Freeman v. Bianco

Full title: STANTON J. FREEMAN and JACQUELINE FREEMAN, Plaintiffs, v. JOSEPH J…

Court: United States District Court, S.D. New York

Date published: Jan 23, 2003

No 02 Civ. 7525 (GEL) (S.D.N.Y. Jan. 23, 2003)

Opinion

No 02 Civ. 7525 (GEL)

January 23, 2003

Noel W. Hauser, New York, NY, for plaintiffs Stanton J. Freeman and Jacqueline Freeman.

Bruce H. Beckmann, Rosensteil Beckmann LLC, New York, N.Y. (Randi L. Maidman, New York, NY, of counsel), for defendant Joseph J. Bianco.

OPINION AND ORDER

GERARD E. LYNCH, United States District Judge.

On September 28, 2002, Stanton and Jacqueline Freeman brought this diversity action against Joseph Bianco, alleging what appear to be intended as causes of action in contract, tort and unjust enrichment. Defendant moves to dismiss on grounds of violation of the statute of limitations, improper venue, failure to join an indispensable party, and failure to state a claim. Defendant also moves for sanctions pursuant to Rule 11 of the Federal Rules of Civil Procedure. The complaint will be dismissed, and the plaintiffs ordered to show cause why sanctions should not be granted.

BACKGROUND

I. Facts

The following facts are alleged in plaintiffs' complaint and must be taken as true for purposes of the motion to dismiss. in or about 1994, the Freemans wished to move from New York and take up residence in Florida. In order to purchase a house in Florida, they needed to obtain a mortgage, but "felt unable to secure a mortgage from an institutional lender." (Compl. ¶ 8.)¹ Bianco, a business associate of Stanton Freeman, agreed to "obtain or guarantee" a mortgage for Freeman. (Compl. ¶ 9.) With this promise in hand, the Freemans "or their nominee" entered a contract to purchase a house in Florida for $900,000, making a $300,000 down payment. However, Bianco "secretly planned, but failed to disclose" to plaintiffs, that as a condition of guaranteeing the mortgage that plaintiffs needed but could not obtain, Bianco would demand that plaintiffs' contract to purchase the house be assigned to a corporation controlled by Bianco, which would then lease the house to the Freemans as tenants, at a rent equal to the monthly carrying charges of the property.² The plaintiffs further allege that Bianco had "reason to believe" that they would be "unable to make the payments called for under the 'lease'" — in other words, that they would not be able to meet the payments due under what they claim was really intended as a mortgage on the property — and that indeed, they did fail to make the payments. (Compl. ¶ 17-18.) The complaint does not allege that Bianco's reason for believing the Freemans could not afford to make the rent or mortgage payments involved any secret knowledge concerning their finances or concerning the lease that was unavailable to the Freemans themselves. When the Freemans defaulted on their mortgage/lease obligations, Bianco caused the corporation that nominally owned the property to bring eviction proceedings against the Freemans. A default judgment was entered in favor of the corporation.

1 The plaintiffs' motion papers more bluntly admit that they "were at the time not creditworthy." (P. Mem. at 2.)

2 The complaint does not expressly state that the plaintiffs actually entered such an agreement or accepted these terms. However, the factual recitals in the complaint clearly imply that the Freemans agreed that the property would be acquired in this manner and leased to them. Despite the allegation that Bianco failed to disclose his "secret plan," the complaint does not allege that the plaintiffs did not ultimately agree to the terms or the lease, or that they failed to understand the terms of the agreement.

After the Freemans were evicted, Bianco advised them that he had found a potential purchaser who would pay a price for the property sufficient to pay off the principal and interest on the mortgage, with $100,000 left over for the Freemans, and persuaded the Freemans to give up any claim to the property in order to facilitate this transaction. According to plaintiffs, they accepted this proposal in reliance on Bianco's representation. In fact, however, there was no purchaser, and Bianco held onto the property until 2000, when he located a buyer and sold the property for $1,800,000.

II. The Agreements

Among other gaps and omissions, the complaint fails to attach as exhibits any of the agreements referred to, and is virtually devoid of dates, specifying only that the Freemans' desire to move to Florida was conceived in 1994 and that the defendant's corporation eventually sold the property in 2000. Nevertheless, the Court may take notice of the underlying documents relied upon in the complaint. Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002). Copies of the documents are supplied by defendant as part of his motion papers; plaintiffs do not question their authenticity.

The Lease Agreement, apparently executed in August 1994,³ recites that the Freemans made a $300,000 payment at the closing of the contract of sale, that Bianco's corporation obtained a mortgage for over $600,000 to supply the balance of the purchase price, and that a corporation controlled by Stanton Freeman (not the Freemans as individuals) "desires to lease the Premises." (Bianco Aff. Ex. B. at 1.)⁴ The Lease provides that the Freemans will pay as rent "the total amount due under the Mortgage and the monthly cost of insurance for the Premises and all taxes and assessments on the Premises." (Id. ¶ 1.) If the Freemans failed to pay rent for three months, the Lease would terminate, the Freemans would vacate the premises, and the house would be sold. (Id. ¶ 12(b), 13, 14(a).) In the event of such a sale, the proceeds would be disbursed first to Bianco to satisfy the mortgage. with any remaining balance to the Freemans. (Id. ¶ 15(a).) The Lease also extended an option to the Freemans to purchase the property from Bianco for $100 once the mortgage and other expenses were paid in full. (Id. ¶ 16.) The Lease contains a choice of law provision stating that the agreement is governed by the law of Florida, and a forum selection clause providing that "The parties hereby consent to and submit to jurisdiction of a competent court located in the State of Florida," which "shall be the sole and exclusive venue for resolution of any disputes or disagreements" concerning the Lease or the related transactions. (Id. ¶ 21.)

3 The copy of the agreement appended to defendant's motion is unexecuted. (Bianco Aff. Ex. B.) However, neither in the complaint nor in their motion papers do plaintiffs deny that the Lease was agreed to, that it was valid, or that the copy provided does not correctly set forth the terms of the agreement.

4 For simplicity's sake, in describing the terms of the Lease, the Court will refer to "the Freemans" and "Bianco" rather than to the corporations that are technically the parties to the Lease.

On May 9, 1997, Bianco and the Freemans entered a second agreement ("the Release Agreement"), terminating the Lease and "settl[ing] all matters between and among them." (Bianco Aff Ex. D.)⁵ Bianco asserts that the Release Agreement is the agreement referred to in paragraphs 22 through 24 of the complaint (Bianco Aff. ¶ 8), and the plaintiffs do not dispute this, although the terms of the Release Agreement do not perfectly correspond to the allegations of the complaint. The agreement requires the Freemans to vacate the premises by April 28, 1997. (Id. Ex. D ¶ 1.) It also provides that unless the Freemans receive an offer from a bona fide third party to purchase the property for more than $885,000 by April 30, 1997, "the offer from Mannis [not otherwise identified in the Release Agreement] in the amount of $885,000.00 shall be accepted and the closing will take place on or before May 15, 1997." (Id. ¶ 2.) The Release Agreement provides that the Freemans shall receive $104,489.33 from the proceeds of the sale. (Id. ¶ 3.) Nowhere do the Freemans allege that they did not receive this amount; the complaint implies that they did. (Compl. ¶ 22.)

5 The copy of this agreement that is part of the record is signed by the Freemans but not by Bianco. Once again, the Court will refer to "the Freemans" and "Bianco" for the sake of simplicity. The actual parties to the Release Agreement are both Freemans, their corporation, and Bianco's corporation. Bianco himself is not a party to the Release Agreement.

As part of the Release Agreement, the Freemans, their corporation, and Bianco''s corporation "hereby tender a full and complete mutual releases [sic ] to each other and their respective agents, heir [sic], affiliates and assigns." (Bianco Aff. Ex. D ¶ 6.) Like the Lease, the Release Agreement provides that it shall be governed by Florida law, that the parties consent to jurisdiction of "a competent court located in Palm Beach County, State of Florida," and that "[s]uch court shall be the sole and exclusive venue of resolution of any disputes or disagreements between the parties relating to this Agreement or the transaction contemplated hereby." (Id. ¶ 10.)

III. Causes of Action

The complaint somewhat opaquely sets forth three claims for relief. Count I charges that "the acts and conduct of the defendant were fraudulent and carried out in bad faith from the inception" (Compl. ¶ 28), and that "the acts and conduct of the defendant were unconscionable and should not be permitted to stand without being rectified" (Compl. ¶ 31). This could be read as a claim in tort for fraud, or as a claim for rescission of one or both of the agreements for unconscionability. The specific factual allegations within Count I detailing the "fraud" simply state that Bianco knew that the Freemans would not be able to make their payments and that he therefore would be able to acquire the property by awaiting the inevitable default and then "securing an agreement from plaintiffs waiving any rights to potential surplus monies arising upon a foreclosure sale." (Compl. ¶¶ 29-30.)

Count II alleges that "the proceedings initiated by defendant's [corporation] in the Palm Beach County Court to secure possession of the premises left the court without jurisdiction over the proceedings and constituted a fraud on the court." (Compl. ¶ 32.) The plaintiffs seek a declaration that the Lease "was in fact security for payment of a mortgage which has never been foreclosed." (Compl ¶ 34.)

Count III alleges that the defendant was unjustly enriched because he "paid no more than about $600,000" for the property and ultimately sold it for $1,800,000. (Compl. ¶¶ 35-36.)

IV. The Motions

Defendant moves for dismissal, arguing that the claims are barred by the statute of limitations, that venue in this Court is improper under the forum selection clause, that Bianco's corporation is an indispensable party, and that the complaint fails to state a claim. Defendant's notice of motion sets forth each of these distinct arguments for dismissal in clearly labeled and separately numbered paragraphs, and along with the motion defendant served and filed a memorandum of law setting forth legal and factual argument and appropriate legal citations in clearly-labeled sections addressing each basis urged for dismissal. Defendant also served and filed a completely separate motion for sanctions pursuant to Rule 11, along with a separate memorandum addressing that motion. Nevertheless, plaintiffs' opposition simply ignores the statute of limitations and failure to state a claim arguments, inaccurately characterizing the motion to dismiss as based solely on improper venue and failure to join an indispensable party (P. Mem. at 1), and addressing only those issues. Although plaintiffs acknowledge that "[d]efendant also moves for sanctions" (id.), they make no further reference to this motion and provide no argument against the imposition of sanctions.

DISCUSSION

I. Statute of Limitations

While defendant sets forth several substantial arguments for dismissal, it is unnecessary to go beyond the first. The complaint must be dismissed because all of the claims alleged are manifestly time-barred.

Where jurisdiction is predicated on diversity of citizenship, a federal court follows the choice of law rules of the forum state. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97 (1941); Tri-State Employment Services, Inc. v. Mountbatten Sur. Co., Inc., 295 F.3d 256, 260 (2d Cir. 2002). Under N.Y. CPLR § 202, a cause of action accruing outside New York is time-barred if it is brought beyond the limitations period established either in New York or in the state where the cause of action accrued, unless the plaintiffs are New York residents. Since plaintiffs are Florida residents (Compl. ¶ 4), the case must be dismissed if their claims are barred by the Florida limitations provisions.

Determining the applicable limitations period under Florida law is more difficult because the complaint is so poorly drafted that it is difficult to characterize the nature of plaintiffs' claims. It is unnecessary to resolve definitively what claims are being asserted, however, because the claims are untimely no matter how characterized.

This action was filed on September 28, 2002. The Florida statute of limitations for fraud claims is four years. Fla. St. § 95.11(3)(j). It is unclear whether plaintiffs claim that they were defrauded into entering the Lease or the Release Agreement or both, but both agreements were entered more than four years before this case was filed, the Lease in August 1994 and the Release Agreement in May 1997. If the plaintiffs were induced to enter these agreements by fraudulent representations, the injury was complete with the signing of the agreements on those dates, more than eight years and five years, respectively, before the filing of the complaint.

The Florida statute of limitations for actions to rescind a contract is four years, Fla. St. § 95.11(3)(1), and that for actions for breach of a written contract is five years, id. § 95.11(2)(b). To the extent that plaintiffs argue the Release Agreement was unconscionable, any such cause of action accrued more than five years before the filing of the complaint, since the agreement was entered in May 1997. To the extent the complaint can be read as alleging that Bianco breached the Release Agreement by failing to sell the property to the mysterious Mannis, that cause of action accrued no later than May 16, 1997, since the Release Agreement required that sale to close by May 15, 1997.

The Florida statute of limitations for unjust enrichment is four years. Fla. St. § 95.11(3)(p); Fowler v. Towse, 900 F.3d. Supp. 454, 459-60 (S.D. Fla. 1995).⁶ This cause of action accrues when a defendant "accepts the benefits bestowed upon him." Id. at 460. While the complaint refers to Bianco's sale of the property for a profit in 2000, any conceivable unjust enrichment claim accrued not when Bianco sold the property, but when Bianco acquired control of the property by divesting the Freemans of their interest in it. There is nothing unjust about the enrichment accruing from the appreciation in value of a property an owner has legitimately acquired. Assuming arguendo that a cause of action in unjust enrichment could be stated on the theory that Bianco acted unjustly in acquiring control of the property and ousting the Freemans, that cause of action accrued either when the Freemans entered the Release Agreement terminating their possessory and option rights in the property, or at the latest when Bianco failed to sell the property as required and paid the Freemans $100,000 of purported proceeds. Once again, these events occurred in May 1997, more than four years before the filing of this action.

6 Defendant states that the statute of limitations for unjust enrichment is five years, apparently relying on the fact that this transaction was the subject of a written agreement. However, unjust enrichment is not a cause of action based upon contract, and would appear to be covered by the residual provision cited above. This distinction is immaterial, however, since the complaint is untimely under either limitation period.

Accordingly, all of the Freemans' claims, on any conceivable theory of liability, are time-barred and must be dismissed.

II. Sanctions

Rule 11(b) of the Federal Rules of Civil Procedure provides that an attorney filing a complaint thereby certifies to the Court that the attorney believes, after reasonable inquiry, that the claims asserted are warranted by existing law. Rule 11(c) permits the Court to impose sanctions for violations of Rule 11(b). The Second Circuit has held that "sanctions shall be imposed against an attorney and/or his client when it appears that a pleading has been interposed for any improper purpose, or where, after reasonable inquiry, a competent attorney could not form a reasonable belief that the pleading is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification or reversal of existing law." Eastway Construction Corp. v. New York City, 762 F.2d 243, 254 (2d Cir. 1985) (italics omitted).

The events giving rise to the Freemans' grievance against Bianco took place in the period between 1994 and 1997, well before the limitations period applicable to the claims the plaintiffs sought to bring in late 2002 expired. This fact should have been obvious to any lawyer undertaking a reasonable inquiry into the validity of the claims at issue. Moreover, even if plaintiffs and their counsel innocently overlooked this issue in filing the initial complaint, Rule 11(c)(1)(A) gives parties an opportunity to cure a faulty pleading after the defect is pointed out to them. Here, defendant made its motion for dismissal returnable more than 21 days after it was served, giving plaintiffs ample opportunity to review defendants' arguments, assess their validity, and either withdraw the complaint or develop any good faith arguments plaintiffs had in opposition to the motion. Presented with this opportunity, plaintiffs neither withdrew the complaint nor, incredibly, made any response whatsoever to defendant's statute of limitations argument, instead misrepresenting in its opposition papers the basis of defendant's motion. While bad faith is no longer required to support an award of sanctions, id. at 253-54, the deliberate omission from the complaint of any reference to the dates of the events alleged, and of the texts of the agreements in question (which would have revealed those dates), strongly suggests that the plaintiffs and their counsel were aware of the statute of limitations problem from the outset and attempted to hide it.

As if this alone were not enough, plaintiffs' complaint is subject to dismissal on other grounds as well. The agreements that are at the heart of the complaint both contain clear choice of forum clauses specifying that any action relating to the subject matter of this suit be brought in Florida. Such clauses are recognized as presumptively valid under federal, New York and Florida law. The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 8-15 (1972) (establishing rule for international contracts in admiralty); Jones v. Weibrecht, 901 F.2d 17, 17-18 (2d Cir. 1990) (extending Zapata to contracts in diversity); National Union Fire Ins. Co. of Pittsburgh, Pa. v. Weir, 517 N.Y.S.2d 141, 141 (1st Dept. 1987) (citing Zapata in contract dispute); Manrique v. Fabbri, 493 So.2d 437, 440 (Fla. 1986) (adopting Zapata). There is no basis for disregarding the clauses in this case. The clauses in both contracts are not boilerplate provisions in fine print on the back of a commercial entity's form, but are clearly set forth in a specifically negotiated and drafted agreement. As the venue chosen is the home venue of the plaintiffs, there is nothing about it that is burdensome or unfair to them. Thus, regardless of which jurisdiction's law applies see Licensed Practical Nurses, Technicians and Health Care Workers of New York, Inc. v. Ulysses Cruises, Inc., 131 F. Supp.2d 393, 396-99 (S.D.N.Y. 2000) (questioning application of federal law to validity of forum selection clause in diversity case), there is no question that even if the claims asserted in the complaint were not time-barred, they could not be legitimately brought in this Court.

Plaintiffs were equally on notice of this manifest defect in the complaint. Even before the complaint was filed, counsel for Bianco advised plaintiffs' attorney of the forum-selection issue, and warned him against proceeding. (Beckmann Aff. ¶ 5 Ex. B.) The arguments were repeated at greater length and with full citation to supporting authority in the motion to dismiss, and plaintiffs were given the opportunity to withdraw the complaint. Once again, plaintiffs did not take advantage of that opportunity. Although plaintiffs at least deigned to reply to this aspect of defendant's motion, they provided no non-frivolous argument and failed to correctly characterize the argument or to respond in any way to the authorities cited in the motion.

Finally, the claims asserted in the complaint lack legal and equitable merit. It is difficult even to articulate the nature of the claims being made. In essence, the Freemans complain that defendant treated them unfairly by agreeing in economic substance to obtain a mortgage for them in a contract that effectively permitted Bianco to foreclose on the property himself if they failed to pay, when Bianco knew or should have known that the Freemans would default on their obligations. The Freemans make no attempt to explain why Bianco should have known the Freemans could not afford the mortgage payments, and therefore entered the agreement in bad faith, but they themselves entered the agreement expecting in good faith to be able to perform. The Freemans' omission from their complaint of the text of the agreements in question suggests that they wished to obscure the facts that (1) the Lease memorializes an arms-length agreement and contains entirely reasonable terms granting them the right to acquire the property outright by paying off the mortgage, and permitting Bianco to acquire the property only upon a default by the Freemans that placed Bianco at risk of loss on the mortgage, and (2) the Release Agreement similarly describes a negotiated transaction in which the Freemans were given an opportunity to find a buyer if they believed the property was worth more than the offer described in the agreement, and were provided substantial consideration in exchange for terminating the mortgage/lease arrangement on which they had, in any event, defaulted. The complaint does not set forth a coherent theory on which these facts entitle the Freemans to any relief. And once again, the Freemans not only chose not to withdraw the complaint in the face of Bianco's legal argument that it failed to state a claim, but completely ignored those arguments in their response.

Rule 11(c)(2)(A) provides that monetary sanctions may not be awarded against a represented party for violations of Rule 11(b)(2), which pertains to the legal invalidity of the claims asserted. However, parties themselves may be sanctioned for violation of Rule 11(b)(1), which concerns pleadings "presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation." At least in the face of defendant's motion to dismiss, any reasonable attorney or party should have known that no argument against dismissal could be made, and indeed it should have been obvious even to a lay person that plaintiffs' papers did not even attempt to respond to either the statute of limitations or failure to state a claim arguments. Under such circumstances, it is difficult to understand what good faith, non-harassing motive the Freemans could have for persisting in the litigation. At any rate, a violation of Rule 11(b)(2) by an attorney is sanctionable without a finding of improper purpose.

Plaintiffs have already had, and squandered, an opportunity to respond to defendant's sanctions motion. Nevertheless, the Court is concerned that the Freemans, as non-lawyers, may not have appreciated the gravity of the sanctions motions or the importance of responding. Since the Freemans should be afforded one last opportunity to defend themselves, the Court, in an excess of caution, will also permit plaintiffs' counsel such an opportunity, before deciding whether to impose any sanction.

Accordingly, plaintiffs and their attorney are ordered to show cause, by written response submitted on or before February 7, 2003, why either plaintiffs or their attorney or both should not be required to reimburse defendant for the expenses incurred in defending this lawsuit. If plaintiffs or counsel desire oral argument on this matter, they should so state in their written response.

CONCLUSION

For the reasons stated above, the complaint is dismissed and the Clerk is respectfully directed to enter judgment to that effect.

Plaintiffs and their attorney, Noel W. Hauser, are ordered to show cause in writing, on or before February 7, 2003, why sanctions should not be imposed against them in the form of an order directing reimbursement of the defendant for his attorneys' fees and other expenses incurred in defending this action, including the expenses of moving for sanctions.

SO ORDERED.