunderstanding of the contents of the papers they signed. “Instead, the plaintiffs contend that they were ‘overwhelmed by the paperwork but do not allege any facts that would suggest that they were prevented from reading the documents prior to signing them or that they were forced to sign.” “Thus, the plaintiffs failed to establish . . . that they were entitled to judgment as a matter of law on the causes of action alleging fraudulent inducement, unjust enrichment, and to quiet title.”

Holder v. Folsom PL Realty, Inc.

August 8, 2022

Alleged Mistake Insufficient to Avoid Arbitration

by The Silber Law Firm LLC

The parties agreed to arbitrate plaintiff’s action for personal injuries arising from a car accident. Prior to agreeing to arbitrate, defendant’s insurance carrier informed plaintiff’s counsel that the policy bodily injury limits were 100,000/300,000. The arbitration agreement included a high-low provision that would restrict any award to an amount of nothing to $50,000. Thereafter (presumably after realizing that term), plaintiff’s counsel refused to arbitrate claiming that he had been mistaken about the policy’s limitations. Supreme Court refused to compel arbitration.

In reversing, the Second Department reiterated the well-settled rule that arbitration agreements are governed by ordinary contract rules. For plaintiff to vitiate the arbitration agreement based on unilateral mistake would require a showing of fraud or wrongful conduct by the other party. To rescind the agreement would require to demonstrate that ordinary care was used.

Finding neither element in this case, the Second Department mandated arbitration.

June 19, 2022

Lawsuit Against Online Reviewer Deemed Anti-SLAPP Suit

by The Silber Law Firm LLC

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]).

May 27, 2022

Supreme Court: Arbitration Agreements Are Treated like Contracts

by The Silber Law Firm LLC

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.

May 16, 2022

Fiduciary Relationship Based on Longstanding Relationship

by The Silber Law Firm LLC

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

April 8, 2022

Lender Entitled to Rely on “Facially Valid” Notarization

by The Silber Law Firm LLC

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.

March 4, 2022

Impossibility of Payment No Defense to Failure to Close

by The Silber Law Firm LLC

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