Client Q & A: Why am I in a Lawsuit in New York?

Why am I in a lawsuit in New York? By Vitali Rosenfeld.

If you get sued, one of the first questions to ask yourself is whether you are being sued in the right place. A lot of commercial lawsuits involving out-of-state parties are filed in New York for various reasons – but not always are there legitimate grounds for a New York court to exercise judicial authority over all defendants. Such authority, referred to as “personal jurisdiction,” is a prerequisite for any civil lawsuit. Does the court have personal jurisdiction over you or your business?

General Jurisdiction. Where a party’s contacts with New York are so strong that it may be considered essentially at home in this state, New York courts (both state and federal) may exercise so-called “general jurisdiction,” i.e. jurisdiction that covers any and all claims against that party. That will normally be the case with an individual who lives in New York, or a company that has its primary place of business in New York.

General jurisdiction can also be based on more attenuated contacts: for instance, a company may be incorporated in Delaware and have its main office in New Jersey, but nevertheless do continuous and systematic business in New York. The general jurisdiction analysis may include such inquiries as whether the party has an office or employees in the state, whether it solicits or conducts business in the state, and whether it has bank accounts, real estate or other property in the state.

Specific Jurisdiction. Where a party’s contacts with New York are insufficient to establish general jurisdiction, it may still be subject to “specific jurisdiction” – which means that the court may exercise its authority over such defendant only with regard to the subject matter of a specific dispute. By definition, the defendant’s contacts with New York that give rise to specific jurisdiction must be related to the events giving rise to the plaintiff’s claim.

For instance, if a foreigner comes to New York and commits some wrongdoing here, he may be sued in New York for the damages caused by that specific wrongful conduct. Likewise, a foreign business may be sued in New York for damages arising from its ownership of real property in this state. But in both examples, the court’s jurisdiction will be limited to the particular claims with a New York nexus, and the non-resident defendant should be able to resist a plaintiff’s attempt to include other claims, for which such a nexus is lacking. There are particular rules for establishing specific jurisdiction depending on the type of claims involved; for some claims, the inquiries are more nuanced and complex than for others.

Forum selection clauses. One of the most common grounds for specific personal jurisdiction in commercial matters is a contractual provision in which the parties consented in advance to jurisdiction of a particular court or courts of a particular state. Such a provision is commonly referred to as a forum selection clause. New York courts usually give effect to such provisions, under the principles that the parties are in the best position to determine where they would want to litigate a potential dispute and that enforcement of forum selection clauses provides certainty and predictability, especially in international cases. Indeed, there is a statute precluding a New York court from declining jurisdiction in high-stakes commercial disputes even where the parties’ only connection to New York is the forum selection clause in their agreement.

There are exceptions, however. As any other contractual provision, a forum selection clause may be invalidated if it is found to have been procured by fraud, contrary of public policy, or otherwise unreasonable or unjust.

It is also important to distinguish between exclusive and non-exclusive forum selection. In the first scenario, the parties agree that any dispute arising from their contract may be litigated only in a particular forum; in the second, they consent to a certain forum’s jurisdiction without ruling out the possibility of litigating elsewhere. Suppose that a plaintiff files his contractual claims in New York, even though the agreement contemplates jurisdiction of foreign courts. If the forum selection clause is exclusive, the defendant will have a much better argument for dismissal of the New York action than with a non-exclusive forum selection clause.

But where the forum selection clause is found to govern, there are further questions. Does it cover all of plaintiff’s claims, and does it apply to all defendants? A plaintiff who wants to sue in New York will rely on a forum selection clause in favor of New York courts, but may try to include claims that are extraneous to the contract and to name defendants who did not sign it, such as the contracting party’s affiliates or executives. A lot of care should be exercised in interpreting forum selection clauses and determining their proper scope. Of course, it is better to pay careful attention to such clauses when signing a contract, to ensure that there are no jurisdictional surprises down the road – in other words, that you do not suddenly find yourself required to litigate in a state or country with which you have no connection.

Once you are sued in New York, however, the important thing is to determine whether you have a jurisdictional defense before you make any court appearance or filing – because such a defense may be easily waived if it is not timely and properly raised. For that reason, you should consult with competent counsel as soon as you are served. We have extensive experience in analyzing jurisdictional issues and effectively asserting jurisdictional defenses on behalf of individual and corporate clients.

Defendants’ Indirect Connections to New York Insufficient to Establish Personal Jurisdiction

On November 6, 2014, the First Department issued a decision in Bluewaters Communications Holdings, LLC v. Ecclestone, 2014 NY Slip Op. 07600, affirming a trial court’s dismissal of foreign defendants for lack of personal jurisdiction.

In Bluewaters Communications Holding, the First Department affirmed the holding that there was not jurisdiction over defendants in New York, explaining:

Plaintiff maintains that the personal jurisdiction defendants committed a tort outside the state that caused injury within the state (see CPLR 302[a][3][ii]), i.e., its loss of New York-based customers, nonparties Apollo Management, L.P. and King Street Capital Management, L.L.C. However, the complaint does not refer to Apollo and King Street as plaintiff’s customers; rather, it refers to them as plaintiff’s financiers. Contrary to plaintiff’s argument, the complaint does not allege tortious interference with plaintiff’s economic relations with Apollo and King Street.

In any event, the event that gave rise to the injury did not occur in New York. That event occurred when Ecclestone persuaded defendant Gerhard Gribkowsky (a German), via the promise of money, to steer the sale by defendant Bayerische Landesbank Anstalt des Öffentlichen Rechts (BLB) (a German bank) of its shares of nonparty Speed Investments Limited (a Jersey company) to defendant CVC Capital Partners Ltd. (an English company) instead of plaintiff’s predecessor in interest (a Jersey company with offices in Jersey and London).

Plaintiff argues that the personal jurisdiction defendants are subject to New York jurisdiction because they conspired with CVC, which transacted business in the state (see CPLR 302[a][1]) by buying the Speed shares owned by nonparty Lehman Commercial Paper, Inc., which had an office in New York. However, plaintiff does not meet the requirements for establishing conspiracy jurisdiction. For example, CVC’s purchase of Lehman’s Speed shares was not a tort, and the complaint does not allege that CVC bought those shares at the direction, under the control, at the request, or on behalf of the personal jurisdiction defendants. The mere conclusory claim that an activity is a conspiracy does not make it so.

Plaintiff alleges that Ecclestone and Bambino bribed Gribkowsky in U.S. dollars and that the payments went from nonparties First Bridge Holding Limited (a Mauritius company) and Lewington Invest Limited (a British Virgin Islands company) to nonparty GG Consulting (an Austrian company). Plaintiff contends that, because the payments were made in U.S. dollars, they must have gone through New York banks. However, Ecclestone’s and Bambino’s indirect use of the New York banking system does not constitute the transaction of business in New York pursuant to CPLR 302(a)(1). Nor does it constitute the commission of a tort within New York pursuant to CPLR 302(a)(2). Unlike the third-party defendants in Mashreqbank PSC v Ahmed Hamad Al Gosaibi & Bros. Co. (2010 NY Slip Op 33909[U], *12 [Sup Ct, NY County 2010], revd on other grounds 101 AD3d 1 [1st Dept 2012], revd on other grounds 23 NY3d 129 [2014]), Ecclestone and Bambino — the alleged payors of the bribe — did not fraudulently gain funds for their own benefit. Nor does American BankNote Corp. v Daniele (45 AD3d 338 [1st Dept 2007]) avail plaintiff with respect to its CPLR 302(a)(2) argument, since that case dealt with jurisdictional discovery and involved a greater connection to the New York metropolitan area than the instant action.

(Internal quotations and citations omitted).

Forum Selection Clause Not Enforced When Neither Parties Nor Agreement Connected to Chosen Forum

On November 5, 2014, the Second Department issued a decision in U.S. Merchandise, Inc. v L&R Distributors, Inc., 2014 NY Slip Op. 07495, refusing to enforce a forum selection clause.

In U.S. Merchandise, the Second Department reversed a trial court decision dismissing an action because the parties’ contract contained a forum selection clause providing for “the exclusive jurisdiction of the courts of the State of Delaware and the Federal Courts therein.” It explained:

A party seeking dismissal of a complaint under CPLR 3211(a)(1) must submit documentary evidence that conclusively establishes a defense to the asserted claims as a matter of law. A contract provision may constitute documentary evidence under CPLR 3211(a)(1), and a forum selection clause contained in a contract may provide a proper basis for dismissal of a complaint under CPLR 3211(a)(1). A 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. Accordingly, a forum selection clause will be given effect in the absence of a strong showing that it should be set aside.

Here, the plaintiff has made the requisite strong showing that the forum selection clause in the nondisclosure agreement was unreasonable. Specifically, the plaintiff has contended, without contradiction, that neither the parties nor the agreement has any connection to the State of Delaware: none of the parties is located in Delaware, the nondisclosure agreement was not executed in Delaware, and performance of the agreement was not to take place in Delaware. Accordingly, the prima facie enforceability and validity of the forum selection clause has been rebutted and, therefore, that clause does not conclusively establish a defense to the asserted claims as a matter of law. Thus, the Supreme Court should have denied that branch of the defendants’ motion which was to dismiss the amended complaint pursuant to CPLR 3211(a)(1).

(Internal quotations and citations omitted) (emphasis added). That there are situations in which forum selection clauses will not be enforced is not a new legal principle. It is a bit surprising to see it applied to these facts.

Non-Signatory May Be Bound by a Contract’s Forum Selection Clause

On October 3, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Taberna Preferred Funding II, Ltd. v. Advance Realty Group LLC, 2014 NY Slip Op. 51461(U), analyzing the question of whether the court had personal jurisdiction over defendants.

One issue addressed by the court in Taberna Preferred Funding was whether the defendants should be bound by a forum selection clause in an indenture to which they were not parties, relying on Indosuez Int’l Fin., B.V. v Nat’l Reserve Bank, 304 AD2d 429, 431 (1st Dept 2003). The court explained:

In Indosuez, the Appellate Division held that “Plaintiff’s parent and subsidiary, although not parties to the agreement containing the choice of law and forum selection clauses, were sufficiently close in their relation to plaintiff to be included.” Indosuez cited federal cases in support of this holding, including Direct Mail Prod. Servs. Ltd. v MBNA Corp., 2000 WL 1277597 (SDNY 2000) (Stein, J.), which held that the relevant inquiry for discerning whether parties are closely related is whether the non-signatory is an intended beneficiary entitled to enforce the clause in question.. This is an accurate recitation of New York law. While defendants maintain this rule only applies to corporate subsidiaries and not individuals, they cite no law in support of this proposition. In fact, the rule has been applied to an individual in the arbitration context. Nonetheless, as this basis for jurisdiction turns on intent, a question of fact, the parties may pursue this issue in jurisdictional discovery and have leave to brief the issue more substantively on a subsequent motion to dismiss.

(Internal quotations and citations omitted).

New York does not Follow the “Fiduciary Shield” Doctrine, so Corporate Officers’ Actions on Behalf of a Company can Form the Basis for Personal Jurisdiction over the Officer

On September 8, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Interventure 77 Hudson LLC v. Falcon Real Estate Investment Co. LP, 2014 NY Slip Op. 32401(U), denying a motion to dismiss.

In Interventure 77 Hudson, the underlying dispute concerns alleged mismanagement of a real estate portfolio. However, the motion at issue involved individual officers of the management company, who are being sued in their individual capacities for breach of fiduciary duty. These defendants moved to dismiss under, inter alia, the “fiduciary shield” doctrine, under which various states have held that actions of a corporation cannot be imputed to corporate officers for purposes of personal jurisdiction.

As the court explained, New York does not follow this doctrine:

Messrs. Hallengren’s and Miller’s main argument appears to be that jurisdiction over the individual officers of a corporation may not be based merely on jurisdiction over the corporation. Messrs. Hallengren and Miller misapprehend New York law and plaintiffs’ allegations.

New York has rejected the fiduciary shield doctrine for purposes of analyzing jurisdiction. See Kreutter v. McFadden Oil Corp., 71 N.Y.2d 460, 472 (1988). Jurisdiction can be exercised over officers for their actions on behalf of a company. The McFadden case is particularly instructive. In McFadden, an individual defendant (acting as a corporate agent) had not physically entered New York, but had acted on behalf of non-domiciliary corporations transacting business in New York, specifically the purported sale-leaseback of an oil rig with plaintiff. The court held that the agent represented two corporations during their participation in purposeful corporate acts in this State, and if he acted improperly in representing them, the fact that he acted for one or both of the corporations should not necessarily relieve him from responding to plaintiffs’ claims against him.

Accordingly, actions that the individual defendants took as corporate agents can be taken into account when deciding if New York can assert personal jurisdiction over them.

No Personal Jurisdiction Based on Solicitation of Business in State Without More

On July 30, 2014, the Second Department issued a decision in Mejia-Haffner v. Killington, Ltd., 2014 NY Slip Op. 05522, affirming a dismissal for lack of personal jurisdiction.

In Mejia-Haffner, the plaintiffs sued a Vermont ski resort in Queens County. Even though the resort advertised in New York, the Second Department affirmed the dismissal for lack of personal jurisdiction, explaining:

A foreign corporation is amenable to suit in New York courts under CPLR 301 if it has engaged in such a continuous and systematic course of doing business here that a finding of its presence in this jurisdiction is warranted. Mere solicitation of business within New York will not subject a defendant to New York’s jurisdiction. Instead, a plaintiff asserting jurisdiction under CPLR 301 must satisfy the standard of solicitation plus, which requires a showing of activities of substance in addition to solicitation.

Even assuming that [the defendant] engaged in substantial advertising in New York, as the plaintiffs claim, the plaintiffs have not demonstrated that [the defendant] also engaged in substantial activity within this State sufficient to satisfy the solicitation-plus standard. Contrary to the plaintiffs’ contention, this Court’s decision in Grimaldi v Guinn (72 AD3d 37, 49-50) does not stand for the principle that a business’s interactive website, accessible in New York, subjects it to suit in this State for all purposes. Instead, the Grimaldi decision stands only for the more limited principle that a website may support specific jurisdiction in New York where the claim asserted has some relationship to the business transacted via the website. Here, even [the defendant’s] alleged substantial solicitation in New York constitutes no more than solicitation.

(Internal quotations and citations omitted) (emphasis added). The Second Department also affirmed the ruling that there was no jurisdiction under CPLR 302.

This decision illustrates the limits to asserting jurisdiction based on solicitation of business in New York.

Court Refuses to Enforce Alleged Parol Forum Selection Clause

On June 12, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Zucker v Ron Waldmann, Basel, LLC, 2014 NY Slip Op. 50914(U), rejecting an argument that a parol forum selection clause applied to an action on a written contract without a forum selection clause.

In Zucker, the defendant moved to dismiss on several grounds, including lack of personal jurisdiction. The trial court held that it lacked personal jurisdiction over the defendants, rejecting the plaintiff’s argument that the parties had agreed in a telephone call that any dispute would be litigated in New York. The court explained:

Plaintiff, in his affidavit, attests that [the defendants] specifically agreed with him that any and all disputes concerning his investment could be taken care of in a court action here in New York. He claims that this agreement as to New York jurisdiction was reached during a telephone call made to him in Brooklyn before he signed the Investment Agreement. He states that he accepted [the individual defendant’s] word on this, without insisting that he put it in writing. While conceding that the Investment Agreement does not mention this aspect of their agreement, plaintiff points to the fact that the Investment Agreement does not specifically state that it constitutes the entire agreement between him and [defendants]. He further states that he relied upon this representation . . . executing the Investment Agreement, and claims that since [the individual defendant] was also a New York City resident at that time, he thought that it made sense that they would have access to New York courts in the event of a dispute. He argues that there is an issue of fact as to whether [the parties] agreed that all disputes among them could be litigated in New York. . . . Here, there is no forum selection clause contained in the Investment Agreement. When parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms, and evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing. Thus, since the written Investment Agreement between the plaintiff and Basel was unambiguous, parol evidence to add terms to this agreement is inadmissible.

(Internal quotations and citations omitted).

Lack of Personal Jurisdiction not a Defense to Domestication of a Foreign Judgment

On May 27, 2014, the First Department entered a decision in Abu Dhabi Commercial Bank PJSC v. Saad Trading, 2014 NY Slip Op. 03767, holding that lack of personal jurisdiction is not a defense to an action to domesticate a foreign judgment.

In Abu Dhabi Commercial Bank, the plaintiff sought to “domesticate and enforce” the judgment of an English court. The defendant moved to dismiss “on the grounds of lack of personal jurisdiction in New York and forum non conveniens.” The First Department affirmed the trial court’s denial of the motion, explaining:

New York has traditionally been a generous forum in which to enforce judgments for money damages rendered by foreign courts. Historically, New York courts have accorded recognition to the judgments rendered in a foreign country under the doctrine of comity absent some showing of fraud in the procurement of the foreign country judgment or that recognition of the judgment would do violence to some strong public policy of this State.

In accordance with this tradition, New York adopted the Uniform Foreign Country Money-Judgments Recognition Act as CPLR article 53, which was intended to codify and clarify existing case law applicable to the recognition of foreign country money judgments based on principles of international comity, and, more importantly, to promote the efficient enforcement of New York judgments abroad by assuring foreign jurisdictions that their judgments would receive streamlined enforcement here. Continue reading

Forum Selection Clause Enforceable Absent Fraud or Overreaching

On May 13, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in U.S. Corrugated, Inc. v. Scott, 2014 NY Slip Op. 31287(U), refusing to dismiss an action for lack of jurisdiction where the defendant agreed to the non-exclusive jurisdiction of the New York courts.

In U.S. Corrugated, the defendant guaranteed payment to the plaintiff in a guaranty that included the following venue provision:

Guarantor hereby irrevocably submits to the non-exclusive jurisdiction of the courts located in the State of New York . . . and hereby irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any such suit . . . and any claim that any such suit . . . has been brought in an inconvenient forum.

Once suit was brought, the defendant moved to dismiss for lack of personal jurisdiction, arguing that the forum selection clause was unenforceable because the clause was the only connection between the guaranty and New York. The defendant also argued that the fact that the clause provided only “non-exclusive jurisdiction” meant that the court could rule that Ohio—where the contract was to be performed—was the more appropriate forum.

The court rejected the defendant’s arguments and denied the motion, explaining:  In New York, a forum selection clause generally operates “as a waiver by the parties based on personal jurisdiction, improper venue, or forum non conveniens.” Forum selection clauses can only be set aside if “a party demonstrates that the enforcement of such would be unreasonable or unjust or that the clause is invalid because of fraud or overreaching, such that a trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court.” (Emphasis added).

Here, the defendant did not allege fraud or overreaching, merely that “it would be inconvenient to litigate in New York, which [did] not amount to a denial of his day in court.”

The court distinguished the present case from cases where it was held that, although a forum selection clause was valid, under the doctrine of forum non conveniens the case should be litigated elsewhere, because the defense of forum non conveniens was explicitly waived by the Guaranty. The court also held that the fact that the clause provided for non-exclusive jurisdiction was irrelevant.

Website, Without More, Insufficient to Create Personal Jurisdiction in New York

On April 7, 2014, Justice Schmidt of the Kings County Commercial Division issued a decision in Steinmetz v. Energy Automation Systems, Inc., 2014 NY Slip Op. 50566(U), analyzing the jurisdictional implications of having a website.

In Steinmetz, the trial court decided motions to dismiss by two Better Business Bureau entities. Part of its analysis included whether having a website made an out-of-state defendant subject to personal jurisdiction in New York. The court explained:

In analyzing personal jurisdiction in the internet context, many New York courts have adopted the sliding scale of interactivity, formulated in Zippo Manuf. Co. v Zippo Dot Com, Inc. (952 F. Supp. 1119, 1125-26 [WD Pa 1997]), according to which websites are classified as (1) interactive a defendant provides goods and services over the internet or knowingly and repeatedly transmits computer files to customers in other states; (2) middle ground permits the exchange of information between users in another state and the defendant, and (3) passive makes information available to users. In this regard, it has been held that exercising personal jurisdiction over the owner of an internet website accessible in New York, required that the site be highly interactive and more than mere presence on the internet. Stated otherwise, personal jurisdiction cannot be based upon a website where it is informational only and, thus, passive in nature. When a website is passive plaintiffs may have to prove something more to justify the exercise of personal jurisdiction—that is, plaintiffs must show that defendant purposefully (albeit electronically) directed his activity in a substantial way to the forum state. Accordingly, such a passive website, without more, cannot be used as the basis for the assertion of long-arm personal jurisdiction. In fact, as the Paterno court pointed out, Grimaldi held that if the foreign corporation maintains an informational Web site accessible to the general public but which cannot be used for purchasing services or goods, then most courts would find it unreasonable to assert personal jurisdiction over that company.

The Paterno court also noted that while Grimaldi concluded that passive Web sites, when combined with other business activity, may provide a reasonable basis for the assertion of personal jurisdiction the other business activity must be substantial and connected to the claim asserted. Thus, the rulings of Paterno and Grimaldi recognize websites which are classified as either interactive or middle ground. As alluded to above, when websites are interactive, they knowingly transmit goods or services to users and if made available to New York residents, the activities can be sufficient for obtaining personal jurisdiction over a defendant. Middle ground websites, as noted above, exist where a user can exchange information with the host computer, and where the exercise of jurisdiction in these cases is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the Web site. In this regard, where a website falls somewhere in the middle ground, the jurisdictional inquiry requires closer evaluation of its contact with New York residents.

(Internal quotations and citations omitted) (emphasis added).