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QUESTIONS OF FACT IN THIS ATTORNEY’S FEES DISPUTE WHETHER THERE WAS AN ORAL AGREEMENT TO RETURN THE UNEXHAUSTED PORTION OF THE RETAINER PAID BY PLAINTIFF AND WHETHER THE VOLUNTARY PAYMENT DOCTRINE APPLIED (FIRST DEPT).

The First Department determined defendant-attorneys failed to eliminate questions of fact about whether there was an oral agreement to return the unexhausted portion of the $176,500 retainer plaintiff paid for representation in an employment discrimination case, and whether the voluntary payment doctrine applied:

It is undisputed that defendants never provided plaintiff with a written agreement, as required under 22 NYCRR 1215.1. In addition, [defendant-attorney] Herman, in his deposition testimony, admitted that he never provided any itemization of the time spent working on plaintiff’s case, even when plaintiff’s counsel requested it. Thus, defendants failed to show that the amount of plaintiff’s payments was fair and reasonably related to the value of services rendered … .

Defendants also failed to establish that plaintiff’s claim is barred by the voluntary payment doctrine, which “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” … . While defendants assert that plaintiff voluntarily made payments to compensate them for their services, rather than any “deposits” towards a retainer, they failed to establish that plaintiff had full knowledge of the relevant facts, such as the number of hours spent by defendants in connection with their representation of him  … . Plaintiff also averred that defendants told him that part of the payments would be used towards a trial and an appeal, which never occurred. Since defendants allegedly intended to keep the payments, regardless of any trial or appeal, there are material issues of fact whether plaintiff made the payments “with full knowledge of the facts”… or based on a mistake of material fact … . Dubrow v Herman & Beinin, 2019 NY Slip Op 03297, First Dept 4-30-19

 

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COMPLAINT STATED A CAUSE OF ACTION FOR CONSTRUCTIVE FRAUD BUT THE HEIGHTENED PLEADING REQUIREMENTS FOR ACTUAL FRAUD WERE NOT MET (FIRST DEPT).

The First Department, in an action alleging members of defendant liability company fraudulently transferred funds from the LLC to the defendant members to render the LLC insolvent. The First Department determined the constructive fraud cause of action was sufficiently pled but  the allegations did not support an actual fraud cause of action:

… [T]he complaint implicitly alleges that a necessary element of fair consideration, i.e., good faith, was lacking when the transfers were made. …

However, the complaint fails to state a cause of action for actual fraud under Debtor and Creditor Law §§ 276 and 276-a. … [U]nlike the allegations supporting the constructive fraud claim, the allegations supporting the actual fraud claim are subject to the heightened pleading standard of CPLR 3016(b), and the allegations about fair consideration do not meet that standard, because they were made upon information and belief, and the source of the information was not disclosed … .

Nor does the complaint allege any other badges of fraud. Brennan v 3250 Rawlins Ave. Partners, LLC, 2019 NY Slip Op 03002, First Dept 4-23-19

 

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RELEVANT REGULATION, RATHER THAN THE POLICY LANGUAGE, CONTROLLED THE CALCULATION OF INTEREST ON INSURANCE POLICY PROCEEDS (FIRST DEPT).

The First Department, reversing Supreme Court, determined the relevant regulation, as opposed to the less generous insurance policy provision, controlled the payment of interest on policy proceeds:

Defendant[‘s] … insurer’s bare offer to pay the policy limit was not a “tender” of the policy for the purposes of stopping the accrual of prejudgment interest under 11 NYCRR 60-1.1(b). While the policy provides that the insurer will pay interest on a judgment until “we have paid, offered to pay or deposited in court the part of the judgment that is within our Limit of Insurance,” 11 NYCRR 60-1.1(b) requires the insurer to pay postjudgment interest until it has “paid or tendered or deposited in court” the part of the judgment that does not exceed the policy limit. As the policy language is less generous to the insured than the regulation, it is deemed superseded by the regulation … . Within that framework, a bare offer to pay does not constitute a tender. Thus, interest must be calculated from the date of entry of the order that granted summary judgment to plaintiff until the date of payment … . Gyabaah v Rivlab Transp. Corp., 2019 NY Slip Op 02417, First Dept 3-28-19

 

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PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT SHOULD HAVE BEEN GRANTED, A DE FACTO MERGER OF THE JUDGMENT DEBTOR WITH THE CURRENT DEFENDANT WAS DEMONSTRATED (FOURTH DEPT).

The Fourth Department, reversing Supreme Court, determined plaintiff judgment-creditor’s motion for summary judgment should have been granted. Plaintiff alleged a de facto merger between defendant Luigi’s Bakery Corp and its predecessor Luigi’s Family Bakery, making the Bakery Corp. liable for the Family Bakery’s debt:

Factors courts consider in determining whether a de facto merger has occurred include “continuity of ownership; . . . a cessation of ordinary business and dissolution of the predecessor as soon as practically and legally possible; . . . assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the predecessor; and . . . a continuity of management, personnel, physical location, assets, and general business operation” … . Not all of these factors are required to demonstrate a merger; ” rather, these factors are only indicators that tend to show a de facto merger’ ” … .

Here, defendants admitted to continuity of ownership between Family Bakery and Bakery Corp., and to two of the other factors of a de facto merger: cessation of ordinary business operations, and continuity of management, personnel, physical location, and general business operation. In both their answer and their bill of particulars, defendants admitted that the successor corporation, Bakery Corp., was formed in the same month that the predecessor corporation, Family Bakery, ceased operations. They also admitted that the successor corporation used the same address and phone number as the predecessor corporation. We therefore conclude that the court erred in determining that there are issues of fact with respect to the date of incorporation of the successor corporation or the date of dissolution of the predecessor corporation. A case for de facto merger can be made without a legal dissolution where, as here, the predecessor company “has become, in essence, a shell” … . Energy Coop. of Am., Inc. v Luigi’s Family Bakery, Inc., 2019 NY Slip Op 02211, Fourth Dept 3-22-19

 

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ONCE AN ACTION TO RECOVER THE PRINCIPAL OF A BOND IS TIME-BARRED, THERE IS NO LEGALLY COGNIZABLE CLAIM FOR POST-MATURITY INTEREST (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Feinman, determined that a bond issuer is not obligated to pay interest once a claim for the principal is time-barred:

The United States Court of Appeals for the Second Circuit has asked us to decide …  “[i]f a bond issuer remains obligated to make biannual interest payments until the principal is paid, including after the date of maturity … , do enforceable claims for such biannual interest continue to accrue after a claim for principal of the bonds is time-barred?” We answer this question in the negative … . Pursuant to New York common law and the terms of the indenture, in the absence of a timely action to recover principal, a bondholder cannot enforce the conditional obligation to make post-maturity interest payments. * * *

The rule we reiterate today effectuates the agreement negotiated by the parties and reinforces our longstanding view of interest as generally dependent on principal. Moreover, it promotes the purposes underlying the statute of limitations … . For those reasons, we conclude that once a claim on the principal is time-barred, a claim to recover unpaid post-maturity interest payments is not legally cognizable. Ajdler v Province of Mendoza. 2019 NY Slip Op 02151, CtApp 3-21-19

 

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DEFENDANT SOLE SHAREHOLDER OF DEFENDANT CORPORATION WAS NOT ENTITLED TO SUMMARY JUDGMENT ON THE ACTION AGAINST HIM PREMISED UPON PIERCING THE CORPORATE VEIL, THERE WERE QUESTIONS OF FACT WHETHER THE WARRANTY PROVISIONS OF THE CONTRACT WERE VIOLATED AND WHETHER DEFENDANT CORPORATION WAS STRIPPED OF ASSETS SUCH THAT IT COULD NOT MEET ITS CONTRACTUAL OBLIGATIONS (SECOND DEPT).

The Second Department, over a partial dissent, reversing (modifying) Supreme Court, determined that defendant Brookstein, the sole shareholder of corporate defendant DKM, was not entitled to summary judgment in the action against him based upon piercing the corporate veil:

“The general rule, of course, is that a corporation exists independently of its owners, who are not personally liable for its obligations, and that individuals may incorporate for the express purpose of limiting their liability… . The concept of piercing the corporate veil is an exception to this general rule, permitting, in certain circumstances, the imposition of personal liability on owners for the obligations of their corporation … . A plaintiff seeking to pierce the corporate veil must demonstrate that a court in equity should intervene because the owners of the corporation exercised complete domination over [the corporation] in the transaction at issue and, in doing so, abused the privilege of doing business in the corporate form, thereby perpetrating a wrong that resulted in injury to the plaintiff … .

A plaintiff seeking to pierce the corporate veil bears a heavy burden… . “Veil-piercing is a fact-laden claim that is not well suited for summary judgment resolution” … .

Here, Brookstein did not establish his prima facie entitlement to judgment as a matter of law dismissing the complaint insofar as asserted against him. It is undisputed that Brookstein dissolved DKM without making any reserves for contingent liabilities, despite the existence of a provision in the contract of sale pursuant to which DKM agreed to indemnify [plaintiff] for any breach of warranty for a period of 7½ years after the closing of the sale. This factor was sufficient to raise a triable issue of fact as to whether Brookstein stripped the corporation of assets, leaving DKM without sufficient funds to pay its contractual contingent liabilities … . Town-Line Car Wash, Inc. v Don’s Kleen Mach. Kar Wash, Inc., 2019 NY Slip Op 01443, Second Dept 2-27-19

 

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BANK ENTITLED TO JUDGMENT UNDER THE DOCTRINE OF EQUITABLE SUBROGATION (SECOND DEPT).

The Second Department determined plaintiff was entitled to summary judgment pursuant to the equitable subrogation theory in this foreclosure action:

… [T]he plaintiff commenced this action to foreclose a mortgage in the principal amount of $480,000, which it alleged was secured by real property in Brooklyn, owned by the defendants Tzilia Dalfin (hereinafter Tzilia) and Angel E. Daflin (hereinafter Angel), who have been divorced since the 1990s. It is undisputed that $453,900.03 of the proceeds of the mortgage were used to pay off Tzilia and Angel’s prior mortgage on the property as well as outstanding taxes. * ** *

Under the doctrine of equitable subrogation, “[w]here property of one person is used in discharging an obligation owed by another or a lien upon the property of another, under such circumstances that the other would be unjustly enriched by the retention of the benefit thus conferred, the former is entitled to be subrogated to the position of the obligee or lien-holder” … . Even if, as Angel contends, his signature on the subject mortgage was forged, the plaintiff could still recover against him on the theory of equitable subrogation based upon its payoff of the prior mortgage and liens against his property at the closing of the subject mortgage … .

… [T]he plaintiff established its … entitlement to judgment as a matter of law on a theory of equitable subrogation by submitting evidence that $453,900.03 of the proceeds of the subject mortgage were used to pay off the prior mortgage and taxes for which Angel was liable … . Wells Fargo Bank, N.A. v Dalfin, 2019 NY Slip Op 01255, Second Dept 2-20-19

 

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THE CONTENTS OF A SAFE DEPOSIT BOX CONSTITUTED THE PROPERTY OF JOINT TENANTS WITH RIGHTS OF SURVIVORSHIP, THEREFORE THE CONTENTS ARE AVAILABLE TO SATISFY A JUDGMENT AGAINST ONLY ONE OF THE JOINT TENANTS (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Gische, in a matter of first impression, determined the presumption of joint tenancy with rights of survivorship applied to the contents of a safe deposit box. The judgment debtor NYCB was owed $11 million by one of two persons (Rachel and Ari) who signed rental agreements for a safe deposit box. The First Department held that Supreme Court properly ordered the safe deposit box opened and the contents turned over to satisfy the judgment against Ari:

CPLR 5225(b) provides for an expedited special proceeding by which a judgment creditor can recover “money or other personal property” belonging to a judgment debtor “against a person in possession or custody of money or other personal property in which the judgment debtor has an interest” in order to satisfy a judgment … . When two or more persons open a bank account, making a deposit of cash, securities, or other property, a presumption of joint tenancy with right of survivorship arises (Banking Law § 675[b] …). If the presumption is applied, each named tenant “is possessed of the whole of the account so as to make the account vulnerable to the levy of a money judgment by the judgment creditor of one of the joint tenants” … .

By relying on the terms of the rental agreement, NYCB met its burden of establishing Ari and Rachel as joint tenants with rights of survivorship of the safe deposit box account. The safe deposit box is controlled by each of them, each of them has access to the box at all times, and each of them can deposit property into the box or remove property from it without each other’s permission. Should either one of them die, the survivor would have access to the box and could remove all its contents … . Matter of New York Community Bank v Bank of Am., N.A., 2019 NY Slip Op 00544, First Dept 1-24-19

 

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OIL AND GAS INVESTMENT SCHEME PROPERLY FOUND TO BE AN ABUSIVE TAX AVOIDANCE TRANSACTION (THIRD DEPT).

The Third Department, in a full-fledged opinion by Justice Pritzker, affirmed the Tax Appeals Tribunal’s determination that petitioner’s complex gas and oil drilling investment scheme constituted an abusive tax avoidance transaction. Therefore the notice of deficiency, penalties and interest assessed by the Department of Taxation and Finance were appropriate. The opinion is fact-specific and too complicated to fairly summarize here. The following quotation from the opinion is provided to demonstrate the nature of the issues:

The Tribunal’s determination that the overall financing structure artificially inflated the actual capital contributions of the Belle Isle partners [the petitioner oil and gas drilling company], allowing large tax deductions based upon IDCs [intangible drilling costs] derived through the inflated turnkey contract, is rationally based and supported by substantial evidence … . Beginning with the Belle Isle financing structure, particularly Sznajderman’s [petitioner general partner’s] subscription note, it is clear that Belle Isle did not have an intent to create a true debtor-creditor relationship as to 85% of the face value of the note. Specifically, while the face value of the subscription note was $540,000, the additional collateral agreement had the practical effect of satisfying the principal of said note by Sznajderman’s payment of only 15% of the face value, which was to be used by SS & T, the so-called creditor, to purchase bonds. Importantly, these bonds were not collateral; rather, they were ostensibly used to pay off the principal of the subscription note in 25 years. …

Further, Sznajderman’s payment of interest during the first year did not legitimize the debt because interest after the first year, which was designed to be paid from Sznajderman’s net operating proceeds, was only paid sporadically, despite such proceeds being available. We agree with the Tribunal that, based upon this sporadic collection of interest, it is highly unlikely that Belle Isle would attempt to collect “its partners’ very large interest accruals when the subscription notes mature.” … . As such, we find that substantial evidence supports the Tribunal’s conclusion that, while Sznajderman’s investment had economic substance in general, … the subscription note, to the extent of 85% of its face value, was artificially inflated and, as such, did not establish true debt and most certainly elevated form over substance … . Matter of Sznajderman v Tax Appeals Trib. of the State of N.Y., 2019 NY Slip Op 00007, Third Dept 1-3-19

 

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THE STATE ACTION ON A MULTI-MILLION DOLLAR DEBT SHOULD NOT HAVE BEEN DISMISSED ON CLAIM PRECLUSION OR RES JUDICATA GROUNDS BASED UPON THE DISMISSAL OF A FEDERAL ACTION AGAINST A DEFENDANT WHO WAS NOT A PARTY IN THE STATE ACTION, THE FACT THAT THE PLAINTIFFS IN THE STATE ACTION MAY HAVE BEEN ABLE TO INTERVENE OR ASSIGN THEIR RIGHTS TO THE DEFENDANT IN THE FEDERAL ACTION WAS NOT A PROPER GROUND FOR CLAIM PRECLUSION (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Moulton, reversing Supreme Court determined that the dismissal of action in federal court to recover on a multi-million dollar notes did not preclude the state action on claim preclusion (res judicata) grounds. The opinion is fact-specific and too complicated to be fairly summarized here:

Supreme Court dismissed the action with prejudice on claim preclusion grounds, and denied the motion to amend as moot. The court found that plaintiffs herein should have intervened in the federal action, or assigned their claims to [the defendant in the federal action,] Varshavsky. The failure to do so was a “blatant misuse of the federal forum,” which resulted in a “stunning” amount of discovery, and several motions, which Supreme Court found were wasted because plaintiffs herein failed to use the federal forum to resolve all “claims aris[ing] from a common nucleus of operative facts.” * * *

The doctrine of claim preclusion does not bar plaintiffs’ claims herein. Varshavsky, the sole defendant in the federal action, was not himself the creditor of the subject loans and had no standing to assert a counterclaim for recovery of plaintiffs’ loans in that action. Plaintiffs’ putative rights to intervene as party defendants in the federal action, or to assign their claims to Varshavsky, are far from clear. Either option, intervention or assignment, might have been rejected by the federal court as an attempt to evade the strictures of diversity jurisdiction. Apart from the efficacy of these options, even if intervention or assignment were possible, there is no legal doctrine that would compel plaintiffs herein to litigate in the federal action. In short, plaintiffs herein, as nonparties to the federal litigation, are not precluded from asserting claims that no party in the federal litigation had standing to pursue. To hold otherwise would mean that a debtor may, by suing a creditor’s principal or associate, require the creditor to participate in the action or have its claims precluded. Avilon Auto. Group v Leontiev, 2019 NY Slip Op 00058, First Dept 1-3-19