New York Business Litigation Lawyer Blog

In another example of sophisticated parties ignoring the obvious, the parties to an option contract fought over the implication of standard contract language which provided that the option contract was supported "by good and valid consideration" and thus enforceable.

In a somewhat complex case, the parties entered into an agreement whereby CamEquity would lend money to SVCare so that SVCare could purchase a business. In connection with that, a CamEquity related entity was granted an option to purchase 99.999% of SVCare for $100 million. That option agreement stated that the parties had exchanged "good and valuable consideration" to create a binding and enforceable contract. The loan agreement and option contract were executed the same day.

The day came when CamEquity sought to exercise its option. SVCare argued that CamEquity provided no consideration in exchange for the option right and the right was therefore void. Aside from arguing that the loan was itself consideration, CamEquity pointed to the contract language stating that it provided valid consideration for the option right. SVCare claimed the loan was never made and that the boilerplate recitation of consideration was not true.

The Court of Appeal found for CamEquity. In doing so, the court decided that the SVCare's attempt to introduce evidence to contradict the boilerplate consideration language--whether or not the $100 million loan was actually made--could not be considered by the court. Allowing that practice, in the face of a clear agreement negotiated and drafted by sophisticated parties, would undermine the stability and predictability of written agreements and create a setting where a party to a contract would question the ability to rely on the plain language of that contract. Because the option agreement "unambiguously provided that the mutually beneficial covenants constituted the consideration[, ] the importation of another obligation, such as a separate loan agreement," could not be allowed. The court addressed the highly sophisticated parties to the transactions noting that "had these sophisticated business entities, represented by counsel, intended to make the $100 million loan payment a condition of the enforceability of the option, they easily could have included a provision to that effect." Because the loan agreement was not even mentioned in the option agreement, the court refused to allow that issue to play any role in the option agreement's terms and enforceability.

Remarkably, the Court of Appeals considered a second case among these parties, also involving an option contract, and again enforced the boilerplate consideration language. And again the court stated that if the parties intended for a provision to apply, the documents would have clearly expressed that intention--"this is not the sort of term these sophisticated, counseled parties would have reasonably left out of the option agreement."

I realize that we do not know what took place when these agreements were signed. I also understand that hindsight is always 20-20. But understanding the implication of every contract provision--even among friendly parties--cannot be overstated. Failing to follow this rule can lead to a very expensive lesson.

A group of investors sued the Security and Exchanges Commission for failing to supervise Madoff and investigate complaints it received before the Madoff scandal unfolded. Despite finding that the SEC had dropped the ball, both before and during the investigation, the Second Circuit found the SEC, as an arm of the United States Government, immune from liability.

In discussing the laws covering this immunity, the court, citing others, stated that the immunity is not "about fairness, it 'is about power. . . [where] the sovereign 'reserves to itself the right to act without liability for misjudgment and carelessness in the formulation of policy.'" Therefore, despite the court's "sympathy for Plaintiffs' predicament (and our antipathy for the SEC's conduct)" the immunity provided by Congress defeats plaintiffs' claims.

Isn't it nice to be king?

In almost any setting, when a borrower fails to pay a mortgage, the lender will issue a letter accelerating the entire amount owed notwithstanding that the terms of the mortgage only require monthly payments. That letter informs the borrower of the default and demands full payment of the amount outstanding. That letter is typically a prerequisite for the lender's filing of a foreclosure action but on the flip side, the lender's six year statute of limitations period begins from the date of that letter.

On August 20, 1992, Dime Savings Bank issued an acceleration letter to the borrowers. In September 1992, Dime commenced a foreclosure action. That action was dismissed but not on the merits of the case. The lender commenced a second lawsuit in April 1999. The court granted the borrowers' motion to dismiss as more than six years had passed from the date of the 1992 acceleration letter. The lender appealed claiming that the dismissal of the first case suspended the running of the statute limitations period.

The Second Department affirmed that dismissal finding that to stop the statute of limitations the lender must affirmatively revoke the acceleration. Because the earlier dismissal was not an affirmative act of revocation, the lender could not now seek payment of that loan.

The court noted that the lender had an opportunity to seek court permission to continue the first action shortly after it was dismissed but never did so. One wonders whether that played any role in the court's decision, as including this fact should not be relevant to the court's decision.

After defendant defaulted on a $1.3 million mortgage and note, the bank foreclosed. Despite the appointment of a receiver, during the pendency of the foreclosure action, the bank incurred a host of expenses. One of those was $40,000 for marketing commissions to a real estate marketing company. After the auction, a surplus in excess of $250,000 remained. In reviewing the expenses submitted by the bank, the court initially rejected them all finding that the receiver should have addressed them, but later allowed the bank to recover taxes and insurance (without interest).

On appeal, the court agreed that the loan documents allowed the bank to pay the assorted expenses in maintaining the property throughout the foreclosure and to recover those costs when the property was sold. It disagreed, however, that the marketing costs were recoverable, notwithstanding that such marketing may have resulted in higher auction bids. As far as costs for appraisals and environmental assessments, the appellate court agreed with the trial judge in finding that once a receiver is in place, the receiver acts to maintain the property, including paying its expenses. Once the bank successfully installed the receiver, it no longer had any authority to pay for any expenses. Furthermore held the court, the receiver would in any event not have been permitted to pay these expenses as they were incurred not to maintain the property, but like the marketing costs, incurred to maximize the bids. This held true even if the bids were maximized, something that would benefit both the bank and the borrower.

It is important to remember that when banks foreclose, especially when the property is "above water" with equity, the property owner is entitled to recover that excess. Often, however, and unlike this case, if the owner does not object, the bank's demands are agreed to by the court. Vigilance is crucial at this point especially if there has been no meaningful opposition to the foreclosure action. Please contact us if this issue is relevant and you have any questions.

Defendant failed to complete eight bridesmaids dresses until two hours after the ceremony was scheduled to begin, when they were delivered by the groom. As a result of this delay, plaintiff incurred a host of delays for which she incurred expenses, including a delay in the bride's appearance from the rented limousine, so as not to break the tradition of not being seen by the groom or guests before the ceremony. For these expenses, the court awarded plaintiff damages. However, for the wedding parties' inability to have pictures taken in the scenes scheduled and for the bridesmaids wearing different clothing in different pictures, no award would be made as no amount could be reasonably fixed as damages for these items. The court also rejected damages for emotional distress, finding that plaintiff "failed to meet the high threshold required in proving" this claim because defendant's failure to deliver the dresses was "not so outrageous in character and extreme in degree that it exceeds all bounds tolerated by a decent society which is of a nature calculated to cause, and does cause, serious mental distress."

After writing about the "haunted house" case recently, I came across another case that addressed the same concepts, and also in an unusual setting. The haunted house court had decided that because the buyer could not have anticipated that the house under contract was haunted, and was therefore not expected to inspect the property for ghosts, and because the sellers had knowledge of the haunting, the buyer could cancel the purchase contract.

This case, Jablonski v Rapalje, involves sellers that may have hid from a buyer the fact that the house in question was bat infested. While some of the facts should have lead the buyer to pay more attention and realize that something was amiss (discussed below), the particulars of what the buyer should have questioned and investigated divided the court. The majority decided that the sellers may have concealed the bats from the buyer, so that the buyer was allowed to cancel the sales contract.

A fair reading of these cases highlight courts trying to find a way to grant recision. To do so, the courts had to first find the sellers' concealment. This case focused on whether the sellers actively concealed the bat infestation, while the haunted house court focused on whether the buyer had an obligation to search for ghosts once the seller publicized the haunting but did not inform the buyer. Each court then turned to a detailed explanation of why the buyers were not obligated to inspect for that concealed issue, so that the contracts could be rescinded.

The outcome in this case triggered a strong dissent, addressing the alleged concealment by the seller, and whether or not the buyer should have, with reasonable effort and investigation, discovered the bat problem that the majority found to have been concealed by the seller.

Although in the minority, the dissent's objections seem to make sense. The dissent argued that the buyer knew or should have known that something was amiss yet failed to investigate. The buyer had ample opportunity to inspect, was aware that the exterior of the property was stained, that the attic smelled strongly of urine and moth balls, and saw electric extension cords (presumably for lighting) running to the attic (which may have been used to force the bats to leave temporarily). The buyer even knew of the removal of "bird feces" (later determined to have been bat guano), all of which should have been sufficient to raise suspicions and cause the buyer to investigate further. Instead, the buyer took the word of the seller that nothing was amiss and left it at that. Given these facts, held the dissent, the buyer had no claim against the seller.

Ghosts and bats aside, don't be fooled. Claims that a seller hid some defect from a prospective buyer are often rejected by the courts. The concept of "buyer beware" is alive and well in New York State. Before one buys a property of any kind, a careful physical inspection and review of title cannot be ignored. Any defect or objection will not be sustained if that defect or objection was in any way known to the public or with reasonable diligence able to have been discovered by a prospective buyer.

Because the facts often dictate the outcome, investigating who knew what and when is critical. The Firm has been involved in concealment cases in New York City and can discuss any issues relevant to your situation.

A musician's laptop, loaded with valuable proprietary information, was stolen while he was on tour in Germany. A reward was offered, initially set at $20,000, but later raised to $1 million. The plaintiff found the laptop and returned it, but the reward was not paid because the hard drive had allegedly been returned with corrupted information. The musician had the hard drive examined and wiped when the data could not be recovered.

The musician argued that he intended the reward to be for the return of his data and information, not just the physical laptop. He also argued that the reward was akin to an advertisement, but not a firm offer to pay anything.

The court in Augstein v. Leslie addressed the second argument first, and rejected it. A reward, wrote the court, was intended to "induce performance" by the "'offeree [for] a specific action.'" The news reports of the theft and subsequent reward "would lead a reasonable person to believe that [the musician] was making an offer." Notwithstanding the size and significance of the amount, the reward was a promise to pay if a service was provided. Because that was the case here, the plaintiff could collect the reward.

The court then determined that the data had been on the hard drive when it was returned, and no matter its value or condition at that time, especially because it was the musician that had the hard drive wiped, the plaintiff had complied with his obligations to reap the reward.

The last time we wrote on this topic, a group of plaintiffs' had their $900 million claim thrown out by a judge, essentially because the plaintiffs had stuck their head in the sand and did not investigate red flags evident in a transaction. In Pappas v. Tzolis, it was a paltry claim of just a few million that was tossed, but the underlying facts and legal principals were the same. Interestingly, it was again the selling party, the one which many believe to have less risk than the buyer, that came up holding the very short end of the stick.

The facts here are as follows: Pappas and Tzolis (and one other) formed a LLC to lease property. Tzolis personally provided the lease deposit of almost $1.2 million and was permitted to sublet the property. The parties also agreed that they had other business and could compete with the LLC or other members without notice. Trouble surfaced when Tzolis subleased the property to a company he controlled for $20,000 above the LLC's monthly payment. Unhappy with that, Pappas claimed that Tzolis prevented the LLC from leasing it directly for a higher rent, and that Tzolis was generally frustrating the lease interest of the LLC. Shortly thereafter, Tzolis bought out the other members, including Pappas. At the closing, Pappas signed a document attesting to the facts that prior to his sale of his membership interest, he had done his own due diligence using his own lawyers, and was not relying on any representation made by Tzolis or upon their relationship as co-members of the LLC. After the transaction closed, Tzolis assigned the lease interest from his entity to a third-party for $17.5 million.

Pappas sued Tzolis claiming that Tzolis had lined up this sublease before the membership interest were transferred, in violation of his fiduciary obligations to him as a member of the LLC. Had he known, argued Pappas, he would not have agreed to sell for the price that he did. The lower court threw out the case, but parts of it, including the fiduciary claim, were reinstated by the Appellate Division. The Court of Appeals, reversed the Appellate Division and threw out the case.

The court, citing to the Centro Empresarial case discussed here earlier, reiterated the rule for raising a claim of fiduciary violations in this setting. Where sophisticated parties enter into negotiations already not trusting each other or embroiled in a dispute, so that each has good reason to know that they are each acting in their own best interest, and even signing a release or waiver, they cannot come back to complain about those transactions based on the purported trust the aggrieved party had in the other.

Here, the court held that Pappas's reliance on Tzolis was unreasonable and the documents he signed controlled. His claim of fraud, that Tzolis told them he had no lessee lined up, was not only waived when Pappas signed the release and waiver, but incredible given their relationship. Pappas's remaining claims were undermined, wrote the court, because Tzolis had a right to control the leasehold and should not have been trusted by Pappas given the history and relationship among the parties.

The Silber Law Firm, LLC has successfully litigated these types of cases, and the focus on the language of the documents, in the specific context and setting in which they are executed, cannot be overstated. There are ways to minimize the risk to the parties engaged in this kind of transaction, but a hefty dose of skepticism combined with realistic due diligence is required. Sometimes the services of a forensic accountant is also something to consider, as the entity's books often tell a story that is inconsistent with what one party is being told. If you are facing a situation described in these cases, feel free to give us a call.

I found this case while researching a potential litigation. While it is not a new decision, it presents a rather unusual set of facts.

A property buyer is charged with acting diligently in inspecting a property that is being considered for purchase. Because a property is purchased "as is," a seller has no obligation to disclose anything, meaninig, that a buyer cannot seek redress for any defects to the property or its chain of title discovered after the closing has taken place. As a result, prior to buying a house--or any property--it is physically inspected and the chain of title carefully examined. There are two exceptions to this rule: (i) Where a seller creates a defect that cannot be found by a buyer in an ordinary inspection, referred to sometimes as a seller's "active concealment" and (ii) where the parties are in some confidential relationship that requires a seller to disclose any information that could affect the property (these are infrequently found).

The buyer in this case sought to rescind the contract because the house he had agreed to buy was reportedly haunted. This fact was reported by some news outlets after the seller announced that it was haunted and allowed for it to be a tourist spot. The buyer, however, was not from the area and had no knowledge of the property's reputation. When the seller refused to cancel the deal, the buyer sued to rescind the sales contract. The trial court denied the buyer any relief, but the Appellate Division, First Department, reversed. The Appellate Division's description of the facts and principles are colorful and I quote some of it here.

After stating that the broker had no obligation to disclose the "phantasmal reputation" of the property, and that the buyer did not have "a ghost of a chance" to assert fraud by the seller (as opposed to rescinding the contract), the court decided, from an equitable perspective, that investigating ghost sightings was practically impossible. "Applying the strict rule of caveat emptor [buyer beware] to a contract involving a house possessed by poltergeists conjures up visions of a psychic or medium routinely accompanying the structural engineer and Terminix man on an inspection of every home subject to a contract of sale. It portends that the prudent attorney will establish an escrow account lest the subject of the transaction come back to haunt him and his client--or pray that his malpractice insurance coverage extends to supernatural disasters. In the interest of avoiding such untenable consequences, the notion that a haunting is a condition which can and should be ascertained upon reasonable inspection of the premises is a hobgoblin which should be exorcised from the body of legal precedent and laid quietly to rest."

The court differentiated between recovering damages and rescinding the contract. While there was no strong legal basis to recover damages, presumably because the court would not find true fault with the seller's actions, fairness would not compel the buyer to close on this contract, where the buyer did not, and could not, have discovered this issue. Recognizing that it was pushing the boundaries of settled law, the court stated that where "fairness and common sense dictate that an exception should be created, the evolution of law should not be stifled by the rigid application of a legal maxim." Finding that the buyer undertook all the normal and reasonable inspections of the property, and because no amount of research would have revealed to the buyer "the presence of poltergeists at the premises or unearth the property's ghoulish reputation," the contract would be rescinded.

The court dismissed the seller's claim that the contract provided that the property was being sold "as is" because this information was unique to this seller and had not been disclosed to the buyer. With its tongue in cheek, the court pointed out that if the terms of the contract were scrutinized, it was the seller that was in breach, as she could not deliver the house "vacant," as called for under the contract.

It is important to note that the court held this way in large part because it was the seller that revealed the condition of the house to the press, but not to the buyer. By doing this, the seller was engaged, to some degree, in the "active concealment" of a defect.

This conduct was not enough for the dissent. The dissenting opinion would have enforced the contract because the seller took no active steps to hide a defect or deceive the buyer. As far as the haunted nature of this house, the dissent argued that the "existence of a poltergeist is no more binding upon the defendants than it is upon the court."

As a practical matter, issues of disclosures have been altered in many respects by New York State's mandatory disclosure laws which compel disclosure and some waiver of defects. That said, there is plenty of active litigation over disclosure and the lack thereof when properties are bought and sold.

Plaintiff sought to recover from a corporation and its shareholders a total of $106,000 based on a $15,000 loan. Defendants denied liability and raised usury as an additional defense. Both sides moved for summary judgment, the plaintiff on the note and the defendants on their defense of usury. In opposition to the usury defense, the plaintiff claimed that the amount in excess of $15,000 was not interest but a combination of smaller loans that were consolidated and included in the repayment for ease of reference and to be repaid all at one time.

In addressing the usury defense, Kings County Commercial Division Judge Carolyn E. Demarest, agreed that if the interest charged was usurious, the lender could not collect. However, in this case, it was the borrower-defendant that drafted the loan documents, proposed the interest rate and payment options, and assured the lender-plaintiff that it was all legal and enforceable. Additionally, the defendants were plaintiff's investment brokers and were hired to research and make investments for him. In that setting found the court, to avoid a situation where "'a borrower could void the transaction, keep the principal, and achieve a total windfall, at the expense of an innocent person, through his [or her] subterfuge and inequitable deception'" a usury defense could not stand.

The court found a related basis not to allow the defendant to hide behind the usury defense. Where the parties entered into the loan based on the relationship of trust between them, and the plaintiff's relied on that relationship, the borrower will not be rewarded for his scheming and misleading conduct. Thus, where a relationship "results in a borrower inducing the lender to make a loan at a usurious rate" the court may not void the loan because it is usurious. Instead, the court will enforce the loan at a legal rate of interest.

Towbin v. Towbin reminds us that one cannot be compelled to give someone a gift. The facts here involve a son's attempt to compel his parents to complete the transaction of giving a trust he controlled a valuable apartment which his parents owned and in which they lived. The lawsuit sought to force his parents to complete the transaction they had started and thought had completed, evict them, and award him $12 million in damages.

The court dismissed the case, refusing to compel the completion of the gift, stating that because the transaction had not been properly completed, notwithstanding the intention of plaintiff's parents, the gift was never finalized and the son had no basis for his claims.

A recent decision by Senior Judge Jack B. Weinstein in United States of America v. DiCristina dismissed claims against the defendant because the gambling complained of did not violate the Illegal Gambling Business Act.

Read some important highlights here

For a discussion about permitted sweepstakes vs. illegal gambling, have a read at a prior post.

Even without a written contract, equity and fairness can sometimes provide for an enforceable oral agreement between two parties. One such basis is called "unjust enrichment." This approach allows for a party's recovery based on fairness, where one party confers a benefit on another without a written agreement, compensation may be permitted to avoid the recipient from being unjustly enriched.. One of the requirements for this to work is that the parties must have some relationship between them. The extent of that relationship is the subject of a case before New York State's highest court, the Court of Appeals, which recently decided that even where one party clearly benefits from another, and is aware that it received those benefits from the other, the lack of a direct relationship between the two defeats the provider's recovery from the recipient.

In Georgia Malone & Co., Inc. v. Rieder, Malone & Co. provided brokerage and property information to parties considering the purchase of real estate in exchange for a set fee plus a percentage of the sales proceeds. In this case, CenterRock Realty hired Malone to investigate a particular property. CenterRock agreed to keep the information provided by Malone confidential. CenterRock opted not to buy the property, but sold Malone's property and research information to Rosewood Realty Group without informing Malone. Rosewood eventually found a buyer for the property, using and benefitting from Malone's work, and earned a fee. Malone did not receive its percentage fee from the sale.

Malone sued Rosewood and CenterRock, alleging that they were both unjustly enriched by Malone. The trial court dismissed the unjust enrichment claim, but on appeal to the Appellate Division, the State's intermediary appellate court, it was reinstated against CenterRock. The Appellate Division, in a split decision, found that the relationship between Malone and Rosewood was "too attenuated" to provide the necessary connection between the two even though Rosewood benefitted from Malone's information.

Malone appealed higher, to the Court of Appeals, arguing that because Rosewood knew it was using Malone's work-product, and because "Rosewood unfairly profited at Malone's expense by collecting a commission on the sale of the properties," Rosewood was liable to Malone. The Court of Appeals disagreed and affirmed the Appellate Court's decision, finding that although an unjust enrichment claim was grounded in "'an obligation imposed by equity to prevent injustice[] in the absence of an actual agreement between the parties'" the relationship between the parties must support "a relationship or connection between [them] that is not 'too attenuated.'" Rosewood's relationship with Malone here was "too attenuated" to allow recovery "because they simply had no dealings with each other." That Rosewood knew the materials it had purchased from CenterRock were prepared by Malone did not, standing alone, create a relationship between them. Finding differently, held the court, would add an unreasonable level of complexity to any commercial transaction, requiring each party to research what parties had earlier agreed to with others, which could create liability for parties that are only tangentially involved in the transaction.

Because this decision seemed at odds with prior decisions of the Court of Appeals involving similar facts, the court felt it necessary to discuss those prior cases which found a sufficient relationship based only on the parties knowledge of each other. Ultimately, the court differentiated this case from the earlier cases because (i) Malone did not claim that it had a relationship with Rosewood, and it did not, and (ii) because Rosewood paid CenterRock for Malone's materials so that Rosewood paid something for what it received so that it was not truly unjustly enriched.

In a strongly worded dissent, two justices argued that Rosewood's knowledge of Malone's work was sufficient to establish the requisite relationship to support liability, especially under a theory grounded on fairness. Adopting the majority's approach would force parties pursuing an unjust enrichment claim to show a much closer relationship, which should not be necessary under this theory of recovery. The dissent felt that "[t]he majority ruling would appear to simply condone willful ignorance."

While Malone's arguments in this case did not persuade the majority of the Court of Appeals, unjust enrichment and similar claims are often asserted where there is no written agreement between the parties. Often, a party is unaware that recovery can be pursued without a written agreement in place, based on an oral representation or unjust enrichment-type claims. In light of this decision, and especially in today's virtual marketplace, a thorough examination of the facts and innovative application of the law, can be necessary to achieve success.

Plaintiff sells software to the financial industry. It sued a former employee and his new employer for stealing plaintiff's secret computer source code. The issue before the court centered on whether or not plaintiff had to specifically identify the secret information that it claimed its former employee had stolen. Defendants maintained that identification was necessary so that the exact information allegedly stolen could be examined to determine whether or not it was a true secret or just general knowledge that the employee had learned. Plaintiff argued that the information was secret and defendant's employment allowed him to learn those secrets while at plainitff and use that information at his new employer.

The court held that defendants did not need to guess the secrets plaintiff claimed were stolen, so that plaintiff had to identify them. This allowed defendants to examine the information and argue that some or all were not true secrets. Additionally, without this disclosure, it would be impossible to discern which of plaintiff's secrets the new employer was using and concerning which plaintiff could legitimately object.

Despite the uniform reaction of courts, trademark holders insist on filing lawsuits over gripe-sites. As discussed here in the past, websites that are created for the sole reason of complaining about a service or product, and which incorporate a trademark in doing so, are not guilty of trademark infringement. In Devere Group GMBH v. Opinion Corp. d/b/a Pissedconsumer.com, pissedconsumer.com was sued by a Swiss consulting company because the site hosted a number of sub-domains that hosted public complaints about the company. The company sought damages for trademark infringement, among other claims.

Although the court determined that the consulting company had established its trademark, it had failed to establish any infringement by the gripe-site. The court agreed with the gripe-site that no reasonable consumer, "'even the dimmest Internet user'" would believe that the comments posted to the gripe-site were sponsored by the consulting company. This was especially true here, where the complaints could never be seen as an endorsement of the services protected by the trademark or endorsed by the company, and the gripe-site did not compete with the company's website for viewers.

For the most part, the court's outcome should be the same for a complaint website that was less obvious in identifying its purpose. The line is crossed, however, where the complaint website has a commercial purpose or seeks to benefit from the protected trademark. In that case, judges look at the relationship with a more critical eye, to understand the purpose of the complaint website, and are more reluctant to dismiss an infringement complaint.