author:
Graffeo, J.
      Read and R.S. Smith, JJ.

text:
    [851 NE2d 1153, 818 NYS2d 802]
    James S. Denio, as Guardian of the Person and Property of Sarah J. Denio, Respondent-Appellant, v State of New York, Appellant-Respondent.
    Argued April 27, 2006;
    decided June 8, 2006

      POINTS OF COUNSEL

      Eliot Spitzer, Attorney General, Albany (Michael S. Buskus, Caitlin J. Halligan, Daniel Smirlock and Peter H. Schiff of counsel), for appellant-respondent.
    I. Fundamental principles of economics, previously embraced by this Court, require that the “discount rate” used to determine the “present value” of awards also be used as the interest rate for the interval of time for which the awards are discounted to present value. (Matter of Oil Spill by Amoco Cadiz Off Coast of France on Mar. 16, 1978, 954 F2d 1279; Jones & Laughlin Steel Corp. v Pfeifer, 462 US 523; Wetzler v Sisters of Charity Hosp., 17 AD3d 1088; Abellard v New York City Health & Hosps. Corp., 264 AD2d 460; Hollwedel v Duffy-Mott Co., 263 NY 95; Milbrandt v Green Refractories Co., 79 NY2d 26; Pay v State of New York, 87 NY2d 1011.) II. Determination of a proper interest rate should be guided by short-term, risk-free Treasury rates, the maturity dates of which should approximate the interval for which interest is owed. (Rodriguez v New York City Hous. Auth., 91 NY2d 76; Brown v United States, 615 F Supp 391, 790 F2d 199, 479 US 1058; Greenway v Buffalo Hotel, 951 F Supp 1039; Jones & Laughlin Steel Corp. v Pfeifer, 462 US 523; Jafri v Jafri, 176 Misc 2d 246;
      Reid v County of Nassau, 156 Misc 2d 533; Auer v State of New York, 185 Misc 2d 254, 283 AD2d 122; Matter of New York State Urban Dev. Corp. [Alphonse Hotel Corp.], 293 AD2d 354; Guido v State of New York, 187 Misc 2d 647; Pay v State of New York, 176 Misc 2d 540.) III. In the alternative, short-term money market interest rates should be selected as a benchmark. (Rodriguez v New York City Hous. Auth., 91 NY2d 76; Matter of County of Suffolk, 109 AD2d 155; Matter of South Bronx Neighborhood Dev. Plan, 110 Misc 2d 571, 89 AD2d 948, 58 NY2d 532; Marine Midland Bank v State of New York, 118 Misc 2d 472; Matter of Janes, 223 AD2d 20, 90 NY2d 41; Binghamton Masonic Temple v City of Binghamton, 158 Misc 2d 916; Matter of Oil Spill by Amoco Cadiz Off Coast of France on Mar. 16, 1978, 954 F2d 1279.) IV Even if equity rates of return were relevant to selection of an interest rate, the State of New York met its burden here since stocks lost money and interest rates were well below 9%. (Rodriguez v New York City Hous. Auth., 91 NY2d 76; Matter of New York State Urban Dev. Corp. [Alphonse Hotel Corp.], 293 AD2d 354.)

      Hogan & Willig, PLLC, Amherst (Colleen E. Buonocore of counsel), for respondent-appellant.
    I. The Court of Claims erred when it apportioned 40% liability to defendant State of New York and 60% liability to Eric Poler. This finding was contrary to the weight of the evidence and to the court’s own findings. The Appellate Division erred when it affirmed the apportionment. (Noseworthy v City of New York, 298 NY 76; Schechter v Klanfer, 28 NY2d 228; Veit v State of New York, 192 Misc 205; Stern v State of New York, 32 Misc 2d 357; Barrett v State of New York, 22 AD2d 347; Brock v State of New York, 58 AD2d 715.) II. The Court of Claims was correct in awarding a statutory interest rate of 9% in its discretion and the Appellate Division, Fourth Department, correctly affirmed the award. (Standard Trust Co. v New York Cent. & Hudson Riv. R.R. Co., 178 NY 407; Innis v State of New York, 60 NY2d 654; Gittleman v Feltman, 191 NY 205; Rodriguez v New York City Hous. Auth., 91 NY2d 76; People ex rel. Emigrant Indus. Sav. Bank v Sexton, 284 NY 57; Auer v State of New York, 283 AD2d 122; Guido v State of New York, 187 Misc 2d 647; Pay v State of New York, 176 Misc 2d 540; Fisher v State of New York, 292 AD2d 882; Matter of Metropolitan Transp. Auth. v American Pen Corp., 94 NY2d 154.)

      Herzfeld & Rubin, PC., New York City (David B. Hamm of counsel), for New York City Housing Authority, amicus curiae.

      I. The lower courts have misapplied Rodriguez v New York City Hous. Auth. (91 NY2d 76 [1997]), thus undermining the legislative intent manifest in State Finance Law § 16 and Public Housing Law § 157 (5). Guidelines for the exercise of discretion under such statutes should be set by this Court. (Abiele Contr. v New York City School Constr. Auth., 6 AD3d 366; Matter of New York State Urban Dev. Corp. [Alphonse Hotel Corp.], 293 AD2d 354; Guido v State of New York, 187 Misc 2d 647, 288 AD2d 345, 97 NY2d 612; Auer v State of New York, 185 Misc 2d 254, 283 AD2d 122; Regis v City of New York, 269 AD2d 515; Sassoonian v City of New York, 178 Misc 2d 660, 261 AD2d 319; Matter of Village of Port Chester, 5 Misc 3d 1031[A], 2004 NY Slip Op 51654 [U]; Matter of New York Urban Dev. Corp., 189 Misc 2d 303; Pay v State of New York, 176 Misc 2d 540; Molinari v City of New York, 176 Misc 2d 523.) II. Where, as here, a discount rate was advanced by plaintiff/claimant for calculations under CPLR article 50-B, no reason exists to permit a different rate for calculation of interest. (Matter of Martin v C.A. Prods. Co., 8 NY2d 226; Secured Equities Invs. v McFarland, 300 AD2d 1137; Sunseri v Macro Cellular Partners, 263 AD2d 365; Matter of Pace v Assessor of Town of Islip, 252 AD2d 88; General Elec. Co. v Inter-America Mktg. Sys., 220 AD2d 307, 87 NY2d 968; Moore v County of Clinton, 219 AD2d 131, 89 NY2d 851; Ford Motor Credit Co. v Colonial Funding Corp., 215 AD2d 435; Prudential Home Mtge. Co. v Neildan Constr. Corp., 209 AD2d 394; Dennis’ Natural Mini-Meals v 91 Fifth Ave. Corp., 209 AD2d 262; Lanzano v City of New York, 202 AD2d 378, 83 NY2d 760.) III. CPLR 1206 (c) provides guidance for the determination of a proper rate of interest. (Gold v United Health Servs. Hosps., 95 NY2d 683; Donato v Glicerian Gonzalo, M.D., P.C., 145 Misc 2d 304; Hilgarth v Costello, 132 Misc 2d 1020; Matter of Livigni v Robinson, 128 Misc 2d 345; Rodriguez v New York City Hous. Auth., 91 NY2d 76; Auer v State of New York, 283 AD2d 122; Guido v State of New York, 288 AD2d 345; Pay v State of New York, 176 Misc 2d 540.)

      Michael A. Cardozo, Corporation Counsel, New York City (Stephen J. McGrath and Cheryl Payer of counsel), for City of New York, amicus curiae.
    The appropriate rate to use in determining the interest rate on judgments against governmental entities should be that of Treasury securities of the relevant maturity. (Rodriguez v New York City Hous. Auth., 91 NY2d 76; Matter of New York Urban Dev. Corp., 189 Misc 2d 303; Matter of City of New York, 284 NY 48, affd sub nom. A. F. & G. Realty Corp. v City of New York, 313 US 540.)
   OPINION OF THE COURT

Graffeo, J.

The issue in this personal injury case is whether the Court of Claims erred by applying a nine percent rate — the maximum rate allowed under State Finance Law § 16 — for prejudgment and postjudgment interest against the State of New York. We conclude that the Court of Claims did not abuse its discretion and therefore affirm.

In 1992, Sarah J. Denio sustained serious personal injuries in a motor vehicle accident that occurred in Niagara County. Her car was struck by a vehicle driven by Eric B. Poler, who lost control of his automobile on a wet roadway. Denio suffered a traumatic brain injury, as well as multiple facial fractures, two jaw fractures, five pelvic fractures, fractures in both ankles and numerous other injuries requiring years of medical treatment and rehabilitation. Claimant James S. Denio, Sarah’s father, commenced this action as her guardian against defendant State of New York, alleging that the State’s negligent maintenance of State Route 31 caused Poler to lose control of his vehicle.

After a trial on liability issues, the Court of Claims in February 1999 found both the State and Poler negligent, apportioning 40% of the liability for Sarah’s injuries to the State and 60% to Poler. The court determined that the State had notice of a preexisting dangerous roadway condition “in the form of three-quarter inch wheel path rutting along with inadequate superelevation/banking on the curve,” and that the State’s failure to take reasonable measures to correct the defect was a proximate cause of the accident. The court further concluded that Poler’s negligence was “the main cause” of the collision based on his vehicle’s three bald tires and expert testimony that he was speeding and did not react properly.

Following a bifurcated trial on damages, the Court of Claims awarded claimant $4,248,879.33. Before judgment was entered, the parties stipulated to CPLR article 50-B calculations, except for the rate of interest that the State owed on the award from the date of the liability determination until the entry of judgment (see CPLR 5002), and from the entry of judgment to the date of final payment (see CPLR 5003). The rate of interest to be charged against the State for prejudgment and postjudgment interest under State Finance Law § 16 was in dispute between the parties — claimant sought a rate of nine percent, while the State urged the application of a lower interest rate.

After reviewing the proof presented by the parties, the Court of Claims found claimant’s position “more persuasive” and ordered the application of a nine percent rate for both prejudgment and postjudgment interest. In January 2003, the court entered a judgment reflecting the CPLR article 50-B stipulations, together with a nine percent interest rate.

The Appellate Division modified the award by increasing the damages recovery to more than $5 million, but otherwise affirmed the judgment and remitted the case to the Court of Claims for further CPLR article 50-B proceedings. During the pendency of their appeals to the Appellate Division, the parties stipulated to a partial payment of the January 2003 judgment. Upon issuance of the Appellate Division order, the parties further agreed to the form and amount of the judgment, expressly preserving their respective interest rate arguments. Judgment was entered and the State made a second payment in September 2005, thereby satisfying payment of all damages awarded to claimant, along with a prejudgment and postjudgment interest payment to the extent the State deemed appropriate. We granted the State and claimant leave to appeal.

The State contends that the Court of Claims erred in applying a nine percent interest rate for prejudgment and post-judgment purposes because the court improperly relied on evidence of stock market rates of return in determining a reasonable rate. Instead, the State submits that trial courts applying “ceiling” rate statutes, such as State Finance Law § 16, should calculate an interest rate based on short-term, risk-free US Treasury rates for the applicable time period covering the payment term of the judgment. Alternatively, the State suggests that trial courts should be limited to using short-term money market interest rates as the suitable benchmark but that, in no event, should equities be considered. We disagree.

A successful plaintiff in a personal injury action is entitled to interest “from the date the verdict was rendered or the report or decision was made to the date of entry of final judgment” (CPLR 5002), as well as from the entry of judgment to the date of payment (CPLR 5003). The applicable rate of interest is nine percent per year “except where otherwise provided by statute” (CPLR 5004). This case involves one such exception. State Finance Law § 16 provides that “[t]he rate of interest to be paid by the state upon any judgment or accrued claim against the state shall not exceed nine per centum per annum.”

In Rodriguez v New York City Hous. Auth. (91 NY2d 76 [1997]), we addressed Public Housing Law § 157 (5), a comparable “shall not exceed” interest rate statute. The primary issue there was whether the nine percent interest rate was mandatory or whether Supreme Court had discretion to apply a lower rate. In resolving that question, we traced the historical underpinnings of CPLR 5004, the provision governing interest rates generally, in relation to the subject statute.

First, we noted that prior to 1972, CPLR 5004 provided that “[i]nterest shall be at the legal rate, except where otherwise prescribed by statute.” At the time, the legal rate was “based upon the variable rate of interest on the loan or forbearance of money as set by the Banking Board, or, if no rate had been prescribed by the Banking Board, the rate of 6% per annum” (Rodriguez, 91 NY2d at 78). The Legislature amended CPLR 5004 in 1972 to replace the variable rate with a fixed interest rate of “six per centum per annum” (L 1972, ch 358).

In the years following the adoption of this amendment, interest rates increased dramatically, making it more attractive for defendants to use funds that would otherwise have been paid to plaintiffs rather than borrow monies. As a result of this development, the Advisory Committee on Civil Practice issued a report in 1981 in support of a rate increase from six percent to nine percent. The report pointed out that the use of delaying tactics permitted defendants to take advantage of the economic situation:

“The Committee has had reported to it many examples of a party’s litigation conduct apparently motivated by the low interest rate contained in CPLR 5004. When the sums involved in the case are large, it is self-evident that the longer the defendant delays the case — assuming that the plaintiff will ultimately prevail — the longer the defendant will be able to keep money at a six percent rate that he would have to pay two, three or even four times more for on the money market. Instances have been reported to us of patently unmeritorious appeals taken in commercial cases merely to obtain the delay, and of tort appeals, where possible in bifurcated trials, of liability findings just to postpone the trial of the damages issue” (1981 McKinney’s Session Laws of NY, at 2658).

The Legislature adopted the recommendation and adjusted CPLR 5004’s interest rate upward to nine percent in 1981 (see L 1981, ch 258).

In 1982, the Legislature decided to increase the ceiling limit for interest relating to certain governmental entities in order to parallel the CPLR 5004 nine percent interest rate enacted a year earlier (see L 1982, ch 681). As justification for the rate increase, the Legislature indicated that

“[t]he current rate of interest on claims paid by public owners in this state ranges from 3% for local governments, to 4% for various public corporations to 6% by the State. Since the mid-1970’s the rate of interest in the private marketplace has exceeded these amounts often to a substantial degree” (Senate Introducer Mem in Support, Bill Jacket, L 1982, ch 681).

It was further recognized that the low statutory interest rates gave public entities “no incentive whatsoever to enter into reasonable negotiations” aimed at settlement (id.). Significantly, however, the Legislature chose to leave in place the “shall not exceed” qualifying language when it amended Public Housing Law § 157 (5), State Finance Law § 16, General Municipal Law § 3-a and Unconsolidated Laws § 2501.

Against this backdrop of legislative history, in Rodriguez we interpreted Public Housing Law § 157 (5) as imposing “a not-to-be-exceeded maximum, instead of a statutorily fixed, rate of interest,” and determined that a trial court may, under appropriate circumstances, exercise its discretion and apply a lower rate (91 NY2d at 80). We further described the nine percent rate as “presumptively fair and reasonable” (id. at 81). Similar to the posture of the State on this appeal, the Housing Authority asked this Court in Rodriguez to limit the trial court’s consideration to “relatively safe” investments such as US Treasury securities “based on the assumption that a reasonable plaintiff would have placed the verdict or judgment amount in” such investment vehicles (id. at 80). We expressly declined to adopt this restriction.

Since Rodriguez, appellate courts addressing “shall not exceed” interest rate statutes have uniformly held that trial judges should examine “all reasonable investment possibilities during the relevant time period,” including both private and public securities, in determining whether to apply a rate less than the ceiling rate (Auer v State of New York, 283 AD2d 122, 126 [3d Dept 2001]; see also Abiele Contr. v New York City School Constr. Auth., 6 AD3d 366, 367 [2d Dept 2004]; Matter of New York State Urban Dev. Corp. [Alphonse Hotel Corp.], 293 AD2d 354, 355 [1st Dept 2002]). Recognizing that Rodriguez rejected the exclusive use of US Treasury rates as a benchmark, all four Departments have concluded that it would be illogical and unfair to focus exclusively on the lowest-returning investments in deciding whether to assign a lower interest rate.

We endorse the reasoning of these decisions. Interest is designed to compensate for the loss that results when a claimant is “deprived of the use of money to which he or she was entitled from the moment that liability was determined” (Love v State of New York, 78 NY2d 540, 545 [1991]). If a successful claimant was able to access a monetary award immediately, the claimant could invest those proceeds in a wide range of prudent investment choices, including money market funds, corporate bonds or reasonably-risked equity funds. Hence, it makes sense to consider a full spectrum of investments — both public and private — in determining an appropriate rate of interest. It follows that the most logical approach when attempting to persuade a trial court to apply a lower rate would be to demonstrate that an array of reasonable and balanced investment alternatives produces a return lower than nine percent.

To rebut the presumption of reasonableness accorded State Finance Law § 16’s maximum rate, the State bears the burden of proffering substantial evidence that rates of return on both public and private investments during the relevant period are below nine percent (see generally Matter of Metropolitan Transp. Auth. v American Pen Corp., 94 NY2d 154, 158 n 1 [1999]; Matter of FMC Corp. [Peroxygen Chems. Div.] v Unmack, 92 NY2d 179, 187 [1998]). Substantial evidence “ ‘consists of proof within the whole record of such quality and quantity as to generate conviction in and persuade a fair and detached fact finder that, from that proof as a premise, a conclusion or ultimate fact may be extracted reasonably — probatively and logically’ ” (FMC Corp., 92 NY2d at 188, quoting 300 Gramatan Ave. Assoc. v State Div. of Human Rights, 45 NY2d 176, 181 [1978]). Once the presumption has been rebutted, the claimant has the burden of coming forward with evidence tending to show that a higher rate, up to the statutory maximum, is reasonable.

When faced with opposing parties’ interest rate evidence, a trial court must weigh the evidence to determine an appropriate rate in the exercise of its discretion. Ordinarily, in weighing the evidence, the court may find a range of reasonable rates and as long as the rate selected is supported by a rational view of the evidence, no abuse of discretion will occur. As we stated in Rodriguez, “[t]he fact that another interest computation may also be ‘reasonable’ does not mandate the selection of that rate in an exercise of discretion” (Rodriguez, 91 NY2d at 81). Only where the State goes so far as to establish that the ceiling rate is unreasonable would the selection of that rate amount to an abuse of discretion, because a court may not reasonably apply an unreasonable rate.

In this case, the State sought the application of an interest rate lower than nine percent. Through an economist, the State advocated the use of “benchmark” rates derived from US Treasury securities, whose maturity coincided with the length of time the verdict remained unpaid. The State’s expert opined that a prejudgment interest rate of 5.35% was appropriate based on the interest rate for a US government security purchased in March 1999 with a maturity date in late 2002. He further recommended a postjudgment interest rate ranging from 1.76% to 2.13% premised on US government securities with one- and two-year maturity dates. The State also submitted evidence of interest rates associated with other low-risk financial instruments, including longer term US government securities and short-term money market instruments. Relying on Federal Reserve statistics, the State’s economist calculated the monthly interest rates on five such instruments: “3 Year Treasury notes, 4.97%; 10 Year Treasury bonds, 5.47%; 30 Year Treasury bonds, 5.76%; Aaa rated bonds, 7.17% and state and local bonds, 5.39%.” Although maintaining that stock market performance was irrelevant, the State nonetheless presented proof indicating that stock market rates of return were also below nine percent for the relevant time period. For example, the State submitted a portfolio composed of “60% equity exposure and 40% fixed income with a portion maintained in liquid short-term investments” that would have yielded a rate of return of negative 1.93%.

In opposing a lower rate, claimant argued that the State’s proposed rates were too restrictive and failed to consider other safe investment vehicles historically yielding higher rates. In support of his position that the nine percent rate should be used, claimant offered a sampling of investment portfolios achieving rates of return ranging from 9.03% to 12.96%. The first portfolio proposed 75% from stock indices (allocating 25% to the S & P 500, 25% to the S & P MidCap 400 Index and 25% to the S & P SmallCap 600 Index) and 25% from a fixed income securities index (measured by the Lehman Brothers Aggregate Bond Index), yielding an annual return of 9.03% between 1999 and 2002. A second portfolio using the same investments achieved a rate of return of 12.47% from 1993 to 2002. A third portfolio allocating 75% to the S & P 500 and 25% to fixed income securities resulted in an annual return of 12.96% between 1975 and 2001. Claimant also submitted evidence demonstrating that an average of five portfolio choices achieved an annual return of 9.32% between 1951 and 2002. Finally, claimant’s expert predicted that the stock market was expected to improve by late 2002.

Based on the foregoing, the State presented substantial evidence that both private and public reasonable investments could have resulted in rates of return less than nine percent during the relevant time period. The State therefore rebutted the presumption that nine percent should be applied. In response, claimant came forward with evidence to support application of the statutory maximum rate. It is clear that the Court of Claims then weighed the conflicting evidence in making its determination to apply the nine percent rate for both prejudgment and postjudgment interest. The Appellate Division affirmed, although it was, of course, free to exercise its own discretion in reviewing the evidence underlying the Court of Claims’ chosen rate.

When we are presented “with affirmed findings of fact, tending to show that the rate of interest was not unreasonable, and [where] these findings are supported by substantial evidence, we are jurisdictionally precluded from reviewing the same” (City of Buffalo v Clement Co., 28 NY2d 241, 266 [1971]; see also Humphrey v State of New York, 60 NY2d 742, 743-744 [1983]). Here, claimant submitted, in relevant part, evidence that a portfolio allocating 75% to equities — as measured by three well-known stock indices — and 25% to debentures achieved a rate of return of 9.03% during the relevant period. The State did not directly challenge the reasonableness of claimant’s investment portfolio selections. While evidence that a single portfolio supports the nine percent rate is admittedly slim and represents the outer limits of sufficiency, we are not prepared to say that such evidence was inadequate as a matter of law to uphold the Court of Claims’ decision. We note that, based on the entirety of this record, either court below would have been justified in applying a lesser rate. Nevertheless, because the record supports its use of the nine percent rate, we are precluded from further review and conclude that the Court of Claims did not abuse its discretion in utilizing a rate of nine percent for prejudgment and postjudgment interest.

Finally, we note that New York’s pre-1972 method of indexing an interest rate was somewhat akin to the floating interest index used by the federal courts. Since 1982, federal law requires the calculation of rates for postjudgment interest based on US Treasury securities (see 28 USC § 1961 [a] [computing interest “at a rate equal to the weekly average 1-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding the date of the judgment”]). Other states have likewise enacted statutory indexing methods to calculate various forms of interest (see e.g. Fla Stat Ann § 55.03; Iowa Code Ann § 668.13; Mich Comp Laws Ann § 600.6013; Minn Stat Ann § 549.09). If the New York State Legislature desires to model its interest statutes after these standards in order to reduce public expenditures or to better reflect market fluctuations in interest rates, it can certainly do so.

On the cross appeal, the affirmed findings of fact with respect to the apportionment of liability are supported by the record. Therefore, this matter is beyond our review (see Scheemaker v State of New York, 70 NY2d 985, 986 [1988]; Humphrey, 60 NY2d at 743-744).

We have considered the parties’ remaining arguments and find them to be without merit.

Accordingly, the judgment of the Court of Claims appealed from and the order of the Appellate Division brought up for review should be affirmed, without costs.

Read and R.S. Smith, JJ.

(dissenting in part). The majority’s opinion is wrong in several ways. First, it is wrong because it confuses two different things — a reasonable rate of interest and a reasonable return on investment. Under the statute, claimant is entitled to the former, subject to a 9% limitation. The majority reads it as though she were entitled to the latter, subject to the same limitation. The majority’s misreading of the statute to authorize awards based on stock market rates of return leads into complexities and contradictions that, we fear, will in practice be resolved by awarding the 9% maximum in every case — a result contrary to the plain intention of the Legislature, as the Court held in Rodriguez v New York City Hous. Auth. (91 NY2d 76 [1997]).

Secondly, the majority’s injection of equity rates of return into interest calculations has disturbing implications for the law of condemnation — an area in which, as the Constitution requires, interest rates are determined without a strict 9% maximum. If the logic of the majority opinion is applied in condemnation cases, condemnees may seek enormous interest rates when the stock market is booming, and condemnors may seek to use the majority opinion in reverse, with unpredictable results.

Finally, the majority opinion is wrong on its own terms. Even if it is correct to use equity rates of return as part of an interest calculation, the record here does not justify the decisions of the courts below, which the majority affirms. The Court should, at a minimum, remit this case to the Court of Claims for determination of a “reasonable” interest rate.

I

State Finance Law § 16 provides: “The rate of interest to be paid by the state upon any judgment or accrued claim against the state shall not exceed nine per centum per annum.” Rodriguez makes clear that under this statute, the trial court is to fix a “fair and reasonable” rate, equal to or lower than 9%, in the exercise of its discretion (91 NY2d at 80). We said in Rodriguez that, since 9% is the rate generally applied in cases between private parties (CPLR 5004), that rate is “presumptively fair and reasonable” (91 NY2d at 81), but that does not mean that 9% may be awarded in every case. The presumption is rebut-table.

What the statute provides for is a “rate of interest.” In deciding what rate is reasonable it is important to remember what “interest” is: “a charge for borrowed money” (Merriam-Webster’s Collegiate Dictionary 610 [10th ed 1993]). In cases like this the State has, in effect, borrowed a claimant’s money for a period of time ending with the date the judgment is paid. Thus the question a court should ask is: “What is a fair and reasonable rate of interest for a loan of this amount by this claimant to the State over this period of time?” Here, there is no way that the answer to that question can be 9%.

Claimant’s involuntary loan, an obligation of the State, was virtually risk free. The interest rate on three-year Treasury bonds — risk-free instruments comparable in duration to the loan at issue here — was roughly 5% or 6% throughout the time in question. We do not imply that the interest rate in a case like this must always be identical to the rate on corresponding Treasury obligations. But it is clear here that the State’s proposed prejudgment interest rate of 5.35% was within the range of reasonable choices, and that 9% was not.

Claimant’s argument for the 9% rate, which the majority accepts, is essentially that she was entitled to more than interest on her money. She did not, she points out, choose to make a loan to the State; if she had had the money she might have invested part or all of it in the stock market, and earned a better return. The short answer is that the Legislature has not said she is entitled to the return on investment she might have earned elsewhere; it has said she is entitled to “interest.” No court outside New York, as far as we know, has ever held that “interest” may be calculated on the basis of stock market returns.

The majority seems to have accepted, as did the courts below, claimant’s argument that it is unfair to limit her to a reasonable interest rate on a risk-free loan. Of course, courts are not free to revise the Legislature’s enactments to achieve greater fairness (Matter of Bello v Roswell Park Cancer Inst., 5 NY3d 170, 173 [2005]). But apart from that, the majority’s quest for a truly “fair” rate of return cannot succeed. No one can know what rate of return claimant would have earned if she had had the money to invest as she chose, because no one can know whether she would have been wise or unwise, lucky or unlucky. Implicit in the majority’s decision is that this problem may be solved by assuming claimant to be a typical prudent investor, but that assumption has its own problems, because there are times — and the 1999-2002 period considered in this case was one such time — when, because the stock market is in decline, most prudent investors will do worse than those who lend out their money at a risk-free rate. The record in this case shows that even a relatively conservative investor, who put only 60% of her money into equities that tracked the Standard & Poor’s 500, would have suffered a net loss of around 2% annually (see infra at 178-179).

Thus the approach of assuming the claimant to be a typical prudent investor can lead, in this and in some other cases, to awarding less than a risk-free rate; in strict logic, it could lead to awarding no interest, and even to awarding less than 100% of the principal. These results are obviously unacceptable, and it is probably for that reason that the Appellate Division in Auer v State of New York (283 AD2d 122 [3d Dept 2001]) adopted a “heads I win, tails you lose” variation on the “prudent investor” approach. Auer holds, in substance, that a 9% rate of return will be held “reasonable” unless the evidence shows that no prudent investor could possibly have hit that target: “[T]he defendant must show that all reasonable investment possibilities during the relevant time period demonstrate that the [9%] statutory rate is unreasonably high . . .” (id. at 126 [emphasis added]; accord, Matter of New York State Urban Dev. Corp. [Alphonse Hotel Corp.], 293 AD2d 354, 355 [1st Dept 2002]). This will probably never happen; there will always be some “reasonable” portfolio, chosen with the benefit of hindsight, that can produce a 9% return. The evidence in this case, which we analyze in detail below (infra at 178-179), illustrates the point: in a low interest rate environment, with the stock market going steeply down, claimant came up with a “reasonable” combination of investments that yielded, miraculously, 9.03%.

The Auer approach is unfair to the State, and it completely frustrates the direction of the Legislature, confirmed by our holding in Rodriguez, that a rate below 9% is sometimes appropriate. The Appellate Division relied on Auer in this case. The majority affirms the Appellate Division’s order and says that it “endorse[s]” the reasoning of Auer (majority op at 167), but it seems to reject, in a footnote, Auer’s key element — its virtually irrebuttable presumption in favor of 9% (majority op at 169 n 6).

The majority’s approach, as we understand it, is that the trial court is free to pick any “reasonable” rate of return. It does not say how the court is to choose, nor whether there is any floor; may the court choose a return below the risk-free rate, or even a negative return, if that is “reasonable”? Nor does the majority explain how it can affirm the decision below, while rejecting its fundamental premise. As we show below, the majority is affirming a decision that the courts below did not make.

The likely practical effect of the majority’s decision, despite its disclaimer, will be to drive all decisions into the 9% safe harbor that Auer created. It would be better, we think, to follow the statute, and Rodriguez, by requiring courts to award a reasonable “rate of interest.”

II

The majority decision also has the untoward side effect of unsettling our established condemnation jurisprudence. Before today, this Court required a condemnee challenging the fairness and reasonableness of the presumptively reasonable statutory rate to do so by comparing it to prevailing market rates of interest (see e.g. Matter of City of New York [Brookfield Refrig. Corp.—Zoloto], 58 NY2d 532, 536-537 [1983]; Matter of County of Nassau [Eveandra Enters.], 42 NY2d 849 [1977]; Adventurers Whitestone Corp. v City of New York, 65 NY2d 83 [1985]). The Court never considered rates of return on “reasonably-risked equity funds” (majority op at 167) to be relevant. Indeed, the idea of doing so is sufficiently fanciful that the California Supreme Court dismissed it in a footnote 21 years ago (see Redevelopment Agency v Gilmore, 38 Cal 3d 790, 806 n 17, 700 P2d 794, 806 n 17 [1985] [“(S)ince interest is at issue, only the rates of return on interest-bearing obligations are relevant. No case has suggested that the Constitution contemplates a ‘prudent investor’ in stocks or other equity securities”], citing City of New York; see also Liberty Sq. Dev. Trust v City of Worcester, 441 Mass 605, 808 NE2d 245 [2004] [holding that an adequate rate of prejudgment interest for a taking reflects what a prudent investor would earn in the usual interest markets], citing Redevelopment Agency and City of New York).

But now the majority has held that the rate of return on reasonably-risked equity funds, selected in hindsight, is indeed relevant to the judicial determination of fair and reasonable prejudgment interest in New York. The implications and consequences of this for condemnees and condemnors are unclear.

Can a condemnee now rebut the presumption that 9% is reasonable by presenting hypothetical portfolios of stocks and bonds with a rate of return in excess of 9% for the period of delay between the taking and payment? This would be an easy hurdle to clear when the period of delay coincides generally with a strong bull market, as was the case in the late 1990’s. Of course, as the evidence in this case, which we analyze below, demonstrates, a hypothetical portfolio of stocks and bonds may be crafted to exhibit almost any rate of return, regardless of general market conditions, so long as a major part of the portfolio may be allocated to any combination of well-recognized indices (of which there are many) after their performance is already known. Or would the condemnee have to show that prevailing market rates also significantly exceeded 9%? Suppose there is a return to double-digit interest rates — the feature of the economic landscape in the late 1970’s and early 1980’s which prompted the Legislature to raise the ceiling rate from 6% to 9% (see majority op at 165-166). In that event, may a trial judge in his discretion still award interest to the condemnee at the rate of 9% so long as the condemnor presents a single hypothetical portfolio of stocks and bonds returning 9% or less? The majority seems to say that equity rates of return are still not relevant to the question of the fairness of the statutory rate in a condemnation case (see majority op at 168 n 4 [“Evidence of stock market rates plays no part in this analysis”]). But a condemnee is entitled to prejudgment interest as part of constitutionally required just compensation. By contrast, a tort claimant obtains prejudgment interest only as a matter of legislative grace. Why, then, is it the tort claimant and not the condemnee who gets the benefit of stock returns? Does this pass constitutional muster?

Ill

The majority concludes that the State has rebutted the statutory presumption, but then opines that “[i]t is clear that the Court of Claims then weighed the conflicting evidence [presented by the State and claimant] in making its determination to apply the nine percent rate for both prejudgment and postjudgment interest”; and that this determination is beyond review in this Court because it is supported by affirmed findings of fact (majority op at 170). The record supporting these affirmed findings — which the majority concedes dwells at “the outer limits of sufficiency” — consists of a single hypothetical portfolio, allocated 75% to equities and 25% to bonds, which exhibited an annual average rate of return of 9.03% during the relevant time period (majority op at 171). In fact, however, there is no basis for the majority to conclude that the trial judge ever weighed the parties’ conflicting evidence, much less made findings of fact related to the conflicting evidence.

The relevant part of the trial judge’s opinion reads in its entirety as follows:

“The court has reviewed all of the arguments presented by both claimant and defendant and their experts on the pre-judgment and post-judgment interest rate issue, and finds the position of the claimant more persuasive. The court does not believe the defendant has overcome the presumption of reasonableness and fairness attributed to the statutory interest rate of 9%. Consequently, the court finds the rate of interest payable will be 9% for the period from the date of the liability decision to the date of entry of final judgment herein, and 9% for the period from the date of entry of final judgment to the date of payment or delivery of the annuity contract, whichever is appropriate” (emphasis added).

While the majority states that “[i]t is clear that the Court of Claims . . . weighed the conflicting evidence” (majority op at 170 [emphasis added]) and “[a]fter reviewing the proof presented by the parties, the Court of Claims found claimant’s position ‘more persuasive’ and ordered the application of a nine percent rate” (majority op at 164 [emphasis added]), the trial judge did not mention weighing “evidence” or reviewing “proof.” Instead, he stated that after reviewing the parties’ arguments — hardly the same thing as proof or evidence — he found the claimant’s position — again, not proof or evidence— “more persuasive.”

Secondly, the trial judge erroneously decided that the State had not “overcome the presumption of reasonableness and fairness attributed to the statutory interest rate of 9%.” After concluding (albeit incorrectly) that the State had not rebutted the presumption and “ [consequently” awarding claimant interest at 9%, the judge had no reason to weigh the parties’ conflicting evidence, and the majority has no basis for assuming that he nonetheless took this unnecessary step. Certainly, there is no indication on the face of the judge’s opinion that he did so. There are no findings of fact stated in his opinion, or discussions of the proof, which in and of itself constitutes reversible error by forestalling meaningful appellate review. The absence of any explanation (assuming the trial judge, in fact, weighed the parties’ conflicting evidence) is particularly worrisome in this case because claimant’s proof is, as the majority charitably labels it, “admittedly slim” (majority op at 171).

Specifically, of the three hypothetical portfolios that claimant presented, each of which allocated 75% to equities and 25% to bonds, only one covered the relevant time period, as the majority acknowledges. If the trial judge relied on either of the two irrelevant portfolios to find in claimant’s favor, he abused his discretion as a matter of law. There is no way to know what proof of claimant’s the judge may have considered — again assuming that he weighed the parties’ conflicting evidence in the first place — because his opinion is silent on the point. Further, claimant’s portfolio evidence was, in fact, disputed; the majority is just wrong when it states that “[t]he State did not directly challenge the reasonableness of claimant’s investment portfolio selections” (majority op at 171).

The three hypothetical portfolios were attachments to claimant’s attorney’s affidavit. He stated that he secured them from UBS/PaineWebber and that each was “tied to well known market indices” for various time periods. There is no explanation or justification in the record as to why UBS/PaineWebber allocated 75% of each of these three hypothetical portfolios to equities and 25% to bonds. Claimant’s attorney submitted only a chart captioned “Performance Results Based on Various Portfolio Asset Allocations.” There is no indication who prepared this chart, which identifies a 75% equity/25% fixed income portfolio as a “growth” portfolio, not a “balanced” portfolio. The majority, by contrast, says that a claimant “must. . . proffer balanced investment alternatives . . . , which may include government securities, reasonably-risked corporate bond indices, money market vehicles and recognized indices for low-to-moderately-risked securities” (majority op at 168 n 5 [emphasis added]).

Next, the State submitted its expert’s affidavit. Although the State’s expert opined that returns on equities were not a proper benchmark for setting a prejudgment interest rate, he nonetheless looked at the rate of return that a hypothetical “prudent investor” would have received over the relevant time period, assuming 60% invested in equities (measured by the S & P 500) and 40% invested in fixed income securities with a portion maintained in liquid short-term investments (measured by the Lehman Brothers Intermediate Government/Corporate Index). The rate of return was a negative 1.93%.

In reply, claimant finally presented the affidavit of her expert, who likewise “recommend[ed] the 60%/40% balanced investment approach [which] represents a prudent investment”; and conceded that the State’s expert “is correct that if a 60% S&P and 40% LBIN is used[,] the rate of return for the pre-judgment period in Denio would be -1.93%.” He squared this uncomfortable fact with his opinion that the statutory rate of 9% was nonetheless “appropriate” by observing that, based on historical patterns, the market was likely to rebound and perform better over the long term. But the expert’s prediction about the long-term future is not relevant to the proper rates of prejudgment and postjudgment interest in this case (see majority op at 171 n 9).

In short, the State disputed both claimant’s investment portfolio choices and her unexplained 75%/25% allocation formula. Critically, claimant’s expert opined that a prudent investor would have invested 60% in equities and 40% in bonds, yet claimant presented no evidence showing what such an investment would have returned over the relevant time period; the only competent evidence in the record for such a hypothetical portfolio, which was provided by the State’s expert, concededly showed a negative return. As a result, we would hold that, as a matter of law, the State has established by a preponderance of the evidence that the 9% statutory rate of interest is unreasonably high for the time period at issue, and would remit this matter for the Court of Claims to set an interest rate below 9% within the range of the State’s proof. Even if the majority is not willing to go so far, it should — having held that the State rebutted the presumption that the 9% statutory rate of interest is fair and reasonable in this case — remit to the Court of Claims for it to weigh the parties’ conflicting evidence, exercise its discretion, and award interest accordingly.

In sum, the majority decision suffers from a confusion — apparently unique to New York’s state courts — between interest and equity rates of return. This confusion has cost the taxpayers an additional $1 million in this case alone, and threatens to disrupt the State’s condemnation jurisprudence. Even assuming that equity rates of return are relevant, the majority has taken the astonishing position that the Court has no choice but to affirm here because the trial judge must have made certain findings of fact that he had no reason to believe he needed to make, and does not say he made. And the only possible record support for these supposed findings of fact — a single hypothetical portfolio allocating 75% to equities and 25% to bonds and yielding 9.03% — was not endorsed by claimant’s own expert, who instead “recommend[ed] the 60%/40% balanced investment approach.” But the only hypothetical 60%/40% portfolio in the record showed a loss for the relevant time period. We respectfully dissent.

Chief Judge Kaye and Judges G.B. Smith, Ciparick and Rosenblatt concur with Judge Graffeo; Judges Read and R.S. Smith dissent in part in a separate opinion.

Judgment appealed from and order of the Appellate Division brought up for review affirmed, without costs.

      . In this case, claimant was entitled to prejudgment interest from February 1999 to January 2003, and postjudgment interest from January 2003 until September 2005, when the State made its final payment.

      . A number of statutes governing the interest rate applicable to judgments against governmental entities contain similar language (see General Municipal Law § 3-a [counties, cities, towns and villages]; Public Authorities Law § 1212 [6] [New York City Transit Authority]; McKinney’s Uncons Laws of NY § 2501 [L 1939, ch 585, as amended] [various public improvement corporations]; Public Housing Law § 157 [5] [public housing authorities]).

      . With this case, the Fourth Department has now joined the other three Departments.

      . We emphasize that the foregoing analysis applies only where a governmental entity requests that the court exercise its discretion to apply a rate lower than the ceiling rate set by State Finance Law § 16. The dissent nevertheless claims that our opinion “unsettl[es] our established condemnation jurisprudence” (dissenting op at 175). We do no such thing. In the condemnation arena, a condemnee entitled to prejudgment interest may argue that the ceiling rate is too low and consequently “would result in a denial of just compensation, or unfairness” (Matter of Metropolitan Transp. Auth. v American Pen Corp., 94 NY2d 154, 158 n 1 [1999]). In that situation, a court has no discretion to apply a higher rate; rather, only where the condemnee establishes that the ceiling rate is unreasonably low in comparison to market rates will the court impose a higher rate (see Matter of City of New York [Brookfield Refrig. Corp.—Zoloto], 58 NY2d 532, 537 [1983] [fixing a higher rate based on medium term public securities]). Evidence of stock market rates plays no part in this analysis because the most logical way to demonstrate that the ceiling rate is constitutionally inadequate is to present evidence that even the interest rates for the most conservative investments — such as US Treasury securities — are higher than the rate set by statute.

      . A claimant cannot simply present a portfolio of common stocks that fared particularly well during the relevant time period since hindsight surely benefits a claimant’s selection of proposed investment options. A claimant must instead proffer balanced investment alternatives for the court to consider, which may include government securities, reasonably-risked corporate bond indices, money market vehicles and recognized indices for low-to-moderately-risked securities.

      . Hence, we disagree with Auer to the extent it indicates that a trial court’s discretion is triggered only after the defendant demonstrates, by a preponderance of the evidence, “that the statutory rate is unreasonably high” (Auer, 283 AD2d at 126). Rather, the court’s discretion is implicated when it is presented with evidence that a rate less than nine percent would also be reasonable.

      . The rate was calculated using an annual return of negative 8.55% as measured by the Standard & Poor’s (S & P) 500, and an annual return of 7.99% as measured by the Lehman Brothers Intermediate Government/ Corporate Index.

      . Thus, we do not agree with the dissent’s suggestion that this case be remitted to the Court of Claims to perform a weight of the evidence analysis. The Court of Claims would have had no basis for finding claimant’s evidence “more persuasive” had it not been weighing the evidence in its selection of the nine percent rate in the exercise of its discretion.

      . On the other hand, claimant’s other portfolios covering various time periods ranging back to the 1950’s are not relevant to the calculation of prejudgment and postjudgment interest commencing in 1999.


source: Caselaw Access Project

author: Ciparick, J.

license: Public Domain

text:
    [851 NE2d 1184, 818 NYS2d 833]
    Edward C. King, Appellant, v Lawrence A. Fox, Respondent.
    Argued May 11, 2006;
    decided June 13, 2006

      POINTS OF COUNSEL

      Profeta & Eisenstein, New York City (Fred, R. Profeta, Jr., of counsel), for appellant.
    I. An attorney, guilty of professional misconduct in the representation of a client, must disgorge all fees paid; his conduct may not be ratified by the client. (Matter of Phillips, 284 AD2d 897; Matter of Lippman, 232 AD2d 69; Teichner v W & J Holsteins, 64 NY2d 977; Campagnola v Mulholland, Minion & Roe, 76 NY2d 38; Orendick v Chiodo, 272 AD2d 901; Matter of Stevens, 252 AD2d 654; Schwartz v Tenenbaum, 7 AD2d 866; Universal Acupuncture Pain Servs., P.C. v Quadrino & Schwartz, 370 F3d 259; In re Badger, 9 F2d 560; Hendry v Pelland, 73 F3d 397.) II. Courts have a duty to disallow unconscionable fee agreements, and such agreements may not be ratified by the client. (Gair v Peck, 6 NY2d 97; Newman v Silver, 553 F Supp 485, 713 F2d 14; Dunn v H.K. Porter Co., Inc., 602 F2d 1105; In re Agent Orange Prod. Liab. Litig., 818 F2d 226; Landsman v Moss, 180 AD2d 718; Wade v Clemmons, 84 Misc 2d 822; Matter of Cox v Scott, 10 AD2d 32; Greene v Greene, 56 NY2d 86; McCoy v Gas Engine & Power Co., 135 App Div 771; Shaw v Manufacturers Hanover Trust Co., 68 NY2d 172.) III. Neither an unconscionable fee arrangement nor professional misconduct can be ratified by a client during a period of continuous representation. (Demov, Morris, Levin & Shein v Glantz, 53 NY2d 553.)

      Richard M. Maltz, PLLC, New York City {Richard M. Maltz
      and David Hammer of counsel), for respondent.
    I. Appellant should not be permitted to raise a disgorgement argument which was not implicated by the questions certified by the Second Circuit, not raised in the summary judgment motion that is the basis for this appeal, and requires this Court to make findings of fact. II. Precedent that denies an attorney a legal fee if discharged for cause does not authorize the disgorgement of an entire legal fee after a successful litigation based upon misconduct incidental to the representation. (Teichner v W & J Holsteins, 64 NY2d 977; Matter of Stevens, 252 AD2d 654; Orendick v Chiodo, 272 AD2d 901; First Natl. Bank of Cincinnati v Pepper, 454 F2d 626; De Luccia v Village of Monroe, 180 AD2d 897; Campagnola v Mulholland, Minion & Roe, 76 NY2d 38.) III. The law of ratification applies to attorney-client contracts. (Blinn v Schwarz, 177 NY 252; Bankers Trust Co. v Litton Sys., Inc., 599 F2d 488; Greene v Greene, 80 AD2d 55, 56 NY2d 86.) IV Ratification may occur during a period of continuous representation because the doctrine does not apply to the law of ratification. (Glamm v Allen, 57 NY2d 87; Borgia v City of New York, 12 NY2d 151; Greene v Greene, 80 AD2d 55, 56 NY2d 86; Schlanger v Flaton, 218 AD2d 597; Luk Lamellen U. Kupplungbau GmbH v Lerner, 166 AD 2d 505; Ruggiero v Powers, 284 AD2d 593; Naetzker v Brocton Cent. School Dist., 50 AD2d 142.) V Postnullification fraud does not nullify the ratification. VI. A client may ratify an unconscionable attorney’s fee agreement because a client may ratify any fee agreement that is not void. (Shiya v National Comm. of Gibran, 381 F2d 602.)
   OPINION OF THE COURT

Ciparick, J.

The United States Court of Appeals for the Second Circuit has asked us, by means of three certified questions, whether New York law permits a client to ratify an attorney’s fee agreement during a period of continuous representation; whether such ratification is possible if attorney misconduct has occurred; and whether a client can ratify an unconscionable fee agreement.

I.

The 30-year relationship between the parties has been summarized by the Second Circuit essentially as follows. In November 1972, plaintiff Edward C. King, a musician and songwriter, became a member of the rock band Lynyrd Skynyrd. Upon joining the band, King contributed to writing, arranging and performing some of its most popular songs, including, “Sweet Home Alabama.” In 1974, the band and its members entered into an exclusive recording agreement with MCA Records, Inc. under which MCA would collect royalties and pay them to the band. During the period from 1974 to 1975, artist’s royalties exceeded $1,000,000 per annum. At that time, King received only writer’s royalties since artist’s royalties were being used to buy out A1 Kooper, the band’s manager.

Before King became a member, the band had recorded 24 songs at a studio in Muscle Shoals, Alabama. In 1974, the band had King overdub guitar parts on 17 of these songs that eventually became known as the “Muscle Shoals Masters.” The band subsequently transferred its rights in these masters to MCA. In May 1975, King left the band due to a deteriorating relationship with its leader, Ronnie Van Zant. King then sought to determine his right to royalties through the band’s attorney, but was unsuccessful.

In August 1975, King sought the advice of a New York entertainment lawyer, who secured an advance on King’s writer’s royalties and retained one third of the advance as his fee. King believed that he was also due artist’s royalties because the buyout of Kooper likely was complete. The entertainment lawyer advised King that he would need a litigator to determine his right to artist’s royalties and referred King to Lawrence A. Fox, Esq.

In October 1975, King met with Fox in New York City. Fox explained that he was a personal injury lawyer who had little experience in entertainment law. His fee was not discussed at this meeting. Shortly after that meeting, Fox contacted the band’s attorney, who (Fox testified) told him that King was not entitled to any royalties, that King owed the band money and that she would not cooperate in providing information. At a meeting the following month, Fox advised King that he planned to pursue discovery of the agreements among the parties to determine King’s rights. At this meeting, Fox stated that he would represent King on a one-third contingency basis because, according to King, he was in “dire financial straits and had no money for a retainer.” King testified that he was under the impression that the fee would be taken only from whatever accumulated royalties were recovered, not from future royalties. No other fee arrangement was discussed at this meeting.

On November 26, 1975, Fox sent King a retainer letter that stated: “[The] fee for services in this matter will be a contingency fee, based upon any money recovered from the defendants. Our fee for representing you will be 1/3 of the recovery, whether by way of settlement, trial, judgment or other method.” King signed the letter agreement and returned it to Fox.

On February 10, 1976, Fox obtained a copy of the exclusive recording agreement with MCA. The agreement required MCA to pay royalties directly to King and also provided that royalties would not be suspended in the event a member left the band. Thus, the agreement appeared to render MCA defenseless against King’s assertion that he was entitled to royalties. On September 30, 1976, Fox initiated a lawsuit against MCA, seeking the unpaid (artist’s) royalties (according to King, writer’s royalties were discontinued by MCA after the initiation of the lawsuit). In January 1977, MCA answered and, in April 1977, it impleaded Sir Productions, Inc., the band’s manager, who claimed that King owed it 20% of his royalties. King claims that the manager’s entitlement to a portion of his royalties was the only issue in contention. Fox, on the other hand, asserts that MCA mounted a “vigorous defense” and that he had to use compulsory process in order to obtain discovery.

In August 1978, a proposed settlement of the litigation was reached. The settlement agreement provided for a lump sum payment of King’s past-due royalties and periodic future royalties to be paid directly to King. MCA, however, retained 20% of the past-due royalties in escrow with its law firm, representing the amount of the cross claim interposed by Sir Productions. The escrowed amount was later reduced to 10% after Fox settled the Sir Productions claim.

King and Fox discussed the proposed settlement agreement by telephone. In that conversation, Fox advised King that under the fee agreement Fox would be entitled to one third not only of all past royalties recovered, but also of all future royalties. King recalled that he was “shocked and surprised” at this revelation but did not pursue the issue since obtaining the settlement funds was of “utmost importance” to him. At this time, King told Fox that his wife wanted her family’s attorney in New Jersey, John K. Groon (now deceased), to review the settlement documents.

Meanwhile, Groon had sent a letter to Fox advising him that he was King’s local counsel and that he would like to review the settlement documents. Fox wrote Groon that he had spoken to Groon’s associate and that as far as they were both concerned, all questions were answered. Fox also stated that he should contact him to expedite the settlement and that time was of the essence:

“By November 11, 1978 I must serve a summons and complaint on Sir Productions, Inc., otherwise MCA will deposit the money into court as a stakeholder with the City of New York. If that happens, we will have to pay MCA’s legal fees, the money will not earn interest, and when the matter is ultimately resolved it will take a long time plus a fee on Ed [Kingl’s behalf to receive the money back from the New York City Treasury.”

In fact, this was a misrepresentation. Pursuant to the settlement agreement, the monies were not to be deposited into court but would remain in escrow. On October 23, 1978, Fox sent Groon a second letter saying that “[t]he one third recovery we receive includes all royalty money Ed [King] is entitled to resulting from his involvment [sz'c] with [the band] as that was our agreement.” This letter concluded with an additional request that Groon call Fox if further discussion was needed.

King signed the settlement documents at Groon’s office. King asserts that Groon wanted to review all of the papers, but that Fox’s statement that he had until November 11, 1978 to avoid the stakeholder proceeding caused King to panic and accept settlement, and that King therefore told Groon to have nothing more to do with the matter. On October 25, 1978, Groon sent a letter to Fox enclosing the executed settlement documents. Shortly thereafter, Groon died. After King received the settlement proceeds, he visited Fox at his New York office to discuss the fee arrangement. King relates that during his visit he was “blown away” when Fox showed him six crates of what Fox said were papers relating to his lawsuit. King asserts that Fox made him “feel embarrassed to bring up the fee arrangement” issue, which he did not.

After the 1978 settlement, MCA began to pay King both artist’s and writer’s royalties semiannually. The payments were sent to Fox who deducted his one-third share and remitted the remainder to King with a cover letter making a specific reference to the one-third payment to Fox’s law firm for legal fees. In 1981, King requested that Fox represent him in another matter concerning the Muscle Shoals Masters at which time there was no discussion of fees. The parties presumed that Fox would take one third of whatever was recovered. The following year, Fox brought an action against MCA demanding the artist’s royalties due to King. The matter was finally settled in 1989 and MCA began paying King royalties for the work done on the Muscle Shoals Masters. In the late 1980s, Fox also represented King in a dispute between the estates of former band members in federal District Court in Atlanta. Fox “traveled to Atlanta for three days, where he worked with King’s local counsel” and participated in “settlement conferences on King’s behalf until the matter was eventually resolved in or around 1989.”

The fee arrangement continued uninterrupted from 1979 to 1987. The topic, however, arose again in 1986 when King mentioned it to Fox during a telephone conversation. King relates that when he mentioned the fee agreement, Fox stated that he fought hard to win back King’s royalties and that King should be grateful. Fox allegedly went on to state that the fee arrangement was related to the 1978 settlement agreement which had been approved by the judge and that he was unable to modify it even if he wished. King contends that this statement caused him to believe that a court order obligated him to pay Fox the one third of his royalties. No such order exists. King further states that he was “strongly intimidated” from raising any further issues about the fee agreement. Fox denies making any statement that the fee agreement was connected to the 1978 settlement order.

In 1987, King wrote to Fox asking him to stop withholding one third of his writer’s royalties, which he had been doing since the 1978 settlement, as the writer’s royalties were never in jeopardy. Although Fox agreed to discontinue taking one third of King’s writer’s royalties in the future, he did not return any of the $55,000 already collected.

In 1988, King was audited by the Internal Revenue Service (IRS). King asked Fox to confirm their one-third fee arrangement, which Fox did in a letter to the IRS dated April 18, 1988. Moreover, on January 31, 1990, King wrote a letter to Fox expressing his appreciation for his help and anticipating future legal problems with MCA. King’s letter concludes with the statement that “you’ll be hearing from me!” Indeed, in 1991, Fox once again represented King on several other matters relating to King’s association with the rock band Strawberry Alarm Clock. There was little contact after this, other than the correspondence from Fox to King remitting King’s share of the periodic royalty payments.

In 1995, MCA contacted King to verify his address, and at King’s request, MCA changed the delivery instructions for his royalty checks to his address. As a result, King’s royalty checks were sent directly to him, and thus Fox was unable to deduct his one-third share. King eventually realized that he was receiving the full share of his artist’s royalties. King stated that he was afraid that he was violating “a court order of some kind” by denying Fox his fee, but made no effort to give Fox his one-third share.

On February 21, 1997, Fox finally contacted King to demand his one-third share of the artist’s royalties. King explained to Fox that he no longer had the money, and did not contact Fox again. King then enlisted the services of yet another attorney, who opined that Fox had taken advantage of King for years by collecting an illegal annuity, and this litigation ensued several months later. Over 17 years, Fox collected more than $104,000 in contingency payments from the two settlements — representing past royalties — approximately $368,000 from King’s future artist’s royalties, and $55,000 from his writer’s royalties for a total of $527,000.

II.

On June 4, 1997, King filed a complaint against Fox in the United States District Court for the Southern District of New York alleging that the one-third fee agreement with Fox was unconscionable, claiming breach of fiduciary duty, unjust enrichment, undue influence, conversion, and attorney delinquency in violation of New York Judiciary Law § 487 (misconduct subject to misdemeanor conviction and treble damages). King demanded that Fox disgorge all fees he collected, plus interest, as well as punitive damages and he sought rescission of the fee agreement. Fox answered the complaint in December 1997 and counterclaimed for an accounting of his share of the artist’s royalties that King had withheld since 1995 when MCA began sending the royalty checks directly to King.

In May 1998, Fox moved for summary judgment based on the untimeliness of King’s claim. The District Court granted summary judgment to Fox and dismissed the complaint on the ground that King’s lawsuit was barred by the six-year statute of limitations governing the fee agreement. The Court of Appeals for the Second Circuit vacated and remanded the matter finding that King “raised a genuine issue of material fact as to whether Fox continued to represent him, thus tolling the statute of limitations on King’s claim” (28 Fed Appx 95, 99 [2002]).

More depositions were taken and the District Court once again granted Fox summary judgment, rejecting King’s unconscionability argument, among others. The District Court accepted Fox’s argument that King ratified the fee agreement since he had accepted payment of royalties pursuant to the agreement with Fox for 17 years. King appealed and on August 2, 2005, the Second Circuit affirmed the judgment in part and certified the following three questions:

“1. Is it possible for a client to ratify an attorney’s fee agreement during a period of continuous representation?
“2. Is it possible for a client to ratify an attorney’s fee agreement during a period of continuous representation if attorney misconduct has occurred during that period? If so, can ratification occur before the attorney has committed the misconduct?
“3. Is it possible for a client to ratify an unconscionable attorney’s fee agreement?” (418 F3d 121, 137 [2d Cir 2005].)

We answer all three questions “yes,” but with significant qualifications. We have not been asked, nor do we decide, whether a valid ratification occurred in this case.

III.

Having found continuous representation through at least 1991, and having further found that the action was not time-barred, the Second Circuit asks whether a client may ratify an attorney-client fee agreement during a period of continuous representation, and whether ratification is possible if the attorney has committed fraud or other misconduct during that period. King maintains that such a fee agreement can never be ratified.

In proving ratification, the burden is on the attorney to establish that the client acquiesced in the agreement “with full knowledge of all the material circumstances known to the attorney,” and that such acquiescence was not brought about by fraud on the attorney’s part, or misconception on the part of the client (Greene v Greene, 56 NY2d 86, 92 [1982]; see also Kent v Quicksilver Min. Co., 78 NY 159, 190 [1879]). Although some other jurisdictions have not permitted ratification of attorney fee agreements because of the nature of the attorney-client relationship (see Walton v Hoover, Bax & Slovacek, L.L.P., 149 SW3d 834, 846-847 [Tex Ct App 2004]; Blattman v Gadd, 112 Cal App 76, 97, 296 P 681, 689 [1st App Dist 1931]), we do not agree that such an arrangement is in all circumstances immune from ratification.

Indeed, some New York courts have already recognized the ratification doctrine as applying to attorney-client agreements (see Greene v Greene, 80 AD2d 55, 59 [1st Dept 1981], affd 56 NY2d 86 [1982] [no ratification unless it be shown client approved act of attorney with knowledge that client allegedly had a cause of action against attorney]; Schlanger v Flaton, 218 AD2d 597 [1st Dept 1995] [attorney misconduct and a continuing business relationship of three years not enough time to warrant imposition of ratification defense]). Appellate courts from other jurisdictions have also held that a client may ratify what otherwise would be a breach of an attorney’s fiduciary duty (see Saggese v Kelley, 445 Mass 434, 837 NE2d 699 [2005]; Rippey v Wilson, 280 Mich 233, 273 NW 552 [1937]; Monco v Janus, 222 Ill App 3d 280, 583 NE2d 575 [1991]) so long as the client is competent and fully informed of the relevant facts. As the Supreme Judicial Court of Massachusetts wrote, “[Ratification is not the preferred method to obtain a client’s consent to a fee-sharing agreement, but it is adequate” (Saggese, 445 Mass at 442, 837 NE2d at 705).

But can ratification occur during a period of continuous representation? In New York, the continuous representation doctrine tolls the statute of limitations when professional malpractice is alleged. We have never held that the ratification doctrine can be suspended during a continuous period of representation, and we refuse to do so here. The Second Circuit noted that if this were a typical contract case, King’s eight years of acquiescence from 1978 to 1986 with full knowledge of the terms of the agreement would be enough under New York law to show ratification. We see no reason why the existence of continuous representation should unsettle traditional contract principles in this case.

Thus, although continuous representation may in some cases toll the statute of limitations, it cannot preclude ratification of an attorney fee agreement. Ratification may occur at any time, so long as a client has full knowledge of the relevant facts (including the terms of the agreement and the choice to disavow it) and has acquiesced. The fact that the agreement’s terms may be more advantageous to the attorney does not change the result. Nor is the result necessarily different if misconduct occurs during the period of continuous representation, so long as the client’s acquiescence is not procured as a result of the misconduct. Obviously, a ratification induced by misconduct would be invalid.

IV

Turning to the final inquiry — whether a client may ratify an unconscionable agreement — at common law an unconscionable agreement was one that no promisor (absent delusion) would make on the one hand and no honest and fair promisee would accept on the other (see Black’s Law Dictionary 75 [8th ed 2004]). In general, an unconscionable contract has been defined as one which is so grossly unreasonable as to be unen forcible because of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party (see Gillman v Chase Manhattan Bank, 73 NY2d 1, 10 [1988]). Such contracts are usually voidable since a party to a contract has the power to validate or ratify the contract, as well as the power to avoid it (see 1 Corbin on Contracts § 1.6, at 17-18 [1993 rev ed]).

In regard to attorney fee agreements, “courts as a matter of public policy give particular scrutiny to fee arrangements between attorneys and clients, casting the burden on attorneys who have drafted the retainer agreements to show that the contracts are fair, reasonable, and fully known and understood by their clients” (Shaw v Manufacturers Hanover Trust Co., 68 NY2d 172, 176 [1986]). A “[Contingent fee[ ] may be disallowed as between attorney and client in spite of [a] contingent fee retainer agreement[ ], where the amount becomes large enough to be out of all proportion to the value of the professional services rendered” (Gair v Peck, 6 NY2d 97, 106 [1959]). Here, the Second Circuit identified the sheer amount of the fee Fox collected as an element that might justify a finding of unconscionability.

Contingent fee agreements between attorneys and their clients, however, generally allow a client without financial means to obtain legal access to the civil justice system. In entering into contingent fee agreements, attorneys risk their time and resources in endeavors that may ultimately be fruitless. Moreover, it is well settled that “the client may terminate [the contingent fee agreement] at any time, leaving the lawyer no cause of action for breach of contract” (Gair, 6 NY2d at 106) only quantum meruit (see Campagnola v Mulholland, Minion & Roe, 76 NY2d 38, 43-44 [1990]).

It is inherently difficult to determine the unconscionability of contingent fee agreements because at the time of agreement, the precise amount of recovery is still unknown. As such, it is not necessarily the agreed-upon percentage of the recovery due the attorney or the duration of the recovery that makes a contingent fee agreement unconscionable (see Matter of Fitzsimons, 174 NY 15 [1903] [attorney’s fee of one half of the recovery does not render the agreement unconscionable]; see also Beatie v DeLong, 164 AD2d 104 [1st Dept 1990] [contingent fee agreement fair and enforceable where attorney was to receive 30% of revenue generated by patents in futuro]), but rather the facts and circumstances surrounding the agreement, including the parties’ intent and the value of the attorney’s services in proportion to the fees charged, in hindsight (see Gross v Russo, 47 AD2d 655 [2d Dept 1975]).

To assist in determining at what point a contingent fee agreement becomes unconscionable or unreasonable, the Legislature has enacted a statute, and the Appellate Divisions of the Supreme Court have promulgated joint rules, for establishing the reasonableness of contingent fee agreements (see Judiciary Law §§ 474, 474-a; Code of Professional Responsibility DR 2-106 [b] [22 NYCRR 1200.11 (b)] [listing factors to be considered as guide in determining reasonableness of fee]; DR 5-103 [a] [2] [22 NYCRR 1200.22 (a) (2)] [allowing for a contingent fee in civil cases]).

Besides the sheer amount of the fee, another factor to consider — and perhaps the most important — in determining the unconscionability of a contingent fee agreement, is whether the client was fully informed upon entering into the agreement with the attorney. Here, the Second Circuit says there exists a dispute as to whether Fox explained the full ramifications of the agreement at the time it was signed. However, ratification by definition occurs only after the initial agreement was made. Because of the special protections given to clients in dealing with their attorneys, it will be a rare case where an unconscionable agreement may be ratified by the client, but we are not prepared to say it can never occur. Where a fully informed client with equal bargaining power knowingly and voluntarily affirms an existing fee arrangement that might otherwise be considered voidable as unconscionable, ratification can occur so long as the client has both a full understanding of the facts that made the agreement voidable and knowledge of his or her rights as a client.

Accordingly, the certified questions should be answered in accordance with the foregoing writing.

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

Following certification of questions by the United States Court of Appeals for the Second Circuit and acceptance of the questions by this Court pursuant to former section 500.17 of the Rules of Practice of the Court of Appeals (22 NYCRR former 500.17 [now 22 NYCRR 500.27]), and after hearing argument by counsel for the parties and consideration of the briefs and record submitted, certified questions answered in accordance with the opinion herein.

      . “[T]o transfer (recorded sound) onto a recording that bears sound recorded earlier in order to produce a combined effect” (Merriam Webster’s Collegiate Dictionary 829 [10th ed 1993]).

      . In September 2000, in a trial of the counterclaim, a jury ruled in King’s favor. Fox initially appealed the order but subsequently withdrew his appeal. Thus, the counterclaim judgment in King’s favor is final. It should be noted that, as a result of King having prevailed in the counterclaim trial and no appeal having been taken by Fox, no future payment for legal fees from royalty checks will be made to Fox.


author: Read, J.

text:
    [851 NE2d 1170, 818 NYS2d 819]
    Bridget Semenetz, Individually and as Parent and Guardian of Sean Semenetz, an Infant, Appellant, v Sherling & Walden, Inc., et al., Defendants, and Sawmills & Edgers, Inc., Respondent.
    Argued May 4, 2006;
    decided June 13, 2006

      POINTS OF COUNSEL

      Powers & Santola, LLP, Albany (Michael J. Hutter of counsel), for appellant.
    I. Plaintiff can properly establish that Sawmills & Edgers, Inc. is subject to personal jurisdiction on the basis that the personal jurisdiction over S & W Edger Works, Inc. can be imputed to Sawmills upon a finding that Sawmills is substantively responsible for Edger Works’ tortious conduct. (Longines-Wittnauer Watch Co. v Barnes & Reinecke, 15 NY2d 443; Kreutter v McFadden Oil Corp., 71 NY2d 460; Arrowsmith v United Press Intl., 320 F2d 219; In re DES Cases, 789 F Supp 552; Anderson Dev. Corp. v Isoreg Corp., 154 AD2d 859; Tonns v Spiegel’s, 90 AD2d 548; Andrew Greenberg, Inc. v Sir-Tech Software, Inc., 4 NY3d 185; Applied Hydro-Pneumatics v Bauer Mfg., 68 AD2d 42; Schenin v Micro Copper Corp., 272 F Supp 523; Purdue Research Found. v Sanofi-Synthelabo, S.A., 338 F3d 773.) II. The product line exception should be adopted as an exception to the general rule of no corporate successor liability upon a transfer of assets. (Schumacher v Richards Shear Co., 59 NY2d 239; Salvati v Blaw-Knox Food & Chem. Equip., 130 Misc 2d 626; Radziul v Hooper, Inc., 125 Misc 2d 362; Hart v Bruno Mach. Corp., 250 AD2d 58; Rothstein v Tennessee Gas Pipeline Co., 174 Misc 2d 437, 259 AD2d 54; Grant-Howard Assoc. v General Housewares Corp., 115 Misc 2d 704, 97 AD2d 390, 63 NY2d 291; Delgado v Matrix-Churchill Co., 205 AD2d 575; Thomas Crimmins Contr. Co. v City of New York, 138 AD2d 138, 74 NY2d 166; City of New York v Pfizer & Co., 260 AD2d 174; Travis v Harris Corp., 565 F2d 443.) III. The essential elements necessary to support application of the product fine exception have been established by plaintiff as a matter of law, or at the very least by a prima facie showing. (Hart v Bruno Mach. Corp., 250 AD2d 58.)

      Goldberg Segalla, LLP, Albany {Jonathan M. Bernstein of counsel), for respondent.
    I. Contrary to plaintiffs arguments, the Appellate Division’s decision and order should be affirmed as no basis exists to establish personal jurisdiction in New York over Sawmills & Edgers, Inc. (Johnston v Pneumo Corp., 652 F Supp 1402; Colder v Jones, 465 US 783; Keeton v Hustler Magazine, Inc., 465 US 770; Rush v Savchuk, 444 US 320; Central States, Southeast & Southwest Areas Pension Fund v Reimer Express World Corp., 230 F3d 934, 532 US 943; Witt v Scully, 539 F2d 950; Sher v Johnson, 911 F2d 1357; Longines-Wittnauer Watch Co. v Barnes & Reinecke, 15 NY2d 443; LaMarca v Pak-Mor Mfg. Co., 95 NY2d 210; American Tel. & Tel. Co. v Compagnie Bruxelles Lambert, 94 F3d 586.) II. Exercise of personal jurisdiction over Sawmills & Edgers, Inc. in New York fails to comport with due process. (Burger King Corp. v Rudzewicz, 471 US 462; International Shoe Co. v Washington, 326 US 310; Asahi Metal Industry Co. v Superior Court of Cal., Solano Cty., 480 US 102; World-Wide Volkswagen Corp. v Woodson, 444 US 286; Metropolitan Life Ins. Co. v Robertson-Ceco Corp., 84 F3d 560; Sedig v Okemo Mtn., 204 AD2d 709; Miller v Surf Props., 4 NY2d 475.)
   OPINION OF THE COURT

Read, J.

A corporation that purchases another corporation’s assets is not liable for the seller’s torts, subject to four exceptions outlined in Schumacher v Richards Shear Co. (59 NY2d 239 [1983]). Plaintiff Bridget Semenetz asks us to revisit Schumacher to endorse a fifth exception — the “product line” exception in cases of strict products liability. For the reasons that follow, we reject the “product line” exception.

I.

In May 1998, defendant S & W Edger Works, Inc., an Alabama corporation, sold a 10,000-pound band sawmill to Semenetz Lumber Mill, Inc., located in Jeffersonville, New York. The sawmill, which cost $45,000, was capable of sawing logs 36 inches in diameter and 20 feet long. On July 26, 1999, Sean Semenetz, an infant, caught his right hand and fingers between a sprocket and chain apparatus in the sawmill, causing partial amputation of several fingers.

On October 5, 2000, Edger Works sold most of its assets, including real property, goodwill, trade names and inventory, to Sawmills & Edgers, Inc., another Alabama corporation, for $300,000. The purchase contract documents expressly stated that “[t]he Buyer [Sawmills] assume[d] none of the Seller’s [Edger Works] liabilities except for the receipt of and payment of ordered but undelivered inventory,” as listed in an attachment. On October 6, 2000, Edger Works changed its name to Sherling & Walden, Inc. Sherling & Walden paid Edger Works’ outstanding corporate debts in the months after the closing.

Sawmills manufactured sawmills at the same plant in Alabama where Edger Works had formerly produced them, and retained at least some of Edger Works’ former employees. Its advertising described Sawmills as “formerly S & W Edger Works,” stating that it “opened [its] doors for business in 1990,” which is the date Edger Works first sold its products in the marketplace. Sawmills has made only two sales in New York, both to Semenetz Lumber at its request and for less than $100.

On April 15, 2002, plaintiff commenced this action for damages on behalf of her infant son, naming Sawmills, Edger Works and Sherling & Walden as codefendants in causes of action alleging strict products liability; negligent design and manufacture; breach of duty to warn; and breach of warranty. She also asserted a cause of action against Semenetz Lumber for failure to maintain safe premises.

In its answer, Sawmills pleaded lack of personal jurisdiction as an affirmative defense; Sawmills subsequently moved for summary judgment dismissing the complaint and all cross claims on this ground. Before deciding the motion, Supreme Court ordered further discovery on the issue of personal jurisdiction, noting that there was, in fact, long-arm jurisdiction over Edger Works, which had sold and shipped the sawmill to Semenetz Lumber in 1998.

Supreme Court denied Sawmills’ motion for summary judgment. The court first turned to our decision in Schumacher to support the proposition that “while, in general, a corporation which acquires the assets of another is not liable for the torts of the predecessor corporation, there [are] exceptions to the rule.” These exceptions arise where a successor corporation “expressly or impliedly assume[s] [its] predecessor’s tort liability”; or “there [is] a consolidation or merger of seller and purchaser”; or “the purchasing corporation [is] a mere continuation of the selling corporation”; or “the transaction is entered into fraudulently to escape such obligations” (Schumacher, 59 NY2d at 245). The court determined that Sawmills did not fit within any of the four Schumacher exceptions, but that this did not end its inquiry in light of the Appellate Division’s decision in Hart v Bruno Mach. Corp. (250 AD2d 58 [3d Dept 1998]).

Supreme Court read Hart as expanding Schumacher to encompass two additional exceptions in cases alleging strict products liability — the “product line” exception, which the Appellate Division expressly espoused in Hart, and the “continuing enterprise” exception, which Supreme Court concluded that the Appellate Division had impliedly adopted in Hart. The court held that “under both . . . exceptions, [Sawmills] is a successor to [Edger Works] and is subject to [ ] long-arm jurisdiction here.” Sawmills appealed.

The Appellate Division first determined that “there can be no jurisdiction here based on the ‘corporate presence doctrine’ or New York’s long-arm statute” (21 AD3d 1138, 1139 [3d Dept 2005] [citations omitted]). The “corporate presence” doctrine was not satisfied because Sawmills was a nondomiciliary corporation and was not doing business in New York. New York’s long-arm statute did not reach Sawmills because it came into existence after the infant’s accident, and therefore did not engage in any tortious conduct causing his injuries. Similarly, assuming Sawmills had a duty to warn, the duty did not arise until after Sawmills acquired Edger Works’ assets, which took place after the infant’s accident. Nor was there any evidence that Sawmills derived substantial revenue from interstate commerce.

Next, the Appellate Division acknowledged that Hart had adopted the “product line” exception, which the First Department later rejected in City of New York v Pfizer & Co. (260 AD2d 174 [1st Dept 1999]), and which we had “not yet embraced” (21 AD3d at 1140). The Court did not determine whether Sawmills fit within the “product line” exception, however, because

“[t]he ‘product line’ and ‘continuing enterprise’ exceptions to the successor liability rule deal with the concept of tort liability, not jurisdiction. When and if either exception is found applicable, the corporate successor would be subject to liability for the torts of its predecessor in any forum having in personam jurisdiction over the successor, but the exceptions do not and cannot confer such jurisdiction over the successor in the first instance. While we recognize that in certain circumstances a successor corporation may inherit its predecessor’s jurisdictional status, the facts of the subject case do not fit within such a scenario” (id. at 1140-1141 [internal quotation marks and citations omitted]).

Accordingly, the Appellate Division reversed so much of Supreme Court’s order as denied Sawmills’ motion for summary judgment, granted the motion and dismissed the complaint against Sawmills. We granted plaintiff permission to appeal and now affirm, but on a different ground altogether.

II.

The “product line” exception to the general rule against successor liability originated with the California Supreme Court’s decision in Ray v Alad Corp. (19 Cal 3d 22, 560 P2d 3 [1977]). In Ray, the court imposed liability on the successor corporation for an injury sustained by a plaintiff who fell off a ladder manufactured by its predecessor. The court concluded that successor liability was proper because “a party which acquires a manufacturing business and continues the output of its line of products under the circumstances here presented assumes strict tort liability for defects in units of the same product line previously manufactured and distributed by the entity from which the business was acquired” (19 Cal 3d at 34, 560 P2d at 11).

The court articulated three rationales for the “product line” exception:

“(1) the virtual destruction of the plaintiffs remedies against the original manufacturer caused by the successor’s acquisition of the business, (2) the successor’s ability to assume the original manufacturer’s risk-spreading role, and (3) the fairness of requiring the successor to assume a responsibility for [its predecessor’s] defective products that was a burden necessarily attached to the original manufacturer’s good will being enjoyed by the successor in the continued operation of the business” (19 Cal 3d at 31, 560 P2d at 9).

As for the Ray court’s first rationale — the virtual destruction of the products liability plaintiffs remedies against the original manufacturer — this “is not a justification for suing the successor, but rather . . . merely a statement of the problem. . . . More than just a statement of the problem is required to justify a change in the corporate law” (Fish v Amsted Indus., Inc., 126 Wis 2d 293, 305-306, 376 NW2d 820, 826 [1985] [rejecting “product line” exception]).

As the Wisconsin Supreme Court has pointed out, the successor may lack capacity to spread the risk of injuries because

“[s]mall manufacturers have a difficult problem obtaining products liability insurance and find it impossible to cover the risks by raising prices because they have to compete with large manufacturers who can keep the price down. . . . [I]t is one thing to assume that a manufacturer can acquire insurance against potential liability for its own products and another to assume it can acquire such insurance for the products made by a different manufacturer” (Fish, 126 Wis 2d at 308, 376 NW2d at 827 [internal quotation marks and citations omitted]).

As for whether liability should be imposed upon the successor corporation because it enjoys the benefit of its predecessor’s goodwill,

“any benefit the successor acquired through the goodwill or reputation of the predecessor’s product line was considered and negotiated for at the time of the sale and constituted part of the sale price. To hold the successor liable for defects in products manufactured by the predecessor would be forcing the successor to pay twice for . . . goodwill” (Fish, 126 Wis 2d at 309, 376 NW2d at 828).

Importantly, the “product line” exception threatens “economic annihilation” for small businesses (Bernard v Kee Mfg. Co., Inc., 409 So 2d 1047, 1049 [Fla 1982] [rejecting “product line” exception]). Because small businesses have limited assets, they face potential financial destruction if saddled with liability for their predecessors’ torts. This threat would deter the purchase of ongoing businesses that manufacture products and, instead, force potential sellers to liquidate their companies. As the Florida Supreme Court has observed, 90% of the nation’s manufacturing enterprises are small businesses, and “[i]f small manufacturing corporations liquidate rather than transfer ownership, the chances that the corporations will be replaced by other successful small corporations are decreased” (409 So 2d at 1050, citing Note, Products Liability and Successor Corporations: Protecting the Product User and the Small Manufacturer Through Increased Availability of Products Liability Insurance, 13 UC Davis L Rev 1000, 1002-1003 [1980]).

Further, extending liability to the corporate successor places responsibility for a defective product on a party that did not put the product into the stream of commerce. This is inconsistent with the basic justification for strict products liability,

“which is to place responsibility for a defective product on the manufacturer who placed that product into commerce. The corporate successor has not created the risk, and only remotely benefits from the product. The successor has not invited usage of the product or implied its safety. Since the successor was never in a position to eliminate the risk, a major purpose of strict liability in modifying a manufacturer’s behavior is also lost” (Bernard, 409 So 2d at 1050 [citations omitted]).

In short, adoption of the “product line” exception would mark “a radical change from existing law implicating complex economic considerations better left to be addressed by the Legislature” (City of New York, 260 AD2d at 176, citing Restatement [Third] of Torts: Products Liability § 12, Comment b, and Reporters’ Note thereto).

We therefore join the majority of courts declining to adopt the “product line” exception (see generally 1 American Law of Products Liability 3d § 7:27 [collecting cases]; see also 15 Fletcher, Cyclopedia of the Law of Private Corporations § 7123.30 [perm ed]). Sawmills does not fit within any of the four Schumacher exceptions, and therefore cannot be liable for Edger Works’ allegedly tortious conduct.

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

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

Order affirmed, with costs.

      . A sawmill is a machine for cutting logs into rough-squared sections or into planks and boards as they move past the saw on a feeder table (see “sawmill,” Encyclopedia Britannica Online, <http://www.britannica.com/eb/ artic!e-9065969>). The cutting tool of a band sawmill is an endless flexible steel band with teeth on one edge; the band is carried on two large-diameter rotating wheels mounted on parallel axes some distance apart (see “sawing machine,” Encyclopaedia Britannica Online, <http://www.britannica.com/eb/ article-9001239>).

      . On this appeal, plaintiff no longer relies upon the “continuing enterprise” exception. Because we do not adopt the “product line” exception, we need not and do not address plaintiffs argument that personal jurisdiction may properly be imputed to a successor corporation whenever it is substantively responsible for its predecessor’s allegedly tortious conduct.