NEW YORK: An Introduction to Litigation: General Commercial

Even though the COVID-19 pandemic has abated and New York courts have resumed at least some regular operations, certain of the pandemic’s effects on legal practice – and on the business landscape, more generally – remain ongoing, and in some instances may be permanent. Below we highlight recent developments in New York commercial litigation, several of which relate to the continuing effects of, and the gradual return from, the pandemic.

Courtroom and Procedural Reforms 

As many commentators have observed, New York courts adapted with alacrity to the pandemic’s disruptions, demonstrating flexibility, patience, and a willingness to keep our justice system humming with extensive use of videoconferencing technology, among other accommodations. As the pandemic abates, some of these adaptations continue to shape the future of litigation practice. New York’s Commercial Division, for example, has elected to keep some of its COVID-related reforms in place. Under new Commercial Division Rule 36, judges may conduct virtual evidentiary hearings and bench trials on consent of the parties. And new Rule 37 permits judges to order virtual depositions.

The past year has also seen other modifications to New York court procedure unrelated to COVID. These include heightened obligations on defendants in New York civil actions to provide information on insurance coverage during the pendency of a litigation following 2021’s Comprehensive Insurance Disclosure Act. The heavy burden of complying with the Act led to amendments in late February intended to make compliance easier, and the nature and scope of the Act’s requirements will likely crystallize further over the next few years, through either litigation or additional amendments.

Commercial litigators also should take note of new rules and guidelines for Electronically Stored Information (ESI), which the court system adopted in April of this year. The amended ESI rule requires parties to confer regarding ediscovery prior to the initial conference and adopts a proportionality standard for ediscovery.

Finally, in early March, Chief Judge Janet DiFiore, Senate Judiciary Committee Chair Brad Hoylman, and Assembly Judiciary Committee Chair Charles D Lavine announced the reintroduction of a series of proposals to streamline New York’s trial court structure. The proposed restructuring would combine New York’s eleven trial courts into three. While the restructuring has long been a goal of court reformers in New York and would require a constitutional amendment, it enjoys significant support with key stakeholders across the State.

Insurance Litigation 

COVID-related litigation between insurers and businesses continued over the past year, with the balance of cases breaking in favor of the insurers. As the case law settles and the pandemic abates, the uptick in these cases is likely to wane.

Other forms of insurance litigation may be on the rise, however. The recent decline in M&A and other deal activity may lead to an increase in claims relating to representations and warranties insurance (RWI) policies and an attendant increase in litigation over RWI.

RMBS Litigation 

In March, the Court of Appeals issued a major decision on residential mortgage-backed securities (RMBS), US Bank NA v DLJ Mortgage Capital, Inc., holding that the operative Pooling and Servicing Agreement in a repurchase case (which was largely similar to the operative contracts in numerous repurchase suits) required the delivery of loan-specific breach notices prior to suit. The court also altered the way a loan’s repurchase price is calculated, permitting accrued interest on liquidated loans only up to the time of liquidation, not up to the repurchase date. These twin rulings had a major sweeping impact on ongoing RMBS cases and on the value of RMBS portfolios in litigation. The market-wide fallout continues as parties and trial and appellate courts in ongoing cases wrestle with the impact of the decision.

SPAC Litigation 

The surge of interest in special purpose acquisition companies (SPACs) over the past several years had commercial litigators on both sides of the “v” gearing up for a wave of related litigation. One plaintiff filed a series of high-profile cases against several SPACs based on the novel theory that SPACs are unregistered investment companies under the Investment Company Act of 1940 because, among other reasons, they invest their capital in government securities as they search for a business combination. In March 2022, the Securities and Exchange Commission (SEC) proposed new rules that would impose substantial additional disclosure requirements in connection with SPAC business combinations, and would create a new safe harbor with particular timing and transactional requirements, within which SPACs can take comfort that they will not be deemed unregistered investment companies. Since the SEC’s move, the market has seen a steep decline in SPAC activity.

Cryptocurrency 

The digital asset sector continues to expand despite a significant increase in regulatory scrutiny, with New York regulators leading the charge. The New York Attorney General’s Office has repeatedly taken action against cryptocurrency companies, and the New York Senate recently provided the New York Department of Financial Services with new authority to collect supervisory costs from licensed virtual currency businesses that it oversees. As federal and state agencies begin to coordinate their efforts and clarify the rules, New York litigators can anticipate private litigation growing out of new corporate investments in digital assets and an increase in cryptocurrency investments from institutional investors.

Forum Issues 

The fallout continues with respect to the Court of Appeals’ 2017 decision in Davis v Scottish Re Group, which held that a Cayman Islands law requiring shareholders to seek leave from a Cayman Islands court before bringing a derivative suit did not apply to an action brought in New York. The decision removed a significant barrier to bringing derivative claims involving Cayman corporations in New York courts, but, as commentators observed at the time Davis was decided, personal jurisdiction and forum non conveniens remained hurdles to these suits. Notwithstanding those issues, a number of firms have brought derivative suits on behalf of shareholders of foreign companies since Davis, in an attempt to use that decision to open the state’s courts to foreign litigation. In recent decisions, New York Commercial Division judges dismissed two such suits, largely on jurisdictional and forum non conveniens grounds, illustrating that New York courts will continue to use well-established tools to keep foreign disputes with minimal nexus to New York from clogging the New York system.

Similarly, the Second Circuit has continued to enforce New York’s separate-entity rule, which generally provides that a bank garnishee with a New York branch that is subject to personal jurisdiction in New York is treated as a separate entity from its foreign branches for judgment enforcement purposes. Relying in part on this rule, the Second Circuit held that Chinese branches of a Chinese bank that also had a New York branch were not subject to a contempt order.

Other Trends 

Looking ahead, commercial litigators should keep their eyes on potential litigation emerging from New York’s legalization of recreational marijuana and sports betting, as well as the forthcoming development of new downstate casinos.