New York Law Review

Tag: Commercial Transaction

  • Fiore v. Oakwood Plaza Shopping Center, Inc., 78 N.Y.2d 572 (1991): Enforceability of Cognovit Judgments and Waiver of Due Process

    Fiore v. Oakwood Plaza Shopping Center, Inc. , 78 N.Y.2d 572 (1991)

    A cognovit judgment from another state is enforceable in New York if the judgment debtor voluntarily, knowingly, and intelligently waived their due process rights to notice and a hearing.

    Summary

    This case addresses whether a Pennsylvania cognovit judgment should be given full faith and credit in New York. The plaintiffs sold land in Pennsylvania to the defendants, who executed a bond and warrant containing a cognovit clause allowing confession of judgment. After the defendants defaulted, the plaintiffs obtained a judgment in Pennsylvania and then sought to enforce it in New York. The New York Court of Appeals held that the Pennsylvania judgment was enforceable because the defendants, as sophisticated parties represented by counsel, had voluntarily, knowingly, and intelligently waived their due process rights.

    Facts

    Plaintiffs contracted to sell land to defendants in Pennsylvania. The defendants, Oakwood Plaza Shopping Center, and its principals, Aronow and Galioto, executed a “bond and warrant” that included a cognovit clause authorizing the plaintiffs’ attorney to confess judgment against them if they defaulted on their payment obligations. After defendants failed to make the required payments, plaintiffs obtained a judgment by confession in Pennsylvania.

    Procedural History

    Plaintiffs obtained a judgment in Pennsylvania Court of Common Pleas. Defendants’ petition to open or strike the judgment was denied. Plaintiffs then commenced an action in New York seeking to enforce the Pennsylvania judgment. Supreme Court granted summary judgment to plaintiffs, and the Appellate Division affirmed. This appeal followed.

    Issue(s)

    Whether a Pennsylvania cognovit judgment is entitled to full faith and credit in New York, where the defendants claim they did not knowingly waive their due process rights.

    Holding

    Yes, because the defendants, as sophisticated commercial parties represented by counsel, voluntarily, knowingly, and intelligently waived their rights to notice and a hearing by agreeing to the cognovit clause.

    Court’s Reasoning

    The court reasoned that while cognovit judgments are viewed with disfavor, the U.S. Supreme Court in Overmyer Co. v. Frick Co., 405 U.S. 174 (1972), established that they are not per se unconstitutional. Instead, the enforceability of such judgments depends on whether the debtor made a voluntary, knowing, and intelligent waiver of their due process rights. The court distinguished its prior holding in Atlas Credit Corp. v. Ezrine, 25 N.Y.2d 219 (1969), noting that subsequent Supreme Court decisions clarified the issue. The court emphasized that the defendants were sophisticated commercial parties, represented by counsel, and that the cognovit clause was part of a bargained-for exchange. The court noted, “where the contract is one of adhesion, where there is great disparity in bargaining power, and where the debtor receives nothing for the cognovit provision, other legal consequences may ensue.”(Overmyer Co. v. Frick Co., 405 U.S. at 188). The court found that the defendants understood they were giving the plaintiff a significant advantage should default occur, and upheld the Pennsylvania judgment. The court also noted that the Pennsylvania cognovit procedure had been amended since Atlas to provide more judicial oversight and better notice to the debtor.

  • Ehrlich-Bober & Co. v. University of Houston, 49 N.Y.2d 574 (1980): Comity and Jurisdiction Over Out-of-State Governmental Entities in Commercial Transactions

    49 N.Y.2d 574 (1980)

    When a commercial transaction is centered in New York, New York courts are not precluded by comity from exercising jurisdiction over an out-of-state governmental entity, despite the entity’s state law limiting suits to specific venues, especially when New York has a strong interest in providing a forum for such transactions.

    Summary

    Ehrlich-Bober & Co., a New York securities dealer, sued the University of Houston, a Texas state agency, in New York for breach of contract related to reverse repurchase agreements. The University argued it was immune from suit in New York due to a Texas law restricting suits against it to specific Texas counties. The New York Court of Appeals held that New York courts could exercise jurisdiction. It reasoned that the transactions were centered in New York, and New York has a strong interest in providing a forum for commercial transactions within the state. Comity did not require deference to the Texas venue restriction.

    Facts

    Ehrlich-Bober, a New York-based securities dealer, engaged in multiple reverse repurchase agreements with the University of Houston. These transactions, totaling approximately $44 million, involved the sale and repurchase of securities. Many transactions were initiated by phone calls to Ehrlich-Bober’s New York office. On several occasions, a University employee visited Ehrlich-Bober’s office in New York. Two specific agreements were at issue, involving Government National Mortgage Association (Ginnie Mae) securities. Ehrlich-Bober delivered the purchase price to Manufacturer’s Hanover in New York, and the securities were delivered to Ehrlich-Bober. The University refused to repurchase the securities as agreed, causing Ehrlich-Bober a loss.

    Procedural History

    Ehrlich-Bober sued the University of Houston in New York. The University moved to dismiss, arguing sovereign immunity, lack of long-arm jurisdiction, and forum non conveniens. Special Term granted the motion to dismiss. The Appellate Division affirmed the dismissal based on sovereign immunity, but found long-arm jurisdiction existed and forum non conveniens did not apply. Ehrlich-Bober appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether New York courts should, as a matter of comity, recognize and enforce a Texas statute that limits suits against the University of Houston to specific counties in Texas.

    Holding

    1. No, because New York’s interest in providing a forum for commercial transactions centered in New York outweighs Texas’s interest in limiting the venue for suits against its agencies, especially when the transaction has only an indirect relation to the governmental function of the University.

    Court’s Reasoning

    The Court of Appeals recognized that while New York could choose to defer to the Texas law as a matter of comity, it was not compelled to do so. The court emphasized that comity is a matter of practice, convenience, and expediency, not a binding rule of law. The court stated, “Whatever the New York rule may once have been…it is abundantly clear that the rule has undergone a substantial evolution over six decades…Today in New York the determination of whether effect is to be given foreign legislation is made by comparing it to our own public policy; and our policy prevails in case of conflict”.

    The court identified New York’s strong public policy in maintaining its status as a major commercial and financial center, which includes providing ready access to its courts for redress of injuries arising from transactions within the state. The court distinguished this case from situations where the foreign law goes to the heart of a governmental function. The Texas statute, as interpreted by Texas courts, was deemed a restrictive venue provision for administrative convenience, not a limitation on liability essential to the governmental function.

    The court emphasized that the transactions were centered in New York: initiated by a call to New York, accepted in New York, with money paid and securities delivered in New York, and repurchases to occur in New York. The court reasoned that requiring New York financial institutions to review the laws of every jurisdiction before doing business with its agencies would be an intolerable burden.

    The dissenting opinion argued that the court was confusing the requirements for obtaining long-arm jurisdiction with considerations of comity. It contended that New York should respect Texas’s decision to limit suits against its state entities, similar to New York’s own restrictions on suits against the State University of New York. The dissent warned that the majority’s decision could allow suits against New York state entities in other states, despite New York’s intent to limit such suits to the New York Court of Claims.

  • Fairchild Hiller Corp. v. McDonnell Douglas Corp., 28 N.Y.2d 331 (1971): Assignment of Claims and Champerty

    Fairchild Hiller Corp. v. McDonnell Douglas Corp., 28 N.Y.2d 331 (1971)

    An assignment of a claim is not champertous under New York Judiciary Law § 489 if the primary purpose of the assignment was part of a larger commercial transaction, even if litigation on the claim is a contingent or incidental purpose.

    Summary

    Fairchild Hiller Corp. (Fairchild) sued McDonnell Douglas Corp. (McDonnell) as the assignee of a claim originally held by Republic Aviation Corp. (Republic). The claim arose from a contract where Republic manufactured aircraft assemblies for McDonnell. McDonnell asserted that the assignment of the claim from Republic to Fairchild was champertous, violating Judiciary Law § 489, and that Farmingdale Company, who had an agreement with Fairchild to receive 75% of any recovery, was the real party in interest and a necessary party. The New York Court of Appeals held that the assignment was not champertous because it was incidental to Fairchild’s acquisition of Republic’s operating assets and that Fairchild was the real party in interest, making Farmingdale not a necessary party.

    Facts

    Republic contracted with McDonnell to manufacture aircraft assemblies. Republic claimed defects in McDonnell’s tools and drawings increased its production costs, leading to a claim against McDonnell.
    Fairchild acquired Republic’s operating assets, including contracts and related claims. Farmingdale acquired Republic’s non-operating fixed assets (real estate).
    Fairchild and Farmingdale agreed that Fairchild would pursue the claim against McDonnell and give Farmingdale 75% of the net proceeds. The agreement gave Fairchild sole discretion over the claim’s settlement or litigation.
    Fairchild sued McDonnell for fifteen million dollars after unsuccessful settlement negotiations.

    Procedural History

    McDonnell moved for summary judgment, arguing champerty, that Fairchild was not the real party in interest, and that Farmingdale was a necessary party.
    Fairchild cross-moved to dismiss these affirmative defenses.
    Special Term denied McDonnell’s motion and granted Fairchild’s motion.
    The Appellate Division reinstated the affirmative defenses, finding questions of fact existed.

    Issue(s)

    1. Whether the assignment of the claim from Republic to Fairchild was champertous under Judiciary Law § 489.
    2. Whether Farmingdale, rather than Fairchild, was the real party in interest.
    3. Whether Farmingdale was a necessary party to the action.

    Holding

    1. No, because Fairchild’s primary purpose in acquiring Republic’s assets was a legitimate business transaction, and the claim assignment was merely incidental to that transaction.
    2. No, because the assignment from Republic to Fairchild was absolute on its face, and the sharing agreement between Fairchild and Farmingdale gave Fairchild control over the claim.
    3. No, because Farmingdale had no legal title to the claim, and its potential recovery depended entirely on the separate sharing agreement with Fairchild.

    Court’s Reasoning

    The Court of Appeals reversed the Appellate Division, reinstating the Special Term’s order dismissing the affirmative defenses.
    Regarding champerty, the court stated that under Judiciary Law § 489, an assignment is champertous only if made for the “very purpose of bringing suit,” excluding any other purpose. The court cited Moses v. McDivitt, 88 N.Y. 62, 65, and Sprung v. Jaffe, 3 N.Y.2d 539, 544, for the principle that “the statute is violated only if the primary purpose of the purchase or taking by assignment of the thing in action is to enable the attorney to commence a suit thereon.”
    The court emphasized that Fairchild’s primary purpose was to acquire Republic’s operating assets, making the claim assignment an “incidental part of a substantial commercial transaction.”
    Regarding the real party in interest, the court noted the assignment was absolute, and Fairchild retained control over the claim. Citing Sprung v. Jaffe, Spencer v. Standard Chem. & Metals Corp., Sheridan v. Mayor of New York, and others, the court affirmed that the assignee is the real party in interest regardless of how proceeds are used.
    The court found Farmingdale was not a necessary party because it lacked legal title to the claim and depended on the sharing agreement for any recovery. The court distinguished cases where further discovery was needed, noting extensive discovery had already occurred, providing a “record sufficiently complete to justify dismissal of these defenses at this time.”