Articles Posted in Litigation

Plaintiff borrowed more than a million dollars from defendant, in addition to using his funds, to form an LLC with which to buy a property. The LLC was in defendant’s name, however, pending plaintiff’s ability to obtain credit to hold the property on his own. When the time came for defendant to transfer the LLC and property to plaintiff, he refused, denying that there was any agreement between them. Defendant tried to explain away the loan proceeds and other indicia of plaintiff’s ownership and control. The lower court found that defendant’s notes that the funds he provided to plaintiff were loans led to the imposition of a constructive trust.

The Second Department affirmed. After finding that the arrangement was not defeated by the statute of frauds, because the parties’ conduct would be “extraordinary” absent their unwritten agreement, it refused to find that plaintiff’s conduct in seeking to avoid his creditors—which led to the arrangement in the first place—could be seen as unclean hands to defeat his claims. Because defendant assisted plaintiff and was not harmed by whatever conduct was alleged to be plaintiff’s unclean hands, the relief to defendant would be denied because: “‘relief is denied under the ‘clean hands’ doctrine, ‘not as a protection to defendant, but as a disability to the plaintiff’ and as a matter of public policy in order to protect the integrity of the court.’” In other words, generally speaking, the clean hands doctrine is a defect in a plaintiff’s claim; it is not a defense for the defendant.

Last, the court found the existence of a fiduciary relationship between the parties. While ordinary business relationships, including that of lender-borrower, do not usually rise to a fiduciary relationship, the details of the general relationship in this case satisfied the court that the parties had a “confidential or fiduciary” relationship.

An LLC member promised to accept “any terms” for the sale of the parties’ entity if another member would pay certain of his personal debts. That member would later renege and agree to a different deal from a second buyer. When that member also refused the terms of the LLC sale to the second party, the other members removed the refusing member and moved toward consummating the sale. When litigation was commenced among the members, that second buyer backed out. The LLC and the remaining members sued the excluded member for, among other things, breach of contract.

Addressing the breach claim in connection with the first potential buyer, while agreeing with the principle that to enforce a contract the terms of the agreement must have been sufficiently clear and capable of being agreed to, the Second Department held that an enforceable agreement can be found even if not all of the terms are “‘absolutely certain [ ]’” so long that the parties intended to agree to an agreement that left a term undefined. The court stated “[c]ontrary to the defendant’s assertion, an agreement to accept a reasonable offer is not necessarily unenforceable; instead, ‘a party may agree to be bound to a contract even where a material term is left open’ provided there is ‘sufficient evidence that both parties intended that arrangement.’”

Additionally, the term “reasonable offer” can be sufficiently definite and not unreasonably vague. “Here, since the agreement involved offers by third parties, leaving open what constituted a ‘reasonable offer’ was not inappropriate. There were objective criteria, such as whether an offer comported with the company’s value as established by an analysis of its financial records, which could be used to determine whether a given offer was ‘reasonable.’”

While short on facts, a recent decision out of the Southern District rejected the defendants’ claim that their inability to pay on a consent judgment was due to COVID-19. The defendants did not deny liability, only that their payment should be excused because the virus and the circumstances rendered them unable to pay.

Magistrate Judge Stewart D. Aaron rejected that argument. Asserting the impossibility defense, held the Judge, is only available when performance is rendered “‘objectively impossible’” by an unforeseen event that could not be anticipated. The “‘means of performance’” must have been destroyed; financial or economic difficulties would not suffice even if those hardships resulted in an objective inability to pay.

With this, while the defendants’ “financial difficulties arising out of COVID-19 and the PAUSE Executive Order” may have adversely affected their ability to pay, their obligation to do so cannot be excused.

Owner of a property entered into a contract for its sale. At the time of the contract, Owner, a corporation, was dissolved by proclamation. The contract had a one-year closing date, time being of the essence, but if there was no closing, Buyer’s downpayment would be returned upon its termination of the contract. If the buyer defaulted, however, it would forfeit its downpayment.

Upon receiving the title report, Buyer learned that Seller had been dissolved, which was marked as an exception on that report. To remedy the issue, language was inserted into the deed “indicating that the transfer was being done to wind up [Seller’s] business.” Upon vacating the residential tenants and putting the commercial tenants on notice that they would have to do the same, Seller notified Buyer that it was ready to close.

Buyer’s new counsel then notified Seller’s that because Seller was not in good standing, and without authority as an entity to enter into the contract, Seller was in default. Buyer demanded the return of its downpayment. Seller’s attorney responded by demanding to close and that if Buyer did not, it would be held in default.