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Who Knew There Could Be So Many Issues Arising From a Breach of Contract Action?

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  • Posted on: Mar 16 2020

Most (lay) people think that a breach of contract action involves nothing more than a failure to perform some requirement in a contract. One need look no further than Wikipedia for such a definition. (Here (“Breach occurs when a party to a contract fails to fulfill its obligation(s) as described in the contract.…”).) But as today’s post shows, there can be more to a breach of contract action than a simple failure to perform. Schum v. Spatorico, 2020 N.Y. Slip Op. 01816 (4th Dept. Mar. 13, 2020) (here).

Implied-in-Fact Contracts

This Blog has often written about contract issues; in particular, the enforceability of a contract whether it be oral or written. Sometimes, however, a contract can be implied from the conduct of the parties. Are implied-in-fact contracts enforceable?

An implied-in-fact contract is a “not really a contract at all, but rather a legal obligation imposed to prevent a party’s unjust enrichment.” Universal Constr. Resources, Inc. v. New York City Hous. Auth., 2018 N.Y. Slip Op. 32846 (U) (Sup. Ct., N.Y. County 2018), citing Parsa v. State of New York, 64 N.Y.2d 143, 148 (1984). It is an agreement created by the conduct of the parties and the circumstances surrounding their relationship: “A contract implied in fact may result as an inference from the facts and circumstances of the case, although not formally stated in words, and is derived from the ‘presumed’ intention of the parties as indicated by their conduct.” Jemzura v. Jemzura, 36 N.Y.2d 496, 503-504 (1975) (internal citations omitted).

The elements of an implied-in-fact contract are the same as those of an express contract: “consideration, mutual assent, legal capacity and legal subject matter.” Maas v. Cornell Univ., 94 N.Y.2d 87, 93-94 (1999). Like an express contract, an implied-in-fact contract requires a showing that there was a meeting of the minds. I.G. Second Generation Partners, L.P. v. Duane Reade, 17 A.D.3d 206, 208 (1st Dept. 2005). A contract implied-in-fact “is just as binding as an express contract … since in the law there is no distinction between agreements made by words and those made by conduct.” Id. A cause of action for breach of an implied contract is not viable where this is an express contract covering the same subject matter, as “the theories of express contract and of contract implied in fact … are mutually exclusive.” Bowne of New York, Inc. v. International 800 Telecom Corp., 178 A.D.2d 138, 138 (1st Dept. 1991).

[Ed. Note: This Blog wrote about a case involving an implied-in-fact contract here.]

Causation and Damages

Like any express contract, to prevail on a breach of an implied contract claim, the plaintiff must allege that his/her damages were proximately caused by the breach. JP Morgan Chase v. J.H. Elec. of N.Y., Inc., 69 A.D.3d 802, 803 (2d Dept. 2010) (the elements of a breach of contract cause of action are “the existence of a contract, the plaintiff’s performance under the contract, the defendant’s breach of that contract, and resulting damages.”). In other words, the plaintiff must establish that the damages “were fairly within the contemplation of the parties when they entered into the contract.” Nitti v. Goodfellow, 256 A.D.2d 1082, 1083 (4th Dept. 1998).

But what if the plaintiff demonstrates proximate causation but no monetary damages at the time of the breach? Can the plaintiff continue to pursue his/her breach of contract claim? In a word, yes. “A breach of contract accrues at the time of the breach even if no damage occurs until later.” Bratge v. Simons, 167 A.D.3d 1458, 1459-1460 (4th Dept. 2018) (internal quotation marks omitted); see also Ely-Cruikshank Co. v. Bank of Montreal, 81 N.Y.2d 399, 402 (1993). Moreover, since “[n]ominal damages are always available in breach of contract actions” (Kronos, Inc. v. AVX Corp., 81 N.Y.2d 90, 95 (1993) (citations omitted)), all the “elements necessary to maintain a lawsuit and obtain relief in court” are present at the time the claim accrues. Ely-Cruikshank, 81 N.Y.2d at 406 (dissenting op.).

With these principles in mind, this Blog examines Schum v. Spatorico.

Schum v. Spatorico

Schum concerned a real estate transaction involving three pieces of property (“subject properties”). Plaintiff, an attorney, represented non-party Homestead NY Properties, Inc. (“Homestead”) in the transaction. The subject properties, as well as numerous other properties owned by Homestead, were encumbered by mortgages held by defendants’ client as well as a lien held by a third party. Defendants Derrick A. Spatorico and his law firm Pheterson Spatorico LLP represented the mortgagee. Homestead was separately represented with respect to the lien, as was the lienholder.

When Homestead sought to sell the subject properties, the four attorneys entered into a series of negotiations, culminating in an agreement regarding the discharge of the mortgage and the release of the lien related to the subject properties. At the closing for the subject properties, plaintiff executed a guaranty providing that the lien on the subject properties would be released. Plaintiff thereafter forwarded to defendants two checks, one made out to defendant representing the money due to the mortgagee and one made out to the lienholder’s law firm in the amount of $1,500, i.e., the amount due to the lienholder for the release of the lien. In the letter accompanying those checks, plaintiff wrote that he was enclosing them “in accordance with [defendant’s] advice,” and asked that defendant forward to him the “completed discharge of mortgage” as well as “[t]he originals of the . . . release of judgment releasing the [subject properties] from the lien.”

Defendant forwarded the relevant amount of money to the mortgagee and “caused the discharge [of mortgage] to be filed.” With respect to the check to be forwarded to the lienholder, defendant let that check “s[i]t on [his] desk” because he believed a different agreement with respect to the lien release would ultimately be negotiated. Several weeks later, defendant, the attorney representing Homestead with respect to the lien and the attorney representing the lienholder reached a separate agreement related to the lien and all properties “owned by Homestead.” Defendant then approached plaintiff’s law partner and had that partner renegotiate the lien release check to make it payable to defendant’s law firm. Defendant later remitted those funds to his client, the mortgagee.

The lien release was not recorded for the subject properties, presumably because the subsequent agreement did not release the lien on those properties. Maximum Income Partners, Inc. v. Webber, 158 A.D.3d 1090 (4th Dept. 2018), aff’g, 58 Misc. 3d 1218[A], 2016 N.Y. Slip Op. 51903[U] (Sup. Ct., Monroe County 2016). Plaintiff, facing liability under the terms of his guaranty, commenced the action asserting causes of action for breach of contract, promissory estoppel and conversion. Defendants appealed from an order that, inter alia, denied their motion for summary judgment dismissing the complaint.

The Fourth Department modified the order by granting defendants’ motion in part and dismissing the third cause of action (for conversion), and as modified affirmed the motion court’s order.

The Court’s Ruling

The Court held that defendants failed to establish their entitlement to judgment as a matter of law with respect to the breach of contract claim. The Court found that defendants’ “own submissions raise[d] triable issues of fact [as to] whether there was an implied-in-fact contract between plaintiff and defendant requiring defendant to obtain the release for the properties.” Slip Op. at *1 (citation omitted). 

The Court further held that “[d]efendants’ submissions also raise[d] triable issues of fact as to “whether the damages alleged by plaintiff were proximately caused by defendant’s purported breach of the implied-in-fact contract.” Id. (citing Sirles v. Harvey, 256 A.D.2d 1227, 1228-1229 (4th Dept. 1998); Niagara Foods, Inc. v. Ferguson Elec. Serv. Co., Inc., 111 A.D.3d 1374, 1376 (4th Dept. 2013), lv. denied, 22 N.Y.3d 864 (2014)). The Court observed that a supporting affidavit from the lienholder’s attorney explained that no release was given, in part, because the $1,500 fee was never received by the lienholder, thereby suggesting that more information was needed to decide the causation issue.  

The Court rejected “defendants’ contention that the breach of contract cause of action [could not] be maintained due to the fact that plaintiff had not suffered any monetary damages at the time that he commenced this action.” Slip Op. at *1. In this regard, the Court noted that a breach of contract claim is viable “‘even if no damage occurs until later.’” Id. (quoting Bratge v. Simons, 167 A.D.3d 1458, 1459-1460 (4th Dept. 2018) (internal quotation marks omitted), and citing Ely-Cruikshank, 81 N.Y.2d at 402). The Court further noted that plaintiff “face[d] liability under the guaranty for any damages sustained by the subsequent owners of the property as a result of the lien that remained on the property.” Id.

Takeaway

Although the Court’s decision and order is brief, it nonetheless highlights the tension between a contract manifested in writing and a contract manifested by the conduct of the parties. As Schum demonstrates, issues of fact often pervade the determination. For this reason, whether an implied-in-fact contract exists is determined on a case-by-case basis.

Schum also highlights the contract principle that a breach of contract action can be viable even if the damages are not manifested until a later date. After all, “[n]ominal damages are always available in breach of contract actions” (Kronos, Inc. v. AVX Corp., 81 N.Y.2d 90, 95 (1993) (citations omitted)), as long as the “elements necessary to maintain a lawsuit and obtain relief in court” are present at the time the claim accrues. Ely-Cruikshank, 81 N.Y.2d at 406 (dissenting op.).  

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