HEAVEN v. McGOWAN

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Docket Number

Nos. 2005-10319, 2005-10320.

Attorney(S)

Mark S. Friedlander, New York, N.Y., for appellants. John M. Giordano, P.C., New York, N.Y., for respondents.

Judges

Robert J. Miller

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Smart Summary

Factual and Procedural Background

The plaintiff Tomlinson Living Trust, created in 1996 as an irrevocable inter vivos trust, owned residential real property in Cambria Heights, Queens, valued at approximately $200,000 as of 2000. Paula Heaven is both trustee and beneficiary of the Trust, and Lorna Heaven is also a beneficiary. Facing foreclosure, the plaintiffs consulted defendant Edward M. McGowan, Jr., an attorney representing the Trust. The plaintiffs alleged that McGowan represented to them that he would help refinance their mortgage, but the documents they signed actually effected a sale of the property to New World Investment Trust—an entity owned by McGowan—for $92,000, with a leaseback arrangement at rent exceeding prior mortgage payments.

After falling behind on rental payments, the defendants initiated an unsuccessful summary holdover proceeding. The plaintiffs then commenced this action seeking damages for fraud and breach of fiduciary duty, claiming they were misled by McGowan’s characterization of the transaction as a refinance rather than a sale-leaseback.

Procedurally, the plaintiffs appealed from an order dated April 3, 2000, which granted summary judgment dismissing the complaint, and from a September 2, 2005 order denying their motion for leave to renew that prior motion for summary judgment dismissal.

Legal Issues Presented

Whether the defendants were entitled to summary judgment dismissing the plaintiffs’ fraud claim based on the alleged misrepresentation of the transaction as a refinance rather than a sale-leaseback.
Whether the defendants were entitled to summary judgment dismissing the plaintiffs’ claim for breach of fiduciary duty.
Whether the plaintiffs’ motion for leave to renew their opposition to the defendants’ prior summary judgment motion should have been granted.

Arguments of the Parties

Appellants' Arguments

McGowan represented that he would help refinance the mortgage, inducing the plaintiffs to enter into the transaction under false pretenses.
The plaintiffs reasonably relied on McGowan’s representations, believing the transaction was a refinance rather than a sale-leaseback.
There existed a fiduciary relationship between McGowan and the plaintiffs, given his role as trust counsel and advisor, which he breached by placing his interests above theirs.
The plaintiffs justified their failure to submit certain affidavits earlier due to circumstances including the defendants’ delay in serving notice of the April 3, 2000 order.

Respondents' Arguments

The defendants submitted documentary evidence demonstrating the plaintiffs’ knowledge that the transaction was a sale, not a refinance, including the real estate contract and recorded deed.
The term "refinance" was asserted in their pleadings as a proper description of the sale-leaseback transaction, negating claims of misrepresentation.
There was no fiduciary relationship between McGowan and the plaintiffs, as argued through exhibits relied upon in their motion.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Jo Ann Homes at Bellmore v Dworetz, 25 NY2d 112	Definition of fraud requiring a false representation made knowingly or recklessly to induce reliance causing injury.	Used to establish the elements of fraud the plaintiffs must prove.
Avecia, Inc. v Kerner, 299 AD2d 380	Supporting authority on fraud elements.	Reinforced the standard for fraud claims applied to the facts.
Cohen v Houseconnect Realty Corp., 289 AD2d 277	Elements of fraud and justifiable reliance.	Confirmed the necessity of showing justifiable reliance on false representations.
Channel Master Corp. v Aluminium Ltd. Sales, 4 NY2d 403	Elements of fraud claims.	Referenced in defining the fraud claim requirements.
113-14 Owners Corp. v Gertz, 123 AD2d 850	Elements of fraud and reliance.	Supported the analysis of the fraud claim.
Alvarez v Prospect Hosp., 68 NY2d 320	Defendants’ burden in summary judgment motions.	Used to evaluate defendants' initial burden in establishing entitlement to summary judgment.
Franco v English, 210 AD2d 630	Existence of triable issues of fact in fraud claims.	Supported the finding of triable issues regarding misrepresentation and reliance.
Koncelik v Abady, 179 AD2d 942	Triable issues in fraud and misrepresentation cases.	Reinforced the presence of factual disputes precluding summary judgment.
Matter of People, 303 NY 423	Liability of attorney for breach of fiduciary duty to trust beneficiaries.	Applied to assess fiduciary duty claims against McGowan.
Chinello v Nixon, Hargrove, Devans Doyle, LLP, 15 AD3d 894	Attorney fiduciary duty and breach thereof.	Supported the court's analysis of fiduciary duty allegations.
O'Connell v Post, 27 AD3d 631	Standards for motions for leave to renew.	Guided the court’s discretion in granting renewal motions.
Renna v Gullo, 19 AD3d 472	Requirements for leave to renew motions.	Provided framework for evaluating plaintiffs’ renewal motion.
Gomez v Needham Capital Group, Inc., 7 AD3d 568	Flexibility in granting leave to renew motions in the interest of justice.	Supported the court’s discretion to grant renewal despite prior knowledge of facts.
Bepat v Chandler, 2 AD3d 764	Discretionary considerations in renewal motions.	Further supported the court’s decision to grant leave to renew.

Court's Reasoning and Analysis

The court analyzed the plaintiffs' fraud claim by first acknowledging the established legal elements of fraud, requiring a false material representation knowingly made to deceive and induce reliance causing injury. The defendants initially met their burden for summary judgment by submitting documentary evidence showing the plaintiffs' knowledge that the transaction was a sale rather than a refinance.

However, the plaintiffs presented triable issues of fact through Lorna's affidavit asserting McGowan represented the transaction as a refinance, a claim not denied by the defendants. The defendants’ own pleadings admitted that the term "refinance" was used to describe the sale-leaseback, raising factual disputes about whether this constituted a misrepresentation and whether plaintiffs justifiably relied on it.

Regarding the breach of fiduciary duty claim, the defendants failed to establish entitlement to judgment as a matter of law. The Trust documents identified McGowan as trust counsel or advisor, indicating a fiduciary relationship. Evidence such as waivers executed by plaintiffs further supported the existence of such a relationship and potential breach.

The court also found that the Supreme Court erred in denying the plaintiffs’ motion for leave to renew their opposition to the summary judgment motion. The plaintiffs provided reasonable justification for their prior failure to submit certain affidavits, and the defendants’ delay in serving notice of the prior order contributed to any prejudice.

Consequently, the court granted the motion for leave to renew, vacated the prior summary judgment dismissing the complaint, and denied that branch of the defendants' motion. The appeal from the earlier order was dismissed as academic due to this disposition.

Holding and Implications

The court REVERSED the order dated September 2, 2005, granted the plaintiffs’ motion for leave to renew, vacated the April 3, 2000 order granting summary judgment dismissing the complaint, and denied the defendants’ summary judgment motion. The appeal from the April 3, 2000 order was dismissed as academic. Costs were awarded to the plaintiffs.

The direct effect of this decision is to allow the plaintiffs’ fraud and breach of fiduciary duty claims to proceed past summary judgment, preserving their opportunity to prove their allegations at trial. The court did not establish new precedent but clarified the application of summary judgment standards, the existence of triable issues on misrepresentations involving sale-leaseback transactions, and the discretion in granting motions for leave to renew.

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LORNA HEAVEN et al., Appellants, v. EDWARD MCGOWAN, JR., et al., Respondents.

Ordered that the order dated September 2, 2005 is reversed insofar as appealed from, on the law, the motion for leave to renew is granted, upon renewal, so much of the order dated April 3, 2000, as granted that branch of the defendants' motion which was for summary judgment dismissing the complaint is vacated, and that branch of the defendants' motion which was for summary judgment dismissing the complaint is denied; and it is further,

Ordered that the appeal from the order dated April 3, 2000 is dismissed as academic; and it is further,

Ordered that one bill of costs is awarded to the plaintiffs.

The plaintiff Tomlinson Living Trust (hereinafter the Trust) was created in 1996 as an irrevocable inter vivos trust, and owned residential real property in Cambria Heights, Queens (hereinafter the property), with a market value as of 2000 in the sum of $200,000. The plaintiff Paula Heaven (hereinafter Paula) is both the trustee and a beneficiary of the Trust, and the plaintiff Lorna Heaven (hereinafter Lorna) is also a beneficiary of the Trust.

Facing foreclosure, the plaintiffs consulted with the defendant Edward M. McGowan, Jr., an attorney who represented the Trust. The plaintiffs alleged that, on the basis of McGowan's representations, they entered into an agreement with him which they believed accomplished a refinance of their mortgage on the property. The documents that the plaintiffs signed, however, actually effected a sale of the property to the defendant New World Investment Trust (hereinafter New World), an entity created and owned by McGowan, for the sum of $92,000 and a leaseback by the plaintiffs at a monthly rent greater than their mortgage payments had been. When the plaintiffs fell behind on their "rental payments" to McGowan and New World, McGowan unsuccessfully commenced a summary holdover proceeding against the plaintiffs in the Civil Court, Queens County. The plaintiffs then commenced this action to recover damages for fraud, among other things, alleging that they were induced to transfer the property to New World and McGowan as a result of McGowan's mischaracterization of the transaction as a refinance.

Fraud consists of "a representation of fact, which is either untrue and known to be untrue or recklessly made, and which is offered to deceive the other party and to induce them to act upon it, causing injury" ( Jo Ann Homes at Bellmore v Dworetz, 25 NY2d 112, 119; see Avecia, Inc. v Kerner, 299 AD2d 380; Cohen v Houseconnect Realty Corp., 289 AD2d 277, 278). Thus, in order to prevail on a cause of action alleging fraud, the plaintiffs must demonstrate that (1) the defendant made material representations that were false, (2) the defendant knew the representations were false and made them with the intent to deceive the plaintiff, (3) the plaintiff justifiably relied on the defendant's representations, and (4) the plaintiff was injured as a result of the defendant's representations ( see Channel Master Corp. v Aluminium Ltd. Sales, 4 NY2d 403, 407; Cohen v Houseconnect Realty Corp., supra; 113-14 Owners Corp. v Gertz, 123 AD2d 850, 851).

The defendants met their initial burden of establishing their entitlement to summary judgment on the fraud claim by submitting documentary evidence in the form of the real estate contract of sale dated July 5, 1997, and the recorded deed executed and acknowledged by the plaintiffs on May 29, 1998, demonstrating the plaintiffs' knowledge that the transaction was an actual sale of the property ( see Alvarez v Prospect Hosp., 68 NY2d 320, 326). However, in opposition, the plaintiffs raised triable issues of fact, precluding the granting of summary judgment, on the basis of Lorna's affidavit, in which she asserted that McGowan "told us that he would help us refinance the mortgage" and that the "market value of our house is approximately $200,000."

The assertion that the arrangement between the parties was represented to be a refinance was not denied by the defendants in either their pleadings or their motion papers. In particular, the fifth affirmative defense set forth in the verified answer avers that the term "refinance" is "commonly" used to refer to a sale-leaseback transaction, and is a "proper" description for a "sale-leaseback" transaction. Based on the record as a whole, including McGowan's own admission that he used the term "refinance" to refer to the sale-leaseback transaction, triable issues of fact remain as to whether McGowan made such misrepresentations to mislead and confuse the plaintiffs into entering into the transaction and as to whether the plaintiffs justifiably relied upon those misrepresentations ( see Franco v English, 210 AD2d 630, 634-635; Koncelik v Abady, 179 AD2d 942, 944).

Moreover, the defendants failed to establish their prima facie entitlement to judgment as a matter of law with respect to the plaintiffs' allegations of a breach of fiduciary duty. The exhibits upon which the defendants relied in this regard controvert their contention that there was no fiduciary relationship between McGowan and the plaintiffs. The language of the Trust, prepared by McGowan, identified him as either trust counsel or as the advisor to Paula, as trustee. An attorney for a trustee is liable for breach of a fiduciary duty to third-party beneficiaries of the trust when the attorney has placed his or her self-interest above that of the trustee ( see Matter of People, 303 NY 423, 431; see also Chinello v Nixon, Hargrove, Devans Doyle, LLP, 15 AD3d 894, 895-896). Additional evidence of the fiduciary relationship may be found in the waivers McGowan had Paula and Lorna execute with respect to the sale-leaseback agreement.

The Supreme Court improvidently exercised its discretion in denying that branch of the plaintiffs' motion which was for leave to renew. A motion for leave to renew must generally (1) be based upon new facts not offered on the prior motion that would change the prior determination and (2) set forth a reasonable justification for the failure to present such facts on the prior motion ( see CPLR 2221 [e] [2], [3]; O'Connell v Post, 27 AD3d 631; Renna v Gullo, 19 AD3d 472). However, these requirements are "flexible . . . and the court, in its discretion, may grant renewal, in the interest of justice, upon facts which were known to the movant where the movant offers a reasonable justification for failing to submit them on the earlier motion" ( Gomez v Needham Capital Group, Inc., 7 AD3d 568, 569; Bepat v Chandler, 2 AD3d 764).

Here, the plaintiffs provided a reasonable excuse for their failure to submit an affidavit from Paula in opposition to the defendants' motion in 2000. Any prejudice that might have inured to the defendants as a result of the plaintiffs' delay in making the renewal motion was, at least in part, the result of the defendants' five-year delay in serving the April 3, 2000 order with notice of its entry. Accordingly, the Supreme Court should have granted that branch of the plaintiffs' motion which was for leave to renew and, upon renewal, should have denied that branch of the defendants' motion which was for summary judgment dismissing the complaint.

In light of our determination on the appeal from the order dated September 2, 2005, the appeal from the order dated April 3, 2000 has been rendered academic, and must be dismissed on that ground.