16-3372-cv
Costco Wholesale Corp. v. GAP Partners IV, LLC


                                UNITED STATES COURT OF APPEALS
                                   FOR THE SECOND CIRCUIT


                                       SUMMARY ORDER
Rulings by summary order do not have precedential effect. Citation to a summary order filed
on or after January 1, 2007, is permitted and is governed by Federal Rule of Appellate
Procedure 32.1 and this Court’s Local Rule 32.1.1. When citing a summary order in a
document filed with this Court, a party must cite either the Federal Appendix or an
electronic database (with the notation “summary order”). A party citing a summary order
must serve a copy of it on any party not represented by counsel.

       At a stated term of the United States Court of Appeals for the Second Circuit, held at
the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York,
on the 30th day of November, two thousand seventeen.

PRESENT:          JOSÉ A. CABRANES,
                  JOHN M. WALKER, JR.,
                  REENA RAGGI,
                               Circuit Judges.



COSTCO WHOLESALE CORPORATION,

                           Plaintiff-Appellant,                      16-3372-cv

                           v.

GAP PARTNERS IV, LLC, DBA CITY GATE WINE &
SPIRITS, ANTHONY J. COSTELLO & SON (SPENCER)
DEVELOPMENT, LLC, ANTHONY J. COSTELLO & SON
DEVELOPMENT, LLC,

                           Defendants-Counter-Claimants-Appellees.




                                                       1
FOR PLAINTIFF-APPELLANT Costco Wholesale
Corporation:                             GREGORY P. JOSEPH (Rachel M.
                                         Cherington and Gila S. Singer, on the brief),
                                         Joseph Hage Aaronson LLC, New York,
                                         NY.

FOR DEFENDANT-COUNTER-CLAIMANT-
APPELLEE GAP Partners IV, LLC, DBA City Gate
Wine & Spirits:                              CHRISTOPHER D. THOMAS, Nixon
                                             Peabody LLP, Rochester, NY.

FOR DEFENDANTS-COUNTER-CLAIMANTS-
APPELLEES Anthony J. Costello & Son (Spencer)
Development, LLC and Anthony J. Costello & Son
Development, LLC:                              GLENN E. PEZZULO, Culley, Marks,
                                               Tanenbaum & Pezzulo, LLP, Rochester,
                                               NY.

       Appeal from a September 7, 2016 judgment of the United States District Court for the
Western District of New York (David G. Larimer, Judge).

       UPON DUE CONSIDERATION WHEREOF, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the judgment of the District Court be and hereby is
VACATED AND REMANDED for such further proceedings as may be appropriate in the
circumstances and consistent with this order.

        This dispute between Plaintiff-Appellant Costco Wholesale Corporation (“Costco”), on one
side, and Defendants-Counter-Claimants-Appellees Anthony J. Costello & Son (Spencer)
Development, LLC, Anthony J. Costello & Son Development, LLC (“Costello”) and GAP Partners
IV, LLC, d/b/a City Gate Wine & Spirits (“GAP”), on the other, turns on the location of a liquor
store in a retail development area. The District Court denied Costco’s motion for judgment on the
pleadings and granted the cross-motions of Costello and GAP for judgment on the pleadings. We
assume the parties’ familiarity with the underlying facts, the procedural history of the case, and the
issues on appeal.

        “We review de novo a district court’s decision to grant a motion for judgment on the
pleadings pursuant to Federal Rule of Civil Procedure 12(c).” Hayden v. Paterson, 594 F.3d 150, 160
(2d Cir. 2010). “On a 12(c) motion, the court considers ‘the complaint, the answer, any written
documents attached to them, and any matter of which the court can take judicial notice for the



                                                  2
factual background of the case.’” L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 422 (2d Cir. 2011)
(quoting Roberts v. Babkiewicz, 582 F.3d 418, 419 (2d Cir. 2009)).

        Costco and Costello each owned parcels of land in the development area. Before developing
the land, therefore, Costco and Costello entered into a Reciprocal Easement Agreement (“REA”). In
the REA, Costco and Costello agreed generally to prohibit liquor stores in the development, except
that Costco could have one on its parcel, and Costello could have one in Building F as well as one in
the Southern Property, which consisted of vacant lots that were not yet developed. In violation of
the REA, Costello leased Building D to GAP, a liquor store tenant. Costco’s liquor store tenant
CHM Liquors, Inc. (“CHM”) was then denied a liquor license by the state liquor authority because
of the proximity of GAP’s liquor store to Costco. The District Court agreed with Costello and GAP,
however, that the REA’s liquor store restriction was unenforceable because (1) the restriction should
be extinguished under New York Real Property Actions and Proceedings Law (“RPAPL”) section
1951 (McKinney 2009); (2) Costco was not injured by Costello’s breach of the REA; and (3) Costco
had orally agreed not to enforce the restriction.

        The District Court erred in granting Defendants’ Rule 12(c) cross-motions on the ground
that the liquor store provisions of the REA were unenforceable under RPAPL section 1951. That
New York statute “provides a mechanism for extinguishing land use restrictions.” 328 Owners Corp.
v. 330 W. 86 Oaks Corp., 8 N.Y.3d 372, 385 n.7 (2007). Extinguishment is proper “if, at the time the
enforceability of the restriction is brought in question, it appears that the restriction is of no actual
and substantial benefit to the persons seeking its enforcement or seeking a declaration or
determination of its enforceability, either because the purpose of the restriction has already been
accomplished or, by reason of changed conditions or other cause, its purpose is not capable of
accomplishment, or for any other reason.” RPAPL § 1951. The Court of Appeals of New York has
explained that RPAPL section 1951 “must be construed in light of [its] legislative history,” which
focused on removing “outmoded restrictions,” particularly ones that eliminated any valuable use of
land, and which “ma[d]e clear that restrictive covenants were intended to be subjected to the
doctrine of relative hardship.” Orange & Rockland Utils., Inc. v. Philwold Estates, Inc., 52 N.Y.2d 253,
264-65 (1981). Thus the question in applying RPAPL section 1951 is “whether in a balancing of
equities” enforcement of the restriction “can be said to be, in the wording of the statute, ‘of no actual
and substantial benefit.’” 52 N.Y.2d at 266 (emphasis in original); see also id. (stating that extinguishment
was permissible under the circumstances “if on balance that appeared to be the equitable course”).
“[T]he party claiming that a restriction is unenforceable bears the burden of proving it” is
unenforceable. Chambers v. Old Stone Hill Rd. Assocs., 1 N.Y.3d 424, 434 (2004).

        Here, Costello and GAP clearly have not met that burden in their Rule 12(c) cross-motions.
As an initial matter, this is not a case in which encumbered land has been rendered valueless due to
changed circumstances. The REA was executed by Costco and Costello themselves—not distant
predecessors-in-interest—and these sophisticated and counseled parties jointly prohibited liquor


                                                     3
stores in the development except in specifically designated areas such as Building F. Moreover,
although the record is notably unclear with respect to the lease between Costello and GAP and that
lease’s various amendments,1 the lawyers for GAP and Costco appeared to be of the view that, in
accordance with the REA, Costello and GAP originally entered into a lease for Building F and
designated Building F as the relevant location in their liquor license application. See J.A. 324-25, 327-
28. Costello and GAP later entered into (at least) two amendments to the lease, the second of which
“reference[d]” three different addresses, including both Building D and Building F.2 Costello Br. 3.
These facts, if true, would appear to suggest that Costello and GAP were aware of the REA’s
restriction from the outset—well before any material investments into the liquor store—and may
even suggest that Costello and GAP were attempting to evade the restriction by continuing to
“reference” Building F in the second amended lease (which, again, is not even in the record).

         Of course, no one disputes that Building F was (and remains) unavailable because it was (and
remains) leased to and occupied by Siemens. But this was true at the time the REA was executed,
and the lessor was (and remains) none other than Costello. Nor does it appear disputed that
Building F was actually closer to Costco than Building D. But, again, at the time the REA was
executed just as at present, Building F was not available, which would (and evidently did) delay or
derail any installation of a liquor store in Building F. See GAP Br. 22 n.5 (Costello “spent over a year
trying to evict [Siemens]”). Indeed, Costco suggests that the designation of Building F was not
“mere happenstance,” J.A. 95 (Costello Answer ¶ 22), but a knowing choice, see Costco Br. 3. Had
Costello and GAP abided by the REA, Costco’s lessee CHM might have procured a liquor license
before Costello’s putative Building F lessee.3 A competitive advantage can constitute a “substantial
benefit,” RPAPL § 1951, under New York law. See, e.g., Neri’s Land Improvement, LLC v. J.J. Cassone
Bakery, Inc., 65 A.D.3d 1312 (2d Dep’t 2009) (upholding restrictive covenant intended to prevent
competition from nearby bakery); see also Hodge v. Sloan, 107 N.Y. 244, 249 (1887) (nothing in public
policy prevents seller from binding buyer of land to restriction of use that was intended to ensure
sale would not be “detrimental to [the seller’s] business”); Silverstein v. Shell Oil Co., 40 A.D.2d 34 (3d
Dep’t 1972) (“Covenants restricting the use of lands for the purpose of preventing competition are
not void if the covenant is reasonable with respect to the territory involved and the duration of the
restriction.”), aff’d, 33 N.Y.2d 950 (1974). The pleadings here give rise to a plausible inference that
Costello’s breach injured Costco by depriving it of a similar competitive advantage.



    1
        None of these documents appears to be in the record before us.
    2
    Costco characterizes Costello’s initial lease to GAP as “secret[ ].” Costco Br. 37. It is not clear
when Costco learned of the lease or its amendments as well as the liquor license application or its
amendments.
    3
     Alternatively, Costello might have installed a liquor store in the Southern Property, which was
presumably farther away from Costco.

                                                    4
        Viewing the record in the light most favorable to Costco, as we are required to do at the
pleadings stage, judgment on the pleadings plainly should not have been awarded to Costello and
GAP on the ground that the unambiguous liquor store prohibition in the REA, which had been
recently negotiated between two sophisticated and knowledgeable parties, was unenforceable.

        Nor was it proper to grant Costello’s and GAP’s motions on the ground of promissory
estoppel because there are contested issues of material fact. Indeed, the key allegations of Costello
and GAP have been denied by Costco. Specifically, Costco denies that (1) there was any clear and
unambiguous oral promise, and (2) that the purported promisor—Keven Danow, the lawyer for
CHM—had any authority to bind Costco. Accordingly, granting the Rule 12(c) cross-motions of
Costello and GAP was error.4

                                          CONCLUSION

       For the foregoing reasons we VACATE the September 7, 2016 judgment of the District
Court and REMAND the cause for such further proceedings as may be appropriate in the
circumstances and consistent with this order.



                                                       FOR THE COURT:
                                                       Catherine O’Hagan Wolfe, Clerk




   4
     Given these disputed issues, there was no error in the District Court’s denial of Costco’s Rule
12(c) motion.

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