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“Bad Faith Claims Handling” Cause of Action Properly Dismissed As Duplicative of Breach of Contract Cause of Action/Sanctions Appropriate for Inclusion of Dismissed Cause of Action in Amended Complaint

The First Department determined a purported cause of action for “bad faith claims handling” in an insurance-coverage dispute was duplicative of the breach of contract cause of action (and was therefore properly dismissed). The court further determined that attorney sanctions were appropriate for including a dismissed cause of action in an amended complaint. The First Department explained the (rare) circumstance when breach of contract will give rise to a distinct tort cause of action (not the case here):

In some circumstances “[t]he very nature of a contractual obligation, and the public interest in seeing it performed with reasonable care, may give rise to a duty of reasonable care in performance of the contract obligations, and the breach of that independent duty will give rise to a tort claim” …, in which the Court held that “a fire alarm company owed its customer a duty of reasonable care independent of its contractual obligations, and that notwithstanding a contractual provision exculpating the alarm company from damages flowing from its negligence, it could be held liable in tort for its gross failure to properly perform its contractual services” … . Further, “[w]here a party has fraudulently induced the plaintiff to enter into a contract, it may be liable in tort” … . However, “where a party is merely seeking to enforce its bargain, a tort claim will not lie” … . Orient Overseas Assoc. v XL Ins. Am., Inc., 2015 NY Slip Op 07788, 1st Dept 10-27-15

 

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Unambiguous Limitation of Liability to $10,000 Should Have Been Enforced

The Second Department determined summary judgment should have been granted to defendant insurer. A fire damaged school dormitories. The insurer paid for the repair but paid only $10,000 toward the more than $200,000 the school paid to relocate the students. The court determined that the policy was unambiguous and the $10,000 limit was properly applied to the relocation costs. The court explained the relevant analytical principles:

In construing policy provisions defining the scope of coverage pursuant to a policy of insurance, courts ” first look to the language of the policy'” …, reading it ” in light of common speech and the reasonable expectations of a businessperson'” …, and in a manner that ” leaves no provision without force and effect'” … . The unambiguous terms of an insurance contract must be given their plain and ordinary meaning, and the interpretation of such terms is a question of law for the court … . Where an ” agreement on its face is reasonably susceptible of only one meaning, a court is not free to alter the contract to reflect its personal notions of fairness and equity'” … . However, if the terms of the policy are ambiguous, any ambiguity must be construed in favor of the insured and against the insurer … .

Here, the defendant established its prima facie entitlement to judgment as a matter of law. The $10,000 limitation was at the end of the pertinent “Additional Coverage” section 5 titled “Institutional Income and Extra Expense.” The limitation stated that the most the defendant “will pay under this Additional Coverage for Institutional Income and Extra Expense is $10,000, unless a higher limit is shown on the Declarations Page.” There was no such higher limit shown on that page. Contrary to the plaintiff’s contention, there was no ambiguity in this additional coverage. Viznitz v Church Mut. Ins. Co., 2015 NY Slip Op 07648, 2nd Dept 10-21-15

 

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Forum Selection and Time Limitation Clauses in Cruise Ship Ticket Enforceable

The Second Department, reversing Supreme Court, determined that the forum selection and time limitation clauses in a “Carnival” cruise ship ticket were enforceable. The passenger’s personal injury complaint was dismissed:

A contractual forum selection clause contained in a cruise passenger ticket is generally enforceable as long as it has been reasonably communicated to the passenger and does not violate notions of fundamental fairness, and the submission thereof constitutes documentary evidence that may provide a proper basis for dismissal of an action pursuant to CPLR 3211(a)(1) … . Here, Carnival’s submissions established that the plaintiffs’ contract of carriage included a clause requiring that any disputes between the parties “shall be litigated, if at all, before the United States District Court for the Southern District of Florida in Miami, or as to those lawsuits to which the Federal Courts of the United States lack subject matter jurisdiction, before a court located in Miami-Dade County, Florida, U.S.A. to the exclusion of the Courts of any other county, state or country.” Furthermore, the contract provided that an action to recover damages for personal injuries “shall not be maintainable unless filed within one year after the date of the injury.” Carnival also established that the plaintiffs had a reasonable opportunity to review their tickets, and there is no allegation of fraud or overreaching … . Fritsche v Carnival Corp., 2015 NY Slip Op 07618, 2nd Dept 10-21-15

 

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Environmental Clean-Up Indemnification Agreement Between Seller and Buyer of Property Triggered by Department of Environmental Conservation’s (DEC’s) “Potentially Responsible Party (PRP)” Letter to Buyer

The Court of Appeals, in a full-fledged opinion by Judge Stein, reversing the Appellate Division, determined the environmental clean-up indemnification agreement between the seller (Pyne) and buyer (Remet) of property was triggered by the Department of Environmental Conservation’s (DEC’s) letter to Remet. Although the letter referred to Remet as a “potentially” responsible party (PRP), the letter required that Remet enter into a consent agreement (re: the clean-up) with the DEC or, if no consent agreement is executed within 30 days, pay for the clean-up done by the DEC:

The plain language of the governing contractual indemnity provision, together with the language of the PRP letter and the surrounding facts and circumstances, demonstrate that Remet was entitled to indemnification because it was “required,” within the meaning of the sales agreement, to act in response to the PRP letter. The PRP letter stated that it pertained to an “Urgent Legal Matter,” indicated that a prompt reply was “necessary,” and set forth the consequences that would flow from Remet’s refusal to act. Regardless of whether Remet was designated a potentially responsible party or a responsible party, the letter demanded either a consent order or payment, and any language indicating that Remet’s response was voluntary must be read in terms of those demands. In other words, the PRP letter — by its terms — effectively marked the beginning of a “legal” process against Remet pursuant to the ECL, in which DEC expressly sought recovery from Remet for any amounts expended in remediating the [the site].

Additionally, the circumstances surrounding the execution of the indemnification clause include the parties’ awareness that, because the [site] was listed as an inactive hazardous waste site, the purchaser of the property at issue here risked incurring substantial expenses, and that Pyne accordingly deposited a large sum in escrow to cover at least a portion of those potential expenses. Remet Corp. v Estate of Pyne, 2015 NY Slip Op 07575, CtApp 10-20-15

 

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contract for the sale of busiwas not intertwined with the promissory note and personal guaranty

Reversing Supreme Court, the Second Department determined the contract for the sale of plaintiff’s one-half share of a business to defendant was not intertwined with the promissory note and personal guaranty executed by the defendant in connection with the sale. Therefore plaintiff was entitled to summary judgment in lieu of a complaint based upon defendant’s default:

The plaintiff made a prima facie showing of his entitlement to judgment as a matter of law by submitting the promissory note, which contained an unequivocal and unconditional obligation to pay, the personal guaranty, and proof of the defendants’ failure to make payments on the note according to its terms … .

In opposition, the defendants failed to raise a triable issue of fact as to a bona fide defense … . “[T]he general rule is that the breach of a related contract cannot defeat a motion for summary judgment on an instrument for money only unless it can be shown that the contract and the instrument are intertwined and that the defenses alleged to exist create material issues of triable fact” … .

Here, contrary to the Supreme Court’s determination, the evidence submitted by the defendants failed to establish that the agreement and the promissory note were intertwined, such that any breach of the related agreement by the plaintiff may create a defense to payment on the note. Chervinsky v Rezhets, 2015 NY Slip Op 07463, 2nd Dept 10-14-15

 

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Where Equitable Relief Described in “Sole Remedy Clause” is Impossible, Monetary Damages Are Available

The First Department, in a full-fledged opinion by Justice Sweeney, in a case addressing many specific-contract-provision issues not summarized here, determined that where the sole remedy clause of a contract allows only equitable relief, and that equitable relief is impossible, monetary damages may be available. The action stems from the collapse of the residential mortgage -backed securities (RSMB) market. The complaints alleged the breach of several representations and warranties (concerning the underlying mortgages) in the mortgage loan purchase agreement (MLPA). The “sole remedy clause” in the agreement purported to limit relief to the defendant’s repurchase of defective mortgages. However repurchase of foreclosed or liquidated mortgages was impossible. In that situation, the First Department held, equity allows the imposition of monetary damages:

Under defendant’s interpretation of the “sole remedy” clause, loans that have been foreclosed upon or liquidated cannot be repurchased and, by agreeing to those provisions, plaintiff accepted the risk of loss such an event would entail. However, such an interpretation would leave plaintiffs without a remedy with respect to those loans, as their only recourse would be to commence an action for specific performance, which would be impossible to fulfill. The present state of the law does not support defendant’s contention.

New York law has long held that contracting parties are generally free to limit their remedies. “A limitation on liability provision in a contract represents the parties’ agreement on the allocation of the risk of economic loss in the event that the contemplated transaction is not fully executed, which the courts should honor” … . Therefore, by the terms of the “sole remedy” clause, the agreements limit plaintiffs to seeking an order of specific performance requiring defendant to repurchase the defective loans at the purchase price defined in those agreements, or to cure the defects in those loans.

However, specific performance is an equitable remedy. In the RMBS context, most courts have repeatedly held that “while a provision providing for equitable relief as the sole remedy’ will generally foreclose alternative relief, where the granting of equitable relief appears to be impossible or impracticable, equity may award damages in lieu of the desired equitable remedy'” … . Such a rule makes sense, for to hold otherwise would create a “perverse[]” incentive for a sponsor “to fill the trust with junk mortgages that would expeditiously default so that they could be released, charged off, or liquidated before a repurchase claim is made” … . Nomura Home Equity Loan, Inc., Series 2006-FM2 v Nomura Credit & Capital, Inc., 2015 NY Slip Op 07458, 1st Dept 10-13-15

 

Law Re: Liquidated Damages Explained

The Fourth Department concluded that defendant’s papers were not sufficient to warrant summary judgment invalidating a liquidated damages provision of an agreement, but noted that plaintiff may not be able to prove the validity of the provision at trial. Liquidated damages are valid only if they bear a reasonable relationship to the loss; otherwise they constitute an unenforceable penalty. Here plaintiff sold defendant a car with the condition that the car not be re-sold for one year. Defendant sold the car two weeks after purchase and plaintiff sued to enforce the $20,000 liquidated damages provision of the “agreement not to export.”  The court explained the relevant law:

Liquidated damages are enforceable only to the extent that they comprise ” an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement’ ” … . As a general rule, a liquidated damages clause is enforceable only if the stipulated amount of damages “bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation” … . If, however, the clause provides for damages that are ” plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced’ ” … .

Here, defendant failed to meet his initial burden of establishing as a matter of law that the amount of liquidated damages does not bear a reasonable relation to plaintiff’s actual damages. In support of his motion, defendant relied on affidavits from himself and his attorney, both of whom asserted, upon information and belief only, that plaintiff sustained no actual damages, and that the liquidated damages clause is therefore unenforceable. Defendant offered no evidence in support of those conclusory assertions, and therefore failed to meet his initial burden of proof … . Thus, the court properly denied defendant’s motion, “regardless of the sufficiency of the opposing papers” … . Although defendant may be correct in contending that plaintiff cannot establish at trial that it sustained any actual damages as a result of defendant’s breach of the Agreement, it is well settled that a party moving for summary judgment must affirmatively establish the merits of its cause of action or defense “and does not meet its burden by noting gaps in its opponent’s proof” … . Great Lakes Motor Corp. v Johnson, 2015 NY Slip Op 07394, 4th Dept 10-9-15

 

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The Absence of Plaintiff’s (Buyer’s) Attorney’s Explicit Unconditional Approval of the Purchase Contract Invalidated the Contract, Despite Plaintiff’s Desire to Go Through with the Purchase

The Fourth Department, reversing Supreme Court, determined that an explicit (not implied) unconditional attorney approval of a real estate contract is a necessary pre-requisite for a valid contract. Here plaintiff’s attorney had approved the contract on the condition that an environmental warranty be provided by the sellers, a condition which was never met or explicitly waived. Despite plaintiff’s desire to go through with the purchase, defendant-sellers’ attorney correctly determined there was no valid contract of sale because plaintiff’s attorney never explicitly unconditionally approved it:

As the Court of Appeals has stated, “[c]larity and predictability are particularly important” in the area of law dealing with attorney approval of real estate contracts … . Here, we conclude that, although plaintiff could have unilaterally waived the environmental conditions that [his attorney] placed on his approval of the contract inasmuch as those conditions benefitted only him …, neither [of plaintiff’s attorneys] clearly and unequivocally did so. Thus, the contract was never unconditionally approved by plaintiff’s attorneys. * * *

“[C]onsiderations of clarity, predictability, and professional responsibility weigh against reading an implied limitation into the attorney approval contingency” … . If [plaintiff’s attorney] intended to waive the conditions placed … on … approval of the contract, he should have done so expressly and not left anything for inference, or he should have stated that he, as plaintiff’s counsel, unconditionally approved the contract as proposed by defendants. Because he failed to do so, we conclude that there was not a valid contract between the parties and that the court erred in directing defendants to sell the property to plaintiffs. Pohlman v Madia, 2015 NY Slip Op 07379, 4th Dept 10-9-15

 

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Forum Selection Clause in Nursing Home Admission Agreement Enforceable

The Second Department determined defendant nursing home’s motion to change venue based upon a forum selection clause in the admission agreement should have been granted. After her mother (a resident of defendant nursing home) died, plaintiff brought this action for medical malpractice in a county other than that designated in the admission agreement:

” A contractual forum selection clause is prima facie valid and enforceable unless it is shown by the challenging party to be unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching, or it is shown that a trial in the selected forum would be so gravely difficult that the challenging party would, for all practical purposes, be deprived of its day in court'” … . Here, the plaintiff failed to show that enforcement of the forum selection clause would be unreasonable, unjust, or in contravention of public policy, or that the inclusion of the forum selection clause in the agreement was the result of fraud or overreaching … . Moreover, the plaintiff failed to demonstrate that a trial in Suffolk County would be so gravely difficult that, for all practical purposes, she would be deprived of her day in court … . Puleo v Shore View Ctr. for Rehabilitation & Health Care, 2015 NY Slip Op 07255, 2nd Dept 10-7-15

 

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Elements of Causes of Action for (1) Misappropriation of (a) Trade Secrets, (b) Business Ideas, and (c) Labor, Skills and Expenditures, (2) Breach of Fiduciary Duty (Delaware Law), (3) Aiding and Abetting Breach of Fiduciary Duty (Delaware Law), (4) Unjust Enrichment, and (5) Promissory Estoppel Described in Some Detail

The First Department, in a full-fledged opinion by Justice Richter, determined the complaint stated causes of action against the Cohen defendants for essentially stealing plaintiffs’ ideas for a website. Defendant Cohen, an investor, eventually served as chairman and CEO of a company formed by plaintiffs to develop the website. The complaint alleged that Cohen caused a strain among the partners which stalled the project. Cohen circulated a liquidation agreement which was never addressed by the other partners. Then, the complaint alleged, Cohen took the plaintiffs’ ideas and website-development work to the founders of Pinterest, which, the complaint alleged, was formed based upon the ideas Cohen misappropriated from plaintiffs. The plaintiffs sued the Cohen defendants and Pinterest. All the causes of action against Pinterest were dismissed by Supreme Court. The First Department held the complaint stated causes of action against the Cohen defendants for (1) breach of fiduciary duty (under Delaware Law), (2) misappropriation of trade secrets, (3) misappropriation of ideas, (4) and misappropriation of labor, skill and expenditures. (Apparently the unjust enrichment cause of action, which Supreme Court dismissed only re: Pinterest, was not a subject of the appeal.) The First Department found that all the causes of action against Pinterest were properly dismissed.   The opinion includes detailed descriptions of the elements of breach of fiduciary duty (Delaware law), aiding and abetting breach of fiduciary duty, unjust enrichment, misappropriation of trade secrets, misappropriation of ideas, misappropriation of labor, skills and expenditures, and promissory estoppel. The discussions are too extensive to be fairly summarized here.  Schroeder v Pinterest Inc., 2015 NY Slip Op 07232. 1st Dept 10-6-15

 

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