Opinion
Index No. 617314-18
03-22-2022
JP PIZZA EASTPORT LLC and 491 Montauk Highway Eastport LLC, Plaintiffs, v. LUIGI'S MAIN STREET PIZZA INC., Luigi's on Main LLC and Luigi Mondi, Defendants.
BARNES & BARNES, P.C., Attorneys for Plaintiffs, 445 Broadhollow Road, Suite 226, Melville, New York 11747 KELLY & HULME, P.C., Attorneys for Defendants, 323 Mill Road, Westhampton Beach, New York 11978
BARNES & BARNES, P.C., Attorneys for Plaintiffs, 445 Broadhollow Road, Suite 226, Melville, New York 11747
KELLY & HULME, P.C., Attorneys for Defendants, 323 Mill Road, Westhampton Beach, New York 11978
Elizabeth H. Emerson, J.
It is, ORDERED that the motion by the defendants for summary judgment dismissing the complaint is granted; and it is further
ORDERED that the cross motion by the plaintiffs for partial summary judgment is denied; and it is further
ORDERED that, on the court's own motion, the counterclaims are dismissed.
The defendant Luigi's On Main, LLC ("Luigi's LLC"), was the owner of a parcel of real property located at 491 Montauk Highway in Eastport, New York. The defendant Luigi's Main Street Pizza, Inc. ("Luigi's Inc."), operated a pizza restaurant on the premises, which was improved with a 2½ storey building, a cottage, and three residential apartments. On July 10, 2018, Luigi's Inc. and the defendant Luigi Mondi sold the pizza business to the plaintiff JP Pizza Eastport, LLC ("JP Pizza"). Pursuant to the bill of sale executed on that date, JP Pizza acquired, inter alia, a leasehold interest in the real property and the furniture, fixtures, and equipment used in the operation of the business for $60,000. On or about the same date, JP Pizza and Luigi's Inc. entered into a five-year commercial lease commencing on July 15, 2018. JP Pizza took possession of the restaurant and began running the business.
The plaintiffs contend that they paid an additional $25,000 for the inventory, which the defendants dispute. The defendants contend that there was a small post-closing adjustment for accounts receivable and that the value of the inventory was only $5,000.
The court notes that the lease is not signed by anyone on behalf of JP Pizza.
The parties contemplated that, in addition to purchasing the business, the plaintiffs would purchase the real property on which it was located. To that end, on July 16, 2018, Luigi's LLC, as the seller, and the plaintiff 491 Montauk Highway Eastport LLC ("Eastport LLC"), as the buyer, executed a contract for the sale of the real property. The purchase price was $665,000, and Eastport LLC gave Luigi's LLC a downpayment in the amount of $33,250 upon the signing of the contract of sale. The closing was scheduled to take place on September 15, 2018, subject to, inter alia, the following condition:
"The delivery by Seller to Purchaser of a valid and subsisting Certificate of Occupancy or other required certificate of compliance, or evidence that none was required, covering the building(s) and all of the other improvements located on the property authorizing their use as a commercial property with permit for restaurant, cottage and apartment rentals at the date of the Closing."
The contract of sale provided that the closing could be adjourned by the seller to October 15, 2018, under the following circumstances:
"(I) If at the date of Closing, Seller is unable to transfer title to Purchaser in accordance with this contract, or Purchaser has other valid grounds for refusing to close, whether by reason of liens, encumbrances or other objections to title or otherwise (herein collectively called "Defects"), ... Seller shall have the right, at Seller's sole election, either to take such action as Seller may deem advisable to remove, remedy, discharge or comply with such Defects or to cancel this contract; (ii) if Seller elects to take action to remove, remedy or comply with such Defects, Seller shall be entitled ... to adjourn the date for Closing hereunder for a period or
periods not exceeding October 15, 2018, and the date for Closing shall be adjourned.... If for any reason whatsoever, Seller shall not have succeeded in removing, remedying or complying with such Defects or delay and if Purchaser shall still be unwilling to waive the same and to close title without abatement of the purchase price, then Purchaser may cancel this contract by Notice to the other whereby Seller shall return the contract downpayment."
Finally, the contract of sale provided, "If Purchaser willfully defaults hereunder, Seller's sole remedy shall be to receive and retain the Downpayment as liquidated damages[.]"
Prior to the closing, the plaintiffs discovered that the property could not legally be used as a restaurant with three rental apartments. By a letter to the defendants’ counsel dated August 22, 2018, the plaintiffs’ counsel alleged that the defendants had fraudulently induced the plaintiffs to enter into the parties’ agreements, declared those agreements to be void ab initio, and demanded an immediate return of the $33,250 downpayment plus $135,000 for amounts expended by the plaintiffs. On August 23, 2018, the plaintiffs returned the premises to the defendants and ceased operating the restaurant.
By a letter dated August 27, 2018, the defendants’ attorney responded, in pertinent part, as follows:
"The contract of sale for the real property requires seller to obtain Certificates of Occupancy for the premises. I enclose herewith copies of the Certificates of Occupancy. As explained to you, in our numerous telephone conversations, the seller will obtain a change of use for the premises for a Restaurant. The Seller is hiring D & I Expediting, who will file the application. It is an administrative application, without need for a hearing. Also the expeditor will file a FOIA for the CEU
Certificate of Existing Use
application, to determine where the residences were on the property and when the CEU was issued by the Town of Brookhaven.
"The Restaurant has operated under the current CO's and Suffolk County Health Department permits for the past eight years. The Seller believed that all permits were in place when he purchased
and when he entered into a contract to sell the premises.
"The property is zoned J-2 Business, which permits a Restaurant. The seller under the contract of sale has the opportunity to obtain the Certificates of Occupancy."
The plaintiffs commenced this action on September 4, 2018, eleven days before the scheduled September 15, 2018, closing. The complaint contains four causes of action: (1) for fraud and recission, (2) for breach of contract, (3) for breach of warranty, and (4) for a judgment declaring that the parties’ agreements are void ab initio and that the plaintiffs are entitled to damages. The defendants counterclaimed (1) for a judgment declaring that Luigi's LLC is entitled to retain the downpayment, (2) for breach of the lease, and (3) for back rent. Discovery is now complete. The defendants move for summary judgment dismissing the complaint and for summary judgment or an order of default on their counterclaims. The plaintiffs cross move for summary judgment in their favor on the second cause of action and for dismissal of the first counterclaim.
To prevail on a claim of fraud, a plaintiff must show that it actually relied on the purported fraudulent statements and that its reliance was reasonable or justifiable ( KNK Enters. Inc. v. Harriman Enters., Inc. , 33 A.D.3d 872, 824 N.Y.S.2d 307 ). New York courts have long held that, unless facts are peculiarly within a defendant's knowledge, a plaintiff cannot establish reasonable reliance unless it has employed its intelligence and engaged in due diligence ( McGuire Children, LLC v. Huntress , 24 Misc. 3d 1202[A] at *12, 2009 WL 1693725 [and cases cited therein], affd 83 A.D.3d 1418, 920 N.Y.S.2d 531 ). New York courts have also recognized that sophisticated business people have a heightened duty to use the means available to them to verify the truth of the information upon which they rely and to use their sophistication to conduct due diligence ( Id . ). As a matter of law, a sophisticated plaintiff cannot establish that it entered into an arms-length transaction in justifiable reliance on alleged misrepresentations if the plaintiff failed to make use of the means of verification that were available to it ( Id . ). Thus, to sustain a claim of fraud, sophisticated investors must have discharged their own affirmative duty to exercise ordinary intelligence and conduct an independent appraisal of the risks they are assuming ( Id . ).
The record reflects that the members of the plaintiff LLC's are sophisticated businessmen who have been involved in multiple transactions regarding the purchase, renovation, and sale of real property and who were represented by counsel in connection with the agreements that are the subject of this action. After signing those agreements, they discovered that the property was not approved for use as a restaurant and that two of the three rental apartments also lacked approvals. Whether the property had the required permits, licenses, and certificates was a matter of public record and could have been discovered with due diligence prior to executing the agreements. A claim of fraud will not lie when, as here, the misrepresentation allegedly relied upon was not a matter within the peculiar knowledge of the party against whom the fraud is asserted and could have been discovered by the party allegedly defrauded through the exercise of due diligence ( Cohen v. Cerier , 243 A.D.2d 670, 672, 663 N.Y.S.2d 643 ). Accordingly, the first cause of action for fraud in the inducement is dismissed.
The second cause of action for breach of contract seeks to recover the downpayment pursuant to the contract of sale. Under New York law, the essential elements of a breach-of-contract cause of action are the existence of a contract, the plaintiff's performance pursuant to the contract, the defendant's breach of its contractual obligations, and damages resulting from the breach ( Innovative Biodefense, Inc. v. VSP Tech., Inc. , 176 F.Supp.3d 305, 317 [S.D.N.Y.] ). A party will not be able to prevail on a breach-of-contract claim unless it proves, by a preponderance of the evidence, that it performed its own obligations under the contract ( Id . ). Thus, a party is relieved of its duty to perform under a contract when the other party has committed a material breach ( Franklin Pavkov Constr. Co. v. Ultra Roof, Inc. , 51 F.Supp.2d 204, 215 [N.D.N.Y.] ). For a breach to be considered material, it must go to the root of the agreement between the parties ( Id . ).
Contrary to the plaintiffs’ contentions, Eastport LLC breached the contract of sale. Luigi's LLC had until September 15, 2018, the date of the closing, to deliver to Eastport LLC valid documentation authorizing the use of the buildings and other improvements on the property "as a commercial property with permit for restaurant, cottage and apartment rentals." If Luigi's LLC was unable to deliver such documentation on September 15, 2018, the contract of sale gave it the right, at its sole election, to adjourn the closing until October 15, 2018, to obtain the necessary documentation. By a letter dated August 27, 2018, Luigi LLC's attorney gave Eastport LLC notice that her client was exercising its right under the contract of sale to obtain certificates of occupancy for the rental apartments and a change of use for the restaurant. By commencing this action, inter alia, for recission of the contract of sale on September 4, 2018, eleven days before the September 15, 2018, closing date, Eastport LLC failed to perform its own obligations under the contract of sale and deprived Luigi's LLC of its bargained-for right to remedy the alleged defects by the closing date or to adjourn the closing until October 15, 2018. The court finds that the commencement of this action was a material breach of the contract of sale that went to the root of the parties’ agreement and substantially defeated the object of the parties in making the agreement (see , Ma v. Biaggi , 150 A.D.3d 778, 779, 54 N.Y.S.3d 46 ). Accordingly, Eastport LLC is not entitled to recover its downpayment ( Id . at 780, 54 N.Y.S.3d 46 ).
The second cause of action for breach of contract also seeks to recover the purchase price for the business. The plaintiffs contend that, after the defendants retook possession of the pizza restaurant, they resold the same assets and inventory to a third party for $50,000 without refunding any of the purchase price to JP Pizza, which resulted in a windfall to the defendants.
A breach-of-contract cause of action fails as a matter of law in the absence of any showing that a specific provision of the contract was breached ( Gianelli v. RE/MAX of New York, Inc. , 144 A.D.3d 861, 41 N.Y.S.3d 273 [and cases cited therein]). Nothing in the bill of sale required Luigi's Inc. or Luigi Mondi to refund the purchase price to JP Pizza upon its vacatur of the premises. Moreover, the plaintiffs’ reliance on § 23 of the lease is misplaced. Contrary to the plaintiffs’ contentions, Luigi's Inc. was not required to remove and store the property left on the premises. Section 23 of the lease explicitly provides that any property left on the premises "shall be deemed to be abandoned" and that it may be removed and stored "at the option of Lessor." Accordingly, the second cause of action for breach of contract is dismissed.
The third cause of action is for breach of warranty. The plaintiffs contend that Luigi's Inc. and Luigi Mondi (the "Selling Parties") breached the following warranty in the bill of sale:
"Each Selling Party, jointly and severally, hereby represents and warrants to JP Pizza the following:
* * *
"2.08 Compliance with Applicable Law. To the best of the Selling Parties’ knowledge, the Selling Parties
have all permits,
consents and licenses of every kind required by the jurisdictions in which each Transferred Restaurant and the Property is located which are necessary to carry on its business as presently conducted, or to own or lease and operate the Assets. To the best of the Selling Parties’ knowledge, the Selling Parties are, and all times have been, in compliance with all laws, regulations and orders applicable to the business conducted at the Transferred Restaurant, the Property and the Assets. No Selling Party has received any notice that the present operation of any Transferred Restaurant, or the Property violates any applicable laws, regulations or orders."
The defendants contend that, since they believed they had all of the required approvals for the pizza restaurant and the three rental apartments when they entered into the bill of sale, there was no breach of warranty. The plaintiffs contend that, at a minimum, the defendants had a duty to perform due diligence to ensure that their representations were true.
The warranty in question is a "best knowledge" warranty. There does not appear to be a wealth of recent authority on the issue. The cases on which the defendants rely are from the late nineteenth and early twentieth centuries (see , Jennings v. Supreme Council of the Loyal Additional Benefit Assn. , 81 App. Div. 76, 81 N.Y.S. 90 [1903] ; Butler v. Supreme Council, Catholic Benevolent Legion , 43 App. Div. 531, 60 N.Y.S. 70 [1899] ; Egan v. Supreme Council, Catholic Benevolent Legion , 32 App. Div. 245, 52 N.Y.S. 978 [1898], affd 161 N.Y. 650, 57 N.E. 1109 ), and involve "best knowledge" warranties in the insurance context. The cases on which the plaintiffs rely are general warranty cases that do not interpret or deal with "best knowledge" warranties. The only recent case that the court was able to find that analyzes "best knowledge" warranties is from the Superior Court of Delaware.
In Price Automotive Group v. Dannemann, 2002 WL 31260007 (Superior Court of Delaware, Sept. 25, 2002, No. Civ.A.01C-06-165JRS), a commercial landlord-tenant case, the Delaware Superior Court analyzed "best knowledge" warranty cases both inside and outside of Delaware. In the context of insurance coverage, the Superior Court found that all of the courts reached the same conclusion: When an applicant for insurance makes certain representations "to the best of [his] information and belief," the focus shifts from an inquiry into whether the facts asserted were true to whether the applicant believed them to be true. Thus, the applicant's answer is assessed in light of his actual knowledge and belief at the time of the application, and no duty of investigation is imposed on the applicant ( Id . at *4-5 ). The Superior Court found that the result was the same outside of the insurance context. In three cases from three different jurisdictions, courts interpreted "best knowledge" warranties as warranties based on actual knowledge without a duty of inquiry ( Id . at *5-6 ).
The language of the "best knowledge" warranty in Price Automotive Group was similar to the language of the warranty in the bill of sale. The landlord represented and warranted, inter alia, that to the best of its knowledge the demised premises were "in compliance with all applicable federal, state and local laws, rules, regulations, orders and rulings." The tenant alleged a wide range of defects to the property, including code violations, water and sewer deficiencies, and inadequate fire protection. The Delaware Superior Court granted summary judgment to the landlord and dismissed the tenant's breach of warranty claims, finding that the landlord had no actual knowledge of the alleged defects at the time it entered into the lease.
Price Automotive Group is consistent with the cases upon which the defendants rely. Applying the principles enunciated therein, the court finds that the defendants have established, prima facie, that they believed they had all of the required permits, consents, and licenses for the pizza restaurant and the three rental apartments when they executed the bill of sale in July 2018. The plaintiffs have failed to raise a triable issue of fact in opposition thereto. Contrary to the plaintiffs’ contentions, Luigi Mondi was not required to perform due diligence to ensure that the representations in § 2.08 of the bill of sale were true ( Id . ). Accordingly, the third cause of action is dismissed.
The fourth cause of action for declaratory relief is duplicative of the plaintiff's other causes of action, which have been dismissed. Accordingly, the fourth cause of action is also dismissed.
The defendants are not entitled to summary judgment on their counterclaims. A motion for summary judgment may not be made before issue is joined (see , CPLR 3212[a] ), and the rule is strictly applied (see , City of Rochester v. Chiarella , 65 N.Y.2d 92, 101, 490 N.Y.S.2d 174, 479 N.E.2d 810 ). The appropriate response to a counterclaim is a reply ( Id . ). It serves the same function with relation to a counterclaim that an answer serves to a complaint ( Id . ). The record reflects that the plaintiffs failed to reply to the defendants’ counterclaims. Summary judgment on the counterclaims is, therefore, untimely ( Id . ).
Nor are the defendants entitled to a default judgment on their counterclaims. The record reflects that the defendants failed to move for a default judgment within one year of the plaintiffs’ default (see , CPLR 3215[c] ). Moreover, the defendants provide no explanation for the delay. Accordingly, the counterclaims are dismissed as abandoned ( Id . ; County of Nassau Chmela , 45 A.D.3d 722, 846 N.Y.S.2d 299 ).
In sum, the complaint and the counterclaims are dismissed.