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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: April 26, 2021

Fact Questions Preclude Dismissal of Claim Based on Oral Agreement to Purchase Real Estate on Statute of Frauds Grounds

On April 7, 2021, the Second Department issued a decision in Toobian v. Golzad, 2021 NY Slip Op. 02185, holding that fact questions precluded dismissal of claim based on an oral agreement to purchase real estate on statute of frauds grounds, explaining:

The statute of frauds prohibits the conveyance of real property without a written contract. However, nothing contained in General Obligations Law § 5-703 abridges the powers of courts of equity to compel the specific performance of agreements in cases of part performance. Thus, the statute of frauds is not a defense to a properly pleaded cause of action to impose a constructive trust on real property.

A party who relies on the part performance exception must demonstrate that his or her actions are unequivocally referable to the oral agreement which he or she seeks to establish. Unequivocally referable conduct is conduct which is inconsistent with any other explanation. It is insufficient that the oral agreement gives significance to plaintiff’s actions. Rather, the actions alone must be unintelligible or at least extraordinary, explainable only with reference to the oral agreement. Significantly, the doctrine of part performance is based on principles of equity, in particular, recognition of the fact that the purpose of the Statute of Frauds is to prevent frauds, not to enable a party to perpetrate a fraud by using the statute as a sword rather than a shield.

Here, while the plaintiff’s work in negotiating the purchase of the subject property and in managing it might be susceptible to other explanations, his contribution of approximately $1.5 million toward its purchase, albeit partially in the form of loans from the defendant, would be unintelligible or at least extraordinary without reference to the alleged oral agreement. Accordingly, the Supreme Court properly determined that although the defendant demonstrated, prima facie, that the alleged oral agreement was barred by the statute of frauds, the plaintiff raised a triable issue of fact regarding part performance.

In addition, since the statute of frauds is not a defense to a cause of action to impose a constructive trust on real property, the Supreme Court properly found that a triable issue of fact exists as to whether a constructive trust should be imposed under the circumstances of this case. A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee. The four factors to be considered in ascertaining whether the imposition of a constructive trust is warranted are the existence of a fiduciary or confidential relationship, a promise, a transfer in reliance thereon, and unjust enrichment. However, since it is an equitable remedy, a constructive trust is necessarily flexible to accomplish its purpose. Therefore, these factors are guidelines, not inflexible elements.

A fiduciary relationship arises between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation. Put differently, a fiduciary relation exists when confidence is reposed on one side and there is resulting superiority and influence on the other. A fiduciary relationship is necessarily fact-specific and is also grounded in a higher level of trust than normally present in the marketplace between those involved in arm’s length business transactions.

Here, the transaction between the plaintiff and the defendant was not arm’s length but rather took place in the context of a friendship characterized not only by shared interests, cultural affiliations, and personal trust, but also by reliance on one another in business matters, including loans in the hundreds of thousands of dollars. While any single factor might not be sufficient, by itself, to establish a fiduciary relationship, viewed collectively, they demonstrate that triable issues of fact exist regarding the existence of a fiduciary relationship between the plaintiff and the defendant, whether the defendant was unjustly enriched and whether, under the circumstances, a constructive trust should be imposed on the subject property and the LLC. Specifically, the plaintiff identified the subject property and introduced the defendant to people who helped facilitate the defendant’s purchase of the property, including financing. The defendant, in turn, deferred to the plaintiff in decisions regarding the transaction. Notably, the plaintiff chose the lawyer who represented the purchaser LLC at closing, and the defendant allowed the plaintiff to manage the subject property’s income and expenses, including paying the mortgage from the rents, notwithstanding the defendant’s complaints about his reliability in doing so. The parties’ deeds, therefore, support the terms of the agreement as described by the plaintiff.

Finally, the defendants’ contention that the alleged oral agreement fails for lack of consideration is without merit. An illusory contract—that is, an agreement in which one party gives as consideration a promise that is so insubstantial as to impose no obligation—is unenforceable. Consideration consists of either a benefit to the promisor or a detriment to the promisee. It is enough that something is promised, done, forborne, or suffered by the party to whom the promise is made as consideration for the promise made to him or her. Legally sufficient consideration does not necessarily entail a benefit flowing to the promisor; instead, a promisee who has incurred a specific, bargained for legal detriment may enforce a promise against the promisor, notwithstanding the fact that the latter may have realized no concrete benefit as a result of the bargain. Indeed, the detriment suffered or the thing promised need not benefit the promisee or a third party, or be of substantial value to anyone.

Here, the plaintiff proffered evidence that, in exchange for the defendant acting as his agent and nominee in the purchase of the subject property, the plaintiff promised to manage the subject property and pay its expenses. Assuming that the property was, in fact, purchased on the plaintiff’s behalf, that promise has, as the defendant notes, little or no value to him since the defendant would not benefit from the plaintiff’s management of a property in which the defendant had no equitable interest. Nevertheless, the plaintiff’s promise to manage the property and pay its expenses was a specific, bargained for legal detriment irrespective of its value to the defendant. Accordingly, the alleged oral agreement does not fail for lack of consideration.

(Internal quotations and citations omitted) (emphasis added).

We frequently litigate disputes over the sale or leasing of commercial property. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding a commercial real estate transaction.

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