Articles Posted in Litigation

Two years after commencing a personal injury accident, plaintiff settled. After counter executing the settlement documents, plaintiff’s counsel returned them to defendant’s counsel with a blank form W-9 for the payee’s information. The W-9 was never returned.

When the settlement payment was not paid in 21 days, under CPLR 5003-a, plaintiff’s counsel filed a judgment. Defendant moved to vacate the default, claiming that the IRS required the W-9 and the judgment was therefore improper. After the W-9 and settlement proceeds were exchanged, plaintiff still opposed vacatur. The lower court vacated.

Disagreeing with the First Department based on the underlying claims in this action, the Second Department held that because the W-9 was neither a release nor a stipulation of discontinuance discussed in CPLR 5003-a as the trigger for the deadline for a settling party to pay, the judgment was proper. Once plaintiff satisfied CPLR 5003-a, the clock began to tick, even without the W-9. “Granting settling defendants the unilateral right to withhold payment in these circumstances would significantly undercut the statutory goal of CPLR 5003-a to ensure the prompt payment of settlement proceeds upon tender of the statutorily prescribed documents. Accordingly, the defendants’ failure to timely pay the sum due under the settlement agreement entitled the plaintiff to enter judgment including interest, costs, and disbursements pursuant to CPLR 5003-a (e).”

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.

In a recent case, the United States Court of Appeals for the Fourth Circuit dismissed an appeal based on the parties’ waiver of any right to an appeal.

A doctor that at one point was associated with Beckley Oncology Associates (“BOA”) filed an arbitration against BOA claiming that he was owed money. The arbitration was to proceed in accordance with the parties’ agreement, which included the provision that the arbitrator’s decision would be final and enforceable in court “without any right of judicial review or appeal.”

The doctor was awarded $167,030. BOA filed a lawsuit seeking to vacate that award. The lower court refused, dismissing the complaint and confirming the award, finding that the Federal Arbitration Act precluded a party’s ability to waive judicial review of an arbitration award.

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.’”

Defendant owned a property that was long alleged to house individuals selling counterfeit goods. Watchmaker Omega bought two counterfeit watches from a retailer at the same location and commenced a lawsuit against the property owner for contributory trademark infringement. Surviving a motion to dismiss by the property owner, the case went to trial. The judge instructed the jury that the property owner’s contributory infringement could be found if the jury found that the property owner allowed those selling the counterfeit goods to continue doing so once it knew what was being sold. Knowing, included “willful blindness,”meaning ignoring the obvious. The jury awarded Omega $1.1 million.

On appeal, the property owner argued that Omega never proved that it leased space to a specific infringer, which it claimed was required. The Second Circuit disagreed. It held that willful blindness, ignoring what it knew or should have known, suffices for “contribution,” because when it had reason to suspect what was being sold looking away would not shield the contributor from liability even if the specific infringer was not specifically identified. While the owner had no obligation to look for the wrongful conduct, but once it was made aware of it, it could not ignore that conduct.

Omega SA, Swatch, SA v. 375 Canal, LLC

Nastasi & Associates, Inc., was a subcontractor for Turner Construction Corp. Payment to Nastasi was conditioned on Turner being paid by the owner. Turner had the right to terminate the parties’ agreement by written notice, with any payments due to Nastasi, again, conditioned on Turner being paid. The agreement also included a one year period in which claims against Turner or the owner could be brought.

In April 2015, Nastasi asked for certain payment from Turner. Turner responded by informing Nastasi that it was working on processing paperwork so payment could be obtained from the owner and paid. In May 2015, Turner terminated its agreement with Nastasi. Between May 2015 and April 2017, Turner continued promising payment to Nastasi. Instead, in April 2017, Turner sued Nastasi for more than $4 million. Nastasi responded with counterclaims, to which Turner moved to dismiss based on the expiration of the one-year limitation period. Nastasi responded by arguing that it had been negotiating with Turner for years. Supreme Court granted Turner’s motion.

The First Department, however, disagreed. While the court agreed that parties may contract to shorter limitation periods, they could not where “a contract imposes a condition precedent that cannot reasonably be met within the time frame of the limitations period under the available facts,” with the “‘circumstances, not the time, … the determining factor.’”

Although not a new issue, we discuss it because it comes up from time to time. What obligation does a lender have to verify documents used by a corporate entity to establish that the individual borrowing the money has the corporate authority to do so? In short, very little (assuming there are no red-flags). A mortgagee has no responsibility— no “duty of care”—to verify that a mortgagor’s alleged principal, with authority to borrow, is so authorized. The lender is permitted to accept whatever documents it requires to allow an individual to borrow for and bind an entity without looking beyond those documents.

In one case, defendant LLC borrowed money and purchased a property. Later, a second loan was taken by that same party. After the borrower’s default, the “real” LLC sued claiming that the individual who had represented himself to be the LLC’s sole member, with authority to borrow for the entity, was not the sole member and had no authority to do so, so that the loans were therefore void.

The court disagreed. Once the individual provided documents to support his authority to borrow on behalf of the entity, the lender had no obligation to “ascertain the validity of the documentation presented by the individual who claims to have authority to act on behalf of a borrower corporation or entity.” As such, the loans and mortgages were valid.

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.

A buyer signed a contract and paid a downpayment as part of the purchase of real property. The buyer did not show at a time of the essence closing, leading the seller to declare its default and intention to retain the downpayment as damages.

Some eight months later, the buyer sued seeking specific performance. The seller counterclaimed for declaratory relief that it was entitled to retain the downpayment. The trial court denied the seller’s summary judgment motion seeking dismissal of the complaint and relief on its counterclaim.

The Second Department reversed finding that the buyer’s counsel’s email to seller’s counsel offering to extend the closing date for additional consideration, which was ignored by the seller’s counsel, did not void the time of the essence declaration or avoid buyer’s default. The counterclaim was remanded for judgment.

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.

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