A CONTRACT IS A CONTRACT - ANOTHER VIEW

Yesterday, I posted the case CENTI v. McGILLIN, 2019 NY Slip Op 9058 - NY: Court of Appeals December 19, 2019 where the Court of Appeals refused to deny the enforceability of a loan on the ground that it was funded by illegal gambling proceeds. Now contrast that case with Doe v. Doe, NYLJ March 26, 2020, Date filed: 2020-03-16, Court: District Court, Nassau, Judge: Judge Scott Fairgrieve, Case Number: SC-002118-19OB:

 "Plaintiff commenced a small claims case against Defendant for $650 for breach of contract. Defendant brought a counterclaim against Plaintiff for $325 for nonperformance. On November 27, 2019, the court dismissed both the claim and counterclaim for the reasons set forth herein.

Testimony of Parties

The parties orally agreed that Plaintiff would work on Defendant’s daughter’s college applications, for an agreed upon rate of $125 per hour for each hour working with Defendant’s daughter in person. For any hours that Plaintiff was working independently at his residence, the rate was $100 per hour. There was no written agreement. The understanding was that the Plaintiff would provide assistance to work on the Defendant’s daughter’s college essays. Defendant regularly paid Plaintiff for the services he provided. Plaintiff alleges that Defendant was content with the services rendered.

The essays were to be submitted through the Common App, which is an online platform to submit college applications. On September 22 and 23, 2019, Plaintiff independently worked on two essays for Defendant’s daughter’s application to the University of Georgia at his home for a rate of $100 per hour. He sent the essays to the Defendant and her daughter for review. Plaintiff said they were very happy with the product. On September 24, Defendant met with her daughter’s school guidance counselor to discuss the essays. Defendant testified…, “any college advisor is fully aware that you show it to your guidance counselor. The guidance counselor read them and said who wrote these, a 40-year old man?” (Transcript at p10). Defendant called the Plaintiff on the phone to express her concerns that the essays were not written by Defendant’s daughter.

The final bill due to the Defendant was for $650. This was comprised of four hours working independently at a rate of $100 per hour, and two hours of working with Plaintiff’s daughter at a rate of $125 per hour. Plaintiff believed that the Defendant would pay the total $650 that was due but was never paid.

Defendant testified that her understanding of the agreement was that the Plaintiff would only edit the essays. Defendant and her daughter felt pressured to use Plaintiff’s services because they were on a time constraint to get the college applications sent out. The school guidance counselor expressed his concern for having the Plaintiff write the essays because the student must certify that they wrote the essay. Plaintiff admitted that he knew that the Defendant’s daughter had to certify that she wrote the essays.

Decision

The Common App is used as a platform for students to easily apply to colleges. As per the Common App students must certify that their whole work is their own. The Plaintiff’s occupation of writing and editing essays for students puts him on notice of the certification. He knew that students would have to certify that the essays are their own work because he has written essays for students in the past. The Defendant is also on notice because she allowed the Plaintiff to work on her daughter’s essays on his own time. Both parties knew that the Plaintiff was writing the essays on behalf of the daughter with the intention of sending the essays to the schools. Thus, the parties entered into an illegal contract.

When both parties are equally at fault (in pari delicto), the courts tend to leave the parties as is. “The doctrine of in pari delicto, Latin for equality of fault, is grounded on two premises: (1) courts should not lend their good offices to addressing disputes among wrongdoers; and (2) denying relief to a wrongdoer is an effective means of deterring illegality.” (28 N.Y. Prac., Contract Law §7:13).
Both the Plaintiff and Defendant are at fault because they knew the essays were not the work product of the Defendant’s daughter. The Plaintiff worked on the essay on his own time, at his own house, not in the presence of the daughter. The Defendant agreed to allow the Plaintiff to work on the essays at his home. Therefore, they both knew the work was not performed by the Defendant’s daughter.
It is well settled that illegal contracts will not be enforced by the courts. In Carmine v. Murphy, 285 N.Y. 413 (1941), plaintiff allegedly sold and delivered alcoholic beverages to the defendant and demanded that the unpaid balance be paid in full. The plaintiff was not properly licensed to sell or distribute alcoholic beverages in the State of New York. The general rule is that no action can be based upon an illegal contract (Carmine v. Murphy, 285 N.Y. 413 (1941)). The Court held that the contract was illegal and unenforceable.

Additionally, in Parpal Restaurant, Inc. v. Robert Martin Company, 685 N.Y.S.2d 481 (2nd Dept. 1999), plaintiff brought an action seeking a permanent injunction barring a construction project from expanding streets abutting the plaintiff’s subleased premises. The contract was deemed illegal since it was created for the purpose of improper tax avoidance. Thus, the contract was unenforceable.
Furthermore, in Sabia v. Mattituck Inlet Marina and Shipyard, Inc., 805 N.Y.S.2d 346 (1st Dept. 2005), plaintiff sued defendant for breach of contract and fraud. Plaintiff alleged that a boat purchased from defendant was faulty. As per their original agreement, both parties attempted to avoid payment of sales tax on the purchase of the boat. “Since no right of action can arise from an illegal contract, plaintiffs are barred, as a matter of law, from suing on the alleged agreement for the purchase of the boat…” Id. at 347. The court ruled the scheme to be illegal and therefore unenforceable.

Similarly, here the oral contract between the Plaintiff and Defendant is illegal. Both parties knew that the essays must be the sole product of the Defendant’s daughter. The Plaintiff cannot write the essays and have the daughter assert that it is her own work. As per their agreement, the Plaintiff and Defendant attempted to create a scheme in which they would present the Plaintiff’s work as the work of the Defendant’s daughter. The schemes in the previously mentioned cases, were deemed illegal leading the court to rule the contracts were unenforceable. Here, the contract was illegal since it was based on a scheme to defraud the institutions of higher learning, which the daughter was applying to for admission. Thus, the contract is unenforceable.

In Stone v. Freeman, 298 N.Y. 268, 271 (1948), plaintiff brought suit against defendant to recover commissions for the sale of clothing. The plaintiff sold clothing to the defendant. The plaintiff used a broker and the defendant used a purchasing agent. The agreement between the broker and purchasing agent provided that the broker was to pay a portion of his commissions to the purchasing agent. This alleges a conspiracy since it is illegal to pay commissions or bonuses to a purchasing agent because they are on different sides of the contract. Due to this conspiracy, the contract was unlawful, thereby making it unenforceable. “A broker or agent who knowingly participates in a criminal scheme is a principal, and in pari delicto with the one who employs him, so that neither may sue the other.” (Id. at 271). The court held that the case should be dismissed.

Here, Plaintiff and Defendant were involved in an illegal agreement. Plaintiff and Defendant were in pari delicto. The present contract was illegal since both parties knew they were submitting plagiarized work. Plaintiff testified, “They have to certify the whole work is their own.” (Transcript at p14). Defendant testified that when her daughter sent in her application, she was not supposed to have a ghost writer (Transcript at p11). Therefore, they were both at fault and could not be granted a money judgement from the court.

According to The Common App, the college application process prepares students for independence that comes with college. This forces students to take responsibility for their work and be proud of their work product.

Since the agreement between the Plaintiff and Defendant is based on illegal conduct, the court refuses to aid a litigant who petitions relief. The law does not aid either party since they are equally at fault (28 N.Y. Prac., Contract Law §7:13).

Conclusion

The court will not grant a money judgement to the parties since the agreement is based on illegal conduct. Both the claim and counterclaim are dismissed with prejudice."

A CONTRACT IS A CONTRACT

Fruit of the poisonous tree is a legal metaphor in the United States used to describe evidence that is obtained illegally. The logic of the terminology is that if the source of the evidence or evidence itself is tainted, then anything gained from it is tainted as well. But that metaphor may not apply to contract law and in this cases, it appears the Court of Appeals abides by the maxim: "He who comes into equity must come with clean hands."

CENTI v. McGILLIN, 2019 NY Slip Op 9058 - NY: Court of Appeals December 19, 2019:

"The doctrine of waiver does not preclude consideration of defendant's challenge here to the enforceability of the loan on the ground that it was funded by illegal gambling proceeds. Nevertheless, that defense was properly rejected on the merits. Given our strong public policy favoring freedom of contract, agreements are generally enforceable by their terms (159 MP Corp. v Redbridge Bedford, LLC, 33 NY3d 353, 359-361 [2019]). There is an affirmed finding, supported by the record, that the parties entered into a bona fide loan agreement and the facts do not support voiding the agreement on public policy grounds.

Neither the terms of the agreement nor plaintiff's performance — i.e., loaning money to a friend — was intrinsically corrupt or illegal. Although the loan was funded by the parties' illegal gambling operation (for which both were criminally prosecuted), the record does not support a characterization of their conduct as "malum in se, or evil in itself" (Lloyd Capital Corp. v Pat Henchar, Inc., 80 NY2d 124, 128 [1992]) and the source of funds used for a loan is not typically a factor in determining its validity. Defendant argues the agreement should be deemed unenforceable because the courts should not assist a party in profiting from ill-gotten gains. But, here, where both parties were involved in the underlying illegality, neither enforcement nor invalidation of the contract would avoid that result. Indeed, if the loan is not enforced, defendant receives a windfall despite his participation in the criminal acquisition of the funds. We have been reluctant to reward "a defaulting party [who] seeks to raise illegality as a sword for personal gain rather than a shield for the public good'" (id., quoting Charlebois v Weller Assoc., 72 NY2d 587, 595 [1988]; cf. McConnell v Commonwealth Pictures Corp., 7 NY2d 465 [1960]). Although we do not condone plaintiff's illegal bookmaking business, for which he was prosecuted and fined, the circumstances presented here do not warrant a departure from this tenet."

CONTRACT NOT TO DISCLOSE EXTRAMARITAL AFFAIR

Is a plaintiff's attempt to enforce an agreement to keep silent about an extramarital affair in exchange for money illegal? We have heard about similar cases in the news and in this recent matter, the Southern District of New York addresses the issue. NOTE: The decision has the name changed to Plaintiff and Defendant as a curtesy to counsel of one of the parties and is posted here as modified by said counsel.

NAME DELETED AS CURTESY, Plaintiff, v. NAME DELETED AS CURTESY, Defendant., No. 19 Civ. 1546 (PAE),  United States District Court, S.D. New York, January 21, 2020:

"Defendant argues that Plaintiff's breach of contract claim is independently deficient because the agreement that Plaintiff posits would be illegal. Illegal agreements "are, as a general rule, unenforceable" in a breach of contract action. Lloyd Capital Corp. v. Pat Henchar, Inc., 80 N.Y.2d 124, 127 (1992). "It is the settled law of [New York] (and probably every other State) that a party to an illegal contract cannot ask a court of law to help him carry out his illegal object." State v. Freeman, 298 N.Y. 268, 271 (1948).

Here, Defendant argues that the agreement alleged by the Complaint is illegal because, on the facts pled, it is the product of extortion by Plaintiff. See Def. Mem. at 11. Under New York law, a person commits extortion if she compels or induces another to transfer property to her by instilling in that person a fear that if the property is not delivered, the actor or someone working with her will "[e]xpose a secret or publicize an asserted fact, whether true or false, tending to subject some person to hatred, contempt or ridicule." N.Y. Penal Law § 155.05(2)(e)(v). Attempted extortion is also a crime. See id. § 110.00. In cases involving contracts found to be extortionate, New York courts have dismissed claims of breach, on the grounds that such contracts are illegal and unenforceable. See Yao v. Bult, 666 N.Y.S.2d 159, 160 (1st Dep't 1997).

Critically here, an element of extortion is a threat, from the person seeking the property, that she will expose the controversial secret or fact. See People v. Dioguardi, 8 N.Y.2d 260, 269 (1960); see also N.Y. Penal Law § 155.05(2)(e)(v). Such a threat can be implied, as opposed to explicit. See Kraft Gen. Foods, Inc. v. Cattell, 18 F. Supp. 2d 280, 285 (S.D.N.Y. 1998); People v. Kacer, 448 N.Y.S.2d 1002, 1007 (Sup. Ct., N.Y. County 1982).

The parties disagree about whether the Complaint and attached exhibits demonstrate that Plaintiff threatened Defendant, as required to find extortion. Defendant argues that the Complaint and the accompanying Demand Letter support such a threat: In his framing, Plaintiff demanded $500,000 from him, implying that she might otherwise disclose their longstanding affair and the child's paternity. See Def. Mem. at 11; Def. Reply at 5 (citing Demand Ltr. at 3). As Defendant notes, Plaintiff, after the child learned about Defendant's likely paternity, wrote: "You thought. . . no one would find out and there never would be consequences." Sept. 17, 2018 Ltr. at 1. Plaintiff counters that, based on the Complaint and the documents attached to it, the condition that Plaintiff remain silent was introduced by Defendant, and that, viewing the pleadings in the light most favorable to Plaintiff, she did not threaten, explicitly or implicitly, to disclose these damaging facts. See Pl. Mem. at 7-8.

The Court regards this question as close. Favoring Defendant's reading, New York courts have held that agreements involving payments to induce a party to stay silent regarding sexual relationships and other intimate information bespeak extortion and are hence void for illegality. In Yao, for example, the plaintiff, a lawyer who had had an intimate relationship with a wealthy financial executive, threatened to expose that the executive was gay and that he had previously been in a relationship with an individual with AIDS. See Matter of Yao, 680 N.Y.S.2d 546, 547 (1st Dep't 1998) (per curiam); Matter of Yao, 661 N.Y.S.2d 199, 200 (1st Dep't 1997) (per curiam).^[6] The plaintiff alleged that he and the executive had entered into an oral agreement in which the executive promised to pay the plaintiff $10,000 per month, in exchange for the plaintiff's promise not to publicize that personal information. See Matter of Yao, 680 N.Y.S.2d at 547; Matter of Yao, 661 N.Y.S.2d at 200. After making the first payment, the executive stopped paying, and the plaintiff sued for breach of contract. Matter of Yao, 661 N.Y.S.2d at 200. The First Department affirmed the dismissal of the breach of contract claim, because the contract was extortionate. Yao, 666 N.Y.S.2d at 160.

As Defendant notes, the agreement alleged by Plaintiff contains similar terms to that in Yao. In the Demand Letter sent to Defendant's attorney, Plaintiff's attorney described the agreement as follows: "Ms. Plaintiff promised not to contact [Defendant] or [his] family or divulge the true nature of [their] relationship and the paternity of her daughter in exchange for [his] promise to pay her $500,000. [He] accepted that offer by agreeing to pay; thereafter a valid contract was formed." Demand Ltr. at 3. This statement is consistent with Plaintiff's having—at least implicitly— threatened that, if she were not paid, she would expose her sexual relationship with Defendant and Defendant's out-of-wedlock paternity of the child, both of which constitute "secret[s]" that would tend to subject Defendant to "hatred, contempt or ridicule." N.Y. Penal Law § 155.05(2)(e)(v).

At the same time, Plaintiff cites to allegations in the Complaint and attached exhibits that, although not establishing that Defendant, unprompted, demanded Plaintiff's silence as a condition on which he would pay her, are at least consistent with that series of events.^[7] On this reading, while the terms of Plaintiff and Defendant's agreement parallel those held void as extortionate in Yao, the non-disclosure condition was Defendant's impetus exclusively.

In the end, the Court is mindful that on a motion to dismiss, the pleadings must be read in the light most favorable to the plaintiff. A court must be wary of drawing factual inferences for a defendant that, even if rational, are arguable. See Edrei v. Maguire, 892 F.3d 525, 539 (2d Cir. 2018) ("Perhaps this is an inference that a factfinder might ultimately make, but at this stage we must draw all inferences in favor of the plaintiffs, not the defendants."). Defendant has not cited case law under which an agreement to pay another not to publicize damaging secrets would necessarily be extortionate and illegal where the facts show neither an express or implied threat of disclosure by the person promising silence. And the Court is unprepared, on the pleadings, which leave less than pellucid the parties' full course of communications, to hold that Plaintiff necessarily threatened disclosure of Defendant's embarrassing secrets so as to have committed extortion. The Complaint and the communications attached to it do not contain an express threat by Plaintiff to this effect. And while these are consistent with an implied such threat, they do not unambiguously reveal that Plaintiff, in seeking money, implied that she otherwise might disclose these secrets.

To be sure, Defendant's claim that Plaintiff implied such a threat, prompting his insistence on such a condition, is quite plausible. A finder of fact, upon hearing the principals' testimony and reviewing the documentary evidence, including the Demand Letter, might well so conclude. But that reading—that Plaintiff introduced the threat of disclosure—is not the only plausible one. Plaintiff's alternative theory is not inconceivable. She posits that, after the child learned of Defendant's apparent paternity, Plaintiff did no more than ask for money from Defendant, and that it was Defendant who, newly fearful of disclosure now that there was no longer a secret to be kept from the child, on his own initiative demanded a vow of silence from Plaintiff as a condition for paying her. On that reading, Plaintiff's acquiescence to that condition, without more, would not constitute extortion on her part. See Andrea Doreen Ltd. v. Bldg. Material Local Union, 299 F. Supp. 2d 129, 156 (E.D.N.Y. 2004) (no extortion because no threat); cf. People v. Flynn, 475 N.Y.S.2d 334, 338 (Sup. Ct., N.Y. County 1984) (larceny by trick and false pretenses charges, N.Y. Penal Law § 155.05(2)(a), not viable where evidence did not "rise to the level of even an implied threat").

Were Plaintiff's breach of contract claim not blocked by the Statute of Frauds, the decisive question as to whether the contract was the product of extortion and hence inherently illegal—whether Plaintiff expressly or impliedly threatened disclosure of Defendant's secrets— would have been tested in discovery. Defendant's claim that the agreement with Plaintiff, if any, was the product of a threat of disclosure would then have been assessed on a full record of the parties' communications, and resolved, at summary judgment or at trial. However, because the breach of contract claim is independently deficient, there is no occasion to undertake such discovery.

The Court, accordingly, dismisses Plaintiff's breach of contract, but only on the first ground urged by Defendant: that the agreement Plaintiff alleges is barred by the Statute of Frauds."