Breach of Contract, Breach of Fiduciary Duty, Investor Dispute, Limited Partnership
Frydman LLC recently secured a favorable recovery for our client in a lawsuit seeking unpaid distributions and our client’s share of the proceeds from a limited partnership’s sale of a New York City rental building. One of FLLC’s practice areas is corporate litigation involving disputes between investors, shareholders, lenders, management and companies for breaches of operating agreements, breaches of fiduciary duty and related claims. In 1984, our client, a resident of Italy, invested as a limited partner in a New York limited partnership managed by her brother, a resident of France, acting as general partner. The general partner brother was also a limited partner, the husband of a limited partner and the beneficiary of a trust with a limited partner interest.
On behalf of our client, we filed suit against the general partner brother and the partnership in New York County Supreme Court alleging causes of action including breach of fiduciary duty and breach of the limited partnership agreement. We claimed that over the years the general partner and the partnership made distributions to our client’s brother and his related limited partners, but deliberately failed to pay our client accrued distributions. We further claimed that, in 2011, without notice to our client and in breach of the partnership agreement, the general partner caused the partnership to sell the rental building for over $5 million through a “Section 1031 Exchange” and purchased an interest in a triple-net lease for a CVS pharmacy located in Texas. After the sale, the general partner brother secretly dissolved the limited partnership, leaving the triple-net lease in a newly formed entity.
Discovery in the action was hard fought. We made an extensive motion claiming that the manager-brother withheld from production in discovery critical email uncovering the misconduct. The court granted our motion to compel the defendants’ attorneys to search thirteen years of the brother’s email employing specific search terms. We subpoenaed the brother’s accountant and others and received productions totaling tens of thousands of emails and other documents. With the help of a consulting expert to forensically examine the partnership’s books and records, we were able to determine how much money the partnership failed to distribute to our client and the amount of our client’s share of the proceeds from the building sale.
We performed detailed analysis of the parties’ records and a reconstruction of the limited partners’ accrued distributions and capital accounts. Armed with these analyses, we engaged in intensive settlement discussions that included multiple conferences with our forensic accounting team. We were able to obtain a novel, tax advantaged settlement package for our client involving a significant cash payment and exit from the investment relationship. We are gratified that our client justly received significant compensation and can now move on from this long-term family investment that had been a source of upset and consternation.
Breach of Contract, Statute of Limitations
You might know there are deadlines to file any type of civil litigation claim known as statutes of limitation. For example, in New York, a breach of contract claim must be filed within six years after the date of breach (e.g. if a breach occurred on January 1, 2013, plaintiff must commence an action by January 1, 2019). Typically, if a plaintiff does not start a lawsuit before the statute of limitations expires, the claim is barred. In other words, coast clear for the would-be defendant … or is it? Businesspeople should be careful in their communications with their counterparts because there are several ways in which an otherwise time-barred claim can be revived. This post will focus on a New York statute that allows an otherwise time-barred claim to be revived if a person (or her agent) admits the outstanding obligation in a signed writing.
New York General Obligation Law § 17-101 allows the statute of limitations to start over where the party to be charged (i.e. the would-be defendant) acknowledges in a signed writing the existence of a debt or other unperformed contract obligation. For the statute to revive a claim, the writing may not contain anything inconsistent with the party’s intention to pay or perform, such as a reservation of rights or conditioning repayment on a future event occurring. The writing need not be a formal letter – New York courts have enforced this statute to revive expired claims against unwary defendants who sent financial statements carrying a debt to the lender, listed the debt in a bankruptcy petition and entered into a stipulation partially settling a claim.
The First Department Appellate Division, covering appeals from Manhattan and the Bronx, recently held that sufficient correspondence from a borrower’s attorney can satisfy the statute. In Nelux Holdings Int’l, N.V. v. Dweck, 2018 N.Y. Slip Op. 02569 (1st Dep’t Apr. 17, 2018), a borrower in 1999 and 2000 borrowed $1,499,900 from the lender, giving back promissory notes requiring repayment by May 10, 2004. Defendant repaid $179,885, leaving a balance due of $1,320,015. In the normal course, plaintiff would have to sue by May 10, 2010 (six years after the repayment date). The lender did not file suit until July 22, 2015 and the borrower made a motion for summary judgment to dismiss the case as time-barred. The lender relied on emails and letters sent by the borrower’s attorney in 2009 and 2012, claiming they satisfy the revival statute and restarted the statute of limitations. The correspondence described the promissory notes, the collateral and the interest rate, and stated that defendant “wishes to pay off and retire the secured loan” and “will be trying to retire the loan by the end of the year,” while also asking plaintiff to confirm the amounts outstanding. Defendant argued the writings were not signed by him and, thus, could not satisfy the statute and, in any event, the attorney did not represent defendant. The court denied the motion, holding (i) an acknowledgment of a debt signed by the party’s agent (an attorney in this case) can revive a time-barred claim; (ii) the writings acknowledged the debt and (iii) whether the attorney represented defendant is an issue for a jury to decide at trial.
If you have any questions about the timeliness of a potential claim, please do not hesitate to contact us.
Breach of Contract, Business Divorce
As we have often noted on this blog, the importance of businesspeople setting all the terms of their agreements into a writing cannot be overstated. If a term is not in a written agreement – such as a requirement that all partners must actually work for a company rather than be a passive investor – with limited exceptions, the term might as well not exist. A recent decision in a “business divorce” case pending in the Commercial Division of the New York County Supreme Court is the latest reminder of the wisdom of a signed writing.
In Stavroulakis v. Pelakanos, et al., 2018 N.Y. Slip Op. 50180(U) (Sup. Ct. N.Y. Co. Feb. 13, 2018), plaintiff – a minority member of the company that owned and franchised the Bareburger restaurant brand – sued the other shareholders alleging they transferred all the assets of the company (including the rights to franchise royalties and the Bareburger Trademark) without consideration to a new entity formed by the other shareholders that did not include plaintiff. Plaintiff alleged, among other claims, that his partners breached their fiduciary duties to plaintiff and the company by self-dealing, usurping corporate opportunities and engaging in corporate waste. The defendant-shareholders claimed they were justified in effectively kicking plaintiff out of the business because plaintiff had not performed any work and owed his equity stake in the company solely to an initial cash investment. Notably, however, the company’s written agreement did not require any shareholder to work for the company. Nonetheless, defendants argued the “business judgment rule” – a doctrine prohibiting courts from inquiring into the internal business decisions of a company – protected their actions against plaintiff.
The Court disagreed with defendants and skewered their defense. The Court noted that the business judgment rule only protects acts taken in good faith and in legitimate furtherance of corporate purposes. The Court held that transferring the assets of the company to a new entity for no consideration solely to exclude plaintiff because he did not work for the company was not done in good faith or in the interest of the company. Further, defendant-shareholders all had a personal interest in the transaction – each shareholder’s interest in the business increased by eliminating plaintiff – barring application of the business judgment rule. Accordingly, defendants had the burden of proving the “entire fairness” of the transition to the company and plaintiff.
Defendants did not attempt to prove the fairness of the process of the transaction (done behind plaintiff’s back) or the price for the transaction (none). Defendants, rather, argued it was “fair” to cut out plaintiff because he had not worked for the company. The Court summarily dispensed with that defense because none of the company’s written agreements, nor the Business Corporation Law, obligated any shareholder to perform work for the company. To the contrary, the Court found that when the company was formed, the parties understood that only some of the shareholders would work for the company and would receive a salary unrelated to their economic interests as shareholders. The Court granted plaintiff partial summary judgment holding the transfer of assets for no consideration was not fair and breached defendants’ fiduciary duties. The Court noted the company’s agreements could have obligated shareholders to work or, alternatively, defendant-shareholders could have bought out plaintiff or engaged in a “freeze-out” merger (a strategic merger conducted to eliminate unwanted minority shareholders, the mechanics of which are beyond the scope of this post). The Court, relying on the precedent setting decision obtained by Frydman LLC in Yudell v. Gilbert, 99 A.D.3d 108 (1st Dep’t 2012), held plaintiff could recover damages against defendants derivatively on behalf of the company because the company suffered the harm of loss of its assets. The Court also determined plaintiff could recover money damages based on defendants’ oppression of plaintiff as a minority shareholder. The Court held off determining which type of recovery was appropriate until after trial.
If you have any questions about disputes among business partners, the best ways to avoid them or a partner’s rights in trying to resolve them, please do not hesitate to contact us.
Anticipatory Breach, Breach of Contract, Repudiation
When a party to a contract tells the other side that it has no intent of performing its contractual duties, the other party is typically entitled to either damages or a court order directing performance of the contract. This is referred to as an “anticipatory breach” or “anticipatory repudiation.” But what happens when a contract has been amended and a party only wants to disregard its obligations under the amendment and perform under the original contract? The Court of Appeals, New York’s top appellate court, recently offered some guidance on this previously unaddressed issue, but in so doing likely created more questions than it answered.
In Princes Point LLC v. Muss Dev. L.L.C., 30 N.Y.3d 127, 65 N.Y.S.3d 89 (2017), plaintiff contracted with defendants to purchase a waterfront commercial property in Staten Island for $36 million with $1.9 million down. Sellers were obligated within 18 months to provide certain government approvals necessary for purchaser to develop the property. Following Hurricane Katrina, the government required the sellers to rebuild a retaining wall at the property, making timely delivery of the permits impossible. The parties amended the contract several times to allow sellers time to rebuild the retaining wall, while increasing the purchase price and down payment, agreeing to share the cost of remediation and pushing out the approvals deadline and closing date.
One month before the new closing date, purchaser sued sellers seeking an order from the court rescinding, or cancelling, the amendments. Purchaser alleged sellers fraudulently induced purchaser to enter into the amendments. Purchaser wanted the amendments stricken and the parties to perform under the original. In short, purchaser wanted to pay the original, lower purchaser price and not contribute to the cost of rebuilding the wall. Sellers claimed that purchaser’s lawsuit was an anticipatory breach because purchaser was seeking to avoid performance of the amendments. The Appellate Division, First Department affirmed the trial court’s holding that the amendments were inseparable from the contract and purchaser’s commencement of the lawsuit evidenced its intent to disavow its contractual duty to perform. The Court of Appeals disagreed and reversed the First Department’s decision. The Court of Appeals held that purchaser sought only to rescind the amendments and perform under the original contract. Accordingly, the lawsuit did not constitute an unequivocal repudiation of purchaser’s obligations. The Court held that “the mere act of asking for judicial approval to avoid a performance obligation is not the same as establishing that one will not perform that obligation absent such approval.” In essence, the Court said that just because the purchaser asked a court to let it off the hook, it did not mean the purchaser would not perform if the court said “no.”
The Court of Appeals was careful to limit its holdings to the specific facts of this case and, as such, created more questions than it answered. Does a lawsuit seeking to rescind an unamended contract constitute an anticipatory breach? What if the lawsuit seeks to avoid performing only certain provisions of a contract? Every scenario requires independent analysis, which should be addressed prior to taking any action that could result in liability. If you have any questions concerning contract performance and enforceability, please do not hesitate to contact us.
Breach of Contract, Brokers, Commissions, Implied Contracts, Real Estate Litigation
This post has musings from recent briefing we did representing a broker seeking a commission for a real estate transaction. In New York, the default rule for real estate brokers is that they earn their commission when they produce a buyer who is “ready, willing and able” to purchase at the terms set by the seller. This is a default rule because the seller (or lessor) and broker can, and often do, agree on different terms concerning a commission. Perhaps most common, the seller and broker agree that a commission is only due if and when the seller actually closes on the sale of the property to the buyer produced by the broker – with the broker getting paid at the closing table out of the sale proceeds.
As with many other commercial transactions, disputes arise when the parties do not reach clear, express agreement of terms, preferably in writing. Assume there is no agreement, the broker markets the property and finds a willing buyer, but the seller changes his mind and does not sell. A broker can successfully sue for its commission if it proves the broker was the “procuring cause” of the transaction. One appellate court (in a case we litigated) set the standard for procuring cause, holding the broker’s efforts “must be a direct and proximate link, as distinguished from one that is indirect and remote,” between the introduction of the property and the consummation of the deal. In other words, a broker must do more than merely introduce a buyer to a property, but the broker does not necessarily have to negotiate the deal’s final terms or attend the closing.
Ordinarily, a buyer that does not retain the broker is not responsible for a seller’s commission. Where a buyer or lessee retains a broker for a property search or other services relating to the deal, even where the same broker represents the seller, the buyer may have liability concerning the commission. In many transactions, the broker representing a buyer or lessee will get compensated by the seller or lessor upon the closing of a transaction. Most times, the seller pays and there is no dispute. When the broker does not get paid, whether because the purchaser does not protect the broker by ensuring a provision for payment of commission in the contract or decides not to purchase, a dispute can arise. In addition to the possibly relevant issue of whether the broker was the “procuring cause” of the deal, a court might also examine the purchaser’s conduct. In cases without an express agreement between a buyer and its broker, New York courts have held that a buyer can still have an enforceable “implied” contract with its broker.
Over fifty years ago in Duross Co. v. Evans, 22 A.D.2d 573, 257 N.Y.S.2d 674 (1st Dep’t 1965), the court recognized an implied contract claim. The broker found the buyer a suitable parcel, and the buyer authorized the broker to submit an offer that the seller accepted. The seller issued a contract of sale providing for the seller to pay the commission upon closing, but the buyer refused to sign the contract. The Court held the broker stated a valid claim that the buyer had an implied agreement to purchase, thus allowing the broker to get paid a commission, and the buyer breached by refusing to enter into the contract. Another cautionary tale about the importance of a purchaser having a clear written agreement with its broker is found in Williams Real Estate Co. v. Viking Penguin, Inc., 228 A.D.2d 233, 644 N.Y.S.2d 19 (1st Dep’t 1996), the court recognized a broker’s claim that it had an oral exclusive brokerage agreement by which the lessee agreed to protect the broker. The court upheld a claim that the lessee breached the oral agreement by entering into the lease with a different broker.
