Opinion
650514-09.
Decided April 29, 2010.
Matalon Shweky PLLC, New York City (Joseph Matalon) for Plaintiff.
Hernick Feinstein, New York City (Christopher J. Sullivan and David Feuerstein) for Defendants.
Plaintiff, Thor Properties, LLC, has filed a breach of contract action, arguing it is entitled to payment of $6.25 million allegedly owed by defendants under the terms of a settlement agreement and attorneys fees. The agreement was entered into upon the break-up of a joint venture designed to acquire the Westin Diplomat Resort and Spa and related properties located in Florida. Defendants have counterclaimed for the return of $6.25 million previously paid to Thor under the same agreement.
In the motions before the Court, each party has moved for dismissal of the other side's claims pursuant to CPLR § 3211. For the reasons that follow, both motions are granted and plaintiff's summary judgment motion is denied as moot.
I. Factual and Procedural Background A. Facts
Thor Properties, LLC (Thor Properties) is a limited liability company formed under the laws of New York and has an office in New York County. The Chetrit Group LLC (Chetrit Group)is a limited liability company formed under the laws of New York and has an office in New York County. The remaining defendants are New York State residents and maintain offices in New York County.
In April 2007, plaintiff and defendant, The Chetrit Group, entered into a Memorandum of Understanding (MOU) to jointly purchase and develop the Westin Diplomat Hotel and surrounding vacant land located in South Florida. The parties were interested in building an additional 1,388 residential units on the site. The potential profits to be earned from the development of the vacant land were estimated to be worth nearly $200 million. While the parties were negotiating the terms of their joint venture, defendants allegedly represented that a third group, The Hotel Group, with expertise in operating hotels also was interested in becoming an equal partner in the venture. The Hotel Group's identity was claimed to be highly confidential, and was described in the parties' documentation only as "The Hotel Group." The MOU stated that each of the three parties would own one-third of the venture.
Komar Five Associates LLC (Komar) was the acquisition vehicle created on April 25, 2007 as a joint venture between Thor Properties and The Chetrit Group. Komar entered into an Agreement of Purchase and Sale with the hotel owners, Diplomat Properties, LLC, dated May 3, 2007, to buy the hotel. Komar is a Delaware limited liability company with offices located in New York City. The purchase price for the hotel was $690 million, and the initial deposit was $20 million, with an option to extend the closing date upon payment of an additional $10 million. Plaintiff's contribution to the deposit, as a one-third partner, was $6,666,666.66.
Plaintiff alleges that it soon discovered that, in fact, there was no "Hotel Group" and that the Chetrit Group sought to take two-thirds control of the project for themselves. Upon complaint by Thor the parties entered into a Settlement Agreement, on July 16, 2007, whereby the Chetrit Group agreed to buy out Thor Properties' interest in Komar. Under the agreement: (I) the $6,666,666.66 that Thor Properties had invested in Komar was returned, and (ii) Thor agreed to sell, and the Chetrit Group agreed to buy, all of Thor's right, title and interest in Komar, the Diplomat purchase agreement and the property for the potential sum of $12,500,000.00 payable as follows:
"(i) the [s]um of Six Million Two Hundred and Fifty Thousand and No/100($6,250,000.00) Dollars by wire transfer of immediately available funds to the account listed on Exhibit A which sum shall be non-refundable except if title fails to close for any reason other than Komar's default and (ii) the sum of Six Million Two Hundred and Fifty Thousand and No/100 ($6,250,000.00) Dollars (the "Escrow Funds") by wire transfer of immediately available funds to Thor to the account listed on Exhibit A or to any other account designated by Thor on the earlier to occur of (a) the closing of title to the Property (the "Closing") or (b) the assignment of the Agreement to any third party which is not owned and/or controlled by one or more members of the Chetrit family (in which event the aforesaid sum of Six Million Two Hundred and Fifty Thousand and No/100 ($6,250, 000.00) Dollars shall be due and payable upon receipt by the undersigned of the consideration for the assignment to such third party)."
( See affidavit of Chetrit, Exhibit 2 [July 16th Agreement], at 1 [emphasis added]).
In addition to the return of Thor's initial contribution of $6.6 million, defendants paid over half of the $12.5 million settlement payment, or $6.25 million. Thereafter, on May 3, 2007 Diplomat Properties, L.P., and Komar entered into the purchase agreement for the Diplomat Hotel. The purchase agreement permitted Komar to inspect the property and review Diplomat Properties, L.P.'s books and other records. The purchase agreement also provided that the closing would occur on August 1, 2007, but that upon notice from Komar and an additional $10,000,000.00 deposit, the purchaser had the right to extend the closing date for up to sixty days. Komar requested an extension of the closing date, and in connection with the request, the parties executed a First Amendment to the Agreement. In it, Komar warranted that it had sufficient opportunity to conduct due diligence and waived any objections related thereto. Komar also warranted that it was accepting the property "as is" and waived its right to terminate the agreement following due diligence. Komar increased the deposit amount to $30 million for the extension of the closing date. However, Komar failed to appear at the closing or to pay the balance of the purchase price.
B. Procedural History
Komar and Diplomat Properties, L.P., the seller, became embroiled in litigation in New York County Supreme Court ( Diplomat Props. L.P. v Komar Five Associates LLC et ano., Index No. 603603-07 [Cahn, J.]), with each side accusing the other of breaching the contract. On December 11, 2008, the court determined that Komar had defaulted under the contract and awarded the $30 million dollar deposit to the seller. That determination was affirmed by the Appellate Division on April 29, 2010 ( Diplomat Props. L.P. v Komar Five Associates LLC, ___ AD2d ___, 2010 NY Slip Op 03476 [1st Dept 2010]).
On September 10, 2009, plaintiff commenced this action, alleging two causes of action for breach of contract in the Complaint. Plaintiff argues it is entitled to a money judgment in the amount of $6,250,000.00, representing the balance of the payments owed under the July 16th agreement, plus interest from October 31, 2007. Additionally, plaintiff is seeking attorneys' fees.
C. Arguments
Plaintiff Thor claims it is entitled to the second payment of $6.25 million. It moves for summary judgment, arguing that no material issues of fact exist with respect to the agreement between the parties. Thor argues that the Settlement Agreement requires the second payment and that defendants cannot be heard to object on the grounds that the closing never took place since they caused the failure to close.
In opposition, defendants contend that plaintiff's claim is barred by the express terms of their contract because any promise to pay was predicated upon a condition precedent — the successful closing or "flipping" of the property — and this condition precedent was never satisfied. Additionally, defendants contend that a mutual mistake voids the July 16th agreement. Specifically, defendants maintain that the contract was based on the property's ability to sustain their proposed development of residential units. Lastly, defendants argue that summary judgment is premature, as there are issues of fact regarding their alleged breach of the purchase agreement.
Defendants contend they are not liable for payment unless the property could have been developed to the degree that the parties anticipated. However, the City of Hallendale Beach, where much of the undeveloped land was located, was opposed to the development of any residential units on the vacant property. In fact, the City's Mayor, City Manager and City Commissioners rejected Diplomat Properties L.P.'s attempt to re-zone the vacant land for the development of those units. Based on the parties mistakenly having believed that the property would have supported their proposed development, which mistake defendants submit is material and relates to the contract's consideration, there was "no meeting of the minds." Therefore, defendants argue that they are entitled, as a matter of law, to the return of the first payment and the rescission of the contract. Defendants have filed two counterclaims, the first is for the equitable remedy of rescission of the Settlement Agreement and the second is for breach of contract, claiming entitlement to refund of the first payment of $6.25 million under the Settlement Agreement, which requires refund "if title fails to close for any reason other than Komar's default." Plaintiff responds that defendants' counterclaims should be dismissed on the ground of collateral estoppel since prior proceedings have determined that Komar did default.
II. Discussion A. Condition Precedent or Time of Payment Clause?
Under the Settlement Agreement, the second installment of $6.25 million would take place "on the earlier to occur" of either of two specified events — sale of the hotel or transfer of Komar's purchase rights. It is this phrase that is in dispute. Defendants maintain that no payment is due because neither event occurred and they were conditions precedent to the obligation to pay.
A condition precedent is an act or an uncertain event that must occur before the agreement of the parties becomes operative. If that condition precedent is not fulfilled, the parties are excused from performing under the contract. A promise may be conditional on the act of a third person. A contract may be conditioned upon the happening of some event or contingency which is uncertain. In order to ascertain whether a condition precedent exists, the Court must ascertain the intent of the parties as expressed in the contract( see Greenfield v Phillies Records, 98 NY2d 562; M. O'Neil Supply Co., Inc., v Petroleum Heat Power Co., Inc., 280 NY 50; 13 Williston on Contracts [4th ed 2000] § 38:16 at 441).
The contractual provision in dispute here is potentially susceptible to two interpretations. It may be interpreted as fixing a condition precedent or merely fixing a time for payment. Although the meaning of language is a factual question, the general rule is that interpretation of a contract is a question of law rather than of fact (4 Williston on Contracts [3rd ed.], § 616). The Court must interpret the contract by determining the meaning that would be attached to it by a reasonably intelligent person when considering the words of the entire agreement along with the circumstances surrounding its negotiation.
Parties may create a condition precedent through plain and unambiguous language or through implication. Any words which express the idea that performance of a promise is dependent on some other event will create a condition. Terms such as "if," "provided that," "when," "while," "after," or "as soon as" are often used (12 Am. Jur. § 295, at 849; 5 Williston, Contracts [3d ed] § 671, at 161). However, there is no strict requirement that these types of phrases be used.
Defendants cite Amies v Wesnofske ( 255 NY 156)for support. In that case, the jury found that defendants had agreed to pay to plaintiffs, acting as real estate brokers, certain commissions "on the closing of title" to premises that were to be sold to third parties. There, title was not closed. The Court of Appeals held that plaintiffs-real estate brokers could not recover because "generally . . . a vendor is under no duty to his broker to enforce specific performance by the vendee, when commissions are conditioned upon performance ( Id. at 163-164)." The Court stated:
"A promise to pay on the closing of title' is [not] a promise to pay on the date fixed by the contract of sale for the closing of title. No such thought is expressed by the words. It is the event itself, not the date fixed for its happening, which makes the promise to pay performable. We think that reason and authority compel the conclusion that we have here a promise to pay a broker upon a condition which has not been fulfilled."
( Id. at 162).
The rule stated there is applicable to this case. Language contained in Mascioni v I.B. Miller, Inc. ( 261 NY 1), is also relevant. In that case, the contractor agreed to pay a subcontractor fifty-five cents per cubic foot for erecting concrete walls. The promise to pay contained the proviso "[p]ayments to be made as received by the Owner." The Court of Appeals reversed the Appellate Division's holding that this proviso merely fixed the time of payment and did not create a condition precedent. The Court stated:
"A provision for the payment of an obligation upon the happening of an event does not become absolute until the happening of an event. Whether the defendant's express promise to pay is construed as a promise to pay if' payment is made by the owner or when' such payment is made, the result must be the same; since, if the event does not befall, or a time coincident with the happening of the event does not arrive, in neither case may performance be exacted.'
True, a debt with consequent obligation to pay may exist aside from any express promise to pay. Then a condition annexed to an express promise to pay the debt may render the promise to pay conditional without making the debt subject to the same condition. It must be admitted, however, that a condition annexed to a promise to pay a debt will commonly, upon the true construction of the instrument in which it is contained, extend to the debt itself. There is a difference also between a promise to pay a debt on a certain condition, and a proviso that the debt shall be payable only upon a certain condition; for the latter necessarily renders the debt itself conditional. (Langdell, Summary of the Law of Contracts, § 36.) In this case, if there were no express promise to pay a stipulated price for stipulated work, such a promise would be implied. There is, however, an express promise to pay moneys as received from the Owner, and the event upon which that promise would ripen into an absolute, immediate obligation has not occurred. From the express promise to pay upon the happening of an event, an inference may be drawn that the parties did not intend or impliedly agree that payment should be made even if the event does not occur. In many cases, nevertheless, an inference, that an express promise to pay a debt on a certain condition excludes an implication that the debt shall be paid, even though performance of the condition is impossible, would defeat the intention of the parties."
( Id. at 4-5 [internal citations omitted]).
On its face, the Settlement Agreement in this case calls for payment upon the occurrence of an event. The consideration received by defendants in return for the $12.5 million payment was the opportunity to purchase the hotel. It is only reasonable to infer that the opportunity's value was conditioned upon successful acquisition; the further the plan developed, the more valuable became plaintiff's "share" of that opportunity.
When a right is subject to a condition, the obligation to pay does not accrue until the condition is met ( Kassner Co. v City of New York, 46 NY2d 544). Thus, promises become enforceable only when the condition to payment is fulfilled ( Laberge v Town of Inlet, 79 AD2d 1070 [3d Dept 1981]). In this case, the closing of title was a significant factor in negotiation of the settlement agreement, and that condition annexed to the promise to pay rendered the promise conditional. The promise to pay became enforceable only when the transfer of title to the defendants from the current owner of the Florida property or to a third party by defendants. Title, however, was never successfully transferred to the defendants.
A contrary reading would create an unacceptable anomaly within the contract itself. The agreement calls for refund upon failure to close (absent default by Komar). In that event, were the Court to adopt plaintiff's view, plaintiff would be forced to refund the first payment, but would still be entitled to collect the second payment. The parties could not have intended such an incongruous result. Accordingly, the Court finds that the contract clause was a condition precedent, and that the condition precedent was not satisfied.
B. Prevention Doctrine
Plaintiff contends as well, that, if the second payment was contingent upon a condition precedent, defendant's cannot avoid payment under the prevention or hindrance doctrine ( Amies v Wesnofske, 255 NY 156, 163 [1931]; Allan S. Feldman Co. v Freeman, 3 Misc 2d 651 [Municipal Court, Bronx Cty [1956] [where a broker's agreement conditioned payment on possession by the lessee and the broker successfully negotiated a lease, court held that lessor's acceptance of a surrender by the lessee prevented the condition precedent and should not deny the broker his commissions]). Under this doctrine, "a party to a contract cannot rely on the failure of another to perform a condition precedent where he has frustrated or prevented the occurrence of the condition ( Kooleraire Serv. Installation Corp. v Board of Educ. of City of NY, 28 NY2d 101, 106). Assuming that under the terms of the July 16th settlement agreement, the closing or assignment to a third-party was a condition precedent to defendants paying the second installment, "[w]here a promisor himself is the cause of the failure of performance of a condition upon which his own liability depends, he cannot take advantage of the failure' ( Aimes v Wesnofske, 255 NY 156, 162 [1931]; see also see E. Consol. Props. Inc. v Adelaide Realty Corp., 691 NYS2d 45, 49 [1st Dept 1999] [Rubin, J. concurring]; Kaplon-Belo Assoc., Inc. v Tae Hee Kim, [2d Dept 1988]); Rappaport v Sabbeth, 134 AD2d 419, 420 [2d Dept 1987])."
Defendants argue that under the prevention doctrine, they are still not liable since they did not act wrongfully or in bad faith ( see Rosenberg v Refco Facilities Corp., 59 Misc 2d 25, 26 [Civil Court, New York County 1969])."At bottom, the application of this [prevention] doctrine rests on an implied obligation under the contract not to frustrate or prevent the performance of the condition precedent ( HGCD Retail Servs., LLC v 44-45 Broadway Realty Co. , 37 AD3d 43 , 53 [1st Dept 2006])."
A strict reading of the Settlement Agreement resolves the issue here. By the understanding of the parties, the first payment would not be refunded if Komar defaulted. At the same time, there is no similar provision requiring payment of the second installment if Komar defaulted. A plain reading of the agreement itself demonstrates that the parties considered the possibility of default and accorded liability for only one-half of the $12.5 million in the event of default.
B. The Counterclaims
First Counterclaim: Mutual Mistake and Rescission
The First Counterclaim alleges there was a mutual mistake of fact underlying the parties' settlement agreement." It is the general rule that where a mistake in contracting is both mutual and substantial, there is an absence of the requisite meeting of the minds' to the contract, and the relief will be provided in the form of rescission ( Brauer v Central Trust Co., 77 AD2d 239, 243 [4th Dept 1980], lv denied 52 NY2d 703)." See also Matter of Gould v Board of Educ. of Sewanhaka Cent. High School Dist., 81 NY2d 446, 453 (1993); Schultz v Hourihan, 238 AD2d 818, 819 (2d Dept 1997); Rekis v Minnewaska Mtn. Houses, 170 AD2d 124, 130 (3d Dept 1991), lv denied 79 NY2d 851. "The mutual mistake must exist at the time the contract was entered into and must be substantial ( Melia v Riina, 204 AD2d 955,957 [3d Dept 1994], lv denied 85 NY2d 857)."
In a recent case, Dunn v Arniotes ( 15 Misc 3d 1144[A], 2007 WL 1615120 [Sup Ct, Kings Cty]), a Brooklyn buyer-developer entered into a contract for the purchase of a development site, which was zoned for a certain size of building. Before closing, New York City adopted a downsizing which reduced the size of the building allowable on the site, and therefore, the site's value to the buyer. The buyer sought to void the contract, arguing, in part, mutual mistake. The court, however, rejected the argument, holding there was no mutual mistake. The Court reasoned that, in the absence of a continuing contractual duty to adjust for a change in zoning, the seller was entitled to the benefit of the bargain. Accordingly, once a party contracts to a promise, that party must perform or face damages for its failure, even when unforseen circumstances make performance burdensome ( see Kel Kim Corp. v Central Markets, Inc., 70 NY2d 900,902 [1987]).
Applying the same principles of law to these facts, the Court finds that defendants failed to allege sufficient grounds to support a claim of mutual mistake. As the Appellate Division found, with regard to the purchase agreement here,
"We note . . . as the motion court pointed out, section 6.6 defines the pre-development work in terms of an "approximately 349 unit hotel" and "a mix of uses at the existing golf course," and the number 1,388 does not appear there or anywhere else in the contract."
( Diplomat Props. L.P. v Komar Five Associates LLC, ___ AD2d ___, 2010 NY Slip Op 03476, *3 [1st Dept 2010]).
There is no language in the contract which permits defendants to be relieved of the contract in the event that their hopes for the development of the Florida property were blocked by city officials. Critically, the Court cannot ignore that defendants were permitted due diligence and chose to accept the property "as is" when they signed the contract with Diplomat Properties L.P. in May 2007. The development of the property was a business venture with concomitant risks. Consequently, there was no mutual mistake requiring rescission of the settlement agreement. Accordingly, the First Counterclaim is dismissed.
Second Counterclaim: Failure to Close
The Second Counterclaim argues that defendants are entitled to return of the first payment under the terms of the Settlement Agreement on the assertion that Komar did not breach the purchase agreement with Diplomat Properties L.P. In response, plaintiff contends it is entitled to dismissal of the Second Counterclaim based upon the doctrine of collateral estoppel.
Under the collateral estoppel doctrine, a party is precluded from re-litigating an issue which has been previously decided against him in a prior proceeding where (1) the identical issue was decided in the prior action and is decisive in the present action, and (2) the party to be precluded from re-litigating the issue had a fair and full opportunity to contest the prior issue ( Luscher v Arrua , 21 AD3d 1005 , 1007 [2d Dept 2005]).
In this case, the Appellate Division, First Department, has decided that "plaintiff . . . was ready, willing and able to close on the closing date, and defendant failed to demonstrate a lawful excuse for its failure to close." ( Diplomat Props. L.P. v Komar Five Associates LLC, ___ AD2d ___, 2010 NY Slip Op 03476, *4 [1st Dept 2010]). Accordingly, Komar is precluded from arguing that it did not breach the purchase agreement. Since the agreement precludes a demand for refund where Komar has breached the purchase agreement, Komar's counterclaim for a refund is dismissed.
III. Conclusion
Defendant's motion to dismiss the first cause of action seeking payment by Plaintiff under the Settlement Agreement is granted. Plaintiff's motion to dismiss the counterclaims for rescission and refund under the Settlement Agreement is dismissed. The motion for summary judgment is denied as moot.
The Clerk of the Court is directed to enter judgment accordingly.
This constitutes the Decision and Order of the Court.