The Courts of New York will not aid in the enforcement of a contract when the subject matter is illegal. Cases standing for this seemingly unremarkable proposition are varied. For example, in Bonilla v. Rotter, 36 A.D.3d 534 (1st Dep’t 2007), the plaintiff was a suspended attorney. The Defendants assumed responsibility for the plaintiff’s cases during the suspension. The plaintiff claimed that he had an agreement with the defendant to provide services as an “investigator” pursuant to which he would, using his contacts at various hospitals, contact injured individuals and “encourage” them to use the defendants’ personal injury firm. In exchange, the plaintiff would receive a $2,500 fee for each referred case that was settled. The motion court denied the defendants’ motion to dismiss. The First Department reversed, finding that the agreement that the plaintiff sought to enforce was “one between a nonlawyer and an attorney to split legal fees which is proscribed by Judiciary Law § 491 [and a]ccordingly, … is illegal and plaintiff is foreclosed from seeking the assistance of the courts in enforcing it.” Bonilla, 36 A.D.3d at 535 (citations omitted). To support its holding, the Bonilla Court reiterated that “[i]t is the settled law of this State that a party to an illegal contract cannot ask a court of law to help him carry out his illegal object, nor can such a person plead or prove in any court a case in which he, as a basis for his claim, must show forth his illegal purpose.” Id. (citations, internal quotation marks and ellipses omitted).
In Parpal Restaurant, Inc. v. Robert Martin Co., 258 A.D.2d 572 (2nd Dep’t 1999), the Appellate Division affirmed the motion court’s finding that “as a matter of law, by reason of the affidavit of the plaintiff’s president, its sublease … was created for the purpose of improper tax avoidance [and, therefore,] the contract was illegal, thereby precluding any right of action arising from such unlawful undertaking.” Parpal, 258 A.D.2d at 573 (citation omitted).
A similar result was reached in Sabia v. Mattituck Inlet Marina and Shipyard, Inc.,24 A.D.3d 178 (1st Dep’t 2005). [Eds. Note: while at a different law firm, the writer of this article was counsel to Mattituck Inlet Marina and Shipyard, Inc. (“Mattituck”) in Sabia.] There, plaintiff previously sold a boat he owned to defendant R. Gil Liepold Assoc. (the “First Boat”). When the plaintiff found a replacement boat (the “Second Boat”) at Mattituck that he wanted purchase, he structured the transaction as a purchase from R. Gil Liepold Assoc. so that sales tax could be avoided on the “trade-in” value of the First Boat. Thereafter, the plaintiff sued, inter alia, Mattituck for breach of contract and fraud alleging that the Second Boat was defective. The motion court denied Mattituck’s motion for summary judgment finding that issues of fact existed “as to which defendant was the true seller”. The First Department reversed, noting that the identity of the actual seller was of no moment because “the contract for the purchase of the boat was illegal.” Sabia, 24 A.D.3d at 179. The Court found that “the deal was documented in a fictional manner for the purpose of improper tax avoidance [and] no right of action can arise from an illegal contract.” Id. Accordingly, the plaintiff was “barred, as a matter of law, from suing on the alleged agreement for the purchase of the boat.” Id. (citation omitted). The Court also held that “[t]he fraud claim based on the same transaction must also be dismissed, since relief cannot be granted on a tort cause of action that requires proof of the plaintiff’s knowing entry into an illegal contract.” Id. (citations omitted).
The First Department, in Valenza v. Emmelle Coutier, Inc., 288 A.D.2d 114 (2001), also found illegality to bar a recovery by the plaintiff. In Valenza, the plaintiff sued her former employer for intentional infliction of emotional distress after her employment was terminated. Because the plaintiff was being paid “off the books” and not reporting her income to the IRS, the Court concluded she was employed “pursuant to an illegal contract.” Accordingly, the Court held that “[s]ince a party to an illegal contract can not resort to a court of law for help in obtaining its enforcement, it follows that plaintiff’s claim for intentional infliction of emotional distress, which in this case requires proof of the illegal contract, cannot be enforced.” Valenza, 288 A.D.2d at 114. See also Carmine v. Murphy, 285 N.Y.413, 416 (1941) (plaintiff cannot recover the unpaid balance on the sale of alcoholic beverages because he did not possess the required license to sell alcoholic beverages and, thus, the sales contract was illegal and “no right of action can spring” therefrom.).
On July 17, 2024, the Appellate Division, Second Department, decided Advanced Dental of Ardsley, PLLC v. Brown, a case in which the plaintiff sought to enforce an illegal contract. The plaintiff in Advanced Dental sold its dental practice to the defendant (a licensed dentist who maintained his own separate practice) pursuant to an asset purchase agreement. A portion of the purchase price was to be paid as a percentage of the revenue generated by, inter alia, the plaintiff’s practice. The motion court denied the defendant’s motion to dismiss the plaintiff’s complaint sounding in breach of contract and unjust enrichment and the defendant appealed.
In reversing the motion court, the Second Department stated:
As the defendant correctly contends, the [Asset Purchase Agreement] constituted a voluntary prospective arrangement for the splitting of fees in violation of the Education Law because it required the defendant to pay the plaintiff a percentage of revenue generated by the plaintiff’s practice and, under certain conditions, the defendant’s own separate dental practice (see Education Law §§ 6509-a, 6530[19]). It is the settled law of this State (and probably of every other State) that a party to an illegal contract cannot ask a court of law to help him or her carry out his or her illegal object, nor can such a person plead or prove in any court a case in which he or she, as a basis for his or her claim, must show forth his or her illegal purpose. Where the parties’ arrangement is illegal the law will not extend its aid to either of the parties or listen to their complaints against each other, but will leave them where their own acts have placed them. Accordingly, the Supreme Court should have granted those branches of the defendant’s motion which were pursuant to CPLR 3211(a)(7) to dismiss the causes of action alleging breach of contract and unjust enrichment. (Some citations, internal quotation marks and ellipses omitted.)
