United States District Court, Southern District of New York
June 19, 1991
NORMAN M. BRUCE, ET AL. PLAINTIFFS,
THOMAS A. MARTIN, ET AL., DEFENDANTS.
The opinion of the court was delivered by: Sweet, District Judge.
Defendant Thomas A. Martin and various defendants aligned in
interest with him ("the Kinderhill Defendants") have moved
pursuant to Fed.R.Civ.P. 12(c) for judgment on the pleadings in
this and two related cases, Bruce v. Martin, 87 Civ. 7737
(RWS) ("Bruce I")*fn1 and Malone v. Martin, 90 Civ. 4651
(RWS), and for an injunction preventing plaintiffs' counsel
from several related actions. For the following reasons, the
motion is denied.
The parties, underlying facts, and prior proceedings are set
forth in the prior opinions in this case and related cases,
familiarity with which is assumed. E.g., Bruce v. Martin,
712 F. Supp. 442 (S.D.N.Y. 1989); Thornock v. Kinderhill Corp.,
712 F. Supp. 1123 (S.D.N.Y. 1989).
Nearly two years after filing the original complaint in Bruce
I, the plaintiffs entered into a settlement agreement ("the
Agreement") with the Kinderhill Defendants, intended to dispose
of all of the claims against those defendants in both Bruce I
and the closely-related Thornock action, 88 Civ. 3978 (RWS).
Pursuant to the Agreement, the Kinderhill Defendants were to
pay the plaintiffs a total of $275,000, $50,000 upon the
signing of the Agreement and the balance in payments of
$175,000 and $50,000. In return, the plaintiffs agreed to
dismiss the Kinderhill Defendants from both Bruce I and
Thornock and to refrain from instituting any further actions
against them. Paragraph 8(b) of the Agreement specifically
If the $175,000 payment to plaintiffs . . . is not timely
made, plaintiff [sic] may either (i) rescind this Agreement
by notice in writing to Kinderhill Corporation and Thomas A.
Martin, or (ii) sue for breach.
In addition, the plaintiffs' counsel agreed not to assist in
any other actions against any of the Kinderhill Defendants
arising out of the transactions at issue in Bruce I.
The Kinderhill Defendants concede that after paying the initial
$50,000, they have defaulted on their remaining obligations
under the Agreement. When the $175,000 payment was not made,
the plaintiffs decided to reassert the underlying claims
against the Kinderhill Defendants, and accordingly sought to
reopen the settlements in Bruce I and Thornock. At the same
time, the plaintiffs instituted this action, repeating most of
the claims in Bruce I ("the Securities Claims") and adding a
new claim for breach of the Agreement.*fn2 On this new
claim, they seek both rescission of the Agreement and monetary
damages for the breach.
The present motion seeks judgment in the defendants' favor in
both Bruce actions, and seeks to enforce the provision of the
Agreement regarding the plaintiffs' counsel by obtaining an
injunction against their prosecution of the Malone action and
a similar state court action, Christensen v. Martin
(Sup.Ct.N.Y.Co.). The motion was filed on May 30, 1991, and
oral argument was heard on June 13.
1. Restoration of the $50,000 is not required.
The Kinderhill Defendants argue first that the plaintiffs'
request for rescission
must be denied because they have made no effort to restore the
defendants to the status quo ante by repaying or even tendering
repayment of the initial $50,000 settlement payment.
Accordingly, the defendants assert that the Agreement remains
in full force and that judgment in their favor on the
Securities Claims both in this case and in Bruce I is
In making this argument, the defendants rely primarily on Cox
v. Stokes, 156 N.Y. 491, 51 N.E. 316 (1898) and Lee v. Vacuum
Oil Co., 126 N.Y. 579, 27 N.E. 1018 (1891) for the principle
that prior to seeking recission of a contract a plaintiff must
restore to the defendant any benefits received under the
contract. However, those two cases have been overruled by New
York CPLR § 3004, which provides that
A party who . . . seeks rescission . . . shall not be denied
relief because of failure to tender before judgment restoration
of . . . benefits; but the court may make a tender of
restoration a condition of its judgment . . . .
Thus the plaintiffs' failure to restore the $50,000 to the
Kinderhill Defendants is not fatal to their rescission claim.
Moreover, the plaintiffs in Cox and Lee based their claims
for rescission on allegations of fraud by the defendants. In
contrast, the plaintiffs here are asserting a right of
rescission granted by the contract itself. In such a case, New
York law provides that the language of the rescission agreement
governs the treatment of benefits received by the rescinding
party prior to rescission. The general rule is that
Where a contract is rescinded while in the course of
performance, any claim in respect of performance, or of what
has been paid or received thereon, will ordinarily be referred
to the agreement of rescission and in general no such claim can
be made unless expressly or impliedly reserved upon the
McCreery v. Day, 119 N.Y. 1, 5, 23 N.E. 198(1890) (citation
omitted); accord Eames Vacuum Brake Co. v. Prosser, 157 N.Y. 289,
295-96, 51 N.E. 986 (1898); M.J. Posner Constr. Co. v.
Valley View Devel. Corp., 118 A.D.2d 1001, 1002, 499 N.Y.S.2d
997 (3d Dep't 1986).
Here the Agreement authorized the plaintiffs to rescind in the
event that the Kinderhill Defendants did not make the $175,000
payment due at the end of 1989. Particularly in light of the
fact that the initial $50,000 was paid at the time of the
signing, the failure to provide in the Agreement for treatment
of any amounts paid prior to rescission compels the conclusion
that restoration was not intended to be a condition to
Therefore, judgment in the defendants' favor on the claim for
rescission is not warranted at this time.
2. The plaintiffs must make an election of remedy.
The Kinderhill Defendants next assert that the plaintiffs
should be required to elect whether they will pursue their
claim for rescission or that for breach of the Agreement, so
that the defendants will know which claim they will be expected
to defend at trial. The general rule is that such an election
is not required until the time of trial. Plant City Steel
Corp. v. National Machinery Exchange, Inc., 23 N.Y.2d 472, 297
N YS.2d 559, 245 N.E.2d 213 (1969). However, in Plant City
Steel the Court of Appeals explained that the purpose of this
rule was to avoid the "needlessly wasteful" practice of forcing
a plaintiff suing for breach of a settlement agreement to
pursue only one claim at a time, which could lead to repetitive
suits if the first claim was denied. Thus if the plaintiff
initially elected to seek rescission of the settlement but the
claim was denied, a second action would be required to collect
damages for the breach. See 23 N.Y.2d at 477, 297 N.Y.S.2d at
562, 245 N.E.2d at 216.
The concerns identified in Plant City Steel are not present
here. Although the plaintiffs seek rescission as a remedy for
the breach of the Agreement, in fact they do not require the
court's permission to rescind. Rather, they may rescind simply
by exercising their right to do so under the Agreement. There
is therefore no risk that if the plaintiffs elect now to pursue
rescission they might fail and be forced to recommence an
action for breach of the Agreement.*fn4
On the other hand, allowing the plaintiffs to delay their
election will prejudice the Kinderhill Defendants. If the
plaintiffs elect not to rescind the Agreement, then they are
not entitled to press their Securities Claims against the
defendants and their counsel is not entitled to participate in
other actions against the same defendants. If they are allowed
to wait until after trial to elect, the Kinderhill Defendants
will be denied the protection which they sought in negotiating
the Agreement. The concerns of fundamental fairness dictate
that the plaintiffs must now decide whether they will put the
Kinderhill Defendants to the task of defending the Securities
Claims or whether they will affirm the Agreement and seek
damages for its breach.
For the foregoing reasons, judgment on the pleadings is not
appropriate and the Kinderhill Defendants' motion is therefore
denied at this time. The plaintiffs are directed to amend their
complaint in Bruce II to clarify whether they wish to rescind
the Agreement or to collect damages for its breach.
It is so ordered.