Articles Posted in Litigation

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.

In refusing to dismiss a complaint alleging breach of an operating agreement which gave the defendants “‘sole and absolute discretion’” to “select the company’s investments,” Judge Jennifer Schecter of New York County’s Commercial Division held that no matter the language of an agreement—which should be enforced according to its terms—“the implied covenant of good faith and fair dealing can never be waived.” Here, defendants’ conduct in diverting a company opportunity for an investment in a fund where they held an undisclosed interest gave rise to plaintiff’s fiduciary duty claim.

Shatz v. Chertok

Specifically in connection with real estate contracts, where issues come up during the due diligence period, parties often demand relief of their own imagination, which courts refuse to enforce.

In a case decided in the Commercial Division of Kings County, involving a buyer’s demand not found in the contract, the court reaffirmed the principle that relief outside the contract would not be considered and would be deemed a default. There, the seller held some 71% of the property, with the remaining interest held by the seller’s brothers. When it turned out that certain estate proceedings required to clear title would be costly, the seller notified the buyer that those proceedings exceeded what was required of him to provide clean title under the parties’ contract, but also asked that the purchase price be raised to comply with the estate proceedings. The buyer sued claiming that this notification breached the contract. Both parties moved for summary judgment.

In dismissing the buyer’s claims and his case, the court found that the buyer had two options once he learned of the costs to be incurred by the seller—either take the property as is or cancel the contract and receive the return of his downpayment. The buyer did neither. Because the buyer had no other option in connection with the seller’s notice his lawsuit was itself a breach of the contract allowing the seller to deem the buyer to be in breach, entitling him to judgment dismissing the lawsuit.

In refusing to dismiss a case where anticipatory repudiation of an employment agreement was claimed, the court held that for the purposes of a pre-answer motion to dismiss, plaintiff’s claim that he sent three emails to defendant about unpaid commissions which were ignored sufficed to properly allege that claim—“the Defendants’ failure to state its intent to perform under the Employment Agreement and Commission Agreement when such agreements required payment by a date certain is sufficient to state a cause of action for anticipatory repudiation.”

Cooperstein v. Securewatch24, LLC

Landlord sued the guarantor of a lease when the tenant failed to pay. The guarantor argued that it should not be liable for the full amount of the rent as called for in the lease because the landlord and tenant had negotiated a temporary discount without informing or consulting the guarantor. The court did not agree.

While the court agreed with the notion that an agreement cannot be modified without the consent of a surety, and that a new agreement relieves the guarantor from liability, “‘[t]he test is whether there is a new contract which will be enforced by the courts.’ However, “‘[i]ndulgence or leniency in enforcing a debt when due is not an alteration of the contract … .’” With that, the court held that “[t]he subsequent agreement between the tenant and the landlord reducing the tenant’s rent obligations did not discharge defendant’s obligations under the guaranty as it merely constituted leniency on the part of the landlord and did not create a new contract between the parties.”

SpringPRINCE, LLC v. Elie Tahari, Ltd.

Over a robust dissent, the Court of Appeals, in a long decision discussing the policy considerations in enforcing contracts as written, affirmed the Second Department’s decision, also over a passionate dissent, affirming a trial court’s decision dismissing a commercial tenant’s declaratory judgment action and with it, the tenant’s Yellowstone injunction.

“In New York, agreements negotiated at arm’s length sophisticated, counseled parties are generally enforced according to the plain language pursuant to our strong public policy favoring freedom of contract.” So begins the Court of Appeal’s decision in 159 MP Corp. v. Redbridge Bedford, LLC.  That case involved a dispute between a commercial landlord and tenant where the parties’ lease provided for the tenant’s waiver of its “right to bring a declaratory judgment action with respect to any provision” of that lease.

In response to the landlord’s demand to cure certain defaults, the tenant commenced an action seeking a declaratory judgment of its rights under the lease, and sought a Yellowstone injunction. The landlord sought dismissal of the declaratory judgment action, and the Yellowstone, based on the waiver contained in the lease. The tenant claimed that the waiver was mistakenly included for this purpose, intended only for summary proceedings. (It seems that it was not until the parties were before the Second Department that the tenant raised the argument that enforcing the lease as written should be void as against public policy.)

Typically, properly executed arbitration agreements, even as boilerplate in a form agreement, are strictly enforced. That said, there is an interesting 2017 First Department case that allows a party to avoid arbitration due to the cost of doing so.

In this case, as part of his employment, an employee agreed to arbitrate any disputes with his employer before the AAA in Florida. Doing so would require the employee to pay half of the arbitration costs, including the fees charged by the arbitrators, and administrative costs. The claims of the employee were as part of a class, where claims of late payment of wages were made, and recovery would include an award of statutory attorneys’ fees. In response to the employer’s motion to compel arbitration, the employee argued that “he had not agreed to arbitrate Labor Law claims, that any such agreement would be against public policy, and that, based on his limited financial means, as detailed in a supporting affidavit, the fee splitting and venue provisions of the agreement render arbitration financially prohibitive.”

The First Department reaffirmed New York’s strong public policy of favoring arbitrations (where agreed to) and that courts interfere as little as possible in that process and resulting award. “As a general matter, therefore, a clear and unmistakable agreement to arbitrate statutory wage claims is not unenforceable as against public policy.” That said, the court recognized the competing public policy argument that the employee could not afford to travel to Florida and participate in the AAA proceeding and that forcing him to do so would “preclude him from pursuing his claims.” The court referred the matter back to the trial court for an accounting of the employee’s income “and assets,” and the cost to participate in the arbitration. The court did not acquit the employee from the arbitration, only directed the trial court to determine if arbitrating in New York at the employer’s expense would obviate the employee’s concerns. The court also allowed the trial court to consider how the attorneys’ fees provision would impact the employee’s ability to participate in the arbitration. The court did not directly address the issue of whether the employee’s inability to pay the AAA expenses would free him from arbitration completely.

Plaintiff made a claim to its insurance company for water damage and loss of business. After what appears to have been a contentious investigation, the claim was denied because the carrier alleged that plaintiff did not provide it with all of the necessary documents and information and because some of the damage was allegedly caused by a prior incident.

Plaintiff sued the carrier, and included a claim under New York’s General Business Law § 349, which prohibits deceptive business practices. This claim was based on the carrier’s bad-faith claim investigation, including its demand for irrelevant documents, and its intentional delay of issuing a denial until after the policy’s statute of limitations period had expired. Defendants moved to dismiss all of the claims.

In denying dismissal, the trial court determined that a claim under § 349 had been made, as plaintiff had sufficiently alleged that the carrier (i) engaged in a deceptive act or practice, (ii) the act or practice was consumer-oriented, and (iii) plaintiff was injured as a result in that it was now pressured to accept an unfavorable settlement due to the expiration of the contractually-shortened statute of limitations period. Finding that the shortened limitations period was universal in all similar insurance policies, the court rejected the carrier’s claim that this was not generally a consumer-oriented claim. The court also allowed the consequential damages claim of lost business to proceed to trial.

Suffolk County Commercial Division Justice Elizabeth Emerson refused to vacate a FINRA arbitration decision which awarded the petitioner $3,229,097, plus interest, after respondent defaulted in the underlying arbitration.

The facts, briefly, are as follows. Respondent was petitioner’s investment advisor and broker. After withdrawing her participation in a FINRA investigation, respondent was permanently barred from the securities industry. Nonetheless, pursuant to her prior agreement with FINRA, respondent was obligated to arbitrate any customer complaints. In connection with that obligation, all FINRA members must provide FINRA with current addresses for service of process.

Petitioner commenced an arbitration proceeding against respondent. Commencement papers were sent to petitioner at her New York City and Sag Harbor addresses. A subsequent mailing to her New York City address informed respondent that she was the sole remaining respondent in the arbitration. A third mailing warned respondent that her time to participate was expiring. None of the mail was returned to FINRA. A final mailing, sent certified, to respondent’s New York City address was returned as unclaimed. After the arbitrator conducted a hearing without the respondent’s participation, a default award was entered.

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