Court Opinion

ID: 9401452
Source: CourtListenerOpinion
Date Created: 2023-06-13 13:06:07.76249+00
Date Added: 2024-06-11T17:19:52.840946
License: Public Domain

State of New York                                                      OPINION
Court of Appeals                                        This opinion is uncorrected and subject to revision
                                                          before publication in the New York Reports.

 No. 52
 The Moore Charitable Foundation,
 et al.,
          Appellants,
       v.
 PJT Partners, Inc., et al.,
          Respondents,
 et al.,
          Defendant.

 Stephen Shackelford, Jr., for appellants.
 Aidan Synnott, for respondents.

 CANNATARO, J.:

        On this appeal, we assess the sufficiency of a cause of action pleaded against an

 investment bank for its negligent supervision and retention of an employee. Plaintiffs—a

 charitable foundation and its affiliate—allege that defendants’ negligent supervision of

                                             -1-
                                             -2-                                       No. 52

their employee resulted in him defrauding them of $25 million under the guise of his

employment, as part of a scheme to cover up mounting personal trading losses and

embezzlements.

       We hold that it was error to dismiss plaintiffs’ negligence claim at the pleading

stage. Contrary to the lower courts’ conclusions, the complaint adequately alleged that

defendants were on notice of the employee’s propensity to commit fraud prior to his

interactions with plaintiffs and their resulting losses. Nor can we agree that defendants’

duty of supervision ran only to their “customers.” We accordingly reverse the order of the

Appellate Division and reinstate plaintiffs’ claim.

                                              I.

       When reviewing a motion to dismiss for failure to state a claim, a court must give

the complaint a liberal construction, accept the allegations as true, and, providing plaintiffs

with the benefit of every favorable inference, examine the adequacy of the pleadings (see

Cortlandt St. Recovery Corp. v Bonderman, 31 NY3d 30, 38 [2018]; AG Capital Funding

Partners, L.P. v State St. Bank & Trust Co., 5 NY3d 582, 591 [2005]; Goshen v Mut. Life

Ins. Co., 98 NY2d 314, 326 [2002]). “Whether a plaintiff can ultimately establish its

allegations is not part of the calculus in determining a motion to dismiss” (EBC I, Inc. v

Goldman, Sachs & Co., 5 NY3d 11, 19 [2005]). We therefore accept the following

allegations as true for purposes of this appeal.

       Defendants PJT Partners, Inc. (PJT) and Park Hill Group, LLC (Park Hill) are,

respectively, an investment bank and a division thereof which provides global alternative

asset advisory and fundraising services. In 2013, Park Hill hired Andrew Caspersen to

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                                             -3-                                       No. 52

manage its “secondaries” business, which involved “facilitating the purchase, sale, or

restructuring of ownership interests in certain kinds of investment vehicles, such as private

equity or hedge funds” (Compl. ¶ 17). Caspersen was hired primarily to start a new

business line focusing on “fund recapitalization” work, specifically by “representing

private equity fund managers who were interested in offering liquidity to their investors”

(id. ¶ 18).

       In furtherance of that goal, defendants gave Caspersen significant authority. They

authorized him to solicit potential clients over telephone and email, to use defendants’

brand names and resources to market their services, and to engage with clients throughout

the solicitation and negotiation process. Indeed, defendants encouraged Caspersen to act

as the primary or sole point of contact for clients on his deals, including with respect to the

transmission of invoices. Caspersen was also given access to virtual data rooms in which

defendants stored confidential documents related to their deals.

       Caspersen was a successful and high-performing employee who brought in a

substantial amount of work for defendants. Over time, however, Caspersen began to

display signs of “dangerous and destructive behaviors” (id. ¶ 25). For example, he would

engage in “excessive high-risk securities trading” from personal accounts during work

hours, and “would obsessively monitor his positions, often checking the value of his

holdings every few minutes . . . using a variety of devices, including the computer and/or

communication devices supplied to him by” defendants (id. ¶ 26). Caspersen also allegedly

“began drinking to excess during the work day,” meaning that he would frequently

“arriv[e] at the office in the morning only after having consumed one or more Bloody

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                                            -4-                                      No. 52

Marys,” “typically consume 10 to 15 alcoholic drinks each day, mostly during business

hours,” and hold meetings with colleagues while inebriated (id. ¶ 27).

       Nonetheless, in 2014, Caspersen landed a major deal for defendants involving the

recapitalization of a private equity fund managed by Irving Place Capital (Irving Place).

Defendants’ role in the transaction was to find a new investor interested in buying out the

fund’s existing equity holders. Caspersen pitched the opportunity to Coller Capital, which

agreed to serve as the lead buyer in the transaction at a price of $500 million. The

transaction closed in August 2015, at which time Irving Place was to pay defendants a deal

fee of $8.1 million. When the time came, however, Caspersen intercepted and diverted

that fee to himself. He did so by sending a fake Park Hill invoice to Irving Place, directing

that company to transfer the fee into an account created and controlled solely by Caspersen.

Irving Place followed those instructions and paid the fee to Caspersen’s account.

Caspersen used the stolen $8.1 million fee to purchase securities on his personal account,

which promptly lost all of their value.

       One month after the closing, in September 2015, employees from defendants’ “back

office” asked Casperson about the missing fee. Caspersen falsely responded that the fee

would not be paid until a “stub closing” was complete.1 The complaint pleads that

defendants “knew or should have known” that this explanation was false because they were

1
  As explained in the complaint, Caspersen meant that “while most of the interests in the
Irving Place fund had already been paid for and transferred in a primary closing, a ‘stub’
portion of the interests had not yet been paid for and transferred but would be in connection
with a second, smaller ‘stub’ closing” (Compl. ¶ 34).
                                            -4-
                                             -5-                                       No. 52

“handling the Irving Place transaction, and knew or should have known that there was no

stub closing on the deal” (id. ¶ 35). The complaint further pleads that Caspersen’s

explanation was “implausible and transparently false” because “[t]ypically, when there was

a stub closing on a deal, which was rare, [defendants] would nevertheless receive [their]

fee in connection with the primary closing” and only a “pro rata portion of the fee,

attributable to the undisclosed ‘stub’ part of the deal” would be deferred in connection with

the stub closing (id. ¶¶ 36-37). Nonetheless, defendants did not challenge Caspersen’s

explanation or immediately inquire further about the delayed payment.

       Caspersen understood that as the end of the year approached, defendants would

likely insist on receiving the $8.1 million fee; accordingly, he devised a scheme to obtain

replacement funds from plaintiff The Moore Charitable Foundation (the Foundation) and

use them to pay what defendants were owed. In October 2015, Caspersen contacted the

Foundation “using a legitimate PJT email address” and offered it “an opportunity to invest

in a security with a risk-free 15% rate of return” (Compl. ¶ 41).              In subsequent

communications, Caspersen told the Foundation that the opportunity related to the Irving

Place transaction, which he falsely stated had not yet closed. More specifically, Caspersen

“claimed that he was syndicating an $80 million loan that he had agreed to make to Coller

Capital in order to help facilitate the closing of the transaction,” and that he was soliciting

investors in that financing (id.). To support the validity of the transaction, Casperson used

his PJT email account to send the Foundation a real annual financial report for Irving Place,

obtained from defendants’ data room, which bore a Park Hill watermark. The Foundation

ultimately agreed to contribute $25 million in financing.

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                                            -6-                                      No. 52

         In November 2015, Caspersen used his PJT email account to send wire instructions

to the Foundation. The instructions were written on Park Hill letterhead and directed that

the funds be sent to a special purpose vehicle (SPV) created and controlled by Casperson

but named to appear like an Irving Place-affiliated entity. Over the next few days,

Caspersen again used his PJT email address to send the Foundation a promissory note,

security agreement, and letter from the SPV, all bearing the signature of “John Nelson,” a

fictitious authorized signatory for Irving Place.

         The Foundation transferred the $25 million to the SPV account through plaintiff

Kendall JMAC. The complaint pleads that plaintiffs did so based on their “reasonable

reliance on the strong reputation of [defendants] as well as Caspersen’s position there” (id.

¶ 46).     Within days, Caspersen transferred $8.1 million from the SPV account to

defendants, “making it appear” that Irving Place was finally paying the missing deal fee

(id. ¶ 47). Caspersen transferred the remainder of plaintiffs’ $25 million financing to his

personal account, where he used the funds to engage in speculative securities trading that

eventually resulted in losses of approximately $14.5 million.

         Caspersen maintained his ruse for several months by making fake interest payments

to the Foundation on the fake promissory note. In March 2016, however, the Foundation

discovered the fraud when its representative asked to speak with John Nelson and

discovered that no such person existed. Later that year, Caspersen entered a plea of guilty

in federal court to securities and mail fraud charges and was sentenced to a four-year term

of imprisonment. Although ordered to pay restitution to plaintiffs, Caspersen has not done

so.

                                            -6-
                                           -7-                                       No. 52

       Plaintiffs eventually commenced this action against defendants to recover their

losses, asserting causes of action against defendants for negligent supervision and

retention, conversion, and fraud. Defendants moved to dismiss the complaint pursuant to

CPLR 3211 (a) (7) and 3016 (b). As relevant here, Supreme Court dismissed plaintiffs’

cause of action for negligent supervision and retention but allowed other claims to proceed.

The court explained that it was dismissing the negligence claim based on plaintiffs’ failure

to adequately plead that defendants were on notice of Caspersen’s propensity for fraud,

and had “not considered” whether defendants’ duty ran only to customers.

       On the parties’ cross appeals, the Appellate Division modified Supreme Court to the

extent of dismissing plaintiffs’ complaint in its entirety (178 AD3d 433 [1st Dept 2019]).

The Court affirmed the dismissal of the negligent supervision and retention claim based on

its conclusion that the complaint did “not allege that defendants were aware of the facts

that plaintiff[s] contend[] would have put them on notice of the employee’s criminal

propensity” (id. at 434). “Further,” the Court summarily held, “the complaint also fails to

allege that plaintiffs were ever customers of defendants, which is fatal to a claim of

negligent supervision” (id.). This Court granted plaintiffs’ motion for leave to appeal (35

NY3d 914 [2020]).

                                            II.

       It is well-settled that to establish a claim of negligence, a plaintiff must prove:

a duty owed to the plaintiff by the defendant, a breach of that duty, and injury proximately

resulting therefrom (Pasternack v Laboratory Corp. of Am. Holdings, 27 NY3d 817, 825

[2016]; Solomon v City of New York, 66 NY2d 1026, 1027 [1985]; Akins v Glens Falls City

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                                            -8-                                       No. 52

School Dist., 53 NY2d 325, 333 [1981]). Where the negligence claim relates to an

employer’s retention and supervision of an employee, the complaint must include

allegations that: (1) the employer had actual or constructive knowledge of the employee’s

propensity for the sort of behavior which caused the injured party’s harm; (2) the employer

knew or should have known that it had the ability to control the employee and of the

necessity and opportunity for exercising such control; and (3) the employee engaged in

tortious conduct on the employer’s premises or using property or resources available to the

employee only through their status as an employee, including intellectual property and

confidential information (see e.g. Restatement [Second] of Torts § 317, Comment b;

Restatement [Second] of Agency § 219 [stating an employer is liable for the torts of

employees acting outside the scope of their employment if, inter alia, the employee was

“aided in accomplishing the tort by the existence of the agency relation”]; Kenneth R. v

Roman Catholic Diocese of Brooklyn, 229 AD2d 159, 161 [2d Dept 1997] [citing, inter

alia, Hall v Smathers (240 NY 486 [1925]), Park v New York Cent. & Hudson R. R. Co.

(155 NY 215 [1898]), and Detone v Bullit Courier Serv. (140 AD2d 278, 279 [1st Dept

1988])]).

       Here, plaintiffs’ complaint adequately states a claim for negligent supervision and

retention. Contrary to the holdings of the courts below, the complaint adequately alleges

that defendants had notice of Caspersen’s propensity to commit fraud. Further, the

Appellate Division erred in holding that a customer relationship is a prerequisite to duty in

a negligent supervision claim.

                                            -8-
                                          -9-                                     No. 52

                                           A.

      When an employer has notice of its employee’s propensity to engage in tortious

conduct, yet retains and fails to reasonably supervise such employee, the employer may

become liable for injuries thereafter proximately caused by its negligent supervision and

retention (see 52 NY Jur Employment Relations § 391; Park, 155 NY 215). As every

Department of the Appellate Division has recognized, a defendant is on notice of an

employee’s propensity to engage in tortious conduct when it knows or should know of the

employee’s tendency to engage in such conduct (see e.g., Belcastro v R.C. Diocese of

Brooklyn, NY, 213 AD3d 800, 800 [2d Dept 2023]; Druger v Syracuse Univ., 207 AD3d

1153, 1154 [4th Dept 2022]; Pirro v Bd. of Trustees of the Vil. of Groton, 203 AD3d 1263,

1271 [3d Dept 2022]; Gibbs v L,man Manhattan Preparatory Sch., 201 AD3d 569, 569

[1st Dept 2022]; 52 NY Jur Employment Relations § 391).

      In this case, defendants argue that the only circumstance in which an employer

“should know” of an employee’s propensity for tortious conduct is when the employer has

actual knowledge of multiple past acts by the employee similar to those alleged in the

complaint. Because the complaint here does not contain such allegations, defendants argue

that dismissal was proper.

      We disagree. Certainly, allegations that a defendant had actual knowledge of prior

acts by an employee similar to those alleged in the complaint satisfy the notice element

(see Hogle v H. H. Franklin Mfg. Co., 199 NY 388, 392 [1910] [knowledge of propensity

established by evidence that employees threw objects out of factory windows onto

plaintiff’s property for more than a year “with the knowledge of the defendant”]).

                                          -9-
                                            - 10 -                                    No. 52

However, an employer cannot avoid liability for negligent supervision and retention by

shutting its eyes to the tortious practices and propensities of its employees—that is, by

being doubly negligent.     An employer “should know” of an employee’s dangerous

propensity if it has reason to know of the facts or events evidencing that propensity, and

may be liable if it nonetheless “place[s] the employee in a position to cause foreseeable

harm” (see Detone, 140 AD2d at 279; see e.g., Hall, 240 NY at 490 [notice of

superintendent’s violent tendencies was shown by “repeated complaints” made to

defendants by tenants and visitors]; Park, 155 NY at 219 [constructive knowledge of

railroad employee’s propensity for negligence “may be shown by evidence tending to

establish that such incompetency was generally known in the community”]). 2               Put

differently, the notice element is satisfied if a reasonably prudent employer, exercising

ordinary care under the circumstances, would have been aware of the employee’s

propensity to engage in the injury-causing conduct.          Where the various facts and

circumstances alleged in a complaint permit such an inference, the notice element is

adequately pleaded (see Cortlandt St. Recovery Corp., 31 NY3d at 38).

2
  Defendants’ argument that actual knowledge of prior bad acts is required to plead notice
in this context is similar to an argument we rejected in Sanchez v State (99 NY2d 247, 253-
254 [2002]), involving a claim against the State for its alleged negligent supervision of
incarcerated persons. Although defendants’ actual knowledge requirement would establish
“a bright-line test” for the pleading of negligent supervision and retention claims, that line
would “redefine[] the traditional standard of reasonableness that has long been the
touchstone of the law of negligence” by “cut[ting] off consideration of other factors that
have previously been found relevant to foreseeability” (id. at 254).
                                            - 10 -
                                             - 11 -                                     No. 52

       Plaintiffs allege that defendants had notice of Caspersen’s propensity to commit

fraud because Caspersen engaged in excessive drinking and obsessive personal stock

trading during work hours, and because he gave defendants’ back-office employees a

“transparently false” response when they inquired as to when defendants would receive the

$8.1 million deal fee from Irving Place.

       The allegations of Caspersen’s purported drinking and gambling problems do not,

standing alone, justify an inference that defendants should have known of Caspersen’s

propensity to commit fraud. For prior conduct to provide notice of an employee’s

propensity to commit a tort, that conduct must be “similar to the [] injury-causing act” (see

Brandy B. v Eden Cent. Sch. Dist., 15 NY3d 297, 302 [2010] [reaching similar conclusion

with respect to a claim against a school district for failing to supervise a troubled student]).

As defendants correctly argue, there is a significant disconnect between excessive drinking

and obsessive personal stock trading—neither of which are illegal or tortious—and the

sophisticated fraud Caspersen ultimately perpetrated against plaintiffs. The former habits

may be unprofessional or irresponsible in a financial advisor, and may warrant some degree

of oversight or discipline,3 but they are not acts of dishonesty or indicative of a proclivity

to mislead or intentionally harm others (see McBride v City of New York, 160 AD3d 414,

414 [1st Dept 2018]; Milosevic v O’Donnell, 89 AD3d 628, 629 [1st Dept 2011]; see also

3
 However, the type and degree of oversight that might be reasonable when an employee
displays signs of alcoholism or gambling addiction likely differ from that appropriate when
an employee displays fraudulent tendencies.
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                                            - 12 -                                    No. 52

Naegele v Archdiocese of New York, 39 AD3d 270, 270 [1st Dept 2007], lv denied 9 NY3d

803 [2007]).

       Here, however, plaintiffs also plead that defendants should have known of

Caspersen’s propensity to commit fraud based on the missing $8.1 million Irving Place

deal fee and Caspersen’s purportedly sloppy attempt to cover up his embezzlement of that

fee. As discussed, the complaint pleads that one month after the Irving Place transaction

closed, employees in defendants’ back office noticed the fee was missing and asked

Caspersen when it would be received. Caspersen allegedly responded that it would not be

paid until a “stub closing” was complete. Affording plaintiffs the benefit of all favorable

inferences at this stage, we must accept that the back-office employees who heard

Caspersen’s explanation should have recognized it as either false or questionable based on

their familiarity with the Irving Place deal or the “typical” payment structure of stub

closings, and that a reasonable employer would have investigated and uncovered the

embezzlement prior to the fraud against plaintiffs.       The complaint also alleges that

Caspersen engaged in at least one other similar diversion-and-cover-up scheme, and that

further discovery could reveal more of the same behavior. Under the circumstances, we

cannot dismiss that possibility as entirely speculative. At this juncture, evidence of exactly

what defendants knew—and when—is primarily within their sole possession and control.

Thus, we find the allegations of notice sufficient to survive a motion to dismiss under our

liberal pleading standards.

                                            - 12 -
                                            - 13 -                                    No. 52

                                             B.

       The Appellate Division also dismissed the negligent supervision claim based on

plaintiffs’ failure to allege that they “were ever customers of defendants,” which the Court

characterized as “fatal” (178 AD3d at 434). We disagree.

       “The existence and scope of a tortfeasor’s duty is, of course, a legal question for the

courts” (532 Madison Ave. Gourmet Foods, Inc. v Finlandia Ctr., Inc., 96 NY2d 280, 288

[2001] [532 Madison]). However, “[a]bsent a duty running directly to the injured person

there can be no liability in damages, however careless the conduct or foreseeable the harm”

(id. at 289). We fix the point of a duty in a particular case

                  “‘by balancing factors, including the reasonable
                  expectations of parties and society generally, the
                  proliferation of claims, the likelihood of unlimited or
                  insurer-like liability, disproportionate risk and
                  reparation allocation, and public policies affecting the
                  expansion or limitation of new channels of liability’”

(532 Madison, 96 NY2d at 288, quoting Hamilton v Beretta U.S.A. Corp., 96 NY2d 222,

232 [2001]; Palka v Servicemaster Mgt. Servs. Corp., 83 NY2d 579, 586 [1994]). This

policy-driven analysis reflects that, “[a]t its foundation, the common law of torts is a means

of apportioning risks and allocating the burden of loss” (532 Madison, 96 NY2d at 289).

The purpose of a civil action for tort is to “compensate for the damage suffered, at the

expense of the wrongdoer” (Prosser and Keeton, Torts § 2, at 7 [5th ed 1985]); however,

courts first must determine whether defendants owed a duty to plaintiffs. “This restriction

is necessary to avoid exposing defendants to unlimited liability to an indeterminate class

of persons conceivably injured by any negligence in a defendant’s act,” even if some of

                                            - 13 -
                                            - 14 -                                    No. 52

those persons’ injuries might be characterized as foreseeable (532 Madison, 96 NY2d at

289).

        We have never held that a cause of action for negligent supervision and retention is

maintainable only by customers of the defendant. Indeed, there is substantial authority in

this State that non-customers may pursue such claims, particularly when they allege

physical injuries or property damage inflicted by a negligently supervised employee (see

e.g. Hogle, 199 NY at 392; Selmani v City of New York, 116 AD3d 943, 943 [2d Dept

2014]; Quiroz v Zottola, 96 AD3d 1035, 1036 [2d Dept 2012]; see also Restatement

[Second] of Torts § 317). Thus, to the extent defendants argue that a special relationship

or privity between plaintiff and employer is a necessary element of a negligent supervision

claim, we expressly reject any such requirement (see NY PJI 2:240, Comment [advising

that an employer “is liable for any harm to other persons resulting from its employee’s”

act, and that liability is “not necessarily predicated on any special relationship between the

employer and plaintiff”] [citing Haddock v New York, 75 NY2d 478 [1990]]).4

4
 In support of their argument that a special relationship should be required when a plaintiff
seeks to recover purely economic losses, defendants cite two cases in which the First and
Second Departments dismissed negligent supervision and retention claims based on the
absence of a “special duty” or “privity” running between the defendant employers and the
plaintiffs (see Heffernan v Marine Midland Bank, 267 AD2d 83, 84 [1st Dept 1999];
Gottlieb v Sullivan & Cromwell, 203 AD2d 241, 241–242 [2d Dept 1994]). Neither case
supports the rule adopted below. In Gottlieb, a law firm’s rogue employees stole
confidential information and sold it to third parties who used it to make illegal trades. The
plaintiff was an unaffiliated trader on the American Stock Exchange, who alleged losses
because the illegal trades affected the market and, consequently, the value of his holdings.
Gottlieb correctly refused to extend the duty to persons injured because of an attenuated
chain of events eventually allegedly affecting the stock market. Here, unlike in Gottlieb,
plaintiffs alleged they were directly defrauded by the negligently supervised employee.
                                            - 14 -
                                            - 15 -                                    No. 52

       Concerns about crushing liability to an indeterminate class of plaintiffs carry less

weight in a negligent supervision and retention case, because the elements of the tort

already protect employers from limitless liability in several ways. First, we have already

recognized that the employer-employee relationship gives rise to a duty to properly

supervise and oversee the conduct of employees (see Hamilton, 96 NY2d at 233). Second,

as discussed above, the employer must have had actual or constructive notice of the

employee’s propensity to engage in a particular type of tortious conduct.            Third, a

defendant’s duty in this context is only to act as a prudent and reasonable employer would

under the circumstances. Finally, as in every tort action, the injuries alleged must have

been proximately caused by the defendant’s negligent supervision and retention. In other

words, there must be a nexus between the actions or omissions of the employer and the

harm the employee was able to inflict. Ultimately, if the employee’s tortious conduct is

too attenuated from the employment relationship, the employer will not be liable.

       In light of the above requirements, our dissenting colleagues are simply incorrect

that without a customer rule, “any employee . . . who goes into the office or uses a telephone

to defraud any third party may expose the employer to liability,” making New York

“unpalatable” to employers and threatening its status as “a leading commercial center”

(dissenting op. at 4, 11). Rather, our framework ensures that an employer is liable only

Heffernan, in turn, relied exclusively on Gottlieb to support its summary determination that
plaintiffs in that case failed to allege facts “showing a special duty running from the bank
to them” (Heffernan, 267 AD2d at 84). Insofar as that case relied on Gottlieb, it does not
support a rule requiring a customer relationship; insofar as it would require a “special”
duty, it is an inaccurate framing of the law.
                                            - 15 -
                                             - 16 -                                      No. 52

when it has notice of a particular employee’s propensity for tortious conduct but neglects

to reasonably supervise and control such employee, enabling the employee to harm third

parties aided by the use of the employer’s resources. There is no policy or commercial

benefit that would justify relieving employers of liability for injuries proximately resulting

from such negligence based solely upon the absence of a customer relationship between

the employer and the injured party.

       Here, plaintiffs were not customers of defendants, as that term is typically

understood, but plaintiffs alleged that they were prospective customers who were solicited

by Caspersen to participate in a financing arrangement related to one of defendants’

legitimate business deals, supported by defendants’ genuine documentation and

information, which he was given access to by defendants as part of his employment. We

hold that these allegations support the existence of a duty on the part of defendants to non-

negligently supervise Caspersen for plaintiff’s benefit (see 532 Madison, 96 NY2d at 288

[listing “the reasonable expectations of parties” as one of the critical factors to be balanced

in defining the scope of a duty]).

       The dissent characterizes this holding as out-of-step with the laws of other

jurisdictions (see dissenting op. at 9-10), but most of the cases it cites do not in fact involve

negligent supervision and retention claims.           Two of the cases involved negligent

misrepresentation claims (see Giannacopoulos v Credit Suisse, 37 F Supp 2d 626 [SD NY

1999]; Clark v Davenport, 2019 WL 3230928 [Del Chancery Court 2019]). The majority

of the cases involved large-scale industrial accidents, which can pose the risk of liability

on a mammoth scale from a single incident (see S. California Gas Leak Cases, 7 Cal 5th

                                             - 16 -
                                           - 17 -                                    No. 52

391, 396 [2019]; Balfour Beatty Infrastructure, Inc. v Rummel Klepper & Kahl, LLP, 451

Md 600 [2017]; Lawrence v O & G Indus., Inc., 319 Conn 641 [2015]; In re Chicago Flood

Litig., 176 Ill 2d 179 [1997]; Petitions of Kinsman Transit Co., 388 F 2d 821 [2d Cir 1968]).

Finally, in two of the cases, the plaintiffs argued that the defendant-employers had duties

to prevent their former employees from committing torts even after terminating those

employees (see Prymark v Contemporary Fin. Solutions, Inc., 2007 WL 4250020 [D Colo

Nov. 29, 2007, No. 07-cv-00103_EWN-KLM]; Palmer v Shearson Lehman Hutton, 622

So 2d 1085 [Fla Dist Ct App, 1st Dist 1993]). None of the cases cited by the dissent limit

the persons eligible to bring negligent supervision and retention claims to customers or

those in privity with the employer.

       Thus, plaintiffs have adequately alleged a claim for negligent supervision and

retention. The Appellate Division therefore erred in dismissing the claim.

       The order of the Appellate Division insofar as appealed from should be reversed,

with costs, and so much of defendants’ motion as sought dismissal of plaintiffs’ negligent

supervision claim denied.

                                           - 17 -
SINGAS, J. (dissenting):

       New York is the financial capital of the country, if not the world. This preeminent

status, which has drawn business interests to New York for centuries, is due in large part

to the predictability of our law. Commercial and financial sectors depend on our courts for

                                           -1-
                                            -2-                                       No. 52

clarity and guidance. Today’s majority opinion offers neither. Worse, it exposes law firms,

banks, hedge funds, and countless other financial institutions to limitless liability for the

criminal actions of rogue employees. Such unprecedented exposure will all but transform

employers into insurers, an outcome against which we have repeatedly cautioned. I dissent.

                                             I.

       In his capacity as manager, and then partner, at PJT, Andrew Caspersen specialized

in representing private fund managers in fund recapitalization deals. In October 2015,

having lost millions of dollars due to excessive personal trading, Caspersen used his PJT

email address to contact his friend, James McIntyre, at Moore Capital Management.

Caspersen offered a fake opportunity to invest in a security—not a recapitalization—that

he promised would result in large, risk-free returns. Neither McIntyre nor Moore Capital

Management was a client of either Caspersen or PJT. Instead, Caspersen knew McIntyre

because they went to college together.

       The Moore Charitable Foundation, an entity related to Moore Capital Management,

expressed interest in Caspersen’s fraudulent proposal after he sent a PJT document from a

real, but closed, recapitalization deal. Caspersen also sent the Foundation instructions on

PJT letterhead to wire money to a non-PJT entity he had created and used his PJT email

account to send a fake promissory note and security agreement in connection with the

Foundation’s proposed investment. The Foundation then wired Caspersen $25 million

dollars, which Caspersen largely gambled away.

                                            -2-
                                           -3-                                       No. 52

                                            II.

       We must now answer the “threshold question in [this] negligence action[]: does

defendant owe a legally recognized duty of care to plaintiff?” (Hamilton v Beretta U.S.A.

Corp., 96 NY2d 222, 232 [2001]). Traditionally, courts determine the scope of a duty upon

a consideration of multiple factors, including, as most relevant here, “the proliferation of

claims [and] the likelihood of unlimited or insurer-like liability” (Matter of New York City

Asbestos Litig., 5 NY3d 486, 493 [2005] [internal quotation marks omitted]). As to these

factors, the majority recognizes that courts must “ ‘avoid exposing defendants to unlimited

liability to an indeterminate class of persons conceivably injured by any negligence in a

defendant’s act,’ even if some of those persons’ injuries might be characterized as

foreseeable” (majority op at 13-14, citing 532 Madison Ave. Gourmet Foods, Inc. v

Finlandia Ctr., Inc., 96 NY2d 280, 289 [2001] [532 Madison]). But despite that significant

concern, the majority proceeds to effectively imply that an employer owes a duty to all

prospective customers.1

       Permitting all potential customers to sue employers for an employee’s fraud

unrelated to the employment but perpetrated via company email or phone would result in

unmitigated proliferation of claims and virtually unlimited liability, well beyond the

1
 The majority correctly notes that the underlying litigation is at the pleading stage, where
we “must give the complaint a liberal construction [and] accept the allegations as true,”
without regard to whether plaintiffs “ ‘can ultimately establish [their] allegations’ ”
(majority op at 2, quoting EBC I, Inc. v Goldman, Sachs & Co., 5 NY3d 11, 19 [2005]).
The very fact that the allegations thus are necessarily unestablished renders the majority’s
vast expansion of duty jurisprudence especially troubling.
                                           -3-
                                            -4-                                       No. 52

traditional concepts of respondeat superior and apparent authority.2         This Court has

repeatedly cautioned against subjecting a defendant “to limitless liability to an

indeterminate class of persons conceivably injured” (Hamilton, 96 NY2d at 232). But the

majority now suggests that any time an employee makes use of “the employer’s premises”

or of “property or resources available to the employee only through their status as an

employee,” the employer may be held liable in negligent supervision (majority op at 8).

The majority opines that this standard will limit liability. But by their logic, any employee,

regardless of their title, who goes into the office or uses a telephone to defraud any third

party may expose the employer to liability. Arguably, employers now could owe a duty to

virtually anyone.

       The majority also posits that liability would be limited, in part, by the elements of

the tort itself (majority op at 15), but none of the elements contemplates, much less imposes

a reasonable limit on, the number of potential victims—and therefore prospective

plaintiffs—to whom the employer owes a duty. Moreover, though there is a propensity

2
  The majority references plaintiffs’ allegations that “they were prospective customers who
were solicited by Caspersen to participate in a financing arrangement related to one of
defendants’ legitimate business deals” (majority op at 16), but plaintiffs have also
acknowledged that the deal proposed to them was not legitimate; therefore, it is debatable
whether plaintiffs were ever even prospective customers. Regardless, the fraud theories of
respondeat superior and apparent authority already protect potential customers interacting
with employees, so long as the employee’s conduct is within the scope of his employment
and benefits the employer (respondeat superior) or the employer presented the employee
to the potential customer as having authority to act on the employer’s behalf, and the
potential customer reasonably relied on that presentation (apparent authority) (see Judith
M. v Sisters of Charity Hosp., 93 NY2d 932, 933 [1999]; Hallock v State of New York, 64
NY2d 224, 231 [1984]). The lower courts dismissed these claims below, correctly
recognizing that plaintiffs’ allegations were insufficient to sustain them.
                                            -4-
                                             -5-                                       No. 52

element to negligent supervision, that does not pertain to the existence of a legal duty;

“foreseeability bears on the scope of a duty, not whether a duty exists in the first place”

(Matter of New York City Asbestos Litig., 5 NY3d at 494; see also Credit Alliance Corp. v

Arthur Andersen & Co., 65 NY2d 536, 553 [1985] [eschewing a duty rule “permitting

recovery by any foreseeable plaintiff”]).

       The majority further disregards our previous emphasis on the public policy necessity

of limiting an employer’s liability for an employee’s fraud. “[A]ny extension of the scope

of duty must be tailored to reflect accurately the extent that its social benefits outweigh its

costs” (Hamilton, 96 NY2d at 232). Generally, a defendant is not expected to control the

conduct of third parties, “even where as a practical matter defendant can exercise such

control” (D’Amico v Christie, 71 NY2d 76, 88 [1987]). It is reasonable to envision a duty

only “where there is a relationship either between defendant and a third-person tortfeasor

that encompasses defendant’s actual control of the third person’s actions, or between

defendant and plaintiff that requires defendant to protect plaintiff from the conduct of

others” (Hamilton, 96 NY2d at 233). “Landowners, for example, have a duty to protect

tenants, patrons and invitees from foreseeable harm caused by the criminal conduct of

others while they are on the premises, because the special relationship puts them in the best

position to protect against the risk” (532 Madison, 96 NY2d at 289, citing Nallan v

Helmsley-Spear, Inc., 50 NY2d 507, 518-519 [1980]). But that duty “does not extend to

members of the general public” (id., citing Waters v New York City Hous. Auth., 69 NY2d

225, 229 [1987]).     The policy of limiting liability is fulfilled “because the special

relationship defines the class of potential plaintiffs to whom the duty is owed” (id.).

                                             -5-
                                            -6-                                       No. 52

       Certainly, a special relationship is not required in every negligent supervision case,

particularly where employers are deemed responsible for non-economic injuries inflicted

by their employees. “Liability in such cases is imposed not necessarily because of any

special relationship between the employer and the injured party” (Rodriguez v United

Transp. Co., 246 AD2d 178, 180 [1st Dept 1998], citing Haddock v City of New York, 75

NY2d 478 [1990]). Instead, because the employer put the employee in a position to cause

that kind of harm (i.e. physical injury), those courts recognized the employer’s legal duty

to “take reasonable care in making its decision concerning the hiring and retention of the

employee” (Sheila C. v Povich, 11 AD3d 120, 129 [1st Dept 2004]; see also e.g. Hogle v

Franklin Mfg. Co., 199 NY 388, 392 [1910] [plaintiff injured by items thrown by employee

from factory window]; Restatement [Third] of Torts § 1 [“Physical forces that cause injury

ordinarily spend themselves in predictable ways; their exact courses may be hard to predict,

but their lifespan and power to harm are limited”]).

       But while “[e]conomic injuries may be no less important than injuries of other

kinds[,] courts impose tort liability for economic loss more selectively than liability for

other types of harms,” as “[e]conomic losses proliferate more easily than losses of other

kinds” (Restatement [Third] of Torts § 1; see 532 Madison, 96 NY2d at 291-292 [where

the potential claims of “those who have suffered purely economic losses” are

indeterminate, “limiting the scope of defendants’ duty to those who have . . . suffered

personal injury or property damage⸻as historically courts have done⸻affords a principled

basis for reasonably apportioning liability”]). Therefore, this Court has consistently stated

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                                            -7-                                       No. 52

that certain negligence actions require a relationship “so close as to approach that of

privity” (Ultramares Corp. v Touche, 255 NY 170 [1930]).

       In Credit Alliance Corp., where the plaintiffs alleged fraudulent and negligent

preparation of a financial report, the Court considered the “limits” of the defendant

accountants’ liability toward non-privy parties (65 NY2d at 541).            We held that,

“[a]lthough accountants might be held liable in fraud to non-privy parties who were

intended to rely upon the accountants’ misrepresentations,” it is a “different question . . .

whether they owed a duty” to these parties (id. at 547 [emphasis added]). Because the

negligence claim “fail[ed] to set forth either a relationship of contractual privity with

[defendants] or a relationship sufficiently intimate to be equated with privity, [it] should

be dismissed” (id. at 543, 547; see also 532 Madison, 96 NY2d at 289 [a duty to protect a

plaintiff from risk of economic harm inflicted by a third party “may arise from a special

relationship” requiring that the defendant provide such protection]). The majority scarcely

acknowledges this settled liability principle regarding claims of purely economic loss.

Indeed, in relying on the Restatement (Second) of Torts § 317—which, by its plain

language, applies to claims of “bodily harm”—to support its creation of a duty under the

circumstances here, the majority effectively removes any distinction between economic

and physical injury and affirmatively jettisons our precedent regarding the principles

underlying that distinction altogether.

       The majority further disputes the relevance of two Appellate Division decisions

unequivocally requiring a special relationship in similar cases (see majority op at 14-15 n

4, citing Heffernan v Marine Midland Bank, 267 AD2d 83, 84 [1st Dept 1999] and Gottlieb

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                                           -8-                                       No. 52

v Sullivan & Cromwell, 203 AD2d 241, 241-242 [2d Dept 1994]). In Heffernan, a rogue

employee of the defendant bank perpetrated a Ponzi scheme, convincing friends and family

to turn over funds for a nonexistent investment that the employee represented was

guaranteed by the bank. The employee then deposited the funds into his personal account

at the bank. The First Department affirmed the trial court’s dismissal of the negligence

claims against the bank, holding that “plaintiffs fail[ed] to allege any facts showing a

special duty running from the bank to them” (267 AD2d at 84). The First Department cited

Gottlieb, in which employees at Sullivan & Cromwell shared confidential firm information

with third parties, who then engaged in insider trading. The Second Department affirmed

the lower court’s grant of summary judgment to the defendant. Rather than relying on “an

attenuated chain of events eventually allegedly affecting the stock market” (majority op at

14-15 n 4), the Court observed that plaintiff, a trader who lost money on the securities in

question, “was not a client of the defendant’s, with the result that, in the absence of any

privity between the parties, the defendant owed the plaintiff no duty in the hiring and/or

supervision of its employees” (203 AD2d at 241-242). Accordingly, both cases are directly

on point. And yet, because the employees in each case used the employers’ property or

resources, it is difficult to conceive, under the majority’s standard, how the employers

would not be liable to the plaintiffs.

       Additional public policy urges caution here. Unrestricted and unpredictable liability

could have disastrous consequences for “New York’s status as the preeminent commercial

center in the United States, if not the world” (159 MP Corp. v Redbridge Bedford, LLC, 33

NY3d 353, 359-360 [2019]). That New York is “a convenient forum which dispassionately

                                           -8-
                                            -9-                                       No. 52

administers a known, stable, and commercially sophisticated body of law may be

considered as much an attraction to conducting business [here] as its unique financial and

communications resources” (Eherlich-Bober & Co. v University of Houston, 49 NY2d 574,

581-583 [1980]).     If subjected to open-ended tort liability on the part of plaintiffs

indiscernible in both amount and identity, financial institutions undoubtedly would

consider conducting their business in foreign jurisdictions with predictable and consistent

precedent. The limitless standard espoused by the majority “might engender uncertainties

in the free market system in connection with untold numbers of sophisticated business

transactions—a not insignificant potentiality in the State that harbors the financial capital

of the world” (Bluebird Partners v First Fid. Bank, 94 NY2d 726, 739 [2000]).

       Indeed, as did New York courts before today, other forums require a customer

relationship to give rise to an employer’s liability for fraud perpetrated by a rogue

employee. In Prymark v Contemporary Fin. Solutions, Inc., the employee of a broker-

dealer registered with SEC sold unregistered securities as part of Ponzi scheme. The

United States District Court of Colorado concluded that the broker-dealer “owed no duty

to protect those [p]laintiffs who were not clients of [the employee] while he was in [the

broker-dealer’s] employ” (2007 WL 4250020, at *14 [D Colo Nov. 29, 2007, No. 07-cv-

00103_EWN-KLM]). Notably, the Court did find a duty to a separate class of plaintiffs

who had a client relationship (id. at *13). But the District Court deemed it “untenable that

every employer has a special relationship, giving rise to tort liability based on harm done

by third parties, with every potential customer or client” (id. at *12 [emphasis omitted];

see also e.g. Giannacopoulos v Credit Suisse, 37 F Supp 2d 626 [SD NY 1999] [dismissing

                                            -9-
                                            - 10 -                                     No. 52

negligent supervision claims brought by plaintiff who was induced by defendant’s

employee to invest in failed oil venture; “not all strangers generally qualified to respond to

a negligent misrepresentation can sue based on their reliance on the misrepresentation”];

Clark v Davenport, 2019 WL 3230928 [Del Chancery Court 2019] [“allegations

describ(ing) ‘mere personal friendship’ . . . would not support a claim for negligent

misrepresentation”]; Palmer v Shearson Lehman Hutton, 622 So 2d 1085 [Fla Dist Ct App,

1st Dist 1993] [no common law duty via special relationship between defendant employer

and plaintiffs because plaintiffs were never customers of defendants and did not deal with

defendant at the time fraudulent employee worked for defendant]).

       Still other courts have acknowledged the need for something approaching privity to

find liability for purely economic harm (see e.g. Petitions of Kinsman Transit Co., 388 F

2d 821, 824 n 6 [2d Cir 1968] [“compensation may be precluded where—as here—the

relationship between the negligence and the injury becomes too tenuous”]; see also S.

California Gas Leak Cases, 7 Cal 5th 391, 400 [2019] [“The primary exception to the

general rule of no-recovery for negligently inflicted purely economic losses is where the

plaintiff and the defendant have a ‘special relationship’ ”]; Balfour Beatty Infrastructure,

Inc. v Rummel Klepper & Kahl, LLP, 451 Md 600, 612 [2017] [no “tort liability (for)

negligence that causes purely economic harm in the absence of privity, physical injury, or

risk of physical injury”]; Lawrence v O & G Indus., Inc., 319 Conn 641, 657 [2015]

[reiterating “the long established common law rule in this state” “that in the absence of

privity of contract between the plaintiff and the defendant, or of an injury to the plaintiff’s

person or property, a plaintiff may not recover in negligence for a purely economic loss”];

                                            - 10 -
                                           - 11 -                                    No. 52

In re Chicago Flood Litig., 176 Ill 2d 179, 198 [1997] [“The economic loss rule avoids the

consequences of open-ended tort liability”]).

       Our precedent until today, consistent with these foreign cases, makes clear that

defendants here owed no duty to plaintiffs for Caspersen’s fraud. Plaintiffs had no

connection to defendants and were targeted by a criminal actor who convinced them to

invest in his scheme—involving a transaction that was not part of his job description—on

the basis of his personal friendship with their employee. That Caspersen was able to

perpetrate his fraud via company email did not bring it within the scope of his employment,

which is why the lower courts correctly dismissed plaintiffs’ respondeat superior claim. In

finding an unbounded duty solely because Caspersen was employed by defendants, the

majority so broadens the tort of negligent supervision as to essentially swallow claims of

respondeat superior and apparent authority. More importantly here, exposing employers

to virtually unrestricted liability for fraud committed by rogue employees will unsettle our

financial and other commercial institutions, to the point that doing business in a State in

which they face undefined, exponential liability might soon prove unpalatable.

       “New York has long been a leading commercial center, and our statutes and

jurisprudence have, over many years, greatly enhanced New York’s leadership as the

center of commercial litigation” (Justinian Capital SPC v WestLB AG N.Y. Branch, 28

NY3d 160, 169 [2016]). Today, we head in a different direction.

       I dissent.

                                           - 11 -
                                         - 12 -                                   No. 52

Order insofar as appealed from reversed, with costs, and so much of defendants' motion as
sought dismissal of plaintiffs' negligent supervision claim denied. Opinion by Judge
Cannataro. Chief Judge Wilson and Judges Rivera, Troutman and Smith concur. Judge
Singas dissents and votes to affirm in an opinion, in which Judge Garcia concurs. Judge
Halligan took no part.

Decided June 13, 2023

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