Plaintiffs, 11 South Laundry, Inc., ("11 South Laundry") and Paul Ziomber ("Ziomber"), commenced this action by filing a summons and complaint dated March 23, 2011 alleging causes of action for breach of contract and fraudulent inducement against the defendants, MCD Assets, LLC, ("MCD") and Eric Gladstein ("Gladstein"), in the sale of a laundromat located at 11 South Fulton Avenue, Mount Vernon, New York, which closing took place on December 10, 2010. The defendants served an answer and counterclaim dated April 20, 2011 alleging breach of a note in the amount of $25,000.00. The plaintiffs served an answer to the counterclaim dated October 3, 2011.

This matter was referred to this Court for a non-jury trial, which was held over two days, on March 11 and 12, 2013. The only witnesses to testify were the plaintiff, Paul Ziomber, and the defendant, Eric Gladstein. Various documents were submitted into evidence. After considering the evidence, the Court makes the following facts deemed established by the evidence and reaches the following conclusions of law.

The defendant, Gladstein, testified that he was a partner in South Fulton Assets, LLC, ("South Fulton"), an entity that owned the building and premises located at 11 South Fulton Avenue, Mount Vernon, New York. Gladstein was also an owner of MCD, an entity that owned and operated a laundromat at the same premises. South Fulton, as the landlord, and MCD, as the tenant, had a written lease for a term of five years commencing on May 1, 2010, with an option to renew for an additional five years, which gave MCD the right to operate a laundromat at the premises for an annual rent of $12,000.00, payable in equal monthly amounts of $1,000.00 on the first day of each month.

Gladstein decided to sell the laundromat business and therefore, he prepared a prospectus as a marketing tool for prospective purchasers representing that the business had a net profit of $44,000.00 per year. Ziomber, who was interested in buying the business, had several discussions with Gladstein over a five-month period about the business operations and terms of sale. Gladstein allowed Ziomber to observe the business operations before committing to buy it. The parties eventually reached an agreement whereby Ziomber agreed to purchase the laundromat from MCD and Gladstein for $75,000.00, payable with a lump sum of $50,000.00 at closing, with the remaining $25,000.00 to be paid through a note in 25 equal monthly payments of $1,000.00 commencing on January 2, 2011. The purchase price included all inventory, fixtures, the leasehold, and goodwill.

According to the purchase agreement dated August 2010, the buyer was not required to assume, pay, perform, or discharge any debts, obligations, or liabilities of the seller of any kind. The seller was required to deliver the business, fixtures, merchandise, and equipment free and clear of any liens, mortgages, debts, taxes, or encumbrances, and to provide the purchaser with a list of creditors and the amounts owed. As a condition of the closing, the seller was obligated to obtain the landlord's consent or approval for a new lease and to execute and deliver an assignment of lease at the time of closing. The purchaser agreed to assume performance of any service contracts held by the seller, with the seller being obligated to pay for service incurred prior to closing. The purchaser acknowledged that it conducted its own inspection of the premises and was not relying on any representations or warranties made by the seller or anyone else. The seller agreed to deliver the equipment in normal working order as of the date of closing.

The closing for the sale of the laundromat was held on December 2, 2010, at which time both parties were present and represented by counsel. At the closing, the parties executed an assignment and assumption of the lease, which indicated that the assignor/tenant was MCD, the assignee was 11 South Laundry, the landlord was South Fulton, and the premises were "11 South Fulton Avenue, Mount Vernon, NY" Along with the right, title, and interest in the lease, MCD assigned a security deposit of $1,000.00 over to 11 South Fulton. According to the assignment and assumption of the lease, MCD, as the assignor, specifically represented that it had "the right to assign this Lease and that the premises [were] free and clear of any judgments, executions, liens, taxes, and assessments." Gladstein signed the assignment and assumption twice—in the place indicated for the [*3]landlord/building owner, and also in the place indicated for the tenant/assignor. Ziomber signed the document as the assignee.

At the closing, Ziomber gave Gladstein $50,000.00 and executed a promissory note for the remaining $25,000.00 of the purchase price. The parties also signed an agreement indicating that any New York State sales tax due would be paid by the seller within 15 days, or the purchaser could make payment and deduct it from the payments due under the note. Gladstein also agreed to repair the hot water heater or alternatively, Ziomber could withhold $2,000.00 from the balance owed. According to Ziomber, Gladstein also represented that the laundry machines were all in working order.

Unbeknownst to Ziomber, the building in which the leased premises were located was in imminent danger of being foreclosed upon. On or about December 20, 2010, Ziomber received a call from a bank advising him that the building had been foreclosed upon on December 7, 2010, five days after the closing date for the laundromat. The referee's deed is dated December 7, 2010, and indicates that the property was purchased at foreclosure by Ridge Forest Realty Corp.

At trial, Gladstein testified he knew for months before the closing that the building was in imminent danger of foreclosure. Although Gladstein believes he discussed this with Ziomber, Gladstein could not provide any specifics on the timing or substance of the conversations. Ziomber emphatically denies ever being told this fact from Gladstein or anyone. Ziomber testified he had no knowledge whatsoever that the building was in foreclosure, and had he known this fact, he never would have purchased the laundromat business.

Thereafter, Ziomber learned that the new owner was a receiving company. He spoke to the receiving company every month about the lease and tendered monthly rental payments to them by registered mail. However, the new owner refused to accept the rental payments and honor the lease and instead, commenced an eviction proceeding against the plaintiffs. The plaintiffs were required to make numerous appearances in Mount Vernon City Court in connection with the eviction proceeding and retain counsel to defend them. Plaintiffs paid their attorneys $1,000.00 to represent them in the eviction proceeding. The eviction proceeding was eventually dismissed in 2012 after another entity bought the building and decided to honor the lease assigned to plaintiffs by defendants. The property was sold to Ramjit LLC in November of 2012. For the year 2011, plaintiffs paid no rent to the new owners and in 2012, plaintiffs paid them rent for 11 months under the lease assigned to plaintiffs by the defendants.

When the plaintiffs took over the business, they found that the heat, hot water, and air conditioning were not working. Two days after the closing, someone showed up at the business to ask for payment for a previous repair on the air conditioning unit. Plaintiffs were required to replace the hot water heater at a cost of $2,700.00. Many of the laundry machines were not working, which cost plaintiffs about $1,100.00 to repair. The plaintiffs owe HK Laundry Equipment, a vendor hired by MCD to repair laundry equipment, a total of $4,126.34 for repairs incurred prior to closing. This vendor will not do business with plaintiffs until these balances are paid. To save on expenses, [*4]Ziomber has now learned how to repair the equipment on his own. The business has not had heat or air conditioning at all since the date of closing. The plaintiffs use space heaters in the winter and fans in the summer.

The plaintiffs were also required to pay the New York State bulk sales tax owed by MCD in the amount of $1,737.20.

Plaintiffs also paid their attorneys a retainer of $3,500.00 for this breach of contract action.

Although Gladstein represented in the prospectus used as a marketing tool that the business had a net annual profit of $44,000.00, Ziomber testified the gross receipts for the business in 2011 were about $10,000.00, and the business operated at a loss in 2011 and 2012.

Plaintiffs commenced this action for fraudulent inducement and breach of contract in March of 2011, about four months after being notified of the foreclosure, and shortly after being notified that the new owners would not honor the lease. The plaintiffs seek an order voiding the contract and note. However, to avoid any unintended benefit to the defendants, plaintiffs request that the court fashion a remedy conditioning the transfer of the business from plaintiffs to defendants upon the defendants repayment of the $50,000.00 plaintiffs paid at closing. Plaintiffs also seek money damages for legal fees incurred, the bulk sales tax paid by plaintiffs, and fees incurred to fix the laundry machines for issues that existed prior to closing.

Defendants do not assert any affirmative defenses, however, they assert a counterclaim seeking enforcement of the note for $25,000.00, together with interest, costs, and attorney's fees.

"In an action to recover damages for fraud, the plaintiff must prove a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury" (Lama Holding Company v Smith Barney Inc., 88 NY2d 413, 421 [1996]). "While [m]ere promissory statements as to what will be done in the [sic] futures are not actionable' . . . , it is settled that, if a promise was actually made with a preconceived and undisclosed intention of not performing it, it constitutes a misrepresentation of a material existing fact' upon which an action for rescission may be predicated" (Sabo v Delmar, 3 NY2d 155, 160 [1957][citations omitted]).

If fraud in the inducement is proven, it renders the contract voidable (Mix v Newf., 99 AD2d 180, 182-183 [3d Dept. 1984],citing Adams v Gilli, 199 NY 314 [1910]). The burden of proving fraud in the inducement requires the heightened standard of clear and convincing evidence (id.).

Initially, the Court credits the testimony of Ziomber as being more worthy of belief on the material issues than the testimony of Gladstein. The Court finds in favor of plaintiffs on the [*5]fraudulent inducement cause of action and specifically, that plaintiffs have established by clear and convincing evidence that the defendants, through Gladstein, made material misrepresentations and omissions of presently existing facts, which were false and known by the defendants to be false, and were made for the purpose of inducing the plaintiffs to enter into a contract to purchase the laundromat business; and that the plaintiffs justifiably relied upon the material misrepresentations and omissions of fact, causing them to sustain economic damage.

Gladstein knowingly and intentionally withheld material information from Ziomber about the imminent foreclosure upon the building he partially owned and made numerous material misrepresentations, including the defendants' right to assign the lease when he knew the building was about to be foreclosed upon, the "premises [being] free and clear of any judgments, executions, liens, or taxes," the condition of the heating, cooling, and water systems for the leased premises, the condition of the laundry equipment, and the net annual profit.

According to the assignment and assumption of the lease, the assignor, MCD, specifically represented that it had "the right to assign [the] Lease and that the premises [were] free and clear of any judgments, executions, liens, taxes, and assessments." Gladstein signed the assignment and assumption twice—in the place indicated for South Fulton, as the landlord/building owner, and also in the place indicated for MCD, the assignor/tenant. Therefore, Gladstein made these misrepresentations as both the owner of the building and as the tenant/assignor of the lease when he had full knowledge that the building was about to be foreclosed upon and that the foreclosure could likely jeopardize the lease and plaintiffs' ability to operate the business. Although the agreement stated that defendant, MCD, was assigning all its right, title, and interest in the lease, Gladstein knew that the imminent foreclosure adversely affected the value of the lease.

By making the misrepresentation that the premises were free and clear of "any judgments, executions, liens, taxes, and assessments," and failing to advise plaintiffs of the foreclosure, Gladstein fraudulently induced the plaintiffs into buying the business. Even if the plaintiffs could have ascertained the existence of the foreclosure action on their own, since this information was peculiarly within the knowledge of the defendants as owner of the building and landlord, plaintiffs should have been able to reasonably rely upon defendants' representation about the financial status of the building and business (cf. Banque Arabe et Internationale D'Investissement v Maryland, 57 F3d 146, 156 [2d Cir 1995]).

Material Breach

"When one party materially breaches an agreement, the nonbreaching party may terminate that agreement and sue for total breach" (see Jordan v Can You Imagine, Inc., 485 F Supp 2d 493, 498 [SDNY 2007]). A material breach of contract by one party may excuse the nonbreaching party from further performance and give him the right to recover his down payment and the reasonable cost of expenses incurred (see Grace v Nappa, 46 NY2d 560, 567 [1979]; New Windsor Volunteer Ambulance Corps, Inc. v Meyers, 442 F3d 101, 117 [2d Cir 2006]). "For a breach to be material, it must go to the root or essence of the agreement between the parties, or be one which touches the [*6]fundamental purpose of the contract and defeats the object of the parties in entering into the contract" (id.).

The Court also finds that the defendants' acts and omissions constituted a material breach, as it affected the fundamental purpose of the contract, which was to transfer to the plaintiffs ownership of a laundromat and the right to operate the business at a fixed location under the specified terms of an assigned lease agreement and as represented by defendants in the prospectus.

Personal Liability of Gladstein

Plaintiffs seek to hold Gladstein personally liable for the damages incurred as a result of the fraudulent inducement and material breach of contract by defendants. Plaintiffs request that the Court pierce the corporate veil to prevent Gladstein from using the limited liability company structure to shield himself from personal liability for committing fraud on the company's behalf. Plaintiffs allege that since MCD is no longer in business, Gladstein personally benefitted from the $50,000.00 he received as a cash down payment.

While members of limited liability companies, like corporate officers, may not be held personally liable on the contract of a limited liability company where they did not purport to bind themselves individually under the contract, this rule only applies where the member has acted in good faith (NY Jur 2d, Business Relationships § 779) Moreover, a member of a limited liability company, like a corporate officer, may be personally liable for committing fraud on the corporation's behalf (First Bank of the Americas v Motor Car Funding, Inc., 257 AD2d 287 [1st Dept 1999]).

"The doctrine of piercing the corporate veil is typically employed by a third party seeking to go behind the corporate existence in order to circumvent the limited liability of the owners and to hold them liable for some underlying corporate obligation" (Matter of Morris v New York State Dept. of Taxation and Fin., 82 NY2d 135, 140-141 [1993]). "While the law permits the incorporation of a business for the very purpose of escaping personal liability . . . equity will intervene to pierce the corporate veil and permit the imposition of personal liability in order to avoid fraud or injustice" (Ventresca Realty Corp. v Houlihan, 28 AD3d 537, 538 [2d Dept 2006][internal quotation marks and citations omitted]; see Matter of Morris v New York State Dept. of Taxation & Fin., 82 NY2d at141). A party seeking to pierce the corporate veil must show that the owners of the corporation exercised complete domination over it in the transaction at issue, and that such domination was used to commit a fraud or wrong against the plaintiff under circumstances that constitute an abuse of the privilege of doing business in the corporate form (id. at 141—142; Nassau County v Richard Dattner Architect, P.C., 57 AD3d 494, 495 [2d Dept 2008]). "The decision whether to pierce the corporate veil in a given instance depends on the particular facts and circumstances" (Weinstein v Willow Lake Corp., 262 AD2d 634, 635 [2d Dept 1999]).

Factors to be considered in determining whether the owner has "abused the privilege of doing business in the corporate form" include whether there was a "failure to adhere to corporate formalities, inadequate capitalization, commingling of assets, and use of corporate funds for personal [*7]use" (East Hampton Union Free School Dist. v Sandpebble Bldrs., Inc., 66 AD3d 122, 127 [2d Dept 2009]). Other factors include the intermingling of corporate and personal funds, an overlap in ownership, officers, directors and personnel, and the common use of office space, equipment, addresses and phone numbers (id; Forum Ins. Co. v Texarkoma Tr. Co., 229 AD2d 341 [1st Dept 1996]).

For the transaction at issue, the Court finds that Gladstein manipulated his overlapping ownership interests in both MCD and South Fulton to his advantage to commit a fraud or wrong against the plaintiffs. Since Gladstein abused the privilege of doing business in the corporate form, he may not use it as a shield to protect himself from personal liability.

Damages

When a party has been induced to enter into a contract on the basis of fraud, misrepresentation, or other wrongful conduct, that party has three options: (1) immediately rescind the contract; (2) bring an action in equity to rescind the contract based on the alleged wrongful conduct; or (3) retain the benefits of the contract and seek damages (see Fitzgerald v Title Guarantee and Trust Co., 290 NY 376, 378-79 [1943]; John Berg Inc. v Associated Spinners Inc., 201 Misc 627, 629-30 (New York City Ct 1951). The party wrongfully induced has no duty to elect a remedy until the time of trial (Libassi v Chelli, 206 AD2d 508, 509 [2d Dept 1994]).

The plaintiffs seek rescission of the contract provided such relief does not result in unjust enrichment to the defendants. The remedy of rescission is one of restoration and would require that the defendants return the deposit of $50,000.00 to plaintiffs, in exchange for a return of the business. While plaintiffs are ready, willing, and able to deliver the business back to the defendants, since MCD is no longer in business, plaintiffs express a legitimate concern that defendants do not have the funds to make plaintiffs whole. Plaintiffs request that the Court fashion a remedy that conditions their delivery of the business to the defendants upon the defendants' payment of $50,000.00 to plaintiffs, together with costs and expenses.

"Rescission is an equitable remedy; therefore, whenever the court rescinds a contract, it has the duty to place the parties where they were before the vitiated contract was made" (Vitale v Coyne Realty, Inc., 66 AD2d 562, 568 [4th Dept 1979][citing 24 NY Jur, Fraud and Deceit § 223]). "If complete restoration is impossible the terms upon which rescission will be granted rest within the sound discretion of the court" (id. at 569). "The court should adjust the equities between the parties to avoid unjust enrichment (CPLR 3004) in order that no one be placed in a better position after rescission than when the contract was executed" (id., citing 50 NY Jur, Restitution §§ 51, 52; Ungewitter v Toch, 31 AD2d 583 [3d Dept 1968 ).

CPLR § 3004 specifically addresses plaintiffs' concern and allows a court to "make a tender of restoration a condition of its judgment" and make such other equitable adjustments in its judgment so as to avoid unjust enrichment to any party. [*8]

Accordingly, based upon defendants' fraudulent inducement and material breach of the contract, the contract is hereby rescinded. In order to restore the parties to their pre-contract positions, plaintiffs are excused from further performance under the contract and are entitled to a return of the down payment and reimbursement for expenses they paid, which were incurred by defendants prior to closing. In exchange, the defendants are entitled to a return of the business. However, to prevent unjust enrichment to the defendants, the restoration order is conditioned upon the defendants paying the plaintiffs $50,000.00, as a return of the down payment, together with interest at the statutory rate of 9% per annum from December 10, 2010 (see CPLR § § 5001 and 5004). The plaintiffs may continue to own and operate the business until such time as the defendants comply with this restoration order.

The plaintiffs are also entitled to a money judgment against MCD and Gladstein, individually, for $3,737.20 for expenses, which include $1,737.20 for the bulk sales tax owed by MCD prior to closing and $2,000.00 defendants agreed to pay to repair the hot water heater. In light of plaintiffs' election of rescission as a remedy, rather than monetary damages, the plaintiffs' request for additional expenses is denied.

Based upon the foregoing, it is hereby

ORDERED AND ADJUDGED, that based upon fraudulent inducement and a material breach of contract by the defendants, the contract between the parties for the sale of the laundromat located at 11 South Fulton Avenue, Mount Vernon, New York, which closing took place on December 10, 2010, is hereby rescinded and the parties shall be restored to their pre-contract positions; and it is further

ORDERED AND ADJUDGED, that the defendants' counterclaim against plaintiffs is hereby dismissed and plaintiffs are relieved of any further obligation under the contract and note; and it is further

ORDERED AND ADJUDGED, that the defendants shall return to the plaintiffs the down payment of $50,000.00, together with interest at the statutory rate of 9% per annum, calculated from December 10, 2010, and upon return of the down payment with interest, plaintiffs shall assign the lease and transfer all right, title, and ownership of the equipment to defendants; and it is further

ORDERED AND ADJUDGED, that plaintiffs are awarded a money judgment against the defendants in the amount of $3,737.20 for expenses paid by plaintiffs, but incurred by the defendants prior to closing, together with interest at the statutory rate of 9% per annum, together with costs and disbursements as taxed by the County Clerk (see 22 NYCRR 202.46), and that plaintiffs shall have execution therefore; and it is further

ORDERED AND ADJUDGED, that the Clerk shall enter judgment in accordance with this decision and order.

[*9]

Dated: White Plains, New York

April 18, 2013

HON. Francesca E. Connolly, J.S.C.