PEOPLE CUOMO v. COVENTRY FIRST LLC

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Supreme Court, Appellate Division, First Department, New York.

The PEOPLE of the State of New York by Andrew M. CUOMO, Attorney General of the State of New York, Plaintiff-Respondent-Appellant, v. COVENTRY FIRST LLC, et al., Defendants-Appellants-Respondents.

Decided: June 17, 2008

LIPPMAN, P.J., ANDRIAS, SWEENY, RENWICK, JJ. O'Melveny & Myers LLP, New York (Yosef Rothstein of counsel), for Coventry First LLC, The Coventry Group Inc., and Montgomery Capital Inc., appellants-respondents. Pillsbury Winthrop Shaw Pittman LLP, New York (Mark R. Hellerer of counsel), for Reid S. Buerger, appellant-respondent. Andrew M. Cuomo, Attorney General, New York (Cecelia C. Chang and Lawrence D. Borten of counsel), for respondent-appellant.

Order, Supreme Court, New York County (Helen E. Freedman, J.), entered September 28, 2007, which granted defendants' motion to dismiss the complaint as it pertains to life settlement transactions by non-New York brokers or to non-New York misconduct, granted the motion with respect to, inter alia, the securities fraud and common-law fraud causes of action, and denied their motion to compel arbitration, unanimously modified, on the law, the common-law fraud cause of action reinstated, and otherwise affirmed, without costs.

 The Donnelly Act claim was properly dismissed to the extent that the alleged conduct did not take place “in this state” (see General Business Law § 340[1];  see also Goshen v. Mutual Life Ins. Co., 98 N.Y.2d 314, 324-325, 746 N.Y.S.2d 858, 774 N.E.2d 1190 [2002] ), as was the Martin Act claim with respect to alleged conduct not “within or from this state” (see General Business Law § 352-c [1] ), and to the extent that it pertained to variable annuity policies already subject to regulation by the Department of Insurance (see Meagher v. Metropolitan Life Ins. Co., 119 Misc.2d 615, 463 N.Y.S.2d 727 [1983] ).   In other respects, these claims, as well as the claim pursuant to Executive Law § 63(12), constituted proper exercises of the State's regulation of businesses within its borders in the interest of securing an honest marketplace (see Matter of People v. Telehublink, 301 A.D.2d 1006, 1009-1010, 756 N.Y.S.2d 285 [2003] ).   The latter cause of action was sufficiently stated;  the elements of fraud need not be alleged (see People v. Concert Connection, 211 A.D.2d 310, 320, 629 N.Y.S.2d 254 [1995], appeal dismissed 86 N.Y.2d 837, 634 N.Y.S.2d 445, 658 N.E.2d 223 [1995];  see also People v. General Elec. Co., 302 A.D.2d 314, 756 N.Y.S.2d 520 [2003] ).   There were sufficient nonconclusory allegations that the life settlement brokers were agents of the sellers of the insurance policies, thereby imposing upon them the fiduciary prohibition against hidden compensation;  the rules governing real estate and insurance brokers are not dispositive.   Defendants' actual knowledge of the brokers' wrongdoing may be fairly inferred from the allegations that defendants participated in and covered up the alleged bid-rigging, supporting the claim for aiding and abetting breach of fiduciary duty (see Kaufman v. Cohen, 307 A.D.2d 113, 125-126, 760 N.Y.S.2d 157 [2003] ).

 The common-law fraud claim should not have been dismissed, since “out-of-pocket” nonspeculative losses were alleged by claims of specific lost sales (see Bernstein v. Kelso & Co., 231 A.D.2d 314, 322, 659 N.Y.S.2d 276 [1997] ).   The contrary ruling in Beznicki v. Fetaya, 11 Misc.3d 1087(A), 2006 N.Y. Misc. LEXIS 979, 2006 WL 1132351, citing our decision in Bernstein for the general damages rule but failing to distinguish it, is unpersuasive.

The motion court properly declined to compel arbitration of even the victim-specific claims (see EEOC v. Waffle House, Inc., 534 U.S. 279, 122 S.Ct. 754, 151 L.Ed.2d 755 [2002];  State of Minnesota v. Cross Country Bank, 703 N.W.2d 562, 570 [Minn.App.2005] ).   Contrary to defendants' contention, none of the exceptions to the rule against subjecting nonsignatories to arbitration applied (see e.g. Denney v. BDO Seidman, L.L.P., 412 F.3d 58, 70 [2d Cir.2005];  Mark Ross & Co., Inc. v. XE Capital Mgt., LLC, 46 A.D.3d 296, 847 N.Y.S.2d 83 [2007] ).

We have considered the parties' other contentions for affirmative relief and find them unavailing.