| Carbon Capital Mgt., LLC v American Express Co. |
| 2011 NY Slip Op 07598 [88 AD3d 933] |
| October 25, 2011 |
| Appellate Division, Second Department |
| Carbon Capital Management, LLC,Respondent-Appellant, v American Express Company et al., Defendants, and IrwinSelinger, Appellant-Respondent. |
—[*1] Bernard A, Nathan, P.C., West Islip, N.Y., for respondent-appellant.
In an action to recover damages for fraud and breach of fiduciary duty, (1) the defendantIrwin Selinger appeals, as limited by his brief, from so much of an order of the Supreme Court,Nassau County (Driscoll, J.), dated February 25, 2010, as directed a hearing to determine thevalidity of service of process upon him, and denied those branches of his motion which werepursuant to CPLR 3211 (a) (7) to dismiss so much of the cause of action alleging fraud insofar asasserted against him as was premised upon the allegations that he misrepresented the integrity ofnonparty Derivium Capital, LLC, and the cause of action alleging breach of fiduciary duty insofaras asserted against him, pursuant to CPLR 3211 (a) (5) to dismiss, as time-barred, the cause ofaction alleging fraud and so much of the cause of action alleging breach of fiduciary duty insofaras asserted against him as was premised upon allegations that he falsely represented the tax-freenature of a loan from Derivium Capital, LLC, and that Derivium Capital, LLC, would holdcertain notes as collateral for an agreed-upon period of time, pursuant to CPLR 3211 (a) (1) todismiss the complaint insofar as asserted against him, and, in effect, pursuant to CPLR 3211 (a)(7) to dismiss the complaint insofar as asserted against him based upon the affirmative defense ofchamperty, and the plaintiff cross-appeals, as limited by its brief, from so much of the same orderas directed a hearing on the issue of whether service of process was properly effected upon thedefendant Irwin Selinger, and granted those branches of the motion of the defendant IrwinSelinger which were pursuant to CPLR 3211 (a) (7) to dismiss so much of the cause of actionalleging fraud insofar as asserted against him as was premised upon the allegations that hemisrepresented the tax-free nature of a loan to it from Derivium Capital, LLC, and pursuant toCPLR 3211 (a) (5) to dismiss, as time-barred, so much of the cause of action alleging breach offiduciary duty insofar as asserted against him as was premised upon allegations that he failed toexercise diligence with respect to ascertaining the fitness of Derivium Capital, LLC, as a lender,(2) the defendant Irwin Selinger appeals, as limited by his brief, from so much of an order of thesame court (Bucaria, J.), dated July 29, 2010, as, sua sponte, in effect, reconsidered his priormotion to dismiss the complaint insofar as asserted against him, and thereupon adhered to thedeterminations in the order dated February 25, 2010, denying those branches of his motion whichwere pursuant to CPLR 3211 (a) (7) to dismiss so much of the cause of action alleging fraudinsofar as asserted against him as was premised upon the allegations that he [*2]misrepresented the integrity of Derivium Capital, LLC, and thecause of action alleging breach of fiduciary duty insofar as asserted against him, pursuant toCPLR 3211 (a) (5) to dismiss, as time-barred, the cause of action alleging fraud and so much ofthe cause of action alleging breach of fiduciary duty insofar as asserted against him as waspremised upon allegations that he falsely represented the tax-free nature of the loan fromDerivium Capital, LLC, and that Derivium Capital, LLC, would hold certain notes as collateralfor an agreed-upon period of time, and, in effect, pursuant to CPLR 3211 (a) (7) to dismiss thecomplaint insofar as asserted against him based upon the affirmative defense of champerty, andthe plaintiff cross-appeals, as limited by its brief, from so much of the same order as, sua sponte,in effect, reconsidered the prior motion of the defendant Irwin Selinger to dismiss the complaintinsofar as asserted against him, and thereupon adhered to the determinations in the order datedFebruary 25, 2010, granting those branches of the motion of the defendant Irwin Selinger whichwere pursuant to CPLR 3211 (a) (7) to dismiss so much of the cause of action alleging fraudinsofar as asserted against him as was premised upon the allegations that he misrepresented thetax-free nature of a loan to it from Derivium Capital, LLC, and pursuant to CPLR 3211 (a) (5) todismiss, as time-barred, so much of the cause of action alleging breach of fiduciary duty insofaras asserted against him as was premised upon allegations that he failed to exercise diligence withrespect to the fitness of Derivium Capital, LLC, as a lender, and (3) the defendant Irwin Selingerappeals, as limited by his brief, from so much of an order of the same court (Bucaria, J.), datedAugust 19, 2010, as, sua sponte, in effect, vacated the determination in the order dated February25, 2010, directing a hearing on the issue of the validity of service of process upon him, and,upon vacatur, denied, without a hearing, that branch of his motion which was pursuant to CPLR3211 (a) (8) to dismiss the complaint insofar as asserted against him.
Ordered that on the Court's own motion, the notices of appeal and cross appeal from so muchof the order dated February 25, 2010, as directed a hearing on the issue of the validity of serviceof process are deemed to be applications for leave to appeal and cross-appeal, respectively, andleave to appeal and cross-appeal from that portion of the order is granted (see CPLR5701 [c]); and it is further,
Ordered that on the Court's own motion, the notices of appeal and cross appeal from theorder dated July 29, 2010, and the notice of appeal from the order dated August 19, 2010, aredeemed to be applications for leave to appeal and cross-appeal, respectively, and leave to appealand cross-appeal is granted (see CPLR 5701 [c]); and it is further,
Ordered that the order dated February 25, 2010, is affirmed, without costs or disbursements,and the matter is remitted to the Supreme Court, Nassau County, for a hearing on the issue of thevalidity of service of process upon the defendant Irwin Selinger; and it is further,
Ordered that the order dated July 29, 2010, is reversed, on the law, without costs ordisbursements; and it is further,
Ordered that the order dated August 19, 2010, is reversed insofar as appealed from, on thelaw, without costs or disbursements.
The order of the Supreme Court dated February 25, 2010, in which Justice Driscoll, amongother things, directed a hearing to determine the validity of service of process upon the defendantIrwin Selinger, an agent of the defendant Corporate Solutions Group, LLC (hereinafter CSG),who facilitated and/or brokered the financial transaction that is the subject of this action,constituted the law of the case, and was binding on all other justices of coordinate jurisdiction(see Post v Post, 141 AD2d 518, 519 [1988]). "The doctrine of the 'law of the case' is arule of practice, an articulation of sound policy that, when an issue is once judicially determined,that should be the end of the matter as far as Judges and courts of co-ordinate jurisdiction areconcerned" (Martin v City of Cohoes, 37 NY2d 162, 165 [1975]; see Post v Post,141 AD2d at 519; George W. Collins, Inc. v Olsker-McLain Indus., 22 AD2d 485,488-489 [1965]). "Such a rule is essential to an orderly and seemly administration of justice in acourt composed of several judges" (George W. Collins, Inc. v Olsker-McLain Indus., 22AD2d at 489). "When there is an appeal from an order which is found to have been made inviolation of the doctrine of law of the case, the Appellate Division may properly reverse it forthat reason alone, without regard to the merits" (Post v Post, 141 AD2d at 519; [*3]see George W. Collins, Inc. v Olsker-McLain Indus., 22 AD2dat 488). Accordingly, the orders dated July 29, 2010, and August 19, 2010, respectively, in whichJustice Bucaria, sua sponte, in effect, reconsidered previously determined motions, must bereversed and reversed insofar as appealed from, respectively, as those orders are in violation ofthe doctrine of law of the case (see Post v Post, 141 AD2d at 519; see also Merriwether v Osborne, 66AD3d 851 [2009]; Crapsi v SouthShore Golf Club Holding Co., Inc., 19 AD3d 1024, 1025 [2005]).
In the order dated February 25, 2010, the Supreme Court properly directed a hearing toresolve that branch of Selinger's motion which was to dismiss the complaint insofar as assertedagainst him for lack of personal jurisdiction (see CPLR 3211 [a] [8]; Post v Post,141 AD2d at 520). In support of that branch of his motion, Selinger submitted, inter alia,affidavits of security officers at his building asserting that the process server delivered the paperson July 5, 2009, which was a Sunday. The affidavit of the plaintiff's process server, submitted inopposition to that branch of Selinger's motion, alleged that service was effected on Saturday, July4, 2009, by delivery of a copy of the summons and complaint to a person of suitable age anddiscretion at Selinger's apartment complex in Atlanta, Georgia, and the subsequent mailing of asecond copy to Selinger at his apartment. Pursuant to General Business Law § 11, "[a]llservice or execution of legal process, of any kind whatever, on the first day of the week isprohibited." Further, "[s]ervice or execution of any process upon said day except as hereinpermitted is absolutely void for any and every purpose whatsoever" (General Business Law§ 11). Service of process is to be effected "without the state, in the same manner as serviceis made within the state" (CPLR 313), and the prohibition of service on a Sunday in GeneralBusiness Law § 11 applies to service made outside of New York regardless of anotherstate's laws with respect to service on that day of the week (see Eisenberg v Citation-LangleyCorp., 99 AD2d 700, 701 [1984]). Accordingly, in view of the conflicting affidavitssubmitted regarding the day that service upon Selinger was purportedly made, the Supreme Courtproperly directed a hearing to resolve that issue (see DeStaso v Bottiglieri, 52 AD3d 453, 454 [2008]; Campbellv Johnson, 264 AD2d 461 [1999]).
Selinger also moved to dismiss the complaint insofar as asserted against him on the groundthat it failed to state a cause of action alleging fraud or breach of fiduciary duty (seeCPLR 3211 [a] [7]). The plaintiff alleged that Selinger, acting through CSG—which is nota party to this appeal—fraudulently induced the plaintiff's assignor, Dr. Jonathan S.Landow, and nonparty New York Medical, P.C. (hereinafter New York Medical), to enter into afinancial transaction with nonparty Derivium Capital, LLC (hereinafter Derivium). The plaintiffalleged that Selinger misrepresented that the transaction was a loan, when it was actually treatedas a sale for federal income taxation purposes. The plaintiff further alleged that Selingermisrepresented that, during the term of the "loan," Derivium would hold certain floating-ratenotes as collateral, and that at the end of the loan term Landow and New York Medical wouldhave the option of repaying the loan with interest or surrendering the notes, but that, instead,Derivium sold those notes and used the proceeds for further investment. With respect to thecause of action alleging breach of fiduciary duty, the plaintiff alleged that Selinger breached hisduty to Landow through the aforementioned fraudulent misrepresentations, and by failing todiligently investigate Derivium's fitness as a lender before advising Landow to enter into thetransaction.
In order to establish fraud, a plaintiff must show "a material misrepresentation of a fact,knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff anddamages" (Eurycleia Partners, LP vSeward & Kissel, LLP, 12 NY3d 553, 559 [2009]; see Channel Master Corp. vAluminium Ltd. Sales, 4 NY2d 403, 407 [1958]). A cause of action alleging fraud must bepleaded with the particularity required by CPLR 3016 (b) (see Eurycleia Partners, LP vSeward & Kissel, LLP, 12 NY3d at 559; Pludeman v Northern Leasing Sys., Inc., 10 NY3d 486, 492[2008]). "Although under section 3016 (b) the complaint must sufficiently detail the allegedlyfraudulent conduct, that requirement should not be confused with unassailable proof of fraud.Necessarily, then, section 3016 (b) may be met when the facts are sufficient to permit areasonable inference of the alleged conduct" (Pludeman v Northern Leasing Sys., Inc., 10NY3d at 492). Here, the Supreme Court properly determined that the complaint stated a cause ofaction alleging fraud with respect to the alleged misrepresentations regarding Derivium's integrityas a lender, and that Derivium would hold the floating-rate notes as collateral during thependency of the "loan." Further, the Supreme Court properly determined that anymisrepresentations by Selinger that the transaction was tax-free are, [*4]standing alone, not actionable (see Lama Holding Co. v SmithBarney, 88 NY2d 413, 419-420 [1996]). However, if the plaintiff can establish that Selinger,with the intent to induce reliance, misrepresented the underlying nature of the transaction for thepurpose of deceiving the plaintiff as to the tax consequences of the transaction, the plaintiff maybe able to recover any proximately caused damages under a theory of fraud (id. at 420).We further reject Selinger's contention that the fraud cause of action should have been dismissedon the ground that Landow was a sophisticated investor, as we cannot say, as a matter of law,that Landow's alleged reliance on Selinger's representations was unjustified (see DDJ Mgt., LLC v Rhone GroupL.L.C., 15 NY3d 147, 155 [2010]; Schlaifer Nance & Co. v Estate of Warhol,119 F3d 91, 98 [1997]).
"[A] fiduciary relationship 'exists between two persons when one of them is under a duty toact for or to give advice for the benefit of another upon matters within the scope of the relation' "(EBC I, Inc. v Goldman, Sachs &Co., 5 NY3d 11, 19 [2005], quoting Restatement [Second] of Torts § 874,Comment a]). "Such a relationship, necessarily fact-specific, is grounded in a higher levelof trust than normally present in the marketplace between those involved in arm's length businesstransactions" (EBC I, Inc. v Goldman, Sachs & Co., 5 NY3d at 19; see NortheastGen. Corp. v Wellington Adv., 82 NY2d 158, 162 [1993]). While courts will generally lookto the parties' contractual agreement to discover the nature of their relationship, the existence of afiduciary relationship is not dependent solely upon an agreement or contractual relation (seeEBC I, Inc. v Goldman, Sachs & Co., 5 NY3d at 20). Rather, the actual relationship betweenthe parties determines the existence of a fiduciary duty (id., citing Restatement [Second]of Torts § 874, Comment b]). Here, the Supreme Court properly concluded, in thefirst instance, that the complaint stated a cause of action alleging breach of fiduciary duty, which,here, was premised both on actual fraud and failure to exercise due diligence in the investigationof an investment opportunity. A factfinder could draw a rational inference of an enhancedfiduciary level of trust between Selinger and Landow from the details of their businessrelationship leading up the consummation of the Derivium transaction. The allegations aresupported by, inter alia, reference to correspondence between Selinger and Landow, whereinSelinger referred to himself as Landow's "financial teacher," and stated that the two made a"great winning team."
The Supreme Court properly concluded that the cause of action alleging fraud was not barredby the statute of limitations. An action alleging fraud must be commenced within "the greater ofsix years from the date the cause of action accrued or two years from the time the plaintiff or theperson under whom the plaintiff claims discovered the fraud, or could with reasonable diligencehave discovered it" (CPLR 213 [8]). "[A] cause of action [to recover damages] for fraud cannotaccrue until every element of the claim, including injury, can truthfully be alleged" (NewYork City Tr. Auth. v Morris J. Eisen, P.C., 276 AD2d 78, 85 [2000]). Here, Landowentered into the contract with Derivium on April 11, 2003, at which point his reliance onSelinger's representations would have given rise to his alleged injuries. Accordingly, since theaction was commenced on April 9, 2009, less than six years later, that branch of Selinger'smotion which was to dismiss the cause of action alleging fraud as barred by the statute oflimitations was properly denied.
The Supreme Court properly determined that the cause of action alleging breach of fiduciaryduty was partially barred by the statute of limitations. "The statute of limitations for a breach offiduciary duty cause of action depends on the substantive remedy which the plaintiff seeks" (Scott v Fields, 85 AD3d 756, 759[2011]; see Loengard v Santa Fe Indus., 70 NY2d 262, 266 [1987]). Where the reliefsought is monetary in nature, the statute of limitations is three years (see Scott v Fields, 85 AD3d 756[2011]; Monaghan v Ford MotorCo., 71 AD3d 848, 849-850 [2010]). However, where an allegation of fraud is essentialto a breach of fiduciary duty claim, courts will apply the six-year statute of limitations applicableto fraud under CPLR 213 (8) (see Monaghan v Ford Motor Co., 71 AD3d at 850; see also IDT Corp. v Morgan Stanley DeanWitter & Co., 12 NY3d 132, 139 [2009]; Kaufman v Cohen, 307 AD2d 113,119 [2003]). Here, the claim that Selinger breached a fiduciary duty to Landow by failing todiligently ascertain Derivium's fitness as a lender is not based upon actual fraud and, therefore,that claim is governed by the three-year statute of limitations, and is time-barred. However, theclaims that Selinger breached his fiduciary duty to Landow by misrepresenting Derivium'slegitimacy as a lender, the tax consequences of the alleged loan, and whether Derivium wouldhold the floating-rate notes as collateral are, in essence, fraud-based claims, and the SupremeCourt correctly determined that these claims were governed by the six-year statute of limitations,and [*5]were timely (see Monaghan v Ford Motor Co., 71AD3d at 850).
We reject Selinger's contention that the complaint should have been dismissed pursuant toCPLR 3211 (a) (1) insofar as asserted against him because of an arbitration clause in a consultingagreement between CSG and New York Medical. As an initial matter, "[a]n agreement toarbitrate is not a defense to an action" and, thus, "it may not be the basis for a motion to dismiss"(Allied Bldg. Inspectors Intl. Union of Operating Engrs., Local Union No. 211, AFL-CIO vOffice of Labor Relations of City of N.Y., 45 NY2d 735, 738 [1978]; see Blatt vSochet, 199 AD2d 451 [1993]). Moreover, Selinger did not move to stay this judicialproceeding pending the arbitration (see CPLR 7503 [a]), and we decline to exercise ourown authority to stay this proceeding at this time (see Allied Bldg. Inspectors Intl. Union ofOperating Engrs., Local Union No. 211, AFL-CIO v Office of Labor Relations of City ofN.Y., 45 NY2d at 738), as he has failed to show that the agreement at issue governs disputesbetween himself and Landow in their personal capacities. Although both are signatories to theagreement, they signed on behalf of CSG and New York Medical, respectively. Additionally, thecomplaint alleges that Selinger breached a fiduciary duty which was separate from any dutycreated by the terms of the agreement (see e.g. EBC I, Inc. v Goldman, Sachs & Co., 5NY3d at 20).
Finally, we reject Selinger's contention that the complaint should have been dismissedinsofar as asserted against him under the doctrine of champerty. The record demonstrates that theplaintiff, Carbon Capital Management, LLC, is owned and managed by Landow, and theassignment of Landow's interest in this action to the plaintiff does not implicate the doctrine ofchamperty (see Judiciary Law § 489; Sprung v Jaffe, 3 NY2d 539, 544[1957]). Angiolillo, J.P., Dickerson, Chambers and Lott, JJ., concur. [Prior Case History:2010 NY Slip Op 30477(U).]