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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Scales of justice

Legal malpractice action dismissed based upon doctrines of res judicata and collateral estoppel

The Appellate Division, in Kleinman v Weisman Law Group, P.C., 176 AD3d 1046 [2d Dept 2019], dismissed a former client’s legal malpractice action based upon the doctrines of res judicata and collateral estoppel. The court stated as follows:

In 2013, the defendant Weisman Law Group, P.C. (hereinafter the defendant firm), commenced an action against the plaintiff to recover unpaid legal fees in the Nassau County District Court. The plaintiff asserted a counterclaim, alleging that he was overbilled by the defendant firm. A judgment was entered in favor of the defendant firm and against the plaintiff. The plaintiff appealed the judgment of the Nassau County District Court to the Appellate Term of the Supreme Court for the Ninth and Tenth Judicial Districts, which affirmed the judgment (see Weisman Law Group, P.C. v. Kleinman, 60 Misc.3d 133[A], 2018 N.Y. Slip Op. 51042[U], 2018 WL 3309514 [App Term, 2d Dept, 9th & 10th Jud Dists 2018] ). In 2016, the plaintiff commenced the instant action against the defendants asserting causes of action alleging, inter alia, breach of contract and legal malpractice.

Scales of justice illustrating article about legal malpractice.

The plaintiff contends that the doctrines of res judicata and collateral estoppel do not apply in the instant case, as the Nassau County District Court lacked subject matter jurisdiction over his counterclaim in the prior action. Contrary to the plaintiff’s contention, the Nassau County District Court did have jurisdiction over his counterclaim pursuant to Uniform District Court Act Section 208(b), as the counterclaim was for money only. The doctrine of res judicata precludes the plaintiff from litigating the claims set forth in his complaint, as a judgment on the merits exists in the prior action between the same parties involving the same subject matter (see Matter of Josey v. Goord, 9 N.Y.3d 386, 389, 849 N.Y.S.2d 497, 880 N.E.2d 18; Matter of Hunter, 4 N.Y.3d 260, 269, 794 N.Y.S.2d 286, 827 N.E.2d 269). New York has adopted the transactional analysis approach to res judicata, so that once a claim is brought to a final conclusion, all other claims between the same parties or those in privity with them arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy (see Matter of Josey v. Goord, 9 N.Y.3d at 389–390, 849 N.Y.S.2d 497, 880 N.E.2d 18; Matter of Hunter, 4 N.Y.3d at 269, 794 N.Y.S.2d 286, 827 N.E.2d 269; *124 O’Brien v. City of Syracuse, 54 N.Y.2d 353, 357, 445 N.Y.S.2d 687, 429 N.E.2d 1158; Greenstone/Fontana Corp. v. Feldstein, 72 A.D.3d 890, 893, 901 N.Y.S.2d 643).

Furthermore, the plaintiff’s causes of action are barred by the doctrine of collateral estoppel, which precludes a party from relitigating in a subsequent action or proceeding an issue clearly raised in a prior action or proceeding and decided against that party or those in privity, whether or not the tribunals or causes of action are the same (see Ryan v. New York Tel. Co., 62 N.Y.2d 494, 500, 478 N.Y.S.2d 823, 467 N.E.2d 487; Williams v. New York City Tr. Auth., 171 A.D.3d 990, 97 N.Y.S.3d 692). The doctrine of collateral estoppel applies here, as the issues in both actions are identical, the issue in the prior action was actually litigated and decided, there was a full and fair opportunity to litigate the action, the issue previously litigated was necessary to support a valid and final judgment on the merits, and the defendant Rachel J. Weisman was in privity with the defendant firm (see Conason v. Megan Holding, LLC, 25 N.Y.3d 1, 17, 6 N.Y.S.3d 206, 29 N.E.3d 215; Williams v. New York City Tr. Auth., 171 A.D.3d at 991–992, 97 N.Y.S.3d 692; Karimian v. Time Equities, Inc., 164 A.D.3d 486, 83 N.Y.S.3d 227).

R. A. Klass
Your Court Street Lawyer

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Outlining the scope of an attorney’s retainer agreement is important.

Outlining the scope of an attorney’s retainer agreement is important. This sets forth the nature of the work to be rendered by an attorney on behalf of his client. In Attallah v Milbank, Tweed, Hadley & McCloy, LLP, 2019 NY Slip Op 00583 [2d Dept Jan. 30, 2019], the court held:

An attorney may not be held liable for failing to act outside the scope of a retainer (see AmBase Corp. v. Davis Polk & Wardwell, 8 N.Y.3d 428, 834 N.Y.S.2d 705, 866 N.E.2d 1033). Therefore, since the defendant’s alleged failure to negotiate with the school, its alleged failure to commence litigation against the school, and its alleged failure to properly advise the plaintiff on the efficacy of a defamation action against nonschool parties fell outside the scope of the parties’ letter of engagement, dismissal of the cause of action alleging legal malpractice was warranted, pursuant to CPLR 3211(a)(1), on documentary evidence grounds.

R. A. Klass
Your Court Street Lawyer

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Employment agreement termination

Employer’s termination of employment agreement must comply with contract provisions

When an employment agreement specifies certain acts or actions to be performed to effectuate a termination, the employer must follow the procedure as outlined in the employment agreement, or it is deemed a breach of the agreement. Kalus v. Prime Care Physicians, 20 A.D.3d 452 [2d Dept. 2005]; Scudder v. Jack Hall Plumbing, 302 A.D.2d 848, 850 [3d Dept. 2003]; Hanson v. Capital District Sports, 218 A.D.2d 909, 911 [3d Dept. 1995] (“If there was cause, plaintiff could not be discharged absent compliance with the relevant provisions of the employment contract. In view of defendant’s demonstrated noncompliance, in either case, the discharge would be ineffective and plaintiff would be entitled to the relief demanded in the complaint.”).

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Frustration of purpose

Contract may be voided when there is a frustration of its purpose.

Frustration of Purpose

“To invoke frustration of purpose as a defense for nonperformance, the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.” PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 AD3d 506, 508 [1st Dept 2011] (quotation marks omitted); Crown IT Servs., Inc. v. Koval–Olsen, 11 AD3d 263, 265 [1st Dept 2004]; see also Rockland Dev. Assocs. v. Richlou Auto Body, Inc., 173 A.D.2d 690, 691 [2d Dept 1991] (the doctrine of frustration of purpose applies when the frustration is substantial). “The doctrine applies when a change in circumstances makes one party’s performance virtually worthless to the other, frustrating his purpose in making the contract.” PPF Safeguard, 85 AD3d at 508 (emphasis added), quoting Restatement (Second) of Contracts Section 265, Comment a. Gelita, LLC v. 133 Second Ave., LLC, 42 Misc 3d 1216(A) [N.Y. Sup Ct 2014].

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Waiver of a contract right

Waiver of a contract right is knowingly giving up a right.

The essence of a waiver is when a party intentionally relinquishes a known right. It is well settled that when there is a no oral modification clause, the doctrines of waiver, release and estoppel do not apply. (“ Waiver is an intentional relinquishment of a known right and should not be lightly presumed. ”) Gilbert Frank Corp. v. Fed. Ins. Co., 70 N.Y.2d 966, 968 [1988]; Brooklyn Fed. Saving Bank v. 9096 Meserole St. Realty LLC, 29 Misc 3d 1220(A) [Kings Sup Ct 2010].

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Monetary damages for breach of employment contract

The damages payable for breach of an employment contract are measured, prima facie, by the wages that would have been paid during the remainder of the contract term (see Cornell v. T.V. Development Corp., 17 N.Y.2d 69, 74, 268 N.Y.S.2d 29, 215 N.E.2d 349; Rebh v. Lake George Ventures, 241 A.D.2d 801, 803, 660 N.Y.S.2d 901). This, however, is only the prima facie measure. “The actual damage is measured by the wage that would be payable during the remainder of the term reduced by the income which the discharged employee has earned, will earn, or could with reasonable diligence earn during the unexpired term” (Hollwedel v. Duffy–Mott Co., 263 N.Y. 95, 101, 188 N.E. 266; see Cornell v. T.V. Development Corp., 17 N.Y.2d at 74, 268 N.Y.S.2d 29, 215 N.E.2d 349). Tendler v. Bais Knesses of New Hempstead, Inc., 112 AD3d 911, 911 [2d Dept 2013].

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Employee breach of good faith and loyalty

Appellate Division Second Department case law is clear that “an employee owes a duty of good faith and loyalty to an employer in the performance of the employee’s duties.” Is. Sports Physical Therapy v. Burns, 84 AD3d 878, 878 [2d Dept 2011].

While there is duty of good faith and loyalty owed to an employer, “an employee may create a competing business prior to leaving her or his employer without breaching any fiduciary duty unless she or he makes improper use of the employer’s time, facilities or proprietary secrets in doing so.” Is. Sports Physical Therapy v. Burns, 84 AD3d 878, 878 (2d Dept 2011) (citing Schneider Leasing Plus v. Stallone, 172 A.D.2d 739, 741, 569 N.Y.S.2d 126).

A common example of a breach of a duty of good faith and loyalty is when an employee solicits his or her employer’s customers or otherwise compete during the course of his or her employment with the employer by the use of the employer’s time, facilities or proprietary information. 30 FPS Productions, Inc. v. Livolsi, 68 AD3d 1101, 1102 [2d Dept 2009]; A & L Scientific Corp. v. Latmore, 265 AD2d 355, 355 [2d Dept 1999}; Schneider Leasing Plus, Inc. v. Stallone, 172 AD2d 739 [2d Dept 1991].

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Oral modification to contract?

Oral modification: Changes to a contract must be in writing and not oral.

“Parties to a written agreement who include a proscription against oral modification are protected by subdivision 1 of section 15-301 of the General Obligations Law. Any contract containing such a clause ‘cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement is sought.’ Put otherwise, if the only proof of an alleged agreement to deviate from a written contract is the oral exchanges between the parties, the writing controls. Thus, the authenticity of any amendment is ensured ( see 1283 DFI Communications v. Greenberg, 41 N.Y.2d 602, 606-607, 394 N.Y.S.2d 586, 589-590, 363 N.E.2d 312, 315-316 [1977]).” Rose v Spa Realty Assoc., 42 NY2d 338, 343 [1977].

“In order to be valid, oral agreement modifying time of payment of original note must be supported by sufficient consideration and part payment on a note which is due does not fulfill these requirements since neither a promise to do that which promisor is already legally bound to do, nor the performance of an existing legal obligation, constitutes a valid consideration for an agreement.” Fed. Deposit Ins. Corp. v Hyer, 66 AD2d 521 [2d Dept 1979]. Moreover, if the contract contains a no waiver clause, failure to honor a party’s demand for compliance with the contract’s unambiguous terms will constitute a breach in spite of what the course of performance has been. DeCapua v Dine-A-Mate, Inc., 292 AD2d 489, 491 [2d Dept 2002].

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Part performance of a contract can be a valid modification.

Although courts have held that if there is partial performance under an oral modification and as a result, the doctrine of equitable estoppel would apply, such modification would have to have been agreed to by both parties. Beacon Term. Corp. v Chemprene, Inc., 75 AD2d 350, 354 [2d Dept 1980]. Additionally, for a course of performance to demonstrate mutual assent to a modification, it must be unequivocally referable to the modification. Nassau Beekman, LLC v Ann/Nassau Realty, LLC, 105 AD3d 33, 35 [1st Dept 2013].

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