By Victor M. Metsch
(Victor M. Metsch is a Senior Litigation/ADR partner at Hartman & Craven LLP. He can be reached at firstname.lastname@example.org. He maintains a website at www.LegalVictor.net and can be found on Twitter at @LegalVictor1).
In Part 1 of this trilogy – the Citadel of Privity — we explored the historical/legal antecedents/precedents in New York in respect of claims sounding in either contract or tort. The Cardozo “quartet” – Glanzer, MacPherson, H.R. Moch and Ultramares – left the “citadel” of privity substantially in tact. In Glanzer, defendants, who were engaged in business as public weighters, had every reason to know that the buyers intended to rely upon their certificates of weight. In MacPherson, the automobile manufacturer knew that the retail dealer intended to re-sell the car to a third party. In H.R. Moch, the record did not establish that the waterworks supplying water to the city undertook to be answerable to the public at large. And, in Ultramares, the public accountants clearly owed a duty to both their client and their client’s counter-parties to prepare financial statements that were not fraudulent. However, absent fraud or gross negligence, the auditor had no duty or obligation to an open-ended class of possible recipients of the statements.
In Part 2 of this trilogy – the Attack on the ‘Citadel,' we concluded that, as the 20th Century came to an end, the Court of Appeals still based its “privity” jurisprudence on a continuum that began with the Cardozo “quartet” of Glanzer, MacPherson, H.R. Moch and Ultrameres and continued through Ossining, Credit Alliance, European American Bank and Security Pacific. The Credit Alliance “trifecta” of “awareness”, “reliance” and “linking conduct” formed the basis of determining the liability of accountants, attorneys and other professionals to third-parties not in direct privity. The requirement of direct “privity” was being superseded by “a nexus” that “sufficiently approached” or was “sufficiently close” to privity. And the Court of Appeals continued to adjudicate the “privity”/”near privity” issues on a fact-specific, case-by-case basis.
In this Part 3 we will examine the “privity” jurisprudence of the Court of Appeals in the Twenty-First Century.
Part 3: The “Citadel” in the Current Millennium
In Parrott v. Coopers & Lybrand, 95 N.Y.2d 479, 741 N.E.2d 506, 718 N.Y.S.2d 709 (2000), the Court of Appeals “[w]as required to examine, once again, the tripartite standard, set forth by this Court in Credit Alliance Corp. v. Anderson…, for their functional equivalent of privity in a cause of action for negligent misrepresentation.”
The Court of Appeals, as follows, summarized the relevant facts:
Harold Parrott was employed by Pasadena Capital Corporation, a privately held investment advisor firm located in California. Pursuant to a January 1992 stock purchase agreement, Parrott purchased over 40,000 shares of the company’s stock. The purchase agreement provided that, upon termination of Parrott’s employment, the company would buy back these shares at a fair market value determined on a minority basis by an independent third-party appraisal conducted in connection with the company’s employee stock ownership plan (ESOP). Coopers & Lybrand (C&L) had for several years been providing accounting services to Pasadena. Included among those services were valuation reports submitted twice annually that were used to determine the value of the stock for ESOP purposes. Each report was based on two methodologies: a discounted cash flow method, and a market comparable method relying on the stock values of similar companies publicly traded.
Parrott was terminated in May 1996. In September 1996, Pasadena notified Parrott that it was exercising its right to repurchase the stock, and explained that it was relying on the $78.21 per share valuation established by C&L in its most recent report of June 30, 1996. After unsuccessfully requesting a preliminary injunction in a Federal action challenging the stock repurchase, Parrott entered into a stipulation with Pasadena providing for a repurchase price of $3.9 million without prejudice to seek a higher price in litigation. The Federal District Court ultimately directed that the dispute be arbitrated pursuant to the stock purchase agreement.
* * *
A final arbitration award rejected C&L’s June 30, 1996 valuation of $78.21 per share and substituted an independent calculation of $122.50 per share. Pasadena paid Parrott the difference per share plus interest – nearly $2.5 million.
The prior proceedings were summarized as follows:
Parrott commenced this action against C&L, asserting claims for professional negligence, negligent misrepresentation, and aiding and abetting his employer’s breach of fiduciary duty. Parrott argued that he reasonably relied on C&L’s misrepresentations and omissions when he stipulated to the sale of the shares. Supreme Court denied C&L’s motion for summary judgment and sanctions. The Appellate Division granted the motion for summary judgment, dismissing the complaint. While the Court unanimously concluded that Parrott’s cause of action for aiding and abetting a breach of fiduciary duty lacked merit – a conclusion not challenged on this appeal – it divided on the privity issue. The majority held that Parrott did not establish a relationship with C&L approaching privity and that C&L’s discharge of its contractual responsibilities was completely unrelated to any transaction under Parrott’s stock purchase agreement. The dissenter noted that Parrott had to rely on CL’s valuation under the stock purchase agreement and that C&L must have been aware of this reliance given the small, identifiable class of employee stockholders. We now affirm.
And the Court of Appeals held that:
We have reiterated time and again that “before a party may recover in tort for pecuniary loss sustained as a result of another’s negligent misrepresentations there must be a showing that there was either actual privity of contract between the parties or a relationship so close as to approach that of privity”…We have explained that our decision to circumscribe liability in this area by privity of contract or its equivalent rests on “concern for the indeterminate nature of the risk”…and that “[s]uch a requirement is necessary in order to provide fair and manageable bounds to what otherwise could prove to be limitless liability”…Although this rule first developed in the context of accountant liability, it has applied equally in cases involving other professions…
The Court has been cautious not to cast those who are called upon to make judgments under a contract of employment into liability to third parties absent a clearly defined set of circumstances which bespeak a close relationship premised on knowing reliance. Therefore, before a liability may attach, the evidence must demonstrate “(1) an awareness by the maker of the statement that it is to be used for a particular purpose; (2) reliance by a known party on the statement in furtherance of that purpose; and (3) some conduct by the maker of the statement linking it to the relying party and evincing its understanding of that reliance”…These “indicia, while distinct, are interrelated and collectively require a third party claiming harm to demonstrate a relationship or bond with the once-removed accountants…”
The evidence here is insufficient to establish a relationship so close as to approach that of privity. Parrott never met or communicated with C&L. C&L had been retained by Pasadena for several years to provide biannual valuations for Pasadena’s use with respect to ESOPs generally. There is no indication that C&L knew the reports would be used in connection with Parrott’s stock purchase agreement. C&L was not specifically made aware that Parrott owned company stock, or that the stock would be repurchased by the employer at a value fixed by the accounting firm. It is undisputed that thee was no direct contact at any time between Parrott and C&L.
Nor did Parrott rely on the valuation statements in C&L’s report. He never read or received defendant’s report; none had been provided to him. In fact, from the outset he rejected C&L’s valuation as inaccurate, noting that the estimated value should have been higher due to an anticipated sale of the company, and he successfully challenged it in an arbitration proceeding.
Finally, no conduct directly linked Parrott and C&L that would evince an understanding by C&L of any reliance on Parrott’s part. Parrott relies on a single phrase appearing in a transmittal letter submitted by C&L in connection with the June 30, 1996 valuation which noted that the valuation was performed “for stock transactions involving employees of the Company”. However, as previously outlined, there is no indication that C&L knew of Parrott’s separate stock purchase agreement or that its valuations would be used to determine the repurchase price of shares pursuant to the termination provision of that agreement. Although Parrott may have been part of a limited and defined class of employees in this small closely held corporation, there is no evidence that C&L was informed that its valuation would be used for the purpose here…[the nature and purpose of the accountant’s contract with the limited partnership made it clear that the accountant’s services were specifically obtained to benefit the members of the partnership who were necessarily dependent upon the defendant accounting firm’s audit to prepare their own tax returns]).
In State of California Public Employees’ Retirement System v. Shearman & Sterling, 95 N.Y.2d 427, 741 N.E.2d 101, 718 N.Y.S.2d 256 (2000), the Court of Appeals was called upon to determine whether the California Public Employees’ Retirement System (“CalPERS”) had a claim against the law firm of Shearman & Sterling.
As to the facts, the Court of Appeals noted:
CalPERS allege[d] that Equitable asked Shearman & Sterling to incorporate the agreed-upon standard form note into the loan documents. At Equitable’s request, Shearman & Sterling prepared the documents and sent a draft note to CalPERS and its counsel. In its cover letter to CalPERS’ counsel, Shearman & Sterling indicated that the documents enclosed included Equitable’s standard loan forms, which had been black-lined to reflect changes required by New York law and those negotiated by Sersons; one of the black-lined provisions was the acceleration clause of the loan. CalPERS made no objection to the loan documents.
* * *
Subsequently, Sersons defaulted and CalPERS accelerated the loan. CalPERS asserts that only then did it discover that the note provided for an acceleration fee of approximately $1.1 million, rather than $9.1 million had the note been drafted in conformity with the standard CalPERS note. In March 1997, Sersons paid CalPERS the $1.1 million.
* * *
CalPERS, as the assignee of Equitable’s rights under the loan documents, then commenced this action against Sheaman & Sterling, asserting two causes of action for professional negligence and breach of contract. CalPERS also alleged that its relationship with the law firm was “so close as to approach that of privity of contract” to permit it to raise direct claims of negligence and breach of contract against Shearman & Sterling. Lastly, CalPERS claimed third-party beneficiary status under the Equitable and Shearman & Sterling contract to sustain its direct claims against the law firm.
With respect to the prior proceedings, the Court of Appeals wrote:
Shearman & Sterling moved to dismiss the complaint for failure to state a cause of action. Supreme Court granted the motion in part, dismissing only the direct causes of action based on its conclusion that CalPERS had not alleged facts sufficient to show either that CalPERS had a relationship approaching privity with Shearman & Sterling or that CalPERS was the intended third-party beneficiary of Shearman & Sterling’s contract with Equitable. The court noted that although the language in the Omnibus Assignment was legally insufficient to effect an assignment of Equitable’s claims, the specific language in the subsequent Settlement agreement did assign Equitable’s claims to CalPERS.
The Appellate Division dismissed the complaint in its entirety. The Court agreed that the language in the Omnibus Assignment did not transfer Equitable’s claims against Shearman & Sterling to CalERS but rejected the contention that the Settlement Agreement nevertheless assigned those claims to CalPERS. The Appellate Division noted that, upon assignment of the loan to CalPERS, Equitable received the full benefit of its bargain with CalPERS. The Court concluded that “[s]ince injury is an essential element of a cause of action for legal malpractice… malpractice…the elimination of any injury to Equitable’s upon the assignment of the loan extinguished any malpractice claims Equitable may have had against defendant related to the loan, and Equitable could not thereafter assign such defunct claims… We now affirm.
And, as to the facts, the Court of Appeals held:
As an initial matter, we agree with the courts below that the allegations in the complaint are insufficient to establish that CalPERS and Shearman & Sterling had a relationship so close as to approach that of privity. We have long held that “before a party may recover in tort for pecuniary loss sustained as a result of another’s negligent misrepresentations there must be a showing that thee was either actual privity of contract between the parties or a relationship so close as to approach that of privity”…The evidence must demonstrate “(1) an awareness by the maker of the statement that it is to be used for a particular purpose; (2) reliance by a known party on the statement in furtherance of that purpose; and (3) some conduct by the maker of the statement linking it to the relying party and evincing its understanding of that reliance”…
The only direct contact between Shearman & Sterling and CalPERS prior to the closing of the Sersons loan is a letter Shearman & Sterling sent to CalPERS asking for review and approval of the note by CalPERS and its counsel. Moreover, Shearman & Sterling provided CalPERS with a black-lined copy of the standard form note, indicating the changes that it had made so that the note would conform to New York law and the borrower’s demands. CalPERS cannot assert that it relied on Shearman & Sterling’s letter when it reserved the right of final approval of the loan documents for itself and its counsel, and failed to object. Thus, the complaint and the documentary evidence fail to establish that Shearman & Sterling knew that CalPERS would and did rely on the note it prepared without reviewing it and that CalPERS’ reliance was premised on conduct by Shearman & Sterling evincing an understanding that CalPERS would do so.
In Hamilton v. Beretta U.S.A. Corp., 96 N.Y.2d 222, 750 N.E.2d 1055, 727 N.Y.S.2d 7 (2001) the Court of Appeals outlined the facts:
In January 1995 plaintiffs – relatives of people killed by handguns – sued 49 handgun manufacturers in Federal court alleging negligent marketing, design defect, ultra-hazardous activity and fraud. A number of defendants jointly moved for summary judgment. The United States District Court for the Eastern District of New York (Weinstein J.), dismissed the product liability and fraud causes of action, but retained plaintiffs’ negligent marketing claim…Other parties intervened, including plaintiff Stephen Fox, who was shot by a friend and permanently disabled. The gun was never fund; the shooter had no recollection of how he obtained it. Other evidence, however indicated that he had purchased the gun out of the trunk of a car from a seller who said it came from the “south.” Eventually, seven plaintiffs went to trial against 25 of the manufacturers.
The Court of Appeals then described the pleadings and prior proceedings:
Plaintiffs asserted that defendants distributed their products negligently so as to create and bolster an illegal, underground market in handguns, one that furnished weapons to minors and criminals involved in the shootings that precipitated this lawsuit. Because only one of the guns was recovered, plaintiffs were permitted over defense objections to proceed on a market share theory of liability against all the manufacturers, asserting that they were severally liable for failing to implement safe marketing and distribution procedures, and that this failure sent a high volume of guns into the underground market.
After a four-week trial, the jury returned a special verdict finding 15 of the 25 defendants failed to use reasonable care in the distribution of their guns. Of those 15, nine were found to have proximately caused the deaths of the decedents of two plaintiffs, but no damages were awarded. The jury awarded damages against three defendants – American Arms, Beretta U.S.A. and Taurus International Manufacturing – upon a finding that they proximately caused the injuries suffered by Fox and his mother (in the amounts of $3.95 million and $50,000, respectively). Liability was apportioned among each of the three defendants according to their share of the national handgun market: for American Arms, 0.23% ($9,000); for Beretta, 6.03% ($241,000); and for Taurus, 6.80% ($272,000).
The Court of Appeals noted that "the threshold question in any negligence action is: does defendant owe a legally recognized duty of care to plaintiff?"
Courts traditionally “fix the duty point by balancing factors, including the reasonable expectations of parties and society generally, the proliferation of claims, the likelihood of unlimited or insurer-like liability, disproportionate risk and reparation allocation, and public policies affecting the expansion or limitation of new channels of liability…Thus, in determining whether a duty exists, “courts must be mindful of the precedential, and consequential, future effects of their rulings, and ‘limit the legal consequences of wrongs to a controllable degree’”…
After noting “judicial resistance to the expansion of duty grows out of practical concerns both about potentially limitless liability and about the unfairness of imposing liability for the acts of another”, the Court of Appeals reasoned that:
A duty may arise, however, where there is a relationship either between defendant and a third-person tortfeasor that encompasses defendant’s actual control of the third person’s actions, or between defendant and plaintiff that requires defendant to protect plaintiff from the conduct of others. Examples of these relationships include master and servant, parent and child, and common carriers and their passengers.
The Court of Appeals concluded, as follows, that handgun manufacturers did not have a duty to exercise reasonable care in the marketing and distribution of their product:
As we noted earlier, a duty and the corresponding liability it imposes do not rise from mere forseeability of the harm …Moreover, none of plaintiffs’ proof demonstrated that a change in marketing techniques would like have prevented their injuries. Indeed, plaintiffs did not present any evidence tending to show to what degree their risk of injury was enhanced by the presence of negligently marketed and distributed guns, as opposed to the risk presented by all guns in society…
InDarby v. Compagnie National Air France, 96 N.Y.2d 343, 753 N.E.2d 160, 728 N.Y.S.2d 731 (2001), the Second Circuit certified the following questions to the Court of Appeals:
(1) Whether, under New York law and all of the circumstances shown by the record developed in this case, a jury question of negligence is presented when there is evidence that an innkeeper whose hotel was across the road from a public beach, use of which by hotel guests was encouraged and facilitated by the hotel, failed to warn of rip tides that caused injury to a guest swimming off that beach.
(2) Whether an innkeeper who so encourages and facilitates use of a nearby public beach has “a duty to take reasonable care to discover the actual condition of the land under water in the area wherein his guests were invited and permitted to bathe, and…warn them of its dangerous condition.”
The Court of Appeals, upon the following facts, answered the certified questions in the negative:
Peter Zeiler drowned while swimming at Copacabana beach, a public facility in Rio De Janeiro, Brazil. He and Regina Darby were guests at the Meridien Copacabana Hotel, which is separated from the beach by a four-lane public highway. The hotel marketed its proximity to the beach and encouraged guests to use it, even providing them with chairs, umbrellas, towels and a security escort service. It also furnished guests with pamphlets warning about sun exposure and crime on the beach. The pamphlets did not, however, say anything about possibly dangerous surf conditions.
The Brazilian government owned and maintained the beach and employed the lifeguards and rescue personnel. The government did not convey surf information to area hotels. When local weather conditions created rip tides, lifeguards were not permitted to enter the water but would post red flags and, when necessary, call for helicopters to rescue swimmers.
On the day in question, Zeiler went swimming at the beach. When he failed to return, Darby summoned help and eventually learned that he had drowned.
The Court of Appeals stated:
A finding of negligence may be based only upon the breach of a duty. If, in connection with the acts complained of, the defendant owes no duty to the plaintiff, the action must fail. Although juries determine whether and to what extent a particular duty was breached, it is for the courts first to determine whether any duty exists (see, Hamilton v. Beretta U.S.A. Corp., 96 NY2d 222; Waters v. New York City Hous. Auth., 69 NY2d 225, 229). In so doing, courts identify what people may reasonably expect of one another. In assessing the scope and consequences of civil responsibility, they define the boundaries of “duty” to comport with what is socially, culturally and economically acceptable (see, Pulka v. Edelman, 40 NY2d 781, 785-786; Tobin v. Grossman, 24 NY2d 609, 619).
The Court of Appeals found, as follows, that the hotel owed no duty to the plaintiff:
Plaintiff asks us to impose on innkeepers a duty to warn of dangerous surf conditions at off-premises beaches they do not own or control. We note some support for the proposition that an innkeeper may be held liable for failure to warn guests about surf conditions at a nearby public beach (see, Fuhrer v. Gearhart-By-The-Sea, Inc., 306 Ore 434, 441, 760 P2d 874, 879-880). An appreciable weight of authority, however, is to the contrary. As the Restatement puts it, an innkeeper owes no “duty to a guest who is injured or endangered while…away from the premises”…[“An entity which does not control the area or undertake a particular responsibility to do so has no common law duty to warn, correct, or safeguard others from naturally occurring, even if hidden, dangers common to the waters in which they are found”…[holding than an innkeeper owed no duty to warn its guests of a hidden sandbar in an adjacent public beach]; [“We hold that a hotel has no duty to warn its guests of a dangerous condition of adjacent property over which the hotel has no control, to wit, the ocean currents”].
In Espinal v. Melville Snow Contractors, 98 N.Y.2d 136, 773 N.E.2d 485, 746 N.Y.S.2d 120 (2002), a personal injury action against a snow removal contractor engaged by a property owner, the Court of Appeals “[was] called upon to determine whether the company may be held liable to plaintiff for injuries she sustained when she slipped and fell on the premises.”
Supreme Court denied defendant’s motion to dismiss and the Appellate Division reversed. The Court of Appeals, as follows, affirmed dismissal of the complaint:
Because a finding of negligence must be based on the breach of a duty, a threshold question in tort cases is whether the alleged tortfeasor owed a duty of care to the injured party…Here, the issue is whether any such duty ran from Melville to plaintiff, given that Melville’s snow removal contact was with the property owner. As we have often said, the existence and scope of a duty is a question of law requiring courts to balance sometimes competing public policy considerations…
Elaborating, the Court of Appeals stated:
Under our decisional law a contractual obligation, standing alone, will generally not give rise to tort liability in favor of a third party…Seventy-four years ago, in H.R. Moch Co. v. Rensselaer Water Co. (247 NY 160, 159 N.E. 896), Chief Judge Cardozo stated that imposing liability under such circumstances could render the contracting parties liable in tort to “an indefinite number of potential beneficiaries”…As a matter of policy, we have generally declined to impose liability to that degree. On the other hand, we have recognized that under some circumstances, a party who enters into a contract thereby assumes a duty of care to certain persons outside the contract…Having rejected the concept of open-ended tort liability, while recognizing that liability to third persons may sometimes be appropriate, we must determine where to draw the line…Although the “policy-laden” nature of the existence and scope of a duty generally precludes any bright-line rules…, three cases help light the way.
And the Court of Appeals found that:
Under the agreement, Melville was obligated to “clear, by truck and plow, snow, from vehicular roadways, parking and loading areas, entrances and exists of the captioned property when snow accumulations exceed three (3) inches.” In addition, Melville agreed that upon Miltope’s request, it would spread a mixture of salt and sand on certain areas of the property. As for snow removal, Melville contracted to plow “during the late evening and early morning hours, and not until all accumulations have ceased, on a one time plowing per snowfall basis. If there is a plowable accum. by 4 A.M., and it is still snowing, Melville will provide a limited plowing to open up the property before 9 A.M., and if accum. continue, Melville will plow a second time during the day or in the evening after all accumulations have ended.”
By the express terms of the contact, Melville was obligated to plow only when the snow accumulation had ended and exceeded three inches. This contractual undertaking is not the type of “comprehensive and exclusive” property maintenance obligation contemplated by a landowner to maintain the premises safely…Indeed, the contract stated that “it is the responsibility of the property manager or owner to decide whether an icy condition warrants application(s) of salt-sand by Melville. Owner must inspect property within 12 hours of work. Any defect in performance must be communicated immediately.” Although Melville undertook to provide snow removal services under specific circumstances, Miltope at all times retained its landowner’s duty to inspect and safely maintain the premises. Melville was under no obligation to monitor the weather to see if melting and refreezing would create an icy condition.
In Church v. Callanan Industries Inc. v. San Juan Construction and Sales Company, 99 N.Y.2d 104, 782 N.E.2d 50, 752 N.Y.S.2d 254 (2002), the Court of Appeals summarized the facts as follows:
Plaintiff Ned Church, age nine, received catastrophic spinal injuries December 26, 1992, when the driver of a Volkswagen Jetta in which he was a rear seat occupant fell asleep at the wheel. The vehicle veered off the southbound traffic portion of the New York state Thruway near milepost marker 132.7, careened down a non-traversable embankment and crashed in a V-shaped ditch at the bottom. The thruway site where the vehicle left the highway was within a 22-mile resurfacing and safety-improving project, which was completed in 1986 pursuant to an agreement between the Thruway Authority and Callanan Industries, Inc., as general contractor.
Suit was brought on behalf of the infant plaintiff against the general contractor, the guardrail subcontractor (San Juan) and the construction engineering firm. According to the Court of Appeals:
The threshold and dispositive question on this appeal is whether San Juan owed the infant plaintiff a duty of care. The existence and scope of a duty of care is a question of law for the courts entailing the consideration of relevant policy factors…In this case, any duty San Juan had with respect to the installation of guiderailing at milepost marker 132.7 on the southbound Thruway arose exclusively out of San Juan’s contractual undertakings set forth in its subcontract with Callanan. In other words, San Juan had no preexisting duty imposed by law to install guiderailing at that point on the Thruway.
The Court of Appeals summarized the state of the law:
As more extensively discussed in Espinal v. Melville Snow Contrs., Inc., our cases have nevertheless thus far identified three sets of circumstances, as exceptions to the general rule, in which a duty of care to noncontracting third parties may arise out of a contractual obligation or the performance thereof. In such cases, the promisor is subject to tort liability for failing to exercise due care in the execution of the contract. The first is where the promisor, while engaged affirmatively in discharging a contractual obligation, creates an unreasonable risk of harm to others, or increases that risk…[“a defendant who undertakes to render services and then negligently creates or exacerbates a dangerous condition may be liable for any resulting injury”. Moch describes that conduct, subjecting the promisor to tort liability, as “launching a force or instrument of harm”…
And the Court of Appeals applied the law to the facts of the case:
Plaintiff fails to qualify under any of the foregoing exceptions. There is no evidence in the record that San Juan’s incomplete performance of its contractual duty to install 312.5 feet of guiderailing falls within the first exception – i.e., that it created or increased the risk of the Jetta’s divergence from the roadway beyond the risk which existed even before San Juan entered into any contractual undertaking. In this respect, San Juan classically exemplifies the promisor described in Moch who is immune from liability because the breach of contact consists “merely in a withholding a benefit…where inaction is at most a refusal to become an instrument for good”…San Juan’s failure to install the additional length of guiderail did nothing more than neglect to make the highway at thruway milepost marker 132.7 safer – as opposed to less safe – than it was before the repaving and safety improvement project began.
Likewise, this case does not fall within the second exception. It is not (and cannot be) contended here that the tragic loss of control of the Jetta occurred because the driver “detrimentally relied on the continued performance of [San Juan’s contractual] duties…when she failed to remain awake and alert at the wheel.
Nor can San Juan’s liability be sustained under an assumption of the Thruway Authority’s safety duty theory under Palka or Espinal, both of which are instructive while reaching opposite results. They teach that tort liability for breach of contract will not be imposed merely because there is some safety-related aspect to the unfulfilled contractual obligation. If liability invariably follows nonperformance of some safety-related aspect of a contract, the exception would swallow up the general rule against recovery in tort based merely upon the failure to act as promised. Thus, the open-ended possibility of liability apprehended by Chief Judge Cardozo in Moch would become a reality. Our decision denying the promisors’ liability in Eaves brooks demonstrates that there are limitations on the imposition of liability based upon a defendant’s assumption of its promisee’s duty to safeguard third persons.
As to San Juan, the Court of Appeals concluded that San Juan owed no recognizable duty to plaintiff:
San Juan did not comprehensively contact to assume all the Thruway Authority’s safety-related obligations with respect to the guiderail system. Instead, the Thruway Authority retained a separate project engineer to provide inspection and supervision of all aspects of the project, including contract compliance with respect to the stipulated length of the guiderail system. These roles of the project engineer were specifically incorporated into both sets of the relevant contact documents, which required the engineer’s approval of the work.
In ECB I, Inc. v. Goldman, Sachs & Co., 5 N.Y.3d 11, 832 N.E.2d 26, 799 N.Y.S.2d 170, plaintiff-creditors committee sued Goldman, Sachs for (among other claims) breach of fiduciary duty arising out of the investment banks conduct as lead managing underwriting of the initial public offering of eToys, Inc. The Court of Appeals dismissed the claims for breach of contract, professional misconduct and unjust enrichment and allowed the cause of action for breach of fiduciary duty to proceed.
The Court of Appeals summarized the facts as follows:
The complaint allege[d] that eToys relied on Goldman Sachs for its expertise as to pricing the IPO, and that Goldman Sachs gave advice to eToys without disclosing that it had a conflict of interest. Specifically, the complaint allege[d] that Goldman Sachs entered into arrangements “whereby its customers were obligated to kick back to Goldman a portion of any profits that they made” from the sale of eToys securities subsequent to the initial public offering. Because a lower IPO price would result in a higher profit to these clients upon the resale of the securities and thus a higher payment to Goldman Sachs for the allotment, plaintiff allege[d] Goldman Sachs had an incentive to advise eToys to underprice its stock. As a result of this undisclosed scheme, Goldman Sachs was allegedly paid 20% of the clients’ profits from trading the eToys securities.
The Court of Appeals began the analysis by stating:
A fiduciary relationship “exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relationship…Such a relationship, necessarily fact-specific, is grounded in a higher level of trust than normally present in the marketplace between those involved in arm’s length business transactions…Generally, where parties have entered into a contract, courts look to that agreement “to discover…the nexus of [the parties’] relationship and the particular contractual expression establishing the parties’ interdependency”…’if the parties…do not create their own relationship of higher trust, courts should not ordinarily transport them to the higher realm of relationship and fashion the stricter duty for them’…However, it is fundamental that fiduciary ‘liability is not dependent solely upon an agreement or contractual relation between the fiduciary and the beneficiary but results from the relation’…
Goldman Sachs argued that:
The relationship between an issuer and the underwriter is an arm’s length commercial relation from which fiduciary duties may not arise. It may well be true that the underwriting contact, in which Goldman Sachs agreed to buy shares and resell them, did not in itself create any fiduciary duty.
The Court of Appeals responded that:
A cause of action for breach of fiduciary duty may survive, for pleading purposes, where the complaining party sets forth allegations that, apart from the terms of the contract, the underwriter and issuer created a relationship of higher trust than would arise from the underwriting agreement alone.
And the Court of Appeals held that:
Accepting the complaint’s allegations as true, as the Court must at this stage, plaintiff has sufficiently stated a claim for breach of fiduciary duty. This holding is not at odds with the general rule that fiduciary obligations do not exist between commercial parties operating at arm’s length – even sophisticated counseled parties – and we intend no damage to that principle. Under the complaint here, however, the parties are alleged to have created their own relationship of higher trust beyond that which arises from the underwriting agreement alone, which required Goldman Sachs to deal honestly with eToys and disclose its conflict of interest – the alleged profit-sharing arrangement with prospective investors in the IPO.
In AG Capital Funding Partners, L.P. v. State Street Bank and Trust Company, 5 N.Y.3d 582, 842 N.E.2d 471, 808 N.Y.S.2d 573 (2005), the Court of Appeals reinstated causes of action for negligence and contribution brought by a secured party representative/indenture trustee against the underwriters and issuer’s counsel:
Because an underwriter or issuer of securities can, by statements and acts interpreted in light of industry custom and practice, assume a duty that may be imposed upon a secured party representative or indenture trustee.
As to the claim against the attorneys, the Court of appeals summarized the applicable law as follows:
As to the allegations against Thelen for attorney malpractice and negligent misrepresentation we agree with the Supreme Court and Appellate Division in their conclusion that no cause of action lies. In assessing the adequacy of a claim of negligent misrepresentation or attorney malpractice, a court must first look to the relationship of the parties. Where the relationship of the parties fails to reveal actual privity or a relationship that otherwise closely resembles privity, no cause of action exists for negligent misrepresentation…In terms of attorney malpractice, absent privity, plaintiff must set forth claim of “fraud, collusion, malicious acts or other special circumstances: in order to maintain a cause of action…
And, applying the facts to the law, the Court of Appeals found that:
Clearly there was no actual privity between Thelen and State Street. Thelen served as counsel for Loewen, who was not by any means unified in interest with State Street, the latter being the agent of the holders. Nor could it be said that the relationship closely resembled privity. As such, no claim for negligent misrepresentation lies. The claim for attorney malpractice also fails as State Street does not set forth a claim for fraud or collusion or any of the other exceptions to the privity rule. This was a rather complex transaction involving sophisticated parties and their counsel. Any misrepresentations or misunderstandings as pleaded do not give rise to a claim of attorney malpractice or negligent misrepresentation absent of a showing of a privity-like relationship.
In J.A.O. Acquisition Corp. v. Stavitsky, 8 N.Y.3d 146, 863 N.E.2d 585 831 N.Y.S.2d 304 (2007), “plaintiff did not raise a triable issue of fact on its negligent misrepresentation and fraud claims against defendant bank”.
A corporation that acquired the stock of another company sued a lender bank for negligent misrepresentation and fraud alleging that:
CoreStates misrepresented D.B. Brown’s outstanding liabilities by negligently failing to include in the payoff letter the $1.3 million negative balance in D.B. Brown’s operating account. J.A.O. contended that it would not have purchased D.B. Brown’s stock had it known it would become liable to pay this additional debt to CoreStates, and that Chase would not have agreed to finance the transaction because the $2 million excess borrowing availability requirement would not have been met. Alternatively, J.A.O.’s fraud claim posited that CoreStates intentionally concealed the $1.3 million debt to cause J.A.O. to complete the asset purchase.
The bank moved for summary judgment “arguing that there was no privity or special relationship between it and J.A.O. [and] the payoff letter was correct in listing only loans and J.A.O. did not reasonably rely on the letter”.
Supreme Court dismissed the complaint; and the Appellate Division affirmed. The Court of Appeals, as follows, affirmed the order of the Appellate Division:
A claim for negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information…Assuming that J.A.O. can meet the first two elements, we conclude that J.A.O. failed to raise a triable question of fact as to the reliance requirement because the evidence established that J.A.O.’s decision to purchase D.B. Brown’s stock was not dependent upon the payoff letter.
In Stiver v. Good & Fair Carting & Moving, Inc., 9 N.Y.3d 255, 878 N.E.2d 1001 848 N.Y.S.2d 585 (2007), the Court of Appeals, as follows, summarized the facts:
In the dusk of the evening of August 8, 2001, plaintiff Gregory G. Stiver was driving his automobile in the eastbound center lane of a divided highway in Tonawanda. The weather was fine; traffic was moderately heavy. Without warning, the vehicle immediately ahead of him shifted abruptly into the right lane. When plaintiff “looked to see what [this driver] was swerving to miss and started to apply the brakes,” he saw a car stopped in the center lane, dead ahead of him. Unable to slow down or pull over into another lane in time to avoid a collision, plaintiff rear-ended the disabled car, which was owned and driven by Stephen Corbett. Plaintiff was wearing a seat belt and his automobile’s airbag deployed upon impact. Nonetheless, his head struck the steering wheel with sufficient force to impair his right eye permanently.
Plaintiff and his wife sued Corbett and Good & Fair Carting & Moving, Inc., the company that had performed the annual inspection of Corbett’s car that was required by law.
Supreme Court denied Good & Fair’s motion for summary judgment; the Appellate Division reversed; and the Court of Appeals, as follows, affirmed the reversal.
A contractual obligation, standing alone, will generally not give rise to tort liability in favor of a third party”…[“(O)rdinarily, breach of a contractual obligation will not be sufficient in and of itself to impose tort liability to noncontracting third parties upon the promisor”]). we have identified only three exceptions to this general rule, which we summarized in Espinal. These are:
“(1) where the contracting party, in failing to exercise reasonable care in the performance of his duties, “launche[s] a force or instrument of harm’ [quoting Moch Co. v. Renssealaer Water Co., 247 NY 160, 168 (1928)]; (2) where the plaintiff detrimentally relies on the continued performance of the contracting party’s duties [citing Eaves brooks Costume Co. v. Y.B.H. Realty Corp., 76 NY2d 220, 226 (1990)] and (3) where the contracting party has entirely displaced the other party’s duty to maintain the premises safely [citing Palka v. Servicemaster Mgt. Servs. Corp., 83 NY2d 579, 589 (1994)]” (Espinal, 98 NY2d at 140; see also Church, 99 NY2d at 112-113).
Good & Fair’s allegedly negligent inspection does not match any of these exceptions.
The Court of Appeals’ decision was based upon the following analyses:
First, Good & Fair cannot be said to have launched an instrument of harm since there is no reason to believe that the inspection made Corbett’s vehicle less safe than it was beforehand (see Church, 99 NY2d at 112). Inspecting the card did not create or exacerbate a dangerous condition (see Espinal, 98 NY2d at 142-143). Second, there was no detrimental reliance. The plaintiff driver did not know whether or when the Corbett vehicle had been inspected. He had never seen the vehicle before the accident, and had no relationship to its owner. Moreover, as Good & Fair observes, there are vehicles on the road, including many vehicles registered in other states, which have not passed a New York State motor vehicle safety inspection. As for the third exception, we cannot reach it in this case. The Appellate Division correctly determined that it was unpreserved for review.
And the Court of Appeals, as follows, explained its conclusion:
Finally, as a matter of public policy, we are unwilling to force inspection stations to insure against risks “the amount of which they may not know and cannot control, and as to which contractual limitations of liability [might] be ineffective” (Eaves brooks, 76 NY2d at 227). If New York State motor vehicle inspection stations become subject to liability for failure to detect safety-related problems in inspected cars, they would be turned into insurers. This transformation would increase their liability insurance premiums, and the modest cost of a State-mandated safety and emission inspection ($12 at the time of the inspection in this case would inevitably increase.”
In Sperry v. Crompton Corp., 8 N.Y.3d 209, 863 N.E.2d 1012, 831 N.Y.S.2d 760 (2007), “plaintiff Paul Sperry commenced this purported class action against defendants seeking damages on behalf of himself and all other consumers ‘who purchased tires, other than for resale, that were manufactured using rubber-processing chemicals sold by defendants since 1994.’ Sperry alleged that defendants entered into a price-fixing agreement, overcharging tire manufacturers for the chemicals, and that the overcharges trickled down the distribution chain to consumers.”
Sperry claimed that defendants violated General Business Law § 304 et. seq. (the “Donnely Act”); sought treble damages; and requested recovery for unjust enrichment.
Supreme Court granted defendants’ motion to dismiss; the Appellate Division affirmed; and the Court of Appeals affirmed the dismissal order, holding, as to the unjust enrichment claim:
Turning to the unjust enrichment cause of action, Sperry argues that the courts below erred in dismissing this cause of action on the basis that no privity existed between Sperry and defendants. It is well settled that “[t]he essential inquiry in any action for unjust enrichment or restitution is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered” (Paramount Film Distrib. Corp. v. State of New York, 30 NY2d 415, 421 , cert denied 414 US 829 ). While we agree with Sperry that a plaintiff need not be in privity with the defendant to state a claim for unjust enrichment, we nevertheless conclude that such a claim does not lie under the circumstances of this case. Here, the connection between the purchaser of tires and the producers of chemicals used in the rubber-making process is simply too attenuated to support such a claim. Additionally, in this situation it is not appropriate to substitute unjust enrichment to avoid the statutory limitations on the cause of action created by the Legislature.
In Sykes v. RFD Third Avenue 1 Associates, LLC, 15 N.Y.3d 370, 938 N.E.2d 325, 912 N.Y.S.2d 172 (2010), the Court of Appeals held that “an action for negligent misrepresentation must be dismissed where the complaint does not allege that the misrepresentations were made with knowledge that plaintiffs would rely on them”.
The facts, as summarized, by the Court of Appeals, were that:
Consentini Associates, a mechanical engineering firm, was hired to design the heating, ventilation and air conditioning systems for a Manhattan condominium. Plaintiffs, who bought an apartment in the building, claim that Consentini designed the systems negligently, with the result that their apartment was too cold in winter and too hot in summer. They brought claims against Cosentini for breach of contract, professional malpractice, fraud and negligent misrepresentation.
The plaintiffs’ claim was based upon:
[S]tatements made in the offering plan given to plaintiffs before they purchased their apartment. The plan contained descriptions of the heating and air conditioning systems, saying among other things that they were capable of maintaining certain indoor temperatures in hot and cold weather. Plaintiffs allege that these statements can be attributed to Consentini; that Consentini was negligent in making them; that the statements were false; and that plaintiffs relied on them in purchasing their apartment.
The Court of Appeals explained that:
It has long been the law in New York that a plaintiff in an action for negligent misrepresentation must show either privity of contract between the plaintiff and the defendant or a relationship “so close as to approach that of privity”…In Credit Alliance, an action against a firm of accountants we listed “certain prerequisites” that “must be satisfied” before the necessary relationship will be found to exist:
(1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties which evinces the accountants’ understanding of that party or parties’ reliance.
We have made clear since Credit Alliance that these requirements do not apply to accountants only – indeed, we have applied them in an action against engineering firms…
However, plaintiffs’ claim failed because:
Plaintiffs’ claim here fails the second branch of the Credit Alliance test: plaintiffs have not sufficiently alleged that they were a “known party or parties,” as Credit Alliance requires. While Consentini obviously knew in general that prospective purchasers of apartments would rely on the offering plan, there is no indication that it knew these plaintiffs would be among them, or indeed it knew these plaintiffs would be among them, or indeed that Consentini knew or had the means of knowing of plaintiffs’ existence when it made the statements for which it is being sued.”
In Estate of Schneider v. Finmann, 15 N.Y.3d 306, 933 N.E.2d 718, 907 N.Y.S.2d 119 (2010): “At issue in this appeal [w]as whether an attorney may be held liable for damages resulting from negligent representation in estate tax planning that causes enhanced estate tax liability”.
Supreme Court granted defendants’ motion to dismiss the complaint; and the Appellate Division affirmed, “holding that, in the absence of privity, an estate may not maintain an action for legal malpractice.”
The facts of the case were outlined, as follows, by the Court of Appeals:
Defendants represented decedent Saul Schneider from at least April 2000 to his death in October 2006. In April 2000, decedent purchased a $1 million life insurance policy. Over several years, he transferred ownership of that property from himself to an entity of which he was principal owner, then to another entity of which he was principal owner and then 2005, back to himself. At his death in October 2006, the proceeds of the insurance policy were included as part of his gross taxable estate. Decedent’s estate commenced this malpractice action in 2007, alleging that defendants negligently advised decedent to transfer, or failed to advise decedent not to transfer, the policy which resulted in an increased estate tax liability.
Applying the law to the facts, the Court of Appeals held:
Strict privity, as applied in the context of estate planning malpractice actions, is a minority rule in the United States. In New York, a third party, without privity, cannot maintain a claim against an attorney in professional negligence, “absent fraud, collusion, malicious acts or other special circumstances” (Estate of Spivey v. Pulley), 138 AD2d 563, 564 [2d Dept 1988]). Some Appellate Division decisions, on which the Appellate Division here relied, have applied strict privity to estate planning malpractice lawsuits commenced by the estate’s personal representative and beneficiaries alike (Deeb v. Johnson, 170 AD2d 865 [4d Dept 1991]; Rossi v. Boehner, 116 AD2d636 [2d Dept 1986]). This rule effectively protects attorneys from legal malpractice suits by indeterminate classes of plaintiffs whose interests may be at odd with the interests of the client-decedent. However, it also leaves the estate with no recourse against who planned the estate negligently.
We now hold that privity, or a relationship sufficiently approaching privity, exists between the personal representative of an estate and the estate planning attorney. We agree with the Texas Supreme Court that the estate essentially “stands in the shoes’ of a decedent” and, therefore, “has the capacity to maintain the malpractice claim on the estate’s behalf” (Belt v. Oppenheimer, Blend, Harrison & Tate, Inc., 192 SW3d 780, 787 [Tex 2006]). The personal representative of an estate should not be prevented from raising a negligent estate planning claim against the attorney who caused harm to the estate. The attorney estate planner surely knows that minimizing the tax burden of the estate is one of the central tasks entrusted to the professional. Moreover, such a result comports with EPTL 11-3.2(b), which generally permits the personal representative of a decedent to maintain an action for “injury to person or property” after that person’s death.
Despite the holding in this case, strict privity remains a bar against beneficiaries’ and other third-party individuals’ estate planning malpractice claims absent fraud or other circumstances. Relaxing privity to permit third parties to commence professional negligence actions against estate planning attorneys would produce undesirable results – uncertainty and limitless liability. These concerns, however, are not present in the case of an estate planning malpractice action commenced by the estate’s personal representative.
In Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 944 N.E.2d 1104 919 N.Y.S.2d 465 (2011), the Court of Appeals “[was] asked to determine whether claims sounding in fraud, negligent misrepresentation, breach of contract, and unjust enrichment were properly pleaded in the plaintiff’s complaint.”
Mandarin purchased a painting for investment purposes paying $13 million therefor, allegedly based upon written appraisal by Wildenstein (prepared for Amir Cohen, the then owner of the piece) stating that the painting was worth between $15 million and $17 million.
The painting was subsequently offered for sale at auction by Mandarin through Christie’s “but the highest bid failed to exceed the reserve and the painting was not sold."
Mandarin sued Wildenstein for negligent misrepresentation, breach of contract and unjust enrichment. Supreme Court granted Wildenstein’s motion to dismiss the complaint; the Appellate Division affirmed; and the Court of Appeals affirmed the order of the Appellate Division, holding, as to the claim for negligent misrepresentation:
It is well settled that “[a] claim for negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information” (J.A.O. Acquisition Corp. v. Stavitsky, [8 NY3d 144, 148 ; seealso Parrott v. Coopers & Lybrand, 95 NY2d 479, 483-484 ).
* * *
A special relationship may be established by “persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified” (Kimmell v. Schaefer, 89 NY2d 257, 263 ). Although Mandarin generally pleads that “a special relationship of trust or confidence” existed between the parties, the lack of allegations showing a relationship with Wildenstein mandates dismissal of this claim. The complaint does not allege whether Wildenstein had any contact with Mandarin, whether Mandarin solicited the appraisal directly from Wildenstein, whether Wildenstein knew the purpose of the appraisal letter, or whether Wildenstein was even aware of Mandarin’s existence.
The Court of Appeals, as follows, distinguished Kimmell.
In Kimmell, the defendant sought to induce plaintiffs to invest in a business venture by directly sending them a memo regarding business projections, meeting with them personally, and sending out correspondence to assure the safety of the investment. We held that the record supported a finding that the defendant established a special relationship with the plaintiffs because of the financial skill and expertise of the defendant, and his continued attempts to communicate directly with the plaintiffs to induce their investment (id. at 264).
* * *
Here, the pleadings fail to allege the existence of any relationship between Mandarin and Wildenstein that would support a negligent misrepresentation claim. Unlike the defendant in Kimmell, there are no allegations here that Wildenstein ever met with Mandarin, was retained by Mandarin for an appraisal, or knew that the appraisal would be used by Mandarin for the purpose of purchasing the painting (seeSpitzer v. Christie’s Appraisals, 235 AD2d 266 [1st Dept 1997]). And this case has an even more tenuous basis for finding privity, or a privity-like relationship, as it lacks even the bare, minimal contact of the parties in Ravenna [v.Christies, Inc.]. Wildenstein’s art expertise alone cannot create a special relationship where otherwise the relationship between the parties is too attenuated.
In Georgia Malone & Company, Inc. v. Ralph Rieder, 19 N.Y.3d 511, 2012 NY Slip Op. 05200 (2012), “a real estate company that prepared due diligence reports for a developer in connection with the potential purchase of commercial properties allege[d] that a rival brokerage firm was unjustly enriched when it acquired the materials from the developer and later obtained a commission on the ultimate sale of the properties."
The issue before the Court of Appeals “[was] whether a sufficient relationship existed between the two real estate firms to provide a basis for an unjust enrichment cause of action.”
The Court of Appeals held that “[b]ased upon the allegations presented in the complaint…the relationship between the two parties was too attenuated” to support a claim for unjust enrichment.
The facts, as outlined by the Court of Appeals were:
Plaintiff Georgia Malone & Company, Inc. (Malone) is a licensed real estate brokerage and consulting firm that provides its clients with information regarding the purchase and sale of properties not yet on the market. Its principal officer is Georgia Malone. Defendant /Rosewood Realty Group Inc (Rosewood) and defendant Aaron Jungreis, a broker in the firm, are also engaged in the real estate trade.
In the course of its realty business, Malone introduced defendant CenterRock Realty, LLC. (CenterRock), a developer, to the sellers of residential apartment buildings in midtown Manhattan. Thereafter, Malone and Center, by its managing member, defendant Ralph Rieder, entered into a contract in which Malone agreed to produce due diligence materials relating to the properties for CenterRock’s review for potential acquisition. CenterRock acknowledged that it would keep the due diligence information confidential and agreed to pay Malone a commission of 1.25% of the total purchase price for its brokerage services.
Malone then provided CenterRock with certain documents, including an underwriting model, purchase contract, certificates of occupancy, income summary, short aging summary, bank accounts and bank deposit reports, rent rolls, reports of environmental and engineering investigations and recommendations for the selection of consultants. In December 2007, CenterRock executed a contract of sale with the owners to purchase the properties for $70 million.
Under the terms of the purchase agreement, CenterRock had 25 days to perform due diligence investigations, during which time it could terminate the deal without a penalty. According to Malone, Rieder delayed tender of the down payment and the sellers agreed to extend the due diligence deadline an additional 21 days. During the due diligence period, Malone claims that it continued to collect, create and provide CenterRock with confidential information pertaining to the properties and that Rieder repeatedly represented that CenterRock would be ready to close on time.
About a week before the expiration of the contract extension, Georgia Malone received an e-mail from Rieder that stated: “See what you can do about finding [another] buyer for [the properties]. If it falls flat I am prepared to do whatever you think is fair including making up your entire fee. Ideally, I would like to tack it on to our next deal.” Malone attempted but failed to locate another buyer. CenterRock terminated the contract on the last day of the due diligence period and refused to pay Malone’s demand for its commission in the amount of $875,000 (1.25% of the contract price).
Malone sued all defendants for unjust enrichment; Supreme Court dismissed the claim; and the Appellate Division affirmed. The Court of Appeals affirmed as follows, relying upon Sperry and Mandarin:
As we have stated on several occasions, “[t]he theory of unjust enrichment lies as a quasi-contract claim” and contemplates “an obligation imposed by equity to prevent injustice, in the absence of an actual agreement between the parties”…An unjust enrichment claim is rooted in “the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another”…Thus, in order to adequately plead such a claim, the plaintiff must allege “that (1) the other party was enriched, (2) at that party’s expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered”…[alterations and quotations marks omitted].
And the Court of Appeals continued that:
Similar to Sperry and Mandarin, the relationship between Malone and Rosewood is too attenuated because they simply had no dealings with each other. Accepting as true the facts alleged in the complaint and affording Malone the benefit of every favorable inference, as we must on a motion to dismiss…the complaint does not contain sufficient allegations to support an unjust enrichment claim against Rosewood. In particular, the complaint does not assert that Rosewood and Malone had any contact regarding the purchase transaction. And although the complaint states that Rosewood “knew at all times” that Malone produced the due diligence reports and provided them to CenterRock with the expectation that it would be compensated in the event a purchase agreement was reached, there is no allegation that Rosewood was aware that Malone and CenterRock had agreed to the confidential nature of the due diligence information or that Rosewood knew that CenterRock had failed to pay Malone before the documents were conveyed to Rosewood. Indeed Jungreis’s e-mail communications submitted by Malone in opposition to the motions to dismiss allude to Rosewood’s offer to pay the Rieders for the “due diligence costs” they “laid out,” suggesting that Rosewood believed that the Rieders had compensated Malone for its services.
In Oddo Asset Mgt. v. Barclays Bank PLC, 19 N.Y.3d 584, 2012 NY Slip Op. 05124 (2012), the Court of Appeals held that “the collateral managers appointed to oversee the assets of the SIV-Lites did not owe a fiduciary duty to plaintiff.”
Oddo Asset management purchased $30 million of Golden Key mezzanine notes through structured investment vehicles (“SIV”) created by Barclays; Barclays appointed Avendis and Solent as collateral managers; Oddo Asset accused Barclays of shifting assets to avoid losses in the sub-prime mortgage market resulting in a loss to Oddo Asset; Oddo sued Barclays and Standard and Poor’s for breach of fiduciary duty to investors in Golden Key; and “[d]efendants moved to dismiss the complaint for lack of personal jurisdiction against Solent and for failure to state a cause of action, arguing that neither Avendis nor Solent owed a fiduciary duty to plaintiff under applicable law.”
Supreme Court granted the motion to dismiss; and the Appellate Division affirmed. The Court of Appeals also affirmed, as follows:
There are additional reasons to conclude that the collateral managers did not owe a fiduciary duty to Oddo. Oddo had no contractual relationship with Avendis and Solent and no direct dealings with them. While Oddo argues that it received monthly investment reports from Avendis and Solent, the complaint provides that the administrator, QSR Management Limited, was the entity that sent note holders periodic valuation reports. The complaint never alleged any direct communications between plaintiff and the collateral managers, and consequently, there is insufficient factual basis to establish a relationship of higher trust between Oddo and Avendis and Solent.
From adherence to the almost “strict privity” standard of Glanzer, MacPherson, H.R. Moch and Ultramares, the Court of Appeals jurisprudence evolved to the “near privity” guidelines of Ossining, Credit Alliance, European American Bank and Security Pacific.
The recent decisions of the Court of Appeals in Sykes, Estate of Schneider,Mandarin Trading, Georgia Malone and Oddo Asset Management suggest either a retreat from “near privity” or, more likely, a sharpening of the factual predicates of standing to sue in the absence of “direct privity”.
In Sykes, the Court of Appeals reiterated the “certain prerequisites” of Credit Alliance. The Court of Appeals found that the mechanical engineering firm that (allegedly negligently) designed the heating, ventilation and air conditioning system for a condominium could not be sued for negligent representation by the purchaser of a residential unit – even thought the offering plan contained a description of, and representations with respect to, the systems so designed – while stating that Credit Alliance applied to engineering firms as well as accountants. The Court of Appeals found that prospective purchasers of units in the condominium did not state a claim for negligent misrepresentation, even though the engineers knew that prospective purchasers would rely upon the offering plan, because – a rather fine distinction – “there [was] no indication that [the engineers] knew these plaintiffs would be among them[.]”.
In Estate of Schneider, the Court of Appeals reiterated the rule that “[i]n New York, a third party, without privity, cannot maintain a claim against an attorney in professional negligence, ‘absent fraud, collusion, malicious acts or other special circumstances’[.]” At the same time, the Court of Appeals added an unremarkable clarification to the rule by holding that “privity, or a relationship sufficiently approaching privity, exists between the personal representative of an estate and the estate attorneys”, based, in part, upon EPTL 11-3.2(b) “which generally permits the personal representative of a decedent to maintain an action for ‘injury to person or property’ after that person’s death. At the same time, the Court of Appeals admonished that “strict privity remains a bar against beneficiaries” and other third-party individuals’ estate planning malpractice claims absent fraud or other circumstances”.
In Mandarin Trading Ltd., the Court of Appeals repeated the mantra that a claim for negligent misrepresentation requires “the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff[.]” At the same time, the Court of Appeals found the absence of a “privity-like” relationship because “there [were] no allegations [t]here that Wildenstein ever met with Mandarin, was retained by Mandarin for an appraisal, or knew that the appraisal would be used by Mandarin for the purpose of purchasing the painting.”
In Georgia Malone, the Court of Appeals affirmed dismissal of a claim for unjust enrichment because “the relationship between Malone and Rosewood [was] too attenuated because they simply had no dealings with each other [“]; and “the complaint [did] not assert that Rosewood and Malone had any contact regarding the purchase transaction.”
And finally and most recently, in Oddo Asset Management the Court of Appeals succinctly held that no fiduciary relationship existed in that case simply because “Oddo had no contractual relationship with Avendis and Solent and no direct dealings with them”.
The recent “privity”/”near privity” decisions of the Court of Appeals may not mark a full retreat from the “strict privity” jurisprudence of the Cardozo “quartet”; however, those decisions may constitute a carefully-orchestrated case-by-case recalibration of the elements of “near privity” enunciated in Credit Alliance and its progeny.