September 2019: Precedential Victory for Oyster Bay in the Second Circuit
The firm achieved an important victory for municipalities struggling with civil litigation caused by the misconduct of their officials. In a recent decision, the U.S. Court of Appeals for the Second Circuit ruled that the Town of Oyster Bay, located in the greater New York metropolitan area, could not be liable on a contract that had been agreed to by Town officials without the approval of the Town’s governing body, the Town Board. See PHL Variable Ins. Co. v. Town of Oyster Bay, 929 F.3d 79 (2d Cir. 2019).
The plaintiff, PHL Variable Insurance Company, lent millions of dollars to Harendra Singh, a restauranteur whose companies operated the concessions at the Town’s parks and beaches. PHL claimed it made the loan because the Town guaranteed the loan’s repayment. The guarantee, however, was fraudulent: it was agreed to by Town officials who have since admitted to accepting bribes from Singh in exchange for falsifying the Town’s agreement to guarantee his debts, including the loan from PHL. Singh, as well, pleaded guilty to bribery and other public corruption charges after the scheme was uncovered. Against this backdrop, PHL sued the Town, seeking to enforce the guarantee and claiming that the Town also committed fraud through its corrupt officials.
The firm moved to dismiss PHL’s claims, arguing that the guarantee was unenforceable because it was never authorized by the taxpayers’ elected officials on the Town Board, as required by New York’s Town Law. The firm also argued that PHL proceeded at its own risk when it dealt exclusively with the disloyal officials rather than obtain Town Board authorization.
The Second Circuit agreed, affirming the district court’s dismissal of PHL’s claims with prejudice in a comprehensive opinion that adopted virtually all of the arguments advanced by the firm on behalf of the Town. In doing so, the Second Circuit reasoned that the purpose of the rule requiring Town Board approval is “to guard against extravagance and collusion on the part of public officials.” Id. at 90 (quotation marks omitted). This requirement is “stringently enforced,” the Court ruled, and because there was no Town Board approval in this case, PHL had no valid contract with the Town. Id. at 89-94. Similarly, in affirming the dismissal of PHL’s fraud claims, the Second Circuit held that PHL could not have been misled into believing it had a legal contract with the Town since it “is presumed to have known” municipal law, including that “it would need [Town Board] authorization.” Id. at 94.
Most importantly for municipalities, the Second Circuit affirmed the principle that statutes governing municipal contracts protect taxpayers above everyone else, even in cases of public corruption. Id. at 93. As a result of this principle, the “risk of loss” from an unauthorized contract was on PHL, not the Town’s innocent residents. Id. at 92 (quotation marks omitted). If there is “occasional hardship” from this, the Court concluded, it should be borne by the person who failed to determine whether proper authorization existed. Id. at 93 (quotation marks omitted).