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CAUSE OF ACTION ALLEGING THE STIPULATION OF SETTLEMENT IN THIS DIVORCE ACTION WAS UNCONSCIONABLE SHOULD HAVE BEEN DISMISSED, CRITERIA EXPLAINED (SECOND DEPT).

The Second Department, reversing (modifying) Supreme Court, determined the cause of action alleging the stipulation of settlement in this divorce action was unconscionable should have been dismissed:

… [W]e agree with the defendant that the Supreme Court should have granted that branch of her cross motion which was pursuant to CPLR 3211(a) to dismiss the second cause of action, seeking to set aside the stipulation on the ground of unconscionability. “‘An unconscionable bargain is one which no person in his or her senses and not under delusion would make on the one hand, and no honest and fair person would accept on the other, the inequality being so strong and manifest as to shock the conscience and confound the judgment of any person of common sense'” … . “An agreement, however, is not unconscionable ‘merely because, in retrospect, some of its provisions were improvident or one-sided'” … . Here, the terms of the stipulation, while perhaps improvident or one-sided in favor of the defendant, were not so unfair as to shock the conscience and confound the judgment of any person of common sense. Heinemann v Heinemann, 2020 NY Slip Op 08044, Second Dept 12-30-20

 

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AN INSURER WHO HAS NO DUTY TO DEFEND THE INSUREDS BECAUSE OF LATE NOTIFICATION, IN THE ABSENCE OF A PROVISION IN THE POLICY, MAY NOT RECOVER THE COSTS OF DEFENDING THE ACTION FROM THE INSUREDS AND THE SUCCESSFUL PLAINTIFF IN THE UNDERLYING ACTION (SECOND DEPT).

The Second Department, reversing (modifying) Supreme Court, in a full-fledged opinion by Justice Duffy addressing a matter of first impression, determined the plaintiff insurer, which was not obligated to indemnify the insureds for a $900,000 default judgment because plaintiff insurer was not timely notified of the claim, could not recover the costs of defending the action from the insureds and the successful plaintiff in the underlying action. The policy was silent on the question. At issue was the effect of a reservation of rights in a letter to the insureds:

There is little doubt that the insurance company could have included in the policy a provision wherein it could recover its defense costs (upon a reservation of rights and a judicial determination that it is not required to indemnify) had it wanted to, but it did not do so here.

The insurance company points to its May 2017 letter wherein it reserved its rights to seek to recover the costs of defending the underlying litigation and argues that other New York courts … . * * *

Typically, a reservation of rights letter asserts defenses and exclusions that are set forth in the policy between the parties. Indeed, awarding an insurer its defense costs when the insurer issues a reservation of rights letter for the same despite the lack of any language in the policy at issue permitting the insurer to recover the costs of defending claims that are later determined not covered by the policy flies in the face of basic contract principles and allows an insurer to impose a condition on its defense that was not bargained for … . Moreover, “‘strong policy considerations militate against allowing an insurer to unilaterally declare that it can recoup the costs of defending an insured where it is later determined [that the policy at issue did not cover the asserted claims]'” as doing so would allow an insurer to define its duty to defend based upon the outcome of a declaratory judgment action and significantly curtail New York’s long held view that the duty to defend is broader than the duty to indemnify … .  Thus, we hold that the insurance company may not recover its defense costs based on the May 2017 letter wherein it reserved its rights to recoup its defense costs in the underlying litigation absent an express provision to that effect in the policy. American W. Home Ins. Co. v Gjonaj Realty & Mgt. Co., 2020 NY Slip Op 08027, Second Dept 12-30-20

 

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THE CONTRACT PROPERLY ACCORDED THE ARBITRATOR THE AUTHORITY TO DETERMINE “GATEWAY” QUESTIONS OF ARBITRABILITY; NONSIGNATORIES ARE COMPELLED TO ARBITRATE (SECOND DEPT).

The Second Department, in a full-fledged opinion by Justice Miller, over a two-justice dissent, determined: (1) the contract properly accorded the arbitrator the power to decide whether the issues raised in the complaint were arbitrable (so-called “gateway” questions); and (2) the non-signatories, here plaintiff’s LLC and defendant’s law partner and law firm, are subject to the arbitration provision in the contract. Plaintiff is a professional football player and defendant is an attorney who represented plaintiff in contract negotiation and marketing and endorsements. The opinion is detailed and comprehensive and cannot be fully summarized here:

… Revis [plaintiff athlete] entered into an agreement with Schwartz [defendant attorney] pursuant to which they agreed to arbitrate “gateway” questions of arbitrability … . …

… [N]either the Supreme Court, nor this Court, nor any court, has the authority to decide whether and to what extent these parties’ disputes are arbitrable … . Indeed, just as a court may not “rule on the potential merits of the underlying” claim that is assigned by contract to an arbitrator, “even if it appears to the court to be frivolous”… , “a court may not decide an arbitrability question that the parties have delegated to an arbitrator” … , even if the court determines that “the argument that the arbitration agreement applies to the particular dispute is ‘wholly groundless'” … . * * *

“Under the direct benefits theory of estoppel, a nonsignatory may be compelled to arbitrate where the nonsignatory ‘knowingly exploits’ the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement” … . “The benefits must be direct, and the party seeking to compel arbitration must demonstrate that the party seeking to avoid arbitration relies on the terms of the agreement containing the arbitration provision in pursuing its claim” … . Revis v Schwartz, 2020 NY Slip Op 08094, Second Dept 12-30-20

 

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THERE WAS A QUESTION OF FACT WHETHER THE ONE-YEAR STATUTE OF LIMITATIONS IN THE CONTRACT WITH DEFENDANT SUBCONTRACTOR WAS REASONABLE BECAUSE THE RUNNING OF THE STATUTE COULD BE TRIGGERED BY A PARTY OVER WHICH DEFENDANT HAD NO CONTROL (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Singh, reversing Supreme Court, determined the counterclaims by defendant subcontractor, Nastasi, in this breach of a construction contract action, should not have been dismissed. The central issue was whether the one-year contractual statute of limitations was enforceable. Because the statute could be triggered by the failure of the owner to pay the plaintiff general contractor, Turner, a circumstance over which the defendant subcontractor, Nastasi, had no control, there was a question of fact whether the one-year limitations period was reasonable:

The relevant question when deciding whether a limitations period is enforceable is whether and when the damages were objectively ascertainable … . A contractual limitations period is unenforceable without a concrete determination of damages accrual … .

Here, the provisions setting a one-year limitation period for claims arising out of the contracts between Turner and Nastasi are reasonable on their face. However, the contracts also provide that payments by the owner are conditions precedent to any sums owed by Turner to Nastasi. As observed in D&S Restoration, it was neither fair nor reasonable to impose such a condition precedent, which was not within Nastasi’s control, but had the capability of nullifying its claim (D&S Restoration, 160 AD3d at 926).

… [T]he intent of the owner should not govern the interplay of the two provisions. Such a holding will unreasonably permit a party to choose to stay silent on the issue of owner payment unless it suited them, and unilaterally set the accrual date for the claim. Turner Constr. Co. v Nastasi & Assoc., Inc., 2020 NY Slip Op 08024, First Dept 12-29-20

 

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THE JUDGE SHOULD NOT HAVE, SUA SPONTE, INCREASED A PENALTY TO WHICH THE PARTIES HAD AGREED IN A SO-ORDERED STIPULATION (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the judge, sua sponte, should not have increased a penalty to which the parties had stipulated:

“A so-ordered stipulation is a contract between the parties thereto and as such, is binding on them and will be construed in accordance with contract principles and the parties’ intent” … . “When an agreement between parties is clear and unambiguous on its face, it will be enforced according to its terms and without resort to extrinsic evidence” … . Accordingly, a court “should not, under the guise of contract interpretation, ‘imply a term which the parties themselves failed to insert’ or otherwise rewrite the contract” … .

Here, we disagree with the Supreme Court’s sua sponte determination to change the $1,000 per week penalty set forth in the 2013 stipulation … . Although the New York City Landmarks Preservation Law authorizes a penalty of up to $5,000 per day … ,  the parties expressly agreed to a different penalty in their 2013 stipulation. Thus, the court should not have “rewritten” the terms of the 2013 stipulation by changing the amount of the penalty agreed to by the parties. City of New York v Quadrozzi, 2020 NY Slip Op 07856, Second Dept 12-23-20

 

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ONCE THE PLAINTIFFS-TENANTS PROPERLY SOUGHT TO EXERCISE THEIR OPTION TO PURCHASE, THE LANDLORD, WHO IMPROPERLY REFUSED TO HONOR THE OPTION, NO LONGER HAD A RIGHT TO USE AND OCCUPANCY PAYMENTS (SECOND DEPT).

The Second Department, reversing Supreme Court, determined plaintiffs’ cause of action for return of the rent paid to defendant after the plaintiffs exercised their option to purchase the property should have been granted. Plaintiffs were defendant landlord’s tenants. Plaintiffs sought to exercise an option to purchase the property which was in the lease. Once the plaintiffs properly exercised the option to purchase, the landlord, who refused to honor the option, could no longer seek payment for plaintiffs’ use and occupancy:

… “[I]t is well settled that the legal owner of real property is not entitled to an award for use and occupancy from a contract vendee in possession unless there also exists a landlord-tenant relationship between the parties” … . Under the merger doctrine, “execution of a contract of sale [for real property] between landlord and tenant serves to merge the landlord-tenant relationship into the vendor-vendee relationship and thus effectively terminates the former, unless the parties clearly intend the contrary result” … . “An intention to deviate from the general rule and to avoid a merger may be directly expressed in the agreement or may be inferred from a medley of factors such as the terms of the agreement, the circumstances of its making, and the subsequent behavior of the parties” … .

Here … the parties did not express an intention to deviate from the general rule or to avoid a merger upon the exercise of the purchase option. To the contrary, the terms of the rider provided, in relevant part, that “[i]n the event that Tenant decides not to exercise its option to purchase, all provisions herein remain in full force and effect and Tenant remains liable for all payments hereunder, including but not limited to rent” … . Since the plaintiffs validly exercised their option to purchase on July 21, 2015, and became a contract vendee in possession, it follows that the landlord-tenant relationship terminated on that date by application of the merger doctrine … . Blackburn Food Corp. v Ardi, Inc., 2020 NY Slip Op 07850, Second Dept 12-23-20

 

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THE SOLE REMEDY PROVISION IN THE REPRESENTATIONS AND WARRANTIES AGREEMENT IN THIS RESIDENTIAL MORTGAGE-BACKED SECURITIES CASE WAS VALID AND ENFORCEABLE; THE GROSS NEGLIGENCE PUBLIC POLICY RULE DOES NOT APPLY WHERE THE SOLE REMEDY PROVISION IMPOSES REASONABLE LIMITATIONS ON LIABILITY OR REMEDIES (CT APP).

The Court of Appeals, reversing the Appellate Division, in a full-fledged opinion by Judge Fahey, over a partial dissent, held that the sole remedy provision in the Representations and Warranties Agreement (RWA) in this residential mortgage-backed securities (RBMS) case was valid and enforceable. Plaintiff unsuccessfully tried to avoid the sole remedy provision by arguing the defendants breached the contract with gross negligence:

… [W]e … conclude that the parties’ contract, as written, means what it says. In this RMBS put-back action, plaintiff seeks to avoid a provision in the contract … that sets out a sole remedy for a breach by alleging that defendants breached the contract with gross negligence. This sole remedy provision purports to limit, but not eliminate, the remedies available to the plaintiff in the event of a breach. We conclude that, in a breach of contract action, the public policy rule prohibiting parties from insulating themselves from damages caused by grossly negligent conduct applies only to exculpatory clauses or provisions that limit liability to a nominal sum. The rule does not apply to contractual limitations on remedies that do not immunize the breaching party from liability for its conduct. The sole remedy provision is not an exculpatory or nominal damages clause. Plaintiff cannot render it unenforceable through allegations of gross negligence. * * *

We have previously considered the application of the gross negligence public policy rule only in cases where the contract provision at issue was an exculpatory clause, purporting to wholly immunize a party from liability, or a nominal damages clause limiting damages to, at most, $250 … . We have not yet determined whether grossly negligent conduct may render unenforceable contractual provisions that do not wholly insulate a party from liability for its breach, but instead impose reasonable limitations on either liability or the remedies available to the non-breaching party. We conclude that, in a breach of contract case, grossly negligent conduct will render unenforceable only exculpatory or nominal damages clauses, and the public policy rule does not extend to limitations on the remedies available to the non-breaching party. Matter of Part 60 Put-Back Litig., 2020 NY Slip Op 07687, CtApp 12-22-20

 

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THE INSURER’S ACCEPTANCE OF PREMIUM PAYMENTS AFTER IT LEARNED OF THE MISREPRESENTATION ABOUT THE SPRINKLER SYSTEM WAIVED THE INSURER’S RIGHT TO RESCIND THE POLICY (SECOND DEPT).

The Second Department determined that the insurer’s (Hamilton’s) acceptance of premiums after disclaiming coverage for fire damage when it learned the building did not have a sprinkler system waived the insurer’s right to rescind the policy. The insured had indicated the building had a sprinkler system it its application for the policy:

The continued acceptance of premiums by an insurance carrier after learning of sufficient facts which allow for the rescission of the policy, constitutes a waiver of the right to rescind … . Here, … the record demonstrated, as a matter of law, that Hamilton waived its right to assert the plaintiff’s misrepresentation as a basis for rescinding the policy and disclaiming coverage by renewing the policy and accepting further premiums after it discovered the misrepresentation … . 5512 OEAAJB Corp. v Hamilton Ins. Co., 2020 NY Slip Op 07525, Second Dept 12-16-20

 

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THE PROFESSIONAL LIABILITY INSURANCE POLICYHOLDERS (DOCTORS), NOT THE POLICYHOLDERS’ EMPLOYER WHICH PAID THE PREMIUMS, ARE ENTITLED TO THE PAYMENTS ASSOCIATED WITH THE CONVERSION OF THE MUTUAL INSURANCE COMPANY TO A STOCK INSURANCE COMPANY (SECOND DEPT).

The Second Department, in a full-fledged decision by Justice Scheinkman, reversing Supreme Court, determined the policyholders (doctors), not the policyholders’ employer which paid the professional liability insurance premiums, were entitled the payments associated with the conversion of a mutual insurance company to a stock insurance company. The Second Department further held that the doctors were not unjustly enriched from the standpoint of their employer because the payments to the doctors were not being made by the employer:

We agree with the Third and Fourth Departments that Insurance Law § 7307 makes clear that the policyholder is entitled to the consideration … . Thus, the defendants [doctors] are “legally entitled to receive the cash consideration” … .

In reaching this conclusion, we also note that the First Department … did not express any contrary views as to the import of the statute, the conversion plan, and the DFS [New York Department of Financial Services] approval decision. Rather, the First Department’s determination to award the cash consideration to the employer medical group was predicated entirely upon the theory of unjust enrichment … . Maple Med., LLP v Scott, 2020 NY Slip Op 07366, Second Dept 12-9-20

 

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THE WIFE’S COUNTERCLAIM FOR ADULTERY IN THIS DIVORCE ACTION, WHICH, IF PROVEN, WOULD HAVE HAD SUBSTANTIAL FINANCIAL CONSEQUENCES FOR THE HUSBAND, SHOULD HAVE BEEN DISMISSED; THE HUSBAND AND THE WOMAN WHO WAS THE SUBJECT OF THE WIFE’S ALLEGATIONS SUBMITTED AFFIDAVITS DENYING ANY SEXUAL RELATIONSHIP; THE WIFE’S AFFIDAVIT WAS BASED ENTIRELY ON PROXIMITY–THE WOMAN WAS THE FAMILY’S BABYSITTER–AND WAS OTHERWISE UNSUPPORTED (SECOND DEPT).

The Second Department, reversing Supreme Court, in a full-fledged opinion by Justice Dillon, determined the husband’s motion for summary judgment dismissing the wife’s adultery counterclaim should have been granted in this divorce action. Whether the husband committed adultery was an important issue because of the significant financial consequences agreed to in the post-nuptial agreement, including the award to the wife of 80% of the husband’s future gross income and 80% of all marital assets. The wife alleged the husband committed adultery with the family’s babysitter, R.I. The husband and R.I. submitted affidavits denying any sexual relationship:

… [T]he wife’s focus on the husband’s “opportunity” to commit adultery amounts to the husband’s mere proximity to R.L. at various times and places. Clearly, R.L. was the family babysitter and, in that capacity, could be expected to be in the husband’s presence on many occasions, including occasional overnight stays. The wife offers no facts or evidence — whether objective, inferential, or otherwise — of any adulterous conduct between the husband and R.L. beyond their mere physical proximity to one another. The wife’s affidavit provides no dates, describes no suspicious circumstance with any detail or particularity, identifies no particular relevant social event, and identifies no witness who observed conduct or heard comments between the husband and R.L. that might inferentially support a claim of adultery against the husband. There is no investigator, no photograph, and no suspicious documents, texts, emails, or social media posts. Put another way, the wife’s opposition to summary judgment amounts to mere unilateral speculation, conjecture, guess, and surmise stemming from the husband’s and R.L.’s mere proximity to one another, without anything more. The wife’s conclusory affidavit cannot substitute for admissible evidence even recognizing, as we do, that the adultery counterclaim is premised upon circumstantial evidence and the court’s role in determining summary judgment is that of issue-finding … . Agulnick v Agulnick, 2020 NY Slip Op 07335, Second Dept 12-9-20

 

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