Intervention Permitted Where Questions of Law and Fact are Shared with A Party in A Pending Litigation

• Posted on: Jan 25 2021

A client calls up an attorney and describes a situation in which two parties are litigating an issue that the client maintains she has interest in. She wants to be sure that her interests are not adversely affected by the outcome of that litigation. She asks the lawyer what she can do. The answer (for purposes of today’s article): intervene in the action.

Intervention is a procedure by which a nonparty may join a pending litigation. In New York, intervention is governed by CPLR §§ 1012 (a)(3) and 1013. CPLR §1012 (a)(3) provides that a nonparty may intervene as of right “when the action involves the disposition or distribution of, or the title or a claim for damages for injury to, property and the person may be affected adversely by the judgment.” CPLR § 1013 allows for permissive intervention where “the person’s claim or defense and the main action have a common question of law or fact.” The court, “[i]n exercising its discretion,” must “consider whether the intervention will unduly delay the determination of the action or prejudice the substantial rights of any party.” Id. Notwithstanding the distinctions between the two forms of intervention, courts “no longer sharply appl[y]” them. Matter of HSBC Bank U.S.A., 135 A.D.3d 534, 534 (1st Dept. 2016) (internal quotation marks and citation omitted). The reason: “[i]ntervention is liberally allowed by [the] courts.…” Yuppie Puppy Pet Prods., Inc. v. Street Smart Realty, LLC, 77 A.D.3d 197, 201 (1st Dept. 2010). 

These principles were considered by Justice Peter P. Sweeney in Shilon v. New Upreal LLC, 2021 N.Y. Slip Op. 30146(U) (Sup. Ct., Kings County Jan. 11, 2021) (here).

Shilon arose from the alleged default on a Promissory Note/Restatement Agreement/Guaranty (“the Restatement Agreement”) by defendants New Upreal LLC (“New Upreal”), 154 Lenox LLC (“154 Lenox”) and Boaz Gilad (“Gilad”). 

Plaintiff, Joseph Shilon (“Shilon”), alleged that prior to execution of the Restatement Agreement, he made certain “advances” for the benefit of New Upreal and 154 Lenox and that on or about September 1, 2018, “New Upreal and 154 Lenox entered into the Restatement Agreement to “record” those advances. Pursuant to the Restatement Agreement, New Upreal promised to pay to plaintiff the principal sum of $4,414,441.00, and 154 Lenox and Gilad agreed to guarantee New Upreal’s obligations under the agreement. Plaintiff alleged that defendants defaulted under the Restatement Agreement and sought judgment for the amount allegedly owed.

In their answer, New Upreal and 154 Lenox denied all of the material allegations in the complaint and raised various affirmative defenses to the effect that the Restatement Agreement was a sham. They alleged that “Plaintiff’s claims were barred because of ‘Unclean Hands’” or because Plaintiff was “in pari delicto”, that “Plaintiff’s claim was barred because the loan was procured, administered and managed by deceptive and fraudulent practices under state and federal law, including, ‘predatory lending’”, and that “Plaintiff’s actions [were] barred because it did not lend Defendants any funds.”

Guy Gissin (“Gissin”), in his capacity as Claims Trustee (“Claims Trustee”) for holders of various bonds (the “Bondholders”) or other debt instruments issued by Brookland Upreal Limited (“Brookland”), moved by order to show cause for leave to intervene in the action pursuant to CPLR §§ 1012 and 1013. Gissin alleged that during 2014 and 2015, Brookland issued bonds in the aggregate principal amount of NIS 247 million to the Bondholders pursuant to two Deeds of Trust, one dated May 26, 2014, and another dated November 29, and that the aggregate principal amount of the Bonds at the end of the second quarter of 2018 was approximately NIS 150 million. Gissin claimed that Brookland, through a number of holding companies, invested the proceeds of the bonds in various real estate development projects in and around Brooklyn, New York, including some of which are owned by New Upreal.

Gissin further alleged that New Upreal engaged in misconduct including, using the bond proceeds to prefer certain investors and creditors over the interests of New Upreal’s other creditors and diverting assets that should have been repaid to Bondholders to other parties not entitled to such assets. Gissin alleged that New Upreal signed the Restatement Agreement for the benefit of Yossi Shilon, without any consideration to New Upreal for a fictitious loan that was never granted to it. Gissin maintained that New Upreal and 154 Lenox were insolvent at the time the Restatement Agreement was executed, or were rendered insolvent thereby, and that each received no value at all in exchange. In sum and substance, Gissin contended that the execution of the Restatement Agreement was a sham and that the parties to the Restatement Agreement were attempting to divert assets to the plaintiff which the Bondholders would otherwise be entitled to.

The Court granted the motion. The Court found that “the answering defendants and Gissin both claim[ed] that the Restatement Agreement [was] a sham.” Slip Op. at *3. Therefore, concluded the Court, “[t]he main action and the proposed Intervenor Complaint … present[ed] common questions of law and fact.” Id. 

Turning to the question of timeliness – i.e., whether the delay in seeking intervention would cause a delay in resolution of the action or otherwise prejudice a party – the Court found that there was no prejudice as the case was in its nascent stages: “Since there has been no discovery in the main action, allowing Gissin to intervene in the action will not delay the action or prejudice a substantial right of any party.” Id. In fact, noted the Court, plaintiff did not object to intervention on timeliness grounds, though it did so on others. Id.

Finally, and “[m]ost importantly,” said the Court, “Gissin ha[d] substantial interest in the outcome of the main action. If [he] prevails on his claim that the Restatement Agreement was a sham and unenforceable, defendants’ assets would remain available to pay New [Upreal]’s obligations to the Bondholders and would not be fraudulently diverted to the plaintiff.” Id. at *3-*4. 

Takeaway

Intervention is a fact-sensitive analysis. Shilon shows that where the facts and law are common, there is no prejudice to any party, and the intervenor has a substantial interest in the outcome of the litigation, intervention is appropriate.