JFK Holding Company LLC, et al., Respondents,v.City of New York, et al., Defendants, The Salvation Army, Appellant.BriefN.Y.October 16, 2013To be argued by: KATHY H. CHIN Time Requested: 30 Minutes New York County Index No. 114577/09 Court of Appeals STATE OF NEW YORK __________________♦__________________ JFK HOLDING COMPANY LLC AND J.F.K. ACQUISITION GROUP, Plaintiffs-Respondents, - against - CITY OF NEW YORK AND DEPARTMENT OF HOMELESS SERVICES, Defendants, - and - THE SALVATION ARMY, Defendant-Appellant. BRIEF OF DEFENDANT-APPELLANT CADWALADER, WICKERSHAM & TAFT LLP Office and Post Office Address: One World Financial Center New York, New York 10281 Tel. No.: (212) 504-6000 Fax No.: (212) 504-6666 kathy.chin@cwt.com Attorneys for Defendant-Appellant December 10, 2012 Appellate Division First Department Appeal No. 6756 CORPORATE DISCLOSURE STATEMENT In compliance with Rule 500.l (f) of the Rules of Practice for the Court of Appeals of the State of New York, Defendant-Appellant The Salvation Army states that it is a New York religious and charitable corporation organized pursuant to Chapter 468 of the Laws of New York, 1899, an act that provides for the incorporation of The Salvation Army, as amended by (a) Chapter 247 of the Laws of New York, 1957 , (b) Chapter 60 of the Laws of New York, 1981, and (c) Chapter 170 of the Laws of New York, 1982. The Salvation Army does not have any parent or subsidiary corporations, although members of its board of trustees serve as directors or trustees of other entities that further the religious and charitable purposes of The Salvation Army. - 1- TABLE OF CONTENTS PAGE CORPORATE DISCLOSURE STATEMENT .................................. ....... ... .............. i TABLE OF AUTHORITIES ............................................................. ... ........... ..... ..... v PRELIMINARY STATEMENT .......... ............. ..... ...... ........ ..... ........ .... ... .. ............... 1 QUESTIONS PRESENTED ............................................................. ... ..................... 3 STATEMENT OF JURISDICTION ................................................. ... ..... ... ............. 5 STATEMENT OF FACTS ................................................................ ... ........ ............. 6 A. History Of Prior Litigation ............... .................. .... .......... ........ .. 6 B. Current LItIgatIon ............................................... .... .......... ........ .. 7 1. Allegations of Plaintiffs' Pleadings .......... ... ....... ... ........... 8 a. DHS Negotiations with JFK .......... .... .... ... .. ........... 8 b. The Lease and Services Agreement.. ........ .. ........... 9 c. Occupancy of Carlton House ......... ... ................. .. 11 d. Closure of Carlton House ......... .. ........... ............... 11 e. Post-Termination Negotiations Between DHS and JFK .. ............................... .. ................ ... . 12 2. The Amended Complaint ......................... ... ..... .............. 13 C. The Motions To Dismiss .............................. ...... .... ....... .. ......... 15 -11- PAGE D. JFK's Appeal Of The October 12,2010 Decision ..... ... ........... 17 E. The Salvation Anny's Motion For Reargument/Leave To Appeal/Interim Stay .......................... .................. ... ......... .......... 20 ARGUMENT .............. ..... ........... ....... .................................... ............ ... ............... ... . 21 POINT I THE LIMITATION OF LIABILITY PROVISION IN THE LEASE REQUIRES DISMISSAL OF THE AMENDED COMPLAINT ............................................................... ... .......... .. .. ..... 21 A. The Limitation Of Liability Provision Contained In The Lease Is A Critical Aspect Of The Relationship Among The Parties, As Recognized In The Amended Complaint.. ...... 23 B. The July 3, 2012 Decision Nullifies The Limitation Of Liability Provision On The Basis Of Unfounded Facts And An Unsupportable Reading Of The Agreements .............. 25 1. The Allegations of the Amended Complaint Do Not Support the Majority's Finding That The Salvation Army Engaged in "Bad Behavior" ... .. ......... ... 26 2. The Services Agreement and the Lease As Written Do Not Support the Conclusion of the Majority That the Limitation of Liability Provision Is Inapplicable to the Claims of JFK ............ ... ...... .. .... ... .. .. 28 C. The July 3, 2012 Decision Improperly Overlooked Or Altered The Factual Allegations Of The Amended Complaint. ........................................................... .. ...... ... ..... ...... 36 POINT II THE RELATIONSHIP BETWEEN THE SAL V ATION ARMY AND THE CITY OF NEW YORK REQUIRES THE DISMISSAL OF THE AMENDED COMPLAINT ..... ........... ........... 39 -lll- PAGE A. According To The Amended Complaint, The Salvation Army Is Not The Real Party In Interest Under The Lease ....... 39 B. The Salvation Army Acted As Agent For The City ................. 40 C. The Amended Complaint Is Precluded Based On Res Judicata ............................................................... .... ... .. ............ . 44 1. JFK's Allegations Establish that The Salvation Army Was in Privity with the City of New York Based on the City's Domination and Control over The Salvation Army .................................. ...... .............. .46 2. JFK's Allegations Demonstrate that The Salvation Army Was in Privity with the City of New York Based on Its Agency Relationship ................................ .48 CONCLUSION .................................................................................. ..... ................. 49 -lV- TABLE OF AUTHORITIES PAGE(S) CASES: Bayshore Family Partners, L.P. v. Foundation of Jewish Philanthropies of Jewish Fed'n of Greater Fort Lauderdale, 270 A.D.2d 374 (2d Dep't 2000) .................................................. .... .................. 45 Blog v. Sports Car Club of Am., Inc., 254 A.D.2d 65 (lst Dep't 1998) .................................................. .............. ......... 48 Covanta Niagara, L.P. v. Town of Amherst Garbage & Refuse Dist. No.1, 16 Misc. 3d 656 (Sup. Ct. Erie Co. 2007), affd, 49 A.D.3d 1295 (4th Dep't 2008) ............................ ............................ ..... 40 Drexel Burnham Lambert Grp., Inc. v. Vigilant Ins. Co., 157 Misc. 2d 198 (Sup. Ct. N.Y. Co. 1993) ................................ .................. ..... 37 EBC I, Inc. v. Goldman Sachs & Co., 5 N.Y.3d 11 (2005) .................................................................... .................. passim Elias v. Rothschild, No. 603288/2002,2005 WL 5960119 (Sup. Ct. N.Y. Co. Apr. 27, 2005), affd, 29 A.D.3d 448 (l st Dep't 2006) .......................................... .. .................. .47 Ell Dee Clothing Co. v. Marsh, 247 N.Y. 392 (1928) ...................................................................... ... .................. 43 Gold v. 29-15 Queens Plaza Realty, LLC, 43 A.D.3d 866 (2d Dep't 2007) .................................................... .... .................. 37 Green v. Santa Fe Indus ., Inc., 70 N.Y.2d 244 (1987) .. ..... ......................................... .. ......... ..... ........... ... .. .. ...... . 45 Greenfield v. Philles Records, Inc., 98 N.Y.2d 562 (2002) .................................................................... .... ................. 25 -v- PAGE(S) Guardian Life Ins. Co. of Am. v. Chemical Bank, 94 N.Y.2d 418 (2000) ................................................... ..... .. ......... .. .. ... ... ............ 41 In re Hunter, 4 N.Y.3d 260 (2005) ............................ .......... ............................... .. ... .... .. .. ..... .... 44 Leonard Holzer Assocs. v. Orta, 250 A.D.2d 737 (2d Dep't 1998) ................................. ............. .... .. ...... ... ..... ...... 43 MBIA Ins. Corp. v. Patriarch Partners VIII, LLC, 842 F. Supp. 2d 682 (S.D.N.Y. 20 12) .......................................... ... .... .... .. ... 34, 35 Melwani v. Jain, No. 02 Civ. 1224, 2004 WL 1900356 (S.D.N.Y. Aug. 24, 2004) ..... ..... ..... .47-48 Morone v. Morone, 50 N.Y.2d 481 (1980) ....................................................... .. ..... ... ... ........... .... ... .. . 22 P.T. Bank Cent. Asia, N.Y. Branch v. ABN AMRO Bank N.V., 301 A.D.2d 373 (1st Dep't 2003 ) .................... ... .......................... ... .... ... 22, 35, 36 Pensee Assocs. v. Quon Indus., Ltd., 241 A.D.2d 354 (1st Dep't 1997) ................. ........ ... .. .................. .... ..... ... .... .40, 42 People ex reI. Spitzer v. Applied Card Sys., Inc., 11 N.Y.3d 105 (2008) .. ................ ............. .. .. ........ ............ ............ ... ...... ...... ....... 45 Riverside Res. Inst. v. KMGA, Inc., 108 A.D.2d 365 (1st Dep't 1985), affd, 68 N.Y.2d 689 (1986) ............. .... ............... .... ... ..... ... ........ .. ... .... ............... 41 Savoy Record Co. v. Cardinal Export Corp., 15 N.Y.2d 1 (1964) ................... ......................... .. ...... .......... ... ... .. ... ..... ... ..... .. 42-43 -VI- Simmons v. New York City Health & Hosps. Corp., 71 A.D. 3d 410 (1st Dep't 2010), PAGE(S) Iv. to appeal denied, 16 N.Y.3d 709 (2011) ............... ................... .. ............. .48-49 Standard B1drs. Supplies v. Gush, 206 A.D.2d 720 (3d Dep't 1994) .................................................. ... ................... 41 Stardust Lanes, Inc. v. Metropolis Bowling Ctrs., Inc., 35 Misc. 2d 291 (Sup. Ct. Queens Co. 1962) ............................... ... ..... .. ... ..... .. . .40 Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470 (2004) ... ...................... .......... .... .................. .... ........ .. ...... .............. 22 Wen Kroy Realty Co. v. Public Nat'l Bank & Trust Co. of N.Y., 260 N.Y. 84 (1932) ... .. ... ..... .. ... .......... .... .... .. ... ....... ....................... ... ............... .... 40 William Stevens, Ltd. v. Kings ViII. Corp., 234 A.D.2d 287 (2d Dep't 1996) .... ..... .... .. ... .... ....................... .. ... .. ...... .......... .... 42 STATUTES & OTHER AUTHORITIES: N.Y. C.P.L.R. 5602(b)(1) (McKinney 2012) ..... .. ... .... .... ....... .... .... ... .......... .............. 5 Restatement (Third) of Agency § 1.01 (2006) ... .................... ........... ... ...... .. ...... .... .40 .. - Vll - PRELIMINARY STATEMENT In granting leave to appeal to this Court from the decision and order entered on July 3, 20 12 (the "July 3,2012 Decision"), the Appellate Division, First Department, certified one question to this Court: "Was the order of this Court, which reversed the judgment of Supreme Court, properly made?" A6.! Defendant-Appellant The Salvation Army ("The Salvation Army" or "Defendant") respectfully submits that it was not. This suit arose out of a determination by defendants City of New York and Department of Homeless Services ("DHS," together with the City of New York, the "City" or "City of New York") to cease utilizing Plaintiffs-Respondents' property, Carlton House, as a homeless shelter. After their first suit against the City was dismissed, Plaintiffs-Respondents JFK Holding Company LLC and IF.K. Acquisition Group (collectively "JFK" or "Plaintiffs") brought suit against the City again. When the City again moved to dismiss, Plaintiffs for the first time named The Salvation Army, the City's social service provider at the homeless shelter, as a defendant, despite the fact that the agreements between the parties and indeed the allegations of Plaintiffs' own pleadings make it abundantly clear that in the "pass The Record on Appeal to this Court consists of (i) the record on appeal to the Appellate Division, First Department (references are in the form, "R[page number]") and (ii) documents filed herein subsequently (references are in the form "A[page number]") . through" agreements negotiated by the City and Plaintiffs, only the City was to be responsible for paying the costs of the lease of Carlton House (the "Lease"). Consistent with the parties' understanding that The Salvation Army was not responsible for the outstanding obligations under the Lease, the motion court dismissed this action against The Salvation Army. Specifically, in the Decision, Order and Judgment of the Supreme Court, New York County (Kern, 1) dated October 12,2010 and entered November 5,2010 (the "October 12,2010 Decision"), Supreme Court granted The Salvation Army's motion to dismiss the Third and Fourth Causes of Action of the Amended Complaint for failure to state a cause of action, and also granted the motion made by the City to dismiss the First and Second Causes of Action, thereby dismissing JFK's action in its entirety. R8 -l7. Supreme Court, on the basis of the wording of the agreements between the parties and the claims made by Plaintiffs herein in their Amended Complaint, properly determined that Plaintiffs failed to state a claim against The Salvation Army. Focusing on the provision in the Lease that limited The Salvation Army's liability, the motion court concluded that "JFK cannot recover any damages from The Salvation Army for breaches of any covenant under this Lease." R 15-16. In a five-page dissent in the July 3, 2012 Decision, two justices of the First Department agreed. A22. However, the eight-page majority Opinion, after -2- making findings of fact not supported by the record (or by the allegations of the Amended Complaint), concluded that "[o]n this record, triable questions of fact exist as to whether The Salvation Army used commercially reasonable efforts to obtain the payments to which it was entitled under the services agreement." A16. The First Department thereby determined to reverse the judgment of dismissal, reinstated the Third Cause of Action for breach of contract and remanded for further proceedings. Plaintiffs chose not to perfect their appeal of the October 12, 2010 Decision insofar as the decision dismissed their claims against the City. As a result, ironically, The Salvation Army now stands alone to defend against JFK's claims arising out of the City's determination to cease utilizing JFK's property as a homeless shelter. For the reasons set forth below, The Salvation Army requests that the July 3, 2012 Decision be reversed and the Amended Complaint again be dismissed in its entirety. QUESTIONS PRESENTED 1. Did the Appellate Division err in holding that the limitation of liability provision of the Lease is only applicable if The Salvation Army used commercially reasonable efforts to enforce its rights against the City upon the termination of the Services Agreement? -3 - The Appellate Division erred. As demonstrated in Point I herein, the language of the agreements and the allegations of the Amended Complaint do not support the conclusion of the majority that the limitation of liability provision is inapplicable to the claims of Plaintiffs. 2. Where the averments of the Amended Complaint establish that The Salvation Army was not the "real party in interest" to the Lease, but was acting as the City's agent with respect to the Lease, and was in privity with the City, should the cause of action for breach of the Lease have been dismissed on the grounds (i) that The Salvation Army was not a proper defendant to the breach of contract cause of action and (ii) that res judicata precludes this cause of action because it arises out of the same transaction that was the subject of JFK's first suit against the City, which has already been dismissed? The Appellate Division, First Department failed to address this question. The answer is Yes, as demonstrated in Point II herein. 3. Was the order of the Appellate Division, First Department, which reversed the judgment of Supreme Court, properly made? The order of the Appellate Division, First Department was erroneous. For the reasons set forth herein, so much of the July 3,2012 Decision as reversed the judgment of Supreme Court should be reversed and the Amended Complaint dismissed in its entirety. -4- STATEMENT OF JURISDICTION By the October 12, 2010 Decision, the motion court (Kern, l) dismissed the Amended Complaint in its entirety. R17. JFK appealed the October 12, 2010 Decision with respect to its claims against The Salvation Army only, perfecting its appeal on or about September 22, 2011. A27. The Appellate Division, First Department reversed the motion court by its July 3, 2012 Decision, reinstating the Third Cause of Action. A 17-18. Pursuant to C.P.L.R. Section 5602(b)(1), an appeal may be taken to the Court of Appeals by permission of the appellate division "from an order of the appellate division which does not finally determine an action .... " N.Y. C.P.L.R. 5602(b)(1) (McKinney 2012). On August 2,2012, The Salvation Army timely moved the First Department for leave to appeal the July 3,2012 Decision to this Court. A25-26 . The First Department granted the application by its Order of October 11, 2012. A6. In its October 11, 2012 Order, the First Department pursuant to C.P.L.R. Section 5713 certified a question of law to this Court, and further certified that its determination was made as a matter of law and not in the exercise of discretion. A6. Accordingly, this Court has jurisdiction over this appeal. -5- STATEMENT OF FACTS A. History Of Prior Litigation This action follows a pnor action between JFK and the City defendants entitled JFK Holding Company LLC and J.F.K. Acquisition Group v. City of New York and Department of Homeless Services, Index No. 110582/08 (Sup. Ct. N.Y. Co. Aug. 4, 2008) (the "Prior Action"). R251-65 (The complaint in the Prior Action shall hereinafter be referred to as the "Complaint"). The Complaint contained a single cause of action alleging that in exchange for JFK's agreement not to commence immediate legal action against The Salvation Army and DHS, the City agreed to "honor all the outstanding obligations under the 2002 Lease between JFK and The Salvation Army, including but not limited to all rent and payment obligations." R263-64 (CompI. ,-r 35). The Complaint goes on to allege that the City "failed to meet any of the obligations it agreed to assume, including its obligation to restore" Carlton House to its pre-Lease condition. R264 (CompI. ,-r 37). JFK did not name The Salvation Army as a defendant in the Prior Action, but rather recited its representative's belief that The Salvation Army, as well as JFK and "the vulnerable Carlton House residents," had been "betrayed" by the City. R259 (CompI. ,-r 23). City of New York's motion to dismiss the Prior Action was denied by Supreme Court, New York County (Tingling, J.) . R291-94. The court held that -6- language in the services agreement entered into between City of New York, acting through DRS, and The Salvation Army, dated December 10, 2002 (the "Services Agreement"), coupled with the "undisputed negotiations between DRS and the property owner," established claims sounding in breach of contract "by a disclosed principal" (City of New York, acting through DRS) as well as "failure to comply with the independent guaranty of the lease obligations incurred by a signatory acting in a purely representative capacity .... " R293 -94 (the "signatory acting in a purely representative capacity" was The Salvation Army, also referred to by the court as "the City agency's alter ego") (citations omitted). On appeal, the Appellate Division, First Department reversed the motion court's decision and granted the City's motion to dismiss the Prior Action. R295 -96. The First Department held that any oral agreement between JFK and City of New York would have been invalid and unenforceable, and that there was no evidence that the Lease was assumed by the City. R296. The First Department did not address the aspects of the lower court's decision that considered the relationship between the City and The Salvation Army. R293. B. Current Litigation The complaint in the action that is the subject of this appeal ("Current Action") was filed on November 24,2009. R21-39. Again, JFK did not name The Salvation Army as a defendant. Only after the City moved to dismiss the -7- complaint did JFK file the Amended Complaint that included The Salvation Army. R41-65. Remarkably, even though JFK added The Salvation Army as a defendant, the Amended Complaint in the Current Action and the Complaint in the Prior Action contain virtually identical factual allegations. The following description summarizes the story as told in Plaintiffs' pleadings. Each aspect of the story described here includes references to both pleadings. 1. Allegations of Plaintiffs' Pleadings a. DHS Negotiations with JFK Like the Complaint filed in the Prior Action, the Amended Complaint avers that in 2002, due to the increase in homelessness in New York City, DHS entered into discussions with JFK concerning the use of Carlton House as a homeless shelter. R42-43 (Am. CompI.,-r,-r 8, 9); R252-53 (CompI.,-r,-r 7, 8). Carlton House, a former Hilton Hotel, was closed at the time. R41-43 (Am. CompI. ,-r,-r 2, 9); R251 -53 (CompI. ,-r,-r 2, 8). DHS represented to JFK that although it wanted to lease the Carlton House, "for political reasons they could not lease or operate the property directly." R44 (Am. CompI.,-r 12); R254 (CompI.,-r 12). Instead, DHS represented to JFK that it would operate the property "through an intermediary, The Salvation Army, and that the City would enter into an agreement -8- with The Salvation Army that would guarantee The Salvation Army' s performance under the lease." R44 (Am. CompI. ~ 12); R254 (CompI. ~ 12). JFK alleges that based on DHS' representations, it began negotiations "directly with attorneys for DHS," and agreed to a contractual arrangement whereby it would enter into the Lease with The Salvation Army and The Salvation Army would enter into the related Services Agreement with DHS. R45 (Am. CompI. ~ 14); R254 (CompI. ~ 13). The Amended Complaint, in naming The Salvation Army as a party, identifies it only as a New York not-for-profit "that acted as service provider on behalf of Defendants at Carlton House." R42 (Am. CompI. ~ 5). b. The Lease and Services Agreement In describing the Lease of Carlton House, Plaintiffs in their pleadings emphasize first that "the Lease limited the liability of The Salvation Army, providing in relevant part: • The Salvation Army was entering into the Lease 'solely in order to enable [it] to fulfill its obligations to [DHS],' and DHS had agreed to be the exclusive source of funds due under the Lease; • 'Tenant shall only be liable for Base Rent, Maintenance Payments, Tax Payments, Insurance Payments, the Termination Fee, Additional Rent or other payments under this Lease ... solely to the extent of the amounts paid to Tenant from time to time under the Services Agreement or otherwise in -9- connection with the use of the Leased P · '" remIses .... R45 (Am. CompI. ~ 15); R254-55 (CompI. ~ 14). In thus quoting from paragraph 31 of the Lease, JFK identified what it viewed as the "relevant part" of the Lease, a very specific limitation of liability to amounts paid to The Salvation Army by the City under the Services Agreement. Reference to the full text of the Lease reveals that the limitation of liability provision is still more explicit about its protection of The Salvation Army than JFK noted in its pleadings, as the text immediately following the quoted material reads: "and expressly excluding any other assets of Tenant[.]" R 135 (Lease ~ 31). Pursuant to the Services Agreement, DRS was required to pay to The Salvation Army a monthly sum sufficient to pay "all Base Rent, Maintenance Payments, Tax Payments and Insurance Payments ... under the Lease." R182 (Services Agmt. Art. 6.1 (E)). Furthermore, if DRS terminated the Services Agreement and did not assign the Lease to another party, the only obligation of DRS to The Salvation Army was to make a "termination payment" to The Salvation Army to enable The Salvation Army to remit to JFK the termination payment that would become due under the Lease. R190 (Services Agmt. Art. 9(A)). According to JFK's pleadings, the Services Agreement "was negotiated by JFK and DRS directly (without The Salvation Army, or its representatives)." R46- 47 (Am. Compi. ~ 17); R256-57 (Compi. ~ 15). -10- c. Occupancy of Carlton House In both the Complaint and the Amended Complaint, JFK claims that the "living and structural conditions at Carlton House deteriorated rapidly" "as a direct and proximate result" of the failure of DHS to provide "even the minimal funding necessary to operate and maintain the facility in a safe and sanitary condition." R48 (Am. Compi. ~ 19); R257 (Compi. ~ 17). The Amended Complaint further describes "the deplorable conditions at Carlton House, for which the City alone was responsible." R60 (Am. Compi. ~ 56). With respect to The Salvation Army, the Amended Complaint adds a paragraph stating that The Salvation Army "although aware of its obligation to restore Carlton House to its pre-Lease condition upon an eventual termination of its agreement with the City, did nothing to enforce its rights against the City for failing to provide the necessary funding to prevent further deterioration of the Property." R48 (Am. CompI. ~ 20). d. Closure of Carlton House JFK alleges that on July 5, 2005, Mayor Bloomberg announced the closure of Carlton House. R48-49 (Am. CompI. ~ 22); R257-58 (CompI. ~ 18). JFK further alleges that DHS informed The Salvation Army on August 5, 2005 that it was terminating the Services Agreement (R49 (Am. CompI. ~ 23); R258 (Compi. ~ 19)) and suggests that under the circumstances, The Salvation Army had no choice but to take the next step: "[ w ]ithout funding from the City, The Salvation -11- Army, on August 18, 2005, notified JFK that it intended to terminate the Lease effective September 20, 2005 in light of DRS's intention to close the Facility." R49 (Am. CompI.,-r 24); R258 (CompI.,-r 19). As it did in its Complaint, JFK in its Amended Complaint states its representative's belief that The Salvation Army, as well as JFK and "the vulnerable Carlton Rouse residents," had been "betrayed" by the City. R50 (Am. Compi. ,-r 28); R259 (CompI. ,-r 23). e. Post-Termination Negotiations Between DHS and JFK After receiving The Salvation Army's termination notification, JFK demanded that The Salvation Army pay certain tax assessments, Base Rent and Maintenance Payments, fees for repairs and restoration, and a $10 million termination fee. R49-50 (Am. CompI. ,-r 25); R258-59 (CompI. ,-r 20) . JFK alleges that "[c]onsistent with the parties' understanding that the City was the real party in interest under the Lease," DRS representatives approached JFK and requested that JFK deal directly with the City to secure satisfaction of all outstanding obligations under the Lease, and represented that the City would honor all The Salvation Army 's obligations under the Lease. R50 (Am. CompI. ,-r 26); R259 (CompI. ,-r 21). JFK further alleges that DRS "repeatedly represented to [JFK] that DRS intended to make sure all the Lease obligations were complied with by directly assuming responsibility for those requirements, including the restoration requirements, from -12- The Salvation Army." R52 (Am. CompI. ~ 31); R260 (CompI. ~ 25). Finally, JFK alleges that "[c]onsistent with this understanding, on or about September 28,2005, the City wired the $10,000,000 termination fee due under the Lease.,,2 R50 (Am. CompI. ~ 26); R259 (CompI. ~ 21). JFK alleges that based on the City'S representations, it agreed to forego legal action against the City and The Salvation Army. R53 -54 (Am. CompI. ~ 37); R261 (CompI. ~ 26). As late as January 5, 2007, the City of New York and JFK were still in discussions to resolve the alleged outstanding obligations under the Lease. R55 (Am. Compi. ~ 40); R262 (CompI. ~ 30). In its pleadings, JFK makes it clear that The Salvation Army did not participate in these discussions: "Going forward, JFK honored its commitment not to initiate legal action, and JFK and DHS dealt directly and exclusively with each other (and without The Salvation Army) concerning the Lease and its outstanding obligations." R54 (Am. Compi. ~ 38); R261 (CompI. ~ 27). 2. The Amended Complaint For its Amended Complaint, JFK added a Third and Fourth Cause of Action. In its new Third Cause of Action, JFK alleges that The Salvation Army 2 The record indicates that the City delivered the funds to The Salvation Army, and that The Salvation Army then transferred the funds to JFK. R 11 (Kern decision); R292 (Tingling decision in Prior Action); R71 (City affirmation in Prior Action ~~ 14-15); R79 (First Department decision in Prior Action). -13- breached the Lease by improperly terminating the agreement, by failing to satisfy its obligations prior to surrendering Carlton Rouse to JFK, and by not using commercially reasonable efforts to enforce its rights against DRS. R61-63 (Am. Compi. ,-r,-r 67 -72). JFK claims that as a "direct and proximate result of this breach JFK has lost more than $15,000.00 3 in rent and real estate tax payments, and is left with a $200,000,000 project in order to restore [Carlton Rouse] to a usable and marketable condition.,,4 R63 (Am. Compi. ,-r 72) . In its new Fourth Cause of Action, JFK alleges that The Salvation Army breached the implied covenant of good faith and fair dealing since The Salvation Army had an obligation to use commercially reasonable efforts to enforce its rights against DRS. R64 (Am. Compi. ,-r 76). Specifically, JFK claims that The Salvation Army should have entered into a tolling agreement with DRS (R64 (Am. CompI.,-r 77» (even though apparently JFK, which was the entity negotiating with the City, failed to do so). JFK avers that due to this breach, JFK 3 In one paragraph of the Amended Complaint, JFK alleges that The Salvation Army has failed to pay over $1.5 million in base rent, maintenance payments, and real estate taxes. R62 (Am. CompI. ~ 68). However, JFK here claims only that it has lost "more than $15,000.00 in rent and real estate tax payments." R63 (Am. CompI. ~ 72). It is not clear what JFK is actually seeking from The Salvation Army. 4 It should be noted that while JFK claims that restoration of Carlton House is called for by the Lease, the $200 million appears to be the estimate for tearing down the old bui lding and putting up a new one. R56 (Am. CompI. ~ 44). No Lease provision requires presenting JFK with a new hotel. -14- lost the ability to enforce its own rights against DRS as a third-party beneficiary to the Services Agreement. R65 (Am. CompI. ~ 81). C. The Motions To Dismiss On April 30, 2010, The Salvation Army moved to dismiss the Amended Complaint on the basis of a defense founded in res judicata and/or failure to state a cause of action. R285-349. The City had already moved to dismiss the Current Action on the grounds that it was barred by res judicata, and that it failed to state a cause of action for fraud and negligent misrepresentation. R66-275. The court heard oral argument from all parties in chambers on September 8, 2010. In its October 12, 2010 Decision, the motion court granted The Salvation Army's motion to dismiss the Third and Fourth Causes of Action, thereby dismissing the Amended Complaint in its entirety against The Salvation Army. R8-17. The court determined that although The Salvation Army was not "entitled to a dismissal of the causes of action on the grounds of res judicata," it was entitled to a dismissal (i) with respect to the breach of contract claim because JFK failed to "state a claim" and (ii) with respect to the breach of the implied covenant of good faith and fair dealing claim because it was "duplicative of its claim" for breach of contract. RI4-16. -15- The motion court explained that JFK could not properly state a claim for breach of contract based on The Salvation Army's alleged failure to return Carlton House in its pre-Lease condition and to meet certain financial obligations upon termination of the Lease, because of the Lease's provision that limited the liability of The Salvation Army to payments made by the City. R15. The court found that "JFK cannot recover any damages from the Salvation Army for breaches of any covenant under the Lease" because the City has not made and will not make any payments to enable The Salvation Army to restore the premises to its pre-Lease condition or to enable The Salvation Army to meet any other financial obligations remaining under the Lease. R 15-16. The court further explained that the "provision in the Lease requiring The Salvation Army to use commercially reasonable efforts is a covenant under the Lease." R16. As such, the court found that the provision of the Lease that limited the liability of The Salvation Army applied to that "covenant as well." R16. With respect to the Fourth Cause of Action, the court found that JFK's claim for breach of the implied covenant of good faith and fair dealing and its claim for the breach of contract based on The Salvation Army's alleged failure to use commercially reasonable efforts, were both "based on the same allegation - that The Salvation Army failed to seek to enforce its rights against the City." R16. -16- In its October 12, 2010 Decision, the motion court also granted the City of New York's motion to dismiss, finding that the claims were barred by res judicata because they arose "out of the same transaction as the claims in the Prior Action." R12-13. D. JFK's Appeal Of The October 12, 2010 Decision Plaintiffs filed their notice of appeal of the motion court 's October 12, 2010 Decision with respect to The Salvation Army on December 23, 2010 (R6-7), and perfected their appeal on or about September 22,2011. A27. JFK chose not to perfect its appeal of the October 12, 2010 Decision insofar as it dismissed JFK's claims against the City. Oral argument was heard January 18, 20 12. A28. In its July 3, 2012 Decision, the Appellate Division, First Department determined in a 3- 2 decision to reinstate the Third Cause of Action for breach of contract against The Salvation Army, and affirmed dismissal of the Fourth Cause of Action. A9-24. Specifically, the majority found that JFK had sufficiently pleaded a cause of action for breach of the Lease. Al 7 -18 . For this finding, the maj ori ty focused on the limitation of liability provision contained in the Lease and most particularly on a sentence that is included in the same paragraph of the Lease, which the majority read to nullify the limitation of liability. A 13 -16. According to the majority, although the Lease limited The Salvation Army's liability to JFK to amounts paid to it pursuant to the Services Agreement, -1 7- the limitation of liability provision was "predicated upon The Salvation Army's having fulfilled its contractual duty to use commercially reasonable efforts to secure payments from DHS pursuant to the services agreement." A15. The majority explained that because the limitation of liability provision is found in the same paragraph of the Lease that includes a provision requiring The Salvation Army to use commercially reasonable efforts, the two clauses are "intended to be read together; only if The Salvation Army used commercially reasonable efforts to obtain payment pursuant to the services agreement would it be able to take advantage of the provision limiting its liability to such payments." A15-l6. As such, the majority concluded that "triable questions of fact exist as to whether The Salvation Army used commercially reasonable efforts to obtain payments to which it was entitled under the [S]ervices [A]greement" after the Services Agreement and Lease were terminated. A16. The dissent would have affirmed the dismissal of the cause of action for breach of the Lease finding no breach had occurred because "The Salvation Army has paid JFK the full amount that it is entitled to receive under the parties ' lease agreement." A 19. Specifically, the dissent found that when the Services Agreement was terminated, the "only payment DRS was required to make was the lease termination fee." A21. The dissent explained that even if it assumed the truth of JFK's allegations that Carlton House deteriorated while The Salvation -18- Army was in possession and that The Salvation Army's failure to restore the premises breached a covenant in the Lease, JFK "could not recover more for damages than the $10 million termination fee" that it had already received because of the explicit limitation on damages contained in the Lease. A22. Moreover, the dissent reasoned that the Lease's provision that required The Salvation Army to use commercially reasonable efforts to enforce its rights against the City was not applicable because "The Salvation Army did not have any right to recover post- termination restoration costs" from the City. A22. Specifically, the dissent explained that the "majority's statement that the City was 'obligated' to pay for the Hotel restoration 'per the terms of the services agreement' is factually incorrect as there is no such provision in that contract." A22-23. With respect to the Fourth Cause of Action, the majority affirmed the motion court's dismissal finding that JFK's breach of the implied covenant of good faith and fair dealing cause of action was duplicative of its breach of the Lease cause of action. A 17. The dissent would have also dismissed this cause of action on the ground that the implied obligation to act commercially reasonable following the termination of the Lease "conflicts with the explicit terms of the contracts." A23-24. - 19- E. The Salvation Army's Motion For Reargument/Leave To Appeal/Interim Stay On August 2, 2012, The Salvation Army moved before the Appellate Division, First Department for reargument with respect to its reversal of the motion court and, in the alternative, for leave to appeal to the Court of Appeals, on the grounds that in reversing the motion court's dismissal of the Amended Complaint and remanding the matter, the majority had overlooked or misapprehended key points that required that the Amended Complaint be dismissed in its entirety as a matter oflaw. A25-29. The Salvation Army also requested that absent reargument and modification of its decision, leave to appeal to the Court of Appeals be granted. A25-26. Additionally, The Salvation Army requested that the First Department stay the underlying action in the Supreme Court, New York County, pending the determination of reargument and, should leave be granted, pending resolution of the appeal. A25 -26. In requesting the stay, The Salvation Army argued that JFK would not be prejudiced, and noted that JFK had not yet served notice of entry of the July 3, 2012 Decision. A28 . JFK opposed The Salvation Army's motion.s By Order entered on October 11, 2012, the Appellate Division, First Department, denied The Salvation Army's motion to the extent The Salvation 5 Although JFK opposed the motion, including the request for a stay, JFK did not serve The Salvation Army with notice of entry of the July 3,2012 Decision until October 4,2012. A 7-8. -20- Army sought reargument of the July 3, 2012 Decision. A6. However, the First Department granted the motion to the extent The Salvation Army sought leave to appeal to the Court of Appeals . A6. The First Department certified that the following question oflaw should be reviewed by this Court : "Was the order of this Court, which reversed the judgment of Supreme Court, properly made?" A6. The First Department further granted The Salvation Army's request for a stay of all proceedings pending disposition of the appeal by the Court of Appeals. A6. ARGUMENT POINT I THE LIMITATION OF LIABILITY PROVISION IN THE LEASE REQUIRES DISMISSAL OF THE AMENDED COMPLAINT By limiting the liability of The Salvation Army to amounts paid under the Services Agreement, expressly excluding any other assets of The Salvation Army, the language of the Lease precludes any recovery from The Salvation Army. R45 (Am. CompI.,-r 15); R135-36 (Lease,-r 31). Nevertheless, the First Department found that "[o]n this record, triable questions of fact exist as to whether The Salvation Army used commercially reasonable efforts to obtain the payments to which it was entitled under the services agreement." A1 6. To engraft a "commercially reasonable effort" requirement into the limitation of liability provision, the majority made findings of fact not supported by the allegations of -21- the Amended Complaint or the record, reached conclusions of law that fail to harmonize critical provisions of the Services Agreement and Lease, and essentially rewrote the factual averments of the Amended Complaint and the agreements at issue. The July 3, 2012 Decision thus violated well-settled principles that require (i) consideration of agreements as written (see, ~, Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004) ("'courts may not by construction add or excise terms, nor distort, the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing"') (citations omitted)) and (ii) on a motion to dismiss, acceptance of the allegations pleaded as true (see, ~, EBC I, Inc. v. Goldman Sachs & Co., 5 N.Y.3d 11, 19 (2005) (on a motion to dismiss, all "allegations of the complaint [are to be taken] as true"); P.T. Bank Cent. Asia, N.Y. Branch v. ABN AMRO Bank N.V., 301 A.D.2d 373, 375 (1st Dep't 2003) ("The scope of a court' s inquiry on a motion to dismiss under [C.P.L.R.] 3211 is narrowly circumscribed. The Court must 'accept the facts alleged as true . . . and determine simply whether the facts alleged fit within any cognizable legal theory"') (quoting Morone v. Morone, 50 N.Y.2d 481, 484 (1980)). For these reasons, the July 3,2012 Decision should be reversed. -22- A. The Limitation Of Liability Provision Contained In The Lease Is A Critical Aspect Of The Relationship Among The Parties, As Recognized In The Amended Complaint The Amended Complaint itself, the allegations of which must be accepted as true for purposes of The Salvation Army's motion to dismiss (EBC 1,5 N.Y.3d at 19), delineates how central the limitation of liability principle was to the arrangements between the City, JFK, and The Salvation Army. The Amended Complaint describes the negotiations between JFK (the owner of Carlton House) and the City, and their agreement to "a contractual arrangement whereby [JFK] would enter into a lease (the 'Lease') with The Salvation Army and The Salvation Army would enter into a related services agreement with DHS (the 'Services Agreement'), pursuant to which, DHS would fund The Salvation Army's Lease obligations." R45 (Am. CompI.,-r 14). The next paragraph of the Amended Complaint indicates (by the word "Accordingly,") that the limitation of liability provIsIOn in the Lease was crafted to effect this basic arrangement, stating as follows: 15. Accordingly, the Lease limited the liability of The Salvation Army, providing in relevant part: • The Salvation Army was entering into the Lease "solely in order to enable [it] to fulfill its obligations to [DHS]," and DHS had agreed to be the exclusive source of funds due under the Lease; -23 - • "Tenant shall only be liable for Base Rent, Maintenance Payments, Tax Payments, Insurance Payments, the Termination Fee, Additional Rent or other payments under this Lease .. . solely to the extent of the amounts paid to Tenant from time to time under the Services Agreement or otherwise in connection with the use of the Leased P · " remIses .. .. R45 (Am. CompI. ~ IS). This paragraph of the pleading, quoted in its entirety here, summarizes JFK's understanding of the limitation of liability negotiated by JFK with the City. For this paragraph of their pleading, JFK quoted from paragraph 31 of the Lease (R135). Plaintiffs also took pains in the Amended Complaint to explain that provIsIOns of the Services Agreement reflected the same basic arrangement whereby the City, and not The Salvation Army, was responsible for Lease obligations: 17. The Services Agreement, which was specifically referenced by the Lease, and referred to as the sole purpose for The Salvation Army's decision to enter the Lease, was negotiated by JFK and DRS directly (without The Salvation Army, or its representatives). In their negotiations, JFK and DRS contemplated a "pass through" agreement in which the City would assume responsibility for costs to The Salvation Army under the Lease through the Services Agreement. . .. R46-47 (Am. CompI. ~ 17). Thus Plaintiffs' own pleading describes the limitation of liability clause as critical, and not conditioned upon any action to be taken by -24- The Salvation Army. The unambiguous wording of the limitation of liability provision, coupled with such evidence of Plaintiffs' own understanding of the intent of that wording, make it clear that no conditions should be engrafted onto the provision now, as a matter of long-settled rules of contract interpretation. See Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569 (2002) ("The fundamental, neutral precept of contract interpretation is that agreements are construed in accord with the parties' intent. ... 'The best evidence of what parties to a written agreement intend is what they say in their writing ... "') (citations omitted). B. The July 3, 2012 Decision Nullifies The Limitation Of Liability Provision On The Basis Of Unfounded Facts And An Unsupportable Reading Of The Agreements Despite the centrality of the limitation of liability provision to the parties' contractual arrangements, as admitted by Plaiptiffs in their own Amended Complaint, the First Department's majority opinion found the provision inapplicable with respect to Plaintiffs' claims for breach of the Lease. A 13. The majority based its decision on a combination of a sentence found in the same paragraph of the Lease as the limitation of liability provision, and findings of fact that had no basis in the record but which the majority described as "bad behavior" on the part of The Salvation Army justifying the majority's refusal to honor the limitation of liability provision. AI3-16. -25- 1. The Allegations of the Amended Complaint Do Not Support the Majority's Finding That The Salvation Army Engaged in "Bad Behavior" Thus, the First Department majority opened its opinion by stating that "[ dJuring its tenancy, The Salvation Army failed to take the most basic steps to maintain the facility in a safe and sanitary condition, as a result of which the property deteriorated precipitously." A 11. There is no support for this statement in the record; not even the Amended Complaint goes so far as to make such an unfounded allegation. Rather, Plaintiffs level that charge at DRS ("the deplorable conditions at Carlton Rouse, for which the City alone was responsible." R60 (Am. CompI. ~ 56)). The majority also stated that: The dissent, citing the provision of the lease which limited damages to amounts paid by DRS and the City pursuant to the services agreement, reasons that since no amounts had been so paid, The Salvation Army has no liability. Yet no amounts had been paid under the services agreement precisely because The Salvation Army failed to "use commercially reasonable efforts" as it was obligated to do under the terms of the parties' lease. A15. In fact, the dissent did not take the position ascribed to it by the majority, rather observing as follows: The services agreement permitted DRS to terminate it without cause if termination was deemed to be in the City ' s best interest, and in that event the only payment DR S was required to make was the lease termination fee . . .. DRS paid The Salvation Army $10 million, which -26- was the specified termination fee under the lease, and The Salvation Army paid that amount to JFK Acquisition. A21. The dissent's reasoning was clearly not based on the assumption that "no amounts had been so paid" under the Services Agreement. Indeed, the majority's repeated refrain that The Salvation Army "did nothing" (AI3), "took no action to obtain the funding necessary from DRS or the City or otherwise to enforce or preserve its rights under the services agreement" (A l3), "failed to take any steps, let alone commercially reasonable ones, to ensure it received monies from the City pursuant to the services agreement" (A17), seems less than justified when the one payment due under the Services Agreement6 upon termination was actually made, as observed by the dissent in the passage quoted above. A21. In fact, payment of the termination fee is acknowledged in paragraph 26 of the Amended Complaint ("[ c Jonsistent with the parties' understanding that the City was the real party in interest under the Lease ... on or about September 28, 2005, the City wired the $10,000,000 termination fee due under the Lease") (R50 (Am. CompI. ~ 26)) and by the majority in a footnote. AI3 n.l ("The City, on September 28, 2005, paid the $10 million early termination fee to JFK as 6 The Services Agreement provides that if DHS terminated the Services Agreement and did not assign the Lease to another party, the only obligation of DHS to The Salvation Army was to make a "tennination payment" to The Salvation Anny to enable The Salvation Anny to remit the tem1ination payment to JFK. R190 (Services Agmt. Art. 9(A)). -27- required by the lease and those amounts are accordingly no longer at issue"). The Amended Complaint does not go into the details of The Salvation Army's role with respect to the delivery of the fee, but the record shows that when this matter was before the First Department in the Prior Action, the Court found as follows : "[t]he $10 million termination payment was paid to The Salvation Army which forwarded the funds to plaintiff in payment of its lease termination fee." R 79 (12/08/09 First Department decision). The motion court in the Current Action so found as well. R11. Accordingly, as the dissent correctly observed, "[i]n August 2005, DRS terminated the services agreement, causing The Salvation Army to terminate the lease. DRS paid The Salvation Army $10 million, which was the specified termination fee under the lease, and The Salvation Army paid that amount to JFK Acquisition." A21. To find The Salvation Army guilty of "bad behavior" under these circumstances, to justify vitiating the limitation of liability provision, is unsupportable. 2. The Services Agreement and the Lease As Written Do Not Support the Conclusion of the Majority That the Limitation of Liability Provision Is Inapplicable to the Claims of JFK Similarly unsupportable is the legal analysis utilized by the First Department in its majority opinion to find the limitation of liability clause inapplicable. The majority focused on claims made by Plaintiffs with respect to the alleged deterioration of the building during The Salvation Army' s tenancy and -28- the alleged failure to return the building upon termination to its pre-Lease condition. A 11, 13-14. As set forth in the Amended Complaint, this boils down to JFK's allegation that The Salvation Army "did nothing to enforce its rights against the City for failing to provide the necessary funding to prevent further deterioration of the Property" (R48 (Am. CompI. ~ 20)) and that effective termination of the Lease was not possible unless The Salvation Army returned the property to JFK in its pre-Lease condition (R62-63 (Am. CompI. ~ 71 )). Even assuming those claims are true (as The Salvation Army must on the motion to dismiss),? Plaintiffs have stated no cause of action under the terms of the agreements. As the motion court noted in the October 12, 20 1 0 Decision, "The Salvation Army's liability is specifically limited by the Lease to any amounts paid to it from the City." R15 . The court went on to quote the limitation of liability provision in support of its conclusion, highlighting the critical limiting language "solely to the extent of the amounts paid to Tenant from time to time under the 7 The majority noted that "The Salvation Army does not dispute that it fai led to retum the property to its pre-lease condition upon termination, contrary to paragraph 23 of the Lease." A 13-14. However, on a motion to dismiss, The Salvation Army may not dispute such allegations, but must assume them to be true. EBC I, 5 N.y'3d at 19. Rather than dispute the allegation, The Salvation Army argues that because of the limitation of liability, as a matter of law, the condition of the building is not an issue that should have to be litigated between JFK and The Salvation Army. The Salvation Anny does not concede any factual issue with respect to the condition of the premises, but notes with respect to the issue of pre-Lease condition that the Amended Complaint at paragraph 9 indicates that Carlton House was not operating as a hotel ("the then closed Carlton House") when negotiations began to tum the building into a homeless shelter, Plaintiffs ' claims of the availability of "lucrative offers" notwithstanding. R42 (Am. CompI.,-r 9). -29- Services Agreement or otherwise in connection with the use of the Leased Premises and expressly excluding any other assets of Tenant. ... " R15. The court then turned to Plaintiffs' allegation that The Salvation Army had failed to use "commercially reasonable efforts" to enforce its rights against the City upon termination of the Lease. Reading the "commercially reasonable efforts" clause of the Lease as another covenant, the motion court reasoned that as such, its breach would be subject to the same limitation of liability provision. R 16. The motion court's conclusion that the "commercially reasonable efforts" clause is an independent covenant is supported by review of the Lease provision. R15-16. The limitation of liability provision is found in one complete sentence that includes specific exceptions: (y) Tenant shall only be liable for Base Rent, Maintenance Payments, Tax Payments, Insurance Payments, the Termination Fee, Additional Rent or other payments under this Lease, including without limitation, indemnification payments, damages for breaches of any covenant under this Lease, and any late charges or default interest, solely to the extent of the amounts paid to Tenant from time to time under the Services Agreement or otherwise in connection with the use of the Leased Premises, and expressly excluding any other assets of Tenant; provided that Landlord and Tenant hereby agree that the foregoing limitation of liabilities shall not apply to amounts available for payment of Landlord's Work as set forth in Exhibit B hereto and shall not limit or effect the rights of Landlord to declare Tenant in default of its obligations under this Lease, or to -30- exercise any rights, options, powers and remedies set forth in this Lease. R135-36 (Lease ,-r 31 ) (emphasis in original) . Plaintiffs have not alleged that either of those exceptions apply. The limitation of liability provision is followed in the same paragraph of the Lease by two further sentences with respect to the Services Agreement, including the "commercially reasonable efforts" clause. Neither of these two sentences contains language indicating that they are conditions to the limitation of liability provision; the limitation of liability provision does not refer to either sentence as an exception. These are not limitations to the limitation of liability provision, but independent covenants, as the motion cOUli held. R 15-16. Even if the "commercially reasonable efforts" clause could be read as a condition to the limitation of liability provision, as held in the July 3, 2012 Decision, rather than as an independent covenant, as held by the motion court, as a matter of law it cannot operate to nullify the effect of the limitation with respect to the claims alleged by JFK that are the focus of the First Department's majority decision. The provision reads as follows : In the event the Department fails to pay any such amounts to Tenant, Tenant shall use commercially reasonable efforts to enforce its rights against the Department under the Services Agreement or otherwise, and Landlord agrees to fully reimburse Tenant for all of its costs in any such enforcement action. -31 - R 136 (Lease ,-r 31). This collection obligation is triggered by failure of DHS to "pay any such amounts to Tenant." R136 (Lease ,-r 31). "Such amounts" references sums of money specifically enumerated in the limitation of liability provision quoted in its entirety above, including such amounts as the "Termination Fee" (which was paid) and "damages for breaches of any covenant under this Lease." R 13 5 (Lease ,-r 31). Plaintiffs' $200 million claim, not yet made, for erection of a new hotel does not fall into the category of "such amounts." Failure to return the building in pre-lease condition, or allowing it to deteriorate, is not "such amounts." The collection obligation on its face does not apply to inchoate claims not yet reduced to a sum certain. Indeed, at the time of termination, the claims had not been made at all. The "commercially reasonable efforts" clause is simply inapplicable to these claims of JFK which, as noted above, are the claims that are the focus of the majority opinion. Had JFK believed back in 2005 that conditions at the premises were deteriorating due to any fault of The Salvation Army, JFK could presumably have declared The Salvation Army in default and sought to establish damages. Significantly, the limitation of liability provision is specifically limited to the extent of not "limit[ing] or effect[ing] the rights of Landlord to declare Tenant in default of its obligations under this Lease .... " R 136 (Lease ,-r 31). Had JFK acted upon such rights, and established damages, those damages could have fallen into -32- the category of "such amounts" that The Salvation Army could have been required to seek from the City upon termination. JFK chose not to take this path. As a result, under the terms of the agreements that JFK negotiated with the City (R45- 47 (Am. CompI. ~~ 14, 17)), JFK cannot claim any breach of the collection obligation or avoid the effect of the limitation of liability provision. Accordingly, even if the "commercially reasonable efforts" requirement were to be treated as a condition to limitation of liabili ty, because the claims made by Plaintiffs that are highlighted by the First Department majority opinion cannot be seen as amounts subject to the collection obligation, The Salvation Army was not required to undertake "commercially reasonable efforts" to enforce its rights against the City as a matter of law. Alternatively, as a matter of law, it is clear that The Salvation Army has met any "commercially reasonable" standard. As the di ssent succinctly observed in the July 3, 2012 Decision, "[u]nder the lease, The Salvation Army only had to seek recovery from DHS if it had any right to recovery." A23. As the dissent also observed, upon termination of the Services Agreement, The Salvation Army had no cause of action against the City under such agreement. A22-23 ("While the lease may have required The Salvation Army to use 'commercially reasonable efforts to enforce its rights against [DHS] under the [s]ervices [a ]greement or otherwise,' that provision does not apply here because The -33- Salvation Army did not have any right to recover post-termination restoration costs from DRS"). Rather, as the dissent stated, the Services Agreement provides for a single payment by DRS upon termination, the termination fee (R189-90 (Services Agmt. Art. 9(A))), which was paid, and the Plaintiffs have not identified "any other source of a right to recover from DRS." A22-23; R79 (12/08/09 First Department decision) ("Article 9 of the services agreement provided only that, if the City terminates the services agreement prior to expiration of the lease and DRS elects not to cause the lease to be assigned, the DRS was obligated either (1) to continue payment of the required lease payments or (2) pay The Salvation Army the applicable termination payment"). To require The Salvation Army to bring a claim where none existed or be found to have committed "bad behavior" that is "commercially unreasonable," as the First Department majority has done, is simply without precedent and wrong. In support of its conclusion that The Salvation Army could "take advantage" of the limited liability provision only if it used commercially reasonable efforts to obtain payment under the Services Agreement, the First Department majority cited one decision filed in the Southern District of New York. A16 (citing MBIA Ins. Corp. v. Patriarch Partners VIII, LLC, 842 F. Supp. 2d 682, 708-09 (S.D.N.Y. 2012)). The MBIA decision does not support the First -34- Department majority position, but rather demonstrates how the maj ority may have misapprehended the issues presented by JFK's appeal. First, the MBIA court was deciding a summary judgment motion, not a motion to dismiss. While the existence of "triable questions of fact" may be critical to a summary judgment motion, that is not the touchstone on a motion to dismiss. See P.T. Bank, 301 A.D.2d at 375-76. In remanding this matter on the basis of "triable questions of fact," and making findings of fact not alleged in the Amended Complaint, the First Department majority seems not to have analyzed this as an appeal of a motion to dismiss . Secondly, the District Court's analysis of the limitation of liability provision in the MBIA case does not provide support for the analysis of the First Department majority. The majority has imported the "commercially reasonable efforts" clause into the limitation of liability provision because they are in the same paragraph of the Lease. The MBIA court did not engage in any such rewriting of the agreement, but carefully construed a limitation of liability provision that by its terms was contingent upon two possible scenarios, one of which was a situation where "such transfers cannot be made because the conditions of this Section 3.04 have not been satisfied." MBIA, 842 F. Supp. 2d at 708. The conditions to be satisfied included "commercially reasonable efforts." Id. at 702-03. The MBIA court's analysis was thus entirely appropriate, and provides no support for the -35- majority's determination to read new conditions into a similarly self-contained limitation of liability provision. Furthermore, the MBlA court was faced with a question of satisfaction of conditions that could not be answered as a matter of law, which is also different from the situation presented here, as demonstrated by the dissent's conclusion that The Salvation Army should not be expected to bring a claim where none existed. A23. C. The July 3, 2012 Decision Improperly Overlooked Or Altered The Factual Allegations Of The Amended Complaint As noted above, the Amended Complaint itself describes the "pass through" arrangement whereby the City was to assume responsibility for costs, and highlights as well the limitation of liability provision. See Point leA), supra. The Amended Complaint further indicates that even JFK understood that the City's entering into the Services Agreement "would guarantee The Salvation Army's performance under the lease." R44 (Am. CompI. ~ 12). However, the end result of the First Department majority'S reading of the agreements as described at Point l(B), supra, essentially transforms The Salvation Army into the guarantor of the City's obligations. This reading contravenes not only the language of the parties' agreements, but the allegations of the Amended Complaint as well. The allegations of the Amended Complaint are to be taken as true for purposes of a motion to dismiss. See EBC l, 5 N.Y.3d at 19; P.T. Bank, 301 -36- A.D.2d at 375-76. Plaintiffs cannot make avelments laying blame solely with the City (R45, 48-50, 60 (Am. CompI. ,-r,-r 15, 19, 21 -22, 26, 56)), and then expect those allegations to be a colorable basis for a suit to recover damages against The Salvation Army. While a party is entitled to plead alternative causes of action, the ability to plead "alternatively" is not extended to specific factual allegations. Gold v. 29-15 Queens Plaza Realty, LLC, 43 A.D.3d 866, 867 (2d Dep't 2007) (noting that pursuant to C.P.L.R. 3014 the "plaintiffs were entitled to plead alternative and inconsistent causes of action"); Drexel Burnham Lambert Grp., Inc. v. Vigilant Ins. Co., 157 Misc. 2d 198,207-08 (Sup. Ct. N.Y. Co. 1993) ("Theories as to the basis for legal recovery may be inconsistent, but not facts. It cannot be alleged that maybe a fact occurred or maybe it didn't"). Consistent with the parties' understanding of the limitation ofliability provision, the Amended Complaint is replete with factual allegations that the City, not The Salvation Army, was liable for the alleged damages. R45, 48-50, 60 (Am. CompI. ,-r,-r 15, 19, 21-22, 26, 56). This understanding is underscored by how JFK pled its causes of action against The Salvation Army: as contrasted to the causes of action alleged against the City, JFK fails to ask for any specific relief from The Salvation Army. In the Third Cause of Action, JFK merely states that as a result of The Salvation Army's breach of the Lease, it has lost more than "$1 5,000.00 in rent and real estate tax payments, and is left with a $200,000,000 project in order -37- to restore the Property." R63 (Am. CompI. '172). JFK does not articulate what relief it is seeking from The Salvation Army. In the Fourth Cause of Action, JFK reiterates that it is left with a $200,000,000 project to restore Carlton House, and then states that this was "required to have been paid for by DHS under the terms of the Lease." R65 (Am. Compl.~81). Again, JFK does not articulate the relief demanded from The Salvation Army. It would thus appear that JFK was well aware that it could not collect any damages against The Salvation Army under the Lease, which explains why JFK did not name The Salvation Army in the Prior Action. It is unclear why JFK asserts any claim against The Salvation Army in a pleading that still includes allegations such as the "City alone was responsible" for the "deplorable conditions at Carlton House". R60 (Am. Compl. ~ 56). It is also unclear why the First Department majority ignored the allegations of Plaintiffs' own pleading with respect to the limited liability of The Salvation Army. See Point I(A), supra. * * * In sum, if the agreements are construed as written, and the factual allegations of the Amended Complaint are assumed to be true, the Amended Complaint must be dismissed in its entirety on the basis that the limitation of liability provision precludes any recovery from The Salvation Army. Accordingly, -38- the decision of the First Department should be reversed, and the Amended Complaint should be dismissed in its entirety against The Salvation Army. POINT II THE RELATIONSHIP BETWEEN THE SAL V ATION ARMY AND THE CITY OF NEW YORK REQUIRES THE DISMISSAL OF THE AMENDED COMPLAINT While the limitation of liability provision is sufficient by itself to justify dismissal of JFK's Amended Complaint, reversal of the July 3, 2012 Decision is also warranted because of the relationship between The Salvation Army and the City as depicted in the Amended Complaint. The allegations of the Amended Complaint establish that The Salvation Army was not the "real party in interest" to the Lease, was acting as an agent of the City, and in privity with the City. R50 (Am. Compi. ~ 26). As a result, (i) The Salvation Army is not a proper defendant in the breach of contract cause of action and (ii) this action is precluded based on the doctrine of res judicata. A. According To The Amended Complaint, The Salvation Army Is Not The Real Party In Interest Under The Lease JFK specifically alleges in the Amended Complaint that the City of New York "was the real party in interest" under the Lease. R50 (Am. Compi. ~ 26). If in the context of a motion to dismiss, all allegations contained within a pleading are assumed to be true (EBC I, 5 N.Y.3d at 19), then The -39- Salvation Army is not the real party in interest under the Lease and no claim of breach of the Lease can lie against The Salvation Army. See Covanta Niagara, L.P. v. Town of Amherst Garbage & Refuse Dist. No.1, 16 Misc. 3d 656, 657-58 (Sup. Ct. Erie Co. 2007) (granting defendant's motion to dismiss complaint as defendant was not real party in interest to contract), affd, 49 A.D.3d 1295 (4th Dep't 2008); Stardust Lanes, Inc. v. Metropolis Bowling Ctrs., Inc., 35 Misc. 2d 291, 291 -92 (Sup. Ct. Queens Co. 1962) (finding no breach of contract action could be brought against defendant as defendant was not the real party in interest to the contract as evidenced by the fact that defendant had assigned its interest in the contract and where, under the express terms of the contract, in the event of such assignment, the defendant was to sustain no liability under the contract). B. The Salvation Army Acted As Agent For The City An agency relationship is created as a result of "conduct by parties manifesting that the principal party is willing to allow the other party, upon such other party's consent, to act for it subject to the principal's control and within the limits of the authority thus conferred." Pensee Assocs. v. Quon Indus., Ltd., 241 A.D.2d 354, 359 (1 st Dep't 1997); Wen Kroy Realty Co. v. Public Nat'l Bank & Trust Co. of N.Y., 260 N.Y. 84, 89 (1932) ("The power of [an] agent results from the manifestation of the principal's consent, and extends no further than such manifestation"); Restatement (Third) of Agency § 1.01 (2006). Furthermore, an -40- agency relationship may be established "by words or conduct of a principal communicated to a third party, if it gives rise to an apparent and reasonable basis by the third party that an agency has been created." Standard Bldrs. Supplies v. Gush, 206 A.D.2d 720, 721 (3d Dep't 1994); Riverside Res. Inst. v. KMGA, Inc., 108 A.D.2d 365, 370 (1st Dep't 1985), affd, 68 N.Y.2d 689 (1986); Guardian Life Ins. Co. of Am. v. Chemical Bank, 94 N.Y.2d 418, 423 (2000) (explaining that "a principal and agent need not enter into a formal contract in order to create an agency relationship"). The allegations contained in the Amended Complaint establish that a principal-agent relationship existed between City of New York on the one hand, and The Salvation Army on the other. Specifically, JFK alleges that: (i) JFK negotiated the Lease directly with attorneys for DRS, not The Salvation Army (R45 (Am. CompI. ~ 14)); (ii) "DRS [represented it] would lease and operate the property through an intermediary, The Salvation Army" (R44 (Am. CompI. ~ 12)); (iii) City of New York "was the real party in interest" under the Lease entered into between JFK and The Salvation Army (R50 (Am. CompI. ~ 26)); (iv) the Lease "limited the liability of The Salvation Army" (R45 (Am. CompI. ~ 15)); (v) DRS represented that it "would honor all [of The Salvation Army's] obligations under the Lease" (R50, 52 (Am. CompI. ~~ 26, 31)); and (vi) DRS requested that JFK "deal directly with the City with respect to securing satisfaction of all outstanding -4 1- obligations" under JFK's Lease with The Salvation Army (R50 (Am. CompI. ~ 26)). Taken together, these allegations establish the necessary level of control by the City over The Salvation Army's conduct to establish an agency relationship. Pensee Assocs., 241 A.D.2d at 359. JFK cannot credibly allege that City of New York was the real party in interest to the Lease (R50 (Am. Compo ~ 26)), that the City negotiated the Lease for The Salvation Army to enter into (R45 (Am. Compo ~ 14)), and that the City unilaterally announced the closure of the premises without input from The Salvation Army (R48-49 (Am. Compo ~ 22)), and then dispute that The Salvation Army was acting in the role of an agent. William Stevens, Ltd. V. Kings ViII. Corp., 234 A.D.2d 287, 288 (2d Dep't 1996) ("The basic tenet of a principal-agent relationship is that the principal retains control over the conduct of the agent with respect to matters entrusted to the agent, and the agent acts in accordance with the direction and control of the principal .. . "). JFK has itself identified The Salvation Army as DRS's "putative agent" in its papers submitted to the lower court. R327. Under the circumstances, no liability for breach of the Lease can attach to The Salvation Army, despite the fact that the Lease was executed by The Salvation Army. Savoy Record Co. V . Cardinal Export Corp., 15 N.Y.2d 1, 4 (1964) ("an agent for a disclosed principal 'will not be personally bound unless there is clear and explicit evidence of the agent's intention to substitute or superadd his personal -42- liability for, or to, that of his principal "') (citations omitted); Ell Dee Clothing Co. v. Marsh, 247 N.Y. 392, 397 (1928) (explaining that "where one party to a written contract is known to the other to be in fact acting as an agent for some known principal, he does not become personally liable"); Leonard Holzer Assocs. v. Orta, 250 A.D.2d 737, 737-38 (2d Dep't 1998) (finding that agent was not liable for the obligations of the contract that he signed since the facts and circumstances surrounding the agreement supported the conclusion that the defendant was acting as an agent). Although the motion court held against The Salvation Army on its res judicata point when it determined that "[T]he Salvation Army fails to establish that it was an 'agent' of the City acting in a 'purely representative capacity'" (RI 4), the court did not address the issue of agency in the context of JFK's breach of contract claim. The Salvation Army respectfully submits that the motion court failed to apprehend that by the terms of the Amended Complaint, which must be taken as true for purposes of this motion to dismiss (EBC I, 5 N.Y.3d at 19), JFK has established that The Salvation Army was an agent. The Salvation Army further submits that while the First Department did not address whether the City was the real party in interest to the Lease or whether The Salvation Army was acting as the City's agent with respect to the Lease as The Salvation Army argued, these -43- allegations of the Amended Complaint provide another basis to reverse the July 3, 2012 Decision and dismiss the Amended Complaint. C. The Amended Complaint Is Precluded Based On Res Judicata The Salvation Army also argued before the First Department that the breach of contract cause of action should be dismissed based on the doctrine of res judicata. Although the motion court addressed this argument and refused to dismiss the Amended Complaint on this ground (R14), the First Department failed to address it in any way. The Salvation Army respectfully submits that in refusing to dismiss the Amended Complaint on the grounds of res judicata, both the motion court and the First Department erred: res judicata provides yet another ground to grant The Salvation Army's motion to dismiss the Amended Complaint and reverse the July 3,2012 Decision. The motion court held that JFK's claims in the Current Action are barred with respect to the City of New York by the doctrine of res judicata because the present claims arise out of the same transaction as the claims in the Prior Action. R12. JFK did not perfect its appeal of that decision, therefore this issue is not in dispute. Accordingly, pursuant to the doctrine of res judicata, JFK is forever barred from bringing any claims against the City of New York that it could have raised in the Prior Action that arise out of the same transaction that was the subject matter of that action. R12; see In re Hunter, 4 N.Y.3d 260,269 (2005). -44- As the motion court properly recognized, the doctrine of res judicata applies not only to the parties to the action, but also to '''those in privity with them. '" R14 (quoting Green v. Santa Fe Indus., Inc., 70 N.Y.2d 244, 253 (1987)). Therefore, a finding that The Salvation Army is in privity with the City of New York would similarly bar the claims that were asserted against The Salvation Army in the Current Action since those claims arise out of the same transactions that were the subject matter of the Prior Action. The term privity "'does not have a technical and well-defined meaning, '" but is an '" amorphous term not susceptible to ease of application. '" People ex reI. Spitzer v. Applied Card Sys., Inc., 11 N.Y.3d 105, 123 (2008) (citations omitted). According to the motion court, the term privity "'includes those who are successors to a property interest, those who control an action although not formal parties to it, those whose interests are represented by a party to the action, and possibly coparties to a prior action. '" R14 (quoting Bayshore Family Partners, L.P. v. Foundation of Jewish Philanthropies of Jewish Fed'n of Greater Fort Lauderdale, 270 A.D.2d 374, 375 (2d Dep't 2000)). Under this standard, the motion court explained that The Salvation Army does "not fall into any of the enumerated categories." R14. The motion court further explained that The Salvation Army's "claim that it was 'controlled' by the City is insufficient to establish privity" and that "[T]he Salvation Army fails to establish that it was an -45- 'agent' of the City acting in a 'purely representative capacity. '" R14. However, the motion court in so holding failed to give appropriate consideration to JFK's own allegations, which concede that there was privity between The Salvation Army and the City of New York. 1. JFK's Allegations Establish that The Salvation Army Was in Privity with the City of New York Based on the City's Domination and Control over The Salvation Army It is well-settled that in the context of a motion to dismiss, all "allegations of the complaint [are taken] as true." EBC I, 5 N.Y.3d at 19. The Salvation Army does not contest that proposition; indeed, this proposition serves to establish privity, as JFK itself has provided the allegations that show The Salvation Army to be in privity with City of New York and DHS. Specifically, JFK identified the paragraphs of its pleading that establish privity in its memorandum of law in opposition to the City of New York's motion to dismiss the Prior Action: More specifically the complaint alleges that [the City] directly brokered the contract between JFK and The Salvation Army (Compi. at ~ 13) [R45 (Am. Compi. ~ 14)], forced its termination (id. at ~~ 18-19) [R48-49 (Am. Compi. ~~ 22-23)], and then prevailed upon JFK not to pursue litigation on the basis that [the City] would step into the shoes of The Salvation Army (id. at ~ 21) [R50 (Am. Compi. ~ 26)], all unauthorized -46- acts of domination and control sufficient to establish privity.8 R314 (emphasis added). These allegations indeed demonstrate that The Salvation Army was in privity with City of New York. Elias v. Rothschild, No. 603288/2002, 2005 WL 5960119, at *5 (Sup. Ct. N.Y. Co. Apr. 27, 2005) (explaining that "privity" could be shown based on "control" of one party over another), affd, 29 A.D.3d 448 (1st Dep't 2006). The motion court's finding that The Salvation Army's "claim that it was 'controlled' by the City is insufficient to establish privity" misses the critical point that it was JFK, in its pleading, that described the control by the City. If the motion court properly accepted all of JFK's claims as true, including the claim that the City exerted "domination and control" over The Salvation Army, the court would have had to conclude that The Salvation Army was in privity with the City of New York. Melwani v. Jain, No. 02 Civ. 1224, 2004 WL 1900356, at **2-3 (S .D.N.Y. Aug. 24, 2004) (finding that the defendant in the action was in privity with a defendant in a prior action based on how plaintiff had "framed his claims" of the defendant's "'domination' and 'control'" over the defendant in the prior 8 Although Plaintiffs were referring to the Complaint in the Prior Action fi led August 4, 2008 (R251 -65), the Amended Complaint contains the same allegations, as referenced in the bracketed text. -47- action and explaining that "[a]t bottom, Melwani cannot avoid the consequences of his own pleading and his own prior arguments to the Court") . 2. JFK's Allegations Demonstrate that The Salvation Army Was in Privity with the City of New York Based on Its Agency Relationship A finding of a principal-agent relationship is also sufficient to find privity between two parties. Blog v. Sports Car Club of Am., Inc., 254 A.D.2d 65, 65 (l st Dep't 1998) ("Since plaintiff has not denied that defendant King was JCRA's agent, we deem King to be in privity with JCRA for purposes of this res judicata finding"). As set forth in Point II(B), supra, the agency relationship between The Salvation Army and the City is also established by the allegations contained in JFK's Amended Complaint. Because the allegations made by JFK definitively establish that The Salvation Army was the "agent" of the City, and JFK itself has specifically asserted that The Salvation Army was the City's "agent," the only proper conclusion that can be reached is that The Salvation Army was acting as the City's agent with respect to the Lease, and therefore, The Salvation Army was in privity with the City. Blog, 254 A.D.2d at 65. Similarly, the fact that JFK alleges that the City was the "real party in interest" to the Lease, that the Lease "limited the liability of The Salvation Army," and the City agreed to "honor all" of The Salvation Army's obligations under the Lease, is sufficient in and of itself to establish privity. Simmons v. New York City Health & Hosps. -48- Corp., 71 A.D. 3d 410, 411 (lst Dep't 2010) ("While defendant was not a party to the prior action, as defendant doctor's employer, required to indemnify defendant doctor in the prior action, it was in privy with defendant doctor ... the real party in interest in that action") (citation omitted), Iv. to appeal denied, 16 N.Y.3d 709 (2011). Accordingly, as The Salvation Army is in privity with the City of New York with respect to transactions arising under the Lease, res judicata bars this Current Action, which has already been dismissed against the City on that ground, from proceeding against The Salvation Army. For this reason as well, the July 3, 2012 Decision should be reversed and the Amended Complaint dismissed in its entirety against The Salvation Army. CONCLUSION The story that emerges from the Amended Complaint is that at a time of crisis, The Salvation Army undertook to contribute its efforts and expertise to assist its community, the City of New York, to deal with homelessness, agreeing to terms negotiated by the City and JFK designed to create a "pass through" arrangement that shielded its assets from liability. The July 3, 2012 Decision effectively rewrites both the agreements made and the factual allegations of the Amended Complaint to find that The Salvation Army has engaged in "bad behavior" and to require that The Salvation Army engage in further litigation as to -49- the import of language in the agreements that should not, as a matter of law, negate the limitation of liability intended by the parties to protect The Salvation Army from claims such as those now made by Plaintiffs. For the reasons set forth above, The Salvation Army respectfully requests that this Court (i) reverse the Decision and Order of the Appellate Division, First Department entered on July 3, 2012 and dismiss the Amended Complaint in its entirety against The Salvation Army and (ii) grant The Salvation Army such other and further relief as the Court may deem just and proper. Dated: ' New York, New York December 10,2012 Of Counsel: Jared L. Facher CADW ALADER, WICKERSHAM & TAFT LLP Office and Post Office Address: One World Financial Center New York, New York 10281 Tel. No.: (212) 504-6000 Fax No.: (212) 504-6666 kathy.chin@cwt.com Attorneys for Defendant-Appellant The Salvation Army -50-