DLJ Mortgage Capital, Inc., Appellant,v.Thomas Kontogiannis, et al., Defendants, Chicago Title Insurance Company, Inc., et al., Respondents.BriefN.Y.November 13, 2013To be Argued by: JOHN M. AMATO New York County Clerk’s Index No. 104675/10 New York Supreme Court Appellate Division – First Department DLJ MORTGAGE CAPITAL, INC., Plaintiff-Respondent, – against – THOMAS KONTOGIANNIS, GEORGIA KONTOGIANNIS, LISA DIPINTO a/k/a LISA KONTOGIANNIS a/k/a LISA POLLATOS, ANNETTE APERGIS, CHLOE KONTOGIANNIS, ADAM DIPINTO, ELIAS APERGIS, JOHN T. MICHAEL, JONATHAN RUBIN, MICHAEL A. GALLAN, ESQ., TED DOUMAZIOS, ESQ., THOMAS F. CUSAK, III, ESQ., STEPHEN P. BROWN, ESQ., STEPHEN A. MARTINI, CARMINE CUOMO, COASTAL CAPITAL CORPORATION d/b/a THE MORTGAGE SHOP d/b/a CLEARLIGHT MORTGAGE, EDGEWATER DEVELOPMENT, INC., GROUP KAPPA CORP., LORING ESTATES LLC, PARKVIEW FINANCIAL CENTER, INC. d/b/a PARKVIEW FINANCIAL, INC. d/b/a PARKVIEW CENTER, INC., CLEAR VIEW ABSTRACT LLC, TRIUMPH ABSTRACT, INC., BOND & WALSH CONSTRUCTION COMPANY, INTERAMERICAN MORTGAGE CORP., HALIFAX GROUP LLC, PLAZA REAL ESTATE HOLDINGS, INC. and WASHINGTON TITLE INSURANCE COMPANY, INC., Defendants, CHICAGO TITLE INSURANCE COMPANY, INC. and UNITED GENERAL TITLE INSURANCE COMPANY, INC., Defendants-Appellants, DOE’s 1 through 100 inclusive, Defendants. BRIEF FOR PLAINTIFF-RESPONDENT DLJ MORTGAGE CAPITAL, INC. HAHN & HESSEN, LLP Attorneys for Plaintiff-Respondent DLJ Mortgage Capital, Inc. 488 Madison Avenue New York, New York 10022 (212) 478-7200 jamato@hahnhessen.com Printed on Recycled Paper TABLE OF CONTENTS Page TABLE OF AUTHORITIES ..................................................................................... ii PRELIMINARY STATEMENT ............................................................................... 1 QUESTIONS PRESENTED ..................................................................................... 2 NATURE OF THE CASE ......................................................................................... 3 I. The Mortgage Fraud Scheme ....................................................................... 3 II. Doumazios' Specific Role And DLJ's Reasonable Reliance Thereon ........ 5 ARGUMENT ........................................................................................................... 12 I. Standard Of Review .................................................................................... 12 II. The Title Insurers Are Liable For The Acts OfDoumazios ..................... 13 A. The Doctrine Of Apparent Authority Imputes Liability To The Title Insurers................................................................................................ 14 B. The Title Insurers Are Liable For The Full Amount OfDLJ's Damages .............................................................................................. 26 III. DLJ Has A Valid Cause Of Action For Fraud Against The Title Insurers 29 A. Doumazios Made Materially False Representations As Part Of The Ongoing Conspiracy ......................................... oooo ...... 00 ................. oo ... 30 B. DLJ Reasonably Relied On The Numerous Indicia Of Title Insurance, Including Statements Made By Doumazios 00 0000 00 .......... 0000000000 .. 000000 ... 34 C. DLJ Conducted Due Diligence, And The So-Called "Red Flags" Do Not Prevent Recovery .................................... oo ..................... oooo•······oo· 38 CONCLUSION .. oooo ............... oo.oo .............. oooo ................. oo ••• oooooo•···oo•oo······· ............... 43 i TABLE OF AUTHORITIES Page(s) FEDERAL CASES Gardi v. Jana Partners LLC (In re: Dreier LLP), 450 B.R. 452 (Bankr. S.D.N.Y. 2011) .......................................................... 22-23 Schlaifer Nance & Co. v. Estate of Warhol, 119F.3d91 (2dCir.1997) ................................................................................. 42 Superintendent of Ins. v. Freedman, 443 F. Supp. 628 (S.D.N.Y. 1977) ..................................................................... 27 Volovnik v. Benzel-Busch Motor Car Corp., No.: 09 Civ. 10595 (DAB), 2010 U.S. Dist. LEXIS 97046 (S.D.N.Y. July 29, 2010) .................................................................................... 13 STATE CASES 150 Beach I 20th Street, Inc. v. Washington Brooklyn Ltd. P 'ship, 39 A.D.3d 723 (2d Dept. 2007) .................................................................... 20, 21 Aarons Fifth Avenue, Inc. v. Ins. Co. ofN. Am., 52 A.D.2d 855 (2d Dept. 1976) .......................................................................... 16 Adler v. Helman, 169 A.D.2d 925 (3d Dept. 1991) ........................................................................ 15 Am. Transit Ins. Co. v. Faison, 242 A.D.2d 201 (1st Dept. 1997) ................................................................. 27, 33 Anesthesia Assocs. of Mount Kisco LLP v. N. Westchester Hosp. Ctr., 59 A.D.3d 473 (2d Dept. 2009) .............................................................. 27, 30, 33 Arnav Indus., Inc. Retirement Trust v. Brown, Raysman, Millstein, Felder & Steiner, LLP, 96 N.Y.2d 300 (2001) ........................................................................................ 12 Arol Dev. Corp. v. Whitman & Ransom, 215 A.D.2d 145 (1st Dept. 1995) ....................................................................... 16 11 Biondi v. Beekman Hill House Apt. Corp., 257 A.D.2d 76 (1st Dept. 1999) ......................................................................... 12 Brookfield Clothes, Inc. v. Tandler Textiles, Inc., 78 A.D.2d 841 (1st Dept. 1980) ......................................................................... 20 Brunetti v. Musallam, 11 A.D.3d 280 (1st Dept. 2004) ................................................................... 34, 38 Burns Jackson Miller Summit & Spitzer v. Lindner, 88 A.D.2d 50 (2d Dept. 1982) ...................................................................... 27, 33 Citibank, N.A. v. Chicago Title Ins. Co., 214 A.D.2d 212 (1st Dept. 1995) ....................................................................... 36 Country World, Inc. v. Imperial Frozen Foods Co., Inc., 186 A.D.2d 781 (2d Dept. 1992) .................................................................. 34, 38 DDJ Mgmt, LLC v. Rhone Group LLC, 15 N.Y.3d 147 (2010) .................................................................................. 39, 41 Duane Thomas LLC v. 62 Thomas Partners LLC, 300 A.D.2d 52 (1st Dept. 2002) ......................................................................... 42 Eng v. Sichenzi, No.: 818/2001, 2005 N.Y. Misc. LEXIS 8423 (Sup. Ct. Putnam Cty. Dec. 6, 2005) ............................................................. 27-28 Ford v. Unity Hosp., 32 N.Y.2d 464 (1973) ........................................................................................ 20 Gilbert Frank Corp. v. Fed. Ins. Co., 91 A.D.2d 31 (1st Dept. 1983) ........................................................................... 15 Goldman Sachs Mortgage Co. v. Natixis Real Estate Capital, Inc., No.: 602359/2007, 2008 N.Y. Misc. LEXIS 9849 (Sup. Ct. N.Y. Co. May 5, 2008) ................................................................. 16, 23 Hallock v. State of N.Y., 64 N.Y.2d 224 (1984) ........................................................................................ 22 Hatton v. Quad Realty Corp., 100 A.D.2d 609 (2d Dept. 1984) .................................................................. 15,23 111 In re guardianship of M, 82 A.D.2d 217, 225 (1st Dept. 1981) ................................................................... 6 Kaufman v. Cohen, 307 A.D.2d 113 (1st Dept. 2003) ....................................................................... 30 Kirschner v. KPMG LLP, 15 N.Y.3d 446 (2010) ................................................................ 21, 22, 23, 25,28 Luna/ Realty, LLC v. DiSanto Realty, LLC, 88 A.D.3d 661 (2d Dept. 2011) .......................................................................... 39 Mandor v. Lawyers Title Ins. Corp., 28 N.Y.2d 739 (1971) ........................................................................................ 37 McGarry v. Miller, 158 A.D.2d 327 (1st Dept. 2007) ................................................................. 20, 21 Meyerson v. Lawyers Title Ins. Corp., 39 A.D.2d 190 (1st Dept. 1972), aff'd, 33 N.Y.2d 704 (1972) ......................................................................................... 17, 19,20,23,37 Morgold, Inc. v. A CA Galleries, Inc., 283 A.D.2d 407 (2d Dept. 2001) .................................................................. 20, 21 N.X v. Cabrini Medical Ctr., 280 A.D.2d 34 (1st Dept. 2001) ................................................................... 20, 21 News Am. Marketing, Inc. v. Lepage Bakeries, Inc., 16 A.D.3d 146 (1st Dept. 2005) ......................................................................... 15 Parlato v. Equitable Life Assurance Soc. of U.S., 299 A.D.2d 108 (1st Dept. 2002) ......................................... 13, 14, 15, 18, 21,23 People v. Coppersmith, 39 A.D.2d 947 (2d Dept. 1972) ............................................................................ 6 People v. Singleton, 36 A.D.2d 725 (2d Dept. 1971) ............................................................................ 6 Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478 (2007) ........................................................................................... 30 lV Scarlett Letters, Inc. v. Compugraphic Corp., 61 A.D.2d 930 (1st Dept. 1978) ......................................................................... 12 Soho Plaza Corp. v. Nationwide Mut. Ins. Co., 309 A.D.2d 504 (1st Dept. 2003) ....................................................................... 26 Stuart Silver Assocs. v. Baco Dev. Corp., 245 A.D.2d 96 (1st Dept. 1997) ......................................................................... 42 Swersky v. Dreyer and Traub, 219 A.D.2d 321 (1st Dept. 1996) ................................................................. 37,42 Talansky v. Schulman, 2 A.D.3d 355 (1st Dept. 2003) ............................................................... 34, 38, 42 UST Private Equity Investors Fund, Inc. v. Salomon Smith Barney, 288 A.D.2d 87 (1st Dept. 2001) ......................................................................... 42 Wald v. Marine Midland Bus. Loans, Inc., 270 A.D.2d 73 (1st Dept. 2000) ......................................................................... 26 Zev Cohen LLC v. Fidelity Nat'/ Title Ins. Co., 15 Misc. 3d 798 (Sup. Ct. Kings Cty. 2007) ...................................................... 36 STATUTES CPLR § 3016(b) ...................................................................................................... 30 CPLR § 3211(a)(l) .................................................................................................. 12 CPLR § 3211(a)(7) .................................................................................................. 12 v Plaintiff-Respondent DLJ Mortgage Capital, Inc. ("DLJ") respectfully submits this respondent's brief in connection with the appeals by Defendants- Appellants United General Title Insurance Company, Inc. ("United") and Chicago Title Insurance Company, Inc. ("Chicago" and, together, the "Title Insurers") from the Order of the Honorable Charles E. Ramos, Supreme Court, New York County (the "Order") (R. at 5a; 12), which properly denied the Title Insurers' motions to dismiss DLJ's Amended Complaint. (R. at 38-39).1 PRELIMINARY STATEMENT This appeal requires the application of New York's principal/agency law to relatively straightforward facts. The facts, which must be accepted as true since this appeal is from the denial of a motion to dismiss, are, nevertheless, not in dispute. The Title Insurers, as principals, admittedly separately employed a title agent, Ted Doumazios, Esq. and his title company that he owned and controlled, Clear View Abstract LLC (collectively "Doumazios"), who misused his actual authority to issue title Commitments on their behalf to defraud DLJ in a massive mortgage fraud scheme. Doumazios pled guilty to the fraud, was convicted of bank and wire fraud, had a $98 million order of restitution entered against him, and was permanently disbarred for his felonious conduct. 1 References to "R at _" refer to the page number of the Record on Appeal. Doumazios was undeniably the Title Insurers' title agent before, during and after the commission of the massive mortgage fraud scheme, as evidenced by, among other things, written agency agreements. During his years-long participation in the fraud, he repeatedly acted within the scope of his apparent authority by falsifying title reports and misrepresenting that he would arrange to have the Title Insurers issue title policies insuring title. Because Doumazios acted within the scope of his apparent authority, the Title Insurers, as his principals, are unquestionably liable to DLJ under principal/agency principles previously articulated by this Court and the Court of Appeals. Accordingly, the Order should be affirmed, allowing discovery to proceed. QUESTIONS PRESENTED 1. Whether a principal should be held liable for the fraudulent acts of its agent, where the agent, while acting within the scope of his apparent authority with which the principal cloaked him, participates in a massive fraudulent conspiracy to defraud an innocent third-party. Answer Below: Yes. 2. Whether, on a motion to dismiss, reasonable reliance by an innocent victim of a massive fraudulent conspiracy should be assumed when the fraudfeasors admittedly conspired to defraud the innocent victim, and they were indicted, prosecuted and criminally convicted of the fraud. 2 Answer Below: Yes. NATURE OF THE CASE DLJ's Amended Complaint details the precise nature of the mortgage fraud scheme (the "Mortgage Fraud Scheme") that was perpetrated upon DLJ (among others), causing it to suffer approximately $50 million in damages. (R. at 358- 520). I. The Mortgage Fraud Scheme The co-conspirators, headed by three-time convicted felon Thomas Kontogiannis, implemented the Mortgage Fraud Scheme as follows: they first decided to make a fraudulent loan (denominated by them as a "Tommy Loan") and would round up phony signatories. (R. at 376-383). The co-conspirators would then create (a) a credit report for the straw buyer, (b) a fraudulent loan application, (c) phony closing documents (including, inter alia, a contract of sale, note, mortgage, Form HUD-1, deed, appraisal and title insurance documentation), and (d) wire transfer documentation to enable the draw down on one of the warehouse lines of the mortgage originator involved in the scheme, Coastal Capital Corporation ("Coastal"), to fund the loan. (R. at 401-402). Each of the necessary parties, including Doumazios, would then attend the sham closings and execute all of the necessary documents that would (a) purport to transfer title of the real property at issue, and (b) reflect that title insurance would be issued and deeds and 3 mortgages would be recorded. (R. at 430-431 ). The mortgage proceeds would then be funded by Coastal, and the proceeds distributed among the co-conspirators according to Thomas Kontogiannis' directives. (R. at 402). Coastal then sold the ninety-five (95) phony loan packages at issue herein (the "95 Fraudulent Transactions") to DLJ (interspersed among approximately 1,800 legitimate mortgage transactions), which was led to believe that the loans were part of legitimate mortgage loan transactions. (R. at 402). To prevent early payment defaults and further conceal the fraud, the defendants issued more than 1,000 cover-up payments over several years, totaling approximately $5.2 million, causing DLJ and any subsequent purchasers of the phony loan packages on the secondary market to be unaware that the deeds and mortgages executed in connection with these transactions were never filed and/or recorded, and that no title insurance had in fact been issued. (R. at 299). Not content with stealing more than $50 million from DLJ, the defendants then proceeded to the second phase of the Mortgage Fraud Scheme which involved the reselling of many of the properties involved in the 95 Fraudulent Transactions to seemingly bona fide purchasers, thus profiting yet again, and forever extinguishing DLJ's interests in the properties. (R. at 204-205). The defendants then, through numerous transactions, fraudulently transferred tens of millions of dollars worth of assets so as to avoid having to pay DLJ any restitution. (R. at 274- 4 275). One of the 95 Fraudulent Transactions played a central role in the bribery conviction of former U.S. Congressman, Randall "Duke" Cunningham (the "Cunningham Scam"). (R. at 367). II. Doumazios' Specific Role And DLJ's Reasonable Reliance Thereon On June 4, 2009, the United States Attorney for the Eastern District of New York unsealed a multi-count criminal indictment (the "Criminal Indictment") against several of the defendants, including Doumazios, for their role in the Mortgage Fraud Scheme. (R. at 367). The Criminal Indictment explicitly names DLJ and Washington Mutual Bank, N.A., ("WaMu"), which is now in Federal Deposit Insurance Corporation ("FDIC") receivership, as victims of the Mortgage Fraud Scheme. On December 15, 2010, Doumazios pled guilty to Count One of the Criminal Indictment, Conspiracy to Commit Bank Fraud and Wire Fraud, and was then permanently disbarred from the practice of law for his role in the Mortgage Fraud Scheme. (R. at 788). In connection with his guilty plea, Doumazios testified: THE DEFENDANT: From [in] or about 2004 to and including September 2007 within the Eastern District of New York, I, along with Thomas Kontogiannis and another individual, owned and operated Clearview Abstract. Clearview was an agent for a title company that was located in Nassau County. During this time period, at the request of Mr. Kontogiannis, I prepared title reports that conveyed clear title when, in fact, it did not have clear title. I knew these reports were going to 5 be used by Thomas Kontogiannis to defraud financial institutions and others. THE COURT: All right. Now, you talked about your knowledge about these title reports that contained false representations and that they were going to be used to defraud certain banks, WaMu among them. Was the purpose of this scheme to obtain funds or monies from the bank, WaMu? THE DEFENDANT: Yea. Mr. Kontogiannis was obtaining funds from the bank. THE COURT: All right, sir. And were there means of wire communications that were used to execute this fraudulent scheme to obtain funds. THE DEFENDANT: reports. THE COURT: THE DEFENDANT: directed me to. Yes. Fax reports. I would fax To Mr. Kontogiannis? Yes, or an entity that he (R. at 788).2 In connection with his conviction and sentencing, United States District Court Judge Kiyo A. Matsumoto entered an $98 million order of restitution against Doumazios in favor ofDLJ and the FDIC, as receiver for WaMu. Throughout the years-long duration of the Mortgage Fraud Scheme, Doumazios was party to several written agency agreements with the Title Insurers, whereby Doumazios acted as an agent to the Title Insurers to issue policies on their 2 This Court can take judicial notice of the proceedings in the criminal action, including the several guilty pleas entered by the defendants therein. See, e.g., In re guardianship of M, 82 A.D.2d 217, 225 (1st Dept. 1981); People v. Singleton, 36 A.D.2d 725, 726 (2d Dept. 1971) (the court may take judicial notice of the defendant's guilty plea, even when the minutes are unavailable); People v. Coppersmith, 39 A.D.2d 947,947 (2d Dept. 1972) (same). 6 behalf, collect fees from the insureds, and perform related functions. (R. at 743, 815). Such a principal/agency arrangement is common in the title insurance industry, as is the practice of authorizing the abstract agent to attend closings on a title insurance company's behalf and accept payment for insurance premiums, all of which was done here. (R. at 737). Pursuant to the agency relationship here, Doumazios acted as the Title Insurers' agent to, among other things, (a) issue title assurances (such as title reports, preliminary reports, certificates of title, commitments, binders, guarantees, etc.), (b) procure policies, (c) collect fees to purchase policies at closings where Doumazios attended on the Title Insurers' behalf, and (d) record mortgages and deeds. (R. at 737-8, 743, 815). Doumazios, however, did not legitimately do any of these things in connection with the 95 Fraudulent Transactions. To enable Doumazios to perform his duties, the Title Insurers gave Doumazios actual authority to be their agent and represent himself to the world that he was their agent. They also provided Doumazios with various documentation -- such as certificates of title -- bearing their respective names for execution at the closings. (R. at 738). The Title Insurers also issued to Doumazios cover "jackets" which were on the letterhead of the respective insurance company from which it was issued. (R. at 738). Jackets are typically accompanied by (a) a recertification or mark-up of the commitment to issue policy (the "Recertification 7 Commitment"), and/or (b) title policy, which the agent issues on the insurance company's behalf. (R. at 738). Each jacket also bears (a) the name ofthe issuing title insurance company, (b) the signature of the issuing title insurance company's President and Secretary, (c) a statement reflecting what it purports to be (either a Recertification Commitment or policy, as the case may be), (d) an area for the abstract agent to sign and execute the document on the title insurance company's behalf, and (e) a unique serial number, which is used to identify and track each individual jacket and the documents which are executed in connection therewith. (R. at 739). A jacket is annexed to all Recertification Commitments and policies and evidences the abstract agent's ability and intent to bind its principal to an insurance policy. (R. at 738). The jackets serve an important function in that they are used by a title insurance company to keep track of the commitments and policies which its agents issue on its behalf. (R. at 739). Title insurance companies are supposed to periodically perform audits of their abstract agents and, during the audit process, the agent is obligated to provide a detailed status report concerning every jacket that it received from the principal. (R. at 739). The status report must disclose each and every jacket that was executed in connection with a Recertification commitment or policy, and all of the relevant details concerning the same. (R. at 739). Although the Title Insurers are quick to blame DLJ for not uncovering the 8 fraud sooner, it is clear that the Title Insurers failed to police their agent as they were required to do. In any event, contrary to the Title Insurers' suggestion that it is per se unreasonable to rely on any document other than an actual insurance policy, there are several indicia of title on which a purchaser on the secondary market may reasonably rely to assure itself that title insurance has been, or will be, procured, including, inter alia, commitments to issue a policy, and Recertification Commitments. (R. at 739-741). The first type of indicia of title, which is prepared before a closing, is essentially a report of title concerning the specific property and a commitment from the insurance company (issued by its agent on its behalf) that it will issue a policy in the future. (R. at 739-740, 703). This document is known by several different names in the industry, including (a) the title report, (b) the preliminary report, (c) the certificate of title, and/or (d) the commitment to issue policy (the "Commitment"). (R. at 740). The Commitment assures the lender and any subsequent purchaser on the secondary market that the title insurance company is committed to issuing a policy at some point in time. (R. at 740). A Commitment was given in connection with all 95 of the Fraudulent Transactions. The second type of indicia of title is the Recertification Commitment. (R. at 740). The Recertification Commitment is a common type of indicia of title, brought to the closing by abstract agents, and is included in a closing binder since 9 the policy frequently is not issued until after closing. (R. at 740). DLJ received a Recertification Commitment in connection with at least 79 of the 95 Fraudulent Transactions. (R. at 740). A Recertification Commitment can take one of two forms. The first is a newly created, formally typed document that reflects any and all changes and/or policy omissions from that which was originally reflected in the Commitment. (R. at 740). The second is a "marked-up" commitment, which simply reflects the agent's handwritten changes and omissions made at the closing. (R. at 7 40-7 41 ). Although facially different, each form of a Recertification Commitment is equally valid and binding upon the principal title insurance company, and it is common industry practice for a lender and any purchaser on the secondary market to rely on the Recertification Commitment as evidence that an abstract agent will fulfill its obligations to procure a title insurance policy from the particular title insurance company. (R. at 741). Although these indicia of title are, without more, sufficient for a purchaser on the secondary market, like DLJ, to reasonably believe that its investment is (or will be) protected by insurance, DLJ's loan files contain even further evidence of title-- for example the Form HUD-ls that were executed in connection with each of the 95 Fraudulent Transactions. (R. at 741). Form HUD-ls are sworn federal documents executed at a closing by the purchaser, seller, and settlement agent that detail all of the fees and expenses paid in connection with the transfer of real 10 property, including the fees paid to an abstract agent in order to procure title insurance, and record mortgages and deeds. (R. at 741-742). DLJ received a sworn-to Form HUD-1 in connection with every single one of the 95 Fraudulent Transactions. These sworn-to documents, together with (a) the many documents executed at each one of, or in connection with, the closings (including, inter alia, the loan application, mortgage, note, deed, appraisal and contract of sale), (b) the indicia of title discussed above, and (c) anticipated jacket audits performed by the principals, are collective evidence that title insurance has been, or will be, procured that is commonly relied upon in the industry. (R. at 740-742). DLJ (and its agent, Bank of America, N.A., successor by merger to LaSalle Bank, N.A. ("LaSalle"), which reviewed the collateral files of the mortgages related to the 95 Fraudulent Transactions) reasonably relied on such indicia of title and the surrounding facts and circumstances indicating that a legitimate closing had taken place in purchasing the mortgages related to the 95 Fraudulent Transactions. (R. at 488, 494, 499, 739-742). The Title Insurers simply cannot disclaim liability under these circumstances on a motion to dismiss, especially since their agent, and his co- conspirators, pled guilty and were convicted of defrauding DLJ. 11 ARGUMENT I. Standard Of Review A Court should not dismiss a complaint for failure to state a cause of action, pursuant to CPLR § 321l(a)(7), unless, after accepting as true the facts alleged in the complaint and giving the plaintiff every possible inference, the facts alleged within the four comers of the complaint do not fit within any cognizable legal theory. See, e.g., Biondi v. Beekman Hill House Apt. Corp., 257 A.D.2d 76, 81 (1st Dept. 1999) (motion to dismiss under CPLR § 32ll(a)(7) "should be granted [only] where the essential facts have been negated beyond substantial question"). The test under CPLR § 3211(a)(7) is "not whether the complaint states a cause of action but whether the pleader has, in fact, a cause of action." Scarlett Letters, Inc. v. Compugraphic Corp., 61 A.D.2d 930 (1st Dept. 1978). Moreover, dismissal of a complaint based on documentary evidence, pursuant to CPLR § 32ll(a)(l), should not be granted unless the documents conclusively establish a defense as a matter of law. See, e.g., Arnav Indus., Inc. Retirement Trust v. Brown, Raysman, Millstein, Felder & Steiner, LLP, 96 N.Y.2d 300, 303-04 (2001) (reversing lower court's grant of motion to dismiss where documents presented by defendant did not "conclusively establish defense to the [claim asserted] as a matter of law"). 12 Under the well-settled applicable law and the facts of this case, DLJ has sufficiently alleged a fraud cause of action against the Title Insurers based on the acts of their agent, Doumazios, and there are no documents that conclusively establish an adequate defense. Therefore, Justice Ramos properly denied the Title Insurers' motions to dismiss. II. The Title Insurers Are Liable For The Acts Of Doumazios The Title Insurers contend that they are not liable to DLJ under the theories of respondeat superior, actual authority and/or apparent authority because Doumazios' participation in the fraud (a) did not fall within the scope of his employment, (b) was not authorized by the Title Insurers, and (c) was not done in connection with any apparent authority emanating from the Title Insurers. The lAS Court properly found, however, that their contention is misguided as a matter of fact and law. As for the doctrines of respondeat superior and actual authority, these theories are irrelevant and should be disregarded since DLJ does not seek to hold the Title Insurers liable on either of these theories. 3 Instead, as discussed more 3 The doctrine of apparent authority is separate and distinct from the doctrines of respondeat superior and actual authority. See Parlato v. Equitable Life Assurance Soc. of U.S., 299 A.D.2d 108, 113-14 (1st Dept. 2002) ("In considering a principal's potential liability for the tortious acts of its agent, it is important to distinguish the doctrine of apparent authority, which ... from the distinct and separate doctrine of respondeat superior.") (internal citation and quotation omitted); Volovnik v. Benzel-Rusch Motor Car Corp., No.: 09 Civ. 10595 (DAB), 2010 U.S. Dist. LEXIS 97046, at *18 (S.D.N.Y. July 29, 2010) (applying New York 13 fully below, the Title Insurers are liable to DLJ for the full amount of its damages because their agent, while acting within the scope of his apparent authority with which the Title Insurers cloaked him, knowingly and actively participated in the massive Mortgage Fraud Scheme and defrauded DLJ out of approximately $50 million, and neither the presence of fraud, nor the adverse interest exception excuse such liability. A. The Doctrine Of Apparent Authority Imputes Liability To The Title Insurers Under the doctrine of apparent authority, a principal is bound by the acts of its agent if the principal cloaked the agent with authority to act on its behalf and a third-party reasonably believed that the agent possessed authority to enter into the transaction on the principal's behalf. See Parlato, 299 A.D.2d at 112. In Parlato, this Court noted: it is well established that a principal may be held liable in tort for the misuse by its agent of his apparent authority to defraud a third-party who reasonably relies on the appearance of authority, even if the agent commits the fraud solely for his personal benefit, and to the detriment of the principal. /d. at 113. When suing on the basis of apparent authority, a plaintiff must "prove that the principal created an appearance of authority on which the plaintiff law) ("Apparent authority is entirely distinct from authority, either express or implied ... Unlike express or implied authority, apparent authority exists when there is no express authority.") 14 reasonably relied, thereby enabling the agent to successfully perpetrate the tort." !d. at 114. A principal is liable for an agent's fraud though he acts solely to benefit himself, if the agent acts with apparent authority. Similarly, a principal is liable for an agent's misrepresentations that cause a pecuniary loss to a third party, when the agent acts within the scope of his apparent authority. News Am. Marketing, Inc. v. Lepage Bakeries, Inc., 16 A.D.3d 146, 148 (1st Dept. 2005). See also Hatton v. Quad Realty Corp., 100 A.D.2d 609, 610 (2d Dept. 1984) (principal liable for agent's fraud where he designated and authorized agent to act on his behalf and agent committed fraud while performing such authorized acts, since "as between two innocent parties, the one who [entrusts the fraudulent agent and] has allowed the fraud to be perpetrated should bear the loss").4 Finally, although, as discussed below, the facts alleged in the Amended Complaint make it quite clear that Doumazios was acting with the apparent authority the Title Insurers afforded him, DLJ' s allegations concerning Doumazios' apparent authority, at a minimum, raise a material issue of fact. Gilbert Frank Corp. v. Fed. Ins. Co., 91 A.D.2d 31, 37 (1st Dept. 1983) (apparent authority is "an issue which is . . . factual in nature, inappropriate for summary 4 The only case upon which the Title Insurers seem to rely for their argument that Doumazios was not acting within his apparent authority is Adler v. Helman, 169 A.D.2d 925 (3d Dept. 1991), which is irrelevant to this case. First, the Adler decision appears to be based on the doctrine of respondeat superior, and not apparent authority. Second, in Parlato, this Court expressly rejected the Third Department's holding in the Adler. 299 A.D.2d at 113. 15 disposition"); Aarons Fifth Avenue, Inc. v. Ins. Co. of N. Am., 52 A.D.2d 855, 855 (2d Dept. 1976) (reversing grant of motion to dismiss and finding that material issues of fact existed as to agent's apparent authority to bind insurance company); Goldman Sachs Mortgage Co. v. Natixis Real Estate Capital, Inc., No.: 602359/2007, 2008 N.Y. Misc. LEXIS 9849, at *19 (Sup. Ct. N.Y. Co. May 5, 2008) (the issue of apparent authority "is inherently a factual one not appropriately determined on a pre-answer dismissal motion") citing Arol Dev. Corp. v. Whitman & Ransom, 215 A.D.2d 145 (1st Dept. 1995). 1. Doumazios Acted Within The Scope Of His Apparent Authority DLJ's Amended Complaint alleges a myriad of facts and circumstances establishing that the Title Insurers cloaked Doumazios with authority to act on their behalf in connection with the 95 Fraudulent Transactions and held him out to the public as their agent -- facts which the Title Insurers have not disputed. Indeed, at all relevant times, a contractual relationship existed between Doumazios and the Title Insurers. (R. at 743, 815). Under the express, written terms of the agency agreement, the Title Insurers authorized Doumazios to act as their agent and hold himself out as such, and, in doing so, issue title assurances, issue policies, attend closings, and collect fees on their behalf. (R. at 432-433, 737-739). Coextensive and consistent with the express terms of the agency agreement, Doumazios did, in fact, hold himself out and represented that he was the Title Insurers' agent, which 16 itself constituted an overt act by the Title Insurers that cloaked their agent with apparent authority. See Meyerson v. Lawyers Title Ins. Corp., 39 A.D.2d 190, 192 (1st Dept. 1972), aff'd, 33 N.Y.2d 704 (1972) ("a reasonable person would be warranted in believing that he was dealing with the [title insurer]" where title agent, among other things, was duly authorized by the principal to hold himself out to the public as the insurer's agent, and, in fact did so). Moreover, the Title Insurers took the additional steps of providing Doumazios with (a) title insurance documentation, including blank title reports and jackets -- all bearing the name of one of the Title Insurers -- which were intended by the Title Insurers to be completed by Doumazios and given to third-parties, and (b) the Title Insurers' respective company manuals and/or policies, which set forth the applicable rates for title related services, and commissions which Doumazios would earn in connection with the various transactions. (R. at 743, 815). This documentation appeared to be in good order and specifically identified Doumazios as their authorized agent and person to whom questions about title should be directed. (R. at 747, 822). Indeed, all of the Commitments and Recertification Commitments in DLJ's loan files (which bore the Title Insurers' respective name), expressly stated: For any title clearance questions on this report please call: Ted Doumazios, Esq. Clear View Abstract, LLC 146a Manetto Hill Road, Suite 104, Plainview, NY 11803 17 Phone: (516) 822-3501 Fax: (516) 822-3502 (R. at 541, 592, 651, 681, 764). These facts, consistent with industry practice, were intended by the Title Insurers to indicate to a reasonable person that Doumazios had authority to act on the Title Insurers' behalf. This is the regular way the title industry works. In an attempt to avoid liability, the Title Insurers rely upon this Court's statement in Parlato that liability under apparent authority turns on the "words or conduct of the principal, communicated to a third party," 299 A.D.2d at 112 (emphasis added). This language supposedly protects the Title Insurers because they assert that they did not allegedly have any direct communications with DLJ. They are wrong for several reasons. First, the Title Insurers have no response to the undisputed fact that they expressly authorized Doumazios to represent to third- parties that he was the Title Insurers' agent authorized to transact business on their behalf. The third-parties were not limited to certain individuals and/or entities, but, rather, included anyone in the public, including DLJ, who, as a well known institutional buyer of mortgages, was a foreseeable recipient of the Title Insurers' representations and documents from and through their duly authorized agent. Second, the Title Insurers also took affirmative steps to provide Doumazios with title documents bearing their respective names, and authorizing him to execute and deliver the same to third-parties, and instructing third-parties to direct any title 18 clearance questions directly to Doumazios. These actions, taken directly by the Title Insurers, individually and collectively, are more than enough to cloak Doumazios with apparent authority under New York law. The Meyerson case is particularly instructive. 39 A.D.2d at 192-93. There, this Court held a title company liable for the fraudulent acts of its title agent where that agent, while committing a fraud, was acting within the scope of his apparent authority with which the principal cloaked him. Meyerson, 39 A.D.2d at 192-93. In Meyerson, as here, the title agent had acted as the title insurer's agent for an extended period of time, including at the time of the fraud. The title insurer provided its agent with blank forms on which to enter a title search and printed at the top of the forms was the title insurer's name to which this Court remarked -- "[i]n all fairness, nobody who received this report, unless he were otherwise warned, would have any reason to doubt that he was dealing with the [title insurer], through a representative." !d. This Court further noted that: if the [title insurer] did not regard [the title agent] as its duly authorized agent to represent it with clients, then it would have been a relatively simple matter for the [title insurer] to print a warning on the title report to the effect that any transaction of business with [the title agent] did not bind [the title insurer]", but there was no such warnmg. !d. at 192. The title insurer also (a) duly authorized the agent to hold himself out to the public as its agent, (b) provided the title agent with a list of the principal's 19 rates, (c) authorized the title agent to collect money on the principal's behalf at closings, and (d) authorized the title agent to later account to the principal for money collected and certify the title report. !d. After considering these facts (which, incidentally, were fully developed through discovery and a trial), this Court held that the principal title insurance company adequately communicated its abstract agent's authority to plaintiff so as to impute liability to the principal for its agent's fraudulent conduct. The foregoing actions and communications are not materially different than those of the Title Insurers upon which DLJ relied. Finally, as this Court noted in Meyerson, which is entirely applicable here, "we would also apply to this case the legal maxim that where one of two innocent parties must sustain a loss from the fraud of a third, such loss shall fall upon the one whose act has enabled such fraud to be committed." !d. at 193 (internal citation and quotation omitted). Here, DLJ' s loss "shall fall upon" the Title Insurers.5 5 The cases on which the Title Insurers rely, Broolifield Clothes, Inc. v. Tandler Textiles, Inc., 78 A.D.2d 841 (1st Dept. 1980), Ford v. Unity Hosp., 32 N.Y.2d 464 (1973), NX v. Cabrini Medical Ctr., 280 A.D.2d 34 (1st Dept. 2001), 150 Beach I 20th Street, Inc. v. Washington Brooklyn Ltd. P'ship, 39 A.D.3d 723 (2d Dept. 2007), Morgold, Inc. v. ACA Galleries, Inc., 283 A.D.2d 407 (2d Dept. 2001), and McGarry v. Miller, 158 A.D.2d 327 (1st Dept. 2007), to argue that they did not take affirmative steps to cloak their agent with authority such that DLJ reasonably relied upon the same are inapposite. In Broolifield Clothes, this Court held that a disputed issue existed as to whether the alleged agent had authority to contractually bind a company (the alleged principal) where, unlike the present case, the alleged agent was not employed by the alleged principal at the time of the alleged acts, it was undisputed that the plaintiff relied solely on the alleged agent's words, and there existed a factual issue as to whether the alleged principal ratified the alleged agent's conduct. In Ford, the Court of Appeals held that it lacked jurisdiction over the alleged principal, which never gave its agent 20 2. Doumazios' Participation In Fraud Does Not Excuse Liability Despite the Title Insurers' reasoning that they are without liability because they never authorized Doumazios to perpetrate the fraud upon DLJ, the fraudulent nature of Doumazios' conduct does not relieve the Title Insurers from liability under the apparent authority doctrine. As this Court previously stated, if that were true "a principal could never be held liable in tort for its agent's misuse of his authority to defraud a third party ... [and] [w]e decline to adopt this view." Parlato, 299 A.D.2d at 113. In fact, the Court of Appeals recently addressed this very issue in Kirschner v. KPMG LLP, 15 N.Y.3d 446 (2010). In that case, the Court of Appeals addressed whether, and to what extent, a principal can be held liable for the fraudulent conduct committed by its agent against an innocent third- party. The Court of Appeals firmly held that a principal can, and indeed should, be held liable, reasoning that because corporations act solely through the instrumentality of their agents, "[a] corporation must []be responsible for the acts of its authorized agents even if the particular acts were unauthorized." Kirschner, 15 N.Y.3d at 465. Not surprisingly, the Title Insurers fail to even mention the Kirschner case in either of their two (2) separate briefs. authority to perform any acts in New York, nor did it cloak the agent with authority to do so, and it was apparent that the agent was really acting as the third-party plaintiffs' agent. NX dealt with the narrow question of a hospital's liability when an employee sexually assaults a patient. Finally, in 150 Beach, Morgold, and McGarry, the courts dismissed the actions because the plaintiffs failed to present any evidence of words or conduct on the part of the purported principal. That is clearly not the case here. 21 "Agency law presumes imputation [of an agent's conduct to the principal] even where the agent acts less than admirably, exhibits poor business judgment, or commits fraud." !d. at 465 (emphasis added). As the Court of Appeals recognized in Kirschner, "the principal is generally better suited than a third-party to control the agent's conduct, which at least in part explains why the common law has traditionally placed the risk on the principal", and not an innocent third-party such as DLJ. !d. As Justice Ramos correctly noted below: THE COURT: ... But the plaintiff does allege that [the Title Insurers] empower[] these people to make representations, and, indeed, to write certificates of title with [the Title Insurers'] logo on it. Whether it's prepared by the abstract company or not, the fact is that this abstract company was authorized by [the Title Insurers]. MR. TRAUB: But for purposes of the motion to dismiss, the complaint admits that all this was done in furtherance of, as they call it, a giant mortgage conspiracy fraud. THE COURT: hook. That doesn't get anybody off the (R. at 31 ). Justice Ramos' conclusion squares with that of the Court of Appeals and New York law. See, e.g., Kirschner, 15 N.Y.3d at 465-69; Hallock v. State of N.Y., 64 N.Y.2d 224, 230 (1984) (principal should bear the responsibility for agent's conduct which is outside the bounds of his authority, and principal is relegated to relief against its rogue agent); see also Gardi v. Jana Partners LLC (In 22 re: Dreier LLP), 450 B.R. 452, 459 (Bankr. S.D.N.Y. 2011) (applying New York law and principles articulated in Kirschner, and holding that, as between the principal and an innocent third-party victim, the principal must bear the loss caused by its agent's fraud). Under these circumstances, therefore, the Title Insurers are liable for the fraud committed by Doumazios because he had apparent authority to act on the Title Insurers' behalf and bind them to his actions. As this Court has previously stated: [i]t is well established that a principal may be held liable in tort for the misuse by its agent of his apparent authority to defraud a third person who reasonably relies on the appearance of authority, even if the agent commits the fraud solely for his own personal benefit, and to the detriment of his principal. Parlato, 299 A.D.2d at 113. See also Hatton, 100 A.D.2d at 610 (principal liable for agent's fraud where it was committed while agent was acting within the apparent authority with which principal cloaked him); Meyerson, 39 A.D.2d at 192-93 (holding that title insurance company is liable for fraud committed by its abstract agent where agent acted within the scope of his apparent authority with which principal company cloaked him); Goldman Sachs Mortgage Co., 2008 N.Y. Misc. LEXIS 9849, at *19-20 (proof that principal used alleged agent as custodian for similar mortgage transactions and provided mortgage loan documents to 23 plaintiff through agent to conduct review of loans sufficient to deny motion to dismiss based on apparent authority). The Title Insurers fully understood that they would be liable to a third-party such as DLJ for the fraudulent acts of Doumazios, and sought to reduce their exposure by inserting an indemnity provision in their agency agreements. For example, United's agency agreement provides that: [Doumazios] agrees to indemnify [United] for all loss, costs or damages . . . which [United] may sustain or become liable for on account of ... [a]ny dishonest, fraudulent, malicious, criminal or negligent act, or dishonest, fraudulent, malicious or negligent omission by [Doumazios], its employees or its agents, in connection with ... [t]he issuance of an abstract of title, commitment, evidence of title, or policy of [United] ... (R. 745) (emphasis added). The indemnity provision in Chicago's agency agreement is not materially different. (R. 818-19). If New York agency law exempted title insurers from liability for the fraudulent acts of their title agents as the Title Insurers now argue, then they would not need to word their indemnity provision to cover fraudulent conduct. As previously discussed, however, the Title Insurers are liable for Doumazios' fraudulent acts, and they are free to press their contractual and common law indemnity rights against Doumazios. 3. The Adverse Interest Exception Does Not Apply The Title Insurers argue that they are not liable for the fraud committed by their agent since, in committing the fraud, Doumazios abandoned the scope and 24 object of the agency relationship. In doing so, they wrongly conflate the doctrines of respondeat superior and apparent authority, and seem to suggest that the adverse interest exception precludes their liability. First, the cases discussing this exception seem to suggest that it is relevant to the doctrines of respondeat superior and in pari delicto, and not the doctrine of apparent authority. Second, even if this exception did apply with respect to apparent authority, it would not save the Title Insurers. Under current and controlling law: to come within the [adverse interest] exception, the agent must have totally abandoned his principal's interests and be acting entirely for his own or another's purposes. It cannot be invoked merely because he has a conflict of interest or because he is not acting primarily for his principal. Kirschner, 15 N.Y.3d at 466 (emphasis in original) quoting Center v. Hampton Affiliates, 66 N.Y.2d 782 (1985). This "most narrow of exceptions" is reserved for those cases in which there is "outright looting or embezzlement ... where the fraud is committed against a corporation ... " /d. at 466-67 (emphasis in original). "So long as the corporate wrongdoer's fraudulent conduct enables the business to survive ... this test is not met." /d. at 468. Here, the fraud was committed against DLJ and WaMu, not against the Title Insurers. Indeed, each one of the eight (8) criminal defendants who pled guilty to this massive fraud, including Doumazios, admitted that their intended victims were 25 purchasers on the secondary market, such as DLJ and WaMu, and not the Title Insurers. (R. at 809). Further, "any harm [the Title Insurers may have suffered] from the discovery of the fraud -- rather than the fraud itself -- does not bear on whether the adverse interest applies." /d. at 469. Therefore, even if this narrow exception did apply to the doctrine of apparent authority, it would not help the Title Insurers. B. The Title Insurers Are Liable For The Full Amount Of DLJ's Damages United argues that, even if this Court finds that the Title Insurers can be held liable for Doumazios' fraud, the Title Insurers should not be held liable for the consequences of the acts taken by Doumazios' co-conspirators in the Massive Mortgage Fraud Scheme. This argument, which was not raised below, is not properly before this Court, and, therefore should not be considered. See, e.g., Soho Plaza Corp. v. Nationwide Mut. Ins. Co., 309 A.D.2d 504 (1st Dept. 2003) (affirming lower court's grant of summary judgment based on grounds stated in decision, and refusing to reach additional basis for reversal proffered by defendant where such basis were raised for the first time on appeal); Wald v. Marine Midland Bus. Loans, Inc., 270 A.D.2d 73 (1st Dept. 2000) ("[A] ruling on an application must be reviewed in respect of the arguments made before the motion court, and not on the basis of some novel contention."). 26 Nonetheless, even if this Court considers this argument (which it should not), it does not help the Title Insurers since it is well-established that a party who knowingly and actively participates in a conspiracy is equally liable for all of the actions (and all of the damages suffered by the plaintiff as a result thereof) of each of his/her/its co-conspirators. See, e.g., Anesthesia Assocs. of Mount Kisco LLP v. N. Westchester Hosp. Ctr., 59 A.D.3d 473, 479 (2d Dept. 2009) (plaintiff adequately alleged conspiracy among defendants so that all defendants could be held responsible for actions of others); Am. Transit Ins. Co. v. Faison, 242 A.D.2d 201 (1st Dept. 1997) ("[U]nder New York law, the liability of a co-conspirator is joint and several, notwithstanding the amount of any direct benefit conferred upon them through a fraudulent transaction."); Burns Jackson Miller Summit & Spitzer v. Lindner, 88 A.D.2d 50, 72 (2d Dept. 1982) (an allegation of conspiracy "connect[s] non-actors who might otherwise escape liability, with the acts of their coconspirators."); Superintendent of Ins. v. Freedman, 443 F. Supp. 628, 638-39 (S.D.N.Y. 1977) (finding, under New York a conspirator, even if not the primary actor, "is jointly and severally liable for the loss to the corporation resulting from the fraudulent scheme."). Thus, there is no question that Doumazios is liable for the full extent ofDLJ's approximately $50 million in damages.6 6 United also makes the argument that in committing the fraud, Doumazios was acting in his personal capacity, and therefore liability cannot be imputed to the Title Insurers, relying on Eng v. Sichenzi, No.: 818/2001, 2005 N.Y. Misc. LEXIS 8423, at *12-13 (Sup. Ct. Putnam 27 Given that Doumazios is undoubtedly liable for his knowing and active participation in this massive fraud, there is no question that the Title Insurers, who (a) entered into the agency agreements with Doumazios, (b) provided him with title documentation and the authority to execute same on their behalf, and (c) failed to adequately police Doumazios, should also be liable for the full extent of DLJ's damages. Simply put, had the Title Insurers adequately policed Doumazios, which they were in a position to do, and, indeed, had an affirmative obligation to do, they would likely have uncovered this massive fraud, and DLJ would not have been swindled out of $50 million. Although the Title Insurers are quick to point the finger at DLJ, the innocent victim, the equities clearly call out for the Title Insurers, and not DLJ, to bear the victim's entire loss here. As the Court of Appeals noted in Kirschner: A corporation must, therefore, be responsible for the acts of its authorized agents even if the particular acts were unauthorized. The risk of loss from the unauthorized acts of a dishonest agent falls on the principal that selected the agent. After all, the principal is generally better suited than a third party to control the agent's conduct, Cty. Dec. 6, 2005), which is easily distinguishable. In Eng, the court held that the principal title insurance company was not liable for the fraud committed by the individual, who was employed by the abstract company, because the individual's specific acts (e.g., preparing mortgages, notarizing documents) were not within the scope of the overall agency relationship between the principal title insurance company and the abstract company (seemingly limited to the issuance of title commitments and policies, and performing related duties), regardless of their fraudulent nature. Here, the fraud committed by Doumazios was squarely within the parameters of his apparent authority, and the very words of the written agency agreements. 28 which at least in part explains why the common law has traditionally paced the risk on the principal. 5 N.Y.3d at 465 (internal citation and quotation omitted). Further, "there are strong considerations of public policy underlying this precedent: imputation fosters an incentive for a principal to select honest agents and delegate duties with care." /d. at 466. Given the equities, as well as the strong public policy, the Title Insurers should be held liable for the full extent ofDLJ's damages. III. DLJ Has A Valid Cause Of Action For Fraud Against The Title Insurers In contending that the lAS Court committed reversible error by not dismissing DLJ's fraud claim, the Title Insurers argue that DLJ has not sufficiently alleged all of the elements of a fraud cause of action -- namely, the materially false misrepresentations that were made to DLJ by Doumazios and the reasonableness of DLJ's reliance on the various indicia of title. These contentions lack merit, and, therefore, this Court should affirm the lower court's decision.7 To sufficiently plead a prima facie fraud cause of action, a plaintiff must allege that: (1) defendant made a representation as to a material fact; (2) such representation was false; (3) defendant intended to deceive plaintiff; ( 4) plaintiff 7 United also argues that DLJ has not sufficiently pled a cause of action for fraud against it since DLJ does not allege any overt acts or statements made to DLJ by United. In doing so, United misconstrues DLJ's claims against the Title Insurers. Indeed, DLJ alleges that the Title Insurers are liable, not as primary participants in the fraud, but because their agent -- whose acts they are liable for -- admitted to knowingly participating in the Mortgage Fraud Scheme, causing DLJ to sustain damages exceeding $50 million, which participation DLJ unquestionably adequately alleges in the Amended Complaint. 29 reasonably relied upon the statement taking a certain course of action; and (5) plaintiff was damaged as a result of such reliance. See Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478, 488 (2007). While plaintiff must set forth "factual allegations in support of each element of fraud, to meet such requirement a plaintiff need only provide sufficient detail to inform defendants of the substance of the claims." Kaufman v. Cohen, 307 A.D.2d 113, 120-21 (1st Dept. 2003) (pleading requirements of CPLR § 30 16(b) "should not be interpreted so strictly as to require specificity where it may be impossible to state in detail the circumstances constituting a fraud.") (internal citation and quotation omitted); see also N.Y. C.P .L.R. § 30 16(b ). Furthermore, where, as here, the fraud claim is conspiracy- based, the plaintiff must simply allege "adequately common action for a common purpose by common agreement or understanding among a group, from which a common responsibility derives." Anesthesia Assocs., 59 A.D.3d at 479. A. Doumazios Made Materially False Representations As Part Of The Ongoing Conspiracy In contending that DLJ fails to allege with sufficient specificity the materially false statements that were made by Doumazios to DLJ, the Title Insurers disregard numerous, detailed facts establishing the conspiracy-based nature of the Mortgage Fraud Scheme and the knowing participation of each co-conspirator (including Doumazios), each one fulfilling his/her/its particular role while acting in concert with the other defendants. DLJ's Amended Complaint is filled with 30 allegations, based upon evidence in admissible form, reflecting Doumazios' numerous material misrepresentations in connection with its role and involvement in the Mortgage Fraud Scheme, including that (a) each of the subject properties had clear record title so that the mortgages sold to DLJ (and WaMu) would create a first priority lien, (b) title insurance would be procured for the properties which are the subject of the 95 Fraudulent Transactions, as evidenced by the insurance- related documents, such as Commitments to issue title insurance and/or Recertification Commitments, (c) the monies received for insurance premiums (as reflected in the Form HUD-ls) would be remitted to the Title Insurers, and (d) the deeds and mortgages would be recorded. (R. at 430, 434). As the lAS Court correctly noted, despite what the Title Insurers may claim, the Commitments and Recertification Commitments (which bear the name of the particular Title Insurer and are part ofDLJ's loan files) state on their face that: This company [United/Chicago] certifies that a good and marketable title is described in Schedule A subject to any liens and encumbrances. Okay. So far, I rely on it. (R. at 37, 541, 650). DLJ learned, after the fact, that this representation (among the others made by Doumazios) was all part of the fraud. Doumazios and his co-conspirators intended to sell the fraudulent mortgages on the secondary mortgage market and specifically intended for a purchaser on the secondary market (like DLJ) to rely on the misrepresentations made concerning, 31 among other things, the title, the mortgage, and the legitimacy of the transaction in deciding whether to purchase the mortgage. (R. at 471). In other words, the very purpose of the Mortgage Fraud Scheme was to create fraudulent mortgages and supporting documentation through mortgage originator (and defendant below) Coastal and the other co-conspirators, and sell the mortgages on the secondary market so that the co-conspirators (including Doumazios) could reap profits from such sales. Each one of the co-conspirators knew of this criminal purpose and intended to take actions in furtherance of that purpose. Indeed, Doumazios admitted that he prepared fraudulent title reports showing clear record title knowing that those reports would ultimately be communicated to financial institutions in the secondary market, such as DLJ. (R. at 914-915). Further, several of Doumazios' co-conspirators have also admitted to knowingly making false representations to DLJ and WaMu. Specifically, on July 13, 2010, John T. Michael (President and 30% equity owner of Coastal) admitted: I agreed with others to process fraudulent loans [through] Coastal Capital Corporation, a mortgage lender that I ran as president and CEO, while knowing the loans were fraudulent in that the underlying applications contained false information. I represented to purchasers on the secondary market, mortgages to [WaMu and DLJ], that the loans they were purchasing from Coastal Capital were legitimate, and in the course of processing mortgages, Coastal Capital transmitted documents by wire communication in interstate commerce as well. (R. at 403) (emphasis added). 32 In light of the conspiracy-based nature of the fraud and the numerous misrepresentations that were made so that a purchaser on the secondary market, like DLJ, would rely on them to purchase the fraudulent mortgages, it is irrelevant that Doumazios did not make these statements directly to DLJ at the closings, particularly given that (a) the misrepresentations made by Doumazios were ultimately communicated to DLJ (which Doumazios admitted he knew to be the case), and (b) certain of Doumazios' co-conspirators admitted to making misrepresentations directly to DLJ. Under New York law, each member of a conspiracy is liable for the acts of the whole when the defendants conspired to develop an intricate pattern of fraud which requires the participation of each particular defendant. See, e.g., Anesthesia Assocs., 59 A.D.3d at 479 (plaintiff adequately alleged conspiracy among defendants so that all defendants could be held responsible for actions of others); Am. Transit Ins. Co., 242 A.D.2d at 201; Burns Jackson Miller Summit & Spitzer, 88 A.D.2d at 72 (an allegation of conspiracy "connect[ s] non-actors who might otherwise escape liability, with the acts of their coconspirators."). Doumazios undeniably was an essential part of the Mortgage Fraud Scheme, and is therefore equally liable for the actions of his co- conspirators. Because the actions of Doumazios are imputable to the Title Insurers under agency principles, the Title Insurers are liable to DLJ for Doumazios' participation in the Mortgage Fraud Scheme. 33 B. DLJ Reasonably Relied On The Numerous Indicia Of Title Insurance, Including Statements Made By Doumazios Equally meritless is the Title Insurers' "blame the victim" defense which posits that DLJ's fraud claim should fail as a matter of law because its reliance on Commitments to issue title insurance as evidence of title insurance was unreasonable. The Title Insurers unpersuasively argued this point to the lAS Court and do so again here, even though "[i]n a fraud action, whether a party could have ascertained the facts with reasonable diligence so as to negate justifiable reliance is a factual question." Country World, Inc. v. Imperial Frozen Foods Co., Inc., 186 A.D.2d 781, 782 (2d Dept. 1992) (internal citation and quotation omitted). See also Brunetti v. Musallam, 11 A.D.3d 280, 281 (1st Dept. 2004) (reversing lower court's grant of defendant's motion for summary judgment since "the issue[] of ... reasonable reliance . . . [is] not subject to summary disposition"); Talansky v. Schulman, 2 A.D.3d 355, 360-61 (1st Dept. 2003) (finding that the motion court erred in holding plaintiffs reliance on defendant's misrepresentations unreasonable as a matter of law since "resolution of a reasonable reliance claim is generally left to a finder of fact"). As the lAS Court correctly held, DLJ has alleged facts that are sufficient to at least establish the existence of a factual question as to whether its reliance was reasonable. As alleged in the Amended Complaint, and contrary to the Title Insurers' mischaracterization, DLJ's belief that title insurance had been, or would be, 34 procured for the properties related to the 95 Fraudulent Transactions, and that the transactions were otherwise legitimate, was not based purely on a Commitment or Recertification Commitment-- although DLJ submits, and the lower court agreed, that that alone could be a reliable indicator that a policy was promised to be issued. (R. at 38-39).8 Indeed, DLJ relied on a number of documents (which appeared on their face to be legitimate and in good order, as was the admitted intention of Doumazios and his other co-conspirators) and facts that collectively created a strong indicia that title insurance had been, or would be, procured and that the transactions were legitimate, including: (a) Doumazios' attendance at, and participation in, the closings conducted in connection with the 95 Fraudulent Transactions; (b) title insurance documentation issued by the Title Insurers (including Recertification Commitments, Commitments to issue title and/or jackets), which appeared to be legitimate and bore the name of the particular Title Insurer; (c) the documentation in the loan files indicating that a closing had in fact taken place, including Form HUD-ls executed in connection with each closing that detailed, among other things, that fees were paid to procure title insurance and record the deeds and mortgages; (d) the general industry practice whereby an agent of a title insurance company attends closings on the company's behalf and procures the policy after closing; 8 The Title Insurers claim that all of the commitments upon which DLJ relied were unmarked commitments to issue title insurance prepared long before any closing. This is not true, as the record clearly indicates that DU received Recertification Commitments with respect to at lease 79 of the 95 Fraudulent Transactions. (R. at 740). As noted above, Recertification Commitments are documents prepared at, or very shortly before a scheduled closing, and are therefore further evidence that a closing was scheduled and ultimately took place. 35 (e) the authority of Doumazios to procure such insurance and his representations that he in fact would do so; (f) the payments in fact made to Doumazios at the closing of the 95 Fraudulent Transactions (as indicated on the sworn-to Form HUD-ls); and (g) the fact that Doumazios was in possession of and was authorized to use title insurance documentation bearing the name of each of the respective Title Insurers at each closing. (R. at 737-742). These documents, together with the other documents contained in DLJ's loan files and the admitted-to circumstances surrounding their issuance, are commonly recognized in the industry as being reliable indicia of title and legitimacy.9 Despite the Title Insurers' attempt to argue otherwise, DLJ relied on the totality of the circumstances and documents in the loan files, and not merely the Commitments to issue title insurance, or a title insurance policy itself -- a fact not lost on the lAS Court, which stated: They are not saying it's [a] title insurance policy. They are saying your agent created the impression that this was a legitimate transaction going through legitimate steps. *** 9 The Title Insurers rely on Citibank, N.A. v. Chicago Title Ins. Co., 214 A.D.2d 212 (1st Dept. 1995) and Zev Cohen LLC v. Fidelity Nat'l Title Ins. Co., 15 Misc. 3d 798 (Sup. Ct. Kings Cty. 2007), for their argument that DLJ, as a matter oflaw, cannot rely upon, or sue the Title Insurers based upon statements in the Commitment and/or Recertification Commitment. In doing so, the Title Insurers seem to miss the whole point of DU's fraud claim. It does not matter what the documents said. Rather, as Justice Ramos correctly noted (R. at 38-39), DLJ relied on the very existence of these documents (and others contained in DLJ's loan files) as evidence that a legitimate closing took place, and title insurance would ultimately be procured in connection therewith. 36 They say DLJ would not have purchased the [95 Fraudulent Transactions] without a ... certificate of title. This has nothing to do with insurance policies. *** They are not alleging fraud of insurance policy; they are saying that the certificates of title appeared to be in good order, and, therefore, they thought these were legitimate transactions ... (R. at 38-39). In fact, DLJ concedes that, unbeknownst to it at the time it purchased the fraudulent mortgages, Doumazios intended not to procure a title insurance policy, and it now appears that no title insurance policy was ever issued (R. at 21) -- which is precisely why DLJ alleged a fraud, and not breach of contract, cause of action. (R. at 38-39). 10 Accordingly, the allegations in the Amended Complaint, at a minimum, are sufficient to raise questions of fact as to whether DLJ's reliance on the insurance- related and other documentation in the loan files, as well as the surrounding facts and circumstances, was reasonable. See, e.g., Swersky v. Dreyer and Traub, 219 A.D.2d 321, 327 (1st Dept. 1996) (reversing lower court's grant of dismissal 10 The Title Insurers rely on Mandor v. Lawyers Title Ins. Corp., 28 N.Y.2d 739, 741 (1971), for their argument that DLJ improperly relied on the title documentation in its loan files and that a commitment of title insurance is not evidence of coverage. In Mandor, which this Court has already distinguished from the facts presented in Meyerson, 39 A.D.2d at 192-93, the complaint was based on an alleged title insurance policy issued by the defendant title insurance company, not a fraud cause of action. The Court dismissed plaintiffs complaint since no policy had ever been issued. Here, as argued to the lAS Court and set forth herein, DLJ has not sued the Title Insurers on any policies, but, instead, has alleged a fraud cause of action based on, inter alia, the very absence of any such policies. 37 motion because the question of reasonable reliance "should not have been resolved as a matter oflaw"); Brunetti, 11 A.D.3d at 281; Talansky, 2 A.D.3d at 360-61. C. DLJ Conducted Due Diligence, And The So-Called "Red Flags" Do Not Prevent Recovery Finally, the alleged "red flags" upon which the Title Insurers rely for their argument that DLJ did not conduct proper due diligence are inconsequential since, as already mentioned, and as the lAS Court properly concluded, the question of DLJ's due diligence and reasonable reliance is a question of fact not properly determined on a motion to dismiss. See Country World, Inc., 186 A.D.2d at 782. Nevertheless, there is no question that DLJ has sufficiently pled its own due diligence so as to defeat the Title Insurers' motions -- because DLJ did conduct due diligence. First, DLJ relied upon the long-standing relationship between DLJ and Coastal. Indeed, DLJ alleges in the Amended Complaint that, by the time the co- conspirators sold the first fraudulent loan package to DLJ, they had already sold approximately 1,300 legitimate mortgage packages to DLJ. (R. at 289). These previous purchases, as well as the additional 400 loans that followed (including the 95 Fraudulent Transactions), were all purchased pursuant to the contract between DLJ and Coastal. (R. at 504-506). In that contract, Coastal made certain explicit representations and warranties, including, inter alia, that (a) all relevant laws were complied with, (b) the mortgages, notes and related documents were complete, 38 accurate, valid and enforceable, and constitute first-priority mortgage liens on the properties to which they relate, and (c) the loans complied with all underwriting standards. (R. at 505-506). New York law does not require DLJ to have taken any further or additional steps prior to purchasing the 95 Fraudulent Transactions. Indeed, the Court of Appeals has expressly stated that where, as here: a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred. In particular, where a plaintiff has gone to the trouble to insist on a written representation that certain facts are true, it will often be justified in accepting that representation rather than making its own inquiry. DDJ Mgmt, LLC v. Rhone Group LLC, 15 N.Y.3d 147, 154 (2010). See also Luna/ Realty, LLC v. DiSanto Realty, LLC, 88 A.D.3d 661, 664-65 (2d Dept. 2011) (plaintiffs raised triable issue of fact concerning reasonable reliance where "plaintiffs received negotiated assurances as to the accuracy of the [statements]"). DLJ, however, went well-beyond what was required of it under New York law, and conducted a significant amount of due diligence in a manner consistent with its internal policies and procedures, which conformed with the normal custom and practices of the mortgage industry at the relevant time. Specifically, DLJ alleges in its Amended Complaint that, after the closing of all residential mortgages which DLJ ultimately purchased on the secondary market (legitimate or not), a Coastal representative would sign onto DLJ's website known as "Credit 39 Suisse Connect. Your Connection to Wall Street," and input certain characteristics of the loan. DLJ quoted Coastal a price, and upon Coastal's acceptance, DLJ was obligated to purchase the loan at the locked price, subject to DLJ's satisfactory inspection and review of the loan file. (R. at 941 ). Coastal then sent the loan file to DLJ's fulfillment center ("Ocwen") for inspection and review. In those instances where Ocwen identified missing or incomplete documentation in the loan file, it alerted Coastal of the missing or incomplete documents and Coastal provided the requested documentation to Ocwen. (R. at 941 ). Additionally, prior to DLJ's purchase of any mortgage from Coastal, the documents comprising the collateral file were sent either by Ocwen or Coastal to DLJ's collateral custodian, LaSalle, which, in accordance with its contract with DLJ, reviewed the documents in the collateral file. (R. at 942). After LaSalle completed its review of each collateral file, it issued to DLJ a corresponding trust receipt, acknowledging, among other things, that the documents in the collateral file were complete and appeared regular on their face. DLJ did not purchase any loans from Coastal until it received LaSalle's trust receipt. (R. at 942). Moreover, John Michael (a key participant in the Mortgage Fraud Scheme who, as discussed above, also pled guilty to the same), stated that: [t]hese fraudulent loans would ultimately be sold into the secondary-mortgage market to a lender [DLJ, for example] who would be led to believe, based on the loan documentation provided by Kontogiannis' agent, that the 40 loan had been sent for recording and that all taxes and recording fees had been paid. (R. at 402). 11 The co-conspirators then issued more than one thousand fraudulent cover-up payments to give the appearance that the notes and mortgages were performing and valid. (R. at 839). Finally, as DLJ has repeatedly stated, and despite the Title Insurers' claims that a simple public records search would have revealed the fraud, because the secondary market for newly originated mortgages involved their sale/purchase shortly after the closing, and there was a significant lag before the mortgages were reflected in the public record, DLJ could not have discovered the non-recordation of the mortgages prior to funding the fraudulent transactions. (R. at 451 ). Although the reasonableness of DLJ's reliance is obvious, the 1ssue nevertheless raises questions of fact (which may even require expert testimony to 11 The Title Insurers claim that since some of the certificates of title are dated after the closing date indicated on the Form HUD-1, as a matter of law there is no "reasonable reliance." The fact remains, however, that given (a) all of the representations and warranties made by Coastal and the other co-conspirators, (b) the numerous documents in the loan files (including the certificates of title) that appeared legitimate on their face, and (c) the fact that the admitted purpose of the Mortgage Fraud Scheme was to create legitimate-looking documents to deceive DLJ, an occasional stray date on a single document in the loan file is hardly enough to place DLJ on inquiry notice of this massive and complex fraud and certainly is not enough (particularly under the circumstances of this case) to warrant dismissal, as a matter of law. See DDJ Mgmt, LLC, 15 N.Y.3d at 155 (New York law "do[ es] not support the interpretation that a duty to inquire is necessarily triggered as soon as a plaintiff has the slightest 'hints' of any 'possibility' of falsehood.") (internal citation and quotation omitted). In any event, it might well be the case that discovery will show that Ocwen and/or LaSalle followed up and received a reasonable explanation from Doumazios or his co-conspirators concerning the so-called discrepancy, if it is indeed a discrepancy at all. 41 resolve) not appropriately decided on a motion to dismiss. See, e.g., Talansky, 2 A.D.3d at 360-61; Swersky 219 A.D.2d at 327!2 12 Each of the cases, UST Private Equity Investors Fund, Inc. v. Salomon Smith Barney, 288 A.D.2d 87 (1st Dept. 2001), Stuart Silver Assocs. v. Baco Dev. Corp., 245 A.D.2d 96 (1st Dept. 1997), Schlaifer Nance & Co. v. Estate of Warhol, 119 F.3d 91 (2d Cir. 1997), and Duane Thomas LLC v. 62 Thomas Partners LLC, 300 A.D.2d 52 (1st Dept. 2002), cited by the Title Insurers concerning reasonable reliance are easily distinguishable. In each of these cases, it was clear that the plaintiffs did not conduct the necessary due diligence in order to verify the fraudulent statements or omissions of the defendants, even where the plaintiffs ( 1) were presented with a strong indication that the statements were in fact fraudulent or otherwise not disclosed, or (2) had an explicit contractual right to review the documents which the defendant based its statements on. In this case, DLJ's fulfillment center clearly conducted appropriate due diligence with respect to the loan documentation provided by the defendants, including Doumazios. Moreover, neither the Schlaifer, nor Stuart Silver courts dismissed the actions at the pleadings stage. Rather, in Schlaifer, the defendant's summary judgment motion was granted only after full discovery and a trial, and in Stuart Silver, this Court affirmed the lower court's grant of a motion for summary judgment after discovery was completed. 42 CONCLUSION The Title Insurers' agent, Doumazios, was acting within the scope of his apparent authority when he, along with his co-conspirators, committed the Massive Fraud Scheme against DLJ. Despite the numerous steps it took to protect itself, DLJ was duped into purchasing approximately $50 million of phony mortgages -- a result that would not have been possible without the knowing and active participation of their agent, whom they fully cloaked with authority but failed to adequately police. Therefore, and for all the foregoing reasons, Justice Ramos' decision denying the Title Insurers' motions to dismiss should be affirmed in its entirety. Dated: New York, New York August 7, 2012 Jo ato, Esq. obert J. Malatak, Esq. ie Power, Esq. 488 Madison Avenue New York, New York 10022 (212) 478-7200 Attorneys for Plaintiff-Respondent DLJ Mortgage Capital, Inc. dismissed the actions at the pleadings stage. Rather, in Schlaifer, the defendant's summary judgment motion was granted only after full discovery and a trial, and in Stuart Silver, this Court affirmed the lower court's grant of a motion for summary judgment after discovery was completed. ---- 43 APPELLATE DIVISION- FIRST DEPARTMENT PRINT SPECIFICATIONS STATEMENT I hereby certify pursuant to 22 NYCRR § 600.10 that the foregoing brief was prepared on a computer using Microsoft Word. Type. A proportionally spaced typeface was used, as follows: Name of typeface: Times New Roman Point size: 14 Line Spacing: Double Word Count. The total number of words in this brief, inclusive of point headings and footnotes and exclusive of pages containing the table of contents, table of citations, proof of service and this statement is 9,452. Dated: New York, NY August 7, 2012 _,.-·-- ! P. mato, Esq. ert J. Malatak, Esq. ie Power, Esq. 488 Madison Avenue New York, New York 10022 (212) 478-7200 Attorneys for Plaintiff-Respondent DLJ Mortgage Capital, Inc.