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January 2, 2012


Kosowsky, et al. v. Willard Mountain, Inc., et al.¸--- N.Y.S.2d ----, 2011 WL 5984277, 2011 N.Y. Slip Op. 08709 (3d Dept. December 1, 2011) presents some interesting issues involving the interplay between fraud and contract claims, as well as the potential slippery slope created when seeking to hold a corporate officer personally liable for an alleged breach of contract by a corporation.

Defendant Willard Mountain, Inc. is a corporation which operated a ski resort upon land owned by the plaintiffs. Plaintiffs leased the property to Defendant under a lease which provided for: (i) computation of rental payments as a percentage of Defendant's sales and income, (ii) required Defendant to provide plaintiffs with an annual accounting, and (iii) prohibited assignment or subletting without plaintiffs' consent. Defendant's owner also operated a separate company offering concessions services at the ski area.

Plaintiffs claimed that Defendant had been paying less than the full amount of rent due under the lease because its president (and owner) had packed down its annual income through "slick" bookkeeping, thereby resulting in lower rental payments. Defendant claimed that the rental amount paid was proper because its own income was a function of the income received by the concessions company pursuant to a separate agreement (which had never been disclosed to the plaintiffs). Plaintiffs claimed that this agreement with the concession company violated the lease's prohibition against assignment. Plaintiffs asserted seven causes of action, including breach of contract and fraud, as well as claims against defendant's owner (individually) and against the concessions company.

Defendants moved to dismiss all the claims (except the breach of contract claim) for failure to state a cause of action under CPLR § 3211(a)(7), and to dismiss all the claims as time-barred under CPLR § 3211(a)(5) (or at least cap the recoverable period). Plaintiffs cross-moved for leave to file an amended complaint.

The Supreme Court granted defendants' motion pursuant to CPLR § 3211(a)(7), in part, by dismissing the causes of action (i) seeking an accounting, (ii) alleging unjust enrichment, and (iii) alleging breach of the implied covenant of good faith and fair dealing. The Supreme Court also held that the claims were not time-barred, and granted plaintiffs' motion for leave to amend their complaint. Defendants appealed and plaintiffs cross-appealed.

Fraud Claim Not Duplicative Of The Cause Of Action For Breach Of Contract
Defendants argued on appeal that the Supreme Court erred in failing to dismiss plaintiffs' fraud claim because: (i) it was duplicative of the cause of action for breach of contract and (ii) it failed to contain allegations of justifiable reliance and special damages.

Generally, a misrepresentation premised directly on the same actions giving rise to a breach of contract does not give rise to a separate cause of action for fraud. Id. at *1 (citing Salvador v. Uncle Sam's Auctions & Realty, 307 A.D.2d 609, 611 (2003)). The Third Department, however, held that because of distinctions among the named parties (neither defendant's owner or the concessions company were parties to the lease) the breach of contract claim was not directed against the owner and could not be considered duplicative as to him. Further, as it was disputed that the concessions company was bound by the lease, the fraud claim against the concessions company could also proceed.

Moreover, the claim against Defendant Willard Mountain, Inc. could also proceed as plaintiffs claimed "that, after the contract was entered into, defendant [through the acts of its agent] repeatedly misrepresented or concealed existing facts" by failing to disclose the existence of the separate agreement with the concessions company and falsifying the annual income reports in order to (i) deceive them as to the true amount of rent owed, (ii) induce them to accept improperly low payments. Further, despite the absence of a fiduciary relationship, defendants allegedly breached a "duty of candor" (independent from their duty to perform under the contract) in that they had superior knowledge unavailable to plaintiffs and knew plaintiffs were relying on the information they supplied (citing Intl. Elecs., Inc. v. Media Syndication Global, Inc., 2002 WL 1897661, *2, 2002 U.S. Dist LEXIS 15200, *5-*6 (SD N.Y.2002)). The Third Department concluded that the conduct alleged in the fraud cause of action was sufficiently discrete from that underlying the breach of contract claim to state a viable separate cause of action.

Fraud Claim Not Lacking Allegations Of Justifiable Reliance And Special Damages
The Third Department also rejected defendants' contention that the fraud claim should have been dismissed for failure to plead the required elements of justifiable reliance and special damages (citing Dube-Forman v. D'Agostino, 61 AD3d 1255, 1257 (2009)). Plaintiffs alleged that they had relied upon the income figures provided by defendants in accepting the rent payments. They also claimed special damages (in addition to lost rent under the contract) as the alleged fraud prevented them from exercising their right to terminate the lease upon a breach of its terms, and thereby deprived them of other business opportunities and of the use and enjoyment of their property.

Tortious Interference Claim Permitted To Proceed Against Defendant's Owner Individually
Plaintiffs' claim against owner for tortious interference with contract was also not subject to dismissal for failure to satisfy the "enhanced pleading standard" that applies when a plaintiff seeks to hold a corporate officer personally liable for a corporation's breach of contract (citing Joan Hansen & Co. v. Everlast World's Boxing Headquarters Corp., 296 A.D.2d 103, 109 (2002)). Plaintiffs were required to allege that owner's actions "either were beyond the scope of [his] employment or, if not, were motivated by [his] personal gain, as distinguished from gain for the corporation" (citing Petkanas v. Kooyman, 303 A.D.2d 303, 305 (2003)).

The Third Department held that the owner's alleged actions (deliberately deceiving plaintiffs by allegedly falsifying the income figures of the corporations that he controlled) cannot be construed as within the scope of his corporate responsibilities (citing Murtha v. Yonkers Child Care Assn., 45 N.Y.2d 913, 915 (1978)). Moreover, the Court stated that the complaint alleged that he took these actions in bad faith for his personal pecuniary gain (citing BIB Constr. Co. v. City of Poughkeepsie, 204 A.D.2d 947, 948 (1994)). As such, plaintiffs were permitted to proceed with a claim for tortious interference with contract against defendant's owner individually.

Breach Of Implied Covenant Of Good Faith And Fair Dealing Claim Permitted To Proceed
Plaintiffs asserted a claim against Defendant Willard Mountain, Inc. and the concessions company for breach of the implied covenant of good faith and fair dealing. "This implied obligation encompasses any promise which a reasonable person in the position of the promisee would be justified in understanding was included" in a contract and "is breached when a party to [the] contract acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party of the right to receive the benefits under their agreement" (citing Just-Irv. Sales v. Air-Tite Bus. Ctr., 237 A.D.2d 793, 794 (1997)). The Third Department stated that this claim should not have been dismissed as the allegations, taken as true, provided sufficient traction for the claim to move forward.

Unjust Enrichment Permitted To Proceed Against Concessions Company
However, the Court held that the unjust enrichment claim was properly dismissed as to Defendant Willard Mountain, Inc. because recovery in quasi contract is precluded where, as here, there is no dispute as to the validity and enforceability of the contract governing the dispute (citing M/A-Com, Inc. v. State of New York, 78 AD3d 1293, 1293-1294 (2010)). By contrast, where a disagreement exists as to "whether the scope of an existing contract covers the disagreement between the parties, a party will not be required to elect his or her remedies and may proceed on both quasi contract and breach of contract theories" (citing id., 78 AD3d at 1294). The Court, therefore, held that plaintiffs should be allowed to proceed upon their unjust enrichment claim against concessions company.

Accounting Claim Not Permitted To Proceed In Absence of Fiduciary Relationship
Finally, plaintiffs' cause of action seeking an accounting required "factual allegation[s] or evidence of a fiduciary relationship" between plaintiffs and defendants (citing Village of Hoosick Falls v. Allard, 249 A.D.2d 876, 879 (1998)). As plaintiffs did not allege the existence of a confidential relationship, and no such relationship was created by the lease, the Court held that this claim was properly dismissed.

Defendants Not Estopped From Asserting Statute Of Limitations
Defendants further contended that Supreme Court erred in finding that they were estopped from asserting a statute of limitations defense. Under the doctrine of equitable estoppel, a defendant may not rely on the statute of limitations defense when the plaintiff was prevented from commencing a timely action by reasonable reliance on the defendant's fraud, misrepresentation or other affirmative misconduct (citing Zumpano v. Quinn, 6 NY3d 666, 673-674 (2006)). However, "'equitable estoppel does not apply where the misrepresentation or act of concealment underlying the estoppel claim is the same act which forms the basis of [the] plaintiff's underlying substantive cause[s] of action'" (citing Robare v. Fortune Brands, Inc., 39 AD3d 1045, 1046 (2007)).

Here, the Court noted that the misrepresentations that allegedly prevented plaintiffs from filing a timely action--that is, defendants' falsified annual income reports--were also the basis for their substantive claims. Thus, despite the nefarious nature of the allegations against the defendants, the Court held that defendants were not precluded from asserting that plaintiffs' claims were time-barred (citing Lucas-Plaza Hous. Dev. Corp. v. Corey, 23 AD3d 217, 218 (2005)).

In turning to the merits of the claims, the Court applied the relevant statutes of limitation and capped plaintiffs' cause of action for breach of contract as subject to the applicable six-year statute of limitations (citing CPLR § 213(2)), and capped plaintiffs' tortious interference with contract as subject to the applicable three-year limitations period (citing CPLR § 214(4)). The fraud claim, however, was left intact as plaintiffs alleged that they did not discover the fraud until they learned of the falsified reports less than two years before this action was filed (citing CPLR § 213(8)).

Heath J. Szymczak, Esq.

DISCLAIMER: This site is for general informational purposes only and is not intended to provide legal advice. Please contact an attorney relative to the circumstances of your particular case. The use and receipt of the information offered on this web site is not intended to create, nor does it create, an attorney-client relationship.


January 17, 2012

Investor "Unamused" By Alleged Diversion of Escrow Funds

In Amusement Industry, Inc. v. Midland Avenue Associates, LLC, ---F.Supp.2d ----, 2011 WL 3463117 (S.D.N.Y. 2011), the defendants, collectively referred to as the "Mark Stern Defendants", have been sued by plaintiff, Amusement Industry, Inc., in order to seek damages for a misappropriation of $13 million in funds that Amusement deposited in an escrow account for the purposes of purchasing eleven shopping centers. Mark Stern entered into a contract to purchase the shopping centers from Colonial Realty Limited Partnership and he sought the additional funds needed to close the purchase of the shopping centers from Amusement. Amusement entered into a "letter of understanding" ("LOU") with Mark Stern, according to which Amusement would deposit $13 million into an escrow account. There was an understanding on behalf of the parties that the funds would stay in escrow until the terms of the agreement were finalized, granting Amusement an ownership interest in the shopping centers, security interests in the properties and the repayment of the $13 million. Despite Amusement's proposals to finalize the terms of an agreement, an agreement was never reached.

At the instruction of Mark Stern, the $13 million was transferred, without the knowledge of Amusement, to FRG Corp., an entity controlled by Mark Stern. A fraction of the funds were used toward the purchase of the shopping centers, but more than half of the funds were used for other purchases. The funds were diverted to the other named defendants, including Stephen Stern, Midland Avenue Associates, LLC, and Payless Office Products Corp., among others. Mark Stern and Stephen Stern subsequently created false expenses so that it would appear that the expenses associated with buying the shopping centers were higher than they actually were. Essentially, Mark Stern wanted Amusement to believe that their money was still in escrow and was being used properly. On several occasions, Amusement requested that the funds be returned, but they received no response. Mark Stern also directed Amusement's funds to be transferred into multiple accounts belonging to his family, friends, and close associates. None of the transferees had any legitimate connection to the purchase of the shopping centers, but they did have close relationships with Mark Stern. Additional transfers were made later, following the initial transfers, to further obscure the location of Amusement's funds.

Under New York law, "if a conveyance is made without fair consideration and the transferor is a debtor who is insolvent or will be rendered insolvent by the transfer, the conveyance is deemed constructively fraudulent." N.Y. Debt. & Cred. Law § 273. Fair consideration requires both fair equivalency of the consideration given and good faith. The remedy available for a creditor in a fraudulent conveyance action where the fraudulently transferred funds are no longer in the possession of the transferee is a money judgment in an amount up to the value of the fraudulently transferred funds.

The Mark Stern Defendants only challenge the claim that they were insolvent or rendered insolvent by the transfers. Defendants concede "the other elements of the fraudulent conveyance claim: that is, the showing that Amusement was a creditor, the transferor was a debtor, there was no fair equivalency of consideration, and the lack of good faith by the transferor and the transferee." Defendants argue that because Mark Stern and his entities controlled the transfers and were the beneficiaries of the improper transfers, they could not have been rendered insolvent by the transfer "because any outgoing transfer of funds would have been 'zero[ed]' out by the subsequent receipt of funds." The court did not accept this contention. Instead, the court held that it was not beyond the fraudulent conveyance statute simply because there was common ownership and control by one of the entities. The court refused to create an exception where a set-aside of a transfer would not be allowed because the transferor had an interest in the transferee entity.

Regarding Amusement's claim for conversion against Stephen Stern and the Mark Stern Defendants, the defendants contend that Amusement failed to state a claim. Under New York law, to state a claim for conversion a plaintiff must show that "someone, intentionally and without authority, assume[d] or exercise[d] control over personal property belonging to someone else, interfering with that person's right of possession." The court disagreed with the defendants, finding that Amusement's allegations met all of the elements of a conversion claim. Amusement had a possessory interest in the $13 million it placed in escrow and the defendants intentionally, without permission of Amusement, took control of the funds and disbursed them to transferees who had knowledge that the funds lawfully belonged to Amusement.

In terms of the claim for aiding and abetting conversion, there must be proof of 1) the existence of a primary violation, 2) knowledge of the violation by the aider and abettor; and 3) proof that the aider and abettor substantially assisted the primary wrongdoer. See Lerner v. Fleet Bank, N.A., 459 F.3d 273, 292 (2d Cir. 2006). The court already held that conversion occurred and was sufficiently alleged, so the first element is proven. Moreover, knowledge of the conversion is clear on the part of both Mark Stern and Stephen Stern as they were aware of the requirement that the funds only be used for the shopping centers and despite this knowledge, Mark Stern still directed the release of the escrow funds. Mark Stern and Stephen Stern both provided wire instructions for the transfer of the funds; therefore, there is proof that defendants assisted in the conversion. Mark Stern also took steps to obscure the use of the funds by creating false expenses so that it would be more difficult for Amusement to know how their money was being used and to recover it, thus satisfying both elements two and three for a claim of aiding and abetting conversion.

The court ultimately held that the constructive fraudulent conveyance claim against the transferee attorney was not sufficiently alleged and that the aiding and abetting fraud claim was not sufficiently alleged. However, the court ruled in favor of Amusement by holding that the constructive fraudulent conveyance claim was sufficiently alleged against the corporation, officer, and transferee entities that Mark Stern controlled, the intentional fraudulent conveyance claim was sufficiently alleged, the conversion claim was sufficiently alleged, the aiding and abetting conversion claim was sufficiently alleged, and the unjust enrichment claim was sufficiently alleged. Therefore, defendants' motion to dismiss was granted in part and denied in part.

- Ashley Fasso, Second Year Law Student at the University at Buffalo Law School

DISCLAIMER: This site is for general informational purposes only and is not intended to provide legal advice. Please contact an attorney relative to the circumstances of your particular case. The use and receipt of the information offered on this web site is not intended to create, nor does it create, an attorney-client relationship.

About January 2012

This page contains all entries posted to Business Torts and Employment Litigation Blog in January 2012. They are listed from oldest to newest.

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