SOS Capital v. Recycling Paper Partners of PA, LLC

220 A.D.3d 25

196 N.Y.S.3d 382

SOS CAPITAL, Plaintiff-Respondent,

v.RECYCLING PAPER PARTNERS OF PA, LLC et al., Defendants-Appellants.

Appeal No. 348

Index No. 159698/20

Case No. 2022-04612

Supreme Court, Appellate Division, First Department, New York.

Entered: August 31, 2023

Silverberg P.C., Central Islip (Karl Silverberg of counsel), for appellants.

Hodgson Russ LLP, Buffalo (James J. Zawodzinski, Jr. of counsel), and Berkovitch & Bouskila PLLC, New York (Steven Berkovitch and Ariel Bouskila of counsel), for respondent.

Cynthia S. Kern, J.P., David Friedman, Tanya R. Kennedy, Saliann Scarpulla, Bahaati E. Pitt–Burke, JJ.

PITT–BURKE, J.

This appeal presents the opportunity to reaffirm this Court's position on what constitutes a tort committed within the boundaries of this state for purposes of New York's long-arm jurisdiction under CPLR 302(a)(2). For the reasons that follow, we find that the language "within the state" in CPLR 302(a)(2), means that a nondomiciliary is only subject to New York's long-arm jurisdiction under subsection (a)(2) when they have committed a tortious act, in person or through an agent, while physically present within the boundaries of this state.

Background

This case arises out of an agreement for the purchase of KN95 masks, between plaintiff, SOS Capital, a New York limited liability company with its principal place of business in New York County, and corporate defendant Recycling Paper Partners of PA LLC (RPP), a Pennsylvania limited liability company with its principal place of business in Harrisburg, Pennsylvania. Individual defendants, Stuart Polsky and Scott Polsky were principals of RPP, and domiciled in Florida and Pennsylvania, respectively, at the time the agreement was executed.

Prior to entering the agreement, RPP provided plaintiff with an image of the masks being sold. The image, which the individual defendants sent to plaintiff in New York via email and on behalf of RPP, depicted KN95 mask packaging that contained a U.S. Food and Drug Administration (FDA) logo, evidencing that the masks were approved for medical use. After plaintiff agreed to purchase the masks, the individual defendants sent an invoice/purchase order to plaintiff on behalf of RPP.

On April 28, 2020, plaintiff entered into the agreement with RPP. Pursuant to the agreement, plaintiff agreed to purchase one million FDA-approved KN95 masks for a total purchase price of $2,140,000 and paid an initial upfront deposit of $633,000. In its complaint, plaintiff alleges that defendants knew it was a buyer-intermediary and had entered into the agreement with the intent to resell the masks to a third party. Therefore, plaintiff alleged, the specific quality of the masks (i.e., FDA-approved and medically-purposed masks) was a material term of the agreement.

Plaintiff further contends that it entered into the agreement based on defendants’ representation that the masks were FDA-approved and in reliance on the image provided by RPP. Specifically, plaintiff's CEO averred in an affidavit that based upon its prior transactions with RPP, it had no reason to believe defendants’ representations regarding the quality of the masks "would be false." In light of these prior dealings, he averred that plaintiff did not fully investigate the transaction and was effectively "lulled into a false sense of security." He further submitted that defendants, at the time of contracting, were "aware of the material discrepancy between what they were selling to [plaintiff] and what they promised."

After receiving plaintiff's deposit for the order, the masks were shipped to a warehouse in California where it was discovered that they did not conform to the quality standard represented in the agreement. Specifically, the packaging for the masks that were shipped did not contain an FDA logo and indicated they were for nonmedical use. Due to the masks nonmedical use designation, plaintiff refused to accept delivery and sought return of its deposit.

Although the individual defendants acknowledged that the parties intended the masks to be FDA-approved, they claim this requirement was not material to the agreement and that the sales order only required RPP to coordinate the delivery of the KN95 masks. Defendants refused to return plaintiff's deposit, asserting that it was nonrefundable.

Procedural History

Plaintiff commenced this action in November 2020 and service upon all three defendants was completed by January 4, 2021. The amended complaint asserted five causes of action: (1) breach of contract; (2) sale of nonconforming goods; (3) constructive fraud; (4) deceit; and (5) fraud.

As relevant to this appeal, it is undisputed that all defendants are domiciled in states other than New York. However, plaintiff alleged that jurisdiction was properly obtained over defendants pursuant to CPLR 302(a), because this action arises out of defendants’ contact within New York State pursuant to the agreement entered into by the parties and the misrepresentation of material facts made to plaintiff within this state. Plaintiff further alleged that venue was proper because it maintained its principal place of business in New York County, the parties’ contract was to be performed in New York County and because the acts or omissions giving rise to this action occurred within the State of New York.

On April 28, 2021, plaintiff moved for a default judgment due to defendants’ failure to appear. On May 25, 2021, Supreme Court granted plaintiff's motion for default judgment as to liability and set the matter down for an inquest to determine damages. On or about June 28, 2021, defendants retained counsel for purposes of settling this matter, but not for purposes of litigation. Following an inquest at which only plaintiff appeared, Supreme Court entered judgment in favor of plaintiff in the amount of $1,273,099.38.

Defendants subsequently moved to vacate their default pursuant to CPLR 5015(a), and to dismiss the action pursuant to CPLR 3211(a)(8) on the grounds that Supreme Court lacked subject matter jurisdiction and personal jurisdiction over the individual defendants.

Defendants further argued that their motion to vacate should be granted pursuant to CPLR 5015(a)(1), because they had both a reasonable excuse for their failure to answer and a meritorious defense to the underlying causes of action. In this regard, defendants did not contest service of the summons and amended complaint. Instead, they argued that they reasonably believed they would be served with all pleadings in the matter, or at the very least, that their attorney would be served with the pleadings once they were retained. Defendants also asserted that by putting plaintiff on notice of the lack of subject matter jurisdiction and by commencing settlement negotiations, they didn't anticipate that plaintiff would proceed to default and default judgment.

As to its alleged meritorious defenses justifying vacatur of their default, defendants argued that plaintiff's misconduct in not serving the pleadings by mail, email or through their counsel constituted misconduct of an adverse party, and that their default judgment should be vacated pursuant to CPLR 5015(a)(3). Defendants also argued, inter alia, that although the parties understood that the ordered masks were to be FDA-approved, FDA approval was not a material term of the agreement.

Plaintiff opposed defendants’ motion, arguing, inter alia, that subject matter jurisdiction was properly predicated upon the corporate defendant's having contracted to sell goods to plaintiff in New York, that the individual defendants were subject to personal jurisdiction in New York because they each transacted business in New York and committed torts in New York, that defendants had not offered a reasonable excuse for their default or a meritorious defense, and that plaintiff entered into a Merchant Cash Advance agreement (MCA) with RPP for the purchase and sale of RPP's future receivables which resulted in a separate litigation whereby defendants also defaulted.

Supreme Court denied defendants’ motion in its entirety. As relevant to this appeal, the court found that New York had subject matter jurisdiction over the action because plaintiff was a New York based entity and claimed the masks advertised by defendants were to be delivered to New York. Although the court noted that all defendants were domiciled in states other than New York, it found that sufficient facts were alleged to sustain personal jurisdiction over the individual defendants pursuant to CPLR 302(a). While the court did not indicate the specific subsection of 302(a) that conferred jurisdiction, it found that plaintiff sufficiently alleged that "defendants agreed to send masks to New York and that defendants, including the individual defendants, made fraudulent misrepresentations about the nature of those masks" ( SOS Capital v. Recycling Paper Partners of Pennsylvania, 2021 N.Y. Slip Op. 32317[U], *2, 2021 WL 5331551 [Sup. Ct., N.Y. County 2021] ). The court further found that it was "of no moment" that "the sales order was signed by the corporate defendant in Pennsylvania or that neither defendant was physically present in New York" ( id. ) The court then denied defendants’ motion to vacate their default judgement, finding that they did not offer a reasonable excuse for their default. Based on this finding, the court did not reach the issue of whether a meritorious defense was provided by defendants.

Defendants appeal from the November 16, 2021 order to the extent that it denied their motion to dismiss the action insofar as asserted against the individual defendants for lack of personal jurisdiction and denied their motion to vacate the default judgment entered against all defendants. We now modify, to grant defendants’ motion to vacate the default judgment as against the individual defendants and dismiss the action for lack of personal jurisdiction as against them.

Discussion

A motion to vacate a default judgment under ...