Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Chipetine

Citations: 221 A.D.2d 284; 634 N.Y.S.2d 469; 1995 N.Y. App. Div. LEXIS 12294

Court: Appellate Division of the Supreme Court of the State of New York; November 29, 1995; New York; State Appellate Court

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The Supreme Court of New York County, presided over by Justice Myriam Altman, issued an order on December 28, 1993, that granted the plaintiff's cross-motion for summary judgment on liability, denied the defendant's motion for summary judgment, and imposed $10,000 sanctions each on the defendant and his counsel, payable to the plaintiff's counsel. The order was modified to dismiss the plaintiff's second cause of action as time-barred and to reduce the sanctions to $5,000 each, payable to the State Commissioner of Taxation and Finance and the Lawyers’ Fund for Client Protection. The court affirmed the remaining parts of the order, with costs awarded to the plaintiff.

The case's key facts are undisputed. In June 1982, the defendant contracted with the plaintiff to manage an account for the Bernard Chipetine Profit Sharing Trust. The plaintiff mistakenly credited the account with 5,320 shares of Tyson Foods, Inc., in March 1986, and an additional 5,320 shares after a stock split in April 1986. The defendant sold these shares in March 1987 for $324,958.12 and later transferred the proceeds to a money market fund. By September 1989, the plaintiff discovered the error, incurring a cost of $438,097.50 to cover the short position.

Although the defendant acknowledged the mistake, he refused to reimburse the plaintiff, citing losses from a failed business venture. The court upheld the plaintiff's first cause of action for fraud, indicating that the defendant's concealment of the error constituted fraud despite a lack of active misrepresentation. The court ruled that constructive fraud applies due to the fiduciary relationship and the detrimental nature of the defendant's actions. The court dismissed the defendant's argument that fraud claims cannot coexist with breach of contract claims, affirming that the CPLR permits such consistency.

However, the court agreed with the defendant that the IAS Court improperly granted summary judgment on the second cause of action for conversion, as the relevant transactions occurred within a specific timeframe that contradicted the claims made.

The Federal action initiated by the plaintiff on June 13, 1990, for violations of Federal securities laws and accompanying State claims was dismissed, as the Federal court classified it as a conversion issue under State law. The cause of action for conversion arose on March 27, 1987, when the defendant unlawfully sold the plaintiff's shares, with no demand for return or refusal occurring until after that date. The Statute of Limitations for this claim had expired by March 27, 1990. Consequently, the defendant's motion for summary judgment to dismiss the second cause of action as time-barred should have been granted.

In relation to the third cause of action for unjust enrichment, the court assessed whether it would be inequitable to allow the defendant to retain the benefits derived from tortious or fraudulent conduct. The defendant's actions were characterized as bordering on larceny, warranting restitution. The IAS Court correctly upheld the fourth cause of action for breach of contract, noting the defendant's violation of the implied duty of good faith and fair dealing, even without the need to specify the breached contract terms.

The defendant's preemption argument was rejected; only State laws regulating employee benefit plans are preempted. The sanctions imposed on the defendant and his counsel were deemed excessive in part. Furthermore, the sanctions should have been directed to the State Commissioner of Taxation and Finance and the Lawyers’ Fund for Client Protection, not to the plaintiff.