The Supreme Court of New York County recently issued a decision in the case of 534 East 11th Street HDFC v. Hendrick. This case, yet another lawsuit over Manhattan real estate, is interesting because one of the main issues is the covenant of good faith and fair dealing, an implied covenant or condition of any contract.
Background of the Case
The plaintiff owns a co-op apartment building at 534 East 11th Street, and the defendant is an individual who leases one of the apartment units – Unit #5. Defendant also owns shares in the cooperative corporation, a not uncommon situation in cooperative apartment buildings designed to give tenants some control over the premises.
The defendant and the plaintiff entered into an agreement, somewhat complicated in form but relatively simple in substance. The defendant, Hendrick, agreed to sell his shares and his lease to unit #5 to a third party buyer, one Dustin Shyrock. In exchange, the plaintiff agreed to the following: the plaintiff would transfer (or assign) the plaintiff’s right to purchase the shares and the lease for apartment unit #6 to the defendant, Mr. Hendrick. In addition the contract contained one other relevant clause: if the sale (for brevity we shall refer to the sale of the lease and shares of a unit as the ‘sale’ of a unit) of unit #5 to Mr. Shyrock proved impossible, then the defendant would sell unit #5 to another purchaser as soon as possible, subject only to the condition that the assignor (the plaintiff) must approve the purchaser.
The factual record of the case is unclear as to the exact motivations behind the contract, but in essence it seems like a deal where the defendant is switching apartments and selling the former apartment to a purchaser approved by the plaintiff.
The following events then happened. The defendant purchased unit #6 as provided for in the contract. Defendant attempted to sell unit #5 to Mr. Shyrock, entering into a separate contract for sale with him, however Mr. Shyrock was unable to obtain financing and exercised his right to cancel the separate sale contract. When this even occurred, the alternative portion of the agreement between plaintiff and defendant, requiring defendant to sell unit #5 to another, approved, buyer became triggered.
Defendant proposed another purchaser: one Lia Gangitano. The plaintiff had a shareholders’ vote (remember that the plaintiff is a type of corporation), in which Gangitano was rejected as a suitable purchaser. In the same meeting the shareholders voted that the approved purchaser would be… Mr. Shyrock!
The plaintiff then filed a lawsuit, seeking specific performance of the allegedly breached contract: essentially forcing the defendant to name a purchaser and make the sale. The complaint alleged that the plaintiff believed the defendant would not propose a purchaser as required under the contract.
The defendant, in the instant action, filed a motion to dismiss, alleging a breach by the plaintiff of the covenants of good faith and fair dealing. These covenants in essence are implied promises by both parties that they will act in fair and expeditious ways to ensure that the contract can be satisfied by the other side. Here the defendant alleged that the plaintiff was engaged in a bit of trickery designed to force a sale to Mr. Shyrock at a reduced price, and there is at least some implication that no other purchaser would ever be approved by the shareholders. The defendant said that plaintiff insisted the sale be made to Shyrock at a reduced price.
The court articulated the legal standard of the covenant. “The party asserting the breach [of the covenant of fair dealing] must allege facts that tend to show that the other party sought to prevent performance of the contract or to withhold its benefits from the party asserting the breach.” The court characterized this as a factual question, dependent on the exact circumstances.
The court implied that the defendant may indeed have a very valid defense, however that a motion to dismiss would not be granted because the plaintiff stated a cause of action (however poor) that could possibly succeed, so the case would move on to trial.
Please don’t hesitate to contact our office for a consultation if you have any questions about implied covenants or their breach.