The Statute of Frauds and the Fork in the Road
11.17.2020
“When you come to a fork in the road, take it,” is one of the more bemusing statements attributed to the late Lawrence Peter Berra. According to the Yogi Berra Museum, Yogi really meant what he said, for the fork was unusual in that no matter which direction you chose, you would end up at his house. If only the Statute of Frauds were that simple.
In that spirit I will start with a little driving hypothetical:
Suppose that you’re one of those drivers who think that the amber light means “step on it to beat the red,” but, alas, the signal turns too soon and you get clipped for both speeding and running a red light. A lot of potential points on the license, you think, not to mention a hefty insurance premium increase. You might draw a kindly judge who believes that the traffic enforcement people are persecuting you, but you do not want to take chances, so you come in with a legal argument: of the two infractions, running the red light was the more particular one – since the purpose of the law was to get you to stop in this particular place, not just to slow down generally – and therefore only it, and not the speeding prohibition, should apply. You will lose because the two provisions were intended to apply independently so as to deter different kinds of conduct, even if a driver might engage in both simultaneously.
When a set of facts implicates two separate rules or provisions, a court is generally supposed to apply both if possible rather than to pick one and ignore the other. That is what should have happened, but did not, in the Appellate Division, Second Department, in Korman v. Corbett.1 Some may see this case as a major change in the law of the statute of frauds as applied to real property contracts. I prefer to see it as an erroneous statutory analysis that created a faulty precedent.
I. Facts
Mr. & Mrs. Korman were tenants of Mrs. Barnes (ultimately, “Decedent”). As the court stated:2
Prior to her death, Decedent and the Kormans allegedly entered into an oral agreement whereby the Kormans would provide Decedent, who required substantial assistance with activities of daily living, with home care services for the duration of her lifetime. In exchange for such services, the Kormans allegedly were to receive an option to purchase the subject property from Decedent’s estate for the agreed-upon price of $1.2 million. It is undisputed that the Kormans provided necessary care to Decedent and maintained the property.
Although Decedent allegedly took steps to memorialize the alleged oral agreement intention and to include it in a revised will, she died prior to executing any document memorializing her intention. After Decedent’s death . . . the executor of Decedent’s estate . . . refused to honor the claimed oral agreement.
II. Which Statutory Provisions Do or Could Apply?
The court recognized this as a statute of frauds case and framed the question as follows:
At issue on this appeal is whether this action is governed by General Obligations Law § 5-701 or General Obligations Law § 5-703. Resolution of this issue is determinative as to whether the Kormans, if successful, are entitled to specific performance of the agreement alleged in the complaint.
Both of these sections are part of the overall New York statute of frauds, but § 5-703 has an important equitable exception in that a court may compel specific performance, even if the contract was not in writing, as long as there has been partial performance:
3. A contract to devise real property, or . . . any interest therein or right with reference thereto, is void unless the contract or some note of memorandum thereof is in writing . . . .
4. Nothing contained in this section abridges the powers of courts of equity to compel the specific performance of agreements in cases of part performance.
On the other hand, § 5-701, which lists the other kinds of contracts about which we all studied in law school that cannot be enforced if not in writing, provides, in relevant part, as follows:
a. Every agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing . . . if such agreement, promise or undertaking:
1. By its terms is not to be performed within one year from the making thereof or the performance of which is not to be completed before the end of a lifetime.
In contrast to § 5-703, where § 5-701 requires a writing this requirement cannot be overridden based on partial performance.
III. What Did the Court Do?
The Appellate Division appeared to acknowledge at least to a degree that the contract in question could be described in both of the sections.
- It was clearly described in § 5-703 because it concerned the creation of an ownership interest in real property.
- It was arguably described in § 5-701 depending on whether, by its terms, it could not be performed within Decedent’s lifetime.
That’s where, in my view, the court cut across the park rather than run the prescribed marathon course. Instead of making the perfectly sensible and plausible observation that these two sections together catalogue most or all of the classical statute of frauds situations, the court veered off and treated these two sections as alternatives in conflict with each other. The court asked whether the contract is governed by § 5-701 or by § 5-703, and then decided that since § 5-703 was, in its view, the “more particular” section, that section alone would apply, rather than § 5-701 (citations omitted):
Contrary to the estate’s contention, this action is not governed by General Obligations Law § 5-701 because the Kormans’ obligations under the alleged oral agreement to provide Decedent with home care services could not “be completed before the end of a lifetime” . . . . “Whenever there is a general and a particular provision in the same statute, the general does not overrule the particular but applies only where the particular enactment is inapplicable” . . . . Here, General Obligations Law § 5-703, the more particular provision governing agreements concerning real property, is the operative statute. The case law relied upon by the estate for the proposition that specific performance is unavailable is distinguishable in that those cases do not involve agreements concerning real property. . . . Moreover, the concerns raised by the estate regarding specific performance of contracts that cannot be completed before the end of a lifetime are not implicated here, as the Kormans allege that they fully performed the home care services for Decedent, and the issue relates to the enforcement of Decedent’s alleged promise to give the Kormans an option to purchase the subject property for a set price.
IV. Why Was the Court’s Analysis Wrong but Its Result Potentially Right?
A. Both Statutory Sections Can Apply, and in Fact Both Might Apply
I would submit that the court should have concluded that sections are not in conflict but rather that the contract is potentially governed by both sections.3 The two sections do not address a single situation and dictate inconsistent results. They independently enumerate various situations covered by the statute of frauds – where any one or another circumstance is present that raises a greater than normal risk of fraud or perjury – and if a contract is described in any part of either section, then it must be in writing in accordance with the particulars of each section in which it is described.4
Thus, although the contract in this case could escape § 5-703 (real property) by virtue of the equity power of a court to order specific performance, that equity power could not excuse the separate and independent absence of a writing under § 5-701 (if indeed § 5-701 also applies, which I will address below).
To make this clear, consider another category under § 5-701, which is that a promise made in consideration of marriage (except mutual promises to marry) must be in writing in order to be valid. If Mr. & Mrs. Moneybags orally promise Young Man, “We will buy you a new car if you marry our dear daughter,” and then they get married, it’s clear that § 5-701, and only § 5-701, would govern, and Young Man could not compel his new in-laws to buy him a new car. If, instead of a car, Mr. & Mrs. Moneybags promise to buy a house, the result of course must be the same. A court should not say, “Gee, that’s a real estate promise, governed by the specific § 5-703 and only by § 5-703, and Young Man performed the getting married part of the bargain, so I can order the rich in-laws to buy the house.”
One might ask whether it is conceivable – as the court assumed – that in enacting a separate section for real property contracts the legislature intended to carve them out of § 5-701 regardless of their other particulars. I find this hard to accept. Why did the legislature include a partial performance exception in the predecessor of § 5-7035 in the real property context? Perhaps because they felt that a mere connection with real property was not a sufficient reason to require a writing in the face of the equity of partial performance. But to decide that the happenstance of a real property connection should also negate § 5-701 and all of the other reasons why a contract might need to be in writing (such as the impossibility of performance within a year or within a lifetime) would require one to reach two quite implausible conclusions: first, that without ever having indicated this explicitly, the legislature decided to do so by implication of “particular versus general,” and second, that without ever having said so, the legislature decided that this industry was so gravely in need of enforcement of oral long-term contracts that § 5-701 should not apply. This is obviously not the case, as § 5-703 explicitly allows the creation of a lease for a year or less without a writing but does not create any short-term exception for other kinds of real property interests.6
B. Does § 5-701 Actually Apply or Not?
Is the contract covered by § 5-701? The answer is certainly not clear enough to justify the court’s cursory dismissal quoted in Part III above.
1. The “Impossibility” Test Applied to “a Lifetime”
Section 5-701(1)(a) applies only when there is “absolutely no possibility in fact and law of full performance within one year.”7 Reading the disjunctive phrases of the section in parallel, a writing is required in order for a contract to be enforceable if there is no possibility of full performance before the end of a specific person’s lifetime,8 regardless of the one-year criterion and regardless of what was likely or actually transpired.
2. Applying the Test to the Kormans’ Performance
In this case, I believe that the court was too blithe in observing that the Kormans had (or even could have) competed their performance within Decedent’s lifetime. Still, I do think that close analysis reaches this result.
By the terms of the contract, performance was required “for the duration” of Decedent’s life. This, of course, means during the entirety of Decedent’s lifetime and therefore not only could, but actually necessarily would, be completed before death. How long before? It is impossible to define a smallest unit of time for that,9 but it is undeniable that “the duration of a lifetime” does not include any moment or point in time when the person is already deceased.10 As a practical matter, there may have been no way for the Kormans to ascertain at any time before death that they could stop providing service, but the statute of frauds is technical and asks what could happen, not what was likely or unlikely, so we must ignore that difficulty. Or to look at this through a more pragmatic prism, the Kormans’ performance was a series of discrete tasks, and it was almost certainly true that the Kormans would have one or more intervals every day during which they were not providing services. At some point, Decedent’s condition could have deteriorated to the point that the next time the Kormans might have had an opportunity to do anything Decedent would have already died. If the Kormans wanted to be extra-careful to fulfill their side of the bargain, they could continue to do what they was doing until they were sure that Decedent was no longer alive, and thereby would have completed the required performance before death, with whatever was done later viewed as irrelevant since it was not a subject of the contract at all.
3. Applying the Test to the Estate’s Performance
Now let’s consider the estate’s performance – granting the Kormans the purchase option. That certainly could not be performed within Decedent’s lifetime, since the creation of the option was contingent on the Kormans’ having performed “for the duration” of Decedent’s life. It is impossible for an option to have been created by the estate and to become effective after “the duration” ended but before death, since, as demonstrated above, if you posit any point in time while Decedent was still alive, I can demonstrate that the Kormans’ duty had not yet ended by that point in time.
4. Can the Estate’s Performance Be Ignored as Pro Forma?
Even looking at the estate’s performance as necessarily taking place after the Decedent’s lifetime, there still is some more wood to chop. In Cron v. Hargro Fabrics, Inc.,11 the Court of Appeals resolved conflicting authorities and held that an at-will employee whose bonus was to reflect profits over a period of greater than a year could enforce that contract. Even though the calculation and payment of the bonus would be impossible before more than a year had elapsed, the court did not consider the calculation and payment to be part of the performance under this contract. The court held that the performance was limited to the employee’s work, which, since he was an at-will employee, could have ended at any time in less than a year. The performance concluded with the employee’s activity, which entitled him to payment of compensation, and the fact that the compensation could be calculated and paid only later was not part of the performance required under the contract.
This is a rather elusive distinction. Perhaps I may characterize it using the terms “pro forma” or “ministerial.” The idea would be that simple nondiscretionary events or actions having no direct connection with the contract – in this case the conclusion of the full year, the calculation of the employer’s profits and the delivery of payment – are not elements of performance whose necessary delay beyond a year throws the contract into the gaping maw of the statute of frauds.
Is this case close enough to Cron that the same rule should be applied here – on the basis that once the Kormans had completed the service to Decedent, there was no further performance required by the estate other than to deliver to the Kormans the fixed-price option purchase right? I come out narrowly to the contrary and therefore on the side of applying the statute of frauds. The Cron rule is intended to be, as the court stated, a limited exception.12 In the Cron opinion, one detects an undertone of solicitude for an at-will employee, and the situation here is similar. But, unlike the situation in Cron, where all that had to be done was to calculate an amount and pay it, here there were non-trivial actions beyond merely making a single payment that the estate was required to take after Decedent’s death, specifically negotiating and agreeing on the terms and conditions of the option – including the time during which the option could be exercised13 and everything else that typically enters into a real property sale contract (other than the price, which was already known) – and reducing it to writing.
But even if one were to decide as in Cron that the contract here escapes § 5-701, it requires considerable fact-specific analysis to reach that conclusion. The court’s approach of treating § 5-701 and § 5-703 as alternatives that cannot both apply is a detour on the wrong path that could be misleading in future cases.
5. A Lifeline for the Kormans – Unconscionability?
Can the statute of frauds here, even § 5-701, which as noted above has no equitable exception, be overcome on the basis of unconscionability? In In re Estate of Hennel,14 the Court of Appeals adopted a principle that the statute of frauds would not be applied to a contract where the result shocks the conscience:
one such as no person in his or her senses and not under delusion would make on the one hand, and as no honest and fair person would accept on the other, the inequality being so strong and manifest as to shock the conscience and confound the judgment of any person of common sense.15
In that case, an individual promised certain of his heirs that he would direct his estate to repay a mortgage on property that he conveyed to them with a reserved life estate, and in exchange the heirs agreed to manage and maintain the property during the individual’s lifetime. And yet, before the individual died four years later, he changed his will in such a way (possibly unintentionally) that the courts determined that it failed to direct repayment of the mortgage, reducing the value of the property to the heirs. As the court stated, “[a]lthough the result may be unfair, it is not unconscionable;”16 the heirs would still receive a considerable net value even if the property remained encumbered or if they chose to repay the mortgage.
The Kormans, by contrast, having faithfully cared for Decedent, would be left with nothing of monetary value but only with the satisfaction of having done well by another. Is that so insignificant that it shocks the conscience? One wonders where the Court of Appeals will, if the case or one like it is appealed, draw the line.
Robert Kantowitz has been a tax lawyer, investment banker and consultant for 40 years. He is responsible for the creation of a number of widely used capital markets products, including “Yankee preferred stock” and “trust preferred,” as well as numerous customized financial solutions and techniques for clients. He is a longtime member of the New York State Bar Association Committee on Attorney Professionalism; he co-authored the Committee’s 2015 Report on Attorney Ratings and as Chair of the Civility Subcommittee helped lead the initiative resulting in the adoption by the New York courts in 2020 of revised Standards of Civility. Over the past several years, he has contributed articles to the Journal on a variety of subjects. He thanks Andrew Oringer for helpful suggestions on this article.
1. 183 A.D.3d 608, 123 N.Y.S.3d 192 (2d Dep’t 2020) (per curiam), lv. to rearg.denied, July 24, 2020.
2. Emphasis added; throughout, for clarity, I will also use “the Kormans” and “Decedent” rather than the actual names or plaintiffs/defendant designations.
3. Independently, EPTL § 13-2.1(a)(2) requires that “a contract to make a testamentary provision of any kind” must be in writing. In light of the court’s supposition of Decedent’s intent to make a will, it is surprising that the court did not address this provision. Because I am more concerned about what I see as the error in not applying all the relevant provisions in parallel than about the specific result in this case, I will not address the EPTL rule separately from GOL § 5-701.
4. See, e.g., Freedman v. Chem. Constr. Co., 43 N.Y.2d 260 (1977) (separately testing a contract under two of the subdivisions of § 5-701).
5. What is now GOL § 5-703 was originally codified in the Real Property Law, see, e.g., Geraci v. Jenrette, 41 N.Y.2d 660, 664 (1977); Wooten v. Marshall, 279 F.2d 558, 560 n.2 (2d Cir. 1960). The history of how and when various kinds of contracts were brought under the statute of frauds should have little bearing on the question of whether one section was intended to apply to the exclusion of another absent some explicit indication to this effect.
6. As an aside, even if I indulge what I believe is the court’s error that only one section, whichever is more specific, applies, the court may have chosen the wrong one. What is to say that § 5-701, which is invoked by virtue of the time impossibility, is not the specific element of the contract, rather than the generic real estate subject element? The inherent difficulty in deciding whether “apple” or “orange” is the more specific fruit counsels against the court’s approach from a practical perspective if from no other.
7. D & N Boening v. Kirsch Beverages, 63 N.Y.2d 449, 454 (1984).
8. Meltzer v. Koenigsberg, 302 N.Y. 525 (1951) (per curiam).
9. I will not enter here into a discussion of whether time is physically quantized or whether that could have a bearing on the result.
10. If the time nuance is not clear, I direct the reader’s attention to the discussion of open and closed intervals in any college text on advanced calculus or analysis. The “duration of a lifetime” is an open interval consisting of all time before death but excluding any time at or after death.
11. 91 N.Y.2d 362 (1998).
12. Id. at 370; see Compensation, Work Hours and Benefits: Proceedings of the New York University 57th Annual Conference on Labor, Vol. 57 at 479 & n. 53 (Jeffrey M. Hirsch, Samuel Estreicher eds. 2009).
13. In particular, one would not assume an open-ended or perpetual option, which could well be void under the Rule Against Perpetuities, EPTL § 9-1.1(b), which still applies in New York to options to purchase property; see Symphony Space, Inc. v. Pergola Props., Inc., 88 N.Y.2d 466 (1996).
14. 29 N.Y.3d 487 (2017).
15. This hurdle in New York is far higher than that which is applied in some other states that allow promissory estoppel to overcome the statute of frauds, even when those other states also use the label “unconscionable,” and there are also other states that do not recognize this exception at all. See S.L. Martin, Kill the Monster: Promissory Estoppel as an Independent Cause of Action, 7 Wm. & Mary Bus. L. Rev. 1, 22–31 (2016).
16. 29 N.Y.3d at 489. It is worth noting that Hennel applied the statute of frauds based on the lifetime criterion in § 5-701 and on EPTL § 13-2.1(a)(2), see note 3 supra, even though an interest in real property was involved. 29 N.Y.3d at 493. Neither the Court of Appeals nor the lower courts in Hennel appear to have specifically addressed § 5-703 or the particular-versus-general question, so I do not want to read too much into Hennel, but if the Appellate Division in Korman is correct, then Hennel should have come out the other way, in favor of the heirs based on performance even absent unconscionability.
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