The doctrine of equitable recoupment, which is codified in CPLR 203(d) permits a defendant to assert an otherwise untimely defense or counterclaim. The Appellate Division, First Department recently applied the doctrine in California Capital Equity, LLC v. IJKG, LLC, and highlighted a few caveats that a litigator should bear in mind when relying upon the doctrine.   Importantly, one must keep in mind that the doctrine of equitable recoupment is to be used as a shield, not a sword.

Plaintiff California Capital Equity, LLC (“CalCap”) commenced an action against defendants IJKG, LLC (“IJKG”) and Vivek Garipalli (“Garipalli”)¹ (collectively, “Defendants”) asserting claims of breach of contract, fraud, and breaches of fiduciary duty arising out of, among other things, Defendants’ failure to make interest payments to CalCap pursuant to a Note Agreement.   In response, IJKG asserted counterclaims for tortious interference with contract, breach of implied covenant of good faith and fair dealing, and unjust enrichment.

CalCap moved to dismiss IJKG’s counterclaims for tortious interference with contract and unjust enrichment on the ground that these counterclaims were barred by New York’s three-year statute of limitations.   Justice Ramos of the New York County Commercial Division denied CalCap’s motion, finding that the doctrine of equitable recoupment permitted IJKG to assert its otherwise time-barred counterclaims.

The First Department affirmed Justice Ramos’ ruling. The Court explained that the doctrine of equitable recoupment, which is codified in CPLR 203(d), permits a defendant to seek equitable recoupment in an otherwise untimely defense or counterclaim.   However, there are two main caveats with respect to the doctrine: (1) the defense or counterclaim must arise from the same transaction, occurrence, or series of transactions or occurrences as alleged in the complaint; and (2) the doctrine may only be asserted to offset any damage award or deficiency judgment that a plaintiff may obtain in its favor against a defendant.   In other words, the doctrine of equitable recoupment may only be used defensively as a shield for recoupment purposes, and not as a sword for a defendant to obtain affirmative relief on an otherwise stale counterclaim.

Applying these principles, the First Department concluded that IJKG’s tortious interference of with contract counterclaim, if proved, could be used defensively for recoupment purposes, but that IJKG could not obtain any relief from the counterclaims, such as disgorgement. Accordingly, the Court permitted IJKG to assert its counterclaim for tortious interference with contract solely to offset any damage award or deficiency that CalCap may obtain in its favor.

¹  Although Garipalli was named as a defendant in the lawsuit, all claims against him have been dismissed.

The Second Department recently handed down a harsh reminder of the importance of obtaining an executed broker’s agreement.  Oral agreements for broker fees are apt to run afoul of the statute of frauds, and personal jurisdiction cannot be conferred by the mere insertion of a forum selection clause in the brokered sale agreement.

In Ausch v Sutton, the plaintiff alleged he was owed a broker’s fee pursuant to an oral agreement with the defendants for arranging the sale of the first defendant’s (Defendant 1) interest in a company to Defendant 2. Defendant 3 co-owned the company with Defendant 1 and resided outside New York. Aside from the purchase agreement, which contained a forum selection clause designating New York for the resolution of any disputes arising from the purchase agreement, Defendant 3 had no contacts with New York.

Defendant 3’s motion to dismiss pursuant to CPLR 3211(a)(8) was denied by the Kings County Supreme Court (Knipel, J.) on the ground that the forum selection clause in the purchase agreement conferred jurisdiction over all disputes arising from the purchase agreement, which included alleged oral agreements for related broker fees. But the Appellate Division reversed, citing Magdalena v Lins,  which held that a forum selection clause among defendants was insufficient to confer personal jurisdiction in a suit brought by the plaintiff, where the plaintiff was neither a party to the agreement containing the forum selection clause nor a third party beneficiary. In essence, the Appellate Division distinguished between the purchase agreement and the alleged oral agreement for a broker’s commission–the forum selection clause in the former was insufficient to confer personal jurisdiction with respect to the latter.

If the lack of personal jurisdiction over Defendant 3 were not enough, then the statute of frauds ultimately would have proved fatal to the plaintiff’s causes of action against all three defendants. General Obligations Law § 5-701[a][10] states that an agreement to pay a commission for arranging a sale transaction is void unless in writing. As held by the Court of Appeals, a claim for unjust enrichment or quasi-contract in connection with a brokered transaction cannot be used to get around the statute of frauds (see Snyder v Bronfman).

The bottom line for brokers of sale transactions is that they cannot rely on protections contained within the sale documents unless they are parties to those documents. To ensure that the dispute will be heard in New York and not dismissed out of hand under the statute of frauds, a broker would be well advised to obtain a signed agreement declaring the terms of her commission before engaging in any work to consummate a potential business opportunity.