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Bunton v. Houze

Supreme Court, New York County

July 3, 2013

GARY BUNTON, Plaintiff,

Unpublished Opinion

Subm.: 2/13/13.

For plaintiff: Samuel Fieldman, Esq. The Fieldman Firm, LLP.

For defendants: Matthew A. Kaplan, Esq. Cowan, Debaets et al.



By notice of motion dated July 10, 2012, plaintiff moves pursuant to CPLR 3211 for an order dismissing defendants' counterclaims and affirmative defenses. Defendants oppose and, by notice of cross motion dated August 31, 2012, move pursuant to CPLR 3211 for an order dismissing the complaint.

By notice of motion dated January 28, 2013, plaintiff moves pursuant to CPLR 3211 and/or 3212 for an order granting summary judgment against defendants. Defendants oppose.

The motions are consolidated for disposition, and, as no discovery has yet been taken, all motions are deemed motions to dismiss.


The following facts are undisputed:

In early 2008, plaintiff and defendant Philippe Houze discussed an agreement by which plaintiff would purchase a stake in L'Epicerie, a New York corporation (the corporation), and perform certain services for it in return for compensation. Three drafts were exchanged by the parties, including the last one dated May 12, 2008, which is entitled "Partnership Agreement, " and provides as follows, as pertinent here: (1) plaintiff would purchase 100 of the corporation's shares at $1, 000 each, a 10 percent stake; (2) plaintiff would receive a share in the corporation's earnings, defined as revenues after expenses, per his share in the corporation, which would be paid as stock for 2008 and 2009, and thereafter in stock or cash at plaintiffs election; (3) Philippe remained in charge of the corporation; (4) plaintiff would be responsible for national marketing and sales, establishing a publishing business, and managerial input; and (5) plaintiff would receive a commission on new accounts and additional orders and would be reimbursed for his expenses, and after January 1, 2010, would be entitled to a salary based on the corporation's performance. The May 2008 draft further provides that it "constitutes the [parties'] full understanding and consideration, " Like the other two drafts, was never signed. (Affirmation of Samuel L. Fieldman, Esq., dated July 10, 2012 [Fieldman Aff.]).

By equal checks dated May 16, 2008 and May 28, 2008, respectively, plaintiff paid Philippe $100, 000. The memo of each check reflects that it constitutes a "stock purchase" in the corporation, Plaintiff then began working for the corporation.

After disputes arose between the parties, on or about July 27, 2008, Philippe and his wife, defendant Marie Houze, drafted a "L'Epiceriedotcom Loan Agreement, " and signed it in their personal capacities. Philippe also signed it as the corporation's CEO. The agreement "sets forth the complete Terms ... between L'Epiceriedotcom, Philippe Houze, Marie Houze (Obligors) and Gary Bunton (Lender), " and provides for: (1) $50, 000 plus interest at seven percent from June 1, 2008 to be repaid on June 1, 2009, and (2) $50, 000 plus seven percent interest from June 1, 2009 to be repaid on June 1, 2010. Security for the loan is set forth as "an unconditional promise and guarantee by the Obligor to the Lender to pay the principal and interest when due under the terms of this Loan Agreement." (Id.).

On or about March 11, 2009, Philippe advised plaintiff that he would be unable to pay the loan when due. On or about February 4, 2010, plaintiff asked Philippe to confirm that he would repay the full balance by the second due date of June 1, 2010. By letter dated February 24, 2010, Philippe replied that he would repay the loan in full but beyond the deadline, and wrote, as pertinent here, that:

Since my decision, from day one, was to share partnership only with an active working partner I then proposed to call off the partnership and transformed the $100, 000 you had deposited in L'Epicerie accounts into a loan. You agreed and when I asked you for the interest rate you would like you proposed a 7% annual interest rate. We shook hand on it and were happy to split still friends, if no longer partners . . .
Rest assured though that we never have, and never will, default on any loan. And yours is no exception even though, due to past circumstances well beyond our ability to predict future, it may as I mentioned earlier going take a bit longer to repay it. . .

To date, defendants have not repaid any of the loan. (Id.).

On or about August 18, 2010, plaintiff commenced the instant action, seeking $116, 618 as damages for defendants' failure to repay the loan.

On or about July 23, 2012, defendants served their amended verified answer, including as affirmative defenses: (1) a failure to state a claim; (2) claims barred by plaintiffs unclean hands; (3) claims barred by waiver, estoppel, acquiescence and/or assumption of risk; (4) claims barred by failure to mitigate; (5) plaintiffs damages were not caused by defendants' acts or omissions but by plaintiffs conduct; (6) claims barred by laches and/or statute of limitations; (7) claims against the individual defendants fail for lack of consideration; and (8) claims barred as plaintiff breached his implied covenant of good faith and fair dealing.

Defendants also assert that plaintiff failed to act on his responsibilities to the corporation, that he demanded that his investment be turned into a loan, that defendants signed the loan agreement in order that they not exacerbate the damage already done to their 20-year relationship, and that due to the recession and plaintiffs bad business decisions, defendants were unable to repay the loan timely. They thus allege as a first counterclaim that the parties entered into an implied partnership agreement, that plaintiff owed a fiduciary duty to the corporation, and that plaintiff breached his duty by failing to perform his duties and responsibilities under the partnership agreement, abandoning his position at the corporation, and refusing to take responsibility for any losses incurred by the corporation.

As a second counterclaim, defendants assert that as an employee of the corporation, plaintiff owed it a duty of good faith and loyalty in the performance of his duties and an affirmative duty to act in the corporation's best interests, and that he breached those duties in various ways, including working on a different business venture while employed by the corporation. Defendants claim that plaintiffs breaches caused them to sustain damages in an amount to be determined at trial.


A. Plaintiffs claim for breach of contract

Plaintiff contends that he is entitled to judgment on his complaint as the parties' loan agreement is a non-negotiable instrument enforceable under Article III of the Uniform Commercial Code (UCC), that it is also a contract that meets the requirements of General Obligations Law (GOL) 5-1105 as it states past consideration in the title or provides for contemporary consideration and as defendants received the proceeds for the loan as consideration, and that the loan agreement is enforceable as a later promise to pay an existing moral obligation. (Mem. of Law, dated Jan. 28, 2013).

Defendants argue that summary judgment is inappropriate as plaintiff submits no admissible evidence and as no discovery has yet been exchanged. To the extent that the loan agreement is a non-negotiable instrument, defendants argue that they have raised valid defenses to its enforcement, including that there was no consideration for it absent any prior obligation or debt or any contemporary consideration, and that there was no consideration given for or by Philippe and Marie personally. They also deny that a moral obligation may constitute valid consideration. (Mem. of Law, dated Feb. 6, 2013).

By submitting proof of the loan agreement and defendants' default thereon, plaintiff met his burden of establishing entitlement to recovery on the agreement. (Carlin v Jemal, 68 A.D.3d 655 [1st Dept 2009]). It was not plaintiffs burden to establish that the existence of adequate consideration for the loan; rather, the burden shifted to defendants to establish their defense of lack of consideration. (Id.).

Here, plaintiff originally paid defendants $100, 000 in a contemplated exchange for stock in the corporation. After the parties' relationship deteriorated, the $100, 000 was converted into a loan, which amount was reflected in the agreement. Both parties received a benefit from this arrangement in that defendants retained the $100, 000 for a certain time period until they could repay it, and plaintiff agreed to hold off on recouping his money in exchange for receiving interest thereon. Defendants have thus failed to establish that their defense of lack of consideration has merit. (See eg Holt v Feigenbaum, 52 N.Y.2d 291 [1981] [consideration may consist of either benefit to promisor or detriment to promisee, or some right, interest, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given or suffered by other party]; Korea First Bank of N.Y.v Noah Enter., Ltd., 12 A.D.3d 321 [1st Dept 2004], Iv denied 4 N.Y.3d 710 [2005] [consideration for loan found adequate where in form of bank's agreement to forgo its rights to immediate payment of outstanding debt and giving borrower extension of payout period]; see also In re Thomson McKinnon Securities Inc., 139 BR 267 [SD NY 1992] [finding note did not fail for lack of consideration as prior payment made by one party, which other party admitted receiving, was expressed in note which recited that it was consideration for loan made]; Mast Prop. Investors, Inc. v Gaines Svce. Leasing Corp., 194 A.D.2d 412 [1st Dept 1993] [letter of indemnity executed after disbursement of loan proceeds not denied effect as supported only by past consideration where letter expressed the past consideration that had been given]).

Moreover, whether or not defendants Houze received any personal benefit from the loan is irrelevant to whether the loan is enforceable against them. (See eg Sandu v Sandu, 94 A.D.3d 1545 [4th Dept 2012] [rejecting defendant's contention that personal guarantee not supported by consideration as it was conceded that note was executed in exchange for plaintiffs release of interest in company and defendant benefitted from release as remaining partner of company]; Ehrlich v Am. Moninger Greenhouse Mfg. Corp., 31 A.D.2d 922 [1st Dept 1969], affd on other grounds 26 N.Y.2d 255 [1970] [where corporate defendant executed note, corporation's secretary personally guaranteed payment of note, and money was given to corporate defendant, secretary could not avoid payment of note on ground of lack of consideration]).

In light of this result, there is no need to consider plaintiffs alternative argument that the loan is enforceable as a later promise to pay an existing moral obligation.

B. Defendants' affirmative defenses and counterclaims

1. Counterclaims

The parties dispute whether defendants' counterclaims for breach of fiduciary duty and breach of the duty of good faith and loyalty are sufficiently pleaded and/or are cognizable here.

The two breach claims are neither identical nor duplicative, as only certain parties owe each other a fiduciary duty while all employees owe their employers a duty of good faith and loyalty. (Le Bel v Donovan, 96 A.D.3d 415 [1st Dept 2012] [partners owe each other fiduciary duty]; Qosina Corp. v C & N Packaging, Inc., 96 A.D.3d 1032 [2d Dept 2012] [employee owes his or her employer duty of good faith and loyalty in performance of employee's duties]).

A partner owes its partners a duty of loyalty and good faith and must consider the partners' welfare and refrain from acting for purely private gain. (15A NY Jur 2d, Business Relationships § 1605 [2013]). Thus, absent plaintiffs denial that he was defendants' partner, defendants' claim that he acted on other business ventures while acting as a partner in the corporation and abandoned his position and responsibilities sufficiently pleads a cause of action for breach of fiduciary duty. (Id; Birnbaum v Birnbaum, 73 N.Y.2d 461 [1989] [fiduciary must avoid situations in which its personal interest possibly conflicts with interests of those owed fiduciary duty]).

Even if plaintiff was only an employee of the corporation, rather than a partner, and while employees owe a duty of loyalty and good faith to their employers in the performance of their duties, an employee's mere failure to perform assigned tasks does not give rise to a claim for breach of the duty of loyalty and good faith. Rather, it must be alleged that the employee misused the employer's resources to compete with the employer. (Cerciello v Admiral Ins. Brokerage Corp., 90 A.D.3d 967 [2d Dept 2011]). Thus, an employee does not breach a duty of good faith and loyalty by creating a competing business before leaving the employer's employ unless the employee improperly uses the employer's time, facilities or proprietary secrets in doing so. (Is. Sports Physical Therapy v Burns, 84 A.D.3d 878 [2d Dept 2011]).

Here, defendants' allegation that plaintiff worked on business ventures unrelated to the corporation during the time that he was supposed to be performing work for the corporation sufficiently states a claim for breach of the duty of good faith and loyalty. (See Wallack Freight Lines, Inc. v Next Day Express, Inc., 273 A.D.2d 462 [2d Dept 2000] [triable issue raised as to whether employees were promoting own business while still in plaintiffs employ and in doing so, whether they used plaintiffs time or resources]).

Accordingly, defendants have sufficiently pleaded their two breach counterclaims against plaintiff.

2. Affirmative defenses

Plaintiff has failed to state any grounds upon which to find that defendants' affirmative defenses are legally insufficient.


Accordingly, it is hereby

ORDERED, that plaintiffs motion for an order dismissing defendants' counterclaims and affirmative defenses is denied; it is further

ORDERED, that defendants cross motion for an order dismissing the complaint is denied; it is further

ORDERED, that plaintiffs motion for an order granting summary judgment against defendants is denied; and it is further

ORDERED, that the parties appear for a compliance conference on August 14, 2013 at 2:15 pm at 80 Centre Street, Room 279, New York, New York.

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