Appellate Division First Department Attempts to Compromise the Christian Doctrine
by Elliot D. Samuelson, Editor
Cases never cease to amaze me. The recent decision in
Kojovic v. Goldman[i] appears to be an apparent attempt by the Appellate Division in the First
Department to compromise the Court of Appeals decision in
Christian[ii] that imposed a fiduciary relationship between husband and wife in the
negotiation and execution of separation or settlement agreements. Upon
the most questionable factual predicate,
Kojovic failed to protect a wife from her husband's fraud and concealment
of material financial information. The gross unfairness of the decision
to an unmonied spouse is especially clear in this case when the decision
by Justice Lobis in the court below, as well as the motion papers, to
dismiss the wife's complaint for failure to state a cause of action,
and the responding arguments are carefully studied. Fortunately, since
a motion was made to the Court of Appeals for leave to appeal, (but characteristically
denied) the record is readily found in any court library.
It is to be remembered that the husband in
Kojovic moved to set aside the complaint for failing to state a cognizable cause
of action. This was not a motion for summary judgment. However, rather
than accepting the facts alleged by the wife to be true, as the court
must on a motion to dismiss, the First Department, without so much as
a dissenting opinion, ignored the facts pled, and came to its own conclusion
that once an asset is disclosed, relevant facts that may affect the value
of the asset may be concealed. The appellate court went on to inexplicably
hold that a spouse with special knowledge of the value of an asset has
no duty to disclose such facts even though the failure to do so would
provide an extraordinary windfall profit to the spouse concealing such
information...which was tantamount to ignoring the equitable principal
of unjust enrichment. The law appears to be otherwise in all other judicial
departments.
You decide for yourself. Consider the facts. A husband during the negotiations
for a settlement of his divorce litigation with his wife, forwards a letter
through his attorney stating that he has no intention to sell his shares
in a dot com fledgling business, and later makes an untrue oral representation
that there were no negotiation talks to do so. He further urges his wife
to accept cash for the value of the dot com business, rather than accept
part of the shares in kind. The wife alleged all of such facts in her
complaint, and the husband on his motion to dismiss did not deny that
he made such false representations to her.
Shortly after the execution of their settlement agreement, the Wife learned
that not only was the Husband's representation false, but he was in
negotiations to sell the business at the time he represented he had no
intention to sell it. A sale was consummated and the Husband received
$18 million for his shares.
After learning of such facts, the Wife served a complaint alleging fraud,
sought to rescind the agreement and receive her equitable share of the
proceeds from the sale of the Husband's shares.
Before reviewing the allegations of the complaint the reader should be
conversant with the elements necessary to state a cause of action for
fraud which include the following:
- That defendant made a false representation to a material fact;
- That defendant knew the representation to be false;
- That the representation was made for the purpose of inducing the plaintiff
to rely upon it;
- That the plaintiff relied upon the representation in ignorance of its falsity, and
-
That the reliance upon such representation created an injury to the Plaintiff.[iii]
The complaint contained,
inter alia, the following allegations.
- Mr. Goldman misrepresented his financial circumstances to then wife, Ms.
Kojovic, in the June 4th Letter, inter alia, by advising her that "he
will not again have the approval for the sale of any of his stock unless
and until the company should be liquidated, which is not contemplated,"
and that his "restriction from selling any more stock has a negative
impact on exercising the options" and that the "stock is now
completely non liquid as it cannot be sold and will be subject to market,
competitive and execution risk for several years."
- Mr. Goldman misrepresented his financial circumstances to then wife, Ms.
Kojovic, by failing to advise her in the June 4th Letter of the possible
sale of Capital IQ to The McGraw-Hill Companies or its subsidiary Standard
& Poor's.
- Mr. Goldman misrepresented his financial circumstances to then wife, Ms.
Kojovic, by failing to advise her during the negotiations of their Stipulation
of Settlement in the matrimonial actions of the possible sale of Capital
IQ to The McGraw-Hill Companies or its subsidiary Standard & Poor's.
Based on these facts, Justice Lobis in the matrimonial part of the court
below held that the primary issue to determine is what the defendant knew
about the sale, and when he knew it. She correctly held that on a motion
to dismiss the complaint she was bound to construe the facts most favorably
to the wife, and accept her allegations as true. Specifically, she referred
to the allegations in the complaint regarding the husband's alleged
misrepresentations and concealment of the sale. In essence, Justice Lobis
concluded that the wife's complaint could not be dismissed for failure
to state a cause of action, and she permitted discovery to go forward.
By contrast, the
Kojovic appellate court granted the motion to dismiss and essentially ruled that
although there is a duty by a spouse to disclose an asset, there is no
corresponding duty to disclose its value ... causing a dichotomy between
rationality and irrationality. Expressed another way, does a spouse who
is mandated by the
Christian doctrine to act as a fiduciary during marriage, need only do so with respect
to but one-half of this rule and disregard the balance with impunity?
Could Judge Benjamin Cardoza, one of our best and brightest jurist who
sat on the New York Court of Appeals and the Supreme Court of the United
States, have ever fashioned such a rule in a court of equity? Would his
sense of fairness and equity compel a far different result? We think so!
Consider his holding in
Beatty v. Guggenheim Exploration Co.[iv], when he sat on the New York Court of Appeals, and explained with terseness
and clarity, the application of equitable principles:
A constructive trust is the formula through which the conscience of equity
finds expression. When property has been acquired in such circumstances
that the holder of the legal title may not in good conscience retain the
beneficial interest, equity converts him into a trustee.
Although a constructive trust case, the legal principal cited in
Beatty, supra, is even more applicable to spouses in matrimonial litigation.
Thereafter, Judge Charles S. Desmond, another distinguished Court of Appeals
jurist, wrote for our high court in
Latham v. Father Devine[v], and similarly found, "A constructive trust will be erected whenever
necessary to satisfy the demands of justice."
Finally, in yet another expression of the learned jurist deciding whether
to invoke the powers of equity, Judge Cardoza concluded:
Though a promise in words was lacking, the whole transaction, it might
be found, was 'instinct with an obligation' imperfectly expressed.[vi]
The First Department never considered such judicial philosophy in coming
to its conclusion in
Kojovic. Rather in reaching its decision and attempting to justify it, the court
selectively quoted from
Christian but failed to recite its most significant pronouncement:
Agreements between spouses, unlike ordinary business contracts, involve
a fiduciary relationship requiring the utmost of good faith. There is
a strict surveillance of all transactions between married persons, especially
separation agreements. Equity is so zealous in this respect that a separation
agreement may be set aside on grounds that would be insufficient to vitiate
an ordinary contract. These principles in mind, courts have thrown their
cloak of protection about separation agreements and made it their business,
when confronted, to see to it that they are arrived at fairly and equitably,
in a manner so as to be free from the taint of fraud and duress, and to
set aside or refuse to enforce those born of and subsisting in inequity.
(Citations omitted). 42 N.Y.2d at 72; 396 N.Y.2d at 823.
With these words from the
Christian decision in mind, it must be asked whether the First Department chose to
ignore the mandate that created a fiduciary relationship between husband
and wife when a separation agreement is negotiated? It must further be
asked whether the First Department should have refused to enforce the
agreement since it appears quite clear that it was born of and subsisting
in inequity?
What is more shocking about this result to dismiss the wife's complaint,
is that the First Department has clearly held otherwise in the commercial
sector, where it reasoned that the managing partners of a limited liability
company who purchased the interest in realty from its other members, were
guilty of fraud and breach of fiduciary duty because they withheld from
the other members that they were engaged in talks to sell the realty for
about three times more than it had been appraised. Despite disclaimers
in the sales agreement, the court held in
Blue Chip Emerald LLC v. Allied Partners, Inc.[vii] that the sellers were "owed a duty of undivided and undiluted loyalty"
and dismissed a motion to dismiss the complaint. The
Blue Chip court went on to explain that the defendants had "no right to keep
to themselves or misrepresent material fact."
The
Blue Chip court made clear, in the context of a commercial case, that a fiduciary
must disclose any information which could bear on the value of an asset.
In this regard it is important to remember that the
Christian court also commented that "...separation agreements must not be permitted
to be employed as instruments for the improper exaction in the inducement
of execution of unconscionable terms within the framework of inequitable
conduct."
It has long been the law that any waiver contained in an agreement is voidable
if it can be shown that it was obtained because of a fiduciary's failure
to make full disclosure.
As such, any waiver made by the wife in
Kojovic should have been deemed void under the circumstances of the case, and
should not have been sanctioned by the court.
Armed with such principals, the decision in
Kojovic reveals its injustice. Although the court remarked that the facts were
straightforward, not all of the facts were recited. Glaringly absent were
the allegations in the complaint of the husband's oral and written
misrepresentations that no deal was being discussed and no sale was being
contemplated. Perhaps the
Kojovic court was swayed by the facts that the parties were involved in but a six
year childless marriage and the Wife did in fact receive a $1.15 million
settlement, and $87,500 in maintenance for four years. However, Justice
Lobis in the court below obviously disagreed, and failed to dismiss the
complaint, believing that the alleged fraud was nevertheless actionable.
Kojovic makes the distinction between the concealment of an asset, and the concealment
of its value....which appears to be the very "distinction without
relevance" that the appellate court accused the wife of making in
its own decision. What is most perplexing is that the
Kojovic court concluded that it was
irrelevant that the husband had information concerning the sale or value of the business
which he kept to himself, and then went on to blame the wife for not investigating
the husband's misdeed.
Even viewed in the context of a short term childless marriage, to deny
the wife any interest in a marital asset, which produced a windfall to
the husband of $18 million, seems unfair and unconscionable. I can't
help but speculate what equitable principals Judge Cardoza would have
brought to bear in this case to prevent such an unjust enrichment.
Elliot D. Samuelson is the senior partner in the Garden City matrimonial
law firm of Samuelson, House & Samuelson, LLP and is a past president
of the American Academy of Matrimonial Lawyers, New York Chapter and is
included in "The Best Lawyers of America" and the "Bar
Registry of Preeminent Lawyers in America." He has appeared on both
national and regional television and radio programs, including Larry King
Live. Mr. Samuelson can be reached at (516) 294-6666 or info@samuelsonhause.net
Endnotes
[ii]. 42 N.Y.2d 63 (1977)
[iii]. See
Abbate v. Abbate, 82 A.D. 2d 368 (2d Dept. 1981)
[iv]. 225 N.Y. 380 (1919)
[vi].
Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 91 (1917)
[vii]. 299 A.D.2d 278 (1st Dept. 2002)