Court limits waiver of liability in agreement governed by UCC Article 7.

In a rare UCC Article 7 issue, the First Appellate Division reversed the defendant’s motion to dismiss in XL Specialty Ins. Co. v Christie’s Fine Art Stor. Servs., Inc., 2016 NY Slip Op 01901 [U][1st Dept., 2016].

The plaintiff is the insurance company for Chowaiki Art Gallery and the defendant is Christie’s Fine Art Storage Services, Inc. which stored Chowaiki’s art pieces.  The parties entered into a one year agreement to provide secured storage for Chowaiki’s art works at Christie’s storage facility in Brooklyn.

Pursuant to the agreement, the Chowaiki had the option to either: “(a) have defendant “accept liability for physical loss of, or damage to, the Goods,” or to (b) “sign a loss/damage waiver,” under which Chowaiki accepted that defendant “shall not be liable for any physical loss of, or damage to, the Goods.  Furthermore, if Chowaiki elected to sign the waiver, it must provide an adequate insurance policy for all goods deposited.  The agreement also had a provision whereby Christie’s additional liability, if ever applicable, would be limited to the lower of either: (1) $100,000 or (2) the market value of the goods.

Chowaiki elected to sign the waiver.  The waiver also required Chowaiki to inform the plaintiff to “arrange for them to waive any rights of subrogation” against Christie’s.

In 2012, Hurricane Sandy struck New York.  Prior to the hurricane approaching, Christie’s informed Chowaiki that all property located on the first floor would be relocated to higher floors to prevent damage to the goods.  However, Christie’s failed to remove the goods and left them on the first floor resulting in extensive damage to Chowaiki’s goods.

The plaintiff reimbursed Chowaiki for the damages and commenced action against Christie’s for gross negligence, breach of bailment, negligence, breach of contract, negligent misrepresentation and fraudulent misrepresentation.  Christie’s responded by moving to dismiss pursuant to CPLR 3016(b), 3211(a)(1), (3), and (7).  Furthermore, in its response, Christie argued four points: (1) the waiver signed by Chowaiki also contained a provision whereby subrogation was waived and in addition liability was limited; (2) the liability was limited to $100,000; (3) there was no breach of bailment as the relationship between the parties was a lessor/lessee relationship and not a bailor/bailee relationship and (4) Hurricane Sandy was an act of god.

The Court affirmed the motion court’s position that the agreement was governed by UCC 7-204(a) and there was a bailor/bailee relationship created.  Thus, any waiver of liability was not enforceable as it was in contravention to the governing statute.  Under UCC 7-204,   a “warehouse is liable for damages for loss of or injury to the goods caused by its failure to exercise care with regard to the goods that a reasonably careful person would exercise under similar circumstances.”  There was a question of fact as to whether Christie’s exercised reasonable duty of care in its failure to move Chowaiki’s goods to another floor to prevent damage.

Furthermore, the Court disagreed with the motion court’s decision to to dismiss the action on the grounds that the waiver of subrogation bars any cause of action.  The Court’s decision was based on Kimberly-Clark Corp. v Lake Erie Warehouse, Div. of Lake Erie Rolling Mill, 49 AD2d 492 [4th Dept 1975], which held that such exculpatory clauses were invalid.  While it is acceptable for a bailor to limit its liability, it cannot completely exempt itself from liability pursuant to UCC Article 7.

Ultimately, the Court’s decision reaffirms that waiver of liability cannot be enforced whereby a bailor/bailee relationship has been established.  Such waivers are in conflict with Article 7 and therefore unenforceable.






First Appellate Division reinstates complaint against major oil companies

In BMW Group v. Castle Oil Corp., 2016 NY Slip Op 01790, (First Dept., March 15, 2016), the First Department reinstated complaints stating that the plaintiffs sufficiently alleged facts to state a cause of action.

The core issue in the case was whether heating oil delivered to the plaintiffs was inferior and therefore did not meet the standard as set forth in the contracts signed between the parties.  The court held that the plaintiffs asserted sufficient cause of action under breach of contract as well as breach of UCC warranties.

There have been irregularities regarding the specific oil that was delivered to various customers.  There were both private and public investigations conducted as to the the fraud and misconduct perpetuated in the oil business.  After the government investigation concluded in 2013, with respect to defendant Castle Oil, the plaintiffs alleged “that during the four previous years they ordered from defendant Castle either No. 4 fuel oil or No. 6 fuel oil, and paid the retail price for that oil, but that the product Castle delivered was a mixture of those grades of fuel oil and waste oil or other types of inferior oil.”

With respect to co-defendant, Hess, the plaintiffs allege “that they contracted with Hess for the purchase of No. 4 and No. 6 fuel oil at various times between 2009 and 2013, but received a blend containing waste oil. Plaintiffs state that they were the victims of a scheme perpetrated by Hess’s independent transportation companies, which skimmed a percentage of the pure No. 4 and No. 6 fuel oil that they picked up from Hess, and replaced it with waste oil, which they then delivered to customers.”

Both respondents moved to dismiss the complaint under CPLR 3211(a)(7), and the lower court granted motions.  The underlying reasoning was that the plaintiffs did not allege any injury caused by the delivery of the inferior product.  Furthermore, the plaintiffs  could not claim “economic damages based on nonconforming goods is insufficient in the absence of any demonstrable ill effect or negative impact on the product’s performance or utility.”

The Court explored whether mere nonconformity with no great financial loss was sufficient to plead breach of contract and breach of warranty.   The Court simply held that if the delivered goods do not conform to the contracted goods, then a cause of action can be pleaded under the Uniform Commercial Code.

The Court further explored if the goods could even be considered non-conforming.  With respect to heating oil, the standard for delivery was based on the established industry standards and in addition, the regulatory standards.  Here, under Administrative Code of the City of New York, § 24-168.1, the Code refers to the American Society for Testing and Materials designation D 396-09a as the standard for New York City.  The standard details the specific formulae with respect to the different grades of oil.  Therefore, Plaintiffs did have a cause of action as to whether the oil delivered was consistent set forth in the ASTM standards.

With respect to the complaint against Castle Oil, the Court acknowledged that the poor quality of heating oil would cause a lower efficiency in heating systems and even may cause some environmental issues.  Castle, on the other hand, contends that the blend of fuel oil conforms with federal standards and further never promised to provide an express warranty for No. 4 and No.6 fuel oils.  The Court, however, rejected the position of Castle as the federal “does not necessarily or automatically justify its use for purposes of the parties’ contracts, and does not provide a basis for dismissal of these complaints.”

In the complaint against Hess, the plaintiffs asserted that the fuel provided was lower quality because it was mixed with “waste oil”, which as defined under Rules of the New York State Department of Environmental Conservation (6 NYCRR) § 225-2.2(b)(11) is essentially fuel oil not that has not been re-refined.    Thus any fuel blended oil would be of lower quality and therefore the value of the delivered oil.

Finally, the Court cited UCC 2-714(2) which defines the measure of damages for breach of warranty is the difference between the value of the goods delivered and the value of the goods warranted.  Here, there were sufficient inferences made to suggest that the quality and thus, the value of the oils delivered and therefore, a cause of action of breach of contract and warranty can be established.

First Appellate Division reaffirms lack of subject matter jurisdiction with respect to dissolution of foreign corporations.

In re Raharney Capital, LLC v. Capital Stack, LLC, 2016 NY Slip Op 01425 [U][1st Dept.,2016], the First Department examined the court’s subject matter jurisdiction as to the dissolution of a foreign entity operating and having a principal place of business in New York.  The Court held that subject matter jurisdiction does not exist to judicially dissolve a foreign business entity and that such power only lies with the courts of the state in which the entity was created.

The petitioner, in Raharney Capital is a Delaware formed LLC and the respondent, Capital Stack, is a dual New York and Nevada formed LLC.  The companies formed a Delaware based joint venture, Daily Funder, LLC that acted as “a news source and forum for the nontraditional business finance industry.”  The entity was to have a principal place of business in New York. Pursuant to the organization of the entity, each of the petitioner and the respondent had a 50% interest with equal membership and management rights in the company.

Raharney sought an order to dissolve Daily Funder pursuant to Delaware Limited Liability Act 18-802. The parties were not able to resolve many internal issues and since there was no standard operating agreement, this resulted in a state of ambiguity regarding the roles and duties of the parties. Rahrney then sought a judgment to dissolve the joint venture whereas Capital Stack cross-moved to dismiss the petition for lack of subject matter jurisdiction. The lower court granted Captial Stack’s motion for dismissal on jurisdiction grounds.

The Court analyzed the difference between a foreign and domestic corporation starting with the seminal Court of Appeals decision in Vanderpoel v. Gorman, 140 N.Y. 563 (1894), whereby “dissolution of a corporation can only occur in the state which created it.”  Furthermore, this precedent has been uniformly applied among other Appellate Divisions and thus has re-affirmed that New York courts do not have subject matter jurisdiction with respect to dissolving foreign corporations.  In particular, the Court noted that dissolving another state’s entity would violate the Full Faith and Credit Clause, since it “requires each state to respect the sovereign acts of other states”.

The Court considered and rejected various arguments presented by Raharney. First, Raharney relied on the holding in Matter of Hospital Diagnostic Equip. Corp., 205 A.D.2d 459 (1st Dept., 1994), which in turn relied in the holding in Broida v. Bancroft, 103 A.D.2d 88 (2nd Dept., 1984). In Broida, the Second Department held that jurisdiction can be exercised over a foreign corporation’s affairs, particularly where the corporation is doing business in New York. The exception to this if the forum is in appropriate or inconvenient. However, the Court distinguished Broida and Hospital Diagnostic, on the grounds that in each action, the issue was a dispute was over an entity’s internal affairs whereas here, the cause of action is related to the dissolution of the company.

Finally, the Court also rejected the argument that Delaware has minimal interest in dissolving the entity. The Court emphasized that since Delaware would have a strong interest in dissolving entities formed under its own state laws.

The takeaway from this case is that firstly, New York courts lack subject matter jurisdiction to dissolve entities formed in other states, even where said entities have their principal place of business in New York. Secondly, the case reemphasizes that courts still retain subject matter jurisdiction where the cause of action relies on any internal dispute of the entities.