text:
    In the Matter of Solomon Abrahams, a Suspended Attorney, Appellant. Grievance Committee for the Ninth Judicial District, Respondent.
    Submitted February 17, 2004;
    decided February 24, 2004
   Appeal, insofar as taken from the Appellate Division order denying appellant’s motion to vacate his interim suspension, dismissed, without costs, by the Court of Appeals, sua sponte, upon the ground that the order appealed from does not finally determine the proceeding within the meaning of the Constitution; appeal, insofar as taken from the final Appellate Division disciplinary order, dismissed, without costs, by the Court of Appeals, sua sponte, upon the ground that no appeal lies as of right from the unanimous order of the Appellate Division absent the direct involvement of a substantial constitutional question (CPLR 5601).


source: Caselaw Access Project

license: Public Domain

text:
    Albany-Plattsburgh United Corporation, Plaintiff, v John L. Bell, Defendant. (Action No. 1.) John L. Bell, Appellant, v David R. White et al., Respondents. (Action No. 2.) (And a Related Proceeding.)
    Submitted November 24, 2003;
    decided February 24, 2004
   Motion, insofar as it seeks leave to appeal from that portion of the Appellate Division order that affirmed Supreme Court’s denial of appellant’s motion to renew and to amend the complaint, dismissed upon the ground that such portion of the order does not finally determine the action within the meaning of the Constitution; motion for leave to appeal otherwise denied.


text:
    North Salem Central School District et al., Appellants, v Mahopac Central School District et al., Respondents.
    Submitted January 12, 2004;
    decided February 24, 2004
   Motion, insofar as it seeks leave to appeal as against Mahopac Central School District, denied; motion, insofar as it seeks leave to appeal as against the Town of Carmel, dismissed upon the ground that the order sought to be appealed from does not finally determine the action as to said party within the meaning of the Constitution.


text:
    The People of the State of New York, Respondent, v Rashan Yates, Appellant.
    Submitted January 20, 2004;
    decided February 24, 2004
   Motion for assignment of counsel granted only to the extent that Jeremy R. Feinberg, Esq., Proskauer Rose LLP, 1585 Broadway, New York, NY 10036-8299 is assigned as counsel to the appellant on the appeal herein.


text:
    The People of the State of New York ex rel. Walter J. Roache, Appellant, v S.A. Connell, Respondent.
    Submitted January 20, 2004;
    decided February 24, 2004
   Motion for leave to appeal dismissed upon the ground that the motion for leave to appeal to this Court does not lie from the order of an individual Justice of the Appellate Division (see NY Const, art VI, § 3; CPLR 5602). Motion for poor person relief dismissed as academic.


text:
    Zachary D. Ruffing, Plaintiff, Candace Curtis et al., Respondents, and Heather Curtis, Respondent-Appellant, v Union Carbide Corporation et al., Defendants, and International Business Machines Corporation, Appellant-Respondent.
    Submitted February 12, 2004;
    decided February 24, 2004
   Motion by International Business Machines Corporation for a stay granted to the extent of staying so much of the Appellate Division order as granted Candace Curtis’s motion to amend the complaint.

Judge Rosenblatt taking no part.


text:
    Zachary D. Ruffing, Plaintiff, Candace Curtis et al., Respondents, and Heather Curtis, Respondent-Appellant, v Union Carbide Corporation et al., Defendants, and International Business Machines Corporation, Appellant-Respondent.
    Submitted February 12, 2004;
    decided February 24, 2004
   Appeal taken by Heather Curtis dismissed, without costs, by the Court of Appeals, sua sponte, upon the ground that the order of the Appellate Division upon which jurisdiction is predicated did not grant Heather Curtis leave to appeal to the Court of Appeals.

Judge Rosenblatt taking no part.


author: Graffeo, J.

text:
    [ 881 NE2d 1187, 852 NYS2d 1]
    Helen Ornstein, Appellant, v New York City Health and Hospitals Corporation et al., Respondents.
    Argued January 8, 2008;
    decided February 7, 2008

      POINTS OF COUNSEL

      Kramer & Dunleavy, LLP, New York City (Lenore Kramer and Denise M. Dunleavy of counsel), for appellant.
    The Appellate Division should not have limited to six months the amount of damages that plaintiff may be awarded. (Brown v New York City Health & Hosps. Corp., 225 AD2d 36; Johnson v State of New York, 37 NY2d 378; Ferrara v Galluchio, 5 NY2d 16; Marchica v Long Is. R.R. Co., 31 F3d 1197; Palsgraf v Long Is. R.R. Co., 248 NY 339.)

      Michael A. Cardozo, Corporation Counsel, New York City (Julie Steiner and Barry P. Schwartz of counsel), for respondents.
    The Appellate Division majority properly dismissed all of plaintiffs claims for emotional distress damages following the first six months of exposure to the AIDS virus. In accordance with all the intermediate appellate court decisions on this issue, the unchallenged scientific and statistical evidence establishes that, for an individual who has not tested positive for HIV, that individual’s fear of contracting AIDS, as well as all other emotional injuries stemming from that initial fear, becomes unreasonable as a matter of law after the first six months following exposure. (Brown v New York City Health & Hosps. Corp., 225 AD2d 36; O’Neill v O’Neill, 264 AD2d 766, 94 NY2d 858; Bishop v Mount Sinai Med. Ctr., 247 AD2d 329; Taormino v State of New York, 286 AD2d 490; Milks v McIver, 264 NY 267; Sims v Comprehensive Community Dev. Corp., 40 AD3d 256; Marchica v Long Is. R.R. Co., 31 F3d 1197; Damanti v Jamaica Community Adolescent Program, 12 AD3d 341; Kelly v Our Lady of Mercy Med. Ctr., 279 AD2d 290, 96 NY2d 719; McLarney v Community Health Plan, 250 AD2d 310, 93 NY2d 848.)
   OPINION OF THE COURT

Graffeo, J.

While working as a nurse at a hospital, plaintiff was exposed to the human immunodeficiency virus (HIV) when she was stuck by a blood-filled hypodermic needle that had been left in the bed of a patient with acquired immune deficiency syndrome (AIDS). HIV-antibody tests ultimately established that she had not contracted the virus. The primary issue in this case is the extent of damages plaintiff may recover on her negligent infliction of emotional distress claim. Defendants argue that plaintiff was properly restricted to presenting the jury with proof that she experienced mental anguish for a period of six months following the needle-stick incident. We disagree and conclude that, because plaintiff produced prima facie proof that she suffered from post-traumatic stress disorder and other emotional distress for more than six months after exposure, she should have been allowed to seek recovery for those injuries at trial.

The facts surrounding plaintiff Helen Ornstein’s exposure to HIV are not in dispute. On September 1, 2000, while working as a nurse on a per diem basis at Bellevue Hospital in Manhattan, plaintiff and a nurse’s aide began bathing a critically-ill patient suffering from AIDS. As she was turning the patient, plaintiff was stuck in the thumb by a hypodermic needle that had been left in the patient’s bed by an intern. Because the needle contained blood, plaintiff was immediately treated with antiviral medications for potential HIV exposure. She remained on these medications for two months, suffering side effects that continued for several months thereafter including nausea and neuropathy in her hands and feet.

Plaintiff also promptly commenced a regimen of periodic HIV testing, a practice that involves examination of the blood to determine whether HIV antibodies are present. Such antibodies are not evident on the date of exposure but can develop over time. The presence of HIV antibodies signals that a person has contracted the HFV virus, which may lead to the development of AIDS or other HIV-related illness. Plaintiff here was tested every three months for a period of two years following her exposure but consistently tested negative for infection with HIV

In May 2001, plaintiff commenced this action against the intern and the New York City Health and Hospitals Corporation, as operator of the hospital, alleging negligent infliction of emotional distress. After defendants answered the complaint and the parties conducted discovery, defendants moved to dismiss that part of plaintiffs claim that sought damages for emotional distress plaintiff suffered more than six months after the needle-stick incident. Relying on the Appellate Division decision in Brown v New York City Health & Hosps. Corp. (225 AD2d 36 [2d Dept 1996]), defendants contended that plaintiff could not recover emotional distress damages beyond the six-month mark because a person exposed to HIV who has tested negative at that juncture is unlikely to become infected and it is therefore unreasonable as a matter of law for that person either to continue to fear infection or claim emotional distress due to the exposure incident.

In opposition to defendants’ motion, plaintiff submitted evidence that she had continued to experience mental anguish relating to the incident long after the initial six-month period had passed and, in fact, expected to suffer permanently from post-traumatic stress disorder. At her deposition, plaintiff testified that she had not been advised by a physician that her fear of contracting HIV should have been allayed after six months. She stated that her anxiety over whether she had been infected with the virus continued until she tested negative in June 2002, about a year and a half after the incident. Even after her fear about testing positive dissipated, plaintiff asserted that she continued to suffer emotional distress in the form of post-traumatic stress disorder, a condition that caused her to experience sleep disturbances and “flash backs” relating to the incident. She developed such a significant fear of future needle-stick incidents that she changed the nature of her work from patient care to office work and, later, to teaching, ultimately accepting a position that did not require any patient contact. Plaintiff explained that she had undergone psychiatric therapy and taken antidepressant medications to alleviate her emotional injuries but, despite these efforts, her symptoms persisted. In addition to her deposition testimony, plaintiff provided the report of a psychiatrist who opined that, as a result of the needle-stick incident, plaintiff suffered from chronic post-traumatic stress disorder warranting additional treatment for the foreseeable future.

In reply, defendants did not dispute that plaintiff could produce prima facie evidence of persistent emotional distress beyond six months of her exposure to HIV Rather, they urged that any plaintiff who tested negative for HIV infection six months after exposure should be precluded, as a matter of law, from recovering damages for subsequent emotional distress because, at the conclusion of the six-month “window of anxiety” period, continuing emotional distress becomes unreasonable and, hence, uncompensable.

Supreme Court denied defendants’ motion, finding that plaintiffs submissions, which were supported by objective medical evidence, established a bona fide claim of continuing emotional distress sufficient for submission to a jury. On defendants’ interlocutory appeal, a three-justice majority of the Appellate Division reversed and granted defendants’ motion to restrict damages, while the two dissenters would have affirmed Supreme Court’s holding.

The case then proceeded to trial, with plaintiff being foreclosed from presenting evidence that she suffered damages beyond the six-month period immediately following the needle-stick incident. The jury found defendants liable and awarded plaintiff a judgment of $333,000 for past pain and suffering and $15,000 for past lost wages. Plaintiff now appeals to this Court as of right from the judgment of Supreme Court, bringing up for review the prior, nonfinal Appellate Division order restricting damages. Because we agree with plaintiff that damages were improperly limited, we reverse both the judgment and Appellate Division order, and remit this matter to Supreme Court for a new trial on damages.

It is well-settled that a person “to whom a duty of care is owed . . . may recover for harm sustained solely as a result of an initial, negligently-caused psychological trauma, but with ensuing psychic harm with residual physical manifestations” (Johnson v State of New York, 37 NY2d 378, 381 [1975] [citations omitted]). A breach of the duty of care “resulting directly in emotional harm is compensable even though no physical injury occurred” (Kennedy v McKesson Co., 58 NY2d 500, 504 [1983]) when the mental injury is “a direct, rather than a consequential, result of the breach” (id. at 506) and when the claim possesses “some guarantee of genuineness” (Ferrara v Galluchio, 5 NY2d 16, 21 [1958]). Applying these principles to negligent infliction of emotional distress claims arising from exposure to HIV] New York courts have required plaintiffs who have not tested HIV positive to come forward with proof that, due to the negligence of another party, they were exposed to HIV through “a scientifically accepted method of transmission of the virus . . . and that the source of the allegedly transmitted blood or fluid was in fact HIV positive” (Bishop v Mount Sinai Med. Ctr., 247 AD2d 329, 331 [1st Dept 1998] [internal quotation marks omitted]; see O’Neill v O’Neill, 264 AD2d 766 [2d Dept 1999], lv dismissed 94 NY2d 858 [1999]; McLarney v Community Health Plan, 250 AD2d 310 [3d Dept 1998], lv dismissed 93 NY2d 848 [1999]).

There is no question in this case that defendants owed plaintiff a duty of care and that she came forward with proof that fulfilled the “actual exposure” requirement, thereby satisfying the indicia of genuineness requirement. Thus, the parties agree that plaintiffs negligent infliction of emotional distress claim warranted a jury trial. The disagreement centers on the extent of damages that plaintiff was entitled to request at trial.

In concluding that plaintiffs damages should be restricted to those suffered during the six months following the HIV exposure incident, the Appellate Division largely relied on Brown v New York City Health & Hosps. Corp. (225 AD2d 36 [1996]). Like this case, the plaintiff in Brown was a nurse who was stuck by a needle used in treating an HIV-infected patient. She then commenced a negligent infliction of emotional distress lawsuit seeking damages for the period from 1990 (when the needle-stick incident occurred) until the year 2005 on the theory that, if she was free of the disease after 15 years, her risk of infection would be extinguished. After an initial HIV test taken on the day of the incident, which would not have shown a positive result even if she had contracted the virus that day, plaintiff refused to take additional tests to definitely establish her HIV status. The Brown defendants moved to compel plaintiff to undergo HIV testing, arguing that her refusal to do so hampered their defense since it opened the door to jury speculation that she had contracted the virus. Alternatively, they sought partial summary judgment dismissing all claims of mental distress beyond six months on the rationale that statistical evidence demonstrated that an HIV test administered six months after the date of exposure would have conclusively established plaintiffs HIV status and likely allayed any fear that the HIV exposure incident caused her to contract the disease. Plaintiff responded with proof from her psychologist that requiring her to take an HIV test would be emotionally harmful.

The motion court refused to order plaintiff to take an HIV test and denied the defendants’ application to restrict damages but, on appeal, the Appellate Division granted the latter relief. The Brown court first noted that “the statistical probability of contracting HIV from a single needle stick, assuming the needle was contaminated, is approximately 0.3 to 0.5%” (225 AD2d at 47), meaning that only 3 to 5 of every 1,000 people stuck with an HIV-contaminated needle will be infected with HIV It recognized that HIV tests are not conclusive in the first three months following exposure because of the time necessary for antibodies that signal the presence of HIV to develop in the bloodstream, thereby triggering a positive test result. The court observed, however, that HIV tests are 99% accurate and that 95% of HIV-positive individuals will test positive within six months after exposure. It therefore concluded “that an individual exposed to the virus can be reasonably assured that he or she is free of infection if tests conducted after six months are negative” (id.). In essence, this evidence supported defendants’ argument that it would be unfair to allow plaintiff to seek damages for 15 years of emotional distress when plaintiff refused to take reasonable steps available to her to determine her HIV status—steps that would have likely mitigated that distress given the low risk of contracting HIV from a needle-stick incident. Based on the statistics, the court determined that “plaintiffs fear of contracting AIDS would be unreasonable as a matter of law after six months, assuming a negative HIV-antibody test result” (id. at 49) and that it would be inequitable to allow her to avoid this result by refusing to be tested.

The restriction of damages in Brown can be viewed as a compromise fashioned to address the dilemma created by plaintiffs decision not to be tested. On the one hand, given the possibility that a test could have yielded positive results, thereby causing plaintiff additional emotional distress and leading to other consequences, the court understandably did not wish to compel plaintiff to undergo testing. On the other, plaintiffs unwillingness to be tested left defendants in the untenable position of having to defend an exposure claim while plaintiffs HIV status was unknown, creating a strong likelihood that the jury would speculate that plaintiff had, in fact, contracted the virus, leading to an excessive damages award. The court struck the balance it deemed appropriate.

In the wake of Brown, some New York courts, including the Appellate Division in this case, have applied its holding to cases in which plaintiffs have undergone HIV testing, issuing orders precluding recovery of injuries suffered more than six months after HIV exposure (see e.g. Sims v Comprehensive Community Dev. Corp., 40 AD3d 256 [1st Dept 2007]; Taormino v State of New York, 286 AD2d 490 [2d Dept 2001]). Where a plaintiff pursuing a negligent infliction of emotional distress claim arising from HIV exposure has been tested at regular intervals with negative results, the Brown restriction of damages approach is inapposite for several reasons.

First, as the facts here demonstrate, a rule that restricts recovery of emotional distress damages for all plaintiffs as a matter of law based only on scientific and medical statistics—no matter how reliable those statistics may be—makes little sense if the probabilities identified by researchers were not known to the plaintiff during the relevant time frame. Plaintiff claimed that none of her physicians advised her that her risk of testing positive in the future would dramatically decrease, if not virtually cease, once she tested negative at the six-month juncture and that she was unaware of this from her own medical training. Nor is there any allegation in this case that plaintiff avoided acquainting herself with the pertinent facts. Rather, she obtained medical care on a timely and consistent basis yet she testified that her fear of contracting HIV from the needle-stick incident continued until she tested negative in June 2002, about a year and a half after exposure. Thus, in contrast to Brown where the plaintiff alleged that her fear of infection would not be alleviated until 15 years had elapsed, this is not a case where a plaintiff is seeking AIDS phobia damages for a protracted period of time. In assessing credibility, the jury is, of course, free to reject plaintiffs testimony but, for purposes of defendants’ motion to restrict damages, her assertions were sufficient to raise a triable issue of fact concerning the duration of her fear of infection.

Second, limitation of all categories of damages based on the statistical probability of testing positive for HIV within a particular time frame does not account for the fact that a plaintiff exposed to HIV may suffer injuries that are distinct from the fear of contracting the virus. In this case, in response to defendants’ motion to dismiss, plaintiff offered medical proof that she continued to suffer from post-traumatic stress disorder, a recognized psychiatric condition requiring treatment with medication and therapy, even after her concern that she had contracted the virus was alleviated. Plaintiff testified that she lost income because she was never able to return to per diem hospital work after the incident due to her fear of similar future exposure incidents. In addition, while her HIV status was uncertain, she was unable to engage in direct patient care but had to confine her duties to office work. She stated that, after it was determined that she had not contracted the virus, she continued to suffer from post-traumatic stress disorder and that this condition was a contributing factor in her decision to permanently change the nature of her employment from direct patient care to teaching. If it credited this evidence, a rational jury could find that plaintiffs psychiatric condition and resulting loss of income were directly related to the exposure incident, warranting monetary recovery.

Defendants contend that damages should be curtailed in negligent infliction of emotional distress cases stemming from HIV exposure due to the “still-prevalent ignorance and subjective, irrational fears surrounding” AIDS, arguing that public policy considerations support “taking emotions out of the equation of AIDS cases at a fixed point in time so as to ensure fairness and consistency” (respondents’ brief at 30). Assuming defendants’ assertions relating to the current state of public awareness about AIDS to be true, we are nonetheless unpersuaded that emotions can appropriately be removed from the damages equation in a negligent infliction of emotional distress claim. Nor have defendants shown that a bright-line restriction of damages rule such as the six-month demarcation—an approach that appears to be unprecedented in our common-law tort jurisprudence—is necessary to avoid unreasonably high verdicts in this genre of tort cases; no such pattern of inappropriate judgments has been identified. If an occasional excessive, idiosyncratic award does issue, it can be corrected by the Appellate Division through exercise of its power to set aside judgments that deviate materially from what would be reasonable compensation (see CPLR 5501 [c]).

We stress that, just as in any personal injury case, trial judges can assess the viability of damages claims in HIV exposure cases before submission to the jury by evaluating whether such claims are supported by legally sufficient evidence. Defendants here do not dispute that, in opposition to their motion papers, plaintiff presented prima facie evidence of continuing post-traumatic stress disorder. But where supporting medical evidence is lacking, a trial court might well preclude a plaintiff from pursuing recovery for that component of psychic distress.

It also bears noting that defendants remain free to challenge AIDS phobia and other emotional distress evidence by presenting medical and scientific proof concerning the probability of a plaintiff contracting HIV after having tested negative at various points in time to ensure that the jury understands the risk a plaintiff actually faced and the future risk of a plaintiff testing positive. Likewise, defendants may question a plaintiff and any treating physicians to ascertain what information was available to the plaintiff concerning testing time frames and probabilities. A rational jury might conclude, based on evidence of this nature, that a particular plaintiffs fear of contracting HIV ceased to be reasonable at a certain point in time and, after that point, any residual anxiety was not sufficiently causally related to the underlying exposure incident to warrant recovery. Similarly, since a plaintiff “is not permitted to recover for damages that could have been avoided by using means which a reasonably prudent person would have used to . . . alleviate the pain” (PJI 2:325), a defendant who believes that a plaintiff has unreasonably failed to take steps to relieve emotional distress arising from an exposure incident can raise a failure to mitigate damages defense.

In this case, however, it is undisputed that plaintiff came forward with evidence that her emotional distress and other direct damages did not cease six months after the exposure incident. Because this proof was sufficient to withstand defendants’ motion to restrict damages, the Appellate Division erred in directing that plaintiffs damages be limited to that time period at trial.

Accordingly, the judgment appealed from and the order of the Appellate Division brought up for review should be reversed, with costs, defendants’ motion to dismiss any claim for damages allegedly sustained by plaintiff more than six months after the incident sued upon should be denied, and the case should be remitted to Supreme Court for a new trial on damages.

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

Judgment appealed from and order of the Appellate Division brought up for review reversed, etc.

      . This is consistent with the approach taken by the majority of other jurisdictions that have considered the issue (see e.g. John & Jane Roes, 1-100 v FHP, Inc., 91 Haw 470, 985 P2d 661 [1999]; Majca v Beekil, 183 Ill 2d 407, 701 NE2d 1084 [1998]; Carroll v Sisters of St. Francis Health Servs., Inc., 868 SW2d 585, 590 [Tenn 1993]).

      . Because the Brown decision is not before this Court for review, we express no view on the propriety of the Appellate Division compromise. We note that restriction of damages may not be the only approach available to address the dilemma presented by a plaintiffs unwillingness to undergo HIV-antibody testing; depending on the facts of the case, a stipulation or jury charge might be employed to prevent prejudice to the defense.


author: Read, J.

text:
    [ 882 NE2d 879, 853 NYS2d 267]
    Financial Industry Regulatory Authority, Inc., Formerly Known as National Association of Securities Dealers, Inc., Respondent, v John J. Fiero et al., Appellants.
    Argued January 2, 2008;
    decided February 7, 2008

      POINTS OF COUNSEL

      Gusrae, Kaplan, Bruno & Nusbaum PLLC, New York City (Brian D. Graifman and Elliot Wales of counsel), for appellants.
    I. Subject matter jurisdiction over this matter is doubtful. (Editorial Photocolor Archives v Granger Collection, 61 NY2d 517; American Distilling Co. v Brown, 295 NY 36; Merrill Lynch, Pierce, Fenner & Smith, Inc. v Dabit, 547 US 71; United States Sec. & Exch. Commn. v Vittor, 323 F3d 930; Grable & Sons Metal Products, Inc. v Darue Engineering & Mfg., 545 US 308.) II. The action is untimely as based on an arbitration award. (Kabia v Koch, 186 Misc 2d 363; Kingsbridge Ctr. of Israel v Turk, 98 AD2d 664; Matter of Penn Cent. Corp. [Consolidated Rail Corp.], 56 NY2d 120; Drivers v Riss & Co., 372 US 517; The Mauretania, 80 F2d 225; Merritt v Thompson, 27 NY 225; International Longshoremen’s Assn., AFL-CIO v Hellenic Lines, Ltd., 549 F Supp 435; Matter of King v Nikko Sec. Co. Intl., 179 AD2d 490; Sloan v New York Stock Exch., Inc., 489 F2d 1; Matter of Hellman [Wolbrom], 31 AD2d 477.) III. The National Association of Securities Dealers cannot judicially enforce collection of a disciplinary fine. (United States Sec. & Exch. Commn. v Vittor, 323 F3d 930; National Assn. of Sec. Dealers, Inc. v Securities & Exch. Commn., 431 F3d 803; FTC v Bunte Brothers, Inc., 312 US 349; Merchants Ladies Garment Assn., Inc. v Coat House of Wm. M. Schwartz, Inc., 152 Misc 130; Varley v Tarrytown Assoc., Inc., 477 F2d 208; American Men’s & Boys’ Clothing Mfrs.’ Assn., Inc. v Proser, 190 App Div 164; Sloan v New York Stock Exch., Inc., 489 F2d 1.)

      Terri L. Reicher, Associate General Counsel, Financial Industry Regulatory Authority, Inc., Washington, D.C. and New York City, for respondent.
    I. The court below properly held that the statute of limitations in CPLR 7510 does not apply to this case because the National Association of Securities Dealers disciplinary proceedings are not “arbitration.” (Datek Sec. Corp. v National Assn. of Sec. Dealers, Inc., 875 F Supp 230; Maschler v National Assn. of Sec. Dealers, Inc., 827 F Supp 131; McLaughlin, Piven, Vogel, Inc. v National Assn. of Sec. Dealers, Inc., 733 F Supp 694; Schubtex, Inc. v Allen Snyder, Inc., 49 NY2d 1; Matter of Marlene Indus. Corp. [Carnac Textiles], 45 NY2d 327; Matter of Acting Supt. of Schools of Liverpool Cent. School Dist. [United Liverpool Faculty Assn.], 42 NY2d 509; Matter of Lehman v Ostrovsky, 264 NY 130; Matter of Riverdale Fabrics Corp.

      [Tillinghast-Stiles Co.], 306 NY 288; Matter of Doughboy Ind. [Pantasote Co.], 17 AD2d 216; Matter of Waldron [Goddess], 61 NY2d 181.) II. The National Association of Securities Dealers may maintain collection actions for debts that Fieros contractually agreed to pay. (Markowski v Securities & Exch. Commn., 34 F3d 99; Sigma Phi Socy. [Alpha of N.Y.] v Rensselaer Fraternity Mgrs. Assn., 114 AD2d 711; Colodney v New York Coffee & Sugar Exch., 4 AD2d 137, 4 NY2d 698; Merchants Ladies Garment Assn., Inc. v Coat House of Wm. M. Schwartz, Inc., 152 Misc 130; United States Sec. & Exch. Commn. v Vittor, 323 F3d 930; Securities & Exch. Commn. v Mohn, 465 F3d 647.) III. New York State courts have subject matter jurisdiction over the National Association of Securities Dealers collection actions. (Hunt v Hunt, 72 NY 217; Kagen v Kagen, 21 NY2d 532; Thrasher v United States Liab. Ins. Co., 19 NY2d 159; Matter of Fry v Village of Tarrytown, 89 NY2d 714.)
   OPINION OF THE COURT

Read, J.

In the early 1990s, John J. Fiero registered with the National Association of Securities Dealers, Inc. (NASD) (now called the Financial Industry Regulatory Authority, Inc. or FINRA), a self-regulatory organization (SRO), as a securities representative. Relatedly, Fiero Brothers—a broker-dealer firm owned by Fiero, the company’s president and sole employee—became a member of NASD. SROs are quasi-governmental entities with a duty under the Securities Exchange Act of 1934, as amended, “to promulgate and enforce rules governing the conduct of [their] members” (Barbara v New York Stock Exch., Inc., 99 F3d 49, 51 [2d Cir 1996]; see 15 USC § 78c [a] [26]; § 78f [b]; § 78s [g]). The SEC must approve or reject any rule, practice, policy or interpretation proposed by an SRO (see 15 USC § 78s [b]; Barbara, 99 F3d at 51 [describing role of SROs in enforcing federal securities laws]).

When Fiero applied for securities industry registration with NASD, he signed Form U-4 in which he “agree[d] to be subject to and comply with all requirements, rulings, orders, directives and decisions of, and penalties, prohibitions and limitations imposed by [NASD], subject to right of appeal or review as provided by law.” Similarly, Fiero Brothers subjected itself to NASD’s rules and discipline when it filed Form BD to apply for broker-dealer registration.

On February 6, 1998, NASD’s Department of Enforcement filed a disciplinary complaint alleging that Fiero and Fiero Brothers (collectively the Fieros) had carried out a so-called “bear raid” to drive down the price of securities underwritten by another NASD member, causing that firm and its clearing firm to collapse while generating significant profits for the Fieros. In October 1999, an NASD hearing panel held a disciplinary hearing on the complaint; on December 6, 2000, the panel issued a decision finding that the Fieros had violated section 10 (b) of the Securities Exchange Act (15 USC § 78j [b]), SEC rule 10b-5 and NASD rules 2120 and 2110. The panel ordered Fiero Brothers expelled from NASD membership; barred Fiero from associating with any member firm in any capacity; fined the Fieros, jointly and severally, $1 million; and imposed hearing costs totaling $10,809.25. The Fieros appealed to NASD’s National Adjudicatory Council, which affirmed the panel’s findings and upheld its sanctions in a decision dated October 28, 2002.

The Fieros did not exercise their statutory rights to appeal the NASD’s final disciplinary disposition to the SEC and, if aggrieved by the Commission’s final order, the United States Court of Appeals (see 15 USC § 78s [d]; § 78y [a]). The SEC may bring an action in federal district court to enforce its order affirming sanctions imposed by NASD for violation of the Securities Exchange Act and its implementing rules (see 15 USC § 78u [e] [1]; see also United States Sec. & Exch. Commn. v Vittor, 323 F3d 930 [11th Cir 2003]).

On December 22, 2003, NASD commenced an action in Supreme Court, alleging that the Fieros had refused to pay the fine and costs, “although due and duly demanded,” and seeking judgment against them in the amount of $1,010,809.25, plus interest, costs and disbursements. The Fieros subsequently moved to dismiss the complaint, principally claiming that NASD lacked authority to recover the fine because it “was not affirmed by the SEC, confirmed by a court, or otherwise converted into a judgment”; for its part, NASD moved to dismiss numerous counterclaims asserted by the Fieros.

On September 12, 2005, Supreme Court granted NASD’s motion and denied the Fieros’ motion, concluding that “NASD’s claim [was] firmly based on ordinary principles of contract law” since the Fieros “expressly agreed to comply with all NASD rules, including the imposition of fines and sanctions” (National Assn. of Sec. Dealers, Inc. v Fiero, 2005 NY Slip Op 30161[U], *2) when they executed NASD registration forms. The court further observed that “New York state courts have long recognized the right of a private membership organization to impose fines on its members, when authorized to do so by statute, charter or by-laws” (id. at *4), and that “NASD is not ‘just a private club,’ but a self-regulatory organization, federally-mandated under . . . the Exchange Act to discipline its members and enforce the federal securities laws as well as its own SECapproved rules” (id. at *5). Supreme Court concluded that “[t]he NASD rules relied on by [NASD] appear[ed] to authorize imposition and collection of [the] fines” at issue (id. at *7).

The Fieros soon thereafter moved for summary judgment dismissing the complaint as time-barred under CPLR 215 (5) and 7510, which prescribe one-year limitations periods for an action upon an arbitration award and a proceeding to confirm an arbitration award respectively. On December 14, 2005, Supreme Court denied this motion, rejecting the notion that the disciplinary proceeding was an arbitration.

Next, NASD moved for summary judgment, and on May 11, 2006, Supreme Court granted the motion, awarding NASD over $1.3 million in fines and costs plus interest from December 2, 2002. Supreme Court observed that “NASD [had] met its burden of establishing a prima facie basis for entitlement to summary judgment” by submitting documentary evidence demonstrating undisputed facts in what “really amount[ed] to a collection action to recover fines and costs levied by NASD against [the Fieros] in a . . . disciplinary proceeding” (National Assn. of Sec. Dealers, Inc. v Fiero, 2006 NY Slip Op 30302[U], *6). The court also concluded that the Fieros’ affirmative defense of selective enforcement was not “legally or factually sufficient to justify denial of summary judgment” (id. at *6).

The Fieros appealed Supreme Court’s order and judgment granting NASD summary judgment. On October 26, 2006, the First Department unanimously affirmed in an opinion endorsing Supreme Court’s reasoning. We subsequently granted the Fieros’ motion for leave to appeal, and now reverse on the ground that state courts do not have subject matter jurisdiction over this lawsuit. Although the issue of subject matter jurisdiction was not raised in the lower courts, “a court’s lack of subject matter jurisdiction is not waivable, but may be [raised] at any stage of the action, and the court may, ex mero motu [on its own motion], at any time, when its attention is called to the facts, refuse to proceed further and dismiss the action” (Matter of Fry v Village of Tarrytown, 89 NY2d 714, 718 [1997] [internal quotation marks and citation omitted]).

Section 27 of the Securities Exchange Act provides that “[t]he district courts of the United States . . . shall have exclusive jurisdiction of violations of [the Securities Exchange Act] or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by [the Securities Exchange Act] or the rules and regulations thereunder” (15 USC § 78aa [emphasis added]). In this case, NASD is not seeking to adjudicate a state law claim. Instead, NASD brought this action to enforce a penalty imposed on the Fieros as a result of disciplinary proceedings provided for by the Securities Exchange Act for violations of the Securities Exchange Act and its implementing rules. Section 27 vests federal district courts with exclusive jurisdiction to entertain such a suit. Thus, state courts do not possess the power to hear and decide this controversy (see American Distilling Co. v Brown, 295 NY 36 [1945]). Because of our disposition of this appeal, we do not reach and express no opinion on any of the other issues raised by the parties and decided by the courts below.

Accordingly, the Appellate Division’s order should be reversed, with costs, and the complaint dismissed.

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

Order reversed, etc.

       On July 26, 2007, the Securities and Exchange Commission (the Commission or SEC) gave the final regulatory approval needed for consolidation of NASD and NYSE Regulation, Inc., a wholly-owned subsidiary of New York Stock Exchange LLC, to form FINRA. Essentially, the member firm regulation and enforcement functions and employees from NYSE Regulation transferred to NASD, which then adopted FINRA as its new corporate name. As a result of the consolidation, FINRA is the sole SRO providing member firm regulation for securities firms that do business with the public in the United States (see 72 Fed Reg 42169, 42170 [Aug. 1, 2007]).


author: Smith, J.

text:
    [ 882 NE2d 875, 853 NYS2d 263]
    Riverside Syndicate, Inc., Respondent, v Victoria Munroe et al., Appellants.
    Argued January 9, 2008;
    decided February 7, 2008

      POINTS OF COUNSEL

      Emery Celli Brinckerhoff & Abady LLP, New York City (Eric Hecker and Richard D. Emery of counsel), and Vernon & Ginsburg, LLP (Darryl M. Vernon of counsel), for appellants.
    I. The enforcement of judicially-approved stipulations of settlement furthers the critical public policy of facilitating the efficient and fair resolution of contested litigation. (Mitchell v New York

      Hosp., 61 NY2d 208; Salesian Socy. v Village of Ellenville, 41 NY2d 521; Hallock v State of New York, 64 NY2d 224; Matter of Siegel, 29 AD3d 914; City of New York v 130/40 Essex St. Dev. Corp., 302 AD2d 292; Merwest Realty Corp. v Prager, 264 AD2d 313; Mill Rock Plaza Assoc. v Lively, 224 AD2d 301; Thornton v Baron, 5 NY3d 175; Draper v Georgia Props., 94 NY2d 809; Matter of Matinzi v Joy, 60 NY2d 835.) II. Enforcing the court-ordered settlement would not offend any countervailing public policy. (Matter of Rockaway One Co., LLC v Wiggins, 35 AD3d 36; Misthopoulos v Estate of Ruhl, 183 AD2d 651; Rent Stabilization Assn. of N.Y. v Higgins, 164 AD2d 283; Kent v Bedford Apts. Co., 237 AD2d 140; Drucker v Mauro, 30 AD3d 37; 390 W. End Assoc. v Harel, 298 AD2d 11; Matter of Matinzi v Joy, 60 NY2d 835; Merwest Realty Corp. v Prager, 264 AD2d 313; Elghanayan v George, 180 Misc 2d 310; Noto v Bedford Apts. Co., 21 AD3d 762.) III. The landlord’s claim for declaratory relief is time-barred. (Matter of Karedes v Colella, 100 NY2d 45; Solnick v Whalen, 49 NY2d 224; Matter of Folks v New York City Hous. Auth., 27 AD3d 270; 390 W. End Assoc. v Harel, 298 AD2d 11; Rima 106 v Alvarez, 257 AD2d 201.) IV The landlord’s claim for declaratory relief is barred by the equities. (390 W. End Assoc. v Baron, 274 AD2d 330; Park Towers S. Co. v Universal Attractions, 274 AD2d 312; Draper v Georgia Props., 230 AD2d 455, 94 NY2d 809; Georgia Props., Inc. v Dalsimer, 39 AD3d 332; Lloyd Capital Corp. v Pat Henchar, Inc., 80 NY2d 124.)

      Rosenberg & Estis, P.C., New York City (Jeffrey Turkel and Gary M. Rosenberg of counsel), for respondent.
    I. The consent judgment is void as against public policy and unenforceable. (City of New York v 17 Vista Assoc., 84 NY2d 299; Szerdahelyi v Harris, 67 NY2d 42; Mitchell v New York Hosp., 61 NY2d 208; Sternaman v Metropolitan Life Ins. Co., 170 NY 13; Public Serv. Mut. Ins. Co. v Goldfarb, 53 NY2d 392; Attridge v Pembroke, 235 App Div 101; Abright v Shapiro, 214 AD2d 496; McConnell v Commonwealth Pictures Corp., 7 NY2d 465; Hettich v Hettich, 301 NY 447; Tooker v Inter-County Tit. Guar. & Mtge. Co., 295 NY 386.) II. Principles of equity and estoppel cannot compel a court to enforce an agreement that is otherwise void as against public policy. (Szerdahelyi v Harris, 67 NY2d 42; Spiegel v 1065 Park Ave. Corp., 305 AD2d 204; Millington v Rapoport, 98 AD2d 765; Sturm v Truby, 245 App Div 357; Levin v Levin, 253 App Div 758; Flegenheimer v Brogan, 259 App Div 347, 284 NY 268; Coverly v Terminal Warehouse Co., 85 App Div 488, 178 NY 602; First Natl. Stores v Yellowstone Shopping Ctr., 21 NY2d 630; 390 W. End Assoc. v Baron, 274 AD2d 330; Park Towers S. Co. v Universal Attractions, 274 AD2d 312.) III. The statute of limitations cannot compel a court to enforce an agreement that is void as against public policy. (Pacchiana v Pacchiana, 94 AD2d 721; Larrison v Scarola Reavis & Parent LLP, 11 Misc 3d 572; Attridge v Pembroke, 235 App Div 101; Spiegel v 1065 Park Ave. Corp., 305 AD2d 204; Oot v Home Ins. Co. of Ind., 244 AD2d 62.)
   OPINION OF THE COURT

Smith, J.

We hold that an agreement by tenants to pay an illegal rent for a rent-stabilized apartment, in exchange for an agreement by the landlord to let the tenants use the apartment as a second home, is void and cannot be enforced by either party.

Facts and Procedural History

The tenants, Victoria Munroe and Eric Saltzman, rented three apartments (apparently combined into one) on Riverside Drive in Manhattan. All three apartments were subject to the rent stabilization laws. Originally, the tenants subleased one of the three from another tenant, and the landlord sued to evict them, claiming that the sublease was illegal. This eviction proceeding was settled by the agreement now at issue, a so-ordered stipulation between the landlord and the tenants entered into in 1996.

The parties agreed that the tenants “shall be recognized as the lawful, rent stabilized legal tenants of the subject premises at a monthly rental rate of $2,000.00.” This was far in excess of the maximum rent allowed by the rent stabilization laws: The landlord’s brief in this Court says that the maximum legal rent would have been $1,325, and the tenants’ brief suggests a lower figure. The agreement said that the tenants “waive all right to challenge the legality of the rent” and that “[r]egardless of [their] primary residence” the tenants “may remain as the rent stabilized tenants.” The agreement also said that, if the apartments were deregulated, the landlord would offer a renewal lease to the tenants every two years, at a rent increase of no more than 8%. In 2000, the apartments were deregulated, without objection from the tenants.

Apparently, the parties continued to comply with the 1996 agreement until 2003. In that year, the landlord began eviction proceedings based on the claim that the tenants were not using the apartments as their primary residence. There was a brief truce, and the proceedings were dismissed without prejudice, but in 2004 the landlord began the present action. It seeks a declaratory judgment that the 1996 agreement violates public policy and is void.

Supreme Court granted summary judgment to the tenants, but the Appellate Division reversed and granted summary judgment to the landlord, declaring the agreement “null, void, and of no force or effect” (39 AD3d 256, 256 [1st Dept 2007]). The Appellate Division granted the tenants leave to appeal, and we now affirm the Appellate Division’s order.

Discussion

Rent Stabilization Code (RSC) (9 NYCRR) § 2520.13 says:

“An agreement by the tenant to waive the benefit of any provision of the RSL [Rent Stabilization Law] or this Code is void; provided, however, that based upon a negotiated settlement between the parties and with the approval of the DHCR [Division of Housing and Community Renewal], or a court of competent jurisdiction, or where a tenant is represented by counsel, a tenant may withdraw, with prejudice, any complaint pending before the DHCR.”

The application of this regulation to this case seems uncomplicated. The agreement is, on its face, one to “waive the benefit” of rent stabilization, and is therefore void. It is not an agreement to withdraw a “complaint pending before the DHCR,” and therefore the exception in the regulation does not apply.

In exchange for an illegal rent, the landlord agreed, among other things, not to enforce its right under RSC § 2524.4 (c) to “recover possession” of a “housing accommodation . . . not occupied by the tenant ... as his or her primary residence.” As the Appellate Division has repeatedly held, an agreement of this kind is not enforceable by the tenant (Park Towers S. Co. v Universal Attractions, 274 AD2d 312 [1st Dept 2000]; Rima 106 v Alvarez, 257 AD2d 201 [1st Dept 1999]). Such an agreement allows a tenant who already has one home, and who is able to pay more than the legal rent for a second one, to use the law as a means of getting that second home in perpetuity at a bargain price. As Justice Wallach said in Rima, to countenance such an arrangement “would violate the fundamental policies and purposes of the statutory rent regulation scheme” (257 AD2d at 204).

Seeking to defend the agreement, the tenants make essentially three arguments: that, on the facts of this case, enforcement of the agreement would violate no public policy; that the “negotiated settlement” exception to ESC § 2520.13 should apply here; and that the landlord’s claim is barred by the statute of limitations. All three arguments lack merit.

The basis for the tenants’ public policy argument is their assertion that, if the 1996 eviction proceeding had not been settled by the agreement in suit, only two outcomes were possible: either the tenants would have remained in the apartments at the legal rent, or they would have been evicted and the apartments would have been deregulated. Neither result, the tenants say, would serve the policy of the rent stabilization laws any better than the compromise result the parties reached. The assertion on which this argument rests is dubious, but even assuming the assertion is true, the conclusion is wrong. It is the policy of the rent stabilization laws that apartments should either be rented at no more than the legal maximum or deregulated. Deregulation, when the conditions for it are met, serves public policy by increasing the availability of housing on the open market. Agreements like the one at issue here distort the market without benefitting the people the rent stabilization laws were designed to protect.

The tenants also argue that settlements, especially court-approved settlements, should be encouraged, and therefore the exception in ESC § 2520.13 should be read broadly. Though the exception applies only to the withdrawal of a “complaint pending before the DHCE,” the tenants say that the absence of any such complaint in this case is a meaningless formality; the tenants could easily have filed such a complaint, and withdrawn it as part of the settlement. Thus, the tenants argue in substance, this case is within the spirit though not the letter of the exception.

We disagree. We find the agreement to be within neither the letter nor the spirit of the law, because it was not a bona fide settlement of the parties’ dispute. The argument for upholding the agreement would be stronger if, in 1996, the parties had had a dispute about the amount of the legal maximum rent, and had compromised at a figure above the tenants’ and below the landlord’s. But the “compromise” in this case put the rent roughly 50% higher than the highest rent the landlord could have demanded. The obvious purpose of the settlement was not to resolve a dispute about what the law permitted, but to achieve something the law undisputedly did not and does not permit.

Finally, the tenants argue that, since the agreement was made in 1996, this action, brought in 2004, is barred by the six year statute of limitations provided by CPLR 213 (2) for “an action upon a contractual obligation or liability.” This argument misconceives the nature of a statute of limitations; it does not make an agreement that was void at its inception valid by the mere passage of time (Pacchiana v Pacchiana, 94 AD2d 721 [2d Dept 1983]). This action is not one “upon a contractual obligation or liability,” but one to declare that no valid contractual obligations ever existed.

We thus conclude that the Appellate Division correctly granted the landlord’s request for a declaratory judgment that the agreement in suit is void. One part of the Appellate Division’s opinion, however, may cause confusion; that court said that it would “leave the parties as we find them, and . . . not place any conditions on our invalidation of the consent judgment,” observing that “the landlord and the tenants are in pari delicto” and that the tenants “have already reaped substantial benefits” from the agreement (39 AD3d at 257). We agree that no “conditions” on the judgment declaring the agreement void are necessary, but that does not mean that only the landlord may benefit from the judgment. The agreement is void as to both parties, and neither party is entitled to rely on it. The tenants may well have a strong claim, subject to any statute of limitations defense that may exist, to recover the excess rent they paid; they may also have a strong claim to rescind the deregulation of the apartments, if that deregulation was the result of the illegal agreement. We do not prejudge these claims except to say that, having successfully argued that the agreement was void at inception, the landlord may not invoke the agreement in its own defense.

Accordingly, the order of the Appellate Division should be affirmed with costs. The certified question is unnecessary, and need not be answered.

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

Order affirmed, etc.


author: ClPARICK, J.

text:
    [ 882 NE2d 389, 852 NYS2d 820]
    Innophos, Inc., Formerly Known as Phosphates Acquisition, Inc., Respondent, v Rhodia, S.A., et al., Appellants.
    Argued January 2, 2008;
    decided February 12, 2008

      POINTS OF COUNSEL

      Shearman & Sterling LLP, New York City (Richard F. Schwed of counsel), for appellants.
    I. The Comision Nacional del Agua claims do not fall within the definition of “taxes.” (Muzak Corp. v Hotel Taft Corp., 1 NY2d 42; Corhill Corp. v S.D. Plants, Inc., 9 NY2d 595; Uribe v Merchants Bank of N.Y., 91 NY2d 336; Matter of Trump-Equitable Fifth Ave. Co. v Gliedman, 57 NY2d 588; Matter of Riefberg, 58 NY2d 134; Popkin v Security Mut. Ins. Co. of N.Y., 48 AD2d 46; SR Intl. Bus. Ins. Co. Ltd. v World Trade Ctr. Props., LLC, 445 F Supp 2d 320; Washington State Dept. of Social & Health Servs. v Guardianship Estate of Keffeler, 537 US 371; 242-44 E. 77th St., LLC v Greater N.Y. Mut. Ins. Co., 31 AD3d 100; People v Illardo, 48 NY2d 408.) II. The purchase and sale agreement as a whole demonstrates that the water bills are not “taxes.” (Rooney v Slomowitz, 11 AD3d 864; 150 Broadway N.Y. Assoc., L.P. v Bodner, 14 AD3d 1; Pearce, Urstadt, Mayer & Greer Realty Corp. v Atrium Dev. Assoc., 77 NY2d 490.) III. At a minimum, the agreement is ambiguous and discovery is necessary. (Federal Ins. Co. v Americas Ins. Co., 258 AD2d 39.)

      Kirkland & Ellis LLP, Washington, D.C. (Christopher Landau, Jeffrey S. Powell, Andrew B. Kay and Angela M. Butcher of counsel), and Kirkland & Ellis LLP, New York City (Peter A. Bellacosa of counsel), for respondent.
    I. The lower courts correctly concluded that the Comision Nacional del Agua claims are “taxes” under the purchase and sale agreement. (God’s Battalion of Prayer Pentecostal Church, Inc. v Miele Assoc., LLP, 6 NY3d 371; Greater N.Y. Mut. Ins. Co. v Mutual Mar. Off, 3 AD3d 44; Harris S.A. De C.V. v Grupo Sistemas Integrales De Telecomunicacion S.A. De C.V., 279 AD2d 263; Wyoming v Oklahoma, 502 US 437; Commonwealth Edison Co. v Montana, 453 US 609; World Wide Mins., Ltd. v Republic of Kazakhstan, 296 F3d 1154; International Assn. of Machinists & Aerospace Workers, [IAM] v Organization of Petroleum Exporting Countries [OPEC], 649 F2d 1354; Rush-Presbyterian-St. Luke’s Med. Ctr. v Hellenic Republic, 877 F2d 574; MOL, Inc. v Peoples Republic of Bangladesh, 736 F2d 1326; State Univ. of N.Y. v Patterson, 42 AD2d 328.) II. The lower courts correctly concluded that discovery is unwarranted. (Ruttenberg v Davidge Data Sys. Corp., 215 AD2d 191; W.W.W. Assoc. v Giancontieri, 77 NY2d 157; Evans v Famous Music Corp., 1 NY3d 452; Janos v Peck, 21 AD2d 529; A.H.A. Gen. Constr. v New York City Hous. Auth., 92 NY2d 20; Wald v Marine Midland Bus. Loans, 270 AD2d 73; Masciotta v Morse Diesel Intl., 303 AD2d 309; Hooper Assoc. v AGS Computers, 74 NY2d 487.)
   OPINION OF THE COURT

ClPARICK, J.

Defendants are a group of related companies that were in the business of producing and selling phosphate products from various locations in Canada, Mexico and the U.S. In early 2004, an agency of the Government of Mexico, the Comisión Nacional del Agua (National Water Commission [CNA]), began an audit of the water usage of defendants’ operation in Mexico—Rhodia Fosfatados de Mexico, S.A. de C.V In March 2004, the CNA sent a letter to Rhodia Fosfatados’s legal representative in Mexico that advised the company of the audit and requested information and documentation regarding the company’s “use [of] national surface or underground waters” pursuant to a concession the Government of Mexico granted to the company. This letter also alleged that Rhodia Fosfatados had not properly fulfilled its fee obligations for the use or utilization of national waters.

In June 2004, plaintiff Innophos, Inc., formerly Phosphates Acquisition, Inc., and defendants entered into a comprehensive, 76-page purchase and sale agreement in which plaintiff acquired Rhodia Fosfatados and defendants’ other operations for a purchase price of over $530 million. At this time, plaintiff was apparently unaware of the ongoing CNA audit or the possibility that it might be charged for past-due fees owed to the CNA, as defendants had not disclosed the audit during negotiations.

The agreement provides, in article VII, that defendants are obligated to “indemnify and hold [plaintiff] harmless against . . . Taxes of the Mexican Subsidiaries with respect to any taxable period (or portion thereof) that ends on or before the Closing Date” for all amounts. The agreement defines “Tax or Taxes” as:

“all. . . United States federal, state or local or non-United States taxes, assessments, charges, duties, levies or other similar governmental charges of any nature, including all income, gross receipts, employment, franchise, profits, capital gains, capital stock, transfer, sales, use, occupation, property, excise, severance, windfall profits, stamp, stamp duty reserve, license, payroll, withholding, ad valorem, value added, alternative minimum, environmental, customs, social security (or similar), unemployment, sick pay, disability, registration and other taxes, assessments, charges, duties, fees, levies or other similar governmental charges of any kind whatsoever, whether disputed or not, together with all estimated taxes, deficiency assessments, additions to tax, penalties and interest.”

The agreement further provides, in article IX, that plaintiff “shall be indemnified and held harmless ... for any and all [Losses], actually suffered or incurred by [plaintiff] arising out of or resulting from” the breach of any representation or warranty made in the agreement. The indemnification for “Losses” is subject to a deductible and a cap of $15.9 million and $79.5 million respectively.

On August 13, 2004, the deal formally closed. Two months later, as a result of the audit, the CNA issued several resolutions that ordered plaintiff—as successor-in-interest to Rhodia Fosfatados—to pay outstanding preclosing water usage fees in excess of $130 million for the years 1998 through 2002. Plaintiff demanded that defendants indemnify it for the outstanding fees pursuant to articles VII and IX of the agreement. Defendants declined to indemnify plaintiff pursuant to article VII, but agreed to assume the defense and control of the CNA claims as “Losses,” pursuant to article IX of the agreement, liability for which, if any, would be subject to the deductible and cap.

Plaintiff thereafter commenced this breach of contract action and subsequently moved for partial summary judgment, seeking a declaration that the CNA fees are “Taxes,” as defined in the agreement. Supreme Court granted plaintiffs motion and held that the CNA fees “constitute taxes, as such term is defined in the purchase agreement . . . [, which] doesn’t confine itself to what we would think of as taxes in the classic sense.”

The Appellate Division, with one Justice dissenting in part, affirmed and opined that “the parties were involved in a sophisticated, multimillion dollar business transaction ... [in which t]hey chose to define the term ‘Tax or Taxes’ with broad, sweeping language . . . [that] cover[s] the government assessment at issue” (38 AD3d 368, 369 [2007]). The Appellate Division concluded that “[i]t is virtually impossible for us to imagine how two sophisticated parties could have made the language any more sweeping than it is” {id. at 370). The Appellate Division granted leave to appeal to this Court and certified the following question: “Was the order of the Supreme Court, as affirmed by the decision and order of this Court, properly made?” We answer that question in the affirmative and, therefore, affirm the Appellate Division’s order.

The issue here is whether the CNA charges are “Taxes,” for which defendants must fully indemnify plaintiff, or “Losses,” which are subject to the cap and deductible, as those terms are understood in the agreement. We have stated previously that “[t]he fundamental, neutral precept of contract interpretation is that agreements are construed in accord with the parties’ intent[, and that t]he best evidence of what parties to a written agreement intend is what they say in their writing” (Greenfield v Philles Records, 98 NY2d 562, 569 [2002] [citations and internal quotation marks omitted]). “Extrinsic evidence of the parties’ intent may be considered only if the agreement is ambiguous, which is an issue of law for the courts to decide” (id. [citation omitted]).

Defendants characterize the CNA fees as simply a “water bill” for the purchase of a commodity from the Government of Mexico that is acting in a proprietary capacity, and not in a governmental capacity. As such, defendants contend that the fees do not fall under the agreement’s definition of “Taxes” because a “water bill” is not similar to any of the governmental charges enumerated in the agreement. Defendants further contend that the lower courts’ interpretation of the agreement renders language in the agreement, which requires indemnification subject to a deductible and cap for certain consequences of government action, superfluous because under the courts’ interpretation any governmental charge would be considered a “Tax.” At best, defendants assert that the agreement is ambiguous and discovery is necessary.

On the other hand, plaintiff asserts that the governmental charges set forth in the agreement’s definition of “Taxes” are all charges that involve a governmental exercise of sovereign, rather than of proprietary authority. Plaintiff submits that the CNA fees were assessed by the Government of Mexico in its sovereign capacity, and, as such, they are “similar” to the examples listed in the definition, particularly to a severance tax. We agree with plaintiff that the CNA fees are “similar,” though not identical, to a severance tax. Black’s Law Dictionary defines a “severance tax” as “[a] tax imposed on the value of . . . natural resources extracted from the earth” (Black’s Law Dictionary 1499 [8th ed 2004]). A severance tax is based on the volume of a natural resource exploited pursuant to a governmental concession (see Wyoming v Oklahoma, 502 US 437, 442 [1992]).

Both plaintiff’s and defendants’ experts agree that Mexico’s Constitution vests ownership over natural resources, including the water at issue here, in the Mexican State. As defendants’ expert affidavit acknowledged, “[w]ater is an asset of the public domain of the Nation . . . [and i]f a private person desires to use or exploit such . . . resources, it must secure a concession . . . [, the fees for which are] calculated in accordance with the volume of water used.” Thus, under the Constitution of Mexico, water is a state-owned natural resource that is regulated by the government in its capacity as a sovereign, and the exploitation of such is only through the granting of a concession. Further, the CNA determined the usage fees by calculating the volume of water extracted from a river and a lagoon connected to the Gulf of Mexico. Hence, the CNA water usage fees are “Taxes,” as that term is defined in the agreement, because they are a “similar governmental charge”—like a severance tax.

In conclusion, no ambiguity exists in this comprehensive agreement, and, as such, it is unnecessary for us to resort to extrinsic evidence to determine the agreement’s meaning. The CNA water fees are “similar governmental charges,” as defined in the agreement, assessed by the Government of Mexico in its capacity as sovereign for the exploitation of a natural resource, here water from its rivers and lagoons, pursuant to a concession. Therefore, applying settled principles of contract interpretation, we conclude that the agreement’s definition of “Taxes” is sufficiently broad to encompass the CNA water charges. Plaintiff should be indemnified pursuant to article VII of the parties’ agreement, and partial summary judgment was properly awarded.

Defendants’ remaining contentions are without merit.

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

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

Order affirmed, etc.

       The outstanding water usage fees are actually now said to be in the range of $20 million to $30 million.


text:
    [ 882 NE2d 381, 852 NYS2d 812]
    The Insurance Company of the State of Pennsylvania, Respondent, v HSBC Bank USA, Appellant.
    Argued January 10, 2008;
    decided February 12, 2008

      POINTS OF COUNSEL

      Phillips Lytle LLP, New York City (David J. McNamara and Patricia A. Mancabelli of counsel), for appellant.
    I. The First Department erred in finding that the Insurance Company of the State of Pennsylvania’s claims are not barred by res judicata even though they constitute an impermissible collateral attack on the Bankruptcy Court’s jurisdiction and prior orders. (O’Brien v City of Syracuse, 54 NY2d 353; Matter of Hunter, 4 NY3d 260; Winkler v Weiss, 294 AD2d 428; Katchen v Landy, 382 US 323; Weiss v Hagopian, 251 AD2d 400; Firedoor Corp. of Am. v Merlin Indus., 86 AD2d 577; EDP Med. Computer Sys., Inc. v United States, 480 F3d 621; Matter of Baudoin, 981 F2d 736; Langenkamp v Culp, 498 US 42; Granfinanciera, S. A. v Nordberg, 492 US 33.) II. The First Department erred because questions of fact preclude summary judgment in the Insurance Company of the State of Pennsylvania’s favor. (Securities & Exch. Commn. v American Bd. of Trade, Inc., 654 F Supp 361; Independent Coal & Coke Co. v United States, 274 US 640; Martin v Briggs, 235 AD2d 192; Dwyer v Mazzola, 171 AD2d 726; Air Traffic Conference v Downtown Travel Ctr., 87 Misc 2d 151.)

      D’Amato & Lynch, LLP, New York City (Ronald H. Alenstein and Edward M. Roth of counsel), for respondent.
    I. The decision below is not a collateral attack on any order of the Bankruptcy Court. (Matter of Hunter, 4 NY3d 260; Dezer Entertainment Concepts, Inc. v City of New York, 8 AD3d 37; Lincoln First Commercial Corp. v New York State Tax Commn., 136 Misc 2d 478; In re Brown, 734 F2d 119; Old Stone Bank v Tycon I Bldg. Ltd. Partnership, 946 F2d 271; Eastern Mins. & Chems. Co. v Mahan, 225 F3d 330; EDP Med. Computer Sys.,

      Inc. v United States., 480 F3d 621; Matter of Hamptons Hosp. & Med. Ctr. v Moore, 52 NY2d 88; Matter of Leisten v McCall, 285 AD2d 897; Matter of Haber Oil Co., Inc., 12 F3d 426.) II. No issues of fact preclude a finding of summary judgment for the Insurance Company of the State of Pennsylvania on the issue of liability. (People v Gruttola, 43 NY2d 116; A.C. Transp. v Board of Educ. of City of N.Y., 253 AD2d 330; 815 Park Ave. Owners v Fireman’s Ins. Co. of Washington, D.C., 225 AD2d 350; Air Traffic Conference v Downtown Travel Ctr., 87 Misc 2d 151.)
   OPINION OF THE COURT

Graffeo, J.

We are asked in this case to decide whether a Bankruptcy Court order allowing a creditor to seize a debtor’s bank account is entitled to res judicata effect in a subsequent state proceeding alleging that a portion of the funds in the account were state tax proceeds that should not have been part of the bankruptcy estate. Because plaintiff and its subrogor had notice of the bankruptcy action and failed to alert the court that the funds at issue were tax receipts held in trust, we conclude that plaintiff cannot now challenge defendant’s court-approved seizure of the funds.

I

Herkimer Wholesale Company, Inc. was a distributor of cigarettes and other goods. In order to sell cigarettes, Herkimer had to affix each package with a cigarette tax stamp obtained from the State of New York (see Tax Law § 471 [2]). As a licensed tax stamp agent, Herkimer purchased stamps directly from the State, either by cash payment or on credit, and later collected the taxes when it sold the cigarettes (see Tax Law § 472 [1]). Herkimer usually bought tax stamps on credit and was required to remit the taxes to the State within 30 days after purchasing the stamps. State law provides that any tax proceeds obtained by a licensed agent from the sale of cigarettes are to be held in trust for the State and such monies are not the property of the agent (see 20 NYCRR 532.2 [a], [b]). Herkimer also had to post a bond as security for unpaid stamps (see Tax Law § 472 [1]). To satisfy this requirement, Herkimer obtained a $2.2 million bond issued by plaintiff the Insurance Company of the State of Pennsylvania (ICSP).

In 1996, Herkimer restructured a business loan with defendant HSBC Bank USA (HSBC) and gave the bank a first priority security interest in all of its property. HSBC declared Herkimer in default of the loan in November 1997 and the bank commenced an action in state Supreme Court to collect on the loan and security agreement.

A short time later, several of Herkimer’s unsecured creditors initiated a chapter 7 involuntary bankruptcy proceeding in federal Bankruptcy Court. This automatically stayed HSBC’s attempt to foreclose on Herkimer’s assets in state court. HSBC therefore intervened in the bankruptcy proceeding and obtained an order that prohibited Herkimer from transferring any of its property except in the ordinary course of business. The Bankruptcy Court also ordered that Herkimer’s cash assets be deposited with HSBC in a “cash collateral account.”

In an effort to save its business, Herkimer persuaded the Bankruptcy Court to convert the chapter 7 liquidation action into a chapter 11 reorganization proceeding. In November 1997, Herkimer filed a list of its 20 largest unsecured creditors with the court, identifying the State of New York as its largest unsecured creditor ■ (Herkimer owed the State approximately $2 million in cigarette stamp taxes). This characterization was erroneous, however, because the taxes collected by Herkimer were being held in trust for the State (see 20 NYCRR 532.2 [b]) and should not have been part of Herkimer’s bankruptcy estate (see 11 USC § 541 [d]; Begier v IRS, 496 US 53, 59 [1990] [“Because the debtor does not own an equitable interest in property he holds in trust for another, that interest is not ‘property of the estate’ ” in a bankruptcy proceeding]).

ICSP soon became aware of the tax deficiency and informed the State that Herkimer’s bond was cancelled. The bond issuer also asked the State not to provide Herkimer with additional tax stamps on credit. Thereafter, Herkimer received tax stamps only if it paid the State cash.

An agreement was eventually reached between Herkimer, HSBC and some of the unsecured creditors that allowed Herkimer to continue operating its business as a “debtor-in-possession.” The Bankruptcy Court approved the arrangement, directing that the cash collateral account be held jointly by Herkimer and HSBC, subject to HSBC’s “continuing first priority security interest” in the funds. The court also allowed monies in the collateral account to be transferred to a debtor-in-possession account to meet Herkimer’s ordinary business expenses.

Herkimer then requested that the State Department of Taxation and Finance advise HSBC whether the bank could obtain a security interest in Herkimer’s cigarette inventory or unused tax stamps. The Department informed HSBC that it would be unable to “acquire a secured interest in cigarette tax stamps whether affixed to cigarettes or not” because only licensed tax stamp agents, like Herkimer, may serve as the State’s “fiduciaries and [they] must account to the State for any unused or unpaid for stamps.” The Department cited Lincoln First Commercial Corp. v New York State Tax Commn. (136 Misc 2d 478 [Sup Ct, NY County 1987]), which held that a private entity could not obtain a security interest in an “account which includes the proceeds of the sale of tax stamps” because such funds belong to the government, not the agent that holds them (id. at 480-481).

This precipitated the filing of a proof of claim in Bankruptcy Court by the State of New York in December 1997 for approximately $2.2 million, representing unpaid cigarette taxes, penalties and interest. Although the State requested priority status for its claim, it incorrectly described the money Herkimer owed as a “debt” rather than as sovereign tax revenue being held in trust by the State’s agent.

The State also sought to recover $2.2 million from ICSP—the maximum exposure on the bond. ICSP filed its own contingent proof of claim in the bankruptcy proceeding in February 1998. This claim similarly indicated that the money owed was premised on unpaid taxes but designated the claim as unsecured and nonpriority. Because the State and ICSP never informed Bankruptcy Court that the tax proceeds were being held in trust by Herkimer and should have been excluded from the bankruptcy estate, the court continued to treat the monies as the property of Herkimer subject to creditors’ claims.

Despite its attempts to emerge from bankruptcy, Herkimer became unable to comply with the debtor-in-possession arrangement and had to surrender all of its collateral. The Bankruptcy Court issued an order dissolving the stay and, since HSBC’s secured claim had priority over the other unsecured creditor claims and the value of Herkimer’s property was less than the total indebtedness owed to the bank, the court permitted HSBC to foreclose on all of Herkimer’s collateral. HSBC did so, transferring more than $4 million from Herkimer’s collateral account to itself, including the funds derived from cigarette taxes collected by Herkimer on the State’s behalf. Neither the State nor ICSP objected to this liquidation and, ultimately, the case was reconverted into a chapter 7 proceeding. HSBC also foreclosed on Herkimer’s inventory of cigarettes and sold them with the State’s permission, retaining the proceeds.

In the meantime, ICSP continued to refuse to honor the State’s demand on Herkimer’s bond. This resulted in the State commencing an action against ICSP in state Supreme Court in December 2000 to enforce the guaranty. ICSP asserted as a defense that its rights as a subrogee had been impaired by the State’s failure to advise the Bankruptcy Court that the tax stamp revenue in Herkimer’s possession was sovereign property distinct from the assets available to creditors. ICSP also initiated a third-party action against HSBC for allegedly misappropriating the tax proceeds with knowledge that these funds were being held in trust and were excludable from Herkimer’s estate. Supreme Court granted summary judgment to the State on the bond claim and to HSBC on the third-party complaint. The Appellate Division affirmed, explaining that the third-party action was premature because ICSP had not paid on the bond and, thus, had not yet acquired subrogee status (see State of New York v Insurance Co. of State of Pa., 305 AD2d 916 [3d Dept 2003], lv denied 1 NY3d 502 [2003]).

In light of this judicial determination, ICSP paid on the bond, satisfying the taxes, penalties and interest owed to the State, and then initiated this lawsuit against HSBC in February 2004. Among other defenses, HSBC asserted that res judicata barred the relief sought in this action because neither the State nor ICSP had informed the Bankruptcy Court that Herkimer was in possession of tax trust funds, which caused the court to treat the monies as part of Herkimer’s collateral available to satisfy creditors. Both parties moved for summary judgment and Supreme Court granted ICSP’s motion as to liability. The Appellate Division, with one Justice dissenting in part, modified by dismissing one cause of action but otherwise affirmed, rejecting HSBC’s res judicata defense. The court later granted leave to appeal to this Court and certified the following question: “Was the decision and order of this Court, which modified the order of the Supreme Court, properly made?” We answer the question in the negative, reverse the order of the Appellate Division and grant HSBC’s motion for summary judgment dismissing the complaint in its entirety.

II

The doctrine of res judicata, or claim preclusion, is designed to “relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions, encourage reliance on adjudication” (Allen v McCurry, 449 US 90, 94 [1980]). In federal court, subsequent litigation is prohibited if a prior court ruling “ ‘was (1) a final judgment on the merits, (2) by a court of competent jurisdiction, (3) in a case involving the same parties or their privies, and (4) involving the same cause of action’ ” (EDP Med. Computer Sys., Inc. v United States, 480 F3d 621, 624 [2d Cir 2007], quoting In re Teltronics Servs., Inc., 762 F2d 185, 190 [2d Cir 1985]). Res judicata “applies with full force to matters decided by the bankruptcy courts ... in a Chapter 7 liquidation where it is desirable that matters be resolved as expeditiously and economically as possible” (EDP Med. Computer Sys., Inc. v United States, 480 F3d at 624-625).

The dispute in this case primarily concerns the fourth element—whether ICSP has raised the same causes of action that were at issue in the bankruptcy proceeding. ICSP argues that it has not because HSBC’s alleged misappropriation occurred after the Bankruptcy Court issued its decision dissolving the stay and allowing HSBC to foreclose the collateral bank account. Thus, ICSP contends, the propriety of HSBC’s conduct could not have been decided by the Bankruptcy Court. This assertion is unavailing.

Federal res judicata law applies to not only issues actually litigated, but also to “issues that . . . could have been raised” in the prior action (Federated Department Stores, Inc. v Moitie, 452 US 394, 398 [1981]) and “any other admissible matter which might have been offered” for the purpose of “sustaining] or defeating] the claim or demand” at issue in the earlier proceeding (Commissioner v Sunnen, 333 US 591, 597 [1948] internal quotation marks omitted]). In our view, the same issue that was central to the bankruptcy proceeding is also of paramount importance in this appeal: what claimant was entitled to the money that was in Herkimer’s collateral account? The Bankruptcy Court was undoubtedly the proper forum for adjudicating that question (see generally Matter of Quality Holstein Leasing, 752 F2d 1009, 1013-1014 [5th Cir 1985]). Indeed, deciding who is entitled to the property of an insolvent debtor is a central function of a bankruptcy court. Significantly, no new facts beyond those that were available in Bankruptcy Court are needed to determine the answer in this case (cf. In re Teltronics Servs., Inc., 762 F2d at 193).

It is readily apparent (as ICSP admits) that neither the State nor ICSP—both of which formally intervened in the bankruptcy action—submitted proper claims to the Bankruptcy Court indicating that Herkimer’s bank account included tax proceeds that were the sovereign property of the State of New York and, hence, were not available to satisfy creditors’ claims against Herkimer’s assets. Doing so certainly would not have been burdensome since the State simply had to declare that its money was being held in trust by Herkimer, or ICSP could have checked a box on its claim form indicating that the funds should be prioritized as tax proceeds owed to the state government. No excuse has been offered for this oversight and ICSF as the State’s subrogee that stood by while the other parties involved in the bankruptcy treated the funds as Herkimer’s property, must bear the brunt of the neglect (cf. EDP Med. Computer Sys., Inc. v United States, 480 F3d at 627). And because the Bankruptcy Court was not asked to segregate the tax funds in the account, the court was within its power to treat the monies as assets of Herkimer’s estate for distribution on HSBC’s secured claim (see generally Matter of Haber Oil Co., Inc., 12 F3d 426, 437 [5th Cir 1994]; In re Black & Geddes, Inc., 58 BR 547, 552-554 [SD NY 1983]). Consequently, the causes of action alleged in ICSP’s complaint are barred by res judicata because almost a decade ago the State and ICSP had a full and fair opportunity to litigate the matter in Bankruptcy Court but chose not to do so.

Accordingly, the order of the Appellate Division, insofar as appealed from, should be reversed, with costs, defendant’s motion to dismiss the complaint in its entirety granted and the certified question answered in the negative.

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

Order, insofar as appealed from, reversed, with costs, defendant’s motion for summary judgment dismissing the complaint in its entirety granted and certified question answered in the negative.

      . The original loans and restructured agreement were actually issued by Marine Midland Bank, a predecessor of HSBC, but for purposes of this opinion, we make no distinction between these financial institutions.

      . Even after Herkimer’s property was sold, HSBC was left with an uncollectible deficiency of more than $3 million.

      . We cite federal cases for the general contours of the doctrine because there are authorities suggesting that a court should apply the rules of res judicata followed in the jurisdiction that rendered the earlier court decision (see e.g. Marrese v American Academy of Orthopaedic Surgeons, 470 US 373, 380-381 [1985]; Langerman v Langerman, 303 NY 465, 474 [1952]; Siegel, NY Prac § 471, at 798-799 [4th ed]; Restatement [Second] of Conflict of Laws § 95, Comment e). Our State’s “transactional” approach to res judicata is arguably broader than the principles adopted by the federal courts (see e.g. Matter of Josey v Goord, 9 NY3d 386, 389 [2007]; Matter of Hunter, 4 NY3d 260, 269 [2005]). Because we conclude that the federal law of res judicata precludes ICSP’s claims, it is unnecessary for us to determine the extent to which New York principles may be relevant to the claim preclusion analysis in a case such as this.

      . For this reason, we reject ICSP’s argument that the Bankruptcy Court’s order allowing HSBC to foreclose on the bank account had no effect on the status of the tax proceeds because the order applied only to “collateral.” Although it is true that tax proceeds cannot be collateral because they are not the property of the debtor, that fact is irrelevant here because all legal conclusions—whether erroneous or correct—are treated identically for purposes of res judicata (see e.g. Federated Department Stores, Inc. v Moitie, 452 US at 398) and the Bankruptcy Court’s treatment of the funds in Herkimer’s account as the company’s property went unchallenged.

      . In light of our determination, HSBC’s additional argument in favor of reversal is academic.


author: Pigott, J.

text:
    [ 882 NE2d 386, 852 NYS2d 817]
    In the Matter of Shelton Johnson, Respondent, v New York City Department of Environmental Protection et al., Appellants.
    Argued January 3, 2008;
    decided February 12, 2008

      POINTS OF COUNSEL

      Michael A. Cardozo, Corporation Counsel, New York City (Stephen J. McGrath, Leonard Koerner, Spencer Fisher, Eric Eichenholtz and Ellen Ravitch of counsel), for appellants.
    The record in this proceeding establishes that petitioner, upon his conviction for criminal possession of a forged instrument in the third degree, forfeited his employment with the City of New York pursuant to New York City Charter § 1116 (a). (Matter of Duffy v Ward, 81 NY2d 127; Matter of Maldarelli v Doherty, 7 AD3d 384, 4 NY3d 703; Matter of Bowman v Kerik, 271 AD2d 225; Matter of Segars v City of Buffalo, 237 AD2d 910; People v Kane, 161 NY 380; Matter of Ferdinand v Moses, 262 App Div 1001, 287 NY 854; Matter of DePaolo v Bronstein, 45 AD2d 691, 35 NY2d 642; Matter of Briggins v McGuire, 67 NY2d 965, 479 US 930; Matter of Felix v New York City Dept. of Citywide Admin. Servs., 3 NY3d 498; Matter of Finegan v Cohen, 275 NY 432.)

      Schwartz, Lichten & Bright, P.C., New York City (Stuart Lichten of counsel), for respondent.
    I. A permanent appointee cannot be summarily discharged upon conviction of a misdemeanor which does not necessarily constitute a fraud upon the City of New York. (Matter of Duffy v Ward, 81 NY2d 127; Matter of Foley v Bratton, 92 NY2d 781; People v Seeber, 4 NY3d 780; People v Cepeda, 29 AD3d 491, 7 NY3d 810; Matter of Ferdinand v Moses, 262 App Div 1001.) II. The plain language of New York City Charter § 1116 (a) prescribes the penalty of forfeiture only for conviction under the statute. (People v Miller, 248 AD2d 404; People v Kane, 161 NY 380; People v Engel, 200 Misc 60; Matter of Maldarelli v Doherty, 7 AD3d 384, 4 NY3d 703.) III. Appellants have waived their right to discharge Shelton Johnson for this conviction.
   OPINION OF THE COURT

Pigott, J.

In 1993, respondent New York City Department of Environmental Protection (DEP) hired petitioner as a construction laborer, a competitive class position in the New York City civil service. In January 2003, petitioner was arrested for allegedly stealing DVDs from a video store. Upon his arrest, police searched petitioner’s car and discovered a forged DEP placard and shield. Petitioner was charged with, among other things, two counts of criminal possession of a forged instrument in the second degree. Two weeks later, petitioner pleaded guilty to one count of criminal possession of a forged instrument in the third degree (Penal Law § 170.20), a class A misdemeanor, in satisfaction of all charges. He was sentenced to a conditional discharge and the imposition of a $500 fine.

Upon learning of petitioner’s guilty plea, DEP obtained a copy of the criminal complaint and certificate of disposition, the latter which merely set forth the charge to which petitioner pleaded guilty but contained no factual basis for the plea; DEP also met with petitioner to discuss the criminal charges and his plea. After the meeting, DEP notified petitioner that, because he had pleaded guilty to the crime of criminal possession of a forged instrument in the third degree, he automatically forfeited his employment pursuant to NY City Charter § 1116 (a). That section provides that:

“Any . . . officer or employee of the city who shall wilfully violate or evade any provision of law relating to such officer’s office or employment, or commit any fraud upon the city, or convert any of the public property to such officer’s own use, or knowingly permit any other person so to convert it . . . shall be deemed guilty of a misdemeanor and in addition to the penalties imposed by law and on conviction shall forfeit such office or employment, and be excluded forever after from receiving or holding any office or employment under the city government” (NY City Charter § 1116 [a]).

Petitioner thereafter commenced this CPLR article 78 proceeding against the DEP and respondent Christopher O. Ward, Commissioner of the DEI] seeking, among other things, a declaration that his termination without a formal charge or a hearing was arbitrary and capricious. Petitioner sought reinstatement, back pay and other benefits owed to him as a result of his wrongful termination. Respondents answered, asserting that pursuant to NY City Charter § 1116 (a) petitioner automatically forfeited his position upon his plea of guilty and therefore neither a formal charge nor a hearing was necessary. Supreme Court dismissed the petition, holding that petitioner’s plea to violating Penal Law § 170.20 was tantamount to an admission that he committed a “fraud upon the city” within the meaning of section 1116 (a) and, therefore, respondents were not required to afford petitioner a pretermination hearing.

The Appellate Division reversed and remanded, holding that petitioner’s conviction, “standing alone, without factual inquiry, does not show that petitioner perpetrated a ‘fraud upon the city,’ violated any law relating to his employment, or converted any city property to his own use within the meaning of section 1116” (7 AD3d 383, 384 [1st Dept 2004]). On remand, Supreme Court annulled the forfeiture determination and ordered petitioner’s reinstatement with back pay. The Appellate Division affirmed that judgment (34 AD3d 241, 242 [1st Dept 2006]). Respondents’ appeal to this Court brings up for review both the previous nonfinal Appellate Division order vacating respondents’ decision to terminate petitioner without a hearing and the Appellate Division’s affirmance of Supreme Court’s order of reinstatement with back pay.

In reversing the dismissal of the petition, the Appellate Division relied on Matter of Duffy v Ward (81 NY2d 127, 134 [1993]), in which we held that the provision in Public Officers Law § 30 (1) (e) requiring dismissal of a public officer upon conviction of “a crime involving a violation of his [or her] oath of office” could be applied only where “the violation is apparent from the Penal Law’s definition of the crime.” We conclude, however, that to apply the Duffy approach to section 1116 (a) would render the application of the charter provision so narrow that it would largely defeat its purpose. The Penal Law sections under which frauds on the City are most likely to be prosecuted— including the one at issue in this case and other sections prohibiting forgery, larceny and related crimes—do not on their face provide that the City of New York must be the victim of the fraud. Where the City is, in fact, the victim, the automatic termination sanction of section 1116 (a) should follow from conviction.

We nevertheless affirm the Appellate Division’s order because the record on which DEP relied, as presented by DEP to Supreme Court, is insufficient to establish the applicability of section 1116 (a). Petitioner was convicted of criminal possession of a forged instrument in the third degree. A person is deemed guilty of that offense “when, with knowledge that it is forged and with intent to defraud, deceive or injure another, he utters or possesses a forged instrument” (Penal Law § 170.20). While it is undisputed that petitioner pleaded guilty to that crime, there is no record evidence that petitioner in so pleading admitted to possessing a forged DEP placard or shield so as to fall within the “fraud upon the city” requirement of section 1116 (a). Absent such evidence, petitioner’s conviction for that offense, standing alone and without a factual inquiry, is insufficient to support respondents’ summary dismissal of petitioner under that charter provision. We note, however, that such inquiry, under circumstances such as these, need only consist of ascertaining the facts upon which the plea was based, from the plea allocution, for example, or other substantial evidence to support the contention that petitioner’s conviction was for conduct falling within the proscribed activities of section 1116 (a).

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

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

Order affirmed, with costs.