Commercial Litigation and Arbitration

Adverse Inference against Client Based on His Lawyer’s Invocation of Fifth Amendment — No Claim in NY for Harm to C Based on A’s Deception of B and B’s Action in Reliance, But C Has Claim If B Conveyed the Misstatement & C Relied on It Directly

Amusement Indus., Inc. v. Stern, 2016 U.S. Dist. LEXIS 163036 (S.D.N.Y. Nov. 10, 2016):

Plaintiff Amusement Industry, Inc. ("Amusement") moves for summary judgment as against defendant Moses Stern. In a report and recommendation dated August 10, 2016 [DI 862] (the "R&R"), familiarity with which is assumed, Magistrate Judge Gabriel W. Gorenstein recommended that the motion be granted. Stern objects on essentially three grounds. He contends principally that

1. The magistrate judge erred in drawing a negative [*57]  inference against Stern based upon Stephen Friedman's invocation of the Fifth Amendment.

2. The New York Court of Appeals in Pasternack v. Laboratory Corp. of Am. Holdings, 27 N.Y.3d 817 (2016), held that third party reliance is not a sufficient basis for a fraud claim and that this eviscerated the fraud claim against Stern because he made no direct misrepresentations to the plaintiffs.

3. There is an issue of fact as to damages because plaintiffs settled a case against Stephen Friedman and Buchanan, Ingersoll, Stern "understand[s]" that it was settled for $26 million, and "[p]laintiffs should not be able to recover the same damages here." R&R at 13.

Negative Inference

The first point is disposed of readily on several bases.

Failure to Raise Issue Previously

As an initial matter, Amusement's opening memorandum in support of its summary judgment motion specifically sought a negative inference against Stern based upon Stephen Friedman's invocation of the Fifth Amendment. Amusement Mem. [DI 829] at 32-36. Stern did not object before the magistrate judge to the drawing of such an inference. Indeed, his opposing memorandum did not even respond to that argument. Stern Mem. [DI 849] passim.

The question whether a party may raise an argument in an objection to a report and recommendation an argument that was not advanced before the magistrate judge appears [*58]  to be open in this Circuit. But district courts that have considered the issue have concluded that the question whether such an argument will be considered by the district judge is a matter of discretion. One of my colleagues helpfully has articulated relevant considerations:1

   (1) the reason for the litigant's previous failure to raise the new legal argument; (2) whether an intervening case or statute has changed the state of the law; (3) whether the new issue is a pure issue of law for which no additional fact-finding is required; (4) whether the resolution of the new legal issue is not open to serious question; (5) whether efficiency and fairness militate in favor or against consideration of the new argument; and (6) whether manifest injustice will result if the new argument is not considered.

1   Levy v. Young Adult Inst., Inc., 103 F. Supp.3d 426, 433-34 (S.D.N.Y. 2015) (quoting Amadasu v. Ngati, No. 05 Civ. 2585 (RRM) (LB), 2012 WL 3930386, at *5 (E.D.N.Y. Sept. 9, 2012) (internal quotation marks omitted)).

Here, Stern has offered no excuse for his previous failure to oppose the drawing of a negative inference against Stern based on Friedman's invocation of the Fifth Amendment. There has been no intervening change in the law. The propriety of drawing such an inference, in Stern's submission, is a fact-bound matter that, he contends, [*59]  requires fact finding. Efficiency and fairness militate against plowing this ground now given Stern's failure to address the issue before, and this Court sees no manifest injustice in declining to consider the question now. Accordingly, the Court overrules Stern's objection to the magistrate judge's drawing of a negative inference against Stern based on Stephen Friedman's invocation of the privilege against self incrimination for that reason alone.

The Merits

The Court would overrule this objection on the merits in any event for two independent reasons.

1. Stern's argument on this point is that the magistrate judge's conclusion that a negative inference against Stern based on Friedman's assertion of the Fifth Amendment, a conclusion that flowed from the application of the standard governing the propriety of such an inference that Stern contends governs -- that articulated in Libutti v. United States, 178 F.3d 114, 124 (2d Cir. 1999) -- was incorrect. He contends that is so because the magistrate judgment "minimized" "the nature of the relationship between Friedman and all off the parties" and conclusions reached by a bankruptcy judge in another matter. Obj. [DI 879] at 4-11 (emphasis in original).

Stern ignores the fact it is undisputed that Stephen Friedman -- whatever his prior and, [*60]  indeed, contemporaneous relationships may have been with others involved in the Colonial transaction that is the subject of this lawsuit -- acted, in Stern's own words, as Stern's "'general council [sic]' in the Colonial deal." Pl. 56.1 St. [DI 834] ¶ 8; Hofsaess Decl. Ex. 10 [DI 833-10] Having reviewed the matter de novo, I reach the same conclusion as did the magistrate judge, viz. under Libutti, it is entirely appropriate to draw a negative inference against Stern based on Friedman's invocation of the privilege against self incrimination.

2. Finally, the negative inference drawn by the magistrate judge based on Friedman's invocation of the Fifth Amendment was not necessary to his recommendation and is not necessary to my de novo reconsideration. Magistrate Judge Gorenstein wrote that two particular misrepresentations "suffice to show Stern's fraudulent intent in light of Stern's strong motivation to ensure Amusement's participation in the deal, especially when combined with the negative inference we draw from Stern and Stephen Friedman's invocation of privilege." R&R at 18 (emphasis added). Thus, the misrepresentations relied upon alone were sufficient. They were buttressed by Stern's invocation of the Fifth Amendment [*61] , and Stern does not dispute the propriety of the negative inference drawn from that fact nor the conclusion that the inference from Stern's invocation of the privilege, combined with the evidence of the misrepresentations, was doubly sufficient. The inference from Friedman's invocation was icing on the cake as far as the magistrate judge was concerned, and it is for this Court as well. This Court has reviewed the record in this respect (and generally) de novo and independently reaches the same conclusion -- summary judgment is warranted even without regard to a negative inference against Stern on the basis of Stephen Friedman's invocation of the Fifth Amendment.

Third Party Reliance

Stern now claims, for the first time, that he made no direct misrepresentations to plaintiffs and that plaintiffs, in light of Pasternack, therefore have no fraud claim against him based on misrepresentations to others that resulted in injury to plaintiffs. This objection is unpersuasive.

Failure to Raise Issue Previously

As with the negative inference argument noted above, Stern never made this argument before Magistrate Judge Gorenstein. Rather, he argued that there "are several issues of fact regarding Plaintiffs claim for fraud, including whether Stern intended to defraud Amusement, whether Amusement reasonably relied upon any statements made by Stem, and causation of loss to Amusement." Stern Mem. [DI 839], at 14. Indeed, he did [*62]  not deny that there was ample evidence that he made misstatements to plaintiff Amusement, limiting himself to whether any such misstatements were made with the requisite mental state, were reasonably relied upon, or caused loss.

The Court has noted above the standard applicable to whether a party may raise via objections to a magistrate judge's report and recommendation an argument never made before the magistrate judge. Here again, Stern has offered no excuse for his previous failure to raise the third party reliance argument. Nor can it be justified on the basis that Pasternack, which was decided after the report and recommendation was issued, was an unexpected starburst in the legal firmament. The question whether a fraud claim under New York law properly can be made based on third party reliance was hotly debated in a series of cases in both federal and state courts well before Stern filed his opposition to the summary judgment motion in January 2016. Indeed, the Second Circuit had certified the issue to the New York Court of Appeals in 2015, well before Stern filed his papers before Magistrate Judge Gorenstein in early 2016. See, e.g., Pasternack v. Laboratory Corp. of Am. Holdings, 807 F.3d 14, 22-24 (2d Cir. 2015) (certifying issue to New York Court of Appeals [*63]  and collecting some divergent state and federal cases).

In these circumstances, there is no sufficient reason to reach the merits of this issue, particularly given the lack of any injustice by taking that view and the inefficiency that it would involve. In the last analysis, however, the Court does not rely on this alone, as Stern, viewing the matter charitably, misunderstands what Pasternack did and did not decide.

The Merits

Pasternack resolved a long-standing conflict as to whether there is a common law cause of action under New York law for fraud in favor of a plaintiff where A deceives B, B acts in reliance on A's deception, and B's action in reliance on A's deception injures the plaintiff ("Third-Party Reliance Claims"). Regardless of terminology, however, the New York Court of Appeals held in Pasternack that there is no cause of action in such circumstances. 27 N.Y.3d at 829.

But the Court of Appeals carefully distinguished a quite different class of fraud cases: cases in which A makes a deceptive statement to B, B conveys the deceptive statement to the plaintiff, and the plaintiff relies detrimentally on A's deceptive statement that was conveyed to him via B acting as a conduit ("Conduit Claims"). [*64]  And it left intact earlier New York authority holding that plaintiffs with Conduit Claims have legally sufficient fraud claims against A. It wrote:

   "The cases that recognize third-party reliance cite favorably to Eaton Cole & Burnham Co. v. Avery, 83 N.Y. 31, 35 (1880). However, as noted by the District Court and the Second Circuit here, Eaton is distinguishable from this case because in Eaton the third party acted as a conduit to relay the false statement to the plaintiff, who then relied upon the misrepresentation to his detriment ([citation omitted]). Eaton and its progeny stand for the proposition that indirect communication can establish a fraud claim, so long as the statement was made with the intent that it be communicated to the plaintiff and that the plaintiff rely on it." Pasternack, 27 N.Y.3d at 828.

Here, the fraud claim rested on claims of misrepresentations made by (a) Stephen Friedman, in his capacity as general counsel for Stern on the transactions, and Stern to the plaintiff, and (b) Stern to one Robert Friedman of Banker's Capital that Banker's Capital repeated to plaintiff. E.g., R&R at 5-8. Amusement's summary judgment motion and Magistrate Judge Gorenstein relied exclusively on such assertions. E.g., Pl. Mem. [DI 829] at 35-42; R&R at 5-8, 15-17, 21-24. Thus, the R&R does not rest in even the slightest respect [*65]  on any Third-Party Reliance Claim. It rests instead in part on claims of misrepresentations made by Stern and his agent and attorney, Stephen Friedman, directly to plaintiff and in part on a Conduit Claim that rests upon Stern's misrepresentations to Banker's Capital that in turn were conveyed to the plaintiff, which relied upon them to its detriment.

There was no error in the R&R's analysis of the fraud claim.


Stern's next objection is to Magistrate Judge's Gorenstein's recommendation that summary judgment be award in favor of plaintiffs and against Stern in the amount of $13 million, The Court quotes the objection in its entirety:2

   The damages sought by the Plaintiffs herein against Stern are the same as the damages that were sought against Friedman and Buchanan, Ingersoll and Rooney, P.C., in a case that was ultimately settled. The case was pending, and settled, before this Court.

It is our understanding that the settlement in that case is confidential, although Stern believes that the case was settled for $26,000,000.00. If the foregoing case, seeking damages arising from the same transactions at issue in this case, was settled, whatever the amount may be, the Plaintiffs should [*66]  not be able to recover the same damages here. Although Stern did not dispute the amount of money that was deposited in Frenkel's escrow account, he did dispute that they are entitled to recover any of it from him. If the Plaintiffs have already recouped their alleged damages in the litigation against Friedman and Buchanan, Ingersoll and Rooney, P.C., they should not be able to recover them, again, against any other party.

At the very least, even if the Court finds that summary judgment is warranted on each of the Plaintiffs' claims against Stern, there is a genuine issue of material fact as to the amount of damages that the Plaintiffs are entitled to recover from Stern, given the settlement reached in the other litigation.

This objection is entirely without merit for a number of reasons.

2   DI 879, at 13-14.

First, this argument was not raised before the magistrate judge. Stern Mem. in Opp. to Summary Judgment (DI 849), passim. The failure to raise it is nowhere justified in the present objection. Nor could the failure be explained on the basis that the alleged settlement occurred after the magistrate judge issued the R&R. The fact is that both Stephen Friedman and Buchanan first came into [*67]  this case in 2008 as third party defendants [DI 65]. They later became cross-claim defendants as well. But the bottom line is that all claims against them by all parties were discontinued on April 1, 2015. DI 784, DI 785, DI 786, DI 788. That was many months before the R&R was issued. Indeed, it was many months before Stern filed his papers in opposition to the motion for summary judgment in January 2016. For reasons quite similar to those articulated above, the Court declines to entertain this argument in view of Stern's failure to raise it before Magistrate Judge Gorenstein.

Even if the Court were willing to consider the argument, it would reject the argument on the merits. There is no competent evidence that the claims against Friedman and Buchanan were settled, no competent evidence that the claims were settled for $26 million (or any other relevant figure), and no competent evidence that any settlement was paid in respect of the same injury for which plaintiffs here seek recovery from Stern. Nor has Stern advanced even a shred of a legal argument in support of his position. A lawyer's unsworn claim that Stern believes the case was settled for $26 million is entirely insufficient [*68]  to raise a genuine issue of fact for trial.

The 2009 Bankruptcy Court Decision

Finally, Stern's counsel attaches to his objection a copy of a 2009 Bankruptcy Court decision in which that court denied a motion by Amusement for interlocutory relief in an adversary proceeding in the First Republic Group Realty, LLC bankruptcy to enjoin the Debtor from using funds traceable to a certain escrow deposit made by Amusement that then allegedly were in reserve accounts of the Debtor. Stein attempts to use the Bankruptcy Judge's analysis of the record that was before him years ago as a basis for rearguing Magistrate Judge Gorenstein's conclusion that the record before him in this case raised no triable issue of fact sufficient to defeat Amusement's motion for summary judgment. This effort is entirely misguided.

If and to the extent that the Bankruptcy Court decision contained factual findings that are material to the issues presented by the summary judgment motion in this case and that are issue preclusive, Stern of course was free to use them to establish the existence of those facts. And, to be sure, Stern did submit the Bankruptcy Court decision to Magistrate Judge Gorenstein on the motion for [*69]  summary judgment. [DI 850-1] But he never asserted that the bankruptcy judge's findings on a preliminary injunction motion seven years ago on a different record involving, to some extent, different parties were binding here or that the requirements of issue preclusion were satisfied. He simply argued before Magistrate Judge Gorenstein that there is a genuine issue of material fact here because the Bankruptcy Judge's analysis in another case rendered "[t]he entire scenario [upon which plaintiffs rely here] highly questionable, at best." [DI 849, at 9]

But the question before this Court now is whether the admissible evidence in this record shows that there is no genuine issue as to any material fact and that the plaintiffs are entitled to judgment as a matter of law. The opinion of the respected Bankruptcy Judge years ago as to Amusement's likelihood of success on the merits on a different record, even to the extent there is some overlap between the issues then before him and those here, is insufficient to persuade this Court that they are not.


Accordingly, plaintiffs' motion for summary judgment against defendant Moses Stern [DI 828] is granted. The Clerk shall enter judgment in favor [*70]  of plaintiffs and against Stern in the amount of $13 million.


Dated: November 10, 2016

/s/ Lewis A. Kaplan

Lewis A. Kaplan

United States District Judge



Share this article:


Recent Posts