Failure to Follow Traditional Mezzanine Financing Structure Precludes Plaintiffs from Recovering as Secured Parties: Lebedowicz v Meserole Factory LLC
In a December 20, 2011, decision by Justice Schmidt, the court denied plaintiffs’ motion for summary judgment declaring that they are entitled to defendants’ membership interests in defendant-LLC as a security interest in connection with the purchase of real property. Defendant-LLC borrowed $3.5 million to purchase real property from the plaintiffs. Plaintiffs claimed that under the mezzanine loan agreements, the defendant-LLC members pledged their membership interests in the LLC as security to be transferred to plaintiffs upon default. The defendant-members signed the loan agreements, not in their individual capacities, but on behalf of defendant-LLC. Because an LLC “cannot hold its own LLC interests and, therefore, could not grant the plaintiffs a lien on its own LLC interests,” the court denied plaintiffs’ motion. The court further noted that had the parties followed “the traditional mezzanine loan structure,” they would have formed a separate holding company to own the borrower-LLC, allowing the LLC to grant plaintiffs a lien on its interests in the newly-formed holding company.
Lebedowicz v Meserole Factory LLC, Sup Ct, Kings County, December 20, 2011, Schmidt, J., Index No. 20293/10
Forum Selection Clause Applies to a Non-party to Agreement When Found to be "Closely Related" to the Party: Montoya v Cousins Chanos Casino, LLC
In a January 12, 2012 decision by Justice Kornreich, the court granted in part defendants’ motion to dismiss a declaratory judgment action that sought a declaration that plaintiffs complied in all respects with a Subscription Agreement.
The case arose out of an investment in a Law Vegas casino. In response to defendants’ threats of suing plaintiffs for misleading them in an investment, plaintiffs brought this action seeking, among other things, a declaration that they fully performed their obligations to defendants under the terms of the Subscription Agreement and that any common-law claims based on defendants’ investment are preempted by New York's Martin Act, (NY General Business Law §§ 352. After plaintiffs commenced this action, defendants filed suit in Nevada. The Nevada action alleges that plaintiffs engaged in fraud, fraudulent concealment and securities fraud in connection with the solicitation of investments; deceptive trade practices; unjust enrichment; conspiracy; breach of fiduciary duties; aiding and abetting breach of fiduciary duties and gross mismanagement.
On this motion to dismiss, defendants argue that plaintiffs were not signatories to the Subscription Agreement and, as a result, lack standing to bring this declaratory judgment action. Moreover, they claim that the forum selection clause in the Subscription Agreement is inapplicable because the causes of action in the Nevada complaint, common-law and statutory claims, do not arise from the Subscription Agreement. In addition, defendants contend that this action should be dismissed because there is another action pending between the parties in Nevada and this action was commenced solely in an effort to circumvent Nevada's adjudication of defendants' claims.
The Court held that a non-party may enforce a forum selection clause if the non-party is "closely related" to one of the signatories. Here, the Subscription Agreement contains both New York choice of law and forum selection clauses. By signing the Subscription Agreement containing the forum selection clause, defendants agreed to submit to the jurisdiction of the New York courts. Plaintiffs do have standing to bring this action because they are intended beneficiaries of the agreement and/or are closely related to the entity, one of the signatories of the agreement. Dismissal of this action, which was the first filed, is not warranted, since plaintiffs are merely asking the court to declare the parties' respective rights and remedies under the Subscription Agreement. The court observed that New York courts routinely enforce contractual forum selection clauses and pursuant to New York's General Obligations Law (GOL) § 5-1402.
The Court also concluded that no private right of action for damages exists under the Martin Act. Rather, the court reasoned that it appeared that plaintiffs were seeking an impermissible advisory opinion from the court to determine whether they have viable defenses to defendants' lawsuit. Plaintiffs' request for a declaration that they complied in all respects with the Subscription Agreement, requires the court to declare findings of fact, rather than to decide issues of law.
Montoya v. Cousins Chanos Casino, LLC, Sup Ct, New York County, Jan. 12, 2012, Kornreich J, Index No. 651353/2011.
Motion for Partial Summary Judgment Granted, In Part: Comprehensive Care Mgt. Corp. v Utica Mutual Ins. Co.
In a December 15, 2011 decision by Justice Emerson, the court granted in part and denied in part the defendant’s motion for partial summary judgment. The case arose from a construction project entered to build a health-care treatment center on behalf of Comprehensive Care (“CCMC”). After a dispute arose between CCMC and the original construction manager (“NCI”), Utica, who issued payment and performance bonds under the contract, entered the “Takeover Agreement” with CCMC to complete the project. Pursuant to a letter agreement, Utica re-engaged NCI to complete the remaining work, but subsequently terminated NCI for allegedly breaching the letter agreement by failing to timely complete the project. CCMC then sued Utica for allegedly breaching the Takeover Agreement. The court denied that branch of the motion seeking to dismiss the first cause of action insofar as it sought attorney’s fees and liquidated damages, which Utica claimed were not provided for under the Takeover Agreement. The court found that: attorney’s fees and liquidated damages were permitted under both the original contract and the performance bond; that neither the contract nor bond was extinguished by the Takeover Agreement; and that CMCC met the performance bond’s requirements for such relief. Further interpreting the bond, the court limited CCMC’s recovery to attorney’s fees incurred in completing the work under the contract. Finally, the court granted the part of the motion to dismiss the second cause of action for a declaratory judgment that NCI’s mechanic’s lien was null and void and directing Utica to remove or satisfy it, and all other liens against the property. The court held that NCI was a necessary party to such a declaratory judgment but had not been joined it this action.
Comprehensive Care Mgt. Corp. v Utica Mut. Ins. Co., Sup Ct, Suffolk County, December 15, 2011, Emerson, J, Index No. 24923/09
Motion to Dismiss Granted Where Causes of Action in Amended Complaint Were Identical to Those in Original: Siegel Consultants, Ltd. v Nokia, Inc.
In an April 28, 2011 decision by Justice Bransten, the court granted the third-party defendant Frieland’s motion to dismiss the third-party complaint against it; denied the defendant/third-party plaintiff 5 LLC’s cross-motion to disqualify Friedland’s attorney (“Frohman”); and denied Friedland’s motion for sanctions. The matter arose out of the rental of real property owned by 5 LLC. Friedland was 5 LLC’s exclusive agent but Siegel, a real estate broker, claimed it had an instrumental role in securing the rental, entitling it to a commission. After a prior order of the Court dismissed all eight causes of action against Friedland, 5 LLC served an amended third-party complaint which repeated each of the eight causes of action previously dismissed, and added a ninth cause for declaratory judgment. Granting Friedland’s motion to dismiss, the court held that “the CPLR does not permit a party to replead causes of action that have already been dismissed through an amendment to the complaint.” The Court also held that the ninth cause of the action was duplicative of the first cause of action and that declaratory relief was inappropriate because 5 LLC had an adequate alternative remedy. The court dismissed 5 LLC’s cross-motion for disqualification, which alleged Frohman had represented both 5 LLC and Friedland and advocated for both at the same time, finding that 5 LLC failed to establish each of the three requirements of a motion to disqualify: 1) 5 LLC was never Frohman’s client; 2) there was not a substantial relationship between the main action and the third-party action; and 3) the interests of the parties were not materially adverse because in the first action both parties maintained that Friedland was the sole procuring broker. Finally, the court found that the sanctions were not warranted because none of the party’s arguments were completely without merit.
Siegel Consultants, Ltd. v. Nokia, Inc., Sup Ct New York County, April 28, 2011, Bransten, J., Index No. 603277/08.
Court Decides Motions for Summary Judgment arising from Fraudulent Financial Advice and Resultant Mortgage Default: Mauro v Countrywide Home Loans, Inc.
In an October 17, 2011 decision by Justice Warshawsky, the court: 1) denied in part and granted in part both Kaplan’s and Countrywide’s motion for summary judgment to dismiss the complaint; and 2) denied Mauro’s cross-motion for summary judgment against Countrywide. On the advice of Dawson, who held himself out as an experienced financial manager, Mauro mortgaged two previously unencumbered properties for investment purposes. Mauro alleged that she did not receive complete information about the loans, including how the proceeds would be disbursed, and that nothing was explained to her at the closing, where Kaplan was the attorney for Countrywide. Although the HUD-1 Settlement Statements indicated that the proceeds would be distributed to Mauro, all proceeds were delivered to Dawson or entities he controlled, including the defendant BMG. BMG initially made the mortgage payments on both loans but eventually defaulted and Dawson was arrested for grand larceny.
The court denied parts of Kaplan’s motion for summary judgment holding that material issues of fact existed as to: 1) the elements of fraud with respect to whether and for what purpose Kaplan made the representation that the loan funds were to be directed to Mauro alone; 2) breach of fiduciary duty, because while it was unlikely that Kaplan entered into an attorney-client relationship with Mauro by drafting two deeds, it was still a factual possibility; and 3) Countrywide’s cross-claims for professional negligence, breach of contract and indemnity. Kaplan’s motion to dismiss the claim for intentional tort was granted because the actions giving rise to the claim occurred beyond the one-year statute of limitations period.
On Countrywide’s motion, the court held that: 1) there were factual issues precluding the dismissal of the claims for breach of contract and fraud, and Countrywide’s cross-claims against Kaplan that it could be only be liable due to its agent’s (i.e., Kaplan’s) negligence and breach of contract; 2) because Mauro could not establish a likelihood of success on the merits and was seeking economic damages, the claim for injunctive relief was inappropriate and therefore dismissed; 3) the claims seeking a declaration that loans were void because obtained under false pretenses were dismissed because Mauro’s cooperation in their placement established their validity; and 5) because there were no factual issues with respect to Dawson’s criminal wrongdoing through BMG, summary judgment was granted on Countrywide’s cross-claim for indemnification against Dawson and BMG.
Finally, the court denied each part of Mauro’s motion for summary judgment against Countrywide finding that: 1) issues of material fact with respect to the direction of proceeds to BMG precluded the claims for breach of contract, fraud, and declaratory relief; and 2) Mauro had not established a likelihood of success on the merits, precluding injunctive relief.
Mauro v Countrywide Home Loans, Inc., Sup Ct, Nassau County, October 17, 2011, Warshawsky, J., Index No. 000191/2011.
Insurer Fails to Demonstrate Material Misrepresentation, Cannot Void Insurance Policy: BW Sportswear, Inc. v. Those Certain Underwriters at Lloyd's of London, Subscribing to Certificate Number 34665
In an August 8, 2011 decision by Justice Oing the court denied an insurer’s motion for summary judgment for a declaration that an insurance policy was void and rescinded ab initio. The litigation stemmed from an insurance claim for water damage to a clothing store. The insurer performed an investigation after the claim was submitted. Based on the investigation the insurer argued that the insured made material misrepresentations on the insurance application when it failed to disclose prior insurance claims at the store’s location. The insurer also argued that the insured filed false documents in connection with the claim.
The court denied the insurer’s motion to declare the policy void because it failed to meet its “burden of providing clear and uncontradicted evidence of the materiality of the misrepresentation.” This included the insurer’s failure to provide evidence of its underwriting policies. The court further found that the insurer’s purported evidence that the insured filed false documents in support of his claim at best raised issues of fact which precluded summary judgment.
BW Sportswear, Inc. v. Those Certain Underwriters at Lloyd’s of London, Subscribing to Certificate Number 34665, Sup Ct, New York County, August 8, 2011, Oing, J, Index No. 603568/09.
New York Law Applies to Insurance Dispute, Even Though Accident Happened in Pennsylvania: Aspen Ins. UK Ltd. v East Coast Preserv. Co., LLC
In a June 9, 2011 decision by Justice Schmidt, the court denied summary judgment to a building contractor who argued that New Jersey or Pennsylvania law applied to an insurance contract which did not contain a choice of law provision. The litigation arose from a personal injury claim filed by a worker while working on renovations to a Pennsylvania nursing home. The contractor first sought coverage (and submitted a notice of claim) after it was sued.The insurer brought a declaratory judgment action seeking an order that it had no duty to defend or indemnify the contractor. The basis for the insurer’s action were: (i) late notice – it was first provided notice 549 days after the accident; (ii) a contractual exclusion for work performed by independent contractors; and (iii) a residential construction work exclusion. The contractor moved for summary judgment arguing that the late notice provision should be interpreted under New Jersey or Pennsylvania law, and therefore, the insurer had to demonstrate prejudice from the late notice. The contractor also argued that the exclusions were inapplicable.
The court denied summary judgment holding that the insured “failed to show that the action lacks substantial connection to New York” so that another’s state’s law should apply in interpreting the late notice provision. Therefore, the insurer did not have to show prejudice from the late notice; as late notice alone would be sufficient to deny the claim. The court also found there were factual issues precluding a finding that the other exclusions were inapplicable.
Aspen Ins. UK Ltd. v East Coast Preserv. Co., LLC, Sup Ct, Kings County, June 9, 2011, Schmidt, J, Index No. 3804/10.
Car Manufacturer's Dealer Incentives Violate NY's Franchised Motor Dealer Act: Audi of Smithtown, Inc. v Volkswagen Group of Am., Inc.
In a May 26, 2011 decision by Justice Pines the Court granted summary judgment to two automobile dealers who successfully argued that an automotive manufacturer’s incentive program was treating newer franchisors better than older franchisors. The Court’s review of two different incentive programs offered through the manufacturer’s captive financial arm provides insight into the relationship between automotive manufacturers and dealers. Based in part on the legislative history of the statute, the Court concluded that because the programs made it easier for a new franchisor to reach certain milestones the programs were providing disparate treatment in violation of the New York Franchised Motor Vehicle Dealer Act.
Audi of Smithtown, Inc. v Volkswagen Group of Am., Inc., Sup Ct, Suffolk County, May 26, 2011, Pines, J, Index No. 12372-2008
Potentially Embarrassing Medical Information Not Enough to Warrant Sealing of Complaint: Cronin v Harris
In a March 1, 2011, decision by Justice Driscoll, the court granted plaintiff’s motion to file his complaint under seal. Plaintiff-partner in a law practice with his father and sister brought an action for judicial dissolution of the firm and sought leave to file the complaint under seal in order to protect his father’s medical condition and history, as well as the welfare of the firm, the legal and financial interests of its clients and their confidence in the firm. Defendant-partners consented to plaintiff’s application. In balancing the interests of the public in accessing court documents with the interests of the parties in preserving confidentiality, the court concluded that “good cause exists to permit plaintiff to file the complaint under seal, in light of the parties’ shared concerns that public access to the complaint would potentially undermine and adversely affect the legal and financial interests of [the firm’s] clients.” The court noted, however, that potentially embarrassing medical information “does not, in and of itself, warrant the requested sealing” and emphasized that its decision on plaintiff’s motion was specific to the complaint. Any subsequent application to file documents under seal would require the court to “conduct an independent review of the documents or records at issue, prior to issuing its ruling.”
Cronin v Harris, Sup Ct, Nassau County, March 1, 2011, Driscoll, J., Index No. 22697/10
*For a more detailed analysis of this decision and its impact, see our colleague Peter A. Mahler’s post at New York Business Divorce.
Court Reads Clear Condition Precedent to Coverage In Owner Controlled Insurance Policy: Zurich Am. Ins. Co. v Illinois Natl. Ins. Co.
In a December 23, 2010, decision by Justice Fried, the court granted defendant’s motion for summary judgment and denied plaintiff’s cross-motion for the same relief. Plaintiff-subcontractor and its carrier sued defendant-general liability insurer for coverage under an “owner controlled insurance policy” (OCIP). Defendant had declined coverage due to plaintiff’s failure to obtain a written subcontract and to enroll in the OCIP program before the loss, both requirements under the policy. The court granted defendant’s motion and dismissed the complaint, finding that requirements were “unambiguous” conditions precedent to coverage under the policy – namely, that “the language is clear: no enrollment, no coverage.” The court rejected plaintiff’s equitable estoppel argument, finding no evidence that defendant took actions to mislead plaintiff into believing that coverage was available or that plaintiff had relied on such allegedly-misleading activity.
Zurich Am. Ins. Co. v Illinois Natl. Ins. Co., Sup Ct, New York County, December 23, 2010, Fried, J., Index No. 105533/09
Claim Against Homeowners' Insurers for Additional Living Expenses for Constructive Eviction Denied: Granirer v. The Bakery, Inc.
In a September 20, 2010 decision by Justice Kapnick, plaintiffs had moved for an order declaring that their homeowners’ policies obligated the insurance carriers to reimburse for alternate housing and increased living expenses incurred by reason of their constructive eviction. The parties had resolved, in 2006, the dispute though a settlement agreement providing for reimbursement. The Agreement provided for a cap of $53,500 for additional living expenses for the loss. Plaintiffs now claim that defendants are liable for additional expenses since they renewed the polices in subsequent years with knowledge that the apartment remained uninhabitable. The Court rejected plaintiffs’ argument, concluding that the additional living expenses arose out of the 2006 loss, thus limited to the amount agreed to for that policy period. Plaintiffs’ motion was denied.
Granirer v. The Bakery, Inc., Sup Ct, NY County, Sept. 20, 2010, Kapnick, J., Index No. 109915/06.
Essex Ins. Co. v Barillaro, et al., Sup Ct Queens County, July 21, 2010, Kitzes, J, Index No. 558/07
In an October 22, 2010 decision by Justice Kitzes, the court granted an insurance company summary judgment declaring that it did not have to provide a defense or indemnification to a contractor who subcontracted certain of the work.
In 2005 an employee of a plumbing contractor allegedly was injured on the construction project. Over one year later he brought suit against the property owner (who was also the general contractor). The owner brought a third-party indemnification action against DMP Contracting Corp, allegedly the subcontractor responsible for the excavation (who subcontracted work to the injured worker’s employer).
The insurer was granted summary judgment because the express and unambiguous language in the insurance contract provided no coverage for injured worker, because it excluded bodily injury to any of the insured’s contractor or subcontractor.
Bridge Funding, Inc. v. Essex Market Development, LLC, Sup Ct, New York County, April 20, 2009, Lowe, J, Index No. 600236/07
In a decision dated April 20, 2009, Justice Lowe, in connection with an action by Plaintiff-lender against Defendant-developer involving an alleged breach of a loan agreement, and on cross-motions for summary judgment, as well as Plaintiff’s motion to strike Defendant’s answer and counterclaims, 1) denied Plaintiff’s motion on its breach-of-contract claim, finding that because the operative loan document merely constituted an offer by Defendant to enter into a loan agreement, which was not accepted by Plaintiff, Plaintiff had no right to recover the fees stated in the offer; 2) granted Defendant’s motion on its breach-of-contract claim, finding that because Plaintiff did not accept Defendant’s offer, Defendant was entitled to a return of its $55,000 deposit submitted with its offer; 3) dismissed Plaintiff’s unjust-enrichment claim, finding that Plaintiff failed to establish a value of services rendered for the benefit of and accepted by Defendant; 4) dismissed Defendant’s unjust-enrichment claim, finding that the subject of its claim was governed by the terms of the offer; 5) dismissed Defendant’s claim for conversion as duplicative of its breach-of-contract claim; 6) dismissed Defendant’s claim for declaratory judgment, finding that it had an adequate, alternative remedy in its breach-of-contract claim; 7) and denied Plaintiff’s motion for summary judgment on its claim for attorney’s fees, finding that because Plaintiff never accepted Defendant’s offer and because the parties never incurred expenses associated with making the loan, the attorney’s fee provision within the offer was not applicable.
