Joint Venture Agreements – I would do anything for [my partners] but I won’t do that…

Three business partners arguing to illustrate an article by Richard Klass about Joint Venture Agreements

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Two partners owned vacant lots in Manhattan and wanted to build on them. They found two developers who pitched building townhouses on the lots. The four of them entered into a joint venture agreement (“JVA”). [1] Essentially, the agreement was that, in return for the developers paying off debts owed on the lots, refinancing an existing mortgage and obtaining a new construction loan, the lot owners would transfer the property to a limited liability company (“LLC”) to be jointly owned by all four of them.

Joint Venture Agreement

According to the JVA, ownership of the new LLC would be equally divided among the four partners (25% each). The LLC was supposed to refinance the property. The funds from the refinance would first be utilized to satisfy the existing mortgage on the property and then finance all of the construction costs for three single-family townhouses. The developers were to use their best efforts to obtain a construction loan to perform the purpose of the joint venture, and the lot owners were to fully cooperate in these efforts.

Formation of the LLC

One of the developers formed an LLC into which title to the lots would be transferred. The LLC was initially formed with him as the sole member for convenience purposes until the prospective refinance and closing were to take place, at which time all four partners would constitute the members.

Lack of cooperation

In order to comply with the mortgage lender’s requests about the property, the developers needed certain back-up documentation from the lot owners concerning expenses. The lot owners did not provide the requested items. Ultimately, they stopped cooperating with the developers. The developers retained Richard A. Klass, Esq., Your Court Street Lawyer, to pursue their rights under the joint venture agreement, including suing for breach of contract and to enforce a constructive trust over the vacant lots.

In response to the developers’ claims, the lot owners contended that they properly rejected the demand to transfer title to the property to the new LLC. They claimed that they were never provided with an operating agreement that named all four of the partners as members. The lot owners declared, “There was no way it was either reasonable or pursuant to the terms of the JVA that we were going to transfer the property worth at least $4,000,000.00 to an LLC in which we had no ownership interest and no control.”

The developers asserted that this defense was pretext — the lot owners never intended on complying with the joint venture agreement from the start. As fully laid out before the arbitrator, both in testimony and documentary evidence, the developers established that this defense was unfounded based on several facts: (1) the transfer tax documents, prepared by the title company, reflected all four joint venturers’ names and respective 25% interests in the new LLC; [2] (2) One of the lot owners himself emailed the title company the names of all four people for the new LLC; (3) the developer emailed the mortgage lender that all four people were partners in the new LLC; (4) the developer informed the lot owner that the mortgage lender needed a draft of the operating agreement, Excel spreadsheet and all checks following; and (5) the developers made various, substantial payments in furtherance of their joint venture prior to any deed transfer.

The developers claimed that the lot owners wrongfully breached their fiduciary duty that was created when they entered into the joint venture.[3] As joint venturers, the developers asserted the lot owners owed them a fiduciary duty to supply financial information which was within their exclusive control and they breached their duty by intentionally failing to cooperate and disclose pertinent information. Cooperation on the part of both sides to a contract is implied in every contract. See, Madison Pictures, Inc. v Pictorial Films, Inc., 6 Misc 2d 302, 324-25 (Sup. Ct. 1956) (“Where a matter is particularly within the knowledge of one party, it is his duty to supply the information.”); see also Weeks v. Rector of Trinity Church in City of New York, 56 App.Div. 195, 67 N.Y.S. 670, 672 (1st Dept. l900) (“The rule of law is that, when the obligation of performance by one party to a contract presupposes the doing of another act by the other party prior thereto, there arises an implied obligation of the second party to do the act which the performance of the contract necessarily…”).

The arbitrator determined that the developers were entitled to compensation from the lot owners for their substantial investment of time and money into the project. The arbitrator awarded half of the value of the property along with reimbursement for all of their expenses.

[1]  Under New York law, five elements are necessary to form a joint venture: “(1) two or more persons must enter into a specific agreement to carry on an enterprise for profit; (2) their agreement must evidence their intent to be joint venturers; (3) each must make a contribution of property, financing, skill, knowledge or effort; (4) each must have some degree of joint control over the venture; and (5) there must be a provision for the sharing of both profits and losses.” Dinaco, Inc. v. Time Warner Inc., 346 F.3d 64, 67-68 (2d Cir. 2003).

[2]  It was noted that both the Joint Venture Agreement and the NYC Real Property Transfer (RPT) Tax Return served as documentary evidence of the respective LLC ownership interests of the parties. As held in Matter of Pappas v Corfian Enterprises, Ltd., 22 Misc 3d 1113(A) [Sup Ct 2009], affd, 76 AD3d 679 [2d Dept 2010]: “In the real world, particularly that in which close corporations operate, clear evidence of share ownership is often not found in the corporate books and records, for any number of reasons. Other evidence must be found, and the lodestar for admissibility and probative value must be the contractual foundation for shareholder status. A court may consider the intent of the parties, particularly evidence of an agreement to form a corporation. (See Matter of Estate of Purnell v. LH Radiologists, 90 N.Y.2d at 530, 664 N.Y.S.2d 238, 686 N.E.2d 1332; Blank v. Blank, 256 A.D.2d at 689, 681 N.Y.S.2d 377.) * * *

Documentary evidence may be particularly probative when the documents were created under circumstances in which there was no incentive to fabricate. Among the types of documents that courts have considered, and that have been proffered in this case, are corporate and personal tax returns, bank loan documents, and financial statements. (See Matter of Capizola v. Vantage International, Ltd., 2 A.D.3d at 845, 770 N.Y.S.2d 395; Blank v. Blank, 256 A.D.2d at 694, 681 N.Y.S.2d 377; Hunt v. Hunt, 222 A.D.2d at 761, 634 N.Y.S.2d 804.

[3]  It is well settled that joint venturers are governed by the same good-faith requirements as co-partners and the creation of a joint venture “imposes a fiduciary relationship, and not a simple contract.” Learning Annex Holdings, LLC v Whitney Educ. Group, Inc., 765 F Supp 2d 403, 412 [SDNY 2011]. In order to demonstrate a breach of fiduciary duty, there must be: “(i) the existence of a fiduciary duty; (ii) a knowing breach of that duty; and (iii) damages resulting therefrom.” N. Shipping Funds I, LLC v Icon Capital Corp., 921 F Supp 2d 94, 101 (S.D.N.Y. 2013)(Citing Johnson v. Nextel Communications, Inc., 660 F.3d 131, 138 (2d Cir. 2011)).

 

R. A. Klass
Your Court Street Lawyer

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#CourtStreetLawyer, #LegalMalpractice, #joint-venture-agreement

Scales of justice illustrating article about legal malpractice.

“Slow Down, You Move Too Fast”

Simon & Garfunkel,
The 59th Street Bridge Song (Feelin’ Groovy)

Rabbit with yellow fur standing next to gray and yellow turtle illustrating article by Richard Klass about nonresident plaintiffs posting security for costs.

A foreign company sued a New York State resident, seeking to force the sale of his house in order to satisfy its judgment.  The company existed under New Jersey law with a New Jersey corporate address.  The house was located in Nassau County.

Petition to Sell House

The judgment creditor’s petition to sell real property alleged that there was sufficient equity in the house exceeding the homestead exemption and existing mortgage lien.  The petition further alleged that attempts to execute on the judgment debtor’s personal property failed and the creditor had otherwise been unable to satisfy its judgment.  Combined, these allegations would normally be enough to satisfy the pleading requirements under CPLR 5203, 5206 and 5238.

In response to the petition, the debtor/homeowner retained Richard A. Klass, Your Court Street Lawyer, to defend the proceeding in order to retain his house.  The defenses put up included the fact that the mortgage lender had already begun foreclosure proceedings and there was a question as to the validity of the claim that there was any net equity in the property.  Further, since the house was owned by the debtor with his wife as a “ tenancy by the entirety, ” the house could not be sold without consideration of her property rights.

Stopping the Creditor in its tracks

Sometimes, a debtor needs a respite from the continual attacks by creditors.  One way to accomplish this is by a bankruptcy filing, in which the automatic stay imposed upon filing stops the pecking at a debtor’s assets by creditors.  Another way to slow down a creditor is to temporarily stay the lawsuit while the debtor and his family “ circle the wagons ” to either gather up strong defenses or develop an orderly plan in which debts will be repaid or settled.  An effective method of getting this pause is by requesting that the judge stay the lawsuit of a non-New York State creditor until the plaintiff/creditor posts security for the costs of the action.

Security for Costs

New York court rules require nonresident plaintiffs maintaining lawsuits in New York courts to post security for the costs for which they would be liable if their lawsuits were unsuccessful.  CPLR 8501(a) provides that, “ except where the plaintiff has been granted permission to proceed as a poor person or is the petitioner in a habeas corpus proceeding, upon motion by the defendant without notice, the court or judge thereof shall order security for costs to be given by the plaintiffs where none of them is a domestic corporation, a foreign corporation licensed to do business in the state or a resident of the state when the motion is made. ” CPLR 8502 provides that until security for costs is given pursuant to court order, all proceedings other than to review or vacate such order shall be stayed, and that if the plaintiff shall not have given security for costs at the expiration of 30 days from the date of the order, the court may dismiss the complaint upon motion by the defendant.

Security for costs is a device ordinarily used against a nonresident plaintiff to make sure if he loses the case, he will not return home and leave the defendant with a costs judgment that can be enforced only in the plaintiff’s home state.  By directing a nonresident to post a bond, the defendant is protected from frivolous lawsuits and is assured that, if successful, he will be able to recover costs from the plaintiff.

In rebuffing a challenge to the constitutionality of the requirement of security for costs imposed upon a nonresident plaintiff, the court in Clement v. Durban, 147 AD3d 39 [2016] aff’d 32 NY3d 337 [2018] cert denied 139 S.Ct. 2649 [2019] held that the court rules do not deprive nonresident plaintiffs of reasonable and adequate access to New York courts and, thus, are constitutional.  Where nonresidents are subject to different treatment than New York residents, there must be reasonable grounds for diversity of treatment (so as to prevent discrimination against citizens of other states).  Disparity of treatment of nonresidents is permitted in situations where there are valid, independent reasons for it; in this situation, deterring frivolous or harassing lawsuits and preventing prevailing defendants from having to chase plaintiffs into foreign jurisdictions to collect their judgments are considered valid reasons.

Upon motion by the defendant requesting that the plaintiff post a bond as security for costs, the judge granted the motion and directed the nonresident plaintiff to post security in the amount of $10,000 for costs.  The plaintiff did not do so within the 30 day period after the order and, accordingly, the court dismissed the lawsuit.

Richard A. Klass, Esq.

©2019 Richard A. Klass. Credits: Photo of Richard Klass by Rob Abruzzese, 2019. Marketing agency: The Innovation Works, Inc. (www.TheInnovationWorks.com)  Image at top of page: Shutterstock

R. A. Klass
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[ nonresident plaintiffs ]

License to Enter and RPAPL 881: New Booklet by Richard A. Klass

A Man’s Home Is (Not Always) His Castle:
RPAPL 881 License to Enter Neighbor’s Property
by Richard A. Klass, Esq.

Cover of book " A Man’s Home Is (Not Always) His Castle: RPAPL 881 License to Enter Neighbor’s Property " by Richard A. Klass, Esq.

Download the free E-Book version in PDF format.
Click here for the free on-line web-book.
12 pages/830 KB

Summary

A Man’s Home Is (Not Always) His Castle

In the current economic and political climate in New York City, which encourages building more and more housing units for the multitudes, it is not surprising that property owners are experiencing “growing pains.” Among those “growing pains” are the inconvenience and annoyance to neighboring property owners when a developer buys land next door, then seeks to build on that land, and must gain access through the adjacent owners’ property in order to do the work. Access may be needed to move equipment, build up to the property line, or deliver material to the building site.

RPAPL 881 grants a license to enter property:

New York law seeks to find middle ground between the property developer and the neighboring owner so that the developer may build its structure while the neighbor can be left relatively undisturbed.

(Click here to read the book.)

R. A. Klass
Your Court Street Lawyer

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…plaintiff could not establish liability because he could not prove the underlying action.

In Blair v Loduca, 164 AD3d 637, 638-40 [2d Dept 2018], the Second Department considered the argument made by the defendant-attorney sued for legal malpractice that the plaintiff could not establish liability because he could not prove the underlying action.

“ To establish the required element of causation in a legal malpractice action, ‘ a plaintiff must show that he or she would have prevailed in the underlying action … but for the lawyer’s negligence ’ ” (Balan v. Rooney, 152 A.D.3d 733, 733, 61 N.Y.S.3d 29, quoting Rudolf v. Shayne, Dachs, Stanisci, Corker & Sauer, 8 N.Y.3d 438, 442, 835 N.Y.S.2d 534, 867 N.E.2d 385; see Detoni v. McMinkens, 147 A.D.3d 1018, 48 N.Y.S.3d 208). The only issue raised in the defendants’ motion for summary judgment was whether the plaintiff could have prevailed in the underlying action against the property owner.

In a premises liability case, a defendant property owner who moves for summary judgment has the initial burden of making a prima facie showing that it neither created the allegedly *639 dangerous or defective condition nor had actual or constructive notice of its existence (see Martino v. Patmar Props., Inc., 123 A.D.3d 890, 890, 999 N.Y.S.2d 449; Kruger v. Donzelli Realty Corp., 111 A.D.3d 897, 975 N.Y.S.2d 689; Smith v. Christ’s First Presbyt. Church of Hempstead, 93 A.D.3d 839, 941 N.Y.S.2d 211; Meyers v. Big Six Towers, Inc., 85 A.D.3d 877, 925 N.Y.S.2d 607). “ Under the so-called ‘ storm in progress ’ rule, a property owner will not be held responsible for accidents occurring as a result of the accumulation of snow and ice on its premises until an adequate period of time has passed following the cessation of the storm to allow the owner an opportunity to ameliorate the hazards caused by the storm ” (Marchese v. Skenderi, 51 A.D.3d 642, 642, 856 N.Y.S.2d 680; see Solazzo v. New York City Tr. Auth., 6 N.Y.3d 734, 810 N.Y.S.2d 121, 843 N.E.2d 748; Dumela–Felix v. FGP W. St., LLC, 135 A.D.3d 809, 810, 22 N.Y.S.3d 896; McCurdy v. Kyma Holdings, LLC, 109 A.D.3d 799, 799, 971 N.Y.S.2d 137; Smith v. Christ’s First Presbyt. Church of Hempstead, 93 A.D.3d 839, 840, 941 N.Y.S.2d 211; Weller v. Paul, 91 A.D.3d 945, 947, 938 N.Y.S.2d 152; Mazzella v. City of New York, 72 A.D.3d 755, 756, 899 N.Y.S.2d 291). If a storm is ongoing, and a property owner elects to remove snow, the owner must do so with reasonable care or it could be held liable for creating a hazardous condition or exacerbating a natural hazard created by the storm (see Kantor v. Leisure Glen Homeowners Assn., Inc., 95 A.D.3d 1177, 944 N.Y.S.2d 640; Petrocelli v. Marrelli Dev. Corp., 31 A.D.3d 623, 817 N.Y.S.2d 913; Salvanti v. Sunset Indus. Park Assoc., 27 A.D.3d 546, 813 N.Y.S.2d 110; Chaudhry v. East Buffet & Rest., 24 A.D.3d 493, 808 N.Y.S.2d 239). In such an instance, that property owner, if moving for summary judgment in a slip-and-fall case, must demonstrate in support of his or her motion that the snow removal efforts he or she undertook neither created nor exacerbated the allegedly hazardous condition which caused the injured plaintiff to fall (see Kantor v. Leisure Glen Homeowners Assn., Inc., 95 A.D.3d at 1177, 944 N.Y.S.2d 640).

In support of their motion for summary judgment dismissing the complaint in this action, the defendants submitted the plaintiff’s deposition testimony, the deposition testimony of the building’s doorman, the affidavit of a meteorologist, and certified climatological data. These submissions demonstrated that a storm was in progress at the time of the accident, that there was no preexisting ice on the ground when the storm commenced, and that the property owner did not create or exacerbate the allegedly dangerous condition created by the storm in progress (see Aronov v. St. Vincent’s Hous. Dev. Fund Co., Inc., 145 A.D.3d 648, 649, 43 N.Y.S.3d 99; **135 Kantor v. Leisure Glen Homeowners Assn., Inc., 95 A.D.3d at 1177, 944 N.Y.S.2d 640; Ali v. Village of Pleasantville, 95 A.D.3d 796, 797, 943 N.Y.S.2d 582). Since the defendants made a prima facie showing that the storm in progress rule applied *640 to the underlying action, the burden shifted to the plaintiff to show that something other than the precipitation from the storm in progress caused the accident (see Baker v. St. Christopher’s Inn, Inc., 138 A.D.3d 652, 653, 29 N.Y.S.3d 439; Burniston v. Ranric Enters. Corp., 134 A.D.3d 973, 974, 21 N.Y.S.3d 694; Meyers v. Big Six Towers, Inc., 85 A.D.3d 877, 877–878, 925 N.Y.S.2d 607; Alers v. La Bonne Vie Org., 54 A.D.3d 698, 699, 863 N.Y.S.2d 750). The plaintiff failed to raise a triable issue of fact.

Accordingly, the Supreme Court should have granted the defendants’ motion for summary judgment dismissing the complaint because the plaintiff could not have prevailed in the underlying action against the property owner (see Rudolf v. Shayne, Dachs, Stanisci, Corker & Sauer, 8 N.Y.3d at 442, 835 N.Y.S.2d 534, 867 N.E.2d 385; Balan v. Rooney, 152 A.D.3d at 733, 61 N.Y.S.3d 29; Detoni v. McMinkens, 147 A.D.3d at 1018, 48 N.Y.S.3d 208).

R. A. Klass
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The Rent Is Too Damn High

Frightened woman in fashionable, white apartment. copyright: PlusONE/Shutterstock.com

The tenant lived in an apartment building in Brooklyn for several years. She dutifully paid her rent to her landlord. After several years, she discovered that the rental amount she was paying exceeded the legally-allowed amount for her rent-stabilized apartment according to New York State law.

DHCR Rent Overcharge

After the tenant realized that she was paying higher-than-permitted rent, she filed a Rent Overcharge Application with the NYS Division of Housing and Community Renewal (DHCR). The DHCR, a State agency, enforces the regulations as to how much rent a landlord may legally charge a tenant. (Point in fact: A tenant may also commence a court case for rent overcharge or assert the claim as a defense in a Housing Court proceeding brought by the landlord). In this case, the tenant proved to the Rent Administrator that there was a rent overcharge by the landlord which exceeded the legal regulated rent.

Penalty phase

Once the DHCR determined that the tenant was overcharged for rent, an appropriate penalty was to be assessed against the landlord. Sometimes, the penalty is merely the amount above the legal regulated rent plus accrued interest. Other times, as in this case, the penalty for a willful overcharge equals three times the amount of the overcharge (treble damages) for two years prior to filing the complaint. In this case, the landlord was penalized with treble damages as detailed in the Final Order.

The Final Order of the Rent Administrator was timely challenged by the landlord through its filing of a Petition for Administrative Review (PAR) with the DHCR Commissioner (which had to be done within 35 days of the Order to stop the tenant from collecting the penalty). After the landlord’s PAR was decided and the landlord lost again, the landlord timely filed a court proceeding known as an “Article 78” to further challenge the DHCR’s Final Order and Order after the PAR (which had to be done within 60 days after the PAR Order). The state court judge determined in the Article 78 proceeding that the DHCR acted appropriately and sustained the treble damage award.

Enforcement of the DHCR Final Order

Now that the DHCR Order was final, the tenant needed to collect the money from the landlord. She retained Richard A. Klass, Your Court Street Lawyer, to collect the debt.

Under DHCR rules, a tenant may enforce the rent overcharge order either through certain deductions from current rent due to the landlord or through entering a money judgment with the County Clerk’s Office (this option is usually selected when the amount is very large or the tenant has moved from the apartment already). Here, the Judgment was entered against the landlord and enforcement measures were immediately taken to collect the Judgment, including docketing a lien against the landlord’s apartment building and issuing an Execution to the Sheriff to levy upon the landlord/judgment debtor. After the full-court press by Richard A. Klass, the Judgment was collected and the tenant received payment pursuant to the DHCR Rent Overcharge finding.

by Richard A. Klass, Esq.

R. A. Klass
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