DLJ Mortgage Capital, Inc., Appellant,v.Thomas Kontogiannis, et al., Defendants, Chicago Title Insurance Company, Inc., et al., Respondents.BriefN.Y.Nov 13, 2013HAHN& HESSEN July 26, 2013 Hahn & Hessen LLP 488 Madison Avenue, New York, NY 1 0022 T 212.478.7200 F 212.478.7400 hahnhessen.com By FedEx Overnight Delivery Judges of the Court of Appeals New York State Court of Appeals 20 Eagle Street Albany, New York 12207 Re: DLJ Mortgage Capital, Inc. v. Kontogiannis, eta/. APL-2013-00138 Trial Court Index No.: 104675/2010 Your Honors: John P. Amato 212.478.7380 email@example.com Plaintiff-Appellant DLJ Mortgage Capital, Inc. ("DLJ") respectfully submits the following written arguments in support of its position, pursuant to Rule 500.1l(c) of this Court's Rules of Practice. DLJ also adopts and fully incorporates herein all arguments raised in its (1) brief to the Appellate Division, First Department (the "First Department"), and (2) motion for reargument, or, alternatively, leave to appeal to this Court, which have also been provided to this Court. DLJ respectfully requests that this Court reverse the decision and order of the First Department, dated January 15, 2013 (the "Order"), and reinstate the Supreme Court's order denying the motions to dismiss by Defendants-Respondents Chicago Title Insurance Company, Inc. and United General Title Insurance Company, Inc. (collectively, the "Title Insurers"), and allow DLJ's action to proceed. PRELIMINARY STATEMENT This is an appeal from a decision misapplying the fundamental principles of New York's principal/ agency law, as most recently articulated by this Court in Kirschner v. KPMG LLP, 15 N.Y.3d 446 (2010), to relatively straightforward facts. The facts, which must be accepted as true since this appeal involves the Title Insurers' motions to dismiss, are, nevertheless, not in dispute. 1 · The defendants below, including convicted felon and disbarred attorney Ted Doumazios (acting through his abstract company ClearView Abstract LLC (collectively, "Doumazios")), built a criminal enterprise - complete with corrupt duly authorized title agents, lawyers, bankers, appraisers, and straw buyers (among others) - who controlled every aspect of the residential mortgage origination process in order to defraud DLJ and its co-victim Washington Mutual Bank, N.A. ("WaMu") (now in FDIC receivership) (the "Mortgage Fraud Scheme"). According to United States District Court Judge Kiyo A. Matsumoto, who presided over the related federal criminal proceedings that resulted in ten Capitalized terms undefined herein shall have the same meaning ascribed to them in DLJ's Respondent's brief to the First Department. HAHN& HESSEN July 26, 2013 Page 2 (10) criminal convictions (including Doumazios') and the entry of $98 million restitution orders in DLJ and the FDIC's favor, the Mortgage Fraud Scheme is the largest mortgage origination fraud on record. (R. 367, 788). 2 This incredibly far reaching and complex criminal enterprise (which required each participant's knowing involvement) could not have succeeded without Doumazios' participation through his role as the Title Insurers' actual, authorized title agent since, without this actual, authorized agency relationship, Doumazios would not have been able to hold himself out as the Title Insurers' agent (as they authorized him to do) and produce to DLJ the Title Insurers' own title insurance documentation (which they provided to him and authorized him to produce). (R. 432-33, 591, 650, 703, 738-40, 815). DLJ's Amended Complaint, dated September 10, 2010, focuses on the fact that Doumazios, and the vast criminal enterprise that he knowingly joined, represented to DLJ that the Title Insurers (1) duly certified, in accordance with industry custom, practice, and usage, that an examination of title to the land had been properly undertaken, with the results expressly set forth in the written title certifications that were in each mortgage loan file at issue, and, more importantly, (2) committed to issue a title insurance policy in the future (a representation that is also consistent with industry custom, practice, and usage), upon which DLJ foreseeably and justifiably relied when it purchased the fraudulent mortgage packages at issue (the "Fraudulent Mortgage Packages").3 (R. 591, 650, 703, 740). It was these false title certifications and false commitments to issue policies in the future, and, among other things, the representations on standard written closing documents that are the actionable fraudulent representations upon which DLJ foreseeably and reasonably relied. Nonetheless, the First Department, in reversing the Supreme Court's order denying the Title Insurers' motions to dismiss, concluded that the Title Insures are not liable for their agent's felonious conduct under the apparent authority doctrine because there is supposedly no allegation of any "misleading" conduct by the Title Insurers that was directed at DLJ since DLJ never directly dealt with the Title Insurers. The First Department further concluded that, as a matter of law, DLJ cannot show justifiable reliance since DLJ's loan flle documents did not show that title insurance policies were issued in connection with the Fraudulent Mortgage Packages. Respectfully, the First Department's conclusions were wrong. References to "R. _"refer to the page number(s) of the Record on Appeal. All references to the Amended Complaint apply equally to DLJ's third amended complaint, which was served and fJJ.ed after the Title Insurers made their motions to dismiss and filed their notices of appeal to the First Department. The third amended complaint contains identical allegations as the Amended Complaint, to which the Title Insurers' motions were directed, and asserts identical claims against the Title Insurers. While the third amended complaint adds new defendants and new claims against those defendants, those new claims and allegations have no bearing on DLJ's claims against the Title Insurers, which remain unchanged. Accordingly, DLJ respectfully submits that any ruling on this appeal regarding the sufficiency of the Amended Complaint should apply equally to the third amended complaint. HAHN& HESSEN July 26, 2013 Page 3 First, Doumazios was, pursuant to written agency agreements, the Title Insurers' actual, authorized agent before, during, and after the Mortgage Fraud Scheme and they expressly authorized Doumazios to, among other things, hold himself out to the world (including DLJ) as their agent, and to prepare title certificates and issue title commitments to any third- party (including DLJ) using the Title Insurers' official forms that they provided to him- forms bearing the Title Insurers' respective names, certification seals, and President and Secretary's signatures. (R. 591, 650, 703, 740, 743, 815). By this conduct, which unquestionably was directed at DLJ given that it was a third-party with whom the Title Insurers authorized and necessarily anticipated Doumazios would deal, the Title Insurers' cloaked Doumazios with apparent authority to hold himself out as their agent in connection with the Mortgage Fraud Scheme and issue the false title certifications and commitments contained in the Fraudulent Mortgage Packages. Second, the First Department's conclusion that DLJ cannot show justifiable reliance, as a matter of law, is also incorrect. The fact that title insurance policies had not been issued as of the time DLJ purchased the Fraudulent Mortgage Packages (which was shortly after the sham closings and, thus, at a time when the Title Insurers' own title documentation suggests, consistent with industry custom, practice, and usage, that an insurance policy would not typically have been issued even in legitimate transactions), or, for that matter, any time after the closing, is irrelevant since DLJ is not suing on a title insurance policy. Rather, DLJ is suing on the fact that it relied upon false title certifications and commitments to issue policies that Doumazios completed with the specific and admitted-to intention of defrauding DLJ in furtherance of his role in a criminal conspiracy, causing DLJ to suffer massive damages. Moreover, DLJ's reliance was absolutely reasonable under the circumstances since, in addition to Doumazios' role as the Title Insurers' actual, authorized agent, who was expressly authorized by the Title Insurers to hold himself out as such and complete the official forms they provided to him for purposes of executing in connection with residential mortgage closings and then providing same to foreseeable end-users such as DLJ, DLJ also relied upon numerous other misrepresentations made in connection with this massive conspiracy-based scheme, which involved dozens of individuals and entities and included the creation of and delivery to DLJ of all of the usual and customary closing documents, all of which turned out to be fraudulent - a fact concealed from DLJ for years by thousands of cover-up mortgage payments that the co-conspirators made to avoid early payment defaults on the fraudulent mortgages. (R. 384-94, 401-08, 412-16, 421, 441-45, 449-63, 788). Accordingly, the First Department's Order dismissing DLJ's complaint against the Title Insurers must be reversed in its entirety, and DLJ must be allowed to press forward with its claims. HAHN& HESSEN July 26, 2013 Page4 STATEMENT OF FACTS The facts relevant to this appeal are detailed in DLJ's Respondent's Brief to the First Department, and throughout the Record on Appeal. For convenience and brevity, DLJ incorporates the relevant facts in the Argument section below. PROCEDURAL HISTORY On April 9, 2010, DLJ commenced this action in Supreme Court, New York County, Commercial Division (Ramos, J.) alleging claims for, inter alia, fraud against the Title Insurers. (R. 72-195). On or about September 10, 2010, DLJ filed its Amended Complaint, which contains the allegations giving rise to DLJ's fraud claims against the Title Insurers. Thereafter, the Title Insurers moved to dismiss DLJ's Amended Complaint under CPLR §§ 3211(a)(1) and (7). The Supreme Court appropriately focused on (1) the actual, authorized agency relationship between Doumazios and the Title Insurers, pursuant to which the Title Insurers authorized Doumazios to hold himself out to the world (including DLJ) as their actual, authorized agent, and to make representations and certifications on their behalf, and (2) the Commitments, Recertification Commitments and accompanying cover "jackets" and other documents bearing the Title Insurers' names, certifications, and officer signatures that they provided to Doumazios and authorized him to execute and deliver to third-parties in the mortgage industry (such as DLJ) on their behalf, and appropriately denied the Title Insurers' motions to dismiss. (R. 12-71). The Title Insurers then appealed the Supreme Court's ruling. (R. 1-11). Pursuant to the Order, the First Department reversed the Supreme Court's decision holding that: (1) the doctrine of apparent authority does not apply to impute liability to the Title Insurers; and (2) DLJ cannot show justifiable reliance as a matter oflaw. DLJ timely moved for reargument, or, alternatively, leave to appeal to this Court. By order dated May 30, 2013, the First Department granted DLJ leave to appeal. ARGUMENT I. THE TITLE INSURERS ARE LIABLE FOR THE ACTS OF THEIR ACTUAL AGENT UNDER THE DOCTRINE OF APPARENT AUTHORITY 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.4 When suing on the basis of apparent authority, a plaintiff must "prove that the principal created the appearance of authority on which the plaintiff reasonably relied, See Parlato v. Equitable Life Assurance Soc. of U.S., 299 A.D.2d 108, 112-114 (1st Dep't 2002). HAHN& HESSEN July 26, 2013 PageS thereby enabling the agent to successfully perpetrate the tort." Parlato, 299 A.D.2d at 114. Here, the facts fit squarely within this standard, and, accordingly, the First Department's Order should be reversed. A. The Title Insurers Created The Appearance That Doumazios Was Authorized To Act On Their Behalf In Connection With The Fraudulent Mortgage Packages At all relevant times, an actual, authorized agency relationship existed between Doumazios and the Title Insurers. (R. 743, 815). Under the express terms of the written agency agreements, the Title Insurers authorized Doumazios to act as their agent and hold himself out as such to the world, and, in doing so, appear at closings, collect title insurance premiums, and issue on the respective Title Insurer's behalf, among other things, those documents that the Title Insurers provided to Doumazios (which bore their respective names and certifications) in order to fulfill his agency role, including, (1) the Commitment, which expressly states that the insurer certifies that the examination of the land title was properly conducted and is committed to issuing a policy in the future (R. 703, 739-40), and/ or (2) the Recertification Commitment, which is a recertification or mark-up of the Commitment. (R. 432-33, 738-40). Significantly, this is precisely the conduct that Doumazios performed in connection with the Fraudulent Mortgage Packages. Unfortunately, and unbeknownst to DLJ at the time, Doumazios performed his duties and fulfilled his agency obligations in a fraudulent manner. Accordingly, the question of the type and extent of conduct by the Title Insurers - beyond authorizing Doumazios to act as their actual agent and actually placing him in a position to so act in connection with the Fraudulent Mortgage Packages -is, quite frankly, irrelevant. 5 Indeed, DLJ is unaware of any New York case (or any case, for that matter) in which a principal escapes liability for the fraud of its actual, authorized agent where said agent committed the fraud while performing, and in connection with, the precise type of conduct and actions contemplated by the agency agreement, regardless of the nature and extent of the principal's actions, conduct and/ or representations to the victim. 6 6 In re Liquidation of Nat'! Sur. Co., 162 Misc. 344, 345 (Sup. Ct., N.Y. Co. 1937) (holding a surety liable for the fraud committed by its actual, authorized agent while said agent was performing the exact type of conduct which was "customary" to, and contemplated by, the agency agreement, noting that, because of the surety principal's acts, the agent "was clothed with the apparent authority" to perform the exact types of actions that were at issue (albeit, not fraudulently), since the principal put the agent in the position to make such statements and representations, and fully expected him to do so in his normal course of business). Cj Id.; Kirschner, 15 N.Y.3d at 465-66 ("When corporate officers carry out the everyday activities central to any company's operation and well-being - such as ... handling customer accounts ... and entering into contracts - their conduct falls within the scope of their corporate authority ... [and] ... everything they know or do is imputed to their principals.") (citations omitted). HAHN& HESSEN July 26, 2013 Page 6 Nonetheless, there is no question that the Title Insurers, in fact, did take certain actions sufficient to cloak Doumazios with the necessary apparent authority, upon which DLJ reasonably relied. Indeed, because DLJ (particularly in light of its prominence in the residential mortgage industry) was included among the pool of persons with whom the Title Insurers expressly authorized and necessarily anticipated Doumazios to deal, such express authorization absolutely constitutes conduct by the Title Insurers that was directly aimed at DLJ which created the appearance that Doumazios was· authorized to act in connection with the Fraudulent Mortgage Packages. 7 Further, in order for Doumazios to fulflll his actual agency role, the Title Insurers took the additional overt steps of issuing to him Commitments, Recertification Commitments, and related cover "jackets" that accompany these documents. (R. 591, 650, 738). These documents (which are signed by the respective Title Insurer's President and Secretary (R. 591, 650, 739)) bear all of the relevant information and certifications of the issuing Title Insurer and Doumazios, who is expressly identified therein as the respective issuing Title Insurer's actual, authorized agent for purposes of completing these documents at a residential mortgage closing, including (among other certifications) the accuracy and validity of the accompanying title report, and the conditions under which the respective Title Insurer committed to insure in the future. (R. 739-40). 8 All of the Commitments and Recertification Commitments in DLJ's loan flies appeared to be in good order and expressly indicated that any questions concerning same should be directed to Doumazios, not the Title Insurers. (R. 747, 822). These steps, which were consistent with industry practice, were specifically intended by the Title Insurers to communicate directly to a reasonable person that Doumazios had the authority to act on the Title Insurers' behalf, which he did.9 Thus, when the Title Insurers gave the Commitments, Recertification Commitments and signed cover "jackets" to Doumazios and authorized him to complete the same and deliver them to anyone in connection with a New York real estate transaction, which by definition included DLJ, this constituted additional conduct by the Title Insurers which was directly See Meyerson v. Lawyers Title Ins. Corp., 39 A.D.2d 190, 192 (1st Dep't 1972), affd, 33 N.Y.2d 704 (1972) ("A reasonable person would be warranted in believing that he was dealing with the [title insurer]" where the 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); William A. Gregory, The Law of Agency & Partnership§ 23, at 69 (3d ed. 2001) ("[I]t must be emphasized that the agent cannot create authority by his own representations of authority, unless these representations are authorized by the principal.") (emphasis added). See generally 1-14 New Appleman New York Insurance Law§ 14.05 (discussing the contents, issuance and effects of Commitments by an abstract agent on behalf of a title insurance company). See Meyerson, 39 A.D.2d at 192; In re Liquidation of Nat'! Sur. Co., 162 Misc. at 345 (principal liable for agent's fraud based on apparent authority where principal provided relevant documents to agent to deliver to third-parties and, in the course of so delivering, the agent made fraudulent misrepresentations upon which the third-party victim relied). HAHN& HESSEN July 26, 2013 Page 7 aimed at DLJ and which created the appearance that Doumazios was authorized to act in connection with the Fraudulent Mortgage Packages. 10 Finally, Doumazios' participation in a fraud does not excuse liability, nor does the fact that the Title Insurers did not authorize and were supposedly unaware of Doumazios' participation in the Mortgage Fraud Scheme, since it is well-settled that, as between a principal and an innocent third-party (such as DLJ), the principal must bear the loss of its agent's fraud11 since the principal (and not an innocent third-party victim) bears the burden of policing and controlling its agent's conduct. 12 B. At A Minimum, The Question Of Apparent Authority Is A Factual One That Should Not Be Decided At The Motion To Dismiss Stage Although DLJ's allegations contained in the record make it clear that Doumazios was acting within the apparent authority which the Title Insurers afforded him, at a minimum, DLJ's allegations concerning same raise a material issue of fact, not appropriately determined at the pre-answer motion to dismiss stage. 13 Accordingly, the Order should be reversed. 10 11 12 13 See Meyerson, 39 A.D.2d at 192-93. See, e.g., Kirschner, 15 N.Y.3d at 465 (holding that a principal can, and should, be held liable for its agent's fraud against an innocent third-party since the corporate principal acts solely through its agents, and therefore, "must be responsible for the acts of its authorized agents even if the particular acts were unauthorized."); Meyerson, 39 A.D.2d at 192-93; In re Liquidation of Nat'! Sur. Co., 162 Misc. at 346; Gardi v. Jana Partners LLC (In 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 the agent's fraud). If the Title Insurers really wanted to police Doumazios, as this Court suggests they do to reduce their potential for liability, it would have been a very simple matter for the Title Insurers to have, among other things, included on their form documents a disclaimer of liability and/ or directed that any questions be directed to themselves, rather than Doumazios. See Kirschner, 15 N.Y.3d at 465 ("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, which at least in part explains why the common law has traditionally placed the risk on the principal."); Meyerson, 39 A.D.2d at 192 (noting that, "if [the principal title company] did not regard [its agent] as its duly authorized agent to represent it with clients, then it would have been a relatively simple matter for [the principal] to print a warning on the title report to the effect that any transaction of business with [the title agent] did not bind [the principal]" and holding the principal liable for the agent's fraud since, inter alia, there was "no such warning."). See, e.g., Gilbert Frank Corp. v. Fed. Ins. Co., 91 A.D.2d 31, 37 (1st Dep't 1983); Aarons Fifth Avenue, Inc. v. Ins. Co. ofN. Am, 52 A.D.2d 855, 855 (2d Dep't 1976). HAHN& HESSEN July 26, 2013 Page 8 II. DLJ JUSTIFIABLY RELIED ON THE MISREPRESENTATIONS MADE BY DOUMAZIOS AND HIS CO-CONSPIRATORS The First Department's conclusion that, as a matter of law, DLJ cannot show justifiable reliance since DLJ's loan files "did not show that title insurance policies had in fact been issued in connection with the [F]raudulent [M]ortgage [P]ackages ... " is incorrect, since it misconstrues DLJ's allegations, and unfairly ignores the full scope of this massive fraud. A. Doumazios Made Materially False Representations As Part Of The Ongoing Conspiracy. Upon Which DLJ Justifiably Relied At the outset, DLJ recognizes (and has always readily admitted (R. 21)) that no title insurance policies were issued, but that fact has absolutely no relevance here since DLJ has not sued for breach of contract arising from a purported insurance policy, but, rather, its claim is one in fraud arising from the Mortgage Fraud Scheme. 14 This fact was not lost on the Supreme Court, which succinctly explained: (R. 38-39). 15 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. *** They say DLJ would not have purchased the [Fraudulent Mortgage Packages] 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 ... In support of its fraud claim, DLJ alleges that it relied on the Commitments and Recertification Commitments and related signed cover "jackets", which turned out to be 14 See Meyerson, 39 A.D .2d at 192-93 (the fact that no title insurance policy was issued does not preclude plaintiffs fraud claim where the claim is "based upon the submission of a false title report to the plaintiffs by the agent, resulting in damages to plaintiffs. It is not based upon a title policy ... "). 15 See also Meyerson, 39 A.D.2d at 192-93. HAHN& HESSEN July 26, 2013 Page 9 fraudulent. It is these documents (which the Title Insurers created and provided to Doumazios so he could perform his agency duties), that contained the inaccuracies and material misrepresentations that Doumazios admitted to making in order to defraud financial institutions such as DLJ. (R. 788). DLJ's Amended Complaint is fllled with allegations, based upon evidence in admissible form (including Doumazios' plea elocution in the related Criminal Proceeding), reflecting Doumazios' numerous material misrepresentations in connection with his role and involvement as the title representative in the Mortgage Fraud Scheme, including that (1) each of the subject properties had clear, good, and marketable record title, (2) the deeds and mortgages would be recorded, (3) DLJ would have a first priority mortgage lien, ( 4) title insurance would be procured for the properties that are the subject of the Fraudulent Mortgage Packages, as evidenced by the insurance-related documents, such as the Commitments to issue title insurance and/ or Recertification Commitments, and (5) the monies received for insurance premiums (as reflected in the Form HUD-1s) would be remitted to the Title Insurers. (R. 430-34). 16 DLJ learned years later that all of these representations were part of the fraud. Thus, regardless of whether the title documentation prepared by Doumazios was accurate (which it was not), the very existence of these documents caused DLJ to reasonably believe that a legitimate closing occurred and that the Title Insurers certified the accuracy of the title examination and had committed to issue insurance policies in the future. Accordingly, DLJ's justifiable reliance is obvious. B. Doumazios' Co-Conspirators Made Materially False Misrepresentations Which Are Imputed To Doumazios (And The Title Insurers) Based On DLJ's Conspiracy-Based Fraud Claim. And Upon Which DLJ Relied In addition to the numerous misrepresentations made by Doumazios (and the Title Insurers) in the Commitments and Recertification Commitments and related cover "jackets", this massive scheme involved literally dozens of false representations made by numerous individuals and entities involved therein. Respectfully, this Court must view all of these statements collectively, and in their proper context of this massive conspiracy. The record shows, and the co-conspirators have admitted, that the Mortgage Fraud Scheme involved individuals and entities at every stage of the mortgage origination process (R. 384- 94, 401-08, 412-16, 421, 788), and the very pwpose behind the scheme was for each of the co- conspirators to fulflll his/her/its role to create, execute, and disseminate into the market all of the documents necessary in connection with a residential mortgage/ sale transaction, so as to make DLJ (the intended victim) believe that it was purchasing legitimate, performing loans, having first-priority lien status. (R. 441-45, 449-63). Each one of the co-conspirators 16 See generally 1-14 New Appleman New York Insurance Law§ 14.05. HAHN& HESSEN July 26, 2013 Page 10 knew of this criminal purpose and intended to (and did) take actions in furtherance of that purpose. 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. 788). Further, several of Doumazios' co-conspirators have also admitted to knowingly making false representations to DLJ and WaMu, with the specific intent to defraud these institutions. (R. 403). Just as the co-conspirators intended, DLJ relied upon all of the usual and customary documents that are prepared, executed, and exchanged in connection with the typical residential real estate closing taking place daily in hundreds of conference rooms throughout this state (R. 401-02), but, unfortunately for DLJ, the documents it actually relied upon - the Fraudulent Mortgage Packages - were fraudulent. 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, Doumazios (and, in tum, the Title Insurers) is charged with all of the wrongful acts of every one of his dozens of co-conspirators since it is well-settled that, under New York law, each member of a conspiracy is liable for the acts of the whole when defendants conspired to develop an intricate pattern of fraud which requires the participation of each particular defendant. 17 C. DLJ's Justifiable Reliance Is. At The Very Least. A Question Of Fact Although DLJ's reliance on the numerous indicia of legitimacy and title was undoubtedly reasonable, DLJ respectfully submits that the question of justifiable reliance is inherently a question of fact that the First Department should not have summarily decided on a pre- answer motion to dismiss. 18 DLJ respectfully submits that, in light of the thousands of misrepresentations made by Doumazios and his co-conspirators in connection with this massive fraud of at least two financial institutions that has resulted in ten (10) criminal convictions and $98 million restitution orders entered in DLJ and the FDIC's favor, there is, at the very least, a question of fact concerning DLJ's reasonable reliance. Accordingly, the First Department's Order dismissing DLJ's action against the Title Insurers should be vacated and DLJ's claims against them reinstated. 17 See, e.g., Am. Transit Ins. Co. v. Faison, 242 A.D.2d 201 (1st Dep't 1997); Anesthesia Assocs. of Mount Kisco LLP v. N. Westchester Hasp. Ctr., 59 A.D.3d 473, 479 (2d Dep't 2009). 18 See Brunetti v. Musallam, 11 A.D.3d 280, 281 (1st Dep't 2004); Talansky v. Schulman, 2 A.D.3d 355, 360-61 (1st Dep't 2003). HAHN& HESSEN July 26, 2013 Page 11 III. UNLESS THIS COURT REVERSES THE FIRST DEPARTMENT'S ORDER, ITS IMPACT WILL HAVE DAMAGING CONSEQUENCES WELL BEYOND THE INSTANT ACTION Fundamental to New York's law of agency is the concept that "the acts of agents, and the knowledge they acquire while acting within the scope of their authority are presumptively imputed to their principals." Kirschner, 15 N.Y.3d at 465 (citing Henry v. Allen, 151 N.Y. 1, 9 (1896); Craigie v. Hadley, 99 N.Y. 131 (1885)). This presumption of imputation "does not depend on a case-by-case assessment of whether this is likely to happen. Instead, it is a legal presumption that governs every case, except where the corporation is actually the agent's intended victim," (id. at 466 (internal citations omitted)), and "agency law presumes imputation even where the agent acts less than admirably, exhibits poor business judgment, or commits fraud." Id. at 465 (citing Price v. Keyes, 62 N.Y. 378, 384-85 (1875)). Given this most fundamental rule, New York law has never before permitted a principal to escape liability for the fraud committed by its actual, authorized agent during the pendency of the agency relationship, and while performing the exact conduct contemplated by all parties, including the principal, agent, and third-parties. The First Department's Order, if not vacated, will allow the title insurance industry to wholly immunize itself from liability whenever it conducts business with the general public through an authorized agent, which is the primary way it conducts its business. 19 Accordingly, public policy favors preserving DLJ's claims, because they are the only viable means under New York law of holding the Title Insurer principals liable for this massive fraud, which could not have been committed absent their principal! agent relationship with Doumazios. IfDLJ, or other similarly situated victims, cannot bring such claims, then any principal who commonly chooses to conduct its business with the general public through an agent (e.g., the Title Insurers) would effectively be granted immunity for the agent's actions taken in connection with and/or in furtherance of this agency relationship, threatening to turn the most basic tenants of principal/agency law on their head, and placing the risk of loss on innocent third-party victims instead of the principal, where it rightfully belongs. Notably, the strong public policy interests to maximize diligence on the part of the principal and thwart fraud and other malfeasance by its agent, which are the very underpinning of New York principal/agency law, as reaffirmed in Kirschner,Z0 are best fostered and 19 See, e.g., 1-14 New Appleman New York Insurance Law § 14.03 ("Title Insurance corporations often conduct business through agents"); James M. Pedowitz, Title Insurance: What Every New York Lawyer Should Know, in Real Estate Titles § 27.6 (N.Y.S.B.A., 3d ed. 2007) (discussing the business of title insurance companies, and noting that such business is, more often than not, conducted through abstract agents). 20 "[W]e have held for over a century that all corporate acts- including fraudulent ones- are subject to the presumption of imputation . . . [and] . . . there are strong considerations of public policy underlying this HAHN& HESSEN July 26, 2013 Page 12 effectuated by holding the principal Title Insurers liable for the fraud committed upon DLJ (an innocent third-party victim) by their agent, convicted felon and disbarred attorney Doumazios. CONCLUSION For the foregoing reasons, and for the reasons set forth in DLJ's submissions to the First Department, DLJ respectfully requests that this Court reverse the First Department's Order and reinstate the Supreme Court's order denying the Title Insurers' motions to dismiss. Additionally, although DLJ does not at this time object to the Court's decision to proceed with Section 500.11 review, given the importance of the issue presented here and the First Department's deviation from the well-established principles of principal/agency law, DLJ respectfully requests permission to file a reply letter in further support of its written arguments set forth herein. precedent: imputation fosters an incentive for a principal to select honest agents and delegate duties with care." 15 N.Y.3d at 466 DISCLOSURE STATEMENT PURSUANT TO 22 NYCRR SOO.l(f) Pursuant to 22 NYCRR 500.1(£), DLJ Mortgage Capital, Inc. ("DLJ"), by and through its undersigned attorneys, provide as follows : DLJ is a wholly-owned subsidiary of Credit Suisse (USA), Inc. Credit Suisse (USA), Inc. is a wholly-owned subsidiary of Credit Suisse Holdings (USA), Inc., which is jointly owned by Credit Suisse and Credit Suisse Group. Credit Suisse is a wholly-owned subsidiary of Credit Suisse Group. 488 Madison Avenue New York, New York 10022 (212) 478-7200 Attorneys for Plaintiff-Appellant DLJ Mortgage Capital, Inc.