Hunts Point Realty Corp. v Pacifico

[*1] Hunts Point Realty Corp. v Pacifico 2007 NY Slip Op 51543(U) [16 Misc 3d 1122(A)] Decided on July 24, 2007 Supreme Court, Nassau County Warshawsky, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 July 24, 2007
Supreme Court, Nassau County

Hunts Point Realty Corp. and RUSSELL SCHWARTZREICH TRUST, Plaintiffs,

against

Vincent Pacifico and HUNTS POINT COOPERATIVE MARKET, INC., Defendants.



009585/2005



PLAINTIFF:MILLER & WRUBEL, P.C.

ATTENTION: MARTIN D. EDEL & CLAIRE L. HUENE, ESQ.

250 PARK AVENUE

NEW YORK, NY 10177

212-336-3500

DEFENDANT:FRANK M. GRAZIADEI, P.C.

ATTENTION: FRANK M. GRAZIADEI, ESQ.

130 WATER STREET

NEW YORK, NY 10005

212-785-0885

Ira B. Warshawsky, J.

Plaintiffs, Russell Schwartzreich Trust and Hunts Point Realty Corp. ("HPRC") brought this action to recover damages from Defendant, Vincent Pacifico, for breach of a Covenant Not to Compete ("Covenant") contained in a Sale of Stock Agreement. This decision is limited to causation and damages.

Russell Schwartzreich ("Schwartzreich") and Vincent Pacifico ("Pacifico") were formerly equal shareholders of HPRC. HPRC was formed in 1997 for the purpose of developing real estate for future sales or leases. HPRC held a five year and two month leasehold interest in storage space in building D of the Hunts Point Cooperative Market, Inc. The lease was for a 9935 sq. ft. of space (4983 sq. ft. of refrigerated space and 4935 sq. ft. of non-refrigerated space). HPRC rented the leased space to other tenants. At expiration, HPRC exercised an option to extend the lease for five more years to terminate on April 30, 2007. HPRC constructed an additional 3000 sq. ft. of refrigeration in building D pursuant to a lease option requirement.

Hunts Point Cooperative Market, Inc. ("Cooperative") is a New York not-for-profit cooperative corporation that operates a wholesale meat market. Bruce Reingold is the General Manager of the Cooperative and oversees the Cooperative's daily operations. The Cooperative holds the property on a long-term lease from the City of New York. Cooperators own shares in the Cooperative and hold propriety leases for space in the facility. The Cooperative consists of [*2]seven buildings, A through G. Buildings A, B, C, E, and F were built in the 1970s. Building G was built in 2001. Building D was renovated in 1997 and 2001. Prior to that time building D was simply a gutted shell of a building.

Both Schwartzreich and Pacifico were board members of the Cooperative during all times relevant to this action. Through his business entities, Pacifico is one of the largest shareholders in the Cooperative. On January 17, 2001, Latin American Distributors offered $99,350 for the space in building D. The offer was rejected by the Cooperative.

On June 11, 2001, Pacifico sold his fifty percent ownership interest in HPRC to Schwartzreich for $50,000 pursuant to a Sale of Stock Agreement. Simultaneously Schwartzreich sold his stock to the Russell Schwartzreich Trust. The Sale of Stock Agreement includes a Covenant Not to Compete providing, that "seller agrees that he will not compete, either directly or indirectly, with HPRC in the future renting or cooperative ownership of the property currently rented by HPRC at the Hunts Point Cooperative Market, Inc."

Despite executing the Covenant Not to Compete, Pacifico subsequently made two separate offers for the HPRC space in the Cooperative. First, at the Coop's board meeting on November 9, 2004 Pacifico offered up to $1 million for the space; second, at the December 7, 2004 Board meeting Pacifico offered up to $2 million for the space. Neither of Pacifico's offers were rejected or accepted by the Cooperative.

After the aforesaid November Board meeting but before the December Board meeting, on December 6, 2004, HPRC tendered a written offer to the Board to purchase the space in building D for $99,350 or $10/sq.ft. The Cooperative rejected HPRC's offer in a letter written by the Cooperative's President, Richard Greenfield, dated December 8, 2005. The letter further stated that the Cooperative has no binding sales price or policy.

Plaintiff subsequently commenced this breach of contract action in June of 2005 against both defendants. Prior to trial Plaintiffs' claim for tortious interference against Hunts Point Cooperative was dismissed. It is also noted that during discovery Pacifico willfully and intentionally disobeyed an order of this Court directing him to preserve communications between himself and the Cooperative from January 2006. See Order dated January 10, 2006. After four days of trial, the proof adduced at trial established that Defendant's offer was a substantial factor in the Cooperative's decision to reject HPRC's offer to buy space in building D, and the Court so ruled. See Order dated December 7, 2006, (December 7, 2006 Trial Record. at 780).

II

Remaining for determination is the amount of damages, if any, to be awarded to Plaintiffs. In awarding damages the primary consideration is whether Pacifico's failure to comply with the Covenant not to compete in the Sale of Stock Agreement resulted in Plaintiffs' alleged lost profits, Jorgenson v Century 21 Real Estate Corp, 217 AD2d 533 (2d Dept 1995), which must be shown by a preponderance of the evidence. Whether cast as a question of causation, Id., or a "clear demonstration of damages" as a requisite element of a claim for breach of contract, Milan Music v Emmel Communications Booking , 37 AD3d 206 (1st Dept 2007), if damage results from the failure to perform a contractual duty, an amount which will compensate plaintiff must be awarded. See Brushton-Moira Cent v Thomas, 91 NY2d 256, 261 (1998)( "It has long been recognized that the theory underlying damages is to make good or replace the loss causedby the breach of contract.") [*3]

The appropriate measure of damages for breach of a restrictive covenant not to compete is the net profit of which a plaintiff is deprived by reason of the defendant's violation of the covenant. Earth Alterations, LLC v. Farrell, 21 AD3d 873, 874 (2d Dep't 2005). The loss of net profit must occur because of the defendant's improper competition. Pencom Systems, Inc. v. Shapiro, 193 AD2d 561 (1st Dep't 1993).

Plaintiff has the burden of proving net lost profit due to the defendant's competition. Borne Chemical Co. v. Dictrow, 85 AD2d 646, 651 (2d Dep't 1981). "In the event that wrongful competition is proven but the proportion of lost profits due to that competition cannot be established, then plaintiff will be entitled to an award of nominal damages only." Id.

To recover lost profits for breach of a restrictive covenant the law requires evidence that the party in breach has caused the plaintiff to lose profits. The Court in Earth Alterations, awarded lost profits where the defendant affirmatively engaged in business with the plaintiff's clients in breach of a covenant restricting the solicitation of such clients. 21 AD3d at 874; see also Weinrauch v. Kashkin, 64 AD2d 897, 898 (2d Dep't 1978) (awarding lost profits when the defendant affirmatively serviced plaintiff's former clients, in breach of a restrictive covenant in an employment contract).

By contrast, the Court in Michel Cosmetics v. Tsikas, 282 NY 195 (1940) held that the defendant's sales of imitation products was by itself insufficient evidence to infer that the plaintiff would have realized profits but-for the defendant's wrong. The Court reasoned that it was not clear whether the plaintiff would have sold its own goods to the customers to whom the defendant sold goods but-for the defendant's sales. "There is no presumption of law or of fact that a plaintiff would have made the sales that the defendant made." Id. at 201.

The facts of this case are categorically different from those cases where damages and lost profits are caused by breaches of restrictive covenants. The evidence at trial does not prove that HPRC would have realized a profit from its putative transaction but-for Pacifico's offers. Pacifico did not displace any business that would have otherwise been conducted by HPRC. The Cooperative did not sell the space to Defendant or to anyone else. The Cooperative neither accepted nor rejected Defendant's offer. In contrast to the defendant in Earth Alterations who objectively benefitted from engaging in business in breach of a restrictive covenant by drawing business away from the plaintiff, see 21 AD3d at 874, the defendant in this case did not objectively benefit from the breach of the Covenant-Not-to-Compete. Pacifico did not gain any benefits that would otherwise have accrued to Plaintiffs. The Coop did not accept Pacifico's offer. As to Plaintiff's damages, whether Defendant benefitted from his breach of the Covenant is not a priori dispositive but is probative as to whether Defendant's actions caused HPRC to lose profits.

In addition to the categorical difference between the facts of this case and the facts of restrictive covenant cases awarding lost profits, the preponderance of evidence does not show that Pacifico's breach caused HPRC to lose profit. It does not show that Pacifico's offer precluded Plaintiffs from conjunctively executing (1) the purchase of the space in building D from the Cooperative, (2) the resale of the same space, and (3) realization of a profit from the purported transaction.

Notwithstanding this Court's previous recognition that Pacifico's breach was a substantial factor in the Cooperative's rejection of Plaintiffs' offer to buy space, the evidence does not rise to [*4]the level of proving that Pacifico's actions caused a loss of Plaintiffs' profits. The evidence does not show that Plaintiffs' would have completed their purported transaction but for Defendant's breach. The evidence does not show that the Cooperative had an obligation to sell space to Plaintiffs or to anyone who made an offer, irrespective of the price of $10/sq. ft or any other price.

As proof, Plaintiffs' proffer a resolution adopted by the Cooperative's Board to sell space in the "new building," building G, at a price of $10/sq. ft. on September 15, 1998. However, Pacifico's offers were made for space in building D. The Cooperative's resolution to sell space in building G is irrelevant in establishing whether the Cooperative committed to sell space in building D at $10/sq. ft. Even if the Cooperative's resolution included building D, Plaintiffs have not shown that the Board's resolution bound the Cooperative to sell space at $10/sq. ft. to Plaintiffs, or that the Cooperative would have sold the space in building D to Plaintiffs but-for Pacifico's offer.

Second, Schwartzreich testified at trial that the Coop adopted a "first in the door" policy in the very late 70s and early 80s. The policy directed the Coop Board to accept the offer of the first person in the door with a check to purchase a given space in the Cooperative. The policy existed to preclude the board from favoring any individual's offer over another's. However, the policy was not strictly followed. The policy was not honored when the Board did not accept Pacifico's November 9, 2004 offer, although it was the first offer on space in building D, after the Board had rejected the Latin American Distributor offer. In light of the inconsistent application of the "first in the door" policy, there is insufficient evidence to find that the Cooperative would have sold the space in building D to Plaintiffs but-for Pacifio's offer pursuant to the "first in the door" policy.

Third, Plaintiffs proffer evidence of three sales to establish a sale price of $10/sq. ft. All three sales were approved by the board at a price of $10/sq. ft. during 1998. One sale was in building G. Two sales were in building E. However, a pattern of three sales for space in different buildings at a price of $10/sq. ft, that occurred six years prior to HPRC's offer, does not show that the Cooperative had an obligation to accept HPRC's offer to purchase space in building D at $10/sq. ft. Moreover, the letter rejecting HPRC's offer from the Cooperative's President states that the Board is not bound by any past pricing policies. Without evidence that the Cooperative made any commitment or was otherwise obligated to sell space to HPRC, this Court will not infer from the tenuous evidence in the record that the Board would have accepted HPRC's offer but-for Pacifico's breach.

Finally, HPRC has not produced a contract or other evidence of negotiations for the resale of the space to a third-party. In the absence of such evidence, this Court will not speculate that another party would have purchased the space in building D from HPRC.

In short, the evidence is insufficient to justify a finding that HPRC would have been able to (1) purchase the space in building D from the Cooperative, and (2) resell the same space except for Pacifico's breach of the Covenant Not to Compete. It is not evident that Defendant's breach of the Covenant caused any damage to Plaintiffs, and this Court is unable to find that there is a preponderance of evidence for the Plaintiffs' claim. Therefore, the question of the causation of damages must be decided in favor of the Defendant.

III[*5]

None of Plaintiffs' three theories for establishing damages is supported by the evidence. Each theory purports to show lost profits as measured by the difference between Pacifico's $2 million offer and HPRC's $99,350 offer. It is necessary to keep in mind that it is the law that damages are measured from the time of the breach. Brushton-Moira Cent v Thomas, 91 NY2d 256, 259 (1998)

The standard for determining lost profits is that profits must be shown with reasonable certainty. Borne, 85 AD2d at 650. The amount does not have to be shown with absolute certainty. Plant Planners v. Pollock, 60 NY2d 779, 780 (1983). "Market value is defined as the selling price upon which a reasonably informed buyer and seller would agree, in an open market setting, neither of whom is acting under any constraint or compulsion regarding the transaction." Matter of Montgomery v. Board of Assessment Review of Town of Union, 30 AD3d 747, 748 (3d Dept 2006) (finding appropriate land value for taxation, citing Matter of Lupo v. Board of Assessors of Town of Huron, 10 Misc 3d 473, 747 (2005)). The court may make additional adjustments to an agreed sale price as may be necessary, unless the sale price is too unusual to be relied upon. See Plaza Hotel v. Wellington, 37 NY2d 273 (1975) (using a reasonable contract price to determine value for a half interest in property agreed upon between sophisticated parties who were aware of conditions and restrictions on the property).

Plaintiffs' first theory is that they would have secured the space at $10/sq. ft. but-for Defendant's action, and would have then sold the space for $2 million pursuant to Defendant's offer to the board. As has already been shown, there was no obligation, binding sales policy, nor stipulation from the Cooperative that it would sell the space in building D at a price of $99,350 or $10/sq. ft. It is inconsistent to argue that, on one hand, the space should have been sold at a price of $99,350 because that is the value, and on the other hand, that the space would have been resold at a price of $2 million (Defendant's offer) because that is the true value. This would be a different case if Plaintiffs had a contract with the Cooperative to purchase space in building D for $10/sq. ft. and had a contract or other negotiations to resell the same space.

Nor is Pacifico's $2 million offer for the space in building D dispositive of its market value. Pacifico's offer price is not a selling price upon which both a reasonably informed buyer and seller agreed. See Montgomery v. Board of Assessment, 30 AD3d at 748. It was merely an offer that was never accepted or rejected by the Coopertive's Board. An offer is unilateral. It does not by itself rise to the level of an agreed upon sale price such as a contract price. See Plaza Hotel, 37 NY2d at 278. By analogous reasoning, HPRC's offer is also not conclusive as to the value of the space in building D.

Plaintiffs' second theory of real estate comparables could be an appropriate measure of damages. "In the absence of a recent arms-length sale of the property, the comparable sales method is the most reliable indicia of market value." Montgomery v. Board of Assessment, 30 AD3d at 748. The degree of comparability is a question of fact determined by the trial court. Phelps Dodge Industries, Inc., v. Kondzielaski, 131 A.D. 675, 678 (2d Dept 1987) (finding the trial court did not abuse its discretion in declining to treat the subject property as a specialty property). The court may properly make adjustment for differences in size. Chase Manhattan v. State of NY, 103 AD2d 211, 222 (2d Dept 1984). In Chase Manhattan, the Second Department accepted the trial court's finding that appellee's proffered comparables were comparable despite their disparity in size from the property at issue (117 acres, 45.66 acres, and 20 acres compared to [*6]the 5.91 acres). Id. By contrast, appellant's proffered comparables were not comparable because of significant differences such as a lack of road frontage and utilities. Id.

The space in building D is not comparable to spaces identified by Plaintiffs; they are categorically different. Plaintiffs proffer five non-distress sales of cooperative space with corresponding sale prices. Plaintiffs' proffered sales of cooperative space from Cooperative owners to third-party purchasers between October 3, 2005 and November 10, 2006. The sales were for space in buildings other than building D. Each unit was a standard size' of 3,240 sq. ft., 12' -13' in height, with 2,400 sq. ft. of refrigerated space. The prices of the sales equate to prices between $90/sq. ft. and $130/sq. ft. Crucially all of Plaintiff's proffered spaces are USDA-approved. USDA approval allows a space to be used for processing in addition to storage. Non-USDA approved storage spaces are limited to storing food.

The space at issue in building D is not USDA approved. All the sold spaces proposed for comparability are USDA approved facilities, and are put to fundamentally different uses. They are not amenable to comparison.

If the spaces were not categorically different by virtue of the USDA classification, they might be amenable to comparison. The space in building D consists of 9935 sq. ft., with about 8,000 sq. ft. of refrigerated space. The ceiling in building D is 25' - 26' in height. Building D is recently renovated and suffers from less wear and tear. Adjustment for these differences in size and refrigerated space can appropriately be made by this Court. See Id. However, the categorical differences in use preclude this Court from accurately valuing the space in building D by merely adjusting for differences provided in the record: size and amount of refrigerated space.

The third theory of damages attempts to bolster the first theory of damages by providing a negative inference pursuant to the doctrine of spoliation. Defendant failed to preserve emails after having been ordered by this Court to preserve documents. In order to obtain an adverse inference a party must, inter alia, show that the missing evidence "is relevant to the party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense." Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 107 (2d Cir.2002). In this case, Plaintiffs have not shown that the destroyed emails are relevant to determining the appropriate amount of damages for breach of the contract. The fact that the missing correspondence was allegedly between Pacifico and the Coop Board in 2006 does not allow a reasonable trier of fact to conclude that the messages contained information relevant to the causation of alleged lost profits incidental to Defendant's breach in late 2004. There is, however, reliable evidence that the Chairman of Hunts Point Coop Market literally changed the "minutes" of board meetings after they were submitted by Mr.Reingold, most importantly, the meeting of December 7, 2004. The Cooperative was unable to find the unredacted minutes of this meeting. Regretfully without the e-mail or reliable testimony as to what the e-mails contained the Court would be forced to speculate as to its value.

IV

In sum, this Court previously held that Defendant breached a Covenant-Not-to-Compete as provided in a contract with Plaintiffs. This Court further found that the breach was a substantial factor in the Coop's rejection of HPRC's offer for space in building D. However, Plaintiffs have not met their burden of showing, by a fair preponderance of the credible evidence, that Pacifico's breach was the cause of any lost profit. Therefore, the question of damages in [*7]decided in favor of Defendant and zero damages are awarded.

However, the Defendant's unabashed flaunting of this Court's preservation order resulted in additional work by Plaintiffs' Counsel and the Court. As sanctions, this Court awards Plaintiffs' counsel fees and costs for all work done by counsel related to Defendant's failure to preserve e-mail. See De Espana v. American Bureau of Shipping, 2007 WL 1686327 at 8 (S.D.N.Y) (awarding attorney fees and costs, under the Federal Rules of Procedure and the Federal Rules of Evidence, incurred by counsel in pursuing missing emails as part of electronic discovery).

The matter of Counsel fees and costs is referred to Court Attorney/Referee Frank Schellace (Room 060, Special 2 Courtroom, Lower Level) to hear and determine on September6, 2007, at 9:30 A.M.. Plaintiff is to prepare a compilation of his hourly fee and related costs to present to Mr. Schellace, and serve a copy on Defense Counsel ten (10) days prior to the hearing date.

Submit Judgment.

Dated: July 24, 2007

J.S.C.