Howard v. Murray

• Decision Date: 21 December 1977
• Citation: 401 N.Y.S.2d 781,43 N.Y.2d 417,372 N.E.2d 568
• Parties: , 372 N.E.2d 568 George M. HOWARD et al., Appellants, v. William E. MURRAY, Respondent.
• Court: New York Court of Appeals Court of Appeals

Page 781

401 N.Y.S.2d 781

43 N.Y.2d 417, 372 N.E.2d 568

George M. HOWARD et al., Appellants, v. William E. MURRAY, Respondent.

Court of Appeals of New York.

Dec. 21, 1977.

Jerome R. Halperin, P. C., New York City, for appellants.

Archibald A. Patterson, New York City, for respondent.

OPINION OF THE COURT

WACHTLER, Judge.

This action to rescind a mortgage, bond and option arrangement is now before our court for the second time. In essence, the plaintiffs claim that the defendant, an attorney specializing in tax law, took unfair advantage of the attorney-client relationship in contriving the agreements now sought to be avoided.

On the first appeal, we were not directly presented with the trial court's asserted error in upholding the over-all fairness of the transaction. The Appellate Division had yet to reach the merits, a divided court having found the plaintiffs' action barred by the Statute of Limitations. We reversed that determination by concluding that article 15 of the Real Property Actions and Proceedings Law applied and that the statutory remedy was not time-barred.

Our initial review set forth the essential details of an intricate loan transaction (Howard v. Murray, 38 N.Y.2d 695, 697-699, 382 N.Y.S.2d 470, 346 N.E.2d 238), and indicated that the defendant attorney at the very least "got the better of the bargain" (at p. 699, 382 N.Y.S.2d at p. 471, 346 N.E.2d at p. 239). The defendant had originally been consulted for tax advice on the plaintiffs' desired sale or refinancing of their primary capital asset a lot and commercial building. At the time the property was worth nearly $500,000; it yielded a net annual rental of approximately $15,000. Aided by the plaintiffs' eagerness to increase this yield on a tax-free basis during their retirement, coupled with their difficulties in accomplishing this goal through outside channels, the defendant in the end acquired for himself "the right to purchase the property at an amount considerably below its actual value" (at pp. 698-699, 382 N.Y.S.2d at pp. 471, 346 N.E.2d at pp. 239).

The bargain itself was patently one-sided. We could not say at that point and on that basis alone, however, that the underlying agreement was unfair as a matter of law. Instead we remitted the matter to the Appellate Division for appropriate review in light of our preliminary analysis. Having yet to review the merits, it was for that court to first respond to the essence of the fairness problem: "The crucial question is whether the defendant attorney established that the contract 'was made by the client with full knowledge of all material circumstances known to the attorney, * * * and that a reasonable use was made by the attorney of the confidence reposed in him' " (at p. 699, 382 N.Y.S.2d at p. 471, 346 N.E.2d at p. 239, quoting Whitehead v. Kennedy, 69 N.Y. 462, 466).

This classic formulation of the legal standard to be applied on remission assumes a level of scrutiny far "stricter than the morals of the market place" (Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546). Recognition of the duty owed to a client may be strained "from human frailty when confronted with conflicting interests" (Matter of People (Bond & Mtge. Guar. Co.), 303 N.Y. 423, 430, 103 N.E.2d 721, 725), but may not later be demonstrated merely by assertions of good faith or the belief that the client obtained the best terms available at the moment (Wendt v. Fischer, 243 N.Y. 439, 443-444, 154 N.E. 303). The law "does not stop (merely) to inquire whether the contract or transaction was fair or unfair. It stops the inquiry when the relation is disclosed" (Munson v. Syracuse, Geneva & Corning R.R. Co., 103 N.Y. 58, 74, 8 N.E. 355, 358).

When we remitted the case to the Appellate Division, our direction contemplated a meaningful review focusing on the adequacy of disclosure attending the attorney-client transaction. That court, by a divided vote, affirmed the trial court's assessment, apparently presupposing that the trial court had a full grasp of the underlying agreement and the plaintiff's informed assent to its terms. As our initial analysis suggested, however, it was in this respect that the trial court in the first instance had gone astray.

Illustrative of this was the trial court's assumption that the agreement was proposed by an attorney who, in attempting to resolve his clients' financial problem, had himself taken a "calculated risk". The defendant was presumed to have made a binding commitment to provide the plaintiffs with "a loan of $4,000 per year for life". In addition, the trial court found that Mrs. Howard was to be entitled to a $9,000 yearly "annuity" if predeceased by her husband. The trial court apparently considered this "final net consideration after taxes" to be "the basis for the reasonableness of the proposal."

As we noted on the prior appeal, however, these assumptions fail to account for the arsenal of contingencies and interrelating qualifications overflowing from the four documents which comprise the parties' agreement. The defendant had in reality hedged any risk that the property might decline in value by including terms and cross references allowing him in effect to discontinue loan payments at will without material penalty. If he chose to back out at any point, all prior payments would remain secured under the bond and ope second mortgage, and the sums advanced would be repayable to him upon the death of George Howard. At that point, if the defendant chose to adhere to the payment schedule, he would acquire the right to purchase the property at an option price limited to actual advances made under the related bond and option agreements. Although the property would be subject to an outstanding first mortgage, any remaining risks were removed by a provision requiring the plaintiffs to annually...