Opinion
650177/2010.
Decided January 31, 2011.
Morgenstern Blue, LLC, New York, NY, (Gregory A. Blue, Esq.), for Plaintiff.
Dickstein Shapiro LLP, New York, NY, (Neal S. Barlia, Esq.), Hodgson Russ LLP, New York, NY, (Joel M. Wolosky, Esq.), for Defendant.
Defendant Joel A. Chernov moves, pursuant to CPLR 3211 (a) (1) and (7) and 3016 (b), for an order dismissing the complaint with prejudice.
In the complaint, plaintiff Saleh Holdings alleges the following:
On October 21, 1997, nonparty Marc S. Dreier, on behalf of nonparty Dreier Baritz LLP (D B), executed a promissory note bearing the principal amount of $550,000 and payable to Saleh Holdings. The note was secured by a personal guaranty. The guaranty, but not the note, was secured by a collateral mortgage on real property located at 27 Meadow Lane, Westhampton Beach, NY, owned jointly by Marc Dreier and nonparty Elisa Dreier, his wife.
The guaranty and the mortgage bear the signature of Marc Dreier and the apparent signature of Elisa Dreier. Chernov, an attorney employed by D B, notarized the signatures, swearing that both signatories personally appeared before him. However, Elisa Dreier attests that she never signed either the guaranty or the mortgage, did not sign them in Chernov's presence, did not authorize anyone to sign them on her behalf, and did not represent to Chernov that she signed the documents or authorized anyone to sign them on her behalf ( see Elisa Dreier Feb. 24, 2010 Aff., ¶ 4). Saleh Holdings would not have loaned D B the principal amount, had it known that Elisa Dreier did not sign the documents.
D B paid $55,000 in principal on the note. At some point prior to the note's October 31, 1999 maturity date, Saleh Holdings verbally agreed to modify the note's terms, waiving the specified maturity date, and requiring payment of interest at 16.5%, the annual rate specified in the note. D B and its successor firm, Dreier LLP, duly made monthly interest payments on the note in accordance with the oral modification through November 2008, and then defaulted, following the arrest of Marc Dreier on unrelated criminal charges and Dreier LLP's closing.
In 2008, Dreier LLP filed for Chapter 11 bankruptcy relief ( see In re Dreier LLP, US Bankr Ct, SD NY, Bank No. 08-15051 [SMB]). In 2009, Marc Dreier filed for Chapter 7 bankruptcy relief ( see In re Marc S. Dreier, US Bankr Ct., SD NY, Bankr No. 09-10371 [SMB]). On April 4, 2009, Saleh Holdings filed proof of a secured claim in the amount of $495,000 against Dreier LLP in thebankruptcy proceeding, seeking to recover the allegedly outstanding principal amount on the note.
On September 23, 2009, Saleh Holdings filed an amended adversary complaint against Dreier LLP, Marc Dreier, and Elisa Dreier to enforce the note and guaranty and seeking to recover $495,000 in outstanding principal ( see Saleh Holdings Group, Inc. v Marc S. Dreier, Elisa Dreier, Dreier LLP, US Bankr Ct, SD NY, Adversary No. 09-01477). Subsequently, Saleh Holdings voluntarily discontinued its claims against Dreier LLP and Marc Dreier. Elisa Dreier moved to dismiss the guaranty claim asserted against her on the grounds that the claim was time barred, and that the mortgage had been satisfied. The bankruptcy court granted the motion, and dismissed the breach of guaranty claim, solely on statute of limitations grounds ( see In re: Dreier LLP, In re Marc S. Dreier, Saleh Holdings Group, Inc. v Dreier, 421 BR 60, 63 [US Bankr Ct, SD NY 2009]). In March 2010, Saleh Holdings filed a notice of dismissal with prejudice of its claims against Elisa Dreier in the bankruptcy proceedings.
Subsequently, in March 2010, Saleh Holdings commenced this action against Chernov for fraud and aiding and abetting fraud on allegations that Chernov fraudulently notarized Elisa Dreier's signature on the guaranty and collateral mortgage with the knowledge that Elisa Dreier did not sign these documents, and as part of a scheme to fraudulently induce Saleh Holdings to loan D B $550,000. Saleh Holdings seeks to recover $495,000, an amount equal to the outstanding principal, together with prejudgment interest accruing from November 2008 through the date of judgment and costs of collection, including attorneys' fees.
Chernov now seeks to dismiss the complaint in its entirety. In the motion, Chernov and Saleh Holdings dispute whether Saleh Holdings has alleged facts sufficient to support claims for fraud and aiding and abetting fraud.
To state a prima facie claim for common-law fraud, the plaintiff must allege, in sufficient detail, facts demonstrating the existence of a misrepresentation or a material omission of fact which is false and known to be false by the defendant, for the purpose of inducing the plaintiff to rely on it, justifiable reliance by the plaintiff on the misrepresentation, and resulting injury ( Small v Lorillard Tobacco Co., Inc., 94 NY2d 43, 57; Lama Holding Co. v Smith Barney, Inc., 88 NY2d 413, 421). Allegations that the defendant knowingly falsely notarized a signature with the intent that the misrepresentation be relied upon by the plaintiff may be held to constitute a legally viable claim for fraud, separate and apart from a claim for notarial misconduct ( Marine Midland Bank, N.A. v Stanton, 147 Misc 2d 426, 429 [Sup Ct, Monroe County 1990]).
Here, however, even when deeming as true the factual allegations in the complaint and resolving all inferences in favor of Saleh Holdings ( see Leon v Martinez, 84 NY2d 83, 87-88; CPLR 3211 [a] [7]), Saleh Holdings has failed to plead the necessary elements of a fraud claim. In pleading these elements, the plaintiff must comply with New York procedural law requiring that the plaintiff's allegations be sufficiently particularized so as to give adequate notice to the court and to the parties of the transactions and occurrences intended to be proved ( Foley v D'Agostino, 21 AD2d 60, 64 [1st Dept 1964]; see CPLR 3016 [b]). Section 3016 (b) of the CPLR provides, in relevant part, that "[w]here a cause of action or defense is based upon misrepresentation, fraud, mistake, wilful default, breach of trust or undue influence, the circumstances constituting the wrong shall be stated in detail" (CPLR 3016 [b]). A plaintiff may be excused from this heightened pleading requirement only where "the surrounding circumstances are peculiarly within the knowledge of" the defendant ( Oxford Health Plans (NY), Inc. v BetterCare Health Care Pain Mgt. Rehab PC, 305 AD2d 223, 224 [1st Dept 2003]). Such circumstances are not present here.
Saleh Holdings' factual allegations demonstrate that Chernov's alleged failure to properly notarize Elisa Dreier's signature could not have been a proximate cause of the alleged loss, as a matter of law. Where, as here, "a significant period of time has elapsed between the defendant's actions and the plaintiff's injury, there is a greater likelihood that the loss is attributable to events occurring in the interim" ( First Nationwide Bank v Gelt Funding Corp., 27 F3d 763, 772 [2d Cir 1994], cert denied 513 US 1079).
A plaintiff cannot successfully plead proximate cause where the "alleged injury was insufficiently close in time to the alleged misrepresentations to warrant the inference of a nexus between the two" ( id.). Saleh Holdings alleges that approximately 11 years elapsed between the notarization and the loss. During that 11-year period, a significant period of time, Saleh Holdings admittedly voluntarily orally modified the note repayment terms and waived the maturity date requirement, in exchange for the right to receive interest-only payments at the rate of 16.5% per annum. Saleh Holdings does not allege that Chernov was involved in, or aware of, the oral modification. Following the agreement, Saleh Holdings never reduced the modification to writing, attempted to renegotiate the date of maturity of the note, attempted to obtain the guarantors' written agreement to the modification, or attempted to collect any part of the outstanding principal from D B or Dreier LLP. Saleh Holdings alleges that D B and Dreier LLP fully performed the oral modification, duly paying monthly interest in full for 11 years, before defaulting. The only inference possible from these allegations is that Saleh Holdings was satisfied with the terms of the modified note and the debtor's performance under them for 11 years.
Further, Saleh Holdings' omissions and allegations demonstrate that the alleged loss was caused by factors other than Chernov's alleged fraudulent notarization. "[W]hen factors other than the defendant's fraud are an intervening direct cause of a plaintiff's injury, that same injury cannot be said to have occurred by reason of the defendant's actions" ( id. at 769). The bankruptcy court dismissed Saleh Holdings' guaranty claim asserted against Elisa Dreier solely on the ground that the claim was barred by the applicable statute of limitations, CPLR 213, and did not address the notarization issues ( see In re: Dreier, LLP, In re Marc S. Dreier, Saleh Holdings Group, Inc. v Dreier, 421 BR at 63-64). The court reasoned that continued interest payments by the maker of a promissory note without the express or implied authority of the guarantor do not toll the running of the limitations period as against the guarantor ( see id., citing Peoples Trust Co. of Malone v O'Neil, 273 NY 312, 315 [1937]; Park Assoc. v Crescent Park Assoc., Inc., 159 AD2d 460, 462 [2d Dept 1990]). The court held that, therefore, Saleh Holdings' guaranty claim against Elisa Dreier accrued on October 31, 1999, when Dreier LLP failed to repay the principal amount in full, and expired prior to commencement of the bankruptcy action ( see id.). Clearly, then, it was Saleh Holdings' own conduct in modifying the note's principal obligation without obtaining Elisa Dreier's consent, and in failing for six years to pursue its rights to enforce the guaranty, that was the sole proximate cause of the loss that Saleh Holdings now seeks to recover from Chernov. As the result of the bankruptcy court decision, Saleh Holdings could not have recovered under the guaranty against Elisa Dreier, even if she had signed the guaranty and collateral mortgage in front of Chernov.
The fraud claim is also fatally defective on the ground that, under the facts as alleged by Saleh Holdings, Saleh Holdings cannot prove that it suffered an injury or loss of the type recoverable on a fraud claim. In a fraud action,
[t]he true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong or what is known as the out-of-pocket rule. Under this rule, the loss is computed by ascertaining the difference between the value of the bargain which a plaintiff was induced by fraud to make and the amount or value of the consideration exacted as the price of the bargain. Damages are to be calculated to compensate plaintiffs for what they lost because of the fraud, not to compensate them for what they might have gained. Under the out-of-pocket rule, there can be no recovery of profits which would have been realized in the absence of fraud ( Lama Holding Co. v Smith Barney, Inc., 88 NY2d at 421 [internal quotes and citations omitted]; Starr Found. v American Intl. Group, Inc. , 76 AD3d 25 , 25 [1st Dept 2010]; Delcor Lab., Inc. v Cosmair, Inc., 169 AD2d 639, 640 [1st Dept], appeal dismissed 78 NY2d 952). In the context of a fraudulently induced loan, "although the loan is procured through fraud, any amounts paid on the debt reduce the amount the plaintiff can claim as damages resulting from the fraud" ( First Nationwide Bank v Gelt Funding Corp., 27 F3d at 768). "Because the fraud defendant is not liable for all losses that may occur, but only for those actually suffered, only after the lender has exhausted the bargained-for remedies available to it[,] can the lender assert that it was damaged by the fraud, and then only to the extent of the deficiency" ( id. at 768).
Saleh Holdings seeks to recover outstanding principal due under the guaranty of the note, as orally modified, in the amount of $495,000, together with outstanding interest, including judicial interest imposed from the date of the default. "Whether principal, interest, or some combination of the two, these are not out-of-pocket losses required to sustain a claim of fraud under New York law" ( In Re Eugenia VI Venture Holdings, Ltd. Litig., 649 F Supp 2d 105, 122 [SD NY 2008], affd 370 Fed Appx 197 [2d Cir 2010]). Moreover, Saleh Holdings admits that it received $55,000 paid against the original $550,000 principal, together with continuous monthly interest payments by D B and Dreier LLP at 16.5% per annum over an 11-year period. In addition, Saleh Holdings admitted before the bankruptcy court that it received $6,806.25 each month beginning July 2006 through November 2008 ( see In re Dreier, LLP, US Bankr Ct, SD NY, Bankr No. 08-15051, Notice of Dismissal and Stipulation as to Defendant Dreier, LLP, Dec. 1, 2009).
Based on these admissions, Chernov calculates that the principal and interest
payments received by Saleh Holdings total $959,697.55, or, more than $904,000 in interest over that period. This sum far exceeds that amount of the unpaid principal and contractual interest sought by Saleh Holdings. While Saleh Holdings disputes the total figure urged by Chernov, it does so without basis. Saleh Holdings does not point to any error in logic or mathematics, nor does it allege that D B or Dreier LLP failed to make any monthly interest payments during the 11-year period or that it received some lesser amount against the debt. Therefore, and in view of these omissions, admissions, and allegations by Saleh Holdings regarding the amount it received against the note and guaranty, it cannot demonstrate that Chernov's alleged misconduct caused it to suffer an actual pecuniary loss of the type recoverable on a fraud claim.
For the foregoing reasons, the branch of the motion to dismiss the fraud claim is granted.
For these reasons as well, the branch of the motion to dismiss the aiding and abetting fraud claim is also granted. In order to state a legally viable claim for aiding and abetting fraud, the plaintiff must allege, with sufficient particularity, facts demonstrating that the defendant had knowledge of the fraudulent nature of the representations, and rendered substantial assistance to the principal actor ( Goldson v Walker , 65 AD3d 1084 , 1085 [2d Dept 2009]; National Westminster Bank USA v Weksel, 124 AD2d 144, 147-148 [1st Dept], lv denied 70 NY2d 604; see CPLR 3016 [b]). As held above, to the extent that Saleh Holdings alleges direct fraud by Chernov, it has failed to allege facts sufficient to state a cognizable primary claim of fraud. Similarly, as held above, Saleh Holdings has failed to allege facts sufficient to demonstrate the existence of a scheme to fraudulently induce it to loan the funds to D B.
In sum, while a plaintiff need not produce absolute proof of fraud, and while there may be cases in which particular facts are solely within a defendant's possession, "it is also true that the strength of the requisite inference of fraud will vary based on the facts and context of each case" ( Eurycleia Partners, LP v Seward Kissel, LLP , 12 NY3d 553 , 560). Here, the facts alleged in the complaint, together with the surrounding circumstances, even when deemed true, do not give rise to a reasonable inference that Chernov committed fraud or aided and abetted another in the commission of a fraud against Saleh Holdings.
Accordingly, it is
ORDERED that the motion is granted and the complaint is dismissed; and it is further
ORDERED that the Clerk of the Court, upon service of a copy of this order with notice of entry, is directed to enter judgment dismissing this action with prejudice, and with costs and disbursements to defendant Joel A. Chernov, as taxed by the Clerk.