New York Law Review

Tag: fiduciary duty

  • Lightman v. Flaum, 97 N.Y.2d 128 (2001): No Fiduciary Duty Arises Solely from Clergy-Congregant Privilege

    Lightman v. Flaum, 97 N.Y.2d 128 (2001)

    CPLR 4505, the clergy-penitent privilege, is a rule of evidence that protects confidential communications from disclosure in court, but it does not, by itself, create a fiduciary duty that can be the basis for a private cause of action for breach of confidentiality.

    Summary

    Chani Lightman sued Rabbis Flaum and Weinberger for breach of fiduciary duty, intentional infliction of emotional distress, and defamation after they disclosed confidential communications made during spiritual counseling sessions. The affirmations were submitted in a divorce proceeding to demonstrate that Ms. Lightman was jeopardizing the Orthodox Jewish upbringing of her children by not following religious law. The New York Court of Appeals held that CPLR 4505, the clergy-penitent privilege, is a rule of evidence and does not create a fiduciary duty. The court reasoned that imposing liability based solely on the statute would raise constitutional concerns by requiring courts to interpret religious principles.

    Facts

    Chani Lightman initiated divorce proceedings against her husband, Hylton Lightman. In opposition to her request for temporary custody of their four children, Hylton submitted affirmations from Rabbis Flaum and Weinberger. Rabbi Flaum stated that Chani had stopped engaging in “religious purification laws” and was “seeing a man in a social setting.” Rabbi Weinberger stated that Chani acknowledged she had stopped her religious bathing so she did not have to engage in sexual relations with her husband and opined that she no longer wanted to adhere to Jewish law. Chani claimed these disclosures were breaches of confidence shared during spiritual counseling.

    Procedural History

    Chani Lightman sued the Rabbis for breach of fiduciary duty, intentional infliction of emotional distress, and defamation. The Supreme Court dismissed the defamation claim but allowed the other claims to proceed. The Appellate Division modified, dismissing the fiduciary duty and emotional distress claims, finding that Ms. Lightman may have waived the clergy-penitent privilege. Two justices dissented regarding the fiduciary duty claim. Ms. Lightman appealed to the Court of Appeals.

    Issue(s)

    1. Whether CPLR 4505 imposes a fiduciary duty of confidentiality upon members of the clergy such that a violation of the statute gives rise to a private cause of action.

    Holding

    1. No, because CPLR 4505 is a rule of evidence that protects confidential communications from disclosure but does not, by itself, create a fiduciary duty.

    Court’s Reasoning

    The Court of Appeals reasoned that CPLR 4505, like other evidentiary privileges, serves to protect certain confidential relationships by preventing the disclosure of information in court. However, these privileges do not automatically create fiduciary duties. The court distinguished between the confidentiality obligations of secular professionals (like attorneys and doctors), which are governed by specific statutes, regulations, and codes of ethics, and the clergy-congregant relationship, which lacks a comprehensive statutory scheme. The court stated: “civil courts are forbidden from interfering in or determining religious disputes. Such rulings violate the First Amendment because they simultaneously establish one religious belief as correct * * * while interfering with the free exercise of the opposing faction’s beliefs” (citing First Presbyt. Church v United Presbyt. Church, 62 NY2d 110, 116). The court further noted that imposing liability on clerics for disclosures, without regard to their religious principles, would raise significant constitutional concerns under the Free Exercise and Establishment Clauses of the First Amendment, as it would require courts to interpret and potentially question religious tenets. The court concluded that CPLR 4505 should be viewed as the Legislature intended – as a rule of evidence, not the basis for a private cause of action.

  • Sonnenschein v. Douglas Elliman-Gibbons & Ives, 96 N.Y.2d 337 (2001): Real Estate Broker’s Duty to Multiple Principals

    96 N.Y.2d 337 (2001)

    A real estate broker owes no duty to a seller to refrain from showing a potential buyer other properties, even after oral negotiations have commenced, unless there is an explicit agreement to the contrary.

    Summary

    Plaintiffs, the Sonnenscheins, listed their condo for sale. DEGI, a brokerage firm, found potential buyers (the Tams) and began negotiations. However, DEGI also showed the Tams another, more desirable apartment in the same building. The Tams purchased the other apartment. The Sonnenscheins sued DEGI for breach of fiduciary duty, claiming DEGI sabotaged their sale. The court held that DEGI owed no such duty, as there was no exclusive agreement and no binding contract between the Sonnenscheins and the Tams. Real estate brokers can represent multiple principals unless explicitly agreed otherwise.

    Facts

    The Sonnenscheins listed their condominium for sale with Phyllis Koch Real Estate.

    Koch contacted other brokers, including Douglas Elliman-Gibbons & Ives (DEGI), seeking potential buyers.

    Susan Turkewitz, a DEGI salesperson, found potential buyers, the Tams, who were initially interested in the Sonnenscheins’ apartment.

    Negotiations ensued, and Sonnenschein drafted a commission agreement with DEGI.

    The Tams were shown another apartment in the same building by Patricia Cliff, another DEGI salesperson; this apartment was superior to the Sonnenscheins’.

    The Tams ultimately purchased the other apartment.

    The Sonnenscheins sold their apartment for a lower price and sued DEGI for breach of fiduciary duty.

    Procedural History

    The Sonnenscheins sued DEGI in Supreme Court, which denied DEGI’s motion for summary judgment.

    A jury found in favor of the Sonnenscheins.

    The Appellate Division reversed, directing judgment for DEGI.

    The Sonnenscheins appealed to the New York Court of Appeals.

    Issue(s)

    Whether a real estate brokerage firm that produces a potential purchaser for a seller owes the seller a fiduciary duty to refrain from showing the potential purchaser additional properties after oral negotiations have commenced.

    Holding

    No, because, in the absence of an agreement with a principal to the contrary, a broker owes no duty to refrain from offering the properties of all its principals to a prospective customer.

    Court’s Reasoning

    The Court of Appeals emphasized that a real estate broker is a fiduciary with a duty of loyalty to their principal. However, determining the existence of a broker/principal relationship requires reviewing the communications and agreements between the parties.

    The Court found that the Sonnenscheins did not establish that DEGI agreed to become their broker or act as their fiduciary. The commission agreement alone was insufficient to create such a relationship.

    Even assuming a broker/principal relationship existed, the Court held that DEGI did not breach any fiduciary duty by showing the Tams another property. The Court adopted the view that, absent an explicit agreement, a broker is not obligated to decline a prospective purchaser’s request to see other properties listed with that broker.

    “Unless a broker and principal specifically agree otherwise, a broker cannot be expected to decline a prospective purchaser’s request to see another property listed for sale with that broker. Any other rule would unreasonably restrain a broker from simultaneously representing two or more principals with similar properties for fear of violating a fiduciary obligation in the event a buyer chose the property of one principal over that of another.”

    The Court also noted that there was no complete and enforceable purchase agreement between the Sonnenscheins and the Tams. The commission agreement and cover letter drafted by Sonnenschein indicated that the parties were free to decline to enter into a contract.

    The Court declined to address the Sonnenscheins’ argument regarding disclosure of confidential price information, as this theory was not raised in the original complaint or summary judgment papers.

  • Dubbs v. Stribling & Associates, 96 N.Y.2d 337 (2001): Termination of Fiduciary Duty in Real Estate Transactions

    Dubbs v. Stribling & Associates, 96 N.Y.2d 337 (2001)

    A real estate broker’s fiduciary duty to a principal can be terminated by agreement or by conduct that demonstrates the end of the broker-principal relationship, especially when the broker enters into an arm’s-length transaction with the principal after full disclosure.

    Summary

    This case addresses whether a real estate broker breached a fiduciary duty to their client when the broker purchased the client’s property and subsequently acquired an adjacent property the client had previously expressed interest in. The New York Court of Appeals held that the broker’s fiduciary duty terminated when she entered into a purchase contract with the client after full disclosure, acting then as an adverse party. The Court emphasized that there was no evidence the broker withheld any information at the time of the sale, and that the plaintiffs acknowledged in the contract that no broker was involved in the transaction. Thus, summary judgment dismissing the breach of fiduciary duty claim was appropriate.

    Facts

    Plaintiffs listed their co-op apartment with Defendant Stribling & Associates on an open listing basis. Plaintiffs told defendant agents that they wanted to purchase the adjacent apartment. Defendant Chappel-Smith, an agent, offered to buy Plaintiffs’ apartment. Plaintiffs were urged to contact their neighbor one last time. In December 1994, Plaintiffs contracted to sell to Chappel-Smith, with the contract specifying no broker was involved, and the commission provision was struck out. Prior to the closing, Chappel-Smith made an oral agreement to buy the adjacent apartment. Plaintiffs were unaware of this and closed the sale to Chappel-Smith. Chappel-Smith then purchased the adjacent apartment.

    Procedural History

    Plaintiffs sued Defendants, alleging breach of fiduciary duty. The Supreme Court dismissed the complaint on summary judgment. The Appellate Division affirmed. Plaintiffs appealed to the New York Court of Appeals based on a two-Justice dissent in the Appellate Division.

    Issue(s)

    Whether a real estate broker breaches a fiduciary duty to a seller when the broker purchases the seller’s property, and subsequently purchases an adjacent property the seller had previously expressed interest in, without informing the seller of the second purchase before the initial sale closes?

    Holding

    No, because the broker’s fiduciary duty was terminated when the broker entered into an arm’s-length purchase agreement with the sellers after full disclosure, explicitly acknowledging the end of the broker-principal relationship in the contract.

    Court’s Reasoning

    The Court reasoned that while a real estate broker owes a fiduciary duty of loyalty to their principal, this duty can be severed by agreement or unilateral action. Here, Chappel-Smith fulfilled her duty by disclosing her intent to purchase the apartment. The purchase contract explicitly stated that no broker was involved, effectively terminating the fiduciary relationship. As the court stated, “[T]he disclosure to be effective must lay bare the truth, without ambiguity or reservation, in all its stark significance”. Once the arm’s-length transaction commenced, the parties’ relationship changed, and there was no longer a basis for Plaintiffs to expect Defendants to continue acting as fiduciaries. The court further noted that plaintiffs speculated that Chappel-Smith knew the neighbor was selling prior to closing, but they failed to present any admissible evidence supporting this. The neighbor’s testimony and Defendants’ statements indicated otherwise, specifically that the neighbor did not decide to sell until shortly before listing the property in May 1995. Additionally, the court found the claim regarding confidential information about combining the apartments was unfounded because the floor plan was already on file and available to any agent. Because Chappel-Smith was no longer acting as the Plaintiffs’ agent when she learned of the adjacent property for sale, no fiduciary duty was breached.

  • In re Estate of Janes, 90 N.Y.2d 41 (1997): Prudent Investor Rule and Duty to Diversify

    In re Estate of Janes, 90 N.Y.2d 41 (1997)

    Under the prudent person rule, a fiduciary’s duty to diversify investments must be evaluated in light of the specific circumstances of the trust, considering the needs of the beneficiaries and the overall portfolio risk, and not solely based on the inherent quality of an individual investment.

    Summary

    The Estate of Janes case addresses the fiduciary duty of an executor to prudently manage estate assets, specifically regarding diversification. The Court of Appeals held that the executor, Lincoln Rochester Trust Company, acted imprudently by retaining a high concentration of Eastman Kodak stock, which significantly declined in value, without adequately considering the needs of the testator’s widow and the overall risk to the estate’s portfolio. The court emphasized that the prudent person rule requires a holistic assessment of investment decisions, not just a focus on the individual merits of a stock. The court affirmed the finding of liability but modified the damages calculation to reflect the capital lost due to the imprudent retention.

    Facts

    Rodney Janes died in 1973, leaving an estate heavily concentrated in Eastman Kodak stock (71% of the stock portfolio). His will created trusts benefiting his widow and charities. Lincoln Rochester Trust Company, as co-executor and trustee, initially sold some Kodak shares to cover administrative expenses but retained the majority. The widow, unsophisticated in financial matters, consented to some sales but wasn’t fully informed about the investment strategy. The price of Kodak stock declined significantly over the next several years, diminishing the estate’s value.

    Procedural History

    The Trust Company filed accountings, which were challenged by the widow and the Attorney General (representing the charitable beneficiaries). The Surrogate’s Court found the Trust Company imprudent in retaining the Kodak stock and imposed a surcharge. The Appellate Division modified the damages calculation, reducing the surcharge. Both sides appealed to the Court of Appeals.

    Issue(s)

    1. Whether a fiduciary can be surcharged for imprudent management of a trust for failure to diversify in the absence of additional elements of hazard pertaining to the specific stock.

    2. Whether the Surrogate Court properly determined August 9, 1973 as the date by which the Trust should have divested the Kodak stock.

    3. Whether the Surrogate Court applied the correct measure of damages in calculating the surcharge.

    Holding

    1. Yes, because the prudent person rule requires considering the investment in relation to the entire portfolio and the needs of the beneficiaries, not just the inherent qualities of the individual investment.

    2. Yes, because the evidence supports the conclusion that a prudent fiduciary would have divested the estate’s stock portfolio of its high concentration of Kodak stock by August 9, 1973.

    3. No, because the proper measure of damages for negligent retention of assets is the value of the capital lost, not lost profits.

    Court’s Reasoning

    The Court of Appeals held that the prudent person rule, as codified in EPTL 11-2.2(a)(1) and interpreted in cases like King v. Talbot, requires fiduciaries to act with the diligence and prudence that prudent persons would use in managing their own affairs. This includes considering the nature and object of the trust, the preservation of the fund, and the procurement of a just income. The court rejected the Trust Company’s argument that diversification is only required when specific hazards exist regarding the individual stock. The Court emphasized that “the very nature of the prudent person standard dictates against any absolute rule that a fiduciary’s failure to diversify, in and of itself, constitutes imprudence, as well as against a rule invariably immunizing a fiduciary from its failure to diversify in the absence of some selective list of elements of hazard”.

    The court noted the importance of considering factors beyond the individual investment, such as “the amount of the trust estate, the situation of the beneficiaries, the trend of prices and of the cost of living, the prospect of inflation and of deflation” (Restatement [Second] of Trusts § 227, comment e). The court found that the Trust Company failed to adequately consider the needs of the testator’s widow, the high concentration of Kodak stock in relation to the overall portfolio, and its own internal review protocols. As the court noted, “[t]he trustee should take into consideration the circumstances of the particular trust that he is administering, both as to the size of the trust estate and the requirements of the beneficiaries. He should consider each investment not as an isolated transaction but in its relation to the whole of the trust estate” (3 Scott, Trusts § 227.12, at 477 [4th ed]).

    Regarding damages, the court distinguished between cases involving negligent retention and those involving self-dealing. In cases of negligent retention, the measure of damages is the value of the capital lost. The court found that the Appellate Division correctly applied this measure, calculating the difference between the value of the Kodak stock when it should have been sold (August 9, 1973) and its ultimate sale price.

    The court specifically rejected the “lost profits” measure of damages used by the Surrogate, noting this was only appropriate in cases of self-dealing, citing Matter of Rothko, where “the fiduciary’s misconduct consisted of deliberate self-dealing and faithless transfers of trust property”.

  • Graubard Mollen Horowitz Pomeranz & Shapiro v. Moskovitz, 86 N.Y.2d 112 (1995): Fiduciary Duty and Solicitation of Clients by Departing Law Partners

    Graubard Mollen Horowitz Pomeranz & Shapiro v. Moskovitz, 86 N.Y.2d 112 (1995)

    Departing law partners breach their fiduciary duty when they secretly solicit firm clients for their personal gain before resigning, as this undermines the duty of loyalty among partners and exceeds the scope of permissible client communication.

    Summary

    This case concerns a dispute between a law firm and its departing partners, focusing on whether the partners breached their fiduciary duty by soliciting firm clients before their resignation. The New York Court of Appeals held that such pre-resignation, surreptitious solicitation is actionable, as it undermines the duty of loyalty partners owe each other. The court clarified that while attorneys can inform clients of their departure and remind them of their right to choose counsel, they cannot secretly lure clients away or lie about their rights. The court also addressed claims of breach of contract and fraud, finding material issues of fact that precluded summary judgment.

    Facts

    Irving Moskovitz and Seymour Graubard founded the plaintiff law firm in 1949. Moskovitz brought in F. Hoffman LaRoche & Co., Ltd. (Roche) as a client in 1959, with billings exceeding $1 million per year by the late 1980s. In 1982, the firm adopted a retirement program that included clauses stating retirees would not impair the firm’s client relationships and would integrate clients with other partners. After the phase-down period, Moskovitz, unhappy with the firm, contacted a legal search consultant about moving to another firm with his tax partners, Schiller and Young, indicating Roche would follow. Moskovitz negotiated with LeBoeuf Lamb Leiby & MacCrae, ensuring Roche’s approval before finalizing any arrangement.

    Procedural History

    The law firm sued Moskovitz, Schiller, and Young for fraud, breach of fiduciary duty, breach of contract, and unjust enrichment after they resigned and joined LeBoeuf. The trial court denied the defendants’ motion for summary judgment, except for claims based on guarantees of client retention. The Appellate Division affirmed, granting leave to appeal to the Court of Appeals. Only Moskovitz appealed.

    Issue(s)

    1. Whether a withdrawing partner breaches fiduciary duty by soliciting firm clients before announcing their resignation.
    2. Whether a contractual requirement that an attorney try to “integrate” or “institutionalize” clients into the firm is legally enforceable.
    3. Whether a cause of action for fraud is stated by alleging that a promisor lacked the intention to perform representations when making them.

    Holding

    1. Yes, because pre-resignation surreptitious solicitation exceeds what is necessary to protect client freedom of choice and undermines the duty of loyalty among partners.
    2. Yes, because such provisions do not compromise client freedom of choice or an attorney’s freedom to practice law, but simply obligate partners to use their best efforts to expose clients to other attorneys in the firm.
    3. Yes, because a false statement of intention is sufficient to support an action for fraud, even if it relates to an agreement between the parties.

    Court’s Reasoning

    The Court of Appeals balanced the fiduciary duty partners owe each other with the attorney’s responsibility to clients and client’s freedom to choose counsel. While attorneys can inform clients with whom they have a prior professional relationship about their impending withdrawal and new practice, and remind the client of its freedom to retain counsel of its choice, secretly attempting to lure firm clients to the new association is inconsistent with a partner’s fiduciary duties. The court emphasized that partners must maintain a “punctilio of an honor the most sensitive.” Regarding the breach of contract claim, the court found that the retirement agreement provision did not compromise client freedom. The court also held that a cause of action for fraud may arise when one misrepresents a material fact with no intention of complying with those representations. The court noted, “A false statement of intention is sufficient to support an action for fraud, even where that statement relates to an agreement between the parties.” Because there were material issues of fact the court determined that summary judgment was inappropriate.

  • In re Estate of Donner, 82 N.Y.2d 574 (1993): Fiduciary Duty to Preserve Estate Assets

    In re Estate of Donner, 82 N.Y.2d 574 (1993)

    Executors of an estate have a fiduciary duty to preserve and protect the assets of the estate, and a failure to prudently manage investments, especially when possessing specialized knowledge, can result in a surcharge for investment losses.

    Summary

    This case concerns the surcharge imposed on co-executors for breaching their fiduciary duty to preserve the assets of an estate. The co-executors, one a long-time attorney and the other a financial advisor with prior investment management roles for the decedent, failed to prudently manage investments during a period of market decline. The New York Court of Appeals held that the Surrogate’s Court did not abuse its discretion in concluding that the co-executors breached their duty, imposing a surcharge for investment losses, and reducing their commissions, emphasizing their unique prior relationship with the testatrix and their failure to act prudently in preserving assets. The court emphasized that fiduciaries are held to a higher standard than those operating at arm’s length.

    Facts

    Carroll Donner died in 1984, leaving a substantial estate with the majority of assets held in two inter vivos trusts managed by Wilmington Trust Company (WTC). Duncan Miller, one of the co-executors, had been the decedent’s financial advisor and directed investments for the trusts. After Donner’s death, the value of the securities in the trusts declined significantly. Mills College, the residuary legatee, objected to the co-executors’ accounting, alleging a failure to collect estate funds, improper expenditures, and investment losses. The objectors uncovered memoranda indicating substantial losses and attempts to withhold information.

    Procedural History

    Mills College and the Attorney-General filed objections to the co-executors’ accounting in Surrogate’s Court. The Surrogate’s Court sustained the objections, reduced the co-executors’ commission, and surcharged them for negligence. The Appellate Division affirmed the Surrogate’s Court decision. The New York Court of Appeals granted leave to appeal and certified the question of whether the Surrogate’s determinations were an abuse of discretion.

    Issue(s)

    Whether the Surrogate’s Court abused its discretion (1) in limiting the co-executors to a single commission and (2) in surcharging the co-executors for losses to the estate and for improper disbursements, given the facts.

    Holding

    No, because the co-executors failed to fulfill their fiduciary duty to preserve the assets of the estate, justifying the surcharge for losses incurred. Additionally, there was sufficient evidence to support the finding that the co-executors intentionally withheld information, warranting the reduction in commissions.

    Court’s Reasoning

    The court emphasized the high standard of conduct required of fiduciaries, quoting Meinhard v. Salmon, 249 NY 458, 464: “A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.” The court found that the co-executors had a duty to preserve the assets from the moment of the decedent’s death, particularly given Miller’s pre-existing role in managing the investments. The court noted that the co-executors knew of the declining values but took no prudent action to prevent losses. The court rejected the argument that they lacked authority to act immediately, holding that their prior relationship to the testatrix imposed an immediate duty to protect the assets. Regarding the surcharge, the court found sufficient evidence that the losses resulted from the co-executors’ negligence and failure to exercise prudence. The court referenced evidence of the individual assets, date-of-death values, and proceeds from the sales. Finally, the court upheld the denial of commissions, finding evidence that the co-executors intentionally withheld information and acted contrary to the interests of Mills College. The court stated: “Here, the indifference and inaction by the coexecutors justifies the imposition of the surcharge on them for postdeath losses incurred by the estate.”

  • McDermott v. Regan, 82 N.Y.2d 354 (1993): Protecting Pension Benefits Under the New York State Constitution

    McDermott v. Regan, 82 N.Y.2d 354 (1993)

    A law changing the funding method of the New York State Retirement Systems violates the state constitution if it impairs the Comptroller’s independent judgment as trustee or breaches the state’s fiduciary duty to protect pension funds.

    Summary

    This case concerns the constitutionality of a New York law (chapter 210 of the Laws of 1990) that changed the funding method for the state’s retirement systems from an Aggregate Cost (AC) method to a Projected Unit Credit (PUC) method. The plaintiffs argued that this change violated Article V, § 7 of the New York State Constitution, which protects pension benefits from being diminished or impaired. The Court of Appeals affirmed the lower courts’ decisions, holding that the law was unconstitutional because it divested the State Comptroller of his autonomous judgment and potentially destabilized the pension fund, thus impairing benefits. The decision emphasizes the state’s fiduciary duty to protect pension funds and the importance of the Comptroller’s independent judgment in maintaining their security.

    Facts

    The New York State Retirement Systems, including the Common Retirement Fund (CRF), provide retirement, death, and disability benefits to public employees. Until 1990, the CRF was funded using the Aggregate Cost (AC) method, which involved calculating the total funding needed for all expected benefits annually. Chapter 210 of the Laws of 1990 mandated a change to the Projected Unit Credit (PUC) method, funding benefits only when they accrue. This resulted in a surplus that was returned to governmental entities, reducing their annual contributions. The law also prescribed a five-year stock valuation method for certain fiscal years, which differed from the Comptroller’s previous four-year averaging method.

    Procedural History

    The plaintiffs, concerned about the security of their pension funds, filed suit challenging the constitutionality of chapter 210. The Supreme Court granted the plaintiffs’ motions for summary judgment, declaring sections 1 through 7 of chapter 210 unconstitutional. The Appellate Division affirmed this decision. The State of New York appealed to the Court of Appeals.

    Issue(s)

    Whether chapter 210 of the Laws of 1990, which changed the funding method for New York State Retirement Systems, violates Article V, § 7 of the New York State Constitution by diminishing or impairing pension benefits.

    Holding

    Yes, because chapter 210 violates Article V, § 7 of the New York State Constitution by divesting the State Comptroller of his autonomous judgment as trustee of the retirement funds and potentially destabilizing the fund, thus impairing benefits.

    Court’s Reasoning

    The Court of Appeals relied on the constitutional provision that membership in any pension or retirement system of the state shall be a contractual relationship, the benefits of which shall not be diminished or impaired (Article V, § 7). The court emphasized the Comptroller’s role as trustee of these retirement benefits, citing Sgaglione v. Levitt, which upheld the Comptroller’s authority. The court found that chapter 210 divested the Comptroller of his autonomous judgment as to whether the PUC method was preferable to the AC method, violating the Nonimpairment Clause.

    The court also emphasized the State’s fiduciary duty to the participants in the retirement fund, stating that the State must act in a manner consistent with the goal of protecting these funds. The court noted that the only factor the Legislature considered when changing the funding method was the fiscal crisis facing the State, not the protection of pension benefits.

    Regarding the Mercer Report, which the State relied upon, the court found that while the report concluded that both methods were appropriate, it also indicated that the AC method may be preferred for smoother cost increases and warned about the extreme volatility of the PUC method. The court quoted the report: “The current PUC amortization method is one that we believe can do harm to the Systems. Due to the well funded condition of the Systems and the strain on governmental budgets, we are concerned that the amortization method provides a level of risk which is inappropriate.”

    The court concluded that chapter 210 impairs the benefits of the existing pension fund by allowing employers to deplete moneys in the fund and reducing the amount of employer contributions. As such, the reserve moneys would not be available for immediate investment, the return on investment would be decreased, and the additional security provided by the reserve moneys would be impaired.

  • Northeast General Corp. v. Wellington Advertising, Inc., 82 N.Y.2d 158 (1993): Finder’s Fee and Duty to Disclose

    82 N.Y.2d 158 (1993)

    Absent a specific agreement establishing a relationship of trust, a finder has no fiduciary duty to disclose adverse information about a potential business transaction partner to their client.

    Summary

    Northeast General Corporation, a finder, sued Wellington Advertising for a finder’s fee after introducing them to a purchaser, Sternau, who ultimately rendered Wellington insolvent. Wellington refused to pay, arguing Northeast failed to disclose negative information about Sternau’s reputation. The lower courts ruled in favor of Wellington, imposing a fiduciary-like duty on the finder to disclose adverse information. The Court of Appeals reversed, holding that absent an explicit agreement creating a relationship of trust, a finder has no inherent fiduciary duty to disclose such information. The court emphasized that parties in commercial transactions are generally governed by marketplace mores unless they explicitly agree to a higher standard of care.

    Facts

    Northeast, acting as a finder, entered into an agreement with Wellington to identify potential purchasers. The agreement designated Northeast as a non-exclusive, independent investment banker and business consultant for finding candidates. Northeast introduced Sternau to Wellington. Prior to the introduction, Northeast’s president learned of Sternau’s reputation for acquiring companies, extracting assets, and leaving minority investors in financial distress. Northeast did not disclose this information to Wellington. After the merger agreement but before the closing, Northeast offered further assistance, which Wellington declined. Sternau’s company acquired Wellington, leaving Wellington’s principals as minority investors. Wellington became insolvent, resulting in financial losses for Wellington’s principals.

    Procedural History

    Northeast sued Wellington for the finder’s fee. The jury found in favor of Northeast. The Supreme Court set aside the verdict, ruling that Northeast had a fiduciary-like duty to disclose the adverse information. The Appellate Division affirmed, adopting the Supreme Court’s reasoning. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a finder, under a standard finder’s fee agreement, has a fiduciary-like duty to disclose adverse information about a potential purchaser to the client.

    Holding

    No, because the agreement between Northeast and Wellington did not establish a relationship of trust imposing such a duty, and absent such an agreement, the parties are governed by the normal mores of the marketplace.

    Court’s Reasoning

    The Court of Appeals reasoned that imposing a fiduciary duty requires a clear indication that the parties intended to create a relationship of trust. The court emphasized that the written agreement defined Northeast’s role solely as a finder, tasked with introducing potential purchasers. The court distinguished finders from brokers, who typically have a fiduciary duty due to their greater involvement in negotiating the transaction. The court noted that “the dispositive issue of fiduciary-like duty or no such duty is determined not by the nomenclature ‘finder’ or ‘broker’ or even ‘agent,’ but instead by the services agreed to under the contract between the parties.” The court refused to impose a duty retroactively that was not contemplated in the agreement. The court also acknowledged that Wellington declined further assistance from Northeast after the initial introduction, indicating that Wellington did not rely on Northeast for ongoing guidance. The court quoted Cardozo, stating some relationships in life impose a duty to act in accordance with the customary morality and nothing more and that those are the standards for the judge. A dissenting opinion argued that the finder had a duty to disclose the negative information based on the confidential information shared and the inherent reliance in the relationship. It emphasized that Dunton knew Arpadi’s business plans and that the merger was the very type of transaction Arpadi feared.

  • In re Henderson, 80 N.Y.2d 388 (1992): Undue Influence When Attorney Benefits From Will

    In re Henderson, 80 N.Y.2d 388 (1992)

    An inference of undue influence may arise, warranting a hearing, when an attorney benefits substantially from a will, even if the attorney did not draft the will, especially when independent counsel’s review was limited.

    Summary

    The New York Court of Appeals addressed whether a hearing was warranted on a claim of undue influence in a will contest. The testatrix’s sister challenged the will, arguing undue influence by the testatrix’s long-time attorney, who was a primary beneficiary, even though he didn’t draft the will. The attorney advised the testatrix to seek independent counsel, but the drafted will heavily favored the attorney based on a memo he provided. The court held that while the Putnam inference doesn’t automatically apply when the attorney-legatee didn’t draft the will, the circumstances, including the limited independent review and the substantial bequest, justified a hearing on the undue influence claim.

    Facts

    Christine Henderson asked her attorney and financial advisor, Irvin Husin, to draft a will naming him and his family as major beneficiaries. Husin declined, citing ethical concerns, and suggested Henderson contact the Nassau County Bar Association for a referral. Husin provided Henderson with a memo outlining her assets, potential beneficiaries (including himself), and suggesting a bequest for her sister. Henderson retained Martin Weinstein, who drafted the will based primarily on Husin’s memo and a brief meeting with Henderson. Weinstein did not thoroughly question Henderson about the large bequest to Husin or the disinheritance of her sister.

    Procedural History

    Henderson’s sister objected to the will’s admission to probate, alleging fraud and undue influence. The Surrogate’s Court initially ordered a hearing. The Appellate Division reversed, dismissing the objection, finding no triable issue of fact. The Court of Appeals then reviewed the Appellate Division’s decision.

    Issue(s)

    Whether the allegations in the objectant’s motion papers were sufficient to raise a triable question of fact on her claim of fraud and undue influence, even though the attorney-legatee did not draft the will.

    Holding

    Yes, because under the specific circumstances, including the limited independent review by the drafting attorney and the size of the bequest to the attorney-legatee coupled with the near disinheritance of the testatrix’s sister, a hearing on the claim of undue influence was warranted.

    Court’s Reasoning

    The court acknowledged the Matter of Putnam rule, which infers undue influence when an attorney drafts a will in which they are a beneficiary. However, the court declined to extend this inference automatically to cases where the attorney-legatee did not draft the will. The court emphasized a testator’s freedom to bequeath property as they wish. However, the court distinguished this case based on the specific facts. While Henderson retained independent counsel, Weinstein relied heavily on Husin’s memo and did not independently explore the reasons for the disproportionate bequest or the disinheritance of the sister. “Consequently, it could be inferred that Henderson did not receive the benefit of counselling by an independent attorney and that her will was essentially the indirect product of her discussions and relationship with Husin.” The court quoted Ten Eyck v Whitbeck, 156 NY 341, 353 stating that, “[W]here a fiduciary relationship exists between parties, ‘transactions between them are scrutinized with extreme vigilance’”. Because Husin benefitted substantially while occupying a position of trust, and the independent counsel’s involvement was minimal, the court found sufficient grounds to warrant a hearing on the undue influence claim. The court emphasized the risk of undue persuasion in attorney-client relationships, justifying judicial inquiry, especially where independent counsel’s intervention was limited. The court noted the size of the bequest to Husin (approximately 47% of the $1 million estate) and the exclusion of the testatrix’s sister as further justification for the hearing.

  • Whalen v. Gerzof, 76 N.Y.2d 914 (1990): Statute of Limitations and Accrual of Claims in Fiduciary Relationships

    Whalen v. Gerzof, 76 N.Y.2d 914 (1990)

    In cases involving alleged contractual or derivative fiduciary relationships, the statute of limitations may be tolled until the plaintiff becomes entitled to earnings or becomes aware of their accrued rights under the agreement.

    Summary

    This case concerns a dispute over a real estate enterprise agreement between Whalen and Gerzof. Whalen claimed entitlement to half of Gerzof’s interest in Pearcove Associates, with benefits accruing after Gerzof received over $50,000 in income. The lower courts granted summary judgment to Gerzof based on the statute of limitations. The Court of Appeals reversed, holding that the statute of limitations did not begin to run until Whalen became entitled to earnings or aware of her rights. Because the lawsuit was filed in the same year the cause of action accrued, it was timely.

    Facts

    In November 1975, Whalen and Gerzof exchanged letters outlining an agreement where Whalen would receive one-half of Gerzof’s partial interest in Pearcove Associates. According to the agreement, Whalen would receive benefits after Gerzof received the first $50,000 in income or sale proceeds. Whalen alleged she did not become entitled to earnings until 1983. She filed suit in 1983 claiming breach of contract and breach of fiduciary duty.

    Procedural History

    The trial court granted summary judgment in favor of Gerzof, dismissing Whalen’s claims based on the statute of limitations. The Appellate Division affirmed this decision. The New York Court of Appeals modified the Appellate Division’s order, denying Gerzof’s motion for summary judgment and remitting the case for further proceedings. The Court of Appeals affirmed the dismissal of claims against the other defendants.

    Issue(s)

    Whether the Statute of Limitations began to run in 1975 when the agreement was made, or at a later date when Whalen became entitled to earnings under the agreement.

    Holding

    No, because under the alleged agreement, the Statute of Limitations was tolled until Whalen became entitled to earnings from the partnership interest above the $50,000 threshold payment and until she demanded or became aware of her accrued rights to earnings under their agreement.

    Court’s Reasoning

    The Court of Appeals reasoned that the Statute of Limitations did not begin to run when the agreement was initially made in 1975. Instead, the court emphasized that the statute was “in repose” until the conditions precedent to Whalen’s entitlement to earnings were met. The court stated, “[U]nder the alleged agreement, the Statute of Limitations was in repose until Whalen became entitled to earnings from the partnership interest above the threshold $50,000 payment, and until she demanded or became aware of her accrued rights to earnings under their agreement.” Since these conditions allegedly occurred in 1983, the lawsuit, also begun in 1983, was deemed timely. The court highlighted the unique nature of the agreement between Whalen and Gerzof, implying that traditional Statute of Limitations principles would not automatically apply. The court considered the alleged fiduciary relationship and its impact on when the cause of action accrued. The Court affirmed the decision of the Appellate Division regarding the other defendants, but it did not provide any specific reasoning for their decision regarding those parties.