THE DOCTRINE OF EQUITABLE ESTOPPEL SHOULD NOT HAVE BEEN APPLIED TO PRECLUDE THE VILLAGE FROM RAISING THE “FAILURE TO FILE A NOTICE OF CLAIM” DEFENSE TO DEFENDANT’S COUNTERCLAIM (CT APP).

The Court of Appeals, affirming the Appellate Division’s reversal of Supreme Court, in a full-fledged opinion by Judge Halligan, over a two-judge dissent, determined the defendant-developer, FPW, in a breach-of-a-real-estate-contract action brought by the plaintiff-village, was precluded from litigating a counterclaim because it never filed a notice of claim with the village. Supreme Court had ruled the doctrine of equitable estoppel precluded the village’s “lack-of-notice-of-claim” argument because the village was aware of the facts underlying the counterclaim from the start of the lawsuit and failed to raise the defense until the statute of limitations had run. The Court of Appeals rejected the equitable-estoppel argument:

We have explained that equitable estoppel generally “is not applied against the government, as a matter of policy, because to do so could easily result in large scale public fraud” and “violate the doctrine of separation of powers” … . Thus, “[w]e have recognized that estoppel may be warranted in unusual factual situations to prevent injustice . . . but we have limited its use against government agencies to all but the rarest cases” … . * * *

… [W]e conclude that the Village did not engage in wrongful or misleading conduct warranting the application of equitable estoppel. As the Appellate Division correctly determined, participation in litigation, without more, does not constitute action calculated to mislead or discourage a party from filing a notice of claim … . That holds true here, where the Village was pressing its own breach of contract claim and therefore had every reason to participate in discovery and related court conferences, independent of FPW’s counterclaim. Moreover, the Village’s answer to the counterclaim put FPW on notice that it was raising FPW’s “fail[ure] to perform all conditions precedent” as an affirmative defense, and compliance with a notice of claim statute such as CPLR 9802 “is a condition precedent” to an action against a municipality … . Incorporated Vil. of Freeport v Freeport Plaza W., LLC, 2026 NY Slip Op 03906, CtApp 6-18-26

Practice Point: Although the equitable estoppel doctrine can very rarely be applied to a municipality, the village did nothing improper or misleading which would warrant precluding the village’s “failure to file a notice of claim” defense to defendant’s counterclaim. There was a two-judge dissent.