Opinion
600409/07.
Decided May 30, 2008.
Pursuant to CPLR 3211(a)(5), defendants Eric P. Reichenbaum ("Reichenbaum") and EPR Capital, L.L.C. ("EPR") (collectively "Movants") move to dismiss the complaint on the grounds that it is barred by res judicata. Plaintiffs SMD Capital Group LLC ("SMD"), Boerum Place Properties LLC, and Frank DeFalco ("DeFalco") (collectively "Plaintiffs") oppose the motion.
Background
On April 3, 2003, SMD, DeFalco, and other non-parties to this action filed a summons and complaint (Index No. 106299/03) against, among others, EPR and Reichenbaum ("First Action"), asserting breach of fiduciary duty, breach of contract and fraud relating to mismanagement of the parties' jointly owned LLC's, including Boerum Place Properties LLC.
After a trial before a judicial hearing officer ("JHO") and a hearing in front of a special referee, the parties attempted to settle the matter. On July 14, 2005, the parties executed a document entitled SMD/EPR Settlement Terms ("Settlement Terms"), under which SMD and DeFalco were to purchase EPR and Reichenbaum's 50% interests in all of the jointly owned LLC's for the price of $7,275,000. On April 10, 2006, the parties executed a contract entitled Membership Interest and Stock Purchase and Settlement Agreement ("Settlement Agreement") that memorialized the Settlement Terms and the sale of the LLC interests. The closing of the sale occurred on April 11, 2006.
Shortly thereafter, in June 2006, SMD and DeFalco brought an Order to Show Cause to enforce the Settlement Agreement (Burke Aff., Ex. B). SMD and DeFalco asserted that Reichenbaum and EPR breached the Settlement Agreement by failing to deliver the books, records, and a rent roll for the LLC's and failing to pay the transfer tax owed in connection with the sale of the membership interest in one of the LLC's (Hirschberg Aff., Ex. C, at ¶¶ 10, 11, 12).
The Order to Show Cause was returnable before the JHO pursuant to Section 10.2 of the Settlement Agreement, which states, "each of the parties hereto (i) . . . agrees that any suit will be heard in front of [the JHO] of the Supreme Court, State of New York. . . ." Indeed, Plaintiffs requested that this action be transferred to the JHO but because there are parties that did not sign the Settlement Agreement who do not consent to the matter being heard by a JHO, the case will remain before this Court. See, July 26, 2007 Letter from David B. Horowitz, Esq. counsel for defendants Jose Ruiz and Jo Ruiz Construction Corp.
SMD and DeFalco further set forth that EPR and Reichenbaum's wrongful conduct was not "limited to their failure to perform under the Settlement Agreement. [They] also made material misrepresentations and omissions . . . in the Settlement Agreement" (Hirschberg Aff., Ex. C, at ¶ 15). SMD and DeFalco specified that EPR and Reichenbaum failed to inform them and concealed the fact that, before the closing, purportedly on behalf of Boerum Place Properties LLC they executed a three-year employment contract ("Ruiz Contract") with Jose Ruiz ("Ruiz"), the superintendent of the building located at 129 Boerum Place. The Ruiz Contract provided Ruiz with a reduced-rate apartment, a free parking space and free use of facilities at the Boerum Place property for his construction business until October 1, 2007.
In their motion, SMD and DeFalco sought damages — including $350,000 in liquidated damages and punitive damages — for breach of the Settlement Agreement and breach of fiduciary duties (Hirschberg Aff., Ex. C, ¶¶ 6-8, 16, 21).
According to Plaintiffs, at a July 5, 2006 hearing on the Order to Show Cause, the JHO explicitly refused to address all of the claims and limited the analysis to whether there was performance of the Settlement Agreement (Burke Aff., at ¶ 6). Plaintiffs assert — and neither EPR nor Reichenbaum deny — that the JHO "instructed Plaintiffs to file another suit in connection with their claims that Defendants . . . committed fraud and breached their fiduciary duties by fraudulently signing an employment agreement and lease rider for co-Defendant Jose Ruiz . . ." ( id.).
In a Decision and Order dated September 18, 2006, the JHO directed judgment against EPR and Reichenbaum for $350,000 in liquidated damages and $26,250 in transfer taxes and stated:
"This case arises from a motion made by the plaintiff seeking $350,000 in connection with a term of the settlement agreement that required the defendant to provide certain documents which have not been provided. So, it seemed to me clear that there was a violation of the settlement agreement. The only issue is whether or not your plaintiff had the right to seek the $350,000 by motion before me or was required to start a new plenary action to recover. . . . It seems to me . . . that I have the right to deal with this on the motion because there's been no final judgment nor has a stipulation of discontinuance been filed in this case. Therefore, I retain jurisdiction and I can . . . take appropriate action to enforce the terms of the Settlement Agreement including [the term that required the defendant to provide certain documents]" (Hirschberg Aff., Ex. D [emphasis added]; see also Crecca v Narofsky , 41 AD3d 216 [1st Dept 2007] [absent unequivocal termination of an action "the court retains its supervisory power over the action and may lend aid to a party who had moved for enforcement of the settlement"]).
The Appellate Division, First Department affirmed the determination, concluding, "the [lower] court appropriately enforced the settlement agreement on plaintiffs' motion since the action had not been unequivocally terminated . . ." ( SMD Capital Group LLC v EPR Capital LLC , 45 AD3d 314 , 314 [1st Dept 2007]).
In this action, which was commenced in February 2007, Plaintiffs bring several claims against EPR, Reichenbaum, Jo Ruiz Construction Corp. and Ruiz. The seven-count complaint asserts causes of action against Reichenbaum and EPR for breach of contract, breach of the covenants of good faith and fair dealing, negligent misrepresentation, and breach of fiduciary duty and asserts a claim against all of the defendants for fraud.
Plaintiffs allege that on April 10, 2006, EPR and Reichenbaum fraudulently and without authorization executed the Ruiz Contract and that the parties to the agreement backdated it to October 15, 2004, because its execution on April 10, 2006 would constitute a fraudulent and tortious act in breach of Reichenbaum and EPR's fiduciary duties and the Settlement Agreement's terms (Hirschberg Aff., Ex. A, at ¶¶ 31-32).
Plaintiffs also claim that EPR and Reichenbaum took affirmative steps to conceal the existence of the contract prior to the April 11, 2006 closing by failing to deliver a rent roll to SMD and DeFalco as the Settlement Agreement required, failing to list the contract on Boerum Place Properties LLC's financial statements, failing to inform the management company for the Boerum Place property about the contract, and failing to disclose the existence of the contract and lease rider (Hirschberg Aff., Ex. A, ¶ 33).
Plaintiffs further assert that EPR and Reichenbaum are liable for failing to pursue the litigation of Boerum Place Properties LLC v. Dean Boerum Owners, Inc. (Index No. 24248/01), a case in Supreme Court, Kings County that was dismissed on February 4, 2005 for failure to file a note of issue but was restored on May 17, 2007 (Hirschberg Aff., Ex. A, at ¶ 40).
The Dean Boerum Owners matter is a property-damage case based on the allegedly improper excavation of an adjacent property.
Only defendant Reichenbaum filed a responsive pleading. In his answer, Reichenbaum brought three counterclaims against Plaintiffs for: (1) one-half of the proceeds from the Dean Boerum Owners case; (2) malicious prosecution; and (3) bringing a frivolous action solely for the purpose of harassment. Reichenbaum seeks $1 billion on his counterclaims.
EPR and Reichenbaum now move to dismiss the complaint as against them only. They argue that this action is "a virtual carbon copy" of the application for a judgment in the First Action, which resulted in an award in Plaintiffs' favor (for a sum including $350,000 in liquidated damages), and that "[b]y commencing the instant action, Plaintiffs seek to double dip,' obtaining additional damages for the same claim" (Hirschberg Aff., at ¶ 2). EPR and Reichenbaum contend that res judicata bars Plaintiffs' claim that EPR and Reichenbaum breached the Settlement Terms and Settlement Agreement, breached the implied covenants of good faith and fair dealing, violated their fiduciary duties, made negligent misrepresentations, and committed fraud by entering into the Ruiz Contract because Plaintiffs already litigated a claim for EPR and Reichenbaum's breach of the Settlement Agreement in the First Action and received a final judgment on the merits. Movants contend that the earlier Order and Judgment did not limit its scope to specific breaches or obligations pursuant to the parties' settlement (Hirschberg Reply Aff., at ¶ 7).
Similarly, Movants contend that claims related to the Dean Boerum Owners litigation are also barred by res judicata and that Plaintiffs are engaging in claim-splitting because all of the allegations here stem from obligations arising out of the Settlement Agreement, and two separate actions cannot be brought for breach of the same contract regardless of whether they were raised in the First Action (Hirschberg Aff., at ¶ 11).
Plaintiffs counter that the motion to dismiss is untimely pursuant to CPLR 3211(e) and that their claims are not barred because: (1) in the First Action the JHO explicitly refused to address anything beyond mere enforcement of the Settlement Agreement (such as fraud) and (2) the claim related to the Dean Boerum Owners was part of a different "gravamen of wrong" (Burke Aff., at ¶ 11).
Analysis
Timeliness
CPLR 3211(e) provides that a party may move to dismiss at "any time before service of the responsive pleading is required." EPR and Reichenbaum were required to serve an answer by March 9, 2007. They did not make this motion until April 5, 2007, almost a month too late. This motion is therefore untimely and must be denied. Movants' excuse for the untimeliness — that "there simply was not enough time to make the motion in view of Plaintiffs' refusal to grant a courtesy extension" (Reply, at ¶ 8) — is plainly insufficient and does not excuse their failure to comply with the CPLR.
Res Judicata
Even assuming that this motion is timely — and it is not — it must nonetheless be denied. Res judicata does not bar this action.
"Once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based on different theories or if seeking a different remedy" ( O'Brien v City of Syracuse, 54 NY2d 353, 357; Schwartzreich v E.P.C. Carting Co., 246 AD2d 439, 441 [1st Dept 1998]). In order to assess whether a set of facts constitute a single "transaction" for determining the applicability of res judicata, courts typically look to see if the alleged facts are "closely related in time, space, motivation, or origin, such that treating them as a unity would be convenient for trial and would conform to the parties' expectations" ( Schwartzreich, 246 AD2d, at 441). In addition, res judicata will only apply if "the party against whom res judicata is invoked had a full and fair opportunity to litigate the claim in a prior proceeding based on the same transaction" ( id.; see also Browning Ave. Realty Corp. v Rubin, 207 AD2d 263, 264-65 [1st Dept 1994]).
In addition, splitting claims, by dividing a cause of action that arises out of a single contract into separate suits, is impermissible under New York law ( Lessler v Unger, 186 NYS 825, 826 [1st Dept 1921]; Bendernagle v Cocks, 19 Wend. 207 [Sup Ct of Judicature of New York 1838]["(I)f a party will sue and recover for a portion, he shall be barred of the residue"]).
It is undisputed that in connection with the earlier motion the JHO refused to address fraud issues and instructed Plaintiffs to file another suit asserting claims related to the Ruiz Contract, fraud and breach of fiduciary duty. The JHO only agreed to address enforcement of the Settlement Agreement's terms (not fraud or breach of fiduciary duty claims). Because the Court refused to entertain Plaintiffs' contentions, they did not have a full and fair opportunity to litigate the matter and commenced this lawsuit in accordance with the JHO's directions ( cf., Parker v Blauvelt Volunteer Fire Co., 93 NY2d 343, 349 ["It would be inequitable to preclude a party from asserting a claim under the principle of res judicata, where, as in this case, the court in the first action has expressly reserved the plaintiff's right to maintain the second action'"]).
Plaintiffs, moreover, did not choose to split any claims related to the settlement. The JHO directed that a new action be commenced and limited analysis in deciding the Order to Show Cause to conformity with the terms of the settlement. Under the circumstances, Plaintiffs did not make a tactical decision to bring a separate lawsuit.
In the end, it would be inequitable to bar Plaintiffs from asserting claims related to the settlement and deny them a day in court. Accordingly, it is
ORDERED that the motion to dismiss by Reichenbaum and EPR is DENIED.