KAHALA FRANCHISING LLC v. ICE CREAM STORE INC (2020)

In this breach-of-contract action, plaintiff, Kahala Franchising, LLC, moves for a default judgment under CPLR 3215 against defendant Hiba Rashid and moves for summary judgment under CPLR 3212 against defendants A & H Ice Cream Store, Inc. and Abdul Rashid. Ms. Rashid cross-moves to dismiss the claim against her under CPLR 3215 (c). The motion for default judgment and the cross-motion to dismiss are denied. The motion for summary judgment against A & H is denied. The motion for summary judgment against Mr. Rashid is granted, but only as to liability.

BACKGROUND

A & H sells frozen desserts as a Kahala franchisee under a franchise agreement between the two. A & H is owned by Abdul Rashid and Hiba Rashid. Ms. Rashid executed a personal guarantee of A & H's obligations under the franchise agreement. Mr. Rashid executed a promissory note under which he owes Kahala $37,766.07, to be paid, interest-free, in 75 monthly installments.

Kahala has contended that A & H is behind on payments it owes under the franchise agreement for dessert supplies and for Kahala's share of A & H's sales; and also that Mr. Rashid missed several payments on the promissory note. Kahala brought this action against defendants for the payments it believes it is owed.

Kahala's verified complaint asserts three claims: one against A & H for the payments allegedly owed under the franchise agreement; one against Ms. Rashid for the same allegedly owed payments, for which she also would be responsible under her guarantee; and one against Mr. Rashid for the full balance of the promissory note (Kahala having accelerated the note upon default pursuant to its terms).

All three defendants answered. The answer contained a verification from Mr. Rashid, but not one from Ms. Rashid—though CPLR 3020 (a) required her to provide a verification given Kahala's having filed a verified complaint.

Kahala now moves for default judgment under CPLR 3215 on its claim against Ms. Rashid, and she cross-moves to dismiss. Kahala also moves for summary judgment under CPLR 3212 on its claims against A & H and Mr. Rashid.

DISCUSSION

I. The Motion and Cross-Motion Regarding Kahala's Claim Against Ms. Rashid

Kahala moves for a default judgment against Ms. Rashid. Kahala argues that because Ms. Rashid's answer was not verified as required by CPLR 3020 (a), the answer was a nullity under CPLR 3020 and CPLR 3022, leaving her in default. Ms. Rashid disputes her default. She also cross-moves to dismiss, arguing that because Kahala's default-judgment motion was brought more than a year after the alleged default, Kahala's claim against her must be dismissed as abandoned under CPLR 3215 (c). This court concludes that the motion and cross-motion should be denied because Ms. Rashid did not default.

Kahala is correct that Ms. Rashid's answer is not verified, as required by CPLR 3020. But under CPLR 3022, a plaintiff may only treat an unverified answer as a nullity—and thus treat defendant as being in default absent a cured verification—if the plaintiff promptly provides notice to defendant of the lack of verification. Nothing indicates that Kahala rejected Ms. Rashid's answer, or otherwise gave notice that her answer was defective, until Kahala moved for default judgment 16 months after the answer was filed. That delay by Kahala waived any claim that Ms. Rashid's answer is a nullity. (See Cherubin Antiques, Inc. v Matiash, 106 AD3d 861, 862 [2d Dept 2013].) Absent a default by Ms. Rashid, Kahala cannot obtain a default judgment against her.

For that very reason, though, Ms. Rashid cannot obtain the dismissal of Kahala's claim against her that she seeks on her cross-motion, either.¹ CPLR 3215 (c), on which Ms. Rashid relies, provides that if a “plaintiff fails to take proceedings for the entry of judgment within one year after the default, the court shall not enter judgment but shall dismiss the complaint as abandoned” unless plaintiff shows good reasons exist not to dismiss. But no default occurred here—even if Kahala believed that one had. CPLR 3215 (c) is therefore inapplicable by its own terms. Ms. Rashid's cross-motion to dismiss is denied.²

Finally, Kahala asks this court to convert its default-judgment motion into a summary-judgment motion on its claim against Ms. Rashid, should the court conclude that she did not default. This request, though, was made for the first time only on reply. Kahala's would-be motion for summary judgment motion against Ms. Rashid also rests heavily on evidence first submitted on reply. Kahala's request to convert is denied.

II. The Branch of Kahala's Summary-Judgment Motion Regarding Its Claim Against A & H

Kahala moves for summary judgment on its claim against A & H for payments allegedly owed under the franchise agreement for supplies and royalties on sales. The motion is denied. This court agrees with A & H that the record on what payments A & H made and what amounts remained owing is simply too muddled and conflicting to demonstrate the absence of any material issues of fact and warrant the grant of judgment as a matter of law to Kahala.

Kahala attempts to rebut A & H's showing in opposition to summary judgment, and to clarify the record, by submitting extensive new evidence on reply. But this reply evidence would have been available to Kahala when it filed its opening papers in support of summary judgment. It also was foreseeable at that time that this evidence would be needed to support Kahala's argument that A & H had indeed failed to make required payments (and ward off A & H's contrary arguments). This court declines to consider Kahala's newly submitted evidence, to which A & H lacked an opportunity to respond.

III. The Branch of Kahala's Summary-Judgment Motion Regarding Its Claim Against Mr. Rashid

Kahala also moves for summary judgment on its claim against Mr. Rashid for the outstanding balance on the promissory note. The motion is granted as to liability.

It is undisputed that the promissory note executed by Mr. Rashid permits Kahala to accelerate the note upon default and demand payment of the full outstanding balance (plus default interest and attorney fees). The question is whether he has established a material dispute of fact about whether he defaulted on one or more monthly payments on the note. This court concludes that no material dispute of fact exists.

Mr. Rashid's opposition to summary judgment rests essentially on three grounds. He and his counsel flatly deny that any default occurred, and assert that he has made all required monthly payments since execution of the promissory note in 2016. These conclusory statements, though, are not sufficient on their own to create a factual dispute. Mr. Rashid provides bank statements for 2016 through 2019. These bank statements do show that he made many payments on the note through the end of 2019. But they do not reflect payments having been made in December 2016 or January and February 2017—the three months during which Kahala asserts he was in default.³

Mr. Rashid also relies on a monthly statement provided to him by Kahala. The statement gives a total balance for the promissory note ($19,266.07) as of September 4, 2019. And it includes a comment that “PN is Current; Next Debit 9/15/19 for $500.00.” (NYSCEF No. 33 at 1.) Mr. Rashid contends that this comment creates at least a genuine dispute about whether he had made loan payments for the months in which he was assertedly in default. This court is not persuaded. The promissory note attaches a monthly payment schedule, including the outstanding balance remaining each month. (See NYSCEF No. 4 at 10-12.) Under that schedule, if all loan payments were made as required, the balance on the note as of September 4, 2019, would be 16,766.07—not $19,266.07.⁴ (See id. at 11.) In other words, the schedule in the promissory note itself indicates that Mr. Rashid had missed five monthly payments of $500 by September 2019, not three (or zero). This dispels any question of fact that might otherwise arise from the “PN is Current” comment, read in isolation.

This court concludes that Kahala has shown entitlement to summary judgment as to Mr. Rashid's liability on the outstanding balance of the note. Kahala has not, however, established how much remains outstanding on the note. The complaint, filed in late April 2018, alleges that the balance of the note was $26,766.70, and seeks judgment in that amount, plus 18% annual default interest and attorney fees.⁵ (See NYSCEF No. 1 at 4-5.) Oddly, the motion for summary judgment, filed in early October 2019, seeks judgment in that same amount (see NYSCEF No. 13 at ¶¶ 22, 27)—though Kahala's own evidence in support of summary judgment indicates that Mr. Rashid had paid down the balance by thousands of dollars between April 2018 and October 2019 (see NYSCEF No. 15 at 100).

Regardless, Mr. Rashid's bank statements and Kahala's own records show that the note balance for which he is responsible—and thus also the amount of default-based interest accruing at 1.5% monthly—was paid down substantially from when Kahala accelerated the note to when the parties finished briefing this motion. The record does not reflect, however, whether Mr. Rashid has further paid down the note balance since the end of briefing. This court therefore lacks a basis to determine the amount in principal and interest for which he is liable under Kahala's claim against him.

Accordingly, it is hereby

ORDERED that the branch of Kahala Franchising's motion seeking default judgment under CPLR 3215 on its claim against Hiba Rashid is denied; and it is further

ORDERED that Ms. Rashid's cross-motion under CPLR 3215 (c) to dismiss Kahala's claim against her is denied; and it is further

ORDERED that the branch of Kahala's motion under CPLR 3212 seeking judgment in its favor on its claim against A & H Ice Cream Store is denied; and it is further

ORDERED that the branch of Kahala's motion under CPLR 3212 seeking judgment in its favor on its claim against Abdul Rashid is granted only as to liability and otherwise denied; and it is further

ORDERED that the parties shall appear for a telephonic status conference with this court on January 20, 2021, and shall be prepared to discuss at that conference how they intend to proceed both as to Kahala's claim against Ms. Rashid and as to determining the amount of damages owed on Kahala's claim against Mr. Rashid.

FOOTNOTES

1.   Although Ms. Rashid did not file a formal notice of cross-motion in support of her request for dismissal, her attorney's supporting affirmation contains a separate set of arguments for dismissal that are denominated as being made in support of a cross-motion. And plaintiff clearly understood Ms. Rashid to be both opposing its default-judgment motion and cross-moving to dismiss. This court therefore disregards the omission of a notice of cross-motion under CPLR 2001 and considers the cross-motion on its merits.

2.   Given this court's conclusion that CPLR 3215 (c) is inapplicable, this court does not reach the issue whether Kahala could show sufficient cause for this court to refrain from dismissing its claim against Ms. Rashid. The court notes, though, that Kahala has been actively litigating its closely related claims against A & H and Mr. Rashid—which would cut against this court treating the claim against Ms. Rashid as having been abandoned.

3.   This court does not reach Kahala's argument (and accompanying evidence) that Mr. Rashid also defaulted in two additional months in the fall of 2018, because that argument was raised for the first time on reply.

4.   Mr. Rashid suggests that the balance as of September 2019 would have been still lower—$10,666.07. (See NYSCEF No. 29 at ¶¶ 46-48.) This suggestion, though, appears to rest on an arithmetical error—assuming that March 2016 through September 2019 (not inclusive) was a 54-month period, not a 42-month period.

5.   This should probably be $26,766.07. The discrepancy, though, is immaterial for present purposes.

Gerald Lebovits, J.