Court Opinion

ID: 9945548
Source: CourtListenerOpinion
Date Created: 2024-02-27 21:10:35.781639+00
Date Added: 2024-06-11T14:25:31.909256
License: Public Domain

Receivables IM Rest, LLC v GFB Rest. Corp.
               2024 NY Slip Op 30541(U)
                   February 20, 2024
           Supreme Court, New York County
        Docket Number: Index No. 653032/2023
                 Judge: Gerald Lebovits
Cases posted with a "30000" identifier, i.e., 2013 NY Slip
 Op 30001(U), are republished from various New York
 State and local government sources, including the New
  York State Unified Court System's eCourts Service.
 This opinion is uncorrected and not selected for official
                       publication.
  FILED: NEW YORK COUNTY CLERK 02/20/2024 04:58 PM                                                                   INDEX NO. 653032/2023
  NYSCEF DOC. NO. 24                                                                                           RECEIVED NYSCEF: 02/20/2024

                                   SUPREME COURT OF THE STATE OF NEW YORK
                                             NEW YORK COUNTY
            PRESENT:             HON. GERALD LEBOVITS                                            PART                             07
                                                                                      Justice
            ---------------------------------------------------------------------------------X   INDEX NO.          653032/2023
                RECEIVABLES IM REST, LLC,
                                                                                                 MOTION DATE         02/14/2024
                                                         Plaintiff,
                                                                                                 MOTION SEQ. NO.        001
                                                 -v-
                GFB RESTAURANT CORP.,                                                              DECISION + ORDER ON
                                                                                                         MOTION
                                                         Defendant.
            ---------------------------------------------------------------------------------X

            The following e-filed documents, listed by NYSCEF document number (Motion 001) 2, 10, 12, 13, 14, 15,
            16, 17, 18, 19, 20, 21, 22, 23
            were read on this motion to/for                                       SUMMARY JUDGMENT (BEFORE JOIND)                 .

            Kasowitz Benson Torres LLP, New York, NY (Donald J. Reinhard of counsel), and Quinn,
            Emanuel, Urquhart & Sullivan, LLP, New York, NY (Benjamin I. Finestone and Rachel E.
            Epstein of counsel), for plaintiff.
            Marks & Klein, LLC, Red Bank, NJ (Brent M. Davis of counsel), for defendant.

            Gerald Lebovits, J.:

                  This action arises from a dispute concerning money owed on a promissory note.
            Defendant, GFB Restaurant Corp., executed a promissory note in favor of non-party Il Mulino
            USA, LLC, for $354,244, effective September 2019. Gerald Katzoff signed the note as principal
            of GFB and manager of Il Mulino. (See NYSCEF No. 5.)

                    In July 2020, Il Mulino filed for bankruptcy in the United States Bankruptcy Court for the
            Southern District of New York. (NYSCEF Nos. 14 at ¶ 59, 17 at 3.) In December 2020, Il
            Mulino sold its assets to non-party BSP Agency, LLC and other entities.1 (NYSCEF No. 17 at 6
            [asset purchase agreement].) The asset-purchase agreement was so ordered by the Bankruptcy
            Court. (NYSCEF No. 3 at 3.) In connection with that agreement, Il Mulino assigned the
            promissory note to plaintiff, Receivables IM Rest, LLC. (NYSCEF No. 6 at 2.) According to
            plaintiff, defendant defaulted on the note.

                 Plaintiff brings this action by motion for summary judgment in lieu of complaint under
            CPLR 3213. It seeks the sum owed under the note in addition to interest, fees, and costs.

            1
             Plaintiff was formed on December 9, 2020. BSP is plaintiff’s owner. (See NYSCEF No. 21 at
            8.)

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  FILED: NEW YORK COUNTY CLERK 02/20/2024 04:58 PM                                              INDEX NO. 653032/2023
  NYSCEF DOC. NO. 24                                                                    RECEIVED NYSCEF: 02/20/2024

            Plaintiff contends that it has demonstrated the existence of a promissory note and defendant’s
            failure to make the required payments. Defendant argues that there are triable disputes of
            material fact: whether defendant was fraudulently induced by non-party BSP Agency, LLC to
            sign the promissory note and whether plaintiff has unclean hands. Defendant also argues under
            CPLR 3215 (f) that summary judgment is premature. (NYSCEF No. 13 at 14.) Plaintiff’s motion
            is denied.

                                                          DISCUSSION

                    To establish a prima facie case under CPLR 3213, plaintiff “must show the existence of a
            promissory note executed by the defendant containing an unequivocal and unconditional
            obligation to repay and the failure of the defendant to pay in accordance with the note’s terms.”
            (Zyskind v FaceCake Mktg. Tech., Inc., 101 AD3d 550, 551 [1st Dept 2012].) If plaintiff
            establishes its prima facie case, the burden shifts to defendant to “establish, by admissible
            evidence, that a triable issue of fact exists.” (SCP [Bermuda] Inc. v Bermudatel Ltd., 224 AD2d
            214 [1st Dept 1996].) The defendant may use “facts extrinsic to an instrument for the payment of
            money” to support a defense. (Alard, L.L.C. v Weiss, 1 AD3d 131, 131 [1st Dept 2003].)

                  I.       Whether Plaintiff Has Established a Prima Facie Case

                    Plaintiff has established its prima facie case under CPLR 3213. Plaintiff demonstrates
            that defendant signed the promissory note, and that Il Mulino assigned the note to plaintiff.2
            Plaintiff also demonstrates that, under the note, defendant promised to pay a principal sum of
            $354,244, capitalized interest, and interest accrued on the principal amount. (See NYSCEF No. 5
            at 1.) Moreover, the promissory note constitutes an instrument for the payment of money only. It
            contains an unequivocal and unconditional obligation to repay the money loaned in connection
            with the note.

                    Plaintiff also shows that defendant failed to make payments under the note. Under the
            note, “[t]he Principal Amount and all accrued and unpaid interest and other amounts under this
            Note shall be immediately due and payable . . . upon delivery of a written demand signed by
            [plaintiff].” (Id. at 4.) Plaintiff sent a demand letter to defendant in March 2023. (NYSCEF No.
            7.) But defendant refused to make any payments under the note. (NYSCEF No. 8 at 3.)

                        Plaintiff has thus made out its prima facie case.

                  II.       Whether Defendant Has Raised a Triable Dispute of Fact

                               a. Fraudulent Inducement

                    Defendant contends that BSP fraudulently induced it to sign the promissory note. It
            argues that it has identified material issues of fact concerning whether defendant was
            fraudulently induced that foreclose granting summary judgment in lieu of complaint.

            2
                Defendant does not contest the existence of the promissory note. (See NYSCEF No. 8 at 2.)

                                                                  2

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  FILED: NEW YORK COUNTY CLERK 02/20/2024 04:58 PM                                                INDEX NO. 653032/2023
  NYSCEF DOC. NO. 24                                                                       RECEIVED NYSCEF: 02/20/2024

                   To state a claim for fraudulent inducement, a party must show a “misrepresentation or a
            material omission of fact which was false and known to be false by defendant, made for the
            purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the
            misrepresentation or material omission, and injury.” (United States Life Ins. Co. in City of New
            York v Horowitz, 192 AD3d 613, 614 [1st Dept 2021].)

                    Defendant alleges that BSP fraudulently induced defendant to enter into the promissory
            note by making material misrepresentations to defendant that BSP knew were false, and that
            defendant was damaged as a result. According to Katzoff’s affidavit, Il Mulino entered into a
            credit agreement with BSP to fund Il Mulino’s expansion in 2015. With the onset of the
            COVID-19 pandemic, Katzoff became concerned that Il Mulino would not be able to make
            required payments under the credit agreement. (NYSCEF No. 14 at 5-6.) He claims that BSP
            offered to provide additional funding and represented that their discussions and “capital infusions
            would lead to a forbearance of the 2015 Credit Agreement.” (Id. at ¶ 50.) Katzoff further claims
            that he was presented with the note as part of the capital infusion. Importantly, Katzoff
            represents that he “executed the Promissory Note only because of BSP’s representations that the
            status quo in connection with management, operation and control would be maintained.” (Id. at ¶
            54.) These, representations, he contends, turned out to be false—according to him, BSP planned
            to seize control of the Il Mulino restaurants all along. (Id. at ¶¶ 55-56.)

                   Plaintiff argues that defendant cannot establish the reliance element of fraudulent
            inducement. It claims that the alleged fraud was committed by a third party: BSP. And it reasons
            that Katzoff signed the promissory note on behalf of both GFB and Il Mulino which were under
            common ownership. (See NYSCEF No. 21 at 6.) Plaintiff also asserts that the language of the
            promissory note precludes defendant from establishing reliance on statements extrinsic to the
            contract.

                     The court concludes that defendant can raise fraudulent inducement as a defense because
            plaintiff has not shown that it is a noteholder in due course. Fraudulent inducement is an
            available defense “to an action by the holder of a negotiable instrument to enforce the instrument
            . . . even if the fraud was committed by a third party,” so long as the noteholder “is not a holder
            in due course.” (Thornock v Kinderhill Corp., 749 F Supp 513, 518 [SD NY 1990] [internal
            citations omitted].) A holder in due course is a “(1) holder (2) of a negotiable instrument (3) who
            took it for value, (4) in good faith, and (5) without notice that it is overdue or has been
            dishonored or of any defense against or claim to it on the part of another.” (DH Cattle Holdings
            Co. v Smith, 195 AD2d 202, 209 [1st Dept 1994], citing UCC 3-302.)

                   Here, plaintiff does not contend that it holds the promissory note in due course. (See Pan
            Atl. Group, Inc. v Isacsen, 114 AD2d 1022, 1022-23 [2d Dept 1985] [holding that absent a
            contention by plaintiff that it was the noteholder in due course, defendant could assert a
            fraudulent inducement defense].) Moreover, a “a person does not acquire rights of a holder in
            due course of an instrument taken . . . [b]y legal process or by purchase in an execution,
            bankruptcy or creditor’s sale.” (UCC 3-302 [a].) Il Mulino assigned the note to plaintiff in
            connection with the asset-purchase agreement that resulted from the bankruptcy proceedings.
            (See NYSCEF No. 6 at 1.)

                                                             3

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  FILED: NEW YORK COUNTY CLERK 02/20/2024 04:58 PM                                                 INDEX NO. 653032/2023
  NYSCEF DOC. NO. 24                                                                       RECEIVED NYSCEF: 02/20/2024

                     This court also concludes that plaintiff has not definitively rebutted defendant’s assertion
            of justifiable reliance. Plaintiff contends that GFB and Katzoff are sophisticated parties who
            cannot claim to have justifiably relied on third-party statements about overall business
            relationships—statements, plaintiffs say, are unrelated to the promissory note. (NYSCEF No. 21
            at 6.) They further emphasize that GFB signed the note in favor of Il Mulino when they were
            under common ownership and that Katzoff signed it on behalf of both GFB and Il Mulino. The
            cases it cites to support these propositions, however, are not persuasive.3 And plaintiff has not
            established that it would have been unreasonable for GFB to rely on BSP’s representations given
            that Katzoff, as manager of Il Mulino, already had a prior business relationship with BSP—nor
            that Katzoff had information available to him that would have revealed BSP’s representations to
            be false. The alleged misrepresentations also were not unrelated to the note: Although they did
            not pertain to particular provisions or obligations of the note, Katzoff has alleged that the
            representations were the “only” reason he executed the note. (NYSCEF No. 14 at ¶ 54.)

                    Further, the language of the promissory note does not foreclose a fraudulent-inducement
            defense. Plaintiff contends that the note’s merger clause “precludes GFB’s purported reliance on
            non-contractual statements—and particularly those of non-parties to the GFB note.” (NYSCEF
            No. 21 at 6.) But a merger clause is insufficient to bar a claim for fraudulent inducement where
            “it makes no reference to the particular misrepresentations allegedly made by [defendants].”
            (LibertyPointe Bank v 75 E. 125th St., LLC, 95 AD3d 706 [1st Dept 2012].) The note’s merger
            clause states that “[t]his Note embodies the entire agreement of the parties hereto and supersedes
            all prior agreements and understandings relating to the subject matter of this Note.” (NYSCEF
            No. 5, at 7.) This general language does not bar defendant’s fraudulent-inducement defense.

                              b. Unclean Hands

                    Defendant argues that plaintiff, through its owner BSP, has unclean hands. (NYSCEF No.
            13 at 13.) But plaintiff is seeking to enforce a promissory note—a claim exclusively for
            damages. Unclean hands is an equitable defense that is not available in a damages action. (See
            Manshion Joho Ctr. Co., Ltd. v Manshion Joho Ctr., Inc., 24 AD3d 189, 190 [1st Dept 2005]
            [unclean hands defense is unavailable in action solely for damages].)

                III.      Whether Granting Summary Judgment Would Be Premature

                    Defendant argues under CPLR 3215 (f) that summary judgment is premature because
            defendant has not had the opportunity to conduct discovery to support its fraudulent-inducement
            and unclean-hands defenses. (NYSCEF No. 13 at 17.) Given this court’s conclusion that
            defendant has raised a dispute of material fact on its fraudulent-inducement defense and may not
            raise an unclean-hands defense, this argument is academic.

                       Accordingly, it is

            3
             In Miller v Icon Group LLC (77 AD3d 586 [1st Dept 2010]) and Stuart Silver Assoc., Inc. v
            Baco Dev. Corp. (245 AD2d 96 [1st Dept 1997]), the defendants relied on alleged
            misrepresentations without doing their own due diligence. Here, plaintiff is not arguing that
            defendant failed to diligently investigate before signing the promissory note.

                                                              4

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  FILED: NEW YORK COUNTY CLERK 02/20/2024 04:58 PM                                                   INDEX NO. 653032/2023
  NYSCEF DOC. NO. 24                                                                           RECEIVED NYSCEF: 02/20/2024

                    ORDERED that plaintiff’s motion for summary judgment in lieu of complaint under
            CPLR 3213 is denied, and the motion-action is converted into a plenary action in which
            plaintiff’s motion papers are deemed to constitute a complaint and exhibits, and defendant’s
            motion papers are deemed to constitute an answer and exhibits; and it is further

                   ORDERED that the parties shall appear before this court for a telephonic preliminary
            conference on March 15, 2024; and it is further

                    ORDERED that defendant serve a copy of this order with notice of its entry on plaintiff.

                    2/20/2024
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                                                                                 HON GERALD
                                                                                        $SIG$LEBO'lt!f?S
                                                                                                      J.S.c . - -
                      DATE
             CHECK ONE:                 CASE DISPOSED                  X   NON-FINAL DISPOSITION

                                                        □                                           □
                                        GRANTED          X    DENIED       GRANTED IN PART              OTHER

             APPLICATION:               SETTLE ORDER                       SUBMIT ORDER

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             CHECK IF APPROPRIATE:      INCLUDES TRANSFER/REASSIGN         FIDUCIARY APPOINTMENT        REFERENCE

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