Is the Statute of Frauds Still Absolute?

Certainly such a lengthy, unusual, and sharp reminder of the rule was intended in part to focus counsel and their clients on the vigor of the statute of frauds and the absolute requirement of a writing. The lengths to which the court went in this opinion raises the question as to whether such a rigorous reminder is necessary. Moreover, is the statute of frauds still the absolute bar it is assumed to be by practitioners and courts alike? In an age of increasingly informal personal and commercial communication, does the law still adhere to the rigors of a 'writing' for all real property transactions?

Exceptions

In New York, at least, there are the continued exceptions to the writing requirement relating to brokerage. See N.Y. Gen. Oblig. ' 5-701(a)(10). Brokers may claim their right to a brokerage in New York even without a writing and may then proceed to place on record a document seeking to enforce that right. N.Y. Real Prop. ' 294-b; see also N.Y. Lien ' 10. As a result, significant impositions on real property and title to it can originate in unwritten, or even unspoken, agreements or understandings.

Another such 'breach' in the 'ramparts' of the statute of frauds may be found in the concept of promissory fraud. A recent survey article by Prof. Ian Ayres of Yale Law School and Gregory Klass of the Georgetown Law Center in the New York State Bar Journal (NYSBAJ, May 2006, p.29), summarizes this concept as elaborated in their longer book treatment, Insincere Promises: The Law of Misrepresented Intent. (Yale Univ. Press 2005). As explained, the separate tort of promissory fraud may lie where a plaintiff can demonstrate that the defendant in entering into a contract never had any intention of performing that which was promised. Graubard Mollen v. Moskovitz, 86 N.Y.2d 112, 122 (1995) ('A cause of action for fraud may arise when one misrepresents a material fact, knowing it is false, which another relies on to its injury. A false statement of intention is sufficient to support an action for fraud, even where that statement relates to an agreement between the parties.') (citation omitted); see also Channel Master Corp. v. Aluminum Ltd. Sales, Inc., 4 N.Y.2d 403, 408 (1958) ('[O]ne who fraudulently misrepresents himself as intending to perform an agreement is subject to liability in tort whether the agreement is enforceable or not.') (citation omitted). To succeed on an action for promissory fraud, the plaintiff must prove 'that the defendant knowingly uttered a falsehood intending to deprive the plaintiff of a benefit and that the plaintiff was thereby deceived and damaged.' Id. at 406-07 (citations omitted). The elements that will support such a finding are: 'representation of a material existing fact, falsity, scienter, deception and injury.' Id. at 407 (emphasis in original) (citing Sabo v. Delman, 3 N.Y.2d 155, 159, 160 [1957]).

Real Property Transactions

To the extent that such a tort is accepted and developed, one may raise the question as to the possible results in real property transactions. Assume, for example that Owner agrees with Buyer on a sale price, and all other relevant details, and then both parties agree that they will proceed to their respective attorneys and promptly enter into a written agreement enforceable for all purposes. If Buyer can later prove that without changes in circumstances or other justification, Owner had absolutely no intention of going to an attorney or signing a contract, would the promise to enter into a writing lay the ground for a claim for promissory fraud wholly separate from the underlying action for conveyance, sale, or leasing? Even where the underlying action might fail for traditional statute of frauds reasons, does the promise to make such a contract provide a separate tort action? What would its remedy be? While admittedly, the summary by the authors does not make the specific suggestion, the cases outlined by them lead one to the belief that such a holding would be possible.

This 'exception' to the statute of frauds permitting promises without a writing even in real property situations is joined by another line of cases relating to real property, that of equitable liens and mortgages. Here, too, conveyance or creation of interests in real property without a writing of the sort that would be binding under the statute of frauds are frequently enforced, apparently without concern that the 'statute' has been ignored or circumvented. All that must be shown is that there is 'an agreement to provide identifiable property (of any kind) as security for performance of an obligation, or a substantial defect in a security instrument rendering it unenforceable at law.' Sharrow JD: The Equitable Mortgage: Its Creation, Enforceability and Lien Priority. N.Y. St. B.A. Real Prop. L.J., Spring 2006, at 6, 8; see also Allen v. Union Fed'l Mortg. Corp., 204 F. Supp. 2d 543, 546 (E.D.N.Y. 2002) ('[A]n equitable mortgage may be imposed where money is advanced upon a verbal agreement to secure the debt by a mortgage on real property, but the agreement, for one reason or another, never culminates in a signed writing.' (citation omitted) (emphasis supplied)).

Conclusion

Both the doctrines of promissory fraud and of equitable mortgage lien serve to address proper needs of commercial activity and personal relations. They act, nevertheless, as counterpoint and further unstated exceptions to the absolute bar to enforcement so vigorously restated by the Appellate Division in Yenom. It will be interesting to see how the interplay of these doctrines faces continued change in modern commercial life and its reliance on less formal modes and means of communication.

Lawrence A. Kobrin, a member of this newsletter's Board of Editors, is co-head of real estate practice at Cahill Gordon & Reindel LLP. Peter Linken, a summer associate, assisted in the preparation of this article.

If Cervantes were to say today, 'An honest man's word is as good as his bond' (Don Quixote, Book IV, Ch. 34), both knowledgeable real estate professionals and their counsel would probably respond, 'except for real property transactions.' While in many areas of the law, unwritten agreements are more readily enforced, it remains accepted as axiomatic that under the principles of the statute of frauds, only a 'writing' will create obligations in connection with real property interests.

Recent Decision

A recent Appellate Division decision went out of its way to emphasize the rule. In Yenom Corp., v 155 Wooster Street, Inc., (NYLJ, July 20, 2006 p. 22, col. 1), the court went out of its way to reinforce the continued vigor of the statute of frauds. The per curiam decision arose in a somewhat unusual way. It was delivered on the Court's own motion (nostra sponte) as a post-appeal proceeding focused on whether sanctions should be imposed on plaintiff and its counsel for pursuing an appeal relating to exceptions to the statute of frauds. The court imposed sanctions against plaintiff and its counsel for having pursued an effort to enforce an alleged contract for the sale of stock of a real estate owning corporation and the simultaneous creation of a net lease. Plaintiff claimed an exception from the normally applicable statute of fraud rules based on alleged part performance by its efforts to effect zoning changes. The court found the claim so 'frivolous and wholly without merit' that sanctions were imposed.

Certainly such a lengthy, unusual, and sharp reminder of the rule was intended in part to focus counsel and their clients on the vigor of the statute of frauds and the absolute requirement of a writing. The lengths to which the court went in this opinion raises the question as to whether such a rigorous reminder is necessary. Moreover, is the statute of frauds still the absolute bar it is assumed to be by practitioners and courts alike? In an age of increasingly informal personal and commercial communication, does the law still adhere to the rigors of a 'writing' for all real property transactions?

Exceptions

In New York, at least, there are the continued exceptions to the writing requirement relating to brokerage. See N.Y. Gen. Oblig. ' 5-701(a)(10). Brokers may claim their right to a brokerage in New York even without a writing and may then proceed to place on record a document seeking to enforce that right. N.Y. Real Prop. ' 294-b; see also N.Y. Lien ' 10. As a result, significant impositions on real property and title to it can originate in unwritten, or even unspoken, agreements or understandings.

Another such 'breach' in the 'ramparts' of the statute of frauds may be found in the concept of promissory fraud. A recent survey article by Prof. Ian Ayres of Yale Law School and Gregory Klass of the Georgetown Law Center in the New York State Bar Journal (NYSBAJ, May 2006, p.29), summarizes this concept as elaborated in their longer book treatment, Insincere Promises: The Law of Misrepresented Intent. (Yale Univ. Press 2005). As explained, the separate tort of promissory fraud may lie where a plaintiff can demonstrate that the defendant in entering into a contract never had any intention of performing that which was promised. Graubard Mollen v. Moskovitz , 86 N.Y.2d 112, 122 (1995) ('A cause of action for fraud may arise when one misrepresents a material fact, knowing it is false, which another relies on to its injury. A false statement of intention is sufficient to support an action for fraud, even where that statement relates to an agreement between the parties.') (citation omitted); see also Channel Master Corp. v. Aluminum Ltd. Sales, Inc. , 4 N.Y.2d 403, 408 (1958) ('[O]ne who fraudulently misrepresents himself as intending to perform an agreement is subject to liability in tort whether the agreement is enforceable or not.') (citation omitted). To succeed on an action for promissory fraud, the plaintiff must prove 'that the defendant knowingly uttered a falsehood intending to deprive the plaintiff of a benefit and that the plaintiff was thereby deceived and damaged.' Id. at 406-07 (citations omitted). The elements that will support such a finding are: 'representation of a material existing fact, falsity, scienter, deception and injury.' Id. at 407 (emphasis in original) (citing Sabo v. Delman , 3 N.Y.2d 155, 159, 160 [1957]).

Real Property Transactions

To the extent that such a tort is accepted and developed, one may raise the question as to the possible results in real property transactions. Assume, for example that Owner agrees with Buyer on a sale price, and all other relevant details, and then both parties agree that they will proceed to their respective attorneys and promptly enter into a written agreement enforceable for all purposes. If Buyer can later prove that without changes in circumstances or other justification, Owner had absolutely no intention of going to an attorney or signing a contract, would the promise to enter into a writing lay the ground for a claim for promissory fraud wholly separate from the underlying action for conveyance, sale, or leasing? Even where the underlying action might fail for traditional statute of frauds reasons, does the promise to make such a contract provide a separate tort action? What would its remedy be? While admittedly, the summary by the authors does not make the specific suggestion, the cases outlined by them lead one to the belief that such a holding would be possible.

This 'exception' to the statute of frauds permitting promises without a writing even in real property situations is joined by another line of cases relating to real property, that of equitable liens and mortgages. Here, too, conveyance or creation of interests in real property without a writing of the sort that would be binding under the statute of frauds are frequently enforced, apparently without concern that the 'statute' has been ignored or circumvented. All that must be shown is that there is 'an agreement to provide identifiable property (of any kind) as security for performance of an obligation, or a substantial defect in a security instrument rendering it unenforceable at law.' Sharrow JD: The Equitable Mortgage: Its Creation, Enforceability and Lien Priority. N.Y. St. B.A. Real Prop. L.J. , Spring 2006, at 6, 8; see also Allen v. Union Fed'l Mortg. Corp. , 204 F. Supp. 2d 543, 546 (E.D.N.Y. 2002) ('[A]n equitable mortgage may be imposed where money is advanced upon a verbal agreement to secure the debt by a mortgage on real property, but the agreement, for one reason or another, never culminates in a signed writing.' (citation omitted) (emphasis supplied)).

Conclusion

Both the doctrines of promissory fraud and of equitable mortgage lien serve to address proper needs of commercial activity and personal relations. They act, nevertheless, as counterpoint and further unstated exceptions to the absolute bar to enforcement so vigorously restated by the Appellate Division in Yenom. It will be interesting to see how the interplay of these doctrines faces continued change in modern commercial life and its reliance on less formal modes and means of communication.

Lawrence A. Kobrin, a member of this newsletter's Board of Editors, is co-head of real estate practice at Cahill Gordon & Reindel LLP. Peter Linken, a summer associate, assisted in the preparation of this article.