author: Chief Judge Lippman. Pigott, J.

text:
    [14 NE3d 367, 991 NYS2d 14]
    Clemente Bros. Contracting Corp. et al., Appellants, v Aprile Hafner-Milazzo, Also Known as Aprileanna Milazzo, Defendant, and Capital One, N.A., Respondent.
    Argued March 26, 2014;
    decided May 8, 2014

      POINTS OF COUNSEL

      Dollinger, Gonski & Grossman, Carle Place (Matthew Dollinger of counsel), for appellants.
    I. Capital One, N.A. did not satisfy its burden of proof and it was error for the court to dismiss plaintiffs’ complaint pursuant to either the UCC or any North Fork Bank rules or corporate resolutions. (Zuckerman v City of New York, 49 NY2d 557; Negri v Stop & Shop, 65 NY2d 625; Louniakov v M.R.O.D. Realty Corp., 282 AD2d 657; Scott v Long Is. Power Auth., 294 AD2d 348; Dolitsky v Bay Isle Oil Co., 111 AD2d 366; S.J. Capelin Assoc. v Globe Mfg. Corp., 34 NY2d 338; Robinson Motor Xpress, Inc. v HSBC Bank, USA, 37 AD3d 117; Winegrad v New York Univ. Med. Ctr., 64 NY2d 851;
      Commissioners of State Ins. Fund v Fox Run Farms, 195 AD2d 372; Efdey Elec. Contrs. v Melita, 167 AD2d 501.) II. The court should not have applied UCC 4-406 (4) to the causes of action involving the line of credit promissory note. (Monreal v Fleet Bank, 95 NY2d 204; Technical Tape v Spray Tuck, 131 AD2d 404; Medinol Ltd. v Boston Scientific Corp., 346 F Supp 2d 575; State St. Bank & Trust Co. v Inversiones Errazuriz Limitada, 374 F3d 158.) III. There is a conflict among the Appellate Division departments as to the impact an alleged breach of the duty of care by a bank has on the application of UCC 4-406. (Putnam Rolling Ladder Co. v Manufacturers Hanover Trust Co., 74 NY2d 340.) IV The Court of Appeals should address the 14-day time bar applied by the court below, on policy grounds. (Putnam Rolling Ladder Co. v Manufacturers Hanover Trust Co., 74 NY2d 340.) V The documentary evidence does not support the application of the 14-day time bar. (Schirmer v Athena-Liberty Lofts, LP, 48 AD3d 223; Matter of Ray, 24 Misc 3d 285; SOS Oil Corp. v Norstar Bank of Long Is., 76 NY2d 561.)

      Herrick, Feinstein LLP, New York City (Mara B. Levin and Christopher P. Greeley of counsel), for respondent.
    I. The trial court and Appellate Division properly held that Capital One, N.A. is entitled to the protections of UCC 4-406 (4). (Monreal v Fleet Bank, 95 NY2d 204; Woods v MONY Legacy Life Ins. Co., 84 NY2d 280; Garage Mgt. Corp. v Chase Manhattan Bank, 22 AD3d 432; Josephs v Bank of N.Y., 302 AD2d 318; Mansi v Gaines, 216 AD2d 536; Wells v Bank of N.Y. Co., 181 Misc 2d 574; Gluck v JPMorgan Chase Bank, 12 AD3d 305; Radon Constr. Corp. v Colwell, 248 AD2d 366; Matter of Ray, 24 Misc 3d 285; Parent Teacher Assn., Pub. School 72 v Manufacturers Hanover Trust Co., 138 Misc 2d 289.) II. Borrowers have misconstrued cases from the Third and Fourth Departments in their failed attempt to invent a split among the departments where none exists. (Monreal v Fleet Bank, 95 NY2d 204; Graves v Wachovia Bank, N.A., 607 F Supp 2d 1277.) III. This Court should affirm the appellate decision which upheld the trial court decision granting summary judgment to Capital One, N.A. on its counterclaims against the borrowers for breach of the loan documents. (Key B.H. Assoc. v Banner Indus., 170 AD2d 246; Marine Midland Bank v Scallen, 161 AD2d 103; Seaman-Andwall Corp. v Wright Mach. Corp., 31 AD2d 136, 29 NY2d 617; Bank of Am., N.A. v Solow, 59 AD3d 304; 117-14 Union Turnpike Assoc. v County Dollar Corp., 187 AD2d 357.)

      Shearman & Sterling LLP, New York City (Brian H. Polovoy and Melissa J. Godwin of counsel), for Clearing House Association L.L.C., amicus curiae.
    I. The Appellate Division properly held that a bank and its customer may agree to shorten the statutory time period within which the customer must notify its bank that the bank has paid on a forged check. (Putnam Rolling Ladder Co. v Manufacturers Hanover Trust Co., 74 NY2d 340; Monreal v Fleet Bank, 95 NY2d 204; Woods v MONY Legacy Life Ins. Co., 84 NY2d 280; Matter of World Trade Ctr. Bombing Litig., 17 NY3d 428; Radon Constr. Corp. v Colwell, 248 AD2d 366; Qassemzadeh v IBM Poughkeepsie Empls. Fed. Credit Union, 167 AD2d 378; Catalano v Marine Midland Bank, 303 AD2d 617; Gluck v JPMorgan Chase Bank, 12 AD3d 305; Josephs v Bank of N.Y., 302 AD2d 318; Garage Mgt. Corp. v Chase Manhattan Bank, 22 AD3d 432.) II. There are sound policy reasons why this Court should, like other appellate courts that have addressed the issue, hold that a bank and its customers may agree to shorten the statutory time period in UCC 4-406 (4). (Monreal v Fleet Bank, 95 NY2d 204; Woods v MONY Legacy Life Ins. Co., 84 NY2d 280.)
   OPINION OF THE COURT

Chief Judge Lippman.

The primary issue presented is whether a bank and its customer may agree to shorten from one year to 14 days the statutory time period under UCC 4-406 (4) within which a customer must notify its bank of an improperly paid item in order to recover the payment thereon. In two opinions issued over 20 years ago, this Court declined to decide this issue because it was not presented directly, but questioned whether a 14-day period could be reasonable and observed that the question ‘‘raise[d] policy considerations” (Putnam Rolling Ladder Co. v Manufacturers Hanover Trust Co., 74 NY2d 340, 349 n 2 [1989]; SOS Oil Corp. v Norstar Bank of Long Is., 76 NY2d 561, 568 [1990]). We now hold that, at least in this case, the parties’ agreement to shorten the period was permissible.

I

In April 2007, plaintiff Clemente Brothers Contracting Corp. opened three corporate operating accounts at North Fork Bank (which subsequently merged with defendant Capital One, N.A. [collectively Capital One]) and took out a loan and a line of credit, each backed by a promissory note. Clemente Brothers could draw money on the line of credit by sending a signed drawdown request to Capital One. As a condition precedent to opening the accounts at Capital One, plaintiff Jeffrey Clemente, the company’s principal, executed a personal guaranty with respect to the loan and line of credit, and Clemente Brothers passed a corporate resolution, which provided that Jeffrey Clemente was the only authorized signatory on the accounts and the only one authorized to sign drawdown requests on the line of credit.

The corporate resolution also provided,

“That unless [Clemente Brothers] shall notify the Bank in writing within fourteen calendar days of the delivery or mailing of any statement of account and cancelled check, draft or other instrument for the payment of money (hereinafter referred to as ‘Instrument’) of any claimed errors in such statement, or that [Clemente Brothers’] signature upon any such returned Instrument was forged, or that any such Instrument was made or drawn without the authority of [Clemente Brothers] ... or that it was raised or otherwise altered . . . said statement of account shall be considered correct for all purposes and said Bank shall not be liable for any payments made and charged to the account of [Clemente Brothers] or for any other errors in the statement of account as rendered to it.”

Capital One mailed statements of account for all three of the operating accounts to the business address provided by Clemente Brothers. The monthly statements included copies of cancelled checks drawn on that account.

As for the line of credit, Capital One mailed a statement to Clemente Brothers each month showing the principal balance and the monthly interest payment, which was automatically debited from the primary operating account. Capital One has not offered any evidence that it included copies of the draw-down requests on the line of credit with the monthly statements. But the drawdowns appeared as credits on the operating account statements.

Defendant Aprile Hafner-Milazzo worked as a secretary and bookkeeper for Clemente Brothers until it was discovered that she had been forging Clemente’s signature on certain Capital One bank documents, including drawdown requests on the line of credit and checks paid from one of Clemente Brothers’ accounts. According to plaintiffs, Hafner-Milazzo embezzled approximately $386,000 over the course of approximately two years, from January 2008 through December 2009.

In February 2010, Clemente Brothers notified Capital One of Hafner-Milazzo’s thefts. Thereafter, Capital One determined that an event had occurred that adversely affected Clemente Brothers’ ability to repay its debts and, pursuant to a clause in the two promissory notes, declared all amounts due and payable.

Plaintiffs subsequently commenced this action against Hafner-Milazzo and Capital One to recover damages resulting from Hafner-Milazzo’s forgeries and to prevent Capital One from forcing repayment on the loans. In its answer, Capital One interposed several counterclaims to recover amounts due under the loans and Clemente’s personal guaranty.

Capital One moved for summary judgment dismissing the complaint insofar as asserted against it and on its counterclaims. Supreme Court granted Capital One’s motion in its entirety and awarded it the principal sum of $1,146,262.90 on its counterclaims (Clemente Bros. Contr. Corp. v Hafner-Milazzo, 2011 NY Slip Op 30384[U] [Sup Ct, NY County 2011]). According to the court, Capital One was “entitled to the protection afforded by UCC 4-406 (4),” which precludes liability for a bank to its customer when it pays a check on a forged signature but makes statements of the account and the allegedly forged items available to the customer, and the customer fails to report the alleged forgery to the bank within one year (id. at *4). Here, the court observed, Clemente Brothers and Capital One, by agreement, properly abbreviated the one-year period to 14 days, within which plaintiffs failed to report each of the alleged forgeries.

The Appellate Division affirmed (Clemente Bros. Contr. Corp. v Hafner-Milazzo, 100 AD3d 677 [2d Dept 2012]). This Court granted plaintiffs leave to appeal (21 NY3d 856 [2013]).

II

New York’s version of the Uniform Commercial Code (hereinafter UCC) imposes strict liability upon a bank that charges against its customer’s account any “item” that is not “properly payable” (UCC 4-401 [1]; Monreal v Fleet Bank, 95 NY2d 204, 207 [2000]). An “item” is “any instrument for the payment of money even though it is not negotiable but does not include money” (UCC 4-104 [1] [g]). Black’s Law Dictionary defines “instrument” as a “written legal document that defines rights, duties, entitlements, or liabilities” (Black’s Law Dictionary 869 [9th ed 2009]). Put another way, a bank may not charge a check, or other written document defining a right to or liability for payment, bearing a forged signature against its customer’s account (Monreal, 95 NY2d at 207).

The UCC nevertheless limits banks’ exposure by imposing obligations on customers that, if unfulfilled, may preclude a customer’s suit against the bank. When a bank sends to its customer statements of account and copies of the items paid, the customer must review those documents promptly and notify the bank of any irregularities:

“When a bank sends to its customer a statement of account accompanied by items paid in good faith in support of the debit entries or holds the statement and items pursuant to a request or instructions of its customer or otherwise in a reasonable manner makes the statement and items available to the customer, the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after discovery thereof” (UCC 4-406 [1]; see also Monreal, 95 NY2d at 207).

If the customer fails to fulfill its obligation, then the customer is precluded from asserting against the bank (1) “his unauthorized signature or any alteration on the item if the bank also establishes that it suffered a loss by reason of such failure” and (2) “an unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank after the first item and statement was available to the customer for a reasonable period not exceeding fourteen calendar days” (UCC 4-406 [2] [a], [b]). These bars to recovery do not apply “if the customer establishes lack of ordinary care on the part of the bank in paying the item(s)” (UCC 4-406 [3]).

An additional limitation, pertinent here, is found in UCC 4-406 (4), which creates something akin to a statute of repose that bars a customer’s claim for recovery on a wrongfully paid item when the customer fails to report the irregularity within one year after the bank provides the statement and item, regardless of either party’s failure to exercise reasonable care:

“Without regard to care or lack of care of either the customer or the bank a customer who does not within one year from the time the statement and items are made available to the customer (subsection (1)) discover and report his unauthorized signature ... is precluded from asserting against the bank such unauthorized signature or indorsement or such alteration” (UCC 4-406 [4]).

Here, the parties shortened the one-year period to 14 days by agreement.

A

Capital One argues that UCC 4-406 (4) defeats plaintiffs’ claims with respect to both the operating accounts and the line of credit. But the application of UCC 4-406 (4) is contingent upon the bank providing the customer with account statements and copies of the items paid under UCC 4-406 (1). The parties do not seriously dispute that Capital One complied with UCC 4-406 (1) with respect to the operating accounts by providing monthly statements and copies of cancelled checks. But they do dispute whether the line of credit is subject to UCC article 4 at all, and, if it is, whether Capital One complied with UCC 4-406 (1).

Plaintiffs argue that the drawdown requests on the line of credit do not qualify as “items” within the meaning of UCC article 4. We disagree. The requests are written instruments formally exercising a contractual right to the payment of money from the line of credit. We do agree with plaintiffs, however, that, at least on this motion for summary judgment, Capital One cannot avail itself of UCC 4-406 (4). Capital One argues that the drawdown requests should be treated as items and that it is entitled to the protections of UCC 4-406 (4), but it conspicuously has not offered evidence showing that it complied with the threshold requirements of UCC 4-406 (1) quoted above.

The language of the New York statute tracks the language of the original model Uniform Commercial Code (Model UCC), and has not been amended by the legislature since adoption in 1962. Section 4-406 of the Model UCC was amended in 1991 to require that the bank must provide a statement of account and “shall either return or make available to the customer the items paid or provide information in the statement of account sufficient to allow the customer reasonably to identify the items paid” (Model UCC [2002] § 4-406 [a] [maintaining 1991 language] [emphasis added]).

The Model UCC’s official commentary explains that under the new language:

“[i]f the bank supplies its customer with an image of the paid item, it complies with this standard. But a safe harbor rule is provided. The bank complies with the standard of providing ‘sufficient information’ if ‘the item is described by item number, amount, and date of payment.’ This means that the customer’s duties under [what was Model UCC 4-406 (4)] are triggered if the bank sends a statement of account complying with the safe harbor rule without returning the paid items” (Model UCC 4-406, Comment 1).

Many states have adopted some form of the revised Model UCC 4-406. Ohio and Illinois, for example, require only that a bank provide an account statement with information sufficient to identify an item paid (see Ohio Rev Code Ann § 1304.35 [A]; 810 111 Comp Stat § 5/4-406 [a]). But New York has not adopted the revised Model UCC.

Banks in New York, as elsewhere, must comply in good faith with UCC 4-406 (1) to seek the protections of UCC 4-406 (4) (see Elden v Merrill Lynch, Pierce, Fenner & Smith Inc., 2011 WL 1236141, *7, 2011 US Dist LEXIS 35886, *21-22 [SD NY, Mar. 30, 2011, No. 08-Civ-8738 (RJS)] [holding that bank did not send copies of the items and did not otherwise reasonably make them available, thus precluding relief under UCC 4-406 (4)]). Again, they may do this in one of three ways: supply the items to the customer with the statement of account, hold the items for the customer, or “otherwise in a reasonable manner make[ ] the statement and items available” (UCC 4-406 [1]). The official commentary explains that this third option is to be used only in “unusual situations” (UCC 4-406, Comment 2). But one treatise author has noted that “literal compliance with this triggering event seem[s] impossible,” and argues that the bank practice of sending or posting simple account statements should be sufficient to satisfy the requirements of section 4-406 (1) (see 5 Hawkland et al., Uniform Commercial Code Series § 4-406:2 at Art. 4-988, 4-992; accord Barkley Clark & Barbara Clark, 1 Bank Deposits, Collections and Credit Cards ¶ 10.05 [1] [a] at 10-39 — 10-40 [2013]).

Here, the record does not show that the drawdown requests were provided to Clemente Brothers. Absent any record evidence or discussion in the briefs about relevant banking practice or applicable regulations on this point, we do not hold that Capital One failed to comply with section 4-406 (1) as a matter of law. But neither has the bank demonstrated its compliance with the statute. Consequently, Capital One is not entitled to summary judgment on the line-of-credit claims under UCC 4-406 (4), and, on remittal, the judgment in its favor must be amended accordingly pending further proceedings on these claims.

Capital One argues in the alternative, and the lower courts also reasoned, that the wrongfully paid drawdown requests did not harm plaintiff. Capital One contends that paying the draw-down requests merely effectuated a transfer of funds from one of plaintiffs’ accounts to another. But this is not an accurate description of the transactions; the funds did not come from plaintiffs’ account, but from the bank itself.

The line of credit was, in effect, a pre-approved loan upon which plaintiffs could draw at will. Plaintiffs did not possess any borrowed funds or owe anything in repayment in the absence of a drawdown request. Upon such a request, Capital One would transfer funds to one of plaintiffs’ accounts, interest immediately would begin to accrue and plaintiffs would be liable to repay the principal. Therefore, when Capital One wrongfully paid the drawdown requests at issue in this case, plaintiffs suffered financial harm.

B

Turning to the application of UCC 4-406 (4), the UCC permits parties to alter the provisions of article 4 by agreement (see UCC 4-103 [1]). The Official Comments go so far as to say that there exists a “blanket power to vary all provisions of the Article” (id., Comment 2). But that power is not boundless:

“[N]o agreement can disclaim a bank’s responsibility for its own lack of good faith or failure to exercise ordinary care or can limit the measure of damages for such lack or failure; but the parties may by agreement determine the standards by which such responsibility is to be measured if such standards are not manifestly unreasonable” (UCC 4-103 [1]).

The application of these limitations raises two issues: first, whether parties can vary the one-year period by agreement; we hold that they can; and second, whether shortening the one-year period to 14 days is manifestly unreasonable; we hold that it is not, at least under these facts.

The argument that modification is not allowed is that by shortening the period, the bank is “disclaiming” its obligation to act with care or that it is limiting the measure of damages for a failure to act with care in violation of UCC 4-403 (1). This argument finds some slender support in our decision in Regatos v North Fork Bank (5 NY3d 395 [2005]).

Regatos involved the funds transfers provisions of UCC article 4-A. Banks are liable under article 4-A for improper funds transfers, similar to how they are liable under article 4 for improperly paid items. As for funds transfers, UCC 4-A-204 (2) provides that “the obligation of a receiving bank to refund payment . . . may not otherwise be varied by agreement.”

UCC 4-A-505 contains a one-year notice period similar to that found in UCC 4-406 (4). This Court held that parties could not shorten the one-year period in UCC 4-A-505 by agreement (Regatos, 5 NY3d at 398-399). The Court reasoned that shortening the one-year period effectively would “var[y]” the bank’s “obligation ... to refund payment” in violation of the plain language of UCC 4-A-204 (2) (id. at 402-403).

Plaintiffs would have us apply Regatos to this case. They rely on two Appellate Division decisions that could be read as extending the logic of Regatos to UCC 4-406 (see Aikens Constr. of Rome v Simons, 284 AD2d 946, 947 [4th Dept 2001]; Herzog, Engstrom & Koplovitz v Union Natl. Bank, 226 AD2d 1004, 1004-1005 [3d Dept 1996]). But this result neither follows from the provisions of article 4 nor is it desirable as a policy matter.

Unlike UCC 4-A-204, UCC 4-103 (1) does not prohibit a bank from altering its obligation to refund payments made in good faith. And shortening the one-year period does not violate any of the prohibitions in UCC 4-103 (1). Capital One did not disclaim its responsibility to act with care by requiring its customer to notify it of an improperly paid item within 14 days of receiving the account statement. While shortening the period certainly affected Capital One’s liability for improperly paid items, whether paid in good faith or not, it did not exclude all liability for negligence. Nor did the modification affect the measure of damages; it merely limited the time within which plaintiffs must provide notice of the improper charge.

Courts around the country have permitted parties to shorten the one year to various periods, from as short as 14 days to more than 60 days (see e.g. Gluck v JPMorgan Chase Bank, 12 AD3d 305, 306 [1st Dept 2004] [60 days]; Peters v Riggs Natl. Bank, N.A., 942 A2d 1163, 1168 [DC 2008] [60 days]; Borowski v Firstar Bank Milwaukee, N.A., 217 Wis 2d 565, 576-580, 579 NW2d 247, 252-253 [1998] [14 days]). And the record and case law suggest that most banks do shorten the period.

To apply Regatos’s logic to this case would be to hold not only the 14-day period impermissible, but every other longer period used in the industry, be it 30 days or nine months. We perceive no good reason for creating such an inconsistency in the banking laws of the various states. We therefore hold that parties may modify by agreement the one-year period in UCC 4-406 (4), as long as the modification is not manifestly unreasonable.

The modification in this case is not manifestly unreasonable. Clemente Brothers had numerous employees, regularly moved hundreds of thousands of dollars in and out of its operating accounts, and had the resources to make an informed decision about opening accounts at Capital One. Critically, Clemente was fully aware of the terms of the agreements with Capital One because Clemente Brothers passed a corporate resolution acknowledging its obligation to notify Capital One of any irregularities within 14 days of each statement of account.

It is not manifestly unreasonable to expect a company with numerous employees and hundreds of thousands of dollars under its control to monitor its accounts once a month, within 14 days of each statement, particularly where it has acknowledged its responsibility to do so in a corporate resolution. That expectation is all the more reasonable in this age, when customers can monitor their account transactions minute by minute online from around the world.

We stress, however, that our holding is limited to the case of a corporate entity that either is financially sophisticated or has the resources to acquire professional guidance. It could well be unreasonable for banks to use contracts of adhesion to impose an exacting 14-day limit on unsophisticated customers, small family businesses, or individual consumers, including, for example, the elderly, people suffering from certain disabilities, or others for whom the 14-day rule could be too unforgiving. These customers may lack the time, technology, or other resources to check their account statements within such a limited period every month. They are more susceptible to unforeseen events disrupting their routines or normal business operations. And it may be that banks need less protection on these accounts because the total assets held may be less than those of larger companies. But whether it would be manifestly unreasonable for these customers to be subject to a 14-day notice period, as opposed to a 30- or 60-day period, is a question for a later day.

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

Pigott, J.

(dissenting in part). Uniform Commercial Code § 4-406, titled “Customer’s Duty to Discover and Report Unauthorized Signature or Alteration,” sets forth a customer’s and bank’s respective duties concerning a customer’s statement of account. When the bank sends the customer such a statement accompanied by items paid in good faith, the customer must “exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature . . . and . . . notify the bank promptly after discovery thereof” (UCC 4-406 [1]). If the customer does not comply with that provision he or she is precluded from asserting against the bank: A customer is not precluded from asserting against a bank an unauthorized signature under subsection (2), however, “if the customer establishes lack of ordinary care on the part of the bank in paying the item(s)” (UCC 4-406 [3]). UCC 4-406 (4) prescribes a one-year time limit on a customer to make a claim against a bank for its payment of an altered or forged paper irrespective of whether the bank exercised ordinary care.

“(a) his unauthorized signature or any alteration on the item if the bank also establishes that it suffered a loss by reason of such failure; and
“(b) an unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank after the first item and statement was available to the customer for a reasonable period not exceeding fourteen calendar days and before the bank receives notification from the customer of any such unauthorized signature or alteration” (UCC 4-406 [2] [a], [b]).

Plaintiff claims that Capital One had notice of defendant Hafner-Milazzo’s predisposition to commit illegal acts and failed to exercise ordinary care. By boilerplate resolution, however, the bank claims to have reduced the time under which the plaintiff could assert such a lack of ordinary care from one year to the same 14-day time period as set forth in section 4-406 (2), effectively repealing section 4-406 (4) as it applies to its customers. The majority finds this reasonable, relying on UCC 4-103 (1), which provides, as relevant here, that UCC article 4’s provisions “may be varied by agreement” with the caveat “that no agreement can disclaim a bank’s responsibility for its own lack of good faith or failure to exercise ordinary care or can limit the measure of damages for such lack or failure; but the parties may by agreement determine the standards by which such responsibility is to be measured if such standards are not manifestly unreasonable” (emphasis supplied).

In my view, because section 4-406 (4) clearly imposes a one-year limitation on claims involving a bank’s “failure to exercise ordinary care,” the time period cannot be changed by agreement. To be sure, there may be a variation in standards by which a bank’s responsibility is to be measured (so long as such standards are not manifestly unreasonable), but the one-year limitation remains.

The majority claims that the shortening of the period resulted in a limitation of liability, and reduced only plaintiffs time to provide notice of the improper charge (majority op at 288). That is mere semantics, however, because the overall effect of the time reduction is to eliminate plaintiffs opportunity to assert, after the 14-day period had passed (but before the one-year time period had elapsed) that Capital One had failed to exercise ordinary care and, consequently, recover damages as a result of that negligence. The shortening of the time period works a de facto disclaimer of liability, which is prohibited under section 4-103 (1).

It is my view that just as the customer and bank in Regatos v North Fork Bank (5 NY3d 395 [2005]) were prohibited from modifying by contract the one-year statute of repose set forth in UCC 4-A-505—which grants a customer one year to notify the bank of an unauthorized wire transfer — plaintiff and Capital One were prohibited from contractually shortening section 4-406 (4)’s one-year time limitation. In Regatos, the bank received two unauthorized funds transfers totaling $600,000 and, in violation of the agreed security procedures, transferred the funds from the customer’s account. When the customer notified the bank of the unauthorized transfers five months later, the bank refused to refund the money, relying on the account agreement’s provision that the customer was to notify the bank of “any unauthorized signature or alteration” within 15 days (see Regatos, 5 NY3d at 399-400). Relying on UCC 4-A-204 (1)’s language that a “bank is not entitled to any recovery from the customer on account of a failure by the customer to give notification as stated in this section,” we concluded that the bank had an obligation to refund the principal so long as notice was given within one year as required by section 4-A-505 (id. at 402-403). We explained that the policy behind UCC article 4-A was to encourage financial institutions “to adopt appropriate security procedures,” and that allowing them “to vary the notice period by agreement would reduce the effectiveness of the statute’s one-year period of repose as an incentive for banks to create and follow security procedures” (id. at 402).

Likewise, UCC article 4 imposes upon a bank the obligation to act with ordinary care, which required Capital One to follow commercially reasonable security procedures to ensure it was not making payments on unauthorized checks. A reduction in the one-year period to 14 days provides little, if any, incentive for a bank to act with ordinary care. And, of course, a bank’s obligation to exercise ordinary care may not be varied by agreement (see Aikens Constr. of Rome v Simons, 284 AD2d 946, 947 [4th Dept 2001]; Herzog, Engstrom & Koplovitz v Union Natl. Bank, 226 AD2d 1004, 1005 [3d Dept 1996]). But that is precisely what the corporate resolution does in this case. Prior to today, our courts have never sanctioned such a practice.

The majority approach has at least two significant drawbacks. First, it impairs the incentive the authors of UCC article 4 created for banks to exercise ordinary care in the payment of items. Second, it seems to make the outcome of cases depend upon whether the customer is a Fortune 500 company, a medium-sized one (this plaintiff is no corporate giant), a small one, or an individual. It would be better to interpret the statute in a way that obviates the need for a court to analyze whether the customer was “financially sophisticated,” possessed “the resources to acquire professional guidance,” was a “small family business” or an “elderly” individual (majority op at 289) because the rule would apply to every type of consumer. The rule proposed by the majority provides less certainty and will create more litigation because it doesn’t apply to everyone in like fashion. The fact that the majority is concerned that financial institutions will “use contracts of adhesion to impose” what it acknowledges is “an exacting 14-day limit on unsophisticated consumers” (majority op at 289 [emphasis supplied]) only underscores why customers and banks should not be permitted to contractually reduce section 4-406 (4)’s one-year limitation period.

Accordingly, I respectfully dissent from that part of the majority holding that a customer and bank may contractually reduce section 4-406 (4)’s one-year limitations period.

Judges Graffeo, Read, Rivera and Abdus-Salaam concur with Chief Judge Lippman; Judge Pigott dissents in part in an opinion in which Judge Smith concurs.

Order modified, without costs, by remitting to Supreme Court, Suffolk County, for further proceedings in accordance with the opinion herein and, as so modified, affirmed.

       UCC 4-A-505, titled, “Preclusion of Objection to Debit of Customer’s Account,” provides that
      “[i]f a receiving bank has received payment from its customer with respect to a payment order issued in the name of the customer as sender and accepted by the bank, and the customer received notification reasonably identifying the order, the customer is precluded from asserting that the bank is not entitled to retain the payment unless the customer notifies the bank of the customer’s objection to the payment within one year after the notification was received by the customer.”


source: Caselaw Access Project

author: Graffeo, J.

license: Public Domain

text:
    [14 NE3d 354, 991 NYS2d 1]
    The People of the State of New York, Respondent-Appellant, v V. Reddy Kancharla, Appellant-Respondent. The People of the State of New York, Respondent-Appellant, v Vincent Barone, Appellant-Respondent.
    Argued March 26, 2014;
    decided May 8, 2014

      POINTS OF COUNSEL

      Zuckerman Spaeder LLP, New York City (Paul Shechtman and Christina P. Skinner of counsel), and Harris Beach PLLC, White Plains (William A. Wetzel of counsel), for appellant in the first above-entitled action.
    I. The spillover prejudice from the enterprise corruption charge denied V. Reddy Kancharla a fair trial on the remaining counts. (People v Morales, 20 NY3d 240; People v Colletti, 73 AD3d 1203; United States v Tellier, 83 F3d 578; People v Baghai-Kermani, 84 NY2d 525; United States v Rooney, 37 F3d 847; United States v Bruno, 383 F3d 65; United States v Pelullo, 14 F3d 881; United States v De Cavalcante, 440 F2d 1264; People v Castillo, 47 NY2d 270; United States v Guiliano, 644 F2d 85.) II. There was insufficient evidence that V. Reddy Kancharla participated in a scheme to defraud relating to steel inspections. (People v Rayam, 94 NY2d 557.) III. The court erred in excluding evidence supporting V Reddy Kancharla’s defense on the mix-design counts. (People v Kisina, 14 NY3d 153; United States v Seelig, 622 F2d 207; United States v Christo, 614 F2d 486; United States v Riley, 550 F2d 233; People v Gilman, 28 Misc 3d 1217[A], 2010 NY Slip Op 51379[U].)

      Lankler Carragher & Horwitz LLP, New York City (Andrew M. Lankler and Joseph C. Perry of counsel), for appellant in the second above-entitled action.
    I. The prejudicial spillover effect of the tainted enterprise corruption count deprived Vincent Barone of a fair trial because there can be no doubt that the jury’s decision to convict on the tainted count unduly influenced its guilty verdict on the remaining counts. (People v Baghai-Kermani, 84 NY2d 525; People v Morales, 20 NY3d 240; People v Concepcion, 17 NY3d 192; People v Doshi, 93 NY2d 499; United States v Tellier, 83 F3d 578; United States v DiNome, 954 F2d 839; People v Colletti, 73 AD3d 1203.) II. The risk of spillover prejudice was exacerbated by the trial court’s erroneous comments and rulings. (People v Ciaccio, 47 NY2d 431; People v Carter, 40 NY2d 933; People v Malloy, 55 NY2d 296; People v O’Rama, 78 NY2d 270; People v Arnold, 98 NY2d 63; People v Yut Wai Tom, 53 NY2d 44; People v Moulton, 43 NY2d 944; People v De Jesus, 42 NY2d 519; People v Tucker, 89 AD2d 153.)

      Cyrus R. Vance, Jr., District Attorney, New York City (Amyjane Rettew, Daniel R. Alonso, Hilary Hassler and Gina Mignola of counsel), for respondent in the first and second above-entitled actions.
    I. Contrary to the views expressed in Justice Catterson’s majority opinion, the evidence was legally sufficient to establish that Vincent Barone and V. Reddy Kancharla were guilty of enterprise corruption. (People v Hampton, 21 NY3d 277; People v Calabria, 3 NY3d 80; People v Giles, 73 NY2d 666; People v Mackell, 40 NY2d 59; People v D’Alessandro, 13 NY3d 216; People v Albro, 52 NY2d 619; People v Washington, 71 NY2d 916; People v Khan, 18 NY3d 535; People v Western Express

      Intl., Inc., 19 NY3d 652; People v McFadden, 106 AD3d 1020.) II. The Appellate Division correctly concluded that the underlying counts against the defendants should be affirmed. (People v Doshi, 93 NY2d 499; People v Baghai-Kermani, 84 NY2d 525; People v Morales, 20 NY3d 240; People v Concepcion, 17 NY3d 192; People v Sinha, 19 NY3d 932; People v Daly, 14 NY3d 848; United States v Bruno, 383 F3d 65; United States v Rooney, 37 F3d 847; United States v Jones, 482 F3d 60; United States v Hamilton, 334 F3d 170.) III. The evidentiary rulings connected to the mix-design counts were proper. (People v Goodman, 31 NY2d 262; People v Kisina, 14 NY3d 153; Smith v United States, 188 F2d 969; United States v Brookshire, 514 F2d 786; Burnett v United States, 222 F2d 426; Newton v Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F3d 266; United States v Seelig, 622 F2d 207; United States v Riley, 550 F2d 233; United States v Christo, 614 F2d 486; People v Gilman, 28 Misc 3d 1217[A], 2010 NY Slip Op 51379[U].) IV There was overwhelming evidence that Vincent Barone tampered with Testwell Laboratories, Inc.’s test data. V The evidence amply proved that the defendants each intentionally aided in the steel inspection scheme. (People v Alfaro, 66 NY2d 985; People v Satloff, 56 NY2d 745; People v Stahl, 53 NY2d 1048; People v Tucker, 55 NY2d 1; People v Rayam, 94 NY2d 557; Dunn v United States, 284 US 390; People v Horne, 97 NY2d 404.) VI. The three judicial comments Vincent Barone attacks could not have influenced the jury’s verdict. (People v Killgo, 33 AD2d 226; People v Charleston, 56 NY2d 886; People v Moulton, 43 NY2d 944; People v Yut Wai Tom, 53 NY2d 44.) VII. The court provided a meaningful response to the jury’s note about the crime of false filing. (People v O’Rama, 78 NY2d 270; People v Weinberg, 83 NY2d 262; People v Steinberg, 79 NY2d 673; People v Malloy, 55 NY2d 296; People v Santi, 3 NY3d 234; People v Almodovar, 62 NY2d 126; People v Torres, 8 AD3d 123; People v Washington, 35 AD3d 288; People v Overlee, 236 AD2d 133; People v Lugo, 81 AD3d 532.)
   OPINION OF THE COURT

Graffeo, J.

We are asked in these appeals whether the Appellate Division applied the correct legal standard when it reviewed the sufficiency and weight of the evidence supporting defendants’ convictions for enterprise corruption (Penal Law art 460). We hold that the Appellate Division did not properly consider the elements of the crime under People v Western Express Intl., Inc. (19 NY3d 652 [2012]), that the trial evidence sufficiently established defendants’ commission of enterprise corruption and that the Appellate Division should reassess its weight of the evidence determination under the applicable statutory standards.

I

Construction contractors in New York City often hire licensed testing firms to ascertain proper compliance with building code provisions due to the stringent nature of those regulations (see Administrative Code of City of NY § 28-701.1 et seq.) and the limited resources of the City’s Department of Buildings. One such compliance firm was Testwell Laboratories, Inc., a leading materials testing company operating in the metropolitan area. Defendant V Reddy Rancharla, a professional engineer, served as Testwell Laboratories’ president and chief executive officer. Defendant Vincent Barone was a company vice-president in charge of the corporation’s engineering department.

A grand jury charged defendants and others with engaging in a pattern of criminal activity while intentionally conducting and participating in the affairs of a criminal enterprise — referred to as the “Testwell Group” — consisting of Testwell Laboratories, Inc., and a number of its officers and employees. The indictment alleged that defendants committed or allowed certain of the corporation’s employees to engage in a multitude of illegal acts involving the falsification of test results, improper inspections of construction projects and double-billing of clients. Those offenses were grouped under distinct, but interrelated, criminal schemes related to five categories of Testwell Laboratories’ material testing services: (1) “Mix-Design”; (2) “Steel Inspections”; (3) “Certified Inspectors”; (4) “Field Tests”; and (5) “Compressive/ Flexural Strength Alterations.”

The essence of the “mix-design” scheme was that Testwell Laboratories would be retained by contractors or project owners to test and determine the strength of proposed concrete mixtures used at various construction sites. Instead of engaging in appropriate laboratory testing of the concrete samples, it was alleged that Testwell Laboratories merely used a mathematical formula to replace actual analysis and then issued reports falsely certifying that the results were based on legitimate test results. Those reports bore Rancharla’s signature and engineer’s stamp, and their falsity became obvious since Testwell Laboratories charged far less ($300 or $500) for those reports than it ordinarily billed when concrete was analyzed with laboratory testing (approximately $4,000). Furthermore, different reports, created months apart, displayed improbably similar results with distinct patterns, and some reports were generated within days of being ordered despite the fact that the building code mandated longer intervals between sequential tests. Testwell Laboratories also designed a computer program that automatically generated figures for concrete strength after a desired final result was specified. In the course of the criminal investigation — in which Testwell Laboratories’ laboratory director cooperated with the People — scores of blank mix-design reports were discovered that were pre-signed by Rancharla and bore his seal. Rancharla acknowledged wrongdoing, but claimed that he committed regulatory violations of the building code rather than criminal offenses.

The “steel inspections” plot was premised on evidence that Testwell Laboratories failed to properly conduct steel inspections according to the code since it assigned two agents to multiple construction projects that they could not possibly have inspected on a full-time basis without additional assistance. Investigators found that neither inspector was in attendance at a steel fabrication facility and mandatory inspection records were not maintained.

The charges pertaining to “certified inspectors” arose from a school construction project in Queens. Testwell Laboratories falsely certified that two of its employees had proper professional certifications to test concrete as it was being poured. The related “field tests” category involved false confirmations that Testwell Laboratories had performed various concrete tests at two construction sites.

Finally, the adequacy of laboratory testing of concrete was the focus of the “compressive/flexural strength alterations” allegations. The building code mandates that concrete being poured must be collected and formed into cylinders (for compressive testing) or beams (for flexural testing), which are then brought to a laboratory for scientific analysis of actual strength. A Testwell Laboratories computer system was programmed to permit certain employees to engage in the alteration of testing data. The program hid the employees’ identities and issued warnings if inputted data did not generate an acceptable concrete strength. Company staff notified Barone or another Testwell Laboratories’ supervisor when such alerts were received and Barone would instruct data entry personnel to change the computations. Investigators discovered facsimile messages from Barone that listed hundreds of numerical changes and a technician who participated in the fraud cooperated with the prosecution. In total, investigators determined that data had been altered several thousand times on more than 100 different construction projects.

In connection with these alleged illegal activities, Rancharla and Barone were tried jointly before a jury on 50 counts that included a charge that they were members of the Testwell Group “criminal enterprise” under article 460 of the Penal Law. In support of that offense, Rancharla was charged with committing various criminal “pattern acts” while participating in the schemes involving mix design, steel inspections and certified inspectors; Barone was charged with multiple offenses for his alleged involvement in the schemes for steel inspections, compressive/flexural strength alterations, and certified inspectors. Rancharla was ultimately found guilty of enterprise corruption, all 13 mix-design counts and one steel inspections count. Barone was likewise convicted of enterprise corruption, along with five crimes under the compressive/flexural strength alterations scheme; seven offenses for the steel inspections scheme; and the certified inspectors scheme as a pattern act for enterprise corruption. Rancharla was sentenced to an aggregate prison term of 7 to 21 years and Barone received a 5Vs-to-16-year aggregate sentence.

The Appellate Division modified by vacating the enterprise corruption convictions and reducing the sentences for both defendants in the interest of justice to lVs to 4 years (101 AD3d 585 [1st Dept 2012]). It concluded that the enterprise corruption convictions lacked sufficient proof and were against the weight of the evidence because “the People failed to produce any evidence that either defendant knew that test results and inspection reports were fabricated, much less that the defendants spearheaded a criminal enterprise” (id. at 587). The court also found that the prosecution did not establish “a leadership structure, overall planning of the criminal enterprise, or any communications ... in furtherance of the criminal enterprise” (id. at 592). The Appellate Division rejected defendants’ challenges to the non-enterprise corruption offenses. One Justice dissented and would have affirmed the enterprise corruption convictions; another Justice dissented and would have ordered a new trial on all of the remaining non-enterprise corruption counts. Both parties were granted leave to appeal to our Court.

II

Our primary concern in this appeal focuses on the enterprise corruption convictions. The People argue that the Appellate Division did not apply the proper legal standard for criminal enterprises in reviewing the sufficiency and weight of the evidence supporting the jury’s verdict. More particularly, the People assert that the Appellate Division vacated the convictions based on a misunderstanding of Penal Law article 460 and People v Western Express Intl., Inc. (19 NY3d 652 [2012]). Defendants, in contrast, ask us to dismiss the cross appeal on jurisdictional grounds because they believe that the Appellate Division examined the correct legal rules and decided only questions of fact.

Sufficiency and weight review are distinct concepts. To determine whether a verdict was based on sufficient proof, a court must “marshal competent facts most favorable to the People and determine whether, as a matter of law, a jury could logically conclude that the People sustained [their] burden of proof’ (People v Danielson, 9 NY3d 342, 349 [2007]). Evidence of guilt is legally sufficient if the facts, viewed in the light most favorable to the People, provide a valid line of reasoning and permissible inferences from which the finder of fact could have rationally concluded that the elements of the crime were established beyond a reasonable doubt (see e.g. id.; People v Heidgen, 22 NY3d 259, 277 [2013]; People v Delamota, 18 NY3d 107, 113 [2011]).

A legally sufficient verdict, however, may be against the weight of the evidence (see People v Danielson, 9 NY3d at 349). Unlike a sufficiency analysis, weight of the evidence review requires an intermediate appellate court to act, in effect, as a second jury (see People v Romero, 7 NY3d 633, 644 n 2 [2006]) by rendering its own determination of the facts as proved at trial “in light of the elements of the crime as charged to the other jurors, even when the law has changed between the time of trial and the time of appeal” (People v Danielson, 9 NY3d at 349). In according “[g]reat deference ... to the fact-finder’s opportunity to view the witnesses, hear the testimony and observe demeanor” (People v Bleakley, 69 NY2d 490, 495 [1987]), the reviewing court must

“first . . . determine whether an acquittal would not have been unreasonable. If so, the court must weigh conflicting testimony, review any rational inferences that may be drawn from the evidence and evaluate the strength of such conclusions. Based on the weight of the credible evidence, the court then decides whether the jury was justified in finding the defendant guilty beyond a reasonable doubt” (People v Danielson, 9 NY3d at 348, citing People v Crum, 272 NY 348 [1936]; see e.g. People v Mateo, 2 NY3d 383, 410 [2004], cert denied 542 US 946 [2004]).

This standard generally requires factual assessments that are within the exclusive province of the intermediate appellate courts (see CPL 470.15 [5]; see e.g. People v Rayam, 94 NY2d 557, 560 [2000]). Consequently, we cannot review a weight of the evidence challenge unless the intermediate appellate court manifestly failed to consider the issue or did so using an incorrect legal principle (see e.g. People v Romero, 7 NY3d at 646). Where the court below erred as a matter of law, the remedy is to reverse and remit for a proper assessment of the weight of the evidence (see People v Danielson, 9 NY3d at 349-350; People v Romero, 7 NY3d at 646).

m

Our evaluation of the sufficiency of the enterprise corruption convictions begins with the relevant Penal Law provisions. The “Organized Crime Control Act” (Penal Law art 460) was created in 1986 (see L 1986, ch 516) “to address the particular and cumulative harm posed by persons who band together in complex criminal organizations” (People v Besser, 96 NY2d 136, 142 [2001]). It outlawed participation in a “criminal enterprise,” defined as “a group of persons sharing a common purpose of engaging in criminal conduct, associated in an ascertainable structure distinct from a pattern of criminal activity, and with a continuity of existence, structure and criminal purpose beyond the scope of individual criminal incidents” (Penal Law § 460.10 [3]).

We addressed the concept of enterprise corruption in People v Western Express Intl., Inc. (19 NY3d 652 [2012]). In that case, the corporation was controlled by a defendant who maintained a website providing a medium for other defendants to independently purchase or sell stolen credit card information. Based on the text of the enterprise corruption statutes, we observed that it is “necessary to distinguish between . . . mere[ ] patterns of criminal conduct and . . . patterns of such conduct demonstrably designed to achieve the purposes and promote the interests of organized, structurally distinct criminal entities” (id. at 658). Only the second situation is encompassed within Penal Law article 460 because the crime of enterprise corruption “demand[s] proof of an association possessing a continuity of existence, criminal purpose, and structure — which is to say, of constancy and capacity exceeding the individual crimes committed under the association’s auspices or for its purposes” (id.). We found the proof of guilt to be insufficient in Western Express because there was no “structured, purposeful criminal organization” or “inference of a distinct, beneficially related criminal enterprise” (id. at 659).

In this case, the Appellate Division did not apply the proper legal standards when it reviewed the sufficiency of defendants’ enterprise corruption convictions. It concluded that “the People failed to introduce any evidence of a leadership structure, overall planning of the criminal enterprise, or any communications between Rancharla, Barone, and any of the Testwell employees in furtherance of the criminal enterprise” (101 AD3d at 592). Those determinations were erroneous as a matter of law.

Testwell Laboratories itself was a corporate entity that had a distinct hierarchical apparatus with Rancharla positioned as its leader and manager. Corporate officers and employees of a legitimate business organization can fall within the ambit of the enterprise corruption statutes (see Penal Law § 460.20 [3]; Governor’s Mem approving L 1986, ch 516, 1986 McRinney’s Session Laws of NY at 3177 [Penal Law article 460 was designed to encompass “a criminal group existing and operating within (a) legitimate enterprise”]). Here, the People demonstrated adequately that the Testwell Group had a “continuity of existence, criminal purpose and structure . . . exceeding the individual crimes committed under the association’s auspices or for its purposes” (People v Western Express Intl., Inc., 19 NY3d at 658). The offenses were perpetrated in conjunction with five interrelated illegal schemes that covered hundreds of construction projects. And the operations of the corporation established the necessary continuity beyond the individual criminal offenses. In this regard, Western Express is clearly distinguishable from the facts presented here because the persons involved in that scheme were ad hoc operators who used the defendant corporation’s website as a medium to independently traffic in stolen credit card information with “no hint that any of the market participants acted except for and according to their own particular interests” (id. at 659). In contrast, the members of the Testwell Group can reasonably be viewed as engaging in their illicit and fraudulent activities within Testwell Laboratories’ existing corporate structure with the common purpose to promote its status as a major metropolitan materials testing laboratory and increase profits, despite the fact that the ill-gotten gains comprised only a small portion of the company’s overall revenue.

The Appellate Division further observed that there was no direct evidence of communications, planning or concerted activity between the Testwell Group actors. Direct proof of this nature, however, is not essential to a legally sufficient case of enterprise corruption. To the contrary, the overall pattern of criminal activity and the involvement of various individuals at all levels of Testwell Laboratories’ corporate structure allowed the jury to infer that Kancharla and Barone, as high-level corporate officers, were aware of, participated in and directed others to commit crimes in furtherance of the Testwell Group’s objectives. Indeed, Kancharla admitted that he personally provided blank mix-design reports bearing his signature and engineer’s stamp so that concrete strength could be fraudulently certified by another company employee using a mathematical formula instead of performing actual tests in the laboratory. Barone, in turn, attempted to conceal those falsehoods with additional fraud — altering testing results so it would appear consistent with acceptable, expected results. When Barone did not do so personally, he directed others to falsify the data, and company employees used a computer program designed to hide the identity of the individuals inputting the fake data and warn them if true information had already been conveyed to clients of Testwell Laboratories. Nor did defendants have to be privy to every crime or scheme committed by the Testwell Group — it was enough that they were aware of the general structure of the enterprise, had knowledge of the overarching criminal design, and engaged in a requisite pattern of criminal activity (see e.g. Penal Law § 460.10 [3], [4]).

In sum, there was a valid line of reasoning and permissible inferences (see e.g. People v Heidgen, 22 NY3d at 277; People v Delamota, 18 NY3d at 113) from which the jury could have rationally concluded that defendants operated the Testwell Group and participated in its illegal activities in a manner that satisfies the definition of a “criminal enterprise.” The People’s evidence was therefore legally sufficient to support the enterprise corruption convictions.

IV

The Appellate Division alternatively concluded that, based on its review of the “law and the facts,” the findings of guilt were against the weight of the evidence. Looking beyond that assertion (see People v D’Alessandro, 13 NY3d 216, 218-219 [2009]; People v Giles, 73 NY2d 666, 670 [1989]), however, it is evident that the court’s weight of the evidence analysis was infected by the same error of law that led it to vacate the enterprise corruption convictions on sufficiency grounds. The Appellate Division should therefore reconsider its determination under the appropriate legal standards (see Penal Law § 460.00 et seq.; People v Western Express Intl., Inc., 19 NY3d 652 [2012]). In light of our conclusion, it is unnecessary to address defendants’ remaining contentions at this juncture.

Accordingly, the order of the Appellate Division should be modified by remitting the cases to that court for further proceedings in accordance with this opinion and, as so modified, affirmed.

Chief Judge Lippman and Judges Read, Smith, Pigott and Rivera concur; Judge Abdus-Salaam taking no part.

In each case: Order modified by remitting to the Appellate Division, First Department, for further proceedings in accordance with the opinion herein and, as so modified, affirmed.

      . The certified inspectors scheme was charged as a “pattern act” for enterprise corruption because it occurred in Queens County and the New York County grand jury therefore lacked geographical jurisdiction to indict defendants on specific crimes pertaining to that scheme.

      . Specifically, Rancharla was convicted of enterprise corruption, two counts of scheme to defraud in the first degree, nine counts of offering a false instrument for filing in the first degree and three counts of falsifying business records in the first degree.

      . The jury found that Barone committed enterprise corruption, attempted grand larceny in the third degree, two counts of scheme to defraud in the first degree and nine counts of offering a false instrument for filing in the first degree.

      . The court also vacated two counts of offering a false instrument for filing against Rancharla. The propriety of that ruling is not at issue on appeal.

      . For this reason, the People’s appeal satisfies the requisites of CPL 450.90 (2) (a).


author: Rivera, J.

text:
    [15 NE3d 274, 991 NYS2d 519]
    CDR Créances S.A.S., as Successor to Société de Banque Occidentale, Respondent, v Maurice Cohen, Appellant, et al., Defendants. CDR Créances S.A.S., as Successor to Société de Banque Occidentale, Respondent, v Leon Cohen, Also Known as Leon Levy and Others, et al., Appellants, et al., Defendants.
    Argued March 27, 2014;
    decided May 8, 2014

      POINTS OF COUNSEL

      Dewey Pegno & Kramarsky LLP, New York City (David S. Pegno of counsel), for appellants in the first and second above-entitled actions.
    I. The lower courts improperly entered a default against appellants based on vigorously disputed allegations of misconduct. (Campione v New Hampshire Ins. Co., 76 AD3d 484; Roadway Express, Inc. v Piper, 447 US 752; Baba-Ali v State of New York, 19 NY3d 627; Melcher v Apollo Med. Fund Mgt. L.L.C., 52 AD3d 244; 317 W. 87 Assoc. v Dannenberg, 159 AD2d 245; Taieb v Hilton Hotels Corp., 131 AD2d 257; Simcuski v Saeli, 44 NY2d 442; Koschak v Gates Constr. Corp., 225 AD2d 315; Chambers v NASCO, Inc., 501 US 32.) II. Appellants were improperly assessed nine-figure damages on an improper legal theory without an evidentiary hearing. (Amusement Bus. Underwriters v American Intl. Group, 66 NY2d 878; Reynolds Sec. v Underwriters Bank & Trust Co., 44 NY2d 568; Rokina Opt. Co. v Camera King, 63 NY2d 728; Matter of Gupta, 38 AD3d 445; Starr Found. v American Intl. Group, Inc., 76 AD3d 25; Lama Holding Co. v Smith Barney, 88 NY2d 413; CDR Créances S.A. v Euro-American Lodging Corp., 40 AD3d 421, 43 AD3d 45; St. Paul Fire & Mar. Ins. Co. v PepsiCo, Inc., 884 F2d 688; Cardinal Holdings, Ltd. v Indotronix Intl. Corp., 73 AD3d 960; Corman v LaFountain, 38 AD3d 706.) III. The judgment against Sonia Cohen is unconscionable. (Montaño v City of Chicago, 535 F3d 558; Walley v Leatherstocking Healthcare, LLC, 79 AD3d 1236; Green v Dolphy Constr. Co., 187 AD2d 635; Melcher v Apollo Med. Fund Mgt. L.L.C., 52 AD3d 244; Aoude v Mobil Oil Corp., 892 F2d 1115.)

      Kellner Herlihy Getty & Friedman LLP, New York City (Douglas A. Kellner of counsel), and Lewis Johs Avallone Aviles, LLP, Islandia (Robert J. Cimino and Robert A. Lifson of counsel), for respondent in the first and second above-entitled actions.
    I. Clear and convincing evidence received at the evidentiary hearing established that appellants were guilty of egregious misconduct designed to defraud the court. (Thoreson v Penthouse Intl., 80 NY2d 490; McMunn v Memorial Sloan-Kettering Cancer Ctr., 191 F Supp 2d 440; Arts4All, Ltd. v Hancock, 12 NY3d 846; Kihl v Pfeffer, 94 NY2d 118; Turk Eximbank-Export Credit Bank of Turkey v Bicakcioglu, 81 AD3d 494; Figiel v Met Food, 48 AD3d 330; Di Russo v Kravitz, 21 NY2d 1008; Birsett v General Acc. Ins. Co. of Am., 241 AD2d 683; Garnett v Hudson Rent A Car, 258 AD2d 559.) II. The court properly assessed CDR Créances S.A.S.’s actual damages based on documentary evidence. (Rokina Opt. Co. v Camera King, 63 NY2d 728; Bingham v New York City Tr. Auth., 99 NY2d 355; CDR Créances S.A. v Euro-American Lodging Corp., 40 AD3d 421; Flamm v Noble, 296 NY 262; Miot v Miot, 24 Misc 3d 1224[A], 2009 NY Slip Op 51605 [U], 78 AD3d 464; Eighteen Holding Corp. v Drizin, 268 AD2d 371; Bailon v Guane Coach Corp., 78 AD3d 608; American Tr. Ins. Co. v Faison, 242 AD2d 201; Merrill Lynch, Pierce, Fenner & Smith v Arcturus Bldrs., 159 AD2d 283.)
   OPINION OF THE COURT

Rivera, J.

In this appeal we conclude that where a court finds, by clear and convincing evidence, conduct that constitutes fraud on the court, the court may impose sanctions including, as in this case, striking pleadings and entering default judgment against the offending parties to ensure the continuing integrity of our judicial system. With one exception, the record on this appeal supports such sanctions, and we therefore affirm, in part, the Appellate Division (104 AD3d 17 [1st Dept 2012]).

I

This appeal arises from fraudulent conduct by defendants during the course of litigation by plaintiff, CDR Créances S.A.S., to recover wrongfully diverted and concealed proceeds of a loan agreement. There is an extensive history of legal actions that is the backdrop for the current appeal, involving numerous individuals and businesses, claims of unlawful money and stock transfers, and charges of manipulation of offshore business entities in furtherance of a conspiracy to conceal funds from plaintiff. Despite the complexities of the various financial matters involved, the focus of the years of litigation is quite simple: the recovery of payment on a loan agreement entered into as part of a hotel business venture. Several of plaintiffs New York legal actions have asserted that defendant Maurice and his son Leon Cohen have conspired to avoid repayment by denying their ownership and control over entities used to conceal the converted funds.

In 1990 Société de Banque Occidentale (SDBO), the subsidiary of a major French bank and plaintiffs predecessor in interest, entered a partnership with SNC Coenson International et Cie (SNC), controlled by defendant Maurice Cohen. The purpose of the partnership was to develop the Flatotel hotel in Paris, France, as part of a worldwide franchise, which SDBO agreed to finance. Later that same year, SDBO and SNC entered an agreement and became shareholders of Euro-American Lodging Corporation (EALC), an American corporation also controlled by defendant Maurice Cohen, for the purpose of converting a Manhattan building into a Flatotel hotel (New York Flatotel). Then, in 1991, SDBO and EALC entered into a loan agreement, governed by French law, whereby SDBO would provide $82,704,990 for acquisition and development of the Manhattan project and EALC would pay property taxes.

Problems developed between SDBO and EALC, and SDBO refused to make any further payments on the loan agreement, alleging that EALC was diverting funds. Thereafter, EALC commenced suit in France seeking to compel SDBO to make payments in accordance with the loan agreement, and SDBO counterclaimed to accelerate repayment of the loan debt caused by EALC’s default. In February 2003, the French court directed EALC to repay the loan and nearly $14 million in unpaid taxes to New York City, pursuant to the loan agreement. In 2005, the New York courts recognized the French judgment against EALC, eventually entering judgments for $95,837,522 and $112,159,088.41 in interest, respectively. The Appellate Division affirmed the judgments (40 AD3d 421 [1st Dept 2007]).

II

As part of its efforts to recover payment of the loan agreement, plaintiff commenced two actions in Supreme Court in 2003 and 2006, based on what plaintiff alleged was an extensive and intricate conspiracy orchestrated to conceal stock transfers and other transactions by Maurice and Leon Cohen. The 2003 complaint alleged breach of contract, fraud, tortious interference with contract, conversion, and unjust enrichment. The complaint named as defendants Maurice Cohen, EALC, and several corporate entities controlled by Maurice which served as alter egos of each other, including Blue Ocean Finance, Ltd. (Blue Ocean), a Panamanian entity; World Business Center, Inc. (World Business), a New York corporation; and several other business enterprises involved in fraudulent stock transfers which were alter egos for and controlled by Simon Elias, a resident of New York and alleged to be the officer and/or director of several defendant entities. In February 2006, Supreme Court entered a preliminary conference order in the 2003 action directing defendants who had not yet answered to do so.

Plaintiff’s 2006 action alleged, inter alia, that defendants Maurice and Leon Cohen conspired with others — whose identities had now been ascertained — to strip EALC of its operating income — the collateral for the loan agreement — and sold the New York Flatotel, in violation of the loan agreement, for $33 million, the proceeds of which were diverted to Blue Ocean without any payment made to plaintiff on the 2005 judgments. Plaintiff asserted claims for fraud, breach of fiduciary duty, fraudulent conveyance, tortious interference with contract, unjust enrichment and conversion. In addition to Maurice and Leon Cohen, plaintiff named as defendants Maurice’s wife Sonia Cohen, former chief executive officer of EALC Robert Maraboeuf, former director of EALC Patricia Habib Petetin, officer of Blue Ocean Allegria Achour Aich, Maurice’s secretary and Pete-tin’s sister Joelle Habib, and several corporate entities controlled by Maurice and Leon Cohen, including Blue Ocean and World Business. Defendants Maraboeuf, Aich, and Patricia Habib failed to appear and a default judgment for $265,865,120.81 was entered against them in January 2008.

In August 2010, plaintiff made separate motions to strike the answers of Maurice, Leon and Sonia Cohen, Joelle Habib, and World Business for failure to comply with discovery obligations in both the 2003 and 2006 actions. Defendants Maraboeuf, Aich and Patricia Habib Petetin appeared and moved to vacate their default in the 2006 action. The 2003 and 2006 actions were consolidated and in August 2008, Supreme Court granted plaintiffs motions to strike and denied defendants’ motion to vacate the default judgments. All of the defendants appealed and the Appellate Division reversed, citing the brief period that had elapsed between the first discovery order and the defaults, the magnitude of the judgments and the lack of specific prejudice to the plaintiff (CDR Créances S.A.S. v Cohen, 62 AD3d 576 [1st Dept 2009]).

Upon remand, discovery resumed in the 2003 and 2006 actions. Defendants Maraboeuf, Aich and Patricia Habib Petetin answered and along with defendants Maurice, Leon and Sonia Cohen submitted to depositions. In the course of these depositions, Maurice and Leon Cohen denied any involvement in the sale of the New York Flatotel or the diversion of funds from the loan agreement. Maurice stated he did not own any of the defendant entities and was not involved in the negotiations and sale of the New York Flatotel. Leon denied that he or any member of his family had any ownership interest in any of the defendant entities plaintiff alleged he and his father controlled. Defendant Sonia Cohen stated that she neither had knowledge of, nor ever participated in, her husband’s business ventures. Defendant Aich stated that a man by the name of Jim Cox controlled Blue Ocean, that she had met him in person several times, and that he showed an interest in purchasing the New York Flatotel. She named Francois Lavalle as the person in charge of the New York Flatotel, and she denied any knowledge that Maurice Cohen owned any of the defendant entities. Defendant Maraboeuf denied serving as the chief executive officer of EALC, and further stated that Maurice Cohen did not control any of the defendant entities and that he had not had contact with Maurice in several years.

Before the conclusion of discovery in New York, federal authorities arrested Maurice and Leon Cohen in Florida where they were residing, and charged them with tax evasion in connection with the profits made from the proceeds of the sale of the New York Flatotel, and additionally alleged a conspiracy to commit fraud on the New York court by forging documents and suborning perjury. The indictment specifically alleged that Maurice and Leon Cohen forged and falsified documents, and instructed Habib, Petetin, Aich, and Maraboeuf to give false testimony at their depositions that would corroborate Maurice and Leon Cohen’s perjury. The federal charges did not implicate Sonia Cohen as part of the conspiracy.

At trial in the United States District Court for the Southern District of Florida, defendants Habib and Petetin (the Habibs) were the government’s key witnesses. In exchange for immunity from prosecution, the Habibs testified to an extensive, systematic effort to conceal from Supreme Court Maurice and Leon’s efforts to conceal proceeds from the $33 million sale of the New York Flatotel, and the transfer of the proceeds to offshore accounts to avoid taxes. During the federal case, the Habibs also settled with the plaintiff in the New York 2003 and 2006 actions. A jury subsequently convicted defendants of tax evasion.

At the August 2010 sentencing, the District Court concluded that Maurice and Leon Cohen had perpetrated fraud on Supreme Court in New York. The District Court found Maurice and Leon Cohen’s criminal activity “spanned the better part of a decade or more, involved numerous fictitious entities, an elaborate web of shell corporations, and heavy handed [treatment] of a number [of] less sophisticated financially dependant employees in the scheme,” and sentenced both Maurice and Leon Cohen to 120 months in federal prison.

Shortly after defendants’ sentencing, plaintiff again moved pursuant to CPLR 3126 to strike defendants’ pleadings and for a default judgment in the consolidated 2003 and 2006 actions, alleging all of the defendants perpetrated fraud on the court. Supreme Court held a full evidentiary hearing at which the Habibs testified to the Cohens’ carefully orchestrated scheme of lies and evidence fabrication. Repeating much of their federal testimony, they recounted a meeting held prior to their depositions in New York, attended by defendants Maurice Cohen, Leon Cohen, Robert Maraboeuf and Allegria Aich, during which the Cohens instructed them and the other defendants to provide false and misleading testimony. At the meeting the Cohens provided the Habibs with a written “script,” which plaintiff introduced into evidence at the hearing, which was intended to provide the Habibs with false answers to be given to their attorney and at their depositions. The Cohens told the Habibs to deny knowing both Maurice and Leon, to present themselves as representatives of the entities the Cohens’ denied controlling, and to give false testimony at their depositions that would corroborate false testimony of defendants Aich and Maraboeuf. According to the Habibs, the Cohens also created fictitious characters, Francois Lavalle and Jim Cox, to further the Co-hens’ lies and conceal their actions. Joelle Habib was instructed to testify that Francois Lavalle hired her and that Jim Cox controlled another entity the Cohens denied ownership of. Aich had also falsely testified that Lavalle controlled the New York Flatotel and Cox controlled Blue Ocean. The Habibs further testified that Aich and Maraboeuf repeatedly perjured themselves in their depositions in an effort to conceal Maurice and Leon Cohen’s involvement in the conversion of proceeds from the loan agreement and the sale of the New York Flatotel.

Based on the testimony and plaintiff’s exhibits, Supreme Court determined, by clear and convincing evidence, that defendants had perpetrated a fraud on the court and granted plaintiffs motion, basing its authority on the court’s inherent power to take action to preserve the integrity of the judicial process. Supreme Court found, inter alia, Maurice and Leon Cohen had suborned perjury by providing the Habibs with a “script” containing false answers to be given to their attorneys and at their depositions; created Francois Lavalle and Jim Cox — wholly fictitious individuals — and intentionally implicated them as controlling the defendant corporations; forged the affidavits of others in an effort to disclaim ownership of the defendant corporations; secretly paid each of their codefendants legal fees through corporate entities in an effort to financially coerce their false testimony; and intentionally and pervasively ignored court-ordered discovery obligations. Supreme Court also found that defendants Maraboeuf and Aich intentionally lied at their depositions, denying a relationship with Maurice and Leon Cohen. Moreover, defendant Aich urged Maraboeuf and the Habibs to lie in accordance with the scripts they were given, and to falsely state that they paid their own legal fees. Supreme Court struck defendants’ answers and entered default judgment (2011 NY Slip Op 33636[U] [2011]).

The Appellate Division affirmed, with one Justice dissenting. The majority concluded that “[t]he ample record is more than sufficient to demonstrate appellants’ utter disregard for the judicial process, and while no finding of fraud on the court is necessary to warrant striking the pleadings, appellants’ conduct is appropriately characterized as such” (104 AD3d at 24). The majority also concluded that Supreme Court properly awarded damages without a hearing because the damages were determinable by reference to the French court’s judgment, recognized in New York. The dissent contended that plaintiff failed to “conclusively demonstrate” deceit, which required a showing that the claims were “undisputed” or “admitted,” because the Cohens denied committing fraud, and challenged the credibility of the Habibs’ testimony, thus raising a material question of fact (id. at 30, 34 [Catterson, J., dissenting]). We granted defendants leave to appeal (21 NY3d 858 [2013]) and now affirm, in part.

III

Defendants contend that the Appellate Division erroneously applied a preponderance of the evidence standard to plaintiffs motion to strike under CPLR 3126, despite its prior decision in Melcher v Apollo Med. Fund Mgt. L.L.C. (52 AD3d 244 [1st Dept 2008]), which defendants argue required a finding that the misconduct be “conclusively demonstrated.” Defendant further argues that plaintiff failed to “conclusively demonstrate” fraud on the court because Maurice and Leon Cohen have consistently denied any misconduct, and the Habibs’ testimony raised credibility issues as to the truth of their statements. Thus, according to defendants, the court was without authority to resolve the outstanding questions for the trier of fact, and should have denied the motion. Defendants further argue that they are entitled to a hearing on damages because plaintiffs claim for damages is not for a “sum certain” and remains subject to factual and legal challenges.

For its part, plaintiff argues that it submitted clear and convincing evidence of a massive scheme of fraud on the court characterized by perjury, witness tampering and falsification of documents, and that defendants’ failure to comply with discovery is further proof of defendants’ egregious actions. They argue that a standard requiring that the fraud is “conclusively demonstrated” is against precedent and unworkable. As for damages, they assert that Supreme Court correctly entered judgment as calculated by the prior judgments against the defendants.

The parties do not dispute the court’s authority to strike the pleadings, but rather the evidentiary standard applicable to a claim of fraud on the court, and what conduct would justify dismissal based on a finding of fraud. As discussed below, we agree with plaintiff that clear and convincing evidence of fraud on the court is necessary to warrant striking the offending party’s pleading, and that the record supports the existence of such evidence. We also agree with plaintiff that judgment on damages was properly entered.

IV

In accordance with CPLR 3126:

“[i]f any party . . . refuses to obey an order for disclosure or wilfully fails to disclose information which the court finds ought to have been disclosed pursuant to this article, the court may make such orders with regard to the failure or refusal as are just, among them: . . .
“3. an order striking out pleadings or parts thereof, or staying further proceedings until the order is obeyed, or dismissing the action or any part thereof, or rendering a judgment by default against the disobedient party” (CPLR 3126 [3]).

As we stated in Kihl v Pfeffer, “[i]f the credibility of court orders and the integrity of our judicial system are to be maintained, a litigant cannot ignore court orders with impunity” (94 NY2d 118, 123 [1999]). Compliance requires “a timely response and one that evinces a good-faith effort to address the requests meaningfully” (id.). A trial court has discretion to strike pleadings under CPLR 3126 when a party’s repeated noncompliance is “dilatory, evasive, obstructive and ultimately contumacious” (see Arts4All, Ltd. v Hancock, 54 AD3d 286, 286 [1st Dept 2008], affd 12 NY3d 846 [2009], and affd 13 NY3d 812 [2009]).

Apart from CPLR 3126, a court has inherent power to address actions which are meant to undermine the truth-seeking function of the judicial system and place in question the integrity of the courts and our system of justice.

“Courts of justice are universally acknowledged to be vested, by their very creation, with power to impose silence, respect, and decorum, in their presence, and submission to their lawful mandates, and, as a corollary to this proposition, to preserve themselves and their officers from the approach and insults of pollution” (Anderson v Dunn, 19 US 204, 227 [1821]).

Fraud on the court involves wilful conduct that is deceitful and obstructionistic, which injects misrepresentations and false information into the judicial process “so serious that it undermines . . . the integrity of the proceeding” (Baba-Ali v State of New York, 19 NY3d 627, 634 [2012] [citation and quotation marks omitted]). It strikes a discordant chord and threatens the integrity of the legal system as a whole, constituting “a wrong against the institutions set up to protect and safeguard the public” (Hazel-Atlas Glass Co. v Hartford-Empire Co., 322 US 238, 246 [1944]; see also Koschak v Gates Constr. Corp., 225 AD2d 315, 316 [1st Dept 1996] [“The paramount concern of this Court is the preservation of the integrity of the judicial process”]).

The federal courts have applied the clear and convincing standard in determining whether the offending party’s actions constitute fraud on the court (see e.g. Aoude v Mobil Oil Corp., 892 F2d 1115, 1118 [1st Cir 1989]). Characteristic of federal cases finding such fraud is a systematic and pervasive scheme, designed to undermine the judicial process and thwart the non-offending party’s efforts to assert a claim or defense by the offending party’s repeated perjury or falsification of evidence (id. at 1118). Fraud on the court warrants heavy sanctions, including the striking of an offending party’s pleadings and dismissal of the action.

For example, in McMunn v Memorial Sloan-Kettering Cancer Ctr., plaintiff commenced suit against her former employer alleging disability discrimination in violation of the Americans with Disabilities Act. Following discovery, defendant moved to dismiss citing “improper conduct of the plaintiff’ (191 F Supp 2d 440, 443 [SD NY 2002]). The court found plaintiff “lied at her deposition . . . intentionally and in bad faith, and that her false testimony directly and irrevocably destroyed potentially critical evidence” (id. at 448); plaintiff “repeatedly lied and misled [defendant] in an intentional effort to prevent it from deposing [a material witness]” (id. at 452); and plaintiff “intentionally spoiled relevant evidence” (id. at 454). Accordingly, the court dismissed plaintiffs claim, finding “a lesser penalty . . . would be ineffective as a sanction for [plaintiff’s] dishonest behavior, which pervades every aspect of this case” (id. at 462).

In Shangold v Walt Disney Co. (2006 WL 71672, *1, 2006 US Dist LEXIS 748, *1-4 [SD NY, Jan. 12, 2006, No. 03 Civ 9522 (WHP)], affd 275 Fed Appx 72 [2d Cir 2008]), plaintiffs, authors who had submitted story proposals to a publisher owned by defendant, sued defendant claiming that defendant published a book similar to plaintiffs 1995 story (id.). Defendant established the plaintiffs’ 1995 submission contained several references to a “Palm Pilot,” a device which was not in existence when plaintiffs allegedly submitted their story proposal (2006 WL 71672, *5, 2006 US Dist LEXIS 748, *14). Accordingly, the court found plaintiffs intentionally fabricated the basis for their lawsuit, and bolstered that fabrication with perjury (id.). In dismissing plaintiffs’ action, the court noted “no sanction short of dismissal [would] suffice to deter future misconduct” (2006 WL 71672, *5, 2006 US Dist LEXIS 748, *15).

In DAG Jewish Directories, Inc. v Y & R Media, LLC (2010 WL 3219292, *1, 2010 US Dist LEXIS 82388, *1-4 [SD NY, Aug. 12, 2010, No. 09 Civ 7802 (RJH)]), plaintiff sought to enjoin defendants from using their company trade name, or misrepresenting themselves as affiliated with plaintiff in an effort to attract customers (id.). The court ordered a preliminary injunction. Thereafter, plaintiff moved for contempt against defendants, submitting a contract allegedly used by defendants that included plaintiffs trade name, in violation of the court’s order (2010 WL 3219292, *2, 2010 US Dist LEXIS 82388, *6). The court held a full evidentiary hearing in which it found the contract submitted by plaintiff was a blatant forgery (2010 WL 3219292, *4, 2010 US Dist LEXIS 82388, *10-12), and concluded “nothing less than outright dismissal would deter similar misconduct” (2010 WL 3219292, *5, 2010 US Dist LEXIS 82388, *17).

In contrast, courts have failed to find egregious conduct constituting fraud on the courts where the moving party fails to meet its evidentiary burden (see e.g. Passlogix, Inc. v 2FA Tech., LLC, 708 F Supp 2d 378, 401 [SD NY 2010] [“(plaintiff) has not presented clear and convincing evidence that (defendant perpetrated fraud)”]); the conduct constitutes isolated instances of perjury about matters not central to the issues in the case (see e.g. Carling v Peters, 2013 WL 865842, *10, 2013 US Dist LEXIS 32808, *31 [SD NY, Mar. 8, 2013, No. 10 Civ 4573 (PAE) (HBP)] [defendant’s conduct was “insignificant, collateral and (did) not give rise to sanctions pursuant to the Court’s inherent power”]); or the offending party offers “equally plausible alternative explanations” for discrepancies in testimony or evidence (see Zimmerman v Poly Prep Country Day Sch., 2012 WL 2049493, *34, 2012 US Dist LEXIS 78816, *109 [ED NY, June 6, 2012, No. 09 CV 4586 (FB)]).

The evidentiary standard applied by the federal courts is sufficient to protect the integrity of our judicial system, and discourage the type of egregious and purposeful conduct designed to undermine the truth-seeking function of the courts, and impede a party’s efforts to pursue a claim or defense. We adopt this standard and conclude that in order to demonstrate fraud on the court, the nonoffending party must establish by clear and convincing evidence that the offending “party has acted knowingly in an attempt to hinder the fact finder’s fair adjudication of the case and his adversary’s defense of the action” (McMunn, 191 F Supp 2d at 445, citing Skywark v Isaacson, 1999 WL 1489038, *14, 1999 US Dist LEXIS 23184, *50-51 [SD NY, Oct. 14, 1999, No. 96 Civ 2815 (JFK)], affd 2000 WL 145465, 2000 US Dist LEXIS 1171 [SD NY, Feb. 9, 2000]). A court must be persuaded that the fraudulent conduct, which may include proof of fabrication of evidence, perjury, and falsification of documents concerns “issues that are central to the truth-finding process” (McMunn, 191 F Supp 2d at 445). Essentially, fraud upon the court requires a showing

“that a party has sentiently set in motion some unconscionable scheme calculated to interfere with the judicial system’s ability impartially to adjudicate a matter by improperly influencing the trier or unfairly hampering the presentation of the opposing party’s claim or defense” (McMunn, 191 F Supp 2d at 445, quoting Aoude, 892 F2d at 1118).

A finding of fraud on the court may warrant termination of the proceedings in the nonoffending party’s favor (see e.g. McMunn, 191 F Supp 2d at 462 [“(defendant) deserves the harsh sanction of dismissal”]; Shangold, 2006 WL 71672, *5, 2006 US Dist LEXIS 748, *15 [plaintiffs’ fabrication of evidence warrants dismissal]; Hargrove v Riley, 2007 WL 389003, *11, 2007 US Dist LEXIS 6899, *37-39 [ED NY, Jan. 31, 2007, No. CV-04-4587 (DGT)] [same]; DAG Jewish Directories, 2010 WL 3219292, *5, 2010 US Dist LEXIS 82388, *17 [same]). For “when a party lies to the court and [its] adversary intentionally, repeatedly, and about issues central to the truth-finding process, it can fairly be said that [the party] has forfeited [the] right to have [the] claim decided on the merits” (McMunn, 191 F Supp 2d at 445). Therefore, once a court concludes that clear and convincing evidence establishes fraud on the court, it may strike a pleading and enter a default judgment.

We caution that dismissal is an extreme remedy that “must be exercised with restraint and discretion” (Chambers v NASCO, Inc., 501 US 32, 44 [1991]; accord Dodson v Runyon, 86 F3d 37, 39 [2d Cir 1996] [“We have long recognized that dismissal is a harsh remedy”]; McMunn, 191 F Supp 2d at 461 [“dismissal is a harsh sanction to be used only in extreme situations”]). Dismissal is most appropriate in cases like this one, where the conduct is particularly egregious, characterized by lies and fabrications in furtherance of a scheme designed to conceal critical matters from the court and the nonoffending party; where the conduct is perpetrated repeatedly and wilfully, and established by clear and convincing evidence, such as the documentary and testimonial evidence found here. Dismissal is inappropriate where the fraud is not “central to the substantive issues in the case” (Rezende v Citigroup Global Mkts., Inc., 2011 WL 1584603, *6, 2011 US Dist LEXIS 45475, *17 [SD NY, Apr. 27, 2011, No. 09 Civ 9392 (HB)]), or where the court is presented with “an isolated instance of perjury, standing alone, [which fails to] constitute a fraud upon the court” (McMunn, 191 F Supp 2d at 445, citing Gleason v Jandrucko, 860 F2d 556, 560 [2d Cir 1988]). In such instances, the court may impose other remedies including awarding attorney fees (Rezende, 2011 WL 1584603, *6, 2011 US Dist LEXIS 45475, *18), awarding other reasonable costs incurred (Sanchez v Litzenberger, 2011 WL 672413, *8, 2011 US Dist LEXIS 18528, *21 [SD NY, Feb. 24, 2011, No. 09 Civ 7207 (THK)] [“Plaintiff will be required to reimburse Defendants for the expenses and fees incurred in rooting out Plaintiffs true identity”]), or precluding testimony (Ades v 57th St. Laser Cosmetica, LLC, 2013 WL 2449185, *12, 2013 US Dist LEXIS 79864, *35 [SD NY, June 6, 2013, No. 11 Civ 8800 (KNF)]). In the rare case where a court finds that a party has committed fraud on the court warranting dismissal, the court should note why lesser sanctions would not suffice to correct the offending behavior (see Dodson, 86 F3d at 39 [“one of the factors that should inform a trial court’s decision [whether to dismiss] is the suitability of lesser sanctions”]).

Defendants argue that because the potential sanctions are severe and include the possibility of dismissal, a court must find that the evidence “conclusively demonstrates” fraud. Defendants would impose a standard which requires proof that lies and falsifications are admitted or undisputed. However, such a standard is theoretically unsupportable, as well as unworkable in practice, because it is the unusual and rare case where there will not be some dispute — regardless of its significance to the matter before the court — as to the conduct and its fraudulent nature. Defendants’ proposed evidentiary standard would encourage parties to “create a dispute” by merely protesting the truth of the allegations. Such standard would permit fraud to continue, regardless of the viability of the contentions creating the purported “dispute.” In other words, defendants’ standard would permit a party to escape a court’s consideration of claims of egregious acts of deceit by presenting bare denials of the truth of the allegations. Thus, the “conclusively demonstrates” standard risks setting the bar too high to prevent and discourage fraud on the court.

V

Here, with the exception of Sonia Cohen as discussed below, we perceive no error in the Appellate Division’s order affirming the striking of defendants’ answers and entering a default judgment. The record reveals numerous instances of perjury, subornation of perjury, witness tampering and falsification of documents by defendants. As Supreme Court and the Appellate Division described in detail, Maurice and Leon Cohen sought to mislead the court about their ownership interests in the defendant corporations, as well as the conversion of the proceeds from the loan agreement and the sale of the New York Flatotel. The record shows that the Habibs produced the script provided by Maurice and Leon Cohen, which demonstrated that codefendants Aich and Maraboeuf were entirely dishonest in their assertions that Maurice and Leon did not own any of the defendant entities and that neither had a relationship with Maurice Cohen. Moreover, the script revealed that defendant Maraboeuf was blatantly lying about his role at EALC and his assertion that he had no contact with Maurice Cohen for several years. Additionally, all of the defendants lied about the payment of their legal fees, which in fact were paid by entities controlled by Maurice and Leon Cohen. Defendant Aich testified regarding her multiple meetings with Jim Cox and conversations with Francois Lavalle — completely aware that these were fictitious individuals, fabricated by Maurice and Leon Cohen. All this conduct was in furtherance of one goal: to hide Maurice and Leon’s connections to the alleged theft, and conceal the location of the funds pursued by the plaintiff. Thus, the defendants intended to undermine the New York actions in which plaintiff sought to discover and procure the concealed proceeds of the loan agreement, and committed a fraud on the court.

In determining the proper sanctions to be imposed, Supreme Court found that Maurice and Leon Cohen intentionally sought to deceive the court and the plaintiff by concealing their involvement in the sale of the New York Flatotel. The conduct prejudiced the plaintiff by impeding its ability to obtain true discovery and forcing plaintiff to spend enormous amounts of money and time to prove its case. Moreover, the conduct was not isolated and defendants did not attempt to correct their misconduct. In considering a lesser sanction, the court concluded that the deception perpetrated by Maurice and Leon Cohen would continue if the lawsuit was allowed to proceed. These factors were properly considered by the court (see McMunn, 191 F Supp 2d at 446; see also Shangold, 2006 WL 71672, *4, 2006 US Dist LEXIS 748, *11-12; DAG Jewish Directories, 2010 WL 3219292, *4, 2010 US Dist LEXIS 82388, *10-11; Rezende, 2011 WL 1584603, *4, 2011 US Dist LEXIS 45475, *12-13), and the record fully supports the sanctions imposed.

Defendants argue that Supreme Court overstepped its authority because the evidence was in dispute and there were credibility issues related to the Habib sisters’ testimony which must be resolved by the trier of fact. However, Supreme Court’s decision states quite clearly that the court did not rely solely on the Habib sisters’ testimony, but found, additionally, that Maurice and Leon Cohen’s “fraud goes beyond the [subornation] of perjury and witness tampering because they also forged and falsified documents that provided additional support for their defense.” In addition to the testimony of the Habibs, Supreme Court indicated it reviewed the script provided by the Cohens, deposition testimony, an affidavit from the attorney who represented the buyers of the New York Flatotel, and “bank records and other documents.” After a review of the documentary evidence, Supreme Court found Maurice and Leon Cohen “falsified and forged ... a number of promissory notes,” and that the Cohens further “fabricated corporate records and [shareholder] affidavits.” Accordingly, Supreme Court’s findings support the conclusion that defendants committed fraud on the court, and warrant striking defendants’ answers and entering default judgment.

However, the evidence is insufficient to justify the default against defendant Sonia Cohen. In support of striking this defendant’s answer, plaintiff points to the fact that she lied about her involvement in her husband’s businesses and the concealment of assets by Maurice and Leon, and thus perjured herself during her deposition. The record establishes that Sonia Cohen operated a perfume shop owned by her husband in which defendant Maraboeuf — who she denied knowing — was the manager, and that she was a signatory on at least one corporate bank account controlled by Maurice and Leon Cohen. Her denials are hardly equivalent to the actions of the other defendants, who lied about Maurice and Leon’s ownership and management of the New York Flatotel and the business entities which were used as vehicles to siphon funds. Moreover, no direct evidence established that she participated in the meeting regarding the false deposition testimony. Although she is not innocent of misconduct, her statements and denials were not central to the success of the scheme to hide information from the court and the plaintiff. Accordingly, with respect to defendant Sonia Cohen, the order of the Appellate Division should be modified to vacate the judgment as against her.

Lastly, defendants assert that they are entitled to a hearing on damages because the plaintiffs claims are subject to numerous legal and factual challenges. We disagree. The Appellate Division was correct to conclude that the plaintiffs damages were based on the French judgments and the documents submitted to the court. Thus, no hearing was required.

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

Chief Judge Lippman and Judges Graffeo, Read, Smith and Pigott concur; Judge Abdus-Salaam taking no part.

Order modified, without costs, by remitting to Supreme Court, New York County, for further proceedings in accordance with the opinion herein and, as so modified, affirmed.

      . In 2003 and 2005, plaintiff initiated separate mortgage foreclose actions in Supreme Court based on EALC’s default on the loan agreement. The first foreclosure action was dismissed in 2005, and in 2007 the Appellate Division modified, on the law, and remanded for further proceedings the second foreclosure action (CDR Créances S.A. v Euro-American Lodging Corp., 43 AD3d 45, 55 [1st Dept 2007]).

      . The suit also named Summerson International Establishment, a corporation organized under the laws of the Grand Duchy of Liechtenstein and an original holder of stock in EALC; Iderval, a corporation organized under the laws of the British Virgin Islands and a holder of new stock issued by EALC without any consideration; Ospin International, Inc., a corporation organized under the laws of the Commonwealth of the Bahamas and a subsequent purchaser of all of EALC’s stock; Gama Lodging, LLC, a New York limited liability company that purchased or otherwise received 3,000 shares of EALC stock; and Megainvest Trust Reg., a trust formed and domiciled in the Principality of Liechtenstein that purchased or otherwise acquired stock in EALC. Additionally, the suit named “John Doe” defendants as co-conspirators whose identities had not yet been ascertained.

      . Maurice and Leon Cohen are currently incarcerated.