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Current Developments in the Commercial Divisions of the
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Posted: September 15, 2014

Plaintiff’s Concealment of Fact that Money Owed under a Note had been Repaid by a Third Party Justified Striking the Complaint as a Discovery Sanction

On September 2, 2014, Justice Schweitzer of the New York County Commercial Division issued a Decision and Order in People’s Capital & Leasing Corp. v. Color-Web, Inc., 2014 NY Slip Op. 32353(U), granting a CPLR 3126 motion to strike the complaint as a sanction for discovery abuses.

In People’s Capital & Leasing, the underlying dispute was an action to enforce a promissory note. Plaintiff PCL agreed to finance defendant Color-Web’s purchase of a printing press from third party Mitsubishi Lithographic Presses, Inc. PLC paid Mitsubishi $200,000 as a down payment on the press, and Color-Webb executed the Note—also for $200,000—in favor of PCL. The Note was guaranteed by the other defendants.

Although PLC did pay Mitsubishi the $200,000, Color-Web never took delivery of the printing press and asked Mitsubishi to cancel their sales agreement for the press due to its economic difficulties. After Color-Web missed a payment due under the Note, PLC alleged that it had defaulted and commenced action against Color-Web and its guarantors.

The motion to strike the complaint and for other discovery sanctions came about when the defendants’ subpoena to Mitsubishi revealed that Mitsubishi had returned the $200,000 to PCL eight months before the action began, and that PCL had been concealing that fact all along: “in response to discovery requests, PCL had intentionally withheld all documents revealing [Mitsubishi’s] return of the money.”

Mitsubishi’s documents revealed that Mitsubishi and PCL agreed that Mitsubishi would refund the $200,000 to PCL if the press was not delivered, that PLC apparently agreed in exchange to remit all payments it received under the Note back to Mitsubishi, and that “PLC asked [Mitsubishi] to confirm that nobody at [Mitsubishi] had told Color Web about [Mitsubishi’s] return of the $200,000 to PCL because ‘legal counsel needs this confirmation so that [PCL] can pursue Color Web for reimbursement.'”

Although the terms of the side agreement between Mitsubishi and PCL were unclear, defendants’ theory was that Mitsubishi repaid the $200,000 in exchange for PCL suing on the Note for Mitsubishi’s benefit, and the reason the parties proceeded in this manner was because any direct action by Mitsubishi to enforce its sales agreement with Color-Web could not reach the guarantors, whereas an action on PCL’s Note could reach the guarantors.

The court found that the information withheld was highly relevant, and that PCL had no excuse for its failure to produce it. “PCL was at pains to hide the re-payment because it arguably satisfied defendants’ obligation under the Note (and Guarantees) to repay the $200,000.” The Court also largely accepted the defendants’ contention that this was part of a scheme by Mitsubishi to pursue the guarantors for damages under a different contract that they did not guarantee.

To choose a sanction, the court applied the Court of Appeals’ recent holding in CDR Creances S.A.S. v. Cohen (analyzed in this blog on May 9, 2014), and dismissed PCL’s complaint. The court found that:

PCL does not dispute that it withheld the documents and information in question, and offers no explanation, only a claim that the discovery is irrelevant. The court finds that claim to be disingenuous, in light of the concerted effort by PCL and [Mitsubishi] to hide their arrangement, and the repayment of the money, from defendants and the court. There is no reasonable justification for PCL’s actions, which were willful and intended to facilitate a recovery from defendants to which PCL was, arguably, no longer entitled. In fact, the court can only conclude that PCL and its attorney were hoping to win the case through the use of material omissions in the complaint, affirmations, affidavits and other legal papers filed with the court. The omission of key facts was also used to influence a settlement with Color Web, as President David Moyal describes in his Affidavit. Moyal explains that after [Mitsubishi] had already returned the money to PCL, of which he was unaware at the time, [Mitsubishi] offered to return the $200,000 to PCL if defendants dropped their counterclaims against PCL.

Defendants were also awarded the costs and fees incurred in connection with the motion.

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