Kimmell v. Schaefer

• Decision Date: 26 November 1996
• Citation: 89 N.Y.2d 257,652 N.Y.S.2d 715,675 N.E.2d 450
• Parties: , 675 N.E.2d 450, 65 USLW 2440 Lee H. KIMMELL et al., Respondents, v. Herman A. SCHAEFER, Appellant, et al., Defendants.
• Court: New York Court of Appeals Court of Appeals

Page 715

652 N.Y.S.2d 715

89 N.Y.2d 257, 675 N.E.2d 450, 65 USLW 2440

Lee H. KIMMELL et al., Respondents, v. Herman A. SCHAEFER, Appellant, et al., Defendants.

Court of Appeals of New York.

Nov. 26, 1996.

Lynch Rowin Novack Burnbaum & Crystal, P.C., New York City (Thomas P. Lynch and Mark I. Silberblatt, of counsel), for appellant.

Riker, Danzig, Scherer, Hyland & Perretti (Alan E. Kraus, of the New Jersey Bar, admitted pro hac vice, of counsel), and Davis, Scott, Weber & Edwards, P.C., New York City, for respondents.

OPINION OF THE COURT

SMITH, Judge.

The primary issue on this appeal is whether the relationship between the parties was sufficient to render defendant liable to plaintiffs for the tort of negligent misrepresentation. We affirm the order of the Appellate Division because the record supports the finding that a special relationship existed between the parties which under the circumstances here required defendant to speak with care.

Plaintiffs invested $320,000 each in a limited partnership called Cogenic Embarcadero L/P. This partnership involved one of several projects developed by Cogenic Energy Systems, Inc. (CESI) for the purpose of providing heat and electricity to industrial and commercial energy users through on-site gas-powered "cogeneration" units. The incentive for employing cogeneration to meet energy needs stemmed from the lower cost of self-generated energy as compared to the rates charged by utility companies for supplying the equivalent units of power. In return for providing and installing the cogeneration units, CESI shared a portion of the energy cost savings realized by the participating facilities.

The Embarcadero project supplied electricity and heat to the Holiday Inn in the San Diego area of California. In late 1987, CESI began seeking new buyers for the Embarcadero project. In furtherance of the renewed sales effort, CESI's president requested an updated "feasibility study" from the San Diego office of the company so that prospective buyers could evaluate the viability of the project on more current financial information. In November 1987, CESI generated projections on the Embarcadero project. The projections assumed that electric and gas rates in 1988 would remain at 1987 levels despite a pending application by the local utility for a rate change which, if approved, would eliminate any return on the investment.

Defendant, a lawyer, certified public accountant and former chief financial officer of Pepsico for 26 years became involved with CESI in 1985 after he retired from Pepsico. Defendant had been recruited to serve on CESI's board because the company believed that his reputation would enhance its credibility with potential investors. In the fall of 1987, CESI's president asked defendant if he knew of anyone who would be interested in buying or investing in the Embarcadero project. At that time, defendant was the chairman of CESI's board. In December 1987, defendant also became CESI's chief financial officer. Defendant became the contact person at CESI for the Embarcadero project and he began seeking investors for the limited partnership.

As part of his efforts to market the Embarcadero project, defendant asked his accountant, Michael Gross, if he knew of anyone who would be interested in the investment. Gross separately approached plaintiffs about the Embarcadero project and provided them with the November 1987 projections which he had obtained from the defendant.

In mid-December, defendant met with plaintiff Katzenbach at Marine Midland Bank in order to discuss financing for plaintiff's potential investment in the Embarcadero project. During this meeting, defendant told Katzenbach that the Embarcadero project was a good investment and that he should look at the numbers provided in the projections. After the meeting at Marine Midland, defendant learned that plaintiff Kimmell was also considering investing in the Embarcadero project.

Defendant's efforts to solicit investors occurred in a climate which was rapidly becoming unfavorable for the San Diego cogeneration industry. After widely publicized hearings on proposed utility rate changes, a settlement was reached and on December 22, 1987, the California Public Utilities Commission approved a new rate structure. Effective January 1, 1988, the new rates rendered any cost savings from cogeneration in the San Diego area minimal at best and doomed any investment in the Embarcadero project to failure.

In early January 1988, based on the revenues received from the Embarcadero project in November and December 1987, a new set of projections predicting an even higher rate of return from the project was issued at defendant's behest. The new projections estimated a 10% increase in energy savings over the November 1987 projections. Defendant sent the revised projections to Gross with a cover memo which stated, in relevant part, "[a]fter a thorough discussion with our West Coast administrator to assure ourselves that the first two months are not an aberration, it is reasonable to assume that we are and will exceed our original projection, done sometime ago, by at least 10%." Defendant intended the memo and the revised projections, dated January 6, 1988, to reach plaintiffs and assumed that Gross would deliver the documents to them. Plaintiffs received and reviewed the revised projections.

Unfortunately, defendant and the revised projections failed to account for the recent and substantial change in local utility rates. Since the January 6, 1988 projections were not based on the current and actual utility rates in effect, they misrepresented the potential rate of return on the Embarcadero project. As of January 1, 1988, the Embarcadero project was unlikely to generate any returns for its investors.

On January 8, 1988, defendant, who did not know of the widely publicized April 1987 application for a change in utility rates, or the devastating nature of the rate change which went into effect on January 1, met with Kimmell and told him that the Embarcadero project was a good investment with earnings better than anticipated. Defendant also sent a letter to Kimmell, dated January 8, 1988, stating, "If you have any questions [about the Embarcadero project] please give me a call as I am confident I can give you 'hot comfort' on this one."

Defendant's efforts at soliciting plaintiffs' participation in the limited partnership were successful. After the meeting at Marine Midland in mid-December 1987, plaintiff Katzenbach decided to take a half interest in the Embarcadero project for $320,000. Katzenbach signed the limited partnership agreement in March 1988. Kimmell made his investment decision shortly after his January 8 meeting with the defendant. He also invested $320,000 in the project. Defendant and Gross received a commission of $40,000 for bringing plaintiffs to the Embarcadero project which they split evenly between them. The $640,000 obtained from plaintiffs represented approximately one third of CESI's total revenues for the fiscal year ending January 1, 1988. CESI, which had a negative net worth of $3.4 million on January 31, 1988, subsequently filed for bankruptcy in 1989, and was later liquidated.

Plaintiffs commenced this action seeking damages arising out of their failed investment in the Embarcadero project. After a nonjury trial, Supreme Court found that defendant had negligently misrepresented, both directly and by encouraging plaintiffs to rely on the projections generated by CESI, that the Embarcadero project would earn income, and that plaintiffs relied on this misrepresentation to their detriment. Supreme Court also found the existence of a special relationship sufficiently resembling privity to justify holding defendant liable for negligent misrepresentation. The Appellate Division affirmed Supreme Court's findings of fact, determined that there was ample support for the trial court's conclusions and held that defendant was liable for negligent misrepresentation. We granted defendant leave to appeal.

Defendant...