The Court of Appeals Makes a Ruling on “the Proper Scope of the Trial Court’s Discretion to Grant Leave to Amend a Complaint Under CPLR 3025(b)”

• Posted on: Mar 22 2024

By Jonathan H. Freiberger

On March 19, 2024, the Court of Appeals decided Favourite Limited v. Cico, a case concerning “the proper scope of the trial court’s discretion to grant leave to amend a complaint under CPLR 3025 (b).” (Hyperlink added.)  [Eds. Note: this BLOG has previously addressed CPLR 3025 [here], [here], [here] and [here].  

This BLOG has previously explained that CPLR 3025(b) provides, in pertinent part, that “[a] party may amend his or her pleading … at any time by leave of court or by stipulation of all parties.” Importantly, CPLR 3025(b) provides that “[l]eave [to amend] shall be freely given.…” Thus, “unless the proposed amendment would unfairly prejudice or surprise the opposing party, or is palpably insufficient or patently devoid of merit,” the motion for leave to amend should be granted. Cirillo v. Lang, 206 A.D.3d 611, 612 (2d Dept. 2022) (citations omitted).  See also Greene v. Esplanade Venture P’ship, 36 N.Y.3d 513, 526 (2021); Toiny, LLC v. Rahim, 214 A.D.3d 1023, 1024 (2d Dept. 2023) (citations omitted).

Briefly, in Favourite, plaintiff Upper East Side Suites LLC (“UESS”) is a Delaware corporation that was formed to purchase a building in Manhattan to be used for short-term apartment rentals.  The remaining Plaintiffs are investors in UESS.  The defendants are the managers of UESS.  When the short-term rental business failed, the subject building was sold at a distress sale and the proceeds were used by the defendants as a down payment on the purchase of a different building.  The defendants lost the down payment when they failed to close on the purchase of the new property.  Because of the loss of the down payment, there were no funds to return to the investors, who alleged that the managers “repeatedly lied to them about these operations and that the purchase of the second building was never authorized or disclosed.”  The managers were removed and “plaintiffs commenced an action in May 2016 for breach of the operating agreement, breach of fiduciary duty, and other related claims.”  After the removal of the managers, one of those managers, who was also UESS’ registered agent, resigned from that position.  Accordingly, under Delaware law, UESS’ certificate of formation was cancelled by Delaware’s Secretary of State.

After UESS’ counsel failed to appear, the first complaint was dismissed.  After an amended complaint was filed by the investors (and not UESS), the defendants moved to dismiss “arguing among other things that a suit may not be brought on behalf of a cancelled Delaware LLC.”  After one of UESS’ members obtained a “certificate of revival”, the plaintiffs cross-moved to file an amended complaint with the investors and UESS as plaintiffs.  The motion was denied, and the cross-motion was granted, the motion court holding that “because UESS had been revived, the [defendant]s’ arguments related to the inactivity of [UESS] were no longer relevant.”  The defendant appealed.  While the appeal was pending, the defendants interposed counterclaims against the plaintiffs based on breaches of the operating agreement.

The Appellate Division reversed the motion court’s order and dismissed the complaint “holding that UESS had not been properly revived” because there was no evidence that the entity that obtained the certificate of revival for UESS had the authority to do so and, therefore, “[UESS] continued to lack standing or capacity.”  A new and proper certificate of revival was obtained, and the plaintiffs moved under CPLR 3025(b) to file a third amended complaint.  The motion was opposed by the defendants, who argued that amendment would be improper because the prior complaint was dismissed in its entirety.  The motion court granted the motion to amend reasoning that “although plaintiffs could have commenced a separate action under CPLR 205 (a) after the Appellate Division dismissed their claims without prejudice, “it would make no sense, under the circumstances, for plaintiffs to have commenced another separate action and then to have moved to consolidate it with this one when this one has always remained active and pending.” The Court also noted that the filing of a new action would have been timely on the amendment date.”  As stated in the Favourite opinion, on appeal, and as is relevant here, a divided Appellate Division reversed, holding that “its dismissal of the second amended complaint left Supreme Court powerless to entertain a motion to file another amended complaint, because no complaint remained pending to amend.”

The Plaintiffs appealed, as of right, pursuant to CPLR 5601(a), because “there [was] a dissent by at least two justices on a question of law in favor of the party taking such appeal.”  CPLR 5601(a).  The Court of Appeals reversed the Appellate Division.  Recognizing that “prejudice or surprise” was an issue, the Court of Appeals noted that “the Appellate Division holding rests on the more fundamental premise that when an appellate court has dismissed a complaint in its entirety, the trial court has no discretion to grant leave to amend that complaint under CPLR 3025 (b), even if the dismissal was without prejudice and not on the merits and the defect would be curable by amendment.”  The Court explained:

[t]he question on appeal, then, is whether the Appellate Division’s decision required the plaintiffs to commence a separate action instead of seeking leave to file an amended complaint. Whatever the answer to that question might be in a case in which no action remained between the parties in Supreme Court, here the action remained pending in Supreme Court because of the [defendant]s’ counterclaims. Therefore, Supreme Court retained control over the parties and continued to adjudicate claims related to the same transactions that formed the subject-matter of the complaint. For that reason, the Appellate Division order also did not render the case final for purposes of appealability, as no appeal to the Court of Appeals may be taken from an order which leaves claims pending in the action between the same parties.  [Citation and footnote omitted.]

Thus, despite the fact that the complaint was dismissed, the action remained pending and “Supreme Court retained the power to grant leave to plaintiffs to file another amended complaint.”  As the Court recognized, “[t]here is nothing particularly novel about repleading a dismissed complaint in Supreme Court to cure a defect discovered on appeal.”

Recognizing that there is no such requirement, the Court also rejected the defendants’ argument that amendments are only permitted “when leave to amend is expressly granted by the appellate court.”  The Court also rejected the defendants’ “more technical” argument “that where the entire complaint has been dismissed, granting leave to amend is not possible because there is no complaint remaining to amend,” because such an argument “is at odds with the common practice of dismissing complaints with leave to amend.”¹

It should be noted that there was a lengthy dissent in which Judge Rivera urged, inter alia, that once the “Appellate Division dismissed the second amended complaint in its entirety and held that the named company-plaintiff lacked standing and capacity to sue” the plaintiffs’ only recourse  was to commence a new action under CPLR 205 (a) based on the same transaction or occurrence, if, within that time, it acquired standing to sue.” (Hyperlink added.)²

Footnotes

1. The Court also determined that the plaintiffs’ motion to amend was timely.
2. This BLOG has previously addressed CPLR 205.  See, e.g., [here] and [here].

Jonathan H. Freiberger 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.