author: Chief Judge Cooke.

text:
    Jack L. Alpert et al., Appellants, v 28 Williams St. Corp. et al., Respondents.
    Argued October 10, 1984;
    decided November 29, 1984

      POINTS OF COUNSEL

      Hyman Bravin and Melvin Hirshowitz for appellants.
    I. ' Where the board of directors of a closely held corporation expects a massive surge of profits over the next few years and approves a merger which will inure to the personal profit of each director, designed to eliminate a substantial long-term shareholder, the business judgment rule is irrelevant. Fairness to all concerned is required, which was breached where there was rampant concealment and misstatements by the board and where there was a failure to prove that a legitimate objective could not have been achieved except by elimination of the minority. (Klurfeld v Equity Enterprises, 79 AD2d 124; Chelrob, Inc. v Barrett, 293 NY 442; Auerbach v Bennett, 47 NY2d 619; Williams v Bartell, 16 AD2d 21; Lewis v S. L. & E., Inc., 629 F2d 764; Leibert v Clapp, 13 NY2d 313; Kavanaugh v Kavanaugh Knitting Co., 226 NY 185; Schwartz v Marien, 37 NY2d 487; Gazda v Kolinski, 91 AD2d 860; Lichtenberger v Long Is. Mach. Sales Corp., 71 AD2d 941.) II. Under subdivision (k) of section 623 of the Business Corporation Law, appellants are entitled to a proper equitable remedy with respect to this unlawful freeze-out merger. (Breed v Barton, 54 NY2d 82; Jones v Securities Comm., 298 US 1; Eisenberg v Central Zone Prop. Corp., 306 NY 58; Lieferant v Bartell, 36 Misc 2d 477; Albright v Bergendahl, 391 F Supp 754.) III. Appellants’ protective appraisal proceeding was entirely proper. (Matter of Menschel, 75 AD2d 525; Matter of Weiss v Summit Organization, 80 AD2d 526.)

      Edward Brodsky, Thomas H. Sear and Emily J. Spitzer for respondents.
    I. The court below applied the correct standard on both appeals. (Matter of Endicott Johnson Corp. v Bade, 37 NY2d 585; Tanzer Economic Assoc. v Universal Food Specialties, 87 Misc 2d 167; Schulwolf v Cerro Corp., 86 Misc 2d 292; Blumenthal v Roosevelt Hotel, 202 Misc 988; Schloss Assoc. v Arkwin Inds., 90 AD2d 149, 61 NY2d 700; Klurfeld v Equity Enterprises, 79 AD2d 124; Zobel v American Locomotive Co., 182 Misc 323; Everett v Phillips, 288 NY 227; Auerbach v Bennett, 47 NY2d 619; Treadway Cos. v Care Corp., 538 F2d 357.) II. The evidence adduced at both trials supports Justice Greenfield’s findings that there were valid business purposes for the merger and that it was fair. (Levy v American Beverage Corp., 265 App Div 208; Zetlin v Hanson Holdings, 48 NY2d 684; Stanton v Schenck, 140 Misc 621.)
   OPINION OF THE COURT

Chief Judge Cooke.

The subject of contention in this litigation is a valuable 17-story office building, located at 79 Madison Avenue in Manhattan. In dispute is the propriety of a complex series of transactions that had the net effect of permitting defendants, who were outside investors, to gain ownership of the property and to eliminate the ownership interests of plaintiffs, who were minority shareholders of the corporation that formerly owned the building. This was achieved through what is commonly known as a “two-step” merger: (1) an outside investor purchases control of the majority shares of the target corporation by tender offer or through private negotiations; (2) this newly acquired control is used to arrange for the target and a second corporation controlled by the outside investor to merge, with one condition being the “freeze-out” of the minority shareholders of the target corporation by the forced cancellation of their shares, generally through a cash purchase. This accomplishes the investor’s original goal of complete ownership of the target corporation.

Since 1955, the office building was owned by 79 Realty Corporation (Realty Corporation), which had no other substantial assets. About two thirds of Realty Corporation’s outstanding shares were held by two couples, the Kimmelmans and the Zauderers, who were also the company’s sole directors and officers. Plaintiffs owned 26% of the outstanding shares. The remaining shares were owned by persons who are not parties to this litigation.

Defendants, a consortium of investors, formed a limited partnership, known as Madison 28 Associates (Madison Associates), for the purpose of purchasing the building. In March 1980, Madison Associates began negotiations with the Kimmelmans and the Zauderers to purchase the latter’s controlling block of stock at a price equal to its proportion of the building’s value, agreed in June 1980 to be $6,500,000. In addition, Madison Associates promised that it would also offer to purchase plaintiffs’ stock under the same terms within four months of the closing of the stock purchase agreement in September 1980.

Madison Associates formed a separate, wholly owned company, 28 Williams Street Corporation (Williams Street), to act as the nominal purchaser and owner of the Kimmelman and Zauderer interests. The stock purchase agreement was actually signed by Williams Street and its principal asset was the newly acquired shares of Realty Corporation.

Upon selling their shares, the Kimmelmans and the Zauderers resigned their positions with Realty Corporation and were replaced by four partners of Madison Associates. Now acting as the controlling directors of Realty Corporation on October 17, 1980, the partners of Madison Associates approved a plan to merge Realty Corporation with Williams Street, Realty Corporation being the surviving corporation. Together with a notice for a shareholders meeting to vote on the proposed merger, a statement of intent was sent to all shareholders of Realty Corporation, explaining the procedural and financial aspects of the merger, as well as defendants’ conflict of interest and the intended exclusion of the minority shareholders from the newly constituted Realty Corporation through a cash buyout. Defendants also disclosed that they planned to dissolve Realty Corporation after the merger and thereafter to operate the business as a partnership. The merger plan did not require approval by any of the minority shareholders.

The merger proposed by the directors was approved at the shareholders meeting, held on November 7,1980. As a result, the office building was owned by the “new” Realty Corporation, which, in turn, was wholly owned by Madison Associates. In accordance with the merger plan, Realty Corporation was dissolved within a month of the merger and its principal asset, title to the building, devolved to Madison Associates.

From the outset, plaintiffs resisted their exclusion from Realty Corporation. First, they rejected overtures by Madison Associates to purchase their shares. Then they unsuccessfully sought to enjoin the sale of the Kimmelman and Zauderer interest to Madison Associates.

The plaintiffs instituted this action on October 31,1980, initially seeking to enjoin the shareholders meeting called to approve the merger. Failing to temporarily enjoin the Realty Corporation’s merger with Williams Street, plaintiffs later amended their complaint to include a request for equitable relief in the form of rescission of the merger.

The propriety of the merger was contested on several grounds. It was contended that the merger was unlawful because its sole purpose was to personally benefit the partners of Madison Associates and that the alleged purposes had no legitimate business benefit inuring to the corporation. Plaintiffs argue that the “business judgment” of the directors in assigning various purposes for the merger was indelibly tainted by a conflict of interest because they were committed to the merger prior to becoming directors and were on both sides of the merger transaction when consummated. Further, they assert that essential financial information was not disclosed and that the value offered for the minority’s shares was understated and determined in an unfair manner.

After a trial, Supreme Court held that the merger had been unlawful. It determined that defendants, as directors and majority shareholders of Realty Corporation, had breached their fiduciary duty owed plaintiffs in approving and executing the merger agreement, largely because of defendants’ failure to show a “strong and compelling legitimate business purpose” for the merger. The matter was set down for a hearing to determine an appropriate remedy.

The Appellate Division unanimously reversed, on the law and the facts, finding that the trial court’s decision was “devoid of factual findings either as to the basis for the conclusion that the shareholders meeting was not lawfully conducted, or whether the entire transaction involved fraud, conflict of interest, or self-dealing” (91 AD2d 530, 531). It rejected the legal standard applied by Supreme Court, holding that the proper standard was that the “[cjourts will not interfere with the proper business judgment of directors in the absence of a showing of fraud, illegality, or self-dealing * * * so long as there is some proper corporate purpose for the merger other than the forced buy-out of the minority shares” (id., at p 531). The matter was remanded for a new trial.

Upon retrial, Supreme Court denied plaintiffs’ requested relief. It determined that plaintiffs had failed to demonstrate that the merger was not for a legitimate business purpose or that they had been dealt with unfairly and inequitably. The court found that the merger advanced several proper corporate business purposes. It provided a means by which the corporation could attract outside capital investment for extensive repairs and renovations of the building that were needed to produce maximum rents. Certain tax advantages and the distribution of mortgage proceeds would accrue upon the ultimate dissolution of the merged corporation and transfer of the building to the partnership.

The court recognized that because the merger would advance defendants’ self-interest and plaintiffs’ shares were to be eliminated, it would have been preferable for defendants to have had independent directors or appraisers evaluate whether the merger was fair to all parties. The failure to do so, however, was not deemed fatal to the transaction if, viewed as a whole, it was fair. Thus, the court undertook its own review considering the role that defendants’ self-interest played in the merger decision, whether overreaching or bad faith were present, and the extent of disclosure of material information to plaintiffs. It also examined how the price for the minority’s shares was established and determined that defendants’ arrangement with the Kimmelmans and the Zauderers was arrived at through arm’s length negotiations and that it reflected the fair market value of the building at the time. In addition, the court noted that the price offered plaintiffs was many times the amount plaintiffs paid for the stock and greatly exceeded the stock’s book value and the corporation’s past and present earnings. The court concluded that, as a whole, the transaction was fair. As the merger also served a legitimate business purpose and was not tainted by fraud or illegality, plaintiffs’ request for rescission was denied. The Appellate Division affirmed the trial court’s decision, without opinion.

On this appeal, the principal task facing this court is to prescribe a standard for evaluating the validity of a corporate transaction that forcibly eliminates minority shareholders by means of a two-step merger. It is concluded that the analysis employed by the courts below was correct: the majority shareholders’ exclusion of minority interests through a two-step merger does not violate the former’s fiduciary obligations so long as the transaction viewed as a whole is fair to the minority shareholders and is justified by an independent corporate business purpose. Accordingly, this court now affirms.

(A)

In New York, two or more domestic corporations are authorized to “merge into a single corporation which shall be one of the constituent corporations”, known as the “surviving, corporation” (see Business Corporation Law, § 901). The statute does not delineate substantive justifications for mergers, but only requires compliance with certain procedures: the adoption by the boards of each corporation of a plan of merger setting forth, among other things, the terms and conditions of the merger; a statement of any changes in the certificate of incorporation of the surviving corporation; the submission of the plan to a vote of shareholders pursuant to notice to all shareholders; and adoption of the plan by a vote of two thirds of the shareholders entitled to vote on it (see, generally, Business Corporation Law, §§ 902, 903).

Generally, the remedy of a shareholder dissenting from a merger and the offered “cash-out” price is to obtain the fair value of his or her stock through an appraisal proceeding (see Business Corporation Law, § 623). This protects the minority shareholder from being forced to sell at unfair values imposed by those dominating the corporation while allowing the majority to proceed with its desired merger (see Matter of Endicott Johnson Corp. v Bade, 37 NY2d 585, 590; Klurfeld v Equity Enterprises, 79 AD2d 124, 134; see Anderson v International Mins. & Chem. Corp., 295 NY 343, 347-350). The pursuit of an appraisal proceeding generally constitutes the dissenting stockholder’s exclusive remedy (see Business Corporation Law, § 623, subd [k]; see, also, Breed v Barton, 54 NY2d 82, 85). An exception exists, however, when the merger is unlawful or fraudulent as to that shareholder, in which event an action for equitable relief is authorized (Business Corporation Law, § 623, subd [k]; see Matter of Willcox v Stern, 18 NY2d 195, 204; Breed v Barton, 54 NY2d 82, 86, supra). Thus, technical compliance with the Business Corporation Law’s requirements alone .will not necessarily exempt a merger from further judicial review.

(B)

Because the power to manage the affairs of a corporation is vested in the directors and majority shareholders, they are cast in the fiduciary role of “guardians of the corporate welfare” (Leibert v Clapp, 13 NY2d 313, 317; see Case v New York Cent. R. R. Co., 15 NY2d 150,156). In this position of trust, they have an obligation to all shareholders to adhere to fiduciary standards of conduct and to exercise their responsibilities in good faith when undertaking any corporate action, including a merger (see Pepper v Litton, 308 US 295, 306, 311; Leibert v Clapp, 13 NY2d 313, 317, supra; Matter of Baldwin Trading Corp., 8 NY2d 144,149; Kavanaugh v Kavanaugh Knitting Co., 226 NY 185, 195; Klurfeld v Equity Enterprises, 79 AD2d 124, 134, supra). Actions that may accord with statutory requirements are still subject to the limitation that such conduct may not be for the aggrandizement or undue advantage of the fiduciary to the exclusion or detriment of the stockholders (see Pepper v Litton, 308 US 295, 311, supra; Case v New York Cent. R. R. Co., 15 NY2d 150,156, supra; Lirosi v Elkins, 89 AD2d 903, 906).

The fiduciary must treat all shareholders, majority and minority, fairly (see Schwartz v Marien, 37 NY2d 487, 491; Katzowitz v Sidler, 24 NY2d 512, 518; Case v New York Cent. R. R. Co., 15 NY2d 150, 156-157, supra). Moreover, all corporate responsibilities must be discharged in good faith and with “conscientious fairness, morality and honesty in purpose” (see Kavanaugh v Kavanaugh Knitting Co., 226 NY 185, 193, supra). Also imposed are the obligations of candor (see Globe Woolen Co. v Utica Gas & Elec. Co., 224 NY 483, 490) and of good and prudent management of the corporation (see Gordon v Elliman, 306 NY 456, 466; Kavanaugh v Kavanaugh Knitting Co., 226 NY 185,192, supra; Weinberger v UOP, Inc., 457 A2d 701, 710 [Del]). When a breach of fiduciary duty occurs, that action will be considered unlawful and the aggrieved shareholder may be entitled to equitable relief (see Pepper v Litton, 308 US 295, 306-307, supra; Schwartz v Marien, 37 NY2d 487, 493, supra; Kavanaugh v Kavanaugh Knitting Co., 226 NY 185, 196, supra).

(C)

While noting the existence of fiduciary duties is an uncomplicated task, the same may not be said of defining precisely what is proper conduct in the context of a particular corporate transaction. In reviewing a freeze-out merger, the essence of the judicial inquiry is to determine whether the transaction, viewed as a whole, was “fair” as to all concerned. This concept has two principal components: the majority shareholders must have followed “a course of fair dealing toward minority holders” (Case v New York Cent. R. R. Co., 15 NY2d 150, 156, supra; see Dunlay v Avenue M Garage & Repair Co., 253 NY 274,279-280; cf. Lichtenberger v Long Is. Mach. Sales Corp., 71 AD2d 941, 947); and they must also have offered a fair price for the minority’s stock (see Katzowitz v Sidler, 24 NY2d 512, 520, supra; Klurfeld v Equity Enterprises, 79 AD2d 124,135, supra; Schulwolf v Cerro Corp., 86 Misc 2d 292, 298).

As a general matter, a principal indicator of fair dealing is the relationship between the parties representing the corporations to be merged (see Chelrob, Inc. v Barrett, 293 NY 442, 460-461). When the directors and majority shareholders of each corporation are independent and negotiate at arm’s length, it is more likely that the negotiations will reflect the full exertion of each party’s bargaining power and the final terms of the transaction will be the best attainable. When, however, there is a common directorship or majority ownership, the inherent conflict of interest and the potential for self-dealing requires careful scrutiny of the transaction (see id., at pp 461-462; Everett v Phillips, 288 NY 227,236; Lirosi v Elkins, 89 AD2d 903, 906, supra).

Generally, the plaintiff has the burden of proving that the merger violated the duty of fairness, but when there is an inherent conflict of interest, the burden shifts to the interested directors or shareholders to prove good faith and the entire fairness of the merger (see Pepper v Litton, 308 US 295, 306, supra; Chelrob, Inc. v Barrett, 293 NY 442, 461-462, supra; Lirosi v Elkins, 89 AD2d 903, 906, supra; Weinberger v UOP, Inc., 457 A2d 701, 710 [Del], supra). The interested parties may attempt to establish this element of fair dealing by introducing evidence of efforts taken to simulate arm’s length negotiations. Such steps may have included the appointment of an independent negotiating committee made up of neutral directors or of an independent board to evaluate the merger proposal and to oversee the process of its approval (see, e.g., Schulwolf v Cerro Corp., 86 Misc 2d 292, 298, supra; Weinberger v UOP, Inc., 457 A2d 701, 709, n 7 [Del], supra). This would tend to negate a finding of self-dealing or overreaching (see Schulwolf v Cerro Corp., 86 Misc 2d, at p 298, supra; cf. Tamer Economic Assoc. v Universal Food Specialties, 87 Misc 2d 167, 181).

Fair dealing is also concerned with the procedural fairness of the transaction, such as its timing, initiation, structure, financing, development, disclosure to the independent directors and shareholders, and how the necessary approvals were obtained (Weinberger v UOP, Inc., 457 A2d 701, 711 [Del], supra; see Tanzer Economic Assoc. v Universal Food Specialties, 87 Misc 2d, at pp 178-179, supra; Schulwolf v Cerro Corp., 86 Misc 2d, at p 298, supra). Basically, the courts must look for complete and candid disclosure of all the material facts and circumstances of the proposed merger known to the majority or directors, including their dual roles and events leading up to the merger proposal (see Case v New York Cent. R. R. Co., 15 NY2d 150, 157, supra; Globe Woolen Co. v Utica Gas & Elec. Co., 224 NY 483, 491, supra; Tanzer Economic Assoc. v Universal Food Specialties, 87 Misc 2d, at pp 178, 181-183, supra; Schulwolf v Cerro Corp., 86 Misc 2d, at pp 295, 297-298, supra; Weinberger v UOP, Inc., 457 A2d, at pp 711-712 [Del], supra).

The fairness of the transaction cannot be determined without considering the component of the financial remuneration offered the dissenting shareholders. When the merger seeks to cancel the minority’s sharés in exchange for cash, the fiduciaries must ensure that the compensation is equitable. This duty may be satisfied when the cash-out price is reasonably related to the value that might be set by an appraisal proceeding (see Tanzer Economic Assoc. v Universal Food Specialties, 87 Misc 2d 167, 178, supra; cf. Katzowitz v Sidler, 24 NY2d 512, 519, supra).

In determining whether there was a fair price, the court need not ascertain the precise “fair value” of the shares as it would be determined in an appraisal proceeding. It should be noted, however, that the factors used in an appraisal proceeding are relevant here (see Business Corporation Law, § 623; Klurfeld v Equity Enterprises, 79 AD2d 124, 136-137, supra). This would include but would not be limited to net asset value, book value, earnings, market value, and investment value (see Matter of Endicott Johnson Corp. v Bade, 37 NY2d 585, 587, supra). Elements of future value arising from the accomplishment or expectation of the merger which are known or susceptible of proof as of the date of the merger and not the product of speculation may also be considered (see Business Corporation Law, § 623, subd [h], par [4]; see, also, Weinberger v UOP, Inc., 457 A2d 701, 713 [Del], supra; Note, Reappraising Minority Shareholder Protection in Freezeout Mergers: Weinberger v UOP, Inc., 58 St John’s L Rev 144,158-161). Evidence that an independent investment firm was retained to render a fairness opinion on the price offered to the minority may be a good means of demonstrating the price which would have been set by arm’s length negotiations (see Tanzer Economic Assoc. v Universal Food Specialties, 87 Misc 2d 167, 178, supra; Schulwolf v Cerro Corp., 86 Misc 2d 292, 298, supra; Weinberger v UOP, Inc., 457 A2d 701, 712-714 [Del], supra).

(D)

Fair dealing and fair price alone will not render the merger acceptable. As mentioned, there exists a fiduciary duty to treat all shareholders equally (see Schwartz v Marien, 37 NY2d 487, 491-492, supra). This duty arises as a concomitant to the power reposed in the majority over corporate governance (see Case v New York Cent. R. R. Co., 15 NY2d 150,156-157, supra, and cases cited therein). The fact remains, however, that in a freeze-out merger the minority shareholders are being treated in a different manner: the majority is permitted continued participation in the equity of the surviving corporation while the minority has no choice but to surrender their shares for cash. On its face, the majority’s conduct would appear to breach this fiduciary obligation.

Majority shareholders, however, have an overriding duty to provide good and prudent management, which demands that decisions be made for the welfare, advantage, and best interests of the corporation and the shareholders as a whole (see Gordon v Elliman, 306 NY 456, 466, supra; Kavanaugh v Kavanaugh Knitting Co., 226 NY 185, 194, supra; Stevens, Corporations [2d ed], § 126, pp 567-568). But, it has long been recognized in this State that, under certain circumstances, “the particular interest of the few must give way to the general interest of the many” (Matter of Niagara Ins. Co., 1 Paige Ch 258, 260; see Kavanaugh v Kavanaugh Knitting Co., 226 NY, at p 194, supra). Thus, “[departure from precisely uniform treatment of stockholders may be justified, of course, where a bona fide business purpose indicates that the best interests of the corporation would be served by such departure” (Schwartz v Marien, 37 NY2d 487, 492, supra; see Katzowitz v Sidler, 24 NY2d 512, 519-520, supra; Tanzer Economic Assoc. v Universal Food Specialties, 87 Misc 2d 167, 176, 180-181, supra; Schulwolf v Cerro Corp., 86 Misc 2d 292, 297, supra; People v Concord Fabrics, 83 Misc 2d 120, 123, affd on opn below 50 AD2d 787).

In the context of a freeze-out merger, variant treatment of the minority shareholders — i.e., causing their removal — will be justified when related to the advancement of a general corporate interest. The benefit need not be great, but it must be for the corporation. For example, if the sole purpose of the merger is reduction of the number of profit sharers — in contrast to increasing the corporation’s capital or profits, or improving its management structure — there will exist no “independent corporate interest” (see Schwartz v Marien, 37 NY2d 487, 492, supra). All of these purposes ultimately seek to increase the individual wealth of the remaining shareholders. What distinguishes a proper corporate purpose from an improper one is that, with the former, removal of the minority shareholders furthers the objective of conferring some general gain upon the corporation. Only then will the fiduciary duty of good and prudent management of the corporation serve to override the concurrent duty to treat all shareholders fairly (see Klurfeld v Equity Enterprises, 79 AD2d 124, 136, supra). We further note that a finding that there was an independent corporate purpose for the action taken by the majority will not be defeated merely by the fact that the corporate objective could have been accomplished in another way, or by the fact that the action chosen was not the best way to achieve the bona fide business objective.

In sum, in entertaining an equitable action to review a freeze-out merger, a court should view the transaction as a whole to determine whether it was tainted with fraud, illegality, or self-dealing, whether the minority shareholders were dealt with fairly, and whether there exists any independent corporate purpose for the merger.

(E)

As noted, the courts below applied the correct legal standard in concluding that the merger here was proper. Plaintiffs contend that the result is not supported by the record even if that standard is used. Plaintiffs’ position, however, relies on weighing the conflicting evidence before the trial court. When this court is confronted by affirmed findings of fact, its scope of review is limited to ascertaining whether there is any evidence in the record to sustain the lower courts’ determination (see Cohen v Hallmark Cards, 45 NY2d 493, 499).

Noting that defendants had not employed any neutral committees in negotiating the merger, Supreme Court conducted its own objective review of the transaction. There is evidence in the record to support its conclusion that, viewed as a whole, the transaction was fair. Full disclosure of material information was made in the statement of intent mailed to plaintiffs who also had access to Realty Corporation’s books. The stock price was tied to the fair market value of the office building, the corporation’s only substantial asset, which was determined in arm’s length negotiations.

Without passing on all of the business purposes cited by Supreme Court as underlying the merger, it is sufficient to note that at least one justified the exclusion of plaintiffs’ interests: attracting additional capital to effect needed repairs of the building. There is proof that there was a good-faith belief that additional, outside capital was required. Moreover, this record supports the conclusion that this capital would not have been available through the merger had not plaintiffs’ interest in the corporation been eliminated. Thus, the approval of the merger, which would extinguish plaintiffs’ stock, was supported by a bona fide business purpose to advance this general corporate interest of obtaining increased capital.

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

Judges Jasen, Jones, Wachtler, Meyer, Simons and Kaye concur.

Order affirmed, with costs.

      . Plaintiffs had commenced a separate appraisal proceeding in January 1981, which has been stayed pending resolution of the action for rescission of the merger. The Appellate Division held that the pendency of the appraisal action did not preclude the action for equitable relief.

      . A merger which by majority rule forces the minority interest to give up its equity in the corporation in exchange for cash or senior securities while allowing the controlling interest to retain its equity is commonly referred to as a “freeze-out” merger. It has also been referred to as a “squeeze-out” or a “take-out” merger. Thus, in freeze-outs the danger exists that “a self-interested majority stockholder or control group has ruled unfairly” thus necessitating the need for “safeguards to ensure that minority stockholders receive equal though not identical treatment” (Brudney and Chirelstein, A Restatement of Corporate Freezeouts, 87 Yale LJ 1354, 1358).

      . It has been observed that corporate freeze-outs of minority interests by mergers occur principally in three distinct manners: (1) two-step mergers, (2) parent/subsidiary mergers, and (3) “going-private” mergers where the majority shareholders seek to remove the public investors (see Brudney and Chirelstein, A Restatement of Corporate Freezeouts, 87 Yale LJ, at pp 1355-1356). While the final result in a freeze-out merger is the same, it does not necessarily follow that the fiduciary duty owed by the majority to the minority stockholders will be satisfied by the same conduct in each context. Due to differences in the “relative dangerjs] of abuse and on the social value[s] of the objective served by the elimination of the minority interest” (id., at p 1359) in each of the three merger categories, different protections for the minority and varying notions of fairness may be appropriate for each (see id.). This court does not now decide if the circumstances which will satisfy the fiduciary duties owed in this two-step merger will be the same for the other categories.

        . As the Appellate Division (91 AD2d 530, 531) properly held, there is no bar to a stockholder’s institution of an appraisal proceeding in addition to challenging the merger in his individual capacity by an action primarily requesting equitable relief under subdivision (k) of section 623 of the Business Corporation Law on the ground that it is fraudulent or unlawful to the shareholder (see Breed v Barton, 54 NY2d 82, 85-86; Matter of Weiss v Summit Organization, 80 AD2d 526; Matter of Menschel v Fluffy Rest., 75 AD2d 525). The appraisal action should not be dismissed on the ground that there is “another action pending” (CPLR 3211, subd [a], par 4) because the other action is not “for the same cause of action” (id.). The two claims are not identical — one seeks to enforce appraisal rights and the other, equitable relief from the merger (see Matter of Weiss v Summit Organization, 80 AD2d 526, supra; Matter of Menschel v Fluffy Rest., 75 AD2d 525, supra). The appraisal action may be stayed until the equitable action is resolved (see Matter of Menschel v Fluffy Rest., 75 AD2d 525, supra).


source: Caselaw Access Project

author: Wachtler, J.

license: Public Domain

text:
    David R. Garner, as Executor of Robert J. Donovan, Deceased, Respondent, v Louis Gerrish, Appellant.
    Argued October 12, 1984;
    decided November 27, 1984

      POINTS OF COUNSEL

      George H. Barber for appellant.
    I. The lease should be interpreted under its terms. (Western Transp. Co. v Lansing, 49 NY 499; Kolasky v Michels, 120 NY 635; Hoff v Royal Metal Furniture Co., 117 App Div 884, 189 NY 555; Bruce v Fulton Nat. Bank, 79 NY 154; Black v General Wiper Supply Co., 305 NY 386; Rowe v Great Atlantic & Pacific Tea Co., 46 NY2d 62.) II. The tenant is entitled to summary judgment. (Andre v Pomeroy, 35 NY2d 361; Gitleson v Du Pont, 17 NY2d 46; 454 Seventh Ave. v Hussey Corp., 295 NY 166.)

      Nathan R. Fenno for respondent.
    I. A written lease authorizing termination at will solely in the lessee should be construed as creating a life estate if that intent is clearly expressed in the lease. (Western Transp. Co. v Lansing, 49 NY 499; Rowe v Great Atlantic & Pacific Tea Co., 46 NY2d 62; DeSantis v Kessler, 83 AD2d 766; Lepsch v Lepsch, 275 App Div 412; Genesee Conservation Foundation v Oatka Fish & Game Club, 63 AD2d 1115.) II. The court below properly placed the burden upon appellant to show that the lease created a perpetual or life lease. (Rowe v Great Atlantic & Pacific Tea Co., 46 NY2d 62; Backer Mgt. Corp. v Acme Quilting Co., 46 NY2d 211; Wigand v Bachmann-Bechtel Brewing Co., 222 NY 272; DeSantis v Kessler, 83 AD2d 766; Lepsch v Lepsch, 275 App Div 412; Genesee Conservation Foundation v Oatka Fish & Game Club, 63 AD2d 1115.) III. This lease must be construed solely on the basis of its written terms. (67 Wall St. Co. v Franklin Nat. Bank, 37 NY2d 245; Intercontinental Planning v Daystrom, Inc., 24 NY2d 372; Brainard v New York Cent. R. R. Co., 242 NY 125.) IV. Respondent was and is entitled to summary judgment. (Bruce v Fulton Nat. Bank, 79 NY 154.)
   OPINION OF THE COURT

Wachtler, J.

The question on this appeal is whether a lease which grants the tenant the right to terminate the agreement at a date of his choice creates a determinable life tenancy on behalf of the tenant or merely establishes a tenancy at will. The courts below held that the lease created a tenancy at will permitting the current landlord to evict the tenant. We granted the tenant’s motion for leave to appeal and now reverse the order appealed from.

In 1977 Robert Donovan owned a house located in Potsdam, New York. On April 14 of that year he leased the premises to the tenant Lou Gerrish. The lease was executed on a printed form and it appears that neither side was represented by counsel. The blanks on the form were filled in by Donovan who provided the names of the parties, described the property and fixed the rent at $100 a month. With respect to the duration of the tenancy the lease provides it shall continue “for and during the term of quiet enjoyment from the first day of May, 1977 which term will end — Lou Gerrish has the privilege of termination [sic] this agreement at a date of his own choice” (emphasis added to indicate handwritten and typewritten additions to the printed form). The lease also contains a standard reference to the landlord’s right to reentry if the rent is not timely paid, which is qualified by the handwritten statement: “Lou has thirty days grace for payment”.

Gerrish moved into the house and continued to reside there, apparently without incident, until Donovan died in November of 1981. At that point David Garner, executor of Donovan’s estate, served Gerrish with a notice to quit the premises. When Gerrish refused, Garner commenced this summary proceeding to have him evicted. Petitioner contended that the lease created a tenancy at will because it failed to state a definite term. In his answering affidavit, the tenant alleged that he had always paid the rent specified in the lease. He also contended that the lease granted him a tenancy for life, unless he elects to surrender possession during his lifetime.

The County Court granted summary judgment to petitioner on the ground that the lease is “indefinite and uncertain *** as regards the length of time accorded respondent to occupy the premises. Although the writing specifies the date of commencement of the term, it fails to set forth the duration of continuance, and the date or event of termination”. The court concluded that the original landlord leased the premises to the tenant “for a month-to-month term and that petitioner was entitled to terminate the lease upon the death of the lessor effective upon the expiration of the next succeeding monthly term of occupancy”. In support of its decision the court quoted the following statement from our opinion in Western Transp. Co. v Lansing (49 NY 499, 508): “A lease * * * for so long as the lessee shall please, is said to be a lease at will of both lessor and lessee”.

The Appellate Division affirmed for the same reasons in a brief memorandum (99 AD2d 608).

On appeal to our court, the parties concede that the agreement creates a lease. The only question is whether it should be literally construed to grant to the tenant alone the right to terminate at will, or whether the landlord is accorded a similar right by operation of law.

At early common law according to Lord Coke, “when the lease is made to have and to hold at the will of the lessee, this must be also at the will of the lessor” (1 Co Litt, § 55a). This rule was generally adopted in the United States during the 19th century and at one time was said to represent the majority view (see Ann., 137 ALR 362, 367; 51C CJS, Landlord and Tenant, § 167, p 475). However, it was not universally accepted (see, e.g., Effinger v Lewis, 32 Penn 367; Gunnison v Evans, 136 Kan 791; Thompson v Baxter, 107 Minn 122) and has been widely criticized, particularly in this century, as an antiquated notion which violates the terms of the agreement and frustrates the intent of the parties (1 Tiffany, Real Property [3d ed], § 159; 1 American Law of Real Property [Casner ed, 1952], § 3.30; Schoshinski, American Law of Landlord and Tenant, § 2:7; see, also, Restatement, Property 2d, Landlord and Tenant, § 1.6).

It has been noted that the rule has its origins in the doctrine of livery of seisin (Tiffany, op. cit., § 159; Effinger v Lewis, supra), which required physical transfer of a clod of earth, twig, key or other symbol on the premises in the presence of witnesses, to effect a conveyance of land (2 Blackstone’s Comm, pp 315, 316; Black’s Law Dictionary [Fourth ed], p 1084). Although this ceremony was not required for leases, which were generally limited to a specified term of years, it was necessary to create a life tenancy which was viewed as a freehold interest. Thus, if a lease granting a tenant a life estate was not accompanied by livery of seisin, the intended conveyance would fail and a mere tenancy at will would result. The corollary to Lord Coke’s comment is that the grant of a life estate would be enforceable if accompanied by livery of seisin and the other requisites for a conveyance. Because such a tenancy was terminable at the will of the grantee, there was in fact no general objection at common law to a tenancy at the will of the tenant. The express terms of a lease granting a life tenancy would fail, and a tenancy at will would result, only when livery of seisin, or any other requirement for a conveyance, had not been met (see, generally, Tiffany, op. cit., § 159; Effinger v Lewis, supra; Tennant v Tennant Mem. Home, 167 Cal 570; Myers v East Ohio Gas Co., 51 Ohio St 2d 121).

Because livery of seisin, like the ancient requirement for a seal, has been abandoned, commentators generally urge that there is no longer any reason why a lease granting the tenant alone the right to terminate at will, should be converted into a tenancy at will terminable by either party (Tiffany, op. cit., § 159; 1 American Law of Property, op. cit., § 3.30; Schoshinski, op. cit., § 2:16, pp 61, 62). The Restatement adopts this view and provides the following illustration: “L leases a farm to T Tor as long as T desires to stay on the land’. The lease creates a determinable life estate in T, terminable at T’s will or on his death.” (Restatement, Property 2d, Landlord and Tenant, § 1.6, Comment g, Illustration 6.) This rule has increasingly gained acceptance in courts which have closely examined the problem (Myers v East Ohio Gas Co., supra; Collins v Shanahan, 523 P2d 999 [Col]; Thompson v Baxter, supra; Gunnison v Evans, supra; Effinger v Lewis, supra).

This court has never specifically addressed the issue. In 1872 we applied the Coke dictum by analogy, and without attribution, in Western Transp. Co. v Lansing (49 NY 499, supra). The case did not deal with a tenant’s right to terminate a lease, but with the right of a tenant to renew a lease beyond its initial term “for such further time, after the expiration of said term, as said party of the second part (the lessee) shall choose or elect” (Western Transp. Co. v Lansing, supra, at p 502). The initial term was for 15 years. At its expiration the original lessor had died and the lessee had assigned the lease to a corporate tenant which sought specific performance of the right to renew. Although on that occasion the assignor only requested renewal for an additional 15 years, we held that the renewal clause itself was indefinite and unenforceable. In the course of the opinion we observed (at p 508) that the renewal clause “is similar to a provision for such time as both parties please * * * or a lease giving a right to occupy as long as lessee pleases * * * A lease for so long as both parties shall please, or for so long as the lessee shall please, is said to be a lease at the will of both lessor and lessee”.

Several years later, however, in Hoff v Royal Metal Furniture Co. (117 App Div 884), where the initial term of the lease was for one year renewable “from year to year” by the tenant “its successors or assigns”, our earlier Western Transp. case was held by the Appellate Division to pose no obstacle to enforcing the original tenant’s request for a one-year renewal made during the life of the lessor who had signed the lease. On appeal to this court we affirmed without opinion (189 NY 555). These cases illustrate that seemingly perpetual leases are not favored by the law, and will not be enforced unless the lease clearly grants to the tenant or his successors the right to extend beyond the initial term by renewing indefinitely.

In the case now before us the lease does not provide for renewal, and its duration cannot be said to be perpetual or indefinite. It simply grants a personal right to the named lessee, Lou Gerrish, to terminate at a date of his choice, which is a fairly typical means of creating a life tenancy terminable at the will of the tenant (Restatement, Property 2d, op. cit., Illustration 6; Collins v Shanahan, supra). Thus the lease will terminate, at the latest, upon the death of the named lessee. The fact that it may be terminated at some earlier point, if the named tenant decides to quit the premises, does not render it indeterminate. Leases providing for termination upon the occurrence of a specified event prior to the completion of an otherwise fixed term, are routinely enforced even when the event is within the control of the lessee (Schoshinski, op. cit., § 2:7, pp 41-42).

In sum, the lease expressly and unambiguously grants to the tenant the right to terminate, and does not reserve to the landlord a similar right. To hold that such a lease creates a tenancy terminable at the will of either party would violate the terms of the agreement and the express intent of the contracting parties.

Accordingly, the order of the Appellate Division should be reversed and the petition dismissed.

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

Order reversed, with costs, and petition dismissed.


author: Kaye, J.

text:
    Andrea Rogers, Individually and as Administratrix of the Estate of Jerome C. Rogers, Deceased, et al., Appellants, v Judith Rogers, Respondent, et al., Defendant.
    Argued November 15, 1984;
    decided December 18, 1984

      POINTS OF COUNSEL

      Nicholas J. Damadeo, Ira J. Raab and DeirdreA. Nicolle for appellants.
    I. Plaintiffs have a vested interest in the proceeds of the insurance policy by virtue of the separation agreement entered into between plaintiff and the decedent. (Stronge v Supreme Lodge, Knights of Pythias, 189 NY 346; Poster v Washington Nat. Life Ins. Co., 87 AD2d 546; Zinga v Zenga, 104 Misc 2d 617; Ferro v Bologna, 31 NY2d 305; Salinas v Salinas, 187 Misc 509, 271 App Div 917; Locomotive Engrs. Mut. Life & Acc. Ins. Assn. v Locke, 251 App Div 146; Simonds v Simonds, 45 NY2d 233.) II. A constructive trust should be imposed on the proceeds of the insurance policy in which plaintiffs have a vested interest. (Simonds v Simonds, 45 NY2d 233; Lengel v Lengel, 86 Misc 2d 460; Sharp v Kosmalski, 40 NY2d 119; Beatty v Guggenheim Exploration Co., 225 NY 380.)

      Larry Jay Kushner for respondent.
    Appellants are not entitled to the proceeds of Phoenix’s policy on the life of Jerome Rogers. (Stokes v Equitable Life Assur. Soc., 46 AD2d 614; Bankers Security Life Ins. Soc. v Shakerdge, 49 NY2d 939.)
   OPINION OF THE COURT

Kaye, J.

In a separation agreement, the decedent promised his first wife to maintain his life insurance policy, which designated her and their children (plaintiffs in this action) as beneficiaries. He breached that agreement when he allowed the policy to lapse and obtained another policy naming a subsequent wife as beneficiary. We hold that under Simonds v Simonds (45 NY2d 233) a constructive trust may be impressed on the proceeds in favor of plaintiffs.

In 1968, decedent Jerome Rogers and plaintiff Susan Rogers entered into a separation agreement which provided for the continuation of decedent’s life insurance policy as follows: “ninth: The Husband promises and agrees to continue in full force and effect his present life insurance policy in the face amount of approximately $15,000.00 with the wife and children as NAMED EQUAL irrevocable beneficiaries.” The agreement was subsequently incorporated into a divorce decree. At the time, decedent’s life was insured for $15,000 through a Travelers Insurance Company group policy issued to Grumman Aerospace Company, decedent’s employer. This coverage terminated in 1970 when decedent left Grumman. He married defendant Judith Rogers in June 1974. From 1970 to 1976, decedent held a number of jobs but there is no indication that his life was insured during this period. In 1976, decedent obtained employment with Technical Data Specialists, Inc., and, by virtue of this employment, his life was insured for $15,000 through a group policy issued by defendant Phoenix Mutual Life Insurance Company. He designated Judith Rogers beneficiary. Jerome Rogers died on April 1, 1980.

Judith Rogers and plaintiffs both notified Phoenix of their intent to claim benefits. Phoenix informed the parties of the dispute on October 17, 1980 and said that it would file an interpleader action if it did not hear from them within 30 days. Subsequently, however, Phoenix communicated with Judith Rogers’ attorney and satisfied itself that the proceeds should be paid to her. On January 9, 1981, it informed plaintiffs’ attorney that it would disburse the benefits to Judith unless within 15 days it was prohibited from doing so by court order. Since no court order was obtained, Phoenix made payment to Judith on February 4, 1981.

Plaintiffs commenced this action to impress a constructive trust on the insurance proceeds. Judith Rogers moved to dismiss the complaint or for summary judgment and Phoenix also moved for summary judgment. Plaintiffs cross-moved for summary judgment against both defendants. Special Term granted defendants’ motions and dismissed the complaint, reasoning that plaintiffs were not entitled to the proceeds because the separation agreement did not address the decedent’s duties in the event of cancellation or lapse of the first insurance policy. The Appellate Division affirmed, without opinion, and this court granted plaintiffs’ motion for leave to appeal. The appeal against Phoenix has been withdrawn.

A constructive trust may be imposed in favor of one who transfers property in reliance on a promise originating in a confidential relationship where the transfer results in the unjust enrichment of the holder (Sharp v Kosmalski, 40 NY2d 119). Accordingly, one who possesses equity in an asset is entitled to restitution of the asset by a subsequent title holder who paid no value even if the latter had no knowledge of the predecessor’s equitable interest (see 5 Scott, Trusts [3d ed], § 462.2; 1 Palmer, Restitution, § 2.20; Lengel v Lengel, 86 Misc 2d 460). In general, it is necessary to trace one’s equitable interest to identifiable property in the hands of the purported constructive trustee (see 1 Palmer, Restitution, § 2.14; Restatement, Restitution 2d, Tent Draft No. 2, § 32); But in view of equity’s goal of softening where appropriate the harsh consequences of legal formalisms, in limited situations the tracing requirement may be relaxed.

In Simonds v Simonds (45 NY2d 232, 237, supra), decedent and his first wife entered into a separation agreement which provided: “ ‘The husband agrees that he will keep all of the policies of Insurance now in full force and effect on his life. Said policies now being in the sum of $21,000.00 and the Husband further agrees that the Wife shall be the beneficiary of said policies in an amount not less than $7,000.00 and the Husband further agrees that he shall pay any and all premiums necessary to maintain such policies of Insurance and if for any reason any of them now existing the policies shall be cancelled or be caused to lapse. He shall procure additional insurance in an amount equal to the face value of the policies having been cancelled or caused to lapse.’ ” After the divorce, the husband remarried and permitted his insurance policies to lapse. However, he acquired three other policies, totaling more than $55,000, which named as beneficiaries his second wife and their daughter. On the husband’s death, and faced with his insolvent estate, the first wife brought an action against the second wife to impose a constructive trust on the insurance proceeds to the extent of $7,000. The court affirmed the grant of summary judgment in favor of the first wife.

As the court noted, a promise in a separation agreement to maintain an insurance policy designating a spouse as beneficiary vests in the spouse an equitable interest in the policy specified, and that spouse will prevail over a person in whose favor the decedent executed a gratuitous change in beneficiary (Stronge v Supreme Lodge, Knights of Pythias, 189 NY 346; Locomotive Engrs. Mut. Life & Acc. Ins. Assn. v Locke, 251 App Div 146, affd 277 NY 584). The first spouse’s superior right to the insurance proceeds will not necessarily be defeated simply because the insured changes policies or insurance companies instead of beneficiaries. The court explained that “inability to trace plaintiff’s equitable rights precisely should not require that they not be recognized” (Simonds v Simonds, 45 NY2d 233, 240, supra; see, also, Appelman v Appelman, 87 Ill App 3d 749; McKissick v McKissick, 93 Nev 139). The need to relax the tracing requirement in exceptional circumstances has been acknowledged in a tentative draft of the Restatement of Restitution, Second: “If the holder of property has acquired it as a replacement for another asset of known value, and owes restitution to a claimant who could have enforced against the holder an agreement to preserve or replace that asset, a constructive trust or an equitable lien will be imposed on the holder’s interest according to § 30 and clause (e) of § 32” (Restatement, Restitution 2d, Tent Draft No. 2, § 33, subd 2; see, also, Comment c thereto).

Defendant Rogers argues that Simonds is distinguishable because the separation agreement there obligated the husband to procure additional insurance in the event of lapse — an obligation not explicitly set forth in the agreement here. But the existence of such a provision was not the articulated basis of the Simonds decision. The “additional insurance” language in the agreement in Simonds did not and could not identify a specific res as subject to the first wife’s superior right. It simply made the persistence of the equitable interest “all the more evident” (Simonds v Simonds, 45 NY2d 233, 239, supra). The survival of the equitable interest is also evident here. No less than in Simonds, what was certainly the contemplation of the parties, embodied in paragraph ninth of their separation agreement, was the promise that decedent would maintain or replace a $15,000 life insurance policy, and not a promise that would persist only so long as he remained an employee of Grumman. Both life insurance policies were obtained by virtue of decedent’s employment, both were in the amount of $15,000, and there is no indication that decedent maintained any other life insurance during the respective terms of the policies. He maintained one $15,000 life insurance policy while an employee of Grumman and, after that had lapsed, maintained a later $15,000 life insurance policy while an employee of Technical Data Services. Thus, despite the time period between the lapse of the Travelers policy and the issuance of the Phoenix policy, the latter may properly be considered a fulfillment of decedent’s implied promise to replace the former. To find that decedent had escaped the obligation imposed upon him by the separation agreement simply because of the absence from the agreement of words specifically addressing the cancellation of the first policy, when the intendment is plain, would be to erect a legal formalism and defeat an essential purpose of equity.

The Simonds decision itself evinced the court’s rejection of defendant’s position by its criticism of Rindels v Prudential Life Ins. Co. (83 NM 181), a case conceded by defendant at Special Term to be “almost identical” to the situation here. In Rindels, the husband agreed to “maintain his present life insurance policy and/or policies setting out the minor children as beneficiaries thereunder.” The husband was then insured under a group policy through his employer. However, the husband changed jobs and became insured under a new group policy issued by a different carrier. The Rindels court refused to impress a constructive trust on the proceeds and emphasized that the case involved not a mere change of beneficiary or substitution of policies but a completely new policy which arose from a change of employment. Simonds criticized Rindels because it relied “heavily on formalism and too little on basic equitable principles”. (45 NY2d 233, 243, supra.) Notably, this court did not distinguish Rindels because there had been no express provision in the agreement for future insurance policies.

In opposing plaintiffs’ request for summary judgment, defendant in this court relies exclusively on the absence from the separation agreement of specific provision governing after-acquired policies. Accordingly, the order of the Appellate Division should be reversed, with costs, defendant Judith Rogers’ summary judgment motion denied, and plaintiffs’ cross motion for summary judgment granted.

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

Order reversed, etc.


text:
    Merrill Lynch Realty/Carll Burr, Inc., Plaintiff, v Stanley J. Skinner et al., Defendants. (Action No. 1.) George J. Roukis et al., Appellants, v Stanley J. Skinner et al., Respondents. (Action No. 2.)
    Decided December 20, 1984

      APPEARANCES OF COUNSEL

      James J. Vaughn and E. Richard Rimmels for appellants.

      John V. Henry for respondents.
   OPINION OF THE COURT

Wachtler, J.

Plaintiffs, George and Marjorie Roukis, commenced this action for specific performance of a contract for the sale of a home and alternatively sought damages for the sellers’ alleged breach of the contract. Defendants Stanley and Elizabeth Skinner moved for summary judgment, which was denied by the Supreme Court. However, the Appellate Division reversed, granted the motion and dismissed the complaint. The plaintiffs have appealed as of right on the basis of the reversal.

The issue is whether the plaintiff buyers’ acceptance of a check representing a return of their down payment constituted an accord and satisfaction under the circumstances. The Appellate Division held that it did.

The defendants own a house in Halesite on Long Island. On April 1, 1981, they entered into a contract with the plaintiffs to sell the house for $83,575. The contract provides that the purchasers will make a down payment of $8,000 on signing the contract, and will pay the balance of $75,575 at the time of closing. The contract further provides that it is subject to the purchasers obtaining an FHA mortgage in an amount of not less than $65,000 and states: “Purchaser shall have 60 days to obtain final bank approval and FHA, VA, CONVENTION [sic] commitment approval. Unless attorney for Seller receives written notice that the aforesaid approvals have been obtained within the dates set forth herein, irrespective of whether said approval and/or commitments shall have actually been obtained, the Seller shall have the option of cancelling this contract and upon return to the purchaser of the downpayment said hereunder, both parties shall be released from any further liability to the other.”

At the contract-signing plaintiffs made the down payment of $8,000 to the sellers’ attorney who held the money in escrow as required by the contract.

On June 2, 1981 the sellers’ attorney sent the plaintiffs’ attorney the following letter:

“Confirming our telephone conversation please be advised that my client has elected to cancel the contract because of the fact that a firm mortgage commitment has not been obtained within the 60 day period as called for under the contract.

“Enclosed you will find my check payable to the order of your client in the amount of $8,000.00 which sum represents the down payment.”

On June 22, 1981 the plaintiffs commenced this action seeking specific performance of the contract of sale, or $30,000 in damages in the event specific performance could not be awarded. In essence they alleged that they had diligently applied for an FHA mortgage, had obtained conditional approval, but had been unable to obtain final approval because the defendants would not respond to their requests to enter the premises to make certain minor repairs required by the FHA. They stated that they “have been at all times and are now ready, willing and able to perform the said agreement and pay the defendants the aforesaid sum of $83,575.00” but that the defendants “have refused and still refuse to deliver a deed”.

On July 18, 1981 the plaintiffs cashed the check which they had received from the defendants’ attorney as return of their down payment.

In their answer the defendants admitted signing the contract and refusing to deliver the deed, but otherwise denied the material allegations. The 60-day notice provision was asserted as an affirmative defense in which the defendants alleged that their attorney “did not receive written notice on or before May 31,1981 that plaintiffs had obtained both ‘final bank approval’ and ‘FHA commitment approval’ ”. They claimed that on “June 2,1981, the defendants exercised their option to cancel the contract, through their attorney by so notifying plaintiffs’ attorney and by returning the contract deposit of $8,000.00”.

On November 29, 1982, the plaintiff George Roukis was questioned at an examination before trial, during which he admitted cashing the check representing the return of his down payment. He stated, without elaboration, that he had done so after consulting with his lawyer.

On May 25, 1983 the defendants moved for summary judgment, claiming that the cashing of the check constituted an accord and satisfaction. They noted that it was accompanied by a letter in which the defendants’ attorney had stated that the check for their down payment was enclosed because the defendants had decided to exercise their option to cancel the contract. The defendants contended that the plaintiffs could not accept the check without also accepting the condition, and that the contract was therefore canceled.

The plaintiffs opposed the motion on the ground, among other things, that there could be no accord and satisfaction where the defendants had simply returned the plaintiffs’ own money to them. The defendants countered by urging that the check was not a return of the plaintiffs own property “but was a return of the contract deposit that belonged to the defendants pursuant to the contract * * * [T]he return of the contract deposit was not due to plaintiffs Roukis except upon cancellation of the contract”.

In opposition to the motion the plaintiffs submitted their own affidavits, and an affidavit by the real estate broker stating that the defendants had first offered their house for sale in 1980. Although the plaintiffs had agreed to buy it and had signed a binder to this effect, defendants refused to sign a contract of sale after the plaintiffs had made certain expenditures. The second contract of sale, at issue on this appeal, was signed the following year after the defendants had approached the plaintiffs, through the same broker, and again offered the house for sale. The affidavits recite in considerable detail the efforts and expenditures the plaintiffs made to meet the 60-day time limit. They also recite the repeated efforts the plaintiffs and the real estate broker allegedly made to obtain the defendant’s permission to enter the premises to permit an FHA inspection prior to he conditional commitment, and to make repairs required by the FHA after the inspection had been completed.

The trial court denied the motion for summary judgment but the Appellate Division reversed on the law. The relevant portion of its memorandum states: “[W]e agree with the defendants that, under the circumstances here present, plaintiffs’ negotiation of the check, especially after consultation with their attorney, constituted a bar to this action under the common-law principle of accord and satisfaction (Gimby v Frost, 84 AD2d 806; see Broido v Busick, 33 Misc 2d 804). Accordingly, the defendants are entitled to summary judgment dismissing the Roukis’ complaint.” (101 AD2d 855.)

In our view the Appellate Division erred in two respects: first, by concluding that the letter accompanying the check constituted a basis for an accord and satisfaction; secondly, and more fundamentally, by holding in effect that sellers who have decided not to perform a realty contract may generally require the buyers to relinquish their rights under the contract as a condition to the return of their down payment.

As a general rule, acceptance of a check in full settlement of a disputed unliquidated claim operates as an accord and satisfaction discharging the claim (Nassoiy v Tomlinson, 148 NY 326; Ann., 34 ALR 1035; 75 ALR 905; Restatement, Contracts 2d, § 281, Comment d). The theory is that the parties have made a new contract discharging all or part of their obligations under the original contract (6 Corbin, Contracts, § 1276; Restatement, Contracts 2d, § 281). Although the use of a conditional check may put the creditor in a position where he will have to make an “embarrassing * * * choice” (Hudson v Yonkers Fruit Co., 258 NY 168, 172 [Cardozo, J.]), it is a generally accepted method of settling contract disputes (Rosenblatt v Birnbaum, 16 NY2d 212; Nassoiy v Tomlinson, supra; Ann., 34 ALR 1035, 1046; 75 ALR 905; Restatement, Contracts 2d, § 281, Comment d).

Such agreements are enforceable, however, only when the person receiving the check has been clearly informed that acceptance of the amount offered will settle or discharge a legitimately disputed unliquidated claim (Hudson v Yonkers Fruit Co., 258 NY 168,174, supra; 6 Corbin, op. cit., § 1277). In the case now before us, neither the check nor the letter accompanying it expressly stated that the check was offered in settlement of any outstanding dispute arising out of the contract. Nevertheless, the defendants urge that the transaction should be given this effect because the letter accompanying the check clearly states the defendants’ intent to cancel the sales contract (see, e.g., Gimby v Frost, 84 AD2d 806).

That intent, however, is qualified by the reference to the defendants’ contractual option to cancel which would not be available to them if, as the plaintiffs contend, the defendants frustrated the plaintiffs’ ability to obtain the mortgage commitment in the time prescribed (Grad v Roberts, 14 NY2d 70; Aimies v Wesnofske, 255 NY 156, 162-163; Patterson v Meyerhofer, 204 NY 96, 100-101; 3A Corbin, op. cit., § 767; Simpson, Contracts [2d ed], § 169; Restatement, Contracts 2d, § 245). Thus by its terms, the letter simply purports to exercise the defendants’ rights under the contract. It does not offer to settle any dispute or advise the plaintiffs that acceptance of the check will cancel the contract, even if the contract of sale would not entitle the defendants to cancel under the circumstances. It does not, in short, evidence a clear intent to alter or modify the original contractual terms or settle a dispute concerning them.

In any event, the defendants should not be permitted to condition the return of the down payment on the plaintiffs’ relinquishing their rights under the contract of sale. As a rule a condition attached to a check requiring the recipient to surrender contractual rights will not serve as an accord and satisfaction if the check simply represents a return of the recipient’s own property (Hudson v Yonkers Fruit Co., supra). We note, however, that this court has not previously considered whether this principle applies to the return of down payments made in connection with realty contracts. The cases from the lower courts are inconclusive.

In the cases cited by the defendants, where the courts found an accord and satisfaction (Gimby v Frost, 84 AD2d 806, app dsmd 56 NY2d 593, supra; Broido v Busick, 33 Misc 2d 804), this point was not considered or discussed. The case cited by the plaintiffs (Car-Lynn Realty Corp. v Almar Props., 30 AD2d 808), in which the court applied the principle and found no accord and satisfaction, is unusual because it only involved a suit for damages, the property having been sold to a third party before the check was cashed.

In the case now before us, the defendants argued in the trial court that the check did not represent a return of the plaintiffs’ own property “but was a return of the contract deposit that belonged to the defendants pursuant to the contract”. Thus, the defendants’ claim to ownership of the money was predicated entirely on the contract of sale. But once they refused to perform the contract by delivering the deed, there was no longer any basis on which they could claim that the money still belonged to them. That is so whether their refusal to perform was justified, as they contend, or constituted a breach of the agreement, as the plaintiffs urge. In either event the defendants, having refused to perform the contract, had no right to retain the plaintiffs’ down payment.

That is not to say that the parties to a real estate contract are precluded from canceling the contract and extinguishing all liability after a dispute arises. This could be accomplished in a number of ways. They could mutually and expressly adopt an agreement to this effect. One of the parties could propose an accord, including substituted performance, or a conditional check representing something more than a return of the recipient’s own property, which, if accepted, would be enforceable. But when the seller simply returns the buyer’s down payment, acceptance of the check should not be considered an accord and satisfaction because the check constituted nothing more than a return of the buyer’s ovzn property.

Accordingly, the order of the Appellate Division should be reversed, with costs, the motion for summary judgment made by the defendants denied, and the complaint reinstated.

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

On review of submissions pursuant to section 500.4 of the Rules of the Court of Appeals (22 NYCRR 500.4), order reversed, etc.

      . After the commencement of this action the broker brought a separate action to recover the brokerage commission. Although the two actions were later consolidated for trial, the present motion for summary judgment relates only to the Roukis complaint. The broker’s suit is not before us.

      . This motion was denied on the ground that the denial of a prior motion for summary judgment constituted the law of the case. The record does not indicate the basis for the prior motion. In any event the plaintiffs do not challenge the Appellate Division’s threshold determination that denial of the defendants’ first motion for summary judgment does not preclude consideration of this second motion for summary judgment under the circumstances of this case. There is therefore no need for us to address the question.

      . But also see, for analogy, Uniform Commercial Code, § 1-207; Rosenthal, Discord and Dissatisfaction: Section 1-207 of the Uniform Commercial Code, 78 Col L Rev 48; Hawkland, Effect of UCC § 1-207 On the Doctrine of Accord and Satisfaction by Conditional Check, 74 Com LJ 329.


text:
    Dale Romanello et al., Appellants, v Abraham Hirschfeld et al., Respondents.
    Decided July 3, 1984

      APPEARANCES OF COUNSEL

      Sheldon M. Greenbaum for appellants.

      Michael Majewski for respondent.
   OPINION OF THE COURT

On review of submissions pursuant to section 500.4 of the Rules of the Court of Appeals (22 NYCRR 500.4), order modified with costs to plaintiffs, plaintiffs’ motion for partial summary judgment granted on the first, second and third causes of action as to liability for wrongful eviction and case remitted to Supreme Court, New York County, for the reasons stated in the dissenting memorandum by Justice E. Leo Milonas at the Appellate Division (98 AD2d 657, 658), and for further proceedings in accordance with that dissenting memorandum; and, as so modified, order affirmed. Question certified answered in the negative.

Concur: Chief Judge Cooke and Judges Jasen, Jones, Wachtler, Meyer, Simons and Kaye.


text:
    In the Matter of Gary Cooper, Appellant, v Harold J. Smith, as Superintendent of Attica Correctional Facility, et al., Respondents.
    Decided July 3, 1984

      APPEARANCES OF COUNSEL

      Norman P. Effrnan and Leigh E. Anderson for appellant.

      Robert Abrams, Attorney-General (Peter H. Schiff and Martin A. Hotvet of counsel), for respondents.
   OPINION OF THE COURT

On review of submissions pursuant to section 500.4 of the Rules of the Court of Appeals (22 NYCRR 500.4), order affirmed, without costs. Petitioner has failed to show any statutory, regulatory or precedential right to his prison job. Accordingly, no proceeding lies for its termination in the absence of proof of denial of constitutional right or statutory violation.

Concur: Chief Judge Cooke and Judges Jasen, Jones, Wachtler, Meyer, Simons and Kaye.


author: Meyer, J.

text:
    Thomas Boylan, Respondent, v G. L. Morrow Company, Inc., et al., Appellants.
    Argued May 2, 1984;
    decided July 3, 1984

      APPEARANCES OF COUNSEL

      Robert M. Brown for appellants.

      Edward R. Feinberg for respondent.
   OPINION OF THE COURT

Memorandum.

The order of the Appellate Division, insofar as appealed from, should be reversed, with costs, the first and second causes of action dismissed, and the question certified answered in the affirmative.

Defendant’s motion to dismiss the first and second causes of action on the Statute of Frauds defense should have been granted. Plaintiff’s argument that the Statute of Frauds defense must be deemed defeated because defendant admitted the existence of an oral contract is without merit. Defendant’s concession that, for purposes of the motion to dismiss, the facts asserted in the complaint must be accepted as true, was not, as plaintiff asserts, an affirmative admission sufficient to defeat the Statute of Frauds, but was merely defendant’s recognition of the procedural context in which the motion arose. Moreover, if this case were to be decided under the statute relied upon by the dissenter in this court, we would note that that statute (Uniform Commercial Code, § 8-319, subd [d]) requires an affirmative admission that a contract was made for the sale of a stated quantity of described securities at a defined or stated price. The purported admission in this case has none of the requisite certainty, and therefore is not sufficient to defeat defendant’s motion to dismiss. Nor does anything in the Uniform Commercial Code provision suggest that a CPLR 3211 motion to dismiss on Statute of Frauds grounds may not be entertained until there has been an opportunity for an admission concerning the claimed oral agreement. In some instances an examination before trial could be had before the motion to dismiss is made or the motion could be held in abeyance until the plaintiff has had an opportunity to depose the defendant.

Finally, we note that plaintiff has failed to state a fraud cause of action inasmuch as a present intent not to carry out the promise of future action is not alleged (Lanzi v Brooks, 43 NY2d 778).

Meyer, J.

(dissenting). Subdivision (d) of section 8-319 of the Uniform Commercial Code excepts from its proscription against enforcement of an oral contract “A contract for the sale of securities * * * [as to which] the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract was made for sale of a stated quantity of described securities at a defined or stated price.” Neither the language of that provision nor the history of its adoption, nor its interpretation by the courts of this or other States warrants or sustains the construction of it which the majority espouses. To the contrary, the direction of subdivision (1) of section 1-102 that the Code “be liberally construed and applied to promote its underlying purposes and policies”, one of which is “to make uniform the law among the various jurisdictions” (§ 1-102, subd [2], par [c]), requires, as the courts below held, that a motion to dismiss on the ground of the Statute of Frauds be denied where, as here, the moving party concedes the making of the oral agreement alleged in the complaint. Respectfully, therefore, I dissent.

I

Plaintiff’s complaint alleges that after he advised defendants of his intention to leave his employment with defendant G. L. Morrow Co., Inc., to form his own company he was offered, among other things, 10% ownership of the corporation to induce him to stay, that he accepted those terms and continued his employment with the corporation, but that defendants have failed and refused to pay to him the value of his 10% share of defendant corporation, which has now merged with another corporation. Without answering the complaint, defendants moved under CPLR 3211 (subd [a], par 5) to dismiss the complaint as barred by the Statute of Frauds. The affidavit of defendant Gerald L. Morrow, submitted in support of the motion, states that there was no “written agreement with regard to the transfer of any corporate stock of the defendant to the plaintiff although the subject was discussed orally by plaintiff and me.

Supreme Court denied the motion in an opinion which stated that “Defendant [sic] concedes that it did offer Plaintiff 10% of the business and that Plaintiff accepted said offer” and that “they themselves [sic] admit the offer and the acceptance.” The Appellate Division affirmed in a memorandum which stated in pertinent part: “Further, for purpose of this appeal, defendants concede that ‘the allegation of Plaintiff * * * that Gerald R. [sic] Morrow offered Plaintiff* * * 10% ownership of G.L. Morrow Co. Inc., if he did not terminate his employment must be accepted as true’. This being the case, we agree with Special Term that Gross v Vogel (81 AD2d 576) is controlling and, accordingly, affirm” (96 AD2d, at p 984 [omissions and insertions in original])”. Justices Main and Levine dissented from that part of the majority holding in a dissent by Justice Levine which reasoned (96 AD2d, at p 985) that: “Defendants’ concession of the existence of the oral agreement, solely for purposes of a ruling on the validity of the complaint, does not constitute any extrajudicial or judicial admission to take the contract out of the Statute of Frauds. Obviously, for purposes of a motion to dismiss the complaint, all of its allegations are deemed to be true. But the existence of the alleged contracts were similarly assumed on the motions to dismiss in Russell v Societe Anonyme des Establissements Aeroxon (supra) [268 NY 173] and Markey v Kelly (supra) [10 AD2d 650]. The dismissals of the complaints in both cases preclude reliance on defendants’ solely procedural concession as to the oral promise here. Whether there actually was such an oral promise made by defendants, the complaint fails to allege any facts authorizing enforcement of that promise. As further stated in Burns v McCormick (233 NY 230, 235, supra), ‘The most that can be said against Mr. Halsey is that he made a promise which the law did not compel him to keep, and that afterwards he failed to keep it’.” (Italics in original; matter in brackets supplied.) The Appellate Division has certified to us the question whether it erred as a matter of law in affirming Special Term’s denial of the motion to dismiss. For the reasons that follow, that question should be answered in the negative.

II

The facts stated in the complaint constitute a contract “for sale of a stated quantity of described securities at a defined or stated price” (Uniform Commercial Code, § 8-319, subd [d]), the quantity being 10% of the corporation’s stock and the price being plaintiff’s continued employment (Gross v Vogel, 81 AD2d 576, supra; see Burnside & Co. v Havener Securities Co., 25 AD2d 373). Thus, the issue before us is whether the specific Statute of Frauds in question (Uniform Commercial Code, § 8-319, subd [d]) permits dismissal of the complaint. Under different circumstances, it may well be plaintiff’s burden in opposing a motion to dismiss to seek disclosure and a continuance, pursuant to CPLR 3211 (subd [d]), in order to obtain defendant’s testimony or admission concerning the claimed oral agreement. In the instant case, however, any such problem is obviated by the affirmed finding that defendants conceded the making of the oral agreement. Nor is it material that, although Special Term’s finding to that effect was express and unequivocal, the Appellate Division majority noted that the concession was “for purpose of this appeal” or, as the dissenters in that court put it, that defendants’ concession of the oral agreement was “solely for purposes of a ruling on the validity of the complaint.” The Russell and Markey cases, on which the dissenters below relied, involved earlier Statutes of Frauds provisions (Personal Property Law, former § 31, subd 1; former § 85, subd 1) which did not contain any exception with respect to an admission “in his pleading, testimony or otherwise in court” as does subdivision (d) of section 8-319 of the Uniform Commercial Code. The concession found by both courts below, having been made by defendants as part of their motion to dismiss on Statute of Frauds grounds, is undeniably an admission “otherwise in court,” which mandates denial of their motion under the present statute. Indeed, as hereafter set forth, the proper construction of the statute is that even absent such a concession a complaint on an oral agreement within its terms should not be dismissed prior to. a denial by defendants that an oral agreement was reached.

Ill

Subdivision (d) of section 8-319 of the Uniform Commercial Code, pertaining to the sale of securities, and its analog, section 2-201 (subd [3], par [b]), pertaining to the sale of goods, were enacted in New York in 1962 (L 1962, ch 553, eff Sept. 27,1964) and have not been amended since in any manner relevant to the instant case (cf. L 1982, ch 928, § 20). Section 8-319 provides in pertinent part:

“A contract for the sale of securities is not enforceable by way of action or defense unless

* * *

“(d) the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract was made for sale of a stated quantity of described securities at a defined or stated price.”

The analogous provision for the sale of goods, section 2-201, provides:

“(3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable

* * *

“(b) if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted”.

Both statutes replaced section 85 of the Personal Property Law, which, as already noted, contained no admission exception (McKinney’s Cons Laws of NY, Book 62½, Uniform Commercial Code, § 2-201, Practice Commentary [7], Official Comment [7], NY Ann [3]; § 8-319, NY Ann [d]).

The admission exception now included in the Statute of Frauds governing sales would be meaningless were the defendant permitted by the simple expedient of a motion to dismiss to deprive plaintiff of the opportunity to obtain from defendant either an admission “in his pleading, testimony or otherwise in court” or a sworn denial of the existence of a contract. Amendment to include the admission exception makes the statutory purpose what the Maryland Court of Appeals long ago declared it should be: “to protect a party, not from the temptation to commit perjury but from perjured evidence against him” (Trossbach v Trossbach, 185 Md 47, 55 [1945]). “In the few states still using the common law demurrer, sustaining the demurrer would effectively negate the exception of the statute, which is why the court in Garrison v Piatt [113 Ga App 94] turned down sustaining a demurrer, deferring to a vitality for section 2-201(3)(b).” (Duesenberg, Statute of Frauds in its 300th Year: The Challenge of Admissions in Court and Estoppel, 33 Bus Lawyer 1859, 1864-1865.) If a prepleading motion to dismiss is permitted to defeat a cause of action on an oral sales contract before plaintiff has had an opportunity to elicit from defendant a statement in court of any kind, only malpractice by defendant’s attorney would subject the defendant to the statute’s ameliorative purpose. The Legislature in adopting the Uniform Commercial Code and the drafters of the Code cannot reasonably be thought to have intended that the exception have such limited application.

IV

The historical framework against which the drafters of the Code prepared its sales Statute of Frauds provisions is fully described in a 1952 essay by Robert Stevens, then Dean of Cornell Law School, entitled Ethics and the Statute of Frauds (37 Cornell LQ 355). Dean Stevens pointed out that the early history of such statutes was that a party claiming the benefit of the statute was required to deny the existence of any agreement in his answer (Child v Godolphin, 1 Dickens 39, 42 [ch 1723]), and that only toward the end of the eighteenth century did the rule begin to change. The policy of permitting a party to welsh on an admitted or undenied agreement, which thereafter came to be the majority view, was by the middle of the present century the subject of severe criticism. Some courts (e.g., Trossbach v Trossbach, 185 Md 47, supra) rejected the rule entirely as ethically untenable and one State anticipated the formulation of the Code by enacting a statutory admission exception (Iowa Code Ann, § 622.34).

Dean Stevens concluded his essay with an impassioned plea for return to the original requirement of a sworn denial. Noting that equity courts had found ways of preventing the statute from being used to perpetuate a fraud in three different situations (fraud by defendant, part performance and defendant’s admission), in each of which there was proof to the satisfaction of the court that a contract had been made, he continued (37 Cornell LQ, at p 381):

“Of the three, the most convincing, the one with no attendant risk of perjured proof of a non-existent contract, was the class of cases in which the defendant confessed the contract. It is astonishing, therefore, that this is the only one of the three exceptional instances that has not been universally perpetuated, and it is more astonishing that the removal of the temptation to the defendant to perjure himself by denying the making of an agreement should have been employed as a device for permitting him unethically to escape an honest obligation.

“The Iowa legislature and the courts of some states deserve applause for the correctness of their attitudes. The law of the United States ought in all jurisdictions be what it was believed to have been in the seventeenth and eighteenth centuries. Effect should be given to the defendant’s admission of the making of an oral contract. The statute should not be recognized as a defense except where the defendant can and does deny the contracting. It should not be permissible to raise the defense of the statute by demurrer, or by a motion to dismiss the complaint except where the motion is supported by an affidavit denying the making of the contract.

■ * * *

“As Dean Roscoe Pound has said: ‘Legal concepts sometimes are, and perhaps sometimes must be, at variance with the requirements of morals. Yet such a condition is not something of which the jurist is to be proud. It is not a virtue in the law to have it so.’ ” (Citations omitted; emphasis supplied.)

Professor Corbin agreed, calling for adoption of an admission exception, denying the benefits of the statute except to a party who is willing “to submit himself to examination in court on the merits of the case and who under oath denies making the promise as alleged” (2 Corbin, Contracts, § 275, at p 13).

It was against this background that the admissions exceptions of the Uniform Commercial Code were considered and adopted. During the period of its consideration and prior to its adoption in New York, the Law Revision Commission proposed amendments of New York’s statute governing contracts not to be performed within a year or a lifetime (1953 Report of NY Law Rev Comm [NY Legis Doc, 1953, No. 65 (O)], p 533; 1957 Report of NY Law Rev Comm [NY Legis Doc, 1957, No. 65 (A)], p 15) and governing the sale of goods (1960 Report of NY Law Rev Comm [NY Legis Doc, 1960, No. 65 (F)], p 245), all of which discussed the admissions exception proposed by the drafters of the Uniform Commercial Code. It also considered the Code provisions themselves making it the sole topic of its labors in 1955 and 1956 (1955 Report of NY Law Rev Comm [NY Legis Doc, 1955, No. 65 (A)], p 31; 1956 Report of NY Law Rev Comm [NY Legis Doc, 1956, No. 65 (A)], p 11).

Our court had, as early as 1950, refused to extend the statute’s protection to one who voluntarily admitted an agreement in his pleadings (Martocci v Greater N. Y. Brewery, 301 NY 57, 61, 63), although a later Special Term decision (Smith v Muss, 203 Misc 356, app dsmd 281 App Div 957), without mention of Martocci, held that an involuntary admission in a deposition did not take the case out of the statute. Against that background, the Commission, in support of its own proposed admission exception, in discussing the proposed Uniform Commercial Code provision took the position that denial of the alleged oral agreement was necessary and that the Code provision would be acceptable only if interpreted to contain such a requirement: “The proposal in the Uniform Commercial Code seems adequate to accomplish the desired end of ‘admits’ if interpreted to include admissions by failure to deny under Civil Practice Act, section 243. It would remain open to a party answering a verified complaint to deny knowledge or information sufficient to form a belief in a proper case. If the defense is raised by motion, there is authority that it cannot be made under Rule 106 of the Rules of Civil Practice, but under the 1944 amendments to Rule 107 must be made under that rule whether or not the defect appears on the face of the complaint. If so, it would accord with the spirit of the proposed amendment if a denial of the agreement were held necessary in the affidavit required by Rule 107.” (1953 Report, p 581 [nn omitted; emphasis supplied]; accord 1957 Report, pp 21-22; 1960 Report, pp 252, 271.)

Even more directly in point are the 1955 and 1956 Reports of the Commission for they make clear that involuntary as well as voluntary admissions were intended to be covered. The 1952 version of the Uniform Commercial Code’s proposed Statute of Frauds did not include the word “testimony.” The New York Commission criticized the provision as ambiguous in that its application to involuntary admissions made on cross-examination was unclear (1956 Report, p 368; 1955 Report, p 372). In response to this criticism the Uniform Commercial Code provisions were revised in 1957 “to make it clear that it applied to admissions on cross-examination” (1956 Recommendations of Editorial Bd for Uniform Commercial Code, p 25 [1957]; Farnsworth, Statute of Frauds Governing Contracts for Sale of Goods, 1960 Report of NY Law Rev Comm, pp 257, 271).

The history thus recounted makes indelibly clear the intent of the drafters of the Code, and of the New York Legislature in adopting the Code in its present form, that denial of the existence of an oral agreement is a sine qua non of reliance on the sales Statute of Frauds provisions of the Code, and such is the unanimous view of commentators who have written on the subject (Perillo, Statute of Frauds in Light of Functions and Dysfunctions of Form, 43 Fordham L Rev 39, 76; see Yonge, Unheralded Demise of the Statute of Frauds Welsher in Oral Contracts for the Sale of Goods and Investment Securities, 33 Wash & Lee Rev 1, and authorities cited therein, at p 24, nn 77-85; Hacker, Admission Exception to Iowa Statute of Frauds, 67 Iowa L Rev 551, 561; Note: Application of Oral Admission Exception to Uniform Commercial Code’s Statute of Frauds, 32 U of Fla L Rev 486, 522; Comment, Use of Oral Admissions to Lift Bar of Statute of Frauds, 65 Cal L Rev 150, 157; Cunningham, A Proposal to Repeal Section 2-201, 85 Comm LJ 361, 362).

V

In light of the expression of purpose for uniformity with the law of other jurisdictions, an important consideration in construing the Code provision before us is how it has been construed elsewhere. In other States the majority of courts take the position here espoused. A demurrer or similar preanswer motion was rejected in Garrison v Piatt (113 Ga App 94); M&W Farm Serv. Co. v Callison (285 NW2d 271 [Iowa]); Duffee v Judson (251 Pa Super Ct 406); and Dangerfield v Market (222 NW2d 373, 378 [ND]). To the same effect are those cases which hold that a compelled admission in a deposition will satisfy the statute (Oskey Gasoline & Oil Co. v Continental Oil Co., 534 F2d 1281 [8th Cir]; Matter of Particle Reduction Corp., 5 UCC Rep Serv 242 [ED Pa]; Hale v Higginbotham, 228 Ga 823; Lewis v Hughes, 276 Md 247; Cargill, Inc. v Hale, 537 SW2d 667 [Mo]; Cohn v Fisher, 118 NJ Super 286; see Duesenberg, op. cit., 33 Bus Lawyer 1859,1862-1865; Construction and Application of UCC § 2-201[3][b] Rendering Contract of Sale Enforceable Notwithstanding Statute of Frauds, to Extent it is Admitted in Pleading, Testimony, or Otherwise in Court, Ann., 88 ALR3d 416, § 4, subd [b]). Only two courts have sustained demurrers in this posture (Fox v Overton, 534 P2d 679 [Okla]; Anthony v Tidwell, 560 SW2d 908 [Tenn]; see, also, Simmons Oil Corp. v Bulk Sales Corp., 498 F Supp 457, 460 [applying New Jersey law, the court found the Statute of Frauds satisfied on other grounds, but stated that it would have otherwise granted a preanswer motion to dismiss the complaint]).

Lower court decisions in this State are to like effect. In two cases directly in point, courts have denied CPLR 3211 motions in precisely the posture of the present case, requiring the defendant to answer the complaint and admit or deny its allegations (Weiss v Wolin, 60 Misc 2d 750; Reissman Int. Corp. v J.S.O. Wood Prods., NYLJ, June 6, 1972, p 2, col 5, 10 UCC Rep Serv 1165). The two Federal cases applying New York law are not to the contrary. In Radix Organization v Mack Trucks (602 F2d 45, 48), a summary judgment motion was granted, but the court found crucial that the plaintiffs “had ample opportunity for full discovery and there is no indication that such an admission has been made or is likely to be made.” Likewise, in Presti v Wilson (348 F Supp 543), a summary judgment motion was granted, but there had first been a denial of any agreement in both the answer and the defendant’s affidavit. Thus, not only the weight of authority outside this State but also all prior decisions in this State under the Uniform Commercial Code are consistent with the position taken by the majority below.

Consistent also with that position are Williston, Sales (4th ed, vol 2, § 14-9, pp 303-304), which characterizes it as “contra to the intention of the Code to sustain a demurrer by the party against whom enforcement [of an oral agreement] is sought” (matter in brackets added), noting that a “demurrer admits the facts that are pleaded, but for the purpose of the demurrer only; and having admitted the facts, the party making the demurrer may not at the same time claim the benefit of using the demurrer and the statute”, and the Restatement of Contracts, Second (§ 133, Comment d), which states, after referring to subdivision (3) of section 2-201 and subdivision (d) of section 8-319 of the Uniform Commercial Code: “Where the writing or oral statement is made under legal compulsion, it is nonetheless effective [to satisfy the statute] unless there is a contrary procedural policy in the state” (matter in brackets added). New York’s procedural policy clearly is not contrary in light of CPLR 3211 (subd [d]), referred to above.

To hold, as did the majority in the Appellate Division, that a defendant may not admit the making of an oral contract and at the same time rely on the Statute of Frauds is, thus, consistent with the language of section 8-319 of the Uniform Commercial Code, of the history of its preparation and adoption, and of its construction by both out-of-State courts and lower courts in this State, as well as by well-recognized secondary authorities. To do so, moreover, is but a recognition of the facts that “[i]f a defendant could prevail simply by raising the Statute of Frauds in a prepleading motion to dismiss, the admission exception would be vacuous. The defendant never would have to face the choice of admitting or denying the contract” (Hacker, op. cit., 67 Iowa L Rev, at p 561) and that the provision “is designed to discourage fraudulent claims and not to caution against the making of unwise and ill-considered promises” (1960 Report of NY Law Rev Comm, p 253).

The order of the Appellate Division should be affirmed.

Chief Judge Cooke and Judges Jones, Wachtler, Simons and Kaye concur in memorandum; Judge Meyer dissents and votes to affirm in an opinion in which Judge Jasen concurs.

Order, insofar as appealed from, reversed, etc.

      . Gross v Vogel held (81 AD2d 576, 577) that: "Since the parties stipulated for purposes of the instant motion that there was an oral agreement between them it was unnecessary for the court to reach the issue of unequivocal referability, which comes into play only where there is a dispute as to the existence of an agreement.”

      . Arguments made below by plaintiff based on the payment and part performance exceptions of the Statute of Frauds are not considered, those questions being premature, for the reasons stated in Gross v Vogel (81 AD2d 576 [n 1, supra]) in light of the conclusion hereafter reached.

      . Those cases which recognize that the Uniform Commercial Code precludes a party who acknowledges an oral contract from simultaneously claiming the benefits of the statute provide implicit support (Dehahn v Innes, 356 A2d 711 [Me]; Farmers Elevator Co. v Anderson, 170 Mont 175; Lish v Compton, 547 P2d 223 [Utah]), as does the case which recognizes that an admission in a deposition, if filed with the court, will take the contract out of the statute (Lippold v Beanblossom, 23 Ill App 3d 595).

      . To the same effect is Gross v Vogel (81 AD2d 576), in which an oral contract was admitted solely for the purpose of a summary judgment motion. Implicitly, the case stands for the principle that a party relying on the Statute of Frauds must deny the existence of the oral contract under oath at trial and ipso facto may not demur to the complaint on this ground.