A Divided Bench Revealed in Top Court’s Commercial Cases

When discussing the U.S. Supreme Court, commentators spend considerable time reviewing the decisions of the Court to create “lineups” of conservative versus liberal Justices and to speculate which Justices, or group of Justices, are the deciding or so-called “swing” votes. In cases raising constitutional issues involving prominent social issues, legal philosophies can be observed that can be helpful in forecasting future results, as well as the potential impact of new Justices.

By contrast, this type of analysis rarely can be applied to the New York Court of Appeals, for at least two reasons.

First, the docket of the Court of Appeals is comprised of mostly statutory and common law disputes, which are less likely to reveal clearly defined legal philosophies than constitutional issues.

Second, the Court of Appeals does not issue a plethora of divided decisions, and it is only in divided cases where trends can be easily discerned.

A Divided Court

In the last year or so, the Court of Appeals has issued five decisions in commercial cases by a 4-3 vote. In reviewing the identity of the judges on each side in the five cases, trends can be identified.

Chief Judge Janet DiFiore and Judge Leslie Stein voted together in each case, four times in the majority and once in dissent. Judges Jenny Rivera and Eugene M. Fahey also voted together in each case, once in the majority and four times in dissent. In none of the five cases did these two groups of judges vote together.

Judge Michael J. Garcia voted twice with Judges Rivera and Fahey, once in the majority and once in the dissent, and with Judges DiFiore and Stein three times, each in the majority.

Judge Rowan D. Wilson voted twice with Judges DiFiore and Stein, once in the majority and once in the dissent, and with Judges Rivera and Fahey in dissent three times.

Only one judge was in the majority in all five cases: Judge Paul Feinman, who joined with Chief Judge DiFiore and Judge Stein four times and with Judges Rivera and Fahey once. In these five cases, Judge Feinman represented the classic swing vote. His vote determined the winning side.

Two of the cases were commercial landlord-tenant disputes, with the landlord prevailing once and with the tenant prevailing once. In the case where the landlord prevailed, Chief Judge DiFiore and Judge Stein were in the majority with Judges Garcia and Feinman. In the case where the tenant was victorious, Judges Rivera and Fahey were in the majority, with Judges Garcia and Feinman.

The third case raised the issue as to whether federal bankruptcy law preempted a state law claim asserted against a non-debtor third party for tortious interference with contract. In finding no preemption, Chief Judge DiFiore and Judge Stein were joined by Judges Wilson and Feinman.

The fourth case involved a permit for the construction of a nursing home on a multiple-building zoning lot. In allowing the construction, Chief Judge DiFiore and Judge Stein aligned with Judges Garcia and Feinman.

In the fifth case, Chief Judge DiFiore was, again, joined by Judges Stein, Garcia, and Feinman in ruling that the holders of a minority of senior secured debt could bring a lawsuit against the debtor and its guarantors after the issuer defaulted.

While labeling judges can be imprecise at best, Chief Judge DiFiore and Judge Stein were consistently on the pro-business side of the ledger while Judges Rivera and Fahey were consistently on the other side. Each of the other three judges voted at least once for both sides.

The Cases

In 159 MP Corp. v. Redbridge Bedford, LLC, 33 N.Y.3d 353 (2019), the plaintiffs entered two commercial leases for property in Brooklyn to operate a Foodtown supermarket. In each lease, the plaintiffs agreed to waive their right to bring a declaratory judgment action with respect to any provision of the lease or any notice sent under the lease.

When the landlord sent a notice to cure various defaults under the lease, the plaintiffs started a declaratory judgment action seeking a so-called “Yellowstone” injunction to prevent the landlord from terminating the leases or starting a summary proceeding while the declaratory judgment action was pending. The legal issue that ultimately reached the Court of Appeals was whether the lease provisions waiving the plaintiffs’ right to a Yellowstone injunction were enforceable.

The majority held that the lease provisions waiving the right to a Yellowstone injunction were enforceable. The dissent would have held that the lease provisions were unenforceable because they violated public policy. (Following the decision, the New York State Legislature enacted Real Property Law Section 235-h, making such waivers null and void as against public policy.)

The second and third cases were argued the same day. In Trustees of Columbia University v. D’Agostino Supermarkets, Inc., 2020 N.Y. Slip Op. 06937, Columbia University leased property to D’Agostino Supermarkets for use as a grocery store. After D’Agostino admittedly breached the lease by failing to pay rent for seven months, the parties settled their dispute out of court by entering into an agreement.

In the agreement, Columbia agreed to settle under terms that discounted the amount it would collect on account of D’Agostino’s breach of the lease on the conditions that D’Agostino timely make 11 installment payments equaling the back rent owed by D’Agostino and that D’Agostino immediately vacate the premises. The agreement further provided that if D’Agostino failed to make the required installment payments, D’Agostino would be responsible for the future rent required under the lease plus other associated payments.

D’Agostino breached the agreement by failing to make the required installment payments, and Columbia sued.

The majority of the Court ruled that the portion of the surrender agreement providing for certain payments in the event of a breach was an unenforceable penalty. The dissent would have enforced the agreement as a legitimate component of an agreement to settle D’Agostino’s breach of the lease.

In Sutton 58 Associates LLC v. Pilevsky, 2020 N.Y. Slip Op. 06939, the plaintiff loaned $147,250,000 to two nonparty borrowers to finance the development and construction of an apartment complex. The loan agreement prohibited the borrowers from incurring most short-term debt and required that they remain a “Special Purpose Bankruptcy Remote” entity.

The borrowers entered bankruptcy, but the process was more protracted than the plaintiff envisioned, allegedly due to the borrowers’ acquisition of other assets and debts in violation of the loan agreement.

The plaintiff sued various individuals and entities, alleging that they had tortiously interfered with the plaintiff’s loan agreement with the borrowers. The defendants argued that federal bankruptcy law preempted the action.

The Court held that the bankruptcy law did not preempt the plaintiff’s tortious interference claims that were based on pre-petition conduct and asserted against non-debtor defendants. The dissent would have held that the bankruptcy law preempted the plaintiff’s claims.

In the fourth case, Peyton v. New York City Bd. of Standards and Appeals, 2020 N.Y. Slip Op. 07662, the petitioners challenged the decision of the New York City Department of Buildings to issue a permit for the construction of a nursing home on a multiple-building zoning lot. The issue was the definition of “open space” in the New York City Zoning Resolution.  Agreeing with the proposed nursing home, the city’s Board of Standards and Appeals (BSA) decided that open space encompassed rooftop gardens accessible to a single building’s residents as long as the residents of each building on the zoning lot received at least a proportionate share of open space. The Court concluded that the BSA’s interpretation was rational, while the dissent would have granted the petition, precluding construction of the nursing home as originally proposed.

Finally, in CNH Diversified Opportunities Master Account, L.P. v. Cleveland Unlimited, Inc., 2020 N.Y. Slip Op. 05976, the holders of a minority of senior secured debt sued the debtor and its guarantors to recover principal and interest after the issuer defaulted. The Court held that the plaintiffs could sue for payment on their notes, even though a majority of bondholders had directed the trustee to begin a strict foreclosure proceeding. The dissent would have held that the plaintiffs’ right to sue did not survive the strict foreclosure remedy pursued by the bondholders.

Conclusion

No doubt this article discusses a relatively small sample size and as such should only be seen as the beginning of a meaningful analysis that will need to be updated as time goes on and additional cases are decided.

Moreover, the impending retirement of Judge Stein in April and Judge Fahey in December will introduce two new judges to the bench, and it will be interesting to see if either of the new judges aligns with Chief Judge DiFiore in commercial cases, as Judge Stein did, or with Judge Rivera, as Judge Fahey did.

Despite its limitations, these observations are not just of academic interest, but should be evaluated in litigating commercial matters in New York, especially as cases make their way to the appellate courts.

Reprinted with permission from the February 24, 2021, issue of the New York Law Journal. © ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.