Category: Uncategorized

Determining which individuals or entities are the proper parties to name in a lawsuit can sometimes be a technical matter—for example, determining the legal name of a corporation—but it can also be a strategic consideration.

However, many times parties are considered “necessary” to a lawsuit, such as a party to a contract who is alleged to have breached the contract.  Whenever a party is considered “necessary” or “indispensable,” that party must be included in the lawsuit.  A plaintiff in a recent case in the Suffolk County Commercial Division, Intelligent Product Solutions, Inc. v. Morstan Gen. Agency, Inc. (J. Whelan), attempted to circumvent the requirement of naming a necessary party by commencing a lawsuit against an entity believed to be a dominant alter ego of the party with whom plaintiff actually contracted. The Court, however, did not let the plaintiff get away with it.

Plaintiff, Intelligent Product Solutions, Inc. (“IPS”), entered into a contract with an entity known as Single Entry Systems, Inc. (“SES”) in which IPS agreed to work with SES in the development, testing, and upgrading of certain computer software applications and to provide program management services to SES.  After IPS provided services to SES for a year, SES notified IPS that it could not pay for services rendered, leaving a balance owed to IPS in the sum of $465,450.00.

Rather than naming SES as a defendant in the breach of contract lawsuit, IPS elected to name only Morstan Gen. Agency, Inc. (“Morstan”) as a defendant under non-contractual theories of account stated and unjust enrichment. IPS alleged that Morstan was the “alter ego” of SES, was a controlling 80% shareholder of SES, and had overlapping directors, employees, assets, etc.  As such, IPS sought damages from Morstan essentially claiming that SES was a “dummy” corporation set up and controlled by Morstan.

Morstan filed a motion to dismiss the complaint on the grounds that IPS failed to name a necessary party (SES) and that the parties were required to go to arbitration to resolve any disputes pursuant to the contract between IPS and SES. Morstan’s motion alleged that IPS named only Morstan as a defendant in an effort to avoid the arbitration clause in the contract.

In its decision, the Court ruled that SES was, in fact, a necessary party to the lawsuit, because claims that rest upon allegations that a party is liable because it is the alter ego of another entity require that the other entity also be named as a party. Mannucci v. Missionary Sisters of Sacred Heart of Jesus, 94 A.D.3d 471 (1st Dep’t 2012).  However, rather than dismiss the Complaint, the Court ordered that SES must be joined because SES was within the jurisdiction of the Court and no reason was given as to why SES could not be joined.  Further, although the Court denied as premature Morstan’s request for an order staying the case and compelling the parties to go to arbitration, it noted that the arbitration claim could be renewed upon SES joining the lawsuit.

Cases such as this one provide an example of the types of strategic considerations that could go into which parties are named in a lawsuit. Evidently, according to the allegations in Morstan’s motion, IPS sought to avoid the arbitration clause in its contract with SES and attempted to go after Morstan instead under alternative theories of liability.  While this decision did not pay off for the plaintiff in this case, it is always important to give careful consideration to the various factors that could impact the potential outcome of a case when deciding whom to name in a lawsuit.

By Patrick McCormick

Commercial landlord/tenant matters do not often reach the Court of Appeals.

However, in December 2014, the Court of Appeals issued a decision addressing the enforceability of a rent acceleration clause in a commercial lease where the landlord obtained possession of the demised premises after tenant defaulted in paying rent and abandoned the premises.  Landlord/tenant practitioners should be aware of this significant decision.[i]

Landord, 172 Duzer Realty Corp., entered into a one year commercial lease with tenant Globe Alumni Student Assistance Association, Inc. under which the premises was used as a dormitory by Globe Institute of Technology.  Before the end of the initial term, landlord and tenant extended the term for a nine-year period and Globe Institute of Technology signed a guarantee.  Shortly after executing the extension, tenant defaulted under the lease and landlord served a notice to cure.  Tenant failed to cure, vacated the premises, and stopped paying rent as of February 2008.  Landlord terminated the lease as of March 28, 2008, on notice to tenant, and commenced an action to recover possession and past due rent.  In August 2008, the Civil Court awarded landlord possession of the premises but did not award a money judgment.

In September 2009, landlord commenced a Supreme Court action to recover rent arrears and the future remaining rent under the lease.  As explained by the Court of Appeals, landlord “thereafter moved for summary judgment based on an acceleration clause in the leasehold agreement which provides that upon the tenant’s default the landowner may terminate the lease, repossess the premises, and ‘shall be entitled to recover, as liquidated damages a sum of money equal to the total of . . .the balance of the rent for the remainder of the term. . . .’  The provision also states that ‘[i]n the event of Lease termination Tenant shall continue to be obligated to pay rent and additional rent for the entire Term as though th[e] Lease had not been terminated.’”  Defendants opposed summary judgment, alleging that under Fifty States Management Corp. v. Pioneer Auto Parks, Inc.,[ii]  landlord could not collect under the acceleration clause once it terminated the lease and took possession of the premises.  The Supreme Court granted summary judgment and referred the matter to a referee to calculate damages.  Judgment was entered in favor of landlord for $1,488,604.66, comprised of rent remaining due under the lease reduced by an amount landlord collected during a two and one-half year period it was able to re-let the premises.  The Appellate Division affirmed.

In affirming, the Court of Appeals rejected tenant’s reliance on Fifty States Management Corp., holding that, despite retaking possession of the premises, landlord was permitted to seek “damages in accordance with the acceleration clause after terminating the lease, once defendants defaulted and breached their leasehold obligations to maintain the property and pay rent.”  The Court of Appeals also rejected tenant’s claim that the acceleration clause amounted to an unenforceable penalty.  The Court held that the acceleration clause was enforceable and not a penalty because defendants “committed material breaches of the lease by ceasing all rental payments as of February 2008 and simultaneously abandoning the premises.” CitingHoly Properties Ltd., L.P. v. Kenneth Cole Productions, Inc.,[iii]  the Court also briefly addressed and rejected defendants’ claim that landlord had an obligation to mitigate its damages.

The Court of Appeals did, however, remit the matter to Supreme Court for further proceedings to determine whether the undiscounted accelerated rent was disproportionate to landlord’s actual loses, “notwithstanding that the landowner had possession, and no obligation to mitigate.”  The Court was persuaded by defendants’ argument that the damages measured by the accelerated rent were disproportionate to landlord’s actual damages because landlord had possession and immediately collected all rent due for the balance of the lease in one lump sum.  The Court seemed to credit the argument that because landlord obtained possession of the premises, the accelerated rent should have been discounted to present-day value.  The Court held that “Defendants should have had the opportunity to present evidence that the undiscounted accelerated rent amount is disproportionate to [landlord’s] actual damages . . .”

While acceleration clauses are not common and are often heavily negotiated, this decision serves to caution to both tenants and guarantors that upon a material default under a commercial lease, they may be liable for significant damages in the amount of accelerated rent due for the balance of the term of the lease.

[i] 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Association, Inc., et al., 2014 WL 7177502 (2014)
[ii]  46 N.Y.2d 573 (1979)
[iii] 87 N.Y.2d 130 (1995)

April 13, 2016

CMM Executive Breakfast: Everything is a Negotiation

Presented by Joe Campolo, Esq., Managing Partner at Campolo, Middleton & McCormick, LLP

All too often, traditional negotiating tactics result in blown up deals, protracted litigation, and destroyed relationships.  Join Joe Campolo as he shares the alternative negotiation strategies he relies on as an attorney and business owner to solve problems and get deals done.  The presentation will cover how to:

• Manage tension in high-stress negotiations
• Balance empathy and assertiveness
• Listen actively
• Combat hard-bargaining tactics
• Diagnose your own weaknesses and regain your footing

Designed for both seasoned professionals and those just starting out, this presentation will arm you with new tools and a fresh perspective on what it means to negotiate effectively.

Event Details

Date: April 13, 2016
Location: Courtyard Marriott Ronkonkoma
5000 Express Drive South, Ronkonkoma, NY 11779

8:30 am – 9:00 am: Registration & Breakfast
9:00 am – 9:45 am: Presentation
9:45 – 10:00 am: Q&A and Discussion

Registration: The event is FREE but registration is required.
Complimentary breakfast will be served.

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I am a firm advocate for more solar power. The benefits are indisputable and can be read about elsewhere. New York has the potential to produce 11 times as much electricity from solar power as the state consumes each year. (“Star Power: The Growing Role of Solar Energy in New York”, Environment New York Research & Policy Center at 4 [November, 2014]). In little more than five years, improvements in battery storage may well enable the excess electricity from solar to be stored for use when electricity is not being generated by solar systems, at night and during cloudy or inclement weather. (Stephen Lacy, “Storage Is the New Solar: Will Batteries and PV Create an Unstoppable Hybrid Force?” [GreenTech Media 2014]). Even before the battery storage problem is resolved, it is likely that the cost of generating power from photovoltaic (“PV”) systems will be equal to or less than the cost of power from traditional power plants that run on carbon based fuels. It has been projected that over half the states could have electricity that is from rooftop solar that is as cheap as local electricity prices by 2017, and New York is projected to achieve this so-called “grid-parity” not long after that. (Mike Jacobs, “How Much Does Rooftop Solar Power Cost? Grid Parity Here or Coming in More Than Half of U.S. States”, Union of Concerned Scientists 2014).

The question which must be discussed and answered by LIPA and PSEG-LI is whether the goal of increasing renewables should cause the utility to focus on commercial large scale solar energy systems that will provide energy pursuant to 20-year, fixed cost inflated contracts, or whether more attention should be given to encouraging building owners to place solar systems on their roofs for their own use? Because I am most familiar with residential solar systems, I will leave it to others to discuss the enormous benefits of having large, well-positioned solar systems on flat commercial building roofs.

Here is the immediate problem. In August of last year, PSEG-LI revealed that LIPA has for decades used a reliability standard that assures that power will be out no more than one day every thousand years. The rest of the State uses a different test – no more than one day of outage every ten years. As a result, LIPA has made long term contractual agreements which have resulted in LIPA paying for 400 MW to 1,000 MW a year of power more than it would need if it followed the same test used by every other utility in the State. This resulted in approximately $641 million dollars in unnecessary costs over 9 years. (Newsday, August 18, 2014). LIPA promptly terminated discussions for the 750 MW Caithness II project, and five peaker plants that would provide power only when power is needed most. The savings to ratepayers from these wise decisions is enormous.

PSEG-LI concluded that a “delay of 12-18 months of LIPA’s current resource plan presents no demonstrable risk to Long Island reliability.” This was in part based on PSEG-LI’s finding that LIPA would not have any resource needs until 2020 based on the NYISO standard used by the rest of the State. Pending its completion of a full Integrated Resource Plan at the end of 2015, PSEG-LI recommended delaying commitments on “all current RFPs excepting those with … immediate needs.” (PSEG Long Island, “Resource Planning Criteria Review”, August 2014 at pp. 26, 27, 28).

However, on December 17, 2014, without any demonstration of “immediate need”, LIPA’s trustees authorized staff to negotiate eleven 20-year fixed cost power purchase agreements (“PPAs”) for a total of 122.1 MW of installed solar power. Shortly thereafter, on January 1, 2015, PSEG-LI assumed virtually all of LIPA’s planning functions. Did PSEG-LI promptly announce that no PPAs for 20 year fixed cost commercial solar facilities would be signed until it completed its needs study? No – its president, David Daily, told Newsday that “Some recent decisions are ‘hard-wired’ into the plan, … including LIPA’s approval of 122.1 megawatts of power from large solar energy facilities in Suffolk County.” (Newsday, January 1, 2015). Then,

Then, on January 6, 2015, Daly said that updated forecasts have led PSEG-LI to conclude that no new power source will be required until 2024. (Newsday, January 7, 2014). Again, according to Newsday, and without explanation, Daly told those at a session of the Long Island Regional Planning Council that, “Despite the excess, PSEG is pushing ahead with LIPA plans to add scores of renewable and other power sources well before 2020. This year, it will follow through on LIPA’s plan to add 120 megawatts for solar arrays on large tracts in Suffolk County,…” In addition, later this year, PSEG will put out a new bid request for 160 MW of renewable energy. (Newsday, January 7, 2015).

If no new energy resources will be needed until 2024, it is fair to ask why LIPA and PSEG-LI are plowing ahead with long term fixed cost inflated contracts before PSEG-LI’s needs study is completed. On January 1, 2015 when PSEG-LI took over LIPA’s planning functions, Mr. Daly told Newsday that “decision making under PSEG will have a ‘very strong focus on transparency’”. If that is true, no PPAs should be signed until all the issues are thoroughly aired.

The average cost per kWh of power from the proposed commercial solar facilities is approximately $0.17, compared to approximately $0.075 per kWh on the open market as of October, 2013. If LIPA and PSEG-LI go ahead with the 11 proposed contracts, the rate payers within LIPA’s territory will be legally obligated to pay this inflated rate for the next 20 years.

Incentives provided to individual owners of residential and commercial buildings by LIPA to place PV systems on their roofs have been reduced by more than 50% since June 2013, and will end altogether by the end of 2016. The rationale for this reduction is that the cost of solar systems is going down so that soon incentives will not be needed at all to persuade building owners to contract for PV systems on their roofs. Indeed, solar PV capacity in New York increased at a rate of 63% per year from 2010 to 2013. If solar PV installations continue to increase at a rate of 47% annually until 2025, New York will have enough solar energy to generate 20 percent of its electricity. (“Star Power: The Growing Role of Solar Energy in New York”, Environment New York Research & Policy Center at 2 [November, 2014]).

In June, 2013, I contracted to put a 20.88 kW PV system on the roof of my house. LIPA’s incentive rebate then was $0.76 per watt. Today, the incentives are down to $0.30 per watt, and all or most of that money is provided by NYSERDA. In June, 2013, LIPA paid for a little less than 23% of the overall cost of my rooftop PV system. When incentives end, all of the PV power generated by rooftop systems will come to LIPA at no cost. Why then would LIPA and PSEG-LI want to enter into long term fixed cost Power Purchase Agreements with commercial developers of solar power at inflated prices well above what it would cost for the same amount of electricity on the open market, especially when it can get this power virtually for free by encouraging building owners to construct their own systems on their roofs?

LIPA has given three reasons for promoting solar power obtained by means of a “Feed-in Tariff” (i.e., purchasing 100% of the electricity generated by commercial solar facilities and then selling the power back to its customers): (1) the costs are spread out over 20 years, as the benefits are received, whereas incentive rebates for rooftop solar systems are all paid upfront; (2) LIPA only pays for what is actually produced, whereas there is a risk that rooftop systems will underperform or fail altogether after the incentive rebate is paid; and (3) there is no loss of revenue under the Feed-in Tariff proposal, whereas retail customers with solar generation avoid LIPA’s full retail rates for every kWh of generation they produce. None of these arguments seem to justify the enormous expense of commercial solar power purchased at inflated costs for twenty years.

LIPA’s concern that it must absorb all the incentive rebates upfront rings hollow because it intends to eliminate these incentives altogether in a few short years. Assuming, however, that LIPA can be persuaded to actually increase incentives for rooftop systems rather than eliminate them, it can spread the cost of those incentives out by bonding the upfront cost over 20 years. Recently, LIPA was able to obtain bonding at an interest rate of approximately a 3 ½ %. The June 2013 incentive of $0.76 per watt represented only 23% of the cost of the solar systems installed on residential roofs (the rest was paid for by federal and state tax credits [about 31% of the cost], and by the homeowner, about 47%). LIPA pays for 100% of the cost of electricity at inflated rates when purchasing solar power from commercial developers, but only a fraction of the actual cost of producing power from rooftop systems when it offers incentive rebates.

The reliability argument also is weak. Solar systems on roofs typically come with 25 year warranties and there is no basis for assuming that building owners who have paid for half or more of the cost of installing the system will not enforce his or her contractual rights if there is a problem.

The third argument, that there is “no loss of revenue under the Feed-in Tariff proposal”, is not strictly accurate. It is true that net meters used by individual solar systems on roofs run backwards if more power is generated than is being used. Because many components of residential LIPA (PSEG-LI) bills are based on kWhs used during the billing period, many of the charges are avoided altogether by the ratepayer with solar on the roof. However, LIPA does not actually “lose” revenue as a result because it recoups any losses through its “Efficiency & Renewable Charge” on its bills. This charge generally is about $0.006 per kWh. Thus a typical LIPA customer who uses 10,000 kWhs a year is already paying about $60 a year to cover revenues lost due to renewable energy.

Nevertheless, it is fair to examine how those who generate electrical power by means of their own rooftop solar PV systems on their roofs impact other ratepayers, and to compare that impact to the impact of buying power from commercial solar systems at a fixed price over 20 years.

A rate of inflation of 2% a year for the cost of electricity on the open market is assumed. It can be argued that this assumption is too conservative because 1/2 of 1% is a figure frequently used when projecting electrical price increases. Further, with the plunge in oil costs, we may see a period where the cost of generating electricity goes down for a period of time. For purposes of discussion, however, we will assume the cost of electricity goes up 2% a year. Here is what my calculations show.

At least as of October, 2013, LIPA could purchase electricity on the open market at an approximate price of $0.075 per kWh. Based on this figure, and the assumed rate of inflation, LIPA ratepayers will pay approximately $360,000,000 more over 20 years for the commercial solar power than they would pay if LIPA purchased the same amount of electricity on the open market.

By comparison, if incentives at the same level as June 2013 are paid to induce sufficient building owners to buy rooftop solar systems that will generate the same amount of kWhs as can be expected from 122.1 MW of commercial rated solar systems, and the incentives are bonded at 5% over twenty years, ratepayers will save approximately $147,000,000 over 20 years for the same amount of power purchased on the open market. If the incentive is assumed to be what it is today ($0.30 per watt rather than $0.76 per watt) and the upfront cost of sufficient incentives needed to get distributed solar systems built that will generate the same power as the commercial solar facilities that are contemplated, and the one-time incentive rebate is bonded, the savings over the cost of open market electricity jumps to $235,000,000 over 20 years. And if LIPA is correct, and no incentive at all will be needed in a couple of years in order for residential homeowners to have solar systems installed on their roofs, then LIPA will obtain electricity from these rooftop systems at no cost to it or its ratepayers. When compared to the cost of purchasing the same amount of power on the open market, over 20 years, LIPA ratepayers would then save more than $350,000,000.

However, when revenues lost are factored in, the cost of purchasing power from the commercial solar generators when compared to the cost on the open market is less than the loss of revenues to LIPA from the same power on rooftops. Depending on the amount of the incentive rebate paid for rooftop systems, the average ratepayer who uses 10,000 kWhs per year may have to pay somewhere between $0.75 and $1.38 per month to cover LIPA’s shortfall if the desired amount of solar power is obtained from rooftop systems rather than from commercial solar providers who have long term contracts.

There are many reasons why this nominal difference between the cost of purchasing commercial solar power and the loss of revenues when power is obtained from individual rooftop systems should not cause LIPA to favor the commercial systems.

First, LIPA can’t stop the loss of revenues. As the cost of solar systems for rooftops comes down, more and more building owners will realize the financial benefit of generating their own power, in whole or part. This will occur even if LIPA contracts with the eleven selected companies to obtain power from systems with a total rating of 122.1 MW. If, as PSEG-LI has found, LIPA today has enough power to maintain reliability into 2020, then why lock into higher prices for twenty years now?

Second, the loss of revenues will continue due to improvements in efficiency. PSEG-LI recognizes the benefit of incentivizing residences and businesses to install more efficient machinery, lighting and appliances. It’s October 6, 2014 “Utility 2.0 Long Range Plan Update Document” describes its decision to expand overall Plan investment from $215 million over four years with the goal of reducing demand by 185 MW to investing $345 million over four years with the goal of reducing demand by 250 MW. Reduced electrical demand necessarily will result in lost revenues. PSEG-LI intends to discuss how it will recover the costs of its program expenditures in the upcoming rate case to be filed in February, 2015. Care must be taken to assure that cost recovery plans do not diminish the individual economic benefits of placing solar power on roof tops.

Third, ratepayers are already paying for revenues lost to LIPA from renewable energy and reductions in demand caused by increased efficiency, so LIPA is not really losing revenues when solar systems are installed on roofs. Residential bills contain a charge each month for “Efficiency & Renewable Charge” which is generally about $0.006 per kWh. Thus a typical LIPA customer who uses 10,000 kWhs a year already is paying about $60 a year to cover these lost revenues.

Fourth, commercial large scale solar projects place increased demand on the transmission system, and upgrades to transmission lines and substations may be required, whereas rooftop solar systems, distributed throughout the system, generally do not require upgrades. While it is true that the Power Purchase Agreements place the burden of having to upgrade the transmission system on the commercial solar energy provider, it is also true that these costs come back to the ratepayer indirectly because the price per kWh bid by these commercial providers is increased to cover such costs.

Fifth, using more distributed (rooftop) solar systems will result in a more efficient electric grid. It has been estimated that five to eight percent of the electricity transmitted over long-distance transmission lines is lost between its production and final consumption. Distributed solar energy avoids these losses by generating electricity at or near the location where it is used. (“Star Power: The Growing Role of Solar Energy in New York”, Environment New York Research & Policy Center at 18 [November, 2014]).

Sixth, commercial solar projects require large areas of open space which are lost as a result. For example, one of the projects among the eleven LIPA accepted for negotiation of PPAs on December 17, 2014 is a 24.99 MW project to be built where the Tall Grass Golf Course in Shoreham now stands. This public recreational facility will be lost in order to allow an out-of-state commercial company to generate solar power which will not be needed until at least 2020. Rooftop solar systems create no loss of open space. In addition, the high cost of land on Long Island contributes to the high cost of power obtained from commercial solar generators. By comparison, in other parts of the country, these projects seem to make sense. “The price of electricity sold to utilities under long term contracts from large-scale solar power projects has fallen by more than 70% since 2008, to just $50/MWh [i.e., $0.05/kWh] on average within a sample of contracts signed in 2013 and 2014 and concentrated among projects located in the southwestern United States.” (Allan Chen, “New Studies Find Significant declines in Price of Rooftop and Utility-Scale Solar” (News Center September 17, 2014).

Seventh, most of the commercial scale solar providers are out-of-state companies. Of the 11 accepted for approval by LIPA on December 17^th, 9 are out of state companies. The one New York Company accepted to provide two solar facilities in Kings Park will provide only 4 MW of the anticipated 122.1 MW of solar power. As a result, approximately $31,000,000 each year for 20 years will be taken out of the Long Island economy to pay for the solar power generated by these out of state companies. By contrast, if the same power that can be generated from commercial solar systems with a combined capacity of 122.1 MW is obtained from distributed rooftop solar systems, approximately $41,000,000 each year will be saved by LIPA customers with solar systems on their roofs. This money can be expected to be spent on Long Island, or saved in banks and made available for loans. Applying a conservative multiplier effect of 3, the electric fees saved by those with solar systems on their roofs will add over $120,000,000 to the Long Island economy each year.

Eighth, most of the distributed rooftop solar systems are installed by small businesses. New York State’s solar energy industry employed 5,000 people in 2013, and 41% of all solar systems in the State are on Long Island. On December 14, 2014, NYSERDA announced the installation of the 10,000^thsolar photovoltaic system on Long Island, and it projects that the 15,000^thsystem could be installed during 2015. Encouraging distributed rooftop solar systems to be installed will increase employment.

CONCLUSION

It is increasingly apparent that LIPA and PSEG-LI are making major decisions without taking into consideration the impact those decisions will have. Two large commercial solar projects have been tentatively approved for residentially zoned areas in Shoreham, one on a 60 acre sod farm (9.5 MW),[1] and another, adjacent to that project, on a 200 acre public golf course (24.99 MW). Another project approved for negotiation of a PPA is in the core area of the Pine Barrens. LIPA’s and PSEG-LI’s attitude appears to be, let the Towns figure out if the locations selected or proposed are appropriate, and we will just consider if we want the power.

This head-in-the-sand approach to planning must change. LIPA and PSEG-LI are subject to the strict procedural requirements of the State Environmental Quality Review Act (“SEQRA”), which requires that a draft Environmental Impact Statement be prepared whenever a discretionary action (such as approving a contract for construction of a power plant) “may” have a significant impact on the environment. Unquestionably, many impacts caused by traditional base load power plants (such as those from air emissions, noise, and water usage) are absent when power will be generated from solar panels. But a non-residential project or action that involves “the physical alteration of 10 acres” is a Type I Action under SEQRA which is “more likely to require the preparation of an EIS than Unlisted actions.” Among the factors LIPA and PSEG-LI are required to consider are “the removal or destruction of large quantities of vegetation or fauna”; “the creation of a material conflict with a community’s current plans or goals as officially approved or adopted”; “the impairment of the character or quality of important historical, archeological, architectural, or aesthetic resources or of existing community or neighborhood character”; “a substantial change in the use, or intensity of use, of land including agricultural, open space or recreational resources, or in its capacity to support existing uses.” In addition, the lead agency must “consider reasonably related long-term, short-term, direct, indirect and cumulative impacts”, and “The significance of a likely consequence (i.e., whether it is material, substantial, large or important) should be assessed in connection with: (i) its setting (e.g., urban or rural); (ii) its probability of occurrence; (iii) its duration; (iv) its irreversibility; (v) its geographic scope; (vi) its magnitude; and (vii) the number of people affected.”

Newsday reported on January 6, 2015 (p. A20) that the Town of Brookhaven is going to put off its review of its zoning code as it relates to solar installations. This is because Suffolk County officials are “crafting their own guidelines for the controversial power facilities” and “it makes more sense for the county, rather than the town, to develop guidelines.” The County apparently will attempt to craft a model zoning code that Towns can adopt who wish to regulate solar projects. The County should be applauded for this effort, but any effort to establish uniform guidelines should include input from PSEG-LI.

The statements coming from PSEG-LI appear contradictory. LIPA is criticized repeatedly for all of its long term contracts because new sources of power are not needed for another ten years. On the other hand, PSEG wants to see PPAs signed for the 122.1 MW of solar power authorized on December 17, 2014, and will release a request for proposals for another 160 MW of renewable power later this year. At least until PSEG-LI completes its needs study, the fact that the power will come from solar panels does not make the power necessary. Distributed power on rooftops can continue to be installed, and it appears that the State’s goal of obtaining 20% of our energy from renewable sources by 2025 can be met without the long term commercial contracts.

While the County and Towns are working on uniform guidelines, LIPA and PSEG-LI should put any further Power Purchase Agreements for electrical power plants on hold, at least until PSEG-LI has finished its needs study. Rather than reduce incentive rebates for distributed solar power on rooftops, they should be increased so the momentum and growth now seen in the solar industry will not be lost.

PSEG-LI has made it clear from its “Utility 2.0 Long Range Plan” that it is actively considering a broad range of proposals, many of which are cutting edge and imaginative, to help assure that it will “invest in more customer-oriented solutions that reduce peak demand for electricity, and improve the efficiency and resiliency of the grid at an affordable cost.” Whether commercial solar projects make sense in Suffolk County in light of the availability of distributed rooftop solar systems should be discussed openly. Having determined that no new power sources are needed until 2024, LIPA and PSEG-LI have the luxury of time. The commercial solar projects and their long term inflated costs can wait; proper planning must come first. Slow down – and get it right.

[1] By way of full disclosure, this firm represents a community group whose members reside around the 60 acre sod farm who have filed a lawsuit challenging the Town of Brookhaven Planning Board and Zoning Board of Appeals approvals of the 9.5 MW project. The opinions in this Blog are strictly those of the author.

By Patrick McCormick

For obvious reasons, commercial landlords routinely insist that a commercial tenant provide a personal guaranty of the payment and performance obligations of the tenant.

It is not surprising that litigation often arises between the landlord and the guarantor upon the default by the tenant with a common defense being that the terms of the guaranty were not intended to cover the specific default at issue.

The general rule is that a personal guaranty is to be strictly construed and a “guarantor should not be bound beyond the express terms of his guarantee.”[i]  As a result, to help ensure maximum security, it is common for landlords to require that a guaranty provide that it is applicable to any “renewal, change or extension of the Lease.”  Despite such broad language, there is much litigation over whether the particular guaranty is enforceable when leases are renewed, extended or changed.

In Commerce Street Professional Center, LLC v. Connolly,[ii] plaintiff and landlord entered into a commercial lease with a stated term commencing March 1, 2006 and expiring February 28, 2013.  The lease was personally guaranteed by the tenant’s president and also by the defendant Connolly. On April 10, 2008, landlord and tenant executed an “Extended and Modified Lease Agreement” under which tenant leased additional space, extended the term by two years, increased the rent, and changed the security provision of the initial lease agreement.  This extension agreement was guaranteed by the tenant’s president, but not by defendant Connolly, who had no involvement in negotiating the extension and who did not sign the extension.  The tenant defaulted on February 27, 2014—during the extension period.  Landlord commenced an action against Connolly, alleging that his guaranty of the original lease was applicable to the extension agreement.  Defendant Connolly moved to dismiss arguing, among other things, that the extension agreement materially altered the terms of the original lease including extending the term and increasing the rent and therefore “impermissibly increased his obligation as a guarantor without his consent.”  Applying the above stated rule and the proposition that a “guaranty of a tenant’s obligation under a lease must be strictly interpreted in order to assure its consistency with the lease terms to which the guarantor actually consented,” the Court granted the motion to dismiss.  Simply stated, the Court found that the extension agreement contained terms to which Connolly did not consent and to which he did not intend to be bound and, because it materially differed from the original lease, it was “not an extension of the original lease dated March 2006 which would allow plaintiff to recover from defendant.”

A similar result was reached in 665-75 Eleventh Avenue Realty Corp. v. Schlanger.[iii]  In that case, the landlord obtained judgments against the tenant that were unsatisfied and thereafter commenced an action against the guarantor.  The written commercial lease at issue was entered into on October 13, 1987 and by its terms expired October 31, 1992.  The defendant Schlanger, the president of the corporate tenant, executed a personal guaranty that provided that “the Guarantor further agrees that this guaranty shall remain and continue in full force and effect as to any renewal, change or extension of the Lease.”  After the expiration of the term of the lease, the landlord and tenant entered into written extensions of the lease with the final extension dated June 1995, extending the lease to June 30, 1995.  The tenant remained in possession after June 30, 1995 as a month-to-month tenant and paid rent for three months, but then stopped paying rent.  Landlord commenced a nonpayment proceeding against the tenant and was awarded a money judgment.  The landlord then commenced this action against the guarantor to collect the rent owed as set forth in the judgment.  In affirming the denial of the landlord’s motion for summary judgment, the Appellate Division, applying the above stated general rule that personal guarantees are to be “strictly construed in favor of a private guarantor,” held that “since it is undisputed that there was no written lease extension beyond June 10, 1995, the guaranty lapsed, releasing the defendant from liability under the lease.”

While the factual differences between these two cases are obvious, what is troubling about Schlanger is that the Court did not address whether the guarantor (the tenant’s president) was aware that the tenant held over after the expiration of the final extension period and what impact this may have had on the Court’s determination.  This leaves one to wonder if the outcome would have been different had the guaranty also provided that is was applicable to any holdover period or any period when the tenant became a month-to-month tenant.

These cases, and there are many others, lead to the conclusion that landlords should be diligent in obtaining the guarantor’s written consent to every change, renewal,  extension, modification, or alteration of any term in a commercial lease and should seek the broadest possible guaranty.

[i] Wesselman v. Engel Co., 309 N.Y. 27 (1955).

[ii] Commerce Street Professional Center, LLC v. Connolly, 2014 WL 5739931 (Sup. Ct., Westchester Co. Giacomo, J.).

[iii] 665-75 Eleventh Avenue Realty Corp. v. Schlanger, 265 A.D.2d 270 (1^st Dep’t 1999)

Considering the potential harm that could strike a business when a key employee leaves to work for a competitor, employers are often quick to pursue litigation against employees when they believe the employee may have taken confidential and/or proprietary information with him/her and is now using (or could use) that information to the benefit of a direct competitor (and to the harm of the employer). 

Many times, an employer may assume or speculate that a former employee has taken confidential information and is using or will use it with a new employer.  However, proving that the former employee stole confidential information and that the information was actually confidential in the first place is often difficult. Courts are generally not likely to take the extra step of imposing a preliminary injunction in these types of cases without solid proof that the former employee has engaged in misconduct.   An interesting case out of the Suffolk County Commercial Division recently sided with the employer in this scenario and granted an injunction in its favor.

In First Manufacturing Co., Inc. v. Young, et al. (J. Whelan), plaintiff First Manufacturing Co., Inc. (“First Manufacturing”), a wholesale provider of leather goods and apparel, commenced a lawsuit against two former employees and the company they left to work for, Shaf International – a direct competitor of First Manufacturing.  The claims against the defendants included breach of fiduciary duty, aiding and abetting breach of fiduciary duty, misappropriation of trade secrets, and unfair competition.  Upon commencing the lawsuit, First Manufacturing also filed a motion seeking a preliminary injunction against the defendants to, among other things, enjoin and restrain them from divulging, disclosing, or reproducing to others any confidential information they obtained during their employment with First Manufacturing and from soliciting First Manufacturing’s customers or employees.    

In reviewing the motion for an injunction, the Court referred to the traditional three-prong test for obtaining a preliminary injunction: (1) likelihood of success on the merits; (2) irreparable harm without the injunction; and (3) balance of the equities to favor the party seeking the injunction.  Nobu Next Door, LLC v. Fine Arts Hous., Inc., 4 N.Y.3d 839 (2008).  Upon review of each of the elements, the Court found that First Manufacturing had met its burden of proof entitling it to a preliminary injunction.

The Court noted that First Manufacturing was likely to succeed on the merits of its fiduciary duty and unfair competition claims because there was uncontroverted proof that the defendants purposely and wrongfully copied and took trade secrets and/or confidential proprietary materials from First Manufacturing when they left their employment.  The Court also noted that this information was used by the defendants for the purpose of “competing directly and unfairly with plaintiff following the termination of their employment” and obtaining monetary gains and benefits “through bad faith and tortious conduct.”   According to the Court, Shaf International (the new employer) was also complicit in the acts of the former employees of First Manufacturing because it knowingly used the pirated confidential information, undercut First Manufacturing’s pricing, and solicited First Manufacturing’s customers.

The Court found that First Manufacturing established irreparable harm and the balance of the equities tipped in its favor because the evidence produced by First Manufacturing made it clear that the defendants were enjoying a competitive advantage to the detriment of First Manufacturing, which was causing direct harm to First Manufacturing’s good will and reputation.

As a result of the Court’s findings, the Court granted the preliminary injunction against the two former employees and current employer as requested, thus preventing the defendants from disclosing or using any confidential information of First Manufacturing (and requiring them to return any information taken) or soliciting any of its customers or employees.  First Manufacturing was required to post an undertaking of $100,000 in order to maintain the injunction.

Unfortunately, the Court in First Manufacturing did not go into great detail with respect to what specific proof in the record demonstrated that the defendants had misappropriated confidential information, but the Court was clearly satisfied that sufficient evidence had been presented documenting the misconduct and that First Manufacturing was harmed as a result.  It is very important as the former employer in these types of cases to perform a thorough internal investigation before commencing a lawsuit to determine exactly what information was or may have been taken by an employee who left the company and how it is or will be used so that the Court has the ability to review actual substantive proof as opposed to mere speculation by the employer.

While the sale of a business is a common occurrence, courts are often looked upon to interpret the terms of the relevant sale documents associated with the transaction when either the buyer or seller is alleged to have breached certain obligations post-closing.

This was the case in a recent decision in the Suffolk County Commercial Division in Huntington Village Dental, P.C. v. Rathbauer, et a. (J. Whelan).

In Rathbauer, plaintiff Huntington Village Dental, P.C. (“HVDPC”) purchased a dental practice from John F. Rathbauer, DMD, LLC (“Rathbauer LLC”), evidenced by an Agreement of Sale, Promissory Note, and Bill of Sale, all dated June 14, 2010.  HVDPC also executed a lease for the first floor of a building owned by another defendant, John F. Rathbauer, DMD, P.C. (“Rathbauer P.C.”).  Of particular significance, the Promissory Note provided that, in the event of a default in payment by HVDPC under the Note, Rathbauer LLC could send a notice of default requiring payment of the balance within 90 days.  Additionally, if the default was not cured within the 90 days, ownership of the dental practice and assets would revert to Rathbauer LLC.

As part of the sale documents, Rathbauer himself remained employed by the dental practice for one year following the sale.  However, shortly after the closing, HVDPC claimed that the defendants breached their obligations under the terms of the sale documents due to “failure to turn over full and complete patient lists, clinical quality copies of x-rays and practice management documents as data which plaintiff purchased from Rathbauer LLC.”  Despite these claims, HVDPC apparently continued performing under the Promissory Note until July 2012, approximately two years after the closing and one year after Rathbauer completed his employment.  Beginning in July 2012, HVDPC refused to pay it obligations under the Promissory Note going forward, essentially based upon the same alleged breaches it claimed back in 2010.

In the Complaint, HVDPC sought rescission of the Promissory Note and the other sale documents on the grounds that the defendants materially breached their obligations and fraudulently induced plaintiff to enter the sale.  HVDPC also sought money damages for alleged tortious interference due to the defendants’ alleged interference between HVDPC and HVDPC’s patients.  Plaintiff further sought a declaratory judgment finding that HVDPC was free from any further obligations under the sale documents and that the provision in the Promissory Note permitting Rathbauer LLC to “take back” ownership of the dental practice and its assets to be deemed null and void.

Defendants then asserted two of their own counterclaims – the first seeking declaratory relief that the “take back” provision in the Promissory Note is valid and enforceable, and the second for money damages due to HVDPC’s failure to pay amounts due under the Promissory Note.

Both parties ultimately moved for summary judgment.  With respect to HVDPC’s claim for rescission of the sale documents due to the alleged “material breaches” by the defendants, the Court noted that rescission of a contract is permitted when a breach “substantially defeats [the] purpose of the contract” when such breach is “material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract.”  Wiljeff, LLC v. United Realty Management Corp., 82 A.D.3d 1616 (4^th Dep’t 2011)(quoting Lenel Sys. Intl., Inc. v. Smith, 34 A.D.3d 1284 (4^th Dep’t 2006)).

Based upon the record before it, the Court denied summary judgment and dismissed HVDPC’s claim for rescission, holding that HVDPC failed to satisfy its burden of proof.  Particularly, the Court noted that the breaches alleged by HVDPC were slight, casual and/or technical breaches, with nothing in the record pointing to a material, substantial breach by the defendants.  Furthermore, the parties operated under the agreement for two years after the closing; thus, rescission was not a remedy available to HVDPC at that point.   Given that the Court found no evidence of material breaches by the defendants, the Court also denied summary judgment and dismissed HVDPC’s declaratory judgment claim.

With respect to HVDPC’s fraudulent inducement claim, the Court held that the alleged representations by defendants were not actionable because the representations were promissory and futuristic in nature and HVDPC could not prove justifiable reliance.  The Court also noted that HVDPC essentially waived its rights for rescission under a fraudulent inducement theory by continuing to operate under the agreement for two years despite allegedly having knowledge of the alleged misrepresentations.

In considering the defendants’ separate summary judgment motion on their counterclaims, the Court granted summary judgment to the defendants for money damages as a result of HVDPC’s failure to pay amounts due under the Promissory Note because HVDPC had no bona fide defense to not paying the amounts due thereunder, given the Court’s finding that the defendants’ alleged breaches were non-material in nature.  However, with respect to the “take back” provision that was available to the defendants in the event HVDPC defaulted under the Promissory Note, the Court refused to enforce the provision, noting that no proof had been shown demonstrating the enforceability of the provision, which was actually handwritten into the Promissory Note at the closing.

This case provides an important illustration of how parties’ actions after the sale of a business is completed will affect how a Court interprets certain provisions of the parties’ agreements when the parties later seek to enforce them.  Particularly for HVDPC, while it thought it had a valid basis to rescind the sale agreements and to stop paying under the Promissory Note due to what it claimed were material breaches by the defendants, the Court ultimately found those breaches to be non-material and that HVDPC’s continued performance under the sale documents for two years post-closing resulted in a waiver of its right to rescission and, as a result, it was plaintiff HVDPC that was in default of the Promissory Note, owing money damages to the defendants.