Preview
FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016
NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF KINGS
––––––––––––––––––––––––––––––X
CHERRY HILL GOURMET, INC., :
:
Plaintiff, :
:
-against- : Index No. 510844/16
:
LUNDY’S MANAGEMENT CORP., : Motion Seq. No. 015
:
Defendant. :
––––––––––––––––––––––––––––––X
LUNDY’S MANAGEMENT CORP., :
:
Defendant and :
Third-Party Plaintiff, :
:
-against- :
:
SHEEPSHEAD RESTAURANT ASSOCIATES, INC., :
:
Third-Party Defendant. :
––––––––––––––––––––––––––––––X
MEMORANDUM OF LAW IN SUPPORT OF DEFENDANT’S CROSS-MOTION
FOR SUMMARY JUDGMENT AND IN OPPOSITION TO THIRD-PARTY
DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
ROSENBERG & ESTIS, P.C.
Attorneys for Defendant and
Third-Party Plaintiff
733 Third Avenue
New York, New York 10017
(212) 867-6000
BRETT B. THEIS
DEJAN KEZUNOVIC
Of Counsel
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TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES ......................................................................................................... iv
PRELIMINARY STATEMENT .....................................................................................................1
STATEMENT OF FACTS ..............................................................................................................4
ARGUMENT ...................................................................................................................................4
POINT I THE COURT SHOULD ENFORCE THE SETTLEMENT AGREEMENT
AND DISMISS THE THIRD-PARTY ACTION....................................................4
A. Legal Standard .........................................................................................................4
B. Sheepshead Executed an Enforceable Settlement Agreement With a Full
Release of All Claims ..............................................................................................5
C. Mr. Kaloidis Had Actual, Implied and/or Apparent Authority To Execute
the Settlement Agreement on Behalf of Sheepshead ...............................................6
POINT II LUNDY’S, NOT SHEEPSHEAD, IS ENTITLED TO SUMMARY
JUDGMENT ON LUNDY’S SECOND CAUSE OF ACTION .............................8
A. Public Policy Trumps Private Agreements, Including So-Ordered
Stipulations of Settlement ........................................................................................8
B. A Liquidated Damages Provision Is Void as Against Public Policy Where
Either (1) the Amount Fixed Is Clearly Disproportionate to the Probable
Actual Loss, or (2) the Probable Actual Loss Was Readily Ascertainable .............9
C. The $132 Million Liquidated Penalty Fails the First Prong of the Truck
Rent-A-Center Test as a Matter of Law .................................................................10
1. The Courts Routinely Find That Escalating or Otherwise Arbitrary
Liquidated Damages Are Grossly Disproportionate to the
Anticipated Probable Losses and, Therefore, Constitute
Unenforceable Penalties.............................................................................10
2. The $132 Million Liquidated Amount and the Arbitrary and
Escalating Monthly Penalties Are Completely Disproportionate to
Sheepshead’s Alleged Probable Loss ........................................................12
3. Contrary to Sheepshead’s Misleading Claim, the Totality of $132
Million Liquidated Penalties Are Ripe for Adjudication ...........................16
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D. The $132 Million Liquidated Penalty Fails the Second Prong of the Truck
Rent-A-Center Test as a Matter of Law Because Any Loss Caused by the
Lack of a CO Was Readily Ascertainable at the Time of Contracting ..................16
1. The Value of the Premises .........................................................................17
2. Refinancing the Premises ...........................................................................18
3. The Escrow Funds......................................................................................19
4. Lundy’s Subrents .......................................................................................20
5. Risk of Foreclosure ....................................................................................21
POINT III SHEEPSHEAD’S ARGUMENTS ARE PATENTLY MERITLESS AND
SHOULD BE REJECTED .....................................................................................22
A. The Bankruptcy Court Neither Opined Upon Nor Approved the TCO and
Annex Penalties .....................................................................................................22
B. Private Parties Cannot Validate Or Ratify an Agreement That Is Void as a
Matter of Public Policy ..........................................................................................25
C. Sheepshead’s Allegations That It “Relinquished Considerable Rights” In
Exchange for the TCO and Annex Penalties Are Completely Irrelevant ..............26
D. The Doctrine of Unclean Hands Does Not Trump Public Policy ..........................28
E. Lundy’s Did Not Admit in the Bankruptcy Proceeding or Otherwise that
the Penalty Provisions Were “Acceptable”............................................................30
F. The Cases Enforcing Liquidated Damages Based on Failure to Obtain COs
Are Completely Distinguishable and Actually Support Lundy’s ..........................31
G. The Court Cannot and Should Not Rewrite the Penalty Provisions .....................32
H. Sheepshead Is Not Without a Remedy If It Can Show Any Actual
Damages .................................................................................................................33
I. Voluntary Payment Doctrine Does Not Bar Lundy’s Recovery Of Over
$700,000 Paid in Unenforceable TCO and Annex Penalties .................................34
POINT IV THE COURT SHOULD GRANT LUNDY’S CROSS-MOTION TO
AMEND ITS COMPLAINT..................................................................................35
A. The Legal Standard ................................................................................................35
B. An Amendment to the Third-Party Complaint Would Not Cause Any
Prejudice to Sheepshead ........................................................................................35
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CONCLUSION ..............................................................................................................................36
Certification Pursuant to 22 NYCRR 202.8-b ...............................................................................37
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TABLE OF AUTHORITIES
Page(S)
Cases
1300 Ave. P Realty Corp. v Stratigakis,
186 Misc 2d 745 (App Term, 2d Dept 2000) ........................................................................... 35
172 Van Duzer Realty Corp. v Globe Alumni Student Assistance Ass’n, Inc.,
24 NY3d 528 (2014) ............................................................................................................. 9, 33
70 W. 45th St. Holding LLC v Waterscape Resort, LLC,
136 AD3d 576 (1st Dept 2016)........................................................................................... 31, 32
Addressing Sys. and Products, Inc. v Friedman,
59 AD3d 359 (1st Dept 2009)................................................................................................... 26
Allen v Riese Org., Inc.,
106 AD3d 514 (1st Dept 2013)................................................................................................... 4
Allied Sheet Metal Works, Inc. v Kerby Saunders, Inc.,
206 AD2d 166 (1st Dept 1994)................................................................................................... 7
Aryeh v Altman,
36 AD3d 492 (1st Dept 2007)................................................................................................... 25
Benjamin Partners, LLC v 583-587 Broadway Condominium
2006 WL 5085953 (Sup Ct, New York County 2005) ............................................................. 25
Brecher v Laikin,
430 F Supp 103 (SDNY 1977) ................................................................................................. 33
Cames v Craig,
181 AD3d 851 (2d Dept 2020) ................................................................................................... 4
Centro Empresarial Cempresa S.A. v America Movil, S.A.B.de C.V.,
17 NY3d 269 (2011) ................................................................................................................... 4
Deutsche Bank Nat. Tr. Co. v Flagstar Capital Markets Corp.,
143 AD3d 15 (1st Dept 2016),
affd sub nom. Deutsche Bank Natl. Tr. Co. Tr. for Harborview Mtge. Loan Tr. v
Flagstar Capital Markets Corp.,
32 NY3d 139 (2018) ................................................................................................................... 8
Dillon v U-A Columbia Cablevision of Westchester, Inc.,
100 NY2d 525 (2003) ............................................................................................................... 34
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DRMAK Realty LLC et al. v Progressive Credit Union,
133 AD3d 401 (1st Dept 2015)................................................................................................. 34
Drucker v Mauro,
30 AD3d 37 (1st Dept 2006)....................................................................................................... 8
Evangelista v Ward,
308 AD2d 504 (2d Dept 2003) ................................................................................................. 15
Forcelli v Gelco Corp.,
109 AD3d 244 (2d Dept 2013) ................................................................................................... 4
Free People of PA LLC v DelShah 60 Ninth, LLC,
169 AD3d 622 (1st Dept 2019)....................................................................................... 8, 11, 15
Geotel, Inc. v Wallace,
162 AD2d 166 (1st Dept 1990)............................................................................................... 6, 7
Gjeka v Iron Horse Transp., Inc.,
151 AD3d 463 (1st Dept 2017)................................................................................................. 35
Goldston v Bandwidth Tech. Corp.,
52 AD3d 360 (1st Dept 2008)............................................................................................. 6, 7, 8
Greene v Hellman,
51 NY2d 197 (1980) ................................................................................................................... 6
Gunderson v Park W. Montessori, Inc.,
24 Misc 3d 1242(A) (Sup Ct, NY County 2009) ...................................................................... 15
Hadden v Consol. Edison Co. of New York, Inc.,
45 NY2d 466 (1978) ................................................................................................................. 25
Hallock v State of New York,
64 NY2d 224 (1984) ................................................................................................................... 6
In re Wille,
61 Misc 2d 992 (Sup Ct, New York County 1968),
affd sub nom. Matter of Wille,
31 AD2d 721 (1st Dept 1968),
affd sub nom. Petition of Wille,
25 NY2d 619 (1969),
rearg denied, remittitur amended,
26 NY2d 831 (1970) ................................................................................................................. 26
Irving Tire Co., Inc. v Stage II Apparel Corp.,
230 AD2d 772 (2d Dept 1996) ............................................................................................. 9, 15
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Jackson Hgts. Care Ctr., LLC v Bloch,
39 AD3d 477 (2d Dept 2007) ................................................................................................... 24
Jazilek v Abart Holdings LLC,
10 NY3d 943 (2008) ................................................................................................................... 9
Kilpatrick v Germania Life Ins. Co.,
183 NY 163 (1905) ................................................................................................................... 35
Kimso Apartments, LLC v Gandhi,
24 NY3d 403 (2014) ................................................................................................................. 35
Mack v City of New York,
165 AD3d 443 (1st Dept 2018)................................................................................................. 35
Marock Int’l. v Brinkman Corp.,
1993 WL 349684, 1993 US Dist LEXIS 12892 (SDNY 1993).................................................. 8
Negrin v Norwest Mortg., Inc.,
263 AD2d 39 (2d Dept 1999) ................................................................................................... 35
Outdoors Clothing Corp. v Schneider,
153 AD3d 717 (2d Dept 2017) ................................................................................................... 5
Parente v Drozd,
171 AD2d 847 (2d Dept 1991) ................................................................................................. 31
People v Bourne,
139 AD2d 210 (1st Dept 1988)................................................................................................. 25
Quaker Oats Co. v Reilly,
274 AD2d 565 (2d Dept 2000) ..................................................................................... 11, 15, 20
Ruxton Towers, L.P. v Floratos,
23 Misc 3d 22 (App Term, 1st Dept 2009) ........................................................................... 9, 24
Scharf v Idaho Farmers,
115 AD3d 500 (1st Dept 2014)................................................................................................... 7
Second Lenox Terrace Assoc. v Cuevas,
24 Misc 3d 1217(A) (Civ Ct, NY County 2009) .................................................................. 9, 24
SMD Capital Group LLC v EPR Capital LLC,
45 AD3d 314 (1st Dept 2007)................................................................................................... 24
Truck Rent-A-Center, Inc. v Puritan Farms 2nd, Inc.,
41 NY2d 420 (1977) ........................................................................... 3, 9, 10, 11, 16, 24, 26, 34
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Welsbach Elec. Corp. v MasTec N. Am., Inc.,
7 NY3d 624 (2006) ..................................................................................................................... 8
Wen Kroy Realty Co. v Public Natl. Bank & Trust Co.,
260 NY 84 (1932) ....................................................................................................................... 6
Willner v Willner,
145 AD2d 236 (2d Dept 1989) ..................................................................... 9, 10, 12, 15, 20, 27
WW-35th LLC v Morgan Ct. Condominium,
60 Misc 3d 1215(A) (Sup Ct, NY County 2018)........................................................................ 6
Zervakis v Kyreakedes,
257 AD2d 619 (2d Dept 1999) ................................................................................................... 9
Statutes
CPLR 2104...................................................................................................................................... 4
CPLR 3025.................................................................................................................................... 35
CPLR 3211(a)(5) ........................................................................................................................ 4, 5
CPLR 3212...................................................................................................................................... 5
Other Authorities
West’s ALR Digest Contracts k134 .............................................................................................. 26
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SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF KINGS
––––––––––––––––––––––––––––––X
CHERRY HILL GOURMET, INC., :
:
Plaintiff, :
:
-against- : Index No. 510844/16
:
LUNDY’S MANAGEMENT CORP., : Motion Seq. No. 015
:
Defendant. :
––––––––––––––––––––––––––––––X
LUNDY’S MANAGEMENT CORP., :
:
Defendant and :
Third-Party Plaintiff, :
:
-against- :
:
SHEEPSHEAD RESTAURANT ASSOCIATES, INC., :
:
Third-Party Defendant. :
––––––––––––––––––––––––––––––X
PRELIMINARY STATEMENT
The above-captioned third-party action (“Third-Party Action”) between Lundy’s (net
lessee) and Sheepshead (overlandlord) has been settled.1 As shown by Sheepshead’s corporate
records and resolutions submitted herewith, in October 2020, George Kaloidis, who owns at least
50% of Sheepshead’s shares, replaced George Pantelidis, who owns 8.34% of Sheepshead’s
shares, as Sheepshead’s President. In his capacity as principal and President of Sheepshead, Mr.
Kaloidis subsequently negotiated and executed a settlement agreement with Lundy’s in December
2020 (the “Settlement Agreement”), which includes a mutual release of all claims and
counterclaims between Lundy’s and Sheepshead (see Ex. AA). Although Mr. Pantelidis apparently
1
Undefined capitalized terms have the same meanings ascribed to the terms in the affidavit of Steve Pappas, sworn
to on May 28, 2021 (“Pappas Affidavit”) and the affirmation of Brett B. Theis, dated June 1, 2021 (“Theis
Affirmation”).
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contests Mr. Kaloidis’ control of Sheepshead, the Settlement Agreement is nevertheless binding
and enforceable because Mr. Kaloidis had both actual and apparent authority to bind Sheepshead
to the Settlement Agreement. It is respectfully submitted that this is a threshold issue, which the
Court should resolve by enforcing the Settlement Agreement and putting an end to tremendous
waste of resources on litigation that has been ongoing in multiple fora since 2013.
Meanwhile, to maintain status quo at the Premises, avoid further litigation expenses and
allow Sheepshead time to fully resolve its internal dispute, Lundy’s signed another interim
agreement with Sheepshead (without prejudice to the Settlement Agreement), whereby Lundy’s
agreed to assign a portion of Cherry Hill’s (subtenant) subrents to Sheepshead to address certain
emergency expenses for the Premises (see Ex. BB). However, Mr. Pantelidis is evidently not
interested in settlement, status quo or reducing litigation expenses. Despite all legal and practical
hurdles, Mr. Pantelidis is determined to fight on, as evidenced by Sheepshead’s instant motion for
summary judgment, which seeks an unprecedented ruling that $132 million liquidated penalties
are enforceable.
These exorbitant penalties stem from a deal negotiated during mediation after Sheepshead
effectively forced Lundy’s into bankruptcy (as detailed in the accompanying Pappas Affidavit).
The terms of the deal were outlined in a Confidential Settlement Outline (which referred to these
penalties as “non-permanent penalties”) and then effectuated in the Lease Modification (which
referred to these penalties as “non-permanent payments”). Contrary to Sheepshead’s disingenuous
allegations, the Bankruptcy Court never reviewed, opined upon or approved any specific terms of
the Confidential Settlement Outline, as shown by the transcript from the bankruptcy proceeding.
In a nutshell, faced with a risk of liquidation, Lundy’s agreed to substantial rent increases
and other consideration, including escalating and arbitrary monthly penalties totaling over $132
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million (which is nearly seven times more than the alleged value of the Premises). In particular,
the Lease Modification provides that until Lundy’s obtains a temporary certificate of occupancy
(the “TCO”) for a portion of the Premises (the Main Building), Lundy’s shall pay Sheepshead an
arbitrary penalty of $10,000 per month, increasing thereafter every six months by an additional
$10,000 for the duration of the Net Lease term (the “TCO Penalties”). The Lease Modification
further provides that until Lundy’s obtains a permanent certificate of occupancy (the “PCO”) for
another portion of the Premises (the Annex), Lundy’s shall pay Sheepshead an arbitrary penalty
of $2,500, increasing thereafter every six months by an additional $5,000 (the “Annex Penalties”).
As explained below, a liquidated damages provision will be declared unenforceable if
either (1) the liquidated amount is clearly disproportionate to the “probable actual loss” anticipated
at the time of contracting, or (2) the “probable actual loss” was readily ascertainable at the time of
contracting. Truck Rent-A-Center, Inc. v Puritan Farms 2nd, Inc., 41 NY2d 420 (1977). Here,
neither the completely arbitrary penalty amounts, nor the completely arbitrary six-month increases,
nor the absurd total liquidated amount of over $132 million, have any bearing whatsoever on
Sheepshead’s “probable actual loss” anticipated at the time of contracting. Rather, the primary
purpose of these absurd penalties was, at best, to compel Lundy’s performance by a threat of large
and escalating penalties. Pursuant to well-settled case law in the Second Department, such
punitive, arbitrary penalties are void as against public policy and cannot be validated by any
subsequent conduct or agreements.
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STATEMENT OF FACTS
For the facts relevant to this motion, the Court is respectfully referred to the accompanying
Pappas Affidavit and Theis Affirmation.2
ARGUMENT
POINT I
THE COURT SHOULD ENFORCE THE SETTLEMENT
AGREEMENT AND DISMISS THE THIRD-PARTY ACTION
A. Legal Standard
It is well-settled that “a valid release constitutes a complete bar to an action on a claim
which is the subject of the release.” Centro Empresarial Cempresa S.A. v America Movil, S.A.B.de
C.V., 17 NY3d 269, 276 (2011). “[S]tipulations of settlement are judicially favored [and] will not
lightly be set aside.” Forcelli v Gelco Corp., 109 AD3d 244, 247-48 (2d Dept 2013).
A release is a contract and, as such, “its construction is governed by contract law.” Cames
v Craig, 181 AD3d 851 (2d Dept 2020). “Where the language is clear and unambiguous, the release
is binding on the parties unless it is shown that it was procured by fraud, duress, overreaching,
illegality or mutual mistake.” Allen v Riese Org., Inc., 106 AD3d 514, 516 (1st Dept 2013); see
also Cames v Craig, 181 AD3d 851 (2d Dept 2020) (holding that “[a]lthough a defendant has the
initial burden of establishing that it has been released from any claims, a signed release ‘shifts the
burden . . . to the [plaintiff] to show that there has been fraud, duress or some other fact which will
be sufficient to void the release”).
A party may enforce a valid release by either moving to dismiss claims asserted against it
pursuant to CPLR 3211(a)(5) (see Cames, 181 AD3d 851; see also CPLR 2104) or for summary
2
Annexed to Theis Affirmation are the affidavit of Daniel F. Sciannameo, MAI, sworn to on October 31, 2019
(Ex. X), the affidavit of George Stergiopoulos, sworn to on November 5, 2019 (Ex. Y) and the affirmation of
Ralph Preite, dated November 4, 2019 (Ex. Z).
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judgment pursuant to CPLR 3212 (see Outdoors Clothing Corp. v Schneider, 153 AD3d 717, 718
[2d Dept 2017]).
B. Sheepshead Executed an Enforceable Settlement
Agreement With a Full Release of All Claims
In or about October 2020, Mr. Kaloidis, who owns at least 50% of Sheepshead’s shares,
engaged in negotiations with Lundy’s to settle the Third-Party Action. As expressly stated in Mr.
Kaloidis’ affidavit and his counsel’s affirmation, Mr. Kaloidis wanted to (a) limit Sheepshead’s
exposure stemming from the Third-Party Action and (b) stop wasting Sheepshead’s resources on
protracted litigation with Lundy’s (see Exs. R and S), which has been ongoing in multiple fora
since 2013.
As President of Sheepshead and owner of at least 50% shares, Mr. Kaloidis, who was
represented by counsel (see Ex. S), negotiated and signed the Settlement Agreement with Lundy’s,
which, inter alia, includes a mutual release of all claims and counterclaims as between Lundy’s
and Sheepshead. To that end, the Settlement Agreement provides, in relevant part:
The Parties hereby withdraw, with prejudice, each
and every allegation, cause of action, claim, defense
and counterclaim raised and/or interposed against
each other in the Third-Party Action (“Claims”) …
and agree that all Claims are withdrawn, with
prejudice.
(Ex. AA, ¶ 1).
The Settlement Agreement is a valid, binding contract entered into between sophisticated
parties, represented by counsel (see Ex. AA, ¶ 5). As such, the Settlement Agreement should be
enforced to end this never-ending dispute between Lundy’s and Sheepshead, which the Court may
do pursuant to either CPLR 3211(a)(5) or CPLR 3212.
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C. Mr. Kaloidis Had Actual, Implied and/or Apparent Authority
To Execute the Settlement Agreement on Behalf of Sheepshead
“[I]t is well settled that an agent may bind a principal to a contract by way of actual
authority, implied actual authority or apparent authority.” WW-35th LLC v Morgan Ct.
Condominium, 60 Misc 3d 1215(A) (Sup Ct, NY County 2018). Actual authority “is determined
by the intention of the principal or, at least, by the manifestation of that intention to the agent.” Id.
(citing Wen Kroy Realty Co. v Public Natl. Bank & Trust Co., 260 NY 84, 89 [1932]). Implied
actual authority is determined by “a principal’s verbal or other actions to the agent which
reasonably give an appearance of authority to conduct the transaction.” Id. (citing Greene v
Hellman, 51 NY2d 197, 204 [1980]). Apparent authority depends on the “words or conduct of the
principal, communicated to a third party, that give rise to the appearance and belief that the agent
possesses authority to enter into a transaction.” Id. (citing Hallock v State of New York, 64 NY2d
224, 231 [1984]).
“Even where an officer acts to the detriment of corporate interests, the law imposes no duty
on a third party who deals with the corporation to inquire into its employee’s actual authority.”
Goldston v Bandwidth Tech. Corp., 52 AD3d 360 (1st Dept 2008). Rather, the “risk of loss from
an unauthorized act” falls on the corporation, and not on the party who relies on a principal’s or
an employee’s apparent authority. Id. (citing Geotel, Inc. v Wallace, 162 AD2d 166, 168 [1st Dept
1990]).
Here, although there now appears to be an internal dispute regarding control of Sheepshead
between Mr. Kaloidis, who owns at least 50% of Sheepshead’s shares (see Ex. T), and Mr.
Pantelidis, who owns 8.34% of Sheepshead’s shares (see Ex. Q), Sheepshead’s corporate
resolution, dated October 25, 2020 (“Resolution”), expressly conferred authority upon Mr.
Kaloidis, as President of Sheepshead, to retain counsel and negotiate a settlement to end the Third-
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Party Action (see Exs. M and N). Based on the Resolution, and the fact that Mr. Kaloidis has far
larger share of ownership of Sheepshead than Mr. Pantelidis (or anyone else), Mr. Kaloidis had
both actual and implied authority to enter into the Settlement Agreement on behalf of Sheepshead.
Furthermore, as both an agent (i.e. President) and principal (i.e. largest shareholder) of
Sheepshead (see Exs. N and Q), Mr. Kaloidis also had apparent authority to negotiate with Lundy’s
and to bind Sheepshead to the Settlement Agreement. Indeed, Mr. Kaloidis signed the Settlement
Agreement as “President” of Sheepshead and represented and warranted that he is “fully
authorized and empowered to bind [Sheepshead] to the terms and conditions of this [Settlement]
Agreement” (Ex. AA, ¶ 7). See, e.g., Scharf v Idaho Farmers, 115 AD3d 500 (1st Dept 2014)
(holding that corporation’s president and 66% shareholder had apparent authority to bind
corporation by executing promissory note on behalf of corporation); Goldston v Bandwidth Tech.,
52 AD3d 360 (1st Dept 2008) (holding that “[t]he president or other general officer of a corporation
has power, prima facie, to do any act which the directors could authorize or ratify”); Allied Sheet
Metal Works, Inc. v Kerby Saunders, Inc., 206 AD2d 166, 168 (1st Dept 1994) (holding that
corporate vice president “has at least apparent authority to bind the corporation”).
In addition to expressly representing to Lundy’s that he was “President” of Sheepshead
with authority to bind Sheepshead, Mr. Kaloidis also produced the Resolution to Lundy’s, which,
alone, was sufficient to cloak Mr. Kaloidis with apparent authority to bind Sheepshead. See Geotel,
Inc. v Wallace, 162 AD2d 166 (1st Dept 1990) (holding that corporation’s treasurer and CFO
“acted with [corporation’s] apparent authority, having furnished a corporate resolution to that
effect”). Therefore, even if Mr. Kaloidis did not have actual or implied authority to enter into the
Settlement Agreement on behalf of Sheepshead, which would be an absurd result given his title
and ownership percentage in the company, the Settlement Agreement is nevertheless valid and
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binding upon Sheepshead. See Goldston v Bandwidth Tech. Corp., 52 AD3d 360 (1st Dept 2008)
(holding that “an agreement entered into within the exercise of a corporate officer’s apparent
authority is binding on the corporation without regard to the officer’s lack of actual authority”).
Based on the foregoing, it is respectfully submitted that the Court should enforce the
Settlement Agreement and dismiss the Third-Party Action.
POINT II
LUNDY’S, NOT SHEEPSHEAD, IS ENTITLED TO SUMMARY
JUDGMENT ON LUNDY’S SECOND CAUSE OF ACTION
A. Public Policy Trumps Private Agreements,
Including So-Ordered Stipulations of Settlement
It is well-settled under New York law that freedom of contract “is not absolute and must
give way to countervailing public policy concerns in appropriate circumstances.” Deutsche Bank
Nat. Tr. Co. v Flagstar Capital Markets Corp., 143 AD3d 15, 20 (1st Dept 2016), affd sub nom.
Deutsche Bank Natl. Tr. Co. Tr. for Harborview Mtge. Loan Tr. v Flagstar Capital Markets Corp.,
32 NY3d 139 (2018); Welsbach Elec. Corp. v MasTec N. Am., Inc., 7 NY3d 624, 629 (2006)
(holding that “[t]he freedom to contract, however, has limits” and that “Courts will not … enforce
agreements that are illegal or where the chosen law violates some fundamental principle of
justice…”). In fact, “the court has a duty to assure that its powers are not employed in the service
of objections contrary to … public interest.” Marock Int’l. v Brinkman Corp., 1993 WL 349684
(SDNY 1993).
Applying these well-settled principles, the courts routinely strike provisions in agreements
which are void as a matter of public policy. See, e.g., Free People of PA LLC v DelShah 60 Ninth,
LLC, 169 AD3d 622 (1st Dept 2019) (declaring that an escalating liquidated damages clause in a
commercial lease constituted an unenforceable penalty); Drucker v Mauro, 30 AD3d 37, 42 (1st
Dept 2006) (reversing Supreme Court and declaring that a settlement agreement memorialized in
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a lease was unenforceable based on “the well-established judicial policy of refusing to enforce
agreements that are unlawful or injurious to the public”); Zervakis v Kyreakedes, 257 AD2d 619,
620 (2d Dept 1999) (striking a liquidated damages provision in a stipulation of settlement as void
against public policy).
This scrutiny applies with equal force to so-ordered stipulations of settlement. See Jazilek
v Abart Holdings LLC, 10 NY3d 943, 944 (2008) (holding that “the so-ordered stipulation violates
the Rent Stabilization Code and is void as against public policy”); Ruxton Towers, L.P. v Floratos,
23 Misc 3d 22, 23 (App Term, 1st Dept 2009) (same); Second Lenox Terrace Assoc. v Cuevas, 24
Misc 3d 1217(A), *2 (Civ Ct, NY County 2009) (holding that “the stipulation of settlement [was]
void as against public policy” despite the fact that it “was the product of negotiations and was so-
ordered by this Court”).
B. A Liquidated Damages Provision Is Void as Against Public Policy Where
Either (1) the Amount Fixed Is Clearly Disproportionate to the Probable
Actual Loss, or (2) the Probable Actual Loss Was Readily Ascertainable
“As a general matter parties are free to agree to a liquidated damages clause ‘provided that
the clause is neither unconscionable nor contrary to public policy.’” 172 Van Duzer Realty Corp.
v Globe Alumni Student Assistance Ass’n, Inc., 24 NY3d 528, 536 (2014). Thus, a liquidated
damages provision “will be upheld only if (1) the amount fixed is a reasonable measure of the
probable actual loss in the event of a breach, and (2) the actual loss suffered is difficult to
determine precisely.” Irving Tire Co., Inc. v Stage II Apparel Corp., 230 AD2d 772, 773 (2d Dept
1996) (emphasis added) (citing Truck Rent-A-Center, 41 NY2d 420).
Moreover, the Second Department has repeatedly held that “where there is doubt as to
whether a provision constitutes an unenforceable penalty or a proper liquidated damage clause, it
should be resolved in favor of a construction which holds the provision to be a penalty.”
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Willner v Willner, 145 AD2d 236, 240-41 (2d Dept 1989) (emphasis added); Vernitron Corp. v
CF 48 Assoc., 104 AD2d 409 (2d Dept 1984) (same).
Accordingly, Lundy’s has to show only that either the $132 million liquidated penalty
amount is disproportionate to Sheepshead’s “actual probable loss” or that Sheepshead’s “actual
probable loss” was ascertainable at the time of contracting. See National Telecanvass Assoc., Ltd.
v Smith, 98 AD2d 796, 797 (2d Dept 1983). If Lundy’s prevails on either prong of the Truck Rent-
A-Center test, Lundy’s is entitled to summary judgment on its Second Cause of Action as a matter
of law.
On the other hand, Sheepshead must show that the $132 million TCO and Annex Penalties
satisfy both prongs of the Truck Rent-A-Center test as a matter of law and “any doubt” as to the
nature of the $132 million liquidated penalty amount of the TCO and Annex Penalties must be
“resolved in favor of a construction which holds the provision to be a penalty.” Willner, 145 AD2d
at 240-41.
C. The $132 Million Liquidated Penalty Fails the First
Prong of the Truck Rent-A-Center Test as a Matter of Law
1. The Courts Routinely Find That Escalating or Otherwise Arbitrary
Liquidated Damages Are Grossly Disproportionate to the Anticipated
Preview
FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF KINGS ––––––––––––––––––––––––––––––X CHERRY HILL GOURMET, INC., : : Plaintiff, : : -against- : Index No. 510844/16 : LUNDY’S MANAGEMENT CORP., : Motion Seq. No. 015 : Defendant. : ––––––––––––––––––––––––––––––X LUNDY’S MANAGEMENT CORP., : : Defendant and : Third-Party Plaintiff, : : -against- : : SHEEPSHEAD RESTAURANT ASSOCIATES, INC., : : Third-Party Defendant. : ––––––––––––––––––––––––––––––X MEMORANDUM OF LAW IN SUPPORT OF DEFENDANT’S CROSS-MOTION FOR SUMMARY JUDGMENT AND IN OPPOSITION TO THIRD-PARTY DEFENDANT’S MOTION FOR SUMMARY JUDGMENT ROSENBERG & ESTIS, P.C. Attorneys for Defendant and Third-Party Plaintiff 733 Third Avenue New York, New York 10017 (212) 867-6000 BRETT B. THEIS DEJAN KEZUNOVIC Of Counsel RE\87804\0002\3417754v3 1 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 TABLE OF CONTENTS Page TABLE OF AUTHORITIES ......................................................................................................... iv PRELIMINARY STATEMENT .....................................................................................................1 STATEMENT OF FACTS ..............................................................................................................4 ARGUMENT ...................................................................................................................................4 POINT I THE COURT SHOULD ENFORCE THE SETTLEMENT AGREEMENT AND DISMISS THE THIRD-PARTY ACTION....................................................4 A. Legal Standard .........................................................................................................4 B. Sheepshead Executed an Enforceable Settlement Agreement With a Full Release of All Claims ..............................................................................................5 C. Mr. Kaloidis Had Actual, Implied and/or Apparent Authority To Execute the Settlement Agreement on Behalf of Sheepshead ...............................................6 POINT II LUNDY’S, NOT SHEEPSHEAD, IS ENTITLED TO SUMMARY JUDGMENT ON LUNDY’S SECOND CAUSE OF ACTION .............................8 A. Public Policy Trumps Private Agreements, Including So-Ordered Stipulations of Settlement ........................................................................................8 B. A Liquidated Damages Provision Is Void as Against Public Policy Where Either (1) the Amount Fixed Is Clearly Disproportionate to the Probable Actual Loss, or (2) the Probable Actual Loss Was Readily Ascertainable .............9 C. The $132 Million Liquidated Penalty Fails the First Prong of the Truck Rent-A-Center Test as a Matter of Law .................................................................10 1. The Courts Routinely Find That Escalating or Otherwise Arbitrary Liquidated Damages Are Grossly Disproportionate to the Anticipated Probable Losses and, Therefore, Constitute Unenforceable Penalties.............................................................................10 2. The $132 Million Liquidated Amount and the Arbitrary and Escalating Monthly Penalties Are Completely Disproportionate to Sheepshead’s Alleged Probable Loss ........................................................12 3. Contrary to Sheepshead’s Misleading Claim, the Totality of $132 Million Liquidated Penalties Are Ripe for Adjudication ...........................16 -i- RE\87804\0002\3417754v3 2 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 D. The $132 Million Liquidated Penalty Fails the Second Prong of the Truck Rent-A-Center Test as a Matter of Law Because Any Loss Caused by the Lack of a CO Was Readily Ascertainable at the Time of Contracting ..................16 1. The Value of the Premises .........................................................................17 2. Refinancing the Premises ...........................................................................18 3. The Escrow Funds......................................................................................19 4. Lundy’s Subrents .......................................................................................20 5. Risk of Foreclosure ....................................................................................21 POINT III SHEEPSHEAD’S ARGUMENTS ARE PATENTLY MERITLESS AND SHOULD BE REJECTED .....................................................................................22 A. The Bankruptcy Court Neither Opined Upon Nor Approved the TCO and Annex Penalties .....................................................................................................22 B. Private Parties Cannot Validate Or Ratify an Agreement That Is Void as a Matter of Public Policy ..........................................................................................25 C. Sheepshead’s Allegations That It “Relinquished Considerable Rights” In Exchange for the TCO and Annex Penalties Are Completely Irrelevant ..............26 D. The Doctrine of Unclean Hands Does Not Trump Public Policy ..........................28 E. Lundy’s Did Not Admit in the Bankruptcy Proceeding or Otherwise that the Penalty Provisions Were “Acceptable”............................................................30 F. The Cases Enforcing Liquidated Damages Based on Failure to Obtain COs Are Completely Distinguishable and Actually Support Lundy’s ..........................31 G. The Court Cannot and Should Not Rewrite the Penalty Provisions .....................32 H. Sheepshead Is Not Without a Remedy If It Can Show Any Actual Damages .................................................................................................................33 I. Voluntary Payment Doctrine Does Not Bar Lundy’s Recovery Of Over $700,000 Paid in Unenforceable TCO and Annex Penalties .................................34 POINT IV THE COURT SHOULD GRANT LUNDY’S CROSS-MOTION TO AMEND ITS COMPLAINT..................................................................................35 A. The Legal Standard ................................................................................................35 B. An Amendment to the Third-Party Complaint Would Not Cause Any Prejudice to Sheepshead ........................................................................................35 - ii - RE\87804\0002\3417754v3 3 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 CONCLUSION ..............................................................................................................................36 Certification Pursuant to 22 NYCRR 202.8-b ...............................................................................37 - iii - RE\87804\0002\3417754v3 4 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 TABLE OF AUTHORITIES Page(S) Cases 1300 Ave. P Realty Corp. v Stratigakis, 186 Misc 2d 745 (App Term, 2d Dept 2000) ........................................................................... 35 172 Van Duzer Realty Corp. v Globe Alumni Student Assistance Ass’n, Inc., 24 NY3d 528 (2014) ............................................................................................................. 9, 33 70 W. 45th St. Holding LLC v Waterscape Resort, LLC, 136 AD3d 576 (1st Dept 2016)........................................................................................... 31, 32 Addressing Sys. and Products, Inc. v Friedman, 59 AD3d 359 (1st Dept 2009)................................................................................................... 26 Allen v Riese Org., Inc., 106 AD3d 514 (1st Dept 2013)................................................................................................... 4 Allied Sheet Metal Works, Inc. v Kerby Saunders, Inc., 206 AD2d 166 (1st Dept 1994)................................................................................................... 7 Aryeh v Altman, 36 AD3d 492 (1st Dept 2007)................................................................................................... 25 Benjamin Partners, LLC v 583-587 Broadway Condominium 2006 WL 5085953 (Sup Ct, New York County 2005) ............................................................. 25 Brecher v Laikin, 430 F Supp 103 (SDNY 1977) ................................................................................................. 33 Cames v Craig, 181 AD3d 851 (2d Dept 2020) ................................................................................................... 4 Centro Empresarial Cempresa S.A. v America Movil, S.A.B.de C.V., 17 NY3d 269 (2011) ................................................................................................................... 4 Deutsche Bank Nat. Tr. Co. v Flagstar Capital Markets Corp., 143 AD3d 15 (1st Dept 2016), affd sub nom. Deutsche Bank Natl. Tr. Co. Tr. for Harborview Mtge. Loan Tr. v Flagstar Capital Markets Corp., 32 NY3d 139 (2018) ................................................................................................................... 8 Dillon v U-A Columbia Cablevision of Westchester, Inc., 100 NY2d 525 (2003) ............................................................................................................... 34 - iv - RE\87804\0002\3417754v3 5 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 DRMAK Realty LLC et al. v Progressive Credit Union, 133 AD3d 401 (1st Dept 2015)................................................................................................. 34 Drucker v Mauro, 30 AD3d 37 (1st Dept 2006)....................................................................................................... 8 Evangelista v Ward, 308 AD2d 504 (2d Dept 2003) ................................................................................................. 15 Forcelli v Gelco Corp., 109 AD3d 244 (2d Dept 2013) ................................................................................................... 4 Free People of PA LLC v DelShah 60 Ninth, LLC, 169 AD3d 622 (1st Dept 2019)....................................................................................... 8, 11, 15 Geotel, Inc. v Wallace, 162 AD2d 166 (1st Dept 1990)............................................................................................... 6, 7 Gjeka v Iron Horse Transp., Inc., 151 AD3d 463 (1st Dept 2017)................................................................................................. 35 Goldston v Bandwidth Tech. Corp., 52 AD3d 360 (1st Dept 2008)............................................................................................. 6, 7, 8 Greene v Hellman, 51 NY2d 197 (1980) ................................................................................................................... 6 Gunderson v Park W. Montessori, Inc., 24 Misc 3d 1242(A) (Sup Ct, NY County 2009) ...................................................................... 15 Hadden v Consol. Edison Co. of New York, Inc., 45 NY2d 466 (1978) ................................................................................................................. 25 Hallock v State of New York, 64 NY2d 224 (1984) ................................................................................................................... 6 In re Wille, 61 Misc 2d 992 (Sup Ct, New York County 1968), affd sub nom. Matter of Wille, 31 AD2d 721 (1st Dept 1968), affd sub nom. Petition of Wille, 25 NY2d 619 (1969), rearg denied, remittitur amended, 26 NY2d 831 (1970) ................................................................................................................. 26 Irving Tire Co., Inc. v Stage II Apparel Corp., 230 AD2d 772 (2d Dept 1996) ............................................................................................. 9, 15 -v- RE\87804\0002\3417754v3 6 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 Jackson Hgts. Care Ctr., LLC v Bloch, 39 AD3d 477 (2d Dept 2007) ................................................................................................... 24 Jazilek v Abart Holdings LLC, 10 NY3d 943 (2008) ................................................................................................................... 9 Kilpatrick v Germania Life Ins. Co., 183 NY 163 (1905) ................................................................................................................... 35 Kimso Apartments, LLC v Gandhi, 24 NY3d 403 (2014) ................................................................................................................. 35 Mack v City of New York, 165 AD3d 443 (1st Dept 2018)................................................................................................. 35 Marock Int’l. v Brinkman Corp., 1993 WL 349684, 1993 US Dist LEXIS 12892 (SDNY 1993).................................................. 8 Negrin v Norwest Mortg., Inc., 263 AD2d 39 (2d Dept 1999) ................................................................................................... 35 Outdoors Clothing Corp. v Schneider, 153 AD3d 717 (2d Dept 2017) ................................................................................................... 5 Parente v Drozd, 171 AD2d 847 (2d Dept 1991) ................................................................................................. 31 People v Bourne, 139 AD2d 210 (1st Dept 1988)................................................................................................. 25 Quaker Oats Co. v Reilly, 274 AD2d 565 (2d Dept 2000) ..................................................................................... 11, 15, 20 Ruxton Towers, L.P. v Floratos, 23 Misc 3d 22 (App Term, 1st Dept 2009) ........................................................................... 9, 24 Scharf v Idaho Farmers, 115 AD3d 500 (1st Dept 2014)................................................................................................... 7 Second Lenox Terrace Assoc. v Cuevas, 24 Misc 3d 1217(A) (Civ Ct, NY County 2009) .................................................................. 9, 24 SMD Capital Group LLC v EPR Capital LLC, 45 AD3d 314 (1st Dept 2007)................................................................................................... 24 Truck Rent-A-Center, Inc. v Puritan Farms 2nd, Inc., 41 NY2d 420 (1977) ........................................................................... 3, 9, 10, 11, 16, 24, 26, 34 - vi - RE\87804\0002\3417754v3 7 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 Welsbach Elec. Corp. v MasTec N. Am., Inc., 7 NY3d 624 (2006) ..................................................................................................................... 8 Wen Kroy Realty Co. v Public Natl. Bank & Trust Co., 260 NY 84 (1932) ....................................................................................................................... 6 Willner v Willner, 145 AD2d 236 (2d Dept 1989) ..................................................................... 9, 10, 12, 15, 20, 27 WW-35th LLC v Morgan Ct. Condominium, 60 Misc 3d 1215(A) (Sup Ct, NY County 2018)........................................................................ 6 Zervakis v Kyreakedes, 257 AD2d 619 (2d Dept 1999) ................................................................................................... 9 Statutes CPLR 2104...................................................................................................................................... 4 CPLR 3025.................................................................................................................................... 35 CPLR 3211(a)(5) ........................................................................................................................ 4, 5 CPLR 3212...................................................................................................................................... 5 Other Authorities West’s ALR Digest Contracts k134 .............................................................................................. 26 - vii - RE\87804\0002\3417754v3 8 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF KINGS ––––––––––––––––––––––––––––––X CHERRY HILL GOURMET, INC., : : Plaintiff, : : -against- : Index No. 510844/16 : LUNDY’S MANAGEMENT CORP., : Motion Seq. No. 015 : Defendant. : ––––––––––––––––––––––––––––––X LUNDY’S MANAGEMENT CORP., : : Defendant and : Third-Party Plaintiff, : : -against- : : SHEEPSHEAD RESTAURANT ASSOCIATES, INC., : : Third-Party Defendant. : ––––––––––––––––––––––––––––––X PRELIMINARY STATEMENT The above-captioned third-party action (“Third-Party Action”) between Lundy’s (net lessee) and Sheepshead (overlandlord) has been settled.1 As shown by Sheepshead’s corporate records and resolutions submitted herewith, in October 2020, George Kaloidis, who owns at least 50% of Sheepshead’s shares, replaced George Pantelidis, who owns 8.34% of Sheepshead’s shares, as Sheepshead’s President. In his capacity as principal and President of Sheepshead, Mr. Kaloidis subsequently negotiated and executed a settlement agreement with Lundy’s in December 2020 (the “Settlement Agreement”), which includes a mutual release of all claims and counterclaims between Lundy’s and Sheepshead (see Ex. AA). Although Mr. Pantelidis apparently 1 Undefined capitalized terms have the same meanings ascribed to the terms in the affidavit of Steve Pappas, sworn to on May 28, 2021 (“Pappas Affidavit”) and the affirmation of Brett B. Theis, dated June 1, 2021 (“Theis Affirmation”). RE\87804\0002\3417754v3 9 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 contests Mr. Kaloidis’ control of Sheepshead, the Settlement Agreement is nevertheless binding and enforceable because Mr. Kaloidis had both actual and apparent authority to bind Sheepshead to the Settlement Agreement. It is respectfully submitted that this is a threshold issue, which the Court should resolve by enforcing the Settlement Agreement and putting an end to tremendous waste of resources on litigation that has been ongoing in multiple fora since 2013. Meanwhile, to maintain status quo at the Premises, avoid further litigation expenses and allow Sheepshead time to fully resolve its internal dispute, Lundy’s signed another interim agreement with Sheepshead (without prejudice to the Settlement Agreement), whereby Lundy’s agreed to assign a portion of Cherry Hill’s (subtenant) subrents to Sheepshead to address certain emergency expenses for the Premises (see Ex. BB). However, Mr. Pantelidis is evidently not interested in settlement, status quo or reducing litigation expenses. Despite all legal and practical hurdles, Mr. Pantelidis is determined to fight on, as evidenced by Sheepshead’s instant motion for summary judgment, which seeks an unprecedented ruling that $132 million liquidated penalties are enforceable. These exorbitant penalties stem from a deal negotiated during mediation after Sheepshead effectively forced Lundy’s into bankruptcy (as detailed in the accompanying Pappas Affidavit). The terms of the deal were outlined in a Confidential Settlement Outline (which referred to these penalties as “non-permanent penalties”) and then effectuated in the Lease Modification (which referred to these penalties as “non-permanent payments”). Contrary to Sheepshead’s disingenuous allegations, the Bankruptcy Court never reviewed, opined upon or approved any specific terms of the Confidential Settlement Outline, as shown by the transcript from the bankruptcy proceeding. In a nutshell, faced with a risk of liquidation, Lundy’s agreed to substantial rent increases and other consideration, including escalating and arbitrary monthly penalties totaling over $132 -2- RE\87804\0002\3417754v3 10 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 million (which is nearly seven times more than the alleged value of the Premises). In particular, the Lease Modification provides that until Lundy’s obtains a temporary certificate of occupancy (the “TCO”) for a portion of the Premises (the Main Building), Lundy’s shall pay Sheepshead an arbitrary penalty of $10,000 per month, increasing thereafter every six months by an additional $10,000 for the duration of the Net Lease term (the “TCO Penalties”). The Lease Modification further provides that until Lundy’s obtains a permanent certificate of occupancy (the “PCO”) for another portion of the Premises (the Annex), Lundy’s shall pay Sheepshead an arbitrary penalty of $2,500, increasing thereafter every six months by an additional $5,000 (the “Annex Penalties”). As explained below, a liquidated damages provision will be declared unenforceable if either (1) the liquidated amount is clearly disproportionate to the “probable actual loss” anticipated at the time of contracting, or (2) the “probable actual loss” was readily ascertainable at the time of contracting. Truck Rent-A-Center, Inc. v Puritan Farms 2nd, Inc., 41 NY2d 420 (1977). Here, neither the completely arbitrary penalty amounts, nor the completely arbitrary six-month increases, nor the absurd total liquidated amount of over $132 million, have any bearing whatsoever on Sheepshead’s “probable actual loss” anticipated at the time of contracting. Rather, the primary purpose of these absurd penalties was, at best, to compel Lundy’s performance by a threat of large and escalating penalties. Pursuant to well-settled case law in the Second Department, such punitive, arbitrary penalties are void as against public policy and cannot be validated by any subsequent conduct or agreements. -3- RE\87804\0002\3417754v3 11 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 STATEMENT OF FACTS For the facts relevant to this motion, the Court is respectfully referred to the accompanying Pappas Affidavit and Theis Affirmation.2 ARGUMENT POINT I THE COURT SHOULD ENFORCE THE SETTLEMENT AGREEMENT AND DISMISS THE THIRD-PARTY ACTION A. Legal Standard It is well-settled that “a valid release constitutes a complete bar to an action on a claim which is the subject of the release.” Centro Empresarial Cempresa S.A. v America Movil, S.A.B.de C.V., 17 NY3d 269, 276 (2011). “[S]tipulations of settlement are judicially favored [and] will not lightly be set aside.” Forcelli v Gelco Corp., 109 AD3d 244, 247-48 (2d Dept 2013). A release is a contract and, as such, “its construction is governed by contract law.” Cames v Craig, 181 AD3d 851 (2d Dept 2020). “Where the language is clear and unambiguous, the release is binding on the parties unless it is shown that it was procured by fraud, duress, overreaching, illegality or mutual mistake.” Allen v Riese Org., Inc., 106 AD3d 514, 516 (1st Dept 2013); see also Cames v Craig, 181 AD3d 851 (2d Dept 2020) (holding that “[a]lthough a defendant has the initial burden of establishing that it has been released from any claims, a signed release ‘shifts the burden . . . to the [plaintiff] to show that there has been fraud, duress or some other fact which will be sufficient to void the release”). A party may enforce a valid release by either moving to dismiss claims asserted against it pursuant to CPLR 3211(a)(5) (see Cames, 181 AD3d 851; see also CPLR 2104) or for summary 2 Annexed to Theis Affirmation are the affidavit of Daniel F. Sciannameo, MAI, sworn to on October 31, 2019 (Ex. X), the affidavit of George Stergiopoulos, sworn to on November 5, 2019 (Ex. Y) and the affirmation of Ralph Preite, dated November 4, 2019 (Ex. Z). -4- RE\87804\0002\3417754v3 12 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 judgment pursuant to CPLR 3212 (see Outdoors Clothing Corp. v Schneider, 153 AD3d 717, 718 [2d Dept 2017]). B. Sheepshead Executed an Enforceable Settlement Agreement With a Full Release of All Claims In or about October 2020, Mr. Kaloidis, who owns at least 50% of Sheepshead’s shares, engaged in negotiations with Lundy’s to settle the Third-Party Action. As expressly stated in Mr. Kaloidis’ affidavit and his counsel’s affirmation, Mr. Kaloidis wanted to (a) limit Sheepshead’s exposure stemming from the Third-Party Action and (b) stop wasting Sheepshead’s resources on protracted litigation with Lundy’s (see Exs. R and S), which has been ongoing in multiple fora since 2013. As President of Sheepshead and owner of at least 50% shares, Mr. Kaloidis, who was represented by counsel (see Ex. S), negotiated and signed the Settlement Agreement with Lundy’s, which, inter alia, includes a mutual release of all claims and counterclaims as between Lundy’s and Sheepshead. To that end, the Settlement Agreement provides, in relevant part: The Parties hereby withdraw, with prejudice, each and every allegation, cause of action, claim, defense and counterclaim raised and/or interposed against each other in the Third-Party Action (“Claims”) … and agree that all Claims are withdrawn, with prejudice. (Ex. AA, ¶ 1). The Settlement Agreement is a valid, binding contract entered into between sophisticated parties, represented by counsel (see Ex. AA, ¶ 5). As such, the Settlement Agreement should be enforced to end this never-ending dispute between Lundy’s and Sheepshead, which the Court may do pursuant to either CPLR 3211(a)(5) or CPLR 3212. -5- RE\87804\0002\3417754v3 13 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 C. Mr. Kaloidis Had Actual, Implied and/or Apparent Authority To Execute the Settlement Agreement on Behalf of Sheepshead “[I]t is well settled that an agent may bind a principal to a contract by way of actual authority, implied actual authority or apparent authority.” WW-35th LLC v Morgan Ct. Condominium, 60 Misc 3d 1215(A) (Sup Ct, NY County 2018). Actual authority “is determined by the intention of the principal or, at least, by the manifestation of that intention to the agent.” Id. (citing Wen Kroy Realty Co. v Public Natl. Bank & Trust Co., 260 NY 84, 89 [1932]). Implied actual authority is determined by “a principal’s verbal or other actions to the agent which reasonably give an appearance of authority to conduct the transaction.” Id. (citing Greene v Hellman, 51 NY2d 197, 204 [1980]). Apparent authority depends on the “words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction.” Id. (citing Hallock v State of New York, 64 NY2d 224, 231 [1984]). “Even where an officer acts to the detriment of corporate interests, the law imposes no duty on a third party who deals with the corporation to inquire into its employee’s actual authority.” Goldston v Bandwidth Tech. Corp., 52 AD3d 360 (1st Dept 2008). Rather, the “risk of loss from an unauthorized act” falls on the corporation, and not on the party who relies on a principal’s or an employee’s apparent authority. Id. (citing Geotel, Inc. v Wallace, 162 AD2d 166, 168 [1st Dept 1990]). Here, although there now appears to be an internal dispute regarding control of Sheepshead between Mr. Kaloidis, who owns at least 50% of Sheepshead’s shares (see Ex. T), and Mr. Pantelidis, who owns 8.34% of Sheepshead’s shares (see Ex. Q), Sheepshead’s corporate resolution, dated October 25, 2020 (“Resolution”), expressly conferred authority upon Mr. Kaloidis, as President of Sheepshead, to retain counsel and negotiate a settlement to end the Third- -6- RE\87804\0002\3417754v3 14 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 Party Action (see Exs. M and N). Based on the Resolution, and the fact that Mr. Kaloidis has far larger share of ownership of Sheepshead than Mr. Pantelidis (or anyone else), Mr. Kaloidis had both actual and implied authority to enter into the Settlement Agreement on behalf of Sheepshead. Furthermore, as both an agent (i.e. President) and principal (i.e. largest shareholder) of Sheepshead (see Exs. N and Q), Mr. Kaloidis also had apparent authority to negotiate with Lundy’s and to bind Sheepshead to the Settlement Agreement. Indeed, Mr. Kaloidis signed the Settlement Agreement as “President” of Sheepshead and represented and warranted that he is “fully authorized and empowered to bind [Sheepshead] to the terms and conditions of this [Settlement] Agreement” (Ex. AA, ¶ 7). See, e.g., Scharf v Idaho Farmers, 115 AD3d 500 (1st Dept 2014) (holding that corporation’s president and 66% shareholder had apparent authority to bind corporation by executing promissory note on behalf of corporation); Goldston v Bandwidth Tech., 52 AD3d 360 (1st Dept 2008) (holding that “[t]he president or other general officer of a corporation has power, prima facie, to do any act which the directors could authorize or ratify”); Allied Sheet Metal Works, Inc. v Kerby Saunders, Inc., 206 AD2d 166, 168 (1st Dept 1994) (holding that corporate vice president “has at least apparent authority to bind the corporation”). In addition to expressly representing to Lundy’s that he was “President” of Sheepshead with authority to bind Sheepshead, Mr. Kaloidis also produced the Resolution to Lundy’s, which, alone, was sufficient to cloak Mr. Kaloidis with apparent authority to bind Sheepshead. See Geotel, Inc. v Wallace, 162 AD2d 166 (1st Dept 1990) (holding that corporation’s treasurer and CFO “acted with [corporation’s] apparent authority, having furnished a corporate resolution to that effect”). Therefore, even if Mr. Kaloidis did not have actual or implied authority to enter into the Settlement Agreement on behalf of Sheepshead, which would be an absurd result given his title and ownership percentage in the company, the Settlement Agreement is nevertheless valid and -7- RE\87804\0002\3417754v3 15 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 binding upon Sheepshead. See Goldston v Bandwidth Tech. Corp., 52 AD3d 360 (1st Dept 2008) (holding that “an agreement entered into within the exercise of a corporate officer’s apparent authority is binding on the corporation without regard to the officer’s lack of actual authority”). Based on the foregoing, it is respectfully submitted that the Court should enforce the Settlement Agreement and dismiss the Third-Party Action. POINT II LUNDY’S, NOT SHEEPSHEAD, IS ENTITLED TO SUMMARY JUDGMENT ON LUNDY’S SECOND CAUSE OF ACTION A. Public Policy Trumps Private Agreements, Including So-Ordered Stipulations of Settlement It is well-settled under New York law that freedom of contract “is not absolute and must give way to countervailing public policy concerns in appropriate circumstances.” Deutsche Bank Nat. Tr. Co. v Flagstar Capital Markets Corp., 143 AD3d 15, 20 (1st Dept 2016), affd sub nom. Deutsche Bank Natl. Tr. Co. Tr. for Harborview Mtge. Loan Tr. v Flagstar Capital Markets Corp., 32 NY3d 139 (2018); Welsbach Elec. Corp. v MasTec N. Am., Inc., 7 NY3d 624, 629 (2006) (holding that “[t]he freedom to contract, however, has limits” and that “Courts will not … enforce agreements that are illegal or where the chosen law violates some fundamental principle of justice…”). In fact, “the court has a duty to assure that its powers are not employed in the service of objections contrary to … public interest.” Marock Int’l. v Brinkman Corp., 1993 WL 349684 (SDNY 1993). Applying these well-settled principles, the courts routinely strike provisions in agreements which are void as a matter of public policy. See, e.g., Free People of PA LLC v DelShah 60 Ninth, LLC, 169 AD3d 622 (1st Dept 2019) (declaring that an escalating liquidated damages clause in a commercial lease constituted an unenforceable penalty); Drucker v Mauro, 30 AD3d 37, 42 (1st Dept 2006) (reversing Supreme Court and declaring that a settlement agreement memorialized in -8- RE\87804\0002\3417754v3 16 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 a lease was unenforceable based on “the well-established judicial policy of refusing to enforce agreements that are unlawful or injurious to the public”); Zervakis v Kyreakedes, 257 AD2d 619, 620 (2d Dept 1999) (striking a liquidated damages provision in a stipulation of settlement as void against public policy). This scrutiny applies with equal force to so-ordered stipulations of settlement. See Jazilek v Abart Holdings LLC, 10 NY3d 943, 944 (2008) (holding that “the so-ordered stipulation violates the Rent Stabilization Code and is void as against public policy”); Ruxton Towers, L.P. v Floratos, 23 Misc 3d 22, 23 (App Term, 1st Dept 2009) (same); Second Lenox Terrace Assoc. v Cuevas, 24 Misc 3d 1217(A), *2 (Civ Ct, NY County 2009) (holding that “the stipulation of settlement [was] void as against public policy” despite the fact that it “was the product of negotiations and was so- ordered by this Court”). B. A Liquidated Damages Provision Is Void as Against Public Policy Where Either (1) the Amount Fixed Is Clearly Disproportionate to the Probable Actual Loss, or (2) the Probable Actual Loss Was Readily Ascertainable “As a general matter parties are free to agree to a liquidated damages clause ‘provided that the clause is neither unconscionable nor contrary to public policy.’” 172 Van Duzer Realty Corp. v Globe Alumni Student Assistance Ass’n, Inc., 24 NY3d 528, 536 (2014). Thus, a liquidated damages provision “will be upheld only if (1) the amount fixed is a reasonable measure of the probable actual loss in the event of a breach, and (2) the actual loss suffered is difficult to determine precisely.” Irving Tire Co., Inc. v Stage II Apparel Corp., 230 AD2d 772, 773 (2d Dept 1996) (emphasis added) (citing Truck Rent-A-Center, 41 NY2d 420). Moreover, the Second Department has repeatedly held that “where there is doubt as to whether a provision constitutes an unenforceable penalty or a proper liquidated damage clause, it should be resolved in favor of a construction which holds the provision to be a penalty.” -9- RE\87804\0002\3417754v3 17 of 45 FILED: KINGS COUNTY CLERK 06/01/2021 04:35 PM INDEX NO. 510844/2016 NYSCEF DOC. NO. 766 RECEIVED NYSCEF: 06/01/2021 Willner v Willner, 145 AD2d 236, 240-41 (2d Dept 1989) (emphasis added); Vernitron Corp. v CF 48 Assoc., 104 AD2d 409 (2d Dept 1984) (same). Accordingly, Lundy’s has to show only that either the $132 million liquidated penalty amount is disproportionate to Sheepshead’s “actual probable loss” or that Sheepshead’s “actual probable loss” was ascertainable at the time of contracting. See National Telecanvass Assoc., Ltd. v Smith, 98 AD2d 796, 797 (2d Dept 1983). If Lundy’s prevails on either prong of the Truck Rent- A-Center test, Lundy’s is entitled to summary judgment on its Second Cause of Action as a matter of law. On the other hand, Sheepshead must show that the $132 million TCO and Annex Penalties satisfy both prongs of the Truck Rent-A-Center test as a matter of law and “any doubt” as to the nature of the $132 million liquidated penalty amount of the TCO and Annex Penalties must be “resolved in favor of a construction which holds the provision to be a penalty.” Willner, 145 AD2d at 240-41. C. The $132 Million Liquidated Penalty Fails the First Prong of the Truck Rent-A-Center Test as a Matter of Law 1. The Courts Routinely Find That Escalating or Otherwise Arbitrary Liquidated Damages Are Grossly Disproportionate to the Anticipated