McMahan & Co. v. Bass

• Decision Date: 19 May 1998
• Court: New York Supreme Court — Appellate Division
• Parties: , 1998 N.Y. Slip Op. 4788 McMAHAN & COMPANY, et al., Plaintiffs-Respondents-Appellants, v. Saul BASS, et al., Defendants-Appellants-Respondents.

Page 19

673 N.Y.S.2d 19

250 A.D.2d 460, 1998 N.Y. Slip Op. 4788

McMAHAN & COMPANY, et al., Plaintiffs-Respondents-Appellants, v. Saul BASS, et al., Defendants-Appellants-Respondents.

Supreme Court, Appellate Division First Department.

May 19, 1998.

Leigh R. Isaacs, for Plaintiffs-Respondents-Appellants.

Matthew W. Woodruff, for Defendants-Appellants-Respondents.

Before WALLACH, J.P., and RUBIN, WILLIAMS, MAZZARELLI and SAXE, JJ.

MEMORANDUM DECISION.

Order, Supreme Court, New York County (Charles Ramos, J.), entered February 21, 1997, which, inter alia, granted plaintiffs' cross motion for summary judgment on the issue of liability as to the first cause of action and denied defendants' motion to dismiss that cause of action, denied plaintiffs' cross motion to dismiss the second and fourth counterclaims and granted, in part, plaintiffs' cross motion to dismiss the third counterclaim, unanimously modified, on the law, to the extent of denying plaintiffs' cross motion for summary judgment on the issue of liability as to the first cause of action and granting defendants' motion for summary judgment as to that cause of action, and granting plaintiff's cross motion to dismiss the second, third and fourth counterclaims and, except as so modified, affirmed, without costs.

McMahan, Brafman, Morgan, & Co. (MBM) is a partnership in which Saul Bass and other defendants had purchased a limited partnership interest during the period from 1980 to 1982. D. Bruce McMahan is the general partner of MBM. In 1992, defendants (and others) commenced a Federal Court action against MBM and its general partner, McMahan. In the Federal action, defendants alleged that they were defrauded in connection with their original purchases of limited partnership interests in MBM. They further alleged that they were defrauded into entering into contracts to sell their limited partnership interests to McMahan in anticipation of an Internal Revenue Service audit of MBM's 1980 tax returns. The audits were to be conducted pursuant to the Tax Reform Act of 1984, which created potentially significant tax liabilities on persons owning limited partnership interests. In connection with the transfer of their interests to McMahan, each defendant, as seller, executed a Contract of Sale and Security agreement (the contracts) with MBM, as partner, and with McMahan, as purchaser.

The Federal action was dismissed on the ground that the claims advanced by defendants herein were barred by the assignments and releases in the contracts. Plaintiffs (defendants in the federal action) thereupon filed this lawsuit, alleging, inter alia, that the Federal action was brought by defendants in violation of the covenant not to sue contained in the respective contracts. Plaintiffs MBM and McMahan seek payment of attorneys fees in connection with the defense of the Federal action.

Defendants assert four counterclaims against plaintiffs in which they seek, respectively: (1) damages for breach of contract for failure to pay the entire purchase price due under the contracts; (2) damages for breach of contract for failure to establish the special trust account or to fund it sufficiently to ensure payment of the entire purchase price due on the contracts; (3) judgment declaring the nonrecourse provisions of the contracts unenforceable together with damages for breach of contract--based upon McMahan's fraudulent misrepresentation, bad faith and breach of fiduciary duty--by causing MBM to incur substantial and excessive legal fees and other expenses in defense of Internal Revenue Service claims and by wrongfully impairing defendants' security interests (as evidenced by certain annexed letters from McMahan to the defendants which described operating losses and expenses); and (4) damages for willful and malicious breach of contract for failure to perform their obligations under the contracts.

The assignment and release clauses contained in the contracts constitute releases, not implied covenants not to sue, because they relate to claims extant at the time the parties entered into the contracts. A release is a provision that intends a present abandonment of a known right or claim. By contrast, a covenant not to sue also applies to future claims and constitutes an agreement to exercise forbearance from asserting any claim which either exists or which may accrue (Wilder v. Pennsylvania R.R. Co., 245 N.Y. 36, 39, 156 N.E. 88 [covenant not to sue found where no liability existed at the time of the parties' agreement]; see also, Colton v. New York Hosp., 53 A.D.2d 588, 589, 385 N.Y.S.2d 65; Stone v. National Bank & Trust Co., 188 A.D.2d 865, 867, 591 N.Y.S.2d 609). The provisions at issue do not speak to the future, but rather are related to known events that had transpired prior to execution of the contracts, namely the Internal Revenue Service audit and the operation of the MBM partnership. Absent a covenant not to sue, there exists no implicit agreement by defendants to pay the attorneys' fees, as would result from breach of a covenant not to sue.

Defendants assert four counterclaims, each of which alleges that defendants have not been paid the full price specified in the contracts. As the courts of this State have observed on numerous occasions, restating a cause of action for breach of contract in various guises does not enhance the pleading (Stendig v. Thom Rock Realty Co., 163 A.D.2d 46, 47, 558 N.Y.S.2d 917 [assessment of merits not furthered by introduction of extraneous theories and unnecessary defendants]; see also, Megaris Furs v. Gimbel Bros., 172 A.D.2d 209, 211, 568 N.Y.S.2d 581 [single cause of...