Conditions for Option Exercise Must be Strictly Construed, Appellate Court Rules
August 21, 2013 -- The Appellate Division, Second Department last week reaffirmed New York's long-standing rule strictly to construe negotiated conditions contained in commercial agreements. Acting on the appeal submitted by Morrison Cohen LLP, the court unanimously reversed a lower court's ruling that had permitted the untimely and otherwise improper exercise of an option, in contravention of the option agreement's unambiguous requirements.
The parties in the case, Sonnenschine v. Taub, Index No. 100176/2010 (Sup. Ct. Richmond Cty.), had agreed that in exchange for the plaintiff pledging personal real estate assets as security for a loan to a limited liability company, she was to have an option to become a member of the company with a 25% interest. The option agreement contained a number of express conditions precedent to exercise of the option, including that the underlying business reach certain financial benchmarks, and that the plaintiff give notice of her exercise of the option within 15 days of the company meeting those benchmarks through a formal notice mechanism.
Although she had neither exercised within the 15-day option window nor complied with other stated conditions precedent, the plaintiff claimed to the trial court that she properly exercised her option. In granting summary judgment to the plaintiff and awarding her over $5.7 million in damages and interest, the trial court reasoned in part that the timing provisions in the option agreement were “unclear” and that it would be “unreasonable” to fault the plaintiff for failing to strictly comply with them because she would not necessarily know when the triggering event had occurred (and, thus, when the contractually specified time period to exercise had begun to run).
The Appellate Division disagreed, ruling that the option agreement had to be constured and enforced as the parties had negotiated it. The appellate court found that even if the triggering event had occurred on the date the plaintiff proposed, she had not timely exercised her option, nor otherwise complied with the other express conditions to the exercise of the option specified in the agreement. Additionally, because the plaintiff could not now exercise her option in strict accordance with the agreement, the Appellate Division further granted summary judgment to the appellants and directed that the matter be remanded for entry of judgment in favor of the defendants and the vacatur of the money judgment.
During the pendency of the appeal, the plaintiff aggressively pursued enforcement, including filing a special proceeding in the Supreme Court, Nassau County seeking a sheriff's sale of the defendant's primary residence. That special proceeding was in effect stayed pending the appeal of the primary action to the Appellate Division, and has since been dismissed.
Morrison Cohen was hired by the defendants for the appeal to the Appellate Division, and also in the enforcement proceedings in the Supreme Court, Nassau County. For a copy of the Appellate Division decision, please click here.