Commercial Division Blog
Court Grants Plaintiff Judgment on Contract Claim Despite Lack of Damages
On August 21, 2018, Justice Platkin of the Albany County Commercial Division issued a decision in Concord Dev. Co. LLC v. Amedore Concord, LLC, 2018 NY Slip Op. 51330(U), granting a plaintiff judgement on a breach of contract claim despite the plaintiff having no evidence of damages, explaining:
On its breach of contract claim, Concord bears the ultimate burden of establishing the existence of a valid contract, plaintiff's performance pursuant to the contract, and defendants' breach of their obligations under the contract. Here, Concord alleges that defendants' sale of the Parcel to an Amedore entity for less than fair market value constitutes a breach of the covenant of good faith and fair dealing implicit in all contracts. Concord also argues that the same conduct constitutes a violation of Section 4.5 of the Operating Agreement, which requires the joint venture's managers to act in good faith and in a manner they reasonably believe to be in the best interests of Amedore Concord.
Even crediting Paul Amedore's testimony and assuming his subjective good faith in assigning an $880,000 price to the Parcel, the Court finds that defendants breached the covenant of good faith and fair dealing by selling the Parcel to a related entity for less than fair consideration. In this regard, the record shows that little or no diligence was conducted prior to the less-than-arm's-length sale, and defendants did not obtain an independent appraisal of the Parcel. Moreover, while Amedore did obtain pricing information about three comparable parcels from a real estate appraiser, the value that ALD chose to assign to the Parcel, $20,000 per lot, is considerably lower than any of the comparables.
Moreover, both appraisers agree that the market value of the Parcel on the date of the related-party sale was substantially in excess of the value assigned by defendants. In particular, defendants' own appraiser opined that the price per lot for comparable properties as of the valuation date was $25,909 (see Ex. 2, pp. 2, 41), which is almost 30% greater than the sale price of the Parcel.
Finally, as interested parties to the transaction, defendants had a special obligation to ensure the fairness of the sale to the joint venture. And given the interested nature of the transaction, no deference is due to defendants' business judgment.
Based on the foregoing, the Court finds that defendants breached the obligation of good faith and fair dealing, as well as the express covenant of Section 4.5 of the Operating Agreement, in selling the Parcel to a related party for less than fair consideration.
Plaintiff seeks to recover monetary damages for the foregoing breach of contract. Specifically, plaintiff claims to have been damaged in the amount of one-half of the difference between the fair value of the Parcel on the date of the sale and the $880,000 contract price. For the reasons that follow, the Court concludes that Concord has failed to establish that it has sustained any monetary damages proximately caused by defendants' breach.
Where corporate property is sold for less than fair value in an interested transaction, it is the corporation that suffers the injury. As the Delaware Chancery Court has stated: Sale of corporate assets to an interested party for an unfair price states perhaps the quintessential derivative claim. It is the corporation that loses the difference between the consideration paid by the corporate insider for the asset and the fair value of the asset at the time of sale.
In contrast, the shareholders of the corporation ordinarily do not suffer any direct pecuniary loss as the result of an interested transaction. A shareholder's loss of the future distributions that it would have received had the corporate property been sold for its fair value is entirely derivative of the harm sustained by the corporation and would be fully remedied if the corporation were made whole. Thus, for example, in reversing the award of money damages to an individual shareholder alleging the conversion of corporate property, the Appellate Division, First Department explained: The conversion resulted in a corporate injury because it deprived the corporation of those funds. The injury to plaintiff was real but only derivative; therefore the funds should have been awarded to the corporation.
The Court sees no basis for departing from these well settled principles here. Having failed to receive fair consideration for the Parcel, Amedore Concord possesses a right of action against defendants, a claim that Concord could have sought to advance derivatively under Business Corporation Law § 626.
But plaintiff's claim here is a direct claim, not a derivative claim. Concord sues for damages that it allegedly sustained in its own right. Under the Operating Agreement, however, Concord does not have a right to receive distributions or obtain the return of its capital absent a liquidation of the company. Thus, Concord has not yet sustained any monetary loss traceable to defendants' breach of contract.
The only form of monetary damage alleged by Concord is a diminution in its expected distributions upon the liquidation of Amedore Concord. However, for a wrong against the corporation, a shareholder has no individual cause of action, even where the shareholder loses the value of the investment. Rather, any future right of Concord to receive distributions or obtain the return of its capital is limited to the relief available in a dissolution proceeding, but this is not such a proceeding. Moreover, if the Court were to award damages in the manner sought by Concord, it would, in effect, be according Concord the right to a priority distribution of capital that is not authorized by the parties' agreements.
Contrary to Concord's contention, the issue is not whether defendants waived any objection to its standing to maintain a derivative claim by failing to move on such defense or preserving the defense in their answer. As the proponent of the contractual claim, plaintiff has the burden of proving its claimed damages. Here, the liquidation damages requested by Concord is not an appropriate or legally permissible measure of damages, and Concord has otherwise failed to establish that it sustained any monetary damages in its own right.
That said, nominal damages are always available in breach of contract actions, as all of the elements necessary to maintain a lawsuit and obtain relief in court are present at the time of an alleged breach. Further, issuance of a declaratory judgment that will guide a future dissolution proceeding by fixing the fair value of the Parcel at the time of the related-party sale will accord Concord complete relief.
For all of the foregoing reasons, the Court finds that Concord has failed to demonstrate its entitlement to anything more than a nominal award of monetary damages.
(Internal quotations and citations omitted).
A key element in commercial litigation is proving damages. Many cases hold that this is true even for a claim of breach of contract. As this decision shows, not all courts follow this rule, and, in any event, the question of whether a plaintiff was damaged is not always straightforward. Contact Schlam Stone & Dolan partner John Lundin at email@example.com if you or a client have questions regarding proving damages.