Sosnoff v. Carter
165 A.D.2d 486, 1991 N.Y. App. Div. LEXIS 4120, 568 N.Y.S.2d 43 (1991)
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Rule of Law:
A contract is voidable on the ground of economic duress when a party is forced to agree to it by means of a wrongful threat that precludes the exercise of free will. A subsequent ratification of the contract, such as making payments, may be excused if the duress was continuing at the time of the alleged ratification.
Facts:
- In 1985, real estate developer Jason Carter and investor Martin Sosnoff entered a partnership to build a residential highrise, with Sosnoff agreeing to contribute 80% of the required equity.
- From 1985 to 1987, Sosnoff complied with the agreement as Carter secured property, development rights, and pursued a $90 million HUD mortgage.
- Following the 1987 market crash and just before the November 19, 1987, closing date for the property, Sosnoff announced he would make no further capital contributions and would not participate in a critical $20 million bridge loan.
- Sosnoff's withdrawal threatened the project's collapse, which would have resulted in Carter forfeiting a $1.875 million deposit and becoming personally liable for a $4.675 million letter of credit.
- After Carter's unsuccessful attempt to find a replacement investor on short notice, Sosnoff offered to provide limited financing but demanded that his prior equity investment of nearly $7.5 million be converted into a debt.
- Sosnoff's demand also required Carter to release him from all partnership obligations and for Carter and his wife, Julia Vance Carter, to personally guarantee the new $9.1 million debt.
- Faced with financial ruin, the Carters capitulated and executed the promissory note and guarantees on the day of the closing, November 19, 1987.
- For nearly two years, Carter made principal and interest payments on the Sosnoff note before ceasing in May 1989.
Procedural Posture:
- Plaintiff Toni Sosnoff sued defendants Jason Carter and Julia Vance Carter in the Supreme Court of New York County, a state trial court.
- Plaintiff moved for summary judgment in lieu of complaint to recover on a promissory note and a guarantee.
- The trial court denied the plaintiff's motion for summary judgment, finding that triable issues of fact existed with respect to the defendants' defense of economic duress.
- Plaintiff Toni Sosnoff, as appellant, appealed the trial court's order to the Supreme Court, Appellate Division.
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Issue:
Do genuine triable issues of fact exist regarding a defense of economic duress, thereby precluding summary judgment, when a party to a partnership threatens to breach his obligations at a critical moment, forcing his partner to convert the partnership equity into a personally guaranteed loan, even if the threatened partner subsequently makes payments on that loan?
Opinions:
Majority - Asch, J.
Yes. Genuine triable issues of fact exist regarding the defense of economic duress, making summary judgment inappropriate. Economic duress is established when a party is forced to agree to a contract by a wrongful threat that precludes the exercise of free will, and where the threatened breach would cause irreparable harm. The defendants raised a substantial issue as to whether Sosnoff’s repudiation of his partnership obligations just before the closing, which threatened to cause Carter's financial ruin, constituted such duress. While a party who makes a contract under duress must typically act promptly to repudiate it, this duty is suspended if the duress is ongoing. Here, the defendants have alleged that Carter's dire financial circumstances continued throughout the period he made payments, raising a triable issue of fact as to whether his actions constituted ratification or were a result of continuing duress.
Analysis:
This decision reaffirms the viability of the economic duress defense, even between sophisticated commercial actors. It significantly clarifies the 'continuing duress' exception to the doctrine of ratification, establishing that actions seemingly affirming a contract (like making payments) do not waive the duress defense if the victim remains under the same financial pressure that induced the original agreement. The ruling makes it more difficult for a party alleged to have used duress to win on summary judgment by simply pointing to the other party's subsequent performance under the contract. It emphasizes that a court must examine the context and circumstances surrounding the alleged ratification.
