| Sears v First Pioneer Farm Credit, ACA |
| 2007 NY Slip Op 10441 [46 AD3d 1282] |
| December 27, 2007 |
| Appellate Division, Third Department |
| Willis E. Sears et al., Appellants, v First Pioneer FarmCredit, ACA, Respondent. (And a Third-Party Action.) |
—[*1] Harris Beach, P.L.L.C., Ithaca (Mark B. Wheeler of counsel), for respondent.
Crew III, J.P. Appeal from a judgment of the Supreme Court (Krogmann, J.), entered January9, 2007 in Washington County, which, among other things, ordered the sale of certain mortgagedproperty.
Plaintiff Willis E. Sears managed and ran all aspects of plaintiffs' dairy farm and appleorchard for a number of years. Beginning in the 1980s, Sears established a relationship withdefendant—more specifically, one of its then loan officers, Christopher Truso. In the yearsthat followed, Sears routinely sought and received annual operating loans from defendant to,among other things, facilitate the harvesting of plaintiffs' crops. In September 1994, Searssuffered a stroke, and he remained hospitalized until December of that year. Although hereturned to the farm after that, Sears was unable to participate in the daily operation of the farmto the extent he had in the past, and additional personnel were brought in to assist with thephysical labor.
After suffering a significant loss due to the poor price received for the 1995 apple crop, Searsrefinanced his loans and took out an additional loan to pay back taxes and finance the 1996 fallapple harvest. Due to the prior operating losses sustained, defendant required Sears to obtain aguarantee from the Farm Service Agency (hereinafter FSA). FSA would guarantee only[*2]$700,000 and, as a result, defendant loaned Sears the additional$171,000. These loans were secured by mortgages on certain of plaintiffs' real property, as wellas a lien on all livestock, machinery and equipment. Unfortunately, plaintiffs' financialdifficulties persisted and Sears filed for bankruptcy in 2001.
Plaintiffs commenced this action in July 2002 alleging breach of fiduciary duty, breach ofobligation of fair dealing, fraud, negligence and breach of various federal laws and regulationsand seeking rescission of the underlying loan agreements. Defendant then brought a counterclaimand third-party action seeking, among other things, foreclosure[FN*] and, in response thereto, plaintiffs raised the affirmative defense of lack of capacity. SupremeCourt thereafter dismissed plaintiffs' causes of action for breach of fiduciary duty, breach ofobligation of fair dealing and negligence upon statute of limitations grounds and discoveryensued.
Ultimately, defendant moved for summary judgment dismissing plaintiffs' remaining causesof action and their affirmative defense, and plaintiffs cross-moved to amend their complaint toassert a cause of action for negligent misrepresentation. Supreme Court granted defendant'smotion for summary judgment dismissing plaintiffs' remaining causes of action, granteddefendant summary judgment on its foreclosure action, denied plaintiffs' cross motion to amendthe complaint and thereafter appointed a referee to determine the amount due under themortgages. The referee's report was filed in October 2006, and defendant thereafter moved for,among other things, confirmation of the referee's report and reasonable counsel fees. Plaintiffsopposed the motion, noting that no hearing was held with respect to the referee's report andrequesting a hearing on the amount of the counsel fees sought. Supreme Court granteddefendant's motion and, in its January 2007 judgment of foreclosure and sale, confirmed thereferee's award of $465,578.15, awarded defendant counsel fees in the amount of $175,036.38and ordered that the subject properties be sold. This appeal by plaintiffs ensued.
Plaintiffs initially contend that Supreme Court erred in dismissing their cause of actionseeking rescission of the underlying loan agreements because a question of fact exists as to Sear'scompetency at the time he executed the July 1996 loan documents. In this regard, the case lawmakes clear that "a person is presumed to be competent at the time of the performance of thechallenged action and the burden of proving incompetence rests with the party assertingincapacity" (Matter of Obermeier, 150 AD2d 863, 864 [1989]). Thus, to prevail,plaintiffs had to demonstrate that Sears' mind was "so affected as to render him wholly andabsolutely incompetent to comprehend and understand the nature of the transaction" (Aldrichv Bailey, 132 NY 85, 89 [1892]) and, further, that such incompetency/incapacity existedwhen he executed the loan documents in July 1996 (see Feiden v Feiden, 151 AD2d 889,890 [1989]; Matter of Obermeier, 150 AD2d at 864). The record as a whole falls far shortof meeting this burden.
To be sure, Sears suffered various physical limitations following his stroke and was unable toperform the actual labor necessary to run the farm on a daily basis; his speech was somewhatslurred, he experienced hearing difficulties and he read at a slower pace. Such proof, however,does not establish that Sears was incapacitated in July 1996. Although his wife now asserts thatthe entire loan transaction was completely beyond his comprehension at that point in [*3]time, it bears noting that she did not attend the closing becauseSears had requested operating loans in the past and such transactions had become a "familiarpattern." Simply put, neither hindsight nor regret establishes incompetency. Nor are wepersuaded by the affidavit of Sears' treating psychiatrist, who opined, in a conclusory andunsubstantiated fashion, that Sears was not competent to engage in any business transactionsfollowing his stroke. Although the psychiatrist describes Sears as "grossly handicapped" as ofJuly 1996, there is nothing in his or his wife's examination before trial testimony to lend credenceto that statement. Accordingly, we have no quarrel with Supreme Court's decision to dismiss thecause of action seeking rescission.
We reach a similar conclusion with regard to the cause of action for fraud. Actual fraudrequires "a misrepresentation, known by the defendant[] to be false and made for the purpose ofinducing the plaintiff to rely upon it, justifiable reliance and damages" (Van Kleeck v Hammond, 25 AD3d941, 943 [2006] [internal quotation marks and citation omitted]). While plaintiffs allege thatdefendant represented that the 1996 loan transaction would be beneficial to them, "[t]he merefact that the expected performance was not realized is insufficient to demonstrate that[defendant] falsely stated its intentions" (Edelman v Buchanan, 234 AD2d 675, 676[1996] [internal quotation marks and citations omitted]). Plaintiffs already were in financial perilat the time that Sears executed the relevant loan documents, the July 1996 transaction onlymarginally raised plaintiffs' indebtedness and it appears that there were two possible paths topursue at that point—refinance, borrow additional money and hope for a good harvest in1996 or begin liquidating assets then and there. The fact that, with the benefit of hindsight,plaintiffs perhaps should have chosen the latter course does not render the underlying transactionfraudulent.
As to the issue of constructive fraud, such a claim is stated where, irrespective of actualintent to deceive, the plaintiff can show that a confidential or fiduciary relationship existedbetween the parties (Williams v Lynch, 245 AD2d 715, 717 [1997], appealdismissed 91 NY2d 957 [1998]). Such a relationship exists where "one party reposesconfidence in another and reasonably relies on the other's superior expertise or knowledge" (Doe v Holy See [State of Vatican City],17 AD3d 793, 795 [2005], lv denied 6 NY3d 707 [2006] [internal quotationmarks and citation omitted]). Where a party is seeking to establish such a relationship with aninstitutional defendant, he or she bears the burden of showing that the relationship was "uniqueor distinct" from the relationship the institution typically enjoyed with individuals (Robare v Fortune Brands, Inc., 39AD3d 1045, 1047 [2007], lv denied 9 NY3d 810 [2007] [internal quotation marksand citation omitted]). Notably, a fiduciary relationship usually does not exist in arm's lengthtransactions between debtors and creditors (see Landes v Sullivan, 235 AD2d 657, 660[1997]).
Here, plaintiffs established nothing more than the fact that Sears and Truso socialized onoccasion. Sears was a seasoned and experienced farmer, and while he plainly relied upon Trusoover the years to procure for him the funds necessary to operate his farm, there simply is nothingin the record to suggest that Sears relied upon Truso for financial advice. Having failed toestablish the existence of a confidential or fiduciary relationship, plaintiffs' cause of action forconstructive fraud was properly dismissed, and their cross motion to amend the complaint toassert a cause of action for negligent misrepresentation was properly denied.
We do, however, find merit to plaintiffs' claim that Supreme Court erred in confirming thereferee's report. Assuming, without deciding, that plaintiffs could and did waive the hearing uponnotice requirement contained in CPLR 4313, the case law nonetheless reflects that it is error toconfirm a referee's report without either conducting a hearing on notice or otherwise [*4]affording the contesting party an opportunity to present its ownproof or challenge the referee's computations (see Shultis v Woodstock Land Dev.Assoc., 195 AD2d 677, 678-679 [1993]). As the record fails to reflect that Supreme Court, asthe ultimate arbiter of the dispute, afforded plaintiffs an opportunity to contest or contradict thefigures contained in the referee's report, and as it is clear that no hearing occurred, SupremeCourt erred in confirming the referee's report. Accordingly, this matter must be remitted toSupreme Court in order to afford plaintiffs some opportunity to respond to the figures containedin the referee's report.
We reach a similar conclusion with regard to the award of counsel fees. While we agree thatparagraph No. 8 of the underlying promissory note is sufficiently broad to permit the recovery ofcounsel fees beyond the narrow confines of foreclosure, the award of such fees nonetheless iscommitted to the sound discretion of the trial court upon due consideration of various factors,including but not limited to "the time commitment involved, the relative difficulty of the matter,the nature of the services provided, counsel's experience and the results obtained" (Matter of Rose BB., 35 AD3d1044, 1046 [2006], appeal dismissed 8 NY3d 936 [2007]). Our review of SupremeCourt's decision on this point evidences no indication that any such analysis occurred, and themere fact that counsel submitted detailed bills and documented the expenses incurred in litigatingevery possible aspect of this matter does not automatically warrant an award of counsel fees inexcess of $175,000. Some analysis of those figures and consideration of whether the sum soughtindeed is reasonable must occur prior to making any award. Plaintiffs' remaining arguments, tothe extent not specifically addressed, have been examined and found to be lacking in merit.
Peters, Spain, Carpinello and Mugglin, JJ., concur. Ordered that the judgment is reversed, onthe law, without costs, and matter remitted to the Supreme Court for further proceedings notinconsistent with this Court's decision.
Footnote *: The bankruptcy stay was liftedto permit commencement of the foreclosure action.