Appellate Division First Department Attempts to Compromise the Christian Doctrine

by Elliot D. Samuelson, Editor

Cases never cease to amaze me. The recent decision in Kojovic v. Goldman^[i] appears to be an apparent attempt by the Appellate Division in the First Department to compromise the Court of Appeals decision in Christian^[ii] that imposed a fiduciary relationship between husband and wife in the negotiation and execution of separation or settlement agreements. Upon the most questionable factual predicate, Kojovic failed to protect a wife from her husband's fraud and concealment of material financial information. The gross unfairness of the decision to an unmonied spouse is especially clear in this case when the decision by Justice Lobis in the court below, as well as the motion papers, to dismiss the wife's complaint for failure to state a cause of action, and the responding arguments are carefully studied. Fortunately, since a motion was made to the Court of Appeals for leave to appeal, (but characteristically denied) the record is readily found in any court library.

It is to be remembered that the husband in Kojovic moved to set aside the complaint for failing to state a cognizable cause of action. This was not a motion for summary judgment. However, rather than accepting the facts alleged by the wife to be true, as the court must on a motion to dismiss, the First Department, without so much as a dissenting opinion, ignored the facts pled, and came to its own conclusion that once an asset is disclosed, relevant facts that may affect the value of the asset may be concealed. The appellate court went on to inexplicably hold that a spouse with special knowledge of the value of an asset has no duty to disclose such facts even though the failure to do so would provide an extraordinary windfall profit to the spouse concealing such information...which was tantamount to ignoring the equitable principal of unjust enrichment. The law appears to be otherwise in all other judicial departments.

You decide for yourself. Consider the facts. A husband during the negotiations for a settlement of his divorce litigation with his wife, forwards a letter through his attorney stating that he has no intention to sell his shares in a dot com fledgling business, and later makes an untrue oral representation that there were no negotiation talks to do so. He further urges his wife to accept cash for the value of the dot com business, rather than accept part of the shares in kind. The wife alleged all of such facts in her complaint, and the husband on his motion to dismiss did not deny that he made such false representations to her.

Shortly after the execution of their settlement agreement, the Wife learned that not only was the Husband's representation false, but he was in negotiations to sell the business at the time he represented he had no intention to sell it. A sale was consummated and the Husband received $18 million for his shares.

After learning of such facts, the Wife served a complaint alleging fraud, sought to rescind the agreement and receive her equitable share of the proceeds from the sale of the Husband's shares.

Before reviewing the allegations of the complaint the reader should be conversant with the elements necessary to state a cause of action for fraud which include the following:

1. That defendant made a false representation to a material fact;
2. That defendant knew the representation to be false;
3. That the representation was made for the purpose of inducing the plaintiff to rely upon it;
4. That the plaintiff relied upon the representation in ignorance of its falsity, and
5. That the reliance upon such representation created an injury to the Plaintiff.^[iii]

The complaint contained, inter alia, the following allegations.

1. Mr. Goldman misrepresented his financial circumstances to then wife, Ms. Kojovic, in the June 4th Letter, inter alia, by advising her that "he will not again have the approval for the sale of any of his stock unless and until the company should be liquidated, which is not contemplated," and that his "restriction from selling any more stock has a negative impact on exercising the options" and that the "stock is now completely non liquid as it cannot be sold and will be subject to market, competitive and execution risk for several years."
2. Mr. Goldman misrepresented his financial circumstances to then wife, Ms. Kojovic, by failing to advise her in the June 4th Letter of the possible sale of Capital IQ to The McGraw-Hill Companies or its subsidiary Standard & Poor's.
3. Mr. Goldman misrepresented his financial circumstances to then wife, Ms. Kojovic, by failing to advise her during the negotiations of their Stipulation of Settlement in the matrimonial actions of the possible sale of Capital IQ to The McGraw-Hill Companies or its subsidiary Standard & Poor's.

Based on these facts, Justice Lobis in the matrimonial part of the court below held that the primary issue to determine is what the defendant knew about the sale, and when he knew it. She correctly held that on a motion to dismiss the complaint she was bound to construe the facts most favorably to the wife, and accept her allegations as true. Specifically, she referred to the allegations in the complaint regarding the husband's alleged misrepresentations and concealment of the sale. In essence, Justice Lobis concluded that the wife's complaint could not be dismissed for failure to state a cause of action, and she permitted discovery to go forward.

By contrast, the Kojovic appellate court granted the motion to dismiss and essentially ruled that although there is a duty by a spouse to disclose an asset, there is no corresponding duty to disclose its value ... causing a dichotomy between rationality and irrationality. Expressed another way, does a spouse who is mandated by the Christian doctrine to act as a fiduciary during marriage, need only do so with respect to but one-half of this rule and disregard the balance with impunity? Could Judge Benjamin Cardoza, one of our best and brightest jurist who sat on the New York Court of Appeals and the Supreme Court of the United States, have ever fashioned such a rule in a court of equity? Would his sense of fairness and equity compel a far different result? We think so! Consider his holding in Beatty v. Guggenheim Exploration Co.^[iv], when he sat on the New York Court of Appeals, and explained with terseness and clarity, the application of equitable principles:

A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee.

Although a constructive trust case, the legal principal cited in Beatty, supra, is even more applicable to spouses in matrimonial litigation.

Thereafter, Judge Charles S. Desmond, another distinguished Court of Appeals jurist, wrote for our high court in Latham v. Father Devine^[v], and similarly found, "A constructive trust will be erected whenever necessary to satisfy the demands of justice."

Finally, in yet another expression of the learned jurist deciding whether to invoke the powers of equity, Judge Cardoza concluded:

Though a promise in words was lacking, the whole transaction, it might be found, was 'instinct with an obligation' imperfectly expressed.^[vi]

The First Department never considered such judicial philosophy in coming to its conclusion in Kojovic. Rather in reaching its decision and attempting to justify it, the court selectively quoted from Christian but failed to recite its most significant pronouncement:

Agreements between spouses, unlike ordinary business contracts, involve a fiduciary relationship requiring the utmost of good faith. There is a strict surveillance of all transactions between married persons, especially separation agreements. Equity is so zealous in this respect that a separation agreement may be set aside on grounds that would be insufficient to vitiate an ordinary contract. These principles in mind, courts have thrown their cloak of protection about separation agreements and made it their business, when confronted, to see to it that they are arrived at fairly and equitably, in a manner so as to be free from the taint of fraud and duress, and to set aside or refuse to enforce those born of and subsisting in inequity. (Citations omitted). 42 N.Y.2d at 72; 396 N.Y.2d at 823.

With these words from the Christian decision in mind, it must be asked whether the First Department chose to ignore the mandate that created a fiduciary relationship between husband and wife when a separation agreement is negotiated? It must further be asked whether the First Department should have refused to enforce the agreement since it appears quite clear that it was born of and subsisting in inequity?

What is more shocking about this result to dismiss the wife's complaint, is that the First Department has clearly held otherwise in the commercial sector, where it reasoned that the managing partners of a limited liability company who purchased the interest in realty from its other members, were guilty of fraud and breach of fiduciary duty because they withheld from the other members that they were engaged in talks to sell the realty for about three times more than it had been appraised. Despite disclaimers in the sales agreement, the court held in Blue Chip Emerald LLC v. Allied Partners, Inc.^[vii] that the sellers were "owed a duty of undivided and undiluted loyalty" and dismissed a motion to dismiss the complaint. The Blue Chip court went on to explain that the defendants had "no right to keep to themselves or misrepresent material fact."

The Blue Chip court made clear, in the context of a commercial case, that a fiduciary must disclose any information which could bear on the value of an asset. In this regard it is important to remember that the Christian court also commented that "...separation agreements must not be permitted to be employed as instruments for the improper exaction in the inducement of execution of unconscionable terms within the framework of inequitable conduct."

It has long been the law that any waiver contained in an agreement is voidable if it can be shown that it was obtained because of a fiduciary's failure to make full disclosure.

As such, any waiver made by the wife in Kojovic should have been deemed void under the circumstances of the case, and should not have been sanctioned by the court.

Armed with such principals, the decision in Kojovic reveals its injustice. Although the court remarked that the facts were straightforward, not all of the facts were recited. Glaringly absent were the allegations in the complaint of the husband's oral and written misrepresentations that no deal was being discussed and no sale was being contemplated. Perhaps the Kojovic court was swayed by the facts that the parties were involved in but a six year childless marriage and the Wife did in fact receive a $1.15 million settlement, and $87,500 in maintenance for four years. However, Justice Lobis in the court below obviously disagreed, and failed to dismiss the complaint, believing that the alleged fraud was nevertheless actionable.