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Court Finds Oral Agreement to Pay Legal Fees Not Barred by Statute of Frauds

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  • Posted on: Sep 9 2019

Attorneys are often asked whether an oral agreement is enforceable. Most will say that the answer depends on the law and the facts surrounding the agreement.

As an initial matter, to be enforceable, an oral agreement must contain the elements of a binding contract, e.g., an offer, acceptance, consideration, mutual assent, an intent to be bound, and agreement on all essential terms. Even if these elements are present, the agreement must still satisfy the Statute of Frauds.

In New York, the statute of frauds is found in General Obligations Law § 5-701 through 5-705. These provisions require a signed writing for certain types of agreements, including, but not limited to: (1) agreements that by their terms are “not to be performed within one year from the making thereof”; (2) the conveyance of real property; (3) contracts for the payment of finder’s fees; (4) agreements for “goods sold at public auction”; (5) contracts to pay compensation for services rendered in negotiating a business opportunity; and (6) modifications to written agreements which state that they cannot be changed orally.

The Statute of Frauds neither applies to an agreement that “appears by its terms to be capable of performance within the year; nor to cases in which the performance of the agreement depends upon a contingency which may or may not happen within the year.” North Shore Bottling Co. v. Schmidt & Sons, 22 N.Y.2d 171, 176 (1968) (citation omitted). Instead, it applies to “those contracts only which by their very terms have absolutely no possibility in fact and law of full performance within one year.” D&N Boening v. Kirsch Beverages, 63 N.Y.2d 449, 454 (1984).

The Court of Appeals has repeatedly held that the courts should “analyze oral agreements to determine if … there might be any possible means of performance within one year.”  Id. at 455. Thus, wherever an agreement is susceptible of fulfillment within one year, “in whatever manner and however impractical,” the courts should find “the Statute to be inapplicable, a writing unnecessary, and the agreement not barred.” Id.

In D&N Boening, the Court of Appeals provided examples of oral agreements that fell outside the Statute of Frauds despite questions surrounding the possibility of performance within one year.  These included agreements:

where either party had the option to terminate the agreement on seven months’ notice (Blake v Voigt, 134 N.Y. 69); where the agreement merely set the terms of anticipated prospective purchases but did not bind either party to any particular transaction (Nat Nal Serv. Stas. v Wolf, 304 N.Y. 332); where defendant had the option to discontinue at any time the activities upon which the agreement was conditioned (North Shore Bottling Co. v Schmidt & Sons, 22 N.Y.2d 171); where defendant had the option of selling at any time the property on lease to plaintiff for four years (Coinmach Inds. Corp. v Domnitch, 37 N.Y.2d 889); where no provision in the agreement directly or indirectly regulated the time for performance despite the extreme unlikelihood of its completion within one year (Freedman v Chemical Constr. Co., 43 N.Y.2d 260, 265); where employment was terminable for any just and sufficient cause wherever dismissal was deemed necessary for the welfare of the company (Weiner v McGraw-Hill, Inc., 57 N.Y.2d 458, 462).

Id. at 455-56.

However, oral agreements that are “terminable within one year only upon a breach by one of the parties” are unenforceable. Id. at 456. The reason: “termination is not performance, but rather the destruction of the contract where there is no provision authorizing either of the parties to terminate as a matter of right.” Id. at 456-57; see also Zupan v. Blumberg, 2 N.Y.2d 547, 552 (1957) (“The possibility of such wrongful termination is not, of course, the same as the possibility of performance within the statutory period.”). By contrast, “where one or both parties have … an explicit option to terminate their agreement within one year, that agreement is, by its own terms, capable of completion within that period and is not governed by the Statute.” Id.

If an alleged agreement is found to fall within the scope of GOL § 5-701(a)(1) (or any other subsection of GOL § 5-701(a)), it is void “unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent. …” There is sufficient tangible evidence that a contract has been made if, inter alia: (i) there is admissible “electronic communication (including, without limitation, the recording of a telephone call or the tangible written text produced by computer retrieval) … sufficient to indicate that in such communication a contract was made between the parties”; (ii) “[t]he party against whom enforcement is sought admits in its pleading, testimony or otherwise in court that a contract was made”; or (iii) “[t]here is a note, memorandum or other writing sufficient to indicate that a contract has been made, signed by the party against whom enforcement is sought or by its authorized agent or broker.” Id. GOL § 5-701(b)(3). Email communications can satisfy the “writing” requirement. See Sassoon v. CDx Diagnostics, 172 A.D.3d 617 (1st Dept. May 28, 2019); Naldi v. Grunberg, 80 A.D.3d 1, 13 (1st Dept. 2010).

The “writing” need not be a communication between the parties to the contract. It can be an internal communication by the party against whom enforcement is sought. See Int’l Trading & Sales, Inc. v. Philipp Bros., 99 A.D.2d 983, 984 (1st Dept. 1984) (“If defendant has such a note or memorandum even though it be internal, that could satisfy the Statute of Frauds.”); Scura Partners Sec. LLC v Universal Stainless & Alloy Prods., Inc., No. 653308/11, 2013 WL 1127733, at *6 (Sup. Ct. N.Y. Cty. Mar. 6, 2013) (permitting discovery to satisfy Statute of Frauds because the defendant “may have internal emails and memorandums which would confirm the existence of the agreement, and these documents are ‘peculiarly within the knowledge’ of [the defendant].”).

With these standards in mind, we look at Cohen v. Trump Organization LLC, 2019 N.Y. Slip Op. 32565(U) (Sup. Ct., N.Y. County Aug. 28, 2019) (here), a case involving an alleged oral agreement by the defendant to pay the legal fees and expenses of the plaintiff in pending and future matters.

Background

Michael Cohen (“Plaintiff” or “Cohen”) claimed he had an oral agreement with the Trump Organization LLC (“Defendant” or “Trump Organization”) to pay his legal expenses for civil, criminal, and investigatory matters arising out of his employment and his “ill-defined role” as Donald J. Trump’s “fixer.” Slip Op. at *1. Cohen claimed the Trump Organization paid his legal fees for a time under the agreement but then stopped when Cohen agreed to cooperate in ongoing investigations into his work for the Trump Organization and its principals, directors, and officers. Id.

Cohen began his employment with the Trump Organization in 2006 as Executive Vice President and Special Counsel. His duties and responsibilities for the Defendant continued through the campaign and election. On January 20, 2017, Cohen resigned from the Trump Organization to serve full time as the President’s personal attorney.

A week before the inauguration and continuing through May 2017, a number of investigations into the President, the Trump Campaign and the Trump Organization were opened by the federal government.

By the end of May 2017, Cohen had emerged as a person of interest in the foregoing investigations and received a subpoena from the House Intelligence Committee as part of its investigation. Cohen retained McDermott Will & Emery LLP (“McDermott”) to represent him in connection with the investigations on the recommendation of an attorney for President Trump. According to Cohen, President Trump and members of the Trump Organization supported such retention and “encouraged [him] to cooperate with the Investigations.” Id. at *4.

In July 2017, faced with these ongoing investigations, and in consideration of Cohen’s cooperation in a joint defense, Cohen and the Trump Organization allegedly reached an oral agreement “under which the Organization agreed to indemnify [Cohen] and, separately, to pay for all of [his] attorneys’ fees and costs in connection with [his] representation and defense in the Investigations and other matters arising from [his] work with and on behalf of the Organization and its principals, directors, and officers” (the “Agreement”). Id. (internal definitions omitted).

On July 24, 2017, Cohen’s counsel at McDermott sent Alan Garten (“Garten”), Defendant’s Executive Vice President and Chief Legal Officer, an email in which the former wrote: “Pursuant to our oral agreement that your client will indemnify my client for this matter, please find enclosed our firm’s statement for services rendered on behalf of Mr. Michael D. Cohen regarding a congressional investigation.” Id.  A few months later, on October 25, Garten informed Cohen’s counsel that “[a] wire was sent to your firms [sic] account for $136,460.99 this afternoon (representing ½ the current outstanding balance that has been billed),” and noting that “[t]he other ½ will be wired in the next few days.” Id. at *4. Garten’s correspondence did not confirm or reference the Agreement. Id.

In December 2017, the Trump Organization confirmed that it would continue to indemnify Cohen and pay his attorneys’ fees and expenses in connection with the Investigations, including the outstanding amounts owed to McDermott. As late as June 2018, Cohen claims that he received continued assurances from the Trump Organization that it would continue to indemnify him and pay his legal expenses in connection with the Investigations. Notably, Cohen did not plead these confirmations and assurances as separate agreements with separate consideration. Id. at *5.

By June 2018, Cohen was the subject of additional investigations and lawsuits relating to his work for the Trump Organization. The various legal actions that proliferated around him fell into three distinct categories, some of which existed at the time the parties allegedly formed the Agreement (“Pending Matters”), and some which did not (“Future Matters”):

(1) Investigations: defined to include congressional investigations and the special counsel investigation;

(2) Matters: defined as eleven civil and criminal matters and investigations that commenced after the Agreement was allegedly formed in July 2017;

(3) Other Matters: defined to include the specific Matters in category two and any other “potential related matters, related to Cohen’s services on behalf of President Trump and the Trump Organization.

Id. at **5-6.

In or around June 2018, Cohen’s relationship with the Trump Organization broke down. That month, Cohen began to consider cooperating with the Special Counsel and federal prosecutors in connection with a separate investigation in the Southern District of New York and President Trump began distancing himself from Cohen. The Trump Organization allegedly ceased to pay the invoices of Cohen’s counsel without notice or justification. Consequently, Cohen’s attorney withdrew as counsel, leaving $1,037,868.87 in unpaid fees allegedly owed by Defendant. Cohen subsequently retained additional counsel to represent him in the Investigations and other matters covered by the Agreement.

On August 21, 2018, Cohen pleaded guilty to eight criminal charges, including campaign finance violations, tax evasion, and bank fraud, in the Southern District of New York. Additionally, on November 29, Cohen pleaded guilty to lying to Congress. Cohen was sentenced to prison on December 12, 2018 and ordered to pay fines and other amounts.

In January 2019, Cohen wrote to the Trump Organization requesting reimbursement pursuant to the Agreement. The Trump Organization did not respond to that request and did not pay any of the amounts requested.

Cohen commenced the action on March 7, 2019. Cohen asserted claims for (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) a declaratory judgment setting forth the scope of his rights under the “indemnification agreement,” and (4) promissory estoppel. In response, the Trump Organization moved to dismiss the complaint on the grounds that the Agreement was not properly pleaded and was barred by the Statute of Frauds, and that the remaining claims failed to state any legally viable claims for relief.

As discussed below, the Court granted in part and denied in part the Trump Organization’s motion to dismiss the claim for breach of contract. The Court held that the Agreement was enforceable to the extent it covered legal proceedings and investigations that were pending in July 2017, when the Agreement allegedly was made. The Agreement was not enforceable, however, with respect to legal proceedings and investigations that began after the Agreement was reached.

This Blog looks at the Court’s ruling with regard to the Statute of Frauds.

The Court’s Decision

As an initial matter, the Court found that Cohen sufficiently pleaded the existence of a viable contract, by setting “forth the parameters of the deal he allegedly struck with the Trump Organization.” Slip Op. at *9.  In this regard, the Court found that Cohen described “what type of agreement [was] being alleged, when it was entered into, with whom it was entered, and the agreement’s terms and scope.” Id.  “These and other alleged facts contained in the Complaint and Affidavit,” said the Court, gave Defendant “sufficient notice as to the facts on which Cohen’s claim [was] founded, and the material elements of the claim.” Id. “That is all that is required at this stage of the case,” concluded the Court. Id.

Next the Court turned to the issue of enforceability under the Statute of Frauds. Specifically, the Court addressed whether the Agreement was capable of performance within one year of the Agreement being reached. Id.

Pending Matters

The Court agreed with Cohen that the Agreement could be performed within one year. Slip Op. at *13. The Court rejected Defendant’s argument that the Agreement could not be performed within one year because it was a contract of indefinite duration. Id. at *14.  Such an argument, said the Court, “goes too far.” Id. “If the terms of the contract … include[ ] an event which might end the contractual relationship of the parties within a year, defendant’s possible liability beyond that time would not bring the contract within the statute.” Id., quoting Martocci v. Greater New York Brewery, 301 N.Y. 57, 62 (1950) (internal quotation marks omitted). The Court found that the House and Senate Intelligence Committee investigations were capable of concluding within one year since they “could have ended in a matter of weeks or months” of the Agreement. Id. at *13 (quoting Cohen’s memorandum of law and noting that the analysis was “correct with respect to Pending Matters that were underway in July 2017”).

Future Matters

As to Future Matters, the Court agreed with the Trump Organization.

The Agreement as to Future Matters is void under the Statute of Frauds because it could not by its terms be performed within one year. Indeed, it could not ever be fully performed because the Trump Organization’s obligations under such an agreement would be triggered by any new action or investigation occurring at any time in the future. The only way to terminate this open-ended obligation within one year would be to breach it. But “[t]he possibility of such wrongful termination is not, of course, the same as the possibility of performance within the statutory period.” Zupan v. Blumberg, 2 N.Y.2d 547, 552 (1957).

Slip Op. at *15.

In finding for the Trump Organization, the Court found “cases involving open-ended agreements to pay sales commissions” to be “instructive.” Id.  In those cases, the employer and employee agreed that the latter would obtain a share of the future sales generated by customers who the employee procured. The courts have held that such agreements must be in writing because they “impermissibly ‘extend[] indefinitely” the agreement, are “dependent solely on the acts of a third party and [are] beyond the control of the defendant.…’” Id., quoting Apostolos v. R.D.T Brokerage Corp., 159 A.D.2d 62, 64-65 (1st Dept. 1990). The same is true with regard to “open-ended distributorship agreements,” which the Court found to “further illustrate the point.” Id. at *16. In those cases, noted the Court, the courts did not apply the Statute of Frauds to oral agreements because the oral agreements could be terminated within one year without a breach thereof. Id., citing North Shore Bottling, 22 N.Y.2d at 176-177.

The Court further reasoned that by definition Future Matters could not be capable of performance within one year because the parties “did not know about [them] at the time” the Agreement was reached. Slip Op. at *17.

Accordingly, “[b]ecause the Agreement covers both Pending and Future Matters,” said the Court, “it cannot by its terms be performed within one year and is unenforceable unless it is supported by tangible evidence of the type required by the Statute of Frauds.” Id.

Was There a Writing?

Having determined that the Agreement had to be in writing, the Court considered whether the correspondence between Cohen’s lawyer and the Trump Organization sufficed “to create an enforceable written agreement under the Statute of Frauds; if not, whether the Trump Organization’s payment of Cohen’s initial legal bills [was] sufficient to create an enforceable agreement to pay his remaining bills; and if not, whether the Agreement [could] be severed so that Cohen’s claims [were] limited to the portion of the Agreement relating to indemnification for Pending Matters.” Id. (Orig’l emphasis.)

The Court held that the email sent by Cohen’s counsel referencing the Agreement, in and of itself, could not constitute the written “note or memorandum” required under the Statute of Frauds because it was “not signed or otherwise endorsed by … the Trump Organization.” Id. at *18.

The email from the Trump Organization likewise failed to satisfy the writing requirement of the Statute of Frauds. Id. The Court held that the responding email “did not acknowledge … any agreement to pay Cohen’s legal bills, let alone one broad enough to extend beyond ‘this matter’ to an unlimited number of civil, criminal, investigatory, and ‘other’ matters that arose after the agreement supposedly was made.” Id. at **18-19.

The Trump Organization’s Partial Performance Did Not Satisfy the Statute of Frauds

The Court rejected Cohen’s argument that the Trump Organization’s payment of some of the invoices “at the outset” satisfied the Statute of Frauds. Id. at *19. The Court held that “[a]lthough ‘partial performance’ can satisfy the Statute of Frauds for certain types of real estate-related agreements under N.Y. Gen. Oblig. L. § 5-703, it [did] not apply to N.Y. Gen. Oblig. L. § 5-701(a)(1), which is the only provision upon which Defendant relies.” Id., citing Castellotti v. Free, 138 A.D.3d 198 (1st Dept. 2016).

The Agreement Can Be Severed So That It Can Be Enforced In Part

The Court held that “it is appropriate to sever the Agreement so as to permit enforcement of the alleged oral agreement to pay Cohen’s legal fees and costs for the Pending Matters.” Slip Op. at *21. The Court noted that “[t]hroughout Cohen’s pleadings and filings, the Investigations [were] consistently demarcated from the ‘other matters’” and the pending Investigations “specifically … spurred the parties to form the agreement in the first place.” Id. Thus, “[f]ar from ‘doing violence’ to the terms of the agreement,” concluded the Court, “severance reflect[ed] the delineation evident in Cohen’s allegations – allegations which, in turn, indicate[d] that the two portions of the agreement [were] ‘separate and distinct.’” Id.

Takeaway

In a perfect world, all agreements would be reduced to a writing signed by all parties, so that in the event of a dispute a court could determine the rights and obligations of the parties thereto. Cohen illustrates the difficulties a party must overcome to demonstrate the existence of an oral agreement.

Cohen is also notable because of the Court’s decision to sever the Agreement to permit enforcement as to Pending Matters.

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