UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF NEW YORK
June 22, 2012
NXIVM CORPORATION ET AL., PLAINTIFFS,
JOSEPH J. O'HARA ET AL., DEFENDANTS.
The opinion of the court was delivered by: Gary L. Sharpe Chief Judge
MEMORANDUM-DECISION AND ORDER
Plaintiffs*fn1 commenced this action alleging, among other things, that defendant Joseph J. O'Hara failed to repay certain loans as required by promissory notes that he executed in favor of plaintiffs Clare W. Bronfman and Sara R. Bronfman ("the Bronfmans"). (See Dkt. No. 80 ¶¶ 91-93; see generally Dkt. No. 1, Attach. 2.) Pending is the Bronfmans' three-branch motion seeking: (1) to renew a prior motion for relief under Fed. R. Civ. P. 60(b) from this court's September 27, 2007 judgment; (2) partial summary judgment on their claims that O'Hara failed to repay the loans as required by the promissory notes; and (3) judgment pursuant to Rule 54(b). (See Dkt. No. 118.) For the reasons that follow, the Bronfmans' motion is granted.
In 2004, Clare and Sara Bronfman each loaned $1,000,000 to O'Hara. (See Pls.' Statement of Material Facts (SMF) ¶¶ 1-3, Dkt. No. 118, Attach. 2.) In exchange for the loans, O'Hara gave both of the
Bronfmans a promissory note and option to purchase certain real property. (See id. ¶ 5; Dkt. No. 118, Attach. 3 at 9-25.) The promissory notes, which were virtually identical, both provided for repayment of the loans with interest at five percent (5%) per annum on December 31, 2006. (See Dkt. No. 118, Attach. 3 at 9-15.) The notes also contained a forum selection clause mandating that any legal action pertaining to them be commenced in "New York State Supreme Court in Albany County, NY." (See id. at 10, 13.) Clare Bronfman's option agreement provided that, in exchange for her $1,000,000 loan, she could elect to purchase from O'Hara a parcel of property situated in the Town of New Baltimore, New York ("New Baltimore property") for $1,000,000. (See id. at 17-20.) In exchange for Sara Bronfman's $1,000,000 loan, O'Hara gave her an option to purchase property located in the City of Saratoga Springs ("Saratoga property") for $750,000. (See id. at 22-25.) Before the December 31, 2006 maturity date of the notes, the Bronfmans gave O'Hara notice of their intention to exercise their options. (See id. ¶¶ 27-28.) While the parties dispute why the subject properties were not transferred to the Bronfmans, it is clear that they were not. (See id. ¶ 28; Def.'s SMF ¶ 10, Dkt. No. 126.)
B. Procedural History
In September 2005, this litigation was commenced in the Supreme Court of the State of New York against O'Hara and co-defendants Douglas Rutnik and Denise F. Polit.*fn3 (See Dkt. No 1, Attach. 1.) As initially plead, the Complaint contained no claim regarding the promissory notes, which had not yet become due. (See id.) Defendants removed the action to the Southern District of New York, (see Dkt. No. 1), and that court granted a later motion by O'Hara and Polit seeking to transfer venue to this District. (See Dkt Nos. 3, 26.) Plaintiffs ultimately stipulated to the dismissal of Rutnik, (see Dkt. Nos. 45-46), and filed a Supplemental Complaint on January 26, 2007, which added a cause of action seeking recovery on the then-due promissory notes. (See Dkt. No. 80.) O'Hara and Polit joined issue on February 5, 2007. (See Dkt. No. 81.)
At some point, the parties began settlement discussions and, on August 23, 2007, they stipulated to a settlement in open court before Magistrate Judge Randolph F. Treece. (See Dkt. No. 106.) As pertinent here, the settlement required O'Hara, or an entity that he controlled, to quitclaim deed the New Baltimore and Saratoga properties to the Bronfmans subject to any existing liens. (See Dkt. No. 103 at 5.) O'Hara was further obligated to discharge all liens that existed on the properties, pay the Bronfman sisters $200,000, and execute warranty deeds upon discharge of any liens-all by November 30, 2007. (See id. at 5-6.) In the event that O'Hara was unable to discharge the liens or pay $200,000 by November 30, 2007, he had the one-time option of extending his deadline for performance to February 28, 2008, in which case he would be obligated to pay interest at the prime rate on the money owing to the Bronfmans.*fn4
(See id. at 6.) This court thereafter entered judgment dismissing the entire action by reason of settlement on September 27, 2007. (See Dkt. No. 104.)
Two months after judgment was entered, plaintiffs' counsel requested a conference with Judge Treece to determine whether the settlement would be vacated in light of a "misrepresentation" by O'Hara that suggested his inability to timely comply with the terms of the settlement agreement. (Dkt. No. 105.) Although the parties appeared for that conference, apparently no action was taken by the court.*fn5 Despite any misrepresentation O'Hara may have made regarding the encumbrances on the properties, however, his time to perform under the settlement agreement had not yet come to pass.
On April 4, 2008, plaintiffs' counsel advised the court that O'Hara failed to perform as required by the settlement, and another telephone conference was held to discuss the matter. (See Dkt. No. 107.) By text only order dated April 29, 2008, Judge Treece permitted the Bronfmans to file a motion to set aside the judgment, which was premised upon the settlement agreement.*fn6 On June 29, 2008, the Bronfmans and plaintiffs Barbara Bouchey and NXIVM Corporation filed such a motion seeking, among other things, to vacate this court's September 27, 2007 judgment and restore the Bronfmans' claims. (See Dkt. No. 113.) Before resolution of the motion, O'Hara informed the court that he had filed for bankruptcy and, thus, the motion was subject to the automatic stay provision of 11 U.S.C. § 362. (See Dkt. No. 114.) By text only order dated July 28, 2008, this court acknowledged the bankruptcy stay and removed the motion from the docket with leave to renew if and when the stay was lifted and further proceedings were necessary or desirable. The instant motion was filed by the Bronfmans on January 30, 2012. (See Dkt. No. 118.) O'Hara subsequently commenced an action on February 9, 2012 that names, among others, the Bronfmans, and William Savino and Bernard Schenkler-their counsel-as party defendants; that action is pending in this court as well. (See Dkt. No. 1, 1:12-cv-252.)
III. Standards of Review
A. Rule 60(b)
Fed. R. Civ. P. 60(b) provides a mechanism by which a court may relieve a party from a final judgment or order. Among the grounds for relief from such a final judgment are: (1) fraud, misrepresentation, or misconduct of an opposing party; and (2) "any other reason that justifies relief." Fed. R. Civ. P. 60(b)(3), (6). A motion seeking relief from a final judgment must be made within a "reasonable time," and, in the case of fraud, no more than one year after entry of judgment. Fed. R. Civ. P. 60(c). A movant seeking relief from a judgment under Rule 60(b)(3) on the basis of fraud has the burden of establishing such fraud by clear and convincing evidence. See Green v. Phillips, 374 F. App'x 86, 88 (2d Cir. 2010). Rule 60(b)(6), on the other hand, "'is properly invoked where there are extraordinary circumstances, or where the judgment may work an extreme and undue hardship.'" Congregation Mischknois Lavier Yakov, Inc. v. Bd. of Trustees for Vill. of Airmont, 301 F. App'x 14, 16 (2d Cir. 2008) (quoting Marrero Pichardo v. Ashcroft, 374 F.3d 46, 56 (2d Cir. 2004)).
B. Summary Judgment
The standard of review pursuant to Fed. R. Civ. P. 56 is well established and will not be repeated here. For a full discussion of the standard, the court refers the parties to its decision in Wagner v. Swarts, No. 1:09--cv--652, 2011 WL 5599571, *4 (N.D.N.Y. Nov. 17, 2011).
Before reaching the merits of the Bronfmans' motion, the court is faced with an allegation by O'Hara that, because of his newly-filed action naming the Bronfmans' current counsel as defendants, counsel "should not be allowed to represent the Bronfman sisters in this matter." (Dkt. No. 122 at 3.) O'Hara further asserts that "inherent conflicts-of-interest . . . will invariably arise [and] mandate that the Bronfman sisters be represented by some other law firm or attorney." (Id.) The court finds no merit whatsoever in O'Hara's unsupported and unexplained contention.
Liberally construing his argument, O'Hara seeks to disqualify the Bronfmans' counsel, and the law firm with which they are affiliated, for what he claims is an unavoidable conflict of interest. (See id.) While disqualification of counsel is within the sound discretion of the court, see Cresswell v. Sullivan & Cromwell, 922 F.2d 60, 72 (2d Cir. 1990), it is disfavored within this Circuit and should only be ordered when necessary, usually: (1) to avoid a conflict that "undermines the court's confidence in the vigor of the attorney's representation of his client"; or (2) where the attorney may potentially use privileged information against a former client to the advantage of his current client.*fn7 Bd. of Educ. of N.Y. v. Nyquist, 590 F.2d 1241, 1246 (2d Cir. 1979).
In this case, there is no indication that the Bronfmans' counsel has a conflict of interest which requires disqualification. While counsel and the law firm with which they are affiliated were named by O'Hara as defendants in case No. 1:12-cv-252, there is no indication that the attorneys and firm would take a position in that litigation which is materially adverse to the Bronfmans.*fn8 (See Dkt. No. 1, 1:12-cv-252.) More importantly, O'Hara's application for disqualification must be denied because counsels' representation of the Bronfmans will not "taint the trial by affecting [counsels'] presentation of [the] case." Bottaro v. Hatton Assocs., 680 F.2d 895, 896 (2d Cir. 1982); see GSI Comm. Solutions, Inc. v. BabyCenter, L.L.C., 618 F. 3d 204, 209 (2d Cir. 2010) ("[D]isqualification is warranted only if 'an attorney's conduct tends to taint the underlying trial.'" (quoting Nyquist, 509 F.2d at 1246)).
The court now turns to the merits of the Bronfmans' motion seeking to vacate the judgment entered on September 27, 2007, (see Dkt. No. 104), and partial summary judgment on the unpaid promissory notes. (See Dkt. No. 118.)
A. Motion to Vacate
The Bronfmans contend that the September 27, 2007 judgment should be vacated "because the settlement upon which it was based could not be consummated." (Dkt. No. 118, Attach. 1 at 7-14.) Specifically, the Bronfmans contend that O'Hara committed fraud by failing to disclose the full extent of the encumbrances on the properties he was to later transfer to the Bronfmans as part of the settlement, (see id. at 8-10), and O'Hara's failure to perform as required by the settlement agreement constitutes an extraordinary circumstance which justifies vacating the judgment. (See id. at 10-14.)*fn9 O'Hara generally opposes the Bronfmans' motion or, alternatively, seeks consolidation of this action with case No. 1:12-cv-0252 under Fed. R. Civ. P. 42(a).*fn10 (See Dkt. No. 122 at 2-6.) Instead of directly responding to the Bronfmans' arguments, O'Hara avers that their motion should be denied because they have unclean hands, engaged in unfair legal tactics, and negotiated the settlement in bad faith. (See id. at 3-7.)
The court agrees with the Bronfmans.
Because the court finds that vacatur is justified in light of extraordinary circumstances, it need not reach the issue of whether fraud, misrepresentation, or misconduct on the part of O'Hara has been sufficiently demonstrated to warrant relief from judgment. As described above, the settlement of all claims in this action contemplated, among other things, that O'Hara would convey the New Baltimore and Saratoga properties unencumbered to the Bronfmans and pay an additional $200,000 to them. (See Dkt. No. 103 at 5-6.) It is undisputed that O'Hara did not fulfill his obligation under the settlement agreement. (See Dkt. No. 118, Attach. 3 ¶ 21; Dkt. No. 118, Attach. 4 ¶¶ 6-7.) Moreover, the Bankruptcy Court authorized a bankruptcy trustee to otherwise dispose of the properties O'Hara promised to convey to the Bronfmans. (See Dkt. No. 118, Attach. 12.) O'Hara's failure has left the Bronfmans with no meaningful way to enforce the judgment and, thus, relief from this court's judgment is appropriate and necessary under Fed. R. Civ. P. 60(b)(6). See Frutiger v. Hamilton Cent. Sch. Dist., No. 90-CV-303, 1993 WL 358480, at *4 (N.D.N.Y. Sept. 9, 1993) ("It is a well-established principle that Rule 60(b)(6) is a proper procedural mechanism to vacate a judgment when, as in this case, the settlement agreement underlying that judgment has been breached."). Accordingly, the Bronfmans' motion seeking relief from this court's judgment as to their promissory notes, which was made within a reasonable time,*fn11 is granted.*fn12
B. Partial Summary Judgment
The Bronfmans seek partial summary judgment on their claims that O'Hara failed to repay the promissory notes. (See Dkt. No. 118, Attach. 1 at 14-24.) In support of their application, the Bronfmans assert that O'Hara has admitted that he executed the notes, he received $1,000,000 from each of them, and did not repay the loans upon maturity-all of which, taken together, entitle them to summary judgment. (See id. at 15, 19-20.) O'Hara counters that summary judgment is inappropriate because the Bronfmans have unclean hands, used "unfair legal tactics," engaged in bad faith during settlement negotiations, and "unresolved questions of law and fact" exist.*fn13 (See Dkt. No. 122 at 3-6.) Specifically, on his last argument, O'Hara contends that summary judgment cannot be granted because the Bronfmans did not execute the promissory notes, the notes were "part of a multi-faceted business transaction rather than stand-alone agreements," the Bronfmans' claims regarding the notes are "intertwined with many of the other claims and counterclaims that are part of the original August 2005 lawsuit," the promissory notes "contained usurious interest provisions," and the notes were satisfied by the Bronfmans' exercise of their options. (Id. at 6; see Def.'s SMF ¶¶ 9-10, 14-17.) The court agrees with the Bronfmans.*fn14
"'To establish prima facie entitlement to judgment as a matter of law with respect to a promissory note, a plaintiff must show the existence of a promissory note executed by the defendant containing an unequivocal and unconditional obligation to repay and the failure by the defendant to pay in accordance with the note's terms.'" Frankini v. Landmark Constr. of Yonkers, Inc., 91 A.D.3d 593, 594 (2d Dep't 2012) (quoting Jin Sheng He v. Sing Huei Chang, 83 A.D.3d 788, 789 (2d Dep't 2011)).
Here, the Bronfmans have provided ample proof to demonstrate that they are entitled to summary judgment. The promissory notes, which bear O'Hara's signature, unconditionally required him to repay the loans by December 31, 2006. (See Dkt. No. 118, Attach. 3 at 9-11, 13-15.) O'Hara also admitted that he executed the notes and had not paid as of the end of 2007. (See Dkt. No. 81 ¶ 11; Dkt. No. 118, Attach. 18 at 9, 10.) Notably, O'Hara has not even attempted to refute the affidavits of the Bronfmans denying that he has-at any time-repaid the loans or permitted them to exercise their option agreements, which would have excused repayment of $1,000,000 to Clare Bronfman and $750,000 to Sara Bronfman. (See Dkt. No. 118, Attach. 3 ¶¶ 17, 28, 30; Dkt. No. 118, Attach. 3 at 17, 23; Dkt. No. 118, Attach. 4 ¶¶ 2, 6-7.) Thus, the Bronfmans have met their burden. See Wagner, 2011 WL 5599571, at *4.
Turning to O'Hara's specific arguments, the court deems them inapplicable or immaterial. First, the doctrine of unclean hands has no application where, as here, the relief sought is for money damages only. See Wells Fargo Bank v. Hodge, 92 A.D.3d 775, 776 (2d Dep't 2012) ("The doctrine of unclean hands is used only to bar the grant of equitable relief."). Second, whether or not the Bronfmans used unfair legal tactics or engaged in bad faith during settlement negotiations is really of no moment. The fact remains that O'Hara executed the notes and failed to fulfill his unconditional obligation to repay them or permit the Bronfmans to exercise their options. (See Dkt. No. 118, Attach. 3 ¶¶ 17, 28, 30; Dkt. No. 118, Attach. 4 ¶¶ 2, 6-7.)
O'Hara raises no issues of fact that preclude summary judgment. His conclusory assertions that adjudication of the promissory notes, which were not "stand-alone agreements," is tied up with "other claims and counterclaims" are unpersuasive. (Dkt. No. 122 at 6.) In the face of the promissory notes, which are, by their terms, unconditional, O'Hara has failed to point to how other claims or relief sought by the Bronfmans are dependent upon the resolution of their causes of action regarding the notes. If what O'Hara is really attempting to argue is that the option agreements altered the rights and obligations of the parties regarding his repayment of the notes-a stretch, but plausible interpretation of his opposition to summary judgment, (see, e.g., Def.'s SMF ¶ 5)-he has still failed to demonstrate a triable issue of genuine fact. This argument turns on interpretation of the promissory notes and option agreements.
Under New York law, "[i]nterpretation of an unambiguous contract provision is a function for the court, and matters extrinsic to the agreement may not be considered when the intent of the parties can be gleaned from the face of the instrument." Teitelbaum Holdings v. Gold, 48 N.Y.2d 51, 56 (1979); see W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157, 163-64 (1990). Here, the notes and options are unambiguous and it is clear that the options did not excuse or otherwise alter O'Hara's obligation to repay the loans plus interest. It is obvious, instead, that the notes merely acted as security for the Bronfmans' loans.
As relevant here, Clare Bronfman's note provided that:
O'Hara . . . hereby promises to pay to the order of Clare W. Bronfman . . . the sum of One Million Dollars ($1,000,000), along with the applicable amount of interest due with respect to each of the applicable "Transfer Amounts and Transfer Dates" that are set forth in Addendum A at the rate of five percent (5%) per annum. In this regard, the payment of the entire $1,000,000 - plus all of the applicable interest thereon - will be due and payable on December 31, 2006. (Dkt. No. 118, Attach. 3 at 9.) The addendum referenced in the note set forth that Clare Bronfman made two transfers of $500,000 each to O'Hara on or about July 15, 2004 and July 31, 2004, respectively. (See id. at 11.) In every relevant way, Sara Bronfman's note was identical to her sister's, but the addendum to her note specified that she made two transfers to O'Hara-the first, for $750,000 on or about October 1, 2004, and the second, for $250,000 on or about October 30, 2004. (See id. at 13-15.)
Clare Bronfman's option agreement provided, in pertinent part:
In conjunction with the . . . Loan [provided by Clare Bronfman to O'Hara], [O'Hara] hereby grants [Clare Bronfman] the right to purchase the [New Baltimore] Property for the sum of $1,000,000. In this regard, the other applicable terms and conditions with respect to that Option are as follows:
* [O'Hara] will have the right to continue marketing the [New Baltimore] Property - and, in the event that he receives a bona fide "Offer" concerning same, he will provide [Clare Bronfman] with a copy of that "Offer" . . . ;
* [Clare Bronfman] will have the right to "match" the above-referenced "Offer" within five (5) days of her receipt of same . . . ;
* If [O'Hara] accepts the above-referenced "Offer", he must utilize all of the funds that he receives from the sale of the [New Baltimore] Property to reduce the amount that he owes to [Clare Bronfman] with respect to the Loan . . . .
(Id. at 17-20.) The option also required O'Hara to provide "the same
type of consultative services that he ha[d] previously provided to NXIVM
Corporation d/b/a/ Executive Success Programs [free of charge] during
the period of July 1, 2004 through December 31, 2006."*fn15
(Id. at 18.) Sara
Bronfman's option varied from that of Clare Bronfman in only the
following ways: (1) she had the option to buy the Saratoga property;
and (2) O'Hara granted her the right to purchase the Saratoga property
for the sum of $750,000. (See id. at 22-25.)
The plain language of the option agreements clearly illuminates the parties' intent-the options were never meant to alter O'Hara's obligation to repay the loans as specified in the notes. They were instead given as further security for the considerable loans provided by the Bronfmans. Under the plain terms of the options, if O'Hara sold the subject properties to a third party, he was obligated to use whatever funds received "to reduce the amount that he owe[d] [the Bronfmans] with respect to the Loan[s]." (Id. at 18, 24 (emphasis added).) In the event that the Bronfmans exercised their options and purchased the New Baltimore and Saratoga properties for $1,000,000 and $750,000, respectively, O'Hara would still have owed them a certain sum of money pursuant to the notes. In the case of Clare Bronfman, that amount would equal only the interest due and owing because the option price of $1,000,000 equaled the principal loan amount; and, as to Sara Bronfman, the amount O'Hara would owe her would equal $250,000 (the principal loan amount of $1,000,000 minus the option price of $750,000) plus any interest due and owing. (See generally id. at 9-11, 13-15, 17-20, 22-25.) Thus, despite the fact that the notes were not stand-alone agreements, when read in conjunction with the options, O'Hara's obligation to repay the loans was unchanged, and any matters extrinsic to the agreements cannot be considered. See Teitelbaum Holdings, 48 N.Y.2d at 56.
Turning to O'Hara's other arguments, while he claims that the interest rate he was obligated to repay under the notes was usurious-an assertion that relies upon the five percent (5%) interest rate set forth in the promissory notes and his promise, pursuant to the option agreements, to provide free consultative services to plaintiffs NXIVM and Executive Success Programs, Inc. from July 1, 2004 to December 31, 2006, (see id. at 9, 13, 18, 24; Def.'s SMF ¶ 9)-N.Y. General Obligations Law § 5-501(6) specifically excepts the sixteen percent (16%) maximum allowable rate of interest on loans equaling or exceeding $250,000. See N.Y. Gen. Oblig. Law § 5-501(a) (McKinney 2011). Finally, O'Hara's disingenuous assertion that he was not obligated to repay the loans because the Bronfmans "exercised their options" does not provide a basis for denying summary judgment. (Def.'s SMF ¶ 10.) Despite the fact that the Bronfmans attempted to exercise their options in 2006, O'Hara ignored their demand, and the New Baltimore and Saratoga properties were never conveyed to them. (See Dkt. No. 118, Attach. 3 ¶¶ 27-28.) Thus, partial summary judgment is appropriate.
WHEREFORE, for the foregoing reasons, it is hereby ORDERED that the Bronfmans' motion (Dkt. No. 118) is GRANTED in its entirety; and it is further
ORDERED that the Clerk shall enter judgment in favor of Clare Bronfman and against O'Hara in the amount of $1,000,000-which represents the unpaid principal loan amount-plus five percent (5%) contractual interest per annum from the date that Clare Bronfman transferred the principal to O'Hara through maturity of her promissory note, and nine percent (9%) statutory interest per annum from the day following maturity through the date of judgment; and it is further
ORDERED that the Clerk shall enter judgment in favor of Sara Bronfman and against O'Hara in the amount of $1,000,000-which represents the unpaid principal loan amount-plus five percent (5%) contractual interest per annum from the date that Sara Bronfman transferred the principal to O'Hara through maturity of her promissory note, and nine percent (9%) statutory interest per annum from the day following maturity through the date of judgment; and it is further
ORDERED that the Clerk close this case; and it is further ORDERED that the Clerk provide a copy of this Memorandum-Decision and Order to the parties.
IT IS SO ORDERED.