author: Chief Judge Kaye. R.S. Smith, J. (dissenting in part).

text:
    [828 NE2d 583, 795 NYS2d 481]
    The People of the State of New York, Respondent, v James Combest, Appellant.
    Argued January 13, 2005;
    decided February 22, 2005

      POINTS OF COUNSEL

      Appellate Advocates, New York City (Jonathan M. Kratter and Lynn W.L. Fahey of counsel), for appellant.
    I. Appellant’s constitutional rights to a fair trial, compulsory process, and confrontation were violated when the courts below ruled that, under Civil Rights Law § 79-h (c), he could be denied a copy of a news organization’s videotape of his police precinct interrogation, which contained the best evidence of both the voluntariness of his statement and his justification defense. (O’Neill v Oakgrove Constr., 71 NY2d 521; People v. Ray, 65 NY2d 282; People v Jones, 47 NY2d 528; People v Washington, 86 NY2d 189; Payton v New York, 445 US 573; Wilson v Layne, 526 US 603; Arizona v Hicks, 480 US 321; Maryland v Garrison, 480 US 79; Lauro v Charles, 219 F3d 202; People v Whitaker, 64 NY2d 347, 474 US 830.) II. The trial court’s denial of defense counsel’s challenge for cause to a prospective juror, who could say only that she would “try” to set aside her sympathy for the victim’s family and decide the case based solely on the evidence but that it would be “difficult” and “there’s always a but,” deprived appellant of his rights to due process and an impartial jury. (Irvin v Dowd, 366 US 717; People v Branch, 46 NY2d 645; People v Johnson, 94 NY2d 600; People v Arnold, 96 NY2d 358; People v Chambers, 97 NY2d 417; People v Blyden, 55 NY2d 73; People v Greene, 290 AD2d 349; People v Culhane, 33 NY2d 90; People v White, 260 AD2d 413.)

      Charles J. Hynes, District Attorney, Brooklyn (Shulamit Rosenblum, Leonard Joblove and Jane S. Meyers of counsel), for respondent.
    I. The Appellate Division correctly held that defendant was not entitled to release of Hybrid Films, Inc.’s videotape of his statements to the police because defendant did not satisfy the three-pronged test of Civil Rights Law § 79-h (c). Moreover, any error resulting from defendant’s inability to introduce the tape was harmless. (Matter of Beach v Shanley, 62 NY2d 241; Gonzales v National Broadcasting Co., Inc., 194 F3d 29; O’Neill v Oakgrove Constr., 71 NY2d 521; Shoen v Shoen, 5 F3d 1289; Krase v Graco Children Prods., Inc., 79 F3d 346; Matter of American Broadcasting Cos., 189 Misc 2d 805; Matter of Brown & Williamson Tobacco Corp. v Wigand, 228 AD2d 187; Matter of Grand Jury Subpoenas [Maguire], 161 Misc 2d 960; Matter of CBS Inc., 232 AD2d 291; Simmons v United States, 390 US 377.)
   OPINION OF THE COURT

Chief Judge Kaye.

This appeal tests the scope of the journalist’s privilege in non-confidential information in the context of criminal proceedings.

On April 16, 2000, gunfire between two groups of young men erupted across a Brooklyn intersection. When the shots concluded, a bystander, caught in the crossfire, lay dying on the sidewalk. Two days later, detectives from the Brooklyn North Homicide Task Force arrested 17-year-old defendant in his home.

Accompanying these detectives was a film crew from Hybrid Films, Inc., a production company that was in the process of creating a documentary on the Task Force for Court TV The show, which aired later that year under the title “Brooklyn North Homicide Squad,” consisted of five episodes intended to present a behind-the-scenes look at the inner workings of the Task Force. In its press release announcing the series, Court TV advertised the “unprecedented access” it had been given by the Task Force, “which allowed a crew to capture the daily activities of detectives, including their personal lives, over a period of five months.” Each episode was to “focus on the discovery, investigation and resolution of a case, interweaving aspects of the detectives’ personal interests and family lives.”

Among the show’s featured detectives was Tony Viggiani, who was assigned to question defendant after his arrest. The police thus permitted Hybrid’s crew to film throughout defendant’s arrest and subsequent interrogation, during which he gave oral and written statements confessing to his participation in the shootout, but attempting to explain his actions as justified by self-defense. A few hours after the police interrogation, which was filmed only by Hybrid, defendant gave a 14-minute videotaped statement to an assistant district attorney, filmed by the prosecution. According to defendant, he and his friends had been forced to return fire after being shot at by a drug dealer and his associate.

Indicted for murder and related charges, defendant served a subpoena duces tecum upon Hybrid for the production of those portions of the video and audio tapes taken during his arrest and interrogation that had not been broadcast. Although Hybrid voluntarily turned over the arrest videotape that it had taken in defendant’s home (that tape is.no longer in issue), it moved to quash the subpoena for portions of the tapes depicting defendant’s interrogation by detectives, asserting that defendant did not establish his entitlement to these tapes under the three-pronged test set forth in Civil Rights Law § 79-h (c) (the Shield Law), which affords journalists and newscasters a qualified privilege in nonconfidential news.

Without deciding the application, and over Hybrid’s objection, Supreme Court ordered Hybrid to produce its tapes, under seal, for in camera review. The court ruled that defendant would, if necessary, have an opportunity during the trial of the criminal action to make the required showing under the Shield Law, and that the tapes would then be reviewed by the court to determine the existence of any relevant material and to redact any irrelevant material. However, the criminal action was subsequently transferred to a different Justice, who directed that the tapes be turned over to the parties, without review and without a showing by defendant that the three-pronged test set forth in Civil Rights Law § 79-h (c) had been satisfied. The tapes were then provided to both defendant and the People.

The following day, Hybrid obtained a stay of Supreme Court’s order from the Appellate Division, and the parties were required to return the tapes to the trial court. Shortly thereafter, the Appellate Division reversed the order and remitted the matter to Supreme Court for further proceedings. The Appellate Division held that the trial court’s decision had been premature, and directed the court to maintain possession of the tapes until an issue concerning their release arose at trial, at which time defendant would be given an opportunity at a hearing to make the necessary showing under the Shield Law. If defendant satisfied the statutory test, the court was then to review the videotapes in camera and redact any irrelevant material prior to release (see Matter of Hybrid Films, Inc. v Combest, 281 AD2d 500, 501 [2001]).

The trial proceeded immediately. After the testimony of Detective Viggiani, a hearing was held on the motion to quash. Concluding that defendant had not met his burden under the Shield Law, the court granted Hybrid’s motion. At the trial, defendant’s statements were the only evidence connecting him to the crime, as well as supporting his justification defense. The jury, without having seen the subpoenaed tapes, acquitted defendant of murder, but convicted him of manslaughter in the first degree and criminal possession of a weapon in the second degree. The Appellate Division affirmed, holding that the trial court properly granted Hybrid’s application to quash the subpoena because defendant failed to satisfy the requirements of Civil Rights Law § 79-h (c). We now reverse and order a new trial.

The Governing Law

We first recognized a journalist’s privilege in nonconfidential news in O’Neill v Oakgrove Constr., Inc. (71 NY2d 521 [1988]), where we determined that our state constitutional guarantee of freedom of the press requires the protection of a qualified privilege when a party to a civil lawsuit seeks nonconfidential information from a news organization (see NY Const, art I, § 8). Explaining that a party’s request for a journalist’s nonconfidential material calls for a balancing of “competing interests” (71 NY2d at 529), we established a three-pronged test that a litigant must satisfy to obtain such materials. At the same time, however, we noted without deciding that different factors might be involved in criminal cases (see 71 NY2d at 528 n 2).

In 1990, the Legislature enacted Civil Rights Law § 79-h (c) to codify our three-pronged test, applying it to both civil and criminal proceedings (see L 1990, ch 33, § 2). Under the statute, a news organization may not be required

“to disclose any unpublished news obtained or prepared by a journalist or newscaster in the course of gathering or obtaining news . . . , or the source of any such news, where such news was not obtained, or received in confidence, unless the party seeking such news has made a clear and specific showing that the news: (i) is highly material and relevant; (ii) is critical or necessary to the maintenance of a party’s claim, defense or proof of an issue material thereto; and (iii) is not obtainable from any alternative source.”

Defendant contends that the Shield Law is unconstitutional as applied to criminal cases, arguing that a criminal defendant is entitled to obtain nonconfidential material possessed by a news organization even when he or she cannot meet the three-pronged showing required by the statute. He maintains that his due process rights to a fair trial, presentation of a defense, compulsory process and confrontation entitled him to obtain the nonconfidential videotapes of his own statements that were recorded by Hybrid.

As made clear in O’Neill, when faced with a litigant’s request for information in the possession of the media, competing interests must be balanced (see 71 NY2d at 529). In a criminal case, defendant’s interest in nonconfidential material weighs heavy. Of course, in any case, the interest in refusing to share nonconfidential information is significantly lower than when confidential material is at issue. When confidential material is at issue, the media may have real reason to fear that their ability to find sources willing to provide information will soon evaporate if their guarantees of confidentiality will not be honored. While we do not question the importance of nonconfidential news gathering, whose significance we recognized in O’Neill, defendant argues that this case involves

“no intrusions upon speech or assembly, no prior restraint or restriction on what the press may publish, and no express or implied command that the press publish what it prefers to withhold. No exaction or tax for the privilege of publishing, and no penalty, civil or criminal, related to the content of published material is at issue here. The use of confidential sources by the press is not forbidden or restricted; reporters remain free to seek news from any source by means within the law. No attempt is made to require the press to publish its sources of information or indiscriminately to disclose them on request” (Branzburg v Hayes, 408 US 665, 681-682 [1972]).

Thus, he contends, a reporter’s privilege in nonconfidential materials does not easily overcome a criminal defendant’s fair trial rights.

Because in this case we conclude that defendant met his burden under the Shield Law, we need not decide what standard is constitutionally required in order to overcome a criminal defendant’s substantial right to obtain relevant evidence.

Application to this Case

It is beyond dispute that a defendant’s own statements to police are highly material and relevant to a criminal prosecution. It is for this reason that such statements are always discoverable, even when the People do not intend to offer them at trial (see CPL 240.20 [1]; cf. CPL 710.30 [1] [a] [requiring notice of the People’s intention to offer a defendant’s statement at trial]). Further, the voluntariness of a defendant’s statement is highly material and relevant when put in issue by the defense. Indeed, even when a motion to suppress a statement as involuntarily made has been litigated and denied, a defendant is not precluded “from attempting to establish at a trial that evidence introduced by the people of a pre-trial statement made by him should be disregarded by the jury or other trier of the facts on the ground that such statement was involuntarily made” (CPL 710.70). “[T]he defendant may adduce trial evidence” in support of his or her contention, and “the court must submit such issue to the jury under instructions to disregard such evidence upon a finding that the statement was involuntarily made” (id.).

Here, defendant expressed to the hearing court his intention to pursue two alternative defenses—that he acted in self-defense, and that his statements were involuntary—and to use the subpoenaed videotapes in support of those defenses. In that there was no dispute that Hybrid’s tapes constituted the only depictions of his interrogation by the police, in this case defendant met his burden under Civil Rights Law § 79-h (c) as a matter of law.

Defendant contended that the tapes would support his involuntariness claim in several ways. First, he contended that the tapes would show the various ruses undertaken by the interrogating detective in an attempt to induce him to confess. Although the detective admitted that he at times used deception in an effort to elicit a truthful confession, he testified that he could not recall whether in this case he made any of the misleading statements specifically identified by defendant. Defendant, however, maintained that the detective had assured him that if he cooperated, he would be charged only with gun possession, whereas if he did not, he would be prosecuted for murder and subject to the death penalty (which the detective testified he knew to be untrue because of defendant’s age). Defendant further asserted that he had been promised, in exchange for his cooperation, that he would get probation. Second, defendant contended that the tapes would show the extent to which he would have felt physically intimidated by the detective’s close proximity to him. Third, defendant argued that the tapes would demonstrate the visibility of the detective’s bolstered gun, inasmuch as the detective could not recall whether his gun was in view during the interrogation.

Defendant also articulated a number of ways in which the tapes would help to establish his justification defense, as well as to negate the elements of intent and recklessness essential to the intentional and depraved indifference murder counts with which he was charged. First, defendant argued that the tapes contained his statement to the police that, when the shooting broke out, his car was not double-parked for a quick getaway, but had instead been parked parallel to the curb, helping to rebut the People’s theory that he was the initial aggressor in a premeditated assassination attempt. Second, he asserted that the tapes included his statement to the detective that he was unaware that his friend had been armed with a gun until after the shooting began. Third, he maintained that the tapes contained his statements that he had warned a woman to get her children off the street before he returned fire, and that he had not seen the deceased until he was hit—evidence offered to rebut depraved indifference.

That defendant was provided with the brief videotaped statement he ultimately gave to the prosecutor does not lessen the importance of the evidence he sought. Defendant was entitled to present evidence, if he could, that he had been coerced into making a statement through a variety of techniques employed during the earlier interrogation period, which occurred behind closed doors and before the People’s cameras began to roll. Defendant argues that only after he had been prepared to give a calm and coherent statement was the prosecutor’s camera turned on. In that event, any earlier displays of fear, upset, suggestibility, protestation—all relevant to the determination whether the statement ultimately given was voluntary—would not be memorialized, but his eventual, dispassionate (and therefore seemingly truthful and accurate) account would be.

In this case, the trial court erred in considering only the allegedly coercive statements that defendant claimed had been made to him by the police, and in analyzing each such statement in isolation. Because it found that no single alleged threat was by itself sufficient to establish that defendant’s statement was involuntary, the court concluded that defendant had failed to make a clear and specific showing that the subpoenaed information was highly material and relevant, and critical or necessary to his defense. But a jury’s assessment of the voluntariness of defendant’s statements may, as defendant contends, involve more than an analysis of the words spoken to and by him. Here, only the tapes could establish those intangibles that might properly be considered.

Finally, we note our concern with the troubling practice of the police partnering with the media to make a television show depicting custodial interrogations. Defendant argues that by inviting Hybrid into the interrogation room, the police created an agency relationship with the film company, thereby entitling him to copies of his statements. Because we conclude that defendant established his entitlement to the videotapes under the statute, we need not decide whether the indicia of state involvement in this case rise to the level at which private conduct is transformed into state action (see e.g. People v Ray, 65 NY2d 282, 286 [1985]).

Nevertheless, the police may not immunize themselves from their obligation to provide defendants with copies of their own taped statements simply by letting a news organization—invited into the room by the police—operate the cameras. Defendant correctly contends that the police here allowed the film company to perform what was in fact a police function—the memorialization of an otherwise private interrogation and admission—by videotaping it, thus possessing the only recording of the event. Had the police made (or had copies of) the videotapes, they would plainly have had to provide them to defendant. Just as plainly, the film company could not have videotaped defendant’s interrogation in the absence of an agreement with the police. Of course, much of the difficulty could have been avoided here had the police themselves taped the entire interrogation or conditioned access to the interrogation on Hybrid’s agreement to provide the police with a copy of the resulting videotapes.

In light of our determination, we do not address defendant’s further contention that the trial court erred in denying his challenge for cause to a prospective juror.

Accordingly, the order of the Appellate Division should be reversed and a new trial ordered.

R.S. Smith, J. (dissenting in part).

I agree that defendant’s conviction cannot be affirmed, because I think Supreme Court erred by not reviewing Hybrid’s tapes in camera. I do not agree, however, that on the present record defendant has made the showing required by the Shield Law that the tapes were “critical or necessary” to the maintenance of his defense.

I

A bullet from defendant’s gun killed a 15-year-old boy, Christopher Hernandez, who had the misfortune to be in the neighborhood when defendant and three other men were trying to settle a disagreement. Defendant gave written and oral statements describing the event to a police officer, and later gave an oral statement to an assistant district attorney. In accordance with common practice, the police did not tape defendant’s first oral statement, though the prosecutor did tape the second, and the tape of the second statement was turned over to defendant. This case is unusual because the first oral statement was taped, with the consent of the police, by a documentary film maker, Hybrid Films, Inc., which did not give copies of the resulting tapes to either the police or the defendant.

At trial, defendant’s principal defense was justification—he claimed he was firing his gun in self-defense, and he relied on the statements he had given to the police and prosecutor to support this assertion. However, defendant had moved before trial to suppress these statements, and he suggested in closing argument that the tactics used by the police to obtain the statements were coercive. Thus, defendant found himself arguing, in effect: “I was coerced into making the statements that prove my innocence.”

In seeking to obtain enforcement of his subpoena to Hybrid for the tapes of his first interrogation, defendant argued that the tapes could give substantial support to either or both of the contradictory themes of his defense. That is, the tapes might contain descriptions of the incident at issue that made defendant’s defense of justification significantly more convincing; or they might show that he was coerced by the police. In my opinion, defendant was correct in saying that both these possibilities existed, and the possibilities were real enough that Supreme Court should have examined the tapes in camera. It cannot be said as a matter of law, on this record, that defendant did not meet the requirements for overcoming Hybrid’s statutory privilege under New York’s Shield Law. But I find even less basis for holding, as the majority does, that the requirements of the Shield Law were met here.

The Shield Law (quoted in majority op at 345-346) provides that Hybrid may not be compelled by threat of contempt to disclose its tapes unless the tapes are (1) “highly material and relevant,” (2) “critical or necessary to the maintenance of [defendant’s] . . . defense or proof of an issue material thereto” and (3) “not obtainable from any alternative source.” I acknowledge that the first and third of these requirements are satisfied here. A defendant’s recorded statement about his alleged crime will almost always, if not always, be “highly material and relevant” at a criminal trial; and certainly no evidence of defendant’s first oral statement comparable in value to video and sound recordings is available from any source but Hybrid.

But I do not see how anyone can conclude, without examining the tapes, that they are “critical or necessary” to the maintenance of defendant’s defense or proof of an issue material to it. The tapes might well show that defendant’s interrogation by the detective was not particularly coercive (indeed, most police officers probably do not act in a coercive way when they know they are being taped), and that the version of the facts he gave to the detective was no more favorable to himself, or insignificantly so, than the version he gave to the assistant district attorney. If that is true, the second element of the statutory test is not met. I would not give the statutory words “critical or necessary” a draconian reading; I would not hold that a person seeking to compel disclosure under that statute must show that the evidence he seeks is likely to be decisive in the case. But the words must mean, at least, that the evidence is favorable to the party seeking it in some significant way. The record does not show that that was the case here.

The majority finds the “critical or necessary” branch of the statutory test to have been met based on its recital of what the defendant contended that the tapes would show. I see nothing in the statute that would justify setting aside the privilege on the basis of a party’s assertions, without verifying that those assertions are correct. And even apart from that, I find defendant’s optimistic description of what might be in the tapes, as summarized by the majority (majority op at 348-349), to be rather unimpressive. Assuming the tapes to be exactly as defendant describes them, they fall well short of proving either that his confession was involuntary or that his killing of Christopher Hernandez was justified. Thus, while I believe Supreme Court should have examined the tapes before making its decision, I am skeptical it would have found sufficient reason to order the tapes’ disclosure.

II

Having found the Shield Law test to be met, the majority rightly does not decide whether “the Shield Law is unconstitutional as applied to criminal cases” (majority op at 346). I do not attempt to answer that question either, but my view of what the question is differs somewhat from the majority’s.

To me, the constitutional question does not require us to balance the important “competing interests” of free press and fair trial (see majority op at 346-347), but only to decide whether the balance the Legislature struck in the Shield Law is within the limits set by the State and Federal Constitutions. Accordingly, I think the most relevant cases are not those cited by the majority in its summary of the issue (majority op at 347 n 3), but cases addressing the issue of when a state-law rule that prevents the presentation of evidence must give way to a criminal defendant’s constitutional right to a fair trial (see Chambers v Mississippi, 410 US 284 [1973]; Crane v Kentucky, 476 US 683 [1986]; People v Robinson, 89 NY2d 648 [1997]). I would hold the Shield Law valid if it complies with the limitations reflected in those cases, and invalid if it does not.

I would reverse defendant’s conviction solely on the ground that Supreme Court erred by not reviewing the tapes in camera, and would remit the case so that the tapes can be reviewed.

Judges G.B. Smith, Ciparick, Rosenblatt, Graffeo and Read concur with Chief Judge Kaye; Judge R.S. Smith dissents in part and votes to reverse and remit to Supreme Court for further proceedings in a separate opinion.

Order reversed, etc.

      . The following day, while defendant was still in custody at the precinct, Hybrid obtained his signature on a release permitting exhibition of the interrogation tapes on television (but forbidding his face from being shown). Defendant subsequently disaffirmed the release on the ground of infancy (see General Obligations Law § 3-101 [1]). As it turned out, the episode involving defendant was not used in the series.

      . Defendant’s videotaped statement to the prosecutor was provided to him by the People in the course of pretrial discovery.

      . The First, Fourth and Fifth Circuits have ruled that nonconfidential material must be turned over in criminal cases, except in the case of bad faith or harassment of a news organization (see e.g. United States v LaRouche Campaign, 841 F2d 1176 [1st Cir 1988]; In re Shain, 978 F2d 850, 852 [4th Cir 1992] [“absent evidence of governmental harassment or bad faith, the reporters have no privilege different from that of any other citizen not to testify about knowledge relevant to a criminal prosecution”]; United States v Smith, 135 F3d 963, 971 [5th Cir 1998] [“the media must bear the same burden of producing evidence of criminal wrongdoing as any other citizen”]). The Sixth, Seventh and Ninth Circuits have gone further, refusing to recognize the existence of any journalist’s privilege in the context of a criminal case (see e.g. In re Grand Jury Proceedings [Storer Communications, Inc. v Giovan], 810 F2d 580 [6th Cir 1987]; McKevitt v Pallasch, 339 F3d 530 [7th Cir 2003]; In re Grand Jury Proceedings [Scarce v United States], 5 F3d 397 [9th Cir 1993], cert denied sub nom. Scarce v United States, 510 US 1041 [1994]). Finally, the Second Circuit has held that a reporter’s privilege in nonconfidential material will be overcome in a civil case by a showing that the material is “of likely relevance to a significant issue in the case, and [is] not reasonably obtainable from other available sources”—a lower standard than that required by Civil Rights Law § 79-h (c) (Gonzales v National Broadcasting Co., Inc., 194 F3d 29, 36 [2d Cir 1999]). Without specifying a standard, the Gonzales court noted that even less of a showing would be required in a criminal case (see 194 F3d at 34 n 3).

      . We note that while a court is not always required to review subpoenaed material in camera in order to determine in the first instance whether the requisite showing has been made, in this case it would have been the better practice to do so. A court in a criminal case should also be mindful that “omissions, contrasts and even contradictions, vital perhaps, for discrediting a witness, are certainly not as apparent to the impartial presiding judge as to single-minded counsel for the accused” (People v Rosario, 9 NY2d 286, 290 [1961]).

      . We note that an increasing number of jurisdictions are now mandating that police questioning of arrestees be recorded, and that a resolution calling for all law enforcement agencies to videotape in their entirety the custodial interrogations of crime suspects has recently been adopted by the New York State and American Bar Associations. Currently, Alaska, Illinois, Maine, Minnesota, Texas and the District of Columbia have, by statute or case law, mandated the electronic recording of certain custodial interrogations (see Stephan v State, 711 P2d 1156, 1158 [Alaska 1985] [state constitutional due process]; 725 111 Comp Stat 5/103-2.1 [homicide cases]; Me Rev Stat Ann, tit 25, § 2803-B [1] [K] [serious crimes]; State v Scales, 518 NW2d 587, 592 [Minn 1994] [exercise of supervisory powers]; Tex Grim Proc Code Ann art 38.22 [3] [oral and sign language statements]; DC Code Ann § 5-133.20 [crimes of violence]. See also Commonwealth v DiGiambattista, 442 Mass 423, 447-448, 813 NE2d 516, 533-534 [2004] [holding that a defendant whose interrogation has not been completely recorded is entitled, on request, to an instruction that “the State’s highest court has expressed a preference that such interrogations be recorded whenever practicable” and that, because of the absence of recording, evidence of the defendant’s alleged statement should be weighed “with great caution and care”]; State v Barnett, 147 NH 334, 338, 789 A2d 629, 632 [2001] [tape-recorded interrogation inadmissible unless the defendant’s statement is recorded in its entirety]; State v Cook, 179 NJ 533, 562, 847 A2d 530, 547 [2004] [New Jersey Supreme Court exercises its supervisory authority to establish a committee to study and make recommendations on the use of electronic recordation of custodial interrogations]). As of summer 2004, law enforcement agencies in at least 238 cities and counties, including Los Angeles, San Francisco, San Diego and Houston, regularly record custodial interviews of suspects in felony or other serious investigations (see Thomas P. Sullivan, Police Experiences with Recording Custodial Interrogations, Northwestern University School of Law, Center on Wrongful Convictions, at 4, A1-A10 [2004] published on the Internet at <http:// www.law.northwestern.edu/depts/clinic/wrongful/documents/SullivanReport.pdf>, cached at <http://www.courts.state.ny.us/reporter/webdocs/ SullivanReport.pdf>).


source: Caselaw Access Project

author: G.B. Smith, J.

license: Public Domain

text:
    [828 NE2d 599, 795 NYS2d 497]
    The People of the State of New York, Respondent, v Derek Andrades, Appellant.
    Argued February 8, 2005;
    decided March 29, 2005

      POINTS OF COUNSEL

      Center for Appellate Litigation, New York City (Jan Hoth and Robert S. Dean of counsel), for appellant.
    I. Appellant was denied his due process right to a fair hearing, the effective assistance of counsel, and his right to be present, where counsel advised the hearing court (and factfinder), before appellant testified and in his absence, that appellant might commit perjury at the Huntley hearing. (People v DePallo, 96 NY2d 437; Nix v Whiteside, 475 US 157; People v Salquerro, 107 Misc 2d 155, 92 AD2d 1091; Lowery v Cardwell, 575 F2d 727; People v Moreno, 70 NY2d 403; People v Arthur, 22 NY2d 325; People v Williams, 85 NY2d 945; People v Roman, 88 NY2d 18; People v Spotford, 85 NY2d 593; Snyder v Massachusetts, 291 US 97.) II. Appellant’s waiver of counsel was invalid where the court failed to conduct an additional inquiry after it learned that appellant’s desire to proceed pro se was influenced by his mistaken belief that he would be permitted to try the case in a manner that counsel could not. (Faretta v California, 422 US 806; People v Arroyo, 98 NY2d 101; People v Rosen, 81 NY2d 237; People v Reason, 37 NY2d 351; Adams v United States ex rel. McCann, 317 US 269; People v McIntyre, 36 NY2d 10; Johnson v Zerbst, 304 US 458; Hacker v Herbert, 825 F Supp 1143; People v Smith, 92 NY2d 516; People v Kaltenbach, 60 NY2d 797.)

      Robert T. Johnson, District Attorney, Bronx (Nancy D. Killian and Joseph N. Ferdenzi of counsel), for respondent.
    I. Defendant’s guilt was proven beyond a reasonable doubt by overwhelming evidence. II. Trial counsel acted properly in disclosing to the court below his perceived “ethical dilemma.” (Strickland v Washington, 466 US 668; People v Baldi, 54 NY2d 137; People v Longtin, 92 NY2d 640, 526 US 1114; People v Ortiz, 76 NY2d 652; Nix v Whiteside, 475 US 157; People v Campos, 249 AD2d 237; Harris v New York, 401 US 222; People v Tyler, 245 AD2d 1100, 91 NY2d 978; People v Diaz, 199 AD2d 182, 83 NY2d 804; People v Appel, 120 AD2d 319, 69 NY2d 824.) III. The trial court properly permitted defendant to proceed pro se, with counsel acting as legal advisor, after engaging defendant in a lengthy inquiry. (People v Brown, 45 NY2d 852; People v Brown, 258 AD2d 354, 93 NY2d 1001; People v Arroyo, 98 NY2d 101; People v McIntyre, 36 NY2d 10; Faretta v California, 422 US 806; People v Slaughter, 78 NY2d 485; People v Vivenzio, 62 NY2d 775; People v Smith, 92 NY2d 516; People v Henriquez, 3 NY3d 210.)
   OPINION OF THE COURT

G.B. Smith, J.

In People v DePallo (96 NY2d 437 [2001]), we held that defense counsel properly balanced the duties he owed to his client and the duties he owed to the court and to the criminal justice system when, during a jury trial, counsel notified the court that his client had offered perjured testimony and refused to use that testimony in his closing argument to the jury. We left open the question of the propriety of a similar disclosure under circumstances where the court sits as the factfinder. We address that issue in the case now before us and hold that counsel’s disclosure to the court, which was open to the inference that his client intended to perjure himself upon taking the stand, did not deprive defendant of a fair hearing or of the effective assistance of counsel.

Defendant became enraged when he heard rumors that Magalie Nieves, a woman with whom he had had a sexual relationship, was infected with the HIV virus. Defendant, with the aid of 14-year-old Ericka Cruz, confronted Nieves and a fight ensued. Subsequently, defendant and Cruz lured Nieves to an isolated area where defendant choked her with a bandana, and he and Cruz stabbed her in the ear and in the breast, killing her. Days later, the police arrested Cruz, who offered a confession of the killing. The next day, defendant was arrested and charged, inter alia, with second degree murder and first degree manslaughter. Upon his arrest, defendant was read his Miranda rights and gave both written and videotaped statements in which he admitted to acting in concert with Cruz in killing Nieves.

Defendant moved to suppress his confessions, and the trial court ordered a Huntley hearing. Prior to the hearing, defendant’s attorney asked to be relieved as counsel stating, “There is an ethical conflict with my continuing to represent [defendant] and I can’t go any further than that.” The prosecutor opposed the application, citing the age of the case. The court asked defense counsel to state the nature of the ethical dilemma without disclosing privileged information so that the court could make an effective ruling. Counsel stated, however, that he could not elaborate. The court then presumed that counsel’s ethical dilemma concerned defendant’s right to testify. The court denied counsel’s application and told him that if the problem arose, he would have to offer more specific information to the court.

After the People presented their case at the Huntley hearing, defense counsel informed the court that defendant intended to testify. Outside defendant’s presence, counsel stated:

“As part and parcel of my request to be relieved in this matter, I think I should tell the Court and place on the record that I did tell [defendant] and advise [defendant] that he should not testify at the hearing and as a result of the problem that I’m having, the ethical problem I’m having. What I’m going to do is just basically direct his attention to date, time and location of the statement and let him run with the ball.”

The court, recognizing that defense counsel was not permitted to divulge privileged matters to the court, concluded that counsel’s conduct complied with his ethical obligations under the disciplinary rules given his anticipation that defendant “could possibly, could commit perjury on the witness stand.” The court further concluded that counsel could still afford defendant the effective assistance of counsel.

Defendant thereafter testified on his own behalf, largely in narrative form, with the court and counsel asking clarifying questions. Defendant testified that at the time he provided his statements to the police, he did not remember the events leading to Nieves’s death and specifically did not recall stabbing her. He stated that during his interrogation, the police informed him of Cruz’s version of the events, and he believed what she said because he did not think that Cruz would lie about him. Defendant stated that he initially refused to sign the written confession drafted by the police officers because its contents were not true, but that later he signed it only after one of the officers took him into a private room. Defendant further testified that when he gave his videotaped statement, he simply restated Cruz’s rendition of the killing as described to him by the officers. Thus, he claimed that this confession was not a recounting of events from his own memory. Finally, defendant stated that by the time he had provided the videotaped confession at approximately 10:00 p.m., he was hungry because he had not eaten all day, and was not permitted food until after he had given that statement.

Defense counsel offered no closing argument, choosing instead to rest on the record and the papers submitted. Following the People’s closing statement, the court denied defendant’s motion to suppress his confessions. In a subsequent written decision, the court noted that it “did not find the defendant’s testimony credible or worthy of belief.” The court held that defendant made his written and videotaped statements after voluntarily waiving his constitutional rights.

Upon a jury trial, at which defendant largely defended himself, defendant was convicted of second degree murder and sentenced to a prison term of 25 years to life. The Appellate Division affirmed the conviction, holding that counsel’s disclosure of an ethical dilemma and his decision to submit defendant’s testimony in narrative form did not deprive defendant of his right to a fair hearing or to the effective assistance of counsel. The Court further held that defendant was not denied his constitutional right to be present at the material stages of his trial insofar as his presence was not required at the colloquy between the court and the attorneys concerning defense counsel’s ethical dilemma regarding defendant’s testimony. A Judge of this Court granted defendant leave to appeal and we now affirm the conviction.

In DePallo, we recognized that a defense attorney’s duty to zealously represent a client must be circumscribed by his or her duty as an officer of the court to serve the truth-seeking function of the justice system (96 NY2d at 441). Moreover, as peijury is a criminal offense, defense counsel has a duty to refrain from participating in the client’s commission of it. Thus, we stated that while counsel must pursue all reasonable means to reach the objectives of the client, counsel must not in any way assist a client in presenting false evidence to the court (id.; Nix v White-side, 475 US 157, 166 [1986]).

Indeed, New York’s Code of Professional Responsibility specifically addresses an attorney’s ethical obligations in providing lawful representation. DR 7-102 (codified at 22 NYCRR 1200.33) expressly states that an attorney may not “Knowingly use perjured testimony or false evidence” (DR 7-102 [a] [4]); “Knowingly make a false statement of law or fact” (DR 7-102 [a] [5]); “Participate in the creation or preservation of evidence when the lawyer knows or it is obvious that the evidence is false” (DR 7-102 [a] [6]); “[c]ounsel or assist the client in conduct that the lawyer knows to be illegal or fraudulent” (DR 7-102 [a] [7]); or “Knowingly engage in other illegal conduct” (DR 7-102 [a] [8]).

In light of the ethical obligations of an attorney in this state, and in accordance with United States Supreme Court jurisprudence, an attorney faced with a client who intends to commit perjury has the initial responsibility to attempt to dissuade the client from pursuing the unlawful course of action (see Nix v Whiteside, 475 US at 169-170; People v DePallo, 96 NY2d at 441). Should the client insist on peijuring himself, counsel may seek to withdraw from the case. If counsel’s request is denied, defense counsel, bound to honor defendant’s right to testify on his own behalf, should refrain from eliciting the testimony in traditional question-and-answer form and permit defendant to present his testimony in narrative form. However, in accordance with DR 7-102 (a) (4), counsel may not use the perjured testimony in making argument to the court.

Here, defense counsel properly discharged his ethical obligations under the circumstances presented. Counsel clearly advised defendant against lying on the witness stand; indeed, counsel encouraged defendant not to take the stand at all. Yet defendant insisted on testifying at the hearing, and his attorney believed that the evidence he intended to present was false. Thus, it was entirely proper for counsel to seek to withdraw as defendant’s attorney prior to the hearing based on his perceived ethical dilemma.

While defendant does not argue the propriety of his attorney’s actions up to that point, he does take issue with his attorney’s telling the court that the ethical dilemma he faced concerned defendant’s right to testify at the hearing. Defendant argues that such a disclosure signifies defendant’s intention to commit perjury to the court which sits as the factfinder for the hearing. He contends that such a disclosure inevitably affected the court’s ability to assess his credibility in determining the outcome of the hearing. In that same vein, defendant argues that his attorney should not have told the court of his intent to question defendant in the narrative before having done so. Defendant asserts that his attorney should have said nothing, proceeded to question defendant in the narrative and if counsel’s suspicions about defendant’s testimony ripened into a reality, counsel could simply refrain from using the perjured testimony in his closing argument.

We disagree. As an initial matter, we note that at no time did counsel ever disclose to the court that defendant intended to commit peijury or otherwise disclose any client secrets. Rather the court inferred defendant’s perjurious intent based upon the nature of counsel’s application. However, counsel could have properly made such a disclosure since a client’s intent to commit a crime is not a protected confidence or secret (see Nix v Whiteside, 475 US at 174; People v DePallo, 96 NY2d at 442; Code of Professional Responsibility DR 4-101 [c] [3] [22 NYCRR 1200.19 (c) (3)]). Moreover, counsel’s ethical obligations do not change simply because a judge rather than a jury is sitting as the factfinder. Moreover, as a practical matter, defendant’s suggestion would solve nothing because counsel would likely find it difficult to allow defendant' to testify in the narrative without prior explanation. Like the direct examination of any witness, defendant’s examination must be guided by proper questioning. Had counsel attempted to offer defendant’s testimony in the narrative, it would have been subject to objection either by the prosecutor or the court. Even if counsel were permitted to present defendant’s testimony in narrative form without objection, the very fact of defendant testifying in such a manner would signify to the court that counsel believes that his client is perjuring himself.

We therefore conclude that defense counsel properly balanced his duties to his client with his duties to the court and the criminal justice system and that in doing so, defendant was not denied his right to a fair hearing. Furthermore, absent a breach of any recognized professional duty, defendant’s claim that he was denied the effective assistance of counsel must also fail (see People v DePallo, 96 NY2d at 442-443, citing Nix v Whiteside, 475 US at 175; People v Baldi, 54 NY2d 137, 151-152 [1981]).

Finally, we reject defendant’s contention that he was denied his right to be present during a material stage of the trial because he was absent during the colloquy between the court and the attorneys regarding defense counsel’s intent to present defendant’s testimony in the narrative. As we stated in DePallo (96 NY2d at 443) and in People v Keen (94 NY2d 533, 539 [2000]), a colloquy of this nature involves procedural matters at which a defendant can offer no meaningful input. Therefore, defendant had no right to be present.

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

Chief Judge Kaye and Judges Ciparick, Rosenblatt, Graffeo, Read and R.S. Smith concur.

Order affirmed.

      . The court also concluded that it was not necessary for defendant to be present during the conference because it did not constitute a critical stage of his trial.

      .  We expressly reject defendant’s claim that the trial court failed to conduct a sufficient inquiry into defendant’s understanding of the perils of self-representation. The record makes plain that the court engaged defendant in a two-hour colloquy and warned him against proceeding pro se. And given the court’s repeated warnings that defendant would be held to the same rules of evidence as would his attorney, no further explanation was needed to address counsel’s statement to the court that defendant believed that he could take certain actions that his attorney could not.

      . In support of his position, defendant relies on Lowery v Cardwell (575 F2d 727 [9th Cir 1978]). In that case, defendant testified at her bench trial and perjured herself, to the surprise of her attorney. Counsel requested a recess, at which time, he unsuccessfully attempted to withdraw from the case. Counsel then ended the defendant’s testimony and made no reference to the defendant’s perjured testimony during his closing arguments. The United States Court of Appeals for the Ninth Circuit held that counsel’s actions denied the defendant a fair trial because counsel’s actions gave the judge the impression that counsel believed that the defendant had testified falsely. The court stated that by his actions, counsel placed himself in opposition to his chent’s interests (see id. at 730). The court suggested that it would have been the better practice for the attorney to have made a record for his own protection in the event that he was ever questioned about his professional conduct (see id. at 731 n 5). We expressly reject this approach because it requires an attorney to remain silent while the client commits perjury, which is wholly incompatible with counsel’s role as an officer of the court and, more specifically, counsel’s obligation to reveal fraud perpetrated by a client upon the court (see DR 7-102 [b] [1]; see also Nix v Whiteside, 475 US at 174).


author: Graffeo, J.

text:
    [828 NE2d 593, 795 NYS2d 491]
    Moses Flores, Plaintiff, v The Lower East Side Service Center, Inc., Defendant and Third-Party Plaintiff-Appellant. Procida Realty and Construction Corp., Third-Party Defendant-Respondent.
    Argued February 16, 2005;
    decided March 29, 2005

      POINTS OF COUNSEL

      Mauro Goldberg & Lilling LLP, Great Neck (Kenneth Mauro and Jennifer B. Ettenger of counsel), and Kral, Clerkin, Redmond, Ryan, Perry & Girvan, New York City, for defendant and Third-party plaintiff-appellant.
    Workers’ Compensation Law § 11 does not require the existence of a “signed” contract for the purposes of contractual indemnification. (Crawford v Merrill Lynch, Pierce, Fenner & Smith, 35 NY2d 291; Matter of Helen Whiting, Inc. [Trojan Textile Corp.], 307 NY 360; Metropolitan Arts & Antiques Pavilion v Rogers Marvel Architects, 287 AD2d 372; Rudolph & Beer v Roberts, 260 AD2d 274; Atlas Drywall Corp. v District Council of NY. City & Vicinity of United Bhd. of Carpenters & Joiners of Am., Carpenters Local Union 531, 207 AD2d 762; Liberty Mgt. & Constr. v Fifth Ave. & Sixty-Sixth St. Corp., 208 AD2d 73; Matter of Caldwell v Alliance Consulting Group, 6 AD3d 761; Matter of Orens v Novello, 99 NY2d 180; Rosner v Metropolitan Prop. & Liab. Ins. Co., 96 NY2d 475; Brown Bros. Elec. Contrs. v Beam Constr. Corp., 41 NY2d 397.)

      Abrams, Gorelick, Friedman & Jacobson, P.C., New York City (Steven DiSiervi of counsel), for third-party defendant-respondent.
    I. The indemnity provision contained in the purported contract is unenforceable under Workers’ Compensation Law § 11, where there was no evidence that the employer had entered into a written contract prior to the accident or had expressly agreed to indemnify appellant. (Rubeis v Aqua Club, Inc., 3 NY3d 408; Burke v Fisher Sixth Ave. Co., 287 AD2d 410; Beckford v City of New York, 261 AD2d 158; Zuckerman v City of New York, 49 NY2d 557; Meis v ELO Org., 97 NY2d 714; Castro v United Container Mach. Group, 96 NY2d 398; Ferri v 63 Madison Assoc., 280 AD2d 419; Thompson v Janowitz Constr., 301 AD2d 588; Guijarro v V.R.H. Constr. Corp., 290 AD2d 485; Billy v Consolidated Mach. Tool Corp., 51 NY2d 152.) II. The intent of the Legislature in modifying Workers’ Compensation Law § 11 supports the decisions of the lower courts. (Majewski v Broadalbin-Perth Cent. School Dist., 91 NY2d 577; Patrolmen’s Benevolent Assn, v City of New York, 41 NY2d 205; Mowczan v Bacon, 92 NY2d 281; Dole v Dow Chem. Co., 30 NY2d 143; Castro v United Container Mach. Group, 96 NY2d 398; Rubeis v Aqua Club, Inc., 3 NY3d 408.) III. The contractual indemnification claim was properly dismissed as appellant did not comply with a condition precedent to litigation. (Garofalo Elec. Co. v New York Univ., 270 AD2d 76; Silva v Incorporated Vil. of Hempstead Community Dev. Agency, 292 AD2d 370.) IV Appellant failed to meet its burden of establishing its entitlement to summary judgment on the contractual indemnification claim as it offered no evidence that Procida Realty and Construction Corp. was negligent. (Zuckerman v City of New York, 49 NY2d 557.)
   OPINION OF THE COURT

Graffeo, J.

Workers’ Compensation Law § 11 permits an owner to bring a third-party claim against an injured worker’s employer in only two circumstances: where the injured worker has suffered a “grave injury” or the employer has entered into a written contract to indemnify the owner. The issue in this case is whether the “written contract” provision in section 11 requires a signed agreement.

Defendant and third-party plaintiff Lower East Side Service Center (LES) is the owner of a multi-story building in Manhattan that was undergoing rehabilitation. Initially, LES hired third-party defendant Procida Realty and Construction Corp. to act as its on-site representative, having retained another firm to function as general contractor on the project. Following a dispute between LES and the other firm, Procida agreed to assume the role of general contractor.

In March 2000, LES sent Procida a written contract including a provision for Procida to indemnify LES for injuries “arising out of or resulting from performance of the Work” on the $3 million project. In accordance with the terms of the agreement, Procida purchased liability insurance and obtained payment and performance bonds. In a June 23, 2000 memorandum entitled “Attachment 4-Scope Clarifications” and forwarded to LES, a Procida representative acknowledged the existence of an agreement, clarifying that under “this contract” Procida assumed no responsibility for work performed by the previous general contractor. For reasons undisclosed in the record, Procida did not sign the March 2000 contract or the June 2000 addendum, but it performed the work specified in the contract and was paid in conformity with the documents.

In September 2000, plaintiff Moses Flores, a laborer employed by Procida, sustained an eye injury while performing demolition work on the project. In addition to obtaining workers’ compensation benefits, Flores commenced this personal injury action against LES as owner of the building. LES filed a third-party action against Procida asserting, in addition to common-law claims, that Procida was obligated to indemnify LES for Flores’ injuries pursuant to the indemnification clause in the March 2000 contract. In its answer to the third-party complaint, Procida “admit[ted] the existence of an agreement between the parties,” reserving the right to refer to the provisions of the “written agreement, if any.”

Following the completion of discovery and the filing of a note of issue, LES moved for summary judgment on its third-party complaint and Procida cross-moved for summary judgment dismissing LES’s claims. Although it acknowledged the existence of a contract in its answer, Procida asserted that there was no binding indemnification agreement with LES. Procida relied on the fact that the March 2000 contract was never signed, arguing that LES was precluded from seeking contractual indemnification because Workers’ Compensation Law § 11 authorizes such a claim only when there is an executed document. LES countered that, notwithstanding the failure to sign the agreement, Procida’s course of conduct demonstrated that it had assented to the terms of the contract months before Flores was injured. Noting that section 11 does not expressly state that an indemnification agreement must be signed, LES contended that the statute authorized enforcement of any “written contract” that was entered into prior to the date of injury.

Supreme Court denied LES’s motion and granted Procida’s cross motion to dismiss the third-party complaint. After disposing of the common-law claims, Supreme Court reasoned that the contractual indemnification clause in the written agreement was unenforceable under Workers’ Compensation Law § 11 because Procida did not sign the document. On appeal, the Appellate Division affirmed, concluding that a contract that was never executed was not “entered into” within the meaning of the statute. This Court granted LES leave to appeal and we now reverse, reinstate the contractual indemnification claim and grant summary judgment to LES.

I.

Workers’ Compensation Law § 11, as amended by the Omnibus Workers’ Compensation Reform Act of 1996 (L 1996, ch 635, § 2), prohibits most third-party claims for contribution or indemnification against an employer for injuries sustained by an employee acting within the scope of employment. But the statute sets forth two exceptions: the employer may be impleaded when the employee has sustained a “grave injury” or when there is a “written contract entered into prior to the accident or occurrence by which the employer had expressly agreed to contribution to or indemnification of the claimant” (Workers’ Compensation Law § 11).

In our prior cases construing section 11, this Court has “attempt[ed] to effectuate the intent of the Legislature” (Majewski v Broadalbin-Perth Cent. School Dist, 91 NY2d 577, 583 [1998] [citations omitted]). “As the clearest indicator of legislative intent is the statutory text, the starting point in any case of interpretation must always be the language itself, giving effect to the plain meaning thereof” (id.). In this regard, we have declined to second-guess the policy choices made by the Legislature, adhering to the literal terms of the statute. Thus, in Castro v United Container Mach. Group (96 NY2d 398 [2001]) and Meis v ELO Org. (97 NY2d 714 [2002]), this Court strictly interpreted the “grave injury” designations specified by the Legislature.

We have had several opportunities to interpret the grave injury exception, but this is the first case requiring us to address the contractual indemnification exception to the prohibition against third-party claims. As previously observed, although the Legislature clearly intended to restrict claims against employers when it adopted the “grave injury” standard, it chose not to abrogate “the power of a third party to recover under express contractual obligations between the employer and the third party” (Majewski, 91 NY2d at 582). Instead, the Legislature preserved the right of parties to enter into binding contractual indemnification agreements. Procida maintains that a contract is only “entered into” within the meaning of section 11 when it is actually signed. In the absence of statutory language indicating that the written indemnification agreement must be executed, LES relies on the common-law rule that a contract need not be signed to be enforceable. Because the Legislature did not express a clear intent to deviate from the common law, we agree with LES.

We have long held that a contract may be valid even if it is not signed by the party to be charged, provided its subject matter does not implicate a statute—such as the statute of frauds (General Obligations Law § 5-701)—that imposes such a requirement. In Brown Bros. Elec. Contrs. v Beam Constr. Corp. (41 NY2d 397 [1977]), a landowner entered into a written agreement with a general contractor for the construction of a shopping plaza. The general contractor in turn contracted with Brown, a subcontractor, for electrical work. When the general contractor failed to pay Brown, the owner requested that Brown complete the work, which Brown did. When Brown submitted its bill for services to the owner, the owner refused to pay on the basis that it had never executed a written contract with Brown. After trial, the lower courts found that there was an enforceable agreement, and this Court agreed that “the course of conduct between [the owner] and Brown, including their writings . . . was sufficient to spell out a binding contract,” notwithstanding the failure of the parties to sign an integrated agreement {Brown, 41 NY2d at 399). We concluded that the absence of an executed document did not end the inquiry, stating:

“In determining whether the parties entered into a contractual agreement and what were its terms, it is necessary to look ... to the objective manifestations of the intent of the parties as gathered by their expressed words and deeds . . .
“And, while it is the responsibility of the court to interpret written instruments . . . , where a finding of whether an intent to contract is dependent as well on other evidence from which differing inferenees may be drawn, a question of fact arises” (Brown, 41 NY2d at 399-400 [citations and internal quotation marks omitted]).

Thus, under the analysis in Brown, an unsigned contract may be enforceable, provided there is objective evidence establishing that the parties intended to be bound (see also Matter of Municipal Consultants & Publs, v Town of Ramapo, 47 NY2d 144 [1979] [publishing contract was enforceable even though it was never signed by a representative of the town]).

When it enacted Workers’ Compensation Law § 11, the Legislature clearly intended to limit the number of indemnification claims against employers by requiring that indemnification agreements be memorialized in a “written contract.” But nothing in the language of the statute or its legislative history provides a basis for us to conclude that, in addition to requiring a written indemnification clause, the Legislature intended to deviate from the common-law rule that written documents can be enforced even if they are not signed. Had the Legislature intended to alter this rule in the context of indemnification claims, it could easily have done so by including the word “signed” or “subscribed” prior to the phrase “written contract” in section 11. Given the many statutes that include language mandating that one or both parties to an agreement sign the document, it is evident that the Legislature knows how to impose such a limitation when it intends to do so. In some instances, the Legislature has gone beyond requiring that agreements be signed by directing that they be executed with a particular level of formality, such as the requirement that separation agreements that serve as the basis of a divorce be memorialized in “a written agreement . . . subscribed by the parties thereto and acknowledged or proved in the form required to entitle a deed to be recorded” (Domestic Relations Law § 170 [6]). No similar language appears in section 11.

Under these circumstances, we cannot presume that the Legislature meant to impose a restriction it failed to include in the statute. We therefore hold that the common-law rule—which authorizes review of the course of conduct between the parties to determine whether there was a meeting of minds sufficient to give rise to an enforceable contract—governs the validity of a written indemnification agreement under Workers’ Compensation Law § 11.

This interpretation of section 11 is consistent with our decisions analyzing comparable language in CPLR 7501, a statute that confers jurisdiction on courts to enforce arbitration awards only if the parties have a “written agreement” to arbitrate. In the arbitration arena, we have determined that the statutory requirement is met even when the parties never signed a contract expressly agreeing to arbitrate, as long as it is evident from the totality of circumstances that the parties intended to be bound by documents containing arbitration obligations (see Matter of Helen Whiting, Inc. [Trojan Textile Corp.], 307 NY 360 [1954] [interpreting predecessor to CPLR 7501, which required that a contract to arbitrate future disputes must be “in writing”]; see also Crawford v Merrill Lynch, Pierce, Fenner & Smith, 35 NY2d 291 [1974] [although there was no integrated contract containing arbitration agreement, documentary proof established that each party was bound to arbitrate dispute]). Of course, arbitration implicates different public policy concerns than third-party claims against employers—public policy favors arbitration while the Legislature sought to reduce the liability of employers under section 11. But we are unpersuaded that this difference provides a reasoned basis for this Court to interpret the term “written contract” to impose a signature requirement when the term “written agreement” does not. In this case, like our prior cases interpreting section 11, our role is to apply the statute as written—not to embellish or expand upon the language selected by the Legislature.

II.

As the fact-dependent nature of the Brown rule suggests, in many instances the issue of whether or when an indemnification agreement came into being in the absence of a signed document will present a question of fact to be resolved by the trier of fact. Based on the record presented in this case, however, LES is entitled to summary judgment on the contractual indemnification claim because Procida failed to come forward with evidence to present a triable dispute concerning the existence of an enforceable written contract.

In its answer, Procida conceded that it had entered into an agreement with LES. When it cross-moved for summary judgment, Procida argued only that the written contract it received from LES was not enforceable because the contract had not been signed. Notably absent from the affidavit of Procida’s corporate secretary was any assertion that there had not been a meeting of the minds between LES and Procida concerning the terms of the agreement, nor did Procida claim that it had declined to sign the contract because the parties were engaged in ongoing negotiations.

To the contrary, Procida admitted that it had become the general contractor on the project and the record shows that it acted in conformity with contractual requirements. In June 2000, Procida forwarded the “Attachment 4” memorandum clarifying certain terms of the parties’ agreement. During the same time frame, Procida obtained a commercial general liability insurance policy naming LES as an additional insured and purchased a performance bond and labor and material bond in the precise amount specified in paragraphs 4.1 (Standard Form of Agreement Between Owner and Contractor) and 11.4 (General Conditions of the Contract for Construction) of the March 2000 document. The bonds, secured more than two months before the Flores accident, reference a written agreement between Procida and the owner of the construction project (LES), providing a contract date of March 20, 2000—the same date that appears on the front page of the contract containing the indemnification clause. Finally, Procida performed the required work as specified in the written document and accepted payment according to its terms. Under these circumstances, Procida failed to raise a question of fact on the issue of whether it had “entered into” a “written [indemnification] contract. . . prior to the accident” (Workers’ Compensation Law § 11), which did not occur until September 2000. LES was therefore entitled to summary judgment on the contractual indemnification claim.

As an alternative ground for affirmance, Procida asks this Court to dismiss the indemnification claim due to LES’s alleged failure to comply with an arbitration clause in the contract. This we decline to do. Assuming the provision applied to this type of dispute, Procida did not timely assert an arbitration claim either by raising it as a defense in its answer or by moving to compel arbitration (see CPLR 7503), electing instead to fully participate in this litigation for more than 16 months through discovery and the filing of a note of issue. “These acts were clearly inconsistent with [its] later claim that the parties were obligated to settle their differences by arbitration” (Matter of Zimmerman [Cohen], 236 NY 15, 19 [1923]; see Sherrill v Grayco Bldrs., 64 NY2d 261, 272 [1985]; De Sapio v Kohlmeyer, 35 NY2d 402, 406 [1974]).

Accordingly, the order of the Appellate Division should be reversed, with costs, the third-party defendant’s cross motion for summary judgment should be denied, the third-party plaintiff s motion for summary judgment on its cause of action for contractual indemnification should be granted and the case remitted to Supreme Court for further proceedings in accordance with this opinion.

Chief Judge Kaye and Judges G.B. Smith, Ciparick, Rosenblatt, Read and R.S. Smith concur.

Order reversed, etc.

      . General Obligations Law § 5-701 (a), the statute of frauds, specifies that certain types of agreements—including those conveying interests in real property—are void “unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith.” As another example, General Business Law § 454 (2), governing the sale of headstones and other monuments, similarly requires that each sale “be evidenced by a written contract which shall be signed by all the parties to the contract.”

      . The copies of the performance bond and the material payment bond that appear in the record also do not bear any signatures on behalf of Procida.


author: Read, J.

text:
    [828 NE2d 604, 795 NYS2d 502]
    JMD Holding Corp., Respondent, v Congress Financial Corporation, Appellant, et al., Defendant.
    Argued February 15, 2005;
    decided March 31, 2005

      POINTS OF COUNSEL

      Otterbourg, Steindler, Houston & Rosen, P.C., New York City (Richard G. Haddad, Daniel Wallen and Stuart J. Wells of counsel), for appellant.
    I. Per se rules are disfavored and summary judgment was improperly granted. (People v Selikoff, 35 NY2d 227; Teachers Ins. & Annuity Assn, of Am. v Butler, 626 F Supp 1229; Rodolitz v Neptune Paper Prods., 22 NY2d 383; Millerton Agway Coop, v Briarcliff Farms, 17 NY2d 57; Sillman v Twentieth Century-Fox Film Corp., 3 NY2d 395; F Garofalo Elec. Co. v New York Univ., 300 AD2d 186; Morris v Lenox Hill Hosp., 232 AD2d 184, 90 NY2d 953; Friends of Animals v Associated Fur Mfrs., 46 NY2d 1065.) II. The early termination fee constituted an enforceable liquidated damages provision because the early termination of the loan deprived Congress Financial Corporation of the benefit of its bargain and was proportional. (Simon v Electrospace Corp., 28 NY2d 136; Brushton-Moira Cent. School Dist. v Thomas Assoc., 91 NY2d 256; Kenford Co. v

      County of Erie, 73 NY2d 312; Chapman v Fargo, 223 NY 32; Clement v Cash, 21 NY 253; Truck Rent-A-Ctr. v Puritan Farms 2nd, 41 NY2d 420; P.J. Carlin Constr. Co. v City of New York, 59 AD2d 847; Maas v Cornell Univ., 94 NY2d 87; Dubiel v Parkchester Mgt. Corp., 284 AD2d 223; In re United Merchants & Mfrs., Inc. v Equitable Life Assur. Socy., 674 F2d 134.) III. The lower courts erred by refusing to enforce the provisions of the amended loan agreement that gave Congress Financial Corporation the right to hold and apply funds for contingent obligations, including Congress’s attorneys’ fees in this action. (Rodolitz v Neptune Paper Prods., 22 NY2d 383.)

      Loeb & Loeb LLP New York City (David B. Eizenman, Paula K. Colbath and Ronald L. Israel of counsel), for respondent.
    I. Section 12.1 (c) of the loan agreement is an unenforceable penalty. (Truck Rent-A-Ctr. v Puritan Farms 2nd, 41 NY2d 420; Seidlitz v Auerbach, 230 NY 167; LeRoy v Sayers, 217 AD2d 63; Vernitron Corp. v CF 48 Assoc., 104 AD2d 409; Bignall v Gould, 119 US 495; Whiteside v Rocky Mtn. Fuel Co., 101 F2d 765; American Multi-Cinema, Inc. v Southroads, L.L.C., 119 F Supp 2d 1190; Gilad Realty Corp. v Ripley Pitkin Ave., 48 AD2d 683; Chrysler Credit Corp. v Dioguardi Jeep Eagle, 192 AD2d 1066; Gillman v Chase Manhattan Bank, 73 NY2d 1.) II. The July letter agreement is an unenforceable agreement for a penalty. (Motichka v Cody, 5 AD3d 185; Quaker Oats Co. v Reilly, 274 AD2d 565; Weiss v Weiss, 206 AD2d 741; Truck Rent-A-Ctr. v Puritan Farms 2nd, 41 NY2d 420; Seidlitz v Auerbach, 230 NY 167.) III. Congress Financial Corporation’s remaining arguments are wrong and irrelevant. (Truck Rent-A-Ctr. v Puritan Farms 2nd, 41 NY2d 420; Dalston Constr. Corp. v Wallace, 26 Misc 2d 698; Public Serv. Mut. Ins. Co. v Goldfarb, 53 NY2d 392; Jarro Bldg. Indus. Corp. v Schwartz, 54 Misc 2d 13; LeRoy v Sayers, 217 AD2d 63; In re Trans World Airlines, Inc., 145 F3d 124; Vernitron Corp. v CF 48 Assoc., 104 AD2d 409; City of New York v Brooklyn & Manhattan Ferry Co., 238 NY 52; Pyramid Ctrs. & Co. v Kinney Shoe Corp., 244 AD2d 625.) IV JMD Holding Corp. was entitled to the money that Congress Financial Corporation withheld after the debt was paid in full. (Hooper Assoc, v AGS Computers, 74 NY2d 487; Bonnie & Co. Fashions, Inc. v Bankers Trust Co., 955 F Supp 203.)

      Balber Pickard Battistoni Maldonado & Van Der Tuin, PC, New York City (Thomas P. Battistoni of counsel), and Goldberg Kohn Bell Black Rosenbloom & Moritz, Ltd., Chicago, Illinois (Richard M. Kohn and Kenneth Ulrich of counsel), for Commercial Finance Association, amicus curiae.
    Early termination fees have been upheld as reasonable liquidated damages provisions. (Walter E. Heller & Co., Inc. v American Flyers Airline Corp., 459 F2d 896; In re United Merchants & Mfrs., Inc. v Equitable Life Assur. Socy., 674 F2d 134; Boston Rd. Shopping Ctr. v Teachers Ins. & Annuity Assn. of Am., 13 AD2d 106.)
   OPINION OF THE COURT

Read, J.

In this action, JMD Holding Corp. seeks to recover $600,000 charged to its loan account by Congress Financial Corporation for early termination of the parties’ $40 million commercial revolving loan agreement. After JMD paid off its outstanding loans, Congress also retained leftover funds in JMD’s account as a cash collateral reserve to cover losses, including attorneys’ fees, allegedly related to JMD’s contingent obligations under the loan agreement. JMD also seeks to recover these funds. For the reasons discussed below, we conclude that JMD has not satisfied its prima facie burden to show that the $600,000 early termination fee is an unenforceable penalty. We also conclude that Congress was not entitled to keep the cash collateral reserve.

I.

On August 22, 1997, JMD’s predecessor entered into a Loan and Security Agreement with Congress. Under the agreement, Congress agreed to make loans “from time to time in amounts requested by [JMD’s predecessor]” in accordance with an asset-based lending formula and up to a maximum credit of $5 million. On January 20, 1998, JMD and Congress executed an Amended, Restated and Consolidated Loan, and Security Agreement (Agreement) to increase JMD’s maximum credit to $40 million. JMD committed to borrow from Congress to finance its working capital needs through the end of the Agreement’s term on August 21, 2000, subject to renewal from year to year thereafter on at least 60 days’ written notice.

To secure payment and performance of its obligations under the Agreement, JMD granted Congress “a continuing security interest in, a lien upon, and a right of set off against” its assets, most pertinently including accounts receivable and inventory and their proceeds. The Agreement required JMD and its “account debtors” to direct all payments on accounts or payments constituting proceeds of other collateral into blocked bank accounts or “lockboxes.” JMD agreed that all payments made into the lockbox were Congress’s property. These funds were transferred or “swept” on a daily basis from the lockbox into Congress’s bank account, and were applied by Congress to pay down the outstanding obligations in JMD’s loan account, thus creating availability for new revolving advances.

Interest on the outstanding principal amount of noncontingent obligations was set at 1.5% above the prime rate per annum. At Congress’s option and without notice, interest was set at 3.5% above the prime rate per annum on noncontingent obligations for the period from and after the Agreement’s termination or nonrenewal or JMD’s default until payment; and on any outstanding loans in excess of amounts JMD was eligible to borrow (e.g., advances in excess of amounts available to JMD under the Agreement’s asset-based lending formula).

The Agreement afforded Congress seven nonexclusive remedies for JMD’s breach, including the right to terminate. Further, if the Agreement was terminated prior to the end of any term, JMD was required to pay Congress an early termination fee of between 1% and 2% of the $40 million maximum credit. The percentage decreased as the end of the Agreement’s term drew closer; that is, the closer the termination to the end of a term, the lower the fee.

The Agreement recited that the early termination fee was required “in view of the impracticality and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of [Congress’s] lost profits as a result [of early termination].” Further, the fee was “presumed to be the amount of damages sustained by [Congress] as a result of such early termination,” and JMD “agree[d] that it [the early termination fee] [was] reasonable under the circumstances currently existing.”

On June 22, 1999, Congress sent JMD notice of default in light of JMD’s failure to comply with multiple provisions of the Agreement, including those governing collateral reporting and covenants as to accounts receivable and inventory; requirements to maintain minimum working capital and adjusted net worth; and delivery of required documentation, including audited financial statements and reports. JMD does not contest that it was in default. Congress accelerated the payment of all JMD’s obligations and demanded their immediate repayment, one of its remedies under the Agreement.

As of the date of the notice of default, the early termination fee was $600,000 (1.5% of $40 million). On July 1, 1999, the parties executed a letter agreement, by which Congress agreed to forgive or discount the early termination fee if JMD paid off its indebtedness before September 3, 1999. As it turned out, JMD did not pay all its outstanding obligations to Congress before the end of this grace period.

On November 10, 1999, Congress charged JMD’s loan account in the amount of $600,000 for the early termination fee. JMD paid Congress all loan balances, both principal and interest, no later than November 23, 1999. Nonetheless, Congress continued to retain the remaining funds in JMD’s loan account as a cash collateral reserve to cover losses, including attorneys’ fees, purportedly related to JMD’s contingent obligations.

On December 28, 2000, JMD commenced this action, which included causes of action asserting that Congress had converted approximately $800,000 of JMD’s property and for money had and received in the same amount. JMD moved for summary judgment on these claims, arguing that the early termination fee was an unenforceable penalty, not legitimate liquidated damages, and that Congress had no right to retain cash collateral. In support of its motion, JMD offered the affidavit of its president, who attested in conclusory fashion that, based on the memorandum of law prepared by JMD’s attorney, the early termination fee was an “unenforceable penalty.” He also alleged that Congress had offered “no legitimate basis whatsoever for its refusal to turn over” JMD’s funds.

Relying on Truck Rent-A-Ctr. v Puritan Farms 2nd (41 NY2d 420 [1977]), Supreme Court concluded in July 2002 that “the liquidated damages clauses executed by the parties [were] so disproportionate from any potential damages suffered by Congress as to constitute an unenforceable penalty”; and that “Congress ha[d] not demonstrated that any issues of fact exist [ed] as to whether it [was] entitled to maintain a cash reserve” and “ha[d] not identified any additional obligations on JMD’s part.” Supreme Court referred the issue of the amount of money to be returned by Congress to JMD to a special referee, who in May 2003 awarded JMD $820,256.41 plus interest at the statutory rate of 9% per annum from December 1, 1999 through entry of judgment. In September 2003, Supreme Court entered an order and judgment accepting the special referee’s determination and awarding JMD $1,098,090.41.

In October 2003, the Appellate Division affirmed Supreme Court’s award of partial summary judgment to JMD (309 AD2d 645 [1st Dept 2003]). In March 2004, the Appellate Division affirmed Supreme Court’s order accepting the special referee’s determination (5 AD3d 334 [1st Dept 2004]). We subsequently granted Congress leave to appeal.

II.

This appeal principally involves a liquidated damages clause—the Agreement’s provision for an early termination fee—considered by the courts below to be a penalty and therefore unenforceable. Whether the early termination fee represents an enforceable liquidation of damages or an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances (Mosler Safe Co. v Maiden Lane Safe Deposit Co., 199 NY 479, 485 [1910]; Leasing Serv. Corp. v Justice, 673 F2d 70, 74 [2d Cir 1982]). The burden is on the party seeking to avoid liquidated damages—here, JMD—to show that the stated liquidated damages are, in fact, a penalty (P.J. Carlin Constr. Co. v City of New York, 59 AD2d 847 [1st Dept 1977]; Wechsler v Hunt Health Sys., 330 F Supp 2d 383, 413 [SD NY 2004]). Further, “[w]here the court has sustained a liquidated damages clause the measure of damages for a breach will be the sum in the clause, no more, no less. If the clause is rejected as being a penalty, the recoveiy is limited to actual damages proven” (Brecher v Laikin, 430 F Supp 103, 106 [SD NY 1977] [citations omitted]; see also 3 Farnsworth, Contracts § 12.18, at 304 [3d ed] [where a liquidated damages provision is an unenforceable penalty, “the rest of the agreement stands, and the injured party is remitted to the conventional damage remedy for breach of that agreement, just as if the provision had not been included”]).

In Truck Rent-A-Center, we characterized liquidated damages as “[i]n effect, ... an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement” (41 NY2d at 424). We called the distinction between liquidated damages and a penalty “well established”:

“A contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. If, however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced” (id. at 425 [citations omitted]).

Thus, JMD must demonstrate either that damages flowing from a prospective early termination were readily ascertainable at the time Congress and JMD entered into their revolving loan agreement, or that the early termination fee is conspicuously disproportionate to these foreseeable losses. Relatedly, we have cautioned generally against interfering with parties’ agreements (see Fifty States Mgt. Corp. v Pioneer Auto Parks, 46 NY2d 573, 577 [1979] [“Absent some element of fraud, exploitive overreaching or unconscionable conduct ... to exploit a technical breach, there is no warrant, either in law or equity, for a court to refuse enforcement of the agreement of the parties”]; cf. 3 Farnsworth, Contracts § 12.18, at 303-304 [3d ed] [“(I)t has become increasingly difficult to justify the peculiar historical distinction between liquidated damages and penalties. Today the trend favors freedom of contract through the enforcement of stipulated damage provisions as long as they do not clearly disregard the principle of compensation”]; see also XCO Inti. Inc. v Pacific Scientific Co., 369 F3d 998, 1002-1003 [7th Cir 2004] [“The rule (against penalty clauses) hangs on, but is chastened by an emerging presumption against interpreting liquidated damages clauses as penalty clauses”]).

Here, Congress committed to advance such sums as JMD might periodically request throughout the Agreement’s entire term, based on an asset-based lending formula and up to a maximum credit of $40 million. The outstanding loan balance would fluctuate based on JMD’s needs for working capital and the value of its collateral (e.g., accounts receivable), which secured the sums advanced and was applied to repay Congress so as to create availability for additional loans.

Under this asset-based financing arrangement, JMD only needed to borrow when and to the extent required for adequate cash flow to operate its business. As a result, JMD did not have to take out fixed loans in amounts sufficient to safeguard itself against short-term cash shortfalls or unanticipated contingencies, and thereby avoided unnecessary interest costs. In return for its commitment to make up to $40 million available to JMD for the Agreement’s full term, Congress bargained for interest income over this entire time period.

JMD reasons that because it had the right but not the obligation to borrow—a signature feature of any commercial revolving loan agreement—Congress has no entitlement to liquidated damages in lieu of interest lost in the 13 months between the Agreement’s early termination and the end of its contractual term. This is so, JMD argues, because Congress was never assured that JMD would ask it to advance any funds whatsoever, much less any particular amounts at any particular time or up to the $40 million maximum credit over this 13-month time period. Under this construct, Congress would necessarily never suffer damages on account of early termination. Having thus hypothetically reduced Congress’s prospective damages to zero, JMD argues that the early termination fee obviously does not bear a reasonable proportion to the readily estimated probable loss from the Agreement’s breach and its consequent early termination.

Of course, this argument begs the question of why JMD would ever have entered into a contract requiring it to pledge virtually all its assets in order to obtain loans that it did not intend to request. JMD never offers any reason, much less proof, to suppose that at the outset of the parties’ agreement it would have been reasonable to predict that JMD planned to borrow considerably less than the maximum credit or, put another way, that it was more likely that JMD intended to borrow amounts closer to nothing than to $40 million. After all, the Agreement increased the maximum credit available to JMD eight-fold over the $5 million line of credit negotiated just five months earlier by its predecessor.

Further, JMD disregards Congress’s costs to make $40 million available to loan. Congress had to have adequate funding in place to fulfill its obligation to lend up to $40 million to JMD upon request throughout the Agreement’s term. This commitment created costs for Congress as well as diminished its capacity to make profitable loans to other entities. The Second Circuit in Walter E. Heller & Co., Inc. v American Flyers Airline Corp. (459 F2d 896, 899 [2d Cir 1972]) identified several similar elements of damages that were real but difficult to estimate ex ante and accordingly enforced $250,000 in liquidated damages for breach of an agreement to borrow $8.9 million to purchase a jet airplane. These damages included the lender’s loss of interest over the term of the contract or, alternatively, until the borrower prepaid principal; that the lender “was, as of the signing of the contract, contractually limiting its lending activities so that the funds to be advanced to [borrower] might be available when needed by [borrower]”; and that if the transaction was not consummated, “the lender was faced with the cost and expense of procuring substitute . . . borrowers and the attendant delay in lending sums to be lent to [borrower]” (id. [internal quotation marks omitted]). Further, “when these factors are considered together with the fact that the sum arrived at was the product of an arms-length transaction between sophisticated businessmen, ably represented by counsel, the sum stated for liquidated damages does not seem to be a sum plainly disproportionate to the possible loss” (id.). The lender’s other conceivable but difficult to calculate losses included “rate of return, duration of the loan, risk, extent and realizability of collateral, and the other obvious uncertainties inherent in this particular contract,” which made it “reasonable that a sum for liquidated damages should be agreed to after arms-length negotiations” (id. at 899-900; accord In re United Merchants & Mfrs., Inc., 674 F2d 134 [2d Cir 1982]).

When Congress and JMD entered into the Agreement, they could not readily forecast the credit facilities for which JMD would qualify under the Agreement’s asset-based formula, which would fluctuate over its term; how much JMD would actually borrow; whether the Agreement would be terminated early; and how much JMD would have borrowed if the Agreement had not been terminated early. Congress also, as already noted, was required to limit its lending activities to insure that adequate funds were available to fulfill its $40 million obligation to JMD, and would incur costs to procure substitute borrowers in the event that JMD breached the Agreement, causing Congress to terminate it. The Agreement therefore included an early termination fee of between 1% and 2% of the $40 million maximum credit, with the percentage decreasing as the Agreement’s term approached. According to amicus Commercial Finance Association, an early termination fee structured as “liquidated damages . . . based on a sliding scale” and “linked to the amount of the commitment as opposed to the outstanding loan balance at any given time” is a common feature in asset-based lending facilities negotiated by sophisticated commercial parties.

To support its position, JMD also relies heavily on Seidlitz v Auerbach (230 NY 167 [1920]), a case in which we considered whether a $7,500 security deposit on a lease was enforceable as liquidated damages. When the lessee failed to pay one month’s rent and was evicted, the landlord argued that it was entitled to the entire deposit. We disagreed:

“[W]here a contract contains a number of covenants of different degrees of importance and the loss resulting from the breach of some of them will be clearly disproportionate to the sum sought to be fixed as liquidated damages, especially where the loss in some cases is readily ascertainable, the sum so fixed will be treated as a penalty. The strength of a chain is that of its weakest link” (id. at 173).

In Hackenheimer v Kurtzmann (235 NY 57 [1923]), however, we held that liquidated damages were enforceable for a material breach of a contract that, read literally, suggested their availability for trivial breaches as well. Otherwise, Seidlitz “may be pressed to so extreme a conclusion as to make it impossible to draw any contract providing for such [liquidated] damages” (id. at 67; see also United Air Lines, Inc. v Austin Travel Corp., 867 F2d 737, 741 [2d Cir 1989] [“(T)he presumed intent of the parties is that a liquidated damages provision will apply only to material breaches”]; 3 Farnsworth, Contracts § 12.18, at 311 n 31 [3d ed]).

JMD does not dispute that it breached multiple provisions of the Agreement, including those governing collateral reporting and covenants as to accounts receivable and inventory; requirements to maintain minimum working capital and adjusted net worth; and delivery of required documentation, including audited financial statements and reports. Nor does JMD dispute that, as a result of these breaches, it was in default and therefore Congress was entitled to terminate the Agreement. Angling for the protection of Seidlitz, however, JMD persistently characterizes its breaches, both individually and collectively, as minor recordkeeping deficiencies. But these breaches were material, given the nature of a commercial revolving loan agreement. For one thing, JMD neglected to provide Congress with the kind of information that any asset-based lender requires in order to track the movement and quality of its borrower’s collateral and to determine loan availability accurately (see generally Levie, Asset-Based Lending, SB74 ALI-ABA 95 [May 15, 1997]).

The proponent of a motion for summary judgment “must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact. Failure to make such prima facie showing requires a denial of the motion, regardless of the sufficiency of the opposing papers” (Alvarez v Prospect Hosp., 68 NY2d 320, 324 [1986] [citations omitted]; see also Friends of Animals v Associated Fur Mfrs., 46 NY2d 1065 [1979]). In this regard, CPLR 3212 (b) provides that a summary judgment motion “shall be supported by affidavit” of a person “having knowledge of the facts” as well as other admissible evidence (see GTF Mktg. v Colonial Aluminum Sales, 66 NY2d 965, 967 [1985]). A conclusory affidavit or an affidavit by an individual without personal knowledge of the facts does not establish the proponent’s prima facie burden (see e.g. Vermette v Kenworth Truck Co., 68 NY2d 714 [1986]).

The conclusory affidavit of JMD’s president, which relied entirely on the memorandum of law prepared by JMD’s attorney, provides no factual basis to support any conclusion that the early termination fee was an unenforceable penalty (see e.g. Bush v St. Clare’s Hosp., 82 NY2d 738 [1993]). JMD presented no proof to show that Congress’s prospective damages upon early termination were capable of precise estimation at the time the parties executed the Agreement, or that the early termination fee was grossly disproportionate to this probable loss.

Congress, which did not cross-move for summary judgment, has asked us nonetheless to grant it this relief or, in the alternative, to determine that material triable issues of fact remain. While Supreme Court and the Appellate Division may search the record and grant summary judgment to a nonmoving party (see CPLR 3212 [b]), we may not (Merritt Hill Vineyards v Windy Hgts. Vineyard, 61 NY2d 106, 110-111 [1984]). Upon remittal of this matter to Supreme Court, however, Congress may seek summary judgment if it is so advised.

III.

Finally, we conclude that Congress was not entitled to engage in self-help by retaining funds remaining in JMD’s loan account after JMD had paid Congress all outstanding loans. Upon termination or nonrenewal of the Agreement and other related financing agreements—notably including security agreements—JMD was required to pay Congress all “outstanding and unpaid” obligations “in full.” In addition, the Agreement required JMD to “furnish cash collateral” to Congress “in such amounts as [Congress] determine [d] [were] reasonably necessary” to secure itself against losses in connection with any of JMD’s contingent obligations. In short, the Agreement provided for JMD to make cash collateral available to ensure its payment of any potential or not indefeasibly paid indebtedness still known to exist at the time Congress terminated its security interest in JMD’s assets. This cash collateral was to be “remitted by wire transfer” by JMD to a bank account designated in writing by Congress for this purpose.

That is not what happened here. After paying off its indebtedness, JMD asked Congress to turn over surplus proceeds from deposits in the lockbox and provide a UCC-3 financing statement amendment to terminate Congress’s security interest in JMD’s assets (see UCC 9-513 [c] [1]). Congress, for its part, offered to remit these monies and terminate its security interest upon JMD’s execution of a release of claims. JMD refused to execute a release, and Congress retained the remaining funds in JMD’s loan account as a so-called “cash collateral reserve” for payment of any contingent obligations that JMD might have owed it.

Congress subsequently substantially drew down the reserve, principally to pay for attorneys’ fees related to either competing claims for the funds in JMD’s account or this lawsuit. As justification for these charges to the reserve, Congress points to JMD’s broad promise to indemnify it for losses, including attorneys’ fees, incurred in connection with disputes related to the Agreement’s “negotiation, preparation, execution, delivery, enforcement, performance or administration.” While we conclude that the Agreement did not authorize Congress to retain and charge a reserve for these attorneys’ fees, we view as a separate matter and express no opinion whether Congress may recoup any of its attorneys’ fees by way of counterclaim or in a separate action for indemnification (see Hooper Assoc, v AGS Computers, 74 NY2d 487 [1989] [promise by one party to a contract to indemnify the other for attorneys’ fees incurred in litigation between them must be unmistakably clear in order to be enforceable, such as where some of indemnified subjects are exclusively or unequivocally referable to claims between parties on the contract rather than claims of third parties]). This issue was beyond the scope of Supreme Court’s reference to the special referee, who was limited to determining “the amount to be returned by Congress to JMD” from the cash collateral reserve retained by Congress.

Accordingly, the order of the Appellate Division should be modified, without costs, and the case remitted to Supreme Court for further proceedings in accordance with this opinion and, as so modified, affirmed.

Chief Judge Kaye and Judges G.B. Smith, Ciparick, Rosenblatt, Graffeo and R.S. Smith concur.

Order modified, etc.

      . The Agreement defined obligations to encompass loans, letter of credit accommodations and generally any other indebtedness owing by JMD to Congress, specifically including contingent obligations.

      . The other six remedies were the right to accelerate and demand immediate payment of all obligations; to enter upon any premises where collateral was located and take possession of it or complete processing, manufacturing and repair of all or any portion of it; to require JMD at its expense to make any part or all of the collateral available at a time and place of Congress’s choosing; to foreclose upon any or all the collateral; to remove any or all of the collateral from the premises where it was located for purposes of sale, foreclosure or other disposition; and to sell, lease, transfer, assign, deliver or otherwise dispose of any and all collateral at such prices or terms as Congress deemed reasonable.

      . Under the letter agreement, Congress agreed to forgive the early termination fee entirely if JMD paid all its outstanding obligations by July 23, 1999. Congress further agreed to discount the fee to $150,000 if JMD paid after July 23, 1999 but on or before August 6, 1999; to $300,000 if JMD paid after August 6, 1999 but on or before August 20, 1999; and to $450,000 if JMD paid after August 20, 1999 but on or before September 3, 1999. Congress expressed its intention to look to JMD for the entire $600,000 early termination fee, however, if JMD did not pay all its outstanding obligations until after September 3, 1999.

      . The $800,000 comprises the $600,000 early termination fee and the funds retained by Congress as a cash collateral reserve, which the parties stipulated amounted to $131,443.40 as of the date JMD brought this lawsuit.

        . Congress sought reargument, contending that Supreme Court had overlooked the fact that the maximum credit was raised from $5 million to $40 million, and that the court had erred in not considering this when evaluating the reasonableness of the liquidated damages provision. In April 2003, Supreme Court granted reargument, and adhered to its original decision.

      . For example, JMD did not even present any suggestive proof on the issue, such as evidence of the sums it actually borrowed from Congress before the Agreement was terminated and, more relevantly, whether or how much money it may have borrowed elsewhere for working capital in the 13 months between the Agreement’s early termination and the end of the contractual term. A wide disparity between the early termination fee and the interest that Congress earned or would have earned on these sums might support an inference that the estimate of harm underlying the liquidation of damages was not reasonable.