By: Jeffrey M. Haber Under the American Rule, each party ordinarily bears its own attorneys’ fees unless a statute, court rule, or agreement provides otherwise. Parties are free to contract around that rule, but New York courts require their intention to do so to be unmistakably clear. And even when an agreement provides for prevailing party attorneys’ fees, a separate question can arise: does the provision also permit recovery of the attorneys’ fees incurred in obtaining or defending an award of attorneys’ fees, commonly referred to as “fees on fees”? That distinction was at the center of the Appellate Division, Second Department’s recent decision in Hershfield v. Davidoff. There, a promissory note permitted the prevailing party in “any action” relating to the subject note or loan to recover reasonable attorneys’ fees and costs. The question was whether that language was broad enough to permit the prevailing party to recover the additional fees incurred in defending an earlier fee award on appeal and in bringing a new action to recover those fees. The Second Department held that it was not. The Applicable Legal Principles The principle that litigants ordinarily bear their own attorneys’ fees has deep roots in American law. The “American Rule” “was originally derived from federal legislation passed in 1853 which recognized that ‘losing litigants were being unfairly saddled with exorbitant fees.’”[1] Under the American rule, “attorney’s fees are incidents of litigation and a prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties, statute or court rule.”[2] “The American rule is intended to increase ‘free access to the courts’ for those who would otherwise be discouraged from seeking ‘judicial redress of wrongs’ for fear of having to pay a defendant’s attorney’s fees.”[3] As explained by the New York Court of Appeals, the American Rule “reflects a fundamental legislative policy decision that, save for particular exceptions or when parties have entered into a special agreement, it is undesirable to discourage submission of grievances to judicial determination and that, in providing freer and more equal access to the courts, the present system promotes democratic and libertarian principles.”[4] “In the context of private agreements to avoid the rule, courts have had to determine the intent of vague fee-shifting language and broad indemnification provisions that do not explicitly allow for the prevailing party in an action between contracting parties to collect attorney’s fees.”[5] The Court of Appeals addressed this issue several years ago, holding that courts examining “broadly worded indemnification provisions”, which “by their nature are intended to cover attorney’s fees in direct party actions,” must hue to the “Court’s exacting standard that the agreement must contain ‘unmistakably clear’ language of the parties’ intent to encompass such actions.”[6] “The best evidence of what parties to a written agreement intend is what they say in their writing.”[7] As such, “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.”[8] “Courts may not ‘by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.’”[9] “‘Whether an agreement is ambiguous is a question of law for the courts … Ambiguity is determined by looking within the four corners of the document, not to outside sources.’”[10] “The entire contract must be reviewed and ‘[p]articular words should be considered, not as if isolated from the context, but in the light of the obligation as a whole and the intention of the parties as manifested thereby. Form should not prevail over substance and a sensible meaning of words should be sought.’”[11] “Where the language chosen by the parties has ‘a definite and precise meaning,’ there is no ambiguity.”[12] Evidence outside the four corners of the agreement – parol evidence – is admissible only if a court finds an ambiguity in the contract. As a general rule, extrinsic evidence is inadmissible to alter or add a provision to a written agreement. This rule gives “stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses … infirmity of memory … [and] the fear that the jury will improperly evaluate the extrinsic evidence.”[13] Further, when a contract contains a merger clause, a court must fully apply “the parol evidence rule in order to bar the introduction of extrinsic evidence to vary or contradict the terms of the writing.”[14] Hershfield v. Davidoff Hershfield grew out of a $250,000 loan that plaintiffs made to defendant, their then-son-in-law. On January 22, 2016, defendant executed a promissory note governing the loan. The note permitted prepayment and contained a broad prevailing party provision, stating that the prevailing party in any action concerning a dispute relating to the note or the loan, or any collection matter relating to them, would be entitled to recover reasonable attorneys’ fees and costs. In October 2018, plaintiffs commenced an action against defendant and others seeking declaratory relief and recovery under the note. Plaintiffs alleged that defendant had failed to make the required payments and that $155,000 in principal remained due and owing. Defendant moved to dismiss the claims against him and sought an award of attorneys’ fees under the note. By order dated May 24, 2019, the Supreme Court, Westchester County, granted the relevant portions of defendant’s motion. The motion court determined that the payments defendant had made to plaintiffs actually exceeded the amount that was then due under the note, which allowed prepayment. The motion court therefore dismissed plaintiffs’ claim for breach of the note and determined that defendant was the prevailing party entitled to recover the attorneys’ fees he had incurred in defending against that claim. Following a hearing on the amount of those fees, the motion court issued an order dated April 30, 2020, awarding defendant $20,207.86 in attorneys’ fees. Plaintiffs appealed from the portion of the order granting defendant attorneys’ fees and fixing the award at that amount. The Second Department ultimately affirmed the fee award. The conclusion of the first appeal did not end the parties’ dispute over attorneys’ fees. Defendant subsequently commenced a new action against plaintiffs, contending that the same provision of the note also entitled him to recover the additional attorneys’ fees and costs he had incurred in successfully defending the original fee award on appeal. He further sought the fees and costs incurred in bringing the new action to enforce that contractual right. According to defendant, the additional attorneys’ fees and costs totaled more than $50,000. Plaintiffs moved pursuant to CPLR 3211(a)(1) and (7) to dismiss the new complaint. Defendant opposed the motion and cross-moved for summary judgment on liability, relying on the language of the note and the prior proceedings. The parties’ dispute thus centered on the scope of the note’s attorneys’ fee provision and, more particularly, whether its language permitted defendant to recover the fees incurred in defending the earlier fee award and in pursuing his contractual entitlement to those additional fees. Plaintiffs argued, among other things, that defendant was seeking what are commonly referred to as “fees on fees,” and that a party seeking reimbursement for attorneys’ fees incurred in recovering other attorneys’ fees bears a heavy burden. Defendant, in contrast, maintained that the issue was controlled by the language of the note, which expressly provided for recovery of reasonable attorneys’ fees and costs by the prevailing party in “any action” relating to a dispute concerning the note or loan, as well as any related collection matter. The motion court agreed with defendant. In an order dated June 5, 2025, the motion court granted his cross-motion for summary judgment on liability, concluding that the clear terms of the note entitled him to recover the reasonable attorneys’ fees incurred in connection with both the prior appeal and the present action. In light of that determination, the motion court denied plaintiffs’ motion to dismiss as academic. Plaintiffs appealed, asking the Second Department to determine whether the note’s prevailing party provision was sufficiently broad to permit recovery of these additional attorneys’ fees. The Second Department reversed. The Court held that the motion court “should have denied [defendant’s] cross-motion for summary judgment on the issue of liability and should have granted [plaintiffs’] motion pursuant to CPLR 3211(a) to dismiss the complaint.[15] The Court found that defendant “failed to establish his prima facie entitlement to judgment as a matter of law on the issue of liability for breach of contract.”[16] The Court explained that the “note did not contain clear language expressly providing for the prevailing party to recover fees on fees or any reference to fees incurred to recover attorneys’ fees.”[17] “Given the absence of unmistakably clear intent regarding the recovery of fees on fees,” said the Court, “a right to recover those fees should not be implied.”[18] Accordingly, the Court concluded that the motion court “should have denied [defendant’s] cross-motion for summary judgment on the issue of liability” and “for the same reasons, the [motion] court should have granted [plaintiffs’] motion pursuant to CPLR 3211(a) to dismiss the complaint.”[19] Takeaway Hershfield highlights the distinction between a contractual right to recover attorneys’ fees and a right to recover “fees on fees.” Under New York law, the latter will not be implied merely because an agreement contains a broad prevailing party fee provision. A party seeking fees incurred in obtaining or defending an attorneys’ fee award must point to specific contractual language establishing that entitlement. Thus, even language authorizing the prevailing party to recover reasonable attorneys’ fees in “any action” relating to the agreement may be insufficient if the contract does not expressly address fees incurred in recovering attorneys’ fees. The decision also reinforces a basic principle of contract interpretation: courts will enforce an unambiguous agreement according to its terms, but they will not expand those terms to impose an obligation the parties did not unmistakably intend. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. __________________________________ [1] Sage Sys., Inc. v. Liss, 39 N.Y.3d 27, 30-31 (2022) (quoting Alyeska Pipeline Service Co. v. Wilderness Soc’y, 421 U.S. 240, 251 (1975)). This Blog examined Sage, here. [2] Id. at 30-31(quoting Hooper Assoc. v. AGS Computers, 74 NY2d 487, 491 (1989)). [3] Id. (quoting Matter of A.G. Ship Maintenance Corp. v. Lezak, 69 N.Y.2d 1, 5 (1986)). [4] Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 22 (1979) (citations omitted). [5] Sage, 39 N.Y.3d at 31. [6] Id. (citing Hooper, 74 N.Y.2d at 492). [7] Greenfield v. Philles Records, 98 N.Y2d 562, 569 (2002) (internal quotation marks and citation omitted). [8] Id. [9] Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P., 13 N.Y.3d 398, 404 (2009) (quoting Reiss v. Financial Performance Corp., 97 N.Y.2d 195, 199 (2001)). [10] Id. at 404 (quoting Kass v. Kass, 91 N.Y.2d 554, 566 (1998)). [11] Id. at 404 (quoting Atwater & Co. v. Panama R.R. Co., 246 N.Y. 519, 524 (1927)). [12] Id. at 404 (quoting Greenfield, 98 N.Y.2d at 569). [13] W.W.W. Assoc. v. Giancontieri, 77 N.Y.2d 157, 162 (1990) (internal quotation marks and citation omitted). [14] Matter of Primex Intl. Corp. v. Wal-Mart Stores, 89 N.Y.2d 594, 599 (1997). [15] Slip Op. at *2 [16] Id. [17] Id., citing Hawthorne Funding, LLC v. Karish Kapital, LLC, 236 A.D.3d 998, 1001 (2d Dept. 2025); 214 Wall St. Assoc., LLC v. Medical Arts-Huntington Realty, 99 A.D.3d 988, 990 (2d Dept. 2012). [18] Id., quoting IG Second Generation Partners, L.P. v. Kaygreen Realty Co., 114 A.D.3d 641, 643 (2d Dept. 2014) (internal quotation marks omitted); and citing see 546-552 W. 146th St. LLC v. Arfa, 99 A.D.3d 117, 121 (1st Dept. 2012). [19] Id.

By: Jonathan H. Freiberger The voluntary payment doctrine is a common law doctrine that “bars recovery of payments voluntarily made with full knowledge of the facts, and in the absence of fraud or mistake of material fact or law.” Dillon v. U-A Columbia Cablevision of Westchester, Inc., 100 N.Y.2d 525, 526 (2003) (citation omitted); see also Utica Mut. Ins. Co. v. American Re-Insurance Co., 218 A.D.3d 1283, 1285 (4th Dept. 2023); Hedley’s, Inc. v. Airwaves Global Logistics, LLC., 130 A.D.3d 872, 873 (2d Dept. 2015). “There is a presumption that a payment is voluntary.” ECI Financial Corp. v. Resurrection Temple of Our Lord, Inc., 213 A.D.3d 735, 736 (2d Dept. 2023) (citation and internal quotation marks omitted). If a written protest is made at the time of payment, a voluntary payment doctrine defense will not lie. Overbay, LLC v. Berkman, Henoch, Peterson, Peddy & Fenchel, P.C., 185 A.D.3d 707, 709 (2d Dept. 2020). Thus, the “voluntary payment doctrine is inapplicable where the payment is made under an appropriate protest or the circumstances attending the payment demonstrate the payor's intention to preserve the right to dispute the legality of the payees demand” or where “by coercion or duress, the payee deprives the payor of a choice of whether to make the payment”. Jenoure v. Body Solutions Plus, LLC of Westbury, 29 Misc. 3d 84, 86 (N.Y. App. Term 2010). “The onus is on a party that receives what it perceives as an improper demand for money to take its position at the time of the demand, and litigate the issue before, rather than after, payment is made.” DRMAK Realty LLC v. Progressive Credit Union, 133 A.D.3d 401, 403 (1st Dept. 2015) (citation and internal quotation marks omitted). The voluntary payment doctrine was addressed by the First Department over 120 years ago in Lesster v. Mayor, 33 A.D. 350 (1898). There, the plaintiff mistakenly continued to pay property taxes on a parcel of land he owned because he did not know the property had been condemned by the City of New York for road widening purposes. The Lesster court recognized that “if a party, with full knowledge of all the facts, voluntarily pays money in satisfaction of a demand made upon him, You cannot afterwards allege such payment to have been made unjustly demanded, and recover back the money.” Id. at 355 (citation and internal quotation marks omitted). The Court continued: “To constitute a voluntary payment, it must appear that the money was paid with knowledge of the facts which showed no liability to pay, and even with knowledge that it ought not to be paid.” Id (citation and internal quotation marks omitted). In directing the return of the mistakenly made tax payments, the Lesster Court stated that because “the money was received by the city under no demand or claim of right, nor was it paid by the plaintiff with knowledge of the fact that the title to the property before the tax was confirmed had passed to the city … such payment cannot be held to be voluntary, but, being one made through inadvertence or mistake, [and, therefore,] should, in consonance with what is just and right, be returned to the plaintiff.” Id. The plaintiff in Hedley’s, supra, was an exporter of antiques that agreed to export artwork valued at $240,000 to a consignee in England. The parties’ contract contained a limitation of liability in the amount of $40,000. When the artwork arrived in London, it was seized by customs. Because the antiques never reached the consignee, the plaintiff paid the consignee the sum of $240,000. The Plaintiff also recovered $40,000 from its insurance carrier. Plaintiff then sued the defendant freight forwarder for, inter alia, $240,000. The defendant moved for summary judgment dismissing the complaint based on the voluntary payment doctrine. The motion court denied the motion but the Second Department reversed. In applying the voluntary payment doctrine, the Court stated that the “defendant established its prima facie entitlement to judgment as a matter of law through the submission of, among other things, a copy of the contract between the plaintiff and the consignee, which included the limitation of liability provision that capped the plaintiff's liability to the consignee at $40,000 [which] demonstrated, prima facie, that the plaintiff's payment to the consignee of anything more than $40,000 was voluntary.” Hedley’s, 130 A.D.3d at 874-75 (citations omitted). Against this backdrop, we discuss 5 Beekman Property Owner, LLC v. Henick-Lane, Inc., decided on October 6, 2026, by the First Department. The plaintiff in 5 Beekman purchased an HVAC system from the defendant that leaked and caused damage to the plaintiff’s property. The defendant’s insurer mistakenly believed that the parties’ ongoing settlement discussions resulted in a full settlement. Accordingly, it made an $850,000 payment to the plaintiff to cover the costs of the plaintiff’s mitigation and other remedial efforts. The motion court ordered that the funds be returned to the defendant, with interest. On the plaintiff’s appeal, the First Department affirmed, finding the voluntary payment doctrine inapplicable based on the defendant’s mistake. In so doing, the Court stated: The voluntary payment doctrine, which bars recovery of payments voluntarily made with full knowledge of the facts, and in the absence of fraud or mistake of material fact or law, does not apply on these facts. Under the doctrine, the payor — here, defendant's insurer — must object or reserve rights at the time of payment in order to avoid the effect of the doctrine. The insurer made such a reservation here, noting on the check that it was a "Settlement Payment for" defendant. However, there was no such settlement, and therefore, no voluntary payment, as the payment was based on the insurer's mistake. [Citations and internal quotation marks omitted.] Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber One of the first questions confronting a party served with a notice of intention to arbitrate is when it must seek judicial intervention if it intends to challenge arbitration. CPLR 7503(c) provides the answer. Under the statute, a party served with a notice of intention to arbitrate generally must seek a stay of arbitration within twenty days after service of the notice or risk being precluded from later objecting to the arbitration. Not surprisingly, disputes frequently arise over whether the twenty-day period was properly triggered and whether any exception permits judicial review after the deadline has expired. New York courts have recognized important exceptions to CPLR 7503(c)’s preclusive effect. For example, a party may challenge arbitration after the twenty-day period where it disputes the existence of an agreement to arbitrate. Similarly, a notice of intention to arbitrate containing material defects or inaccuracies may be insufficient to trigger the running of the statutory period. These principles reflect the judiciary’s continuing gatekeeping role under CPLR Article 75 in resolving fundamental issues of arbitrability before a matter proceeds to arbitration. In Matter of Ean Holdings, LLC v. Samuels, 2026 N.Y. Slip Op. 51647(U) (Sup. Ct., Queens County Sept. 22, 2026), the motion court addressed both exceptions. Although the petitioner commenced its Article 75 proceeding more than twenty days after service of the arbitration demand, the motion court held that the petition to stay was not barred because the petitioner challenged the existence of an agreement to arbitrate and because the notice of intention to arbitrate contained material defects. The motion court further held that a dispute concerning whether an insured vehicle was involved in the underlying accident presented a threshold factual issue requiring a framed-issue hearing before arbitration could proceed. Matter of Ean Holdings, LLC v. Samuels Ean Holdings arose from a motor vehicle accident that allegedly occurred in Queens County, New York. Respondents Christina M. Samuels and Justin A. Batson Kirk (“respondents”) claimed that they sustained injuries while riding as passengers in a Nissan rental vehicle bearing an Ohio license plate and owned by petitioner EAN Holdings, LLC (“petitioner”). In the MV-104 submitted with their uninsured motorist (“UM”) arbitration demand,[1] respondents identified the adverse vehicle as a 2008 Lexus bearing a New York license plate. The Lexus was registered to proposed additional respondent Awadram Rambali and insured by proposed additional respondent LM General Insurance Company (“LM General”) under an automobile insurance policy in effect on the date of the accident. Respondents contacted LM General to open a claim. In a letter dated November 17, 2025, LM General denied the claim on the ground that its insured bore no legal responsibility for the accident. LM General stated that photographs of its insured’s vehicle showed no damage, an event-data-recorder report demonstrated no impact involving the vehicle on the date of the accident, and Rambali and his wife had each submitted an affidavit denying involvement in the occurrence. LM General’s denial was therefore based on its position that the Lexus was not involved in the accident, rather than on the absence, cancellation, or nonrenewal of insurance coverage. On March 2, 2026, respondents served by certified mail a Notice of Intention to Arbitrate naming “Enterprise Insurance Company” as the respondent. The notice was addressed to a post office box in Lexington, Kentucky, maintained by Rental Claims Services, EAN’s third-party claims administrator. The notice identified the operative insurance policy only as “policy # ?” and did not state the location of the accident, the amount claimed, the claimants’ addresses, or the identity and address of the self-insured owner of the rental vehicle. EAN commenced the proceeding on April 7, 2026, seeking a stay of the UM arbitration. Respondents opposed the petition as untimely under CPLR 7503(c), arguing that EAN had commenced the proceeding more than 20 days after service of the Notice of Intention to Arbitrate. The motion court determined that the petition was not barred. First, the motion court applied the exception recognized in Matarasso v. Continental Casualty Co., 56 N.Y.2d 264, 267 (1982), under which a court may consider an otherwise untimely stay application when the petitioner contends that no agreement to arbitrate exists.[2] EAN relied on the sworn petition of its senior liability administrator, who attested that neither EAN nor its affiliate, ELRAC, LLC, doing business as Enterprise Rent-A-Car, had any affiliation with an entity named “Enterprise Insurance Company.”[3] He further attested that no entity bearing that name had issued coverage to respondents and that “no such entity entered into any agreement to arbitrate with respondents.”[4] Respondents did not refute those assertions.[5] The motion court therefore concluded that EAN’s petition fell within the Matarasso exception.[6] Second, the motion court concluded that respondents’ Notice of Intention to Arbitrate contained material defects and thus did not trigger CPLR 7503(c)’s 20-day period.[7] A notice containing “material inaccuracies,” explained the motion court, is “defective and insufficient to trigger the running of the twenty-day period.”[8] The motion court observed that the notice “name[d] a different entity than the rental agreement,” identified the relevant coverage only as “policy # ?,” and “omit[ted] the location of the accident, the amount claimed, the claimants’ addresses, and the identity and address of the self-insured owner of the rental vehicle.”[9] Respondents acknowledged the defect and misnomer.[10] The motion court also rejected respondents’ contention that EAN’s actual receipt of the notice cured its deficiencies, explaining that “proper delivery does not remedy the inaccuracies in the notice.”[11] After resolving the timeliness issue, the motion court considered whether the record warranted a stay of arbitration. As an initial matter, the motion court addressed the burdens applicable to the motion: “[t]he party seeking a stay of arbitration has the burden of showing the existence of sufficient evidentiary facts to establish a preliminary issue which would justify the stay.”[12] Once the petitioner makes that showing, “the burden is on the party opposing the stay to rebut the prima facie showing.”[13] “Where a triable issue of fact is raised, the Supreme Court, not the arbitrator, must determine it in a framed-issue hearing, and the appropriate procedure under such circumstances is to temporarily stay arbitration pending a determination of the issue.”[14] Upon review of the parties’ submissions, the motion court found that petitioner “set forth evidentiary facts sufficient to establish a preliminary issue as to whether there was insurance coverage for the vehicle involved in the accident,” thereby shifting the burden to respondents to rebut petitioner’s prima facie showing.[15] In support of the petition, EAN submitted respondents’ Notice of Intention to Arbitrate and accompanying MV-104 accident report, the title and registration for the rental vehicle, the rental agreement summary, EAN’s New York State Certificate of Self-Insurance, DMV records relating to the adverse Lexus, and its pre-arbitration discovery demands. EAN argued that the accident did not involve an uninsured vehicle because the rental vehicle was owned by EAN, a self-insured entity, and the adverse vehicle identified by respondents was insured by LM General.[16] Respondents did not challenge the admissibility or form of those records. In fact, noted the motion court, respondents’ own submissions corroborated the existence of coverage.[17] Respondents nevertheless argued that UM arbitration was warranted because LM General had denied their claim after the submission of affidavits of non-involvement.[18] In reply, petitioner contended that “involvement and coverage present[ed] distinct questions.”[19] Petitioner maintained that the Lexus indisputably carried insurance coverage on the accident date, while the evidence submitted by LM General created a factual dispute about whether that vehicle had actually been involved.[20] The motion court agreed that the record presented a factual issue concerning the Lexus’s involvement.[21] It found that LM General’s denial, “premised upon non-involvement rather than upon cancellation or non-renewal,” raised “a triable issue of fact as to whether the identified, insured adverse vehicle was involved in the accident.”[22] Accordingly, the motion court granted EAN’s petition to the extent of temporarily staying the UM arbitration, joined Rambali and LM General as additional respondents, and directed a framed-issue hearing to determine “whether the adverse vehicle, owned by Rambali and insured by LM General, was involved in the September 26, 2025 accident.”[23] Takeaway EAN Holdings reinforces several important principles concerning arbitrability, the scope of CPLR 7503(c), and the court’s role in resolving threshold disputes before arbitration proceeds. First, the decision serves as a reminder that CPLR 7503(c)’s twenty-day deadline, while strictly enforced, is not absolute. A party that challenges the existence of an agreement to arbitrate is not necessarily foreclosed from seeking judicial relief merely because more than twenty days have elapsed since service of the notice of intention to arbitrate. In EAN Holdings, the motion court held that EAN could seek a stay notwithstanding the passage of the statutory period because it asserted that neither it nor any affiliated entity had agreed to arbitrate with respondents. Second, EAN Holdings highlights the importance of a properly drafted notice of intention to arbitrate. The motion court reiterated that a notice containing “material inaccuracies” is “defective and insufficient to trigger the running of the twenty-day period.” As the motion court noted, the demand misidentified the respondent, failed to identify the applicable policy, and omitted several basic pieces of information concerning the claim. Because the notice was materially defective, the motion court concluded that the twenty-day clock never began to run. Third, EAN Holdings underscores the court’s gatekeeping function when it comes to arbitrability. The motion court emphasized that disputes concerning arbitrability remain questions for judicial determination, not for the arbitrator. Although respondents sought uninsured motorist benefits, the evidence demonstrated that the adverse vehicle identified in their own submissions was insured on the date of the accident. The real dispute concerned whether that vehicle was involved in the accident at all. Because that question affected respondents’ entitlement to uninsured motorist arbitration, it constituted a threshold issue for the court to resolve. Finally, EAN Holdings illustrates the burden-shifting framework applicable to the challenge to petitions to stay arbitration. Once EAN produced documentary evidence establishing the existence of insurance coverage, the burden shifted to respondents to rebut that prima facie showing. When the competing submissions revealed a factual dispute concerning the involvement of the insured Lexus, the motion court ordered a framed-issue hearing. As the motion court observed, where a triable issue of fact is raised, “the Supreme Court, not the arbitrator, must determine it in a framed-issue hearing.” __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. __________________________________ [1] An MV-104 is the New York State Department of Motor Vehicles Report of Motor Vehicle Accident, commonly referred to as the driver’s accident report. Under New York Vehicle and Traffic Law § 605, a driver must generally file an MV-104 with the DMV when an accident causes death, personal injury, or property damage exceeding the statutory threshold. [2] See also Matter of Progressive Specialty Ins. Co. v. Louis, 122 A.D.3d 637 (2d Dept. 2014); Matter of Allstate Ins. Co. v. Marke, 121 A.D.3d 1107 (2d Dept. 2014). [3] Slip Op. at *2. [4] Id. [5] Id. [6] Id., citing Matter of Progressive Specialty Ins. Co. v. Louis, 122 A.D.3d 637 (2d Dept. 2014); Matter of Allstate Ins. Co. v. Marke, 121 A.D.3d 1107 (2d Dept 2014). [7] Id. [8] Id., citing Matter of State Farm Ins. Co. v. Williams, 50 A.D.3d 807, 809 (2d Dept. 2008); Matter of Allstate Ins. Co. v. Lichtenstein, 24 A.D.3d 662, 663 (2d Dept. 2005); Matter of Northern Assur. Co. of Am. v. Bollinger, 256 A.D.2d 580, 581 (2d Dept. 1998). [9] Id. [10] Id. State Farm, 50 A.D.3d at 809; Allstate, 24 A.D.3d at 663; Northern Assur., 256 A.D.2d at 581. [11] Id., citing Northern Assur., 256 A.D.2d at 581. [12] Id., quoting Matter of American Protection Insurance Co. v. DeFalco, 61 A.D.3d 970, 972 (2d Dept. 2009). [13] Id., quoting Matter of Hertz Corp. v. Holmes, 106 A.D.3d 1001, 1002 (2d Dept. 2013). [14] Id., quoting Hertz, 106 A.D.3d at 1002, and citing Matter of Allstate Ins. Co. v. Aizin, 102 A.D.3d 679, 681 (2d Dept. 2013); Matter of Utica Mut. Ins. Co. v. Leconte, 3 A.D.3d 534, 535 (2d Dept. 2004). [15] Id. at *3. [16] Id. [17] Id. [18] Id. [19] Id. [20] Id. [21] Id. [22] Id. at 3-4. [23] Id. at *4.

New York, NY (Law Firm Newswire) December 22, 2016 - The Law Office of Jeffrey M. Haber is pleased to announce that Mr. Haber has once again been named by Super Lawyers magazine to be among the top lawyers in the New York metropolitan area. Mr. Haber was recognized in the 2016 Super Lawyers, Business Edition (an annual guide to the nation’s top business law firms and attorneys) for his business litigation work. As part of his history of professional achievements, he was also recognized as a Super Lawyer in the Super Lawyers, Business Edition in 2011, 2013, 2014, and 2015. Super Lawyers magazine is an affiliate of Thomson Reuters. The publication recognizes attorneys who have distinguished themselves by both a high degree of professional achievement and by peer recognition. Each year, no more than 5 percent of lawyers are recognized as Super Lawyers by the magazine. The annual selection involves a survey of lawyers, independent research evaluation of candidates, and peer reviews within each practice area. The magazine publishes its lists nationwide, as well as in leading city and regional magazines and newspapers across the country. A description of the selection process can be found on the Super Lawyers website. About The Law Office of Jeffrey M. Haber Located in New York City, The Law Office of Jeffrey M. Haber is dedicated to representing corporations, small businesses, partnerships and individuals engaged in a broad range of business and litigation matters. For over 25 years, The Law Office of Jeffrey M. Haber has been involved in high-profile, complex litigations and arbitrations and has served in various roles in both individual and class action lawsuits which have resulted in million and multimillion-dollar settlements and awards. Its practice combines the sophistication and counsel of a large national law firm with the economy, flexibility, commitment, and personal attention of a small firm. ATTORNEY ADVERTISING. © 2016 The Law Office of Jeffrey M. Haber. The law firm responsible for this advertisement is The Law Office of Jeffrey M. Haber, 708 Third Avenue, 5th Floor, New York, New York 10017, (212) 209-1005. Prior results do not guarantee or predict a similar outcome with respect to any future matter. For more information, please contact Freiberger Haber LLP at (212) 209-1005.

By: Jeffrey M. Haber Perpetrating a fraud on the government is a serious problem. It has economic and life-threatening consequences (e.g., increasing costs to taxpayers, and providing defective bulletproof vests to the military). Congress and the states have passed many laws to end fraud on the government. Chief among these is the False Claims Act (“FCA”) and the state analogues. The FCA imposes liability on persons and companies who defraud the government and protects and rewards whistleblowers who come forward with information that exposes the wrongdoing. One of the FCA’s most ardent proponents is Senator Chuck Grassley (R-IA). Earlier this month, Senator Grassley was at the forefront of legislation passed by the Senate that increases the protections for whistleblowers. These bills, two of which he sponsored and/or co-sponsored, protect whistleblowers who report information to the office of the inspectors general, extend protections to employees of government subcontractors and grantees, and permit FBI employees to report wrongdoing to their direct supervisors. These bills are discussed below. Whistleblower Protection for Contractor and Grantee Employees Act On December 5, the Senate passed S. 795, legislation sponsored by Senator Claire McCaskill, that gives subgrantees and personal services contractors the same whistleblower protections currently given to contractors, grant recipients, and subcontractors, and prohibits contractors from being reimbursed for legal fees accrued in their defense against retaliation claims by whistleblowers. The bill also would make protections for civilian contractors and grantees permanent – protections that contractors and grantees of the Department of Defense already enjoy. “We’ve got an enormous contracting workforce in the federal government, and we’ve got to make sure that all of our contractors have the same whistleblower protections as the government employees they work alongside—because these folks are the ones raising the alarm on waste, fraud, and abuse of power,” said Senator McCaskill. The legislation became law on December 14, 2016. Inspector General Empowerment Act of 2016 On December 10, the Senate passed H.R. 6450, the Inspector General Empowerment Act of 2016. Co-sponsored in the Senate by Senator Grassley, the legislation will expand the tools for inspectors general to identify and address fraud, waste and misconduct in government. The act restores Congress’ intent to guarantee inspectors general access to “all records” of the agencies they oversee, overturning a July 2015 opinion from the Department of Justice’s Office of Legal Counsel that stated otherwise. The House of Representatives passed identical legislation earlier that week. The Senate version of the bill was introduced by Senator Grassley, who stated the following about the legislation: “If we’ve learned one thing in the last year, it’s that government needs more transparency and oversight, not less. Inspectors general are our eyes and ears in government. They are on the front lines in the fight against fraud, waste and misconduct, but they can’t do their job if they can’t access the necessary government documents. This bill makes sure that they have the tools and access they need to safeguard our tax dollars, improve efficiency, and tackle misconduct.” “Passage of the IG Empowerment Act enhances the IGs’ ability to fight waste, fraud, abuse and misconduct, protects whistleblowers who share information with IGs, increases government transparency and bolsters the public’s confidence in the independence of IGs,” said Justice Department Inspector General and CIGIE Chair Michael Horowitz. “For these reasons, the act is an important milestone for good government. The inspector general community is grateful to the sponsors and co-sponsors of this act and all those who stood up for independent oversight.” The legislation is awaiting President Obama’s signature. Federal Bureau of Investigation Whistleblower Protection Enhancement Act of 2016 On December 10, the Senate passed H.R. 5790, the Federal Bureau of Investigation Whistleblower Protection Enhancement Act of 2016. H.R. 5790 was introduced as a companion to S. 2390, the Federal Bureau of Investigation Whistleblower Protection Enhancement Act of 2015, which was introduced in the Senate on December 10, 2015 by Senators Grassley and Leahy. The 2015 Senate bill attempted to reform the FBI whistleblower protection system by changing the process for investigating and adjudicating claims of retaliation by employees who report fraud, abuse and waste. For example, it would have strengthened the appeals process for whistleblowers by requiring appellate review by the Attorney General and giving employees access to the courts. It would have defined prohibited personnel practices to be consistent with those of other Federal employees, and it would have prohibited the use of nondisclosure agreements unless the employee was fully aware of his/her rights before signing such an agreement. Currently, FBI employees are not protected when they disclose wrongdoing to their supervisors. Instead, Justice Department regulations require disclosures to be made to a limited group of senior officials even though FBI policy encourages employees to report to supervisors. Thus, FBI whistleblowers often make their initial disclosure to a supervisor, but have no legal protection in the event of retaliation. H.R. 5790 represents a modification of the 2015 Senate version. If signed by the President, H.R. 5790 will allow FBI employees to report abuse, fraud, and waste to their direct supervisors, as well as to the Inspector General of the Department of Justice and the Office of Special Counsel; change the process for investigating and adjudicating complaints regarding reprisals against whistleblowers; and require the Department of Justice and the Government Accountability Office to prepare reports related to complaints of whistleblower retaliation and the handling of those cases by the FBI. “This is a really important provision for the patriotic men and women at the FBI who have gone without the whistleblower protections given to other federal employees for far too long. The current process is vague, confusing and lacks common sense, and it often puts people in hot water for no legitimate reason,” said Senator Grassley. “The protections in this bill ensure a logical reporting requirement which allows more cases to be heard on the merits instead of being senselessly dismissed because an FBI employee logically reported wrongdoing to their supervisor.” He also stated that he will pursue the remaining provisions of the Senate version of the act in the next Congress. On December 15, the bill was presented to President Obama for signature. The Takeaway In a statement to Congress on July 8, 2016, Senator Grassley highlighted the integral role of whistleblowers in the fight against fraud on the government. The legislation discussed in this article, which he helped to shepherd through the Senate, signals the government’s continued commitment to support and encourage whistleblowers, whose efforts save taxpayers billions of dollars each year and lead to a more accountable government, to come forward with information that discloses fraud and other wrongdoing on the government. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber On December 6, 2016, the United States Supreme Court ruled that a violation of the seal provisions of the False Claims Act (“FCA”) does not mandate dismissal of a relator’s complaint. In doing so, the Court affirmed the judgment of the Fifth Circuit, which, in turn, affirmed the judgment of the district court. In State Farm Fire & Casualty Co. v. United States ex rel. Rigsby (which this Blog wrote about here and here), whistleblowers, Cori and Kerri Rigsby, filed a qui tam action against State Farm accusing the insurer of defrauding the government by falsely classifying wind damage caused by Hurricane Katrina as flood damage. Prior to Hurricane Katrina, State Farm issued homeowner-insurance policies that included both flood and wind damage. The flood insurance was backed by the National Flood Insurance Program, while State Farm’s own general homeowner’s policies covered wind damage. This meant that policyholders affected by Hurricane Katrina would receive compensation from the government for flood damage, while State Farm would be responsible for damage caused by the wind. According to the relators, the insurer instructed its adjusters to falsely classify wind damage as flood damage in order to shift the cost of insurance payouts to the federal government. The Rigsby sisters, claims adjusters for State Farm, filed a qui tam complaint under seal, alleging that the insurer wrongfully sought to maximize their policyholders’ flood claims in order to minimize its exposure to wind damage claims. Prior to the seal being lifted, counsel for the sisters leaked news of the existence of the complaint to media outlets who published stories about the alleged fraud. State Farm moved to dismiss the complaint, arguing that the relators’ violation of the seal requirement mandated the dismissal of the complaint. It did not, however, request a lesser sanction. The district court found that dismissal was not warranted, applying a balancing test that looked at three factors: (1) actual harm to the government; (2) the severity of the violations; and (3) evidence of bad faith. The case went to trial, resulting in a victory for the Rigsby sisters. The Fifth Circuit affirmed, and found that a seal violation does not mandate dismissal. The Supreme Court granted certiorari and affirmed. The Supreme Court’s Ruling In declining to require dismissal of a complaint for violating the seal requirement, the Court found that the FCA did not require such a harsh result. The Court noted that the language of the seal provision only creates a mandatory rule the relator must follow, it does not say anything “about the remedy for a violation of that rule.” Slip op. at 6. As such, “the sanction for breach is not loss of all later powers to act.” Id. (citation and internal quotation marks omitted). The Court found support for this finding in the structure of the FCA itself. The Court observed that the FCA contains several provisions requiring, in express terms, the dismissal of a relator’s action. E.g., §§ 3730(b)(5), (e)(1)–(2). The seal provision is not one of them. Since the Court refrains from inferring the “explicit” limitations found in other provisions of the statute to the one under review, it concluded that Congress did not intend to require dismissal for a violation of the seal requirement. Id. at 7. This result, said the Court, was consistent with the general purpose of the seal provision, which was enacted to “encourage more private enforcement suits,” and protect the Government’s interests in pursuing investigations without the knowledge of the defendants. Id. (citing S. Rep. No. 99–345, pp. 23–24). Thus, “it would make little sense to adopt a rigid interpretation of the seal provision that prejudices the Government by depriving it of needed assistance from private parties.” Id. Further, the Court found that the seal provision provides no textual indication that Congress “conditioned the authority to file a private right of action on compliance with a statutory mandate.” Id. at 8. In fact, said the Court, there is no textual reason to tie the relator’s ability to bring an action on his/her adherence to the seal requirement. While dismissal is not the mandatory remedy, the Court stated that a district court could order dismissal in the exercise of its discretion if the circumstances warranted it and suggested that the factors set forth by the Ninth Circuit in United States ex rel. Lujan v. Hughes Aircraft Co., 67 F.3d 242 (9th Cir. 1995), “appear to be appropriate” for that consideration. Id. at 10. In Lujan, the Ninth Circuit considered such factors as whether the Government was actually harmed by the disclosure, Congressional intent to encourage litigation through qui tam actions, and the presence or absence of bad faith or willfulness of the disclosure. The Court declined to “explore” those factors “and other relevant considerations,” leaving it to “later cases” to decide the “standards” to apply when determining whether dismissal of a qui tam complaint is the proper remedy for a violation of the seal provision. Id. at 10. Finally, the Court ruled that the district court did not abuse its discretion in denying State Farm’s motion to dismiss. The Court did not consider whether lesser sanctions were appropriate in the case because State Farm requested no other sanction than dismissal. As a result, the question was not preserved. Accordingly, the Fifth Circuit’s judgment was affirmed. The Court’s opinion is available on the Supreme Court’s website. The Takeaway In this Blog’s first article on the case, we indicated that the Ninth Circuit’s balancing approach was the most reasonable: “Balancing the violation, the reason for the violation and the impact of the violation on the government’s investigative interests seems to be the most reasonable way to ensure that meritorious cases are not dismissed over a technicality.” Although the Court did not specifically adopt the approach, it cited the approach with approval for the lower courts to use as a guidepost in determining whether dismissal is the appropriate remedy. This Blog continues to believe that the Ninth Circuit approach is the appropriate one and should serve as the guidepost for future cases. Since the Court declined to rule out dismissal as a possible remedy for violating the seal requirement, parties should be aware that dismissal is still on the table. Thus, while the Court’s decision can be considered a win for relators, whistleblowers who wish to bring a false claim action should, nevertheless, avoid disclosing the suit to the public. By the same token, defendants who learn through public sources that they are facing a qui tam action should identify the actual harms they incurred because of the disclosure. Since mandatory dismissal is not an option, both sides will be well advised to remember that the remedy to be assessed rests in the sound discretion of the court. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber In a December 2016 regulatory notice to member firms, the Financial Industry Regulatory Authority (“FINRA”) announced that the Securities and Exchange Commission (“SEC”) approved amendments to Rule 12403 of the Code of Arbitration Procedure for Customer Disputes. The amended rule will increase (1) the number of arbitrators on the public arbitrator list that FINRA sends to parties during the panel selection process from 10 to 15, and (2) the number of strikes to the public arbitrator list from four to six, so that the proportion of strikes is the same under the amended rule as it is under the current rule. Prior to the rule change, FINRA provided customers with a choice between two methods for the selection of a three-person panel. The first method, the Majority-Public Panel Option, provided for a panel of one chair-qualified public arbitrator, one public arbitrator and one non-public arbitrator. Prior to February 1, 2011, this option was FINRA’s only method for the selection of three-member panels. The second method, the All-Public Panel Option, which was added on February 1, 2011, permits any party to select a panel consisting of three public arbitrators. Customers were given the option of choosing this method of selection in their statement of claim or within 35 days from service of the statement of claim. In the absence of a customer’s selection, by default, the Majority-Public Panel Option would apply. Following implementation of the All-Public Panel Option, FINRA reviewed arbitrator ranking data and awards to determine whether the All-Public Panel Option was having the intended result – to eradicate the perceived bias in favor of the securities industry in cases involving three arbitrators and enhance confidence in and increase the perception of fairness in the arbitration process. FINRA found that in approximately 75% of the eligible cases, customers chose the All-Public Panel Option. Customers using the Majority-Public Panel Option did so by default 77% of the time, rather than making an affirmative choice. FINRA also found that the choice of selection method had an impact on the awards issued by its panels: namely, customers were awarded damages significantly more often when an all-public panel presided over their case. Moreover, FINRA’s review led to its concern that pro se litigants and attorneys unfamiliar with the selection process would inadvertently end up with a mixed panel without understanding the significance of that panel composition. Based on, among others, these findings and concerns, FINRA proposed the amendments to Rule 12403. The amendments will become effective for all arbitrator lists FINRA sends to parties on or after January 3, 2017, for panel selection in customer cases with three arbitrators. The text of the amendments is set forth in the attachment to the notice. The Takeaway The amended rule provides the parties with greater choice in the selection of public arbitrators during the panel selection process. By increasing the number of qualified public arbitrators to be ranked, the amended rule should minimize the selection of arbitrators by FINRA without the parties’ input (also known as cramdown arbitrators). At bottom, the amended rule should improve the parties’ ability to select a panel that they feel is most appropriate to resolve their dispute (i.e., a panel of all public arbitrators), while increasing the perception that the arbitration process is fair and equitable. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber Over the year, this Blog has written about awards given to whistleblowers under the SEC and CFTC whistleblower programs – the anti-fraud/anti-corruption programs created under the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). See here, here, here, here, and here. As this Blog previously reported, on December 5, 2016, the SEC announced that it had awarded $3.5 million to a whistleblower who came forward with information that led to a successful SEC enforcement action. Just four days later, on December 9, the SEC once again announced that it had awarded money under its bounty program – nearly $1 million – to a whistleblower “whose tip enabled the SEC to bring multiple enforcement actions against wrongdoers.” The whistleblower is the 37th relator to receive an award under the SEC whistleblower program. In total, since 2011, the SEC has paid approximately $136 million to whistleblowers who provided information resulting in the collection of monetary sanctions against violators of the securities laws. To date, the SEC has recovered more than $874 million from enforcement actions resulting from whistleblower tips. The SEC declined to identify the whistleblower or the wrongdoers. By law, the SEC protects the confidentiality of whistleblowers and does not release information that might directly or indirectly reveal the whistleblower’s identity. Commenting on the award, Jane Norberg, Chief of the SEC’s Office of the Whistleblower, stated: “With the issuance of this second award in less than one week, we hope to continue to encourage individuals to submit high-quality tips that we can leverage to enforce the law and protect investors, and they can receive significant financial rewards for their valuable contributions to a case.” Under the program, whistleblowers are eligible for an award if they voluntarily provide the SEC with original information that leads to a successful enforcement action that exceeds $1 million. The award can range from 10 percent to 30 percent of the money collected. All payments come from an investor protection fund established by Congress that is financed through monetary sanctions paid to the SEC by securities law violators. No money is taken or withheld from harmed investors to pay whistleblower awards. Takeaway As the SEC continues to use its bounty program to provide financial rewards to whistleblowers, more and more whistleblowers have come forward with information that has led to successful enforcement proceedings. As Jane Norberg’s comments indicate, the bounty provisions of the whistleblower program have played an important role in the SEC’s efforts to encourage people with information about violations of the securities laws to come forward and report them to the Commission. This Blog hopes that whistleblowers will continue to come forward, especially since the program is under the microscope of the new administration (discussed by this Blog here). This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber Let’s say you, the reader, are an entrepreneur who wants to open a business. Although you are willing to run the risks associated with a startup, you do not want to incur any personal liability for the acts done by the business. After speaking with your family, friends and neighbors, you decide to incorporate the business. The consensus view is that a corporate entity, such as a corporation or limited liability corporation (“LLC”), will enable you to operate the business and shield yourself from any personal liability caused by the acts of the company. After all, they tell you, entrepreneurs form such entities all the time. Taking the advice of those with whom you consulted, you incorporate your business as an LLC. You hire an attorney who helps you with the incorporation. He also warns you that although you incorporated the business, you are not necessarily insulated from personal liability for the acts of the company or LLC. The reason you remain at risk, he explains, is because creditors, among others, can pierce the corporate veil (that is, lift the corporation or LLC’s veil of limited liability). Corporate Liability for Business Debts Corporations and LLCs are separate and distinct legal entities, independent of the people who form and own them. The owners of these entities are normally not liable for the debts incurred by the corporation or LLC. However, in certain circumstances, courts will ignore the corporate form and hold the officers, directors, and shareholders or members personally liable for the company’s fraudulent or dishonest acts. When this happens, it is called piercing the corporate veil. Effects of Piercing the Corporate Veil If a court pierces the corporate veil, then the company’s owners, shareholders, or members will be held personally liable for the company’s wrongdoing. This means that the company’s creditors, among others, can go after the owners’ home, bank account, investments, and other assets to satisfy the company’s debt. The courts will not, however, impose personal liability on individuals who are not responsible for the company’s wrongful or fraudulent activities; only those parties responsible for the wrongful conduct will be held liable for the company’s debts. Courts Will Pierce the Corporate Veil Under Certain Circumstances In general, the courts will pierce the corporate veil and impose liability on the company’s owners, shareholders, or members when: (1) the owners, shareholders, or members exercised complete domination over the corporation or LLC; and (2) the owner’s domination of the corporation or LLC was used to commit a fraud or wrong that injured another. There Is No Daylight Between the Company/LLC and Its Owner Domination of the corporation or LLC by its owners, shareholders or members is not by itself sufficient to pierce the corporate veil. Still, it is a necessary element. The plaintiff must prove that the owner, shareholder or member is operating the corporation or LLC as a “sham” for his/her personal benefit and the corporation or LLC is acting as the “agent,” “alter ego” or “mere instrumentality” of the owner, shareholder or member. Conclusory allegations of domination and control are insufficient. The plaintiff must come forward with facts demonstrating that there was such a unity of interest and control between the defendant and the other entity that they cannot really be said to be two separate entities. Indicia of domination includes, among others: (1) the failure to adhere to corporate formalities (such as, making important corporate or LLC decisions without recording them in minutes of a meeting); (2) inadequate capitalization (that is, the corporation or LLC never had sufficient funds to operate; it was not a separate entity that could stand on its own); (3) a commingling of assets; (4) one person or a small group of closely related people were in complete control of the corporation or LLC; and (5) use of corporate funds for personal benefit (e.g., the owner, shareholder or member pays his/her personal bills from the business checking account). The Company’s Actions Were Wrongful or Fraudulent In New York, it is not necessary to plead or prove fraud in order to pierce the corporate veil. Those seeking to pierce the corporate veil must show that the corporation or LLC was dominated in connection with the transaction at issue and that the domination was the instrument of fraud or otherwise resulted in wrongful or inequitable consequences. In other jurisdictions, the plaintiff must show that the corporate form in and of itself operated to serve some fraud or injustice, distinct from the alleged wrongs of the individual defendant. The Wrongful or Fraudulent Conduct Caused Harm A critical component of the doctrine is establishing that the domination of the corporation or LLC led to an inequity, fraud, malfeasance, or injustice against the party seeking to pierce the corporation’s veil. Abuse of the corporation or LLC is not enough. Nor is a simple breach of contract, without more. To establish this element, there must be a temporal relationship between the domination by the owner, shareholder or member and the wrong. Therefore, the party seeking to pierce the corporate veil must establish a causal connection between the abuse of the corporate form and the wrongful conduct for which relief is sought. How to Protect Against Veil Piercing Let’s go back to the hypothetical that started this article. You formed an LLC on the advice of your family, friends and neighbors. The company, ABC Co. LLC, sells clothing accessories. Unfortunately, when you started the business, you did not capitalize it with sufficient funds. After a few months in business, you started to do several things that blurred the lines between you and the business. For example, you closed the business’s bank account and opened one account for both you and the business. You also personally guaranteed loans from creditors (such as the bank), and agreed to pay the business’s debts from your own personal assets. Finally, you failed to make sure the world knew it was dealing with ABC Co. – you failed to conspicuously identify the company status on all business cards, letters, quotes, invoices, statements, directory listings, advertisements, and other forms of company communication. Recognizing that you might be exposing yourself to liability, you go back to the lawyer who helped you incorporate the business for advice. During your meeting, your lawyer tells you to do the following to avoid trouble: hold annual meetings of directors and shareholders or members, keeping accurate, detailed minutes of important decisions that are made at the meetings; adopt company by-laws; maintain a separate bank account for the company; maintain separate books and records; refrain from commingling personal assets with those of the business; refrain from using corporate assets for personal use; adequately capitalize the company; refrain from personally guaranteeing payment of the corporation or LLC’s debts; make sure the world knows it is dealing with a corporation or LLC by conspicuously identifying the company status on all business communications; sign company documents in your representative capacity; and refrain from engaging in illegal, fraudulent, or reckless acts. EB Ink Technologies, LLC v. Lamocu Holdings, LLC Recently, a New York trial court, applying Delaware law, had the opportunity to consider the foregoing principles. On November 28, 2016, Justice Kornreich of the New York County Supreme Court, Commercial Division, issued a decision in EB Ink Technologies, LLC v. Lamocu Holdings, LLC, 2016 NY Slip Op. 32339(U), dismissing a veil piercing claim. Facts of the Case The case arose from an option held by EB Ink Technologies, LLC (“EB Ink”) to acquire 20% of the fully diluted stock of T-Ink, Inc. (“T-Ink”), which was secured by T-Ink stock held in escrow. The number of shares in escrow was subject to increase (e.g., in the event of further dilution); the escrow was supposed to be “topped up” to reflect the 20% of T-Ink’s stock. The top up obligation was a contractual obligation of Lamocu Holdings, LLC (“Lamocu”), a Delaware LLC, as special purpose vehicle (“SPV”). EB Ink had no written agreement with the Individual Defendants (T-Ink’s founders) obligating them to personally top up the escrow with their own shares. Between December 2007 and May 2008, EB Ink and T-Ink entered into a number of agreements, pursuant to which EB Ink (1) purchased approximately 3.1% of T-Ink’s common stock; (2) loaned $22 million to T-Ink with the right to convert the loan into approximately 17.1% of T-Ink’s common stock; and (3) obtained a warrant to purchase 22% of T-Ink’s common stock on a fully diluted basis. The top up obligation was the result of these transactions. In October 2009, the Individual Defendants formed Lamocu in order to execute seven contracts with EB Ink. The action concerned only one of those contracts: the Option Agreement. The Option Agreement provided EB Ink with the right to purchase 20% of T-Ink’s common stock on a fully diluted basis for $5 million. The option expires on October 31, 2019. At the time the Option Agreement was executed, Lamocu did not own any shares of T-Ink other than those it deposited with the escrow agent. EB Ink alleged that “[i]t was understood and agreed among the [Individual Defendants] and EB Ink that the [Individual Defendants] would at all times provide Lamocu with sufficient shares to satisfy its obligations under the Option Agreement.” Slip op. at 2 (internal quotation omitted). This alleged oral agreement was not contained or referenced in any of the parties’ contracts. By letter agreement dated March 5, 2013 (the “Letter Agreement”), the parties agreed to amend the Option Agreement so that the amount of shares due upon EB Ink’s exercise of its option would be fixed. This amendment would, therefore, eliminate the perpetual possibility of the escrow needing to be topped off until the option’s expiration in 2019. In October 2013, one of the Individual Defendants requested that EB Ink exercise its amended option rights under the Letter Agreement to facilitate a transaction with a non-party, Pacific Capital Group (“PCG”) and another investor, who were prepared to invest more than $3 million in T-Ink. EB Ink refused, contending that the conditions of the Letter Agreement had not been satisfied. Between November 13 and December 6, 2013, the same Individual Defendant and EB Ink negotiated the number of additional shares that would be needed to top up the escrow at the time the amended option was executed. But, no agreement was ever reached. EB Ink claims that it learned that the proceeds from PCG were being used for a purpose prohibited by the Letter Agreement, namely, an acquisition of a German technology company (which also, allegedly, was done by T-Ink acquiring a further $3 million payment obligation). Shortly thereafter, according to EB Ink, it discovered other improper uses of the proceeds. For these reasons, EB Ink never exercised its amended option under the Letter Agreement, nor did it exercise its original option under the Option Agreement, which it claimed was still effective (and which, as noted, does not expire until October 31, 2019). In January 2014, the same Individual Defendant orally conceded that the conditions under the Letter Agreement were not satisfied. He also allegedly admitted that the Option Agreement was not disclosed to PCG because PCG would not have provided T-Ink with financing had it known about EB Ink’s option. It was at that time, that the Individual Defendants allegedly verbally acknowledged their personal liability to top up the escrow under the Option Agreement. The parties then attempted to negotiate another proposed amendment to EB Ink’s option rights, but no such agreement was reached. By letter dated October 14, 2015, EB Ink demanded that Lamocu top up the escrow as required by the Option Agreement. Lamocu refused to do so, and EB Ink terminated the Letter Agreement. The Motion to Dismiss and Ruling EB Ink commenced the action on January 7, 2016 by filing a complaint with seven causes of action: (1) a declaratory judgment that Lamocu and the Individual Defendants have the obligation to top up the escrow under the Option Agreement; (2) specific performance of the top up obligation, asserted against Lamocu; (3) specific performance of the top up obligation, asserted against the Individual Defendants; (4) piercing Lamocu’s corporate veil to hold the Individual Defendants liable for Lamocu’s top up obligations; (5) fraudulent inducement of the Option Agreement, asserted against Lamocu, the Individual Defendants, and T-Ink; (6) injunctive relief prohibiting the Individual Defendants from selling their T-Ink shares and T-Ink from repurchasing its shares from the Individual Defendants; and (7) anticipatory breach of the escrow top up obligation, asserted against Lamocu and the Individual Defendants. On April 29, 2016, the defendants filed a motion to dismiss, which sought dismissal of all claims except the breach of contract claim asserted against Lamocu (the second cause of action). The court granted the defendants’ motion. In granting the motion, Justice Kornreich observed that EB Ink’s complaint principally relied on claims of veil piercing and alleged oral admissions by the Individual Defendants. These issues, said Justice Kornreich, were the “core issue[s]” in the case. As such, the court set out to answer “whether the Individual Defendants [may] be held liable for Lamocu’s top up obligations.” Although not stated explicitly in the decision, the court found that EB Ink properly alleged domination by the Individual Defendants, stating: “The allegations in the complaint regarding domination, control, and inadequate capitalization, as set forth above, are insufficient to pierce the corporate veil of a closely held Delaware LLC.” Slip op. at 4. But, as the quote shows, those allegations were insufficient to state a claim. The reason being “the requisite fraud allegations [are] not alleged. The only bad act alleged, Lamocu’s breach of its contractual obligations, cannot be used to satisfy the fraud prong.” Id. Under Delaware law, a valid veil piercing claim requires the plaintiff to plead that the company “controlled by defendants [is a] sham entit[y] designed to defraud investors and creditors . . . .” EBG Holdings LLC v. Vredezicht’s Gravenhage 109 B.V., 2008 WL 4057745, at *12 (Del Ch 2008) (“the requisite element of fraud under the alter ego theory must come from an inequitable use of the corporate form itself as a sham, and not from the underlying claim.”). The Takeaway EB Ink reinforces the point that domination of the corporation is not enough to pierce the corporate veil. A plaintiff must demonstrate the other elements of the doctrine – namely, a fraud and causation. EB Ink was unable to allege either. In fact, Justice Kornreich made a point of noting that this failure was “fundamental” to the dismissal of the claim: On an even more fundamental level, the claim that the Individual Defendants were intended to be held liable for Lamocu’s top up obligations is based on the entirely foreseeable assumption that Lamocu, an SPV, would not have the ability to top up the escrow because it did not own the shares needed to do so. Even if the court found EB Ink’s position to be sympathetic, equity is not a concern the court may consider when interpreting a contract or assessing the legitimacy of a Delaware corporation. The parties here are sophisticated and, therefore, the court must enforce their agreement, even if the court or one of the parties believes the agreement to be unwise. EB Ink admits that it knew that Lamocu did not own shares of T-Ink that could be used to top up the escrow. Obviously, entering into a contract with a judgment proof SPV that obligates the SPV to deliver shares, which it does not own nor has the means to acquire, is an extremely perilous risk. It is hard to imagine a more extreme undertaking of counterparty credit risk. Had the parties intended to obligate the Individual Defendants, instead of just Lamocu, to top up the escrow, they could have (and would have) expressly done so in one of their many agreements. They did not. The court cannot rewrite the parties’ contract to give EB Ink a better bargain than it negotiated. Rather, the court must give effect to the parties’ decision to not contract for the Individual Defendants to have the personal obligation to top up the escrow. Slip op. at 4 (citations and internal quotations omitted). This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber Previously, this Blog wrote about the importance of having a complete record when challenging an arbitration award. Recently, three claimants in arbitration learned the hard way that an incomplete record will not support vacatur of an award. See Abbott v. RBC Dain Rauscher Inc., No. 1-15-1612, 2016 IL App (1st) 151612-U (Ill. App. Ct. 1st Dist. Sept. 29, 2016). The Arbitration Proceeding David, James, and Michael Abbott (“Plaintiffs”) filed a claim in arbitration against RBC Dain Rauscher Incorporated, now known as RBC Capital Markets Corporation, and Charles Lane, a broker at RBC Capital (“Defendants”), for violating various financial regulations. The Plaintiffs retained RBC Capital and Lane as their financial consultants. Around 2005, the Plaintiffs discovered unsuitable trades in their accounts. In September 2008, the Plaintiffs filed a five-count statement of claim before the Financial Industry Regulatory Authority (“FINRA”). The Plaintiffs asserted violations of the federal securities laws and Illinois consumer laws, and various claims under the common law. The matter went to arbitration for over two years with hearings spanning approximately 57 days. In February 2014, a three-member panel awarded the Plaintiffs almost $200,000 in compensatory damages and $3,000 in sanctions against the Defendants. During the hearing, the Plaintiffs orally moved to submit two FINRA news releases (from 2009 and 2010) and also a “financial industry regulatory letter of acceptance, waiver, and consent,” which is the equivalent of a FINRA settlement, involving RBC Capital. The hearing transcript revealed that counsel for the Plaintiffs briefly described the documents, outlined their contents, and argued they would buttress his expert’s testimony that the Defendants had violated various industry standards and that RBC failed to properly supervise its employees, including Lane. The presiding arbitrator held that the documents did not relate directly to the claims and denied their admission as exhibits. The presiding arbitrator nonetheless reserved the matter for the close of evidence. At the close of evidence, counsel for the Plaintiffs again moved to submit the documents as exhibits. The presiding arbitrator stated that the Plaintiffs could attach the documents to their closing brief and that essentially the arbitrators may or may not review them. The Plaintiffs, however, did not attach the documents. The Motion Court Proceedings The Plaintiffs moved to vacate the arbitration award, arguing that the arbitrators refused to hear evidence material to the matter, thereby rendering their damages award insufficient. The court denied their motion, holding the matter was within the arbitrators’ discretion. The Plaintiffs filed a motion to reconsider, which was denied. The court thereafter granted the Defendants’ motion to confirm the arbitration award. The Plaintiffs appealed the judgment affirming the arbitration award, contending that the arbitrators did not properly consider the evidence described above. The Appellate Court Ruling On appeal, the Plaintiffs challenged the motion court’s ruling denying their motion to vacate the arbitration award, arguing the arbitrators erred in declining to admit the news releases and settlement documents. The Plaintiffs maintained that had these documents been admitted, they would have been able to establish liability against RBC for the failure to monitor employee activities, and then been able to obtain punitive damages. The Plaintiffs contended that their expert should have been allowed to testify about the news releases and settlement documents, but inexplicably failed to provide the court with the full transcripts of their expert’s testimony, the Defendants’ expert’s testimony, or that of any other witness. Instead, they only provided the court with snippets of arbitration testimony and transcripts of their interchange with the court and opposing counsel, whereby they argued the evidence at issue should have been admitted. Incredibly, as the Court noted, “[S]ome of the snippets [do] not even identify by name which witness is testifying.” Slip op. at n.2. The Court held that, even assuming the Plaintiffs had properly sought to admit the documents, “without a record bearing the full hearing testimony, especially that of the competing experts,” it could not say that those documents “were so material to the matter at hand that without them the course of the case would have changed vis a vis RBC.” Id. at 6. Consequently, the Court affirmed the judgment. The Takeaway The teaching of Abbott is simple: a party challenging an arbitral award must file as complete a record as possible to support the motion, taking care to highlight all evidence, not merely snippets and argument among counsel. The importance of this teaching cannot be underscored enough because the party seeking to vacate an arbitral award has the burden of establishing the basis upon which the award should be vacated. Unfortunately for the Plaintiffs in Abbott, they did not learn the lesson. They failed to meet their burden because they “submit[ted] a record … [that is] woefully insufficient to find prejudice or that [the] plaintiffs were deprived of a fair arbitration hearing.” Slip op. at 7. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber Jane is a shareholder in ABC Co. Over the past three years, the company has been losing money, due in large part to an increase in expenses. Jane learns the truth about the company’s financial condition and discovers that senior managers of the company are reporting their personal use of the company’s jet, cars and houses as a business expense. Because of management’s failure to properly report the use of company property, the company’s expenses have skyrocketed. Jane wants to recover the expenses incurred because of the managers’ misuse of corporate property. Jane can do so by filing a shareholder derivative action. A derivative action is a lawsuit brought by a shareholder of a company, on behalf, and for the benefit, of the company to enforce or defend a legal right or claim. Derivative actions seek the recovery of damages and/or equitable relief arising from unlawful or improper conduct engaged in by officers, directors, or other persons in control of the company. Such conduct includes, but is not limited to: breaches of fiduciary duty; fraud; self-dealing by insiders; conflicts of interest; waste of company assets; insider trading; options backdating; inflated, false, or misleading financial statements; improprieties related to executive compensation; conduct leading to regulatory investigations; and management or board decisions that expose the company to harm or risk (e.g., violations of consumer protection laws, environmental violations). A derivative action allows current shareholders to bring an action in the name of the company to redress the harm caused by management where it is unlikely that management will redress the harm itself. In addition to the recovery of damages, which are awarded to the company and not to the individual shareholders that initiate the action, a successful derivative action may include corporate governance reforms that strengthen and protect shareholder value. Any recovery of money or implementation of governance reforms by way of settlement must be approved by the court. Approval must be based on facts and circumstances showing that the result is fair and reasonable to the company and in its best interest. Although a shareholder has the derivative action in his/her arsenal, he/she cannot immediately run to court to redress the alleged wrongdoing. The shareholder must first formally demand the company’s board of directors act in the manner that the shareholder requires, such as suing the wrongdoers. The “demand” requirement, however, can be waived if the suing shareholder can show that such a demand would have been futile. If the shareholder makes a demand on the board, then the board must be allowed time to determine the proper course of action to pursue. To assist it, the board will often seek outside counsel and/or create a committee of disinterested directors who were not involved in the transaction about which the shareholder is complaining. If the board and/or committee recommend legal action, then the board will likely file an action against the wrongdoers who have pursued, or are pursuing, the illegal or improper course of conduct. If, however, the board and/or the committee determine that legal action is not appropriate, then the demanding shareholder may commence an action on his/her own for the benefit of the company. In addition to the demand requirement, many jurisdictions require a shareholder to prove that he/she has standing to bring the action. These laws often require the shareholder to meet certain qualifications, such as maintain a minimum value of the shares held and hold the shares for a certain period of time. Culligan Soft Water Company v. Clayton Dubilier & Rice, LLC As noted above, any settlement of a derivative action must be approved by the court. See, e.g., Section 626(d) of the New York Business Corporation Law. In June 2015, the Honorable Jeffrey K. Oing, Justice of the Supreme Court, New York County, approved such a settlement. However, on November 29, 2016, the First Department reversed that approval because, among other reasons, the settlement did not confer a benefit on the company. Culligan Soft Water Co. v. Clayton Dubilier & Rice, LLC, 144 A.D.3d 611, 2016 NY Slip Op 08021 (1st Dep’t 2016). The Motion Court Proceedings On June 8, 2015, Justice Oing approved the partial settlement of a derivative action brought by minority shareholders of Culligan Soft Water Company (“Culligan”). The action arose from the $610 million leveraged buyout (“LBO”) of the company by Clayton Dubilier & Rice, LLC (“CD&R”), a private equity firm. The suing shareholders claimed that after CD&R bought Culligan, it saddled the company with more debt than it could repay. At the same time, CD&R extracted the company’s value for its own benefit through a series of transactions, including a $375 million dividend, and allowed its debt to be sold at a steep discount to investment firms Angelo Gordon & Co., Silver Oak Capital LLC and Centerbridge Partners LP (the “Lenders”). The shareholder plaintiffs reached a settlement with Angelo Gordon, Centerbridge and a related entity. Under the settlement, the Lenders agreed to pay the shareholders $4 million to be held in trust and used to settle the plaintiffs’ past legal fees, as well as fund the derivative action against CD&R and the current and former Culligan officers and directors. CD&R and the director defendants objected to the proposed settlement, arguing, among other things, that the proposed settlement only benefited the plaintiffs – the minority shareholders – and not the company or its two largest shareholders, both CD&R entities. At oral argument, Justice Oing rejected these arguments, though he expressed skepticism at first, questioning whether it would be better to keep the $4 million in escrow, pending the final resolution of the case. Justice Oing found that the partial settlement was fair since it resolved the claims against the Lenders (which related to the restructuring and the acquisition of Culligan’s assets pursuant to a 2012 exchange transaction) and provided money for the claims against the remaining defendants, in addition to cooperation from the Lenders in the continued litigation. Justice Oing noted that the proposed partial settlement “compartmentalized” the suit by removing peripheral claims, while keeping the focus on the central allegations of the action – those concerning the LBO and the allegedly illegal distributions paid to CD&R and the Culligan officers and directors. In his bench ruling, Justice Oing underscored the fact that, under the settlement, the minority shareholders would receive $4 million and cooperation from the Lenders to pursue the larger case, which was in the best interest of the broader case: “Those are factors they had to weigh and think about, not only for their benefit but also for the company’s benefit, and at the end of the day, that is something I cannot ignore.” The First Department’s Holding On November 6, 2016, the First Department heard argument on CD&R’s objections to the partial settlement. As an initial matter, CD&R argued that the plaintiffs, minority holders of beneficial shares of the company, did not have standing to settle the claims. CD&R noted that the plaintiffs were Culligan franchisees and “business partners” with the defendant investment firms that bought Culligan’s debt after CD&R’s $610 million LBO. Additionally, CD&R argued that the settlement provided no benefit to Culligan. According to CD&R, the settlement benefited the minority shareholders and not the corporation. “The money is going straight into the pockets of the dealers, their trade association and its attorneys,” said CD&R’s counsel. “[T]hey haven’t obtained anything except cash for their trade association.” Notably, the minority shareholders did not disagree, stating: “The $4 million is to be used for legal fees and to the extent that there’s anything left, it would go to the company.” Neither the trade association nor the dealers would receive any money outside of what they had spent on legal fees. Approximately three weeks later, the First Department agreed with CD&R and the company defendants and reversed the approval of the partial settlement. In a unanimous, terse opinion, the Court accepted the reasons advanced by these defendants for vacating the judgment below: The settlement does not provide for payment to the company. Plaintiffs are to receive the bulk of the $4 million settlement in reimbursement for their legal fees in this case, and the remainder is to be turned over to their franchisee organization for future legal fees or for distribution, at the organization's discretion, to plaintiffs. Moreover, because they have not obtained a substantial benefit for the company, but have accomplished only getting their lawyers paid, plaintiffs, who, after four attempts, have yet to plead properly that they have standing to sue derivatively, are not entitled to legal fees. It was an abuse of discretion to approve the settlement of a derivative action purporting to bind the company and all shareholders that was obtained by plaintiffs who had not established — and may never establish — their standing to bring the action. Contrary to plaintiffs' argument, defendants, as shareholders in the company who received notice of the settlement and had an opportunity to and did object to the settlement, have standing. Internal citations omitted. The Takeaway It is well-established that the fundamental purpose of a derivative action is to vindicate a wrong done to the company. Because that is the purpose of the derivative action, New York courts have long held that any recovery obtained in a derivative action should be for the benefit of the injured company. Thus, any monetary payment recovered and/or non-monetary benefit obtained in the action must be paid and/or flow to the company whose claims are at issue. The settlement before the Court in Culligan, however, did not comport with these principles. The record showed that in exchange for a broad release of Culligan’s claims against the settling parties, the minority plaintiffs would receive: (1) $4 million to be paid directly to their franchise dealers association, which was given complete discretion – without court review – to distribute attorney’s fees, hold “up to $1 million” in trust “to fund future legal expenses,” and to pay the balance “directly to Plaintiffs” in proportion to their fundraising efforts for the association; and (2) cooperation in the continued litigation (i.e., the ability to subpoena documents and testimony from the settling parties) – consideration that was opposed by the company and its majority shareholder because it only conferred a benefit on the plaintiffs and their attorneys. The Court rightly found that neither form of consideration provided any benefit to Culligan or its majority shareholder. Where derivative actions are concerned, courts must be vigilant in protecting the interests of the corporation and shareholders, especially in the context of settlement. The reason courts are given such a responsibility is “to discourage the private settlement of a derivative claim under which a shareholder-plaintiff and his attorney personally profit to the exclusion of the corporation and the other shareholders....” Mokhiber on Behalf of Ford Motor Co. v. Cohn, 783 F.2d 26, 27 (2d Cir. 1986). By examining the substance of the proposed settlement in Culligan, the Court fulfilled its role as gatekeeper and ensured that the relief obtained was fair and reasonable and would go to the company. As the Court found, however, the partial settlement did not provide a real or substantial benefit to the company but, instead, allowed the plaintiffs to negotiate fees in exchange for illusory benefits to the corporation and broad general releases for the alleged wrongdoers. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jonathan H. Freiberger General Business Law § 349 was promulgated to address “the impact of deceptive conduct on consumer purchases [and, therefore,] prohibits deceptive acts and practices that misrepresent the nature or quality of products and services.” Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v. Matthew Bender & Co., Inc., 37 N.Y.3d 169, 176 (2021) (citing Teller v. Bill Hayes, Ltd., 213 A.D.2d 141, 146 (2nd Dept. 1995).) To state a cause of action under General Business Law § 349, a plaintiff “must allege that: (1) the defendant's conduct was consumer-oriented; (2) the defendant's act or practice was deceptive or misleading in a material way; and (3) the plaintiff suffered an injury as a result of the deception. Himmelstein, McConnell, 37 N.Y.3d at 176 (citations omitted). Significantly, a plaintiff need not allege reliance on the deceptive act and, therefore, need not allege that “they would not otherwise have entered into the transaction.” Stutman v. Chemical Bank, 95 N.Y.2d 24 (2000). The key to the applicability of General Business Law § 349 is “consumer oriented conduct.” An “act or practice is consumer-orientated when it has a broader impact on consumer’s at large.” Himmelstein, 37 N.Y.3d at 177 (citations and internal quotation marks omitted). The Court of Appeals explained “consumer oriented conduct” in the context of a General Business Law § 349 action as follows: Consumer-oriented conduct does not require a repetition or pattern of deceptive behavior. The statute itself does not require recurring conduct. Moreover, the legislative history makes plain that this law was intended to "afford a practical means of halting consumer frauds at their incipiency without the necessity to wait for the development of persistent frauds" (see, Mem of Governor Rockefeller, 1970 NY Legis Ann, at 472-473). Plaintiff, thus, need not show that the defendant committed the complained-of acts repeatedly — either to the same plaintiff or to other consumers — but instead must demonstrate that the acts or practices have a broader impact on consumers at large. Private contract disputes, unique to the parties, for example, would not fall within the ambit of the statute. Oswego Laborer’s Local 214 Pension Fund v. Marine Midland Bank, 85 N.Y.2d 20, 25 (1995) (Some citations and internal quotation marks omitted). General Business Law § 349 has been applied to a variety of situations. See, e.g., Karlin v. IVF America, Inc., 93 N.Y.2d 282 (1999) (in vitro fertilization services); Plavin v. Group Health Inc., 35 N.Y.3d 1 (2020). However, “the consumer-oriented element precludes a General Business Law § 349 claim based on private contract disputes, unique to the parties.” Himmelstein, 37 N.Y.3d at 176 (citations, internal quotation marks and brackets omitted); see also Teller, 213 A.D.2d at 146. The plaintiff in Kovalenko v. Bhatti General Contracting & Development, LLC, 241 A.D.3d 1540 (2nd Dept. 2025), made a General Business Law § 349 claim against a contractor for the breach of a construction contract. The Second Department reversed the motion court’s denial of the contractor’s motion to dismiss the claim. The Court recognized that a “single shot transaction, which is tailored to meet the purchaser’s wishes and requirements, does not, without more, constitute consumer-oriented conduct for the purposes of General Business Law § 349. Kavalenko, 241 A.D.3d at 1544 (citations, internal quotation marks and brackets omitted). The Court stated: Here, in the complaint, the plaintiff failed to allege that the defendants’ conduct was consumer-oriented conduct. The plaintiff did not allege that the defendants offered their services to the general consuming public or that the defendants’ acts and practices were of a recurring nature and harmful to the public at large. Id. (citations omitted). Interestingly, the United States Court of Appeals for the Second Circuit recently found that a plaintiff’s General Business Law § 349 claim was preempted by the Federal Food, Drug, and Cosmetic Act. Yousefzadeh v. Johnson & Johnson Consumer, Inc., 184 F.4th 130 (2026). There, plaintiffs, buyers of nasal decongestant, brought actions against several drug manufacturers and retailers claiming that the decongestant was produced, marketed, advertised and sold knowing that its active ingredient was not effective as a decongestant. Yousefzadeh, 184 F.4th at 138. The Court held that state consumer protection laws (including General Business Law § 349) were preempted because the manufacturers “followed the FDA's prescribed labeling requirements by designating their decongestants’ purpose as decongestion … [and, therefore, they] cannot now be sued for complying with those FDA specifications. Therefore, the claim that Defendant Manufacturers mislabeled their products by indicating their use for decongestion fails.” Id. Against this backdrop, we discuss USMMA Sailing Found, Inc. v. Hilb Group of N.Y., LLC, decided by the Appellate Division, Second Department, on October 7, 2026. The plaintiff in USMMA alleged that defendant insurance broker failed to procure “the full scope of insurance coverage requested by the plaintiff for the racing yacht and that the defendant concealed the fact that such coverage was available to the plaintiff at a higher premium.” The defendant moved to dismiss the General Business Law § 349 claim. The motion court denied the motion and the defendant appealed. The Second Department reversed and, in so doing, stated: General Business Law § 349(a) declares unlawful all unfair, deceptive, or abusive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state. Parties claiming the benefit of General Business Law § 349(h) must, at the threshold, charge conduct that is consumer oriented. The conduct need not be repetitive or recurring but defendant's acts or practices must have a broad impact on consumers at large. Private contract disputes, unique to the parties, do not fall within the ambit of the statute. Here, accepting as true the facts alleged in the complaint and according the plaintiff the benefit of every possible favorable inference, the plaintiff's allegations that the defendant violated General Business Law § 349(h) failed to state a cause of action. The plaintiff failed to allege that the defendant's acts or practices had a broad impact on consumers at large, and the plaintiff did not assert any facts that would support such an allegation. The allegations in the complaint merely refer to a private contract dispute over the procurement of insurance coverage and the processing of a claim that is unique to these. Accordingly, the Supreme Court should have granted that branch of the defendant's motion which was pursuant to CPLR 3211(a)(7) to dismiss the third cause of action for failure to state a cause of action. [Citations, internal quotation marks, brackets and ellipses omitted.] Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.