Equitable Estoppel: Reliance and Detriment

• Posted on: Nov 28 2024

“The doctrine of equitable estoppel prevents a party from denying her own expressed or implied admission which has in good faith been accepted and acted upon by another.”[1] “The purpose of equitable estoppel is to preclude a person from asserting a right after having led another to form the reasonable belief that the right would not be asserted, and loss or prejudice to the other would result if the right were asserted.”[2] Stated differently, the purpose of the doctrine “is to prevent someone from enforcing rights that would work injustice on the person against whom enforcement is sought and who, while justifiably relying on the opposing party’s actions, has been misled into a detrimental change of position.”[3] “The law imposes the doctrine as a matter of fairness.”[4] “The burden is upon the party pleading an estoppel to establish it.”[5]

“In order for estoppel to exist, three elements are necessary: (1) Conduct which amounts to a false representation or concealment of material facts, or, at least, which is calculated to convey the impression that the facts are otherwise than and inconsistent with, those which the party subsequently seeks to assert; (2) intention, or at least expectation, that such conduct will be acted upon by the other party; (3) and, in some situations, knowledge, actual or constructive, of the real facts.”[6] “The party asserting estoppel must show with respect to himself: (1) lack of knowledge of the true facts; (2) reliance upon the conduct of the party estopped; and (3) a prejudicial change in his position.”[7]

In Xiaoyan Lu v. Sagewood SFF III LLC, 2024 N.Y. Slip Op. 05895 (1st Dept. Nov. 26, 2024) (here), the Appellate Division, First Department addressed the doctrine of equitable estoppel in a case involving a group of investors seeking to recover funds that were allegedly misapplied or misappropriated.

Background/The Complaint

[Eds. Note: the background facts are derived from prior decisions of the motion court and the parties briefing on appeal.]

Each of the plaintiffs invested $200,000 in defendant Sagewood KTII, LLC (“Fund II”).[8] Fund II invested money in real estate to renovate and flip the properties for a profit. Plaintiffs made these investments in June 2017 pursuant to subscription agreements. Plaintiffs wired their contributions to Fund II by November 2017.

In the spring or early summer of 2018, plaintiffs approached Wu with their concerns about the lack of information they were receiving about their investments in Fund II. Wu responded by presenting them with a pitch book about Fund III which detailed an investment opportunity focused around acquiring, renovating, and selling real estate. She informed plaintiffs that they could join Fund III and their capital contributions could be satisfied by rolling over the $200,000.00 they had already invested in Fund II. She also met with three of the plaintiffs on August 4, 2018, and described the benefits of doing so.

On August 6, 2018, Wu sent plaintiffs documents prepared by Fund III and Sagewood, including the Fund III operating agreement. The agreement provided, inter alia, for dissolution of Fund III no later than August 1, 2020, subject to a one-year extension at the sole discretion of KT, the managing member. Plaintiffs made no changes to the operating agreement and promptly executed and returned the documents in early August 2018. Shortly thereafter, plaintiffs all received a “Net Capital Demand Notice” from Sagewood on behalf of Fund III asking for a capital contribution of $50,000. However, on September 13, 2018, Wu informed them that they would not have to worry about funding Fund III because they were “all 100% rollover”.

Wu also advised plaintiffs that they would continue to receive similar demands as they were sent out by email uniformly to all investors. Consequently, plaintiffs received a second demand for $50,000 from Fund III on October 25, 2018, as well as an email from a senior sales specialist from an entity called Sagewood Equity LLC, which attached the notice but stated that it was for informational purposes only as “the draw will be rolled over from Fund II.” Plaintiffs received a demand for $100,000 on March 6, 2019, with a similar disclaimer, and the letter also stated that their unpaid capital contribution was $0.

Plaintiffs received quarterly reports for Fund III starting in the third quarter of 2018, in emails addressed to them as “investors” in Fund III. The reports provided information regarding the properties purchased with Fund III capital and the status of the renovation and sale process. The first quarter 2019 report listed the capital received as $10 million, and the balance minus expenses as approximately $7 million.

On August 20, 2019, plaintiffs received an invitation to a Fund III “investor portal” which promised access to communications about their investments and fund documents. Through that portal, on September 30, 2019, plaintiffs received statements of assets and liabilities and statements of operations.

In September 2019, plaintiffs received through the portal a notice of “Distribution of Unused Capital and Preferred Returns.” Each plaintiff was to receive from Fund III a net distribution consisting of $23,454.79 – $20,000.00 of which was categorized as a partial return of their capital contribution while the remaining $3,454.79 was categorized as a distribution, both from Fund III. Plaintiffs thereafter received physical bank checks for the distributions.

Plaintiffs also received a Capital Account Statement for Fund III as of September 30, 2019. A footnote next to the line item “Contributions” stated that “[y]our original commitments to the Fund [Fund III] include $200,000 of committed capital due as equity rollover from Sagewood KTII, LLC (“Fund II”).” Additionally, plaintiffs were sent K-1 statements for 2018 reflecting their capital contributions of $100,000 each to Fund III.

On November 30, 2019, however, Wu claimed for the first time that plaintiffs had no interest in Fund III. She stated that they were investors in Fund II only and that Fund II had lost all of its funds. In that connection, plaintiff alleged that Fund II was suing Tse for breach of contract and conversion for failing to perform various real estate-related services.

In December 2019, Wu further advised plaintiffs that the distributions made to them from Fund III had been made in error. Wu later changed her position and claimed that plaintiffs were in fact investors in Fund III but were each required to fund their subscriptions with $200,000.00. On December 19, 2019, plaintiffs received a formal demand for the payment of their capital contribution, with the notice identifying Wu as “partner” of Sagewood. Wu asserted that plaintiffs violated the Fund III operating agreement and subscription agreements due to their failure to pay.

Thereafter, plaintiffs retained counsel and served a books and records demand upon both Fund II and Fund III, seeking detailed financial information including records reflecting the receipt and expenditure of plaintiffs’ capital contributions. Fund II provided partial records that did not contain information about the contributions, and Fund III refused to respond at all.

Plaintiffs brought action, alleging eleven causes of action sounding in contract and tort. Defendants counterclaimed.

Following discovery, the parties moved for summary judgment. The motion court granted plaintiffs’ motion (1) on their first cause of action for declaratory judgment, deeming plaintiffs to have membership interest in Fund III; and (2) dismissing defendants’ counterclaim for breach of contract, and otherwise denied the motion. The motion court granted defendants’ motion for summary judgment in so far as dismissing plaintiffs’ claim for breach of contract and otherwise denied the motion.

The First Department’s Ruling

On appeal, the First Department unanimously affirmed.

The Court held that “[p]laintiffs established equitable estoppel by showing defendants’ admitted concealment of the fact that plaintiffs’ investments had been embezzled by the co-manager of Sagewood KT II LLC (Fund II).”[9] The Court also held that plaintiffs satisfied the doctrine due to” defendants’ repeated and varied statements and actions confirming that their investment was rolled over into defendant Sagewood SFF III LLC (Fund III), despite there not being any money to roll over.”[10] The Court further held that plaintiffs satisfied the elements of the doctrine by “establish[ing] that they did not take any action to recover the embezzled funds because of defendants’ concealment and subsequent affirmative statements that plaintiffs’ funds were actually invested into Fund III.”[11]

[Eds. Note: This Blog previously examined cases involving the doctrine of equitable estoppel here and here.]

Takeaway

The purpose of equitable estoppel is to preclude a person from asserting a right when he or she has led another to form the reasonable belief that the right would not be asserted, and loss or prejudice to the other would result if the right were asserted. The doctrine requires the court to first look at the elements of representation, reliance, and detriment. The party raising equitable estoppel issues has the initial burden to establish a prima facie case sufficient to support that claim. If these are shown, the burden then shifts to the opposing party to demonstrate why estoppel should not be applied.[12]

In Xiaoyan Lu, the evidence showed that defendants concealed the fact that plaintiffs’ investments had been embezzled by KT, the co-manager of Fund II, and that defendants repeatedly told plaintiffs that their investments were rolled over into Fund III, despite there not being any money to roll over. The Court found that based upon the foregoing evidence, plaintiffs established detriment/prejudice in that they refrained from taking any action to recover the embezzled funds. Such evidence was enough for plaintiffs to satisfy the elements of the equitable estoppel doctrine.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] Gillin v. Patterson, No. 104543/93, 1994 WL 16857347 (Sup. Ct., N.Y. County Aug. 25, 1994).

[2] Matter of Shondel J. v. Mark D., 7 N.Y.3d 320, 326 (2006).

[3] Id. (citing Nassau Trust Co. v. Montrose Concrete Prods. Corp., 56 N.Y.2d 175, 184 (1982)).

[4] Id.

[5] Wetzlar v. Wood, 143 A.D. 311, 317 (1st Dept. 1911).

[6] BWA Corp. v. Alltrans Express U.S.A., Inc., 112 A.D.2d 850, 853 (1st Dept. 1985).

[7] Id. (internal quotation marks and citation omitted).

[8] Defendant KT Sagewood LLC (“KT”) is the managing member of Fund II. Defendant Jingying Wu (“Wu”) is a member of Fund II, and together with non-party Kenneth Tse (“Tse”) executed the operating agreements on behalf of both KT and Fund II. Wu is also a member of Sagewood SFF III LLC (“Fund III”), of which defendant Sagewood Management LLC (“Sagewood”) is the managing member. Additionally, Wu is an agent of KT and Sagewood.

[9] Slip Op. at *1.

[10] Id.

[11] Id.

[12] Sharon GG v. Duane HH., 63 N.Y.2d 859 (1984); Edward WW v. Diana XX, 79 A.D.3d 1181 (3d Dept., 2010).