M-GBC, LLC v Milvila Foods, Inc.

[*1] M-GBC, LLC v Milvila Foods, Inc. 2005 NY Slip Op 50923(U) Decided on March 31, 2005 Supreme Court, Suffolk County Sgroi, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on March 31, 2005
Supreme Court, Suffolk County

M-GBC, LLC, Plaintiff,

against

Milvila Foods, Inc. and LAOUDIS OF CALVERTON, LLC, Defendants.



04-09349



Attorney for Plaintiff:

Berkman, Henoch, Peterson & Peddy, Esqs.

100 Garden City Plaza, Garden City, New York 11530

Attorney for Defendants:

Perry & Campenelli, Esqs.

320 Old Country Road, Suite 207, Garden City, New York 11530

Sandra L. Sgroi, J.

This is a motion by the defendants for an order granting the following relief:

1. Pursuant to CPLR §6301, granting a temporary restraining order and preliminary [*2]injunction enjoining the plaintiff, M-GBC, LLC, as well as Calverton Camelot, LLC and Jan Burman from causing the cessation of steam for heat to the defendants, at the location which is the subject of the plaintiff's complaint.

2. For such other and further relief as this Court deems just, proper and equitable.

Plaintiff opposes the motion.

Upon consideration of the papers submitted in support of and in opposition to the requested relief, it is

ORDERED that for the reasons set forth herein, the defendants' motion for a preliminary injunction is granted to the extent set forth below.

Pursuant to a contract of sale dated October 8, 2001, between Calverton/Camelot, LLC ("Calverton") as seller and the defendant Laoudis of Calverton, LLC ("Laoudis") as purchaser, the defendant Laoudis acquired a parcel of property of approximately thirty-two (32) acres

within what is generally referred to as the Calverton Industrial Park. The purchase price was four million nine hundred thousand ($4,900,000.00) dollars. The parcel, located in the County of Suffolk, was purchased by Calverton from the Town of Riverhead. The industrial park, a former aircraft manufacturing facility, contains ten (10) individual buildings and a self-standing power plant which produces electricity as well as providing steam for heat to the ten buildings. Since acquiring the property, Calverton has sold a number of the buildings to third parties including the defendant Laoudis while retaining ownership of the self-standing power plant which continues to supply steam heat to those buildings.

The contract of sale contains the following provisions that are directly relevant to the matter before the Court:

SECTION 14 Seller's Representations and Warranties. ... B. In addition to any other covenants and agreements made by Seller elsewhere in this Agreement, Seller covenants and agrees with Purchaser as follows:

(1) From and after the Closing Date and until the earlier of the tenth anniversary of the Closing Date or such time as steam heat shall be made available to the Premises at market rates by a public utility or other person or entity, Seller shall cause the steam plant servicing the Premises to be operated and maintained at Seller's expense and shall cause steam heat to be provided to the Premises at rates comparable to those imposed in the surrounding area generally. Seller shall also cause Seller's other purchasers of parcels in the Planned Industrial Park at Calverton to use such steam plant. Notwithstanding the foregoing, Purchaser shall not be required to utilize steam heat in the property. .... [*3]

The above covenants and agreements shall survive the Closing. Seller agrees to indemnify Purchaser and to hold Purchaser harmless from and against, and to pay to Purchaser the full amount of, any and all costs, expenses, liabilities, losses or damages (including, without limitation, court costs, out-of-pocket expenses and reasonable attorneys fees) resulting to Purchaser, directly or indirectly, by reason of Seller's failure to perform and observe the covenants and agreements set forth in this Section 14.B, which indemnity shall include, in the case of Seller's breach of Paragraph B (1)hereof, the cost of installation a heating system at the Premises. ...

SECTION 25. Modification, Binding Effect. ...

B. This Agreement may not be changed or terminated orally. The provisions hereof will apply to and bind the heirs, executors, administrators, successors and permitted assigns of the respective parties. ...

SECTION 27. Waiver. Any failure by a party to insist upon strict performance by the other of any of the provisions of this Agreement will not be deemed a waiver of any of the provisions hereof, irrespective of any number of violations or breaches which may occur, and notwithstanding any such failure, such party will have the right thereafter to insist upon strict performance by the other of any and all provisions of this Agreement to be performed by such other party. ...

SECTION 30. Governing Law: Enforceability. This Agreement is to be construed and governed in all respects by the laws of the State of New York applicable to agreements made and to be performed wholly therein. If any provision of this Agreement is determined to be unenforceable or invalid, such invalidity or unenforceability will not effect the remaining provisions of this Agreement, as the provisions of this Agreement are intended to be and will be severable. It is the intention of the parties that if any provision of this Agreement is capable of two constructions, one of which would render the provision void and the other which would render the provision valid, then the provision will have the meaning that renders it valid." (See Exhibit "B" annexed to defendants' motion papers). (Emphasis added).

The building purchased by Laoudis is occupied by Milvila Foods, Inc. ("Mivila"), a sister company of Laoudis, which is engaged in business as a food distributor. Milvila is a full line food service distributor which supplies food to approximately one (100) hundred public schools on Long Island, the Suffolk County Sheriff's Department, the County of Nassau's Correctional Facility, the County of Suffolk's Correctional Facility and nursing homes throughout Long Island.

The plaintiff, M-GBC, LLC is the successor in interest to Calverton/Camelot, LLC.

The buildings in the industrial park, including the defendants', have no independent heating systems and must rely on steam from the plaintiff's plant as the sole means of heating their buildings. [*4]

During the next two years the parties continually disputed as to what was the appropriate rate to be charged for the provision of steam by the plaintiff to the defendants. Defendants claimed that the rate charged for steam should be comparable to that charged by Con Edison, which they alleged was the nearest comparable rate in the vicinity pursuant to the terms of the contract. Plaintiff alleges that the amount they charged for steam was based on the actual cost or a portion of the cost associated with that usage. (See par. 3 of the affidavit of Jan Burman, sworn to January 24, 2005 and par. 2 of the affidavit of Frank Palmieri, sworn to January 22, 2005, both annexed to the plaintiff's answering papers).

This disagreement led to defendants paying less than the amounts billed by plaintiff for steam, but at least as much or more than defendants believed was due and owing under the contract of sale. (See Exhibits "E", "F" and "G" annexed to defendants' motion papers). This ongoing dispute culminated in plaintiff, by letter dated 11/24/03, forwarding to the defendants a contract designated as a "Steam Service Agreement". The letter stated, in relevant part: "Please sign and return one copy as soon as possible to insure continuous steam service to your building as is stipulated in our purchase agreement." (See Exhibit "H" to defendants' motion papers, as well as the proposed agreement annexed as Exhibit "I" thereto). After the defendants failed to sign and return the proposed "Steam Service Agreement" and after one prior threat by plaintiff to discontinue steam service (See Exhibit "J" to the defendants' motion papers), the plaintiff sent a letter dated March 17, 2004, to defendants, stating in relevant part: "In the event that the outstanding balance is not paid by March 29, 2004, then and in that event M-GBC, LLC will no longer provide steam heat or electrical services to your premises. Please be guided accordingly." (See Exhibit "K" to the defendants' motion papers).

This action was then brought by the plaintiff on or about April 21, 2004. (See Exhibit "L" to the defendants' motion papers). The defendants answered the complaint by a Verified Answer With Counterclaims dated May 20, 2004. (See Exhibit "N" to the defendants' motion papers). Plaintiff seeks monetary damages, costs and attorneys' fees for the defendants' alleged breach of contract. By way of their counterclaims the defendants seek monetary damages, costs and attorneys' fees as well as an order directing the Plaintiff to install electric and steam meters and a permanent injunction enjoining the plaintiff from intentionally cutting steam service to the subject premises.

The inherent problem with the parties contractual agreement with regard to the provision of steam service and the rate that should be charged for such service was, and is, that it failed to take into account the Public Service Law. Public Service Law §5 (1)(b) extends the jurisdiction of the Public Service Commission to "the manufacture, holding, distribution, transmission, sale, or furnishing of steam for heat or power, to steam plants and to the persons or corporations owning, leasing or operating the same."(Emphasis added). Public Service Law §81 requires the certification of steam plants by the Public Service Commission. Public Service Law §79 (1) states:

"Every steam corporation shall furnish and provide such service, instrumentalities and facilities as shall be safe and adequate and in all respects just and reasonable. All charges [*5]made or demanded by any such corporation for such service rendered or to be rendered shall be just and reasonable and not more than allowed by order of the commission. Every unjust or unreasonable charge made or demanded for such service, or in connection therewith or in excess of that allowed by law or by the commission is prohibited." (Emphasis added).

It is now undisputed by the parties that the steam plant is subject to these provisions of the Public Service Law and that an application for certification and rate approval should have been filed at the time of the sale of the property. However they do dispute the effect of the relevant law on the provisions of the contract of sale.

Plaintiff finally made application to the Public Service Commission for the required certification and rate approval for its steam plant in January of 2005, but has not yet received approval thereof. (See Exhibits "1" and "2" annexed to the plaintiff's response papers).

Plaintiff, in its memorandum of law, argues that the Public Service Commission has exclusive jurisdiction over the provision of steam from its plant and over the terms of the contract relating to the charges imposed for supplying steam to the defendants. Because of this it is argued that the contract is unenforceable and that the Court may not require specific performance of the contract because to do so would result in a violation of the Public Service Law. It is further argued by plaintiff that the contract actually contemplates Public Service Commission approval. Plaintiff does not, however, explain why more than three (3) years passed after the signing of the contract of sale before application was actually made for rate approval. Defendants, in their reply affirmation dated February 14, 2005 argue that the contract provides that its terms are to be "construed and governed in all respects by the laws of the State of New York." (See Exhibit "B" annexed to defendants' motion papers, p. 18, Section 30). (Emphasis added).

The objectionable portion of the contract is contained in Section 14.B (1) which states in relevant part: "Seller shall cause the steam plant servicing the Premises to be operated and maintained at Seller's expense and shall cause steam heat to be provided to the premises at rates comparable to those imposed in the surrounding area generally." (See Exhibit "B" annexed to defendants' motion papers, p. 13). (Emphasis added). However, the contract also provides in Section 30 of the contract that: "If any provision of this Agreement is determined to be unenforceable or invalid, such invalidity or unenforceability will not effect the remaining provisions of this Agreement, as the provisions of this Agreement are intended to be and will be severable." (See Exhibit "B" annexed to defendants' motion papers, p. 18, Section 30). Thus, only that part of the contract which attempted to set a price for the steam to be delivered must be voided. What remains is the plaintiff's obligation to provide steam service to the defendants and plaintiff's obligation pursuant to the Public Service Law to obtain rate approval from the Public Service Commission. This plaintiff failed to do so until after this proceeding was commenced. Plaintiff's apparent claim (contained only in pp. 9-10 of its memorandum of law) that the contract for steam service that it attempted to impose upon the defendants (See Exhibit "I" annexed to defendants' motion papers) was actually an attempt to comply with the Public Service Law is unsupported by any documents or allegations based upon personal knowledge. [*6]

Illegal contracts are generally unenforceable. However, where contracts which violate statutory provisions are merely malum prohibitum, the general rule that illegal contracts are unenforceable does not always apply; rather, violation of statutory provision will only render a contract unenforceable when the statute so provides, and the loss of judicial recourse would not be out of proportion to requirements of public policy or appropriate individual punishment. (Wowaka & Sons, Inc. v. Pardell, 242 AD2d 1, 672 N.Y.S.2d 358 [2nd Dept. 1998]; Benjamin v. Koeppel, 85 NY2d 549, 626 N.Y.S.2d 982 [1995]; Rosasco Creameries v. Cohen, 276 NY 274 [1937]). "As a general rule also, forfeitures by operation of law are disfavored, particularly where a defaulting party seeks to raise illegality as 'a sword for personal gain rather than a shield for the public good'. " (Citation omitted). Allowing parties to avoid their contractual obligation is especially inappropriate where there are regulatory sanctions in place to redress violations of the law." (Lloyd Capital Corporation v. Pat Henchar, Inc., 80 NY2d 124, 128, 589 N.Y.S.2d 396, 398 [1992]).

Here only a small part of the agreement violates the Public Service Law and its vacatur and the substitution with the requirement that the plaintiff comply with the requisite state law is all that is necessary to remedy the legal flaws therein. To vacate any larger portion of the agreement would only serve to reward the plaintiff for its violations of said agreement.

In this regard, plaintiff further ignores the last paragraph of Section 14.B of the contract. After agreeing to indemnify and hold defendants harmless for any damages etc., arising from the plaintiff's failure to perform its obligations under Section 14.B., it states: "which indemnity shall include, in the case of Seller's breach of Paragraph B (1)hereof, the cost of installation a heating system at the Premises." (See Exhibit "B" annexed to defendants' motion papers, p. 13, Section 14.B) (Emphasis added). Thus, under the terms of the contract and the requirements of the Public Service Law, the plaintiff had two options. The first was to provide steam service to the defendant pursuant to the terms and rates to be set under the Public Service Law or, failing that, the second option was to bear the cost of the installation of heat at the defendants' premises. Plaintiff failed to choose either option but chose instead to determine the rate charged for steam service pursuant to its own formulation, in violation of its obligations under the contract between the parties and under the law.

To obtain a preliminary injunction, the movant must establish: (1) the likelihood of success on the merits; (2) irreparable injury absent the granting of the preliminary injunction; and (3) a balancing of the equities in the movant's favor. (Ying Fung Moy v. Hohi Umeki, 10 AD3d 604, 781 N.Y.S.2d 684 [2nd Dept. 2004]; See, also Peterson v. Corbin, 275 AD2d 35, 713 N.Y.S.2d 361 [2nd Dept. 2000]; Aetna Insurance Company v. Capasso, 75 NY2d 860, 552 N.Y.S.2d 918 [1990]). The party seeking the drastic remedy of a preliminary injunction must establish a clear right to that relief under the law and the undisputed facts upon the moving papers. (Gagnon Bus Company, Inc. v. Vallo Transportation, LTD., 13 AD3d 334, 786 N.Y.S.2d 107 [2nd Dept. 2004]; William M. Blake Agency, Inc. v. Leon, 283 AD2d 423, 723 N.Y.S.2d 871 [2nd Dept. 2001]).

Based upon the foregoing facts and law the Court finds that the defendants have a high [*7]likelihood of success on the merits. The plaintiff is in violation of the parties agreement. Plaintiff's first three causes of action under the complaint (See Exhibit "L" to annexed to defendants' motion papers) are based upon the defendants' alleged failure to pay charges for steam service according to rates set by the plaintiff itself in violation of law rather than at a rate set pursuant to the requirements of the Public Service Law. Its fourth cause of action seeks to collect costs and attorneys' fees in its attempt to recoup these illegal charges. Under these circumstances, the defendants are more than likely going to succeed on the merits.

Defendants are totally reliant upon the plaintiff for steam for the operation of their business. Plaintiff has threatened to cut off such service unless the defendants pay for such service at rates set by the plaintiff in violation of law. Such a cutoff would prevent the defendants from honoring their food service contracts with literally hundreds of clients, including schools, potentially destroying the defendants' entire business as well as placing them in breach of their obligations pursuant to their contracts with their customers. While their steam demands are shown by the record to be seasonal to a degree, they are subject to the whims of the weather even in non-winter months and the defendants may require steam service at times other than those alleged by the plaintiff. (See Exhibits "E", "F", and "G" annexed to defendants' motion papers). Therefore, the cutoff of steam service could result in irreparable harm to the defendants.

Finally, in light of the failure of the plaintiff to meet its contractual obligations to the defendants, the importance shown under the terms of the contract for the defendants to have continuing, long term access to the steam service, which can only be provided by the plaintiff and the potential devastating effect that the plaintiff's actions may have on the defendants' business, the balancing of the equities favors the defendants.

Based upon the foregoing facts and law, the defendants' motion for a preliminary injunction is granted to the following extent: The plaintiff, its agents, servants, assigns or any other person or persons acting on its behalf shall cause the steam plant which is the subject of this action to provide, on demand, all steam for heat which is requested by the defendants on a continuing basis for defendant's building, pending the trial of this action or the further order of this Court. Defendants shall pay for such steam service at the rate at which they previously paid until such time as such rate may be set by the Public Service Commission and thereafter shall pay at such rate as has been set by said Commission. All legal issues regarding the propriety of charges demanded by plaintiff for prior steam service and payments made by the defendants therefore are referred to the trial or other disposition of this action.

Counsel for the defendants in this matter is directed to serve a copy of this order, within ten (10) days of the date hereof, by personal delivery upon the plaintiff and by overnight mail, upon counsel for the plaintiff herein.

The foregoing shall constitute the Order of the Court.

Dated: March 31, 2005 ________________________

Central Islip, New York SANDRA L. SGROI,

J.S.C.