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FRAUD AND FRAUDULENT CONCEALMENT CAUSES OF ACTION AGAINST MORGAN STANLEY, STEMMING FROM RESIDENTIAL MORTGAGE-BACKED SECURITIES, PROPERLY SURVIVED A MOTION TO DISMISS.

The First Department, in a full-fledged opinion by Justice Friedman, determined Morgan Stanley’s motion to dismiss fraud and fraudulent concealment causes of action was properly denied.  The action stemmed from residential mortgage backed securities (RMBS) and the collapse of subprime mortgages. In essence, Morgan Stanley argued the plaintiff, Basis Yield, a mutual fund, did not allege justifiable reliance on the ratings of the investments and did not allege it exercised due diligence in researching the quality of the investments. With respect to the “failure to allege the exercise of due diligence” argument, the court wrote:

… Morgan Stanley … argues that the fraud claims are legally insufficient because Basis Yield does not allege that it conducted, or sought to conduct, a due diligence investigation into the allegedly misrepresented matters. This argument relies on the well-established principle that a plaintiff suing for fraud (and particularly a sophisticated plaintiff, such as Basis Yield) must establish that it “has taken reasonable steps to protect itself against deception” … . * * *

If accepted, Morgan Stanley’s position would require the prospective purchaser of a credit instrument to assume that the instrument’s credit rating is fraudulent until the rating has been verified through a detailed retracing of the steps of the underwriter and credit rating agency. This would largely negate the utility of the credit ratings of negotiable bonds and notes that are published by accredited rating agencies. Morgan Stanley does not draw our attention to any New York decision holding that the due diligence obligation of even a sophisticated investor extends so far as to require it to seek to verify the accuracy of an accredited agency’s credit rating of a note or bond through an investigation of nonpublic information. Basis Yield Alpha Fund Master v Stanley, 2015 NY Slip Op 09645, 1st Dept 12-29-15

FRAUD (FRAUD AND FRAUDULENT CONCEALMENT CAUSES OF ACTION AGAINST MORGAN STANLEY, STEMMING FROM RESIDENTIAL MORTGAGE-BACKED SECURITIES)/RESIDENTIAL MORTGAGE-BACKED SECURITIES (FRAUD AND FRAUDULENT CONCEALMENT CAUSES OF ACTION AGAINST MORGAN STANLEY)/MORGAN STANLEY (FRAUD AND FRAUDULENT CONCEALMENT CAUSES OF ACTION AGAINST)

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FACEBOOK’S SUIT AGAINST LAW FIRMS WHICH REPRESENTED A CLIENT IN A FRAUDULENT SUIT AGAINST FACEBOOK DISMISSED.

The First Department, reversing Supreme Court, dismissed a malicious prosecution and Judiciary Law 487 action brought by Facebook against law firms which represented a client who brought a fraudulent lawsuit against Facebook. The client apparently forged a contract with Mark Zuckerberg (the founder of Facebook) which would have given the client a 50% interest in Facebook. The client’s suit against Facebook was dismissed and the client was indicted for wire fraud. The First Department held that the “conclusory” allegations in the complaint did not sufficiently plead the “no probable cause to bring the suit” element of a malicious prosecution cause of action or the “egregious conduct” element of a Judiciary Law 487 cause of action:

With respect to the element of probable cause [re: malicious prosecution], a plaintiff must allege that the underlying action was filed with “a purpose other than the adjudication of a claim” and that there was “an entire lack of probable cause in the prior proceeding” … . Moreover, the lack of probable cause must be “patent” … . In this context, the Court of Appeals has stated as follows: “Probable cause is the knowledge of facts, actual or apparent, strong enough to justify a reasonable man in the belief that he has lawful grounds for prosecuting the defendant in the manner complained of. The want of probable cause does not mean the want of any cause, but the want of any reasonable cause, such as would persuade a man of ordinary care and prudence to believe in the truth of the charge” … . In a malicious prosecution action, the burden of proof to establish a want of probable cause is on the plaintiffs … .

Here, the … court’s granting of a TRO at the inception of the [client’s] action, prior to any of the defendants’ representation of [the client], created a presumption that [the client] had probable cause to bring the case. This presumption must be overcome by specifically pleaded facts … . Moreover, a plaintiff’s factual allegations regarding lack of probable cause and malice may be disproved by the evidentiary material submitted by defendant in support of a motion to dismiss … .

Applying these principles to this case, we find that the allegations in the instant complaint concerning defendants’ lack of probable cause are entirely conclusory, and are thus inadequate to support the lack of probable cause element of the malicious prosecution claim … . * * *

Relief under a cause of action based upon Judiciary Law § 487 “is not lightly given” … and requires a showing of “egregious conduct or a chronic and extreme pattern of behavior” on the part of the defendant attorneys that caused damages … . Allegations regarding an act of deceit or intent to deceive must be stated with particularity … ; the claim will be dismissed if the allegations as to scienter are conclusory and factually insufficient … . Facebook, Inc. v DLA Piper LLP (US), 2015 NY Slip Op 09602, 1st Dept 12-29-15

ATTORNEYS (MALICIOUS PROSECUTION ACTION AGAINST LAW FIRMS WHICH REPRESENTED A CLIENT IN A FRAUDULENT SUIT DISMISSED)/MALICIOUS PROSECUTION (ACTION AGAINST LAW FIRMS WHICH REPRESENTED A CLIENT IN A FRAUDULENT SUIT DISMISSED)/JUDICIARY LAW 487 (ACTION AGAINST LAW FIRMS WHICH REPRESENTED A CLIENT IN A FRAUDULENT SUIT DISMISSED)

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INCONSISTENCIES IN TWO FINAL RENT-ADJUSTMENT ORDERS ALLOWED RECONSIDERATION OF THE NATURE OF THE MAJOR CAPITAL IMPROVEMENTS [MCI’S] DESCRIBED IN THE ORDERS.

In a rent-increase matter which was before the NYS Division of Housing and Community Renewal (DHCR), the First Department, over an extensive two-justice dissent, determined a discrepancy between two prior rent-adjustment orders constituted “an irregularity in a vital matter” which allowed the DHRC, on remand, to reconsider the two (final) orders. The discrepancy related to the nature of the “major capital improvement [MCI]” (purportedly justifying a rent increase) to which each order referred. The dissent argued that the two orders were final orders and collateral estoppel prohibited further reexamination of them. Matter of 60 E. 12th St. Tenants’ Assn. v New York State Div. of Hous. & Community Renewal, 2015 NY Slip Op 09599, 1st Dept 12-29-15

ADMINISTRATIVE LAW (RECONSIDERATION OF INCONSISTENT FINAL ORDERS BY NYS DIVISION OF HOUSING AND COMMUNITY RENEWAL)/DIVISION OF HOUSING AND COMMUNITY RENEWAL [DHCR] (RECONSIDERATION OF INCONSISTENT FINAL RENT-ADJUSTMENT ORDERS)

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STIPULATION WHICH DID NOT SPECIFICALLY CALL FOR A REDUCTION OF CHILD SUPPORT UPON THE EMANCIPATION OF THE OLDEST CHILD WOULD NOT BE INTERPRETED OTHERWISE.

The First Department, over a two-justice dissent, determined that a stipulation which was incorporated but not merged into the divorce did not call for the reduction of child support upon emancipation of the older child. The dissent argued that, applying standard principles of contract interpretation, it was clear the parties intended emancipation of the older child would result in the reduction of child support, despite the absence of a formula for the reduction in the stipulation:

There is no evidence, other than plaintiff’s testimony, that the parties had agreed to a reduction in child support on account of any purported emancipation of the older child. Indeed, their agreement, freely entered into, does not allocate plaintiff’s child support obligation as between the children or provide a formula for a reduction in the event of one child’s emancipation … . “When child support has been ordered for more than one child, the emancipation of the oldest child does not automatically reduce the amount of support owed under an order of support for multiple children” … . Schulman v Miller, 2015 NY Slip Op 09603, 1st Dept, 12-29-15

FAMILY LAW (STIPULATION DID NOT CALL FOR REDUCTION OF CHILD SUPPORT UPON EMANCIPATION OF OLDER CHILD)/CONTRACT LAW (STIPULATION DID NOT CALL FOR REDUCTION OF CHILD SUPPORT UPON EMANCIPATION OF OLDER CHILD)/STIPULATION, DIVORCE (STIPULATION DID NOT CALL FOR REDUCTION OF CHILD SUPPORT UPON EMANCIPATION OF OLDER CHILD)/CHILD SUPPORT (STIPULATION DID NOT CALL FOR REDUCTION OF CHILD SUPPORT UPON EMANCIPATION OF OLDER CHILD)

FAILURE TO NAME INDIVIDUAL POLICE OFFICERS, OR JOHN DOE OFFICERS, IN A NOTICE OF CLAIM PRECLUDED SUIT AGAINST THE POLICE OFFICERS SUBSEQUENTLY NAMED IN THE COMPLAINTS.

The First Department affirmed the lower court’s dismissal of an action against the police department and several named individual police officers because the notice of claim named only the New York City Police Department as a defendant and did not name any individual officers or any “john doe” officers. Justice Sweeney explained his reasoning for affirming in a concurring memorandum. Two justices dissented in a memorandum by Justice Manzanet-Daniels. Justice Sweeney argued that the underlying purpose of a notice of claim is to allow the municipality to make a timely investigation into the allegations. By failing to name individual officers, the municipality was not given sufficient notice. The dissent argued that the General Municipal Law does not require the naming (in a notice of claim) of individual employees of a municipality to state a valid claim against employees of a municipality:

Plaintiffs here did not put the City on notice that it would seek to impose liability upon specific employees of the NYPD. Indeed, as the action progressed, more and more police officers were added as individual defendants, the last of which over three years removed from the incident in question, thus rendering a timely investigation into and assessment of the claims impossible. To permit such a result raises questions of fundamental fairness for the individual defendants, since they were not put on notice, even in a generic way by way of “Police Officer John Doe” or similar language, that they were going to become defendants. Moreover, the prejudice accruing to both the municipal and individual defendants from such a delay is obvious, since memories fade over time, records that could have easily been obtained early on may have been archived, lost or discarded, and witnesses may have relocated, just to name a few of the potential obstacles. Delay in investigating and evaluating a claim defeats the purpose of GML § 50-e. Alvarez v City of New York, 2015 NY Slip Op 09601, 1st Dept 12-29-15

MUNICIPAL LAW (NOTICE OF CLAIM, FAILURE TO NAME POLICE OFFICERS OR JOHN DOE OFFICERS PRECLUDED SUIT AGAINST OFFICERS SUBSEQUENTLY NAMED)/NOTICE OF CLAIM (FAILURE TO NAME POLICE OFFICERS OR JOHN DOE OFFICERS PRECLUDED SUIT AGAINST OFFICERS SUBSEQUENTLY NAMED)/POLICE OFFICERS (NOTICE OF CLAIM, FAILURE TO NAME POLICE OFFICERS OR JOHN DOE OFFICERS PRECLUDED SUIT AGAINST OFFICERS SUBSEQUENTLY NAMED)

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DESTRUCTION OF BLOOD EVIDENCE IN FLOODING CAUSED BY HURRICANE SANDY DID NOT WARRANT AN ADVERSE INFERENCE JURY INSTRUCTION.

The First Department, over an extensive dissent, determined that the destruction of blood evidence by Hurricane Sandy did not warrant an adverse inference jury instruction, despite the People’s failure to timely respond to the defense request for the evidence. The court determined that the adverse inference jury instruction is not triggered by a loss of evidence for which the People are blameless:

… [T]he Handy [20 NY3d 663] adverse inference charge is a penalty for destruction of evidence, not for mere tardiness in producing it. …  While we do not condone the People’s slowness in fulfilling their disclosure obligations in this case, the evidence in question was not lost as a foreseeable result of the passage of time, but as a consequence of a natural catastrophe that happened to occur just before this case went to trial. Moreover, the delay in production of the evidence here appears to be as much the fault of the defense as of the People. Even though the defense always knew that the case would rely on DNA evidence, defense counsel, after making a pro forma request to which the physical blood evidence would have been responsive, never took any steps before the hurricane, over a period of approximately two years, to enforce defendant’s right to production of that evidence. As previously noted, the physical evidence did not become a focus of the discussion among the court and counsel until after the hurricane had passed. …

We see no support in the record for the dissent’s position that the physical blood evidence from the crime scene was somehow material to the defense. As previously discussed, while the dissent correctly notes that the match of defendant’s DNA with the DNA in the crime scene evidence was “the lynchpin of the People’s case against defendant,” placing before the jury the physical blood evidence from the crime scene would not have told them anything about the accuracy of the DNA match. Indeed, this appears to have been the original conclusion of defense counsel, who, without ever having had an opportunity to examine the physical evidence, announced that he was “ready to go” to trial before he learned that such evidence was no longer [*4]available. Nothing but speculation supports the dissent’s unlikely supposition that the appearance of the physical blood evidence at trial might have told the jury anything about “the manner of its collection, storage or handling” at the time the State analyzed its DNA, three years before trial. The condition of the physical evidence after the State conducted its analysis is irrelevant, since defendant has never expressed any interest in conducting an independent DNA analysis. People v Austin, 2015 NY Slip Op 09372, 1st Dept 12-22-15

CRIMINAL LAW (DESTRUCTION OF EVIDENCE CAUSED BY HURRICANE SANDY, ADVERSE INFERENCE CHARGE NOT WARRANTED)/JURY INSTRUCTION (ADVERSE INFERENCE CHARGE NOT WARRANTED, EVIDENCE DESTROYED BY HURRICANE SANDY)/EVIDENCE (DESTRUCTION BY HURRICANE SANDY, ADVERSE INFERENCE CHARGE NOT WARRANTED)/ADVERSE INFERENCE JURY INSTRUCTION (NOT WARRANTED WHERE EVIDENCE DESTROYED BY HURRICANE SANDY)

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EVIDENCE OF HOW THE MURDER VICTIM FELT ABOUT DEFENDANT AND EVIDENCE OF STRIFE IN THE COUPLE’S RELATIONSHIP ADMISSIBLE TO SHOW MOTIVE AND IDENTITY.

The First Department determined evidence of how the murder victim felt toward the defendant and evidence of the couple’s “strife and unhappiness” was properly admitted to show the defendant’s motive and was inextricably interwoven with the issue of the identity of the killer:

The court properly admitted testimony from friends of the victim reflecting the victim’s unfavorable perception of defendant’s character, in order to show the victim’s beliefs as part of a showing that the couple had been arguing and that the victim had been attempting to break up with defendant. Proof of the “murder victim’s espoused intention to terminate her relationship with, and stay away from, defendant” was admissible to show the “victim’s state of mind” and was “relevant to the issue of the motive of defendant, who was aware of the victim’s attitude, to kill the victim” … . Hence, the background information about the couple’s “strife and unhappiness” was admissible as “highly probative of the defendant’s motive and [was] either directly related to or inextricably interwoven with the issue of his identity as the killer” … . The friends’ testimony about disputes between defendant and the victim was similarly admissible … . People v Brooks, 2015 NY Slip Op 09379, 1st Dept 12-22-15

CRIMINAL LAW (EVIDENCE OF MURDER VICTIM’S STATE OF MIND AND STRIFE BETWEEN DEFENDANT AND VICTIM ADMISSIBLE TO SHOW MOTIVE AND IDENTITY)/EVIDENCE (MURDER VICTIM’S STATE OF MIND AND STRIFE BETWEEN DEFENDANT AND VICTIM ADMISSIBLE TO SHOW MOTIVE AND IDENTITY); PRIOR BAD ACTS (STRIFE IN RELATIONSHIP BETWEEN DEFENDANT AND MURDER VICTIM ADMISSIBLE TO SHOW DEFENDANT’S MOTIVE AND IDENTITY)

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MASSIVE 750-FOOT TOWER CRANE DESTROYED BY HURRICANE SANDY NOT COVERED UNDER “TEMPORARY WORKS” CLAUSE IN INSURANCE POLICY.

The First Department, in a full-fledged opinion by Justice Andrias, over a two-justice dissent (opinion by Justice Mazzarelli), determined that a massive 750-foot tower crane destroyed during Hurricane Sandy was not included in the policy-definition of “Temporary Works” and was included in a policy-exclusion for “contractor’s tools, machinery, plant and equipment.” Damage to the crane, therefore, was not covered:

The policy defines a temporary structure as something that is “incidental to the project.” Although the term incidental is not defined, “it is common practice for the courts of this State to refer to the dictionary to determine the plain and ordinary meaning of words to a contract” … .

Black’s Law Dictionary defines the term “incidental” as”[s]ubordinate to something of greater importance; having a minor role” (10th ed 2014]). The American Heritage Dictionary, defines incidental as “[o]f a minor, casual, or subordinate nature” (5th ed 2011]). The Merriam-Webster Online Dictionary defines the term “incidental” as “being likely to ensue as a chance or minor consequence” (11th ed 2003).

Applying these definitions, the 750-foot tower crane is not a structure that is “incidental” to the project. Indeed, rather than ensuing by chance or minor consequence … the “[b]uilding was specifically designed to incorporate the Tower Crane during construction” and the crane’s design and erection involved an “in-depth process” that had to be approved by a structural engineer. Moreover, once it was integrated into the structure of the building, the custom designed tower crane, rather than serving a minor or subordinate role, was used to lift items such as concrete slabs, structural steel and equipment, was integral and indispensable, not incidental, to the construction of the 74-story high-rise, which could not have been built without it. Accordingly, the tower crane does not fall within the policy’s definition of Temporary Works. Lend Lease (US) Constr. LMB Inc. v Zurich Am. Ins. Co., 2015 NY Slip Op 09389, 1st Dept 12-22-15

INSURANCE LAW (DAMAGE TO MASSIVE CONSTRUCTION CRANE NOT COVERED BY TEMPORARY WORKS CLAUSE)/CONTRACT LAW (DAMAGE TO MASSIVE CONSTRUCTION CRANE NOT COVERED BY TEMPORARY WORKS CLAUSE IN POLICY)

MISSING WITNESS CHARGE SHOULD NOT HAVE BEEN GIVEN, NO SHOWING REQUEST FOR THE CHARGE WAS TIMELY; ADVERSE INFERENCE CHARGE RE: EXPERT WHO DID NOT BRING SUBPOENAED NOTES SHOULD HAVE BEEN GIVEN.

The First Department, in ordering a new trial, determined the trial judge should not have given a missing witness charge with respect to one of plaintiff’s doctors and should have given an adverse inference charge based upon a defense expert’s failure to bring her notes, which were subpoenaed:

The party seeking a missing witness charge has the burden of promptly notifying the court when the need for such a charge arises … . The purpose of imposing such a burden is, in part, to permit the parties “to tailor their trial strategy to avoid substantial possibilities of surprise” … . Once the party requesting the charge meets its initial burden, the party opposing the request can defeat it by demonstrating that, among other things, the witness was not available, was outside of its control, or the issue about which the witness would have been called to testify is immaterial … .

Here, the record does not reflect when defendants asked for a missing witness charge for Dr. Rose. This presents the possibility that they did not do so until after plaintiff presented her case. Had that been so, plaintiff would have lost any opportunity to account for Dr. Rose’s absence, argue that plaintiff did not have the requisite control over him, or attempt to procure his appearance. Accordingly, since there is no indication that defendants met their burden, we find that the missing witness charge was improperly given. * * *

…[W]hile Dr. Elkin [a defense expert] did not, as plaintiff suggests, testify that she “destroyed” her notes, she did concede that she did not comply with the subpoena, which required her to bring with her to court the notes that she used in generating her report on behalf of defendants. The failure to produce those notes affected plaintiff’s ability to cross-examine defendants’ expert and was fundamentally unfair to plaintiff. At the least, it would have been appropriate for the court to issue an adverse inference charge … . That Dr. Elkin testified that the notes were subsumed in the report is of no moment. Plaintiff was entitled to independently investigate that claim without having to rely on Dr. Elkin’s own assurances that the notes were themselves of no probative value. Herman v Moore, 2015 NY Slip Op 09352, 1st Dept 12-17-15

MONTHLY COMPILATION INDEX ENTRIES:

EVIDENCE (MISSING WITNESS CHARGE SHOULD NOT HAVE BEEN GIVEN, NO SHOWING REQUEST WAS TIMELY)/MISSING WITNESS CHARGE (SHOULD NOT HAVE BEEN GIVEN, NO SHOWING REQUEST WAS TIMELY)/EVIDENCE (ADVERSE INFERENCE CHARGE SHOULD HABE BEEN GIVEN, EXPERT DID NOT BRING SUBPOENAED NOTES)/ADVERSE INFERENCE CHARGE (SHOULD HAVE BEEN GIVEN, EXPERT DID NOT BRING SUBPOENAED NOTES)/JURY INSTRUCTIONS (MISSING WITNESS CHARGE SHOULD NOT HAVE BEEN GIVEN, NO SHOWING OF TIMELY REQUEST)/JURY INSTRUCTIONS (ADVERSE INFERENCE CHARGE SHOULD HAVE BEEN GIVEN, EXPERT DID NOT BRING SUBPOENAED NOTES)

WRONGFUL BIRTH CAUSE OF ACTION ACCRUES UPON BIRTH OF THE CHILD, NOT UPON THE TERMINATION OF TREATMENT CULMINATING IN THE IMPLANTATION OF A FERTILIZED DONOR EGG.

The First Department, in a full-fledged opinion by Justice Friedman, over a partial dissent, determined that plaintiffs’ action for wrongful birth accrued upon the birth of the child, not when the procedure implanting a fertilized donated egg was complete. The plaintiffs alleged that a donor egg was not adequately screened for genetic defects and that, in fact, a genetic defect in the egg was passed on to plaintiffs’ child:

This is a medical malpractice action for “wrongful birth” … , in which it is alleged that defendants’ failure to perform adequate genetic screening of an egg donor for an in vitro fertilization resulted in the conception and birth of plaintiffs’ impaired child. The primary question raised on this appeal is whether plaintiffs’ wrongful birth cause of action accrued upon the termination of defendants’ treatment of the plaintiff mother, less than two months after the implantation of the embryo, or upon the birth of the infant several months later. We hold that the wrongful birth claim accrued upon the birth of the infant and, therefore, was not barred by the applicable statute of limitations (CPLR 214-a) when this action was commenced within 2½ years after the birth. * * *

In the case of a claim for wrongful birth, “the parents’ legally cognizable injury is the increased financial obligation” of raising an impaired child … , … . Whether this legally cognizable injury will befall potential parents as the result of the gestation of an impaired fetus cannot be known until the pregnancy ends. Only if there is a live birth will the injury be suffered. Thus, until there is a live birth, the existence of a cognizable legal injury that will support a wrongful birth cause of action cannot even be alleged . Without legally cognizable damages, there is no legal right to relief, and “the Statute of Limitations cannot run until there is a legal right to relief” … . Accordingly, the statute of limitations begins to run on a wrongful birth claim upon the live birth of an impaired child, whose care and support will occasion the pecuniary damages the parents may seek to recover. B.F. v Reproductive Medicine Assoc. of N.Y., LLP, 2015 NY Slip Op 09370, 1st Dept 12-17-15

MONTHLY COMPILATION INDEX ENTRIES:

NEGLIGENCE (WRONGFUL BIRTH CAUSE OF ACTION ACCRUES UPON BIRTH OF CHILD)/MEDICAL MALPRACTICE (WRONGFUL BIRTH CAUSE OF ACTION ACCRUES UPON BIRTH OF CHILD)/WRONGFUL BIRTH (CAUSE OF ACTION ACCRUES UPON BIRTH OF CHILD)

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