Fitzpatrick v. Animal Care Hosp., PLLC

• Decision Date: 28 March 2013
• Citation: 104 A.D.3d 1078,2013 N.Y. Slip Op. 02119,962 N.Y.S.2d 474
• Parties: Timothy L. FITZPATRICK, Respondent–Appellant, v. ANIMAL CARE HOSPITAL, PLLC, et al., Appellants–Respondents.
• Court: New York Supreme Court — Appellate Division

104 A.D.3d 1078

962 N.Y.S.2d 474

2013 N.Y. Slip Op. 02119

Timothy L. FITZPATRICK, Respondent–Appellant,

v.ANIMAL CARE HOSPITAL, PLLC, et al., Appellants–Respondents.

Supreme Court, Appellate Division, Third Department, New York.

March 28, 2013.

Waite & Associates, PC, Albany (Stephen J. Waite of counsel), for appellants-respondents.

Terrence R. Dugan, Endicott, for respondent-appellant.

Before: ROSE, J.P., STEIN, SPAIN and EGAN JR., JJ.

STEIN, J.

Cross appeals from an order of the Supreme Court (Lebous, J.), entered June 30, 2011 in Broome County, upon a decision of the court partially in favor of plaintiff.

In late 2004, plaintiff executed an asset purchase agreement (hereinafter APA) to sell his veterinary practice located in the Town of Vestal, Broome County to defendants.¹ Defendants financed the purchase, in part, through a personally guaranteed promissory note in the amount of $400,000, which called for monthly payments, with 5% interest. Defendants began managing and operating the practice in January 2005. However, it was contemplated that plaintiff would continue to perform occasional veterinary services for the practice.

In late March 2005, plaintiff was arrested and charged in Virginia with the crime of soliciting sex from a person over the Internet who he had reason to believe was a minor.² Because plaintiff had been a well-known veterinarian in the Broome County area, his arrest was covered by the local news, and his connection to the veterinary practice was specifically mentioned. Defendants failed to make the April and May 2005 payments on the promissory note, prompting plaintiff to declare defendants in default and accelerate the note. Defendants eventually made such payments and continued to make payments thereafter until April 2007, when they ceased payments altogether.

Plaintiff thereafter commenced this action to recover, among other things, the amount outstanding on the promissory note. Defendants answered and interposed a counterclaim alleging that plaintiff's arrest constituted a material breach of the APA and sought, among other things, damages for loss of the goodwill and revenue occasioned by plaintiff's conduct. Following a nonjury trial, Supreme Court determined that plaintiff had breached the APA and awarded damages to defendants on their counterclaim in the amount of $89,030, representing lost profits sustained by the practice. Supreme Court also awarded plaintiff the amount due from defendants on the promissory note—to be offset by the $89,030 in damages that defendants sustained—and denied the parties' demands for certain interest payments, late payments and counsel fees. The parties now cross-appeal.

Upon review of a nonjury trial verdict, this Court “ ‘independently review[s] the probative weight of the evidence, together with the reasonable inferences that may be drawn therefrom, and grant[s] the judgment warranted by the record’ ” while according due deference to the trial court's factual findings and credibility determinations ( Ash v. Bollman, 80 A.D.3d 1115, 1117, 916 N.Y.S.2d 266 [2011], quoting Shon v. State of New York, 75 A.D.3d 1035, 1036, 906 N.Y.S.2d 642 [2010];see Haber v. Gutmann, 64 A.D.3d 1106, 1107, 882 N.Y.S.2d 780 [2009],lv. denied13 N.Y.3d 711, 891 N.Y.S.2d 304, 919 N.E.2d 719 [2009] ). Addressing first whether plaintiff breached the APA, it is beyond cavil that “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms” ( MHR Capital Partners LP v. Presstek, Inc., 12 N.Y.3d 640, 645, 884 N.Y.S.2d 211, 912 N.E.2d 43 [2009] [internal quotation marks and citation omitted]; see Stillwater Hydro Partners, LP v. Stillwater Hydro Assoc., LLC, 100 A.D.3d 1455, 1456, 953 N.Y.S.2d 541 [2012];Ruthman, Mercadante & Hadjis v. Nardiello, 260 A.D.2d 904, 906, 688 N.Y.S.2d 823 [1999] ).

As pertinent here, section V(A) of the APA provides, under the heading “Goodwill: Publicity,” that neither party would “intentionally take or omit to take any action ... which could directly impair the goodwill of the [b]usiness or the business reputation or good name.” In our view, such provision is susceptible to only one reasonable interpretation ( see Zinter Handling, Inc. v. General Elec. Co., 101 A.D.3d 1333, 1335, 956 N.Y.S.2d 626 [2012];Currier, McCabe & Assoc., Inc. v. Maher, 75 A.D.3d 889, 890, 906 N.Y.S.2d 129 [2010] ), namely, that any intentional act that could directly impair the goodwill of the practice would violate the APA. While plaintiff argues that he did not breach the APA because he did not intend his conduct to impair the goodwill of the practice, such an interpretation is contrary to the plain meaning of section V(A), and Supreme Court properly determined that the conduct that led to plaintiff's arrest and conviction constituted a breach of the APA.³

Supreme Court also correctly found that plaintiff's breach entitled defendants to an offset against their obligation on the promissory note. A breach of a related contract is generally not a defense to nonpayment of an instrument for money only ( see Ingalsbe v. Mueller, 257 A.D.2d 894, 895, 684 N.Y.S.2d 59 [1999];A+Assoc. v. Naughter, 236 A.D.2d 655, 656, 654 N.Y.S.2d 44 [1997] ). However, where the note and the contract are “inextricably intertwined” as part of the same transaction, a breach of the related contract may create a defense to payment on the note ( Couch White v. Kelly, 286 A.D.2d 526, 528, 729 N.Y.S.2d 206 [2001] [internal quotation marks and citation omitted]; see Ingalsbe v. Mueller, 257 A.D.2d at 895, 684 N.Y.S.2d 59;A+Assoc. v. Naughter, 236 A.D.2d at 656, 654 N.Y.S.2d 44;see also Lorber v. Morovati, 83 A.D.3d 799, 800, 922 N.Y.S.2d 109 [2011];Vecchio v. Colangelo, 274 A.D.2d 469, 711 N.Y.S.2d 456, 458 [2000] ).

Here, the promissory note was executed contemporaneously with the APA and represented partial consideration for the assets purchased by defendants. The APA specifically refers to the promissory note, and a copy of the note was attached thereto ( see Ingalsbe v. Mueller, 257 A.D.2d at 895, 684 N.Y.S.2d 59). Further, the note does not include any waiver of the right to an offset for counterclaims. Inasmuch as we find the parties' rights and obligations set forth in the note and APA to be inextricably intertwined ( see id. at 895, 684 N.Y.S.2d 59), we agree with Supreme Court's determination that, as a result of plaintiff's breach of the APA, defendants were entitled to offset their obligations due under the promissory note against any damages caused by plaintiff's breach.⁴ Additionally, because the note and the APA were inextricably intertwined, defendants' suspension of payments on the note following plaintiff's breach of the APA did not cause them to be in default. Thus, we also concur with Supreme Court that plaintiff is not entitled to recover counsel fees, late fees or an increase in the applicable interest rate under the terms of the note.

On the other hand, we find merit to defendants' argument that plaintiff was not entitled to accelerate the balance due on the promissory note. Although the express terms of the note permit acceleration upon defendants' failure to make payments in a timely manner, Supreme Court ultimately determined that they were justified in suspending payments in order to maintain the status quo until the parties' respective obligations could be determined. In view of our finding that plaintiff's breach of the APA created a defense to defendants' obligations under the note and justified their suspension of payments, acceleration was not appropriate and damages should be recalculated, accordingly.

Turning to the damages sought by defendants on their counterclaim, in order to recover lost profits, they had the burden of proving that the “damages were actually caused by the breach, that the ‘particular damages were fairly within the contemplation of the parties to the contract at the time it was made’ and that the alleged loss is ‘capable of proof with reasonable certainty’ ” ( Awards.com v. Kinko's, Inc., 42 A.D.3d 178, 183, 834 N.Y.S.2d 147 [2007],affd.14 N.Y.3d 791, 899 N.Y.S.2d 123, 925 N.E.2d 926 [2010], quoting Kenford Co. v. County of Erie, 67 N.Y.2d 257, 261, 502 N.Y.S.2d 131, 493 N.E.2d 234 [1986];see Latham Land I, LLC v. TGI Friday's, Inc., 96 A.D.3d 1327, 1333, 948 N.Y.S.2d 147 [2012] ). “The rule that damages must be within the contemplation of the parties is a rule of foreseeability. The party breaching the contract is liable for those risks foreseen or which should have been foreseen at the time the contract was made” ( Ashland Mgt. v. Janien, 82 N.Y.2d 395, 403, 604 N.Y.S.2d 912, 624 N.E.2d 1007 [1993];see Kenford Co. v. County of Erie, 67 N.Y.2d at 261, 502 N.Y.S.2d 131, 493 N.E.2d 234;Wathne Imports, Ltd. v. PRL USA, Inc., 101 A.D.3d 83, 87, 953 N.Y.S.2d 7 [2012];Crystal Clear Dev., LLC v. Devon Architects of N.Y., P.C., 97 A.D.3d 716, 949 N.Y.S.2d 398 [2012] ).

Here, while the APA is silent with respect to damages, we apply a “commonsense rule” to determine “what the parties would have concluded had they considered the subject” ( Kenford Co. v. County of Erie, 67 N.Y.2d at 262, 502 N.Y.S.2d 131, 493 N.E.2d 234;see Ashland Mgt. v. Janien, 82 N.Y.2d at 404, 604 N.Y.S.2d 912, 624 N.E.2d 1007). Notably, a substantial portion of the purchase price of the practice was expressly attributable to goodwill. A purchaser of goodwill “ ‘acquires the right to expect that the firm's established customers will continue to patronize the business' ” ( Bessemer Trust Co., N.A. v. Branin, 16 N.Y.3d 549, 557, 925 N.Y.S.2d 371, 949 N.E.2d 462 [2011], quoting Mohawk Maintenance Co. v. Kessler, 52 N.Y.2d 276, 285, 437 N.Y.S.2d 646, 419 N.E.2d 324 [1981] ). Considering the “nature, purpose and particular circumstances of the contract” ( Kenford Co. v. County of Erie, 73 N.Y.2d 312, 319, 540 N.Y.S.2d 1, 537 N.E.2d 176 [1989] ), we agree with Supreme Court that lost profit damages were...