author: Simons, J.

text:
    First Commercial Bank, Respondent, v Gotham Originals, Inc., Appellant, et al., Respondent.
    Argued January 8, 1985;
    decided February 12, 1985

      POINTS OF COUNSEL

      Gerald M. Kleinbaum for appellant.
    I. The court below ignored controlling precedent of this court. (United Bank v Cambridge Sporting Goods Corp., 41 NY2d 254.) II. The court below erred by summarily granting judgment despite significant issues of material fact. (United Bank v Cambridge Sporting Goods Corp., 41 NY2d 254; Bank Leumi Trust Co. v Isramkor, Ltd., 51 AD2d 940; Karpas v Bandler, 218 App Div 418; Chemical Bank v Haskell, 51 NY2d 85; Banco Di Roma v Merchants Bank, 92 AD2d 42; Magi Communications v Jac-Lu Assoc., 65 AD2d 727; Banco Tornquist, S. A. v American Bank & Trust Co., 71 Misc 2d 874; Banco Espanol de Credito v State St. Bank & Trust Co., 409 F2d 711.) III. UCC 4-303 does not apply. (United Bank v Cambridge Sporting Goods Corp., 41 NY2d 254; Sztejn v Schroder Banking Corp., 177 Misc 719; Old Colony Trust Co. v Lawyers Tit. & Trust Co., 297 F 152, 265 US 585.) IV. The court below abused its discretion by denying Gotham an opportunity to answer the petition. (Matter of Dodge, 25 NY2d 273; Matter of Brentmore Estates v Hotel Barbizon, 263 App Div 389.) V. The pendency of another action between the same parties for the same relief mandated dismissal of the. petition.

      Thomas F. Clauss, Jr., and Stephen A. Weiner for First Commercial Bank, respondent.
    I. Under the express provisions of UCC 4-303, First Commercial was entitled to payment from Bank Leumi notwithstanding the orders of attachment. (Citizens & Peoples Natl. Bank v United States, 570 F2d 1279; United

      Bank v Cambridge Sporting Goods Corp., 41 NY2d 254.) II. The vacated orders of attachment could not reach the accepted drafts. III. First Commercial was entitled to relief regardless of its status as a holder in due course. IV. Gotham has failed to demonstrate that the decision of the court below is improper for procedural reasons. (Matter of Dodge, 25 NY2d 273.)
   OPINION OF THE COURT

Simons, J.

This is a special proceeding instituted pursuant to CPLR 6221 to determine adverse claims to attached property. The disputed property consists of funds and assets held by respondent Bank Leumi Trust Company of New York. Petitioner, First Commercial Bank, claims the proceeds because Bank Leumi accepted drafts it presented in the amount of $70,978.50 which had been drawn in connection with a letter of credit. Respondent Gotham Originals, Inc., the customer of Bank Leumi which obtained the letter of credit, claims that Bank Leumi may not transfer the proceeds because the court enjoined it from doing so before it honored the drafts. Petitioner bases its claim to the funds on the provisions of Uniform Commercial Code § 4-303 (1) (a) which provides that legal process comes too late to suspend the bank’s duty to pay an item if it comes, as this order did, after the bank has accepted it. Gotham contends, however, that the restraining order was timely under section 5-114 (2) (b) of the Code because the order was served upon the Bank before it honored the drafts. The Code defines honor as “to pay or to accept and pay” (Uniform Commercial Code § 1-201 [21]). Thus, the order was untimely under section 4-303 because Bank Leumi had accepted the drafts before enjoined but timely under section 5-114 because it had not yet honored them. The Appellate Division held that under these circumstances section 4-303 prevails.* * We agree and therefore affirm its order.

“(1) Any * * * legal process served upon * * * a payor bank, whether or not effective under other rules of law to terminate, suspend or modify the bank’s right or duty to pay an item or to charge its customer’s account for the item, comes too late to so terminate, suspend or modify such right or duty if the * * * legal process is received or served and a reasonable time for the bank to act thereon expires or the setoff is exercised after the bank has done any of the following:
“(a) accepted or certified the item”.

I

In June 1981 respondent Gotham Originals, Inc. agreed to purchase approximately 24,000 pairs of ladies leather and snakeskin shoes from Teng Shih Industries Company, Ltd., and other Taiwanese shoe manufacturers. To finance the purchase, it obtained an irrevocable letter of credit from Bank Leumi designating Teng Shih Industries as beneficiary and petitioner First Commercial Bank, a banking corporation organized under the laws of the Republic of China and having its principal place of business in Taipei, as advising bank. The total amount of the letter of credit, as amended, was $172,026. It was transferrable and contained an expiration date of September 5, 1981. On September 10, 1981, R. Bore International, Inc., a transferee beneficiary of Teng Shih Industries, negotiated to petitioner two drafts in the amount of $70,978.50, payable on sight 60 days from date, together with the other documents required by the letter of credit. Petitioner paid for the drafts in Taiwanese currency and credited the amounts to R. Bore’s checking account although it did so “under reserve” because the letter of credit had expired on September 5, 1981. On September 21st, Bank Leumi received from petitioner the two drafts, the required documentation and transmittal letters and a request for payment of the drafts on Gotham’s letter of credit. Petitioner disclosed the discrepancy in the expiration date, noted that it h ad negotiated the drafts “under reserve” and requested advice as to when it could lift the reserve and make final payment to R. Bore. Bank Leumi subsequently obtained a waiver of the discrepancy in the expiration date from Gotham and on September 24th. it notified petitioner by letter that the drafts had been accepted and that payment would be made on November 23, 1981.

After Bank Leumi had accepted the drafts, but before it had paid them, Gotham instituted an action against Teng Shih, R. Bore and the other shoe manufacturers-sellers in Supreme Court, New York County, claiming they had sold it worthless merchandise and charging them with fraud and breach of contract. It simultaneously obtained a temporary restraining order enjoining Bank Leumi from transferring the letter of credit or any moneys or assets of the sellers and sought orders attaching the proceeds of the drafts. After the restraining order was served on Bank Leumi and the attachment was perfected, Bank Leumi refused to pay petitioner.

Petitioner first attempted to recover the funds by a plenary action against Bank Leumi and the bank, in turn, impleaded Gotham. Petitioner then moved for summary judgment and when its motion was denied it commenced this proceeding. In it petitioner seeks to vacate and discharge the restraining order and the orders of attachment, to void the Sheriff’s levy and to obtain a determination that section 4-303 of the Code controls this transaction and requires Bank Leumi to pay the accepted drafts. Before answering, Gotham moved to dismiss the petition contending that it failed to state a cause of action and that granting the relief sought would violate a prior order of the same court (i.e., the order denying petitioner summary judgment in the plenary action). It requested leave to answer if its motion was denied. Bank Leumi appeared and answered the petition.

On November 15, 1983 Special Term granted Gotham’s motion and dismissed the petition holding that (1) petitioner’s plenary action involved the same parties and issues and was still pending, (2) no judgment had been obtained in it, which it viewed as a necessary predicate to a CPLR 6221 petition, and (3) petitioner failed to name as necessary parties the defendants in the Gotham action and the Sheriff of New York City.

The Appellate Division, First Department, unanimously reversed and granted the petition (101 AD2d 790). It held that there were no procedural bars to reaching the merits and, on the merits, it held that the attachment order was untimely under Uniform Commercial Code § 4-303 and was therefore ineffective to terminate or suspend Bank Leumi’s duty to pay the accepted drafts.

II

The purpose of a letter of credit is to substitute for, and therefore support, an engagement to pay money. Letters of credit are used in various ways in modern business practice, but when used in the traditional manner to finance a sale of goods, the credit subsumes a separate agreement by a buyer to pay money to a seller (for illustrations of other uses see J. White & R. Summers, Handbook on Uniform Commercial Code § 18-1, at 708-09 [2d ed]). By issuing a letter of credit, the issuer undertakes an obligation to pay the beneficiary, or his transferee if the letter is negotiable, from the account of its customer. Thus, a commercial letter of credit transaction involves three separate contractual relationships and undertakings: first, the underlying contract for the purchase and sale of goods between the customer (the buyer, Gotham in this case) and the beneficiary (the seller Shih); second, the agreement between the issuer (Bank Leumi), customarily a bank but frequently some other institution or person, and its customer (Gotham) in which the issuer typically agrees to issue the letter of credit in return for its customer’s promise to reimburse it for any payments made under the credit plus a commission; and third, the letter of credit itself which is an engagement by the bank or other issuer that it will honor drafts or other demands for payment presented by the beneficiary or a transferee beneficiary upon compliance with the terms and conditions specified in the credit (see, United Bank v Cambridge Sporting Goods Corp., 41 NY2d 254, 258-259; Uniform Commercial Code § 5-103 [1] [a]; see also, Voest-Alpine Intl. Corp. v Chase Manhattan Bank, 707 F2d 680, 682 [2d Cir]; PLI, Letters of Credit and Bankers’ Acceptances 13-14 [1984]; J. White & R. Summers, Handbook on Uniform Commercial Code § 18-1, at 704, 708-10 [2d ed]).

The fundamental principle governing these transactions is the doctrine of independent contracts. It provides that the issuing bank’s obligation to honor drafts drawn on a letter of credit by the beneficiary is separate and independent from any obligation of its customer to the beneficiary under the sale of goods contract and separate as well from any obligation of the issuer to its customer under their agreement (see, Uniform Commercial Code § 5-114 [1]; J. White & R. Summers, Handbook on Uniform Commercial Code § 18-2, at 711-13 [2d ed]). Stated another way, this principle stands for “the fundamental proposition * * * that all parties [to a letter of credit transaction] deal in documents rather than with the facts the documents purport to reflect” (H. Harfield, Letters of Credit 76 [ALI-ABA Uniform Commercial Code Practice Handbook 1979]; see, United Bank v Cambridge Sporting Goods Corp., 41 NY2d 254, 259, supra; Uniform Commercial Code § 5-114 [1]; Uniform Customs and Practice for Commercial Documentary Credits [UCP], promulgated by the International Chamber of Commerce, General Provisions and Definitions [c] and art 9). Thus, the issuer’s obligation to pay is fixed upon presentation of the drafts and the documents specified in the letter of credit. It is not required to resolve disputes or questions of fact concerning the underlying transaction.

A limited exception to this rule of independence is provided in section 5-114 of the Code (see also, Sztejn v Schroder Banking Corp., 177 Misc 719). Under the general rule the issuer must honor the draft when the documents presented comply with the terms of the letter of credit (Uniform Commercial Code § 5-114 [1]). But when a required document does not conform to the necessary warranties or is forged or fraudulent or there is fraud in the transaction, an issuer acting in good faith may, but is not required to, refuse to honor a draft under a letter of credit when the documents presented appear on their face to comply with the terms of the letter of credit. Further than that, a customer may also enjoin an issuer from honoring such a draft if the issuer fails to do so on its own (Uniform Commercial Code § 5-114 [2] [b]; see, United Bank v Cambridge Sporting Goods Corp., 41 NY2d 254, 259, supra; Harfield, Practice Commentary, McKinney’s Cons Laws of NY, Book 62V2, Uniform Commercial Code § 5-114, pp 686-688). Notwithstanding this exception, if the person presenting a draft drawn on a letter of credit is a holder in due course (see, Uniform Commercial Code § 3-302), the issuer must pay the draft, whether it has notice of forgery or fraud or not (see, United Bank v Cambridge Sporting Goods Corp., supra, p 259; Uniform Commercial Code § 5-114 [2] [a]).

Thus, if petitioner had taken the drafts under circumstances which made it a holder in due course, it would have acquired greater rights than the beneficiary and Bank Leumi would be obligated to honor the drafts despite Gotham’s allegations of fraud in the transaction. Petitioner has neither pleaded nor proved its status as a holder in due course, however. Indeed it asserts that its status as such is irrelevant and maintains that it is entitled to recover on the facts presented in any event.

Petitioner was initially designated as an advising bank and stood in a neutral position; its only obligation was to convey accurate information of the issuance, amendment and terms and conditions of the credit to its beneficiaries (see, Uniform Commercial Code § 5-103 [1] [e]; H. Harfield, Letters of Credit 10-111; PLI, Letters of Credit and Bankers’ Acceptances 43). By purchasing the signed drafts drawn under the letter of credit by the transferee-beneficiary, R. Bore, it became a negotiating bank and because of Bank Leumi’s express engagement in the letter of credit to honor drafts presented by a negotiating bank, petitioner acquired rights against Bank Leumi, as issuer, “to the same extent as if it were named as beneficiary of the credit” (H. Harfield, Letters of Credit 14; see, PLI, Letters of Credit and Bankers’ Acceptances 45-46).

Thus, although the parties agree subdivision (2) (b) is the provision of section 5-114 pertinent to this appeal because petitioner does not claim to be a holder in due course, they disagree on its significance. Gotham contends that the court was authorized to enjoin payment of the drafts pursuant to it because there was fraud in the transaction. Petitioner asserts that section 4-303 prevails in the case of conflict and that because the drafts were accepted before the restraining order was issued or served on Bank Leumi, its rights became fixed and are paramount to Gotham’s, notwithstanding its status and the statutory authorization to enjoin payment found in section 5-114.

in

Section 4-102 of the Code specifically provides that if the provisions of article 4 conflict with those of article 3 then article 4 shall govern and that if they conflict with the provisions of article 8 then the provisions of article 8 shall govern. It contains no similar provision with respect to a conflict with the provisions of article 5 nor does any section in article 5 deal with the conflict. The controlling language must be found in section 4-303 (1). It states that any legal process served upon a payor bank, “whether or not effective under other rules of law” to terminate or suspend the bank’s duty to pay the item comes too late to terminate or suspend that duty if the bank has previously accepted the item (Uniform Commercial Code § 4-303 [1] [a]). Section 5-114 contains no similar provision. Indeed, the Legislature made clear that article 5 and the UCP do not control every aspect of a transaction that involves a letter of credit when :it provided that article 5 was intended to deal “with some but not all of the rules and concepts of letters of credit” (Uniform Commercial Code § 5-102 [3]; see, J. White & R. Summers, Handbook on Uniform Commercial Code § 18-2, at 711 [2d ed]). Accordingly, section 4-303, by its terms, supersedes section 5-114 and when Bank Leumi accepted the drafts on September 24, 1981, it became directly, primarily and unconditionally obligated to the holder to pay them at maturity (Uniform Commercial Code § 3-413 [1]; see, United States Rail Co. v Wiener, 169 App Div 561; PLI, Letters of Credit and Bankers’ Acceptances 231-32; for the definition of “acceptance” see Uniform Commercial Code § 3-410 [1]). Because the restraining order was served on it on October 30, 1981, 36 days after the act of acceptance, it came “too late” to prevent payment to petitioner. .

This view is reinforced by authorities holding that article 4 continues to apply in letter of credit transactions to the rights and liabilities on documentary drafts (see, Continental Time Corp. v Merchants Bank, 117 Misc 2d 907, 909; PLI, Letters of Credit and Bankers’ Acceptances 231-36; J. White & R. Summers, Handbook on Uniform Commercial Code § 18-3, at 718 [2d ed]; Farnsworth, Documentary Drafts Under the Uniform Commercial Code, 22 Bus Law 479, 480). So, also, in Key Intl. Mfg. v Stillman (103 AD2d 475), the Appellate Division, Second Department, noted that it was improper for the lower court to restrain the issuing bank from paying cashier’s checks it had previously issued to the beneficiary following presentment of a draft and necessary documents under a letter of credit. A cashier’s check is accepted upon its issuance (Dziurak v Chase Manhattan Bank, 44 NY2d 776, 777) and therefore the court, citing section 4-303 (1) (a) of the Code, stated that the restraining order was not timely (Key Intl. Mfg. v Stillman, supra, p 479). Similarly, in Voest-Alpine Intl. Corp. v Chase Manhattan Bank (707 F2d 680, supra), the Second Circuit, applying New York law, reversed and remanded an award of summary judgment for a confirming bank in an action by the beneficiary of a letter of credit, because there was an issue of fact whether the bank had accepted the beneficiary’s drafts prior to its refusal to pay them (707 F2d, at pp 685-686). Implicit in the court’s decision is the determination that if the bank had accepted the drafts, it would be precluded from subsequently refusing payment.

Important policy considerations suggest the result also. Letters of credit provide a quick, economic and predictable means of financing transactions for parties not willing to deal on open accounts by permitting the seller to rely not only on the credit of the buyer but also on that of the issuing bank. By its terms, the credit often reflects a conscious negotiation of risk allocation between customer and beneficiary and its utility rests heavily on strict adherence to the agreed terms and the doctrine of independent contract (see, J. White & R. Summers, Handbook on Uniform Commercial Code § 18-1, at 704-08 [2d ed]). It is this predictability of credit arrangements which permits not only the financing of sale of goods transactions between widely separated parties in different jurisdictions but also has permitted the development of a market in trade or bankers’ acceptances of time drafts. Once a draft payable in the future is accepted by a bank, it becomes known as a bankers’ acceptance, and such acceptances can be, and regularly are, sold in conjunction with letter of credit transactions to obtain financing prior to the date of maturity in a market sanctioned by the Federal Reserve Board (see, 12 USC § 372; PLI, Letters of Credit and Bankers’ Acceptances 231-34, 236). If the courts intervene to enjoin issuing banks from paying drafts they have previously accepted they seriously undermine this market and limit the use of acceptances as a financing tool.

IV

Our decision in United Bank v Cambridge Sporting Goods Corp. (41 NY2d 254, supra) does not compel a contrary conclusion. In United Bank, the presenters claimed to be holders in due course and asserted their right to payment under section 5-114 (2) (a). They did not rely on section 4-303 as a basis for relief and we expressly noted that the petitioning banks did not “dispute the validity of the prior injunction” and that we did not reach “the question of the availability and the propriety of this relief” (41 NY2d, at p 260).

Accordingly, the order of the Appellate Division should be affirmed, with costs.

Chief Judge Wachtler and Judges Jasen, Meyer, Kaye and Alexander concur.

Order affirmed, with costs.

      . Section 4-303 provides:

      . Section 5-114 (2) provides:
      “(2) Unless otherwise agreed when documents appear on their face to comply with the terms of a credit "but a required document does not in fact conform to the warranties made on negotiation or transfer of a document of title (Section 7-507) or of a certificated security (Section 8-306) or is forged or fraudulent or there is fraud in the transaction
      “(a) the issuer must honor the draft or demand for payment if honor is demanded by a negotiating bank or other holder of the draft or demand which has taken the draft or demand under the credit and under circumstances which would make it a holder in due course (Section 3-302) and in an appropriate case would make it a person to whom a document of title has been duly negotiated (Section 7-502) or a bona fide purchaser of a certificated security (Section 8-302); and

        “(b) in all other cases as against its customer, an issuer acting in good faith may honor the draft or demand for payment despite notification from the customer of fraud, forgery or other defect not apparent on the face of the documents but a court of appropriate jurisdiction may enjoin such honor” (emphasis added).

      . Article 4 of the Uniform Commercial Code governs bank deposits and collections and applies to this case because the issuer of the letter of credit was a bank. Letters of credit may be issued by parties other than banks, however, and article 4 of the Uniform Commercial Code and part III of this opinion would not apply to such persons.

      . Although the letter of credit at issue here was expressly made subject to the Uniform Customs and Practice which would therefore make article 5 inapplicable (see, Uniform Commercial Code § 5-102 [4]), we have previously indicated that “the Uniform Customs and Practice, where applicable, does not bar the relief provided for in section 5-114 of the code” (United Bank v Cambridge Sporting Goods Corp., 41 NY2d 254, 258, n 2).

      . A “confirming bank” engages that it will honor a letter of credit issued by another bank or that the letter of credit will be honored by the issuer (Uniform Commercial Code § 5-103 [1] [f]) and thus “becomes directly obligated on the credit to the extent of its confirmation as though it were its issuer and acquires the rights of an issuer” (Uniform Commercial Code.§ 5-107 [2]; see, Venizelos, S.A. v Chase Manhattan Bank, 425 F2d 461, 465 [2d Cir]).


source: Caselaw Access Project

author: Per Curiam.

license: Public Domain

text:
    In the Matter of James H. Reedy, a Justice of the Galway Town Court and Galway Village Court, Petitioner. State Commission on Judicial Conduct, Respondent.
    Argued February 11, 1985;
    decided February 21, 1985

      POINTS OF COUNSEL

      Morris D. Strauss and Thomas F. Scaringe for petitioner.
    I. The charge of judicial misconduct was not established by the State Commission on Judicial Conduct. (Matter of Cunningham, 57 NY2d 270.) II. As the State Commission on Judicial Conduct failed to establish, by a preponderance of the evidence, its allegations of judicial misconduct, the Commission’s formal written complaint should be dismissed. III. The Honorable James H. Reedy’s conduct does not warrant removal from office;. (Friedman v State of New York, 24 NY2d 528; Matter of Steinberg, 51 NY2d 74; Matter of Shilling, 51 NY2d 397; Matter of Dixon v State Commn. on Judicial Conduct, 47 NY2d 523.)

      Gerald Stern and Henry S. Stewart for respondent.
    I. Petitioner’s conduct violated established ethical standards, is properly subject to discipline and demonstrates lack of fitness for judicial office. (People v Byrne, 47 NY2d [b]; Matter of Dixon v State Commn. on Judicial Conduct, 47 NY2d 523; Matter of Bulgar v State Commn. on Judicial Conduct, 48 NY2d 32; Dowling v Hastings, 211 NY 199; Wylde v North R.R. Co., 53 NY 156; Matter of Randel, 158 NY 216; Marine Midland Bank v Russo Produce Co., 50 NY2d 31; Matter of Shilling, 51 NY2d 397; Matter of Quinn, 54 NY2d 386.)
   OPINION OF THE COURT

Per Curiam.

Upon review of the record pursuant to NY Constitution, article VI, § 22 and Judiciary Law § 44 the court concludes that the evidence presented before the Commission on Judicial Conduct sustains the misconduct charge found by the Commission against petitioner and that the determined sanction should be accepted.

Petitioner is a Town Justice of the Town of Galway and a Village Justice of the Village of Galway, County of Saratoga. On April 2,1982, his son and a friend of his son were both ticketed by a State trooper for speeding in the village. The tickets were returnable before petitioner and, his co-Judge being unavailable because of illness, petitioner decided correctly to transfer the matter to the Justice in the adjoining Town of Providence, Justice Norman Neahr.

Petitioner then called Judge Neahr, informed him that the persons involved were his son and his son’s friend, asked him to accept transfer of the cases and told him he would call back about the procedure for transfer. A few days later he again called Judge Neahr, advised him that Morris Strauss was the attorney representing both defendants, that an Assistant District Attorney had agreed to the reduction of the speeding charges to illegal parking provided Judge Neahr also agreed, asked whether Judge Neahr would agree and when he received an affirmative response asked what the sentence would be. Judge Neahr responded that the fine would be $25 for each defendant.

At petitioner’s request, Judge Neahr picked up the papers relating to the two cases at petitioner’s home. Opening the envelope he received within a few minutes after receipt, he found the uniform traffic tickets, the two simplified informations and $50 in cash. The tickets had been signed on the reverse side by the respective defendants, and on each information the reference to Vehicle and Traffic Law § 1180 (d) and to 50 miles per hour speed had been crossed out. In the “charge convicted of” space on the tickets appeared “1202-A1,” which refers to a parking violation. The State trooper testified that he did not make the changes in the information, that they were made without his consent and that when Judge Neahr advised him that the Judge had agreed to the reductions he said nothing. Neither defendant appeared before Judge Neahr, nor did an attorney on behalf of either.

Petitioner argues that it has not been proven that he falsely informed Judge Neahr that an Assistant District Attorney agreed to the reduction, inquired of Judge Neahr whether he objected to reduction of the charges or what the fine would be, sent $50 representing the fines to Judge Neahr, or altered the informations. Whether petitioner falsely informed Judge Neahr that the Assistant District Attorney had agreed to reduction of the charges was immaterial; petitioner’s intercession would constitute misconduct even if the statement were true. Moreover, Judge Neahr’s testimony when considered together with that of the State trooper establishes that the tickets and informations were received by petitioner from the trooper in one condition and when picked up by Judge Neahr from petitioner’s home were in a different condition, which the trooper never authorized or agreed to, and were accompanied by $50 in cash. Thus, while not all of the facts referred to by petitioner were established by direct evidence, the circumstantial proof leaves no doubt that petitioner engaged in the misconduct charged. The more particularly is this so in view of petitioner’s failure to testify concerning the charges or to present any evidence in relation to them (see, Matter of Randel, 158 NY 216; cf. Marine Midland Bank v Russo Produce Co., 50 NY2d 31, 42).

Petitioner also argues that the sanction of removal is excessive. Ticket-fixing is misconduct of such gravity as to warrant removal, even if this matter were petitioner’s only transgression. In fact, however, petitioner was censured by the Commission on Judicial Conduct in 1979 for repeated attempts to influence other Judges on behalf of defendants appearing before them.

Accordingly, the determined sanction of removal should be accepted, without costs.

Chief Judge Wachtler and Judges Jasen, Meyer, Simons, Kaye and Lynch concur in Per Curiam opinion; Judge Alexander taking no part.

Determined sanction accepted, without costs, and James H. Reedy is removed from the offices of Town Justice of the Town of Galway and Village Justice of the Village of Galway, Saratoga County.

       Designated pursuant to NY Constitution, article VI, § 2.


author: Jasen, J.

text:
    Seaboard Surety Company, Appellant, v The Gillette Company et al., Respondents.
    Argued November 20, 1984;
    decided December 27, 1984

      POINTS OF COUNSEL

      James F. Rittinger, Robert M. Callagy and Ronald R. Papa for appellant.
    I. Partial summary judgment on the issue of duty to defend is improper where its effect is to negate completely the exclusions of the libel policy. (Stelick v Gangl, 47 AD2d 789; Zandri Constr. Co. v Stanley H. Calkins, Inc., 81 AD2d 106, 54 NY2d 999; Schiff Assoc. v Flack, 51 NY2d 692; Utica Mut. Ins. Co. v Cherry, 38 NY2d 735; International Paper Co. v Continental Cas. Co., 35 NY2d 322; Goldberg v Lumber Mut. Cas. Ins. Co., 297 NY 148; United Waste Mfg. Co. v Maryland Cas. Co., 85 Misc 539,169 App Div 906; Sucrest Corp. v Fisher Governor Co., 83 Misc 2d 394, 56 AD2d 564; Atlantic Mut. Fire Ins. Co. v Cook, 619 F2d 553; County of Monroe v Travelers Ins. Co., 100 Misc 2d 417, 75 AD2d 1025.) II. The court below erred in affirming the order of severance of the issue of damages relating to the duty to defend. (Crossett v Natali, 60 Misc 2d 312; Metro Envelope Corp. v Westvaco, 72 AD2d 502; Huttick v Biograph Realty Corp., 37 AD2d 597; Clifford Realty v Dudrak, 72 AD2d 964; Kunstadt v Tietelbaum, 36 AD2d 744; A & R Constr. Co. v New York State Elec. & Gas Corp., 28 AD2d 1055.)

      John M. Friedman, Jr., and Joseph Zelmanovitz for respondents.
    I. The duty to defend exists whenever the complaint against the insured alleges a claim potentially within the coverage: extrinsic facts are irrelevant. (Goldberg v Lumber Mut. Cas. Ins. Co., 297 NY 148; Utica Mut. Ins. Co. v Cherry, 38 NY2d 735; Prashker v United States Guar. Co., 1 NY2d 584; Schwamb v Fireman’s Ins. Co., 41 NY2d 947; United States Fid. & Guar. Co. v Copfer, 63 AD2d 847, 48 NY2d 871; Michigan Millers Mut. Ins.

      Co. v Christopher, 66 AD2d 148.) II. Seaboard’s specific arguments on the exclusions are without merit. (Stern, Walter & Simmons v Seaboard Sur. Co., 308 F Supp 252; Cenven, Inc. v Bethlehem Steel Corp., 41 NY2d 842; Lamberti v Anaco Equip. Corp., 16 AD2d 121; Green Bus Lines v Consolidated Mut. Ins. Co., 74 AD2d 136, 52 NY2d 701; Sincoff v Liberty Mut. Fire Ins. Co., 11 NY2d 386.) III. The order of severance on the issue of the amount of defense costs recoverable for Seaboard’s breach of the duty to defend should be affirmed.
   OPINION OF THE COURT

Jasen, J.

The question presented on this appeal is whether the exclusions from liability coverage contained in the insurance policies at issue negate the insurer’s duty to defend.

This is an action brought by Seaboard Surety Company (Seaboard) for a declaratory judgment that it had no duty to defend or indemnify The Gillette Company (Gillette) or J. Walter Thompson Company (Thompson) under separate but similar insurance policies, each known as a “Libel, Slander, Copyright, Piracy, Plagiarism, and Privacy Liability Policy” (Libel Policy). Previously, Seaboard had refused to defend Gillette and Thompson in a suit brought against them by the Alberto-Culver Company (Alberto).

In 1974, a product manufactured by Gillette was advertised on national television in a commercial prepared by Thompson. The commercial compared a rival product manufactured by Alberto unfavorably to Gillette’s product in a demonstration depicting the supposed advantages of the latter. Alberto brought suit in Federal court in Chicago against both Gillette and Thompson, seeking damages and injunctive relief on the ground that its product had been wrongfully portrayed. Alberto’s complaint included claims of unfair competition, deceptive trade practices, consumer fraud and deceptive business practices, and common-law libel. Alberto alleged, inter alia, that the commercial “falsely implie[d]” deficiencies in its product, “falsely” and “unfairly disparage[d] [plaintiff’s] business”, its reputation “and its * * * products”, and featured Alberto’s trademark “without [plaintiff’s] authorization or consent”. The complaint specifically asserted violations of several Federal and State laws, including an Illinois statute prohibiting deceptive trade practices (defined as “disparaging] the goods, services or business of another by false or misleading representation of fact” [111 Rev Stat, 1973, ch 121/2, § 270, subd (a); §§ 311-313]), and another prohibiting the unauthorized use of brand names or trademarks (111 Rev Stat, 1973, ch 140, §§ 26, 28).

At the commencement of the Alberto action, Gillette and Thompson requested that Seaboard provide them with a defense under their separate insurance policies. Seaboard disclaimed all coverage under the policies and declined. Repeated requests throughout the course of the action met with continued refusal. Finally, in 1979, the Alberto action was settled by Gillette and Thompson and they demanded that Seaboard pay their settlement as well as defense costs. Again Seaboard refused.

Shortly thereafter, Seaboard commenced this action for a declaration that it properly refused to defend Gillette and Thompson in the Alberto action, and that it has no duty to indemnify them for any part of the settlement in that action or for any costs or legal expenses they incurred. Gillette and Thompson counterclaimed for reimbursement of their defense costs and for the amount of the settlement. The action against Gillette was dismissed by Special Term by reason of the pendency of a similar action instituted by Gillette in Massachusetts. In the action against Thompson, Special Term granted that party’s motion for partial summary judgment, holding that Seaboard had a duty to defend Thompson in the Alberto action, despite the possible limitations on Seaboard’s duty to indemnify. The Appellate Division affirmed, without an opinion.

In the interim, the Appellate Division reversed Special Term’s prior dismissal of Seaboard’s action as against Gillette. Then, in a motion identical to Thompson’s, Gillette sought partial summary judgment on Seaboard’s duty to defend, and both Gillette and Thompson sought summary judgment awarding them actual defense costs incurred in the Alberto action or an immediate trial to determine the amount of damages. Special Term granted Gillette’s motion on Seaboard’s duty to defend and granted the joint motion by ordering a severance and trial on the defense cost claims.

The Appellate Division affirmed, again without opinion, and subsequently granted Seaboard’s motion for leave to appeal to this court certifying the following question: “Was the order of the Supreme Court, as affirmed by this Court, properly made?” We now affirm and answer the certified question in the affirmative for the following reasons.

The insurance policies issued by Seaboard to Gillette and Thompson, in effect at all relevant times, are virtually identical. They each contain sections which outline with some specificity what is covered and what is excluded from coverage. Under the heading “insuring agreements”, each policy contains the following pertinent provisions describing the scope of coverage:

“Indemnity 1. To pay on behalf of the Insured all sums which the Insured shall become obligated to pay by reason of the liability imposed upon him by law, or assumed by him under contract as defined herein, as the result of any final judgment for money damages resulting from

“(a) libel, slander, defamation or
“(b) any infringement of copyright or of property rights or title or of slogan or
“(c) piracy, plagiarism or unfair competition or idea misappropriation under implied contract or
“(d) any invasion of rights of privacy committed or alleged to have been committed in any advertisement, publicity article, broadcast or telecast and arising out of the Insured’s advertising activities.
“Service 2. To defend, in the name and on behalf of the Insured, any suit seeking damages for any of the above causes, even if such suit is groundless, false or fraudulent.”
Under the heading “this agreement is subject to the following conditions”, each policy contains a list of what is not included in its coverage. As modified by certain endorsements, these sections provide in pertinent part:
“Exclusions A. This Policy does not cover any liability for:
* * * ■
“4. Incorrect description of any article or commodity, or any claim or suit based upon or arising out of alleged false, misleading, deceptive, fraudulent or misrepresenting advertising or to any claim or suit for unfair competition based thereon.
* * *
“8. Any claim, suit or action brought against the Insured because of an act committed by that Insured with knowledge the same constituted any of the hazards insured by this policy. ’

While Seaboard concedes that the allegations in the Alberto complaint fall within the scope of the inclusory sections of each policy entitled “insuring agreements”, it, nevertheless, contends that the exclusory provisions upon which the agreements are explicitly conditioned negate coverage for the Alberto acti on and, thereby, freed it from any duty to defend Gillette and Thompson therein. Under the rules governing an insurer’s duty to defend and the effect to be given exclusory provisions in a policy, Seaboard’s contentions must fail and the policies in question must be construed to provide Gillette and Thompson with coverage for defending against the Alberto action.

Where an insurance policy includes the insurer’s promise to defend the insured against specified claims as well as to indemnify for actual liability, the insurer’s duty to furnish a defense is broader than its obligation to indemnify. (International Paper Co. v Continental Cas. Co., 35 NY2d 322, 326; Lionel Freedman, Inc. v Glens Falls Ins. Co., 27 NY2d 364, 368.) The duty to defend arises whenever the allegations in a complaint against the insured fall within the scope of the risks undertaken by the insurer, regardless of how false or groundless those allegations might be. (Goldberg v Lumber Mut. Cas. Ins. Co., 297 NY 148, 154.) The duty is not contingent on the insurer’s ultimate duty to indemnify should the insured be found liable, nor is it material that the complaint against the insured asserts additional claims which fall outside the policy’s general coverage or within its exclusory provisions. Rather, the duty of the insurer to defend the insured rests solely on whether the complaint alleges any facts or grounds which bring the action within the protection purchased. (Ruder & Finn v Seaboard Sur. Co., 52 NY 2d 663, 669-670; Schwamb v Fireman’s Ins. Co., 41 NY2d 947, 949; Utica Mut. Ins. Co. v Cherry, 38 NY2d 735, 737; Prashker v United States Guar. Co., 1 NY2d 584, 590, 592.) Though policy coverage is often denominated as “liability insurance”, where the insurer has made promises to defend “it is clear that [the coverage] is, in fact, ‘litigation insurance’ as well.” (International Paper Co. v Continental Cas. Co., supra, at p 326.) As such, “[s]o long as the claims [asserted against the insured] may rationally be said to fall within policy coverage, whatever may later prove to be the limits of the insurer’s responsibility to pay, there is no doubt that it is obligated to defend.” (Schwamb v Fireman’s Ins. Co., supra, at p 949.)

Moreover, whenever an insurer wishes to exclude certain coverage from its policy obligations, it must do so “in clear and unmistakable” language. (Kratzenstein v Western Assur. Co., 116 NY 54, 59; see, also, Hartol Prods. Corp. u Prudential Ins. Co., 290 NY 44, 49-50.) Any such exclusions or exceptions from policy coverage must be specific and clear in order to be enforced. They are not to be extended by interpretation or implication, but are to be accorded a strict and narrow construction. (Taylor v United States Cas. Co., 269 NY 360, 363; Griffey v New York Cent. Ins. Co., 100 NY 417, 421; Rann v Home Ins. Co., 59 NY 387, 389; see, also, Wagman v American Fid. & Cas. Co., 304 NY 490.) Indeed, before an insurance company is permitted to avoid policy coverage, it must satisfy the burden which it bears of establishing that the exclusions or exemptions apply in the particular case (Neuwirth v Blue Cross & Blue Shield, 62 NY2d 718; Prashker v United States Guar. Co., 1 NY2d 584, 592, supra; Slocovich v Orient Mut. Ins. Co., 108 NY 56, 66), and that they are subject to no other reasonable interpretation (cf. International Paper Co. v Continental Cas. Co., supra, at p 325; Hoffman v Aetna Fire Ins. Co., 32 NY 405, 413-415).

Here, it cannot be said that the provisions of the insurance policies clearly negated Seaboard’s duty to defend against every allegation asserted in Alberto’s complaint. Some of the claims against Gillette and Thompson fall within the general inclusory provisions of the policies and are not unambiguously excepted from coverage by the exclusions. The inclusory provisions contained in the sections titled “insuring agreements” explicitly predicate the duty to defend on the commencement against the insureds of “any suit seeking damages for any of the above causes”. (Emphasis added.) Consistent with the case law, these provisions triggered Seaboard’s duty to defend as soon as Alberto brought an action alleging, as it did, such misconduct as disparagement of Alberto and its products, unauthorized use of Alberto’s brand name or trademark, unfair competition, and common-law libel — all of which fairly fall within the scope of the various torts listed in the inclusory provisions of the policies. The veracity of the allegations and the ultimate liability of Gillette and Thompson, as well as the ultimate obligation of Seaboard “to pay by reason of liability”, under its duty to indemnify, are irrelevant to its duty to defend.

Nor do the particular exclusory provisions relied upon by Seaboard negate its duty to defend under the facts in this case. If Seaboard is to be “relieved of [its] duty to defend it is obligated, to demonstrate that the allegations of the complaint cast that pleading solely and entirely within the policy exclusions, and, further, that the allegations, in toto, are subject to no other interpretation.” (International Paper Co. v Continental Cas. Co., supra, at p 325 [emphasis added].) But Alberto’s complaint against Gillette and Thompson did include allegations whi ch were not explicitly listed in the exclusions. Alberto’s claims of product disparagement and misuse of trademark in violation of Illinois’s consumer fraud and deceptive trade practices laws — which are not disputed by Seaboard to fall within the scope of the policy’s general inclusions — cannot be said “solely and entirely” to fall within either of the exclusory provisions relied upon by Seaboard. Neither of these claims is contingent upon an “[i]ncorrect description” of the insured’s own product and neither of these claims is exclusively predicated upon allegations of knowing, willful or intentional conduct on the part of Gillette or Thompson. Rather, as they are stated in Alberto’s complaint, these claims allege facts and grounds which brought the lawsuit within the coverage of the policies and which Seaboard has failed to demonstrate fall necessarily within the policies’ exclusions.

In sum, appellant insurer has not established on this motion for summary judgment that as a matter of law it has no duty to defend. “A declaration that there is no obligation to defend cou ld now properly be made only if it could be concluded as a matter of law that there is no possible factual or legal basis on which [the insurer] might eventually be held to be obligated to indemnify [the insured] under any provision of the insurance policy” (Spoor-Lasher Co. v Aetna Cas. & Sur. Co., 39 NY2d 875, 876).

We have considered appellant’s other contentions and find them to be without merit.

Accordingly, the order of the Appellate Division should be affirmed, and the certified question answered in the affirmative.

Chief Judge Cooke and Judges Jones, Wachtler, Meyer, Simons and Kaye concur.

Order affirmed, etc.

      . Subsequently, the Appellate Division denied Seaboard’s motion for reargument or for leave to appeal to this court. Thereafter, this court dismissed Seaboard’s motion for leave to appeal by reason of nonfinality of the Appellate Division’s order.

      . When Gillette moved for partial summary judgment, Seaboard cross-moved for a stay pending the outcome of its appeal on Thompson’s motion. Special Term granted the stay and did not consider the instant motions — i.e., Gillette’s motion and its joint motion with Thompson — until the Appella te Division affirmed the partial summary judgment granted in Thompson’s favor.

      . This clause in Thompson’s policy concluded with “arising out of the Insured’s business of Advertising Agents.”

      . This exclusion, as stated, is set forth in an endorsement to exclusion No. 4 in the Gillette policy and to exclusion No. 5 in the Thompson policy.

      . This exclusion appears as No. 9 in the Thompson policy.

      . The parties agree that this is the meaning of the “Incorrect description” exclusion.


author: Chief Judge Cooke.

text:
    5303 Realty Corp., Respondent, v O & Y Equity Corp. et al., Appellants.
    Argued November 12, 1984;
    decided December 27, 1984

      POINTS OF COUNSEL

      Julius Berman, Stanley H. Fuld, Paul J. Curran, Aaron Rubinstein and Steven E. Shapiro for appellants.
    I. Both settled decisional law and clear statutory language (CPLR 6501) require cancellation of the notice of pendency. (Deerfield Bldg. Corp. v Yorkstate Inds., 77 Misc 2d 302; Braunston v Anchorage

      Woods, 10 NY2d 302; Israelson v Bradley, 308 NY 511; Chambi v Navarro, Vives & Cia, 95 AD2d 667; Whittemore v De Pasquale, 8 AD2d 793; Mageloff v Sarkin, 52 Misc 2d 737;Arcaro v Arcaro, 20 Misc 2d 489; General Prop. Corp. v Diamond, 29 AD2d 173; Rosen v Rosen, 126 Misc 37; Paine & Chriscott v Blair House Assoc., 70 AD2d 571.) II. Plaintiff’s complaint on its face cannot support the remedy of specific performance and, absent a basis for specific performance, there can be no notice of pendency. (Siegel v Silverstone, 250 App Div 784;Brox vRiker, 56 App Div 388; Rosenberg v Ritter, 34 Misc 2d 1099; Tavolacci v Valentine Enterprises, 34 Misc 2d 775; Richards v Chuba, 195 Misc 732; Ratner v Tavern-on-the-Green, 11 Misc 2d 564.) III. Defendants should be awarded costs and expenses, including the cost of the application to vacate the notice.

      George Weisz and Deborah M. Buell for respondent.
    I. Because plaintiff’s action seeks specific performance of a sales contract affecting title, possession, use or enjoyment of real property, the notice of pendency is proper under CPLR 6501. (17th Ave. & 73rd St. Corp. v Ocean Operating Corp., 215 App Div 106; Matter of Elna Constr. Co. v Flynn, 39 Misc 2d 254; Siegel v Silverstone, 250 App Div 784; Port Chester Elec. Constr. Corp. v Atlas, 40 NY2d 652; African Metals Corp. v Bulloa, 288 NY 78; Lowendahl v Baltimore & Ohio R.R. Co., 247 App Div 144, 272 NY 360; Matter of Castle Hill Beach Club v Arbury, 208 Misc 35, 1 AD2d 943, 2 NY2d 596; Matter of Stirling Homex Corp., 591 F2d 148; International Controls Corp. v Vesco, 490 F2d 1334; Eaton v Laurel Delicatessen Corp., 5 AD2d 590.) II. Because plaintiff’s complaint and amended complaint seek specific performance of a contract of sale, the notice of pendency is proper and should not be canceled. (Siegel v Silverstone, 250 App Div 784;Brox v Riker, 56 App Div 388; Lusker v Tannen, 90 AD2d 118; Twaite v Buckhorn Estates, 84 AD2d 632.) III. Defendants are not entitled to an award of any costs or expenses in connection with their motion, this appeal or this action. (Patrician Plastic Corp. v Bernadel Realty Corp., 25 NY2d 599; Lusker v Tannen, 90 AD2d 118; Ryan v La Rosa, 22 Misc 2d 125.)
   OPINION OF THE COURT

Chief Judge Cooke.

A notice of pendency, commonly known as a “lis pendens,” can be a potent shield to protect litigants claiming an interest in real property. The powerful impact that this device has on the alienability of property, when conjoined with the facility with which it may be obtained, calls for its narrow application to only those lawsuits directly affecting title to, or the possession, use or enjoyment of, real property. Consequently, a suit to specifically perform a contract for the sale of stock representing a beneficial ownership of real estate will not support the filing of a notice of pendency.

I

This action arises out of plaintiff’s unsuccessful attempt to purchase an office building and its land in Manhattan. The fee owner of this property was a limited partnership, defendant, 41 Fifth Ave. Associates (“Associates”). Defendants Fruchthandler Brothers Enterprises and Edward J. Minskoff were the limited partners in Associates, owning a 3% interest between them. The remaining 97% was owned by the general partner, defendant 41 Fifth Ave. Realty Corp. (“Realty Corporation”), which, in turn, was wholly owned by defendant O & Y Equity Corp.

After extended negotiations, plaintiff and O & Y Equity reached an agreement to convey the property. Rather than an outright transfer of the title by deed, the transaction was constructed in terms of a sale of stock. This was allegedly done at defendants’ request in order to avoid the Nevz York City Real Property Transfer Tax. The contract provided that O & Y Equity would sell its shares in Realty Corporation and would cause the limited partners in Associates to convey their interests as well. The limited partners also signed this contract, agreeing to perform all acts required of them to consummate the transaction.

The contract was a lengthy document running over 40 pages, not including a number of extensive schedules. It expressly specified that Realty Corporation’s sole business was owning the general partnership in Associates and that Associates’ sole business was owning and operating the office building that plaintiff wished to acquire. The sale of the stock and title to the property were linked throughout the contract, which provided for title warranties and insurance, real estate tax protests, cancellation or adjustment upon taking by condemnation, and representations as to the stattis of the rents and leases in the building. Article 10 of the contract governed how the building would be operated pending closing. Paragraph 10.03 restricted Associates’ power to execute new leases and required O & Y Equity to have an experienced person “expend a reasonable amount of time (i.e., an average of approximately 10 hours per regular work week)” to renew leases or obtain new tenants.

The closing never took place, and plaintiff’s $500,000 deposit was paid to defendants out of the escrow account. Plaintiff commenced this suit, alleging that defendants had failed to carry out their obligations under paragraph 10.03, which would cause irreparable injury to plaintiff and make it impossible to close title pursuant to the contract. The complaint further alleged that defendants refused to perform their other obligations. In its prayer for relief, plaintiff requested that defendants be ordered “to specifically perform the Contract specifically to comply with paragraphs 10.03(b) and 10.03(c) thereof and within a reasonable time thereafter, which time is to be set out by the Court to deliver title to the Property to plaintiff or its assignee;” plaintiff also sought an alternative remedy of money damages in the amount of $4,500,000, as well as judgment for $500,000 against defendant Bachner, Tally & Mantell.

Plaintiff filed the complaint and immediately filed a notice of pendency against the property owned by Associates. The notice described the underlying action as one to enforce a contract to sell the fee ownership in the property and to deliver its possession. Defendants moved to cancel the notice. While the motion was pending, plaintiff filed an amended complaint that added allegations of fraudulent conduct by defendants. Supreme Court denied the motion, without considering the effect of the amended complaint, on the ground that the original complaint was sufficient to sustain the notice of pendency. The Appellate Division, First Department, affirmed, with two Justices dissenting.

II

The question presented on this appeal concerns the right to obtain a provisional remedy authorized by the Legislature. Specifically, we are asked to decide whether an action to enforce a contract to sell the ownership interest in a realty-owning entity may be accompanied by a notice of pendency pursuant to CPLR 6501. Because the terms of the statute and its history do not support plaintiff’s claimed right to this provisional remedy, this court must reverse the decisions below and order that plaintiff’s notice of pendency be canceled.

A

The authority and requirements for securing a valid notice of pendency against real estate are set forth in CPLR article 65. CPLR 6501 provides: “A notice of pendency may be filed in any action in a court of the state or of the United States in which the judgment demanded would affect the title to, or the possession, use or enjoyment of, real property.” Once properly indexed, the notice acts as constructive notice to all subsequent purchasers or incumbrancers: “A person whose conveyance or incumbrance is recorded after the filing of the notice is bound by all proceedings taken in the action after such filing to the same extent as if he were a party” (CPLR 6501). It is this special consequence, resulting as a matter of law from the filing of the statutory notice of pendency which is the essence of the remedy afforded by the Legislature.

This, of course, is not a recent innovation. CPLR 6501 cam trace its lineage directly back to the Code of Procedure enacted in 1848 (see L 1848, ch 379, § 111). A still earlier law required a notice of pendency in mortgage foreclosures (see L 1840, ch 342, §§ 8, 9, as amd by L 1844, ch 346, §§ 4, 5). These statutes, however, merely evolved from the common-law doctrine of lis pendens.

The doctrine of lis pendens is long livéd. It was first formal ly recognized in New York by Chancellor Kent in 1815 (Murray v Ballou, 1 Johns Ch 566; see 2 Reeves, Real Property, § 750, p 1045). It can be traced at least to rule 12 of Lord Chancellor Bacon’s Ordinances for the Government of the Court of Chancery, adopted in 1618 (see Murray v Blatchford, 1 Wend 583, 594; Bennett, Lis Pendens, pp 57, 437). The doctrine was applied in actions concerning real property before Lord Bacon prescribed its use in chancery (see Bennett, op. cit., at pp 59, 96), and one commentator ascribed the rule’s remote derivation to Roman Law (see id., § 9, pp 62-63).

The rule itself provided substantially the same protection as the modern statute. The doctrine of lis pendens — the pendency of a suit — “was, of itself, notice to the purchaser * * * It is no more than an adoption of the rule in a real action at common law, where, if the defendant aliens after the pendency of the writ, the judgment in the real action will overreach such alienation” (Murray v Ballou, supra, at p 577; see Leitch v Wells, 48 Barb 637, 649, revd 48 NY 585; Murray v Blatchford, 1 Wend 583, 618, supra; Aron, NY Real Property Law, p 204; 2 Reeves, op. cit., at pp 1044-1045; Note, Application of Lis Pendens to Personalty, 47 Harv L Rev 1023,1024-1025). For the purposes of lis pendens, a suit was not begun until the summons was served and the complaint filed (see Leitch v Wells, 48 NY 585, 609-610, revg 48 Barb 637, supra; Murray v Blatchford, supra, at p 618; Murray v Ballou, supra, at p 576).

The purpose of the doctrine was to assure that a court retained its ability to effect justice by preserving its power over the property, regardless of whether a purchaser had any notice of the pending suit. Courts and commentators acknowledged the doctrine’s potentially harsh impact on innocent purchasers, but they willingly accepted this as a necessary concomitant to preserving the judicial power (see Leitch v Wells, supra, at pp 608-609; Murray v Ballou, supra, at pp 576-577; Bennett, op. cit., §§ 12, 14; 5 Tiffany, Real Property [3d ed], § 1294, p 82). Some justification for the doctrine’s rugged application was found by reference to the rule of caveat emptor (see Murray v Ballou, supra, at p 577; Bennett, op. cit., § 21, p 82). The statutes diminished this effect by requiring that a notice of pendency be filed in a central registry.

B

Determining the substantive scope of the notice of pendency, as embodied in CPLR 6501, cannot be divorced from consideration of the relative procedural ease with which it can be imposed throughout the duration of a lawsuit. Basically, a plaintiff can cloud a defendant’s title merely by serving a summons and filing a proper complaint and notice of pendency stating the names of the parties, the object of the action, and a description of the property (CPLR 6511, subds [a], [b]; see Israelson v Bradley, 308 NY 511). Indeed, the notice of pendency may even precede the service of summons (CPLR 6511, subd [a]; 6512). The notice is valid for three years and it may be extended by court order (CPLR 6513).

Critically, the statutory scheme permits a party to effectively retard the alienability of real property without any prior judicial review. To the extent that a motion to cancel the notice of pendency is available (CPLR 6514), the court’s scope of review is circumscribed. One of the important factors in this regard is that the likelihood of success on the merits is irrelevant to determining the validity of the notice of pendency (see Interboro Operating Corp. v Commonwealth Security & Mtge. Corp., 269 NY 56; Keating v Hammerstein, 196 App Div 18, 21; Small Realty Co. v Strauss, 162 App Div 658; Brox v Riker, 56 App Div 388, 391).

Usually, there is little a court may do to provide relief to the property owner. If the procedures prescribed in article 65 have not been followed or if the action has not been commenced or prosecuted in good faith, the notice must be canceled in the first instance and it may be in the second (see Israelson v Bradley, supra; CPLR 6514, subds [a], [b]). If the notice of pendency is valid, the court may, in its discretion, cancel the notice, but the moving party will generally have to post an undertaking (CPLR 6515).

To counterbalance the ease with which a party may hinder another’s right to transfer property, this court has required strict compliance with the statutory procedural requirements (see Israelson v Bradley, 308 NY 511, supra). “This is an extraordinary privilege * * * If the terms imposed are not met, the privilege is at an end. Such has been the law of our State, as declared in cases over the years, which did not, however, reach this court.” (Id., at p 516 [citations omitted].)

In entertaining a motion to cancel, the court essentially is limited to reviewing the pleading to ascertain whether the action falls within the scope of CPLR 6501 (see Interboro Operating Corp. v Commonwealth Security & Mtge. Corp., supra; Keating v Hammerstein, supra; Jones v Armenia Ins. Co., 136 App Div 453; Brox v Riker, supra; Kunz v Bachman, 61 How Prac 519). In conjunction with this concept, the complaint filed with the notice of pendency must be adequate unto itself; a subsequent, amended complaint cannot be used to justify an earlier notice of pendency (see Van Tuyl v New York Real Estate Security Co., 153 App Div 409, affd no opn sub nom. Carnegie Trust Co. v New York Real Estate Security Co., 207 NY 691; Brox v Riker, supra). This derives from the ancient concern that would-be purchasers obtain adequate notice of the risk to the property’s title.

The same considerations that require strict compliance with the procedural prerequisites also mandate a narrow interpretation in reviewing whether an action is one affecting “the title to, or the possession, use or enjoyment of, real property” (CPLR 6501). Thus, a court is not to investigate the underlying transaction in determining whether a complaint comes within the scope of CPLR 6501. Instead, in accordance with historical practice, the court’s analysis is to be limited to the pleading’s face.

C

The courts have willingly given effect to the statute’s broad coverage of actions concerning land. Importantly, however, they have restricted its application by requiring that the relief requested be directly related to the statutory terms (see Aron, NY Real Property Law, p 205). Thus, attempts to impose a lis pendens against personal property in suits entirely unrelated to real property have been defeated (see Holbrook v New Jersey Zinc Co., 57 NY 616; Leitch v Wells, 48 NY 585, 612-613, supra [Earl, C.]; American Press Assn. v Brantingham, 75 App Div 435, 437-438; but cf. Bennett, op. cit., § 83; Note, 47 Harv L Rev 1023).

The courts have been frequently confronted by attempts to file a notice of pendency in controversies that more or less referred to real property, but which did not necessarily seek to directly affect title to or possession of the land. In the absence of this direct relationship, the remedy was denied. For example, an action brought under a will for an accounting and for a determination of rights to and sale of real property supported filing a notice of pendency (Kunz v Bachman, 61 How Prac 519, supra). In contrast, a trespass action seeking money damages only did not justify a notice of pendency as the judgment would not affect title to or possession of the realty (Hailey v Ano, 136 NY 569, 575). Other decisions carry out this differentiation (compare Keating v Hammerstein, 196 App Div 18, supra [accounting for rents and impression of trust on realty; notice of pendency allowed]; and Small Realty Co. v Strauss, 162 App Div 658, supra [specific performance of contract to erect specified buildings; notice of pendency allowed], with Jones v Armenia Ins. Co., 136 App Div 453, supra [request for substitution of parties on bond and mortgage, with request for receiver being incidental relief only; no notice allowed]; and Behrens v Sturges, 121 App Div 746 [broker’s suit for compensation based on increases in properties’ value sought money damages only; no notice allowed]; and Clark v Mclnnis Realty Co., 65 Misc 307 [purchaser at foreclosure sale not a proper party in suit over ownership of mortgage that did not involve controversy over title to property; no notice allowed]; see, also, 5 Tiffany, op. cit., § 1295; 7A Weinstein-Korn-Miller, NY Civ Prac, par 6501.05).

Two other cases demonstrate the niceties of the distinction involved in applying the doctrine. In Moeller v Wolkenberg (67 App Div 487), the plaintiff sought an injunction to have defendant remove a portion of his building that was encroaching on plaintiff’s property and to restrict defendant’s further construction that would weaken plaintiff’s building. A notice of pendency was deemed proper because the action would limit defen - dant’s use of the property. But a notice of pendency was held inappropriate in another encroachment action when the only relief sought was removal of the offending portions of defendant’s building (McManus v Weinstein, 108 App Div 301). McManus distinguished Moeller on the ground that, in McManus, no restriction on the defendant’s use of his property was involved (id., at pp 302-303).

This court has affirmed this strict approach. In Braunston v Anchorage Woods (10 NY2d 302), plaintiffs brought an action for nuisance for the dumping of surface water on their property. This court held that a notice of pendency was inappropriate in such a suit, which was to recover for a tort rather than to determine a claim of title to property (id., at p 305). “The usual object of filing a notice of lis pendens is to protect some right , title or interest claimed by a plaintiff in the lands of a defendant which might be lost under the recording acts in event of a transfer of the subject property by the defendant to a purchaser for value and without notice of the claim. This is not that kind of situation.” (Id., at p 305.)

Ill

The “direct relationship” requirement has received its fines t application when the action concerns the transfer of a chose in action or other personal property which represents the beneficial ownership of realty. This has most commonly arisen in situations, such as the present, when the transaction was for the sale of stock in a corporation whose sole or primary asset was real estate. Lower courts have placed such suits outside the scope of CPLR 6501 and declined to permit a notice of pendency in those cases (see Chambi v Navarro, Vives & Cia, 95 AD2d 667; Whittemore v De Pasquale, 8 AD2d 793, affg 15 Misc 2d 648; Mageloff v Sarkin, 52 Misc 2d 737; Arcaro v Arcaro, 20 Misc 2d 489; see, also, Rosen v Rosen, 126 Misc 37 [interest in real estate investment partnership]; cf. Note, Partnership — Lis Pendens, 26 Col L Rev 488). We agree.

As has been shown, the notice of pendency is derived from the lis pendens. The common-law rule’s potentially harsh effect against innocent purchasers has been alleviated by the statutory filing requirements. Its impact on alienability has also been diminished by authorizing the court to require an undertaking to be posted by the party who files the notice of pendency (CPLR 6515). Nevertheless, many of the concerns over the effect of the lis pendens still exist. Consequently, in interpreting the statute, the courts have continued to apply the same, narrow analysis as was invoked at common law. Thus the drastic impact of the notice of pendency authorized by CPLR 6501 requires a strict application of that statute.

In the present action, plaintiff cannot have the advantage of a notice of pendency. Although the prayer for relief seeks a transfer of title, the court must examine the complaint in its entirety. It is apparent from the allegations that the true action is to enforce a contract to sell stock. It is well settled that the property interests of a shareholder and the corporation are distinct. “[T]he corporation in respect of corporate property and rights is entirely distinct from the stockholders who are the ultimate or equitable owners of its assets * * * even complete ownership of capital stock does not operate to transfer the title to corporate property and * * * ownership of capital stock is by no means identical with or equivalent to ownership of corporate property.” (Brock v Poor, 216 NY 387, 401.) To allow plaintiff here to have its notice of pendency would run counter to the Brock rule and muddle an otherwise clear concept. Consequently, the notice must be canceled.

Moreover, it is simply improper to use a notice of pendency as a form of attachment (see Brox v Riker, 56 App Div 388, 390, supra). But this does not necessarily leave plaintiff, and others similarly situated, with no protective devices whatsoever. The property’s conveyance may be blocked by, for example, attachment or injunction. In this way, a party may guard against conduct that will defeat the purpose of a lawsuit, but a court will have an opportunity to review the interference with alienability before it begins to operate.

Other considerations militate against permitting a notice of pendency when the actual subject of the conveyance is stock. It might be easy to justify the notice in the present case where i;he parties are transferring all of the ownership interest in an entity whose sole business is owning and operating a single office building, but the rule would be far more difficult to apply in other situations. For example, how great an interest must be purchased before a notice of pendency would be permitted? Would 90, 75, or more than 50% be required? Would enough to obtain effective control of the corporation be a sufficiently large interest? Or would any amount, even less than 5%, be adequate? Furthermore, what is to be done if the corporate business is diversified so that its realty ownership is only one facet of its operations? Indeed, the corporate real estate may be only incidental to its primary business (e.g., a manufacturer which owns its factory). To allow a would-be purchaser of stock, particularly of a minority interest, to tie up the corporate real estate merely by filing a complaint and a notice of pendency would be unreasonable.* ******

There is another reason for denying a notice of pendency in cases such as the present. One of this court’s paramount goalsi is to formulate equitable, stable rules by which individuals can reliably order their affairs. The complexity of society requires that exceptions be engrafted to the rules in order to maintain their equity. Exceptions, however, must be reluctantly drawn, lest they proliferate and render the rule meaningless. There is no compelling reason to create an exception to the traditional distinction set forth in Brock and, thereby, raise the possibility of future confusion.

IV

Accordingly, the order of the Appellate Division should be reversed, with costs, and defendants’ motion to cancel the notice of pendency should be granted. The question certified is answered in the negative.

Jasen, J. (dissenting). I respectfully dissent for the reasons stated in the memorandum opinion of the majority at the Appellate Division (98 AD2d 632).

I would only add that, pursuant to CPLR 6501, “[a] notice of pendency may be filed in any action in a court of the state or of the United States in which the judgment demanded would affect the title to, or the possession, use or enjoyment of, real property.” It is not disputed that the judgment demanded — specific performance of a contract to compel defendant to transfer full beneficial ownership of 475 Fifth Avenue — would inescapably affect the title to, and the possession, use and enjoyment of a specific parcel of real property. The essence of the instant transaction does not concern recovery of legal tender, securities, or articles of ordinary commerce, but, rather, the conveyance of real property. In recognition of the hybridization of modern applications of corporate law and traditional protections accorded to realty transfers, courts have sought to render such potentially divergent approaches complementary, rather than mutually exclusive. (See, e.g., Grossfeld v Beck, 42 AD2d 844 [a lis pendens was held applicable in a shareholder’s derivative action to impress a constructive trust on certain real property].) Under the plain language of the statute, the instant action for specific performance of what is essentially a contract for the transfer of real property should be subject to the lis pendens.

The view of the majority, that a lis pendens is inapplicable to a sale of stock representing an interest in real property, constitutes an unwarranted elevation of form over substance, with broad ramifications for the transfer of realty in this State. In an analogous context, the United States Supreme Court has held that the name or label given to a transaction is not dispositive, but, rather, “‘form should be disregarded for substance and emphasis should be on economic reality.’ ” (United Housing Foundation v Forman, 421 US 837, 848, reh den 423 US 844, citing Tcherepnin v Knight, 389 US 332, 336 [emphasis added].)

By failing to take cognizance of the economic realities involved in this commercial transaction, the majority’s view may serve to render inapplicable other devices designed to limit purchaser risks. Inasmuch as the sale of stock representing realty is not a transaction involving real property under the majority’s rationale, nor is a sale of shares of stock representing realty considered a transfer of a chattel real (Matter of State Tax Comm. v Shor, 43 NY2d 151, 156), there exists substantial doubt as to whether title insurance companies are empowered to issue title insurance against loss by reason of defective title or encumbrances, upon the transfer of realty by means of a sale of stock. (Insurance Law, § 46, subd 18; § 432, subd 2.) There is also question, under the reasoning of the majority, as to whether the transfer of realty by means of a stock transfer would be subject to the protections of the Recording Act. (Real Property Law, § 290; see Note, Legal Characterization of the Individual’s Interest in a Cooperative Apartment: Realty or Personalty?, 73 Col L Rev 250, 268-270.) If the transfer of stock intimately intertwined with realty is not to be treated as a real properly transfer, nor to be treated as a sale of securities (United Housing Foundation v Forman, supra), the transaction may technically fall outside the scope of the Statute of Frauds (General Obligations Law, § 5-703; Uniform Commercial Code, § 8-319). While the weight of lower court authority suggests that a contract for the purchase of shares of stock representing realty is to be considered a contract for the transfer of real property and, thus, subject to the Statute of Frauds (see, e.g., Pollard v Meyer, 61 AD2d 766; Rosner v 80 CPW Apts. Corp., 73 AD2d 39; Anton Sattler, Inc. v Cummings, 103 Misc 2d 4; Sebel v Williams, 88 Misc 2d 411), the majority’s position, that traditional protections associated with the transfer of realty are inapplicable to the transfer of realty effected by stock transfer, creates uncertainty in this regard.

Accordingly, I would affirm the order of the Appellate Division denying defendant’s motion to vacate the lis pendens.

Judges Jones, Wachtler, Meyer, Simons and Kaye concur with Chief Judge Cooke; Judge Jasen dissents and votes to affirm in a separate opinion.

Order reversed, etc.

      . The remaining defendant, Bachner, Tally & Mantell, was defendants’ counsel who acted as escrow agent and is claimed to have improperly disbursed escrow funds to the other defendants. Unless otherwise specified, the term “defendants” in this opinion will not include Bachner, Tally & Mantell.

      . As the reader will have noted, the statutes refer to a “notice of pendency,” in contrast to the term “lis pendens” used at common law. This distinction will be employed throughout this opinion.

      . Notwithstanding the sometimes vehement disavowal of any reliance on the law of notice to explain the rule (see Bennett, Lis Pendens, § 17; 5 Tiffany, Real Property [3d ed], § 1294, p 82; see, also, Leitch v Wells, 48 NY 585; Murray v Ballou, 1 Johns Ch 566), a careful review of the decisions reveals a concern that purchasers and incumbrancers should have some opportunity to ascertain whether the transferor had clear title or use of the property at issue. The doctrine presumed that the careful grantee could examine the local court records and thereby learn of the pending suit upon reading the filed complaint, which contained a description adequate to identify the property. This solicitude for the innocent purchaser was unnecessary to protect a court’s power to execute its judgments. In formulating this equitable doctrine, the courts clearly were seeking to strike some balance between the interests of the plaintiff, the court, and the transferee (see Murray v Blatchford, 1 Wend 583, 618). As will be seen (see at pp 320-321, infra), this emphasis on the statements in the pleadings has not changed over the years.

      . Lusker v Tannen (90 AD2d 118) is not to the contrary. The court there looked behind the contract to ascertain whether it was actually' intended to convey real property, but it did so only to determine whether it would be appropriate to allow an action for specific performance of a contract to sell personalty (id., at pp 124-125).

      . Moreover, in a trespass action, alienation of the property would not effectively prevent the court from ultimately awarding the relief requested (Hailey v Ano, 136 NY 569, 575), which is the primary purpose of the notice of pendency.

      . Plaintiff’s reliance on Lusher v Tannen (90 AD2d 118) is misplaced. That case involved a factual background substantially identical to the present appeal. There, Supreme Court canceled the notice of pendency and dismissed the complaint. The property was conveyed before the Appellate Division rule in favor of plaintiff by reinstating the complaint. Therefore, it did not reach the question whether a notice of pendency was proper under the circumstances (id., at p 125).

      . We have no occasion to consider, as the dissent would invite us to do, whether the special nature of shares in cooperative apartment buildings might require a different result (cf. Lawlor v Densmore-Compton Bldg. Co., 60 Misc 555, affd no opn 133 App Div 896), and, accordingly, that issue is expressly left open.
      The concerns expressed by the dissent appear to be unfounded. Firstly, nothing in the Insurance Law provisions cited (Insurance Law, § 46, subd 18; § 432, subd 2) even suggest that there must be a transfer of title by deed before an interested party can obtain a title insurance policy. Secondly, whether the present transaction, had it been consummated, would have been subject to the Recording Act is not before the court, but it is noted that the very purpose of this type of business deal often is to avoid the transfer of title to realty (which would require compliance with the Recording Act) by instead transferring fc.tle to personalty. Lastly, all of the authorities cited by the dissent for the Statute of Frauds question concern cooperative apartments, which, as noted, is not the present situation.

      . That a notice of pendency was permitted in a shareholder’s derivative suit (see Grossfeld v Beck, 42 AD2d 844) is irrelevant to the controversy here. Such a suit is brought on behalf of the corporation for its benefit (see 13 Fletcher, Cyclopedia of Corporations [1984 rev], § 5939), and, therefore, a notice of pendency would be proper if the suit is seeking to recover die corporation’s real property.


text:
    In the Matter of Thomas S. Agresta, a Justice of the Supreme Court, Eleventh Judicial District, Queens County, Petitioner. State Commission on Judicial Conduct, Respondent.
    Argued January 9, 1985;
    decided February 12, 1985

      POINTS OF COUNSEL

      Michael S. Sileo for petitioner.
    I. The determination of the Commission on Judicial Conduct is not supported by the facts established at the hearing. II. The Commission’s determination that intent is not a necessary element to establish misconduct was in error. (Matter of Cerbone, 61 NY2d 93.) III. The Commission’s failure to provide the material contained in petitioner’s supplemental record requires a reversal of the determination herein. IV. The sanction imposed by the Commission was unduly harsh.

      Gerald Stern and Jean M. Savanyu for respondent.
    Petitioner’s conduct violated established ethical standards and should be condemned. (Matter of Kuehnel v State Commn. on Judicial Conduct, 49 NY2d 465; Matter of Cerbone, 61 NY2d 93; Matter of Aldrich v State Commn. on Judicial Conduct, 58 NY2d 279; Matter of Shilling, 51 NY2d 397; Matter of Sims, 61 NY2d 349.)
   OPINION OF THE COURT

Per Curiam.

Petitioner, a former Justice of the Supreme Court, instituted this proceeding to review a determination of the State Commission on Judicial Conduct which censured him for misconduct. He contends that the Commission’s determination is not supported by the evidence and that the sanction imposed is unduly harsh.

Respondent’s complaint contained one charge alleging that petitioner had violated the Rules and Canons governing judicial conduct by making derogatory racial remarks during the sentencing of two black defendants in May 1983. The remark was made in court during a colloquy between petitioner and counsel for Eris Blount, one of two defendants appearing before petitioner who had been convicted of robbery. During the course of the colloquy, petitioner noted that defendant Blount had previously made a statement (which had been suppressed) implicating his uncle, Willie Blount, in a double homicide and other crimes. Petitioner, referring to Willie Blount as the “real culprit”, offered to extend consideration to defendant if he cooperated with the police and made a legally sufficient statement implicating his uncle. Observing that somebody had been “lying throughout this entire mess”, he stated: “I know there is another nigger in the woodpile. I want that person out. Is that clear? What about that Mr. Blount? You want to think it over?”

Petitioner admitted making the statement but he denied any impropriety in his conduct, asserting that it was a harmless “metaphor”. He also denied that his remark referred to any particular person, but he claimed that in any event, he did not intend it as a racial slur. He contended that the metaphor referred to an unsolved mystery and that his comments were directed at the police, not defendant’s uncle, because he was critical of their investigation.

The referee found the facts as set forth above. He also found that the phrase “nigger in the woodpile” is offensive and derogatory to black people and, while accepting petitioner’s contention that the reference was not intended as a racial slur, he found that petitioner had been referring to a specific person — Willie Blount — when he made it.

In confirming the referee’s report the Commission found that: “Racial epithets, indefensible when uttered by a private citizen, are especially offensive when spoken by a judge. Whether or not he meant it as a racial slur, [petitioner’s] use of the term ‘nigger’ in any context is indefensible. That he used the term in open court with black defendants before him and in obvious reference to a particular black person makes his conduct especially egregious.” Commenting on petitioner’s attitude after the charges were presented, the Commission stated: “Furthermore, [petitioner] has persisted in the belief that his remark was not inappropriate and that his ‘metaphor’ was misunderstood. [Petitioner’s] claim that he was not referring to a black man and that he apologized for his remark (the apology appeared only in a confidential letter to the Commission) are not persuasive.”

We find that the Commission’s finding is supported by the evidence and that the sanction is appropriate.

The rules require that judges “observe * * * high standards of conduct so that the integrity * * * of the judiciary may be preserved” (Rules Governing Judicial Conduct, 22 NYCRR 100.1; see also, 100.2; Matter of Aldrich v State Commn. on Judicial Conduct, 58 NY2d 279; Matter of Kuehnel v State Commn. on Judicial Conduct, 49 NY2d 465). Applying this standard, we have held that it is improper for a judge to make remarks of a racist nature even when the remarks are made out of court (Matter of Cerbone, 61 NY2d 93; Matter of Aldrich v State Commn. on Judicial Conduct, supra; Matter of Kuehnel v State Commn. on Judicial Conduct, supra). Manifestly, such remarks are even more objectionable when made by a judge during court proceedings.

Accordingly, the determined sanction of censure should be accepted, without costs.

Chief Judge Wachtler and Judges Jasen, Meyer, Simons and Kaye concur in Per Curiam opinion; Judge Alexander taking no part.

Determined sanction accepted, without costs.


author: Chief Judge Wachtler.

text:
    The People of the State of New York, Appellant, v Robert Kendzia and MacLeod’s Prescription Pharmacy, Inc., Respondents.
    Argued January 3, 1985;
    decided February 12, 1985

      POINTS OF COUNSEL

      Robert Abrams, Attorney-General (Edward D. Saslaw and William F. Dowling of counsel), for appellant.
    I. The People effectively announced its readiness during the periods mandated by CPL 30.30. (People v Hamilton, 46 NY2d 932; People v

      Brothers, 50 NY2d 413; People v Passero, 83 AD2d 769; People v Bradley, 96 AD2d 707; People v Burney, 90 AD2d 959; People v Kellerson, 84 AD2d 965; People v Dean, 45 NY2d 651; People v Conrad, 44 NY2d 863; People v Santiago, 96 AD2d 720; People v Moorhead, 61 NY2d 851.) II. A person who files a false sales tax return may be convicted under the Penal Law for offering a false instrument for filing. (People v Valenza, 60 NY2d 363; People v Eboli, 34 NY2d 281; Hutcherson v United States, 345 F2d 964, 382 US 894; People v Malvassi, 248 App Div 784, 273 NY 460; People v Sansanese, 17 NY2d 302; People v Bord, 243 NY 595; People v Licausi, 23 Misc 2d 75; People v Campisi, 82 Misc 2d 254.)

      James C. Roscetti and Steven G. Wiseman for respondents.
    I. Defendants’ CPL 30.30 speedy trial rights were denied. II. Defendants were improperly charged and convicted of violations of Penal Law § 170.35 in that the conduct of which defendants were convicted must be treated as violations of the Tax Law on ly in that the Tax Law is an integrated and exclusive scheme for treatment of violations thereof. III. Even if gross sales are improperly stated on State sales tax returns, such error cannot support a conviction for offering for filing a false instrument because gross sales is immaterial for sales tax purposes. IV. The People failed to prove beyond a reasonable doubt the amount of defendants’ taxable sales. V. The use of written statements attributed to defendants constituted at most an admission which, for conviction, required corroborating evidence. VI. Exhibits 6-10, sales tax returns, were improperly admitted into evidence. VII. It was improper for the court to advise and assist the People in the manner in which to admit evidence. VIII. Failure of the People to comply with statutory and court-ordered discovery mandates dismissal or preclusion. IX. The totality of the errors in the trial deprived defendants of a fair trial.

      Arnold C. Stream and Lawrence B. Trachtenberg for Bushkin Gaims Gaines Jonas & Stream, amicus curiae. The rationale of People v Valenza (60 NY2d 363) requires the dismissal of counts 2-5.
   OPINION OF THE COURT

Chief Judge Wachtler.

After a nonjury trial, both defendants were convicted of grand larceny in the second degree (Penal Law § 155.35), offering a false instrument for filing in the first degree (Penal Law § 175.35), and violating Tax Law, article 28, § 1145 (b). On appeal, the Appellate Division reversed, all of the convictions and dismissed the indictment against the defendants on the ground that the People were not ready for trial within the time period mandated by CPL 30.30 (1), the “speedy trial statute”. The issue on this appeal is what actions the People must take to indicate “readiness” within the meaning of the statute and thus toll the running of the applicable time period.

In 1978, the State Tax Department began investigating the accuracy of quarterly sales tax returns being filed by defendant MacLeod’s Prescription Pharmacy, Inc. Work done by the Department’s Special Investigations Bureau eventually led to the indictment of MacLeod’s and its president, defendant Robert Kendzia, for grand larceny in»the second degree, offering a false instrument for filing in the first degree and violating Tax Law, article 28, § 1145 (b). The indictment was filed on September 17, 1980, which became the date the criminal actions commenced for purposes of CPL 30.30.

At the defendants’ arraignment on September 18, 1980, the court ordered the People to provide the defendants with copies of documents which had been subpoenaed from them by the Grand Jury. The defendants sought these documents in order to prepare pretrial motions, and therefore the court stated that the time up until the People returned the documents would not be charged to the defendants for purposes of the limitations period of the speedy trial statute. Some of the documents were turned over by the People on October 2, 1980, and the case was adjourned on that date for defendants’ omnibus motion. After receiving an extension of time in which to bring the motion, defendants served their papers on December 1, 1980, with a return date of December 22,1980. At some point after receiving the motion papers, the People spoke with the Niagara County Court Clerk about adjourning the return date and, over the objection of the defendants, the Court Clerk rescheduled the return date on the omnibus motion to January 28, 1981.

The motion was argued on January 28, 1981 and the court made oral rulings on the same day. It also appears that on that day, at an unrecorded conference in chambers, the court set a trial date of April 20,1981, with neither side objecting. On April 14,1981, the Assistant Attorney-General representing the People called defendants’ lawyer to request an adjournment of the trial date in light of a conflict he had with another trial. Defense counsel agreed to the adjournment as long as the time was charged to the People, and the trial date was subsequently rescheduled for May 26, 1981.

In a letter sent on May 6, 1981 to defense counsel which discussed primarily compliance with court rulings as to discovery, the People stated “[W]e will be ready for trial on * * * May 26,1981”. On May 8,1981 the defendants moved to dismiss the indictment, asserting that the People had not complied with the requirements of CPL 30.30. The motion was returnable May 20, 1981,. but the People requested an adjournment and the return date was moved back to June 5,1981. On September 8,1981, the court denied defendants’ motion to dismiss, finding that only 94 days chargeable to the People had elapsed since the filing of the indictment. The court apparently excluded the period from January 28,1981 to April 20,1981 based on a trial date having been set on January 28 for April 20 without objection by the People.

Following the court’s decision, the Court Clerk set a new trial date for October 19, 1981. In early October, defendants chose to waive their right to a jury trial. Apparently on account of thi s waiver, the case was assigned to a new Judge and the trial date was adjourned into November. On November 16, 1981, defendants again moved to dismiss the indictment pursuant to CPL 30.30. On November 18, 1981, the trial began. In a decision dated March 8, 1982, the court found both defendants guilty of all of the counts of the indictment and, without discussion, denied defendants’ November 16 speedy trial motion.

On appeal, the Appellate Division reversed the convictions and dismissed the indictment. In a unanimous decision, the court found that the People were not ready for trial within the meaning of CPL 30.30 (1) until November 18,1981 and that they had not demonstrated sufficient excludable time between September 17,1980 and November 18, 1981. We agree that the People were not ready for trial within the period established by CPL 30.30 (1) and thus affirm.

Because the indictment against the defendants included felony charges, the People were required to be “ready for trial” within six months of the commencement of the criminal action on September 17, 1980 (CPL 30.30 [1] [a]). The People assert that they made a sufficient statement of “readiness” on January 28, 1981, when a trial date was set without their objection, or, alternatively, on May 6,1981, when they stated in a letter that they would be ready on May 26, 1981. Defendants assert that the People never demonstrated that they were ready for trial until they answered “ready” on November 18,1981, the first day of the trial.

In People v Hamilton (46 NY2d 932), this court held that it was insufficient for the People to assert for the first time in an affidavit submitted in opposition to a motion to dismiss, pursuant to CPL 30.30, that they had been ready to proceed at some earlier date. Rather, we stated that “the People must communicate readiness for trial to the court on the record when ready to proceed” (People v Hamilton, supra, p 933). We again rejected a subsequent assurance of prior readiness in People v Brothers (50 NY2d 413, 416), as there was “no record proof of any contemporaneous communication of * * * readiness [by the People]”. We also implicitly found in Brothers that the placement of a case on the “ready reserve” calendar without objection did not satisfy this requirement.

It is apparent from these cases that “ready for trial” in CPL 30.30 (1) encompasses two necessary elements. First, there must be a communication of readiness by the People which appears on the trial court’s record. This requires either a statement of readiness by the prosecutor in open court, transcribed by a stenographer, or recorded by the clerk or a written notice of readiness sent by the prosecutor to both defense counsel and the appropriate court clerk, to be placed in the original record (cf. United States v New Buffalo Amusement Corp., 600 F2d 368, 373, n 6; Bellacosa, Practice Commentary, McKinney’s Cons Laws of NY, Book 11 A, CPL 30.30, p 151). As the prosecutor must make an affirmative representation of readiness (see, People v Santiago, 96 AD2d 720), he may not simply rely on the case being placed on a trial calendar.

The second requirement under the statute, as noted in Hamilton and Brothers, is that the prosecutor must make his statement of readiness when the People are in fact ready to proceed. The statute contemplates an indication of present readiness, not a prediction or expectation of future readiness.

Applying these principles to the present case shows that the People were not “ready for trial” until November 18, 1981, when they answered “ready” on the first day of the trial. The acquiescence to the setting of an April 20 trial date during an off-the-record conference on January 28 does not satisfy either of the two requirements. There is no evidence that the People, during that conference, made an affirmative representation on the record that they were then ready to proceed. Furthermore, the failure to object to the scheduling of a trial for some future date by itself demonstrates no more than an expectation of readiness as of that future date. While the People are not to be penalized if court congestion causes a trial date to be set beyond the applicable time period of CPL 30.30 (see, People ex rel. Franklin v Warden, 31 NY2d 498, 501-504), they cannot take advantage of court congestion so as to ignore their own responsibility of being ready for trial on time (see, People v Brothers, 50 NY2d 413, 417-418, supra).

The May 6 letter is insufficient because it merely expressed an expectation of readiness as of May 26. To hold otherwise would effectively allow the People to satisfy the requirements of CPL 30.30, in a felony prosecution, by attaching a note to the indictment stating that the People will be ready for trial in six months. Approval of such a practice would, of course, create problems where, as occurred at least once here, the People’s expectation of readiness turned out to be overly optimistic (cf. People v O’Neal, 99 AD2d 844).

The defendants have shown that the People were not ready for trial until November 18, 1981, a date well over six months after the commencement of the criminal actions, and the People thus bear the burden of demonstrating sufficient excludable time (People v Berkowitz, 50 NY2d 333, 349). The People, however, have shown that 196 days at most can reasonably be excluded, due to defendants’ omnibus motion, speedy trial motions, and their trial on other charges during February 1981. Excluding this number of days from the period of time between September 17,1980 and November 18,1981 leaves well over six months chargeable to the People.

Accordingly, we affirm the orders of the Appellate Division reversing the convictions and dismissing the indictment. In light of our disposition on the speedy trial issue, we do not reach any other issues raised.

Judges Jasen, Meyer, Simons, Kaye and Alexander concur.

Orders affirmed.

       If the prosecutor’s statement of readiness in open court were made without defense counsel present, the prosecutor would have to promptly notify him of the statement of readiness (see, People v Cole, 90 AD2d 27).