Many years ago, when I was a young court attorney to a criminal court judge, there was, within the omnibus applications available to a criminal defendant, an application known as a “Clayton motion,” otherwise known as a “motion to dismiss in the interest of justice.” See CPL 210.40 ; People v. Clayton, 41 A.D.2d 204 (1973). The motion beseeched the court to dismiss a case against an otherwise culpable party “in the interest of justice” upon consideration of certain factors. Because of its extraordinary nature, courts urged that such power should be exercised “as sparingly as garlic.” See, e.g., People v. Stern, 83 Misc.2d 935 (Crim. Ct., Bronx County 1975). I now suggest to you that, based upon recent case pronouncements by both New York’s highest court and federal courts, the doctrine of promissory estoppel should be invoked with equal selectivity, particularly when used to undermine the protections offered by the Statute of Frauds and other similar statutes designed to protect individuals from the risk of fraudulent conduct.
Promissory estoppel requires a clear and unambiguous promise, reasonable and foreseeable reliance by the party to whom the promise was made, and an injury to the party to whom the promise was made by reason of the reliance. See Cyberchron v. Calldata Sys Dev., 47 F.3d 39, 44 (2d Cir. 1995).
The federal bench had already refused to invoke promissory estoppel, absent an “unconscionable injury,” under some fairly compelling factual scenarios. An “unconscionable injury” was defined as one in which the injury is beyond that which could be expected or contemplated from the non-performance of the statutorily barred contract. See ABA Refinery v. Republic Metals Ref., 2017 U.S. Dist. LEXIS 165923 (S.D.N.Y. Oct. 5, 2017). The circumstances must be egregious not merely unfair, or resulting in lost profits or opportunities to avoid undermining statutory protections. Id.
For example, an oral promise to give the plaintiff first choice to purchase paintings priced over $1 million by a certain artist was insufficient to trump the Statute of Frauds. See Robins v. Zwirner, 713 F. Supp. 2d 367 (S.D.N.Y. 2010). The predictable injuries suffered from the abnegation of the defendant’s promise were within the realm of those one would reasonably expect from non-performance of a sales contract. Id. at 377.
Likewise, repudiation of an oral agreement between the parties to extend plaintiff’s services for at least three additional years presented nothing more egregious than the natural consequence of non-performance, which did not rise to the level of unconscionability. See Mobile Data Shred v. United Bank of Switz., 2000 U.S. Dist. LEXIS 4252 (S.D.N.Y. 2000). This was the case even though the plaintiff claimed that it purchased special equipment in reliance upon this oral agreement.
In a similar vein is Philo Smith & Co. v. USLIFE, 554 F.2d 34 (2d Cir 1977), in which renunciation of an oral finders’ fee agreement subject to the Statute of Frauds did not produce “unconscionable injury” sufficient to invoke promissory estoppel.
Late last year, the Court of Appeals in Matter of Hennel, 29 N.Y.3d 487 (2017) brought New York state laws into conformity with pre-existing federal law.
Hennel involved a decedent who owned a four-story apartment building. His grandsons, the petitioners, assisted him in maintaining the grounds and snow removal on the premises. In 2001, the decedent took a $100,000 loan secured by a mortgage on the property. In 2006, the decedent approached the petitioners about taking ownership of the property and assuming all management and maintenance duties. The petitioners claimed that they told the decedent that they did not wish to take ownership of the property subject to the mortgage, because they believed they would be subsidizing gifts to other family members. The decedent executed a warranty deed granting petitioners ownership of the apartment building property. The deed did not mention the mortgage, and it stated that the consideration for the transaction was one dollar. The decedent also executed a will in 2006. The will provided that the mortgage on the property, if any, and in existence at the time of decedent’s death, would be paid off from the assets of his estate. His grandsons continued to manage the property, paying the mortgage from the proceeds of the rental income. In 2008, the decedent executed a new will, which revoked all prior wills and codicils. The 2008 will made no mention of satisfaction of the mortgage on the property upon his death. The petitioners claimed that while the decedent informed them that he had executed a new will, he assured them that there had been no change in their agreement with regard to the apartment property. The decedent died in 2010. The petitioners commenced the action in order to determine the validity of their claim against the decedent’s estate. The respondent claimed that the petitioners’ claim was barred by the Statute of Frauds. Both parties moved for summary judgment. The Surrogate’s Court granted the petitioners’ motion for summary judgment, and directed the respondent to satisfy the outstanding balance of the mortgage and reimburse the petitioners for the payments they had made since the decedent’s death. It reasoned that petitioner’s claim fell squarely within that limited class of cases where promissory estoppel should be applied in order to remedy a potential injustice. A divided Appellate Division affirmed, finding that petitioners had established the elements of promissory estoppel such that the application of the Statute of Frauds would be unconscionable under the circumstances. The dissenting justices opined that application of the Statute of Frauds would not inflict an unconscionable injury upon the petitioners.
The Court of Appeals reversed the majority of the Appellate Division, and agreed with the dissenting justices. It adopted the federal standard for promissory estoppel (see Philo Smith & Co. v. USLIFE, supra), holding that the Statute of Frauds will not be applied if, and only if, the promisee can establish the elements of promissory estoppel, and that they would otherwise suffer unconscionable injury if the promise is not enforced. The court had previously recognized that the doctrines of equitable estoppel and part performance may in theory preclude application of the Statute of Frauds. See, e.g., American Bartender School v. 105 Madison Co., 59 N.Y.2d 716, 718 (1983) aff’ing 91 A.D.2d 901 (1st Dept. 1983); and Anostario v. Vicinanzo, 59 N.Y.2d 662, 663-64 (1983); cf. Messner Vetere Berger McNamee, Schmetterer Euro Rscg v. Aegis Group Plc, 93 N.Y.2d 229 (1999). The Appellate Division had likewise held that promissory estoppel may preclude enforcement of the Statute of Frauds if application of the statute would result in unconscionability. See, e.g., Carvel v. Nicolini, 144 A.D.2d 611, 612-13 (2d Dept. 1988); Bernard v. Langan Porsche Audi, 143 A.D.2d 495, 496 (3d Dept. 1988); Buddman Distribs. v. Labatt Importers, 91 A.D.2d 838, 839 (4th Dept. 1982).
The Statute of Frauds was designed to guard against perjury and prevent enforcement of fraudulent claims. It was not intended to supply immunity to litigants lacking integrity, or to enable defendants to evade a contract fairly and admittedly made. Id. at 494). In reversing the Appellate Division’s finding of unconscionability, the Court of Appeals stated that an agreement is unconscionable when “no person in his or her senses and not under delusion would make on one hand, and … no honest and fair person would except on the other, the inequality being so strong and manifest as to shock the conscience and confound the judgment of any person of common sense.” Id.; see Christian v. Christian, 42 N.Y.2d 63, 71 (1977).
The petitioners’ proof fell well short of this standard. They were able to make the mortgage payments entirely from the rental income generated by the property without expending any personal funds to pay the mortgage or manage and maintain the property. There was no reason to believe that the rental income would not be sufficient to satisfy the mortgage payments in the future. There was no claim that the petitioners’ management responsibilities were so overwhelming that they were forced to neglect their other business responsibilities, or sacrifice other opportunities. Plus, the petitioners’ efforts eventually inured to their benefit, since they maintained the value of the property that they now owned. They could sell the property to satisfy the mortgage balance, and still realize about $150,000 in remaining equity in the property.
By contrast, the underpinnings of the Statute of Frauds would be severely undermined if mere unfairness was the benchmark for unconscionability. The court reasoned that what is unfair is not always unconscionable. As a result, it advised that the cases wherein the party can successfully avoid the Statute of Frauds will be rare. Application of the Statute of Frauds in this case did not render a result so inequitable and egregious as to shock the conscience and confound the judgment of any person of common sense.
Judge Rowan Wilson’s dissent urged that there be consideration of whether the mortgage should be considered as a “just debt” of the estate under Surrogates Court Procedures Act §1803. The majority had opined that it should not.
Soon after Hennel, another federal court found that that a counterclaim based upon an alleged oral promise to deliver in excess of $50 million in gold failed to assert an “unconscionable injury” that would permit it to invoke promissary estoppel to enforce the defendant’s promise. See ABA Refinery v. Republic Metals Ref., 2017 U.S. Dist. LEXIS 165923 (S.D.N.Y. Oct. 5, 2017). Referencing Hennel, the court held that, while unfair, the defendant’s injuries were not egregious enough to reach the level of unconscionability.
In light of the foregoing, promissory estoppel has been severely restricted as an equitable device to enforce oral agreements. Clearly, New York’s highest court intended for promissory estoppel to be successfully used to enforce a promise that is barred by the Statute of Frauds or similar legislative fiat “as sparingly as garlic.” One open question of course, is when damages would be so severe as to render the unenforcement of the oral promise unconscionable. The damages would have to be entirely distinct from those that could be reasonably be anticipated from a normal breach of contract, loss of a bargain and consequential damages. They would have to be not just unfair, but so inequitable and egregious as to shock the conscience. The element of foreseeability would come into play in making this determination, insofar as the resulting damages would have to be both unforeseeable, and calamitous, in order to warrant circumvention of a statute. There have been few, if any cases, finding circumstances rising to that level. Moreover, there is still an open question as to what the standard would be when the promisee seeks to circumvent another rule of law other than a statute. Since legislative policy would no longer be involved, the same policy rationale presumably no longer exists. It remains to be seen if the standard enunciated in Hennel would then be relaxed.
Nelson Timken has been a court attorney with the New York State Unified Court System for over 24 years. He has served as a court attorney in the Commercial Division of the Supreme Court, in IAS parts of the Supreme Court, in Civil Court, and in Criminal Court. He is also a trained mediator and arbitrator in Small Claims Court and Part 137 Attorney Fee Disputes.