Coffee Holding Co., Inc. v Schmalfeld

[*1] Coffee Holding Co., Inc. v Schmalfeld 2013 NY Slip Op 51700(U) Decided on October 17, 2013 Supreme Court, Richmond County Minardo, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 October 17, 2013
Supreme Court, Richmond County

Coffee Holding Co., Inc., Plaintiff(s),

against

Peter Schmalfeld, Defendant(s).



150173/13

Philip G. Minardo, J.

The following papers numbered 1 to 3 were marked fully submitted on the 15th day of August, 2013.

Papers

Numbered

Notice of Motion by Plaintiff COFFEE HOLDING CO., INC., to Dismiss

Counterclaims of Defendant PETER SCHMALFELD., with Supporting Papers and

Exhibits (dated May 20, 2013) 1

Responding Affidavit by Defendant PETER SCHMALFELD, with Exhibits

and Memorandum of Law (dated July 10, 2013) 2,3

Upon the foregoing papers, plaintiff's motion for dismissal of defendant's counterclaims is granted to the extent that the first counterclaim for breach of contract is dismissed with [*2]prejudice; the balance of the motion has been rendered academic.

Plaintiff COFFEE HOLDING CO., INC. (hereinafter CHC) commenced this action against defendant PETER SCHMALFELD (hereinafter defendant) in connection with a business agreement entered into by the parties for the purpose of operating a limited liability company called Global Mark, LLC (hereinafter Global Mark), which would distribute instant coffee products.

By way of background, CHC is a wholesale coffee roaster and dealer, which agreed, at defendant's request for financial assistance, to provide a $2 million capital contribution, in return for which defendant and his associate would run the day-to-day product distribution business. To this end, the parties formed a limited liability company called Global Mark, and executed both an Operating Agreement and a Purchasing Agreement under which defendant and his associate would share 60% of Global Mark's membership and interests, and CHC would hold the remaining 40%. In addition, CHC was to receive "preferred pricing" on all purchases of instant coffee products from Global Mark such that CHC would always be entitled to a lower price than that received by any of its other customers.

With regard to compensation, the Operating Agreement provided that defendant would receive a salary of $150,000 unless the company's losses exceeded $150,000 in any six-month period, in which event defendant would not be entitled to receive any salary or bonuses until such time as Global Mark's losses are less than this threshold. The Operating Agreement further provided that CHC was entitled to quarterly financial statements to be provided within 20 days of the end of each fiscal quarter, as well as monthly profit and loss statements upon request.

To the extent relevant, it appears that after a few months of operation, CHC came to the conclusion that Global Mark was not fairing well. In particular, it is claimed that the customers defendant allegedly told CHC that he would be able to produce never materialized. Thereafter, CHC grew increasingly concerned with the slow progress of the business and the prospect of losing its investment. Accordingly, pursuant to its rights under the Operating Agreement, CHC requested that defendant provide it with financial statements and other financial information. This information purportedly revealed, inter alia, that defendant was taking compensation in excess of that to which he was entitled under the Operating Agreement. In addition, CHC claims that it was not given the agreed "preferred pricing" on products purchased from Global Mark, and that it was actually being charged the same price as the market in general. It also learned that Global Mark was losing money.

As a result of defendant's perceived mismanagement of Global Mark, an Asset Transfer Agreement (hereinafter ATA) was negotiated and executed by the parties under which defendant agreed to transfer various items of inventory, assets and cash to CHC in an attempt to repay as much of CHC's investment as was possible. It is alleged that during these negotiations, defendant made several key representations and warranties on behalf of Global Mark regarding the accuracy of its financial statements, e.g., the value of the inventory to be transferred and the value of Global Mark's account receivables, upon which CHC claims that it relied, only to discover that "usable and saleable" inventory listed on schedule 3.5 of the ATA was worth less than defendant had represented. In addition, instead of being valued on Global Mark's books at "inbound accumulated cost", as represented and warranted in the ATA, it is alleged that the value of the inventory reflected on Global Mark's financial statements included an undisclosed mark-[*3]up. Finally, since the ATA was intended to wind-up the business relationship between the parties, it contained a clause wherein the parties agreed to release any and all claims which each had against the other.

In the complaint, plaintiff alleges various causes of action, sounding in unfair competition, tortious interference with prospective economic advantage, misappropriation of proprietary business information, and breach of contract. As pleaded, CHC maintains that it performed all of its obligations under the ATA, but that (1) defendant made false representations and warranties relating to the value of Global Mark's inventory and accounts receivable, and (2) CHC relied on such representations and warranties in executing the ATA. In his answer, defendant denied these allegations and asserted two counterclaims: the first, for breach of contract, and the second, for sanctions.

In moving to dismiss the counterclaim for breach of contract, CHC contends that defendant lacks the capacity to sue (see CPLR 3211[a][3]). In particular, CHC contends that defendant, individually, is not a party to any contract, and accordingly, cannot pursue damages for any injuries allegedly sustained by Global Mark as a result of CHC's purported non-payment of the sums claimed to be due and owing. In addition, CHC contends that defendant lacks the capacity to sue as a third-party beneficiary of any agreement between CHC and Global Mark for the sale of its coffee products. Finally, it is alleged that any failure to pay defendant's salary which may be attributed to the non-payment of Global Mark's invoices to CHC is too attenuated to vest defendant with any purported rights as a third-party beneficiary, and that there is no proof that any such benefit was intended by the parties.

CHC further contends that even assuming defendant had the legal capacity to sue, e.g., as a third-party beneficiary under the Operating Agreement, his counterclaim for breach of contract is barred by the express language of release included in the ATA negotiated and executed by him, individually, which terminated the Operating Agreement. Accordingly, his first counterclaim should be dismissed pursuant to both CPLR 3211(a)(5) and 3211(a)(1), i.e., based on the terms of the ATA. According to CHC, that subsequent agreement terminated the parties' business relationship, and allowed defendant to continue to operate Global Mark independently. Moreover, it is claimed that since the ATA contains representations and warranties concerning Global Mark's outstanding accounts receivable as of the date of its execution, CHC's liability on any remaining unpaid invoices which were listed among those receivables is barred by the terms of the release.

As for defendant's counterclaim for sanctions and costs pursuant to 22 NYCRR 130-1.1, CHC contends that a request for sanctions may not be pleaded as a separate cause of action. Moreover, it is argued that the counterclaim fails to allege facts sufficient to make out a prima facie case that plaintiff's claims are completely devoid of merit. In any event, it is alleged that defendant has failed to set forth evidentiary facts sufficient to demonstrate an intent on the part of CHC to harass or maliciously injure defendant through commencement of this lawsuit.

In opposition, defendant contends that the Operating Agreement executed by the parties establishes a limited liability company only, and that the parties were never joint venturers or partners, as plaintiff alleges. As a result, defendant claims that he owes no fiduciary duty to CHC, but rather to Global Mark. Therefore, any claims predicated thereon must fail.

In addition, defendant strenuously denies ever providing CHC's competitors with [*4]confidential business information about their alleged "joint venture". Here, defendant again argues that there was no joint venture, and that CHC never provided defendant with any "confidential" business information.

Insofar as standing is concerned, defendant argues that since CHC is suing defendant, individually, for breach of contract, and "privity" is an essential element of every such cause of action, he cannot simultaneously be in privity of contract with CHC yet lack the legal capacity to sue for its breach. In short, CHC cannot have it both ways.

In any event, with regard to defendant's salary, it is claimed that the Operating Agreement specifying defendant's salary was signed by defendant and, accordingly, he is a direct party thereto. In addition, defendant maintains that CHC's refusal to pay it invoices would put Global Mark out of business, and, as a result, defendant would not get paid. Therefore, any claim by defendant regarding his unpaid salary is not attenuated, but is a direct result of CHC's failure to pay for goods it has received. In addition, defendant contends that he is a known, third-party beneficiary, who is specifically named in a valid and binding agreement that was intended for his benefit. Therefore, the damages which he claims are not incidental, but form an integral part of the Operating Agreement on which his counterclaim is based. Defendant also argues that CHC should not be permitted, through its systematic refusal to pay its bills, to unilaterally breach the Operating Agreement, thereby depriving Global Mark of the capital which it needs to survive. According to defendant, this would put an end to Global Mark and deprive him of the compensation which he is due under the Operating Agreement.

Finally, defendant contends that if his counterclaim is barred due to the release in the ATA, then plaintiff's first three causes of action are also barred. According to defendant, the gravaman of any activity claimed by plaintiff to support these first three causes of action either occurred prior to the execution of the ATA and are bared by the release, or after its execution and the severance of any contractual obligation to CHC.

With regard to the counterclaim for sanctions, defendant agrees that such a claim cannot be the subject of a separate cause of action, and asks that he be granted leave to make a proper request, if warranted, in the future.

In the opinion of this Court, defendant's first counterclaim must be dismissed based on the release provision contained with the ATA, which, by its terms, would bar defendant from personally asserting any counterclaim based on CHC's alleged breach of the Operating Agreement (see CHC Exhibit C, p7, para 5.2). It is well settled that a release is a contract and its construction is governed by contract law (see Shklovskiy v. Khan, 273 AD2d 371, 372). Accordingly, it must be given the effect intended of the parties as indicated by the language they employed (see Stone v. National Bank & Trust Co., 188 AD2d 865, 867).

Here, the language contained in the release provision of the ATA is clear on its face and sufficiently broad to indicate that the parties intended to encompass both the breach of contract counterclaim asserted by defendant with regard to his salary and CHC's alleged failure to pay certain invoices, since both these claims arise out of the terms of the Operating Agreement creating the business relationship which the ATA was designed to dissolve. Since the terms of the release indicate an intention on the part of both parties that they mutually release any claims against the other arising out of the subject matter of their prior agreements, dismissal of the counterclaim is warranted under CPLR 3211(a)(5). [*5]

However, with regard to defendant's contention that the release contained in the ATA should also compel the dismissal of plaintiff's first, second and third causes of action, sounding, respectively, in unfair competition, tortious interference with prospective economic advantage and misappropriation of proprietary business information, this Court will not act, sua sponte, to grant such relief in the absence of a proper application on notice to the adverse party (see Dossous v. Corporate Owners Bayridge Nissan, Inc., 101 AD3d 937, 938; Jacobs v. Mostow, 23 AD3d 623; cf. Tirado v. Miller, 75 AD3d 153). "[T]hat use of the sua sponte power of dismissal must be restricted to the most extraordinary circumstances" (Myung Chun v. North Am. Mtge. Co., 285 AD2d 42, 46).

Since defendant has voluntarily withdrawn his "counterclaim", for sanctions, no further issue needs to be considered.

Accordingly, it is

ORDERED that plaintiff's motion to dismiss defendant's counterclaims is granted to the extent that the first counterclaim for breach of contract is hereby severed and dismissed; and it is further

ORDERED that defendant's second counterclaim is withdrawn, without prejudice; and it is further

ORDERED that the Clerk enter judgment accordingly.

E N T E R,

Philip G. Minardo

J.S.C.

Dated: October 17, 2013