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1411306_lonely_house.jpgDid you ever wonder how a person, or a business, could come to own a piece of land he never bought? Did you even know that it is possible? It can be done in New York, and, as shown by certain high profile cases, in other states as well, through an old legal doctrine known as adverse possession.

Recently, a Florida man tried to obtain title to a $2.5 million mansion in Boca Raton, merely by living there and paying the taxes and utilities on it. The property was foreclosed on in 2012 and remained vacant until he moved in sometime in July, when he filed an adverse possession claim. If he could live there for 7 years, unchallenged, and pay the bills and the real estate taxes, the property would become his under Florida law. Just yesterday afternoon, however, his dream came to an end. The owner, the Bank of America, went to court, sued him for trespassing, and had him evicted. In ending his dream, Bank of America demonstrated the core principal of an adverse possession claim; i.e., the true owner must be able to force the squatter to give up possession but, if he waits too long, the squatter gets to keep the property.
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1346000_bible_collage_1.jpgIs there really such a thing as a simple sales contract? In New York, at least, the answer is no.

As we previously discussed, a contract does not have to be written in order to be enforced. There can be an implied in fact contract; though it often is easier to prove the existence of a written contract than it is to prove a contract simply by showing that the parties acted like they had entered into a mutually binding agreement.

Most New York business owners place and fill orders for goods all the time. Often they do it just by placing, or receiving, a telephone call, with a purchase order, or at least an invoice, that follows. Most know that if the Buyer, or the Seller, does not keep its end of the bargain, the other could sue it for breach of contract. But what most may not realize is that the Seller also can be responsible for any promises or representations he might make regarding his particular item. Such an unwritten promise, in an unwritten contract, can be a warranty; if the Seller breaks it, he possibly can be liable for breach of warranty and, maybe, even fraud.

There are promises that go along with most sales transactions. For instance, when you buy a car, it often comes with a written warranty; if something breaks in the car within a specified time after you purchase it, the manufacturer often will fix it at little or no cost to you. Sometimes, a car company will voluntarily recall a large number of cars to pre-emptively fix a problem. Recently, for example, according to news reports, Toyota announced a large recall to fix an airbag problem in some of its models..

A warranty does not have to be written to be enforced; sometimes it does not even have to be spoken. A New York business, for instance, that normally sells a particular product, warrants, or promises, even without a writing, that the goods it sells are merchantable. This basically means that if a parts supplier sells widgets, it promises that the widgets it sells are acceptable widgets in the widget trade; that its widgets are of fair average quality as far as widgets go; that its widgets are fit to be used as widgets normally are; that its widgets are basically all of like kind and quality; that its widgets are adequately packaged and labeled as agreed; and that its widgets live up to whatever statements are on the packaging or labeling of the widgets. This is known as the warranty of merchantability. N.Y. U.C.C. Law § 2-314.
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Posted in: Sales Contracts
Tagged: Warranties
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1280219_rocks_rocks_rocks.jpgIn our last entry we discussed how piercing the corporate veil can result in the owner of a New York corporation being personally responsible for the corporation’s debts and obligations. We also set out the test for piercing the corporate veil: A Plaintiff must show that the owner of the corporation exercised complete domination of the corporation in the transaction the Plaintiff has complained about; that the owner’s domination was used to commit a fraud or wrong against the Plaintiff which resulted in the Plaintiff’s injury, and that the owner, through her domination, abused the privilege of doing business in the corporate form to perpetrate the wrong against the Plaintiff. See Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 141-42, 623 N.E.2d 1157, 1160-61 (1993); E. Hampton Union Free Sch. Dist. v. Sandpebble Builders, Inc., 66 A.D.3d 122, 126, 884 N.Y.S.2d 94, 98 (2nd Dept. 2009) aff’d, 16 N.Y.3d 775, 944 N.E.2d 1135 (2nd Dept. 2011); Love v. Rebecca Dev., Inc., 56 A.D.3d 733, 868 N.Y.S.2d 125 (2nd Dept. 2008).

There are some interesting cases that illustrate just how difficult it is to pierce the corporate veil. One is E. Hampton Union Free Sch. Dist. v. Sandpebble Builders, Inc., 66 A.D.3d 122, 126, 884 N.Y.S.2d 94, 98 (2nd Dept. 2009) aff’d, 16 N.Y.3d 775, 944 N.E.2d 1135 (2nd Dept. 2011). There, the Plaintiff was a Long Island school district that sued not only a construction company, Sandpebble Builders, Inc., but also its president and principal owner, for breach of contract. The School District alleged that the construction company had negotiated the terms of a construction services contract in bad faith. According to the School District, the company came to an agreement in principal with it on the terms of the contract numerous times only for the company to try to negotiate better terms, and, when it could not, the company would refuse to execute the contract. The company, according to the School District, was trying to delay the project on which it was supposed to work, by prolonging the negotiations, and using that as leverage to negotiate a better deal, one closer to a previous contract which the School District evidently canceled. That, without more, would make the dispute nothing more than another example of why it is important to spell out all of the terms of the contract in writing and to make it clear that the parties involved in a transaction do not wish to be bound unless and until there is a written, executed agreement.
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1191957_grey_emblem.jpg“Piercing the Corporate Veil” is a term that may sound strange, archaic, or even intimidating; but when you dig through the lawyer-speak, it is really a simple concept. Piercing the corporate veil basically means that the owner of a corporation will be personally liable for the debts or obligations of the corporation. That is a concept with which every New York business owner should be familiar.

When people want to start a business in New York, they often form a corporation or other legal entity, such as a Limited Liability Company, to operate the business. They often will not do business under their own name, but, instead, under the corporation’s name. Most people know the reason for this is to limit the owners’ liability for the acts and debts of the corporation. In New York, as in most jurisdictions, a corporation is a separate legal entity that exists independently of its owners, the owners normally are not liable for the corporation’s debts, and a business owner can form a corporation for the very reason that she wants to limit her liability for the corporation’s debts. See Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 140-41, 623 N.E.2d 1157, 1160 (1993); and E. Hampton Union Free Sch. Dist. v. Sandpebble Builders, Inc., 66 A.D.3d 122, 126, 884 N.Y.S.2d 94, 98 (2nd Dept. 2009) aff’d, 16 N.Y.3d 775, 944 N.E.2d 1135 (2nd Dept. 2011).

Most business owners form a corporation because they do not want to put their personal assets at risk if they do not have to. If the corporation they own incurs a bill, they intend to pay it, that is how they stay in business; but if the corporation goes out of business or does not have the money to pay the bill, they do not want to have to pay it out of their own pockets. Every New York business owner should remember, however, that this shield against personal liability is not bulletproof. There are ways to hold an owner personally liable for the corporation’s debts; i.e., to pierce the corporate veil.
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13073_fire_island_beach.jpg A contract does not always have to be in writing to be enforceable in New York. Most people, including business owners, might think it has to be in writing, but it does not. It must be an agreement, between at least two parties, where each has committed to give up something in order to get something back, and everyone has agreed on the important terms. Those terms, and that agreement, however, do not have to be set down on paper, where each side has signed on the proverbial dotted line. It might be nice to have such a signed document, which is known as an express contract; it might make it easier to prove that there is a contract and what its terms are; but you can still have a valid, enforceable contract without it, if that is what the parties want. In other words, in order to enforce a contract, what you need is a contract, not a writing which shows there is a contract.

In New York, a contract is binding if there is an offer, acceptance, consideration, mutual assent, an intent to be bound, and both sides agree on all of the essential terms. See Kowalchuk v. Stroup, 61 A.D.3d 118, 121 (First Dept. 2009). Parties can enter into a binding contract even without committing their agreement to a fully executed written document. See Bear Stearns Inv. Products, Inc. v. Hitachi Auto. Products (USA), Inc., 401 B.R. 598, 617 (S.D.N.Y. 2009). A contract may be implied in fact from the facts and circumstances surrounding the dispute and the intention of the parties as indicated by their conduct. See Yankee Lake Pres. Ass’n, Inc. v. Stein, 68 A.D.3d 1603, 1604-05 (3rd Dept. 2009); and Matter of Boice, 226 A.D.2d 908, 909 (3rd Dept. 1996). In other words, the parties can be shown to have entered into a binding contract because they acted like they entered into a binding contract.
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1065701_castle_-_hdr.jpg Every New York business deals with contracts: sales contracts; purchase agreements; leases, for equipment or for real property such as a store, warehouse, or office; even insurance policies which protect the business, its employees, and its property from loss and damage. Contracts are the means by which a business conducts business. When people, including business owners, think of a contract, they commonly picture a written document, which specifies all of the terms and conditions of the agreement between the parties. A contract, in order to be valid, does not necessarily need to have all of its terms reduced to writing. When there is a written contract, however, it is important that a business owner take the time to read and understand it because, chances are, the business will be bound by the contract in its entirety.

Most businesses believe that they know the terms of a contract before they enter into it, but they often concentrate on what they think are the most important provisions, without being concerned about the rest. Before the typical business enters into a contract, it will know how much money it will spend or how much money it will earn. It will be certain of exactly what it has agreed to sell, to buy, or to lease, and of how long it has to pay or to be paid. Many times, however, a business does not understand, and has not even read, the fine print. That, unfortunately, is a mistake.

In New York, a party that signs or accepts a written contract is conclusively presumed to know its contents and to assent to them, unless the other contracting party is guilty of fraud or some other wrongful act. See Metzger v. Aetna Ins. Co., 227 N.Y. 411, 416 (1920); Superior Officers Council Health & Welfare Fund v. Empire HealthChoice Ass., Inc., 85 A.D.3d 680, 682 (1st Dept. 2011); and Imero Fiorentino Associates, Inc. v. Green, 85 A.D.2d 419, 420 (1st Dept. 1982). This rule often can have unintended, and harsh, consequences for the unwary.

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1026301_olive_branch.jpgMany businesses share a common problem in negotiating and drafting contracts. Rather than resolving all key issues before they enter into a contract, rather than making clear what each party to the contract is obliged to do, and what each is entitled to receive, they allow serious ambiguities to remain in the terms of their agreement. Often the businesses want to gloss over their differences in order to close the deal. The problem with that approach is that ambiguities involving important issues, if not resolved beforehand, often lead to more serious disputes, including litigation, once the parties execute the contract. A recent case decided in New York by the Appellate Division, First Department, illustrates the problems engendered by this approach.

Parcside Equity, LLC v. Freedman, 2012 NY Slip Op 05106, Appellate Division First Department, June 26, 2012, involved a Defendant who entered into a contract in which he made an irrevocable offer to sell his life insurance policies to the Plaintiff. The terms and timing of the contract are the key to understanding the dispute. To begin with, there was no straightforward agreement to sell/buy the policies. Instead, the Defendant/Seller offered, in writing, to sell his policies to the Plaintiff/Buyer at a specific price. The Plaintiff/Buyer, however, could purchase the policies, but was not required to do so.

The central issue in the dispute was simple: The Defendant/Seller wanted to sell one of his policies for a higher price than he originally agreed to, and tried to renegotiate the terms of the offered sale, while the Plaintiff/Buyer evidently wanted to pay the lower, original price offered in the contract. This was expressed in two questions, which essentially mean the same thing. The first was how long the Plaintiff/Buyer could take to accept or reject the offer; i.e., to decide whether to purchase the policies. The second was when, if ever, the Defendant/Seller could withdraw his offer, or, in effect, materially change the terms of the proposed sale.

The written contract provided, in relevant part:

“Performance. This Agreement has been executed first by the Seller as an offer to sell the Policy hereunder, which offer shall be open for acceptance by the Purchaser until 5:00 p.m. on October 17, 2008, at which time the offer shall be deemed to be withdrawn if this contract has not been returned to the Purchaser and in the Purchaser’s sole discretion accepted by the Purchaser by that date or any other date selected by the Purchaser.”

That contract language was at the center of the dispute. The Defendant/Seller argued it meant that his offer to sell his life insurance policies to Plaintiff/Buyer could be withdrawn after October 17, 2008. If the court agreed, the Defendant/Seller would be allowed to sell the policies for a higher price than he originally agreed to, either by renegotiating with the Plaintiff/Buyer or by finding another purchaser. The Plaintiff/Buyer argued that the same contract language meant the Defendant/Seller’s offer to sell was irrevocable; i.e., it could not be withdrawn.

The appellate court interpreted the contract language in favor of the Plaintiff/Buyer. It held that the contract language clearly gave the Plaintiff/Buyer the right to purchase the life insurance policies at the offered terms at any time the Plaintiff/Buyer chose; i.e., once the Defendant/Seller made the offer, it could not withdraw the offer; it was irrevocable. That, however, was not the end of the dispute. In New York, a written offer to enter into a contract that states it is irrevocable, has a time limit even if it does not state one: It is irrevocable only for a reasonable period of time. The court applied this rule, which is embodied by General Obligations Law Section 5-1109, to the facts and found that the Plaintiff/Buyer’s acceptance, on December 4, 2008, was within a reasonable time as a matter of law.
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1386458_shopping_mall_2.jpgWe have been discussing how much a New York business can recover from someone who damages its property. If the property is damaged, but not destroyed, the business normally can recover either the loss in market value caused by the damage, or the cost of repairs, whichever is less. See Fisher v. Qualico Contracting Corp., 98 N.Y.2d 534, 539 (2002). See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). If the property is totally destroyed, it can recover the reasonable market value of the property just before it was destroyed. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). If the destroyed property is a business’ sales inventory, the business normally can recover the wholesale cost of the merchandise, because that is what it would cost to replace the merchandise, and any damages actually sustained by reason of the absence of the articles while they are being replaced. See Dubiner’s Bootery, Inc. v. Gen. Outdoor Adver. Co., 10 A.D.2d 923 (1st Dept. 1960). These rules seem intrinsically fair because each will put the business back to where it was before the loss.

A business also can try to recover for damage to its property by making a claim under the property coverage of its business owner’s insurance policy. If the policy covers the type of property that was damaged, the damage was caused by something the policy insures against, and the insured otherwise has lived up to its obligations under the policy, the business owner should be able to recover for the damage to its property. The amount the business can recover depends on the language of the policy. It might be able to recover only the actual cash value of the property. One way to determine that is replacement cost minus depreciation. It might be able to recover the replacement cost of the property, without deduction for depreciation. For the destruction of sales inventory, it might be able to recover the sales price of that inventory, if it has purchased the proper coverage. Sometimes, an insurance policy, depending on how it is written, might reimburse the business for its lost income. Even then, however, the business should be aware that it cannot recover both the retail selling price of the damaged inventory and the income it would have earned by selling that same merchandise.

This is illustrated by J & R Electronics Inc. v. One Beacon Ins. Co., 35 A.D.3d 169 (1st Dept. 2006). The case involved J&R Electronics, an electronics retailer in Manhattan that was badly damaged as a result of the terrorist attacks in New York City on September 11, 2001. As a result, it made a claim to recover, under its policy of property insurance with One Beacon Insurance Company, for, among other things, the damage to its merchandise, and for its loss of business income. Pursuant to the terms of the policy, One Beacon paid J&R the selling price minus unincurred expenses for the damaged merchandise. That basically means that J&R was paid the selling price minus the money it normally would have spent in order to sell the merchandise. When One Beacon paid J&R’s claim for loss of business income, it subtracted the amount it paid J&R for the sales price of the damaged merchandise. J&R objected to this, claimed the sales price should not be subtracted from its lost income, and sued. The appellate court held that J&R could not recover both the selling price of the merchandise and the lost income based on its failure to sell that same merchandise; to do so would have been to give J&R a double recovery.

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1208318_sailing_ship.jpgA business has to know how to recover for damage to its property. Most times it will need to use the money to repair or replace the damaged property or, in the most severe cases, to re-start the business.

In our last entry, we spoke about how a business can establish the amount it can recover from someone who damages its property. Normally, the business can recoup either the reasonable cost to repair the damaged property, or the loss of market value caused by the damage, whichever is less. See Fisher v. Qualico Contracting Corp., 98 N.Y.2d 534, 539 (2002). See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). Where the property is totally destroyed, the owner can recover the market value of the property immediately before it was destroyed. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934).

Though everyone likes to think the worst will never happen, it can, and often does, in strange and unexpected ways. Recently, on Long Island, a car crashed into the front of a house and drove all the way through to the backyard. This happened in the middle of the night, while the homeowner was asleep. Similar damage also can happen to a business. A couple of months ago, a car drove through the front of a print shop in Florida, through where the supplies were kept, while the store owner was helping a customer. Only a few weeks earlier, a car drove through the back of the same store.

Property damage affects all types of businesses, from retail stores to factories, from start-ups to well established companies. This winter a fire heavily damaged three stores in Smithtown, Long Island. The fire reportedly started in a bar, which had to be closed for repairs; it had opened only a few weeks earlier. In May, a bell factory in East Hampton, Connecticut, was so badly damaged by fire that it was trying to temporarily re-locate so it could re-start production on a limited basis while rebuilding its facilities; the company had operated for 180 years and was the last bell factory in this country. Sometimes, property damage, even from a mundane cause, can be so extensive that it totally shuts down a business. Last week, a custom car tuning shop outside of Rochester, New York was damaged so severely by fire that it had to close; the fire reportedly started in an electrical circuit box.

It is clear that all types of businesses suffer when their property is damaged. One affected by a special set of rules is a retail store. For example, if a car drove through a grocery store, or a clothing shop, in New York, what could the store owner recover from the driver for the destruction of its stock or sales inventory? That would depend on the market value of the property immediately before it was destroyed. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). What, however, is the market value of the destroyed food, or clothes, and how is it determined?
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648333_measuring_tape.jpgEveryone knows that if someone damages their property, they should be able to make that person pay for the damage. The Owner of the damaged property should be able to recover as long as it can prove the other person was liable for the damage. Many people, however, including business owners, are unclear about how much they can recover, and what they need to do in order to recover.

A business needs its property to operate, whether that’s its equipment, stock, inventory, or its office or warehouse space. When property is damaged in New York, how much can the owner recover from the party that caused the damage, and how is that amount determined? Knowing the answer, in order to ensure that the damage can be repaired, is essential to good business planning. The answer depends, to a large degree, on the type of property and how badly it is damaged.

Property Damage can occur at any time, and often in unexpected ways. It can consist of damage to real property, such as to a building, or damage to personal property, such as to the contents of a building, the personal belongings in a house or an apartment, the business personal property in a leased store or office, or the equipment and stock a business uses to operate. It can affect anyone who owns property, including a business, a landlord, a tenant, a homeowner, or a car owner.

Recently, there was a story in the news that shows just how easily property can be damaged and how quickly the cost of repairs can add up. A hotel in Austin, Texas, claims it suffered $10,000 of property damage because several beer bottles were dropped from the 29th floor into its pool and hot tub. As a result, the pool and hot tub had to be drained to make sure that all of the glass was removed so that no one would be hurt, and the filters for the pool and hot tub had to be repaired. Evidently, a little mischief can cause a lot of damage. The beer bottles were dropped from a privately owned condominium located above the hotel. According to the article, the owner of the Hotel planned to sue the owner of the condominium to recover the cost to repair the damage. If this happened in New York, what would the Hotel have to do to establish that it suffered $10,000 of damage?

When property is damaged in New York because of the negligence of someone else, like the person who dropped the beer bottles into the Hotel pool (the “Defendant”), the basic goal is to make the Owner of the property “whole”. That means that a court will try to put the Owner back into the exact same position she was in immediately before the damage occurred. See Ward v. New York Cent. R. Co., 47 N.Y. 29, 33 (1871). The Owner of the damaged property cannot wind up being better off than she was before the property was damaged. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44, (1934). This generally means that the Owner can recover either the difference between the market value of the property immediately before and immediately after it was damaged, or the reasonable cost to restore the property to the same condition it was in before it was damaged (the “Repairs”), whichever is less. See Fisher v. Qualico Contracting Corp., 98 N.Y.2d 534, 536-37 (2002), and Dilapi v. Empire Drilling & Blasting, Inc., 62 A.D.3d 936, 937, (2nd Dept. 2009).
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