Legal Opinion Letters Can Be FraudulentPrint Article
- Posted on: Apr 24 2023
By: Jeffrey M. Haber
In Lucky of 195 Madison St. Roofing & Contracting Inc. v. Creif, 109 LLC, 2023 N.Y. Slip Op. 02065 (1st Dept. Apr. 20, 2023) (here), the Appellate Division, First Department was asked to consider whether a legal opinion issued in connection with a mortgage transaction was fraudulent. As discussed below, the First Department affirmed the holding of the motion court, which found that the legal opinion in question was, for pleading purposes, fraudulent.
A legal opinion is typically a letter issued by a lawyer that is used to facilitate a party’s due diligence process in a transaction. An opinion letter helps to validate the legality of the transaction by opining on matters such as the validity of a corporate entity, the authority of a party to enter into the transaction, the enforceability of the transaction documents, and whether the transaction complies with applicable laws, rules and regulations. A legal opinion will also identify any legal risks that should be considered by the parties.
An opinion letter can be used in many types of commercial transactions. For example, an opinion letter can be used to help a lender determine whether to lend money to a potential borrower. It can also be used in connection with the purchase and sale of securities.
Legal opinions focus on the issues relevant to the transaction. Lawyers typically do not give an opinion on every aspect of the transaction and the law. Whether a legal opinion is given, and the contents to include in the opinion, is often negotiated.
Lucky of 195 Madison St. Roofing & Contr. Inc. v. Creif
[Ed. Note: the factual discussion below derives from the complaint, the parties’ briefs on appeal and the First Department’s factual discussion.]
Beginning in October 2015, defendants Allan J. Stevo (“Stevo”) and Srun Taing (“Taing”) and certain third-party defendants entered into a fraudulent scheme whereby they falsely claimed that they were the owners, shareholders, members and/or agents of Lucky of 195 Madison St. Roofing & Contracting Inc. (“Lucky 195”) in order to take out mortgages on property that plaintiff owned.
To implement the scheme, defendants allegedly created false documents intended to convince lending institutions, including defendant and third-party plaintiff Creif 109 LLC (“Creif”), that they were the owners, shareholders, or members of Lucky 195 and were authorized to enter into loan agreements on behalf of Lucky 195. They also retained an attorney, Stephen Seung (“Seung”), to prepare and deliver a legal opinion letter, which allegedly stated that Lucky 195 had the authority to enter into the mortgages, that Stevo and Taing had the authority to execute the transaction documents on behalf of Lucky 195, and that Seung had performed the necessary due diligence to confirm these representations. The opinion letter also stated that Lucky 195 had the “right, power, and authority” to execute the loan documents. At the conclusion of the opinion letter, Seung stated that the opinion was issued “solely for [Creif’s] benefit and the benefit of [Creif’s] successors and assigns and any participant in the Loan, and may not be relied upon by any other party or for any other purpose without our prior written consent”. Notably, the opinion letter did not contain any carve-outs to insulate Seung from liability.
According to Creif, Seung admitted that he did not “confirm that Stevo and Taing could actually act on behalf of Lucky 195” even though his opinion letter said otherwise. Creif claimed that if it had known that Seung did not make any inquiries of the borrower (i.e., Lucky 195), Creif would never have agreed to close the transactions.
On January 29, 2021, Creif filed a third-party complaint against Seung and the other conspiring defendants, alleging negligence and fraud.
On March 7, 2021, Seung filed a motion to dismiss the fraud and negligence claims that were asserted against him. Seung argued that the fraud claim failed to satisfy the particularity requirement of CPLR § 3016(b). According to Seung, Creif merely alleged fraud in a conclusory fashion; there were no factual allegations supporting the claim. Seung also argued that there was nothing in the third-party complaint to establish or justify a claim that Seung knew that the statements contained in the opinion letter were false. Seung further argued that the allegations concerning reliance on the opinion letter were conclusory and rebutted by sworn statements made by Creif in which Creif claimed that it relied on several corporate documents in making the subject mortgage loans.
On July 11, 2022, the motion court denied Seung’s motion to dismiss, holding that there were sufficient inferences of fraud at the pleading stage of the litigation.
On August 18, 2022, Seung filed a motion for reargument. Following oral argument, the motion court granted that portion of Seung’s motion for reargument to dismiss the claim for negligence but denied that portion of his motion with regard to the fraud claim.
On appeal, the First Department affirmed.
The Court held that Creif satisfied the particularity requirement of CPLR § 3016(b), stating that “allegations were sufficient to permit a ‘reasonable inference’ of Seung’s alleged fraudulent conduct”.1
Under CPLR § 3016 (b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.”2 To satisfy the particularity requirement, the plaintiff must allege such facts as the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result.
The Court of Appeals has explained, however, that CPLR § 3016(b) “should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.”3 Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.”4 Thus, as noted, a plaintiff will satisfy CPLR § 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct.5
In holding that Creif pleaded its fraud claim with particularity, the Court rejected Seung’s reliance on Fortress Credit Corp. v. Dechert LLP, 89 A.D.3d 615 (1st Dept. 2011).
In Fortress, a lender brought suit against a law firm for professional malpractice and negligent misrepresentation. The defendant law firm had written a legal opinion for its client, a borrower, on whether relevant loan documents had been carried out with the formalities necessary to make them binding. In its written legal opinion letter, the law firm determined that the relevant loan documents had been duly executed and delivered. The lender alleged that it sustained damages by relying on the law firm’s faulty written opinion. The First Department held that the plaintiff failed to demonstrate that the opinion letter contained misrepresentations of fact. In so holding, the Court explained that the opinion letter, by its very terms, “provided only legal conclusions upon which plaintiffs could rely” and was “clearly and unequivocally circumscribed by the qualifications that defendant assumed the genuineness of all signatures and the authenticity of the documents”.6 The opinion letter further represented that the lawyer had “made no independent inquiry into the accuracy of the factual representations or certificates, and undertook no independent investigation in ascertaining these facts”.7
By contrast, the Court in Lucky held that “the opinion letter contain[ed] no such carve-outs, and in fact represent[ed] that Seung made the relevant ‘inquiries’”.8 “The alleged fraud in this case,” said the Court, was “based on actual misstatements”.9 [Ed. Note: When alleging fraud, the plaintiff must allege that the misrepresentation was more than an opinion or a promise of future intent to perform some act. He or she must show that the misrepresentation is one of existing fact made to induce action or inaction on his or her part.10] Accordingly, concluded the Court, “there remain[ed] the possibility that Seung may have known about the underlying fraud, rather than simply having failed to detect it”.11
- Slip Op. at *1 (citing, Pludeman v. Northern Leasing Sys., Inc.,10 N.Y.3d 486, 492 (2008)).
- Pludeman, 10 N.Y.3d at 491 (2008) (citation omitted).
- Id. (internal quotation marks and citation omitted).
- Id. at 492.
- Fortress, 89 A.D.3d at 617.
- Slip Op. at *1.
- Connaughton v. Chipotle Mexican Grill, Inc., 135 A.D.3d 535, 537-38 (1st Dept. 2016), aff’d, 29 N.Y.3d 137 (2017). See Netshoes Sec. Litig. v. XXX, 64 Misc. 3d 926, 932, (Sup. Ct., N.Y. County 2019) (citing, Waterford Twp. Police & Fire Retirement Sys. v. Regional Mgt. Corp., 2016 WL 1261135, at *9 (S.D.N.Y. 2016)).
Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.