In the case of Sapphire v. Mark Hotel Sponsor, the Supreme Court of New York Countyexamined a situation in which the plaintiff sought rescission of a contract due to alleged bad conduct by the defendant and the defendant moved to dismiss the plaintiff’s complaint. The case features a collateral estoppel and res judicata argument, which is very informative to an understanding of basic contract law and litigation practice.
Background of the Case
The defendant is a LLC seeking to renovate the historic Mark Hotel. Part of this process involves converting some of the upper areas of the hotel into residential apartments. Plaintiff Sapphire is an investment venture that signed a purchase agreement with defendant (hereafter “Sponsor”) for one of these apartment units.
After signing the agreement, plaintiff learned of some facts that gave it cause for concern. Specifically, the hotel property was encumbered by $23,000,000 in mortgages, a fact never disclosed by the defendant and an omission significant enough to hypothetically breach the contract and several implied covenants of good faith and fair dealing. Plaintiff, as a result, sued to rescind the contract and recover its down payment.
There is one additional and unusual fact to this case. The Attorney General of New York issued a ruling stating that the defendant’s omission of the mortgage was not bad enough to give plaintiff grounds for rescission! The defendant, obviously, relies quite heavily on the impact of the Attorney General’s ruling.
The legal doctrine of res judicata, also known by a variety of related names such as collateral estoppel, issue preclusion, claim preclusion etc. is one that is commonly encountered. The doctrine, in essence, says that if a party has already litigated a matter (or obtained some other form of judgment), public policy disfavors his or her ability to re-open or re-litigate the same matter. Res judicata does NOT apply to appeals, in that an appeal is a continuation of litigation on the same matter.
Effect of AG’s Ruling
The court squarely addressed the impact of the AG’s ruling by stating the standard by which rulings by administrative agencies are to be evaluated. New York uses a 4-factor test, articulated in Allied Chem. v. Niagara Mohawk Power Corp., 72 N.Y.2d 271, 276-77 (1988). Res judicata applies in situations where the agency used procedures “substantially similar” to those used in a court of law to decide issues.
One of the crucial elements of the res judicata doctrine failed here, and the court’s articulation of the failure was quite instructive. Remember that the doctrine states that a party must have had a full and fair opportunity to fully litigate the matter for res judicata to apply and bar re-litigation of the claim. One of the very common things a court does, as it did here, was examine the prior proceeding, here the AG’s determination.
The court found that the plaintiff had the opportunity to present documents to the AG’s office, as it would have at a trial. However, there was no opportunity to provide “non-documentary evidence” such as witness testimony. Plaintiff had no opportunity to challenge the veracity (truthfulness) of the defendant’s documents. Plaintiffs also had no chance to cross-examine any of the individuals who had signed or otherwise played a crucial role in the documents defendant provided as evidence. Remember that a party, at trial, has an opportunity to do all of these things under New York Law and the Federal Rules of Evidence. In effect, the defendant may have won in front of the AG’s office because the plaintiff was not able to challenge the defendant’s case to the extent plaintiff would have been able to in court.
Because plaintiff, thus, did not have a ‘full and fair’ opportunity to litigate the matter, the court decided that the defense of res judicata was not appropriate and that the case would proceed forward to a trial on the merits.
It is important to retain competent counsel both when entering into contracts and litigating disputes over breach of contract, especially situations in which administrative agency decisions may come into play. Please do not hesitate to contact our office for a consultation.