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The Privity or Near-Privity Doctrine: First Department Affirms Denial of Motion to Dismiss Fraud Claim Involving Artwork

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  • Posted on: Dec 30 2019

An interesting question sometimes arises in the tort arena in which a third-party to a transaction claims to have been injured by one of the parties. Do the parties to the transaction owe a duty to the third party? The answer depends on whether the third party can show privity or near privity with the alleged tortfeasor. In this regard, the third party must demonstrate that the parties were aware that their report, agreement or transaction documentation would be used by the third party for a particular purpose, the parties intended the third party to rely on such documents, and the parties took action linking them to the third party thereby evincing their understanding of the third party’s reliance on their documents. In Artemus USA LLC v. Paul Kasmin Gallery, Inc., 2019 N.Y. Slip Op. 09391 (1st Dept. Dec. 26, 2019) (here), the Appellate Division, First Department addressed this issue.

As discussed below, Artemus involved the purchase and sale of an artwork named La Scienza de la Fiacca (“La Scienza”) by Frank Stella. The plaintiff, Artemus USA LLC (“Artemus”), alleged that defendant, Paul Kasmin Gallery, Inc. (“PKG”), an art gallery, created materially false, back-dated invoices at the request of non-party Anatole Shagalov (“Shagalov”), for retransmission to Artemus. Plaintiff alleged that those invoices falsely represented that Shagalov purchased La Scienza for $430,000. According to plaintiff, Shagalov had, in fact, purchased only a 60% interest of La Scienza at the stated price, and owed a substantial balance. In reliance on those fraudulent invoices, Artemus maintained that it agreed to purchase La Scienza and entered into a multimillion-dollar transaction with Shagalov, which it would not have done had it known the truth. The motion court (Justice Eileen Bransten) upheld the complaint, finding that Artemus stated a claim for fraud. The First Department affirmed.

The Privity or Near Privity Doctrine

In dealing with liability for the tortious acts of persons not in privity with the alleged tortfeasor (typically a professional, such as an accountant, lawyer, and architect), New York courts apply a special analysis that was first established by Chief Judge Cardozo in Ultramares Corp. v. Touche, 255 N.Y. 170, 174 (1931).

In Ultramares, the New York Court of Appeals was asked to consider whether an accounting firm could be held liable for negligently preparing a balance sheet that its client subsequently furnished to the plaintiff. Although the accountants knew that their client would show the balance sheet to various persons as a basis for financial dealings (e.g., “banks, creditors, stockholders, purchasers or sellers, according to the needs of the occasion”), no mention was made of the plaintiff or of any other specific party to whom the sheet would be furnished, or of any particular transaction in which it would be used. In that regard, the Court emphasized the following:

Nothing was said as to the persons to whom these [copies] would be shown or the extent or number of the transactions in which they would be used. In particular there was no mention of the plaintiff, a corporation doing business chiefly as a factor, which till then had never made advances to the [accountants’ client], though it had sold merchandise in small amounts. The range of the transactions in which a certificate of audit might be expected to play a part was as indefinite and wide as the possibilities of the business that was mirrored in the summary.

Id. at 174.

After reviewing legal developments permitting recovery by non-privity plaintiffs for harm resulting from the release of “a physical force” (255 N.Y. at 181), the Court raised the question of whether liability should attach for injury caused by “the circulation of a thought or a release of the explosive power resident in words.” Id. Noting that there existed no practical way to predict or limit the number or character of persons who might learn about and rely upon any written or oral statement, the Court concluded that creating an unlimited duty would impermissibly lead to “liability in an indeterminate amount for an indeterminate time to an indeterminate class.” Id. at 179.

The Ultramares court distinguished its approach from Glanzer v. Shepard, 233 N.Y. 236 (1922), a case decided in an opinion also written by Cardozo nine years earlier. In Glanzer, a public weigher had been held liable in negligence to a purchaser who had not been in privity with it, where the seller had requested the weigher to certify the official weight sheets and furnish a copy to the buyer. In such circumstances, the Ultramares court explained, “[t]he bond [between buyer and weigher] was so close as to approach that of privity,” and did not expose the defendant to indeterminate liability because “the transmission of the certificate to another was not merely one possibility among many, but the ‘end and aim of the transaction.’” Id. 255 N.Y. at 182. The Court went on to observe that in Glanzer, the services rendered by the weigher had been “primarily for the information of a third person … and only incidentally for that of the formal promisee.” Id.

In reaching its decision, and the imposition of a non-contractual duty of care to the third party, the Glanzer explained:

We think the law imposes a duty toward buyer as well as seller in the situation here disclosed. The [buyer’s] use of the certificates was not an indirect or collateral consequence of the action of the weighers. It was a consequence which, to the weighers’ knowledge, was the end and aim of the transaction. [The seller] ordered, but [the buyer was] to use. The defendants held themselves out to the public as skilled and careful in their calling. They knew that the beans had been sold, and that on the faith of their certificate payment would be made. They sent a copy to the [buyer] for the very purpose of inducing action. All this they admit. In such circumstances, assumption of the task of weighing was the assumption of a duty to weigh carefully for the benefit of all whose conduct was to be governed. We do not need to state the duty in terms of contract or of privity. Growing out of a contract, it has none the less an origin not exclusively contractual. Given the contract and the relation, the duty is imposed by law.”

Id. at 238-239.

The Court of Appeal’s restatement of Glanzer in Ultramares established the principle that liability for misstatements or omissions to a third party not in contractual privity may attach where the representation is made for the principal purpose of having it relied upon by such person, and where its benefit to the party authorizing the representation stems precisely from such reliance by the third party. Vereins-Und Westbank, AG v. Carter, 691 F. Supp. 704, 709 (S.D.N.Y.1988). This principle came to be known as the “Ultramares doctrine.”

Following the issuance of Ultramares, the Court of Appeals reiterated the requirement of a “contractual relationship or its equivalent” in State St. Trust Co. v. Ernst, 278 N.Y. 104, 111 (1938), White v. Guarente, 43 N.Y.2d 356 (1977), Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536 (1985), and William Iselin & Co. v. Mann Judd Landau, 71 N.Y.2d 420 (1988).

In White, the accountants had contracted with a limited partnership to perform an audit and prepare the partnership’s tax returns. The nature and purpose of the contract, to satisfy the requirement in the partnership agreement for an audit, made it clear that the accountants’ services were obtained to benefit the members of the partnership who, like the plaintiff, a limited partner, were necessarily dependent upon the audit to prepare their own tax returns. After outlining the principles articulated in Ultramares and Glanzer, the Court observed that: “[T]his plaintiff seeks redress, not as a mere member of the public, but as one of a settled and particularized class among the members of which the report would be circulated for the specific purpose of fulfilling the limited partnership agreed upon arrangement.” 43 N.Y.2d, at 363. Because the accountants knew that a limited partner would have to rely upon the audit and tax returns of the partnership, and because such awareness fell within the contemplation of the parties under the retainer agreement (Vereins-Und Westbank, 691 F. Supp. 709), the Court held that, “at least on the facts here, an accountant’s liability may be so imposed.” Id. at 358. The resulting relationship between the accountants and the limited partner was one “approach[ing] that of privity, if not completely one with it.” Id. (citing Ultramares, 255 N.Y. at 183).

In Credit Alliance, the Court revisited and elaborated upon the Ultramares doctrine. After reviewing the applicable authorities – both within and outside of New York – the Court reaffirmed and restated the Ultramares rule as follows:

Before accountants may be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports, certain prerequisites must be satisfied: (1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants’ understanding of that party or parties’ reliance.

65 N.Y.2d at 551.

The Court went on to observe that while “these criteria permit some flexibility in the doctrine” they were “intended to preserve the wisdom of the policy set forth” in Ultramares and Glanzer. Id.

Finally, in William Iselin & Co., the Court applied the Ultramares doctrine to affirm the grant of summary judgment to the defendant accountant. There, the plaintiff (Iselin) was seeking to charge an accountant (Mann) (with whom it had no privity) with liability for a misstatement in a report that Mann had prepared for a client (Suits) who subsequently obtained credit from Iselin. In explaining why summary judgment had been properly granted to the defendant, the Court made the following summary of the facts which the plaintiff would have been required to establish in order to prevail under the Ultramares doctrine:

Iselin was obligated to submit evidence of Mann’s awareness that Suits, intending that Iselin would rely on the Reports, would use them for the purpose of procuring credit from Iselin. Beyond that, Iselin was required to show a nexus with Mann from which Mann’s understanding of Iselin’s reliance could be drawn.

71 N.Y.2d at 426.

In Artemus, one of the issues before the First Department was whether PKG intended Artemus to rely on the allegedly fraudulent invoices.

Artemus USA LLC v. Paul Kasmin Gallery, Inc.


As noted, Artemus involved a claim for fraud based on defendant’s alleged materially false representations in certain invoices. Artemus alleged that PKG sold a 60% interest in La Scienza to Shagalov for $430,000, and that, two years later, when Artemus was conducting due diligence in connection with purchasing La Scienza and three other artworks from Shagalov, PKG provided Shagalov with a backdated invoice that indicated that Shagalov would acquire full title to La Scienza upon payment of the $430,000.

Plaintiff alleged that Shagalov made PKG aware that the invoice was either for itself or for a potential purchaser. Thereafter, at Shagalov’s request, PKG provided a second backdated invoice, which included a previously omitted resale certificate number and showed the purchaser as Shagalov’s company, rather than Shagalov personally. After completing due diligence, Artemus and Shagalov entered into a transaction that Artemus characterized as a “sale-leaseback,” wherein Artemus purchased four artworks, including La Scienza, for $3.4 million, and leased those artworks back to Shagalov, with a repurchase option for Shagalov.

Thereafter, PKG filed a UCC-1 financing statement on La Scienza, and Shagalov commenced an action alleging, inter alia, that Artemus violated his rights under article 9 of the UCC by trying to dispose of the artwork. In an appeal in the Shagalov action, the First Department affirmed the grant of a preliminary injunction enjoining Artemus from selling, transferring or disposing of, inter alia, La Scienza. See Shagalov v. Edelman, 161 A.D.3d 455, 456 (1st Dept. 2018).

PKG moved to dismiss the complaint pursuant to CPLR §§ 3211(a)(1) and (7). PKG argued that the complaint failed to plead with particularity (as required by CPLR § 3016(b)) that (1) PKG intended to defraud Artemus or another in its position, and (2) there were facts from which anyone could infer that PKG was the proximate cause of any damages incurred by Artemus.

Justice Bransten denied the motion on the record, ruling in part that Artemus “sufficiently pleaded that the Defendant misrepresented the ownership interest the non-party was acquiring on the invoice for La Scienza, that the Defendant knew that the invoice falsely reflected the conveyance of full title, and that the invoice was intended for the purpose of resale of the painting, which the Plaintiff relied upon.” PKG appealed.

The First Department unanimously affirmed.

The First Department’s Decision

The Court held that Artemus sufficiently pleaded the requisite intent under the Ultramares doctrine, stating: “Plaintiff’s allegations are sufficient to permit the inference that defendant intended that the fraudulent invoices would be provided to potential purchasers or lessors.” Slip Op. at *1.

The Court rejected PKG’s argument that the inference was based on information and belief without any factual support: “While the allegations concerning Shagalov’s direct statements to defendant about the necessity of the invoices were made ‘upon information and belief,’ additional alleged facts, such as the timing of defendant’s furnishing of the invoice and its accommodation to Shagalov’s requests for revisions, support the inference that defendant knew the purpose and the recipient of the invoices.” Id. (citing Aozora Bank, Ltd. v. J.P. Morgan Sec. LLC, 144 A.D.3d 440, 441 (1st Dept. 2016).

The Court also rejected PKG’s causation arguments.

There are two components of causation: transaction causation and loss causation. “To establish causation, [a] plaintiff must show both that [the] defendant’s misrepresentation induced [the] plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which [the] plaintiff complains (loss causation).” Laub v. Faessel, 297 A.D.2d 28, 31 (1st Dept. 2002).

“Transaction causation means that the violations in question caused the [plaintiff] to engage in the transaction in question.” AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202, 209 (2d Cir.2000) (citation and internal quotation marks omitted). The term is often used by the courts synonymously with “but for” causation. Moore v. PaineWebber, Inc., 189 F.3d 165, 172 (2d Cir.1999) (“To show transaction causation, the plaintiffs must demonstrate that but for the defendant’s wrongful acts, the plaintiffs would not have entered into the transactions that resulted in their losses.”) (citation omitted) (emphasis in original). See also Basis PAC-Rim Opportunity Fund (Master) v. TCW Asset Mgmt. Co., 149 A.D.3d 146, 149 (1st Dept. 2017) (“Transaction causation is akin to reliance” and requires the plaintiff to allege that “but for the claimed misrepresentation or omissions, the plaintiff would not have entered into the detrimental … transaction.”) (internal quotation and citation omitted).

The loss causation requirement is synonymous with the proximate cause concept found in other tort cases and in the federal securities context. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189, 196-97 (2d Cir.2003) (loss causation in common law fraud claims comparable to federal securities fraud claims); Laub, 297 A.D.2d at 31 (“[l]oss causation is the fundamental core of the common-law concept of proximate cause”) (citations omitted); accord AUSA Life Ins. Co., 206 F.3d at 209 (“Loss causation is causation in the traditional ‘proximate cause’ sense—the allegedly unlawful conduct caused the economic harm.”) (citation omitted). Thus, loss causation is “the causal link between the alleged misconduct and the economic harm ultimately suffered by [the] plaintiff.” Fin. Guar. Ins. Co. v. Putnam Advisory Co., 783 F.3d 395, 402 (2d Cir. 2015).

Whether the plaintiff satisfies the loss causation element requires a fact-intensive analysis, making a decision on a motion to dismiss generally inappropriate. See Metro. Life Ins. Co. v. Morgan Stanley, 2013 WL 3724938, at *18 (Sup. Ct. N.Y. Cnty. June 8, 2013) (holding proximate cause was not an appropriate issue on a motion to dismiss); see also Schroeder v. Pinterest Inc., 133 A.D.3d 12, 26 n.7 (1st Dept. 2015) (noting that “issues of proximate cause are for the trier of fact….”).

The Court held that Artemus satisfied the (transaction and loss) causation requirement, noting that “[t]he complaint also adequately alleges that defendant’s misrepresentations induced plaintiff to enter into the ‘sale-leaseback’ transaction with Shagalov and that they directly caused plaintiff’s loss. Slip Op. at *1 (citing Basis PAC-Rim, 149 A.D.3d. at 149). The Court explained that “Plaintiff allege[d] that it would not have entered into the transaction had it known that defendant’s invoices falsely represented Shagalov’s ownership of La Scienza” – the transaction causation requirement of the claim. The Court went on to say that the complaint “further allege[d] that the misrepresentation of Shagalov’s 100% ownership interest directly caused [Artemus] to pay more than it would have paid for a 60% interest, and that it incurred costs in uncovering the truth after defendant filed its UCC-1” – the loss causation requirement. Id. Accepting these allegations as true on the motion, the Court found them to be “sufficient to sustain plaintiff’s claim that it may be entitled to recover some of its litigation costs in the Shagalov action as damages because it would not have incurred those costs had it not been for defendant’s alleged fraud.” Id. at *2.


In Ultramares, the Court of Appeals held that a misrepresentation or omission by a defendant can give rise to an action for fraud by a third party not in privity with the defendant if the statement was “made with the intent to be communicated to the persons or class of persons who act upon it to their prejudice.” 255 N.Y. at 187. Not all jurisdictions agree with the Ultramares approach. As the Court of Appeals noted, “[s]ome courts continue to insist that a strict application of the privity requirement governs the law of [a professional’s] liability except, perhaps, where special circumstances compel a different result …. [while] an increasing number of courts have adopted what they deem to be a more flexible approach than that permitted under this court’s past decisions.” Credit Alliance, 65 N.Y.2d at 551. Regardless of the divide, in New York, liability will attach where the third party falls within the class of persons the defendant intended to, or had reason to expect would, rely on its misrepresentations – i.e., to wit: “(1) the [defendant] must have been aware that the … reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the [defendant] linking them to that party or parties, which evinces the [defendant’s] understanding of that party or parties’ reliance.” Id.

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