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HERE THE PLAINTIFF WAS IN PRIVITY WITH A NONPARTY WHICH WAS DEEMED TO HAVE HAD A “VICARIOUS DAY IN COURT” SUCH THAT THE DOCTRINE OF RES JUDICATA PRECLUDED PLAINTIFF’S ACTION (FIRST DEPT).

The First Department, reversing Supreme Court, in a full-ledged opinion by Justice Scarpulla, determined the doctrine of res judicata required dismissal of plaintiff’s fraudulent conveyance cause of action. The lawsuit concerned disputed ownership of precious gems. The opinion is fact-specific and too complex to fairly summarize here. With respect to the application of the res judicata doctrine, the court wrote:

This appeal stems from a dispute between precious gemstone traders. Plaintiff Shanghai Pearls & Gems, Inc. … alleges that defendants … improperly transferred gems they received on consignment from nonparty Diamond Corporation Capital Group, LLC (D&M). The transferred gems included the “Pink Diamond,” in which plaintiff held a one-third interest, and the “Kashmir Sapphire.” * * *

Although defendants’ settlement with D&M did not release plaintiff’s original one-third interest in the Pink Diamond, plaintiff’s fraudulent conveyance claims based on that interest should be dismissed because the claims are barred by res judicata. Pursuant to the doctrine of res judicata, a valid final judgment precludes “future actions between the same parties or those in privity with them on any claims arising out of the same transaction or series of transactions . . . , even if based upon different theories or if seeking a different remedy” … .

A determination that privity exists, in the context of res judicata, must be based on a “flexible analysis” of the relationship between the party and the nonparty in the previous litigation … . This analysis, in turn, requires courts to consider “whether the circumstances of the actual relationship, the mutuality of interests, and the manner in which the nonparty’s interest were represented in the earlier litigation established a functional representation such that the nonparty may be thought to have had a vicarious day in court” … .

Here, plaintiff was in privity with D&M vis-À-vis the assignment of the interests in the Pink Diamond and Kashmir Sapphire. D&M’s claims against defendants in the bankruptcy proceeding and plaintiff’s claims against defendants in this action “are closely related in time, space, motivation, or origin” such that the claims “arise out of the same transaction, and res judicata should apply” … . Shanghai Pearls & Gems, Inc. v Paul, 2025 NY Slip Op 01433, First Dept 3-13-25

Practice Point: Although this opinion is complicated and fact-specific, it provides useful insight into the flexibility of the “privity” element of the res judicata doctrine. Here the nonparty with which plaintiff was in privity was deemed to have had a “vicarious day in court” triggering the application of the res judicata doctrine to the plaintiff’s action.

 

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BOTH INSURANCE POLICIES WERE DEEMED TO COVER SEXUAL HARASSMENT CLAIMS AGAINST AN EMPLOYER AND ITS EMPLOYEE BROUGHT BY SEVERAL CO-EMPLOYEES SPANNING YEARS AND DIFFERENT WORKPLACES; THE POLICY LANGUAGE DID NOT RESTRICT THE COVERAGE FOR “RELATED” OR “INTERRELATED ACTS” TO A SINGLE PLAINTIFF (FIRST DEPT).

The First Department, reversing Supreme Court, in a full-fledged opinion by Justice Singh, determined the language of the two insurance policies covered sexual harassment claims against an employer and its employee brought by several co-employees spanning years and different workplaces. The case is fact-specific and turned on the contractual definition of “related wrongful acts” in one policy and “interrelated wrongful acts” under the other policy:

Nothing in the language of either policy restricts Related or Interrelated Wrongful Acts to those harming the same plaintiff. * * *

… [I] both policies, common facts and common causation are presented in the disjunctive. Shared causation is necessary only in that the allegations must “aris[e] from” the “common nexus or nucleus of facts.” “In insurance contracts, the phrase ‘arising out of’ is ordinarily understood to mean originating from, incident to, or having connection with. It requires only that there be some causal relationship between the injury and the risk for which coverage is provided or excluded” … . * * * Zurich Am. Ins. Co. v Giorgio Armani Corp., 2025 NY Slip Op 01335, First Dept 3-11-25

Practice Point: The language used in an insurance policy determines the coverage. Here the policy language was such that it covered sexual harassment claims spanning years and different workplaces brought by several plaintiffs as “related” or “interrelated acts.”

 

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ABSENT AMBIGUITY A COURT CAN NOT CONSIDER EXTRINSIC EVIDENCE TO INTERPRET A CONTRACT; HERE PLAINTIFF HAD BROUGHT TWO ACTIONS AGAINST THE CITY CHALLENGING TWO SEPARATE ARRESTS; THERE WAS NO INDICATION THE RELEASE ONLY APPLIED TO THE ACTION DESCRIBED IN THE CAPTION OF THE RELEASE; THE SPACE FOR DESCRIBING ANY ACTION TO BE EXCLUDED FROM THE RELEASE WAS LEFT BLANK; THEREFORE THE RELEASE APPLIED TO BOTH ACTIONS; THERE WAS A DISSENT (FIRST DEPT).

The First Department, reversing Supreme Court, over a dissent, determined the release signed by plaintiff applied to both actions plaintiff had brought against the city, not just the action identified in the caption of the release. Plaintiff brought two separate actions challenging two arrests occurring 14 days apart. The release identified the action stemming from the second arrest and left a blank space to describe anything to be excluded from the release. That space was left blank. Supreme Court and the dissent determined that the plaintiff intended to exclude the first action from the release but plaintiff’s attorney inadvertently left the space for the exclusion blank:

Like any contract, a release must be “read as a whole to determine its purpose and intent,” and extrinsic evidence of the parties’ intent may be considered only if the agreement is ambiguous … . “A contract is unambiguous if the language it uses has a definite and precise meaning, unattended by danger of misconception in the purport of the [agreement] itself, and concerning which there is no reasonable basis for a difference of opinion” … . “More to the point, an ambiguity never arises out of what is not written at all, but only out of what was written so blindly and imperfectly that its meaning is doubtful” … .

Here, there was nothing surreptitious about the City sensibly filling in plaintiff’s name as the releasor, the case name and the index number referrable to Action 2, in the general release to identify the specific matter being settled. What followed are standard, boiler-plate operative terms of this general release, namely, a broadly worded waiver provision and a claim exclusion clause, both of which are clear and unambiguous. Thus, there was no legal basis for the motion court to use any extrinsic evidence, discern an unfounded ambiguity therefrom and ultimately surmise the parties’ intent to limit the scope of the general release to Action 2 … . Smith v City of New York, 2025 NY Slip Op 01198, First Dept 3-4-25

Practice Point: Here Supreme Court considered extrinsic evidence indicating that the release was meant to apply to only one of two actions plaintiff brought against the city. The First Department held that, because the release was not ambiguous, the court cannot consider extrinsic evidence. Therefore the release, by its terms, applied to both actions.

 

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ALTHOUGH THE CAUSES OF ACTION WERE PLED AS “CONVERSION” AND “UNJUST ENRICHMENT,” THEY STEMMED FROM ALLEGED BREACHES OF THE PARTNERSHIP AGREEMENT; THEREFORE THE SIX-YEAR BREACH-OF-CONTRACT STATUTE OF LIMITATIONS APPLIED, NOT THE THREE-YEAR TORT STATUTE OF LIMITATIONS (SECOND DEPT). ​

The Second Department determined that, although the causes of action were couched as “conversion” and “unjust enrichment,” they stemmed from the alleged breach of a partnership agreement. Therefore the six-year contract, not the three-year tort, statute of limitations applied:

… [T]he causes of action were subject to a six-year statute of limitations rather than a three-year statute of limitations. “In determining which limitations period is applicable to a given cause of action, the court must look to the substance of the allegations rather than to the characterization of those allegations by the parties” … . “[W]hen damage to property or pecuniary interests is involved, the six-year statute governs regardless of how the theory of liability is described, as long as the asserted liability had its genesis in the contractual relationship of the parties” … . Thus, “where liability is premised on a contractual relationship, the six-year statute of limitations applies” … . Fernandes v Fernandes, 2025 NY Slip Op 00848, Second Dept 2-13-25

Practice Point: Here the causes of action for conversion and unjust enrichment stemmed from alleged breaches of the partnership agreement, so the breach-of-contract, not the tort, statute of limitations applied.

 

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HERE THE LLC AGREEMENT, IN ACCORDANCE WITH ITS TERMS, WAS UNILATERALLY AMENDED BY DEFENDANT SUCH THAT DEFENDANT’S PRIOR CONTRACTUAL OBLIGATION TO PLAINTIFF WAS EXTINGUISHED AFTER PLAINTIFF HAD PERFORMED; ALTHOUGH HARSH, THIS OUTCOME WAS SUPPORTED BY DELAWARE LAW AND WAS AFFIRMED BY THE MAJORITY OVER A THREE-JUDGE DISSENT (CT APP). ​

The Court of Appeals, affirming the Appellate Division, in a full-fledged opinion by Judge Singas, over a three-judge dissenting opinion, determined plaintiff was bound by the terms of an amended limited liability company (LLC) agreement which was unilaterally amended by defendant. The amended agreement included a merger clause which effectively nullified a prior oral agreement between plaintiff and defendant providing that defendant would buy-out plaintiff’s interest in the LLC after five years. Plaintiff had invested three million and his share of the LLC was worth over 11 million at the five-year mark:

… [T]he amended LLC agreement … contained a merger clause which states:

“This Agreement, together with the Certificate of Formation, each Subscription Agreement and all related Exhibits and Schedules, constitutes the sole and entire agreement of the parties to this Agreement with respect to the subject matter contained herein and therein, and supersedes all prior and contemporaneous understandings, agreements, representations and warranties, both written and oral, with respect to such subject matter, including the Original Agreement.” * * *

Upon his initial investment, plaintiff became bound by the original LLC agreement, including its clause dictating how its terms could be altered. Once the agreement was altered pursuant to its terms, plaintiff became bound by the amended LLC agreement, including its merger clause. Pursuant to the amended LLC agreement’s choice-of-law provision, Delaware law governs its interpretation and reach … . Under Delaware’s Limited Liability Company Act, which aims to “give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements” … , a member of an LLC “is bound by the limited liability company agreement whether or not the member . . . executes the limited liability company agreement” … . Plaintiff, as a member of [the LLC], is therefore bound by its operating LLC agreement—the amended LLC agreement—regardless of whether he signed it. * * *

Though an outcome whereby one member to a contract unilaterally extinguishes his contractual obligation, even after the other party has performed, may appear “harsh,” … Delaware law “unambiguously advises prospective investors in a closely held LLC (especially one considering a multimillion-dollar investment) to scrutinize the existing LLC agreement and condition their investment upon the clear written delineation thereunder of . . . their contracted-for rights in the event of any future amendments to the LLC agreement” … . Behler v Kai-Shing Tao, 2025 NY Slip Op 00803, CtApp 2-13-25

Practice Point: Here the LLC agreement was, in accordance with its terms, unilaterally amended by defendant to extinguish a prior contractual obligation owed plaintiff after plaintiff had performed. This harsh result was supported by Delaware law, which basically says anyone entering an LLC agreement which can be unilaterally changed should think twice.

 

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HERE THE PLAINTIFFS-TENANTS WERE ENTITLED TO A YELLOWSTONE INJUNCTION WHICH TOLLS THE CURE PERIOD UNTIL A COURT DETERMINES WHETHER THE TENANT HAS ACTUALLY DEFAULTED; PURPOSES OF AND CRITERIA FOR A YELLOWSTONE INJUNCTION CLEARLY EXPLAINED (FIRST DEPT). ​

The First Department reversed Supreme Court and granted plaintiff’s a “Yellowstone” injunction to allow time for a court to determine the nature and status of an ambiguous lease. Supreme Court had erroneously struck the “temporary restraining order” paragraph in plaintiffs-tenants’ order to show cause, which allowed the period to cure the alleged defaults to run out resulting in termination of the lease. The opinion includes a clear explanation of the nature and equitable purpose of a Yellowstone injunction, which is applicable to commercial leases. One of the issue here was whether the lease was commercial or residential:

A Yellowstone injunction “maintains the status quo so that a commercial tenant, when confronted by a threat of termination of its lease, may protect its investment in the leasehold by obtaining a stay tolling the cure period so that upon an adverse determination on the merits the tenant may cure the default and avoid a forfeiture” … .

… [T]he Yellowstone injunction tolls the relevant cure period, thereby preventing the termination of the lease … . With the Yellowstone injunction in place, the tenant can litigate with some confidence: if the tenant prevails in the underlying dispute with the landlord, the tenant walks away from the litigation with the lease intact; if the tenant loses the underlying dispute, the tenant can cure the demonstrated lease defaults before the expiration of the remaining cure period … .

* * * Yellowstone relief is a unique injunction. Unlike a standard preliminary injunction that can be granted only upon a demanding three-part showing of a likelihood of success on the merits, irreparable injury, and that the equities favor the party seeking the preliminary injunction, a Yellowstone injunction is granted on “far less” a showing … .

The party seeking Yellowstone relief must demonstrate the following four elements: “(1) It holds a commercial lease; (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease; (3) it requested injunctive relief prior to the termination of the lease; and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises” … . Wharton-Bickley v 388 Broadway Owners LLC, 2025 NY Slip Op 00802, First Dept 2-11-25

Practice Point: Consult this decision for a clear explanation of the purposes of and the criteria for a Yellowstone injunction.

 

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DEFENDANTS MOTION TO VACATE THE DEFAULT BASED UPON LAW OFFICE FAILURE AND PROOF OF A MERITORIOUS DEFENSE SHOULD HAVE BEEN GRANTED (THIRD DEPT).

The Third Department, reversing Supreme Court, determined defendants motion to vacate the default judgment based upon law office failure should have been granted:

In support of the motion to vacate, defendants affirmed that they had retained former counsel and that he had informed them that he would file an answer, but his office failed to do so. However, they did not become aware of this failure until they were served with the default. Although defendants could have provided stronger support by way of an affirmation from former counsel to better substantiate their claim of law office failure, this is not required. Markedly, plaintiff’s submissions in support of his application for costs — included in the record before this Court — establish that his counsel’s office was aware that defendants were represented. In fact, plaintiff’s counsel’s billing records specifically name former counsel and set forth that he was “attorney for defendant[s].” These billing records further demonstrate that plaintiff’s counsel had conversed with former counsel and been informed that an answer was being prepared. These facts, in conjunction with the short duration between entry of default in July 2023 and the subsequent motion to vacate in September 2023, establish that plaintiff was not prejudiced by the delay, and that defendants’ failure to file an answer was the result of law office failure and not willfulness on the part of defendants … . * * *

“To establish the existence of a potentially meritorious defense, defendants needed only to make a prima facie showing of legal merit, as the quantum of proof needed to prevail on a CPLR 5015 (a) (1) motion is less than that required when opposing a summary judgment motion” … . In consideration of this minimal standard of proof, defendants’ sworn assertions that plaintiff fraudulently induced them to enter the contract and then breached the contract before any breach on their part establishes a potentially meritorious defense … . Darling v Fernette, 2025 NY Slip Op 00507, Third Dept 1-30-25

Practice Point: Consult this decision for the criteria for vacating a default judgment based upon law officer failure, and for demonstrating a meritorious defense to a breach of contract action.

 

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EVEN THOUGH THE COOPERATIVE LANDLORD WON IN THE UNDERLYING LITIGATION AGAINST A SHAREHOLDER TENANT, THE LEASE PROVISION REQUIRING THE TENANT TO PAY ATTORNEY’S FEES REGARDLESS OF DEFAULT OR MERIT WAS UNENFORCEABLE AS UNCONSCIONABLE (FIRST DEPT). ​

The First Department, reversing Supreme Court, determined the lease provision which provides for attorney’s fees regardless of default or merit unenforceable as unconscionable:

Because the lease provides for attorneys’ fees regardless of default or merit, in a dispute between a residential co-op [The Dakota] and a shareholder tenant [Fletcher] , we find this provision to be unenforceable as unconscionable … . The lease is not “silent as to whether such right is contingent upon the merits of plaintiff’s action” … , but explicitly provides for attorneys’ fees whenever the tenant sues The Dakota. This interpretation is not changed by the description of the fees as “reasonable” … . “Bearing in mind that agreements providing for payment of attorneys’ fees should be construed strictly” … , we will not rewrite the parties’ agreement simply because The Dakota prevailed in the underlying litigation … .”To enforce such a provision would produce an unjust result because it would dissuade aggrieved parties from pursuing litigation and preclude tenant-shareholders from making meaningful decisions about how to vindicate their rights in legitimate instances of landlord default” … . Kasowitz, Benson, Torres & Friedman, LLP v JPMorgan Chase Bank, N.A., 2025 NY Slip Op 00396, First Dept 1-28-25

Practice Point: A lease provision which requires a tenant to pay attorney’s fees regardless of default or merit is unconscionable and will not be enforced even where the landlord won the underlying litigation.

 

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IT WAS SUFFICIENTLY ALLEGED THE RELEASE WAS INDUCED BY FRAUD; THE COMPLAINT SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT).

The First Department, reversing Supreme Court, determined the complaint should not have been dismissed on the basis of the release because it was sufficiently alleged the release was induced by fraud:

Plaintiff’s complaint sufficiently alleges that the general release that was the basis for dismissal of the complaint was fraudulently induced based on defendant’s misrepresentations upon which plaintiff justifiably relied … . For example, the complaint alleges, among other things, that defendant induced plaintiff’s signature on the release by stating that if plaintiff did not sign, defendant would withdraw a New York Gaming Commission complaint that plaintiff had urged defendant to file, when, in fact, there was no complaint to withdraw because defendant had falsely represented he had filed the complaint.

Upon a “detailed analysis of whether plaintiff had sufficiently alleged the existence of overreaching or unfair circumstances such that enforcement of the general release[] would be inequitable” … , we concluded that dismissal of the complaint based on the release was not warranted. Jones v Jacobs, 2025 NY Slip Op 00377, First Dept 1-23-25

Practice Point: Here the complaint sufficiently alleged the release was induced by fraud. The complaint should not have been dismissed based on the release.​

 

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PRIVATE CONTRACT DISPUTES, UNIQUE TO THE PARTIES, ARE NOT COVERED BY GENERAL BUSINESS LAW 349 OR 35O WHICH ARE APPLICABLE ONLY TO CONSUMER-ORIENTED CONDUCT (SECOND DEPT).

The Second Department, reversing (modifying) Supreme Court, determined that a General Business Law section 349 or 350 action must be based upon consumer-oriented conduct, not, as here, on a unique contract between private parties:

“To successfully assert a claim under General Business Law § 349 or § 350, a party must allege that its adversary has engaged in consumer-oriented conduct that is materially misleading, and that the party suffered injury as a result of the allegedly deceptive act or practice” … . “‘[P]arties . . . must, at the threshold, charge conduct that is consumer oriented'” … . “Private contract disputes, unique to the parties, . . . [do] not fall within the ambit of the statute” … . A “single shot transaction” … , which is “tailored to meet the purchaser’s wishes and requirements” … , “does not, without more, constitute consumer-oriented conduct for the purposes of [General Business Law §§ 349 and 350]” … . Here, the complaint … failed to sufficiently allege that the … defendants engaged in a consumer-oriented deceptive act or practice … . Katsorhis v 718 W. Beech St, LLC, 2025 NY Slip Op 00211, Second Dept 1-15-25

​Practice Point: General Business Law 349 and 350 actions must be based upon consumer-oriented conduct. Private contract disputes, unique to the parties, are not encompassed by General Business Law 349 and 350.

 

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