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This past week two appellate decisions were rendered involving fraud claims against attorneys.  One decision by the First Department recognized that in an action alleging fraud against an attorney by his client, the attorney cannot claim that the client did not act reasonably by failing to read the contract for which the client sought legal advice from that same attorney.  The other decision, by the Second Department, involved claims against attorneys for aiding and abetting fraud and violations of New York Judiciary Law § 487.

Failure to Read Contract Not a Defense

A well-recognized principle in fraud claims is that a plaintiff claiming to have been fraudulently induced to enter into a contract cannot establish reasonable reliance on alleged fraudulent representations as to the content of the contract if it did not read or understand the contract.  As explained in my previous post:  “The courts do not have much patience for parties who enter into contracts and then claim that they should not be bound by the agreement they admittedly signed but allegedly did not read or understand.  If you sign the contract, you are bound by it, because you have a duty to read and understand the contract before you sign it.  This is essential to preserve the integrity of agreements and the law of contracts.”  This was also addressed in another recent post of mine.

Courts reason that if a party does not understand the contract, prudence requires the party to seek legal advice about the contract’s terms before signing it.  Of course, it would make sense, therefore, if the client does seek legal advice about the contract, reasonably relying on its attorney to explain and advise as to its content, the attorney itself should not be permitted to claim its own client should have independently understood the contract.

In Suttongate Holdings Ltd. v Laconm Mgt. N.V., 2018 NY Slip Op 02424 (1st Dep’t Decided on April 10, 2018), the First Department made the point clear.

In Suttongate, the clients alleged that their lawyer abused their attorney-client relationship and committed fraud against them in connection with a joint venture. They conceded that they did not carefully review the legal documents that their attorney prepared for the joint venture.  Nevertheless, the clients contended that they justifiably relied on their own attorney’s representations and assurances to them, claiming that the documents did not reflect the joint venture but required them to repay an $8 million “loan” to an entity controlled by their attorney, while giving him the windfall of a substantial economic interest in their properties.

The New York Commercial Division (Ramos, J.) denied the attorney’s motion to dismiss.  The First Department affirmed, ruling as follows:

The allegations of the complaint state a cause of action for fraudulent inducement (see Sokolow, Dunaud, Mercadier & Carreras v Lacher, 299 AD2d 64, 70 [1st Dept 2002]). The well settled principle relied on by [attorney] David that a party claiming fraudulent inducement cannot be said to have justifiably relied on a representation negated by the plain terms of the contract they signed does not apply here, since his alleged assurances and fraud were the very cause of [the clients’] failure to review the documents carefully. As it was reasonable for [the clients] to rely on the advice of counsel, we also reject David’s arguments premised on the plain language [*2]of the agreements that [the clients] admit they did not read carefully.

Aiding and Abetting Fraud

In Betz v Blatt, 2018 NY Slip Op 02444 (2d Dep’t Decided on April 11, 2018) the Second Department addressed claims of aiding and abetting fraud and violations of Judiciary Law § 487.

The plaintiff commenced the action against the defendants seeking to recover damages for legal malpractice, fraud, and other torts arising out of work the attorney-defendants each performed relating to the administration of an estate of the decedent by the decedent’s brother Carbone. The defendants represented Carbone and/or the estate in contested probate proceedings in Surrogate’s Court, including an accounting which was contested and that was submitted by Carbone in those probate proceedings. In his will, the decedent left the bulk of his estate to his daughters, one of whom was the plaintiff, and named his brother as executor. After the contested probate proceedings, including the contested accounting, Carbone’s letters testamentary were suspended, he was surcharged in excess of $1,025,000 for his looting and mismanagement of the estate, the court found him in contempt, and he fled the jurisdiction.  The daughter then sued the attorneys involved in the estate administration with Carbone.

The claims of fraud and violation of Judiciary Law § 487 were dismissed initially.  After depositions in the remaining claims, plaintiff’s motion to renew was granted and plaintiff was granted leave to replead based upon the additional information obtained in discovery.  Defendants appealed.

On the claims against certain of the attorneys for aiding and abetting the fraud perpetrated by Carbone, the Second Department explained:

“To recover for aiding and abetting fraud, the plaintiff must plead the existence of an underlying fraud, knowledge of the fraud by the aider and abettor, and substantial assistance by the aider and abettor in the achievement of the fraud” (Fox Paine & Co., LLC v Houston Cas. Co., 153 AD3d at 679; see Swartz v Swartz, 145 AD3d 818, 824; Weinstein v CohnReznick, LLP, 144 AD3d 1140, 1141; Markowits v Friedman, 144 AD3d at 996). ” Substantial assistance’ requires an [*3]affirmative act on the defendant’s part” (Fox Paine & Co., LLC v Houston Cas. Co., 153 AD3d at 679, quoting Baron v Galasso, 83 AD3d 626, 629; see Markowits v Friedman, 144 AD3d at 996). “[T]he mere inaction of an alleged aider or abettor constitutes substantial assistance only if the defendant owes a fiduciary duty directly to the plaintiff” (Markowits v Friedman, 144 AD3d at 996 [internal quotation marks omitted]).

The portions of the proposed second amended complaint that alleged, among other things, that the Sirignano defendants knew of Carbone’s fraudulent and wrongful acts and assisted him in concealing those acts from the beneficiaries. The allegations detailed specific false claims that the Sirignano defendants made or defended on Carbone’s behalf, which are adequate to support the plaintiff’s cause of action alleging aiding and abetting fraud. Thus, the Supreme Court properly granted the plaintiff leave to replead that cause of action against the Sirignano defendants.

Judiciary Law § 487

Under New York Judiciary Law Section 487, an attorney can be held liable to a party to litigation for deceiving the court.  In relevant part, NY Jud. Law § 487 provides:

An attorney or counselor who:

1.  Is guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party; …

2.  Is guilty of a misdemeanor, and in addition to the punishment prescribed therefor by the penal law, he forfeits to the party injured treble damages, to be recovered in a civil action.

Can such deceit also form the basis of a claim for common law fraud?  The Appellate Division, Second Department, recently found in New York Tile Wholesale Corp. v Thomas Fatato Realty Corp. ,2017 NY Slip Op 06538 (2d Dep’t Decided on September 20, 2017) that it cannot, to the extent that the plaintiff alleges that the attorneys’ alleged misrepresentations were relied upon solely by the court.

In Betz, the Court’s analysis of the Judiciary Law claims was as follows:

A plaintiff may state a Judiciary Law § 487 cause of action by relying upon a defendant’s intentional deceit during the course of an underlying action (see Specialized Indus. Servs. Corp. v Carter, 68 AD3d 750, 751). A cause of action alleging a violation of Judiciary Law § 487 must be pleaded with specificity (see Betz v Blatt, 116 AD3d at 817; Putnam County Temple & Jewish Ctr., Inc. v Rhinebeck Sav. Bank, 87 AD3d 1118, 1120; Briarpatch Ltd., L.P. v Frankfurt Garbus Klein & Selz, P.C., 13 AD3d 296, 297) and is “focuse[d] on the attorney’s intent to deceive, not the deceit’s success” (Amalfitano v Rosenberg, 12 NY3d 8, 14). Accordingly, although injury to the plaintiff is an essential element of a Judiciary Law § 487 cause of action (see Gumarova v Law Offs. of Paul A. Boronow, P.C., 129 AD3d at 911; Rozen v Russ & Russ, P.C., 76 AD3d at 968), “recovery of treble damages under Judiciary Law § 487 does not depend upon the court’s belief in a material misrepresentation of fact in a complaint” (Amalfitano v Rosenberg, 12 NY3d at 15). Rather, because defending the action is a result of the misrepresentation, a party’s legal expenses in defending the lawsuit may be treated as the proximate result of the misrepresentation (see Amalfitano v Rosenberg, 12 NY3d at 15).

Here, the plaintiff adequately pleaded facts in its proposed second amended complaint, supported by the record, which, if proved, would demonstrate that Blatt both acted with intent to deceive the court or other parties and wilfully delayed the proceedings with a view toward his own gain (see Coccia v Liotti, 70 AD3d 747, 754-755), to the financial harm of the plaintiff. Since the proposed second amended complaint set forth these allegations with the required degree of specificity (see Armstrong v Blank Rome LLP, 126 AD3d 427, 427), the Supreme Court providently exercised its discretion in permitting the plaintiff to replead that cause of action.

As this Court found that the legitimacy of the plaintiff’s objections to the accounting filed by Pieragostini on Carbone’s behalf was apparent from a plain reading of the account (see Matter of Carbone, 101 AD3d at 869), the plaintiff also has pleaded facts sufficient to demonstrate, if proven, that Pieragostini affirmatively ignored or concealed Carbone’s misdeeds or the inaccuracies in the information Carbone provided. The plaintiff’s proposed second amended complaint adequately detailed alleged failings by Pieragostini in not investigating the estate’s affairs in the course of preparing the accounting, and an outright attempt to deceive by Pieragostini’s filing of a deficient accounting and an addendum, which further delayed the administration of the estate, causing additional legal fees to be incurred by the plaintiff, along with other financial injury. Accordingly, the Supreme Court providently exercised its discretion in permitting the plaintiff to replead a Judiciary Law § 487 cause of action against Pieragostini.

The plaintiff also sufficiently alleged that the Sirignano defendants “consent[ed] to . . . deceit or collusion” (Judiciary Law § 487[1]) in that they were aware of the falsity of the information Carbone had provided to the court but continued to misrepresent the estate’s financial status and advocate for the allegedly fraudulent accounting filed by Pieragostini. In addition, the proposed second amended complaint alleged that the Sirignano defendants purposely delayed the [*4]litigation for their own benefit and for Carbone’s benefit to the financial detriment of the plaintiff, an allegation which, if proven, satisfies Judiciary Law § 487(2). Thus, the Supreme Court correctly determined that there were sufficient allegations to support this cause of action against the Sirignano defendants.