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Preventing a Party from Carrying Out Its Agreement Constitutes a Material Breach

The Third Department determined Supreme Court properly held that defendants breached the contract. Plaintiff owned a business which produced and sold aggregate stone. Plaintiff entered a lease agreement with defendants which allowed plaintiff to remove stone from a quarry on defendants’ property and required that defendants pay “rent” based upon the amount of stone removed. No stone was removed for some time. Defendants sent a letter indicating they would consider the lease null and void unless plaintiff started up the business within 90 days. The parties then entered discussions, some stone was removed and rent was paid. Thereafter, the defendants unilaterally declared the lease null and void, ordered plaintiff to remove its equipment, and prevented plaintiff from entering the property. Supreme Court found plaintiff had done enough to comply with defendants’ initial demand that plaintiff start up its business and, therefore, defendants’ actions, which prevented plaintiff from carrying out its agreement, constituted a material breach. The Third Department agreed:

“In the case of every contract there is an implied undertaking on the part of each party that he [or she] will not intentionally and purposely do anything to prevent the other party from carrying out the agreement on his [or her] part” … . In the April 1996 letter, [defendant] advised [plaintiff]  that the lease was null and void, threatened legal action if plaintiff did not “promptly” remove its equipment from the quarry, and stated that [defendant] did not consider himself bound by the lease because it was void. Two months later, defendants’ counsel advised plaintiff’s counsel that it was defendants’ position that the lease had been rescinded and that plaintiff “ha[d] no right to enter upon the property.” … “[R]efusing to permit the other party to perform is a breach of contract” … . Here, defendants’ unilateral declaration that the lease was null and void, and their threat of legal action if plaintiff did not promptly remove its equipment, followed shortly thereafter by the statement of defendants’ counsel that plaintiff had no right to enter the property, constituted a refusal to permit plaintiff to perform. Galusha & Sons, LLC v Champlain Stone, Ltd, 2015 NY Slip Op 06286, 3rd Dept 7-23-15

 

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General Obligations Law Prohibition of Indemnification Agreements Which Exempt a Lessor from Its Own Negligence Does Not Apply to a Commercial Lease Negotiated at Arm’s Length Between Sophisticated Parties With an Insurance Procurement Requirement

The Second Department determined the lessor of a shopping center, Montauk Properties, under the terms of its lease with a supermarket, Gambar Food, was entitled to indemnification re: plaintiff’s slip and fall on a sidewalk in front of the supermarket.  Although the terms of the lease exempted the lessor from liability for its own negligence, which is a violation of General Obligations Law (GOL) 5-321, GOL 5-231 does not apply to a commercial lease negotiated at arm’s length between sophisticated parties with an insurance procurement requirement:

The lease between Montauk Properties and Gambar Food requires Gambar Food to indemnify Montauk Properties “for any matter or thing growing out of the occupation of the demised premises or of the streets, sidewalks or vaults adjacent thereto.” The plaintiff’s accident falls within the scope of this indemnification provision …, which, under its broadly drawn language, obligates Gambar Food to indemnify Montauk Properties for its own negligence. Although General Obligations Law § 5-321 provides that an agreement that purports to exempt a lessor from its own negligence is void and unenforceable, the subject indemnification provision is not rendered unenforceable by this statute. “[W]here, as here, the liability is to a third party, General Obligations Law § 5-321 does not preclude enforcement of an indemnification provision in a commercial lease negotiated at arm’s length between two sophisticated parties when coupled with an insurance procurement requirement” … . Campisi v Gambar Food Corp., 2015 NY Slip Op 06205, 2nd Dept 7-22-15

 

“Voluntary Payment Doctrine” Explained and Applied to Preclude Recovery

The Second Department determined the “voluntary payment doctrine” precluded recovery against the defendant. Plaintiff had an agreement with a consignee that plaintiff’s liability associated with the export of fine art would be limited to $40,000. Plaintiff hired defendant to transport the fine art to the consignee, but the art was seized by customs because the documentation was incomplete. The plaintiff, despite the $40,000 liability cap, voluntarily compensated the consignee for its loss (around $240,000). Then plaintiff sued defendant for the $240,000. Because the plaintiff made that payment voluntarily, the “voluntary payment doctrine” required dismissal of the complaint:

“[T]he voluntary payment doctrine . . . bars recovery of payments voluntarily made with full knowledge of the facts, and in the absence of fraud or mistake of material fact or law” … . Here, the defendant established its prima facie entitlement to judgment as a matter of law through the submission of, among other things, a copy of the contract between the plaintiff and the consignee, which included the limitation of liability provision that capped the plaintiff’s liability to the consignee at $40,000. This demonstrated, prima facie, that the plaintiff’s payment to the consignee of anything more than $40,000 was voluntary … . Further, the defendant demonstrated, prima face, that the plaintiff recovered the full $40,000 for which it was liable to the consignee from its insurance company. Hedley’s, Inc. v Airwaves Global Logistics, LLC, 2015 NY Slip Op 06215, 2nd Dept 7-22-15

 

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Failure to Timely Submit a Proposed Judgment of Divorce Did Not Constitute Abandonment of the Divorce Action/Decedent’s Death Before the Judgment of Divorce Was Entered Did Not Abate the Divorce Action/The Stipulation of Settlement (Re: the Divorce), In Which the Parties Agreed They Were No Longer the Beneficiaries of Each Other’s Wills, Was Enforceable

Decedent and her husband had entered a stipulation of settlement and all matters related to their divorce had been settled at the time of decedent’s death. Only the submission of the proposed judgment of divorce remained. The stipulation of settlement included the parties’ agreement that they were no longer the beneficiaries of each other’s wills. Decedent’s husband sought letters testamentary and a share in the estate, arguing that, because the proposed judgment of divorce was not submitted by decedent, decedent had abandoned the divorce action. Surrogate’s court agreed the divorce action had been abandoned and found there was a question of fact whether the stipulation of settlement was enforceable.  The Second Department reversed, finding that the divorce action was not abandoned and the stipulation of settlement was enforceable. Decedent’s husband, therefore, had no right to share in decedent’s estate:

Contrary to the Surrogate Court’s determination, the decedent did not abandon the divorce action pursuant to 22 NYCRR 202.48 by failing to timely submit a proposed judgment within 60 days of the Supreme Court’s verbal direction. Since the 60-day time period to submit a proposed judgment under 22 NYCRR 202.48(a) does not run until “after the signing and filing of the decision directing that the [judgment] be settled or submitted,” and the court’s direction was not reduced to a written decision, there was no violation of that rule here … . Furthermore, since all issues in the divorce action had been resolved at the time of the decedent’s death, the Supreme Court had adjudged that the decedent was entitled to a divorce, and nothing remained to be done except the ministerial entry of a judgment of divorce, the decedent’s death did not abate the divorce action … . Under these circumstances “the parties’ substantive rights should be determined as if the judgment of divorce had been entered immediately as of the time nothing remained to be done except enter a judgment” …, and the stipulation of settlement is thus enforceable as a matter of law. Moreover, since the stipulation of settlement contained language which “clearly and unequivocally manifests an intent on the part of the spouses that they are no longer beneficiaries under each other’s wills” …, the stipulation of settlement revoked any testamentary disposition in Carmine’s favor under EPTL 3-4.3, regardless of whether it was ultimately followed by a formal dissolution of the marriage … . Matter of Rivera, 2015 NY Slip Op 06247, 2nd Dept 7-22-15

 

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Where the Parties’ Intent Can Be Determined from the Four Corners of the Contract, the Interpretation of the Contract is a Purely Legal Question Which Can Be Raised for the First Time on Appeal and Which Can Be Finally Determined by the Appellate Court (No Need for a Trial)

The First Department, reversing Supreme Court, determined defendants were entitled to summary judgment dismissing the breach of contract complaint. Defendants owned an improved parcel of land next to a parcel owned by plaintiff. Plaintiff purchased a portion of defendants’ parcel and the parties entered an agreement which included a promise by the defendants that they would not object to any construction on plaintiff’s parcel, which was interpreted by the court to mean defendants agreed to provide their consent if it was necessary to the construction. Upon an examination of the facts, the court concluded plaintiff did not demonstrate he needed the defendants’ consent to anything related to the construction, and therefore the contract provision requiring defendants to consent was never triggered. The aspect of the case which is worth noting is the court’s determination that a purely legal question of contract interpretation was involved and that the purely legal question could be raised for the first time on appeal. The court explained that “where the intention of the parties may be gathered from the four corners of the instrument, interpretation of the contract is a question of law and no trial is necessary to determine the legal effect of the contract…”:

Initially, although defendants’ arguments on appeal differ from those made in support of their motion, they may be considered by this Court because they present a pure legal issue of contract interpretation, which appears on the face of the record and could not have been avoided if raised below … .

“On appeal, the standard of review is for this Court to examine the contract’s language de novo” … . “Our function is to apply the meaning intended by the parties, as derived from the language of the contract in question” … . In interpreting a contract, words should be accorded their “fair and reasonable meaning,” and “the aim is a practical interpretation of the expressions of the parties to the end that there be a realization of [their] reasonable expectations” … . Moreover, “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms” … . Although the parties offer conflicting interpretations of a contract, that does not render it ambiguous … . Moreover, “where the intention of the parties may be gathered from the four corners of the instrument, interpretation of the contract is a question of law and no trial is necessary to determine the legal effect of the contract” … . Dreisinger v Teglasi, 2015 NY Slip Op 06197, 1st Dept 7-21-15

 

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Constructive Trust Cause of Action Did Not Accrue When Defendant Acquired the Subject Property (In 1995 or 1996), But Rather When Defendant , Who Had Properly Acquired the Property, Breached Her Promise to Transfer an Interest in the Property to Plaintiff (In 2012)

In finding the constructive trust cause of action should not have been dismissed as time-barred, the Second Department explained that a cause of action for a constructive trust accrues (1) when the constructive trustee acquires the property wrongfully, or (2) when the constructive trustee wrongfully withholds property which was lawfully acquired but was to be transferred:

A cause of action “for the imposition of a constructive trust is governed by the six-year Statute of Limitations of CPLR 213(1), which starts to run upon the occurrence of the wrongful act giving rise to a duty of restitution” … . “A determination of when the wrongful act triggering the running of the Statute of Limitations occurs depends upon whether the constructive trustee acquired the property wrongfully, in which case the property would be held adversely from the date of acquisition, or whether the constructive trustee wrongfully withholds property acquired lawfully from the beneficiary, in which case the property would be held adversely from the date the trustee breaches or repudiates the agreement to transfer the property” … .

Here, the gravamen of the plaintiff’s cause of action for the imposition of a constructive trust is not … that the defendants wrongfully acquired the subject properties in or around 1995, or 1996, but rather that subsequent thereto, sometime in 2012, the defendant… breached her promise to the plaintiff that they would be equal partners with respect to those properties … . Barone v Barone, 2015 NY Slip Op 06102, 2nd Dept 7-15-15

 

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Specific Disclaimers Indicating No Information Extrinsic to the Written Contract Was Relied Upon Precluded Fraud in the Inducement Cause of Action/Summary Judgment on Promissory Note Precluded—Breach of Contract Cause of Action Was Intertwined with Promissory Note

In a decision addressing many other issues, the Second Department determined specific disclaimers in the contract indicating nothing extrinsic to the contract was relied upon by the parties precluded any claim alleging fraudulent inducement.  The court also noted that plaintiff was not entitled to summary judgment on a promissory note because the note was intertwined with the breach of contract cause of action:

“While a general merger clause is ineffective to exclude parol evidence of fraud in the inducement, a specific disclaimer destroys the allegations in [a] plaintiff’s complaint that the agreement was executed in reliance upon . . . contrary oral [mis]representations'” … . In support of this branch of their motion, [defendant] relied upon the contract, which provides that [defendant] made no representation or warranty, either express or implied, as to the assets sold, [defendant’s] business, or “any matter or thing affecting or relating to this agreement, except as specifically set forth in this agreement.” The contract also indicates that it contains all of the terms agreed upon between the parties and that it was entered into after full investigation. Such clauses are sufficiently specific to bar the [plaintiffs] from claiming that they were fraudulently induced into entering the contract because of certain oral misrepresentations … . * * *

Although the breach of a related contract generally cannot defeat a motion for summary judgment on an instrument for money only, that rule does not apply where the contract and instrument are intertwined … . Here, the action to recover damages for breach of contract is sufficiently intertwined with the action to recover on the promissory note, such that denial of summary judgment to enforce the promissory note and personal guaranty was proper … . Oseff v Scotti, 2015 NY Slip Op 06123, 2nd Dept 7-15-15

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“Special Facts Doctrine” as Applied to Fraud Allegations Explained

In an action stemming from the alleged breach of an Asset Purchase Agreement (APA), the First Department explained the applicability of the “special facts doctrine” to the related fraud allegations. There was a defense verdict. The issue was raised on appeal by the plaintiffs because the trial judge refused to instruct the jury on the special facts doctrine, an error the First Department deemed harmless. The court offered a clear description of the doctrine:

… [P]laintiffs claimed that defendants had a duty to disclose certain documents concerning alleged adverse contract information. The “special facts” doctrine holds that “absent a fiduciary relationship between parties, there is nonetheless a duty to disclose when one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair” … . As a threshold matter, the doctrine requires satisfaction of a two-prong test: that the material fact was information peculiarly within the knowledge of one party and that the information was not such that could have been discovered by the other party through the exercise of ordinary intelligence … . Greenman-Pedersen, Inc. v Berryman & Henigar, Inc., 2015 NY Slip Op 06091, 1st Dept 7-14-15

 

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Although the Elevator Maintenance Company May Have Been Negligent, Under “Espinal,” the Company Did Not Owe a Duty of Care to the Plaintiff—There Was No Evidence the Maintenance Company “Launched an Instrument of Harm,” the Only Available Theory of Liability (Re: Plaintiff) Which Could Have Arisen from the Maintenance Contract

The First Department, in a full-fledged opinion by Justice Saxe, determined an elevator maintenance company (The Elevator Man) did not owe a duty of care to the plaintiff who was injured when the elevator free-fell three stories in September 2010. The maintenance contract with the elevator maintenance company had been cancelled for non-payment, but the company had subsequently agreed to do, and had done, emergency repairs when called to do so. Although there was evidence the elevator maintenance company was negligent re: repairs done in early 2010, applying the “Espinal” criteria, the First Department held there was no evidence the maintenance company “launched an instrument of harm,” the only available theory of liability:

If the issue were limited to whether The Elevator Man was negligent, a question of fact would preclude summary judgment. However, the issue is not that simple.

“Because a finding of negligence must be based on the breach of a duty, a threshold question in tort cases is whether the alleged tortfeasor owed a duty of care to the injured party” (Espinal v Melville Snow Contrs., 98 NY2d 136, 138 [2002]).

Where a contractor has entered into a contract to render services, it may only be held to have assumed a duty of care to nonparties to the contract in three situations:

“(1) where the contracting party, in failing to exercise reasonable care in the performance of his duties, launches a force or instrument of harm’; (2) where the plaintiff detrimentally relies on the continued performance of the contracting party’s duties and (3) where the contracting party has entirely displaced the other party’s duty to maintain the premises safely” (Espinal, 98 NY2d at 140 [internal citations omitted]).

To the extent plaintiff relies on the inspection performed by The Elevator Man on January 14, 2010 in which it gave the elevator a “Satisfactory” rating, despite a “Cease Use” violation that had been issued on November 1, 2009, The Elevator Man was subject to the maintenance contract then in effect. To the extent plaintiff argues that The Elevator Man was negligent in the work it performed on May 26, 2010, any duty The Elevator Man had toward him could not be based on the terminated 2009 maintenance agreement; nevertheless, The Elevator Man continued to be subject to a more limited contract with the manager of the parking facility, in which it agreed to respond to emergency calls, upon payment of an agreed fee.

We find the rule set forth in Espinal to apply here. It is conceded that of the three possibilities listed in Espinal, only the first could provide a basis for liability to plaintiff: “where the contracting party, in failing to exercise reasonable care in the performance of his duties, launches a force or instrument of harm'” (id. at 140). However, even accepting for purposes of this analysis that The Elevator Man negligently inspected the elevator on January 14, 2010 and negligently failed to correctly assess the condition of the elevator and necessary repair on May 26, 2010, it cannot be said to have launched a force or instrument of harm. That is, in failing to correctly inspect or repair the elevator, it did not create or exacerbate an unsafe condition. Medinas v MILT Holdings LLC, 2015 NY Slip Op 06044, 1st Dept 7-9-15

 

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Agreement to Assist Spouse in Obtaining a Visa Did Not Render the Marriage a Sham and the Separation Agreement Unenforceable/Agreement to Pay for One-Half of a Jointly Held Business Could Be Severed from Any Arguably Unenforceable Portions of the Separation Agreement/Even Where a Marriage is Annulled as Void or Voidable, Equitable Distribution Rules Apply

Reversing Supreme Court, the Second Department determined the provision in a separation agreement in which one spouse agreed to help the other obtain a visa did not render the marriage a sham and the separation agreement unenforceable. Therefore the provision of the separation agreement that one spouse pay the other one-half of the value of a jointly-owned business was enforceable. The Second Department noted that even if a portion of the agreement was not enforceable, the valid provisions could remain enforceable. The Second Department further noted that equitable distribution rules apply even when a marriage is annulled as void or voidable:

Although parties are usually free to chart their own contractual course, that is not the case in certain situations where public policy would be offended … . Further, as a general rule, illegal contracts are unenforceable … , and this includes marital agreements for visa sponsorship that unlawfully circumvent United States immigration laws … .

Here, the terms and conditions of the separation agreement ostensibly required the plaintiff to assist the defendant in obtaining a visa. Further, in an affidavit submitted in support of her motion, the plaintiff admitted that she stayed in the marriage longer than she wished so that the defendant could obtain an E-2 dependent visa. However, there is no proof that the marriage was a sham, or that any other tribunal or government agency had made such a determination.

More importantly, even if the Supreme Court was correct in determining that certain terms of the separation agreement are illegal and unenforceable, the terms directing the defendant to compensate the plaintiff for transferring her interest in the business to him would nevertheless be severable and enforceable … . Where an agreement consists of an unlawful objective in part and a lawful objective in part, the court may sever the illegal aspect and enforce the legal one, so long as the “illegal aspects are incidental to the legal aspects and are not the main objective of the agreement” … . Whether a contract is to be enforced in its entirety or is severable is generally a question of intent, “to be determined from the language employed by the parties, viewed in the light of the circumstances surrounding them at the time they contracted” … . Moreover, “[c]ourts will be particularly ready to sever the illegal components and enforce the other components of a contract where the injured party is less culpable and the other party would otherwise be unjustly enriched by using his own misconduct as a shield against otherwise legitimate claims” … . Here, the separation agreement contained an express provision that the doctrine of severability shall apply should any particular term of the agreement be deemed invalid or unenforceable.

Contrary to the Supreme Court’s determination, we do not find that the main objective of the parties’ separation agreement was to compensate the plaintiff for remaining in the marriage and thereby helping the defendant obtain a visa (cf. Donnell v Stogel, 161 AD2d at 97). The separation agreement addressed various aspects of the parties’ marriage, including distribution of their marital assets. According to the plain language of the separation agreement, the $30,000 payment to the plaintiff constitutes compensation for the transfer of her 50% interest in the business that the parties co-owned at the time of the marriage. Notably, the parties agreed that, even if the visa sponsorship did not come to fruition, the defendant would still be obligated to pay the distribution of the value of the business.

It should be noted that, even if the marriage were proven to be a sham marriage, either party could have sought a divorce, a judgment declaring the nullity of a void marriage (see Domestic Relations Law § 140), or an annulment of a voidable marriage (see id.), all of which mandate the equitable distribution of assets acquired during the marriage (see Domestic Relations Law § 236[B][5][a], [c]…). Absent a judicial finding, after a hearing, that the money to be transferred to the plaintiff was payment for spousal sponsorship of a visa and nothing more, which would be against public policy and thus unenforceable in court, the terms of the separation agreement dealing with the distribution of assets acquired during the marriage are enforceable, separate and apart from any unenforceable terms. Thus, the terms of the separation agreement governing the transfer of the previously co-owned business in exchange for $30,000 are severable from any terms of the separation agreement which may be unenforceable … . Lanza v Carbone, 2015 NY Slip Op 05917, 2nd Dept 7-8-15

 

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