The underlying complaint asserts the following:

Plaintiff Anthony Valenti is the controlling member of plaintiff American Industries, LLC; and, the predecessor-in-interest of American is NYCF Acquisition Company, LLC (collectively, plaintiffs). Co-defendants Drory, Portal, and Himan (variously spelled as "Hiiman" and "Himan" in the papers of all parties) were owners and/or officers and/or directors and/or shareholders of a number of businesses which installed, repaired, finished and serviced floors and carpets, and which performed interior painting, construction and contract work (collectively, "the Corporations"). Defendant Himan was an officer and/or director and/or shareholder of various of the corporations.

Around October 31, 2002, plaintiffs entered into an asset purchase agreement with Drory, Portal and the Corporations, under which they acquired the assets, including the goodwill, of the Corporations, for a price of $2,223,000. They paid $1,705,000 of this amount in cash, and they executed a long term and a short term promissory note for the remaining $518,000 due. As part of this purchase agreement, the parties also entered into a covenant not to compete within a radius of 100 miles of the Corporations' main address of 110 West 26th Street in New York, New York. Defendant Hillman also signed this portion of the contract. The covenant was to run for a period of five years.

The complaint further asserts that, notwithstanding the covenant, around March 2003, defendants Drory, Portal and Himan were involved in the establishment of defendant Metropolitan, a business and showroom in Manhattan which installs, repairs, finishes and services wood floors. In addition, in June of the same year, the same defendants incorporated under the name New York Kitchen and Bathroom, Corporation ("NYKB"), another competing business. Plaintiffs state that NYKB, also a defendant here, has a showroom and business which installs, repairs, finishes and services floors and floor coverings, installs and designs kitchens and baths, and performs interior painting, construction and contract work. Both of these are within the geographic area covered by the covenant not to compete. [*2]

Accordingly, the original complaint asserts four causes of action. First, the complaint claims that defendants Drory, Portal and Himan violated the covenant not to compete by operating Metropolitan and NYKB and by soliciting employees and customers of the Corporations. Second, the complaint asserts tortious interference with contractual relations and of interference with goodwill by Metropolitan and NYKB. The first and second causes of action seek injunctive relief preventing further violations.

Third, the agreement containing the covenant provides that plaintiffs are entitled to profits, compensation and other benefits derived by Drory, Portal and Himan due to any violations of the agreement. Accordingly, plaintiffs seek an accounting so that they can determine the proper measure of damages under this clause. Fourth, plaintiffs contend that defendants have misappropriated the confidential and proprietary business information of the Corporations and, therefore, of plaintiffs and that plaintiffs have sustained losses as a result of this misappropriation. Plaintiffs also seek an accounting and damages on this basis. Plaintiffs also seek $1,000,000 in punitive damages and attorney's fees, the latter of which is awardable under the Asset Purchase Agreement; and, it seeks costs and expenses as normally awardable by the Court.

On April 11, 2005, plaintiffs filed and served an Amended Complaint.^[FN1] In this pleading, plaintiffs additionally allege that when plaintiffs purchased the Corporations defendants misrepresented their net income as $1,112,500, and that the $2,223,000 purchase price was computed based on this misrepresentation. The inaccuracies in the net income allegedly resulted from defendants' failure to include numerous unpaid bills, taxes and other debts in their computations; defendants representation that workers' compensation insurance cost $43,023.79, when it actually cost $78,800; and defendants' failure to include liability insurance costs of $41,000. Plaintiffs stated that they believed the misrepresentations because defendants substantiated their estimates with forged documents, and they seek additional damages of at least $500,000 based on this alleged fraud.

Next, plaintiffs seek $9801.39 in closing costs, which they purportedly had to pay although it was the responsibility of defendants. In this added claim, they also ask for attorney's fees under the purchase agreement. In addition, plaintiffs state that they have made and continue to make all payments due under the agreement. However, due to the current dispute, they have placed the payments into an escrow account. As their seventh cause of action, they ask that the court determine the relative rights of the parties to this money which, at the time of the Amended Complaint, exceeded $200,000.

Defendants Himan, Portal and NYKB ("movants") answered collectively and asserted counterclaims ("the Answer"). The Answer asserts that plaintiffs are in default on their payments for the business under the promissory notes that they executed at the time of sale. The total purchase price was $2,223,000. The Answer further states that the escrow payments violate the contract, which according to movants requires that plaintiffs pay them directly. Based on this wrongful deposit and on the failure to pay the remainder of the funds at all, the Answer states that plaintiffs breached the agreement and therefore are not entitled to any relief under it, including enforcement of the covenant not to compete. In the second counterclaim, the Answer [*3]seeks the money paid into escrow; and, in the first counterclaim, the Answer asks for the remaining money due under the promissory note along with attorney's fees, interest, costs and expenses.

Initially, when they commenced this action, plaintiffs sought, and the Court denied, a temporary restraining order. However, on February 17, 2005 and March 4, 2005, respectively, the parties entered into two stipulations. In the first stipulation, defendants agreed not to engage in "the business of installing, repairing, finishing and servicing floors, floor coverings, rugs and carpeting, interior renovations (other than kitchen or bathroom remodeling) and interior painting, in competition with the Plaintiffs, or any subsidiaries within 100 miles of 110 West 26th Street, New York, New York." Stipulation No. 1, ¶ 1. In addition, defendants agreed not to solicit the Corporations' employees or communicate with its current or former customers. Finally, defendants agreed that, pending the resolution of the first motion before the court, in 2005, that they would remove from their web page and advertisements any references to floor installation, carpet installation and interior painting. In the second TRO, concerning defendant Metropolitan, Metropolitan denied a connection to the other defendants but agreed not to conduct any business with NYKB that would facilitate any violation by the other defendants of the first TRO stipulation.

On May 11, 2005, the Court issued an Order in connection with plaintiff's motion for a preliminary injunction. Valenti v. Drory, 7 Misc 3d 1023(A), 801 NYS2d 243 (Sup. Ct. NY County May 11, 2005) (avail at 2005 WL 1148498). As to Metropolitan, the Court denied the motion. It found that plaintiffs had failed to show a likelihood that Metropolitan was sufficiently connected to the other defendants for it to be bound by the asset purchase agreement at issue in this case. Instead, Metropolitan apparently was owned by two non-signatories to the Agreement, who also are not parties to this case. The Court reached a contrary conclusion as to NYKB and the individual defendants. It found that plaintiffs established a likelihood of success on the merits of its claim that these defendants had agreed not to compete in the business of installing, repairing, finishing and servicing floors, floor coverings, rugs and carpeting, and of doing interior painting. It also found ambiguities as to the extent of the covenant not to compete in the area of construction and contracting as it relates to kitchen and bathroom remodeling; and that, therefore, the preliminary injunction would not be granted as to these areas. Moreover, the Court determined that there was an issue of fact as to whether the time and geographic restrictions contained in the covenant were reasonable. It stated that these issues would best be resolved at a hearing. It continued the two TROs to which the parties stipulated, and it directed the parties to contact this Part to schedule a hearing.

According to plaintiffs, the parties agreed to indefinitely adjourn the motion pending settlement negotiations and to stay all discovery as well. On January 9, 2006, when settlement efforts had failed, the Court held a hearing on the geographic and temporal reasonableness of the covenant not to compete. As a result of this hearing, the court issued an order in which it adhered to its interim determination to issue a preliminary injunction as to Metropolitan. As to movants, the Court clarified that the covenant not to compete should extend to "the business of repairing, finishing and servicing rugs and carpets," and also should prevent movants from "installing, repairing, finishing and servicing floors, floor coverings and interior painting." Valenti v. Drory, Index No. 101977/05 (Sup. Ct. NY County June 11, 2006)(motion sequence number 1). It further decided that the covenant was too broad to the extent that it prevented movants from operating competing businesses within 100 miles of plaintiffs, and limited the [*4]covenant to Manhattan. Finally, it appeared that movants were not engaged in a competing business at the time of the hearing. However, based on a balancing of the equities, the Court continued the injunction as to the areas covered by the covenant not to compete, as that covenant was limited in the decision.

Now, Movants bring a motion for summary judgment in which they seek (1) an Order dismissing the Complaint, (2) an Order rescinding the Asset Purchase Agreement, (3) Judgment on their counterclaims against both plaintiffs, (4) a vacatur of the Court's May 11, 2005 injunction, and (5) legal fees. According to the motion, of the original $2,223,000 purchase price, plaintiffs still owe defendants $250,000 plus interest; and, plaintiffs have ceased making payments either directly or into the escrow account. This is a sufficient breach of the agreement by plaintiffs, movants argue, to excuse defendants from complying with it as well.

In their opposition, plaintiffs do not deny that they have stopped making payments under the promissory notes, even into the escrow account. However, they point to their added claims of fraud and their assertion of various economic injuries due to movants' alleged misconduct, apparently using their argument that they were overcharged for the Corporations as justification for their refusal to make further payments into escrow. They also state that movants were required to follow a specific notice procedure set forth in the Note in the event of any default in payments, and they argue that movants did not do so through an individual with proper authority to send the notice. As to the underlying claims in the Amended Complaint which, as stated, assert fraud against movants plaintiffs state that summary judgment is premature because there has been no discovery.

Initially, the Court notes that movants seek, but cannot obtain, duplicative relief. That is, in their motion they seek an order absolving them of their duty not to compete under the purchase agreement, even while they seek payment under the same contract. The "covenant not to compete was part of the consideration for the sale of an existing business with its goodwill." Frank May Assoc. Inc. v. Boughton, 281 AD2d 673, 674, 721 NYS2d 154, 155 (3rd Dept. 2001). If movants wish to hold plaintiffs to the agreement they also must adhere to the contractual terms. Moreover, they cannot do so selectively, selling the business but not complying with the covenant. It appears that, in general, none of the parties seek to abrogate the sale itself. Therefore, both full payment and full compliance with the other terms of the contract is the goal.

First, then, the Court examines movants' demand for full payment under the contract. Plaintiffs assert that they do not have to pay due to defendants' breach of the covenant not to compete and due to their asserted fraud and the concomitant damages plaintiffs have sustained as a result of this fraud. Plaintiffs are correct that once a breach of the covenant has been established, the purchaser is no longer obligated to make payments pursuant to the promissory notes. Sarantopoulos v. E-Z Cash ATM, Inc., — AD2d —, — — NYS2d —, —, 2006 NY Slip Op. 09596 (2nd Dept. Dec. 19, 2006)(avail at 2006 WL 3733788, *2). Similarly, plaintiffs may be able to reduce their financial obligations under the notes based on the purported fraud of movants. However, these issues are still unresolved, and it is improper for plaintiffs to stop making payments at this juncture. In paragraph 13.4 of the contract, plaintiffs stated that they would make escrow payments in the event of any dispute; and, in their initial actions, they complied with their obligations under their negotiated agreement. The Court sees no legal reason why they should not continue to make these payments, which will be returned to them in the event that the Court finds this is appropriate. Therefore, the Court directs plaintiffs to deposit the remainder of the money currently due into the escrow account, where it shall remain [*5]pending resolution of the dispute.

The court does not find that the violation of these terms is a sufficient breach of contract to warrant complete victory for movants in this litigation, however. Here, plaintiffs assert that movants have committed other wrongful acts in addition to the alleged breach of the covenant not to compete; and, movants have not set forth any reason why the entire action should be dismissed including the claims of fraud against them. Also, plaintiffs assert that they were never properly informed of their default; and, the appropriateness of the notice by Ilan Porter remains unresolved.

Moreover, the case is still replete with factual issues which the court cannot resolve based on the information before it at this time. Among other things, it has not heard and determined the issue of the final injunction and the alleged breach of the covenant not to compete; and, it has not considered any evidence regarding the purported fraudulent actions of movants.Under these circumstances, and with so much in heated dispute, the Court is reluctant to grant final judgment to anyone.

In addition, the Court does not vacate the preliminary injunction. Here, defendants have asserted that they do not intend to violate the terms of the covenant, as modified. Thus, through the existing injunction defendants are simply restrained from violating an agreement which, purportedly, they never intended to violate. Also, as the court stated in its June 2006 decision, see Valenti v. Drory, Index No. 101977/05 (Sup. Ct. NY County June 11, 2006)(motion sequence number 1), a violation of the covenant has the potential to irreparably harm plaintiffs. See Hay Group, Inc. v. Nadel, 170 AD2d 398, 399, 566 NYS2d 616, 617 (1st Dept. 1991). This is because "irreparable injury is presumed from the breach of a non-competition agreement entered into to protect a buyer's purchase of a business and accompanying goodwill." Manhattan Real Estate Equities Group LLC v. Pine Equity, NY, Inc., 16 AD3d 292, 791 NYS2d 418, 419 (1st Dept. 2005); see Capri Nail Corp. v. Iris Nail Corp., 13 AD3d 129, 130, 786 NYS2d 167, 168 (1st Dept. 2004).

For the reasons above, it is

ORDERED that the portion of the motion seeking summary judgment is denied; and it is further

ORDERED that the portion of the motion seeking to dismiss the complaint is denied; and it is further

ORDERED that the portion of the motion seeking to rescind the Agreement is denied; and it is further

ORDERED that the portion of the motion seeking to grant judgment on the counterclaims is granted to the limited extent of directing plaintiffs to make full payment of all money currently due on the promissory notes into the escrow account within 30 days of service of this order with entry, and is otherwise denied; and it is further

ORDERED that the portion of the motion seeking to vacate the injunction dated May 11, 2005 is denied; and it is further

ORDERED that the portion of the motion seeking legal fees and other costs is denied without prejudice, pending reconsideration once this matter is fully resolved.

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Louis B. York, J.S.C.