Court Opinion

ID: 5832201
Source: CourtListenerOpinion
Date Created: 2022-01-12 22:28:04.763773+00
Date Added: 2024-06-11T08:43:29.204684
License: Public Domain

Lynch, J.
(dissenting in part). I dissent from that part of the majority opinion granting summary judgment to plaintiffs on their first cause of action and dismissing defendants’ affirmative defense and counterclaim and would affirm in those aspects the order of Special Term. Defendants organized Lombard-Wall Group, Inc. (the holding company) as a vehicle for the purchase of the stock of Lombard-Wall, Inc. (the operating company). The purchase was financed by a short-term loan from a Swiss bank. Payment of the loan was made possible by a $4,000,000 loan from the operating company to the holding company in exchange for a noninterest-bearing note. Under two contemporaneous instruments, a stockholders’ agreement and a loan and security agreement, plaintiff Zion was made a class A shareholder of the holding company, while Zion’s Half Moon Land Company guaranteed the note with a mortgage on land it owned in California. A stated purpose of this arrangement was to enable the operating company to carry the note on its books at its face value. After the execution of these agreements, defendants’ accountants informed them, contrary to an earlier opinion, that the note could not be carried at face value unless it were interest bearing. To cure this defendants executed an interest agreement to make the note bear interest at 12% per annum and an escrow agreement to facilitate its payment. The plaintiffs’ first cause of action alleges that the holding company’s entry into the interest and escrow agreements was an indulgence in "business or activities” forbidden by their contract. I disagree with the finding of the majority that "the holding company was to have no function save as a repository”. Its mandate was to refrain from "any business or activity of any kind * * * other than the acquisition and ownership of the stock of [the operating company]”. Thus it was expressly authorized to engage in any business or activity necessary to the acquisition and ownership of the stock. The stockholders agreement provided: "In order for the business and affairs of [the operating company] to be conducted properly, it is important that the Note continue to be valued at the guaranteed amount [$4,000,000]”. The preservation of the value of the note was at the heart of the stock acquisition and ownership scheme. Consequently I find an issue of fact remaining whether the execution of the interest and escrow agreements was a necessary and permitted activity or was unnecessary and forbidden. In the event that it should be found that the defendants’ activity was forbidden by contract, they seek by counterclaim reformation on the ground of mutual mistake. Plaintiffs support their motion for summary judgment to dismiss it solely upon the contention that any mistake would be one of law not able to be remedied by reformation. CPLR 3005, however, provides that "When relief against a mistake is sought *860in an action or by way of defense or counterclaim, relief shall not be denied merely because the mistake is one of law rather than one of fact”. Taking as evidence all of the instruments that accumulated in this transaction I find sufficient support for the defendants’ allegations to justify denial of a remedy as drastic as summary judgment (see Millerton Agway Coop. v Briarcliff Farms, 17 NY2d 57). I am in accord with the majority opinion’s reasoning that the defendants should be granted summary judgment dismissing the plaintiffs second cause of action. Settle order.