By: Jeffrey M. Haber Few principles of contract law are more fundamental than the requirement that parties reach a meeting of the minds on all material terms before a binding agreement will be enforced. Under New York law, an enforceable contract requires an offer, acceptance, consideration, mutual assent, and an intent to be bound. Where the parties continue to negotiate essential terms, exchange draft agreements, or contemplate future execution of a written contract, courts are often reluctant to conclude that a binding agreement has been formed. These principles were at issue in MEP Capital Holdings II, L.P. v. Arclight Films International Pty Ltd., where the Commercial Division addressed whether an unsigned sales agency agreement could bar fiduciary duty, unjust enrichment, constructive trust, and declaratory judgment claims. The defendant argued that the parties’ email communications and conduct demonstrated the existence of a binding contract, rendering plaintiffs’ equitable claims duplicative of contract remedies. The plaintiffs countered that no contract was ever formed because the parties never agreed on a material term, leaving only a common-law principal-agent relationship. The motion court agreed with the plaintiffs and held that the parties did not have an enforceable agreement as there was no meeting of the minds. MEP Capital Holdings II, L.P. v. Arclight Films International Pty Ltd. The dispute arose from the acquisition of the “Lotus Library,” a collection of film and media assets. According to the complaint, defendant encouraged MEP Capital Holdings II (“MEP II”) to acquire the library and later sought to serve as the sales and servicing agent for the collection. The parties negotiated a proposed Sales Agent Agreement pursuant to which defendant would act as the servicing and sales agent for the Lotus Library titles, which would entitle it to certain fees on existing licensing obligations from the library’s distributors, as well as a commission on deals it closed for the acquisition or renewal of distribution agreements. During the negotiations, both parties expressed their shared understanding that plaintiffs would retain discretion to approve or reject deals proposed by defendant. Plaintiffs alleged that they conveyed to counsel their expectation that this reservation of rights would be included in the Sales Agent Agreement, but that counsel did not include the provision in the draft. Plaintiffs asserted that this approval right was a material term of any agreement between the parties. The Sales Agent Agreement was never finalized or executed. Despite the absence of a finalized contract, defendant purportedly held itself out as plaintiffs’ sales agent for the Lotus Library titles and allegedly entered into several unauthorized agreements with distributors. Plaintiffs claimed that defendant entered an agreement to distribute at least two Lotus Library films without obtaining their approval, concealed these agreements, underreported or did not report revenues collected therefrom, and then provided plaintiffs with “misinformation, incomplete information, and fraudulent documentation” when asked for disclosure. Defendant also allegedly misappropriated revenues assigned to plaintiffs on films it produced and financed. Separately, plaintiffs allege that MEP III was induced into financing a film by defendant’s execution of an irrevocable Guarantee of payment of $900,000, and that defendant defaulted under the Guarantee by failing to secure distribution rights for the film. Plaintiffs asserted five causes of action for: (1) breach of fiduciary duty (asserted by MEP II); (2) unjust enrichment (asserted by MEP II); (3) constructive trust (asserted by both Plaintiffs); (4) breach of contract under the Guarantee (asserted by MEP III); and (5) declaratory judgment that no sales agent relationship exists between plaintiffs and defendant with respect to the Lotus Library titles (asserted by MEP II). Defendant moved to dismiss, contending that the first, second, third, and fifth causes of action should be dismissed as duplicative of a breach of contract claim that plaintiffs allegedly could have asserted under the proposed Sales Agent Agreement. According to defendant, the Sales Agent Agreement constituted a valid and enforceable contract notwithstanding the absence of signatures because contemporaneous email communications purportedly demonstrated that the parties agreed to its terms and partially performed under it. Defendant further argued that MEP III’s constructive trust claim was duplicative of its breach of contract claim under the Guarantee and that any constructive trust claim asserted by MEP II was likewise duplicative of contract claims purportedly arising from the financing arrangements referenced in the Complaint. In opposition, plaintiffs maintained that no valid contract ever existed between MEP II and defendant because the parties never finalized or executed the proposed Sales Agent Agreement and instead operated, at most, within a common law principal-agent relationship. Plaintiffs argued that the draft agreement was never ratified because it omitted what they characterized as a material, industry-standard reservation of rights that permitted MEP II to approve or reject proposed distribution transactions. Plaintiffs further contended that defendant’s email correspondence did not conclusively establish contract formation or ratification and therefore failed to refute their allegations. In the absence of an enforceable contract, plaintiffs asserted that their claims for breach of fiduciary duty, unjust enrichment, and constructive trust were properly pleaded and, in any event, could be asserted in the alternative. Plaintiffs also argued that declaratory relief was appropriate to resolve the parties’ respective rights and obligations arising from their alleged principal-agent relationship, particularly where no contractual remedy was available. The motion court agreed with plaintiffs, finding, among other things, that the parties neither executed the proposed Sales Agent Agreement nor reached agreement on all material terms.[1] Noting that “an enforceable contract exists where there is ‘an offer, acceptance of the offer, consideration, mutual assent, and an intent to be bound . . . [and a] meeting of the minds . . . on all essential terms,’”[2] the motion court found that the Sales Agent Agreement was not an enforceable agreement.[3] The motion court explained that the “Complaint explicitly allege[d] that the ‘parties never finalized or executed the [Sales Agent Agreement]’ because they did not agree on an essential term of the contract, namely the exclusion of MEP II’s purported ‘customary rights’ as owner of the Lotus Library to approve or deny deals entered by Defendant for the library’s content.”[4] As such, the motion court held that “Plaintiffs sufficiently allege[d] that the Sales Agent Agreement was never approved and that MEP II and Defendant only had a common law principal-agent relationship with respect to the Lotus Library.”[5] In so holding, the motion court rejected defendant’s proffered documents – namely the emails exchanged by the parties – in support of the motion.[6] The first set of emails that defendant proffered, noted the motion court, reflected the parties’ ongoing negotiation of the terms of the Sales Agent Agreement in October 2020.[7] “These emails do not indicate unambiguous agreement between the parties on the putative agreement’s terms; rather, they indicate the exchange of ‘redlines,’ ‘tweaks,’ and ‘proposed language,’” said the motion court.[8] “Nowhere does this set of emails indicate that the Sales Agent Agreement was finalized, approved, or executed,” concluded the motion court.[9] The motion court found that the “second tranche of emails from January and February 2022, between the parties and a non-party licensee of a Louts Library title, contain[ed] no mention of the Sales Agent Agreement.”[10] The motion court concluded that references to defendant as MEP II’s “sales agent” did not conclusively demonstrate the existence of an enforceable Sales Agent Agreement. Instead, said the motion court, the communications were consistent with plaintiffs’ allegation that defendant served in a common-law agency capacity, leaving unresolved the central question of whether the parties ever formed a binding contract.[11] Particularly significant to the motion court was a May 2023 email exchange in which a plaintiffs’ representative inquired whether a signed copy of the Lotus Sales Agent Agreement existed and, if not, requested that efforts be made to put one in place.[12] Counsel’s response that he did not possess a signed copy was difficult to reconcile with defendant’s position that the agreement had already been finalized and was enforceable. The motion court concluded that, when read together with the other communications, the emails fell short of conclusively establishing the formation of a contract.[13] Takeaway The motion court’s decision in MEP Capital Holdings highlights several principles of contract law for parties litigating disputes involving unsigned agreements, agency relationships, and equitable claims. Perhaps most significantly, the decision underscores that a defendant cannot dismiss fiduciary duty and quasi-contract claims at the pleading stage by pointing to a contract that the plaintiff plausibly alleges was never formed. First, the case serves as a reminder that New York courts remain steadfast in requiring a meeting of the minds before recognizing an enforceable contract. Although defendant argued that the parties’ email communications and subsequent conduct demonstrated the existence of a binding agreement, the motion court focused on plaintiffs’ allegation that the parties never agreed on a material term: MEP II’s right to approve or reject distribution agreements involving the Lotus Library. Because mutual assent on all essential terms is a prerequisite to contract formation, the motion court refused to treat the proposed agreement as enforceable merely because the parties had engaged in negotiations and had performed to some degree. Second, the decision illustrates the limited role of documentary evidence on a CPLR 3211(a)(1) motion. To warrant dismissal, documentary evidence must conclusively establish a defense as a matter of law and utterly refute the plaintiff’s factual allegations. The emails relied upon by defendant fell short of that standard. The motion court found that the communications reflected continuing negotiations through the exchange of redlines, revisions, and proposed language rather than a finalized agreement. Other communications referring to defendant as the “sales agent” did not establish the existence of a written contract because those references were equally consistent with plaintiffs’ allegation that the parties operated under a common-law agency relationship. Particularly damaging to defendant’s position was a May 2023 email exchange in which a plaintiffs’ representative inquired whether a signed Sales Agent Agreement existed and, if not, requested that efforts be made to put one in place. Counsel’s response that he did not possess a signed copy significantly undermined the contention that the agreement had already been finalized and ratified. Third, the decision confirms that plaintiffs may pursue fiduciary duty, unjust enrichment, constructive trust, and other equitable remedies where the existence of a governing contract is disputed or nonexistent. Defendant attempted to characterize plaintiffs’ equitable claims as duplicative of contract claims that plaintiffs could have brought under the proposed Sales Agent Agreement. The motion court rejected that argument because the threshold question of contract formation remained unresolved. Finally, the case demonstrates that agency relationships may give rise to fiduciary obligations independent of a written contract. Accepting the complaint’s allegations as true, the motion court concluded that plaintiffs had adequately alleged the existence of a common law principal-agent relationship relating to the Lotus Library. That finding was sufficient to permit the fiduciary duty claim to survive dismissal. __________________________________ 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] Slip Op. at *3. [2] Id., quoting Kowalchuk v. Stroup, 61 A.D.3d 118, 121 (1st Dept. 2009). [3] Id. [4] Id. [5] Id. [6] Id. [7] Id. at *4. [8] Id. [9] Id. [10] Id. [11] Id. [12] Id. [13] Id., citing VXI Lux Holdco S.A.R.L. v. SIC Holdings, LLC, 171 A.D.3d 189, 193 (1st Dept. 2019).

By: Jeffrey Haber. Whether a party has standing to bring a lawsuit is often considered through the constitutional lens of justiciability – that is, whether there is a “case or controversy” between the plaintiff and the defendant “within the meaning of Art. III.” Warth v. Seldin, 422 U.S. 490, 498 (1975). To have Article III standing, “the plaintiff ‘alleged such a personal stake in the outcome of the controversy’ as to warrant invocation of federal-court jurisdiction and to justify exercise of the court’s remedial powers on behalf.” Id. at 498–99 (quoting Baker v. Carr, 369 U.S. 186, 204 (1962)). To show a personal stake in the litigation, the plaintiff must establish three things: First, he/she has sustained an “injury in fact” that is both “concrete and particularized” and “actual or imminent.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992) (internal quotation marks omitted). Second, the injury has to be caused in some way by the defendant’s action or omission. Id. Finally, a favorable resolution of the case is “likely” to redress the injury. Id. at 561. When a person or entity receives an assignment of claims, the question becomes whether he/she can show a personal stake in the outcome of the litigation, i.e., a case and controversy “of the sort traditionally amenable to, and resolved by, the judicial process.’” Sprint Commc’ns Co., L.P. v. APCC Servs., Inc., 554 U.S. 269, 285 (2008) (quoting Vt. Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 777–78 (2000)). To assign a claim effectively, the claim’s owner “must manifest an intention to make the assignee the owner of the claim.” Advanced Magnetics, Inc. v. Bayfront Partners, Inc., 106 F.3d 11, 17 (2d Cir. 1997) (internal quotation marks and brackets omitted). A would-be assignor need not use any particular language to validly assign its claim “so long as the language manifests intention to transfer at least title or ownership, i.e., to accomplish ‘a completed transfer of the entire interest of the assignor in the particular subject of assignment.’” Id. (emphasis added) (citations omitted). An assignor’s grant of, for example, “‘the power to commence and prosecute to final consummation or compromise any suits, actions or proceedings,’” id. at 18 (quoting agreements that were the subject of that appeal), may validly create a power of attorney, but that language would not validly assign a claim, because it does “not purport to transfer title or ownership” of one. Id. On September 15, 2016, the New York Appellate Division, First Department, issued a decision addressing the foregoing principles, holding that one of the plaintiffs lacked standing to assert claims because the assignment of the right to pursue remedies did not constitute the assignment of claims. Cortlandt St. Recovery Corp. v. Hellas Telecom., S.à.r.l., 2016 NY Slip Op. 06051. BACKGROUND: Cortlandt involved four related actions in which the plaintiffs – Cortlandt Street Recovery Corp. (“Cortlandt”), an assignee for collection, and Wilmington Trust Co. (“WTC”), an indenture trustee – sought payment of the principal and interest on notes issued in public offerings. Each action alleged that Hellas Telecommunications, S.a.r.l. and its affiliated entities, the issuer and guarantor of the notes, transferred the proceeds of the notes by means of fraudulent conveyances to two private equity firms, Apax Partners, LLP/TPG Capital, L.P. – the other defendants named in the actions. The defendants moved to dismiss the actions on numerous grounds, including that Cortlandt, as the assignee for collection, lacked standing to pursue the actions. To cure the claimed standing defect, Cortlandt and WTC moved to amend the complaints to add SPQR Capital (Cayman) Ltd. (“SPQR”), the assignor of note interests to Cortlandt, as a plaintiff. The plaintiffs alleged that, inter alia, SPQR entered into an addendum to the assignment with Cortlandt pursuant to which Cortlandt received “all right, title, and interest” in the notes. The Motion Court granted the motions to dismiss, holding that, among other things, Cortlandt lacked standing to maintain the actions and that, although the standing defect was not jurisdictional and could be cured, the plaintiffs failed to cure the defect in the proposed amended complaint. Cortlandt St. Recovery Corp. v. Hellas Telecom., S.à.r.l., 47 Misc. 3d 544 (Sup. Ct., N.Y. Cnty. 2014). The Motion Court’s Ruling As an initial matter, the Motion Court cited to the reasoning of the court in Cortlandt Street Recovery Corp. v. Deutsche Bank AG, London Branch, No. 12 Civ. 9351 (JPO), 2013 WL 3762882, 2013 US Dist. LEXIS 100741 (S.D.N.Y. July 18, 2013) (the “SDNY Action”), a related action that was dismissed on standing grounds. The complaint in the SDNY Action, like the complaints before the Motion Court, alleged that Cortlandt was the assignee of the notes with a “right to collect” the principal and interest due on the notes. As evidence of these rights, Cortlandt produced an assignment, similar to the ones in the New York Supreme Court actions, which provided that as the assignee with the right to collect, Cortlandt could collect the principal and interest due on the notes and pursue all remedies with respect thereto. In dismissing the SDNY Action, Judge Oetken found that the complaint did not allege, and the assignment did not provide, that “title to or ownership of the claims has been assigned to Cortlandt.” 2013 WL 3762882, at *2, 2013 US Dist. LEXIS 100741, at *7. The court also found that the grant of a power of attorney (that is, the power to sue on and collect on a claim) was “not the equivalent of an assignment of ownership” of a claim. 2013 WL 3762882 at *1, 2013 US Dist. LEXIS 100741 at *5. Consequently, because the assignment did not transfer title or ownership of the claim to Cortlandt, there was no case or controversy for the court to decide (i.e., Cortlandt could not prove that it had an interest in the outcome of the litigation). The Motion Court “concurred with” Judge Oetken’s decision, holding that “the assignments to Cortlandt … were assignments of a right of collection, not of title to the claims, and are accordingly insufficient as a matter of law to confer standing upon Cortlandt.” In so holding, the Motion Court observed that although New York does not have an analogue to Article III, it is nevertheless analogous in its requirement that a plaintiff have a stake in the outcome of the litigation: New York does not have an analogue to article III. However, the New York standards for standing are analogous, as New York requires “[T]he existence of an injury in fact—an actual legal stake in the matter being adjudicated.” Under long-standing New York law, an assignee is the “real party in interest” where the “title to the specific claim” is passed to the assignee, even if the assignee may ultimately be liable to another for the amounts collected. Citations omitted. Based upon the foregoing, the Motion Court found that Cortlandt lacked standing to pursue the actions. The Appeal Cortlandt appealed the dismissal. With regard to the Motion Court’s dismissal of Cortlandt on standing grounds, the First Department affirmed the Motion Court’s ruling, holding: [T]he court correctly found that plaintiff Cortlandt Street Recovery Corp. lacks standing to bring the claims in Index Nos. 651693/10 and 653357/11 because, while the assignments to Cortlandt for the PIK notes granted it “full rights to collect amounts of principal and interest due on the Notes, and to pursue all remedies,” they did not transfer “title or ownership” of the claims. Citations omitted. The Takeaway Cortlandt limits the ability of an assignee to pursue a lawsuit when the assignee has no direct interest in the outcome of the litigation. By requiring an assignee to have legal title to, or an ownership interest in, the claim, the Court made clear that only a valid assignment of a claim will suffice to fulfill the injury-in-fact requirement. Cortlandt also makes clear that a power of attorney permitting another to conduct litigation on behalf of others as their attorney-in-fact is not a valid assignment and does not confer a legal title to the claims it brings. Therefore, as the title of this article warns: when assigning the right to pursue relief, always remember to assign title to, or ownership in, the claim. Jeffrey M. Haber 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.

On September 29, 2016, the Securities and Exchange Commission (the “SEC” or the “Commission”) announced that International Gaming Technology (“IGT”), a casino-gaming company, agreed to pay $500,000 to settle charges of retaliating against one of its executives with several years of positive performance reviews because he reported to senior management and the SEC concerns about the accuracy of IGT’s financial statements. According to the SEC’s order, within weeks of raising concerns that the company’s cost accounting was arbitrarily inflated, senior managers retaliated against the whistleblower by removing him “from two opportunities he considered significant to performing his job successfully.” IGT terminated the whistleblower approximately three months later, following the conclusion of an internal investigation into the whistleblower’s allegations. As noted by the SEC, “[T]he internal investigation found that the cost accounting model IGT used … was appropriate and did not cause its reported financial statements to be distorted.” The case marks the first time that the SEC has brought an enforcement action under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or the “Act”) against a company without an underlying securities law violation. Section 21F(h) of the Act protects whistleblowers who provide information to the SEC about violations of the securities laws, or violations of any protected activity under the Sarbanes-Oxley Act of 2002, from retaliation. Under SEC rules, the Commission may, as it had done with IGT, prosecute violations of the anti-retaliation provisions of the Dodd-Frank Act through an enforcement action. “Bringing retaliation cases, including this first stand-alone retaliation case, illustrates the high priority we place on ensuring a safe environment for whistleblowers,” said Jane A. Norberg, Chief of the SEC’s Office of the Whistleblower. “We will continue to exercise our anti-retaliation authority when companies take reprisals for whistleblowing efforts.” Without admitting or denying the SEC’s findings, IGT agreed to pay the $500,000 penalty and cease and desist from committing or causing any further violations of Section 21F(h) of the Securities Exchange Act of 1934. Takeaway As this Blog wrote last month, the SEC has been making good on its promise to crack down on employers that retaliate (or attempt to retaliate) against employees who report securities fraud to the SEC. The IGT penalty and cease and desist order is another example of the success of these efforts. Links: SEC press release SEC Order Section 21F(h) of the Dodd-Frank Act T his 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.

On September 14, 2016, Andrew Ceresney (“Ceresney”), Director, Division of Enforcement of the Securities and Exchange Commission (the “SEC” or “Commission”), spoke at the Sixteenth Annual Taxpayers Against Fraud Conference in Washington, D.C. Ceresney covered a lot of ground during his presentation, addressing issues such as the impact of the whistleblower program to the role of whistleblowers and their attorneys in the investigation and claims process. Impact of the Whistleblower Program on the Commission Ceresney described the impact of the whistleblower program on the Commission as “transformative”, “both in terms of the detection of illegal conduct and in moving … investigations forward quicker and through the use of fewer resources.” Since the inception of the whistleblower program, the SEC has received more than 14,000 tips from whistleblowers and paid $107 million to 33 whistleblowers, “in cases with more than $500 million ordered in sanctions.” He also spoke of the Commission’s impact on employers who retaliate (or try to retaliate) against employees that come forward to report fraud – efforts that this blog recently highlighted. In that regard, Ceresney noted the settlement of four actions brought by the SEC “against companies for violating Rule 21F-17”, and the filing of amicus briefs in the courts of appeals and district courts, in support of the SEC’s position that “individuals who make internal reports of possible securities law violations are protected under the Commission’s whistleblower rules.” Finally, Ceresney underscored the transformative impact of the whistleblower program on “other domestic and foreign regulators,” noting that those regulators “have sought to replicate the successes of program.” Types of SEC Cases where Whistleblower Assistance Is Valued While valuing all tips of securities fraud or other violations of the securities laws, Ceresney identified “issuer reporting and disclosure cases” as “a category of cases where whistleblower assistance is extremely helpful.” These cases often involve misconduct that (a) is difficult to uncover, (b) is “very document-intensive”, and (c) involves “sophisticated defense counsel.” For these reasons, whistleblowers, especially company insiders, are valued because they can provide (a) the information necessary to understand the misconduct, (b) guidance on the documents to request, and (c) analysis of the information as it relates to the alleged violation. Another class of cases identified by Ceresney where whistleblowers are helpful is in the enforcement of the Foreign Corrupt Practices Act. Noting that “ost of the activity in these cases is usually overseas, where less access to evidence,” Ceresney emphasized the importance of international whistleblowers. The SEC has made eight awards to whistleblowers living in foreign countries, with the largest award — $30 million — being paid to a foreign whistleblower who provided the Commission with “original information about an ongoing fraud that would have been very difficult to detect.” In making this award, the Commission made it clear that foreign residency “does not prevent an award when the whistleblower’s information to a successful Commission enforcement action brought in the United States concerning violations of the U.S. securities laws.” Who Qualifies as a Whistleblower People wishing to blow the whistle on securities fraud and other violations of the securities laws often have questions about whether they qualify as a whistleblower under the Dodd-Frank Act. Ceresney addressed this question. First, Ceresney identified company insiders, either current or former employees, as the “best positioned to witness wrongdoing” and help “investigators unlock intricate fraudulent schemes and investigate the full extent of violations.” “Through 2015, almost half of the award recipients were current or former employees of the companies for which they reported wrongdoing ….” Second, Ceresney identified compliance and internal audit personnel as important whistleblowers. To underscore their importance, Ceresney noted that awards have been made to this group of whistleblowers in August 2014 and April 2015. Third, Ceresney identified company outsiders as valuable whistleblowers, such as data analysts. “We welcome analytical information from those with in-depth market knowledge and experience that may provide the springboard for an investigation or may supplement an ongoing investigation,” he said. Again, to underscore the importance of outside whistleblowers, Ceresney noted the payment of “more than $700,000 to an individual who was a company outsider and who provided this type of data analysis, leading to a successful enforcement action.” Finally, Ceresney addressed the situation where a person is a participant in the wrongdoing and wants to report the misconduct under the program. Ceresney said that “in many circumstances, they are eligible for awards” because as “culpable insiders with first-hand knowledge of misconduct” they “can provide valuable information and assistance in identifying participants in, transactions relating to, and proceeds of, fraudulent schemes.” In those instances, they can “receive at least 10% … of the monetary sanctions collected in the enforcement action,” said Ceresney Timing of Whistleblower Assistance Ceresney told the audience that whistleblowers should report misconduct “as soon as you learn of ,” because “you never know whether someone else will report, whether the information will become stale, or whether the statute of limitations will run.” He noted that “oming forward without delay also helps prevent misconduct from continuing unabated while investors suffer more harm.” He emphasized the fact that “nreasonable delay in the reporting of information to is a significant factor the Commission considers in determining the amount of a whistleblower award.” Notwithstanding, Ceresney made it clear “there is no requirement under the Dodd-Frank Act or rules that a whistleblower originate a case in order to qualify for an award.” The key is that the information provided “causes the Commission to commence an examination, open or reopen an investigation, or to inquire into different courses of conduct where the resulting enforcement action is based on the whistleblower’s tip, or that otherwise significantly contributes to the success of an enforcement action.” He noted that even if “an investigation is underway, a whistleblower will be eligible for an award if his or her information ‘significantly contributes’ to success by, for example, allowing to bring a successful action in significantly less time or with significantly fewer resources, bring additional successful claims, or bring successful claims against additional parties.” Closing Thoughts For Whistleblowers and Whistleblower Attorneys Ceresney closed his presentation with a discussion on the importance of attorneys in the investigation of securities fraud and other violations of the securities laws. As an initial matter, Ceresney noted that the Commission “welcome the involvement of counsel in whistleblower tips.” He noted the many ways whistleblower attorneys can help advance the investigation, including: identify information having a nexus with the alleged violation of the securities laws; manage client expectations regarding the duration of an investigation and the awards process, especially since the SEC’s investigations are nonpublic; and identify facts or documents that may tend to identify the whistleblower so that the SEC can maintain the confidentiality of the whistleblower and help “to craft document requests and conduct testimony in the most protective manner.” He also identified ways for both whistleblowers and their counsel to assist the Commission, including: identify and provide corroborating information for their tips; avoid providing information that may be protected by the attorney-client privilege or the work product doctrine; and assist the SEC with its outreach efforts – that is, to help publicize the program and increase public awareness of it. Links: Full text of Speech by Andrew Ceresney, Director, Division of Enforcement SEC Whistleblower Resources 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.

What is being done about fraud in the FHA's mortgage insurance program? In September, the U.S. Department of Justice announced that Regions Bank ("Regions") agreed to pay $52.4 million to resolve allegations that it violated the False Claims Act. The Alabama-based bank knowingly originated mortgage loans insured by the Federal Housing Administration ("FHA") that did not meet the underwriting guidelines of the U.S. Department of Housing and Urban Development ("HUD"). What is an FHA Direct Endorsement Lender? Since January 2006, Regions has been a direct endorsement lender ("DEL") in the FHA's mortgage insurance program which gives these lenders the authority to originate, underwrite and endorse mortgages for FHA insurance. If the borrower subsequently defaults, the holder of the note can submit an insurance claim to HUD to recoup the losses related to the default. Under the program, the FHA relies on the DEL to certify compliance. As part of the settlement, Regions admitted that from January 1, 2006 to December 31, 2011, it certified loans that did not meet HUD underwriting requirements regarding borrower creditworthiness. The bank also admitted that its quality control department did not review a sufficient number of FHA loans. Even worse, when deficiencies were identified, bank employees often cured the deficiencies, understating the defect rate being reported to senior management. In addition, Regions did not comply with HUD guidelines regarding the bank's review of Early Payment Default loans. The guidelines require a review of all loans that became 60 days past due within the first six months, but Regions reviewed only those loans that became 90 days past due. Lastly, the bank did not fully adhere to HUD's self-reporting requirements, which require DELs to report fraud and other serious violations or other material deficiencies. In fact, the bank identified numerous loans containing deficiencies between 2006 and 2011, but did not begin self-reporting until 2011. By failing to comply with the requirements of the FHA program, HUD insured hundreds of loans that were ineligible and incurred substantial losses. The Takeaway The FHA mortgage insurance program is designed to encourage home ownership for lower income borrowers or those suffering from financial hardship. Lenders are given incentives to make potentially riskier loans in exchange for government guarantees to reimburse holders of the loans for default-related losses. By failing to adhere to HUD's underwriting guidelines, and recover losses from the FHA program, Regions essentially made false claims to the government. The question remains as to how far reaching these issues are at the FHA, and whether there is the potential of a crisis similar to the one that culminated in the collapse of the subprime mortgage market in 2008. For this reason, the False Claims Act rewards whistleblowers who successfully recover funds on behalf of 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.

How can I protect my business from conduct risk? The U.S. Attorney in Manhattan recently announced a number of charges against two former executives of American Realty Capital Properties, Inc. ("American Realty"), a real estate investment trust ("REIT"), for their role in a 2014 accounting scandal. Brian Block, the former chief financial officer ("CFO"), is facing six criminal counts for securities fraud, conspiracy and the making of false statements. Lisa McAlister, the REIT's former chief accounting officer, previously pleaded guilty to four counts, including securities fraud and conspiracy, and has been cooperating with authorities, according to U.S. Attorney Preet Bharara. "Market investors are entitled to be told the truth from publicly traded companies," Bharara said in a statement. "When investors are lied to about material information, as is alleged to have happened here, the perpetrators need to be investigated and prosecuted." In addition, the Securities and Exchange Commission has filed civil charges against the two former executives, seeking fines as well as officer and director bans. The attorney representing the fallen CFO said that the charges were "unwarranted" and that his client would prevail at trial. The American Realty Scandal The September 2014 accounting scandal wiped out almost $4 billion of the REIT's market value. The U.S. Attorney alleges that the defendants manipulated American Realty's adjusted funds from operations ("AFFO"), a key metric used by analysts to measure the performance of a REIT. Authorities contend that Block concealed an error in the calculation of AFFO -- one that he had been warned about internally -- and, with McAlister in his office, input fictitious numbers into a spreadsheet that was later incorporated into the financial results American Realty reported to the public and the SEC. According to the government, the fictitious data made it appear that American Realty met Wall Street forecasts, when, in fact, it had not. On October 29, 2014, the REIT acknowledged that the executives "intentionally" concealed the accounting errors, which caused American Realty to overstate its AFFO. On that day, the REIT's shares plunged by 37 percent. American Realty eventually restated 3-1/2 years of its reported financial results. American Realty, which went public in 2011 and was part of Nicholas Schorsch's commercial real estate empire, is now the Phoenix-based VEREIT, Inc. Although Schorsch has not been charged in the case, another of his businesses filed for bankruptcy seven months ago, giving lenders control of an affiliated investment advisory unit. At this juncture, it is unclear whether the U.S. Attorney is investigating these matters further. The Takeaway This case illustrates how essential it is for investment firms and other financial service providers to have policies and procedures in place to mitigate conduct risk. The illegal actions of senior executives, officers and directors can have a significant adverse affect on a business, resulting in serious market losses that ultimately harm investors. If your firm is being investigated or is embroiled in an investor lawsuit, you should engage the services of an experienced business litigation attorney. 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 Frequently, litigation is resolved consensually. Most often in such cases, the parties execute a settlement agreement, and their attorneys execute and file a stipulation of discontinuance. It is not uncommon for settlement agreements to contain various terms and conditions of the settlement – some of which will be satisfied after the dismissal of the action. For example, if the settlement involves the payment of money from one litigant to another, the settlement agreement may call for numerous payments to be made over time. In other cases, a settlement may require one party to perform remedial work for, or otherwise deliver goods and/or services to, the other party in the future. Today’s article addresses whether a party that settles an action that is discontinued can revive same by motion in the discontinued action, or is required to commence a new plenary action. This situation was addressed by the Court of Appeals long ago in Yonkers Fur Dressing Co. v. Royal Ins. Co., 247 N.Y. 435 (1928). The Plaintiff in Yonkers[1] owned a fur plant that was destroyed by fire. Yonkers commenced litigation against its insurance carrier because it refused to pay the claims related to the fire. While the carrier believed the fire to be suspicious, it did not have proof of wrongdoing. Shortly before the action was scheduled for trial, the parties reached a settlement. “When the case[] appeared on the day calendar for trial …, [it], in accordance with the agreement of settlement, [was] marked "settled and discontinued" in open court by counsel for all parties.” Yonkers, 247 N.Y. at 442. One month later, the insurance company’s lawyer filed a motion to vacate the settlement agreement, arguing that new evidence suggests that the fire was caused by arson started at the request of Yonkers’ president and, in anticipation of the fire, Yonkers’ president arranged to have machinery, customers’ furs and other valuables (for which insurance claims were made) removed from the plant. Yonkers argued, among other things, that “the settlement agreement should not be set aside on a motion in the action; that an equitable action to set aside the settlement was the proper remedy.” Yonkers, 247 N.Y. at 443. The court granted the carrier’s motion, and the Appellate Division affirmed. The Court of Appeals reversed. The Court explained: The settlement of the original controversies involved in [this] action[] resulted in a new agreement to the effect "that the above entitled litigation is settled and terminated, the insurance companies in interest having agreed to pay the sum of $92,500 in full settlement of all claims." This is not a mere arrangement between counsel made during the pendency of the case from which a party might be relieved when both parties could be restored substantially to their former position in court and when it would be inequitable to hold the parties to it. It is the settlement and termination of the litigations, marking a fresh start by the plaintiff from a new coign of vantage. The compromise was wholly foreign and extrinsic to the litigation and to any action by the court. The signing of stipulations and entry of orders of discontinuance were not conditioned upon the payment of the money. They would be evidence merely, not the fruit of the settlement. When the case[] [was] marked "settled and discontinued" in open court by the parties, it was as if [it] had never been begun. Yonkers, 247 N.Y. at 444 (internal quotation marks and ellipses omitted). The Court noted that a “contract of settlement, if valid in itself, is final and is to be sustained by the court without regard to the validity of the original claim.” Id. at 445 (citation omitted). The Court further noted that the case being decided was distinguishable from prior cases because here, the litigation “was terminated,” and a new liability was “substituted” for, and “superseded,” the old. Id. at 446. The Court concluded that the carrier may be able to bring a new suit to unwind the settlement “for reasons that may invalidate a contract,” but “when a compromise results in the termination of an action and the execution of a new agreement giving effect to the settlement, it cannot be undone in the discretion of the court, on motion in the action and on conflicting affidavits raising anew the same dispute once settled, merely to bring about a final disposition of the original action on its merits.” Id. (citation omitted). Against this backdrop, we discuss HSBC Bank USA, N.A. v. Rini, a foreclosure action decided by the Second Department on August 5, 2026. Just prior to a traverse hearing, the parties “entered into a conditional agreement to settle the action, which included a term for a loan modification for the defendant.” The conditional agreement was placed on the record and the court “stated that it would retain jurisdiction over the action.” Thereafter, the parties executed and filed a stipulation of discontinuance pursuant to which “the plaintiff withdrew the complaint and discontinued the action, the defendant withdrew her answer and counterclaims, and all claims interposed in the action were discontinued.” The stipulation, however, failed to address whether the court retained jurisdiction for any purpose. Nine months later, the plaintiff moved to vacate the stipulation of discontinuance and to restore the action because the defendant failed to complete the contemplated loan modification papers. The motion court granted the motion and scheduled a hearing to determine if the conditional agreement was breached. On the defendant’s appeal, the Court reversed, explaining: A motion must be addressed to a pending action. A court lacks jurisdiction to entertain a motion after the action has been unequivocally terminated by the execution of an express, unconditional stipulation of discontinuance or actual entry of judgment in accordance with the terms of the settlement. Here, the Supreme Court lacked jurisdiction to entertain the plaintiff's motion, among other things, to vacate the stipulation of discontinuance and to restore the action to the court's active calendar. The action was unconditionally discontinued by the stipulation of discontinuance executed by the plaintiff and the defendant and filed with the court, in which the plaintiff withdrew the complaint and discontinued all claims interposed in the action, and the stipulation was silent as to the court's retention of jurisdiction for any. Accordingly, under the circumstances, the plaintiff's requested relief was not available by way of a motion and could only be obtained by commencing a plenary action. 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. [1] The facts recited for the Yonkers case are greatly simplified for editorial purposes.

By: Jeffrey M. Haber New York’s former Debtor and Creditor Law (“DCL”) imposed a straightforward but powerful rule: transfers made by an insolvent debtor without fair consideration may be set aside for the benefit of creditors. A recent decision from the Appellate Division, Second Department, Ardent Harmony Fund, Inc. v. Fuschetto Home Improvements, LLC, 2026 N.Y. Slip Op. 04919 (2d Dept. August 12, 2026), underscores the principle that defendants seeking dismissal of fraudulent conveyance claims at the summary judgment stage bear the burden of establishing, with admissible evidence, that the transfers they received were supported by fair consideration. Mere assertions that services were performed are not enough. In Ardent Harmony, the Second Department reversed an order of the Supreme Court, Nassau County, holding that defendant failed to establish its entitlement to judgment as a matter of law on claims brought under former DCL §§ 273, 274, and 278, as well as a related claim for unjust enrichment. Background Plaintiffs commenced the action in 2018 seeking, among other relief, to set aside transfers to non-parties allegedly made by defendants, who were judgment debtors of the plaintiffs. According to the complaint, defendants transferred substantial sums of money to a home improvement company while owing unsatisfied judgments to the plaintiffs. Plaintiffs alleged that the transfers were made without fair consideration and had the effect of rendering the defendants insolvent or leaving them with unreasonably small capital. Plaintiffs sought relief under former DCL §§ 273, 274, and 278 and also asserted a cause of action for unjust enrichment. Defendants moved for summary judgment dismissing the complaint. The Supreme Court granted the motion. On appeal, the Second Department reversed and reinstated the claims. The Second Department’s Decision Under former DCL §§ 273 and 274, a conveyance could be deemed constructively fraudulent where it was made without fair consideration and the transferor was thereby rendered insolvent or left with unreasonably small capital. Former DCL § 278 permitted a creditor to set aside a fraudulent conveyance unless the transferee qualified as a purchaser for fair consideration. Significantly, defendant did not dispute that the transfers at issue rendered the judgment debtors insolvent or left them with unreasonably small capital.[1] Instead, the dispute centered on whether the defendant had established that the funds it received constituted fair consideration for work allegedly performed on behalf of the judgment debtors. The Court concluded that it had not. Although defendant claimed that the transfers related to work it performed, it failed to submit sufficient evidentiary proof in admissible form demonstrating that the payments represented fair consideration for those services: Contrary to the determination of the Supreme Court, the defendant did not submit sufficient evidentiary proof in admissible form to establish that the transfers of funds it received from the [judgment debtors] constituted “fair consideration” for the work it purported to have undertaken for them.[2] “Consequently,” concluded the Court, “the [Supreme Court] should have denied those branches of the defendant’s motion which were for summary judgment dismissing the causes of action alleging violations of Debtor and Creditor Law former §§ 273, 274, and 278 insofar as asserted against it as the defendant failed to establish its prima facie entitlement to judgment as a matter of law dismissing those causes of action insofar as asserted against it.”[3] The Court also held that defendant “failed to establish its prima facie entitlement to judgment as a matter of law dismissing the cause of action to recover for unjust enrichment insofar as asserted against it.”[4] Under New York law, to plead a claim for unjust enrichment, the plaintiff must alleged “(1) the defendant was enriched, (2) at the plaintiff’s expense, and (3) that it is against equity and good conscience to permit the defendant to retain what is sought to be recovered.”[5] The Court held that defendant failed to demonstrate that “it was not enriched at the plaintiffs’ expense and that it [was] not against equity and good conscience to permit it to retain the sums sought to be recovered.”[6] Takeaway Ardent Harmony highlights the role that fair consideration plays in constructive fraudulent conveyance litigation under former DCL §§ 273 and 274. Where a creditor establishes, or a defendant does not dispute, that challenged transfers rendered a debtor insolvent or left the debtor with unreasonably small capital, the litigation often turns on whether the transferee can demonstrate that reasonably equivalent value was provided in exchange for the transferred assets. The Court’s decision makes clear that conclusory assertions that services were performed or value was provided in connection with the conveyance are insufficient to defeat a claim for violation of the former DCL’s constructive fraud provisions. The decision also serves as a reminder concerning the proof required to prevail on summary judgment. A defendant moving for summary judgment must affirmatively establish its entitlement to judgment as a matter of law before the burden shifts to the plaintiff. Here, because defendant failed to submit evidentiary proof in admissible form demonstrating that the payments it received constituted fair consideration for work allegedly performed, it failed to satisfy its prima facie burden. As a result, the Court denied summary judgment. Equally significant is the Court’s treatment of the unjust enrichment claim. The decision underscores that equitable remedies may remain viable even where a defendant contends that it received funds in exchange for services. To obtain dismissal of an unjust enrichment claim, a defendant must establish, prima facie, that it was not enriched at the plaintiff’s expense and that equity and good conscience permit it to retain the benefit received. Where the record leaves unresolved questions regarding the legitimacy of the transfers or the value allegedly provided in return, dismissal is inappropriate. Ultimately, Ardent Harmony Fund reinforces a fundamental principle of New York fraudulent conveyance law: where an allegedly insolvent debtor transfers assets, the recipient must be prepared to demonstrate through admissible evidence that the transfer was supported by fair consideration. Absent that showing, fraudulent conveyance and related equitable claims will survive and proceed to further litigation. __________________________________ 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] Slip Op. at *1. [2] Id. [3] Id., citing Can Man Carting, LLC v. Spiezio, 165 A.D.3d 1029, 1031 (2d Dept. 2018). [4] Id. [5] Deerin v. Ocean Rich Foods, LLC, 158 A.D.3d 603, 606 (2d Dept. 2018) (internal quotation marks omitted). [6] Slip Op. at *1 (citation omitted).

By Jeffrey M. Haber What anticompetitive business actions are considered unfair? Amidst the recent commotion surrounding the wildly elevated prices of certain products sold by Mylan Pharmaceuticals ("Mylan"), New York State Attorney General Eric Schneiderman is investigating whether the drug company has unfairly limited competition. Although Mylan has been accused of profiteering before, this time the product involved is EpiPen®, the emergency injector used for extreme emergency allergic reactions (anaphylaxis). Allergies requiring EpiPen administration may include severe allergic reactions to insect stings, nuts, shellfish, or certain medications. Because EpiPens are auto-injectors, they can be easily carried and used anywhere and can be administered by patients themselves or by untrained people who happen to be nearby. A single jab to the thigh dispenses lifesaving epinephrine. Mylan's Business Practices under Investigation Right now, the state attorney general's office is examining data to find out whether Mylan unfairly limited competition as a means of steeply increasing its prices for EpiPen. In a preliminary report, Schneiderman announced that the company "may have inserted potentially anticompetitive terms" into sales contracts with many school systems, thereby engaging in anti-competitive business practices or violating antitrust laws. If this turns out to be the case, Schneiderman says, "We will hold them accountable." Recently, Mylan was served with subpoenas for company information. Of course, investigation does not mean proof of wrongdoing. If your company is accused of, or investigated for, illegitimate practices, it is essential that you have a strong business attorney with skill and experience in commercial and complex litigation. Just how steep are the increases in price? The possible legal charges here are serious since they not only involve potentially illegal business practices, but matters of public health and lifesaving medical treatment. Mylan has increased the cost of the EpiPen product astronomically, apparently just because they can. In 2007, pharmacies paid less than $100 for a two-pen set (patients are advised to carry two in case they require a second dose). By 2009, the price had increased marginally to $103.50 per set. By July 2013, however, the cost was up to $264.50, and by May 2015 it had risen to $461. The alarming increases in price did not stop there. By May of this year, the price of two EpiPens skyrocketed to $608.61 — an increase of 500 percent in less than a decade. For individuals whose lives depend on these products (which typically have to be replaced annually), this is a tremendous burden. Possible Alternatives to the Outrageous Pricing In response to the uproar surrounding its pricing, the company has announced that it will be launching a $300 generic version of the medication within several weeks. Also, Mylan has stated that it has distributed more than 700,000 free EpiPens to 65,000 schools nationwide. While there are other generics, such as Adrenaclick, presently available, EpiPen is the recognizable brand name and patients are extremely reluctant to trust their lives to an unknown product. While the controversy and investigation rage on, Mylan spokeswoman Nina Devlin stated, "The program continues to adhere to all applicable laws and regulations." 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 How has Turing managed to get into even more trouble after last year's bombshell? It is difficult to imagine Martin Shkreli ("Shkreli") being shamed even more than he already has been, nor Turing Pharmaceuticals AG ("Turing") having its reputation further blackened by more bad news. Nonetheless, this is exactly what's happening. After last fall's commotion surrounding pricing discrepancies, Nancy Retzlaff ("Retzlaff"), once looked at as the most likely candidate for CEO of the company, has now brought federal charges against Turing for retaliating against her after she testified in a case involving a sexual assault by one of Shkreli's friends and a co-founder of the company -- Edwin Urrutia. When companies are involved in litigation and their reputations are on the line, the stakes can be very high. Executive positions, as well as the firm itself, can be at risk. Under such circumstances, it is imperative that the company brings in a business law firm of unchallenged competence to settle disputes, represent them vigorously in a court of law, and help them keep the business afloat and moving full-steam ahead through stormy waters. It is also important to hire attorneys able to understand and protect the rights of whistleblowers whose attempts to repair company defects are all too often met with retaliation. The Background Last February, Shkreli famously appeared smug and flippant during a Congressional investigation of his company's astonishing pricing practices. Retzlaff, a highly valued member of the Turing team at the time, supported the company, explaining away the fiftyfold overnight increase in the price of the drug Daraprim, used for over 50 years to treat a deadly parasitic infection, by stating that it had previously been underpriced and that it had great value to the patients who required it. While not especially convincing, her defense was considered professional and well-articulated, particularly in contrast to Shkreli's unseemly antics in the face of such serious charges. Shkreli later stepped down as chief executive of Turing after being arrested on securities fraud and wire fraud charges in connection with his activities at hedge funds and another pharmaceutical company he founded. Turing also faces investigations by the New York attorney general and the Federal Trade Commission. The Current Case Retzlaff now claims that, while in Washington for a Congressional hearing on the inflated price case, Edwin Urrutia, Shkreli's friend and the interim chief financial officer of Turing, made unwanted sexual advances to her, eventually assaulting her in a hotel bedroom. Retzlaff did not originally report the sexual assault because she feared, according to her lawyer, "reprisal, victim blaming, and being denied the C.E.O. position for which she was eminently qualified — all of which are now happening." When a co-worker made a strong complaint of unwanted sexual advances by the same man, however, Turing hired a private company to investigate the charges, and at that time Retzlaff spoke up. The investigation company substantiated the charges that Urrutia had made unwanted sexual advances to his accuser and had assaulted Retzlaff and other members of the staff. Urrutia, as a result, resigned from Turing "in lieu of termination." According to Retzlaff, before the assault and its aftermath, she had been a candidate for chief executive of the firm and had been promised restricted stock in the company. She charges that more recently she was told that she is no longer eligible for either. She also alleges that Shkreli had set a sexist and vulgar tone for the office with his own crude behavior, although he had left the company by the time her own sexual assault took place. Shkreli now states “I know she was made some promises, but she fell a little bit short of expectations.” 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 September 20, 2016, the Securities and Exchange Commission (“SEC”) announced that it awarded more than $4 million to a whistleblower who provided original information about a fraud that resulted in the recovery of monetary sanctions. Since 2011, the SEC has awarded more than $111 million to 34 whistleblowers pursuant to the agency’s whistleblower program. The SEC did not identify the whistleblower. By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. Commenting on the award, Jane Norberg, Acting Chief of the SEC’s Office of the Whistleblower, stated: “Our program continues to incentivize whistleblowers to come forward with solid information that helps us bring violators to justice before more wrongdoing can occur.” Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, a whistleblower who provides original information to the SEC that leads to a successful enforcement action resulting in over $1 million in monetary sanctions may be awarded an amount not less than 10% and not more than 30% of the monetary sanctions collected. All payments made to whistleblowers are paid out of an investor protection fund established by Congress that is financed through monetary sanctions paid to the SEC by securities law violators. Links: SEC Press Release SEC Order SEC Whistleblower Resources Related reading: U.S. Supreme Court Unanimously Narrows The Definition Of Whistleblower Under Dodd-Frank 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 By: Jeffrey M. Haber One element of a fraud claim under New York law is justifiable reliance. A plaintiff must allege not only that a material misrepresentation was made, but also that the plaintiff actually relied upon that misrepresentation to its detriment. Reliance by a third party is insufficient. In ANS 1 Corp. v. Yosef, 2026 N.Y. Slip Op. 04918 (2d Dept. Aug. 12, 2026), the subject of today’s article, the Appellate Division, Second Department, reaffirmed that fundamental precept,[1] holding that fraud and civil conspiracy claims could not be maintained against a law firm where the complaint failed to allege that the plaintiffs themselves relied on the alleged misrepresentations. Instead, the only alleged reliance was by the purchaser of the property at issue, a pleading defect that proved fatal to both the fraud claim and the derivative claim for civil conspiracy to commit fraud. Background The dispute arose from the October 2021 sale of real property owned by ANS 1 Corp. The plaintiffs alleged that the transaction occurred without the consent of the company’s shareholder, who claimed to hold a 50% ownership interest pursuant to a shareholder agreement dated July 1, 2019. They further alleged that the defendant law firm, which represented the corporation in connection with the sale, knew of the shareholder’s ownership interest and the requirement that he consent to the transaction. According to the amended complaint, defendant falsely represented that he was the sole owner of the property and had authority to complete the sale. Based on those allegations, plaintiffs asserted causes of action sounding in fraud and civil conspiracy to commit fraud against, among others, the law firm. The law firm moved to dismiss the fraud-based claims under CPLR 3211(a). The Supreme Court denied the motion. On appeal, the Second Department modified that determination and dismissed the fraud and conspiracy claims against the firm. The Second Department’s Ruling The Court began its substantive discussion by articulating the elements of a fraud claim under New York law: “a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.”[2] The Court then addressed the issue on appeal: whether plaintiffs justifiably relied on the alleged misrepresentation. Although the amended complaint alleged that defendant falsely represented that he was the sole owner of the property, the Court found that the amended complaint contained no allegations showing that plaintiffs actually relied upon that representation. Instead, said the Court, plaintiffs alleged the opposite.[3] According to the amended complaint, the corporation’s shareholder maintained that he possessed an ownership interest in the corporation.[4] The amended complaint therefore did not allege that plaintiffs accepted or acted upon defendant’s statements: “the only party who relied on [defendant’s] alleged misrepresentation in any way was the purchaser of the subject property ….”[5] That fact was fatal to plaintiffs’ fraud claim because New York law requires reliance by the plaintiff asserting the fraud claim, not reliance by a third party.[6] “Since the amended complaint failed to connect the actions of [the law firm] ‘to a cognizable cause of action to recover damages for fraud,’” concluded the Court, “the [Supreme Court] should have granted those branches of [the law firm’s] motion which were pursuant to CPLR 3211(a)(7) to dismiss the second and sixth causes of action, alleging fraud and civil conspiracy to commit fraud, respectively, insofar as asserted against it.”[7] Regarding the civil conspiracy claim, New York does not recognize civil conspiracy as an independent cause of action. Rather, conspiracy allegations are merely a vehicle through which a plaintiff may connect various actors to an underlying tort.[8] Because plaintiffs failed to adequately plead fraud, there was no viable underlying tort to support a claim for civil conspiracy to commit fraud.[9] Accordingly, the conspiracy claim was dismissed as well.[10] Takeaway ANS 1 is a reminder that courts will closely examine whether a fraud claim alleges each required element, particularly justifiable reliance. Fraud claims often focus on the alleged falsity of a representation and the defendant’s intent (i.e., scienter), but ANS 1 demonstrates that those allegations are insufficient unless the plaintiff also alleges that it relied on the misrepresentation and suffered damages as a result. Where the complaint instead alleges that the plaintiff knew the truth, disputed the representation, or otherwise did not act in reliance upon it, the claim is vulnerable to dismissal. Equally important, the Court reaffirmed that reliance by a third party cannot substitute for reliance by the plaintiff. In ANS 1 Corp., the alleged misrepresentation concerned ownership and authority to sell the property, but the amended complaint alleged that the purchaser, rather than the plaintiffs themselves, relied on those statements. The Court held that such allegations do not satisfy the reliance element of fraud under New York law. As a result, even assuming the alleged misrepresentation was made, the fraud claim could not survive because the complaint failed to connect that misrepresentation to any justifiable reliance by the plaintiffs. The decision also reinforces the well-settled principle that civil conspiracy is not an independent cause of action in New York. Allegations of conspiracy merely serve to link multiple actors to an otherwise viable underlying tort. Consequently, where the underlying fraud claim is deficient, a claim for civil conspiracy to commit fraud necessarily fails as well. The Court’s dismissal of both causes of action illustrates the principle that a conspiracy claim “stands or falls” with the underlying tort upon which it is based.[11] Finally, ANS 1 Corp. highlights the value of a pre-answer motion to dismiss under CPLR 3211(a)(7) when a complaint fails to plead essential elements of a fraud claim. Rather than permitting the parties to engage in costly discovery into disputed factual issues concerning the property transaction and shareholder agreements, the Second Department focused on the threshold pleading requirements and dismissed the claims because the complaint failed to allege a legally cognizable theory of reliance. __________________________________ 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] Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 31 N.Y.3d 569 (2018). [2] Slip Op. at *2, quoting Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009), and citing Nabatkhorian v. Nabatkhorian, 127 A.D.3d 1043, 1043-1044 (2d Dept. 2015). [3] Id. [4] Id. at 2-3 (“the allegations [in the amended complaint] were that [the corporation’s shareholder] consistently asserted his alleged interest in ANS …”). [5] Id. at *3. [6] Pasternack v. Laboratory Corp. of America Holdings, 27 N.Y.3d 817, 829 (2016); New York Tile Wholesale Corp. v. Thomas Fatato Realty Corp., 153 A.D.3d 1351, 1354 (2d Dept. 2017). [7] Id., quoting Mohammad v. Rehman, 236 A.D.3d 892, 894 (2d Dept. 2025); and citing Philip S. Schwartzman, Inc. v. Pliskin, Rubano, Baum & Vitulli, 215 A.D.3d 699, 703 (2d Dept. 2023); McSpedon v. Levine, 158 A.D.3d 618, 621 (2d Dept. 2018). [8] Philip S. Schwartzman, Inc., 215 A.D.3d at 703; Nabatkhorian, 127 A.D.3d at 1044. [9] Slip Op. at *3. [10] Id. [11] Nabatkhorian, 127 A.D.3d at 1044.In ANS 1 Corp. v. Yosef, 2026 N.Y. Slip Op. 04918 (2d Dept. Aug. 12, 2026), the subject of today’s article, the Appellate Division, Second Department, reaffirmed that fundamental precept,[1] holding that fraud and civil conspiracy claims could not be maintained against a law firm where the complaint failed to allege that the plaintiffs themselves relied on the alleged misrepresentations. Instead, the only alleged reliance was by the purchaser of the property at issue, a pleading defect that proved fatal to both the fraud claim and the derivative claim for civil conspiracy to commit fraud. Background The dispute arose from the October 2021 sale of real property owned by ANS 1 Corp. The plaintiffs alleged that the transaction occurred without the consent of the company’s shareholder, who claimed to hold a 50% ownership interest pursuant to a shareholder agreement dated July 1, 2019. They further alleged that the defendant law firm, which represented the corporation in connection with the sale, knew of the shareholder’s ownership interest and the requirement that he consent to the transaction. According to the amended complaint, defendant falsely represented that he was the sole owner of the property and had authority to complete the sale. Based on those allegations, plaintiffs asserted causes of action sounding in fraud and civil conspiracy to commit fraud against, among others, the law firm. The law firm moved to dismiss the fraud-based claims under CPLR 3211(a). The Supreme Court denied the motion. On appeal, the Second Department modified that determination and dismissed the fraud and conspiracy claims against the firm. The Second Department’s Ruling The Court began its substantive discussion by articulating the elements of a fraud claim under New York law: “a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.”[2] The Court then addressed the issue on appeal: whether plaintiffs justifiably relied on the alleged misrepresentation. Although the amended complaint alleged that defendant falsely represented that he was the sole owner of the property, the Court found that the amended complaint contained no allegations showing that plaintiffs actually relied upon that representation. Instead, said the Court, plaintiffs alleged the opposite.[3] According to the amended complaint, the corporation’s shareholder maintained that he possessed an ownership interest in the corporation.[4] The amended complaint therefore did not allege that plaintiffs accepted or acted upon defendant’s statements: “the only party who relied on [defendant’s] alleged misrepresentation in any way was the purchaser of the subject property ….”[5] That fact was fatal to plaintiffs’ fraud claim because New York law requires reliance by the plaintiff asserting the fraud claim, not reliance by a third party.[6] “Since the amended complaint failed to connect the actions of [the law firm] ‘to a cognizable cause of action to recover damages for fraud,’” concluded the Court, “the [Supreme Court] should have granted those branches of [the law firm’s] motion which were pursuant to CPLR 3211(a)(7) to dismiss the second and sixth causes of action, alleging fraud and civil conspiracy to commit fraud, respectively, insofar as asserted against it.”[7] Regarding the civil conspiracy claim, New York does not recognize civil conspiracy as an independent cause of action. Rather, conspiracy allegations are merely a vehicle through which a plaintiff may connect various actors to an underlying tort.[8] Because plaintiffs failed to adequately plead fraud, there was no viable underlying tort to support a claim for civil conspiracy to commit fraud.[9] Accordingly, the conspiracy claim was dismissed as well.[10] Takeaway ANS 1 is a reminder that courts will closely examine whether a fraud claim alleges each required element, particularly justifiable reliance. Fraud claims often focus on the alleged falsity of a representation and the defendant’s intent (i.e., scienter), but ANS 1 demonstrates that those allegations are insufficient unless the plaintiff also alleges that it relied on the misrepresentation and suffered damages as a result. Where the complaint instead alleges that the plaintiff knew the truth, disputed the representation, or otherwise did not act in reliance upon it, the claim is vulnerable to dismissal. Equally important, the Court reaffirmed that reliance by a third party cannot substitute for reliance by the plaintiff. In ANS 1 Corp., the alleged misrepresentation concerned ownership and authority to sell the property, but the amended complaint alleged that the purchaser, rather than the plaintiffs themselves, relied on those statements. The Court held that such allegations do not satisfy the reliance element of fraud under New York law. As a result, even assuming the alleged misrepresentation was made, the fraud claim could not survive because the complaint failed to connect that misrepresentation to any justifiable reliance by the plaintiffs. The decision also reinforces the well-settled principle that civil conspiracy is not an independent cause of action in New York. Allegations of conspiracy merely serve to link multiple actors to an otherwise viable underlying tort. Consequently, where the underlying fraud claim is deficient, a claim for civil conspiracy to commit fraud necessarily fails as well. The Court’s dismissal of both causes of action illustrates the principle that a conspiracy claim “stands or falls” with the underlying tort upon which it is based.[11] Finally, ANS 1 Corp. highlights the value of a pre-answer motion to dismiss under CPLR 3211(a)(7) when a complaint fails to plead essential elements of a fraud claim. Rather than permitting the parties to engage in costly discovery into disputed factual issues concerning the property transaction and shareholder agreements, the Second Department focused on the threshold pleading requirements and dismissed the claims because the complaint failed to allege a legally cognizable theory of reliance. __________________________________ 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] Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 31 N.Y.3d 569 (2018). [2] Slip Op. at *2, quoting Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009), and citing Nabatkhorian v. Nabatkhorian, 127 A.D.3d 1043, 1043-1044 (2d Dept. 2015). [3] Id. [4] Id. at 2-3 (“the allegations [in the amended complaint] were that [the corporation’s shareholder] consistently asserted his alleged interest in ANS …”). [5] Id. at *3. [6] Pasternack v. Laboratory Corp. of America Holdings, 27 N.Y.3d 817, 829 (2016); New York Tile Wholesale Corp. v. Thomas Fatato Realty Corp., 153 A.D.3d 1351, 1354 (2d Dept. 2017). [7] Id., quoting Mohammad v. Rehman, 236 A.D.3d 892, 894 (2d Dept. 2025); and citing Philip S. Schwartzman, Inc. v. Pliskin, Rubano, Baum & Vitulli, 215 A.D.3d 699, 703 (2d Dept. 2023); McSpedon v. Levine, 158 A.D.3d 618, 621 (2d Dept. 2018). [8] Philip S. Schwartzman, Inc., 215 A.D.3d at 703; Nabatkhorian, 127 A.D.3d at 1044. [9] Slip Op. at *3. [10] Id. [11] Nabatkhorian, 127 A.D.3d at 1044.