author: Graffeo, J.

text:
    [952 NE2d 482, 928 NYS2d 666]
    NML Capital, Respondent-Appellant, and Montreux Partners et al., Respondents, v Republic of Argentina, Appellant-Respondent.
    Argued June 1, 2011;
    decided June 30, 2011

      POINTS OF COUNSEL

      Cleary Gottlieb Steen & Hamilton LLP, New York City (Carmine D. Boccuzzi, Jonathan I. Blackman and Christopher P. Moore of counsel), for appellant-respondent.
    Post-maturity or post-acceleration, plaintiffs are entitled to prejudgment interest on principal at the contract rate, not interest at the statutory rate in addition to the contract rate. (Pryor v City of Buffalo, 197 NY 123; Jamaica Sav. Bank v Giacomantonio, 59 Misc 2d 704; Taylor v Wing, 84 NY 471; Astoria Fed. Sav. & Loan Assn. v Rambalakos, 49 AD2d 715; Stull v Feld, 34 AD2d 655; Schwall v Bergstol, 97 AD2d 540; Valloni v Crisona, 170 AD2d 596; Citibank, N. A. v Liebowitz, 110 AD2d 615; European Am. Bank v Peddlers Pond Holding Corp., 185 AD2d 805; City Real Estate Co. v MacFarland, 67 Misc 286.)

      Dechert LLP, New York City (Robert A. Cohen and Dennis H. Hranitzky of counsel), for respondent-appellant.
    I. The Republic of Argentina was contractually required to make semiannual payments of contract interest on the unpaid principal of NML Capital’s (NML) accelerated floating rate accrual notes (FRANs) until the date of NML’s judgment. (Clients’ Sec. Fund of State of N.Y. v Grandeau, 129 AD2d 383, 72 NY2d 62; Matter of Hickey, 7 AD2d 932; Matter of People v Applied Card Sys., Inc., 11 NY3d 105; Judd v O’Brien & Waddle, 21 NY 186; Connors v Hartford Fire Ins. Co., 138 AD2d 877; Matter of Podiatry Socy. of State of N.Y. v Regents of Univ. of State of N.Y., 78 Misc 2d 731; A.J. Temple Marble & Tile v Union Carbide Marble Care, 87 NY2d 574; 91 E. B’way Corp. v Pippo Toy Co., Inc., 185 Misc 779; Capital Ventures Intl, v Republic of Argentina, 552 F3d 289; Empire Trust Co. v Equitable Off. Bldg. Corp., 167 F2d 346.) II. Under Spodek v Park Prop. Dev. Assoc. (96 NY2d 577 [2001]) the Republic of Argentina must pay statutory interest on all overdue amounts of contract interest, including semiannually due amounts of contract interest that became payable after maturity. (NYCTL 1998-2 Trust v Wagner, 61 AD3d 728; Bank of Am., N.A. v Solow, 19 Misc 3d 1123[A], 2008 NY Slip Op 50830[U], 59 AD3d 304.) III. This Court should not follow Capital Ventures Intl. v Republic of Argentina (552 F3d 289 [2d Cir 2009]). (Valloni v Crisona, 170 AD2d 596; Matter of Khatibi v Weill, 8 AD3d 485; Long v State of New York, 7 NY3d 269; Aardwoolf Corp. v Nelson Capital Corp., 861 F2d 46; Citibank, N. A. v Liebowitz, 110 AD2d 615; Bostwick-Westbury Corp. v Commercial Trading Co., 94 Misc 2d 401; Gizzi v Hall, 309 AD2d 1140; Berman v Schwartz, 59 Misc 2d 184, 33 AD2d 673; Franklin Natl. Bank of Long Is. v Capobianco, 51 Misc 2d 30; Northwestern Mut. Life Ins. Co. v Uniondale Realty Assoc., 11 Misc 3d 980.) IV. Other provisions in the bond documents support NML Capital’s reading.

      Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York City (Walter Rieman of counsel), and Goodwin Proctor LLP, Boston, Massachusetts (Stephen D. Poss and Robert D. Carroll of counsel), for respondents.
    I. Because the Republic of Argentina has never paid the principal amounts due at maturity, Argentina was contractually required to continue making payments of contract interest every six months until the dates of the judgments. (Paramount Communications v Horsehead Indus., 231 AD2d 40; Matter of Budd v Valentine, 283 NY 508; Abiele Contr. v New York City School Constr. Auth., 91 NY2d 1; Uribe v Merchants Bank of N.Y., 91 NY2d 336; Ace Wire & Cable Co. v Aetna Cas. & Sur. Co., 60 NY2d 390; Matter of Union Indem. Ins. Co. of N.Y., 92 NY2d 107; Empire Trust Co. v Equitable Off. Bldg. Corp., 167 F2d 346; O’Brien v Young, 95 NY 428; European Am. Bank v Peddlers Pond Holding Corp., 185 AD2d 805; Valloni v Crisona, 170 AD2d 596.) II. Under Spodek v Park Prop. Dev. Assoc. (96 NY2d 577 [2001]), the Republic of Argentina must pay statutory interest on all overdue amounts of contract interest, including semiannually due amounts of contract interest that became payable after maturity. (Empire Trust Co. v Equitable Off. Bldg. Corp., 167 F2d 346; Prager v New Jersey Fid. & Plate Glass Ins. Co. of Newark, N.J., 245 NY 1; Love v State of New York, 78 NY2d 540.) III. NML Capital should not be penalized for exercising its contractual right to accelerate. (Aardwoolf Corp. v Nelson Capital Corp., 861 F2d 46; Atlas Fin. Corp. v Ezrine, 42 AD2d 256; Bostwick-Westbury

      Corp. v Commercial Trading Co., 94 Misc 2d 401; Matter of LHD Realty Corp., 726 F2d 327.) IV. Other provisions in the bond documents support the floating rate accrual notes’ (FRANs) holders’ reading. (Gizzi v Hall, 309 AD2d 1140.) V. The Republic of Argentina misinterprets the applicable law and the underlying documents and events. (O’Brien v Young, 95 NY 428; Spodek v Park Prop. Dev. Assoc., 96 NY2d 577; Rachlin & Co. v Tra-Mar, Inc., 33 AD2d 370; EM Ltd. v Republic of Argentina, 720 F Supp 2d 273; Allied Bank Intl. v Banco Credito Agricola de Cartago, 757 F2d 516; Pravin Banker Assoc., Ltd. v Banco Popular del Peru, 895 F Supp 660, 109 F3d 850; National Union Fire Ins. Co. of Pittsburgh, Pa. v People’s Republic of the Congo, 729 F Supp 936; A.I. Credit Corp. v Government of Jamaica, 666 F Supp 629; Travelers Ins. Co. v Brass Goods Mfg. Co., 239 NY 273; Sprint Communications Co. v APCC Services, Inc., 554 US 269.)
   OPINION OF THE COURT

Graffeo, J.

In this case the United States Court of Appeals for the Second Circuit has certified questions that require us to interpret the terms of bonds issued by the nation of Argentina. We are asked to determine whether Argentina’s obligation to make biannual interest-only payments to bondholders continued after maturity or acceleration of the indebtedness and, if so, whether the bondholders were entitled to CPLR 5001 prejudgment interest on payments that were not made as a consequence of the nation’s default.

In 1998, Argentina issued a series of floating rate accrual notes (FRANs) that were scheduled to mature in April 2005 when the principal was due to be repaid in full to bondholders. The FRANs were governed by a series of bond documents (a Fiscal Agency Agreement, Prospectus, Prospectus Supplement and Floating Rate Accrual Notes Certificate) directing that they were to be interpreted according to New York law. As the issuer, Argentina assumed the obligation to pay the bondholders interest-only payments twice a year, on April 10 and October 10, “until the principal hereof is paid or made available for payment,” at a floating interest rate calculated and published by a determination agent pursuant to a complex formula. The formula was structured in such a manner that, for each six-month period, the interest rate would rise or fall depending on Argentina’s financial health as measured by certain market indicators. Acceleration clauses were also included in the bond documents, permitting bondholders to accelerate the due date of the principal in the event of a default by the issuer.

From the date it issued the bonds until October 2001, Argentina fulfilled its obligations under the FRANs by making the interest-only payments twice a year as required. Given Argentina’s relatively stable economy during that period, the floating interest rate (published by Morgan Stanley, the determination agent retained by Argentina) related to the biannual payments fluctuated between 9% and 14.4% per annum. However, after a severe financial crisis in late 2001, Argentina announced that it would no longer service its approximately $80 billion in external debt, including the FRANs at issue in this case. As a consequence of that pronouncement, the floating interest rate rose meteorically, reaching approximately 101% per annum (50.526% per biannual period) in April 2005, the last date such a calculation was made by Morgan Stanley, whose contract expired at that time. Since December 2001, Argentina has not made any of the biannual interest payments nor has it repaid any of the principal owed to the bondholders that brought this litigation. Argentina’s failure to make interest-only payments and its 2001 declaration of a moratorium on servicing foreign debt were both “events of default” under the terms of the bond documents.

Plaintiffs are companies that acquired the FRANs at different points in time, some before Argentina’s financial collapse and some after. In total, plaintiffs acquired FRANs representing approximately $290 million in unpaid principal, with the lead plaintiff in this litigation — NML Capital — holding bonds valued at $102 million. In February 2005, NML Capital accelerated about $32 million of that debt. The principal relating to the remaining FRANs became due on the April 2005 maturity date.

Plaintiffs commenced numerous separate actions against Argentina in the United States District Court, Southern District of New York, seeking damages for the nation’s default on the bonds, and the claims were subsequently consolidated. Argentina did not dispute that it breached its obligations under the FRANs and was required to repay the principal indebtedness. But after plaintiffs were granted summary judgment on liability, a controversy arose concerning the appropriate calculation of damages.

In particular, Argentina raised several arguments affecting plaintiffs’ entitlement to prejudgment interest. First, the nation maintained that it should not be required to pay prejudgment interest at the contract rate — the floating interest rate calculated biannually based on the complex formula in the bond documents. Because the interest rate rose to extraordinary levels, Argentina asserted that the rate was unconscionable, usurious and amounted to a liquidated damages clause that imposed an unenforceable penalty. The District Court rejected these arguments, finding that the floating interest rate provision was enforceable (2009 WL 721736, 2009 US Dist LEXIS 21530). The Second Circuit affirmed this aspect of the District Court’s analysis on the merits, without certifying any questions regarding those issues to this Court.

Argentina’s second contention involved prejudgment interest on the biannual interest-only payments. The nation acknowledged that, in addition to prejudgment interest on unpaid principal, it was required to pay 9% statutory prejudgment interest pursuant to CPLR 5001 on the interest payments it failed to render between the date of its default and the date the FRANs matured or were accelerated. However, Argentina disputed that it had any obligation to continue biannual interest payments after the FRANs matured or were accelerated and further contended that 9% statutory interest should not be imposed on such payments because this constituted the impermissible collection of “interest on interest” under New York law.

Plaintiffs countered that Argentina had a duty under the plain language of the bond documents to continue the biannual interest payments post-maturity or post-acceleration of the debt until the principal was paid in full. Because the nation failed to make such payments (in fact, it ceased making interest payments in December 2001), plaintiffs maintained that they were entitled to collect the unpaid interest-only payments as damages, plus 9% statutory interest on those payments from the date they were due until the date of entry of a judgment.

The District Court partially credited each of the parties’ arguments. Based on the language in the bond documents, the court agreed with the bondholders that Argentina was obligated to pay interest-only payments after the bonds matured until the principal was paid and, therefore, the bondholders were entitled to 9% statutory interest on the unpaid post-maturity interest-only payments. But, with respect to the subset of bonds that were accelerated, the court sided with Argentina. Relying on Capital Ventures Intl. v Republic of Argentina (552 F3d 289 [2d Cir 2009], cert denied 558 US —, 130 S Ct 202 [2009]), the District Court held that the nation’s liability for biannual interest payments ceased on the date of acceleration and, therefore, the 9% statutory interest was not owed post-acceleration (2009 WL 721736, 2009 US Dist LEXIS 21530).

Argentina and NML Capital cross-appealed to the Second Circuit. After affirming the District Court’s determination that the floating interest rate provision in the bond documents was enforceable, the Second Circuit concluded that the remaining issues concerning the biannual interest payments and the calculation of prejudgment interest raised unresolved issues of New York law. Accordingly, the Second Circuit certified the following three questions for our review:

“[1] Is a bond provision requiring the issuer of the bond to make, on dates certain, bi-annual interest payments on principal ‘until the principal hereof is paid’ properly construed as an obligation to pay interest for so long as the principal is outstanding, including after the date of maturity?
“[2] Is a bond provision requiring the issuer of the bond to make, on dates certain, bi-annual interest payments on principal ‘until the principal hereof is paid’ properly construed as an obligation to pay interest for so long as the principal is outstanding, including after acceleration?
“[3] If either of the foregoing questions is answered in the affirmative, does that obligation provide a valid basis for awarding statutory interest under N.Y. C.EL.R. § 5001 (a) on post-maturity or post-acceleration interest payments that came due but were never paid?” (621 F3d 230, 244 [2010].)

We accepted the certification (15 NY3d 859 [2010]).

I.

Since this appeal primarily involves a dispute concerning the calculation of prejudgment interest, we begin with some general principles of New York law pertaining to that topic. Under CFLR 5001, interest on a sum awarded as a result of a breach of contract is computed from the earliest date that the claim accrued, “except that interest upon damages incurred thereafter shall be computed from the date incurred” (CPLR 5001 [a], [b]). Thus, CPLR 5001 permits a party that prevailed in a breach of contract action to obtain prejudgment interest (postjudgment interest is addressed in CPLR 5003). And where a contract provides for periodic payments or installments, the defaulting party is required to pay prejudgment interest on any missed payment from the date the payment became due (see Spodek v Park Prop. Dev. Assoc., 96 NY2d 577 [2001]).

When a claim is predicated on a breach of contract, the applicable rate of prejudgment interest varies depending on the nature and terms of the contract. Most agreements associated with indebtedness provide a “contract rate” of interest that determines the value of the loan and that rate is used to calculate interest on principal prior to loan maturity or a default in performance. If the parties failed to include a provision in the contract addressing the interest rate that governs after principal is due or in the event of a breach, New York’s statutory rate will be applied as the default rate (see Isaias v Fischoff, 39 AD2d 850 [1st Dept 1972], affd 33 NY2d 941 [1974]). CPLR 5004 sets forth a statutory rate of 9% per annum. For example, in Chipetine v McEvoy (238 AD2d 536, 537 [2d Dept 1997]), where a debtor “executed a promissory note for the principal sum of $1,000,000, with interest at 12% per annum, payable to the plaintiff,” interest on the unpaid principal was calculated at the contract rate — 12%—until the debtor defaulted on the note and, thereafter, was calculated at the statutory rate of 9%.

As an important corollary, New York courts have long held that when an agreement involving an indebtedness “provides that the interest shall be at a specified rate until the principal shall be paid, then the contract rate governs until payment of the principal, or until the contract is merged in a judgment” (O’Brien v Young, 95 NY 428, 430 [1884] [emphasis added]; see e.g. Stull v Feld, 34 AD2d 655 [2d Dept 1970]; see generally NYCTL 1998-2 Trust v Wagner, 61 AD3d 728 [2d Dept 2009]). Said another way, when the principal on a loan is due on a date certain and the debtor fails to make payment, the interest rate in the contract will be used to calculate interest on unpaid principal from the date of maturity of the loan to the entry of judgment (see e.g. Astoria Fed. Sav. & Loan Assn. v Rambalakos, 49 AD2d 715 [2d Dept 1975]). Thus, inclusion of a clause directing that interest accrues at a particular rate “until the principal is paid” (or words to that effect) alters the general rule that interest on principal is calculated pursuant to New York’s statutory interest rate after the loan matures or the debtor defaults.

If the current dispute involved the proper rate to be applied when calculating interest on the principal loaned to Argentina, this well-established precedent would readily settle the issue. The bond documents required that Argentina pay interest at the complex floating rate “until the principal hereof is paid or made available for payment,” triggering the requirement that interest on principal be assessed at the contract rate until the principal was repaid (which has not occurred) or the contract merged in the judgment. Indeed, it is undisputed that Argentina must pay interest on principal at the contract rate post-maturity and post-acceleration of the debt, which is a sum equivalent to the total of any unpaid biannual interest payments. But the controversy here is not over the proper prejudgment interest rate to apply to principal-, rather, the issue is whether the biannual interest payments continued to be due after maturity or acceleration of the debt and, if so, whether the bondholders are entitled to collect prejudgment interest on the interest-only payments that were due prior to judgment but were not made. We therefore turn to the questions framed by the Second Circuit.

II.

To answer the first inquiry we must interpret the language in the bond documents to determine whether Argentina’s duty to remit interest biannually on unpaid FRANs principal continued after the bonds matured in April 2005. As we have repeatedly stated, “when parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms” (Vermont Teddy Bear Co. v 538 Madison Realty Co., 1 NY3d 470, 475 [2004] [ellipsis and citation omitted]). It is the role of the courts to enforce the agreement made by the parties — not to add, excise or distort the meaning of the terms they chose to include, thereby creating a new contract under the guise of construction (Reiss v Financial Performance Corp., 97 NY2d 195, 199 [2001]). Adherence to these principles is particularly appropriate in a case like this involving interpretation of documents drafted by sophisticated, counseled parties and involving the loan of substantial sums of money.

The FRANs certificate contains a repayment clause in which Argentina promised to pay Cede & Co. (an intermediary that was to pass funds on to the beneficial owners of the bonds) the principal owed on the bonds

“on April 10, 2005 upon presentation and surrender of this Security, and to pay interest thereon . . . every six months in arrears on April 10 and October 10 in each year, commencing October 10, 1998 (each an ‘Interest Payment Date’), at the rate set forth below, until the principal hereof is paid or made available for payment.”

The “rate set forth below” refers to the floating interest rate formula applied biannually by the determination agent.

The parties agree that this provision required Argentina to make biannual interest-only payments from the commencement date until the date of maturity of the bonds. Argentina maintains, however, that its obligation to make these periodic payments ended when the debt matured. Based on the plain language of this provision, plaintiffs assert that the only event that would terminate the duty to remit interest payments would be repayment of principal, which did not occur.

Plaintiffs’ interpretation best comports with the plain language of the contract. After identifying the date that the bonds would mature and that repayment of principal was required, the provision imposes an obligation to make interest payments every six months “in arrears” on specified dates, commencing on a date certain (October 10, 1998) and continuing at the contract’s floating interest rate “until the principal hereof is paid or made available for payment.” By its terms, the contract contemplates that the bondholders are entitled to biannual interest payments until the principal is actually repaid in full — and not merely until the bond maturity date as Argentina suggests.

Had Argentina — the drafter of the bond documents — intended that its responsibility to pay interest twice a year cease upon maturity, it could easily have clarified that intent in any number of ways. It could have stated that payments would continue from October 10, 1998 to April 10, 2005 (the specific maturity date identified earlier in the clause). Similarly, it could have restructured the clause by first referencing the payment obligation and then stating that the obligation continued “until” the maturity date. Or it could have directed that interest payments were to be made until the principal was due, thereby referring back to the loan maturity date.

Instead, both the structure and language of the provision point to a contrary intent. The clause begins by referencing the duty to repay principal on April 10, 2005 and then proceeds to indicate — using the word “and” — that interest will be paid every six months “in arrears” until the principal is paid or made available for payment. This formulation suggests two potentially separate obligations on the part of the issuer. The first is to repay the principal on the maturity date and the second is to make biannual interest payments until repayment of the principal. Nothing in the language chosen by the drafters suggests that breach of the first obligation was intended to relieve the issuer of the duty to fulfill the second. To the contrary, given the structure and language chosen in the clause, the natural interpretation is that principal was due in April 2005 and that interest-only payments would continue to be due biannually until the principal was actually paid or made available for payment.

This interpretation is consistent with our well-established construction of comparable “until the principal is paid” language in controversies involving the calculation of prejudgment interest on principal. Absent such language, the contract rate ceases to be applicable when the loan matures or the debtor defaults and prejudgment interest on principal will be calculated at the statutory rate, currently 9%. But where the parties direct that interest on principal accrues at a particular rate “until the principal shall be paid,” this extends the effectiveness of the contract’s interest rate provision beyond the date of maturity so that it “governs until payment of the principal, or until the contract is merged in a judgment” (O’Brien, 95 NY at 430). By analogy, in this case where the bond not only directed that interest accrue at a particular rate but also imposed a duty to make biannual interest payments until the principal was paid, the use of this language signaled that this periodic payment obligation remained in effect after the loan matured, until the principal was paid or the contract merged in a judgment. Because the FRANs certificate in this case required the issuer to continue to make biannual interest payments post-maturity while the principal remained unpaid, we answer the first certified question in the affirmative.

III.

Next, in relation to the subset of FRANs debt that was subject to acceleration prior to the contract maturity date, we are asked whether Argentina was required, under the same repayment clause, to make biannual interest-only payments after acceleration. As both parties acknowledge, “acceleration” of a repayment obligation in a note or bond changes the date of maturity from some point in the future (in this case, April 2005) to an earlier date based on the debtor’s default under the contract. In the context of a loan, this is the very definition of “acceleration” (see Black’s Law Dictionary 12 [9th ed 2009] [defining acceleration as “(t)he advancing of a loan agreement’s maturity date so that payment of the entire debt is due immediately”]). When NML Capital accelerated $32 million of the debt in February 2005, it altered the maturity date for that debt from April 2005 to February 2005. The question then becomes whether Argentina’s obligation to make the interest payments twice a year “until the principal hereof is paid” — which we have already concluded extended beyond the maturity date of the loan — ceased because loan maturity was hastened by a default and acceleration.

The parties to a loan agreement are free to include provisions directing what will happen in the event of default or acceleration of the debt, supplying specific terms that supercede other provisions in the contract if those events occur. They may, for example, agree that if principal is not repaid on the maturity date, a default rate of interest will apply thereafter (see e.g. European Am. Bank v Peddlers Pond Holding Corp., 185 AD2d 805 [2d Dept 1992] [using default interest rate provision in modification and extension agreement to calculate interest on principal from the date the loan matured until the date the contract merged in a judgment]). Or they may direct that a party pay a prepayment premium and specify that the premium obligation will be triggered if there is a default and acceleration of the indebtedness (see e.g. Northwestern Mut. Life Ins. Co. v Uniondale Realty Assoc., 11 Misc 3d 980 [Sup Ct, Nassau County 2006] [based on the contract language, a payment arising from foreclosure did not constitute prepayment and therefore did not trigger the duty to remit a prepayment premium]).

In this case, however, the FRANs certificate unqualifiedly states that the biannual interest payments are to be made until the principal is paid. And Argentina has not pointed to any language in the repayment or acceleration clauses — or any other provision of the bond documents — indicating that the parties intended this requirement to terminate upon acceleration of the debt, even if the principal was not repaid at that time.

Argentina points to the observation in Capital Ventures Intl. v Republic of Argentina (552 F3d at 296) that

“[t]he normal consequence of acceleration is that interest payments that would have been due in the future are no longer due, because, after acceleration, the entire principal is immediately due and owing; in other words, future interest payments are ‘unearned’ because the creditor is no longer loaning the debtor the principal.”

Interpreting Argentinian bonds similar to these, in Capital Ventures the court held that the bond issuer was not required to continue making interest payments after acceleration on the rationale that there was no specific language in the bond documents indicating that the parties intended to supplant the “normal” meaning of acceleration.

As we have indicated, in New York the consequences of acceleration of the debt depend on the language chosen by the parties in the pertinent loan agreement. While it is understood that acceleration advances the maturity date of the debt, we are unaware of any rule of New York law declaring that other terms of the contract not necessarily impacted by acceleration — such as an obligation to make biannual interest payments until the loan is repaid — automatically cease to be enforceable after acceleration. And although it is true that “unearned” interest is generally not awarded as damages in New York (absent an

enforceable agreement to the contrary), the interest-only payments in this case do not involve “unearned” interest as that term has been used by New York courts. As pertinent here, unearned interest is interest that has not accrued, typically because it is attributable to a period after the loan has been repaid, when the creditor is no longer lending its money but has reacquired it either through repayment or a foreclosure sale (see Atlas Fin. Corp. v Ezrine, 42 AD2d 256 [1st Dept 1973]; Berman v Schwartz, 59 Misc 2d 184 [Sup Ct, NY County 1968], affd on op below 33 AD2d 673 [1st Dept 1969], lv denied 26 NY2d 612 [1970]; Bostwick-Westbury Corp. v Commercial Trading Co., 94 Misc 2d 401 [NY City Civ Ct 1978]; see generally Aardwoolf Corp. v Nelson Capital Corp., 861 F2d 46 [2d Cir 1988]). In this case, principal has not been repaid and the biannual payments reflect interest that has already been earned (i.e., the interest in each unmade payment relates to a six-month interval between February 2005 and the judgment — a period when the loan remained outstanding). As such, New York’s “unearned interest” jurisprudence is inapplicable to this controversy.

Having concluded that the obligation to make biannual interest payments continued after the bonds matured if principal was not promptly repaid, and that nothing in the bond documents indicates that the payments were to stop in the event of acceleration of the debt, it follows that Argentina’s duty to make the payments continued after NML Capital accelerated $32 million of the debt in February 2005. We therefore answer the second certified question in the affirmative.

IV

Since we have determined that the biannual interest payments continued after the bonds matured either on the expected maturity date or through acceleration of the debt, we reach the last question posed by the Second Circuit: whether the bondholders were entitled to statutory prejudgment interest on the unmade payments from the date that they were due. Argentina acknowledged in the District Court that it was required to pay prejudgment interest at the statutory rate on the biannual payments it failed to make prior to the maturity or acceleration of the bonds. But it contended that it should not be charged with prejudgment interest on unpaid post-maturity or post-acceleration interest payments because the contract did not require it to make those payments (an argument we have rejected) and the imposition of such interest would constitute impermissible “interest on interest,” providing a windfall to the bondholders. Plaintiffs counter that they are entitled to prejudgment interest at the statutory rate on any unpaid interest payments under this Court’s holding in Spodek (96 NY2d 577), arguing that the imposition of “interest on interest” is neither inappropriate nor amounts to a double recovery.

Historically, there may have been some question as to whether the collection of “interest on interest” was disfavored in New York but New York public policy concerning the recovery of simple interest on overdue interest payments has become evident over time. In 1989, General Obligations Law § 5-527 was enacted, which clarified that agreements calling for “compound interest” — defined broadly as “the accruing of interest upon unpaid interest irrespective of whether such unpaid interest is added to the principal debt” — were enforceable if the principal debt involved more than $250,000 (see L 1989, ch 202, § 1). And, in our 2001 decision in Spodek, we held that a promissory note holder could collect prejudgment interest pursuant to CPLR 5001 on unpaid, overdue installment payments from the date they were due, even where the payments were comprised of both principal and interest.

Based on our analysis in Spodek, we conclude that the bondholders are entitled to prejudgment interest under CPLR 5001 on the unpaid biannual interest payments that were due— but were not paid — after the loans were either accelerated or matured on the due date. To be sure, there are significant differences between this case and Spodek. These Argentinian bonds do not call for repayment through installments of principal and interest and, here, the prejudgment interest dispute involves post-maturity and post-acceleration interest payments (the Spodek note did not contain “until the principal is paid” language and the unpaid installments had become due prior to loan maturity). But, for purposes of determining whether the bondholders are entitled to prejudgment interest at the statutory rate on unpaid periodic interest payments, these distinctions are not material.

As we have previously explained, the function of prejudgment interest is to compensate the creditor for the loss of use of money the creditor was owed during a particular period of time (see 96 NY2d at 581; Love v State of New York, 78 NY2d 540, 545 [1991]). In this case, the biannual interest payments were designed to reimburse the bondholders for the loss of use of the principal during the relevant six-month time interval. The imposition of statutory interest on the unpaid interest payments compensates the bondholders for a different loss — the failure of the issuer to timely make the interest-only payments. If those interest payments had been made, the bondholders could have invested those funds, generating income. As a consequence of this default, plaintiffs are entitled to be compensated for the loss of the time value of that money — which can be accomplished only by awarding them statutory interest on the unpaid interest-only payments. Absent this component of damages, plaintiffs would be reimbursed only for their loss of use of the principal — and not for loss of use of the periodic interest payments, a separate injury.

We do not agree with Argentina that the imposition of prejudgment interest on the unpaid interest payments permits the bondholders to recover interest twice on the same principal. The bondholders are receiving interest relating to their retention of the principal only once (represented by the recovery of the interest-only payments). The application of statutory interest on unpaid interest payments compensates them for a distinct injury — Argentina’s failure to timely make interest payments.

Argentina emphasizes that fact that, in prior New York cases interpreting “until the principal is paid” language, interest has been applied to principal at the contract rate — a second level of statutory interest has not been recovered on the contract interest. But it overlooks the fact that the contracts in the other cases are distinguishable because the “until the principal is paid” terminology was not attached to an obligation to make periodic interest-only payments. In most, the pertinent language was included in a clause that did nothing more than establish the overall value of the debt by declaring the amount of the principal and the applicable interest rate (see e.g. NYCTL 1998-2 Trust v Wagner, 61 AD3d at 729 [tax lien certificate directed that the holder of the lien was entitled to principal plus interest at 18%, compounded, “until the Tax Lien Principal Balance is paid in full”]). As a result, the issue in these other cases was which interest rate should be applied to calculate damages for nonpayment of principal — they did not involve the computation of damages for unpaid interest payments.

The “interest on interest” question posed by the Second Circuit is raised in this case because the “until the principal hereof is paid” phrase is an integral component of the requirement that Argentina pay interest twice a year. For the reasons articulated above, our answer to the question of whether the bondholders are entitled to statutory interest on the delinquent interest-only payments is also “yes.”

There is no question that the judgment against Argentina will be extraordinarily large, primarily due to the passage of time and the application of the contract’s floating interest rate. But this is no reason to depart from the legal principle that contracts must be enforced according to the language adopted by the parties, particularly here where Argentina drafted the bond documents.

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

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

Following certification of questions by the United States Court of Appeals for the Second Circuit and acceptance of the questions by this Court pursuant to section 500.27 of the Rules 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 questions answered in the affirmative.

      . If the nation’s financial condition was poor and the market perceived the FRANs as a high-risk debt, the interest rate would rise. Conversely, if Argentina’s prospects improved and the FRANs were viewed as a lower-risk debt, the interest rate would decline.

      . Parties can accomplish the same result without including the phrase “until the principal is paid” (see e.g. Citibank, N. A. v Liebowitz, 110 AD2d 615 [2d Dept 1985] [where mortgage granted creditor the right to demand payment of the entire amount owed, “with interest up to the day (the creditor) receive(s) payment” (id. at 616 [emphasis omitted]), this amounted to an agreement that the contract rate of interest would continue to apply after a default]).

      . As the District Court noted, on the bond maturity date, the biannual interest rate was 50.526%, the equivalent of an annual rate of 101.052%.

      . It bears noting that the contract in this case did not call for repayment of principal in periodic installments over time, with interest amortized over the life of the loan and added to each principal payment. In that situation, depending on the language chosen by the parties and the nature of the transaction, acceleration of the debt — i.e., a demand for lump sum payment of all outstanding principal — might be inconsistent with continuing enforcement of a periodic payment obligation that purported to remain in effect until the principal was repaid. Under that scenario, it could be argued that the installment payments were designed to effectuate the repayment of principal over time, something the accelerating creditor no longer sought. We note that, in this case, the principal was to be repaid in a lump sum — the periodic payments were not a vehicle for repayment of principal.

      . Unearned interest issues usually arise when repayment of the loan is to occur in installments of combined principal and interest over an extended time period and interest is precomputed at loan commencement based on the assumption that the loan will continue until full maturity. When that assumption is upset, and the loan is repaid early, such as through a foreclosure sale, the creditor is generally not entitled to recover the total amount of interest that it would have earned had the loan continued until the expected maturity date — unless the parties have agreed otherwise.

      . For this, and other reasons, Argentina’s reliance on Gizzi v Hall (309 AD2d 1140 [3d Dept 2003]) is misplaced. Gizzi involved a mortgage note that was to be repaid in installments of principal and interest. The loan document did not include an “until the principal is paid” clause of any kind. When the debtor failed to make several installment payments, the creditor accelerated the debt and subsequently brought suit, arguing that damages should be calculated as “the sum of all future mortgage payments, including unpaid principal and all future interest amounts, plus statutory interest” (309 AD2d at 1141). Thus, the creditor sought “unearned interest” — interest that had not accrued — and then demanded statutory interest on top of the unearned contract interest. The court properly denied that relief. Given the absence of “until the principal is paid” language, no similar argument could have been made in Gizzi that the obligation to make interest payments continued after acceleration of the debt, thereby generating an obligation to pay interest on unpaid interest payments that accrued prior to judgment.


source: Caselaw Access Project

author: Ciparick, J.

license: Public Domain

text:
    [952 NE2d 995, 929 NYS2d 3]
    Centro Empresarial Cempresa S.A. et al., Appellants, v América Móvil, S.A.B. de C.V., et al., Respondents.
    Argued April 27, 2011;
    decided June 7, 2011

      POINTS OF COUNSEL

      Fox Horan & Camerini LLP, New York City (Kathleen M. Kundar, JooYun Kim and Jennifer A. Fischer of counsel), for appellants.
    I. In dismissing the complaint, the Appellate Division majority committed reversible error when it concluded that plaintiffs had not alleged any basis for voiding the release they had granted defendants. (Bloss v Va’ad Harabonim of Riverdale, 203 AD2d 36; Littman v Magee, 54 AD3d 14; Lobel v Maimonides Med. Ctr., 39 AD3d 275; Anger v Ford Motor Co., Dealer Dev., 80 AD2d 736; Newin Corp. v Hartford Ace. & Indem. Co., 37 NY2d 211; Farber v Breslin, 47 AD3d 873; Channel Master Corp. v Aluminium Ltd. Sales, 4 NY2d 403; H.W. Collections v Kolber, 256 AD2d 240; Madison Hudson Assoc. LLC v Neumann, 44 AD3d 473; Birnbaum v Birnbaum, 73 NY2d 461; Meinhard v Salmon, 249 NY 458.) II. The issues argued at the Appellate Division as to dismissing the complaint on grounds other than the release should be decided in favor of plaintiffs consistent with the opinion of the dissenting Justices. (Selinger Enters., Inc. v Cassuto, 50 AD3d 766; First Bank of Ams. v Motor Car Funding, 257 AD2d 287; Mañas v VMS Assoc., LLC, 53 AD3d 451; Rich v New York Cent. & Hudson Riv. R.R. Co., 87 NY 382; Albemarle Theatre v Bayberry Realty Corp., 27 AD2d 172; M & T Bank Corp. v Gemstone CDO VII, Ltd., 23 Misc 3d 1105[A], 2009 NY Slip Op 50590[U]; Mandelblatt v Devon Stores, 132 AD2d 162; Zumpano v Quinn, 6 NY3d 666; General Stencils v Chiappa, 18 NY2d 125; Century Fed. Sav. & Loan Assn. of Long Is. v Net Realty Holding Trust, 87 AD2d 858.)

      Mayer Brown LLP (Donald M. Falk of the California bar, admitted pro hac vice, of counsel), Mayer Brown LLP, New York City (Philip Allen Lacovara and Scott A. Chesin of counsel), Mayer Brown LLP, Houston, Texas (Steven R. Selsberg of counsel), and Mayer Brown LLP, Chicago, Illinois (Timothy S. Bishop and Joshua D. Yount of counsel), for respondents.
    I. Plaintiffs released all of their claims. (Troy News Co. v City of Troy, 167 AD2d 730; Ingram Corp. v J. Ray McDermott & Co., Inc., 698 F2d 1295; Erie Telecoms., Inc. v City of Erie, Pa., 853 F2d 1084; Henslee v Houston, 566 F2d 475; RBS Holdings, Inc. v Wells Fargo Century, Inc., 485 F Supp 2d 472; Cardiovascular Diagnostics Inc. v Boehringer Mannheim Corp., 985 F Supp 615; Booth v 3669 Delaware, 92 NY2d 934; Mangini v McClurg, 24 NY2d 556; Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603; Matter of Schaefer, 18 NY2d 314.) II. If not released, plaintiffs’ claims nonetheless fail as a matter of law. (Matter of 166 Mamaroneck Ave. Corp. v 151 E. Post Rd. Corp., 78 NY2d 88; Arcadian Phosphates, Inc. v Arcadian Corp., 884 F2d 69; Tonkery v Martina, 78 NY2d 893; Cobble Hill Nursing Home v Henry & Warren Corp., 74 NY2d 475; Joseph Martin, Jr., Delicatessen v Schumacher, 52 NY2d 105; Saint Regis Paper Co.

      v Hubbs & Hastings Paper Co., 235 NY 30; United Press v New York Press Co., 164 NY 406; Demisay v Allied Clove Lakes Co., 91 AD2d 1032; Marinas of the Future v City of New York, 87 AD2d 270; Willmott v Giarraputo, 5 NY2d 250.) III. Most of the causes of action must be dismissed on additional grounds. (Krantz v Chateau Stores of Canada, 256 AD2d 186; Tesoro Petroleum Corp. v Holborn Oil Co., 108 AD2d 607; Bridgestone/Firestone, Inc. v Recovery Credit Servs., Inc., 98 F3d 13; New York Univ. v Continental Ins. Co., 87 NY2d 308; Stangel v Zhi Dan Chen, 74 AD3d 1050; McGee v J. Dunn Constr. Corp., 54 AD3d 1010; Mañas v VMS Assoc., LLC, 53 AD3d 451; Selinger Enters., Inc. v Cassuto, 50 AD3d 766; Old Clinton Corp. v 502 Old Country Rd., 5 AD3d 363; Skillgames, LLC v Brody, 1 AD3d 247.)
   OPINION OF THE COURT

Ciparick, J.

Plaintiffs claim they were fraudulently induced to sell their ownership interests in a company they co-owned with one of the defendants, and to release defendants from claims arising out of that ownership. We affirm the Appellate Division’s determination that this action is barred by the release.

Plaintiffs Centro Empresarial Cempresa S.A. (Centro) and Conecel Holding Limited (CHL) allege they once owned substantial shares of an Ecuadorian telecommunications company, defendant Consorcio Ecuatoriano de Telecomunicaciones S.A. Conecel (Conecel). The complaint alleges that, in 1999, they approached defendant Carlos Slim Held (Slim), the “moving force behind” defendant Teléfonos de México, S.A. de C.V (Telmex México), which owned defendant AMX Ecuador LLC, then known as Telmex Wireless LLC (Telmex), about the possibility of Telmex investing in Conecel.

Through a “Master Agreement” executed in March 2000, Telmex obtained a 60% indirect interest in Conecel, while plaintiffs each retained a minority interest, all held through a new entity, defendant Telmex Wireless Ecuador LLC (TWE). In exchange for its interest, Telmex contributed $150 million to TWE and paid CHL $35 million to cancel Conecel debts. The parties simultaneously entered into various other agreements. Under the “Limited Liability Company Agreement,” the members of TWE agreed that Telmex would manage accounting, tax, and record-keeping for TWE, and that TWE would provide quarterly financial statements to all its members. In the

“Agreement Among Members,” the members of TWE agreed that if Telmex ever consolidated — or “rolled up” — its Latin American telecommunications interests into a single entity “for purposes of selling the equity securities of such entity in international capital markets” at a time when plaintiffs owned 5% or more of TWE, plaintiffs could “negotiate in good faith (for a period not to exceed 20 days)” to exchange their TWE units for equity shares in the new company “at a mutually satisfactory rate of exchange.” The Agreement also stated that, prior to any roll-up, Telmex and TWE would provide “financial, accounting and legal information with respect to Conecel and [TWE] as may reasonably be requested.” A fourth agreement, the “Put Agreement,” gave plaintiffs the right to require Telmex to purchase plaintiffs’ TWE units at a set “floor price” during three separate 180-day periods between March 2002 and March 2006. Plaintiffs could exercise these put options for up to 50% of their units during the 2002 period; up to 75% during the 2004 period; and up to 95% during the 2006 period.

In September 2000, Telmex México formed defendant América Móvil, S.A.B. de C.V (América Móvil), which became the holding company for several entities, including TWE. Plaintiffs allege that, under the Agreement Among Members, this triggered their right to negotiate an exchange of their TWE units for shares in América Móvil. They allege that in March 2001 they asked defendant Daniel Hajj Aboumrad (Hajj), Slim’s son-in-law and CEO of América Móvil, for financial information about Conecel and TWE for use in the contemplated negotiations. Plaintiffs assert that they never received the information, despite repeated requests. They also allege that throughout 2001 Hajj falsely represented that Conecel was financially weak and had not generated any profits to distribute to TWE.

At this point, the complaint states, plaintiffs were “wary of the threat that Defendants would never negotiate in good faith and would never distribute the Conecel profits ... as agreed.” Thus left with “no practical alternative,” plaintiffs exercised the first put option in March 2002 and sold Telmex 50% of their TWE units, the maximum number allowed in the first 180-day period, for which the put agreement entitled them to over $66 million. Over the next year, plaintiffs allege that they repeatedly attempted to open exchange negotiations, but defendants refused to negotiate. In 2003, defendants provided Conecel’s balance sheet, which indicated that the company was not doing well, and made further representations to that effect.

In 2003, Telmex offered to purchase plaintiffs’ remaining units at the floor price, and plaintiffs — allegedly relying on the false financial information — agreed, entitling them to additional substantial consideration. In July 2003, plaintiffs entered a Purchase Agreement with América Móvil, AM Wireless, LLC (formerly Telmex), and Wireless Ecuador LLC (formerly TWE). The parties executed various releases in connection with the sale. In the “Release for Agreement Among Members” (Members Release), the sellers released Telmex and its affiliates, shareholders, and agents from

“all manner of actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims and demands, liability, whatsoever, in law or equity, whether past, present or future, actual or contingent, arising under or in connection with the Agreement Among Members and/or arising out of, based upon, attributable to or resulting from the ownership of membership interests in [TWE] or having taken or failed to take any action in any capacity on behalf of [TWE] or in connection with the business of [TWE].”

A second release, the “Release for Master Agreement” (Master Release), employed nearly identical language, but added a proviso. It released the Telmex-related parties from claims,

“relating to (A) the ownership by the Telmex Released Parties of the [TWE] Units, or (B) any matter arising under or in connection with the Master Agreement, or any other document, agreement, instrument related thereto or executed in connection therewith . . . provided that the foregoing release shall not release any claims involving fraud.”

In June 2008, plaintiffs commenced this action against Telmex México and several of its affiliates: América Móvil, AMX Ecuador (formerly Telmex), Wireless Ecuador LLC (formerly TWE), Conecel, Slim, and Hajj. The complaint asserts 12 causes of action for, among other things, breach of contract, breach of fiduciary duty, fraud, and unjust enrichment. The crux of plaintiffs’ claim is that defendants failed to provide them with accurate tax and financial statements for Conecel and were unwilling to negotiate in good faith for a share exchange. Plaintiffs allege that they only discovered that defendants supplied them with fraudulent information in 2008, after the Ecuadorian government audited Conecel and released the results. They seek a minimum of $900,000,000 in damages — the amount they claim they would have made if a good faith share exchange had been accomplished under the terms of the Members Agreement — plus interest.

Defendants moved to dismiss the complaint on several grounds, including that a defense is founded on documentary evidence (see CPLR 3211 [a] [1]) and the action is barred by a release (see CPLR 3211 [a] [5]). Supreme Court, ruling from the bench, denied the motion.

The Appellate Division reversed and granted the motion to dismiss, holding that plaintiffs’ claims, “are barred by the general release they granted defendants in connection with the sale of their interest” (Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 76 AD3d 310, 311 [1st Dept 2010]). After finding that the release “includes any claim possibly to be discovered in the future that defendants had misrepresented the value of Conecel” (id. at 317), the court concluded that the release was not fraudulently induced, since plaintiffs failed to allege any fraud “separate and distinct” from that contemplated by the release (id. at 317-318). That Telmex, as the majority shareholder, owed plaintiffs a fiduciary duty did not alter the court’s analysis. Further, the court noted, plaintiffs were allegedly aware that they lacked a full picture of Conecel’s internal finances and that the relationship between the parties had become adversarial, yet they failed to condition the release on the truth of the information supplied by defendants, obtain representations or warranties to that effect, or insist on viewing additional information.

Two justices dissented on the ground that the release was fraudulently induced, since plaintiffs did not realize the depths of the alleged fraud and a fiduciary cannot be released from liability unless it has fully disclosed its tortious conduct (see id. at 329 [Catterson, J., dissenting]). The dissent emphasized that the complaint does not allege that plaintiffs had knowledge of defendants’ fraud, and plaintiffs were “reasonably justified in their expectations that the defendants,” as fiduciaries, “would disclose any information in their possession that might affect plaintiffs’ decision on their best course of action” (id. at 330). Moreover, in the dissent’s view, the release did not “mention[ ] or contemplate[ ]” fraud claims (id. at 331). Plaintiffs appealed as of right pursuant to CPLR 5601 (a).

Plaintiffs argue that, as the Appellate Division dissent found, the Members Release was not intended to reach fraud claims. They further contend that the release itself was fraudulently induced, particularly in light of the parties’ fiduciary relationship, and that their reliance on defendants’ financial disclosures was justified.

Generally, “a valid release constitutes a complete bar to an action on a claim which is the subject of the release” (Global Mins. & Metals Corp. v Holme, 35 AD3d 93, 98 [1st Dept 2006]). If “the language of a release is clear and unambiguous, the signing of a release is a ‘jural act’ binding on the parties” (Booth v 3669 Delaware, 92 NY2d 934, 935 [1998], quoting Mangini v McClurg, 24 NY2d 556, 563 [1969]). A release “should never be converted into a starting point for . . . litigation except under circumstances and under rules which would render any other result a grave injustice” (Mangini, 24 NY2d at 563). A release may be invalidated, however, for any of “the traditional bases for setting aside written agreements, namely, duress, illegality, fraud, or mutual mistake” (id.).

Although a defendant has the initial burden of establishing that it has been released from any claims, a signed release “shifts the burden of going forward ... to the [plaintiff] to show that there has been fraud, duress or some other fact which will be sufficient to void the release” (Fleming v Ponziani, 24 NY2d 105, 111 [1969]). A plaintiff seeking to invalidate a release due to fraudulent inducement must “establish the basic elements of fraud, namely a representation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury” (Global Mins., 35 AD3d at 98).

Notably, a release may encompass unknown claims, including unknown fraud claims, if the parties so intend and the agreement is “fairly and knowingly made” (Mangini, 24 NY2d at 566-567; Alleghany Corp. v Kirby, 333 F2d 327, 333 [2d Cir 1964]). As the Appellate Division majority explained below (Centro, 76 AD3d at 318), a party that releases a fraud claim may later challenge that release as fraudulently induced only if it can identify a separate fraud from the subject of the release (see Bellefonte Re Ins. Co. v Argonaut Ins. Co., 757 F2d 523, 527-528 [2d Cir 1985]). Were this not the case, no party could ever settle a fraud claim with any finality.

As a preliminary matter, the parties here debate whether the Members Release encompasses unknown fraud claims. We find that it does. The broad language of the release reaches “all manner of actions . . . whatsoever . . . whether past, present or future, actual or contingent, arising under or in connection with the Agreement Among Members and/or arising out of . . . the ownership of membership interests in [TWE].” The phrase “all manner of actions,” in conjunction with the reference to “future” and “contingent” actions, indicates an intent to release defendants from fraud claims, like this one, unknown at the time of contract (see Ingram Corp. v J. Ray McDermott & Co., Inc., 698 F2d 1295, 1312 [5th Cir 1983]; Consorcio Prodipe, S.A. de C.V. v Vinci, S.A., 544 F Supp 2d 178,192 [SD NY 2008]).

Plaintiffs note that the Master Release, executed at the same time as the Members Release, is substantially similar but expressly excludes fraud claims. They argue — apparently for the first time in their briefs before us — that the fraud exception in the Master Release should be read into the Members Release. Even assuming we can reach this argument (see Matter of SoHo Alliance v New York City Bd. of Stds. & Appeals, 95 NY2d 437, 442 [2000]), “courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include” (Rowe v Great Atl. & Pac. Tea Co., 46 NY2d 62, 72 [1978]). We see no reason to import the Master Release’s express statement into the Members Release. If anything, the explicit exclusion of fraud claims from the Master Release suggests that the Members Release is not so limited. Plaintiffs’ claims are either brought under the Agreement Among Members, under which Telmex agreed to negotiate in good faith and provide Conecel and TWE’s financial information, or otherwise “aris[e] out of’ their “ownership of membership interests in [TWE].” They therefore fall under the Members Release.

Having executed this release, plaintiffs cannot now claim that defendants fraudulently misled them regarding the value of their ownership interests in TWE unless the release was itself induced by a separate fraud. The fraud described in the complaint, however, falls squarely within the scope of the release: plaintiffs allege that defendants supplied them with false financial information regarding the value of Conecel and TWE, and that, based on this false information, plaintiffs sold their interests in TWE and released defendants from claims in connection with that sale. Thus, as the Appellate Division observed: “plaintiffs seek to convert the 2003 release into a starting point for new . . . litigation, essentially asking to be relieved of the release on the ground that they did not realize the true value of the claims they were giving up” (Centro, 76 AD3d at 317).

That the parties had a fiduciary relationship does not alter our conclusion. It is true that Telmex, as a majority shareholder in a closely held corporation, owed a fiduciary duty to plaintiffs, minority shareholders (see Fender v Prescott, 64 NY2d 1077, 1079 [1985]). Telmex was therefore required to “disclose any information that could reasonably bear on plaintiffs’ consideration of [its purchase] offer” (Dubbs v Stribling & Assoc., 96 NY2d 337, 341 [2001]).

A sophisticated principal is able to release its fiduciary from claims — at least where, as here, the fiduciary relationship is no longer one of unquestioning trust — so long as the principal understands that the fiduciary is acting in its own interest and the release is knowingly entered into (see Alleghany Corp., 333 F2d at 333 [“There is no prerequisite to the settlement of a fraud case that the (fiduciary) defendant must come forward and confess to all his wrongful acts in connection with the subject matter”]; Consorcio Prodipe, S.A. de C.V., 544 F Supp 2d at 191). To the extent that Appellate Division decisions such as Littman v Magee (54 AD3d 14, 17 [1st Dept 2008]), Blue Chip Emerald v Allied Partners (299 AD2d 278, 279-280 [1st Dept 2002]) and H.W. Collections v Kolber (256 AD2d 240, 241 [1st Dept 1998]) suggest otherwise, they misapprehend our case law. Plaintiffs here are large corporations engaged in complex transactions in which they were advised by counsel. As sophisticated entities, they negotiated and executed an extraordinarily broad release with their eyes wide open. They cannot now invalidate that release by claiming ignorance of the depth of their fiduciary’s misconduct.

In addition to failing to allege that the release was induced by a separate fraud, plaintiffs have failed to allege that they justifiably relied on defendants’ fraudulent statements in executing the release. As we recently reiterated:

“[I]f the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations” (DDJ Mgt., LLC v Rhone Group L.L.C., 15 NY3d 147, 154 [2010], quoting Schumaker v Mather, 133 NY 590, 596 [1892]).

Here, according to the facts alleged in the complaint, plaintiffs knew that defendants had not supplied them with the financial information necessary to properly value the TWE units, and that they were entitled to that information. Yet they chose to cash out their interests and release defendants from fraud claims without demanding either access to the information or assurances as to its accuracy in the form of representations and warranties. In short, this is an instance where plaintiffs “have been so lax in protecting themselves that they cannot fairly ask for the law’s protection” (id. at 154).

In certain circumstances, a fiduciary’s disclosure obligations might effectively operate like a written representation that no material facts are undisclosed, and this might satisfy a principal’s obligation to investigate further (see id. at 154-155). Where a principal and fiduciary are sophisticated parties engaged in negotiations to terminate their relationship, however, the principal cannot blindly trust the fiduciary’s assertions. This is particularly true where, as alleged here, the principal has actual knowledge that its fiduciary is not being entirely forthright: “[W]hen the party to whom a misrepresentation is made has hints of its falsity, a heightened degree of diligence is required of it. It cannot reasonably rely on such representations without making additional inquiry to determine their accuracy” (Global Mins., 35 AD3d at 100 [citations omitted]; see also Littman, 54 AD3d at 17 [if the fiduciary is “aware of information that rendered (its) reliance unreasonable, or if (it) had enough information to create a duty to investigate further, the requisite reliance cannot be established”]).

Plaintiffs repeatedly and unsuccessfully attempted to hold defendants to their disclosure obligations for years before negotiating and executing the sale of their shares and the accompanying releases. Moreover, the complaint alleges that plaintiffs were driven to sell because they were “wary of the threat that Defendants would never negotiate in good faith and would never distribute the Conecel profits.” Plaintiffs therefore cannot be said to have reasonably relied on defendants’ assertions regarding Conecel’s performance in executing the releases.

In sum, the 2003 Members Release was intended to bar the very claims that plaintiffs now bring, and plaintiffs fail to allege that the release was induced by any fraud beyond that contemplated by the release. In any event, the fraudulent statements plaintiffs point to cannot support a conclusion that the release was fraudulently induced, since plaintiffs allege that they released defendants from claims relating to the sale of their TWE units without conducting even minimal diligence to determine the true value of what they were selling. The Appellate Division majority was therefore correct in concluding that, fully crediting plaintiffs’ allegations, they would not be able to prevail as a matter of law.

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

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

Order affirmed, with costs.


author: Ciparick, J. Chief Judge Lippman

text:
    [952 NE2d 1011, 929 NYS2d 19]
    Christakis Shiamili, Individually and on Behalf of Ardor Realty Corp., Appellant, v The Real Estate Group of New York, Inc., et al., Respondents.
    Argued May 2, 2011;
    decided June 14, 2011

      POINTS OF COUNSEL

      The Shapiro Firm, LLP, New York City (Jonathan S. Shapiro and Robert J. Shapiro of counsel), for appellant.
    I. The First Department overlooked relevant facts and misapplied the Communications Decency Act when it found that defendant-respondents were simply “publishers” of the defamatory content and, as such, were entitled to immunity. (Leon v Martinez, 84 NY2d 83; Rovello v Orofino Realty Co., 40 NY2d 633; Fair Hous. Council of San Fernando Val. v Roommates. Com, LLC, 521 F3d 1157; Universal Communication Sys., Inc. v Lycos, Inc., 478 F3d 413; Federal Trade Commn. v Accusearch Inc., 570 F3d 1187; Carafano v Metrosplash.com. Inc., 339 F3d 1119; Chicago Lawyers’ Comm. For Civ. Rights Under The Law, Inc. v Craigslist, Inc., 461 F Supp 2d 681; Batzel v Smith, 333 F3d 1018, 541 US 1085; Parker v Google, Inc., 422 F Supp 2d 492; Green v America Online [AOL], 318 F3d 465, 540 US 877.) II. The First Department erred in dismissing plaintiff-appellant’s complaint prediscovery, where the complaint raised a sufficient inference that defendants-respondents were responsible for authoring and/or developing the defamatory material. (Stendig, Inc. v Thom Rock Realty Co., 163 AD2d 46; Integrated Logistics Consultants v Fidata Corp., 131 AD2d 338; Simpson v Term Indus., 126 AD2d 484; Baron v Incorporated Vil. of Freeport, 143 AD2d 792; Colicchio v Port Auth. of N.Y. & N.J., 246 AD2d 464.)

      Ford Marrin Esposito Witmeyer & Gleser, L.L.P., New York City (Joseph D’Ambrosio, Andrew I. Mandelbaum and John Mattoon of counsel), for respondents.
    I. On a motion to dismiss pursuant to CPLR 3211, pleadings are afforded a liberal construction. (Edwards v Codd, 59 AD2d 148; Herzog v Town of Thompson, 216 AD2d 801; Lancaster v Colonial Motor Frgt. Line, 177 AD2d 152; NCAS Realty Mgt. Corp. v National Corp.

      for Hous. Partnerships, 241 AD2d 541; Dillon v City of New York, 261 AD2d 34; People v Kin Kan, 78 NY2d 54; Zeran v America Online, Inc., 129 F3d 327, 524 US 937.) II. The claims are barred by the Communications Decency Act. (Zeran v America Online, Inc., 129 F3d 327, 524 US 937; Carafano v Metro-splash.com. Inc., 339 F3d 1119; Batzel v Smith, 333 F3d 1018; Ben Ezra, Weinstein, & Co., Inc. v America Online Inc., 206 F3d 980; Chicago Lawyers’ Comm. For Civ. Rights Under The Law, Inc. v Craigslist, Inc., 461 F Supp 2d 681; DiMeo v Max, 433 F Supp 2d 523; Green v America Online [AOL], 318 F3d 465; Blumenthal v Drudge, 992 F Supp 44; Reit v Yelp!, Inc., 29 Misc 3d 713; Gucci Am., Inc. v Hall & Assoc., 135 F Supp 2d 409.) III. Plaintiffs alleged need for additional discovery is not a basis to deny defendants’ motion to dismiss. (Fair Hous. Council of San Fernando Val. v Roommates.Com, LLC, 521 F3d 1157; Batzel v Smith, 333 F3d 1018; Bell Atlantic Corp. v Twombly, 550 US 544; Walsh v Liberty Mut. Ins. Co., 289 AD2d 842; Matter of Greenbaum v Google, Inc., 18 Misc 3d 185; Doe v MySpace, Inc., 528 F3d 413; Chicago Lawyers’ Comm. For Civ. Rights Under The Law, Inc. v Craigslist, Inc., 461 F Supp 2d 681.)
   OPINION OF THE COURT

Ciparick, J.

On this appeal, we consider for the first time whether a plaintiffs claim against a Web site operator arising out of allegedly defamatory comments posted to the Web site is barred by the Communications Decency Act (CDA), codified at 47 USC § 230. We conclude that it is, and that the defendants’ motion to dismiss the complaint was properly granted.

As stated in the complaint, plaintiff Christakis Shiamili is the founder and CEO of Ardor Realty Corp. (Ardor), a New York apartment rental and sales company. In March 2008, Shiamili filed this action for defamation and unfair competition by disparagement against defendants The Real Estate Group of New York, Inc. (TREGNY), Daniel Baum, and Ryan McCann. TREGNY is a competitor of Ardor’s, also engaged in selling and renting New York City apartments; Baum is TREGNY’s principal and chief operating officer; and McCann is Baum’s assistant.

These defendants allegedly “administer and choose content for” a publicly accessible Web site — a “blog” — dedicated to the New York City real estate industry. In February 2008, defendants allegedly published defamatory statements about Shiamili on the Web site. Specifically, a lengthy comment was added to a discussion thread by a user operating under the pseudonym “Ardor Realty Sucks.” The comment made several allegedly defamatory statements suggesting that Shiamili mistreated his employees and was racist and anti-Semitic, referring to one of the company’s agents as “his token Jew.” McCann, in his role as Web site administrator, moved the comment to a stand-alone post, prefacing it with the statement that “the following story came to us as a . . . comment, and we promoted it to a post.” The post was given the heading, “Ardor Realty and Those People,” and the subheading, “and now it’s time for your weekly dose of hate, brought to you unedited, once again, by ‘Ardor Realty Sucks’, and for the record, we are so. not. afraid.” The post was accompanied by a traditional image of Jesus Christ with Shiamili’s face and the words “Chris Shiamili: King of the Token Jews.”

Several of the comments posted by anonymous users in the ensuing discussion thread contained further allegedly defamatory statements, including suggestions that Ardor was in financial trouble and that Shiamili abused and cheated on his wife. One of the commentators ended by saying “call me a Liar and I’ll come back here and get REALLY specific.” The complaint alleges that McCann, under a pseudonym, responded, “liar” in an attempt to encourage the user to say more, but that commentator did not post further. Shiamili responded by drafting a lengthy comment, which was added to the discussion thread. Shiamili also contacted McCann and requested that he remove the defamatory statements, but McCann refused to do so.

Shiamili brought this action, alleging in his complaint that the defamatory statements were made with the intent to injure his reputation, and that defendants either “made” or published the statements. In addition to damages, the complaint requests injunctive relief requiring defendants to stop “publication of any and all defamatory statements concerning Shiamili and Ardor” and “any further disparagement.”

Defendants moved to dismiss the complaint for failure to state a cause of action (CPLR 3211 [a] [7]). In support of the motion, McCann submitted an affidavit acknowledging that he was the “administrator and moderator” of the Web site, which “functioned as a virtual bulletin board, or open discussion forum” to which anyone could add content in the form of a comment on an existing post. Only McCann, in his role as moderator, could create stand-alone posts capable of generating their own discussion threads.

Supreme Court denied the motion to dismiss. As relevant here, it found that section 230 (c) (1) of the CDA (47 USC § 230 [c] [1]) did not require dismissal of plaintiffs claims, since “information as to defendants’ role, if any, in authoring or developing the content of the website is exclusively within their possession” and discovery had not yet occurred (2008 NY Slip Op 33479[U], *7).

The Appellate Division unanimously reversed, granted the motion to dismiss, and dismissed the complaint. The court explained that the CDA protects Web site operators from liability derived from the exercise of a publisher’s traditional editorial functions (see Shiamili v Real Estate Group of N.Y., Inc., 68 AD3d 581, 583 [1st Dept 2009]). Because the complaint here does not allege that defendants authored the defamatory content, but only that they published and edited it, the court concluded that the CDA bars Shiamili’s claim and that further discovery is unnecessary (see id.). We granted Shiamili leave to appeal (15 NY3d 705 [2010]) and now affirm.

Although a publisher of defamatory material authored by a third party is generally subject to tort liability, Congress has carved out an exception for Internet publication by enacting section 230 of the CDA, passed as part of the Telecommunications Act of 1996 (Pub L 104-104, 110 US Stat 56 [104th Cong, 2d Sess, Feb. 8, 1996]). Section 230 establishes that “[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider” (47 USC § 230 [c] [1]), and it preempts any state law — including imposition of tort liability — inconsistent with its protections (see 47 USC § 230 [e] [3]). A defendant is therefore immune from state law liability if (1) it is a “provider or user of an interactive computer service”; (2) the complaint seeks to hold the defendant liable as a “publisher or speaker”; and (3) the action is based on “information provided by another information content provider” (47 USC § 230 [c] [1]; see also Federal Trade Commn. v Accusearch Inc., 570 F3d 1187, 1196 [10th Cir 2009]; Barnes v Yahoo!, Inc., 570 F3d 1096, 1100-1101 [9th Cir 2009]; Universal Communication Sys., Inc. v Lycos, Inc., 478 F3d 413, 418 [1st Cir 2007]). The statute defines an “information content provider” as “any person or entity that is responsible, in whole or in part, for the creation or development of information provided through the Internet or any other interactive computer service” (47 USC § 230 [f] [3]).

In passing section 230, Congress acknowledged that “[t]he Internet . . . offer [s] a forum for a true diversity of political discourse, unique opportunities for cultural development, and myriad avenues for intellectual activity” (47 USC § 230 [a] [3]), and that it has “flourished, to the benefit of all Americans, with a minimum of government regulation” (47 USC § 230 [a] [4]). Further, “[i]t is the policy of the United States ... to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation” (47 USC § 230 [b] [2]). As the Fourth Circuit explained in the seminal case of Zeran v America Online, Inc. (129 F3d 327, 330 [1997]):

“Congress recognized the threat that tort-based lawsuits pose to freedom of speech in the new and burgeoning Internet medium. The imposition of tort liability on service providers for the communications of others represented, for Congress, simply another form of intrusive government regulation of speech. Section 230 was enacted, in part, to maintain the robust nature of Internet communication and, accordingly, to keep government interference in the medium to a minimum.”

Additionally, section 230 was designed “to encourage service providers to self-regulate the dissemination of offensive material over their services” (id. at 331). In this respect, the statute was a response to cases such as Stratton Oakmont, Inc. v Prodigy Servs. Co. (1995 WL 323710, 1995 NY Misc LEXIS 229 [Sup Ct, Nassau County 1995]), in which an Internet service provider was found liable for defamatory statements posted by third parties because it had voluntarily screened and edited some offensive content, and so was considered a “publisher” (see 1995 WL 323710 at *4, 1995 NY Misc LEXIS 229 at *10-11; S Rep 104-230, 104th Cong, 2d Sess, at 194). Section 230 (c) (1) was meant to undo the perverse incentives created by this reasoning, which effectively penalized providers for monitoring content (see Zeran, 129 F3d at 331). Thus, section 230 has “two parallel goals. The statute is designed at once ‘to promote the free exchange of information and ideas over the Internet and to encourage voluntary monitoring for offensive or obscene material’ ” (Barnes, 570 F3d at 1099-1100, quoting Carafano v Metro-splash.com. Inc., 339 F3d 1119, 1122 [9th Cir 2003]).

Both state and federal courts around the country have “generally interpreted Section 230 immunity broadly, so as to effectuate Congress’s ‘policy choice . . . not to deter harmful online speech through the . . . route of imposing tort liability on companies that serve as intermediaries for other parties’ potentially injurious messages’ ” (Universal Communication Sys., 478 F3d at 418, quoting Zeran, 129 F3d at 330-331; see also Johnson v Arden, 614 F3d 785, 791 [8th Cir 2010] [“The majority of federal circuits have interpreted the CDA to establish broad federal immunity to any cause of action that would make service providers liable for information originating with a third-party user of the service” (internal quotation marks omitted)]; Doe v My Space, Inc., 528 F3d 413, 418 [5th Cir 2008] [“Courts have construed the immunity provisions in (section) 230 broadly in all cases arising from the publication of user-generated content”]; Barrett v Rosenthal, 40 Cal 4th 33, 46, 146 P3d 510, 518 [2006] [noting that a broad reading of section 230 (c) (1) immunity has been “accepted, in both federal and state courts”]; Doe v America Online, Inc., 783 So 2d 1010, 1013, 26 Fla L Wkly S141 [2001] [adopting the reasoning in Zeran]). New York trial courts have also taken this view (see Reit v Yelp!, Inc., 29 Misc 3d 713, 716 [Sup Ct, NY County 2010]; Kuersteiner v Schrader, 2008 NY Slip Op 33614[U] [Sup Ct, NY County 2008]).

We have not yet had occasion to address the scope of section 230’s protections. In Lunney v Prodigy Servs. Co. (94 NY2d 242 [1999]), we took note of the Fourth Circuit’s opinion in Zeran and its robust understanding of CDA immunity as encompassing both publisher and distributor liability, but we left the decision whether to adopt that interpretation for another day (id. at 251). Today, we follow what may fairly be called the national consensus (see Barrett, 40 Cal 4th at 46 n 9, 146 P3d at 518 n 9 [citing cases]) and read section 230 as generally immunizing Internet service providers from liability for third-party content wherever such liability depends on characterizing the provider as a “publisher or speaker” of objectionable material.

Consistent with this view, we read section 230 to bar “lawsuits seeking to hold a service provider liable for its exercise of a publisher’s traditional editorial functions — such as deciding whether to publish, withdraw, postpone or alter content” (Zeran, 129 F3d at 330; see also Barnes, 570 F3d at 1102 [“publication involves reviewing, editing, and deciding whether to publish or to withdraw from publication third-party content”]). Notably, the statute does not differentiate between “neutral” and selective publishers (see e.g. Batzel v Smith, 333 F3d 1018, 1031 [9th Cir 2003] [“the exclusion of ‘publisher’ liability necessarily precludes liability for exercising the usual prerogative of publishers to choose among proffered material and to edit the material published while retaining its basic form and message”]; Blumenthal v Drudge, 992 F Supp 44, 52 [D DC 1998] [“Congress has made a . . . policy choice by providing immunity even where the interactive service provider has an active, even aggressive role in making available content prepared by others”]).

Service providers are only entitled to this broad immunity, however, where the content at issue is provided by “another information content provider” (47 USC § 230 [c] [1]). It follows that if a defendant service provider is itself the “content provider,” it is not shielded from liability (see e.g. Nemet Chevrolet, Ltd. v Consumeraffairs.com, Inc., 591 F3d 250, 254 [4th Cir 2009]; Fair Hous. Council of San Fernando Val. v Roommates.Com, LLC, 521 F3d 1157, 1162 [9th Cir 2008]; Universal Communication Sys., 478 F3d at 419). Since a content provider is any party “responsible ... in part” for the “creation or development of information” (47 USC § 230 [f] [3]), any piece of content can have multiple providers.

It may be difficult in certain cases to determine whether a service provider is also a content provider, particularly since the definition of “content provider” is so elastic, and no consensus has emerged concerning what conduct constitutes “development”:

“[T]he broadest sense of the term ‘develop’ could include the functions of an ordinary search engine— indeed, just about any function performed by a website. But to read the term so broadly would defeat the purposes of section 230 by swallowing up every bit of the immunity that the section otherwise provides. At the same time, reading the exception for co-developers as applying only to content that originates entirely with the website . . . ignores the words ‘development ... in part’ in the statutory passage” (Roommates.Com, 521 F3d at 1167).

The Ninth’s Circuit’s approach, which Shiamili asks us to adopt, is to “interpret the term ‘development’ as referring not merely to augmenting the content generally, but to materially contributing to its alleged unlawfulness” (id. at 1167-1168). This view, which has been cited with approval by the Tenth Circuit (see Accusearch Inc., 570 F3d at 1200), considers a Web site a content provider “if it contributes materially to the alleged illegality of the conduct” (Roommates.Com, 521 F3d at 1168).

In the case before us, we need not decide whether to apply the Ninth Circuit’s relatively broad view of “development” since, even under that court’s analysis, Shiamili’s claim fails. Although the statements at issue are unquestionably offensive and obnoxious, defendants are nonetheless shielded from liability by section 230. Shiamili does not dispute that defendants, as alleged Web site operators, are providers of an “interactive computer service” under section 230 (see Roommates.Com, 521 F3d at 1162 n 6 [“the most common interactive computer services are websites”]; Universal Communication Sys., 478 F3d at 419 [“web site operators . . . are providers of interactive computer services within the meaning of Section 230”]). Further, the claims here — defamation and unfair competition by disparagement — clearly seek to hold the defendants liable as publishers and speakers. The remaining question is whether, taking the facts alleged in the complaint as true, the defamatory statements were “provided by another information content provider” (47 USC § 230 [c] [1]).

As an initial matter, the complaint alleges that the defamatory statements were first posted by anonymous users; there is no allegation that defendants actually authored the statements. A Web site is generally not a “content provider” with respect to comments posted by third-party users (see DiMeo v Max, 248 Fed Appx 280, 282 [3d Cir 2007]). We reject Shiamili’s contention that defendants should be deemed content providers because they created and ran a Web site which implicitly encouraged users to post negative comments about the New York City real estate industry. Creating an open forum for third parties to post content — including negative commentary — is at the core of what section 230 protects (see Accusearch Inc., 570 F3d at 1195 [noting that online message boards are “(t)he prototypical service qualifying for (section 230) immunity”]).

Moreover, there is no allegation that the defamatory comments were posted in response to any specific invitation for users to bash Shiamili or Ardor (cf. Doctor’s Assoc., Inc. v QIP Holder LLC, 2010 WL 669870, 2010 US Dist LEXIS 14687 [D Conn 2010]). Evidence submitted by Shiamili in opposition to defendants’ motion to dismiss indicates that the Web site had been operating for over a year before any of the comments that are the subject of this lawsuit were posted, and that the posted commentary spanned a range of topics. Even assuming that solicitation can constitute “development,” this is plainly not a case where the Web site can be charged with soliciting the defamatory content at issue. Nor can it be said that McCann’s attempt at provoking further commentary in the Shiamili discussion thread is actionable, since none followed.

The defendants did not become “content providers” by virtue of moving one of the comments to its own post. Reposting content created and initially posted by a third party is well within “a publisher’s traditional editorial functions” (Zeran, 129 F3d at 330). Indeed, this case is analogous to others in which service providers have been protected by section 230 after reposting or otherwise disseminating false information supplied by a third party. To cite only a few examples, in Ben Ezra, Weinstein, & Co., Inc. v America Online Inc. (206 F3d 980 [10th Cir 2000]) the defendant service provider would publish updated securities information supplied by third parties and derived from a variety of stock exchanges and markets. Plaintiff sued the provider for publishing inaccurate information concerning the price and share volume of plaintiff’s stock. The Tenth Circuit found that the inaccurate information was “created” by third parties, and the Web provider was not “responsible, in whole or in part, for [its] creation and development” (id. at 986). The Ninth Circuit reached the same result in Batzel (333 F3d 1018), cited with approval in Roommates.Com (521 F3d at 1170). There, the editor of an e-mail newsletter received a tip and incorporated it into the newsletter, adding a headnote. The tip proved false, but the Ninth Circuit found that section 230 protected the editor from being sued for libel because he had been “merely editing portions of an e-mail and selecting material for publication” (Batzel, 333 F3d at 1031). Similarly, in DiMeo (248 Fed Appx at 281)—a case quite like this one—the plaintiff sued for defamation based on comments left by anonymous users on defendant’s Web site, where defendant could “select which posts to publish and edit[ed] their content” (DiMeo v Max, 433 F Supp 2d 523, 530 [ED Pa 2006]). The Third Circuit found that “the website posts . . . constitute information furnished by third party information content providers” (248 Fed Appx at 282).

Shiamili argues that this case fits within a line of federal decisions in which courts have found that “even if the data are supplied by third parties, a website operator may still contribute to the content’s illegality and thus be liable as a developer” of the content (Roommates.Com, 521 F3d at 1171; see also Accusearch Inc., 570 F3d at 1199). Those cases, however, are easily distinguishable. In Roommates.Com, the nonparties providing the data were required to post actionable material to the defendant Web site as a condition of use, and the Web site’s “work in developing the discriminatory questions, discriminatory answers and discriminatory search mechanism [was] directly related to the alleged illegality of the site” (521 F3d at 1172). Here, in contrast, there are no allegations that posting false and defamatory content was a condition of use, or that the site worked with users to develop the posted commentary. This case also differs considerably from Accusearch Inc., where the defendant Web site paid researchers to obtain information for the site to disseminate that “would almost inevitably require [the researcher] to violate the Telecommunications Act or to circumvent it by fraud or theft” (570 F3d at 1192). There is no comparable allegation against these defendants.

Defendants appear to have been “content providers” with respect to the heading, subheading, and illustration that accompanied the reposting. That content, however, is not defamatory as a matter of law. The complaint does not allege that the heading and subheading are actionable, but only that they “preceded” and “prefaced” the objectionable commentary. The illustration that accompanied the post is alleged to be a “false and defamatory statement[ ] of fact,” but all it states is that Shiamili is “Kang of the Token Jews.” This is not a defamatory statement, since no “reasonable reader could have concluded that [it was] conveying facts about the plaintiff’ (Gross v New York Times Co., 82 NY2d 146, 152 [1993] [internal quotation marks and some brackets omitted]). The illustration was obviously satirical and, although offensive, it cannot by itself support Shiamili’s claim of defamation. Nor, contrary to the dissent’s view, does it “develop” or “contributef ] materially to the alleged illegality” of the third-party content within the meaning of the CDA (dissenting op at 294).

Simply put, the complaint alleges that defamatory statements were posted on defendants’ Web site, and some of them were re-posted by the defendants. These statements are all “information provided by another information content provider” (47 USC § 230 [c] [1]). Defendants’ added headings and illustration do not materially contribute to the defamatory nature of the third-party statements. Shiamili has therefore failed to state a viable cause of action against defendants, as his claims for defamation and unfair competition by disparagement are clearly barred by the CDA and were properly dismissed below.

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

Chief Judge Lippman

(dissenting). It is unfortunate that in this, our first case interpreting the Communications Decency Act (CDA) (47 USC § 230), we have shielded defendants from the allegation that they abused their power as Web site publishers to promote and amplify defamation targeted at a business competitor. Even in the muted form in which the majority presents them, the allegations concerning the Web site operator’s material contributions to the scurrilous defamatory attacks against Mr. Shiamili and Ardor Realty are sufficiently stated and are outside the scope of CDA immunity.

Plaintiff alleged that defendants published defamatory content, which claimed, in vulgar terms, that plaintiff was a racist and anti-Semite who mistreated his employees, could not retain real estate agents, failed to pay office bills, beat up his wife, and used his office space to commit adultery with prostitutes. The allegedly defamatory statements included the following: “I have personally heard [plaintiff] making derogatory comments about [various ethnic groups]. He calls them ‘those people,’ etc. He has even said he keeps [his main listing agent] around only because he is Jewish, and this is how he gets ‘those’ landlords . . . [Plaintiff] has called him his token Jew.”

If the complaint alleged that defendants merely reposted these outrageous statements to a more prominent position on the Web site, this could plausibly be considered an exercise of “a publisher’s traditional editorial functions” (Zeran v America Online, Inc., 129 F3d 327, 330 [4th Cir 1997], cert denied 524 US 937 [1998]). But, the allegations of defendants’ actions here are not so benign.

According to the complaint, defendants not only moved the defamatory comments to an independent post entitled “Ardor Realty and Those People,” but embellished the comment thread by attaching a large, doctored photograph of plaintiff depicted as Jesus Christ, with the heading: “Chris Shiamili: King of the Token Jews.” The defamatory statements were “preceded by an editor’s note, on information and belief written and published by [defendant] McCann, that ‘the following story came to us as a long . . . comment, and we promoted it to a post.’ ” McCann also allegedly introduced the post with the statements: “ ‘[A]nd now it’s time for your weekly dose of hate’ and ‘for the record, we are so. not. afraid.’ ”

The majority is anxious to trivialize the religiously charged illustration as “obviously satirical” and “not a defamatory statement, since no ‘reasonable reader could have concluded ... [it was] conveying facts about the plaintiff ” (majority op at 292 [citation omitted]). Of course, a reasonable reader would not have gathered from this digitally edited photograph that defendants were asserting that plaintiff was in fact Jesus Christ or the king of “token” Jewish real estate agents. But a reasonable reader, viewing the heading and illustration, might very well have concluded that the site editor was endorsing the truth of the appended facts, which asserted that plaintiff was an anti-Semite who employed a single Jewish realtor in order to maintain business with Jewish landlords. Even setting aside the preface referring to the “weekly dose of hate” and the allegations of defendants’ efforts to instigate additional attacks against plaintiff’s character and business, defendants’ attachment of this illustration, if proven, should alone defeat their immunity under the CDA. As the majority concedes, it is well established in federal law that “a website helps to develop unlawful content, and thus falls within the exception to section 230, if it contributes materially to the alleged illegality of the conduct” (Fair Hous. Council of San Fernando Val. v Roomates.Com, LLC (521 F3d 1157, 1168 [9th Cir 2008]; see also Federal Trade Commn. v Accusearch Inc., 570 F3d 1187, 1199 [10th Cir 2009] [“(A) service provider is ‘responsible’ for the development of offensive content only if it in some way specifically encourages development of what is offensive about the content”]).

Like the majority, I accept the “national consensus” on statutory immunity under the CDA (majority op at 288). However, I see no basis in the record for the majority’s confident conclusion that defendants served only as a passive conduit of this defamatory material, and are therefore immune as a matter of law. As the majority notes, section 230 of the Communications Decency Act, titled “Protection for private blocking and screening of offensive material,” was prompted by the undesirable result in Stratton Oakmont, Inc. v Prodigy Servs. Co. (1995 WL 323710, 1995 NY Misc LEXIS 229 [Sup Ct, Nassau County 1995]), where the trial court held a service provider liable in a defamation action based on its voluntary efforts to filter and edit offensive messages posted on its bulletin boards. This editorial activity, the court reasoned, rendered the provider a publisher and thus responsible for libelous content posted on its Web site (see 1995 WL 323710 at *4, 1995 NY Misc LEXIS 229 at *10-11).

Concerned that cases like Stratton Oakmont, Inc. would discourage providers from censoring offensive content on their own sites, Congress enacted section 230, in part, to insulate providers from liability for “any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected” (47 USC § 230 [c] [2] [A]). Both houses of Congress stressed that “[o]ne of the specific purposes of this section is to overrule Stratton-Oakmont v. Prodigy and any other similar decisions which have treated such providers and users as publishers or speakers of content that is not their own because they have restricted access to objectionable material” (HR Rep 104-458, 104th Cong, 2d Sess, at 194; S Rep 104-230, 104th Cong, 2d Sess, at 194 [containing same quote]).

While I do not dispute the adoption of a broad approach to immunity for on-line service providers under the CDA, an interpretation that immunizes a business’s complicity in defaming a direct competitor takes us so far afield from the purpose of the CDA as to make it unrecognizable. Dismissing this action on the pleadings is not required by the letter of the law and does not honor its spirit.

Judges Graffeo, Read and Smith concur with Judge Ciparick; Chief Judge Lippman dissents and votes to reverse in a separate opinion in which Judges Pigott and Jones concur.

Order affirmed, with costs.

      . Defendants maintain that only McCann administers the Web site. On this motion to dismiss, we accept plaintiffs allegation that “all McCann’s actions . . . were taken with the knowledge of or acquiescence by” the other defendants.

      . Section 230 defines an “interactive computer service” as “any information service, system, or access software provider that provides or enables computer access by multiple users to a computer server” (47 USC § 230 [f] [2]).

       We must deem the allegations of the complaint to be true in considering defendants’ CPLR 3211 (a) (7) motion to dismiss.