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New York State Courts by Schlam Stone & Dolan LLP
Posted: November 18, 2019

Written Contract’s Merger Clause Does Not Bar Parol Evidence Regarding an Alleged Agreement When Alleged Agreement was Collateral to the Written Contract

On October 30, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Hai Yang Liu v. 88 Harborview Realty, LLC, 2019 NY Slip Op. 33280(U), holding that a written contract’s merger clause did not bar parol evidence regarding an alleged agreement when the alleged agreement was collateral to the written contract, explaining:

There can be no dispute that Liu has legal title to five (5) units of 88 Harborview as is evidenced by the membership certificate that bears his name. This fact is not dispositive as the issue to be decided is whether there was an oral side agreement between Liu and Chen reserving beneficial ownership of the units to Chen and, if so, whether Liu is obliged to assign those units to Chen’s estate. The primary evidence of the oral agreement consists of the following: (i) deposition testimony and an affidavit from Cheung Yeung, a founder and managing member of 88 Harborview, that he knew the money for Liu’s shares came from Chen since he managed the company’s finances, that there were four other membership holders who assigned their interests to Chen’s estate once he died, and that plaintiff did not assert ownership over the units until a year after Chen’s death; (ii) deposition testimony from Chen’s wife Qian He that she knew plaintiff did not have the money to purchase the Property in 2002 or the membership stake in 88 Harborview in 2005; and (iii) testimony from the plaintiff regarding a loan to purchase the Property that is contradicted by the affidavit of Chen’s first wife, Chen Sai Zhu Chen.

The parol evidence rule does not bar extrinsic evidence concerning a collateral oral agreement where the written contract is not intended on its face to cover the collateral agreement. Evidence of an oral collateral contract is admissible, even in the face of a merger clause, where: a) the agreement is collateral in form, b) the oral agreement does not contradict the written contract and c) the oral agreement is an agreement that the parties would not ordinarily be expected to embody in the written contract. Cases in which an agreement was found to be wholly independent and collateral are relatively rare. Such may be the case here. First, the alleged agreement is collateral in form as it is an understanding between two individuals unrelated to the affairs of the company. Second, nothing in the alleged oral agreement contradicts the written agreement. Liu is the record owner of the units. However, under the terms of the side agreement, Liu purportedly held them for the benefit of Chen and has an independent obligation to assign the units to Chen’s estate. Indeed, this intention may be reflected on the face of the five certificates issued at the same time in the names of plaintiff Liu and non-parties Lu Tao Chen, Yuan Pan Zheng and Tian Ping Zhang. Each of these certificates contain the legend “Inherit You Liang Cheng.” Notably all of these certificate holders except Liu transferred his interest in 88 Harborview to Chen’s estate. Third, the collateral oral agreement at issue here would not be expected to be embodied in the operating agreement. If the agreement exists, it is between a member and a non-member for the non-member providing to be the member of record for the benefit of another. The existence or non-existence of the alleged collateral agreement cannot be decided on this motion. A trial to determine the facts is required unless the evidence to be considered is excludable as a matter of law.

Plaintiff asserts that any purported oral agreement for Liu to hold title to the Property for Chen’s benefit is barred by the statute of frauds as codified at General Obligations Law ยง 5-703(3). The statute states:

A Contract to devise real property or establish a trust of real property, or any interest therein or right with reference thereto, is void unless the contract or some note or memorandum thereof is in writing and subscribed by the party to be charged therewith.

This provision does not apply because this case concerns ownership of units in a limited liability company. Those units do not constitute interests in personal, not real property. The parol evidence rule does not apply because the alleged collateral oral agreement is separate from the 88 Harborview operating agreement. Defendants do not claim that the oral agreement alters the terms of the operating agreement in any way. The written contract is not intended on its face to cover the collateral oral agreement.

(Internal quotations and citations omitted).

This decision touches on issues we frequently encounter in commercial litigation: whether and to what extent an oral agreement or oral modification to a written agreement are enforceable. As this decision shows, the answer sometimes is not a simple one. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the enforceability of an oral agreement.

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Posted in Commercial, Contracts
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