Category Archives: Corporate

Should Parol Evidence be Used When The Terms of an Employment Agreement are Unambiguous?

In Margot W. Teleki v. Talk Marketing Enterprises, No. a-1448-11T2 (N.J. Super. Ct. App. Div. 2012), the court was presented with a common legal issue: whether parol evidence may be used to interpret a contract.  The court determined that it could not because the contract was unambiguous.

Parol evidence is evidence that is extraneous to a contract and is used to interpret its meaning.  The law discourages the use of parol evidence since contracts are meant to be interpreted by their actual wording.  Therefore, unless the contract is ambiguous or there are other exceptional circumstances, parol evidence will not be allowed.  Id. at 16-17.

In this case, since the employment agreement at issue clearly stated that wages would be paid to the Plaintiff, the failure to pay those wages provided personal liability to the principals of the employer  under NJSA 34:11-4.1 and 4.2 (New Jersey Wage Payment Law).  The fact that there was an “understanding”, as demonstrated by parol evidence,  that there would be no personal liability was irrelevant.

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© 2012 Nissenbaum Law Group, LLC

 

How Does The Imposter Rule Apply in Cases Involving Conversion in Connection With the Cashing of False Checks?

Who should be to blame when a person wrongfully and seamlessly misappropriates the assets of another?  The Supreme Court in New York County, New York recently addressed this question in  Tripp & Co., Inc. v. Bank of New York, 911 N.Y.S.2d 696 (N.Y. County 2010).

That case involved Tripp & Co., Inc. (“Tripp”), a brokerage firm that retained the clearing services of non-party Pershing, LLC (“Pershing”) to hold the assets of Tripp’s customers in an account.  At Tripp’s request, Pershing issued checks payable to Tripp’s customers through Pershing’s account maintained by The Bank of America (Delaware) Inc., n/k/a BNY Mellon Trust of Delaware, N.A. (“BNY”).  Tripp’s former employee, Michael Axel (“Axel”) misappropriated over $600,000.00 through a series of fraudulent checks.  Axel accomplished this by requesting the checks from Pershing and then forging the payee’s name, replacing the true recipients name with his own. Id. at 1.  Axel would then deposit or cash the checks into his personal account at Citibank.  Id.  Citibank accepted the checks and made payments on them, while BNY accepted and cleared the checks.  Tripp was ultimately forced out of business in trying to address the issue and reimburse patrons.  Id.  Consequently, Tripp filed an action alleging amongst other things conversion against both defendants, BNY and Citibank.  Id.  Both defendants moved to dismiss the complaint. Id.

While the Court acknowledged that the general rule pertaining to conversion imposes the risk of loss upon the drawee bank for improper payment over a forged endorsement, UCC §3-419, the Court noted that UCC §3-405(1)(C), commonly known as “the imposter rule,” states that “any endorsement by any person in the name of a named payee is effective if . . . an agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no such interest.” UCC §3-405(1)(c).  Additionally, the official comments to UCC §3-405(1)(c) state that the loss should fall on the employer as a risk of his business enterprise because the employer is usually in the best position to prevent the forgery by reasonable care in the regulation of his employees.  See Official Comment, UCC §3-405(1)(c)(2009).

The Court found that Axel was an agent of the drawer, Pershing, and so the imposter rule applied.  Id. at 3.  Further, the Court stated that Pershing acted as Tripp’s agent in performing the services it was hired to perform.  Pershing had drew up checks at Axel’s request for over four years and thus established a course of dealing in which Axel routinely supplied the payee information to Pershing so that Pershing could draw the checks.  Id.  The Court reasoned that as an agent of Pershing, Axel supplied the names of the payees with no intention of Pershing having an interest, such that the imposter rule applied and the endorsements are legally effective.  Id.

Further, the Court rationed that Tripp was in a position to prevent the conversion since it could have done a better job of monitoring Axel.  In addition, “the imposter rule” imposes no duty of care and makes the endorsements effective despite the commercial reasonableness of the defendants.  Id. at 4.  Banks cannot, however, use §3-405(1)(c)  to shield its own bad faith, but Tripp did not allege that the defendants acted in commercial bad faith. Id.  Since the imposter rule applied, Tripp’s conversion claims against BNY and Citibank were precluded and dismissed from the complaint.  Id. at 5.

Ultimately, §3-405(1)(c)  takes the responsibility off of banks for improper payment over a forged endorsement and shifts the risk of loss to the drawer of the checks.

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© 2012 Nissenbaum Law Group, LLC

 

Why Are Temporary Restraining Orders A Common Mechanism To Stop The Sale Of Gray Market Goods?

Gray market goods are those that are exchanged in a market that is unauthorized or unintended by the original manufacturer of the goods. Many of these goods contain either a copyright or trademark that is registered and owned by the original manufacturer. However, the manufacturer does not reap the benefits of the exchange of his goods in the gray market because it is done in an unauthorized manner. In order to stop those selling their goods on the gray market, an owner might seek to have the court grant a temporary restraining order (“TRO”) against the seller to stop the alleged infringing conduct immediately and to preserve evidence for eventual litigation.

Owners of a copyright or trademark will often bring infringement claims against those selling goods containing their mark on the gray market. However, it is possible that those receiving notice of impending litigation could conceal or destroy evidence of infringing behavior during the time between notification and discovery. In order to avoid this problem, plaintiffs often seek to have a court issue a TRO against defendants.

Under Rule 65(b) of the Federal Rules of Civil Procedure, a TRO may be granted without notice to the opposing party (or the party’s counsel) when “it clearly appears from the specific facts shown by affidavit…that immediate and irreparable injury, loss or damage will result to the applicant before the adverse party or that party’s attorney can be heard in opposition.” F.R.C.P. 65(b).

TROs can be an effective way for mark owners to shut down the infringing behavior of defendants. An example is North Face Apparel Corp. v. Fujian Sharing Import & Export Lts. Co., No. 10-cv-1630 (S.D.N.Y. December 20, 2010). In that case, the defendants were alleged to have been operating hundreds of websites that were similar to the sites operated by North Face and Polo. Examples of the websites included “4thenorthface.com,” “northfaceoutletsale.com,” “poloralphworld.com” and “poloshirtcompany.com.” Upon filing their complaint, North Face and Polo Ralph Lauren (“Polo”) requested that a TRO prohibiting this be issued.

The Court granted the TRO, determining that the brand owners were likely to succeed at trial and that the defendant’s infringing conduct was likely to cause the brand owners irreparable harm. The temporary injunction restrained the defendants from committing any of the acts alleged in the complaint, which included claims for federal trademark infringing, unfair competition and false designation of origin. The TRO enabled the mark owners to shut down many of the sites and to seize some of the counterfeit sales from the defendants’ accounts.

There are several other recent examples within the United States District Court for the Southern District of New York of this approach to prohibiting gray market goods. See Rolex Watch U.S.A., Inc. v. Oganesyan, No. 11-CIV-8182 (S.D.N.Y. Nov. 14, 2011), Coach, Inc. v. Andre, No. 11-CIV-6215 (S.D.N.Y. Sept. 6, 2011), Coach, Inc. v. Smith, No. 11-CIV-3573 (S.D.N.Y. May 26, 2011).

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© 2012 Nissenbaum Law Group, LLC

Do Copyrighted Goods Have To Be Manufactured In The U.S. To Provide the Seller with the Protection of The “First Sale Doctrine”?

One of the exclusive rights belonging to a copyright holder is the ability to control or change the ownership of a given work. However, the “doctrine of first sale” – which is codified in the U.S. Copyright Act – imposes a limitation on how long the copyright holder can control the distribution rights of the work. 17 U.S.C. § 109(a). In other words, the doctrine of first sale means that the distribution rights of a copyright holder end once that work has been lawfully transferred to some other party.

But do works have to be manufactured in the United States in order to implicate the first sale doctrine? That question was considered by the United States Court of Appeals for the Ninth Circuit in 2008. Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008).

Omega was a watch manufacturer based in Switzerland that sold its product around the globe. “Omega Globe Design” was engraved on the underside of each watch. The mark was copyrighted in the United States. Omega sold its watches to authorized distributors in other countries. Third parties bought the watches and sold them to ENE Limited (“ENE”), a New York company. Costco then bought the watches from ENE and sold them to its customers in California. Though Omega had authorized the initial sale to foreign distributors, it did not authorize the watches being imported into the United States or the sale of the watches by American companies.

Omega said that Costco obtained the watches through the “gray market.” In doing so, Omega claimed that Costco infringed on its copyright. Costco filed a cross-motion. Its argument was that, under the first sale doctrine, the initial sale of Omega watches to foreign distributors precluded any claim of copyright infringement in connection with subsequent, unauthorized sales. A lower court ruled in favor of Costco. Omega appealed.

In considering the appeal, the Omega Court considered three specific sections of the Copyright Act. Section 602(a) states that “[i]mportation into the United States … of [a copyrighted] work that [has] been acquired outside the United States [without consent of the copyright holder or its representative] is an infringement of the exclusive right to distribute copies…under section 106, actionable under section 501.” Id. at 602(a). In other words, copyright owners possess the exclusive right to import and distribute copies of their copyrighted work to the public by sale or some other transfer of ownership. See Id. sections 107 through 122.

At first blush, this appears to contradict the “first sale doctrine” under section 109(a) of the same statute. That doctrine states that once a copyrighted item is sold, the new owner “of a particular copy…lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.” Id. 109(a).

The Court was asked to determine how to reconcile these two legal concepts. In making its decision, the lower court focused on whether the goods were manufactured in the United States. It referred to the U.S. Supreme Court decision in Quality King Distributors, Inc. v. L’Anza Research Int’l, Inc., 523 U.S. 135 (1998) allowed the sale of goods manufactured in the United States. However, , unlike in Quality King, the products at issue in Omega were not manufactured in the United States.

Thus, the Court determined that the first sale doctrine did not apply to the sale of Omega watches to foreign distributors of foreign manufactured goods. The Court interpreted Section 109(a)’s reference to works “lawfully made under this title” to mean works that are actually made in the United States. Because Omega’s watches were made outside of the United States – and thus not “lawfully made under this title” – the Court held that the first sale doctrine did not apply.

“[T]he application of Section 109(a) to foreign-made copies would impermissibly apply the Copyright Act extraterritorially in a way that the application of the statute after foreign sales does not,” the Court held. Id. The Court determined that to treat the goods in Omega the same as the goods in Quality King “would mean that a copyright owner’s foreign manufacturing constitutes lawful reproduction under…Section 106(1) even though the statute does not clearly provide for extraterritorial application.” Id.

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© 2012 Nissenbaum Law Group, LLC

Is An Insurer’s Refusal To Consent To A Declaratory Judgment Sufficient For A Court To Find A Gross Disregard For An Insured’s Interests?

May an insurer reject a demand that would make its contribution to a settlement contingent upon the outcome of a suit to establish the limits of liability under the policy? In Greenridge v. Allstate, the United States District Court for the Southern District of New York answered that question in the positive. Greenridge v. Allstate Ins. Co., 312 F. Supp. 2d 430 (S.D.N.Y. 2004).

The plaintiffs (the “Greenridges”) owned a three-family home in the Bronx. One of their tenants sued them, alleging that his daughter suffered lead poisoning from exposure to lead paint in the building owned by the Greenridges. The plaintiffs were insured by Allstate Insurance Company (“Allstate”). They purchased homeowners’ liability insurance from them on an annual basis from February 1988 through the time of the dispute. The policy provided coverage for claims for bodily injury up to a $300,000 limit. The Greenridges alleged that the limit should be $600,000 because the exposure at issue allegedly occurred over two different policy periods. Allstate argued its liability was limited to $300,000.

The plaintiff tenant offered to settle his claim against the Greenridges for $300,000 plus an additional $300,000 if, through a declaratory judgment, a court ruled that Allstate was liable for the second policy limit. Allstate subsequently refused to consent to the settlement. A judgment of more than $1.6 million was eventually entered against the Greenridges. They then sued Allstate, claiming it was liable for the $600,000 under the two policies. They also claimed the company was liable because it had demonstrated bad faith when refusing to accept the settlement.

The Greenridge Court acknowledged that an insurer may be held liable for a breach of its duty of good faith in defending and settling claims against its insured. Pavia v. State Farm Mutual Automobile Insurance Co, 82 N.Y.2d 445, 452 (1993). But it also held that bad faith “is not a free-floating concept to be invoked whenever the insurer fails to maximize the interests of the insured.” Gordon v. Nationwide Mut. Ins. Co.¸ 30 N.Y.2d 427, 437 (1972). Bad faith is an implied obligation that derives from an insurance contract. Id. at 452.  The Greenridge Court found in favor of Allstate, denying the bad faith claim and finding that an anti-stacking clause in the contract between the two parties was arguably enforceable. Therefore, there was a basis for the insurer’s position that its liability was limited to one policy period ($300,000.00), rather than stacking two policy periods that followed one another (which would double the limit to $600,000.00), was enforceable. The decision was later affirmed by the United States Court of Appeals for the Second Circuit.

The Greenridge Court’s decision suggests that an insurer’s refusal to consent to an insured’s declaratory judgment action is not likely to be considered sufficient to find that the insurer grossly disregarded the interests of the insured party.

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© 2012 Nissenbaum Law Group, LLC

Does The New Jersey Declaratory Judgments Act Grant Rights To A Party Affected By a Municipal Ordinance?

May an individual whose rights have been affected by a municipal ordinance seek a declaratory judgment? The Supreme Court of New Jersey has construed the Declaratory Judgments Act in a way that allows such individuals to seek declaratory action. Bell v. Stafford Tp., 110 N.J. 384, 390 (1988). N.J.S.A. 2A: 16-53.

In that case, the Township of Stafford, N.J. (“Stafford”) enacted an ordinance that declared that “[b]illboards, signboards, and off-premises advertising signs and devices are prohibited within any zoning district of the Township.” Stafford Ordinance No. 84-35. The plaintiff, Wesley Bell (“Bell”), owned three billboards affected by the ordinance. The trial court found the ordinance to be constitutional, but the Appellate Division reversed. Stafford appealed.

In part of his original complaint, Bell sought a declaratory judgment that the ordinance was unconstitutional on its face. In response, Stafford contended that the Appellate Division erred and should have refrained from making any determination of unconstitutionality.

The Appellate Court found that Stafford’s response invoked the doctrine of “strict necessity”, which holds that courts will adjudicate the constitutionality of legislation only if a constitutional determination is absolutely necessary to resolve a controversy between the parties. Rescue Army  v. Municipal Court of Los Angeles, 331 U.S. 549 (1947). This was also applied in New Jersey in Donadio v. Cummingham¸ where it was held that “a court should not reach and determine a constitutional issue unless absolutely imperative in the disposition of litigation.” Donadio v. Cummingham¸ 58 N.J. 309, 325-26 (1971).

The Court also found that Bell had standing to press his constitutional challenge under the Declaratory Judgments Act. The Act “expressly confers standing on a person whose legal rights have been affected by a municipal ordinance.” Bell  at 390. The Court held that the Act is not to be used to secure court decisions that are merely advisory. Rather, the Act affords “expeditious relief from uncertainty with respect to rights when claims are in genuine conflict.” Id. at 391. The Court concluded that the issue of the constitutionality of the ordinance was properly presented, since Bell had standing to raise the constitutional issue in a context that warranted a decision so as to fairly resolve the legal controversy caused by the application of Stafford’s ordinance. It subsequently affirmed the Appellate Division’s ruling.

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© 2012 Nissenbaum Law Group, LLC

May Debt Collectors Contact People by Phone Who Are Not In Debt?

The Telephone Consumer Protection Act (“TCPA”) governs the conduct of telemarketing services and other companies that use telephone solicitation during the course of their business. A number of lawsuits have raised the question of whether debt collectors should be treated similarly to telemarketers, insofar as they should be subject to the same restrictions.

In a recent case before the United States District Court for the Western District of New York, a plaintiff argued that a debt collection agency’s continuous phone calls regarding a financial obligation that the putative debtor did not owe were in violation of the TCPA. Franasiak v. Palisades Collection, 09-cv-835S. The plaintiff, John Franasiak, claimed that the defendant, Pallisades Collection (“Pallisades”), repeatedly contacted his residence regarding a debt owed by his daughter. He alleged that Palisades did this even though Franasiak continued to inform them that he was not the debtor and that his daughter did not live at his residence. He claimed the calls continued several times a week for seven months. After Pallisades ignored a cease-and-desist letter he issued, Franasiak filed an action under the TCPA.

In its motion for summary judgment, Pallisades argued that debt collection calls are exempt from the TCPA. A Federal Communication Commission (“FCC”) administrative decision indicates “that calls solely for the purpose of debt collection are not telephone solicitations and do not constitute telemarketing.” In the Matter of Rules and Regulations Implementing the Telephone Consumer Protection Act of 1991, 23 FCC Rcd. 559, 565, ¶¶ 11 [2008 WL 65485 (F.C.C.)]. Additionally, earlier in 2011, another Western District Court determined that “debt collection calls are exempt from the TCPA’s prohibitions against prerecorded message calls because they are commercial calls which do not convey an unsolicited advertisement and do not adversely affect residential subscriber rights.” Santino v. NCO Fin. Sys., 09-cv-982-JTC.

Franasiak argued that this exception did not necessarily include calls by debt collectors to individuals who are not the debtor. In other words, he argued that the TCPA should extend to situations where debt collectors are persistently calling those who are not actually in debt. However, the Court decided to defer to the FCC and its specific exemption of all debt collection activities from the TCPA. The Court held that it is for the FCC “to determine whether a resident’s privacy rights are adversely affected by seemingly intrusive phone calls by prerecorded messages.” The Court added that “[a]lthough it is this Court’s opinion that such calls, when they are made to non-debtors, do adversely affect the individual’s privacy interests, the FCC has found otherwise,” and noted that a holding in favor of Franasiak would overstep the bounds of the judiciary.

It is significant to note that the answer to this question could vary depending on the district. For example, the United States District Court for the Eastern District of Pennsylvania has held that non-debtors have their rights violated when they receive continuous collection calls. Watson v. NCO Group, 462 F. Supp 2d 641 (E.D. Pa. 2006). However, the majority of courts have followed the same path as the Franasiak court and decided to defer to the FCC and not interpret different rules for non-debtors. It will be interesting to see if the FCC decides to amend its regulations or take any steps to address this issue, and whether the majority of courts will continue to exercise judicial restraint.

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© 2012 Nissenbaum Law Group, LLC

When May The Landlord Of A Strip Mall Be Covered Under the Mall’s Tenants’ Insurance Policy?

If a person slips in the icy parking lot of a strip mall, may the landlord be indemnified by one of the tenants’ insurance policies? In a recent decision, the Appellate Division of the Superior Court of New Jersey attempted to clarify that question. Cambria v. Two JFK Blvd, LLC, Superior Court of New Jersey, Appellate Division. A-0802-10T2 (2012).

The plaintiff, John Cambria (“Cambria”), slipped and was injured in an icy parking lot of a strip mall that was owned by the landlord and defendant Two JFK Blvd., LLC (“the landlord”). The landlord and a real estate manager, David Rubin (“Rubin”), sought a declaration that they were covered by the liability insurance policy that one of the mall’s tenants (“the tenant”) had obtained. The policy had been issued by Harleysville Insurance Company of New Jersey (“Harleysville”). A lower court determined that the tenant had failed to obtain the required coverage for the landlord by failing to name it as an additional insured. However, the lower court also held that the landlord did not have to consider whether the tenant was liable for breaching the lease because that court viewed Rubin as the tenant’s “real estate manager.” The (defendants) appealed.

The Appellate Court determined that Rubin was a real estate manager and was the landlord’s real estate manager, but said that the landlord and Rubin needed to provide evidence that Rubin was also the real estate manager for the tenant in order for them to succeed on their claim that Harleysville owed them indemnification. The Appellate Court held that the landlord and Rubin failed to meet that requirement.

In order to determine whether Rubin was acting as the real estate manager of the landlord or the tenant, the Court looked at whether the incident causing the injury occurred in the leased premises or some other area of property for which the tenant was responsible. The lease stated that the “leased premises” did not include any part of the parking lot where the plaintiff fell. Additionally, the landlord and Rubin argued that New Jersey courts have previously interpreted “real estate manager” expansively. However, the Court distinguished this case from previous interpretations, holding that here the landlord retained the sole responsibility for maintaining and caring for the parking lot. Consequently, Rubin again acted solely as the landlord’s – and not the tenants’ –  real estate manager.

Finally, the Court determined that contending Rubin was the tenant’s real estate manager would not be persuasive unless the lease saddled the tenant with a duty of care for the parking lot. The landlord and Rubin relied on a lease provision that imposed on the tenant “additional rent” for its “proportionate share” of the “operating costs,” which included, among others, that of “removing snow and debris.” However, the Court rejected this argument, stating that common law principles impose on the landlord a duty to maintain the parking lot and other common areas in a reasonably safe condition for the use of both tenants and guests. See Gonzalez v. Safe & Sound Sec. Corp., 185 N.J. 100, 121 (2005). The Court clarified that though this provision may have advised the tenant of the manner in which part of the rent would be applied, it did not shift the burden of caring for the common areas from landlord to tenant. “That a portion of the rent was devoted by the landlord to hire someone to care for the common areas, which were the landlord’s responsibility, does not alter the parties’ rights and obligations regarding the common areas or render that hired person the real estate manager for the tenant.” Id. “The obligation to care for the common areas remained with the owner absent a clear and unambiguous declaration to the contrary that cannot be found in the parties’ lease.” Id. 

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© 2012 Nissenbaum Law Group, LLC

What Is Sufficient Evidence To Prove the Existence of A Partnership or LLC?

In order for a court to determine that a defendant is in civil contempt, it must first determine that the defendant actually exists. In a recent decision, the United States District Court for the Southern District of New York considered what evidence would be sufficient for a plaintiff to prove the existence of a competitor. BeautyBank, Inc. v. Harvey Prince LLP, No. 10 Civ. 955 (S.D.N.Y. 2011).

In October 2010, plaintiff BeautyBank, Inc. (“BeautyBank”) filed a motion to hold defendant Kumar Ramani (“Ramani”) in contempt. The original complaint was filed against the entity Harvey Prince and included, among other allegations, claims for trademark infringement and false advertising. It alleged that Harvey Prince was selling perfume and other cosmetic products that violated a BeautyBank trademark. BeautyBank later added Ramani – whose name was listed as a partner in the Harvey Prince entity – as a defendant.

When BeautyBank later pursued its default judgment against Harvey Prince, Ramani maintained that Harvey Prince did not exist as an entity. In his answer to the complaint filed against him, Ramani said that Harvey Prince LLP was never formed as a Nevada limited liability partnership and instead claimed that his attorney filed trademark applications that incorrectly listed Ramani as a controlling partner in that LLP. Despite this, BeautyBank ultimately persuaded the court to enter a default judgment that included a permanent injunctive relief against Harvey Prince. The injunction enjoined the entity and its officers from imitating, manufacturing and similar practices relating to its trademarked perfume. BeautyBank later made a motion to find Ramani in contempt because, it argued, Ramani was a principal of Harvey Prince and the website www.harveyprince.com continued to sell BeautyBank’s trademarked perfume.

In order to prove Ramani’s noncompliance with the injunction, BeautyBank had to establish that Ramani served Harvey Prince in one of the capacities listed in the injunction. This included showing, at a minimum, that the entity Harvey Prince existed.

The Court found that the evidence presented by BeautyBank did not “demonstrate to a reasonable certainty” that Harvey Prince, LLP existed. Id. at 5. Admittedly, BeautyBank introduced as evidence filings made to the United States Patent and Trademark Office that attested to the existence of Harvey Prince. However, the Court held that “the mere fact that a party states on a document, sworn under penalty of perjury, that an entity is an LLP in the state of Nevada does not result in the creation of an LLP within that state.” Id. at 6.

The Court noted that a limited liability partnership (LLP) is created by statute. It is an entity that allows two or more persons to create a partnership with the added protection that their potential liability will be limited. Therefore, the Court emphasized that whether or not an entity was created is something that is determined by the behavior of parties, not merely the words in a document. Nevada law states that a partnership is formed when

a)      two or more persons associate

b)      to carry on as co-owners of a business

c)       for profit

Nev. Rev. Stat. §§ 87.060, 87.4322.

The Court found that BeautyBank presented no evidence that indicated Ramani associated with another person to form a partnership or that he organized and formed an LLP. Because BeautyBank failed to establish the existence of Harvey Prince, the Court found that the injunction could not be enforced against Ramani. Thus, BeautyBank’s motion for contempt failed.

The Court’s decision is interesting because it suggests that merely referring to an entity as an LLP does not necessarily indicate that a legal LLP has been formed. It is important for businesses seeking to form such an entity to check the relevant state statute and ensure it is complying with the requirements established for such a business entity. Court decisions such as BeautyBank serve as reminders that simply calling a business a “limited liability partnership” on paper may not suffice. 

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© 2012 Nissenbaum Law Group, LLC

Can a Tenant Recover Attorney’s Fees From a Landlord if the Lease Does Not Provide for That Right?

Landlords are generally the parties that prepare the lease agreements into which their tenants enter. This unequal bargaining power typically allows landlords to insert language that requires tenants to pay the landlord’s attorney’s fees for any legal claims that arise out of their agreement, but does not require the landlord to pay the tenant’s attorneys fees for breach of the lease terms by the landlord. New York law requires there to be either a contractual or statutory basis for a prevailing party to collect attorney’s fees. But if there is no express language in a lease agreement allowing for tenants to demand attorney’s fees from landlords, does that mean tenants will not able to collect them?

This question was at issue in a recent New York case. Casamento v. Juaregui. Casamento v. Juaregui, 2011 WL 4090175 (2d. Dept. 2011). In the case, Luis Juaregui (“the tenant”) entered into a lease agreement for a Queens apartment owned by Dominic Casamento (“the landlord”). Paragraph 7 of the agreement required the tenant to receive the prior written consent of the landlord before making any alterations to his apartment. Paragraph 10 held the tenant liable for any damages or expenses incurred by the landlord relating to any neglectful act of the tenant. Additionally, paragraph 16 specifically referred to attorneys’ fees, stating that “[a]ny rent received by Landlord for the re-renting shall be used first to pay Landlord’s expenses” and including “reasonable legal fees” within the definition of “expenses.” Id. at 288.

In March 2007, the landlord alleged that the tenant had violated paragraphs 7 and 10 by making alterations to certain rooms without the landlord’s consent and also claimed the tenant was responsible, per the terms of the lease, for the landlord’s legal fees. He served a notice of termination and commenced a holdover proceeding.

The question for the court in Casamento was whether the lease at issue was covered by Real Property Law (“RPL”) §234. That law governs residential leases and addresses the imbalance resulting from the unequal bargaining power between landlords and tenants. It establishes an implied covenant that addresses when a tenant will be able to recover attorneys’ fees incurred in the successful defense of a summary proceeding to recover possession of a leasehold. If the court determines that the lease is covered by §234, the tenant should be able to collect attorney’s fees from the landlord.

Section 234 states that courts shall construe a lease to include this implied covenant whenever:

1)  a lease of residential property shall provide that in any action or summary proceeding the landlord may recover attorneys’ fees and/or expenses incurred as the result of the failure of a tenant to perform any covenant or agreement contained in such lease, or

2) that amounts paid by the landlord therefore shall be paid by the tenant as additional rent

See RPL §234.

The Casamento Court determined that the outcome of any claim pursuant to §234 depends upon an analysis of the specific language of the lease provision at issue. In that case, it held that “Paragraph 16, thus, literally fits within the language of the first prong of section 234, since it does ‘provide that in any action or summary proceeding the landlord may recover attorneys’ fees and/or expenses incurred as the result of a failure of the tenant to perform any covenant or agreement contained in such lease.’” Additionally, the court found that construing the covenant in favor of the tenant is “consistent with the Legislature’s remedial purpose of effecting mutuality in landlord-tenant litigation and helping to deter frivolous and harassing litigation by landlords who wish to evict tenants.” The court said that RPL §234 helps avoid a situation where a landlord would have nothing to lose by instituting an eviction proceeding with a frivolous factual basis where there was  prospect of re- enting for a higher amount and the lease included a provision enabling the landlord to recover attorney’s fees. Because the Court determined that RPL §234 applied, it held that tenants can recover attorney’s fees from landlords.

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© 2012 Nissenbaum Law Group, LLC