Stutman v. Chemical Bank

• Decision Date: 18 May 2000
• Citation: 95 N.Y.2d 24,709 N.Y.S.2d 892,731 N.E.2d 608
• Parties: MICHAEL E. STUTMAN et al., Appellants, v. CHEMICAL BANK, Respondent.
• Court: New York Court of Appeals Court of Appeals

95 N.Y.2d 24

731 N.E.2d 608

709 N.Y.S.2d 892

MICHAEL E. STUTMAN et al., Appellants, v. CHEMICAL BANK, Respondent.

Court of Appeals of the State of New York.

Argued April 6, 2000.

Decided May 18, 2000.

Landy & Seymour, New York City (Whitney North Seymour, Jr., Craig A. Landy and Peter James Clines of counsel), and William V. DeCandido, P. C., Forest Hills, for appellants.

Chase Manhattan Legal Department, New York City (Ahuva Genack and Patricia M. Kelly of counsel), for respondent.

Judges BELLACOSA, SMITH, LEVINE, CIPARICK, WESLEY and ROSENBLATT concur.

OPINION OF THE COURT

Chief Judge KAYE.

This case requires us to determine whether a $275 bank fee assessed in connection with the refinancing of a homeowner's loan constituted a deceptive practice under General Business Law § 349. We hold that it did not, and we therefore affirm the Appellate Division order dismissing plaintiffs' suit.

In November 1991, plaintiff Michael Stutman and his wife, plaintiff Jeanette Rodriguez, borrowed $175,000 from defendant Chemical Bank (now merged into the Chase Manhattan Bank) to finance the purchase of a cooperative apartment. The loan was secured by plaintiffs' shares in the co-op. The note covering the loan permitted plaintiffs to prepay the principal at any time without incurring "any prepayment charge." The note stated:

"I have the right to make payments of principal at any time before they are due. * * * I may make a full prepayment or partial prepayments without paying any prepayment charge."

In February 1994, plaintiffs sought to refinance their loan with a new loan from Citibank, using the same shares of stock as collateral. Chemical, however, would not release the collateral until it received the funds to satisfy the loan, and Citibank would not release the funds for the new loan until it received the collateral.

Chemical informed plaintiffs that it would charge a $275 "attorney's fee" to arrange a simultaneous transfer in which Chemical would deliver the collateral and other documents to Citibank in exchange for the funds. Plaintiffs initially objected to the fee, but then decided to pay it, under protest, in order to complete the refinancing. About a day after plaintiffs "closed" the loan with Citibank, a representative from Chemical—who plaintiffs allege was not an attorney—delivered the collateral and other unidentified documents to Citibank. Simultaneously, Citibank gave the representative a check which retired the Chemical Bank loan.

Plaintiffs then brought the instant lawsuit, on behalf of themselves and all persons similarly situated, alleging that the $275 charge was a deceptive practice under General Business Law § 349, and that it violated the Federal Truth in Lending Act (TILA) (15 USC § 1601 et seq.). Plaintiffs also raised several common-law claims, including breach of contract, fraud and excessiveness of the $275 fee. Defendant removed the case to the United States District Court for the Southern District of New York. The District Court granted defendant's motion to dismiss the TILA claim, holding that the $275 charge was not a finance or prepayment charge under TILA, and that TILA did not create a general prohibition against making misleading statements in connection with loans. The court added that, in any event, the $275 charge was not misleading but was assessed for plaintiff's "special request" that the loan be refinanced through Citibank. Having dismissed the only Federal claim, and there being no diversity of citizenship, the District Court remanded the State claims to State court (Stutman v Chemical Bank, 1996 US Dist LEXIS 13970, 1996 WL 539845 [SD NY 1996]).

Defendant then filed a preanswer motion in Supreme Court to dismiss the remaining claims (see, CPLR 3211 [a] [5], [7]). The court declined to dismiss plaintiffs' General Business Law § 349 claim, stating:

"It is impossible to conclude, as a matter of law, that it was not materially misleading to contract with plaintiffs in the language of their note—that there would not be `any' prepayment charge—without telling them that there may be an attorney's fee payable if prepayment were made in the not unusual manner of a refinancing through another bank."

The court also denied defendant's motion to dismiss plaintiffs' claim that the $275 fee was excessive, but granted defendant's motion to dismiss the remaining claims.

On defendant's appeal, the Appellate Division reversed and dismissed both of plaintiffs' surviving claims. Concerning the General Business Law § 349 claim, the Appellate Division stated that the "burden is on plaintiffs to show materially deceptive conduct on which they relied to their detriment" (internal quotations omitted). The court concluded that plaintiffs had failed to meet this burden, because it was "highly improbable that the allegedly misleading language had any effect on plaintiffs' decision to borrow from defendant in the first place." In addition, the Appellate Division held that plaintiffs failed to state a claim that the $275 fee was excessive, noting that "`courts are not empowered to set policy on [the excessiveness of] prices.'" (260 AD2d 272, 273.)

On appeal to this Court, plaintiffs have abandoned their excessiveness claim and argue only that their General Business Law § 349 claim was improperly dismissed, because the Appellate Division applied the wrong legal standard. We affirm the Appellate Division's dismissal of plaintiffs' claim, although for different reasons.

Analysis

Section 349 of the General Business Law, enacted in 1970 as a broad consumer protection measure, begins:

"Deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state are hereby declared unlawful" (General Business Law § 349 [a]).

A decade later, in 1980, the Legislature added section 349 (h), giving private citizens a right of action for deceptive trade practices. Citizens can enjoin an unlawful business practice, recover actual damages (or $50, whichever is greater) and obtain attorney's fees. In addition, if a defendant knowingly or willfully engages in a deceptive practice, the court may, in its discretion, award treble damages up to a maximum of $1,000 (see, General Business Law § 349 [h]).

A plaintiff under section 349 must prove three elements: first, that the challenged act or practice was consumer-oriented; second, that it was misleading in a material way; and third, that the plaintiff suffered injury as a result of the deceptive act (see, Oswego Laborers' Local 214 Pension Fund v Marine Midland Bank, 85 NY2d 20, 25; see also, Gaidon v Guardian Life Ins. Co., 94 NY2d 330, 344; Small v Lorillard Tobacco Co., 94 NY2d 43, 55-56). Whether a representation or an omission, the deceptive practice must be "likely to mislead a reasonable consumer acting reasonably under the circumstances" (Oswego Laborers' Local 214 Pension Fund v Marine Midland Bank, supra, at 26). A deceptive practice, however, need not reach the level of common-law fraud to be actionable under section 349 (see, Gaidon v Guardian Life Ins. Co., supra, at 343). In addition, a plaintiff must prove "actual" injury to recover under the statute, though not necessarily pecuniary harm (see, Oswego Laborers' Local 214 Pension Fund v Marine Midland Bank, supra, at 26; see also, Givens, Practice Commentaries, McKinney's Cons Laws of NY, Book 19, General Business Law § 349, at 565).

Further, as we have repeatedly stated, reliance is not an element of a section 349 claim (see, Small v Lorillard Tobacco Co., supra, at 55 ["Intent to defraud and justifiable reliance by the plaintiff are not elements of the statutory claim"]; Oswego Laborers' Local 214 Pension Fund v Marine Midland Bank, supra, at 26 ["the statute does not require proof of justifiable reliance"]; see also, Givens, Supp Practice Commentaries, McKinney's Cons Laws of NY, Book 19, General Business Law §§ 349-350, 2000 Cum Pocket Part, at 223 [section 349 contains "no requirement that an injured party show reasonable reliance on erroneous statements * * * in order to obtain relief"]). The plaintiff, however, must show that the defendant's "material deceptive act" caused the injury (Oswego Laborers' Local 214 Pension Fund v Marine Midland Bank, supra, at 26).

In the case at hand, plaintiffs allege that defendant violated section 349 by promising, in the note, that there would be no "prepayment charge," but then assessing a $275 "attorney's fee" when plaintiffs sought to refinance their loan. Plaintiffs contend that the $275 fee was a "prepayment charge" in disguise and that the note was deceptive for not revealing that fee. The Appellate Division dismissed plaintiffs' claim, holding that they failed to show justifiable reliance: that is, that the note's failure to disclose the $275 attorney's fee "had any effect on plaintiffs' decision to borrow from defendant in the first place." That, however, was the wrong standard, because reliance is not an element of a section 349 claim.¹

Nor did the Appellate Division merely apply the causation standard in the guise of reliance. The Appellate Division's ruling clearly imposed a reliance requirement: that plaintiffs made the decision to take the loan in reliance on their belief that the $275 fee would not apply. In contrast to section 349 claims, that is precisely the type of reliance that must be shown in order to state a common-law...