A recent decision by Westchester Commercial Division Justice Gretchen Walsh demonstrates how even a non-party subpoena from an arbitrator can quickly and irrevocably lead to party status and considerable liability if you fail to respond. The case, In re Sivanesan v. YBF LLC et al., Index. No. 67996/2018, showed that parties who believe they can take a “wait and see” approach and then seek redress with a state or federal court run a huge risk in light of the astonishingly limited scope of judicial review of arbitration awards. Here’s what happened:

An Agreement Is Breached

Petitioner Janu Sivanesan was a consultant for YBF LLC, a company that sells retail cosmetics products worldwide. In 2009, she was retained by YBF to help the company regain ownership of the “YBF” trademark and related marks from a third party. The deal closed, but Sivanesan did not get paid. Under her consulting agreement, she was entitled to hourly pay and a three-percent equity interest as compensation. After unsuccessfully attempting to secure her compensation, Sivanesan commenced an arbitration through JAMS as required in the agreement. The Arbitrator was Hon. Helen E. Freedman (Ret.).

The Arbitrator found that YBF’s owners repeatedly acknowledged its debt to Sivanesan but failed to pay her. The wrinkle came in with regard to respondents TPR Holdings LLC and Visual Beauty LLC. TPR is an investor in the health, beauty, and wellness industries. During the arbitration, TPR purchased the rights to the YBF trademarks that Sivanesan had helped YBF regain; Visual Beauty is a shell company created for that transaction. When Sivanesan learned of TPR’s purchase, she argued that TPR and Visual Beauty were successors-in-interest to YBF such that they were jointly and severally liable.

The Arbitrator Issues Subpoenas

The Arbitrator issued subpoenas to TPR and Visual Beauty, and although the two entities were not parties to the arbitration, the subpoenas made clear that Sivanesan believed them to be successors-in-interest such that they should be held liable for YBF’s alleged defaults.  When neither party appeared for the arbitration or responded to the subpoenas, Sivanesan made an oral motion at the hearing to add them as parties. The motion was granted, and the Arbitrator agreed that TPR and Visual Beauty were successors-in-interest and jointly and severally liable to Sivanesan for the compensation sought.

This got the attention of TPR and Visual Beauty. After Sivanesan filed a petition in the Westchester Commercial Division seeking an order confirming the Arbitrator’s award, TPR and Visual Beauty cross-petitioned to vacate the award. They argued that their due process rights were violated because the subpoenas did not constitute notice of the prospect that they could be added as parties should they fail to respond. TPR and Visual Beauty argued that the subpoenas only indicated that noncompliance could result in a court order compelling them to attend or, at most, punishing them for contempt.

The Court’s Decision

Under the CPLR, arbitration awards may be vacated only if the award: (1) violates a strong public policy; (2) is irrational; or (3) clearly exceeds a specifically enumerated limitation on the arbitrator’s power. As to the “irrationality” prong, an award is considered rational if “any basis for the conclusion is apparent to the court.” Even a clear legal error by the arbitrator is not grounds to vacate the award if it does not meet one of the three criteria above. Clearly, very few arbitration awards are going to fail this test.

And the one in this case, like most others, did not, as Justice Walsh was unconvinced by TPR’s arguments. The Court held that the subpoenas provided TPR and Visual Beauty with notice that the Arbitrator intended to take evidence on the issue of whether the two entities were successors-in-interest and should be held liable to Sivanesan. Apprised of that fact, the implications were clear and TPR and Visual Beauty could not complain of lack of due process. While Justice Walsh appeared to agree that TPR and Visual Beauty had received adequate notice of the possibility they could be added as parties, the Court cautioned that even if it had found fault with the Arbitrator’s approach, its ability to vacate the award would be extremely limited.

Takeaway: Under both New York and federal law, courts will be extraordinarily deferential to arbitration awards, making it all the more incumbent on counsel to respond to arbitrators’ subpoenas just as if they had been received from a court of law. In short, those who believe that an arbitrator’s decision will not be the last word do so at their peril.

Sometimes, based on the nature of an action, plaintiffs wish to present their case to a jury and file a demand for one with the court. If the defendants oppose, they can move to strike the demand pursuant to CPLR 4101. This was the subject of a recent decision by Westchester Commercial Division Justice Linda Jamieson in Hanover v. Palazzolo, Index No. 54643/2018.

This was the second case between the parties. In the first case, presided over by Westchester Supreme Court Justice Sam Walker, Christopher Hanover sued a husband and wife, the Palazzolos, and their entity, F&M Funding, LLC, over an alleged guaranty given by the Palazzolos to Hanover concerning the sale of stock of entities that owned property in the Bronx (“Prior Action”). In that first case, Hanover won a judgment of more than $350,000.

While that case was going on, F&M filed a Confession of Judgment against Hanover for $3.2 million. Hanover always said that the Confession of Judgment was forged and Justice Walker was troubled by the evidence and testimony about it. To make matters more suspicious, an F&M employee had been arrested for improperly notarizing documents, including the Confession of Judgment.

After winning the first case, Hanover filed a new action to nullify the Confession of Judgment and for damages suffered as a result of it. In June 2019, Hanover demanded a jury trial and at the end of October 2019, Defendants moved to strike the demand pursuant to CPLR 4101(1). In the meantime, Defendants vacated the Confession of Judgment.

Justice Jamieson denied Defendants’ motion to strike the jury demand for several reasons:

First, it was not made in a reasonable period of time prior to trial.

“[A]lthough a motion to strike a jury demand ‘may be made at any time up to the opening of trial, it is preferable in the interest of orderly procedure that it be made within a reasonable period prior thereto’” (quoting A.J. Fritschy Corp. v. Chase Manhattan Bank, 36 A.D.2d 600, 600, 318 N.Y.S.2d 369, 370 (1st Dep’t 1971)).

Here, Defendants waited more than four months after Hanover filed the jury demand, and less than four weeks prior to trial, to raise the issue. In denying Defendants’ motion, Justice Jamieson held: “Defendants’ motion is not returnable until only a few days before the trial, making it exceedingly unreasonable; the parties have to prepare differently for a jury trial versus a non-jury trial.”

Second, when a plaintiff asserts both legal and equitable claims, the plaintiff is entitled to a jury trial where the crux of the action sounds in tort law.

Defendants argued that Plaintiff waived his right to a jury by combining legal and equitable claims. In response, Plaintiff argued that: (i) his declaratory judgment claims are “at the heart of the claims for monetary damages for Defendants’ actions over the course of seven (7) years in maintaining and insisting on the veracity of the” Confession of Judgment; and (ii) “simply declaring the [Confession of Judgment] to be invalid would not make the [him] whole.”

Justice Jamieson agreed with Plaintiff, finding that his arguments are “in line with settled Second Department caselaw,” holding that even if some claims are equitable in nature, where “the gravamen of the action sounds in … tort law rather than equity … [s]uch causes of action are eligible for jury trial …” (quoting Harris v. Trust of Bank New York, 224 A.D.2d 790, 791, 637 N.Y.S.2d 527, 528 (2d Dep’t 1996)).

Third, Justice Jamieson explained that, if Defendants had vacated the Confession of Judgment before Plaintiff sued them, Plaintiff would not have needed the declaratory judgment claims, but still would have been able to assert his claims for damages. “Under those circumstances,” the Court held, “there would be no doubt that plaintiff would have been entitled to a jury trial.” “While the Court cannot speculate as to what prompted defendants to vacate the Confession of Judgment at this juncture,” Justice Jamieson held, “the Court will also not allow defendants to manipulate this action or the Court.”

Takeaway: If a party wants to strike a jury demand, it should do so promptly after the demand is filed. It should also refrain from employing tactics that, like here, could be perceived as an attempt to manipulate the Court.

Defendants usually make a CPLR 3211 motion to dismiss at the outset of the case and file it together with a Request for Judicial Intervention (RJI).  In that situation, a defendant can simply file the motion without contacting the court in advance.  When a defendant makes a later motion to dismiss, though, it is best to check the rules, because you may have to first request a conference.

On November 14, 2019, in Dwyer v. Avo Construction LLC, Index No. 53784/2019, a case we previously wrote about here, Westchester Commercial Division Justice Gretchen Walsh summarily denied a post-RJI motion to dismiss by writing on the notice of motion: “Motion denied based on Defendants’ counsel’s failure to obtain authorization to file this motion under Commercial Division Rule 24.”

Rule 24, titled “Advance Notice of Motions,” provides that “[p]rior to the making or filing of a motion, counsel for the moving party shall advise the Court in writing (no more than two pages) on notice to opposing counsel outlining the issue(s) in dispute and requesting a telephone conference.” Further, “[i]f a cross-motion is contemplated, a similar motion notice letter shall be forwarded to the court and counsel” and “[s]uch correspondence shall not be considered by the court in reaching its decision on the merits of the motion.” The court will then schedule a conference, Rule 24(d), and, “[i]f the matter cannot be resolved, the parties shall set a briefing schedule for the motion which shall be approved by the court.” Rule 24(f).

Notably, Rule 24 does “not apply to disclosure disputes covered by Rule 14 nor to dispositive motions pursuant to CPLR 3211, 3212 or 3213 made at the time of the filing of the Request for Judicial Intervention or after discovery is complete. Rule 24(a).

Because most dispositive motions are made either at the time of the filing of an RJI or after the completion of discovery, counsel may overlook the need to comply with this rule when filing a dispositive motion at another time. (Rule 24 also does not apply to motions to be relieved as counsel, for pro hac vice admission, for reargument or in limine.)

One last step: Rule 24(g) requires that, “[o]n the face of all notices of motion and orders to show cause, there shall be a statement that there has been compliance with this rule.” That way, the judge immediately knows whether to read the motion papers or, as Justice Walsh did, dispose of the motion with a written notation that the motion is denied for failure to comply with Rule 24.

Takeaway: When faced with an unusual procedural situation – like a post-RJI / pre-Note-of-Issue dispositive motion – read the rules, even if you think you know what they say.

Although contracts are to be construed in accordance with the parties’ intent, in New York, it is firmly established that the best evidence of what parties intend is what they say in writing. This rule is applied with special force when the agreement is negotiated at arm’s length or by sophisticated business people. Sometimes, parties dispute the meaning of a contract’s terms and litigation over their intent and the alleged ambiguity ensues. This was the case in Gristede’s Operating Corp. v. Scarsdale Shopping Center Associates, LLC, Index No. 53040/2012.

In 1998, the plaintiff, supermarket chain Gristede’s, leased space in the Golden Horseshoe Shopping Center from defendant Scarsdale Shopping Center Associates, LLC (“Scarsdale”), to operate Gristede’s Store No. 90 (“Store No. 90”) through April 2015 with no right of renewal.

In 2006,  Gristede’s and drug store chain Walgreens, which were in talks for Walgreens to acquire certain leases held by Gristede’s, including Store No. 90, entered into a “Confidentiality Agreement” prohibiting Walgreens from discussing (by itself or through an agent) any possible lease or other issues with the owner or agent of any premises in which a Gristede’s store was located. In 2007, Gristede’s and Walgreens entered into a contract of sale (“2007 Contract”) for Walgreens to purchase six leases from Gristede’s, including the one for Store No. 90. Gristede’s and Walgreens also agreed to extend the Confidentiality Agreement for five years from the contract’s execution date.

On January 1, 2009, Gristede’s and Walgreens amended the 2007 Contract to limit its applicability to the purchase of only one lease for a property in Manhattan and “to terminate the Contract with [sic] to all other Property which has not been sold, assigned or otherwise transferred by Sellers to Purchaser as of the date hereof” (“2009 Amendment”). The 2009 Amendment also provided that “the Contract is terminated and deemed of no further force with respect to each and every Property (other than Store 561) which, as of the date hereof, has not been sold, assigned or otherwise transferred by Sellers to Purchaser pursuant to the Contract  … and that the parties shall have no rights, obligations and liabilities thereto except to the extent that the same expressly survive the termination of the Contract” (emphasis in original).

It was undisputed that Store No. 90 was one of the unsold properties that was excised from the 2007 Contract by the 2009 Amendment.

In 2011, an alleged agent of Walgreens contacted Scarsdale about Store No. 90.

Thereafter, Gristede’s and Walgreens resumed negotiations regarding the potential sale of leases held by Gristede’s. In 2012, Gristede’s and Walgreens entered into an agreement (“2012 Agreement”) providing that they “each hereby confirm that … all of the terms, covenants and conditions of the [Confidentiality Agreement], as amended by [the 2007 Contract] … remain in full force and effect and are incorporated herein by reference thereto” (emphasis added).

Later in 2012, Gristede’s commenced action against Walgreens and Scarsdale. As relevant to the appeal, Gristede’s asserted a cause of action alleging that Walgreens breached the Confidentiality Agreement and Walgreens moved for summary judgment to dismiss it. Westchester Commercial Division Justice Linda S. Jamieson granted Walgreens’ motion and Gristede’s appealed.

The Second Department affirmed, holding that “when parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms’” (citing Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P., 13 N.Y.3d 398, 403 (2009) (quotation omitted)). “Courts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing’” (citations omitted). “Ambiguity is determined by looking within the four corners of the document, not to outside sources’” (quoting Riverside S. Planning Corp. v., 13 N.Y.3d at 404 (quotation omitted)). “The entire contract must be reviewed and [p]articular words should be considered, not as if isolated from the context, but in the light of the obligation as a whole and the intention of the parties as manifested thereby. Form should not prevail over substance and a sensible meaning of words should be sought’” (quotations omitted). “Where the language chosen by the parties has a definite and precise meaning, there is no ambiguity” (quotations omitted).

The Second Department held that “Walgreens established, prima facie, that the 2009 Amendment unambiguously terminated the Confidentiality Agreement as its pertained to Store No. 90” and that “in narrowing the applicability of the 2007 Contract to one property in Manhattan, Gristede’s and Walgreens ‘clearly and unambiguously’ stated that they ‘shall have no rights, obligations and liabilities’ as to Store No. 90 ‘except to the extent that the same expressly survive the termination of the Contract’” (emphasis added).

In addition, the 2007 Contract and 2009 Amendment contained no express language preserving the Confidentiality Agreement as to Store No. 90. The Second Department held, therefore, that “since an essential element of a breach of contract cause of action is the existence of a valid contract … the alleged contact between an agent of Walgreens and Scarsdale in 2011 could not have constituted a breach of the Confidentiality Agreement, as it was ‘clearly and unambiguously terminated as to Store No. 90 at that time’” (internal citations omitted).

Finally, the Court held that “[a]lthough the subsequent 2012 agreement recited that the Confidentiality Agreement ‘remain[s] in full force and effect,’ there was clearly no contractual prohibition against contact between Walgreens and Scarsdale in existence when the contact between Walgreens and Scarsdale was allegedly made.”

Takeaway: When an agreement between sophisticated parties is memorialized in a clear, complete document, courts will enforce it according to its terms and will not look to outside sources.

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A recent decision by the Honorable Linda S. Jamieson again demonstrates that the Justices of the Westchester Commercial Division will not decide matters on procedural technicalities, and usually will go out of their way to decide a case on the merits. The matter involved service of process, and an apparent default in appearance.

First, some background. In New York, the easiest way to serve a summons on an entity is usually by serving the Secretary of State.  Provisions of the Business Corporation Law, Not-for-Profit Corporation Law, Limited Liability Company Law, and Partnership Law allow service of process upon the Secretary of State as the statutory agent for entities registered with the Department of State. Rather than hire a process server to attempt personal service on the business, you can serve process by having someone hand deliver two copies of the summons and complaint (or other process) to the New York Secretary of State in Albany, together with the statutory fee of $40. The best part of serving the Secretary of State is that it is quick and, as a matter of law, effective.

Courts, however, are reluctant to allow a plaintiff/petitioner to use service on the Secretary of State as a way to avoid giving actual notice to the entity being served. That was what happened in In re C&M Bagel, Inc. v. Semp Realty LLC, Index No. 51985/2019.

In that special proceeding to designate an arbitrator, the petitioner, C&M Bagel, served the petition on the respondent, Semp Realty, via the Secretary of State.  Initially, Justice Jamieson found that “[d]espite proper service of the petition and accompanying documents by serving the Secretary of State … the Court received no opposition to the petition from respondent.” Justice Jamieson then granted the relief sought by the petitioner and directed service of the Order on the respondent by overnight mail.

Days later, the respondent filed a motion to renew and vacate the Court’s order, arguing that it never received the papers from the Secretary of State’s office, and was unaware of the petition. The respondent also argued that for the previous ten years, the petitioner corresponded with the respondent directly, and paid rent, at a specific address, and should have served the papers at that address. In an affidavit, the respondent’s managing member said that he believed the petitioner “attempted to ‘pull a fast one’ on me by serving the Secretary of State and hoping I would not receive the Notice of Petition and Petition in time to answer.” Perhaps significantly, the parties had been embroiled in litigation for some time, and the respondent also argued that the petitioner’s attorney could have just asked the respondent’s attorney to accept service of the papers.

Justice Jamieson recognized that service was proper, but still determined that the proceeding should be decided on the merits:

“It turns out that although petitioner did nothing wrong by serving the Secretary of State, petitioner also well knew that respondent had a preferred address at which it received mail. Petitioner used this alternate address many times over the years, including within months before commencing this special proceeding. To ensure that justice is done, the Court vacates the Decision.”

Takeaway: Service on the Secretary of State may be entirely appropriate, and effective, but that doesn’t mean it is enough.  If you know how to find your adversary or your adversary’s attorney, and they haven’t appeared in the case, give them a heads up that you’ve served via the Secretary of State.

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We’ve previously written about how judges in the Westchester Commercial Division will dismiss cases in which the contract at issue contains a forum selection clause requiring the parties to resolve their dispute elsewhere. On September 10, 2019, Justice Linda Jamieson issued another decision doing just that.

Satin v. 1-800 NY Bulbs Limited, Index No. 63512/2018, concerned the sale of defendant 1-800 NY Bulbs Limited (“Bulbs”). A Stock Purchase Agreement (“SPA”), among defendant Tarsier Ltd., plaintiff Satin, and non-party Lawrence Merson, was one of several agreements relevant to the parties’ relationship. The SPA referenced and attached a Management Agreement between Bulbs and plaintiff NY Bulbs Management LLC. The Management Agreement was signed on the same date as the SPA and referenced the SPA on the first page.

The SPA contained a forum selection clause, which stated that: “EACH PARTY HEREBY CONSENTS TO JURISDICTION AND VENUE EXCLUSIVELY IN THE SUPREME COURT OF THE STATE OF NEW YORK, COUNTY OF NASSAU FOR RESOLUTION OF ANY DISPUTE ARISING FROM, BASED ON, OR RELATED TO THIS AGREEMENT AND/OR ANY OTHER BUSINESS RELATIONSHIP BETWEEN THE PARTIES.” Justice Jamieson noted that this was one of only two provisions in the SPA written in all capital letters.

There was no dispute that the SPA was “the foundational agreement among the parties, even though not all of the parties are parties thereto.” Justice Jamieson also concluded that based on a review of the complaint, “the [SPA] is the critical document in this dispute.” In addition, “[t]he fact that certain of the parties did not sign the [SPA] [was] not relevant in this matter, because ‘a non-signatory may invoke a forum selection clause if the relationship between the nonparty and the signatory is sufficiently close so that the nonparty’s enforcement of the forum selection clause is foreseeable by virtue of the relationship between the signatory and the party sought to be bound’” (quoting Freeford Ltd. v. Pendleton, 53 A.D.3d 32, 40, 857 N.Y.S.2d 62, 68 (1st Dep’t 2008)).

Against this backdrop, the defendants moved to dismiss based on the forum selection clause. The Court held that “a ‘contractual forum selection clause is prima facie valid and enforceable unless it is shown by the challenging party to be unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching, or it is shown that a trial in the selected forum would be so gravely difficult that the challenging party would, for all practical purposes, be deprived of its day in court. Absent a strong showing that it should be set aside, a forum selection agreement will control’” (citations omitted).

As the plaintiffs failed to make such a showing, the Court dismissed the case without prejudice and directed the Clerk of the Court to transfer the file to Nassau County.

Takeaway: If you file in Westchester and the governing agreement requires the parties to resolve their dispute elsewhere, you’re getting the boot.

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Sometimes, companies want employees to think like owners, and for good reason. With a vested interest in their work and the team’s success, employees are more motivated to perform at the highest level. They also focus on what’s best for the business rather than just themselves. But firing an employee with “skin in the game” can be a mess, as was the case in Dwyer v. Avo Construction LLC, Index No. 53784/2019.

In 2014, Avo Construction hired John Dwyer as its Director of Construction. According to Dwyer, the Company referred to him as a partner. Avo also offered Dwyer the opportunity to invest in projects. Soon after he started working for the Company, Dwyer made a $100,000 loan to an Avo-related entity working on a specific project. The loan documents were signed by Elizabeth McDonald, Avo’s sole member, who also signed a personal guaranty.  Dwyer was repaid the principal, plus a 12% return. This was the first of four loans that Dwyer made to Avo projects from 2014 to 2018. Each time he received essentially the same loan documents and was repaid his principal investment with a 12% return.

Eventually, in November 2017, the Company asked Dwyer for money to help make payroll for projects. Over a ten-week period, Dwyer contributed $237,000. According to Dwyer, the Avo acknowledged and recorded the loans, and he provided the funds based on the parties’ prior loan experience. Even though, Dwyer says, he was told he would receive paperwork to memorialize these loans, just as he did with the others, and two other individuals working for the Company promised him orally and in writing that he would receive repayment with interest, no loan documents were signed. In January 2019, Avo fired Dwyer.

Dwyer then sued Avo, McDonald, and the two others who promised he would get repaid.

Breach of Contract

Avo moved to dismiss Dwyer’s breach of contract claim, but Justice Walsh denied Avo’s motion based on Avo’s receipt of $237,000 from Dwyer and his allegation that Avo agreed to repay him on terms similar to those in the other loans he made to Avo. Justice Walsh, however, dismissed the breach of contract claim against the individuals because Dwyer did not allege that they agreed to be bound by the payroll loans in their personal capacities. Justice Walsh explained that, “[a] corporate officer may not be held personally liable merely because, while acting for the corporation, he made decisions and took steps that resulted in the corporation’s breaching its contract” (citations omitted). “In order to hold a corporate officer liable for inducing the corporation to breach its contract, it must be alleged and proved that the officer’s actions were taken outside the scope of employment, that the officer personally profited from the acts, or that the officer committed any independently tortious acts” (citations omitted).

Unjust Enrichment

Unjust enrichment claims are typically dismissed where there is a valid and enforceable contract between the parties. But here, Justice Walsh sustained this claim against Avo as not duplicative because “Avo is disputing that there was any agreement between the parties with regard to this loan” (citing, inter alia, First Class Concrete Corp. v. Rosenblum, 167 A.D.3d 989 (2d Dep’t 2018) (“[s]ince the defendants disputed the existence and enforceability of a contract covering the dispute at issue, the plaintiff was entitled to allege causes of action to recover for unjust enrichment and in quantum meruit as alternative theories of relief”)).

As against the individual defendants, Justice Walsh dismissed this claim “because Plaintiff has not alleged that the individual defendants were parties to the contracts and that they were individually enriched by Plaintiffs loan of $237,000 to Avo to meet its payroll” (citing Auguston v. Spry, 282 A.D.2d 489 (2d Dep’t 2001)).

Constructive Trust

Dwyer alleged that prior to his termination, he had been held out as an Avo partner and, thus, had additional rights under law and equity. He alleged that the parties’ agreements evidence a trust relationship engendering fiduciary duties to preserve and protect his interests and that because Defendants breached that duty and unjustly enriched themselves, the Court must impress a constructive trust on Avo’s assets. But the Court dismissed this claim because Dwyer did not sufficiently allege a confidential or fiduciary relationship between himself and Defendants. Justice Walsh held that, at most, Plaintiff alleged an employer-employee relationship, “which does not involve a confidential or fiduciary relationship” (citing Budet v. Tiffany & Co., 155 A.D.2d 408 (2d Dep’t 1989) (“an employer owes an employee at will no fiduciary duty”) (citation omitted)).

Takeaway: Companies can’t have their cake and eat it too. If they want employees to take a stake in the business, they must treat them as investors. If, instead, they view them as mere “at will” employees and fire them without returning their investments, litigation will ensue.

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In real estate agency relationships, an agent owes its client, a buyer or seller of property, fiduciary duties, including duties of undivided loyalty, reasonable care, and confidentiality. Due to the increasing number of large brokerage firms, “dual agency” deals have become commonplace. A dual agency occurs when an agent represents the buyer and the seller in the same deal, or, the buyer’s and seller’s agents are employed by the same firm. In New York, dual agency is legal as long as proper disclosure is made. This is the key issue in Goldstein v. Houlihan/Lawrence Inc., Index No. 60767/2018, an important case pending in the Westchester Commercial Division before Justice Linda Jamieson.

In Goldstein, Plaintiffs, which include buyers and sellers, allege that Houlihan Lawrence routinely acts as a dual agent as part of a corporate strategy to grow its market share and, in doing so, fails to disclose its agents’ dual roles.

The Complaint asserted four claims, which Houlihan Lawrence moved to dismiss pursuant to CPLR 3211(a). As discussed below, the Court allowed two of Plaintiffs’ claims to proceed: (i) breach of fiduciary duty based on an alleged failure to disclose the risks of dual agency; and (ii) violation of New York General Business Law § 349, based on alleged deceptive acts and practices. (The Court dismissed Plaintiffs’ claims for violation of Section 443 of the Real Property Law and unjust enrichment.)

Breach of Fiduciary Duty

Houlihan Lawrence sought dismissal of this claim on the grounds that each plaintiff executed the statutory disclosure form demonstrating consent to the firm’s dual agency. In analyzing this claim, Justice Jamieson cited Section 443(4)(a) of the Real Property Law (“Dual Agent”), which states:

“A real estate broker may represent both the buyer and the seller if both the buyer and seller give their informed consent in writing. In such a dual agency situation, the agent will not be able to provide the full range of fiduciary duties to the buyer and seller. The obligations of an agent are also subject to any specific provisions set forth in an agreement between the agent, and the buyer and seller. An agent acting as a dual agent must explain carefully to both the buyer and seller that the agent is acting for the other party as well. The agent should also explain the possible effects of dual representation, including that by consenting to the dual agency relationship the buyer and seller are giving up their right to undivided loyalty. A buyer or seller should carefully consider the possible consequences of a dual agency relationship before agreeing to such representation. A seller or buyer may provide advance informed consent to dual agency by indicating the same on this form.” Id. (emphasis added).

In denying the motion, Justice Jamieson concluded that establishing consent for dual agency requires more than a client’s signature on a form:

“By these very words … it appears that the mere signing of the [statutory disclosure] form is insufficient, and the legislature required more. If the form was all that was necessary, there would be no need for this language, and it would be rendered superfluous.” Id. (emphasis added).

General Business Law § 349

Plaintiffs also asserted a claim under GBL § 349, which is directed at deceptive acts and practices against the consuming public. As the Court noted: “[P]laintiffs … must charge conduct of the defendant that is consumer-oriented, by having a broader impact on consumers at large. Private contract disputes, unique to the parties, for example, would not fall within the ambit of the statute” (quoting Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank, N.A., 85 N.Y.2d 20, 24-25 (1995)).

Here, the alleged wrongs are that Plaintiffs were not properly informed of the risks associated with dual agency and the firm’s compensation. In that regard, the Court stated:

“To analyze the ultimate efficacy of each claim, this Court will be called upon to determine what was said and what disclosure[s], if any, were made to each plaintiff during the relationship … with Houlihan Lawrence. Each of these transactions are separate, different people were involved, and undoubtedly different things were said and communicated. While the alleged commonality between these plaintiffs may be alleged non-disclosure, the ultimate resolution of the claims can only be determined by individual analysis of each transaction, and to a certain extent each transaction can be considered unique.” Id.

But above and beyond alleged deceptive conduct itself, the Court ultimately must consider whether conduct has “a broad impact on consumers at large.” And on that point, Justice Jamieson allowed the claim to proceed based on Plaintiffs’ allegations (which, at this early stage, the Court must accept as true) that “the practices of Houlihan Lawrence are pervasive, have and will affect many others, and Houlihan Lawrence has promoted its practices.” The Court qualified this ruling by stating that “if discovery in this matter proves otherwise, [it] will certainly revisit this issue upon the proper application.”

Houlihan Lawrence also argued that GBL § 349 does not apply to real estate transactions or deals involving the amounts of money at issue, but the Court disagreed and held that “real estate transactions are not excluded from the protections of the statute.” Id. (citing Polonestsky v. Better Homes Depot, Inc., 97 N.Y.2d 46 (2001)). The Court also was not prepared to dismiss this claim based on the amount of the commissions but noted that it “will certainly be a factor in determining, at the proper time, whether the transaction was unique.”

Litigation Status: On May 15, 2019, Justice Jamieson appointed a full-time discovery master to hear and report to the Court on all issues of discovery, including pending discovery motions, pursuant to CPLR § 4311.

We will continue to monitor this case and provide updates on new decisions and developments.

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There’s a clever saying of murky origin that goes, “if your only tool is a hammer, then every problem looks like a nail.” It describes the “law of the instrument,” or Maslow’s Hammer, which says that people tend to over-rely on their available and familiar tools, even when they shouldn’t. Well, when you’re looking for a default judgment, service often looks like nail and mail.  And often it shouldn’t look that way.

We’ve previously written about how judges in the Westchester Commercial Division will deny even an unopposed motion for default judgment when the plaintiff fails to submit proof of the claim or of damages. On July 31, 2019, Justice Linda Jamieson issued another decision doing just that. The decision in Lliguicota v. Perez, Index No. 50059/2018, though, also shows that, on a motion for default judgment, the Court will independently determine if service was proper and deny a motion for default judgment if it was not.

In Lliguicota, the proof of service stated that the plaintiff served the summons under CPLR 308(4), customarily referred to as “nail and mail,” which permits service by a combination of “affixing the summons to the door” of the defendant’s home or business, and by mail, when personal service “cannot be made with due diligence.” Examining the affidavit of service, Justice Jamieson found that “it does not appear to the Court that plaintiff exercised due diligence before resorting to ‘nail and mail’ service under CPLR § 308(4).” Instead, “a review of the process server’s affidavit shows that although four attempts at service were made, all of them were ‘made on weekdays during hours when it reasonably could have been expected that [defendant] was either working or in transit to work’” (quoting County of Nassau v. Letosky, 34 A.D.3d 414, 824 N.Y.S.2d 153 (2d Dep’t 2006)). Justice Jamieson, therefore, directed the plaintiff to properly serve the summons within 20 days, and denied the motion.

Takeaway: Motions for default judgments will not be rubber-stamped by the justices of the Westchester Commercial Division. Be sure to submit proof of the underlying claim, damages, and proper service.

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New York’s Commercial Division is an attractive forum for parties to litigate disputes over financial transactions. And, because so many transactions flow through New York institutions, aggrieved plaintiffs often believe that the flow of money through the state gives them a hook to sue defendants in New York courts. Often, that is true. But there are limits.

Justice Jamieson discussed those limits in de Arata v. Mathison, Index No. 55723/16. In that case, the plaintiff alleged that her former son-in-law, Mathison, who managed her investments, stole money from her in three transactions. Mathison gave that money to defendant Central Andean Investment Corp. to invest, but Central lost the money. The plaintiff sued Mathison, who defaulted, and the Court entered summary judgment against him.

This decision, however, concerns the plaintiff’s claims against Columbia-based Central and its principal, Jorge Fernando Ricardo Varela. Central and Varela moved for summary judgment dismissing them from the case on the ground that the New York court could not exercise personal jurisdiction over them.

Significantly, there was no evidence that Central or Varela knew that the money they received from Mathison belonged to the plaintiff. There was also no evidence that they stole or misappropriated the money. Instead, it appeared that they simply made bad investments. Central cleared its transactions through a company in Panama, which in turn cleared through Pershing, LLC, which maintained an account with Bank of New York–Mellon. Justice Jamieson found that this connection to New York was too tenuous to support personal jurisdiction over Central and Varela under New York’s longarm statute.

The key provision in the analysis is CPLR 302(a)(1), which allows a New York court to exercise jurisdiction over a “nondomiciliary” if it “transacts any business within the state or contracts anywhere to supply goods or services in the state” and there is “a substantial relationship between the transaction and the claim asserted.” Wilson v. Dantas, 128 A.D.3d 176 (1st Dep’t 2015), aff’d 29 N.Y.3d 1051 (2017). The plaintiff argued that: (i) Central and Varela purposefully used the correspondent bank on three occasions in connection with the plaintiff’s investments; and (ii) their use of those accounts came to an end “only because Defendants’ clandestine conversion was discovered by Plaintiffs and thereby stopped.”

Justice Jamieson, however, found that Central and Varela’s connections with New York were “essential adventitious” (quoting Licci v. Lebanese Canadian Bank, 20 N.Y.3d 327 (2012)). They were, in other words, not even defendants’ doing. “Central used a Panamanian bank for its transactions with plaintiffs’ money,” the Court explained. “The Panamanian bank is the entity that used the New York bank.” This, Justice Jamieson held, is not enough to support long arm jurisdiction over the defendants. The Court concluded: “There is nothing in the complaint, nor in the papers on this motion, that demonstrates that movants purposefully and knowingly availed themselves of a New York forum; the only contacts in New York are passive and coincidental. These transactions all occurred in Colombia, among Colombian actors, involving Colombian funds. Put differently, if any wrongdoing occurred, it occurred in Colombia, not New York.” Justice Jamieson granted summary judgment dismissing the claims against Central and Varela.

Takeaway: It is tempting to assert claims involving financial fraud in New York courts and, especially, in the Commercial Division, when funds are misappropriated using New York-based clearing banks. But plaintiff’s counsel must make sure that the connections to New York are strong enough to support personal jurisdiction. Justice Jamieson’s decision again demonstrates that the mere clearing of funds through New York, at some stage of the transaction, is not enough.

To learn more about new developments in the Westchester Commercial Division, please subscribe to the Westchester Commercial Division Blog.