author: Pigott, J.

text:
    [866 NE2d 1016, 834 NYS2d 688]
    In the Matter of S. Elof Nilsson et al., Respondents, v Department of Environmental Protection of City of New York, Appellant.
    Argued February 14, 2007;
    decided April 3, 2007

      POINTS OF COUNSEL

      Michael A. Cardozo, Corporation Counsel, New York City (Alan Beckoff, Stephen J. McGrath and Michael Burger of counsel), for appellant.
    I. The determination by the Department of Environmental Protection to deny the application for a variance was rational and not arbitrary and capricious. (Matter of Pell v Board of Educ. of Union Free School Dist. No. 1 of Towns of Scarsdale & Mamaroneck, Westchester County, 34 NY2d 222; Corliss v Solomon, 75 AD2d 837; Matter of Browning-Ferris Indus. of N.Y. v Danahy, 210 AD2d 477; Matter of Fineway Supermarkets v State Liq. Auth., 48 NY2d 464; Matter of Howard v Wyman, 28 NY2d 434; Matter of Dexter v Town Bd. of Town of Gates, 36 NY2d 102.) II. Assuming that the Appellate Division properly annulled the Department of Environmental Protection’s (DEP) determination, the Court improperly interfered with DEP’s discretion by ordering the agency to grant respondents the variance rather than remanding the matter to the agency to exercise its discretion appropriately and reconsider respondents’ application. (Matter of Brusco v Braun, 84 NY2d 674; Matter of Hassig v New York State Dept. of Health, 5 AD3d 846; Matter of Mitchell v Essex County Sheriff’s Dept., 302 AD2d 732; Matter of Posner v Levitt, 37 AD2d 331; Matter of Hamptons Hosp. & Med. Ctr. v Moore, 52 NY2d 88; Matter of East Clinton Devs, v Department of Envtl. Conservation of State of N.Y., 109 Misc 2d 786; Matter of Abrams v New York City Tr. Auth., 39 NY2d 990; Jones v Beame, 45 NY2d 402; James v Board of Educ. of City of N.Y., 42 NY2d 357.)

      Daniels and Porco, LLP, Carmel (Robert C. Lusardi of counsel), for respondents.
    I. Appellant did not have authority to consider stormwater impacts when reviewing respondents’ variance application. II. Appellant did not have authority to consider “impervious surface” issues when reviewing respondents’ variance application. III. Appellant applied an improper standard of “substantial hardship” in its review of respondents’ variance application. (Matter of Dexter v Town Bd. of Town of Gates, 36 NY2d 102; Matter of St. Onge v Donovan, 71 NY2d 507; Matter of Warren v Harris, 179 AD2d 660; Grimaldi v Suffolk County Dept. of Health Servs., 118 AD2d 621; Matter of Weinrib v Weisler, 33 AD2d 923.) IV. The Appellate Division acted within its power when it directed appellant to grant the variance. (WNEK Vending & Amusements Co. v City of Buffalo, 107 Misc 2d 353; Matter of Moore v D’Ambrose, 57 AD2d 394, 46 NY2d 816; Matter of Freidus v Guggenheimer, 57 AD2d 760; Matter of Scherbyn v Wayne-Finger Lakes Bd. of Coop. Educ. Servs., 77 NY2d 753; Matter of Pell v Board of Educ. of Union Free School Dist. No. 1 of Towns of Scarsdale & Mamaroneck, Westchester County, 34 NY2d 222; Matter of Treadway-Binghamton Co. v State Liq. Auth., 62 Misc 2d 626.)
   OPINION OF THE COURT

Pigott, J.

Intending to build a house on a parcel of vacant land in Putnam County, petitioner S. Elof Nilsson applied for a permit to build a subsurface sewage treatment system (SSTS). The parcel is within what is commonly referred to as the New York City Watershed, where reservoirs provide drinking water to that city and to an increasing number of residents of counties north of it. Construction within the Watershed is governed by regulations administered and enforced by the City of New York Department of Environmental Protection (DEP) (Rules of City of NY Dept of Envtl Protection [15 RCNY] ch 18). The Watershed Regulations incorporate by reference more stringent local standards enacted by agreement between DEP and the Putnam County Department of Health (PCDOH) (see 15 RCNY 18-38 [a] [2]). The DEP-PCDOH standards require that no more than 42 inches of the soil beneath an SSTS be “fill” (new soil added to the site). Nilsson’s proposal contemplated the use of as much as 78 inches of fill in places, and DEP therefore denied him a permit.

Nilsson then sought a variance from the provision prohibiting more than 42 inches of fill, stating that compliance was not possible because of the shallow depth of usable preexisting soil in the area where an SSTS could be built. He asserted that, without a variance, there would no longer be a “buildable” lot and this would impose a substantial hardship. DEP responded by requesting that Nilsson’s surveying and engineering firm propose various mitigation measures to reduce potential contamination resulting from the use of excessive fill. DEP also asked the engineers to propose mitigation measures for potential stormwater runoff from the new impervious surfaces that residential construction would entail — the house, the driveway and the SSTS itself. Finally, turning to the question of whether a denial of the variance would cause Nilsson substantial hardship, DEP requested information about the date of Nilsson’s acquisition of the property.

Nilsson’s engineers then proposed the following mitigation measures: enhanced sewage treatment systems for household waste; shallow, grass-lined channels to capture and redirect stormwater runoff from the driveway and SSTS; and a means of dissipating runoff from the roof of the house involving a roof-to-footing drain to a riprap apron. The engineers answered DEP’s question about the acquisition of the property, and reiterated Nilsson’s claim that, due to the physical conditions of the site, construction on the parcel in compliance with the fill provision was impossible, and this inability to use the property as a “buildable” lot would itself impose a substantial hardship. When DEP requested information regarding Nilsson’s other real estate holdings in the vicinity of the subject parcel, the engineers refused.

DEP denied Nilsson’s variance application, stating that “[w]hile the applicant has proposed adequate mitigation for the SSTS itself, [he] has not proposed adequate mitigation measures to offset the potential for adverse water quality impacts associated with stormwater runoff from the new residence, driveway and septic system area” (NY City DEP Variance Determination, June 2, 2004, at 2). In addition, DEP stated that “[t]he applicant has not provided information about his other real estate holdings in the immediate vicinity of the project area, as requested by [DEP], to substantiate a hardship case” (id.).

Petitioners then commenced this CPLR article 78 proceeding, seeking to vacate DEP’s denial of the variance as arbitrary, capricious and an abuse of discretion, and asking the court to direct DEP to grant the variance. Supreme Court denied the petition and dismissed the proceeding, holding that DEP’s “imposition of further mitigation measures to offset adverse water quality impacts” was rational, and that petitioners failed to prove substantial hardship because they did not show “by competent financial evidence that a reasonable rate of return cannot be realized . . . Mere diminution of value of the property is insufficient to establish substantial hardship.”

The Appellate Division reversed, concluding that DEP “acted outside the scope of its authority conferred by the applicable regulations when it considered storm runoff issues and impervious surface impacts, for which no variance was required” (28 AD3d 773, 775 [2006] [citations omitted]). The Court further held that “petitioners’ noncontiguous real estate holdings are irrelevant to the issue of whether the subject property is entitled to relief from the strict adherence to the regulations regarding construction of an SSTS” (id. [citation omitted]). The Appellate Division directed DEP to grant the requested variance (28 AD3d at 773). We granted DEP leave to appeal and now modify.

Variances from the requirements of the Watershed Regulations rest in the sound discretion of DEP (see 15 RCNY 18-61 [a]). The burden of proof is on the applicant (15 RCNY 18-61 [a] [4]). 15 RCNY 18-61 (a) (1) (iii) requires an applicant seeking a variance from the requirements of the Watershed Regulations to “[demonstrate that the activity as proposed includes adequate mitigation measures to avoid contamination to or degradation of the water supply which are at least as protective of the water supply as the standards for regulated activities set forth in these rules and regulations.” In other words, before it grants a variance, DEP must be persuaded that the applicant’s proposed mitigation measures will protect the watershed just as much as compliance with the regulation from which the applicant seeks a variance.

DEP properly required Nilsson, under 15 RCNY 18-61 (a) (1) (iii), to propose measures to reduce potential contamination resulting from his proposed use of excessive fill. It was an abuse of discretion, however, to require him to propose mitigation of stormwater runoff.

The provisions of the Watershed Regulations concerning stormwater runoff from impervious surfaces are contained in 15 RCNY 18-39. DEP concedes that there is no provision in that section that authorizes it to regulate stormwater runoff on Nilsson’s land. Nilsson’s engineer has stated, and DEP does not deny, that the subject property and the proposed SSTS are not within the regulated ranges delineated in 15 RCNY 18-39. In short, the stormwater runoff regulations do not apply.

Instead, DEP claims that it is authorized to require mitigation of stormwater runoff simply because approval of the variance from the fill provision would allow the construction of a residence with impervious surfaces. DEP, however, cannot extend its jurisdiction to otherwise unregulated sources of degradation or contamination of the New York City water supply, simply because they might potentially arise from the granting of a variance. If it could, then DEP could require Nilsson to propose mitigation measures to reduce the effect of any pollution source associated with a residence, from automobile exhaust emissions to domestic animal waste. Such broad jurisdiction would render meaningless the precise provisions of the Watershed Regulations that specify the distances from various water bodies within which construction may be regulated.

Moreover, it was an abuse of discretion to deny the variance application on the basis that Nilsson did not provide information on his other real estate holdings “in the immediate vicinity” of the subject parcel. The request to provide “information regarding the applicant’s real estate holdings in the vicinity of the subject lot” (letter from DEP to John Delano, Jan. 30, 2004) was too broad.

An applicant seeking a variance from the Watershed Regulations is required to “[demonstrate that for the proposed use or activity for which the variance is requested, compliance with the identified provisions of the rules and regulations would create a substantial hardship due to site conditions or limitations” (15 RCNY 18-61 [a] [1] [iv] [emphasis added]). This provision requires the applicant to describe those physical conditions on the subject parcel that make compliance with a particular regulation difficult — or impossible — and thereby explain the perceived need for a variance. While the hardship of a landowner is necessarily economic in nature, the Watershed Regulations contain no express requirement that a variance applicant provide evidence of projected financial loss. In this respect, although both types of application require proof of “hardship,” the procedure for applying for a variance from the Watershed Regulations differs from the use variance application process in the zoning context, which requires proof, by competent financial evidence, of a substantial lack of reasonable return (General City Law § 81-b [3] [b] [i]; Town Law § 267-b [2] [b] [1]; Village Law § 7-712-b [2] [b] [1]).

Where compliance with a provision of the Watershed Regulations is possible, but the applicant claims that it is prohibitively expensive, DEP may reasonably require the variance applicant to quantify the “substantial hardship” by submitting an estimate of the costs of compliance. But where the hardship claimed is the impossibility of building a residence on the parcel, as Nilsson’s engineers repeatedly noted, there is little more to be said.

DEP may, however, reasonably request information about an applicant’s contiguous real estate holdings, because an applicant who could combine lots may be able to minimize any hardship (see NY City DEP Variance Determination, June 2, 2004, at 2). Because Nilsson failed to provide information concerning contiguous holdings to DEI] the question whether he demonstrated substantial hardship must be remitted to DEP for reconsideration.

Accordingly, the order of the Appellate Division should be modified, with costs to petitioners, by remitting to Supreme Court, with directions to remand to the New York City Department of Environmental Protection for further proceedings in accordance with this opinion, and, as so modified, affirmed.

Chief Judge Kaye and Judges Ciparick, Graffeo, Read, Smith and Jones concur.

Order modified, etc.

      . Petitioners are Nilsson and the co-owners of the parcel, Alan S. Matzkin and Maria V Matzkin.

      . The Regulations prohibit “[t]he construction of an impervious surface within the limiting distance of 100 feet of a watercourse or wetland, or within the limiting distance of 300 feet of a reservoir, reservoir stem, or controlled lake” (15 RCNY 18-39 [a] [1]). Subdivision (a) (5) governs construction of a new house. “ [C] onstruction of a new individual residence within the limiting distance of 300 feet of a reservoir, reservoir stem, or controlled lake is prohibited” (15 RCNY 18-39 [a] [5] [i]). There are also restrictions on the construction of a new individual residence in a subdivision within the limiting distance of 100 feet of a watercourse or wetland (15 RCNY 18-39 [a] [5] [ii]). Additionally, under certain circumstances, “[construction of a new individual residence . . . within the limiting distance of 100 feet of a perennial stream or wetland requires an individual residential stormwater permit” from DEP (15 RCNY 18-39 [a] [5] [iii]). Subsequent subdivisions specify under what circumstances stormwater pollution prevention plans are required (see 15 RCNY 18-39 [b]). The provision most pertinent to Nilsson’s planned construction requires the preparation of such plans when “[c]onstruction of a new solid waste management facility or alteration of modification of an existing solid waste management facility within 300 feet of a watercourse or wetland or 500 feet of a reservoir, reservoir stem or controlled lake” is proposed (15 RCNY 18-39 [b] [3] [v]).


source: Caselaw Access Project

author: Read, J. Smith, J.

license: Public Domain

text:
    [866 NE2d 1020, 834 NYS2d 692]
    Highland Capital Management LP, Appellant-Respondent, v Leonard Schneider et al., Respondents-Appellants and Third-Party-Plaintiffs, and Jenkens & Gilchrist Parker Chapin LLP, Respondent. RBC Dominion Securities Corp., Third-Party Defendant-Respondent.
    Argued February 14, 2007;
    decided April 3, 2007

      POINTS OF COUNSEL

      Troutman Sanders LLP, New York City (Katherine C. Ash and Alvin M. Stein of counsel), for respondents-appellants.
    I. The Schneiders’ notes are not “securities” and any alleged oral agreement for their sale is covered by the statute of frauds at UCC 1-206 (1). (Federal Deposit Ins. Corp. v Herald Sq. Fabrics Corp., 81 AD2d 168; Parma Tile Mosaic & Marble Co. v Estate of Short, 87 NY2d 524; Morris Cohon & Co. v Russell, 23 NY2d 569; State of New York v Patricia II., 6 NY3d 160; Van Amerogen v Donnini, 78 NY2d 880; Vigilant Ins. Co. of Am. v Housing Auth. of City of El Paso, Tex., 87 NY2d 36; Graham v Commissioner of Internal Revenue, 304 F2d 707; Gerard v Helvering, 120 F2d 235; Rangolan v County of Nassau, 96 NY2d 42; Abood v Hospital Ambulance Serv., 30 NY2d 295.) II. The legislative history belies the contention that the securities industry is to be unburdened from compliance with the statute of frauds. III. Highland Capital Management LP proffers no valid grounds for excluding the Schneiders’ notes from the application of UCC 1-206 (1). (ALH Props. Ten v 306-100th St. Owners Corp., 191 AD2d 1, 86 NY2d 643; Horn & Hardart Co. v Pillsbury Co., 703 F Supp 1062, 888 F2d 8; Corporacion Venezolana de Fomento v Vintero Sales Corp., 452 F Supp 1108, 607 F2d 994; Cohn, Ivers & Co. v Gross, 56 Misc 2d 491; Allegaert v Chemical Bank, 657 F2d 495; Dairyland Fin. Corp. v Federal Intermediate Credit Bank of St. Paul, 852 F2d 242; Lazard Freres & Co. v Protective Life Ins. Co., 108 F3d 1531, 522 US 864; Matter of Waldstein, 160 Misc 763; Baker v Gotz, 387 F Supp 1381.)

      Lackey Hershman, L.L.P. (Paul B. Lackey and Jamie R. Welton of the Texas bar, admitted pro hac vice, of counsel), for appellant-respondent.
    I. UCC 8-102 (a) (15) should be construed liberally to encompass the notes. (ALH Props. Ten v 306-100th St. Owners Corp., 191 AD2d 1.) II. The notes are transferable. III. The notes are divisible. (Allegaert v Chemical Bank, 657 F2d 495; Baker v Gotz, 387 F Supp 1381.) IV. The notes are considered “securities” by the market. (Allegaert v Chemical Bank, 657 F2d 495; Vigilant Ins. Co. of Am. v Housing Auth. of City of El Paso, Tex., 87 NY2d 36; ALH Props. Ten v 306-100th St. Owners Corp., 191 AD2d 1; Matter of Waldstein, 160 Misc 763; Lazard Freres & Co. v Protective Life Ins. Co., 108 F3d 1531; Morris Cohon & Co. v Russell, 23 NY2d 569.)
   OPINION OF THE COURT

Read, J.

The United States Court of Appeals for the Second Circuit has asked us whether the eight promissory notes at issue in this case are “securities” within the meaning of section 8-102 (a) (15) of the Uniform Commercial Code. For the reasons that follow, we conclude that they are.

I.

In April 1998, Norton McNaughton, Inc. (subsequently, McNaughton Apparel Group, Inc.) acquired two women’s apparel companies — Jeri-Jo Knitwear Inc. (owned by Leonard Schneider), and Jamie Scott, Inc. (owned by his three children, Leslie, Susan and Scott Schneider). These two businesses were combined to form a division of McNaughton called Jeri-Jo Knitwear, Inc. (Jeri-Jo). Under the terms of the Agreement of Purchase and Sale, McNaughton paid the Schneiders $55 million in cash, assumed $10.9 million in debt, and agreed to a future earn-out payment based on Jeri-Jo’s performance over the two-year period ending in June 2000, during which the Schneider children managed this business for McNaughton.

The earn-out payment was fixed at $190 million, which the Agreement called for McNaughton to pay to the Schneiders in cash or, at McNaughton’s option, up to 50% in common stock. In light of available cash flow, however, McNaughton was only able to make the minimum cash payment, and wished to avoid the significant dilutive effect on earnings of paying the balance in stock. As an alternative, McNaughton proposed issuing the Schneiders a three-year note secured solely by the face value of the stock to which they were entitled. Ultimately, McNaughton and the Schneiders compromised, agreeing to retire the earn-out obligation as of August 29, 2000 for $161 million, consisting of $125 million in cash ($95 million to be paid immediately and $30 million to be paid on or before November 30, 2000, subject to financing); two million shares of common stock at $13 per share ($26 million); and four three-year subordinated promissory notes with a combined face value of $10 million. They also agreed that if financing could not be arranged for the $30 million cash payment, McNaughton would pay the Schneiders $59 million in a combination of cash, unsecured subordinated notes and/or shares of common stock at McNaughton’s option.

In October 2000, McNaughton’s chief executive officer informed the Schneiders that, given McNaughton’s stock price, the company was unlikely to raise the additional equity needed to fund the $30 million payment fast coming due. He asked the Schneiders to extend the November 30th deadline to April 30, 2001. In the end, the Schneiders declined this request and, on December 10, 2000, four three-year subordinated promissory notes with an overall face value of $59 million were issued to them in lieu of the $30 million cash payment.

The eight notes with an aggregate face value of $69 million (the four issued in August 2000 plus the four issued the following December), running 12 pages apiece, were each payable to one or another of the four Schneiders. The notes required McNaughton to make quarterly principal and monthly interest payments to the named payee. McNaughton was designated the maker of the notes, each of which bore the following restrictive legend: “THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. IT MAY NOT BE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR AN OPINION OF COUNSEL TO THE MAKER THAT SUCH REGISTRATION IS NOT REQUIRED.” Each note was marked “SUBORDINATED PROMISSORY NOTE” on its face because these notes were subordinate to McNaughton’s existing bank and bond debt amounting to roughly $350 million. Upon McNaughton’s default, the payee had the right to declare the entire amount under the note due and owing, and to elect either to receive payment in stock or to accelerate payment. The notes stated that they were “governed by and construed in accordance with” New York law.

The securities industry professionals who subsequently dealt with the notes considered them to be high-risk debt akin to junk bonds. Consequently, it was anticipated that any potential purchaser would expect a high yield or internal rate of return. Concomitantly, the notes carried a substantial, variable interest rate (initially, 9.34% on the December notes).

As it turned out, McNaughton was acquired in June 2001 by Jones Apparel Group, Inc. As a result of the merger (an “Event of Default” under the terms of the notes), Jones redeemed the notes at par value, paying the Schneiders $69 million plus interest through June 19, 2001. The parties to this litigation dispute whether the Schneiders reneged on an oral agreement to sell seven of the eight notes when they learned of the planned acquisition before it was announced to the public. In particular, Highland Capital Management LP alleges that the Schneiders, through their agent and broker, Glen Rauch of Glen Rauch Securities, Inc., retained RBC Dominion Securities Corporation (now RBC Capital Markets Corporation) to market the notes on their behalf, and that on March 14, 2001, RBC purchased the notes from the Schneiders for 51 cents on the dollar, and then immediately resold seven of the eight notes to Highland for 52.5 cents on the dollar.

On October 18, 2001, Highland brought this suit against the Schneiders in Texas state court. The action was removed to federal court in Texas on diversity grounds, and then transferred to the United States District Court for the Southern District of New York. As relevant here, the complaint alleges that the Schneiders breached an oral agreement to sell the notes to Highland or, alternatively, breached a binding preliminary agreement to do so, or breached an agreement to sell the notes to RBC, of which Highland was a third-party beneficiary. The Schneiders answered, denying they had ever agreed to sell the notes to anyone on March 14, 2001 at any price, and asserting that any such oral agreement would have been unenforceable anyway since it fell within the statute of frauds. After the close of discovery, the Schneiders moved for summary judgment to dismiss the complaint.

The Uniform Commercial Code generally bars enforcement of purported agreements to sell personal property in excess of $5,000 unless “there is some writing which indicates that a contract for sale has been made between the parties at a defined or stated price, reasonably identifies the subject matter, and is signed by the party against whom enforcement is sought or by his authorized agent” (UCC 1-206 [1]). In considering the Schneiders’ statute-of-frauds defense, the District Judge observed that the statute does not apply to a contract for the sale or purchase of a “security” (UCC 8-113) (Highland Capital Mgt., L.P. v Schneider, 2005 WL 1765711, *13, 2005 US Dist LEXIS 14912, *43 [SD NY, July 26, 2005], quoting Wharf [Holdings] Ltd. v United Int’l Holdings, Inc., 532 US 588, 595 [2001] [“Oral contracts for the sale of securities are sufficiently common that the Uniform Commercial Code and statutes of frauds in every State now consider them enforceable”]). He concluded, however, that the seven promissory notes were not securities for purposes of article 8 of the Uniform Commercial Code, because they were not transferrable within the meaning of section 8-102 (a) (15) (i).

The District Judge dismissed Highland’s two breach-of-contract claims against the Schneiders on the merits. Although he found an issue of material fact with respect to Highland’s claim to be a third-party beneficiary of a contract between the Schneiders and RBC, the District Judge dismissed this cause of action for lack of subject matter jurisdiction. He reasoned that since the underlying oral agreement, even if proven, would only be enforceable up to $5,000 because of the statute of frauds, the claim fell short of the $75,000 statutory threshold for diversity jurisdiction. Highland appealed.

“Given the dearth of caselaw on what constitutes a security under the New York version of [article 8] of the New York U.C.C., and the manifest significance of the determination,” the Second Circuit retained jurisdiction over Highland’s three contract-based claims, and certified the following question to us: “Based on this record, do the eight promissory notes issued by McNaughton Apparel Group, Inc. to the Schneiders fall within the definition of a security as contemplated by Section 8-102 [(a)] (15) of the New York Uniform Commercial Code?” (Highland Capital Mgt. LP v Schneider, 460 F3d 308, 322 [2d Cir 2006] [internal quotation marks, omitted].) We answer that question in the affirmative.

II.

The Uniform Commercial Code defines “security” at section 8-102 (a) (15) as

“an obligation of an issuer or a share, participation, or other interest in an issuer or in property or an enterprise of an issuer:
“(i) which is represented by a security certificate in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the issuer;
“(ii) which is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations; and
“(in) which:
“(A) is, or is of a type, dealt in or traded on securities exchanges or securities markets; or
“(B) is a medium for investment and by its terms expressly provides that it is a security governed by this Article.”

Thus, the promissory notes must fulfill the requirements of subparagraphs (i) (the transferability test), (ii) (the divisibility test) and (iii) (the functional test) of section 8-102 (a) (15) in order to qualify as a security for purposes of article 8 (see generally UCC 8-102, Comment 15; 7A Hawkland and Rogers UCC Series § 8-102:01 [rev art 8]; see also, Report on Proposed Revisions to Article 8, made to Assn of Bar of City of NY as prepared by Comms on Uniform State Laws and Banking Law, Bill Jacket, L 1997, ch 566, at 65 [“ ‘Security’ as defined in Revised Section 8-102 (a) (15) . . . includes . . . any other obligation of the issuer . . . that is transferable, divisible, and is dealt in or traded on securities exchanges”]).

First, we must consider whether the notes are obligations “represented by a security certificate in bearer or registered form.” Section 8-102 (a) (4) defines a “certificated security” as “a security that is represented by a certificate,” and section 8-102 (a) (16) defines a “security certificate” as “a certificate representing a security.” These definitions are, as the Second Circuit observed, somewhat circular, and might refer either to a specialized document like a traditional stock certificate or, more generally, to a paper embodying the underlying intangible interest. Of course, the definitions in section 8-102 were deliberately worded by the drafters “in general terms, because they must be sufficiently comprehensive and flexible to cover the wide variety of investment products that now exist or may develop” (UCC 8-103, Comment 1 [emphasis added]). We see no reason to accept the Schneiders’ invitation to read “certificated security” and “security certificate” more narrowly than their plain words suggest. Thus, we interpret these terms to encompass the eight subordinated promissory notes, which are papers that definitively embody and evidence the underlying intangible obligation of McNaughton to the Schneiders.

The notes are obviously not in bearer form; therefore, our next inquiry is whether they are in “registered form.” In this regard, section 8-102 (a) (13) states that

“ ‘[Registered form’, as applied to a certificated security, means a form in which:
“(i) the security certificate specifies a person entitled to the security; and
“(ii) a transfer of the security may be registered upon books maintained for that purpose by or on behalf of the issuer, or the security certificate so states.”

Each of the notes specifies one of the four Schneiders as the “person entitled to the security,” which satisfies section 8-102 (a) (13) (i). Accordingly, we must next look at whether “a transfer of the security may be registered upon books maintained for that purpose by or on behalf of the issuer,” as required by section 8-102 (a) (13) (ii) (emphasis added). The Schneiders (and the dissent) argue that in order to fulfill this requirement, McNaughton must have set up or kept separate and independent transfer books for this purpose at the time it issued the notes. We agree with the Second Circuit, however, “that the proper inquiry is whether the notes could have been registered on transfer books maintained by McNaughton, not whether they were registered on transfer books at the time of the litigation” (460 F3d at 314 [discussing identical language in section 8-102 (a) (15) (i)]).

In this regard, the rules in part 4 of article 8 are instructive. Part 4, along with parts 2 and 3, deals with the rights of persons who hold certificates directly, as the Schneiders did here. Section 8-401 sets out the preconditions that trigger the issuer’s duty to register a certificated security when it is presented with a request to register a transfer. Thus, the phrase “may be registered” in section 8-102 (a) (13) (ii) refers to whether McNaughton would have been required to register the transfer of the notes to a third party at the Schneiders’ request.

We conclude that McNaughton ultimately would have been constrained to do so. McNaughton did not restrict transfer of the notes other than by the legend, as its chief executive officer acknowledged. And the restrictive legend itself suggests that the parties contemplated the possibility of future transfer. As Highland points out, as a practical matter, McNaughton would have to have recorded any transfer of the notes in order to protect itself and the senior debt holders. For example, in the event of default, the payee of the notes could have elected conversion of the principal to common stock, thus diluting other shareholders’ value; and because the notes called for hefty payments of principal and interest, McNaughton had to have a way to keep track of the proper payees. Accordingly, we conclude that the notes satisfy the transferability test in UCC 8-102 (a) (15) (i): they were obligations represented by a security certificate in registered form.

Further, the notes satisfy the divisibility test in section 8-102 (a) (15) (ii). “[M]inimum compliance with this formality requires that there be at least two instruments in a specified class or series, or that the single instrument be divisible into at least one additional instrument” (Allegaert v Chemical Bank, 657 F2d 495, 507 [2d Cir 1980] [citation and internal quotation marks omitted]; see also Baker v Gotz, 387 F Supp 1381, 1390 [D Del 1975] [where six notes are issued for a total of 25,360,000 Swiss francs, the notes are “patently one of a class or series”] [citation and internal quotation marks omitted]; UCC 8-102, Comment 15 [“The divisibility test of subparagraph (ii) applies to the security — that is, the underlying intangible interest”]). Here, there were eight notes, divided into two groups of four notes each. The eight notes were identified in McNaughton’s Form 8-K as a class of obligations, in the same category, in fact, as McNaughton’s 12½i% senior notes, which the Schneiders concede were article 8 securities.

Next, the notes fulfill the functional test in section 8-102 (a) (15) (iii) (A) because these obligations “[were], or [were] of a type, dealt in or traded on securities exchanges or securities markets.” This component “provides flexibility while ensuring that the Article 8 rules do not apply to interests or obligations in circumstances so unconnected with the securities markets that parties are unlikely to have thought of the possibility that Article 8 might apply” (UCC 8-102, Comment 15). Tellingly, the many securities industry professionals from Rauch, RBC and Highland who dealt with the notes uniformly treated them as securities. McNaughton’s chief executive officer, when he first proposed issuing the notes in lieu of cash or stock, described them as a “form of a convertible subordinated debenture.” When McNaughton issued the notes to the Schneiders in August 2000, it reported its actions to the Securities and Exchange Commission, and put out a press release to inform the public.

Finally, our determination that these subordinated promissory notes are article 8 securities is consistent with existing case-law, sparse though it may be (see e.g. Vigilant Ins. Co. of Am. v Housing Auth. of City of El Paso, Tex., 87 NY2d 36, 43 [1995] [stating broadly that “article 8 of the Uniform Commercial Code . . . governs stocks, bonds and other evidences of indebtedness”]; see also Baker, supra [promissory notes are securities under section 8-102]; S.N Phelps & Co. v Prudential Ins. Co. of Am., US Dist Ct, D Conn, Nov. 22, 1991, Cabranes, J. [considering senior subordinate notes, essentially indistinguishable from the subordinated promissory notes in this case, to be article 8 securities]). Treating these notes as article 8 securities comports with a central goal of the Uniform Commercial Code, which is to create a framework for commercial activity that reflects and fosters developing custom and usage. Or as one commentator remarked with specific reference to article 8: “[T]he definition [of securities] will change as ‘securities’ trading practices evolve to include or exclude new property interests. It is believed that the definition will cover anything which securities markets, including not only the organized exchanges but as well the ‘over-the-counter’ markets, are likely to regard as suitable for trading” (8 Lawrence’s Anderson on the Uniform Commercial Code § 8-102:1, at 29 [3d ed rev 2005]; see also Bentley v ASM Communications, Inc., 1991 WL 105220, at *2, 1991 US Dist LEXIS 7855, at *5-6 [SD NY, June 11, 1991] [citing pre-1997 Comment 2 to section 8-102 to support defining the term “security” broadly]).

Accordingly, the certified question should be answered in the affirmative.

Smith, J.

(dissenting). The question of when a promissory note is a “security” is a familiar one in federal securities law, and has proved very difficult (see e.g. Reves v Ernst & Young, 494 US 56 [1990]; Chemical Bank v Arthur Andersen & Co., 726 F2d 930 [2d Cir 1984]; Exchange Natl. Bank of Chicago v Touche Ross & Co., 544 F2d 1126 [2d Cir 1976]). The authors of the Uniform Commercial Code made the question of what is a “security” for UCC purposes easier, by including in the definition of “security” an element not present in federal securities law: with some exceptions, an obligation is not a security for UCC purposes unless it “may be registered upon books maintained for that purpose by or on behalf of the issuer” (UCC 8-102 [a] [15] [i]). Today, the majority effectively undoes the work of the UCC’s authors, by reading this registrability requirement in so broad a way as to make it meaningless.

Though it is not apparent from the majority opinion, registrability is the only significant issue in this case. No one disputes that what the majority calls the “divisibility test” and the “functional test” in the UCC definition of “security” (UCC 8-102 [a] [15] [ii], [iii]) are met here. The majority holds that the notes at issue are “represented by . . . securities] certificate [s]” within the meaning of UCC 8-102 (a) (15) (i), but it does not matter whether the majority is right or wrong about this, because registrability is necessary to make either an uncertificated obligation or a non-bearer certificated obligation into a security. If the obligation is certificated, the certificate must be in either “bearer or registered form” (id.), and the definition of “registered form” requires that “a transfer of the security may be registered upon books maintained for that purpose by or on behalf of the issuer, or the security certificate so states” (UCC 8-102 [a] [13] [ii]). If the obligation is not certificated, it is still a security if it meets the other tests and its “transfer . . . may be registered upon books maintained for that purpose by or on behalf of the issuer” (UCC 8-102 [a] [15] [i]). Registrability is therefore critical, whether there is a certificate or not.

Before considering the meaning of the registrability requirement, it is useful to consider why the UCC’s authors made it part of their definition of “security” — a definition that is completely independent of the federal securities law definition of the same term (see UCC 8-102, Comment 3 [1977 amendments], reprinted in 8 Lawrence’s Anderson on the Uniform Commercial Code § 8-102:1, at 29-30 [3d ed rev 2005]). The apparent reason for the requirement is to facilitate line-drawing — to provide a relatively simple test to distinguish between obligations and interests that are securities and those that are not. As the Comment says: “The definition of ‘registered form’ . . . [s]erves primarily to distinguish Article 8 securities from instruments governed by other law, such as Article 3” (UCC 8-102, Comment 13).

These distinctions matter. For example, the rights and obligations of an issuer and holder of an article 3 negotiable instrument are substantially different from those of an issuer and holder of an article 8 security. The issuer of a security in registered form may treat the registered owner as the owner for all purposes, until the security is presented for registration of transfer (see UCC 8-207 [a]). The issuer of an unregistered negotiable instrument does not have that option. The indorser of a negotiable instrument may also be liable to subsequent holders in the event that the issuer defaults (see UCC 3-414). The indorser of an article 8 security, in contrast, makes no warranties with respect to the issuer’s ability to satisfy the underlying obligation (see UCC 8-108).

The need for clear distinctions led the authors of the UCC to adopt the formalistic requirement of registrability. Such formalism would be out of place in the federal securities laws, which have the prevention of fraud and other abuses in securities markets among their primary purposes. Congress wanted to make evasion of the federal securities laws difficult, and accordingly:

“[i]n defining the scope of the market that it wished to regulate, Congress painted with a broad brush. It recognized the virtually limitless scope of human ingenuity, especially in the creation of ‘countless and variable schemes devised by those who seek the use of the money of others on the promise of profits,’ SEC v. W. J. Howey Co., 328 U. S. 293, 299 (1946), and determined that the best way to achieve its goal of protecting investors was ‘to define “the term ‘security’ in sufficiently broad and general terms so as to include within that definition the many types of instruments that in our commercial world fall within the ordinary concept of a security.” ’ [United Housing Foundation, Inc. v Forman, 421 US 837, 847-848 (1975)] (quoting H. R. Rep. No. 85, 73d Cong, 1st Sess., 11 (1933)). Congress therefore did not attempt precisely to cabin the scope of the Securities Acts. Rather, it enacted a definition of ‘security’ sufficiently broad to encompass virtually any instrument that might be sold as an investment” (Reves, 494 US at 60-61).

The UCC is less concerned with frustrating the ingenuity of schemers, and more with providing a workable and predictable code to govern legitimate transactions. The purposes of the UCC are therefore well served by making the line between securities and other interests and obligations as clear as possible — a clarity that is lacking in federal securities law. The “broad brush” approach of the federal securities laws prompts participants in transactions to err on the side of caution, and to assume — as the parties in this case did — that anything near the borderline is a “security” for federal purposes. But the goal of the UCC is to mark the border plainly.

Registrability is a test well suited to that goal. It has long been a common practice for issuers of stocks, bonds, notes and other obligations or interests to maintain (or to retain a transfer agent to maintain) books on which the transfers of these obligations and interests may be registered. It is not hard to determine whether such books exist or not. If they do, then “transfer [of the obligation or interest] may be registered upon books maintained for that purpose by or on behalf of the issuer” and the registrability requirement is met.

In this case, no claim is made that McNaughton, the issuer of the notes in suit, maintained (itself or through an agent) transfer books on which transfers of these notes could be registered. McNaughton did have transfer books, and transfers were registered on them — including transfers of certain classes of promissory notes — but those books were not available for registering transfers of the notes at issue here. That should end the inquiry: the registrability requirement is not met, and these notes are not securities.

The majority’s contrary conclusion rests in part on circular reasoning. It finds that these notes “may be” registered because UCC 8-401 would require registration — but that section applies only to “a certificated security in registered form.” Whether the notes are such securities is the very question the majority is deciding.

The majority also seeks to justify its result by overemphasizing some words in the statutes describing the registrability requirement and ignoring others. It emphasizes the words “may be” (majority op at 413-414), which the majority seemingly takes to mean that the notes are registrable if any books could possibly exist in which transfers of the notes could be registered. Read so broadly, the words “may be” deprive the registrability requirement of any meaning — it is always theoretically possible there could be books on which transfers of anything could be registered. The words “may be registered upon books maintained for that purpose” are much more plausibly read to mean that “books maintained for that purpose” must exist, on which transfers may (or may not) be registered. In other words, the requirement is met whether transfers are actually registered on the books or not, but not if there are no books “maintained for that purpose” on which registration could occur.

The majority ignores the statutory words “maintained for that purpose.” It concludes that the registrability requirement is met because, if the notes are transferred and McNaughton is informed of the transfer, it must obviously record the information somewhere, so that it will have “a way to keep track of the proper payees” (majority op at 414). On this reading of the statute, it is hard to imagine any transferable obligation of any issuer that would not be registrable. The right question is not whether transfers may be reflected in some way in McNaughton’s books and records — of course they may — but whether they “may be registered upon books maintained for that purpose.”

Confusing registrability upon transfer books with recording in corporate books generally was essentially the error criticized, in another context, by a distinguished panel of the Second Circuit Court of Appeals in Gerard v Helvering (120 F2d 235 [2d Cir 1941, per curiam: L. Hand, Chase and Frank, JJ.]). The issue there was whether payments on a certain bond were a “retirement” of “capital assets” for federal income tax purposes, a question that in turn depended on the registrability of the bond. The court said:

“[the taxpayer] cannot succeed unless [the bond] was ‘in registered form,’ a phrase whose meaning in this context is entirely plain. It refers to the common practice in the issuance of corporate bonds which allows the holder of one or more coupon bonds of a series the option to surrender them and have one bond ‘registered’ upon the books of the obligor or of a transfer agent; or the holder may subscribe for such a bond in the first place. The purpose is to protect the holder by making invalid unregistered transfers, and the bond always so provides upon its face. The mere fact that the debtor keeps books of account upon which the debt appears is altogether immaterial; to construe the statute as the taxpayer asks would in effect make the payment of any corporate debt — ‘evidence of indebtedness’ — a ‘retirement’ of ‘capital assets,’ for almost all corporations keep books. It is scarcely necessary to labor the answer to so plain a misinterpretation” (120 F2d at 235-236 [emphasis added]).

I find the majority’s error in interpreting the UCC here to be equally plain.

Chief Judge Kaye and Judges Ciparick, Graffeo and Jones concur with Judge Read; Judge Smith dissents and votes to answer the certified question in the negative in a separate opinion in which Judge Pigott concurs.

Following certification of a question by the United States Court of Appeals for the Second Circuit and acceptance of the question by this Court pursuant to section 500.27 of the Rules of Practice of the Court of Appeals (22 NYCRR 500.27), and after hearing argument by counsel for the parties and consideration of the briefs and the record submitted, certified question answered in the affirmative.

      . Earn-out provisions in merger-and-acquisition agreements are intended to accommodate the seller’s desire for compensation for the anticipated future value of the transferred assets and the buyer’s reciprocal desire to avoid overpaying for potential, but as yet unrealized, value. In this case, the earn-out was based on Jeri-Jo’s profitability, not its sales.

      . Specifically, the subordinated promissory notes issued and dated August 29, 2000 were payable to Leonard Schneider in the amount of $4 million; Leslie Schneider in the amount of $2.4 million; Scott Schneider in the amount of $1.2 million; and Susan Schneider in the amount of $2.4 million. The subordinated promissory notes issued December 10, 2000 and dated December 1, 2000 were payable to Leonard Schneider in the amount of $23.6 million; Leslie Schneider in the amount of $14.16 million; Scott Schneider in the amount of $7.08 million; and Susan Schneider in the amount of $14.16 million.

      . Highland alleges that RBC resold the remaining note to Fidelity Management and Research Company, also on March 14, 2001 and for 52.5 cents on the dollar.

      . RBC intended to act as a “riskless principal.” That is, RBC sought to eliminate its risk for variable market conditions by obtaining commitments to a specified price from both the seller (here, 51 cents on the dollar) and the ultimate buyer (here, 52.5 cents on the dollar from two buyers) before executing a trade with the seller. RBC’s compensation on the transaction would have been the spread between these two prices.

      . These preconditions for certificated securities include whether, under the security’s terms, the person seeking registration of transfer is eligible to have the security registered in his name; the indorsement is made by the appropriate person or an agent with actual authority; reasonable assurance is given that the indorsement is genuine and authorized; applicable tax laws have been complied with; the transfer does not violate any restriction on transfer imposed by the issuer against a person with actual knowledge, or constructive knowledge (i.e., any restriction is conspicuously noted on the certificate); there is not in force an effective demand by a registered owner that the issuer not register a transfer; and the transfer is in fact rightful or is to a protected purchaser (see UCC 8-401).

      . We note that we are not “[c]onfusing registrability upon transfer books with recording in corporate books generally,” as the dissent contends (dissenting op at 420). Rather, we conclude, for the reasons stated, that “the notes could have been registered on transfer books maintained by McNaughton” (460 F3d at 314). The dissent also acknowledges that McNaughton had (or must have had) transfer books (presumably, to register transfer of the 12½% senior notes), but asserts that “those books were not available for registering transfers of the notes at issue here” (dissenting op at 419). Even if correct, this pronouncement begs the question of whether, in light of section 8-401, McNaughton would have been required to register transfer of the subordinated promissory notes if the Schneiders had asked McNaughton to do so.


author: Chief Judge Kaye.

text:
    [867 NE2d 381, 835 NYS2d 530]
    White Plains Coat & Apron Co., Inc., Appellant, v Cintas Corp. et al., Respondents.
    Argued March 20, 2007;
    decided April 26, 2007

      POINTS OF COUNSEL

      Mayer, Brown, Rowe & Maw LLP (Lee Rubin of the California bar, admitted pro hac vice, of counsel) and Mayer, Brown, Rowe & Maw LLP, Los Angeles, California (Todd Lundell of counsel), for appellant.
    I. New York law protects existing contracts against a competitor’s interference and does not provide a justification defense based solely on defendant’s interest in soliciting new business. (Posner Co. v Jackson, 223 NY 325; Israel v Wood Dolson Co., 1 NY2d 116; Bernberg v Health Mgt. Sys., 303 AD2d 348; P. Kaufmann, Inc. v Americraft Fabrics, Inc., 198 F Supp 2d 466; Akcess Pac. Group LLC v Winstar Communications Inc., 67 F Supp 2d 394; American Para Professional Sys. v Examination Mgt. Servs., 214 AD2d 413; Kaminski v United Parcel Serv., 120 AD2d 409; Pyramid Brokerage Co. v Citibank [N.Y. State], 145 AD2d 912; KSL Recreation Corp. v Boca Raton Hotel & Club Ltd. Partnership, 168 Misc 2d 18; Guard-Life Corp. v Parker Hardware Mfg. Corp., 50 NY2d 183.) II. The District Court’s rule would obliterate the sensible distinction between contract interference and interference with prospective business relations. (Carvel Corp. v Noonan, 3 NY3d 182; Guard-Life Corp. v Parker Hardware Mfg. Corp., 50 NY2d 183; NBT Bancorp v Fleet/Norstar Fin. Group, 87 NY2d 614.)

      Harris Beach PLLC, Pittsford (A. Vincent Buzard and Laura W. Smalley of counsel), and Keating Muething & Klekamp, PLL {Steven C. Coffaro of the Ohio bar, admitted pro hac vice, of counsel) for respondents.
    I. Under New York law, knowledge that the customer is using the goods is not sufficient to prove actual knowledge of the contract in proving a tortious interference claim; as such, White Plains Coat & Apron Co., Inc. failed to establish an element of its prima facie case. (Foster v Churchill, 87 NY2d 744; A A Tube Testing Co. v Sohne, 20 AD2d 639; Bogoni v Friedlander, 197 AD2d 281; Burns Jackson Miller Summit & Spitzer v Lindner, 88 AD2d 50, 59 NY2d 314; Roulette Records v Princess Prod. Corp., 15 AD2d 335, 12 NY2d 815; J&L Am. Enters., Ltd. v DSA Direct, LLC, 10 Misc 3d 1076[A], 2006 NY Slip Op 50101[U]; LinkCo, Inc. v Fujitsu Ltd., 230 F Supp 2d 492; Pattison-Bolson Rug Serv. v Sloane, 45 AD2d 862; Riordan v Nationwide Mut. Fire Ins. Co., 977 F2d 47; Carvel Corp. v Noonan, 3 NY3d 182.) II. A competitor conducting its business to sell its goods and solicit business in the normal course where it knows that the customer is receiving goods from plaintiff but does not know plaintiff has an enforceable contract with the customer should not be liable for tortious interference absent malice or improper means. (Guard-Life Corp. v Parker Hardware Mfg. Corp., 50 NY2d 183; Foster v Churchill, 87 NY2d 744; Felsen v Sol Cafe Mfg. Corp., 24 NY2d 682; Rossi v Kelly, 96 AD2d 451; State Enters. v Southridge Coop. Section 1, 18 AD2d 226; Carvel Corp. v Noonan, 3 NY3d 182.)
   OPINION OF THE COURT

Chief Judge Kaye.

Plaintiff, White Plains Coat & Apron Co., Inc., is a New York-based linen rental business. Its competitor, defendant Cintas Corp., is a nationwide business that rents similar products to commercial customers. White Plains alleges that it had five-year exclusive service contracts with customers and that, knowing of these arrangements, Cintas nonetheless induced dozens of White Plains’ customers to breach their contracts and enter into rental agreements with Cintas. White Plains by letter demanded that Cintas desist solicitation and discontinue servicing White Plains’ contract customers, enclosing a list of customers allegedly solicited improperly. Cintas denied knowledge of any contracts and continued its solicitation.

White Plains sued Cintas in United States District Court for the Southern District of New York for tortious interference with existing customer contracts. After discovery, Cintas sought summary judgment, arguing that it had no knowledge of contracts with White Plains and had not induced any breach. While noting “a small element of doubt” in New York law (and itself suggesting a need for certification to this Court), the District Court granted summary judgment and dismissed the complaint, ruling orally that Cintas’ legitimate interest as a competitor to solicit business and make a profit alone triggered the defense of economic justification. Given Cintas’ economic interest, the court concluded, to survive summary judgment White Plains had to show that Cintas acted with malice or illegality, and failed to do so. The court later denied White Plains’ motion for reconsideration, finding that defendant did not need an ownership interest in the breaching party’s business in order to assert the economic interest defense.

On White Plains’ appeal, the Court of Appeals for the Second Circuit reviewed New York’s law on tortious interference with contract, noting that procuring “the breach of a contract in the exercise of equal or superior right is acting with just cause or excuse and is justification for what would otherwise be an actionable wrong.” The court observed, however, that there was an important open state law question regarding the economic interest defense. While satisfied that the defense applies when the tortfeasor has a preexisting legal or financial relationship with the breaching party — not present in the case before us— the Second Circuit sought clarification as to the broader reach of the defense and therefore certified the following potentially dispositive question to us: “Does a generalized economic interest in soliciting business for profit constitute a defense to a claim of tortious interference with an existing contract for an alleged tortfeasor with no previous economic relationship with the breaching party?” We answer that question in the negative.

Analysis

It is a familiar proposition that one “who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.” Though long a part of our law, this commonly asserted tort continues to generate a spate of decisions, with sometimes varying views. At bottom, as a matter of policy, courts are called upon to strike a balance between two valued interests: protection of enforceable contracts, which lends stability and predictability to parties’ dealings, and promotion of free and robust competition in the marketplace.

While New York law recognizes the tort of interference with both prospective and existing contracts, “greater protection is accorded an interest in an existing contract (as to which respect for individual contract rights outweighs the public benefit to be derived from unfettered competition) than to the less substantive, more speculative interest in a prospective relationship (as to which liability will be imposed only on proof of more culpable conduct on the part of the interferer).”

In a contract interference case — as here — the plaintiff must show the existence of its valid contract with a third party, defendant’s knowledge of that contract, defendant’s intentional and improper procuring of a breach, and damages. In response to such a claim, a defendant may raise the economic interest defense — that it acted to protect its own legal or financial stake in the breaching party’s business. The defense has been applied, for example, where defendants were significant stockholders in the breaching party’s business; where defendant and the breaching party had a parent-subsidiary relationship; where defendant was the breaching party’s creditor; and where the defendant had a managerial contract with the breaching party at the time defendant induced the breach of contract with plaintiff.

A defendant who is simply plaintiffs competitor and knowingly solicits its contract customers is not economically justified in procuring the breach of contract. In other words, mere status as plaintiffs competitor is not a legal or financial stake in the breaching party’s business that permits defendant’s inducement of a breach of contract. We do not subscribe to the District Court’s view that “the only answer . . . is to go out and do it also to the other guy.” Rather, the answer is succinctly articulated in the New York Pattern Jury Instructions: “When the defendant is simply a competitor of the plaintiff seeking prospective customers and plaintiff has a customer under contract for a definite period, defendant’s interest is not equal to that of plaintiff and would not justify defendant’s inducing the customer to breach the existing contract.” To conclude otherwise — to answer the certified question in the affirmative— would blur the distinction between tortious interference with existing, enforceable contracts and tortious interference with prospective contractual relations, where, as a matter of policy, the balance of interests is different.

Finally, we note that protecting existing contractual relationships does not negate a competitor’s right to solicit business, where liability is limited to improper inducement of a third party to breach its contract. Sending regular advertising and soliciting business in the. normal course does not constitute inducement of breach of contract. A competitor’s ultimate liability will depend on a showing that the inducement exceeded “a minimum level of ethical behavior in the marketplace.”

Accordingly, the certified question should be answered in the negative.

Judges Cipabick, Graffeo, Read, Smith, Pigott and Jones concur.

Following certification of a question by the United States Court of Appeals for the Second Circuit and acceptance of the question by this Court pursuant to section 500.27 of the Rules of Practice of the Court of Appeals (22 NYCRR 500.27), and after hearing argument by counsel for the parties and consideration of the briefs and the record submitted, certified question answered in the negative.

      . White Plains Coat & Apron Co., Inc. v Cintas Corp., 460 F3d 281, 283 (2d Cir 2006), quoting Foster v Churchill, 87 NY2d 744, 750 (1996) (internal quotation marks omitted).

      . Id. at 289.

      . We are not called upon to, nor do we, address the other issues briefed and argued by defendant, including its alleged lack of knowledge of White Plains’ contracts with its customers, the enforceability of any such contracts and the propriety of defendant’s solicitation methods.

      . Restatement (Second) of Torts § 766.

      . Guard-Life Corp. v Parker Hardware Mfg. Corp., 50 NY2d 183, 191 (1980).

      . Lama Holding Co. v Smith Barney, 88 NY2d 413 (1996); see also NBT Bancorp v Fleet/Norstar Fin. Group, 87 NY2d 614 (1996); Israel v Wood Dolson Co., 1 NY2d 116, 120 (1956).

      . Felsen v Sol Cafe Mfg. Corp., 24 NY2d 682, 687 (1969); Morrison v Frank, 81 NYS2d 743 (1948); see also Foster, 87 NY2d at 751.

      . American Protein Corp. v AB Volvo, 844 F2d 56, 63 (2d Cir 1988), cert denied 488 US 852 (1988); WMWMach. Co. v Koerber AG., 240 AD2d 400, 401 (2d Dept 1997); Koret, Inc. v Christian Dior, S.A., 161 AD2d 156, 157 (1st Dept 1990), lv denied 76 NY2d 714 (1990).

      . Ultramar Energy v Chase Manhattan Bank, 179 AD2d 592, 592-593 (1st Dept 1992).

      . Don King Prods., Inc. v Smith, 47 Fed Appx 12 (2d Cir 2002).

      . See Restatement (Second) of Torts § 768 (2).

      . 2 NY PJI2d 3:56, at 507-508 (2007).

      . Restatement (Second) of Torts § 766, Comment m (1977).

      . Guard-Life, 50 NY2d at 200 (Cooke, Ch. J., dissenting in part); see also V. Marangi Carting Corp. v Judex Enters., 171 Misc 2d 820 (Sup Ct, NY County 1997).


author: ClPARICK, J.

text:
    [866 NE2d 1033, 834 NYS2d 705]
    AmBase Corporation, Appellant, v Davis Polk & Wardwell et al., Respondents.
    Argued March 21, 2007;
    decided April 26, 2007

      POINTS OF COUNSEL

      Greenberg & Massarelli, LLP, Purchase (William Greenberg and Crystal M. Massarelli of counsel), for appellant.
    I. The lower court should not have granted Davis Polk & Wardwell’s motion to dismiss AmBase Corporation’s cause of action for legal malpractice. (Rovello v Orofino Realty Co., 40 NY2d 633; Foley v D’Agostino, 21 AD2d 60; Weil, Gotshal & Manges, LLP v Fashion Boutique of Short Hills, Inc., 10 AD3d 267; Darby & Darby v VSI Intl., 95 NY2d 308; Jacobson v Sassower, 66 NY2d 991; Gair v Peck, 6 NY2d 97, 361 US 374; VDR Realty Corp. v Mintz, 167 AD2d 986; Skinner v Stone, Raskin & Israel, 724 F2d 264; Alva v Hurley, Fox, Selig, Caprari & Kelleher, 156 Misc 2d 550; Rosner v Paley, 65 NY2d 736.) II. AmBase Corporation’s complaint should not be dismissed on grounds of “equitable estoppel” or “judicial estoppel.” (Triple Cities Constr. Co. v Maryland Cas. Co., 4 NY2d 443; Burrowes v Combs, 25 AD3d 370; New York City Health & Hosps. Corp. v St. Barnabas Hosp., 10 AD3d 489; Hart v Carro, Spanbock, Kaster & Cuiffo, 211 AD2d 617; Weil, Gotshal & Manges, LLP v Fashion Boutique of Short Hills, Inc., 10 AD3d 267.) III. AmBase Corporation’s cross motion for partial summary judgment on the issue of liability for legal malpractice should have been granted. (Prudential Ins. Co. of Am. v Dewey, Ballantine, Bushby, Palmer & Wood, 170 AD2d 108; Grago v Robertson, 49 AD2d 645; Estate of Gottlieb v Karlsson, 295 AD2d 158; Shapiro v Butler, 273 AD2d 657; Yiouti Rest, v Sotiriou, 151 AD2d 744; Shaughnessy v Baron, 151 AD2d 561.) IV. AmBase Corporation’s cause of action for breach of fiduciary duty should not have been dismissed.
      (Weil, Gotshal & Manges, LLP v Fashion Boutique of Short Hills, Inc., 10 AD3d 267; Darby & Darby v VSI Intl., 95 NY2d 308; Estate of Nevelson v Carro, Spanbock, Kaster & Cuiffo, 259 AD2d 282; Thies v Bryan Cave LLP, 13 Misc 3d 1220[A], 2006 NY Slip Op 51920[U]; Williams v Sidley Austin Brown & Wood, L.L.P., 11 Misc 3d 1064[A], 2006 NY Slip Op 50381 [U]; Reyes v Leuzzi, 10 Misc 3d 1064[A], 2005 NY Slip Op 52112[U]; Sonnenschine v Giacomo, 295 AD2d 287; Turk v Angel, 293 AD2d 284; Edwards v Thorpe, 876 F Supp 693; Bukoskey v Walter W. Shuham, CPA, P.C., 666 F Supp 181.) V. AmBase Corporation’s damages set forth in the complaint are not “speculative.” (Foley v D’Agostino, 21 AD2d 60; Tenzer, Greenblatt, Fallon & Kaplan v Ellenberg, 199 AD2d 45; InKine Pharm. Co. v Coleman, 305 AD2d 151; VDR Realty Corp. v Mintz, 167 AD2d 986; Skinner v Stone, Raskin & Israel, 724 F2d 264; Wolstencroft v Sassower, 124 AD2d 582; Derdiarian v Felix Contr. Corp., 51 NY2d 308; Prudential Ins. Co. of Am. v Dewey, Ballantine, Bushby, Palmer & Wood, 170 AD2d 108.) VI. Assuming arguendo that the amended verified complaint was deficient, the IAS court should have permitted AmBase Corporation leave to replead. (Cushman & Wakefield v John David, Inc., 25 AD2d 133.) VII. The entry of the judgment for money damages in the amount of $1,867,244.15 pursuant to the lower court’s order denied AmBase Corporation its rights to procedural due process and was violative of the New York Civil Practice Law and Rules. (Armstrong v Manzo, 380 US 545; Mullane v Central Hanover Bank & Trust Co., 339 US 306; McKinsey & Co. v Olympia & York 245 Park Ave. Co., 79 AD2d 557; Consumers Union of U.S., Inc. v State of New York, 5 NY3d 327; Levy v Blue Cross & Blue Shield of Greater N.Y., 124 AD2d 900; Griscti v Mortgage Commn., 249 App Div 632; National Sur. Corp. v Peccichio, 48 Misc 2d 77.)

      Simpson Thacher & Bartlett LLP, New York City {Roy L. Rear-don of counsel), and Davis Polk & Wardwell (Guy Miller Struve, Mario J. Verdolini, Nancy B. Ludmerer, David B. Toscano and Elliot Moskowitz of counsel pro se) for Davis Polk & Wardwell and others, respondents.
    I. AmBase Corporation cannot maintain this action because it has admitted, in representations to courts and others in sworn testimony, the falsity of the allegations upon which this case rests. (Matter of Union Indem. Ins. Co. of N.Y., 89 NY2d 94; Morgenthow & Latham v Bank of N.Y. Co., 305 AD2d 74, 100 NY2d 512; Weil, Gotshal & Manges, LLP v Fashion Boutique of Short Hills, Inc., 10 AD3d 267; Bull & Bear Group v Fuller, 170 AD2d 275, 78 NY2d 1110; Metzger v

      Aetna Ins. Co., 227 NY 411; Ford Motor Credit Co. v Colonial Funding Corp., 215 AD2d 435; Kimco of N.Y. v Devon, 163 AD2d 573; Environmental Concern v Larchwood Constr. Corp., 101 AD2d 591; Davis v Wakelee, 156 US 680; Matter of 67 Vestry Tenants Assn. v Raab, 172 Misc 2d 214.) II. AmBase Corporation has failed to satisfy any of the elements required to sustain a legal malpractice claim. (Darby & Darby v VSI Intl., 95 NY2d 308; Dimond v Kazmierczuk & McGrath, 15 AD3d 526, 5 NY3d 715; Town of N. Hempstead v Winston & Strawn, LLP, 28 AD3d 746, 7 NY3d 715; Byrnes v Palmer, 18 App Div 1, 160 NY 699; Rosner v Paley, 65 NY2d 736; Davis v Klein, 88 NY2d 1008; N.A. Kerson Co. v Shayne, Dachs, Weiss, Kolbrenner, Levy & Levine, 45 NY2d 730; McKenna v Forsyth & Forsyth, 280 AD2d 79; McCoy v Feinman, 99 NY2d 295; Pellegrino v File, 291 AD2d 60, 98 NY2d 606.) III. The Appellate Division properly dismissed AmBase Corporation’s claim for breach of fiduciary duty. (Mecca v Shang, 258 AD2d 569, 95 NY2d 791; Tyborowski v Cuddeback & Onofry, 279 AD2d 763; Tasseff v Nussbaumer & Clarke, 298 AD2d 877; Carmel v Lunney, 70 NY2d 169; N.A. Kerson Co. v Shayne, Dachs, Weiss, Kolbrenner, Levy & Levine, 45 NY2d 730; Vooth v McEachen, 181 NY 28; Milbank, Tweed, Hadley & McCloy v Boon, 13 F3d 537; Santulli v Englert, Reilly & McHugh, 78 NY2d 700; Sears, Roebuck & Co. v Enco Assoc., 43 NY2d 389; Chase Scientific Research v NIA Group, 96 NY2d 20.) IV. The entry of a money judgment in favor of Davis Polk & Ward-well was proper and AmBase Corporation’s due process arguments are meritless. (St. Lawrence Univ. v Trustees of Theol. School of St. Lawrence Univ., 20 NY2d 317; Hirsch v Lindor Realty Corp., 63 NY2d 878; People v Robinson, 88 NY2d 1001; McMillan v State of New York, 72 NY2d 871; Matter of Barbara C., 64 NY2d 866; Xiao Yang Chen v Fischer, 6 NY3d 94; Matter of Hunter, 4 NY3d 260; Podhorecki v Lauer’s Furniture Stores, 201 AD2d 947; Matter of Entertainment Partners Group v Davis, 155 Misc 2d 894, 198 AD2d 63; People v Gruden, 42 NY2d 214.) V. The courts below did not err in denying AmBase Corporation’s cross motion for partial summary judgment. VI. The courts below correctly denied AmBase Corporation’s request to file a second amended complaint. (Probst v Albert Einstein Med. Ctr., 82 AD2d 739; Helene-Harrisson Corp. v Moneyline Networks, 6 AD3d 151; Russo v Feder, Kaszovitz, Isaacson, Weber, Skala & Bass, 301 AD2d 63; Davis v Klein, 88 NY2d 1008.)
   OPINION OF THE COURT

ClPARICK, J.

In this appeal we are asked to determine whether a law firm that successfully litigated an Internal Revenue Service (IRS) tax dispute nonetheless committed legal malpractice when it failed to question whether an agreement entered into between the client and a related company may have relieved it of the tax liability in dispute. We are also asked to determine whether defendants were properly awarded a money judgment where defendants had not answered or asserted a counterclaim. We conclude that defendants did not commit legal malpractice, and a money judgment was properly awarded to defendants.

I.

In 1985, plaintiff AmBase Corporation became an independent entity when its parent City Investing Company elected to liquidate. In order to ensure payment of its postliquidation liabilities, City Investing transferred substantial assets to City Investing Company Liquidating Trust (City Trust). At the same time, AmBase and its parent company entered into an Assignment and Assumption Agreement (the Agreement) that purportedly required AmBase to assume primary liability for City Investing’s federal income taxes, and assume secondary liability as a “backstop” to City Trust for all other liabilities which it was unable to pay.

Shortly thereafter, the IRS determined that City Investing was liable for having failed to withhold 30% of interest payments to a related entity, City Investing Finance N.V (N.V), for a period of six years from 1979 through September 1985. In 1991, Lester Mantell, a senior vice-president of AmBase and trustee of City Trust, advised AmBase and the IRS in a Tax Protest that AmBase was liable as N.V’s agent for the withholding taxes in issue if such liability was ultimately determined to exist. Attempts to settle the tax matter failed and a year later, AmBase retained defendant Davis Polk & Wardwell to resolve this dispute with the IRS.

In May 1995, the IRS issued a notice of deficiency for the tax years 1979 through 1985 for the withholding taxes in the sum of $20,986,609, and in June, Davis Polk filed a petition in United States Tax Court challenging the alleged deficiencies. The matter was litigated and in May 2001, the Tax Court rendered a decision in AmBase’s favor, rejecting the IRS’s claim for the subject withholding taxes (see AmBase Corp. v Commissioner of Internal Revenue, TC Memo 2001-122 [2001]). Following this victory on behalf of its client, Davis Polk requested payment of $1,424,104 in outstanding legal fees pursuant to the terms of its retainer agreement. AmBase refused to pay and requested that Davis Polk return previously paid legal fees.

AmBase then commenced this action for legal malpractice alleging that, although it won the tax case, it suffered substantial damages as a result of defendants’ failure to advise that it was only secondarily liable for payment of taxes as per the Agreement with its parent. Plaintiff further requested a declaration that it did not owe Davis Polk $1,424,104 in outstanding legal fees. Davis Polk moved to dismiss plaintiffs amended complaint and for a declaration that AmBase was obliged to pay all fees owed as per its retainer agreement plus interest and for “such other and further relief as this Court may deem just and proper.” AmBase cross-moved for partial summary judgment on the issue of liability for legal malpractice.

Supreme Court rejected AmBase’s assertions, granted Davis Polk’s motion to dismiss the complaint and awarded the firm a money judgment of $1,424,104 representing outstanding legal fees plus statutory interest. The court found that Davis Polk was hired to resolve tax issues for liability that AmBase had assumed, and that even if Davis Polk had committed malpractice, AmBase’s damages were “entirely speculative.” Supreme Court then directed the parties to settle an order, and defendants submitted a proposed order directing the entry of a money judgment. AmBase did not submit a proposed counterorder, nor did it advise the court that the proposed money judgment was improper in the absence of a pleading seeking such a judgment, and it never requested an opportunity to litigate the matter.

The Appellate Division unanimously affirmed, holding that since “ [defendants successfully represented plaintiff in a tax dispute with the [IRS],” the claim that the dispute could have been “resolved in a more expeditious fashion[ ] was properly dismissed as speculative” (30 AD3d 171, 172 [2006]). The Court further held that “[d]efendants were entitled to a money judgment ... in light of [plaintiff’s] failure, throughout these proceedings, to contest the amount, which was based on calculations consistent with the retainer agreement” (id.). We granted leave to appeal, and now affirm.

II.

We need not answer the question whether a legal malpractice claim is precluded by virtue of a complete victory in an underlying action. What is before us is whether a cause of action for legal malpractice lies under the circumstances of this particular case. We hold it does not. In order to sustain a claim for legal malpractice, a plaintiff must establish both that the defendant attorney failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession which results in actual damages to a plaintiff (see McCoy v Feinman, 99 NY2d 295, 301-302 [2002]), and that the plaintiff would have succeeded on the merits of the underlying action “but for” the attorney’s negligence (see Davis v Klein, 88 NY2d 1008, 1009-1010 [1996]).

The gravamen of this legal malpractice claim is that defendants failed to advise plaintiff that the Agreement allegedly provided that AmBase was not .primarily liable for the subject taxes in the underlying Tax Court proceeding — that primary liability rested with City Trust. Plaintiff claims that defendants were provided with a copy of the Agreement but never fully reviewed the document to determine what effect, if any, it had on the underlying dispute with the IRS, thereby failing to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession. AmBase further asserts that “but for” Davis Polk’s negligence, it would not have had to maintain the multi-million dollar loss reserve on its books, creating the appearance that it had a negative net worth, which caused it to lose business opportunities and incur monetary damages.

Defendants dispute AmBase’s claim that its liability for the taxes was only secondary. In addition, they assert that they were retained to litigate only whether taxes were due, not to determine who was responsible for such taxes. Defendants further argue that they had not advised AmBase to carry the loss reserve and that AmBase publicly acknowledged that it was responsible for the withholding taxes at issue since 1985, seven years before Davis Polk was retained.

The retainer agreement states that AmBase has “engaged [Davis Polk] to represent [it] as agent for City Investing to resolve the tax issues currently before” the IRS. The plain language of the retainer agreement indicates that Davis Polk was retained to litigate the amount of tax liability and not to determine whether the tax liability could be allocated to another entity. Thus, the issue whether plaintiff was primarily or secondarily liable for the subject tax liability was outside the scope of its representation. As such, defendants exercised the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession when they focused their efforts on the controversy between AmBase and the IRS — the subject of the retainer agreement — resulting in a most favorable outcome, which was publicly praised by AmBase principals (see Darby & Darby v VSI Intl., 95 NY2d 308, 313 [2000]).

Furthermore, AmBase understood that it was primarily liable for the subject withholding taxes. For approximately seven years prior to Davis Polk’s retention in this matter, both AmBase and the IRS took the position — privately and in public filings — that AmBase was responsible for all of the subject tax obligations. AmBase now takes the position that it relied on an erroneous interpretation of the Agreement that equated “federal income taxes” and the subject “withholding taxes” as one and the same. Nevertheless, language in the Agreement suggests that the intent of the parties was for AmBase to assume all of City Investing’s tax liability. A contrary interpretation of the Agreement may be possible, but no such interpretation has been given to the language of the Agreement by any court or arbitrator to date and none need be given here. We have observed that “[a] legal malpractice action is unlikely to succeed when the attorney erred because an issue of law was unsettled or debatable” (Darby, 95 NY2d at 315 [citation omitted]). A speculative assertion as to which entity was primarily liable for the subject taxes — AmBase or City Trust — cannot support a legal malpractice claim.

Additionally, the record provides no support for plaintiffs assertion that “but for” Davis Polk’s failure to advise it that it may not have been primarily liable for the subject taxes, the loss reserve would have been removed earlier and it would not have suffered loss of business opportunities. Indeed, the loss reserve had been in place for years before Davis Polk was even retained. After Davis Polk reviewed the case, it promptly informed AmBase’s accountants of its belief that AmBase had a very strong case and that it was probable that it had no liability for the subject taxes. Davis Polk reiterated this opinion to Am-Base’s board of directors as well. Despite this advice, AmBase and its accountants continued to maintain the loss reserve. Thus, AmBase has also failed to produce any evidence that Davis Polk’s lack of advice was the “but for” cause of the loss reserve remaining on AmBase’s financial statements.

In this matter, there is no way to know whether the advice not given — that AmBase may have been only secondarily as opposed to primarily liable for the subject taxes — “would have altered the [duration] of the [underlying] action” (N.A. Kerson Co. v Shayne, Dachs, Weiss, Kolbrenner, Levy & Levine, 45 NY2d 730, 732 [1978]; see also Carmel v Lunney, 70 NY2d 169, 173 [1987]). Therefore, any effect of such lack of advice is purely speculative and cannot support a legal malpractice claim.

III.

A second argument also merits review: whether the award of a money judgment to defendants, when no proceeding for the recovery of a money judgment had been commenced (nor counterclaim interposed), violated plaintiffs procedural due process rights under the Federal and New York State Constitutions, which require notice and an opportunity to be heard (see Armstrong v Manzo, 380 US 545, 550 [1965]; Consumers Union of U.S., Inc. v State of New York, 5 NY3d 327, 358 [2005]).

AmBase asserts that it was not presented with an opportunity to contest the amount of the success fee, since Davis Polk’s request for relief did not place it on notice that the amount owed was in issue. Defendants respond that AmBase had ample notice of the amount awarded since AmBase itself raised the issue in the first instance, and had numerous opportunities throughout the litigation to contest the amount of the outstanding legal fees.

A party is required to bring all of its claims arising out of a transaction in a single complaint. Here, AmBase, in its amended complaint, specifically identified the amount of the fee as $1,424,104 and thus was undeniably on notice of its exact amount. AmBase had numerous opportunities throughout the litigation to challenge the calculation of the fee, but did not. It failed to dispute the amount claimed in its opposition to Davis Polk’s motion to dismiss, and did not request a hearing on the issue. AmBase also had an opportunity to question the amount and award of the fee at the time Supreme Court rendered its decision from the bench. It also failed to raise any question whatsoever about the unorthodox procedure of entering a money judgment in the absence of a pleading demanding one. AmBase additionally could have raised the question as to the amount of the award in a subsequent filing — a proposed order perhaps— which it did not, nor did it ever request a hearing to determine the reasonableness of the calculation.

Thus, having failed to challenge the amount of the legal fees in its complaint or at any time throughout the proceedings that followed, and also having failed to challenge the procedure leading to entry of judgment against it, including correcting Supreme Court’s mistaken impression that a counterclaim had been filed, AmBase is now precluded from doing so. Under these circumstances, the order of Supreme Court awarding defendant a money judgment for the outstanding legal fees was proper {see CPLR 3017 [a], [b]). We have examined plaintiffs remaining contentions and find them to be without merit.

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

Chief Judge Kaye and Judges Graffeo, Read, Smith, Pigott and Jones concur.

Order affirmed, with costs.

      . At the time of the liquidation, AmBase was known as The Home Group, Inc.

      . Plaintiff also individually named as defendants the Davis Polk attorneys assigned to the IRS matter, but we collectively refer to all defendants as Davis Polk.

      . The retainer agreement provided that if Davis Polk were successful in resolving the tax matter with the IRS, AmBase would pay Davis Polk a “success fee” calculated at 150% of Davis Polk’s billed time, subject to a two million dollar cap.

      . Supreme Court was mistaken when in its decision from the bench it referred to “the counterclaim,” as no counterclaim was ever filed. Neither party sought to correct the court.


author: Graffeo, J.

text:
    [867 NE2d 385, 835 NYS2d 534]
    Bernard Rudolf et al., Appellants, v Shayne, Dachs, Stanisci, Corker & Sauer et al., Respondents. (And a Third-Party Action.)
    Argued March 21, 2007;
    decided April 26, 2007

      POINTS OF COUNSEL

      Howard, R. Birnbach, Great Neck, for appellants.
    I. Plaintiffs are entitled to compensatory damages for monies expended at a second trial necessitated by legal malpractice. (Giambrone v Bank of N.Y., 253 AD2d 786; Zarin v Reid & Priest, 184 AD2d 385; DePinto v Rosenthal & Curry, 237 AD2d 482; Garniel v Curtis & Riess-Curtis, P.C., 16 AD3d 140; Lebeau v Morales, 245 AD2d 269; VDR Realty Corp. v Mintz, 167 AD2d 986; Affiliated Credit Adjustors v Carlucci & Legum, 139 AD2d 301; Lory v Parsoff, 296 AD2d 535.) II. Respondents are liable for statutory interest on the monies denied to appellants due to malpractice. (Love v State of New York, 78 NY2d 540; Campagnola v Mulholland, Minion & Roe, 76 NY2d 38; Burton v Kaplan, 184 AD2d 408; Jamie Towers Hous. Co. v William B. Lucas, Inc., 296 AD2d 359; Ocean Ships, Inc. v Stiles, 315 F3d 111.)

      LAbbate, Balkan, Colavita & Contini, L.L.P., Garden City (Matthew K. Flanagan of counsel), for respondents.
    I. The Appellate Division correctly held that plaintiffs failed to demonstrate that they suffered any damages. (Pistilli v Gandin, 10 AD3d 353; Magnacoustics, Inc. v Ostrolenk, Faber, Gerb & Sof

      fen, 303 AD2d 561; Campagnola v Mulholland, Minion & Roe, 76 NY2d 38; McKenna v Forsyth & Forsyth, 280 AD2d 79.) II. Aside from the fact that plaintiffs have not suffered any damages, they failed to establish that their alleged damages would not have been sustained “but for” defendants’ alleged malpractice. (Davis v Klein, 88 NY2d 1008; Schwartz v Olshan Grundman Frome & Rosenzweig, 302 AD2d 193.)
   OPINION OF THE COURT

Graffeo, J.

In this legal malpractice action, we conclude that plaintiff is entitled to recover from defendant law firm consequential damages consisting of legal and expert witness fees and related expenses. Under the circumstances of this case, however, we agree with the courts below that plaintiff should not receive an interest award.

In September 1999, plaintiff Bernard Rudolf sustained personal injuries when he was struck by an automobile while walking across the westbound lanes of Sunrise Highway in Merrick, Long Island. The intersection where the accident occurred was controlled by a traffic signal and the car that hit plaintiff was making a left turn from Hewlett Avenue onto Sunrise Highway. Defendant law firm, Shayne, Dachs, Stanisci, Corker & Sauer, was retained to represent plaintiff, and his wife derivatively, in a personal injury action against the driver and owner of the vehicle. A firm member served as plaintiffs trial counsel.

The trial was bifurcated and during the liability stage there was conflicting testimony as to whether plaintiff was in the crosswalk at the time of the accident. After completion of the testimony, at the request of plaintiffs counsel, the trial court instructed the jury on the statutory requirements of Vehicle and Traffic Law § 1151. Section 1151 addresses intersections without operational traffic signals and generally provides that pedestrians have the right of way in crosswalks. But that provision also imposes a duty on pedestrians not to “suddenly leave a curb or other place of safety and walk or run into the path of a vehicle which is so close that it is impractical for the driver to yield” (Vehicle and Traffic Law § 1151 [b]). The jury returned a verdict finding both plaintiff and the driver negligent and apportioned 50% of the fault to each party. Following the damages phase of the trial, the jury calculated damages at $255,000, to be reduced by half to reflect plaintiffs comparative negligence.

Plaintiff then retained new counsel and moved to set aside the verdict, asserting that the court gave an erroneous charge and should have instructed the jury on section 1111 of the Vehicle and Traffic Law rather than section 1151. Section 1111 applies to intersections regulated by traffic signals and grants pedestrians “facing any steady green signal” the right of way within a crosswalk (Vehicle and Traffic Law § 1111 [a] [3]). The statute further provides that vehicular traffic facing a green arrow signal may enter the intersection cautiously, but must “yield the right of way to other traffic lawfully within the intersection or an adjacent cross walk” (Vehicle and Traffic Law § 1111 [a] [2]). Supreme Court denied the motion, noting that plaintiffs attorney had requested an instruction based on section 1151. Plaintiff appealed and the Appellate Division reversed, holding that “[t]he erroneous charge was a fundamental error requiring a new trial because it affected the jury’s consideration of the plaintiffs liability if the jury determined that the plaintiff was in the crosswalk when he was hit” (4 AD3d 408, 409-410 [2004]). The Court granted plaintiff a new trial.

A second trial ensued in November 2004. This time, the court properly charged Vehicle and Traffic Law § 1111 and the jury determined that the driver was solely responsible for the accident. At the damages phase, five expert witnesses testified on plaintiffs behalf. Before the jury returned a verdict on damages, the parties settled the case for $750,000.

Plaintiff initiated this legal malpractice action against defendants relating to their representation during the first trial, alleging that they were negligent in not requesting that Vehicle and Traffic Law § 1111 be charged to the jury and in failing to object to the charge given. In his damages claim, plaintiff sought payment of the legal fees associated with the motion to set aside the verdict and the appeal, as well as the expert witness fees and expenses incurred for the second trial. Plaintiff also requested approximately $190,000 in interest that would have accrued at nine percent per annum on the $750,000 had that sum been awarded at the conclusion of the first trial in January 2002. Defendants interposed a counterclaim for unpaid legal fees as trial counsel in the first litigation. Plaintiff then moved for summary judgment, seeking the total sum of $225,175.

Supreme Court granted plaintiff summary judgment to the extent of awarding $28,703.27 (plus interest thereon) to reimburse plaintiff for legal and expert fees and expenses, but denied the motion insofar as it sought predecision interest on the $750,000 settlement. The court also dismissed defendants’ counterclaim. The Appellate Division reversed plaintiffs award of $28,703.27 and dismissed the complaint in its entirety, reasoning that plaintiff did not sustain any actual damages as a result of defendants’ malpractice in light of the substantial settlement obtained during the course of the second trial. We granted plaintiff leave to appeal.

In an action to recover damages for legal malpractice, a plaintiff must demonstrate that the attorney “failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession” and that the attorney’s breach of this duty proximately caused plaintiff to sustain actual and ascertainable damages (McCoy v Feinman, 99 NY2d 295, 301-302 [2002] [internal quotation marks and citation omitted]). To establish causation, a plaintiff must show that he or she would have prevailed in the underlying action or would not have incurred any damages, but for the lawyer’s negligence (see Davis v Klein, 88 NY2d 1008, 1009-1010 [1996]; Carmel v Lunney, 70 NY2d 169, 173 [1987]).

Here, defendants do not dispute that they were negligent in requesting that section 1151 of the Vehicle and Traffic Law be charged in light of the undisputed evidence that the intersection at issue was controlled by a traffic light. As the Appellate Division noted, section 1111 governs intersections regulated by traffic signals and is more favorable to pedestrians than section 1151, which, by its plain terms, applies only where there are no traffic signals. The erroneous charge forced plaintiff to hire new counsel to move to set aside the verdict assigning 50% fault to plaintiff, pursue an appeal from Supreme Court’s judgment and retain expert witnesses to testify at the second trial. These steps would not have been necessary but for defendants’ negligence.

Defendants contend, and the Appellate Division concurred, that plaintiff did not sustain any actual damages as a result of the malpractice because plaintiff ultimately recovered a settlement of $750,000 in the underlying personal injury action. We are unpersuaded.

Damages in a legal malpractice case are designed “to make the injured client whole” (Campagnola v Mulholland, Minion & Roe, 76 NY2d 38, 42 [1990]). A plaintiffs damages may include “litigation expenses incurred in an attempt to avoid, minimize, or reduce the damage caused by the attorney’s wrongful conduct” (DePinto v Rosenthal & Curry, 237 AD2d 482, 482 [2d Dept 1997]; see also Baker v Dorfman, 239 F3d 415, 426 [2d Cir 2000]; 3 Hallen and Smith, Legal Malpractice §§ 20:6, 20:10 [2007]).

In this case, plaintiff incurred litigation expenses to correct defendants’ error and paid a second time for expert fees for the retrial. These expenditures were readily ascertainable and calculated at $28,703.27 by Supreme Court. Although plaintiff achieved a $750,000 settlement as a result of the second trial, that sum represented compensatory damages in the underlying personal injury action and was not designed to reimburse plaintiff for the fees and expenses caused by defendants’ negligence. We therefore agree with Supreme Court that plaintiff is entitled to consequential damages of $28,703.27.

Like the courts below, we reject plaintiffs argument that he should recover interest on the $750,000 settlement from January 2002 to November 2004. Plaintiff contends that, had it been properly charged, the first jury would have found the driver solely responsible for the accident and returned a damages verdict of $750,000, and that defendants should be responsible for interest that would have accrued on that sum during that period before he received payment. But plaintiffs assertion that, had the proper instruction been charged, the first jury would have awarded $750,000 — instead of the $255,000 it actually awarded — is pure speculation. Sections 1151 and 1111 of the Vehicle and Traffic Law relate only to liability and not to the damages issues. There is no basis to presume that a difference in the instructions on determining liability would have altered the jury’s calculation of damages. Plaintiff is therefore not entitled to interest as an element of damages in this malpractice action.

Accordingly, the order of the Appellate Division should be modified, without costs, by reinstating the judgment of Supreme Court and, as so modified, the order should be affirmed.

Chief Judge Kaye and Judges Ciparick, Read, Smith, Pigott and Jones concur.

Order modified, etc.

      . Specifically, the jury found that plaintiff sustained damages of $140,000 for past loss of earnings; $50,000 for future loss of earnings; $25,000 for past pain and suffering; $25,000 for future pain and suffering; and that his wife was entitled to $15,000 for loss of services.

      . Although the jury found both plaintiff and the driver negligent, it concluded that plaintiff’s negligence was not a substantial factor in causing the accident.

      . We need not decide in this case whether predecision interest may he recoverable in a legal malpractice action under other circumstances (see generally CPLR 5001; Baker, 239 F3d at 424-425; 3 Hallen and Smith, Legal Malpractice § 20:5 [2007]).