New York Law Review

Tag: agency law

  • People v. Ippolito, 20 N.Y.3d 607 (2013): Agent’s Authority and Criminal Possession of a Forged Instrument

    People v. Ippolito, 20 N.Y.3d 607 (2013)

    An instrument is not forged when an agent, acting under a valid power of attorney, signs the principal’s name, even without indicating the principal-agent relationship, because the agent is authorized to execute the instrument.

    Summary

    Gerard Ippolito, an accountant with power of attorney for Katherine M. L., was convicted of grand larceny and criminal possession of a forged instrument (CPFI) for allegedly stealing from her. The prosecution argued that Ippolito committed forgery by signing Katherine M. L.’s name on checks without indicating he was acting as her agent under a power of attorney (POA). The New York Court of Appeals reversed the CPFI convictions related to the checks, holding that because Ippolito had the authority to sign Katherine M. L.’s name, the checks were not forged. The court affirmed the remaining convictions, finding the defendant failed to preserve his objection to the judge’s response to a juror question.

    Facts

    Katherine M. L. granted Gerard Ippolito a durable general power of attorney, giving him broad authority over her financial affairs. Ippolito opened an escrow account into which Katherine M. L.’s income was deposited. He then allegedly stole over $696,000 by writing checks to Katherine M. L., endorsing them in her name, and depositing the funds into his own accounts. Ippolito did not indicate on the checks that he was signing as an agent under the POA.

    Procedural History

    Ippolito was indicted on multiple counts of grand larceny and CPFI. He was convicted by a jury on most counts. The Appellate Division reversed the CPFI convictions related to the checks, vacated the restitution order, and otherwise affirmed. The dissenting Justice granted the People leave to appeal, and a Judge of the Court of Appeals granted Ippolito permission to appeal. The Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    1. Whether an agent with power of attorney commits forgery when signing the principal’s name on a check without indicating the principal-agent relationship.
    2. Whether the trial judge committed reversible error by answering a juror’s question without first consulting with counsel.

    Holding

    1. No, because the agent was authorized to sign the principal’s name by virtue of the power of attorney.
    2. No, because Ippolito’s counsel failed to object to the judge’s action at trial, thus failing to preserve the issue for appeal.

    Court’s Reasoning

    The Court of Appeals reasoned that a person is guilty of CPFI when they utter or possess a forged instrument with knowledge that it is forged and with intent to defraud. An instrument is “forged” when it is “falsely made, completed, or altered.” A written instrument is “falsely made” if it purports to be an authentic creation of its ostensible maker, but the ostensible maker, if real, did not authorize the making or drawing of the instrument. The court distinguished this case from People v. Shanley, where an attorney falsely acknowledged that his client had personally signed a mortgage satisfaction. Here, Ippolito had the power to sign Katherine M. L.’s name, and the checks were not forgeries because Ippolito’s actions were authorized by the POA. The court cited precedent stating that the writing of the principal’s name alone is sufficient to bind the principal, even if the agent doesn’t add their own name as agent. Addressing the juror question, the court found that Ippolito’s attorney failed to object when the judge answered the question without consulting the parties, thereby failing to preserve the issue for appellate review. The court noted, “Counsel must be afforded an opportunity to suggest a meaningful response to any jury question arising during deliberations.” However, because the objection was not timely, the court declined to reverse the remaining convictions.

  • Kirschner v. KPMG LLP, 15 N.Y.3d 446 (2010): In Pari Delicto and the Adverse Interest Exception

    15 N.Y.3d 446 (2010)

    Under New York law, the doctrine of in pari delicto prevents a corporation from recovering against a third party for damages resulting from the corporation’s own wrongdoing, unless the adverse interest exception applies, requiring that the agent has totally abandoned the corporation’s interests, acting entirely for their own purposes.

    Summary

    In the wake of the Refco and AIG scandals, the Court of Appeals addressed whether corporations could sue their auditors for failing to detect internal fraud. The court reaffirmed the in pari delicto doctrine, which prevents wrongdoers from seeking relief in court. The court explained imputation, where an agent’s actions are attributed to the principal, and the adverse interest exception, where the agent acts entirely against the principal’s interest. The court held that absent total abandonment by the agent to the principal’s interest, the corporation is barred from suing third parties for wrongs that the corporation itself participated in, furthering the policy that corporations should monitor their agents.

    Facts

    Refco, a brokerage firm, collapsed after revealing fraudulent loans orchestrated by its CEO, which had hidden massive debt. A Litigation Trust was created to pursue claims on behalf of Refco’s creditors. AIG was found to have defrauded investors into thinking they were more secure and prosperous than they really were.

    The Litigation Trustee sued Refco’s executives, investment banks, law firms, accounting firms, and customers, alleging they aided and abetted the fraud or were negligent in not discovering it. Shareholders of AIG brought a derivative action accusing AIG officers of misstating AIG’s financial performance.

    Procedural History

    The District Court dismissed the Litigation Trustee’s claims, citing the Second Circuit’s Wagoner rule, finding the trustee lacked standing due to Refco’s participation in the fraud and that the adverse interest exception didn’t apply. The Delaware Court of Chancery dismissed the AIG derivative action on similar grounds. The Second Circuit and the Delaware Supreme Court certified questions to the New York Court of Appeals regarding the scope of the adverse interest exception and the applicability of in pari delicto.

    Issue(s)

    1. Whether the adverse interest exception to imputation is satisfied by showing that the insiders intended to benefit themselves by their misconduct?

    2. Whether the adverse interest exception is available only where the insiders’ misconduct has harmed the corporation?

    3. Would the doctrine of in pari delicto bar a derivative claim under New York law where a corporation sues its outside auditor for professional malpractice or negligence based on the auditor’s failure to detect fraud committed by the corporation; and, the outside auditor did not knowingly participate in the corporation’s fraud, but instead, failed to satisfy professional standards in its audits of the corporation’s financial statements?

    Holding

    1. No, because the agent must totally abandon the principal’s interest and act entirely for their own purposes.

    2. Yes, because the fraud must be committed against the corporation, not on its behalf.

    3. Yes, because in pari delicto applies when a corporation, through its agents, is equally culpable with the defendant.

    Court’s Reasoning

    The court reasoned that the in pari delicto doctrine prevents courts from resolving disputes between wrongdoers. Agency principles dictate that an agent’s actions are imputed to the principal. The adverse interest exception is narrow and applies only when the agent has “totally abandoned” the principal’s interest. The court rejected the argument that intent alone is sufficient; the fraud must be against the corporation, not merely for its benefit. The court emphasized that principals are best suited to monitor their agents and that any harm from the discovery of the fraud does not bear on whether the adverse interest exception applies.

    The court stated, “To come within the exception, the agent must have totally abandoned his principal’s interests and be acting entirely for his own or another’s purposes. It cannot be invoked merely because he has a conflict of interest or because he is not acting primarily for his principal”.

    The court declined to broaden the adverse interest exception, noting the potential for a double standard where stakeholders of corporations are absolved while stakeholders of third-party professionals are held responsible. The court was not convinced that expanding remedies would meaningfully deter professional misconduct and found that existing legal and regulatory frameworks already provide disincentives. The court concluded that maintaining stability in the law outweighed the speculative benefits of altering precedent.

  • Guardian Life Ins. Co. of America v. Chemical Bank, 94 N.Y.2d 420 (2000): Fictitious Payee Rule and Agency in Check Fraud

    Guardian Life Ins. Co. of America v. Chemical Bank, 94 N.Y.2d 420 (2000)

    Under UCC 3-405(1)(c), the fictitious payee rule applies when an agent of the drawer supplies the name of the payee intending the latter to have no interest in the instrument, shifting the loss from a forged endorsement to the drawer.

    Summary

    Guardian Life sued Chemical Bank to recover funds from checks fraudulently obtained by an insurance broker, Rutberg, who forged policyholders’ endorsements. Rutberg, acting for Baer Insurance Agency, requested checks from Guardian for policy loans/dividends, which he then intercepted and cashed after forging the endorsements. The court addressed whether the general rule placing the risk of loss on the drawee bank for forged endorsements applied, or whether the fictitious payee exception shifted the risk to Guardian. The Court of Appeals held that Rutberg acted as Guardian’s agent for the purpose of UCC 3-405(1)(c), thus the fictitious payee rule applied, and Guardian bore the loss because it was in a better position to prevent the fraud.

    Facts

    Jerome Rutberg, an insurance broker for Baer Insurance Agency, defrauded Guardian Life for ten years by requesting checks for policy loans/dividend withdrawals in the names of Guardian policyholders without their consent. Guardian issued the checks and sent them directly to Rutberg, who forged the payees’ endorsements and cashed them. Baer Agency was a “general agent” of Guardian. Guardian did not verify the requests or notify the policyholders before issuing the checks to Rutberg.

    Procedural History

    Guardian sued Chemical Bank to recover the value of fraudulent checks cashed between June 5, 1986, and July 9, 1989. The Supreme Court granted Chemical Bank’s motion for summary judgment, holding Rutberg was Guardian’s agent. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether, under UCC 3-405(1)(c), Rutberg acted as an agent of Guardian when he supplied the names of payees (policyholders) to Guardian, intending that the payees have no interest in the checks, thus triggering the fictitious payee rule and shifting the loss from the forged endorsements to Guardian.

    Holding

    Yes, because Rutberg was entrusted by Guardian with the responsibility of processing requests for policy loans and dividend withdrawals, making him Guardian’s agent for the purpose of UCC 3-405(1)(c); therefore, the fictitious payee rule applies, and Guardian bears the loss.

    Court’s Reasoning

    The court reasoned that UCC 3-405(1)(c) assigns the risk of loss to the drawer when an agent supplies the payee name intending the payee to have no interest, reflecting a policy of placing the risk on the party best able to prevent the loss. While Rutberg was not a formal employee of Guardian, agency principles apply. Agency can be established by conduct and does not require a formal agreement. Pennsylvania law, where Rutberg cashed the checks, holds that an insurance broker can act as an insurer’s agent when authorized to perform specific tasks. The court emphasized that Rutberg, with Guardian’s consent, performed all steps to process policy loan requests except the check issuance. The court noted that Guardian could have prevented the fraud through better verification and supervision. The court stated, “Since the undisputed facts establish that Rutberg was ‘an agent * * * of the * * * drawer [who] supplied [it] with the name of the payee intending the latter to have no such interest’ when he effected these insurance policy loan and dividend withdrawal transactions, his indorsements were effective under UCC 3-405 (1) (c) despite their having been forged.”

  • Standard Funding Corp. v. Lewitt Agency, Inc., 88 N.Y.2d 546 (1996): Insurance Company Not Liable for Agent’s Unauthorized Premium Financing Agreements

    Standard Funding Corp. v. Lewitt Agency, Inc., 88 N.Y.2d 546 (1996)

    An insurance company is not liable for the fraudulent acts of its agent when the agent enters into unauthorized premium financing agreements, as such agreements fall outside the scope of the agent’s actual or apparent authority, and the insurance company receives no benefit from the fraud.

    Summary

    Standard Funding Corp. sued Public Service Mutual Insurance Company to recover losses from fraudulent premium financing agreements entered into by Lewitt Agency, an agent of Public Service Mutual. Lewitt fraudulently secured financing from Standard Funding for fictitious insurance policies. The New York Court of Appeals held that Public Service Mutual was not liable for Lewitt’s actions because Lewitt lacked actual or apparent authority to enter into premium financing agreements on behalf of the insurer, and the insurer did not ratify the unauthorized agreements or receive any benefit from them.

    Facts

    Lewitt Agency, Inc. was an agent authorized to sell insurance policies for Public Service Mutual. Standard Funding Corp., a premium financing company, entered into financing agreements with Lewitt to finance insurance premiums for Public Service Mutual policies. Lewitt submitted fraudulent financing agreements to Standard Funding, representing that Public Service Mutual policies had been issued and that insureds had paid a portion of the premiums. Based on these agreements, Standard Funding issued checks to Lewitt. These agreements covered fictitious policies and false insureds; no policies were ever issued, and Public Service Mutual never received any premiums.

    Procedural History

    Standard Funding sued Lewitt and Public Service Mutual. After Lewitt filed for bankruptcy, the claim against Public Service Mutual proceeded to trial. The Supreme Court entered judgment for Standard Funding. The Appellate Division affirmed, holding Public Service Mutual liable under the doctrine of apparent authority. The New York Court of Appeals reversed.

    Issue(s)

    1. Whether Lewitt had actual authority to procure premium financing agreements on behalf of Public Service Mutual.

    2. Whether Lewitt had apparent authority to procure premium financing agreements on behalf of Public Service Mutual.

    3. Whether Public Service Mutual ratified Lewitt’s unauthorized actions.

    Holding

    1. No, because the agency agreement between Lewitt and Public Service Mutual only authorized Lewitt to issue insurance policies and collect premiums, not to negotiate or enter into premium financing agreements.

    2. No, because Public Service Mutual made no representations that Lewitt had the authority to procure premium financing, and the terms of the financing agreements themselves indicated that Lewitt was acting on its own behalf.

    3. No, because Public Service Mutual never accepted the terms of the financing agreements and received no benefit from the fraudulent transactions.

    Court’s Reasoning

    The Court of Appeals reasoned that Lewitt’s agency agreement with Public Service Mutual only authorized Lewitt to issue insurance policies and collect premiums. The Court rejected the argument that premium financing was an activity incidental to those express powers, citing First Trust & Deposit Co. v. Middlesex Mut. Fire Ins. Co., 284 NY 747. The court emphasized that Lewitt’s actions in entering into the premium financing agreements were outside the scope of activities authorized by the agency agreement.

    Regarding apparent authority, the Court stated, “Essential to the creation of apparent authority are words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction” (Hallock v. State of New York, 64 NY2d 224, 231). The Court found that Public Service Mutual made no such representations regarding Lewitt’s authority to procure premium financing. The Court also noted that the terms of the premium financing agreements themselves contradicted the claim of apparent authority, as the agreements were signed by Lewitt as “Broker or Agent,” and the checks were payable solely to Lewitt.

    Finally, the Court rejected the argument that Public Service Mutual ratified Lewitt’s actions by receiving notices of financing, because Public Service Mutual never accepted the terms of the agreements. The Court also noted that the rule of implied ratification does not apply because Public Service Mutual received no premiums or any other benefit from the fraudulent transactions.

  • Hirschfeld Productions, Inc. v. Mirvish, 698 N.E.2d 1055 (N.Y. 1998): Arbitration Agreements Extend to Agents Acting on Behalf of Signatories

    Hirschfeld Productions, Inc. v. Mirvish, 698 N.E.2d 1055 (N.Y. 1998)

    Under the Federal Arbitration Act, agents of a signatory to an arbitration agreement can invoke the agreement’s protections when the alleged misconduct relates to their actions as officers, directors, or agents of the corporation, preventing circumvention of the agreement.

    Summary

    Hirschfeld Productions (HPI) sued Edwin and David Mirvish, officers of Mirvish Productions (MP), alleging tortious interference with contract and breach of fiduciary duty related to a failed theatrical production joint venture. The agreement between HPI and MP contained an arbitration clause. The Mirvishes, though nonsignatories, moved to compel arbitration. The New York Court of Appeals held that because the claims against the Mirvishes arose from their roles as agents of MP in relation to the agreement, they could enforce the arbitration clause, preventing circumvention of the agreement and effectuating the parties’ intent.

    Facts

    HPI and MP entered a joint venture to produce “Hair” at the Old Vic Theater in London. David Mirvish signed the agreement on behalf of MP. The agreement contained a clause requiring arbitration of disputes. The play closed quickly due to poor ticket sales. HPI sued Edwin and David Mirvish individually, alleging tortious interference with contract and breach of fiduciary duty.

    Procedural History

    The defendants moved to stay the action and compel arbitration. The Supreme Court denied the motion. The Appellate Division reversed, granting the motion to compel arbitration. The New York Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether an arbitration clause in a contract between a plaintiff and a corporation can be invoked by individual officers/agents of that corporation, who are not signatories to the contract, when the plaintiff’s claims relate to the officers’/agents’ conduct on behalf of the corporation.

    Holding

    Yes, because the Federal Arbitration Act and related federal law extend the benefit of arbitration agreements to agents acting on behalf of their principals, especially when the alleged misconduct relates to their behavior as officers or directors in their capacities as agents of the corporation.

    Court’s Reasoning

    The court reasoned that the dispute involved an international commercial contract, making it subject to the Federal Arbitration Act (9 U.S.C. § 201 et seq.) and federal law. Federal courts have consistently allowed agents to benefit from arbitration agreements entered into by their principals, provided the alleged misconduct relates to their roles as officers, directors, or agents. The court emphasized the importance of preventing parties from circumventing arbitration agreements by suing agents of the signatory party. Allowing agents to invoke arbitration effectuates the intent of the original parties to protect individuals acting on behalf of the principal in furtherance of the agreement. The court stated, “The rule is necessary not only to prevent circumvention of arbitration agreements but also to effectuate the intent of the signatory parties to protect individuals acting on behalf of the principal in furtherance of the agreement.” The Court found that HPI’s complaint focused on the Mirvishes’ conduct related to MP’s failure to effectively produce and promote the play, not their separate roles as owners of Enterprises. Therefore, the Mirvishes, as agents of MP, could enforce the arbitration agreement.

  • National Bank of North America v. Paskow, 53 N.Y.2d 953 (1981): Enforceability of Personal Guarantees Despite Corporate Agency Claims

    53 N.Y.2d 953 (1981)

    A personal guarantee remains enforceable when the guarantor fails to provide the written notice of termination required by the guarantee agreement, and the corporate principal whose debt was guaranteed has been held liable for the underlying debt, even if the corporation acted as an agent.

    Summary

    In this case, the New York Court of Appeals affirmed the enforcement of a personal guarantee. Rosalee Paskow, the defendant, argued that her guarantee should be terminated because the overdrafts occurred after the guarantee should have been terminated based on the precedent set in *Bankers Trust Hudson Valley., N. A. v Christie*. She also argued that the corporation whose debts she guaranteed was acting as an agent, thus relieving her of personal responsibility. The Court of Appeals rejected both arguments, holding that Paskow did not provide written notice of termination as required by the guarantee agreement, and the corporation had already been held liable for the overdrafts in a prior action. The court found her personal guarantee enforceable.

    Facts

    Rosalee Paskow executed a personal guarantee for the debts of a corporation. The corporation incurred overdrafts with National Bank of North America (the Bank). Paskow did not provide written notice to terminate the guarantee, as required by the guarantee agreement. The Bank sought to enforce the guarantee against Paskow after the corporation failed to cover the overdrafts. The account title showed the corporation acting as agent.

    Procedural History

    The Bank brought an action to recover the overdrafts from the corporation and subsequently sought to enforce Paskow’s personal guarantee. The lower court ruled in favor of the Bank, finding Paskow liable under the guarantee. The Appellate Division affirmed the lower court’s decision. Paskow appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether Paskow’s personal guarantee was terminated despite her failure to provide written notice of termination as required by the guarantee agreement, based on the precedent of *Bankers Trust Hudson Valley., N. A. v Christie*.
    2. Whether Paskow could avoid liability under the personal guarantee based on the argument that the corporation, whose debts she guaranteed, was acting as a disclosed agent.

    Holding

    1. No, because Paskow failed to provide the written notice of termination required by the guarantee agreement and the factual predicate of the *Bankers Trust* case was missing from the record.
    2. No, because the corporation (the principal) had already been held liable for the overdrafts in a prior action.

    Court’s Reasoning

    The Court of Appeals reasoned that Paskow’s failure to provide written notice of termination, as explicitly required by the guarantee agreement, was fatal to her defense. The court distinguished the case from *Bankers Trust Hudson Val., N. A. v Christie*, stating that the factual circumstances necessary for applying the *Bankers Trust* precedent were not present in the record. The court did not elaborate on what factual differences were critical, leaving the precise holding of *Bankers Trust* somewhat ambiguous. The court also dismissed Paskow’s agency argument, emphasizing that the corporation had already been held liable for the overdrafts in a prior action. The court stated: “Defendant’s corporate principal having been held liable, defendant is, under the terms of her guarantee, also liable.” This highlights that a guarantor’s liability is derivative of the principal’s liability. The court focused strictly on the terms of the guarantee agreement and the prior determination of the corporation’s liability, declining to create exceptions based on equitable arguments absent explicit contractual provisions or compelling factual distinctions. This reinforces the importance of adhering to the specific requirements outlined in guarantee agreements and the principle that a guarantor is liable if the principal is liable. The decision emphasizes predictability and enforceability in commercial transactions.

  • Greene v. Heilman, 51 N.Y.2d 195 (1980): Establishing Apparent Authority for Real Estate Brokers

    Greene v. Heilman, 51 N.Y.2d 195 (1980)

    A real estate broker is not entitled to a commission unless they are the procuring cause of the sale, and apparent authority to hire a broker requires actions by the principal that reasonably give the appearance of authority and upon which the third party relies.

    Summary

    Alfred Greene, a real estate broker, sued Maynard Heilman for commissions allegedly owed on the sale of a shopping center. Greene claimed that Richard Driscoll, acting with apparent authority on Heilman’s behalf, hired him to find a buyer. The sale occurred a year after Greene initially informed I. Gordon Realty Corporation about the property, with direct negotiations between Heilman and Gordon. The court held that Greene was not the procuring cause of the sale and that Driscoll lacked apparent authority to bind Heilman, as Heilman made no manifestations that would reasonably give the appearance of authority to Driscoll.

    Facts

    In October 1974, Driscoll told Greene he wanted to find a buyer for a shopping center. Greene, assuming Todd Mart, Inc. owned the property, informed Robert Gordon of I. Gordon Realty Corporation about the center and provided operating statements. Heilman actually owned the property, having purchased it at a Sheriff’s sale, but this was unknown to Greene and Gordon. Gordon was initially uninterested due to W.T. Grant’s bankruptcy and other business matters. In the spring of 1975, Heilman, facing financial pressure, was advised by his accountant that Gordon was seeking investment opportunities. Heilman then directly contacted Gordon, leading to negotiations and a sale in the fall of 1975, a year after Greene’s initial contact. Greene was not involved in these later negotiations.

    Procedural History

    Greene sued Heilman, Driscoll, and others for breach of contract, fraud, and civil conspiracy. The trial court ruled in favor of Greene solely against Heilman on the contract claim, finding Driscoll had apparent authority. The Appellate Division affirmed, stating Heilman had a duty to address Greene’s potential claim after the purchase offer mentioned Greene. Justice Cardamone dissented, arguing that neither actual nor apparent authority was established. The New York Court of Appeals reversed the Appellate Division’s order.

    Issue(s)

    1. Whether Driscoll had apparent authority to bind Heilman to a brokerage agreement with Greene.

    2. Whether Greene was the procuring cause of the sale of the shopping center to I. Gordon Realty Corporation.

    Holding

    1. No, because Heilman did not engage in any conduct that would reasonably lead a third party to believe that Driscoll had the authority to hire a broker on his behalf.

    2. No, because there was not a direct and proximate link between Greene’s initial introduction and the ultimate consummation of the sale; Greene did not bring together the minds of the buyer and seller.

    Court’s Reasoning

    The Court of Appeals found no evidence that Heilman delegated authority to Driscoll or Diamond to hire Greene. The court emphasized that holding stock or serving as officers in common corporations does not automatically confer authority to act on behalf of each other’s personal property. “Mere authority to manage Heilman’s personal realty would not include authority to take steps to sell it.”

    The court clarified that apparent authority requires verbal or other acts by the principal that reasonably give the appearance of authority to conduct the transaction, and the third party must be aware of them and rely upon them. Here, Heilman made no such manifestations. The court noted that Gordon’s purchase offer mentioning Greene’s statement did not create a duty for Heilman to settle with Greene, as it did not acknowledge a commission was due or that Greene was the procuring cause.

    Regarding procuring cause, the court stated that a broker must do more than initially call the property to the buyer’s attention. There must be a direct and proximate link between the broker’s actions and the sale. Citing Sibbald v Bethlehem Iron Co., the court emphasized that Greene did not bring together the minds of the buyer and seller. Greene’s role was limited to alerting Gordon to the property’s availability, with no further involvement in negotiations or the ultimate sale, indicating abandonment of the effort.

  • Marine Midland Bank v. John E. Russo Produce Co., Inc., 50 N.Y.2d 31 (1980): Permissible Inference from Invoking Fifth Amendment in Civil Cases

    Marine Midland Bank v. John E. Russo Produce Co., Inc., 50 N.Y.2d 31 (1980)

    In a civil case, the jury may draw an adverse inference from a party’s invocation of the Fifth Amendment privilege against self-incrimination.

    Summary

    Marine Midland Bank sued John E. Russo Produce Co. and Canestraro Produce, Inc., along with their officers, alleging a check-kiting scheme. During the trial, John and Rita Russo invoked their Fifth Amendment rights when questioned about the checks. The trial court instructed the jury that no adverse inference could be drawn from this. The jury found the defendants not liable, but also fixed the bank’s loss at $309,800. The Appellate Division reversed in part, finding the Fifth Amendment charge erroneous. The Court of Appeals held that in civil cases, an adverse inference can be drawn from a party’s invocation of the Fifth Amendment, and that the error was not harmless, warranting a new trial against Canestraro.

    Facts

    John E. Russo Produce Co., Inc. (Produce) and Canestraro Produce, Inc. (Canestraro) were closely related produce businesses. John and Rita Russo owned Produce; their sons, Joseph and Andrew Russo, controlled Canestraro. They shared office space and storage, and Canestraro was a supplier to Produce. Rita was Canestraro’s part-time bookkeeper and a signatory on its bank account with Marine Midland Bank. Produce allegedly engaged in check kiting, covering overdrafts at Marine Midland with checks from Citibank, where the Citibank account was then covered by checks drawn on Marine Midland. Citibank eventually dishonored Produce’s checks, leaving Marine Midland with a $309,800 deficit.

    Procedural History

    Marine Midland sued the defendants for fraud and conversion. During the trial, John and Rita Russo invoked their Fifth Amendment privilege against self-incrimination. The trial court instructed the jury that no adverse inference could be drawn from the invocation. The jury found no liability but determined the bank’s loss at $309,800. The Appellate Division reversed the judgment in favor of John, Rita, and Produce and ordered a new trial, holding the Fifth Amendment charge was erroneous, but affirmed as to Canestraro and Joseph. Marine Midland appealed the affirmance as to Canestraro.

    Issue(s)

    1. Whether, in a civil case, an adverse inference may be drawn from a party’s invocation of the Fifth Amendment privilege against self-incrimination.

    2. Whether the trial court’s erroneous charge regarding the Fifth Amendment was harmless error with respect to Canestraro.

    Holding

    1. Yes, because the policy of the Fifth Amendment, designed as a safeguard in criminal prosecutions, should not be extended to civil cases where the parties are on equal footing.

    2. No, because Canestraro’s exculpation might have been based on the jury’s conclusion that Rita was unaware of the deficit balances, a determination they might not have reached had there been a correct charge on the Fifth Amendment.

    Court’s Reasoning

    The Court of Appeals reasoned that the Fifth Amendment privilege, designed to protect individuals from state oppression in criminal investigations, should not shield them in civil cases where parties are on equal footing. The court likened the situation to a party’s failure to produce a material witness under their control, which allows the jury to assess the strength of the opposing party’s evidence. Therefore, the trial court’s instruction that no adverse inference could be drawn was erroneous.

    Regarding Canestraro, the court held that the erroneous charge was not harmless. The jury might have concluded that Rita Russo, Canestraro’s bookkeeper, was unaware of the deficit balances in the accounts, which would have exculpated Canestraro. A correct charge on the Fifth Amendment might have led the jury to a different conclusion. The court emphasized that “an error is only deemed harmless when there is no view of the evidence under which appellant could have prevailed.”

    The court also addressed the imputation of knowledge from agent (Rita) to principal (Canestraro). While knowledge is generally imputed, this is not the case when the agent has an interest adverse to the principal. The court found that whether Rita’s interests were adverse to Canestraro was a factual issue for the jury. The court noted Canestraro’s corporate liability could also arise from an unjust enrichment theory. “A principal that accepts the benefits of its agent’s misdeeds is estopped to deny knowledge of the facts of which the agent was aware.”

    Finally, the court affirmed the Appellate Division’s ruling regarding Joseph Russo’s individual liability. Corporate officers are not liable for fraud unless they personally participate in the misrepresentation or have actual knowledge of it. The jury found that Joseph lacked such knowledge, and this finding was supported by the evidence. The court noted, “Since the theory that Joseph actually knew of the misrepresentation was necessarily encompassed by the case as presented to the first jury…the answers in his favor must be deemed a finding that he had no such knowledge.” The court also held that any error related to the Fifth Amendment instruction regarding John and Rita would not have affected the determination of Joseph’s knowledge.

  • Hutzler v. Hertz Corp., 39 N.Y.2d 209 (1976): Liability Discharge When Attorney Forges Endorsement

    Hutzler v. Hertz Corp., 39 N.Y.2d 209 (1976)

    A tortfeasor’s liability is discharged when a settlement check, jointly payable to the plaintiff and their attorney, is paid by the drawee bank, even if the attorney forges the plaintiff’s endorsement and misappropriates the funds, placing the onus on the plaintiff who chose the dishonest agent.

    Summary

    Christina Hutzler, as administratrix of her husband’s estate, settled a wrongful death claim against Hertz Corporation. Hertz issued a settlement check payable to Hutzler and her attorney, Daniel Yudow. Yudow forged Hutzler’s endorsement, deposited the check into his account, and absconded with the funds. Hutzler sued Hertz, seeking repayment. The court held that Hertz’s liability was discharged upon the bank’s payment of the check, despite the forgery. The court reasoned that Hutzler, by selecting the dishonest attorney, bore the risk of his unauthorized actions. The loss falls on the creditor, not the debtor.

    Facts

    Christina Hutzler was appointed administratrix of her deceased husband’s estate.
    Hutzler retained attorney Daniel Yudow to pursue a wrongful death claim against Hertz.
    Yudow settled the claim with Hertz for $11,500, and Hutzler executed a general release.
    Hertz issued two checks: one to the State Insurance Fund and another for $10,929 payable to “Christina Hutzler Individually And As Administratrix of the Estate of Michael E. Hutzler and Daniel D. Yudow as Attorney.”

    Yudow forged Hutzler’s signature on the $10,929 check, endorsed it with his own signature, deposited it into his account, and later closed the account, misappropriating the funds.
    Hutzler was unable to locate Yudow until June 1973, and then discovered he had closed his practice.

    Procedural History

    Hutzler sued Hertz and Manufacturers Hanover Trust Company (the drawee bank) to recover the settlement amount.
    Special Term granted summary judgment to Hutzler against Hertz, but granted summary judgment to the bank. Hutzler did not appeal the judgment in favor of the bank.
    The Appellate Division modified the judgment, reducing Hutzler’s recovery by the amount of Yudow’s attorney’s lien.
    Hertz appealed, and Hutzler cross-appealed.

    Issue(s)

    Whether a tortfeasor is discharged from liability when a settlement check, jointly payable to the plaintiff and their attorney, is negotiated by the attorney on the plaintiff’s forged endorsement, and the proceeds are appropriated?

    Holding

    Yes, because the tortfeasor’s obligation is discharged upon payment of the settlement draft by the drawee bank, the forgery notwithstanding, and the claimant may not thereafter recover against the tortfeasor.

    Court’s Reasoning

    The court distinguished between agency principles and negotiable instruments law. While an attorney generally has authority to receive payment on behalf of a client, the issue arises when payment is made via check payable to both the client and attorney.
    The court relied on the established rule that a debtor’s liability is discharged when a check payable to the creditor is wrongfully endorsed by the creditor’s agent and paid by the drawee bank.
    The court reasoned that the drawer’s only obligation is to ensure funds are in the bank. It is the creditor who chose the dishonest agent and should bear the risk of the agent’s unauthorized acts. As the court noted quoting Sage v. Burton, 84 Hun 267, 270, “It is the creditor, after all, who selected a dishonest person to represent him, and he, not the drawer, should bear the risk of his unauthorized acts, having placed him in a position to perpetrate the wrong.”

    The court cited the Restatement (Second) of Agency § 178(2), which states that if an agent authorized to receive a check payable to the principal forges the principal’s endorsement, the maker is relieved of liability if the drawee bank pays the check and charges the amount to the maker. The court expressly approved of that restatement provision as correctly stating New York Law.
    Referring to UCC § 3-404(1), which states that an unauthorized signature is wholly inoperative, the court stated that the plaintiff is “precluded from denying” the unauthorized signature because of their unwise selection of the agent.
    The court noted that the plaintiff might have had a cause of action for conversion against the drawee bank, but that claim was not preserved on appeal.
    The court emphasized that its decision was not unduly harsh, as the creditor could pursue an action against the bank or the agent.

  • Commission on Ecumenical Mission v. Roger Gray, Ltd., 27 N.Y.2d 457 (1971): Statute of Frauds and Agent’s Written Authority for Lease Extensions

    27 N.Y.2d 457 (1971)

    Under New York’s Statute of Frauds, an agent executing a lease extension for a term longer than one year must have written authorization to do so; the title of “managing agent” alone is insufficient to infer such authority.

    Summary

    The Commission on Ecumenical Mission sought to invalidate a lease extension granted by a “managing agent” of its predecessor in interest. The Court of Appeals held that the managing agent needed written authorization to execute the lease extension under the Statute of Frauds. The court reasoned that while corporations act through individuals, the Statute of Frauds requires written authorization for an agent to execute leases exceeding one year. The title of “managing agent” alone, without express written authority to execute leases, does not satisfy the Statute of Frauds. This case highlights the importance of clearly defined written authorization for agents in real estate transactions.

    Facts

    Madison Avenue Realty Corporation owned a commercial property. Harry Aprahamian served as the building’s managing agent, collecting rents and negotiating leases. In 1966, Aprahamian purported to extend a tenant’s lease by letter. The Commission on Ecumenical Mission later acquired the property and sought to invalidate the lease extension, arguing Aprahamian lacked written authority.

    Procedural History

    The Special Term granted summary judgment to the Commission, declaring the lease extension invalid. The Appellate Division reversed, finding that general corporate law, not the General Obligations Law, applied. The Court of Appeals reversed the Appellate Division and reinstated the Special Term’s decision, holding that written authorization was required under the Statute of Frauds.

    Issue(s)

    1. Whether the “managing agent” of a landlord’s predecessor, who executed a lease extension agreement, was an agent for purposes of the Statute of Frauds requiring written authorization (General Obligations Law § 5-703(2)).

    2. If so, whether the evidence of the managing agent’s authority to execute the extension agreement satisfied the Statute of Frauds.

    Holding

    1. Yes, because the Statute of Frauds applies to agents, even if they are also employees of a corporation, when executing leases exceeding one year.

    2. No, because the written authorization provided to the managing agent did not expressly grant authority to execute leases, and the title of “managing agent” alone is insufficient.

    Court’s Reasoning

    The Court reasoned that the Statute of Frauds requires an agent to have written authorization to execute leases longer than one year. The Court rejected the argument that the statute doesn’t apply when the agent is also a corporate employee, stating that this would effectively nullify the Statute of Frauds for corporations. The Court distinguished between corporate officers and directors (who may not always require written authorization) and other employees/agents, holding that the latter do require written authorization. The written authorization must contain “express language conferring authority to execute a contract of sale.” Here, the letter designating Aprahamian as “Managing Agent” did not explicitly authorize him to execute leases. The Court emphasized that allowing the extension without proper written authorization would open the door to inaccurate recollections and undermine the purpose of the Statute of Frauds. Chief Judge Fuld dissented, arguing that authority to lease can be inferred from authority to manage property, creating a question of fact inappropriate for summary judgment. Fuld pointed to Aprahamian’s past practice of signing lease extensions as evidence of implied authority. However, the majority found no such implied authority given the lack of express written authorization and the importance of maintaining a clear standard for real property transactions.