Opinion
No. 5466–11.
2013-02-14
In the Matter of the Application of Eugene W. RYAN, trustee of the Sarah A. Ryan 2503(C) Trust and Paul Ryan, Petitioners, For the Judicial Dissolution of Integra Networks, Inc., Respondent, and David PRESCOTT and Melissa Prescott, Respondents.
(James E. Hacker, of counsel), Hacker Murphy, LLP, Latham, for Gregory Streeter. (Peter A. Lauricella, of counsel), Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, Albany, for Integra Networks, Inc.
(James E. Hacker, of counsel), Hacker Murphy, LLP, Latham, for Gregory Streeter. (Peter A. Lauricella, of counsel), Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, Albany, for Integra Networks, Inc.
(F. Charles Dayter, of counsel), Hiscock & Barclay, LLP, Albany, for David Prescott.
RICHARD M. PLATKIN, J.
The above-captioned third party action arises out of an oral agreement that petitioner Paul Ryan allegedly entered into with third-party plaintiff Gregory Streeter as the agent of respondent/third-party defendant Integra Networks, Inc. (“Integra”). At the time of the alleged oral agreement, Ryan was a part-time employee of Integra who expected to receive an ownership interest in the company. After overhearing Ryan discussing prospective investors at an Albany bar, Streeter expressed interest in investing. According to both Streeter and Ryan, they agreed that Streeter would invest $50,000 in Integra in the form of an interest-bearing, 24–month loan that Streeter could convert at his option into a five percent ownership interest in Integra.
On November 19, 2008, Streeter delivered to Ryan two checks totaling $50,000, bearing the memorandum “Integra buy in”. The checks were deposited into Integra's checking account, and Integra began remitting $500 per month in interest to Streeter in early 2009. Ryan claims that third-party defendant David Prescott, the sole owner of Integra at the time, authorized the transaction and was fully aware of the convertible term from the outset. Prescott denies this, claiming he did not learn of Streeter's claim to equity in Integra until the commencement of this action.
By March 2010, Ryan had become the president of Integra. In or about April 2010, Streeter allegedly converted his loan into equity, though no one other than Ryan acknowledges being aware of this alleged election. And in or about October 2010, a 48.75% stake in Integra was conveyed to the Sarah A. Ryan 2503(c) Trust (“Trust”). Sarah Ryan is Ryan's daughter, and the Trust is overseen by Ryan's brother, Eugene Ryan (“the Trustee”).
On August 12, 2011, Ryan and the Trustee commenced a proceeding for, inter alia, judicial dissolution of Integra. In October 2011, Streeter filed the instant third-party action to obtain specific performance of the alleged convertible loan agreement. Reasoning that a prompt determination of Streeter's claim could provide clarity regarding the control of Integra and establish which party or parties may pursue dissolution, the Court expedited the third-party action while deferring adjudication of the dissolution petition.
Following joinder of issue and the completion of discovery, an immediate trial on Streeter's claim was held before the Court on August 20, 21 and 23, 2012.
The Court heard testimony from Streeter, Ryan and Prescott, as well as Integra's accountant, counsel and banker. In addition, the Court received approximately 115 documents into evidence. Post-trial briefing was completed on November 19, 2012.
Prescott eventually filed a motion for summary judgment seeking dismissal of Streeter's complaint, but given the proximity of the motion's return date to the assigned day certain, the case proceeded to trial without determination of the motion.
The principal issues raised at trial and in the parties' post-trial submissions are whether: (1) the terms of the alleged agreement between Ryan and Streeter were sufficiently definite as to give rise to an enforceable contract; (2) Ryan had actual or apparent authority to enter into the alleged convertible loan; (3) Prescott, on behalf of Integra, ratified the alleged convertible loan; and (4) the Statute of Frauds bars proof of the alleged oral agreement. On the basis of the credible testimony and documentary evidence adduced at trial, the Court makes the following findings of fact and conclusions of law.
BURDEN OF PROOF & CREDIBILITY
In a bench trial, a “plaintiff has the burden of proving his case by a fair preponderance of the credible evidence” (Rinaldi & Sons v. Wells Fargo Alarm Serv., 39 N.Y.2d 191, 196 [1976];see also Michaels v. Agricultural Ins. Co., 38 N.Y.2d 793, 794 [1975] ). Accordingly, Streeter bears the burden of proof, except as to Integra and Prescott's affirmative defense that the alleged oral agreement is barred by the statute of frauds ( seeCPLR 3018 [b], 3211[a][5]; Bourdeau Bros., Inc. v. Bennett, 74 AD3d 1542, 1542 [3d Dept 2010] ).
Witness credibility plays a pivotal role in this action. After all, there is no writing evidencing the alleged convertible loan agreement or Prescott's knowledge of the same. Moreover, as a business corporation, Integra “must act solely through the instrumentality of [its] officers or other duly authorized agents' “ (Kirschner v. KPMG LLP, 15 NY3d 446, 465 [2010] [quoted case omitted] ). Unfortunately, the Court found a considerable portion of testimony given by Prescott and Ryan to be lacking in credibility. While the Court will highlight specific credibility problems in the context of the various factual and legal contentions raised by the parties, it sets forth here some of the governing legal principles.
“The credibility of the witnesses, the reconciliation of conflicting statements, a determination of which should be accepted and which rejected, the truthfulness and accuracy of the testimony, whether contradictory or not, are issues for the trier of the fact.... The memory, motive, mental capacity, accuracy of observation and statement, truthfulness and other tests of the reliability of witnesses can be passed upon with greater safety by a trial judge who sees and hears the witnesses....” (Healy v. Williams, 30 AD3d 466, 468 [2d Dept 2006] [quoted source omitted]; see also Magie v. Preferred Mut. Ins. Co., 91 AD3d 1232, 1235 [3d Dept 2012] ).
Prescott, Ryan and Streeter each have a substantial personal stake in the outcome of this litigation. The five percent interest claimed by Streeter could tip control of Integra from Prescott to Ryan. Further, Streeter has an obvious interest in being able to realize his objective of obtaining equity in Integra. Thus, the Court must consider the extent to which the witnesses' testimony has been influenced, whether intentionally or unintentionally, by their interest in the outcome of the case.
The doctrine of falsus in uno allows the trier of fact to completely disregard the testimony of a witness who has wilfully testified falsely as to any material fact ( see e.g. DiPalma v. State of New York, 90 AD3d 1659, 1660 [4th Dept 2011] ). This doctrine is grounded upon the principle that one who testifies falsely about one material fact may well have testified falsely about everything.
Finally, Ryan was convicted of securities fraud, for which he served 29 months in prison. In pleading guilty to this federal felony, Ryan admitted altering account statements, lying to clients, forging signatures and making unauthorized account transfers. Although Ryan's testimony is not incredible as a matter of law ( see Prince v. 209 Sand & Gravel, LLC, 37 AD3d 1024, 1025 [3d Dept 2007] ), the Court must consider Ryan's felony conviction and the surrounding facts and circumstances in assessing the truthfulness of his trial testimony.
FACTUAL BACKGROUND
Integra was incorporated on June 18, 2007 as a New York business corporation for the purpose of purchasing and reselling network communications hardware. In its incorporation papers, Integra was authorized to issue 200 shares of stock. At the time of incorporation, Prescott was the sole owner of Integra, although no shares of stock had been issued.
Ryan had worked with Prescott in the past. By 2008, Ryan began rendering services to Integra on a part-time basis while maintaining full-time employment elsewhere. While Prescott focused on the technical side of Integra's business, Ryan was involved in sales, operational and finance issues. Ryan's duties included maintaining Integra's QuickBooks bookkeeping system, and he had authority to sign checks on behalf of Integra. Notwithstanding Prescott's focus on technical aspects of the business, he had access to all of Integra' financial records, including QuickBooks.
Throughout 2008, Integra was seeking an infusion of operating capital. In addition to all of the other types of expenses associated with a start-up company, Integra required funds to purchase hardware components from overseas manufacturers to resell to its customers. As a newly formed company lacking in operating history and assets, Integra could not obtain a line of credit from a bank. Indeed, it was only due to Ryan's preexisting relationship with Joe Bucciero, a commercial banker, that Integra was able to obtain a low-balance credit card.
As part of Integra's efforts to secure funding, Ryan was working to identify potential sources of capital among his business and social contacts. Prescott was aware Ryan was looking for funding, but he denies authorizing Ryan to bind Integra to a loan transaction or an equity investment. In contrast, Ryan testified that he was authorized to bind Integra to the sale of an equity interest in the company.
In early November 2008, Ryan met with Bucciero at Appletini's Café to discuss possible investors in Integra. Streeter, the manager of operations for a local business that specializes in environmental remediation, also was at Appletini's. Streeter and Ryan had been friends since 2007. Indeed, Streeter previously had loaned Ryan $100,000 to finance the purchase of a home, a transaction that was memorialized via execution of a written note.
After overhearing the discussion at the bar between Ryan and Bucciero, Streeter and another individual, Tom Perrault, expressed interest in loaning Integra $100,000 at an interest rate of 12% per annum for two years with the option of converting the loan into a 10% ownership stake in Integra. Ryan claims to have called Prescott immediately after this discussion to advise him of the potential deal. Prescott does not deny receiving this call from Ryan, but claims that he only was told that some friends of Ryan were interested in extending credit to Integra, which Prescott viewed as a positive development.
Over the next week or two, Ryan contacted Streeter to follow-up on their barroom discussion. Streeter advised Ryan that Perrault had decided not to pursue the transaction, but that Streeter was willing to go forward with lending Integra the sum of $50,000, which could be converted into a five percent ownership interest. Streeter would also receive 12 % annual interest over the two year loan term, in the form of monthly payments of $500.
On or around November 18, 2008, Streeter delivered two checks to Ryan, totaling $50,000, bearing the notation “Integra buy in”. Ryan claims to have shown these checks to Prescott before depositing them into Integra's checking account and recording the loan in QuickBooks. However, no reference to the convertibility term was included in QuickBooks, and Prescott denies ever being shown Streeter's checks.
Prior to the deposit of Streeter's checks, Integra's checking account had a balance of about $6,000, and the company had many outstanding accounts payable. Thus, a considerable portion of the Streeter loan proceeds were used to pay vendors, the Internal Revenue Service, employees and other creditors of Integra. In fact, Integra applied more than $14,000 of the Streeter loan proceeds to pay outstanding obligations to Prescott.
In his direct trial testimony, Prescott asserted that he did not learn of the transaction with Streeter until early 2009, after he discovered QuickBooks entries reflecting the $500 interest payments. On redirect, Prescott acknowledged that he contemporaneously was aware of the infusion of $50,000 into Integra, but claims to have believed that Ryan was the source of the funds, whether as a loan or an investment of his own capital. However, Prescott did not inquire into the source of the funds, and his deposition testimony suggests that he had no knowledge of the source.
Prescott testified that after he noticed the $500 monthly payments to Streeter in QuickBooks, he did make inquiry. Ryan allegedly told him that Streeter had loaned the company $50,000 for two years at an annual interest rate of 12%. Prescott denies being informed of the convertibility term. Prescott further testified that he expressed displeasure at the “high interest rate loan” and demanded that Streeter be repaid immediately. However, Prescott backed off this stance, apparently due to his interest in an unrelated transaction concerning the sale of an airplane. Thus, no steps actually were taken to rescind the loan, and Integra continued to make $500 interest payments to Streeter.
In November 2009, Teal, Becker & Chiaramonte, CPAs, PC (“Teal Becker”) was engaged to perform a valuation of Integra in connection with the transfer of stock to the Trust. A draft report was issued on January 14, 2010. Paragraph 4.2, entitled “Prior Transactions”, reads as follows:
To partially fund the startup of the Company, Greg Streeter, a friend of David Prescott, took a $50,000 note. The note has no formal written agreement, but has an annual interest rate of 1% paid monthly, and is convertible into 5% of the Company's common stock. This transaction took place in 2007, and may not be an indication of value as of December 1, 2009. The convertibility characteristic of the note may have expired at the date of valuation, however, the informal nature of the note creates uncertainty regarding its terms. The uncertainty surrounding this note will be taken into consideration in the discount for lack of marketability ( id. at 000001315).
Prescott denies ever reviewing this draft valuation report.
At a March 8, 2010 meeting of Integra, the company adopted new by-laws. At that time, Prescott and Ryan were designated directors of Integra, Prescott was designated chairman of the board, Ryan was appointed as Integra's president, and Prescott was appointed as treasurer and secretary.
Meanwhile, in the Fall of 2009, Integra retained Jeremy Speich, Esq. as its corporate counsel. Speich first met with Ryan and Prescott on March 19, 2010. The Streeter transaction was a principal topic of discussion at this meeting. Prescott acknowledges that there was discussion of allowing Streeter to convert the loan into equity in lieu of repayment, but he denies that convertibility was an element of the original Streeter/Ryan agreement. Counsel testified that Prescott and Ryan “seemed to disagree about whether or not there was gong to be conversion” of the Streeter loan, but he was unable to shed any light on the terms of the original transaction or Prescott's knowledge of the same.
Streeter claims that on April 13, 2010, while attending a sporting event with Ryan, he orally elected to exercise his alleged conversion right. Ryan confirms this testimony and claims that he advised both Speich and Prescott of the conversion. However, both Speich and Prescott deny ever being so informed.
Months after the March 19, 2010 meeting with Prescott and Ryan, Speich drafted transactional documents for Integra that, among other things, would have effectuated the conversion of Streeter's loan to Integra into five percent of the company's voting stock. However, these documents never were executed. Likewise, subsequent documents that would have converted the Streeter loan into non-voting shares of Integra stock were not executed. However, on October 5, 2010, Integra issued shares of stock to Prescott, who in turn conveyed stock to the Trust. Following this distribution, Prescott held 51.25% and the Trust 48.75 % of the voting shares of Integra stock.
Finally, in connection with Integra's efforts to obtain a bank line of credit, the company retained Teal Becker to prepare a reviewed financial statement. That statement was prepared using information as of June 30, 2010, and it was issued on October 11, 2010. Note 13 to the Financial Statement entitled “Stockholder” provides: “Effective July 1, 2010, a loan payable due to an unrelated party in the amount of $50,000 will be converted into ten shares of common stock, which represents a five percent ownership interest in the corporation”. The CPA who prepared the financial statement, Pasquale Scisci, testified that he reviewed the report with Prescott on or about its issuance date and was based upon information provided at a meeting at which Prescott was present. However, Prescott denies reviewing the financial statement and testified that the information regarding Streeter was obtained from Ryan, a claim that finds some support in the record.
ANALYSIS
A.Contract Formation and Definiteness of Material Terms
In arguing the existence of a valid and legally enforceable contract, Streeter contends that the offer made by Ryan on behalf of Integra was the right to acquire an ownership interest in Integra via conversion of a $50,000 loan. The loan would bear interest at a rate of 1% per month for up to two years and was convertible at any time during the loan term into five percent of Integra's common stock. Streeter contends that this offer was accepted when he tendered, and Integra received, checks totaling $50,000.
Prescott and Integra respond by arguing that the terms of this alleged oral agreement lack the definiteness required for contract formation and, thus, there was no meeting of the minds. Specifically, Prescott contends that there was no credible evidence as to at least three material elements of the alleged convertible loan: (1) the nature of the ownership interest that Streeter would receive; (2) whether such interest would include voting rights; and (3) the effect of an early election on the continuation of monthly interest payments.
As the proponent of the alleged contract, Streeter “must establish an offer, acceptance of the offer, consideration, mutual assent, and an intent to be bound. That meeting of the minds must include agreement on all essential terms” (Kowalchuck v. Stroup, 61 AD3d 118, 121 [1st Dept 2009], citing 22 N.Y. Jur 2d, Contracts §§ 9, 31). “[I]f an agreement is not reasonably certain in its material terms, there can be no legally enforceable contract' “ (Marder's Nurseries, Inc. v. Hopping, 171 A.D.2d 63, 68 [2d Dept 1991], quoting Cobble Hill Nursing Home v. Henry & Warren Corp., 74 N.Y.2d 475, 482 [1989] ). After all, “a court cannot enforce a contract unless it is able to determine what in fact the parties have agreed to' “ (F & K Supply Inc. v. Willowbrook Dev. Co., 288 A.D.2d 713, 714 [3d Dept 2001], quoting Matter of 166 Mamaroneck Ave. Corp. v. 151 E. Post Rd. Corp., 78 N.Y.2d 88, 91 [1991] ). Moreover, “the requirement of definiteness assures that courts will not impose contractual obligations when the parties did not intend to conclude a binding agreement” (Cobble Hill Nursing Home v. Henry & Warren Corp., 74 N.Y.2d at 482.;see Allied Sheet Metal Works v. Kerby Saunders, Inc., 206 A.D.2d 166, 169–170 [1st Dept 2004] ). Nonetheless, the doctrine “has never been applied with a heavy hand' “ and “[a]bsolute certainty has never been required” (Marder's Nurseries, 171 A.D.2d at 68–69, quoting Cobble Hill Nursing Home, 74 N.Y.2d at 483). “Instead, reasonable certainty has always been viewed as sufficient to avoid the last resort' of canceling an otherwise valid contract” ( id. at 69; see Lo Cascio v. James v. Aquavella, M.D., P.C., 206 A.D.2d 96, 100 [4th Dept 1994] ).
The Court is satisfied that the material terms of the oral agreement were sufficiently definite and that there was a meeting of the minds between Streeter and Ryan ( see Lo Cascio, 206 A.D.2d at 100). Both Ryan and Streeter agree that this was a conversion loan, giving Streeter the option to convert the $50,000 loan into a five percent ownership interest in the company. Contrary to Prescott's contention, Streeter's vague and imprecise understanding of what it means to own five percent of the stock of a business corporation does not render the transaction indefinite or otherwise incapable of judicial enforcement. Moreover, at the time of the alleged transaction, there only was voting stock in the company. As Prescott acknowledged at trial, if Streeter were entitled to five percent of Integra, it could only have been a voting interest. Finally, while recognizing that there was diverging testimony as to whether Integra's obligation to pay interest on the $50,000 loan would continue if the loan were converted into equity prior to the expiration of the 24–month loan term, the Court does not believe that this issue is sufficiently material to the transaction as to warrant “the last resort' of canceling an otherwise valid contract” (Marder's Nurseries, 171 A.D.2d at 68–69, quoting Cobble Hill Nursing Home, 74 N.Y.2d at 483).
The Court notes that Streeter previously had claimed that the loan was convertible at the end of the 24–month term. However, at trial, he testified that the loan could be converted into an ownership interest at any time, a proviso that he claimed was essential to protect his interests in the event the company were sold. While the Court generally found Streeter's testimony to be credible and supported by the documentary evidence, this aspect of Streeter's testimony was unworthy of belief. Given the informality and lack of due diligence and sophistication with which Streeter conducted this transaction, it is apparent that Streeter simply was parroting what he was told to say by Ryan or others in an effort to avoid the Statute of Frauds defense.
B. Authority
Having concluded that there was a meeting of the mind between Streeter and Ryan concerning the essential, material terms of the transaction, the issue becomes whether Ryan had actual or apparent authority to bind Integra to the alleged contract. As stated above, “[a] corporation can only act through its directors, officers and employees. They are the conduit through which the corporation is given being and from which its power to act and reason springs” (Goldenberg v. Bartell Broadcasting Corp., 47 Misc.2d 105, 108 [Sup Ct, New York County 1965] ). Thus, in order for the corporation to be bound, the proponent of the contract must establish the authority of the director, officer or employee to enter into the contract ( see id., citing Booth v. Litchfield, 201 N.Y. 466 [1911] and Sponge Rubber Prods. Co. v. Purofied Down Prods. Corp., 281 App.Div. 380 [1st Dept 1953], affd306 N.Y. 776 [1954] ).
Actual authority, whether express or implied, “exists when an agent has the power to do an act or to conduct a transaction on account of the principal which, with respect to the principal, he is privileged to do because of the principal's manifestation to him' “ ( Forest Park Coop., Inc., v. Commonwealth Land Tit. Ins. Co., 2011 N.Y. Slip Op 31352U at *10–11 [Sup Ct, Queens County 2011], quoting Minskoff v. American Exp. Travel Related Servs. Co., 98 F3d 703, 708 [1996] [quoting Restatement (Second) of Agency § 7 comment a (1958) ] ). “Apparent authority will only be found where words or conduct of the principal—not the agent—are communicated to a third party, which give rise to a reasonable belief and appearance that the agent possesses authority to enter into the specific transaction at issue” (Edinburg Volunteer Fire Co., Inc. v. Danko Emergency Equip. Co., 55 AD3d 1108, 1110 [3d Dept 2008], citing Hallock v. State of New York, 64 N.Y.2d 224, 231 [1984] ). In addition, “a third party with whom the agent deals may rely on an appearance of authority only to the extent that such reliance is reasonable” (Hallock, 64 N.Y.2d at 231).
Streeter contends that Ryan had actual authority to enter into the alleged oral agreement, arguing that Ryan acted as a corporate officer of Integra in a wide variety of matters, including court filings, litigation settlement agreements, agreements with vendors and customers, and the procurement of workers' compensation insurance. Streeter further contends that even if there were a lack of actual authority, Ryan was cloaked with apparent authority to act on Integra's behalf and that he reasonably and correctly dealt with Ryan as an authorized agent of Integra.
The Court rejects these contentions and finds that Ryan had neither actual nor apparent authority to convey an ownership interest in Integra to Streeter. At the time of the oral agreement, Ryan was not an officer, director, shareholder or even a full-time employee of Integra. While Ryan could undertake a variety of sales, operation and financial issues on behalf of Integra, the creation of an agency for some purposes does not imbue the agent with authority for all purposes (Ford v. Unity Hosp., 32 N.Y.2d 464, 472;see Edinburg Volunteer Fire Co., Inc., 55 AD3d at 1110). Moreover, Ryan's self-serving and conclusory assertion that Prescott imbued him with actual authority “to make a deal with individual investors for loans and stock conversions on behalf of Integra” and “to trade equity” in Integra—equity that belonged solely to Prescott at the time—is patently incredible.
Further, Streeter failed to establish any words or conduct by Integra or Prescott that could reasonably have caused Streeter to believe that Ryan was authorized to “trade equity” in Integra. Insofar as Streeter relied upon Ryan's own words and conduct, any such belief would be unreasonable because “[a]n agent cannot by his own acts imbue himself with the apparent authority' to act for a principal” (Edinburg Volunteer Fire Co., Inc., 55 AD3d at 1110, quoting Hallock, 64 N.Y.2d at 231).
In this connection, the Court observes that nothing prevented Streeter from directly contacting Prescott or otherwise attempting to confirm that the oral transaction with Ryan was authorized. As settled case law holds, a third party “who deals with an agent does so at his [or her] peril, and must make the necessary effort to discover the actual scope of authority' “ (ER Holdings, LLC v. 122 W.P.R. Corp., 65 AD3d 1275, 1277 [2d Dept 2009], quoting Fitzgibbon v. Abatelli Real Estate, 214 A.D.2d 642, 644 [2d Dept 1995], lv denied87 N.Y.2d 805 [1996], quoting Ford v. Unity Hosp., 32 N.Y.2d 464, 472 [1973] ). Other than a brief conversation with an accountant regarding Integra's investment potential, Streeter failed to undertake any investigation or due diligence.
C. Ratification
Streeter further contends that even if Ryan lacked actual or apparent authority to enter into convertible loan agreement, Integra nonetheless ratified the transaction. Prescott acknowledges being aware of the loan from Streeter since early 2009, so the issue distills to when Prescott learned of the alleged convertibility term.
In claiming that Prescott was aware that the loan could be converted into a five percent stake in Integra, Streeter points to Ryan's testimony that he fully informed Prescott of the convertible term following the Appletini's meeting and that he showed Prescott the checks from Streeter bearing the memorandum “buy in”. Further, Streeter directs the Court's attention to two documents prepared by Integra's accountants, the draft appraisal and the reviewed financial statement, both of which reference a convertible loan. Prescott disputes Ryan's testimony regarding their oral communications and interactions and asserts that he did not read the two Teal Becker reports. Streeter responds by claiming that “Prescott has adopted an ostrich' defense, sticking his head in the sand and feigning ignorance of those portions of the Streeter transaction which do not suit his objectives” (Streeter Reply Br at 13).
“[A]n agreement executed without proper authority may be enforceable under the doctrine[ ] of ... ratification” (IRB–Brasil Resseguros, S.A. v. Inepar Invs., S.A., 83 AD3d 573, 575 [1st Dept 2011], affd20 NY3d 310 [2012] ). “Ratification is the express or implied adoption of the acts of another by one for whom the other assumes to be acting, but without authority[,] [and it] relates back and supplies original authority to execute [an agreement]' “ (Rocky Point Props.v Sear–Brown Group, 295 A.D.2d 911, 913 [4th Dept 2002], quoting Holm v. C.M.P. Sheet Metal, 89 A.D.2d 229, 232 [4th Dept 1982]; see Jayne v. Talisman Energy USA, Inc., 84 AD3d 1581, 1583 [3d Dept 2011], lv denied17 NY3d 710). The burden of proof rests upon the party asserting ratification ( see e.g. Goldstein v. Tank, 73 Misc. 300, 304 [Onondaga County Ct 1911], affd149 AD 341 [4th Dept 1912] ).
As a general matter, “[r]atification requires full knowledge of the material facts relating to the transaction” (Rocky Point Props., 295 A.D.2d at 913, quoting Holm, 89 A.D.2d at 233 and citing, in part. Matter of New York State Med. Transporters Assn. v. Perales, 77 N.Y.2d 126, 131 [1990];see Standard Funding Corp. v. Lewitt, 89 N.Y.2d 546, 552 [1997] [“knowledge of the material facts”]; Robbins v. Tucker Anthony Inc., 233 A.D.2d 854, 855 [4th Dept 1996] ). However, there is limited authority for the proposition that ratification may be found even where the principal lacked knowledge of all material facts when the principal is aware of its lack of knowledge and fails to investigate ( see Matter of Cologne Life Reins. Co. v. Zurich Reins. [N. Am.], 286 A.D.2d 118, 127–129 [1st Dept 2001], citing Restatement [Second] of Agency § 91, Comment e ).
The Court begins with Ryan's testimony that he fully advised Prescott of the terms of the Streeter loan, including the convertibility term. In assessing this testimony, the Court is mindful that Ryan pleaded guilty to federal felony charges for conduct involving dishonesty and deception in connection with business transactions. Further, Ryan has a strong interest in seeing Streeter prevail. By joining the substantial minority interest held by the Trust, which was established for the benefit of Ryan's daughter and is overseen by Ryan's brother, with the five percent interest claimed by Streeter, his friend and personal creditor, Ryan would effectively gain control over Integra and be in a position to remedy the grievances raised in the dissolution proceeding. The Court also is convinced that Ryan willfully testified falsely as to highly material issues that go to the heart of this case, including his risible claim that he had been given actual authority “to trade [Prescott's] equity” in Integra.
As such, the doctrine of falsus in uno permits the Court to disregard Ryan's testimony in its entirety ( see Deering v. Metcalf, 74 N.Y. 501, 505–506 [1878];PJI 1:22). Having had the opportunity to see and hear the witness's testimony and given all of the foregoing facts and circumstances,
This is by no means the only false testimony given by Ryan. For example, Ryan's claim that he contemporaneously advised Integra's corporate counsel of Streeter's alleged election was flatly refuted by Jeremy Speich, who has no interest in the outcome of the case, and is unsupported by documentary evidence under circumstances in which documentation ordinarily would be generated.
the Court declines to accord any weight to Ryan's testimony regarding his alleged communications and interactions with Prescott regarding the convertibility term of the loan.
The implications of Ryan's use of the Trust on account of his federal restitution obligation are not lost on the Court. However, the Court need not delve into this issue to resolve the issues raised in the third-party action.
The issue then becomes whether Streeter can meet his burden of proving ratification without reliance upon Ryan's testimony. In seeking to discharge this burden, Streeter relies primarily upon notes in the draft valuation report and reviewed financial statement prepared by Teal Becker that refer to a convertible loan. Streeter argues that these documents, at a minimum, put Prescott on notice that he lacked material information concerning the loan and, therefore, gave rise to a duty to investigate.
As stated previously, ratification generally requires proof that the principal had “full knowledge of all material facts, and ratification will not be found unless there is this full knowledge” ( seeRestatement [Second] of Agency § 91, Reporters Notes; see also supra ). Nonetheless, a principal cannot close his eyes and avoid investigating information within his possession and control in an effort to obtain the benefits of an unauthorized transaction while being spared its corresponding detriments (Inn Foods v. Equitable Co–Operative Bank, 45 F3d 594, 597 [1st Cir1995]; Restatement [Third] of Agency § 4.06, Comment d.; Matter of Cologne Life Reins. Co., 286 A.D.2d at 127–129).
It is Prescott's testimony that he never read the Teal Becker reports that referenced the convertible nature of the Streeter loan. However, the notion that Prescott would not read a report valuing his start-up company seems highly implausible. Prescott actively was involved in all aspects of Integra, and his testimony demonstrated deep familiarity with even the most minute aspects of the company's business. Moreover, Prescott authorized Integra's sale of stock to the Trust for substantially the price assigned in Teal Becker's valuation. Additionally, a number of other aspects of Prescott's testimony defied credulity.
And, of course, Prescott has a powerful interest in seeing Streeter's claim defeated so as to maintain his control over Integra. Thus, in many critical respects, Prescott's testimony is no more credible than the testimony given by Ryan.
For example, Prescott's claim that he discovered $50,000 in Integra's bank account at a time when the company had limited cash on hand and needed capital, but he did not even inquire of Ryan into the source of the funds is farfetched. Likewise, Prescott's excessive indignation at the 12% interest rate on the Streeter loan appears contrived. After all, no bank would lend Integra money at the time, and it was only Ryan's personal relationships with Bucciero that allowed the company to obtain a low-balance credit card.
But even if Prescott had read the Teal Becker reports and the references therein to convertibility, the fact remains that Prescott did discuss the Streeter transaction with Ryan on several occasions. Clearly Prescott and Ryan had some discussion of the transaction in late 2008 and/or early 2009. Prescott and Ryan further discussed the transaction in the presence of Integra's counsel in March 2010. However, with counsel unable to confirm Ryan's version of events, the accountant's testimony and supporting documentation inconclusive, and the testimony of both Ryan and Prescott unworthy of belief, the Court is unable to say that the credible evidence preponderates in favor of a finding that Ryan fully and truthfully disclosed the convertibility term to Prescott in response to his inquiries. And while Prescott could have contacted Streeter directly, the Court is not persuaded that any duty of investigation extended beyond the inquiries made to Ryan, Integra's purported agent in the transaction. Accordingly, Streeter has failed to establish that Prescott willfully blinded himself to the full sweep of the transaction or otherwise ratified the transaction with full knowledge of the convertibility term.
In finding that Streeter has failed to meet his burden of proving ratification, the Court acknowledges that Streeter's trial testimony largely was credible ( but see n 2), unlike that of Ryan and Prescott. However, the law of agency and ratification reflects a policy judgment regarding the allocation of risk in situations where a third party enters into a contract with an agent lacking in both actual and apparent authority. Even accepting that Streeter acted in good faith, he nonetheless purported to buy into Integra based upon a handshake agreement made in a bar with a convicted felon who was not an officer, director, owner or even a full-time employee of the company, and he failed to undertake even the most rudimentary due diligence concerning the transaction. As such, his claim is left to rest not upon his own testimony or credibility, but rather upon that of two individuals who seem to have lied repeatedly to each other and to the Court.
D. Alternative Relief
Although the Court must reject Streeter's claim for specific performance, equity requires that Streeter be given some form of relief ( seeCPLR 3017[a]; Ungewitter v. Toch, 31 A.D.2d 583, 584 [3d Dept 1968], affd26 N.Y.2d 687 [1970]; 5–3017 Weinstein–Korn–Miller, N.Y. Civ Pract CPLR 3017.06 [2012]; accord Buttonwood Ltd. Partnership v. Blaine, 37 AD3d 910, 912–913 [3d Dept 2007] ). All parties acknowledge that Streeter lent Integra $50,000, a sum that remains outstanding. Streeter is entitled to have the loan repaid, with interest, to prevent Integra from being unjustly enriched ( see e.g. IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 NY3d 132, 142 [2009] ). Accordingly, Integra is directed to repay Streeter $50,000, together with any interest still owed under the original 24–month term. Integra is further directed to pay Streeter interest at the statutory rate on the principal balance of $50,000 from the expiration of the loan term until entry of judgment ( see Love v. State of New York, 78 N.Y.2d 540, 544 [1991];see also Spodek v. Park Prop. Dev. Assoc., 96 N.Y.2d 577, 581–582 [2001] ).
CONCLUSION
Based on the foregoing, the Court finds that Streeter has failed to meet his burden of demonstrating by a preponderance of the credible evidence that a binding and enforceable oral agreement existed between himself and Integra. However, to prevent its unjust enrichment, Integra shall repay the loan in accordance with the foregoing. Accordingly,
The Court has reviewed the parties' remaining contentions, concluding that they either lack merit or are not necessary to consider given the Court's determination, including whether the oral agreement is barred by the Statute of Frauds.
ORDERED that third party plaintiff Streeter's complaint is granted against Integra to the limited extent set forth herein and dismissed in all other respects; and it is further
ORDERED that judgment against Integra shall enter accordingly; and finally it is
ORDERED that third-party David Prescott's motion for summary judgment is denied as academic.
This constitutes the Decision and Order After Trial of the Court. The original Decision and Order After Trial is being transmitted to counsel for Gregory Streeter. The parties shall retrieve their original trial exhibits from the Supreme Court Clerk within twenty days; otherwise, they will be discarded. All other papers are being transmitted to the Albany County Clerk. The signing of this Decision and Order After Trial shall not constitute entry or filing under CPLR Rule 2220, and counsel is not relieved from the applicable provisions of that Rule.