Kimso Apartments, LLC v. Gandhi

• Decision Date: 25 November 2014
• Docket Number: No. 197.,197.
• Citation: 23 N.E.3d 1008,24 N.Y.3d 403,998 N.Y.S.2d 740,2014 N.Y. Slip Op. 08219
• Parties: KIMSO APARTMENTS, LLC, Successor by Merger to Kimso Apartments, Inc., et al., Respondents, v. Mahesh GANDHI, Appellant, and Arlington Filler et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

24 N.Y.3d 403

23 N.E.3d 1008

998 N.Y.S.2d 740

2014 N.Y. Slip Op. 08219

KIMSO APARTMENTS, LLC, Successor by Merger to Kimso Apartments, Inc., et al., Respondents

v.Mahesh GANDHI, Appellant, and Arlington Filler et al., Respondents.

No. 197.

Court of Appeals of New York.

Nov. 25, 2014.

Heller Horowitz Feit, P.C., New York City (Eli Feit and Stuart A. Blander of counsel), for appellant.

Wilson Elser Moskowitz Edelman & Dicker, LLP, White Plains (Robert A. Spolzino of counsel), for respondents.

OPINION OF THE COURT

RIVERA

, J.

Defendant/counterclaim plaintiff Mahesh Gandhi appeals an order of the Appellate Division that modified Supreme Court's judgment by denying Gandhi's application to amend his pleading to assert a counterclaim for payments Gandhi alleges are due to him under a settlement agreement. We conclude, as a matter of law, the Appellate Division abused its discretion in denying the amendment, and reverse and remit.

I

The underlying litigation in this appeal is based on claims that have roots in a now dissolved real estate business partnership between Gandhi, and his two associates, counterclaim defendants Arlington Filler and Darshan Shah. The individuals formed and held equal one-third interests in three corporations, Kimso Apartments, Inc., Poonam Apartments, Inc., and 185–225 Parkhill Corp. The corporations purchased residential properties in Staten Island, New York, consisting of multi-rental unit apartment buildings which were regulated and subsidized as affordable housing by

the United States Department of Housing and Urban Development (HUD).

The corporations secured a $20 million loan from HUD, $11 million of which was allocated to rehabilitate and improve the properties to maximize rentals under the federal Section 8 housing subsidy program.¹ The remaining $9 million was loaned to Gandhi, Filler and Shah as shareholder loans, evidenced by several promissory notes, of which Gandhi received $2,970,000 pursuant to the notes he signed and for which he made regular interest payments.²

Over time, in 2001, Filler and Shah began to suspect that Gandhi, who was the daily manager of the corporations, was conspiring to overcharge for supplies and repairs. As the distrust towards Gandhi grew, Filler and Shah removed Gandhi as manager. Litigation among them and the corporations soon followed.

In May 2002, Gandhi filed a petition in state court to compel arbitration of disputes between them. The following month the corporations brought an action in federal court against Gandhi for, inter alia, breach of fiduciary duty and conversion based on his alleged theft from the corporations. Gandhi then filed a second state action for breach of contract, conversion, and breach of fiduciary duty.

In August 2002, the parties executed a settlement agreement to end the state and federal actions. Pursuant to this settlement agreement, Gandhi sold his one-third interest in the corporations, along with other entities, to Filler and Shah for $1,648,000, to be paid in 120 equal monthly installments of $20,000, including interest. As relevant here, the agreement contained a provision stating that the corporate and individual parties

“agree to hereby release, acquit, and forever discharge each other ... of and from any and all claims, known and unknown, counterclaims, actions, causes of action ... whatsoever of any kind, from the beginning of time until the present that they now have or that may accrue that are the subject of the [parties'] lawsuits herein.”

The agreement, however, did not expressly state whether it extinguished Gandhi's shareholder loan obligation under the notes.

The corporate successors in interest to Kimso, Poonam and Parkhill, similarly named and now controlled solely by Filler and Shah, made 23 monthly payments to Gandhi, totaling $460,000. Although Gandhi ceased paying interest on the notes, initially, the corporations did not seek payments. Finally, in November 2003, the corporations declared the notes due and in default, and sent Gandhi a demand notice.

The corporations then filed this action, seeking declaratory judgment that the corporations have a common-law right to offset the remaining amount they owed Gandhi under the settlement agreement against the money Gandhi owed the corporations on the shareholder loan notes.³ The complaint expressly asserted that, “if Plaintiffs fail to make the full payments to

Defendant [Gandhi] as specified under [the settlement agreement],

Plaintiffs would be in default of that agreement and Defendant Gandhi would be entitled to all its remedies in that Agreement.”

Gandhi answered, seeking rescission of the settlement agreement and reinstatement as a shareholder in the corporations, and asserting various other counterclaims. He also named Filler and Shah as individual counterclaim defendants, along with several other corporate entities.⁴

Several months later, in September 2004, the corporations ceased making the monthly payments as required by the settlement agreement. Thereafter, the corporations' request for an offset against money they owed Gandhi, and Gandhi's counter demand for money owed based on the corporations' termination of payments, continued as the focus of the litigation, as reflected in the parties' amended pleadings and motion practice.

The corporations' amended complaint repleaded their demand for declaratory judgment and specific payments based on the offset cause of action.⁵ As before, the corporations asserted that they were entitled under their common-law right to offset the amount they owed Gandhi pursuant to the settlement agreement against the amount he owed them under the notes. They further stated they “are jointly and severally liable for the amounts due” Gandhi under the settlement agreement, and “if Plaintiffs fail to make the full payments to Defendant as specified under [sic] Settlement Agreement, Defendant may allege that Plaintiffs are in default of the Settlement Agreement and that Defendant would be entitled to all his remedies thereunder.”

In response, Gandhi's amended answer asserted numerous counterclaims, and again sought rescission and corporate shareholder status reinstatement. However, he did not assert a counterclaim for back payments under the agreement. Two years later, the court granted plaintiffs partial summary judgment, dismissing Gandhi's rescission claims.

The corporations subsequently moved and cross-moved for summary judgment on the declaratory judgment causes of action.

Ghandi opposed and cross-moved for summary judgment,

seeking dismissal of the declaratory judgment causes of action, and demanding judgment for him on his counterclaims, and “judgment in [his] favor for the amounts due from [the corporations] under the Settlement Agreement, with interest and attorneys fees.” In his supporting affidavit, Gandhi asserted that “plaintiffs acknowledge that they entered into a settlement agreement with me ..., and that they presently owe me in excess of $1 million (exclusive of accrued interest) under the terms of the settlement agreement.”

Plaintiff Parkhill opposed Gandhi's cross motion, claiming that Gandhi failed to assert his demand for payments under the settlement agreement in his amended answer. Gandhi responded that he was not required to “affirmatively plead this relief as a counterclaim” because, “[u]pon dismissal of [the corporations'] ‘set-off’ claims, it naturally follow[ed] that [he would be] entitled to immediately recover the undisputed monthly payments currently due

and owing to him under the Settlement Agreement, with interest and attorneys fees.” In October 2009, Supreme Court denied the corporations' motions as premature and denied Gandhi's motion with leave to renew after discovery.

In October 2010, approximately a month before trial, respondents filed a motion in limine seeking to preclude Gandhi from presenting evidence of, or making a claim for, payments allegedly due to him under the settlement agreement. Gandhi opposed, arguing he did not “assert an affirmative claim for past-due settlement payments” because “the payments have always been an acknowledged obligation of the [corporations].” Gandhi further asserted that “it is well-settled that pursuant to CPLR § 3025(c)

, pleadings may be conformed to the proof at any time, even during or after trial. ” The court denied the motion, reserving decision until the conclusion of trial.

At trial, the court permitted the introduction of evidence regarding the settlement agreement and back payments allegedly owed to Gandhi. Counsel for plaintiff Parkhill questioned Gandhi about his negotiations with Filler and Shah concerning the buyout provision in the settlement agreement. The corporations also successfully proffered the settlement agreement into evidence. Gandhi testified as to the payments he was promised under the settlement agreement.

Before resting, Gandhi moved to conform the pleadings to the proof, seeking to assert a counterclaim for money currently owed him under the settlement agreement. Plaintiff Poonam

opposed, claiming prejudice based on Gandhi's delay in asserting the counterclaim, and asserting that Gandhi's claims were time-barred.

Supreme Court granted Gandhi's motion to amend, and subsequently entered judgment in his favor on the counterclaim against the corporations for $2,186,787. After finding that the settlement agreement encompassed a release of all claims, including the claims on the notes, Supreme Court reasoned that the payments due Gandhi under the settlement agreement,

“although not plead [sic] by [Gandhi] in his counterclaims [have] been an intrinsic counterclaim since the onset of this litigation. [The corporations'] claim that they were entitled to withhold payments under the Settlement Agreement because they were entitled to payment under the Notes, while [Gandhi] raised the opposite as his defense. The inverse of that argument would then state that if this Court does not find the Corporations are entitled to repayment under the Notes,

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