Opinion
6951/06.
Decided September 4, 2008.
The Defendant moves for partial summary judgment dismissing the complaint. The action involves an Asset Purchase Agreement for the acquisition of a 160-bed skilled nursing facility in Holmes, New York. The agreement was dated July 24, 2002, and involved a $200,000 Escrow Agreement, naming O'Connell and Aronowitz as escrow agent. When the Purchaser (Putnam), failed to obtain approval from the New York State Department of Health (DOH), the Seller (KNH) demanded and received payment of the escrow funds.
In the First Cause of action of the Complaint, dated June 19, 2006, Putnam alleged that unbeknownst to them, DOH insisted on capital improvements in the range of $2,000,000 — $3,000,000 as a condition of approving Putnam's Certificate of Need (CON) application, and that this fact was know to KNH before the execution of the Asset Purchase Agreement. In addition, by permitting the occupancy rate to drop from 98% to 76% during the pendency of the application, KNH made it impossible for Putnam to show to DOH their ability to finance the requisite capital improvements.
The Second Cause of Action alleges that both parties were operating under a mistake of material fact, in that neither of them was aware of the pending application for mandatory capital improvements in the amount of $3,000,000. In addition, Putnam was mistaken as to its ability to obtain requisite approvals from DOH, which mistake was caused by the fraudulent concealment of the needed capital improvements by KNH. Putnam alleges entitlement to reformation or rescission of the Contract.
The Third Cause of Action alleges that KNH advised Putnam only that they had an approved application with DOH for renovations at an estimated cost of $3,000,000; but that they did not advise them that the improvements were mandated, as opposed to voluntary. It alleges that KNH remains responsible for the mandated capital repairs, and seeks a declaration of the rights and obligations of the parties.
KNH's Answer, dated July 14, 2006, denies the essential allegations of the complaint, but acknowledges the execution of the agreement, the escrow deposit of $200,000, and the payment to them of the deposit after notice to the Plaintiff in accordance with the Escrow Agreement. It raises five Affirmative Defenses: failure to state a cause of action, the relief sought by Plaintiff would constitute unjust enrichment, relief to the Plaintiff is barred by doctrine of unclean hands, the Plaintiff has waived relief to which it may otherwise be entitled, and, the Plaintiff is legally and equitably estopped from obtaining the relief demanded.
The Answer also raises five Counterclaims, which are based upon the allegations that Putnam determined that it no longer wished to pay the full purchase price, and, after filing its CON application, failed to diligently pursue it, and unsuccessfully sought to renegotiate the contract with KNH. On or about December 29, 2005 KNH entered into a new agreement for the sale of the nursing home with GWS Management Services Group, LLC (GWS), which submitted its own CON to DOH. On or about April 3, 2006, DOH advised KNH that it could not process the GWS application because of the continued pendency of Putnam's.
As a result of the refusal of Putnam to withdraw its application, KNH and GWS are prevented from completing their agreement. The First Counterclaim alleges tortious interference by Putnam in the contractual relationship between KNH and GWS. The Second Counterclaim alleges intentional damage to Defendant's business relations and economic harm. The Third alleges a prima facie tort. The Fourth alleges fraud by the Plaintiff in its representation that their CON application remains viable, thereby preventing Defendant from obtaining DOH approval for the sale to GWS. In the Fifth Counterclaim, the KNH alleges that Putnam, along with others, has engaged in a conspiracy to deprive it of a business opportunity.
BACKGROUND
The parties executed an Asset Purchase Agreement (Purchase Agreement) and an Escrow Agreement on July 24, 2002. ¶ 9 (H) of the Purchase Agreement 1 requires the Buyer to submit a CON application to DOH within 60 days of receipt of Seller's Cost Reports for 1999, 2000, and 2001, along with the Seller's Medicaid Rate Sheets as of January 1, 2002. ¶ 11 (H) provided for a 30-day period during which the Buyer was to conduct any and all due diligence as to the condition, financial and otherwise, of the Nursing Home and all assets. There is no dispute but that the Buyer initiated the CON application and conducted due diligence and that the Seller did not withhold any requested financial information. The Buyer did not exercise its right to terminate the contract by service of a written notice to the Seller within 5 business days after the conclusion of the Due Diligence Period.
¶ 15 (C)of the Purchase Agreement provides for termination if the DOH has not issued a written approval of the Application within twelve months of the date of filing the Application. After the completion of its Due Diligence investigation, Putnam, on or about February 7, 2003, filed its CON with DOH. No approval of the application was issued within twelve months, and, in fact, has never been issued. There are serious issues as to why this is so.
By letter dated January 13, 2005 2 counsel for Putnam rejected the January 5, 2005 draft of a termination notice and demand for distribution of the escrow deposit. Quoting ¶ 15 (C)of the Purchase Agreement, he stated that the twelve-month period within which to obtain written approval of the Certificate of Need Application would be extended so long as the Buyer was diligently pursuing approval of the application. The letter further stated that the initial delay in the processing of the Application was the concern of DOH as to the propriety of the earlier transfer of the interest of Harry Satin, a former partner in the ownership of the nursing home, to Leslie Kaye.
The letter further relates a meeting in November at DOH in which the agency expressed concern about the application because of: (a) the census decline at the facility; (b) the reduction in the Case Mix Index; (c)the reduction in the net income of the facility; and, (d) deterioration of the physical plant, necessitating an additional cash investment by the Purchaser of $2,000,000 as a condition of granting the application. Counsel claims that these conditions constituted a violation of ¶ 10 (B)(i), (ii), (iii), (v), (vi), and (xi) of the Purchase Agreement, which, in general, required the Seller to continue normal operations pending the closing of the transaction.
The parties appear to have made efforts toward a resolution of the matter, and on May 2, 2005, counsel for the Buyer forwarded an "Amended and Restated Asset and Exchange Agreement". This was intended to override the "Put/Call Agreement" with respect to the purchase of the Real Estate, and substitute a consolidated document which provided for a single purchase price of $14,300,000, to include the real estate "as is". $10,300,000 was allocated to the real estate. Instead of signing this agreement, KNH, by letter dated July 19, 2005, elected to terminate the agreement and demanded the $200,000 from escrow. By letter dated July 22, 2005, Escrowee, attorneys for KNH, advised counsel for Putnam that they received a termination letter and a demand for the escrow funds. It does not appear that Putnam served a written objection, as required by the Escrow Agreement, and the funds were dispersed to KNH.
KNH and 404 Ludingtonville Associates, LLC, the owner of the real estate, thereafter contracted with GWS Management Services Group, LLC (GWS) to sell the assets and real estate for the sum of $10,450,000. 3
The last-dated document annexed as an exhibit is a September 27, 2006 letter in which counsel for GWS relates the contents of a conference call with DOH during which the subject of a pending application for $3,000,000 in mandatory capital improvements was pending, and that, as alleged in the Putnam Complaint, this was an incumbrance to the processing of the Putnam application. Counsel then requests information and documentation with respect to the nature of the required capital improvements, and by whom they are required; correspondence between KNH and DOH regarding the mandated capital improvements, and KNH's application for approval of the improvements; correspondence between Putnam and DOH respecting Putnam's application; and, an explanation of why mandatory capital improvements was not disclosed to the buyer.
The parties, obviously experienced and sophisticated operators in the nursing home field, have found themselves entangled in a Gordian knot, the undoing of which they leave to the Court.
DISCUSSION A. Summary Judgment
When presented with a motion for summary judgment, the function of a court is "not to determine credibility or to engage in issue determination, but rather to determine the existence or non-existence of material issues of fact." Quinn v. Krumland, 179 AD2d 448, 449 — 450 (1st Dept. 1992); See also, S.J. Capelin Associates, Inc. v. Globe Mfg. Corp. 34 NY2d 338, 343, (1974).
To grant summary judgment, it must clearly appear that no material and triable issue of fact is presented. Stillman v. Twentieth Century-Fox Corp., 3 NY2d 395, 404 (1957). It is a drastic remedy, the procedural equivalent of a trial, and will not be granted if there is any doubt as to the existence of a triable issue. Moskowitz v. Garlock, 23 AD2d 94 (3d Dept. 1965); Crowley's Milk Co. v. Klein, 24 AD2d 920 (3d Dept. 1965).
The evidence will be considered in a light most favorable to the opposing party. Weill v. Garfield, 21 AD2d 156 (3d Dept. 1964). The proof submitted in opposition will be accepted as true and all reasonable inferences drawn in favor of the opposing party. Tortorello v. Carlin, 260 AD2d 201, 206 (1st Dept. 2003). But this rule will not be applied where the opposition is evasive or indirect. The opposing party is obligated to come forward and bare his proof, by affidavit of an individual with personal knowledge, or with an attorney's affirmation to which appended material in admissible form, and the failure to do so may lead the Court to believe that there is no triable issue of fact. Zuckerman v. City of New York, 49 NY2d 557, 562 (1980). B. Fraudulent Concealment
Caveat emptor is a fundamental premise of New York law. This doctrine imposes no liability on a seller for failing to disclose information regarding the premises when the parties deal at arm's length, unless there is some conduct on the part of the seller which constitutes active concealment. Matos v. Crimmins , 40 AD3d 1053 (2d Dept. 2007) involved the sale of real estate which was burdened by a conservation easement and a shade tree easement in the backyard. The Plaintiffs alleged fraud in failing to disclose the existence of the easements and breach of contract. The Court affirmed the dismissal of the complaint and summary judgment on the second counterclaim which was to retain the down payment. The Plaintiffs failed to raise a triable issue of fact as to whether the Defendants actively concealed the easements and thwarted the Plaintiffs efforts to discover the easements.
Such is not the case, however, when a Seller makes a false representation, as in a Real Property Disclosure Statement pursuant to Real Property Law § 462. When a Seller makes a false statement in a Disclosure Statement, those statements will support a claim of active concealment. Simone v. Homecheck Real Estate Servs., Inc , 42 AD3d 518, 519 (2d Dept. 2007).
Where in the spectrum the subject case falls is not made easier in light of the many missing parts of the puzzle. The entire issue of "mandatory capital improvements" is somewhat ethereal. There is not a single document from DOH which identifies them. Neither is there any clear evidence of whose responsibility they are. 404 Ludingtonville Associates, LLC, not a party to the action, appears to be the owner of the land and building constituting the nursing home. The original Purchase Agreement called for the transfer of assets from KNH to Putnam, but not the real estate, which was to be leased by Luddingtonville to Putnam. The proposed lease does not appear to constitute part of the Purchase Agreement, is not submitted on the Motion, and there is no evidence elsewhere as to the relative responsibilities of the landlord and tenant, specifically with respect to capital improvements, mandatory or otherwise.
Unless the January letter from Putnam's counsel to the attorney for KNH is considered a continuing rejection of the termination of the agreement and demand for escrow distribution, the distribution of the escrow to KNH was justified. Putnam does not argue that they did not receive a letter from the escrowee relating the demand for distribution of the funds, or that they timely objected. But the transfer of the down payment does not conclusively determine that the original contract is a dead letter.
The matter is not appropriate for summary judgment. There are a number of factual issues which require determination:
1. Among the representations and warranties of the Seller was that (n)o notice from or on behalf of any governmental body, insurance carrier or other party has been received by seller claiming any violation or calling attention for the necessity of any work, repairs, construction, alterations or installations on or in connection with any of the foregoing which has not been materially complied with, and Seller does not know or have any grounds to believe that any such notice is threatened or 4
It seems evident that KNH was aware of a demand from DOH of some $3,000,000 of required capital improvements. While caveat emptor does not mandate disclosure, representations to the contrary may well evidence active concealment. It is significant to determine the precise terms of the obligation for capital improvements, and who was responsible for their completion;
2. What was the length of the delay occasioned by the prior transfer of the partnership interest of Harry Satin to Leslie Kaye, and is it accurate that DOH would not consider the Putnam CON until issues involving that transfer were resolved? If so, was the 12-month term within which Putnam was required to obtain DOH approval stayed, and for how long?
3. The nature and status of the application by KNH for authorization to perform some $3,000,000 in capital improvements leads to a series of questions:
a. Did DOH refuse to consider the Putnam CON unless and until they were satisfied that the overall transaction was adequately capitalized to enable Putnam to perform the work? If so, was it a delay caused by the actions of KNH, during which the period within which Putnam was to obtain approval was also stayed?
b. As between the owner of the land and the prospective tenant, who was responsible for the capital improvements? If it was Putnam, was the denial by KNH of a financial obligation imposed by DOH a material breach of the contract?
c. In view of the ostensibly open application for capital improvements, and the alleged position of DOH to consider only one application at time, was the Putnam Contract rendered impossible of performance by the actions of KNH?
d. Did KNH's contract with GSW, resulting in an additional application to DOH, further render the Putnam Agreement impossible of performance?
CONCLUSIONS
There are two fundamental reasons why the Putnam Purchase Agreement was not concluded. The first was the issue raised by DOH with respect to the transfer of one partner's interest to another. Certainly, any delay occasioned by this issue should not be charged against the Purchaser's time within which to obtain written approval. The second reason was an undisclosed, and affirmatively denied, commitment by KNH to DOH to perform some $3,000,000 in capital improvements. This had the impact of precluding DOH from considering Putnam's CON until it was resolved how the Purchaser would be able to finance these improvements. Exacerbating the resolution of this problem were a drastic reduction in the occupancy rate from 98% to 76%, a significant change in the resident mix, contributing to an approximately 50% reduction in net income, and further physical deterioration to the improvements, allegedly requiring an additional commitment of $2,000,000.
There may have been external forces which forced KNH into this situation; or, they may have failed to fulfill their obligations to use their best efforts to maintain the status quo during the process from contract to closing. All of these constitute factual issues which must be adequately resolved before the matter can be concluded. The Defendant's motion for partial summary judgment dismissing the complaint, and implicitly ratifying the distribution of escrow, is denied. This decision constitutes the order of the court.