People v Katz
Annotate this CaseDecided on June 4, 2007
Supreme Court, New York County
The People of the State of New York, by Eliot Spitzer, Attorney General of the State of New York, Plaintiffs,
against
Isaac Katz et al., Defendants.
405062/06
Marylin G. Diamond, J.
Upon the foregoing papers, it is ordered that: Plaintiffs bring this action, pursuant to Executive Law § 63(12) and General Business Law §§ 349 and 350, alleging that defendants unlawfully engaged in a conspiracy to defraud minority buyers of real property and mortgage lenders in what the complaint describes as a "property flipping scheme." According to the complaint, defendants, a group of 11 real estate owners, mortgage brokers, attorneys and appraisers, engaged in illegal, discriminatory and fraudulent business practices in connection with real estate transactions in Brooklyn, New York. Specifically, the complaint alleges that the defendants purchased homes in minority neighborhoods in Brooklyn and lured buyers into purchasing the properties at inflated prices by promising them that they would obtain mortgages without having to make a down payment. The complaint alleges that the defendants then deceived various lending institutions by submitting false documents about the transactions which inflated the financial assets of the buyers and made the transactions appear to be legitimate real estate purchases.
This action was commenced on November 22, 2006. The complaint asserts eight causes of action against the 11 defendants. The court has been advised that all of the defendants other than Benzion Frankel have either reached a settlement with the plaintiff or are in default. Frankel has now moved, pursuant to CPLR 3211(a)(5) and (7), to dismiss the complaint as against him.
Frankel, who was an attorney for the lenders, is alleged to have actively participated in the scheme to defraud both the lenders and the buyers by preparing and submitting false documents concerning the real estate transactions. The first, second and seventh causes of action in the complaint are the only claims asserted against Frankel. The first cause of action alleges violations of section 349 of the General Business Law. The second cause of action alleges that Frankel engaged in repeated fraudulent conduct in violation of section 63(12) of the Executive Law. The seventh cause of action alleges breach of fiduciary duty against Frankel and is also brought pursuant to section 63(12). [*2]
As to the first cause of action, brought pursuant to GBL §349, Frankel contends that it must be dismissed because it was untimely brought. GBL §349(a) provides that it is unlawful to perform "[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state." The limitations period for claims brought under GBL §349 is three years from the time of the deceptive act or behavior. See Gaidon v. Guardian Life Ins. Co., 96 NY2d 201, 210 (2001); Morelli v. Weider Nutrition Group, Inc., 275 AD2d 607, 608 (1st Dept. 2000). Since the complaint was filed on November 22, 2006, the statue of limitations bars any GBL §349 claims which accrued prior to November 22, 2003.
The complaint alleges that the defendants, including Frankel, have engaged in a fraudulent real estate scheme since 2002. Plaintiffs argue that because Frankel is alleged to have participated in an ongoing fraudulent scheme which continued past November 22, 2003, their claim under the GBL is timely. The problem with plaintiffs' argument is that the only allegations in the complaint which specifically refer to Frankel concern two real estate transactions that allegedly closed, respectively, in March and May, 2003. The complaint alleges that, as part of these transactions, Frankel submitted documents to the lenders which gave false and/or inaccurate information concerning the sales price, loan amount, appraised value of the property and amount of money actually paid by the buyer. The complaint also alleges that Frankel knew or should have known that the buyer had not actually paid any money at the time of the closing because he had issued a check to the buyer to cover repairs to the property and a check to an attorney to cover the buyer's legal fees. Plaintiffs nevertheless argue that the specific transactions mentioned in the complaint are only meant to be "illustrative" of the larger fraudulent scheme in which Frankel was allegedly an ongoing participant. Plaintiffs also argue that dismissal on statute of limitations grounds would be premature at this stage because the parties have not yet engaged in any discovery which would clarify the scope and duration of the fraudulent scheme and Frankel's role in it. The plaintiffs, however, have not offered any evidentiary support for their claim that Frankel may have participated in the scheme after November 22, 2003. Their mere speculation that he may have done so is insufficient to avoid the dismissal of the first cause of action. Since the only transactions mentioned in the complaint which involve Frankel took place more than three years before the commencement of this action, the first cause of action as against him must be dismissed.
The second cause of action alleges that Frankel engaged in repeated fraudulent conduct in violation of section 63(12) of the Executive Law. Frankel argues that the second cause of action should be dismissed because it fails to state a cause of action against him. Executive Law § 63(12) empowers the Attorney General to commence a special proceeding seeking injunctive relief, restitution and/or damages whenever any person or business engages in "repeated fraudulent or illegal acts or otherwise demonstrate[s] persistent fraud or illegality in the carrying on... or transaction of business." Under the statute, fraud is defined as "any device, scheme or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, false promise or unconscionable contractual provisions." It is well settled that the definition of fraud under Executive Law §63(12) is broadly construed so as to include acts which are misleading or dishonest irrespective of an intent to defraud. See People v Apple Health & Sports Club, 206 AD2d 266, 267 (1st Dept. 1994). See also People v. General Electric Co., 302 AD2d 314, 315 (1st Dept. 2003). The test of whether conduct is fraudulent under [*3]Executive Law §63(12) is whether the particular act "has the capacity or tendency to deceive, or creates an atmosphere conducive to fraud."People v. General Electric Company, Inc., 302 AD2d at 314.
Here, the complaint alleges that as an attorney for the lenders at some of the closings, Frankel disbursed mortgage funds even though he was aware that the borrowers had not made their required down payments and that the transactions thus did not comport with the lenders' terms and conditions. In addition, Frankel allegedly prepared and submitted closing documents which misrepresented the nature of the transactions. In moving to dismiss, Frankel suggests that the Attorney General lacks standing under Executive Law § 63(12) to enjoin and/or seek damages for conduct primarily directed at lenders and financial institutions, as opposed to ordinary consumers. Frankel also suggests that the complaint does not adequately allege the specific actions by him which were misleading or deceptive. These contentions are without merit. First, there is no requirement under Executive Law §63(12) that the injured or defrauded party be a consumer. In any event, the complaint adequately alleges that the consumers who agreed to purchase the properties at inflated prices, as well as the lenders who were defrauded, suffered injury as a result of Frankel's allegedly deceptive acts. Second, construed liberally, the complaint adequately alleges conduct by Frankel which, in violation of section 63(12), has the capacity or tendency to deceive or create an atmosphere conducive to fraud.Frankel's motion to dismiss the second cause of action as against him must therefore be denied.
As to the seventh cause of action, which alleges breach of fiduciary duty against Frankel, it, too, is brought pursuant to Executive Law §63(12). In particular, it alleges that Frankel and the other lender attorneys "had a fiduciary duty to exercise the utmost good faith and loyalty towards their clients, as well as a duty of care to ensure that the transactions comported with the lenders' closing instructions." Alleging that Frankel breached this duty by submitting closing reports which contained material misrepresentations and/or omissions, plaintiffs assert that these breaches of duty constitute "repeated and persistent illegal conduct" in violation of section 63(12). In moving to dismiss this claim, Frankel argues that a breach of fiduciary duty is not an "illegal" act within the meaning of the Executive Law. The court agrees.
Although the plaintiffs argue that the expansive interpretation the courts have given to the scope of Executive Law §63(12) should include violations not only of statutes and regulations but of the common law as well, they have failed to cite a single case where the Attorney General has successfully brought an action pursuant to Executive Law §63(12) based on an alleged breach of fiduciary duty. If this court were to extend the Executive Law in the manner requested by plaintiffs, plaintiffs could presumably have jurisdiction over any dispute between an attorney and his client, including breach of contract and/or legal malpractice. The cases cited by the plaintiffs do not support such a broad reading as they involve either a public nuisance, see State v. Schenectady Chem., Inc., 103 AD2d 33 (3rd Dept 1984) or a federal common law violation involving the federally-regulated telecommunications industry. See Oncor Communications, Inc. v. State of New York, 165 Misc 2d 262 (Sup Ct Albany Co 1995). Neither of these common law violations is remotely similar to a standard, interpersonal claim alleging an attorney's breach of fiduciary duty to his client. In any event, the claim warrants dismissal since [*4]it is duplicative of the plaintiffs' second cause of action for fraud. See Weil, Gotshal & Manges, LLP v. Fashion Boutique of Short Hills, Inc., 10 AD3d 267 (1st Dept 2004).
Accordingly, Frankel's motion to dismiss is granted to the extent that the first and seventh causes of action are hereby dismissed as against him. The motion is otherwise denied.
The parties shall appear before the court in Room 412, 60 Centre Street, New York, New York on June 26, 2007 at 11:00 a.m for a preliminary conference.
.
ENTER ORDER
Dated: 6/4/07_______________________
Marylin G. Diamond, J.S.C.
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