Business Council of New York State, Inc. v. Roberts, 30 N.Y.2d 242 (1972)
A claim of economic duress requires a showing that the alleged wrongdoer’s actions deprived the victim of its free will and that ordinary remedies for breach of contract would be inadequate.
Summary
This case addresses the issue of economic duress in contract law. Hudson Boulevard East Land Corporation owed Roberts $15,000. Needing funds, the remaining stockholders agreed to sell their stock to another developer. The plaintiff obtained an option to purchase the interests of the other stockholders for $250,000, with a provision to pay Roberts $15,000. Instead of developing the land through the corporation, plaintiff arranged to resell it to another developer for $350,000 and 49% equity interest in himself and exercised his option to become the sole stockholder. Before defendant Roberts would transfer his stock he demanded payment of the $15,000. Plaintiff paid it and then sued for the return of the funds claiming duress. The New York Court of Appeals held that Roberts’ demand for payment was not duress because it was an attempt to protect himself from the plaintiff’s actions that would have left the corporation without funds to pay its debts. The court emphasized the implied obligation of good faith in contracts.
Facts
Hudson Boulevard East Land Corporation (Hudson) owed Samuel Roberts $15,000 for engineering services related to a planned construction project.
Due to financial difficulties, Hudson’s stockholders decided to sell the corporation to another developer. The plaintiff, a stockholder, secured an option to purchase the other stockholders’ shares for $250,000, including a provision to pay Roberts the $15,000.
Instead of developing the land through Hudson, the plaintiff arranged to resell the land to another developer for $350,000 and a 49% equity interest in himself. The plaintiff then exercised his option to become the sole stockholder of Hudson.
Roberts, another shareholder, refused to transfer his stock unless the plaintiff personally paid Hudson’s $15,000 debt to him. Roberts foresaw the conveyance of the land would deprive the corporation of funds to pay him.
The plaintiff paid Roberts $10,000 in cash and a note for $5,000. Roberts then transferred his shares and released the plaintiff and Hudson from all claims.
The plaintiff then sued Roberts to recover the $10,000 and cancel the $5,000 note, arguing that they were exacted under duress.
Procedural History
The trial court ruled in favor of the defendant, Roberts, finding no duress.
The Appellate Division reversed the trial court’s decision.
The New York Court of Appeals reversed the Appellate Division and reinstated the trial court’s judgment, finding that Roberts’ actions did not constitute duress.
Issue(s)
Whether Roberts’ demand for payment of Hudson’s debt, as a condition for transferring his stock and releasing claims, constituted economic duress that would allow the plaintiff to recover the payment.
Holding
No, because Roberts was protecting himself from the plaintiff’s actions that would have left the corporation without funds to pay its debt, and the plaintiff acted in bad faith by attempting to circumvent the terms of the option agreement.
Court’s Reasoning
The court reasoned that Roberts’ actions did not constitute duress but were a reasonable attempt to protect himself from the plaintiff’s manipulation of the corporate affairs. The court emphasized that the plaintiff was attempting to benefit from the sale of the corporate assets without ensuring the payment of its debts, including the $15,000 owed to Roberts.
The court highlighted the implied obligation of good faith in contracts, stating, “in every contract there is an implied undertaking on the part of each party that he will not intentionally and purposely do anything to prevent the other party from carrying out the agreement on his part.”
The court found that the plaintiff, as an officer, director, and sole stockholder of Hudson, could not legally transfer the corporation’s property to himself in derogation of the rights of creditors. Roberts was entitled to insist that the plaintiff assume the corporate indebtedness if he were to take over the corporation’s assets personally.
The court distinguished this case from situations where duress is found in the refusal to deliver tangible property or documents in violation of an existing legal obligation. Here, Roberts’ actions were justified by the plaintiff’s attempt to circumvent the terms of the option agreement and leave the corporation judgment-proof. The court noted, “It was not duress but simple justice for defendant to insist upon payment by plaintiff of the $15,000 indebtedness of the corporation to defendant, as a condition of transferring his stock and giving the general release, in view of plaintiff’s announced intention of abandoning the procedure provided by the option agreement.”