Scott E. Mollen

Brokerage—Law firm Alleged It Was Treated as an Out of Town “Yokel”—Tenant’s Motion to Dismiss Real Estate—Broker’s Fraud Counterclaim Granted, But Judiciary Law §487 Counterclaim Survived Dismissal Motion—Fraud Claim Did Not Plead Compensable Damages—Law firm’s Alleged Misrepresentations as to Expected Future Growth Constituted “Mere Puffery” or Expectations of Future Performance, Which Cannot Sustain a Cause of Action for Fraud

A law firm (firm) sued its real estate broker (broker) for breach of fiduciary duty, fraud, negligent misrepresentation, and professional negligence. The broker asserted counterclaims for fraud and violation of Judiciary Law §487 (§487). The firm moved pursuant to CPLR §§3016, and 3211(a)(7) to dismiss the broker’s counterclaims. The court granted the firm’s motion to dismiss the fraud claim, but denied the motion to dismiss the §487 claim.

The Los Angles based firm was looking to expand in New York City. It hired the broker to help find appropriate space. The broker held itself out as having particular expertise in providing real estate brokerage services to law firms.

The firm alleged that it asked the broker to find a “small starter office in Mid-town with five or six offices, a conference room and one or two secretarial bays.” The firm initially advised the broker, that the firm’s budget was $28,000 per month. The firm’s budget was subsequently increased to $30,000 per month. The firm alleged that the broker had provided an initial report which presented “only properties that were outside” of the firm’s budget.

The broker countered that it had produced twelve possible leasing opportunities and only two of the twelve exceeded the firm’s budget. The broker further alleged that the firm eventually leased a larger space at a cost well above the firm’s initial budget, in a building (building) that the broker had identified. The broker had initially recommended a “budget-friendly ‘starter office’” opportunity of three thousand square feet for $23,500 per month.

After the firm allegedly rejected all of the broker’s initial suggestions and ultimately pursued more expensive opportunities, the broker presented the firm with a proposal for a larger space at the building. The firm ultimately negotiated a lease for such space. Although the firm allegedly asked the broker to review the proposed lease, the broker allegedly declined and advised the firm that it “should seek legal counsel before entering into the lease.” One of the firm’s partners reviewed the lease and represented the firm in the lease transaction.

The firm thereafter signed a lease and a lease amendment, pursuant to which the firm rented office space in the building at a rent of $59,000 per month. The lease amendment provided (for additional space) and increased the base rent to $110,000 per month, with rent increasing to $120,000 per month beginning in 2021. The lease term was to expire in 2027.

The firm alleged that the leased premises had several problems, including “loud noises, unsatisfactory construction, a poorly-functioning HVAC system, and a lack of an electricity submeter, resulting in overcharges for electricity….” It further alleged that despite assurances from the broker that it would be able to sublease unused space, the firm was “unable to do so, even at a steep discount….” The firm claimed that the broker “failed to assist it in dealing with these issues….” After failed attempts to sublease the space, the firm vacated the property. The landlord had sued the firm for back rent and the firm “remains liable for future rent payments.” The firm then sued the broker.

With respect to the firm’s motion to dismiss the broker’s counterclaims, the court explained that the allegations, even when viewed in a “light most favorable” to the broker, “do not support the inference that (broker) suffered any calculable damages based on (firm’s) alleged fraudulent conduct.” The broker claimed that when the firm defaulted on its lease, the broker’s “reputation with other commercial real estate firms was damaged because (broker) had advocated on behalf of (firm) in helping it secure the office space….” The broker had not alleged that it suffered any “monetary harm or that its relationships with any specific entities, such as the bank or the landlord involved in this matter, were adversely impacted.”

The court found that such “conclusory allegation does not support the inference that (broker) suffered any cognizable injury as a result of (firm’s) alleged conduct” and that the “(broker’s) failure to adequately plead compensable damages is fatal to its counterclaim for fraud.” Moreover, the firm’s “alleged misrepresentations regarding expected future income growth fall into the category of mere (puffery) or expectations of future performance, which cannot sustain a cause of action for fraud….”

The court then explained:

To state a cause of action for violation of Judiciary Law §487, a party must plead intentional deceit and damages proximately caused by the deceit…. To be actionable, the alleged deceit must have occurred during a pending judicial proceeding…. Allegations of deceit or an intent to deceive must be stated with particularity…. Where a cause of action under Judiciary Law §487 is based on allegations of false statements and pleadings, a party may prevail by establishing that “the lawsuit could not have gone forward in the absence of the material misrepresentation, [and] that party’s legal expenses… may be treated as the proximate result of the misrepresentation….”

The §487 counterclaim was based on the firm’s statements in its complaint and its opposition to the landlord’s motion for summary judgment in a related action. The broker claimed that the firm “knowingly made several false statements concerning the underlying events in this matter as contrived predicates for its claims with the intent to deceive the court.” The broker cited, for example, an allegation that the firm had sought legal space that would not exceed $28,000 to $30,000 per month, that the firm had “spelled out its need and budget” and had reinforced “those points during face-to-face meetings.” The firm also alleged that the broker had a “differen[t] agenda.” The firm alleged that the broker had viewed the firm as an “out-of-town ‘yokel’” who could generate a “fat commission” and the broker had “upsold” the firm from the “get-go.” The firm also alleged that the broker had “exclusively” presented lease opportunities “far outside of (firm’s) price range,” and to “encourage” the firm to rent space above its budget, the broker had “represented falsely that the rent was below-market and a great deal.”

The court found that documentary evidence showed that the firm’s allegations were “not only misleading, but demonstrably false.” The broker’s “space report” which presented opportunities to the firm, showed that 10 of 12 properties were within the firm’s stated budget. The court found that the firm’s lawsuit was based on “material misrepresentations of fact and, as a proximate result of those misrepresentations, (broker) was compelled to defend the action and incur legal fees.” The court concluded that assuming that the broker’s allegations were true and giving the broker “every favorable inference, the counterclaim for violation of §487 is adequately pled to survive dismissal.” Accordingly, the court dismissed the fraud counterclaim, but upheld the sufficiency of the §487 counterclaim.

Comment: In order to accommodate future growth, professional firms will often lease more space than is necessary to accommodate their immediate needs. Depending on the anticipated needs, the additional space may simply be held for expansion or may be sublet.

Generally, if a broker expresses an opinion that such excess space will be relatively easy to sublet, courts will view such statement as an opinion as to a future event, not as a material misrepresentation of an existing fact.

Here, as the court noted, the tenant was a law firm which had a partner review the proposed lease and represent the firm in the lease negotiation.

Gerard Fox Law PC v. Vortex Grp., Supreme Court, N.Y. Co., Index No. 654794/2018, decided July 7, 2019, Borrok, J.

Laches Bars Plaintiffs from Setting Aside Deed—Plaintiffs Knew or Should Have Known About Alleged Fraudulent Conduct Well Before the Subject Sale and Failed to File a Notice of Pendency—Innocent, Bona Fide Purchaser For Value

This case involved allegations that the defendant had engaged in “self-dealing and deprived plaintiffs of their interest in and income from” from four properties over a period of more than ten years.

An intervenor-defendant, third-party plaintiff (“A”) had moved for summary judgment, dismissing the complaint or in the alternative, partial summary judgment declaring “that movant is the holder of an equitable first mortgage lien against the subject property in a sum certain, plus interest, superior to plaintiffs’ rights, title to and interest in the property.” (“A”) had signed a contract with defendant (“B”) to purchase the subject property on August 27, 2015 and closed the purchase on September 18, 2015. Prior to the purchase, a title report had been obtained. The title report confirmed that (“B”) was the “sole record title holder of the property … by virtue of a deed dated May 21, 2009 and recorded on June 25, 2009.” The title report did not reveal “any Notices of Pendency or pending lawsuits.”

(“A”) asserted that it is “innocent, bona fide purchaser and encumbrancer for value” and that “laches bar the plaintiffs’ causes of action and that the causes of action against (“A”) lack merit.” Alternatively, (“A”) claimed that it was “entitled to a declaration that it holds an equitable mortgage lien on the property in the amount of $338,874.85, plus interest from the closing, and that plaintiffs’ affirmative defenses lack merit.”

The plaintiffs argued that the movant did not “eliminate all issues of fact.” Plaintiffs claimed there cannot be a “bona fide purchaser or encumbrancer for value based upon a forged deed, and the deed of May 21, 2009 is a forgery in that (a plaintiff) did not sign same conveying title from him and his father (“B”) to the father alone.” Plaintiffs also argued that the movant could not establish the elements of laches since a plaintiff had testified that he was not aware of (“B”’s) self-dealing until late 2014. The plaintiffs also argued that the movant did not meet its burden “relative to equitable subrogation on account of their unclean hands.”

The court observed that “[e]ssentially plaintiffs failed to file a Notice of Pendency against the property at the commencement of this action in February 2015, or when an emergency application seeking injunctive relief was denied in May 2015, or when they filed Notices of Pendency against (certain other properties) in August 2015.” “The Notice of Pendency relative to the property at issue was inexplicably filed only in late September 2015, after the closing took place and title was transferred to movant.”

The court explained that the equitable defense of laches is

“based on a lengthy neglect or omission to assert a right and the resulting prejudice to an adverse party”…. It requires a showing of “(1) conduct by an offending party giving rise to the situation complained of, (2) delay by the complainant in asserting his or her claim for relief despite the opportunity to do so (3) lack of knowledge or notice on the part of the offending party that the complainant would assert his or her claim for relief, and (4) injury or prejudice to the offending party in the event relief is accorded the complainant”….

“In order for laches to apply to the failure of an owner of real property to assert his or her interest, it must be shown that the plaintiff inexcusably failed to act when he or she knew, or should have known, that there was a problem with his or her title to the property. … for there to be laches, there must be elements to create an equitable estoppel. Equitable estoppel arises when a property owner stands by without objection while an opposing party asserts an ownership interest in the property and incurs expense in reliance on that belief. The property owner must inexcusably delay in asserting a claim to the property, knowing that the opposing party has changed his position to his irreversible detriment”….

The movant emphasized that it only bought the property after it had obtained a title report which did not disclose any “Notices of Pendency filed against the property, and the last Deed of record into (“B’s”) name alone was executed and filed making it public record, more than six years prior to transfer, in 2009.” Movant also cited the plaintiffs’ “neglect and delay in addressing (“B”’s) blatant, adverse and continuous conduct giving rise to this action.”

The movant argued that in 2005, a plaintiff and (“B”) mortgaged the property in the amount of $393,750.00 and (“B”) appropriated the entire proceeds for himself without objection from the plaintiff. In 2005, the plaintiff “had suggested that (“B”) “establish a separate account for the rental income from the property but (“B”) ignored this suggestion.” (“B”) helped continue to “co-mingle and keep that income, again, with knowledge, but without objection from (plaintiff).” In 2007, plaintiff knew that (“B”) had ignored a proposed plan to transfer the property into a limited liability company. Between 2006 and 2007, the plaintiffs knew that (“B’s”) “conduct of retaining mortgage proceeds for himself, co-mingling rental income and failing to cooperate in the LLC scheme extended to the other properties at issue in this action, … but again no action was taken and (plaintiff) ‘left it alone.’” The court further stated that the plaintiffs “knew as early as 2007 of the alleged forged deeds and in a continuing pattern neglected to act or to protect their interests or the properties.”

The plaintiffs had submitted “simple, self-serving statements that they were unaware of their father’s actions until the end of 2014 and that they relied upon their relationship to assume that (“B”) was acting properly.”

The court held that given (“B”’s) actions, “their unconcealed, public and continuous nature, both assertions are implausible, as the veracity of the statements as weighed against the actions to which they refer is not probable.” The court opined that the plaintiffs’ statements were “unlikely in the face of (“B’s”) conduct.”

Although the court was “sympathetic to the influence of the relationship between the parties, the same does not permit the plaintiffs to be like ostriches and ignore years of behavior contradictory to and undermining of that relationship.” Moreover, a plaintiff was not a “unsophisticated individual.” He held an undergraduate degree in finance, an Executive MBA and has years of experience working in accounting and finance with a few “prominent companies.” The court believed that a plaintiff’s “ignorance appears feigned and his indifference is indefensible.” Furthermore, the plaintiffs failed to explain that the delay and the complete failure until after the sale, to file notices of pendency, which if filed “would have wholly eliminated movant’s involvement in this action.”

The plaintiffs had also argued that the movant knew or should have known of an issue with respect to title since they had purchased the property for an amount more than $500,000 below market value. The court found that such argument lacked merit and was without probative value “as unsubstantiated.” The plaintiffs did not submit evidence of the market value or that movant had purchased the property for less than that value. The court held that the movant had demonstrated that the doctrine of laches “applies and precludes plaintiffs from seeking to set aside, or affect movant’s deed, title and interest in the property.” The court found that the plaintiffs’ remaining causes of action lacked merit and the movant was entitled to summary judgment and dismissed the plaintiffs’ complaint against it.

Olowofela v. Olowofela, Supreme Court, Queens Co., Index No. 2363/2015, decided June 17, 2019, Greco Jr., J.

Condominiums—Reserve Fund—Trial Court’s Denial of Sponsor’s Motion to Dismiss Affirmed

A plaintiff commenced an action, alleging that the sponsor of a condominium (sponsor) had “underfunded plaintiff’s reserve fund by using the wrong value for ‘total price’ in the calculation of the amount of the fund….” See Admin Code of City of New York §§26-703[b][i] “three percent of the total price”; 26-702[b][2] “the sum of the cost of all units in the offering at the last price which was offered to tenants in occupancy prior to the effective date of the plan.” The plaintiff also alleged that the “aggregate price of the four commercial units in the condominium building should be factored into the calculation of the amount of the reserve fund.”

The Appellate Division (court) affirmed, but on different grounds than those cited by the trial court. With respect to the correct value for “total price,” the court stated that “‘the last price which was offered to tenants in occupancy prior to the effective date of the plan’ was the tenant discount price contained in the Fifth Amendment to the Condominium Offering Plan.” The court acknowledged that the discount price in the Fifth Amendment “was made effective simultaneously with the acceptance of the amendment for filing.”

However, the court reasoned that the “fact that the price was made available retroactively to any tenant who had purchased a unit under the original plan or any amendment preceding the Fifth Amendment renders it the lowest price offered ‘prior to the effective date of the plan.’” It further stated that “[c]onstruing the ordinance to provide for calculation of ‘total price’ based on a retroactively applicable discounted price promotes public policy by ‘encouraging the sponsor to lower the inside price, which inures to the benefit of the tenants in occupancy,’ and ‘gives the sponsor an incentive to fund the entire reserve fund at closing, which is beneficial to all shareholders….’”

With respect to commercial units, the court found, contrary to the trial court, that the commercial units should be included in the calculation of “total price.” It explained that the Admin. Code §26-702[b][2] defined “total price” as “the sum of the cost of all units in the offering.” The court stated “[t]he word ‘all’ is unambiguous; the provision does not on its face distinguish between residential and commercial units.” Thus, it concluded that it did not need to look at the “principle of in pari materia or otherwise look beyond the plain words of the legislation…” and held that the complaint adequately stated a cause of action for breach of contract.

Board of Mgrs. Of 150 E. 72^nd St. Condominium v. Vitruvius Estates, LLC, 2019 Slip Op 05074, Decided on June 25, 2019, Appellate Division, First Department. Renwick, J.P., Manzanet-Daniels, Webber, Oing, JJ.

Scott E. Mollen is a partner at Herrick, Feinstein.