| Kramer v W10Z/515 Real Estate Ltd. Partnership |
| 2007 NY Slip Op 07763 [44 AD3d 457] |
| October 16, 2007 |
| Appellate Division, First Department |
| Richard L. Kramer et al., Appellants, v W10Z/515 RealEstate Limited Partnership et al., Respondents. Kerusa Co. LLC, Appellant, v W10Z/515 RealEstate Limited Partnership et al., Respondents. |
—[*1] Gibson, Dunn & Crutcher LLP, New York City (Robert L. Weigel of counsel), for KerusaCo. LLC, appellant. Landman Corsi Ballaine & Ford P.C., New York City (William G. Ballaine of counsel), forrespondents. Kramer Levin Naftalis & Frankel LLP, New York City (Charlotte Moses Fischman ofcounsel), amicus curiae.
Order, Supreme Court, New York County (Jane S. Solomon, J.), entered December 8, 2005,which denied the Kramer plaintiffs' motion to serve a second amended complaint, and order,same court and Justice, entered December 8, 2005, which denied plaintiff Kerusa's motion toserve a second amended complaint, unanimously modified, on the law and the facts, to permitplaintiffs to assert claims for common-law fraud and to permit Kerusa to assert a claim of grossnegligence against defendant W10Z/515 Real Estate Limited Partnership (the sponsor), and [*2]otherwise affirmed, without costs.
The Martin Act (General Business Law art 23-A) does not preclude a private party fromprosecuting an otherwise valid common-law fraud claim in connection with the sale of securitieswhenever the alleged fraudulent conduct is such that the Attorney General would be authorizedto bring an action against the defendant under the Martin Act (see Residential Bd. of Mgrs. ofZeckendorf Towers v Union Sq.-14th St. Assoc., 190 AD2d 636, 637 [1993] [upholdingclaim of fraud in the sale of condominium units brought against sponsor who allegedlyknowingly and intentionally advanced a misrepresentation in the offering plan]; Horn v 440E. 57th Co., 151 AD2d 112, 117-118 [1989] [upholding fraud and breach of warranty claimswhere it could be argued that the Martin Act was written in the parties' contract for the sale ofstock in a cooperative via a warranty against material omissions and misrepresentations inoffering statement and its amendments]).
To be sure, some support for the contrary conclusion—that such claims are barred bythe Martin Act—appears in the case law (see 511 W. 232nd Owners Corp. v JenniferRealty Co., 285 AD2d 244 [2001], affd on other grounds 98 NY2d 144 [2002];Thompson v Parkchester Apts. Co., 271 AD2d 311 [2000] [Thompson II]; 167Hous. Corp. v 167 Partnership, 252 AD2d 397 [1998]; Thompson v Parkchester Apts.Co., 249 AD2d 68 [1998] [Thompson I], lv dismissed 92 NY2d 946 [1998];15 E. 11th Apt. Corp. v Elghanayan, 220 AD2d 295 [1995], lv dismissed 87NY2d 1050 [1996]). Whitehall Tenants Corp. v Estate of Olnick (213 AD2d 200[1995], lv denied 86 NY2d 704 [1995]) is the apparent progenitor of this line ofauthority. In that case, this Court affirmed a judgment dismissing a fraud claim brought by acooperative against a sponsor notwithstanding a jury verdict in favor of the cooperative. First,this Court noted the holding of CPC Intl. v McKesson Corp. (70 NY2d 268 [1987]) thatthere is no private right of action under the Martin Act. This Court then stated that althoughCPC Intl. v McKesson Corp. "does not foreclose a cause of action for common-lawfraud, private plaintiffs will not be permitted through artful pleading to press any claim based onthe sort of wrong given over to the Attorney-General under the Martin Act" (213 AD2d at 200[citations omitted]).[FN1]This Court viewed the common-law fraud claim as an example of such impermissible "artfulpleading" because there was no evidence of reliance by the allegedly defrauded shareholder orintent to defraud by the sponsor (id. at 200-201).
In this regard, Whitehall Tenants Corp. makes good sense, and so the sins of itsdescendants cannot be blamed on it. To prevail on a claim of fraudulent practices under theMartin Act, the Attorney General need not allege or prove either scienter or intentional fraud(State of New York v Rachmani Corp., 71 NY2d 718, 725 n 6 [1988]). Accordingly, toprevent an end run around the rule prohibiting a private right of action under the Martin Act, aprivate plaintiff cannot be permitted to bring a cause of action that, although styled as one forcommon-law fraud, lacks proof of an essential element of common-law fraud.
The reasoning of Whitehall Tenants Corp., however, has erroneously been extendedto cases in which there is no legitimate reason to question at the pleading stage the ability of theplaintiff to prove all of the essential elements of common-law fraud. Thus, the decisions of thisCourt after Whitehall Tenants Corp. appear to regard as an example of the "artfulpleading" first decried in Whitehall Tenants Corp. every claim of common-law fraudarising out of conduct that could have been the basis for an action by the Attorney General.Certainly none of those decisions suggest a principled basis for identifying those claims ofcommon-law fraud that would not be regarded as such impermissible ploys.
When a plaintiff pleads all the elements of fraud with particularity, no end run around theMartin Act would be entailed by granting the plaintiff an opportunity to prove the truth of theallegations. But to throw the plaintiff out of court merely because the Attorney General would beentitled to relief under the Martin Act on the strength of the same allegations, or a subset of thoseallegations, makes no sense. The Martin Act, of course, "was enacted to protect the public fromfraudulent exploitation" (Matter of Badem Bldgs. v Abrams, 70 NY2d 45, 54 [1987]) and"has a broad remedial purpose to protect the public interest" (State of New York v Fine,72 NY2d 967, 969 [1988]). To construe the Martin Act to have abolished the right of purchasersof condominium and cooperative interests (and purchasers of other securities) to sue sellers forcommon-law fraud is to give the Martin Act a construction that is antithetical to its remedialpurpose. Nor does anything in the text of the Martin Act lend any support to such a construction.
Moreover, no decision of the Court of Appeals supports this construction of the Martin Act.In fact, in CPC Intl. v McKesson Corp., the Court upheld a claim of common-law fraudthat was based on the same financial projections that constituted the crux of the Martin Act claimthe Court dismissed (70 NY2d at 284-286). In Vermeer Owners v Guterman (78 NY2d1114 [1991]), the Court confirmed that no private right of action was authorized under theprovision of the Martin Act (General Business Law § 352-e) which governs real estateofferings. Although the Court also dismissed the plaintiffs' common-law fraud claim, it did sobecause the plaintiffs failed to establish an essential element of common-law fraud, namely,reliance, not because that claim was barred by the Martin Act (78 NY2d at 1116).[FN2]
For these reasons, the Martin Act does not bar plaintiffs' causes of action for common-lawfraud. Moreover, defendants' contention that the second amended complaints do not allege [*3]the requisite "active concealment" is without merit (see Bethkav Jensen, 250 AD2d 887 [1998]; 17 E. 80th Realty Corp. v 68th Assoc., 173 AD2d245 [1991]; Stambovsky v Ackley, 169 AD2d 254 [1991]; see also Junius Constr.Corp. v Cohen, 257 NY 393 [1931]), as is their contention that the fraud claimsimpermissibly duplicate the plaintiffs' contract claims (see First Bank of Ams. v Motor CarFunding, 257 AD2d 287 [1999]). Finally, defendants' arguments premised on the law of thecase doctrine also are without merit as the allegations of the second amended complaints are notthe same as the allegations of the earlier pleadings that the IAS court found to be lacking inparticularity.
With respect to the Kramer plaintiffs' claim for diminution damages, given defendants'concession in their brief that the order appealed from does not bar that claim, the Kramers willnot be harmed by the motion court's refusal to permit them to add allegations about thediminution in the value of their unit. Concerning the Kramer plaintiffs' claim that theconstruction defendants aided and abetted the Zeckendorfs' alleged breaches of fiduciary duty,we reject the Kramers' argument that on a motion to amend the complaint, a defendant may onlychallenge the merits of a proposed new cause of action. Nor is the opposing constructiondefendant, Jaros, Baum & Bolles, being given a second bite at the apple, since it does not appearthat it had previously moved to dismiss the Kramers' aiding and abetting claim in the firstamended complaint. On the merits, the Kramers' second amended complaint contains no factsfrom which one can infer Jaros'—or any other construction defendant's—knowledgeand assistance of the Zeckendorfs' breach of fiduciary duty during the relevant time period, i.e.,the duration of the initial, sponsor-dominated board of managers (see Kaufman v Cohen,307 AD2d 113, 125-126 [2003]).
Regarding plaintiff Kerusa's claim for gross negligence against the sponsor, defendants didnot argue before the motion court that Kerusa had no such cause of action; rather, they arguedthat Kerusa had no cause of action for gross negligence against the other defendants. Similarly,the motion court stated that "there is no allegations [sic] of duty of care owed to Kerusaby the Sponsor defendants (other than the sponsor itself)" (emphasis added), but thendenied Kerusa's motion for leave to add a gross negligence claim against the sponsor. SinceKerusa's proposed second amended complaint contains sufficient factual allegations to supportthe inference that the sponsor intentionally acted unreasonably in the face of a known or obviousrisk highly likely to result in harm (see Maltese v Westinghouse Elec. Corp., 89 NY2d955, 956-957 [1997]), Kerusa should be allowed to add a claim of gross negligence against thesponsor, and we modify accordingly. We note that the Kramer plaintiffs' first amended complaint(the operative complaint in that case) contains allegations of gross negligence that the motioncourt permitted to stand, and that defendants did not appeal from the partial denial of theirmotion to dismiss the first amended complaint. Concur—Sullivan, J.P., Williams,Catterson and McGuire, JJ.
Footnote 1: In Thompson I, thisCourt stated that "there is still a private cause of action for common-law fraud" (249 AD2d at68), even as it immediately went on to state that " 'private plaintiffs will not be permitted throughartful pleading to press any claim based on the sort of wrong given over to the Attorney-Generalunder the Martin Act' " (id. at 68-69, quoting Whitehall Tenants Corp.,supra). Similarly, this Court stated in 511 W. 232nd Owners Corp. that "[w]hileprivate plaintiffs may maintain common-law fraud claims, plaintiffs are not permitted to disguiseclaims which rightfully belong to the Attorney General as their own" (285 AD2d at 248).
Footnote 2: More recently, the Court ofAppeals made note of the issue in 511 W. 232nd Owners Corp. (supra). In thecourse of affirming on the sponsor's appeal, the Court noted that "[p]laintiffs and plaintiffs'amici, including the Attorney General, argue that the Attorney General does not have exclusivejurisdiction to prosecute Martin Act violations and that the Appellate Division erred in holdingthat plaintiffs had no standing to prosecute their fraud causes of action" (98 NY2d at 151 n 3).This argument however, was one the Court could not address because plaintiffs had notcross-moved for leave to appeal (id.).