Implicit in every contract is a covenant of good faith and fair dealing. New York Univ. v. Continental Ins. Co. , 87 N.Y.2d 308, 318 (1995). “The covenant is breached where one party to a contract seeks to prevent its performance by, or to withhold its benefits from, the other.” Michaan v. Gazebo Hort., Inc. , 117 A.D.3d 692, 693 (2d Dept. 2014) (citation and quotation omitted).  “While the duties of good faith and fair dealing do not imply obligations inconsistent with other terms of the contractual relationship, they do encompass any promises which a reasonable person in the position of the promisee would be justified in understanding were included.” 511 W 232nd Owners Corp. v. Jennifer Realty Co. , 98 N.Y.2d 144, 153 (2002). This Blog previously wrote about the covenant here and here . On August 23, 2017, the Supreme Court, Appellate Division, Second Department, considered these principles in affirming the dismissal of a claim alleging a breach of the implied covenant of good faith and fair dealing. Rayham v. Multiplan, Inc. , 2017 NY Slip Op 06306 (2d Dept. Aug. 23, 2017). Rayham v. Multiplan, Inc. Background Roman Rayham (“Rayham”), a plastic surgeon, and his private practice, RR Plastic Surgery P.C. (“RR Office”), commenced the action on June 17, 2013 against one the defendants, Multiplan, Inc. (“Multiplan”), a preferred provider organization, alleging causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment and quantum meruit. In 2009, in connection with his practice at New York Methodist Hospital (“Methodist”), Rayham executed a limited power of attorney authorizing Allegiance Billing & Consulting, LLC (“Allegiance”) to contract on his behalf with network providers and health insurance companies for services performed at Methodist. In 2010, Allegiance executed an agreement (the “Beech Street Agreement”) on Rayham’s behalf with one of the defendants, Beech Street Corporation (“Beech Street”), a preferred provider organization. The Beech Street Agreement provided that its terms could be amended upon “30 days prior written notice from Beech to ” and that the “amendment shall be effective at the conclusion of such 30 day notice period unless objects to the amendment and notifies Beech in writing of intent to terminate prior to the conclusion of such notice period.” The address to which the Beech Street Agreement required the written notice to be sent was the address for the office of Park Slope Physician Services P.C. (“PSPS”), which handled all of Methodist’s billing, including the billing for services Rayham provided at Methodist. The Beech Street Agreement further provided that Beech Street could assign its rights under the contract to a “Beech Affiliate,” which was defined as any “entity” that is “controlled by or is under common control of Beech .” In 2010, Multiplan acquired Beech Street’s parent company. In March 2011, Multiplan sent two letters to Rayham at PSPS’s address. Both letters advised that Multiplan had acquired Beech Street and that, effective July 15, 2011, the Beech Street and Multiplan networks would integrate and claims would be processed under Multiplan’s fee schedule. The second letter, dated March 28, 2011, advised that the Beech Street Agreement would be amended so as to include the claims for services Rayham provided at Methodist in the Multiplan network. Rayham claimed he never received these letters. In November 2011, the Plaintiffs faxed Beech Street a letter requesting that the RR Office be added “to our profile,” with a retroactive date of July 1, 2011. The letter provided the RR Office’s address and tax-identification number, and a W-9 form was attached. Upon receiving the fax, the Defendants retroactively enrolled the RR Office in their networks and processed the RR Office’s claims according to Multiplan’s fee schedule. A few months later, after realizing that the RR Office was receiving lower reimbursements than were once provided by Beech Street, Rayham learned that Multiplan had acquired Beech Street and that claims were being processed pursuant to Multiplan’s fee schedule. Rayham requested the RR Office’s removal from the Defendants’ networks. This request was granted, but the request for the reprocessing of the RR Office’s claims was denied. In their complaint, the Plaintiffs alleged that the Defendants unilaterally altered the terms of the Beech Street Agreement by placing the RR Office in the Multiplan network and repricing its claims under the Multiplan fee schedule without affording the Plaintiffs notice or an opportunity to object as required under the Beech Street Agreement. Following joinder of issue and the completion of discovery, the Plaintiffs moved for summary judgment on the complaint, and the Defendants cross-moved for summary judgment dismissing the complaint. The motion court denied the Plaintiffs’ motion and granted the Defendants’ cross motion. The Plaintiffs appealed. The Court’s Ruling On the breach of contract claim, the Court held that the motion court “properly granted that branch of the defendants’ motion….” The Court found that the Defendants “complied with the Beech Street Agreement by sending the March 2011 letters, which advised Rayham that Multiplan had acquired Beech Street and that claims would be processed under the Multiplan fee schedule, to the address expressly required by the contract for such written notices.” The Court rejected the Plaintiff’s argument that Beech Street should have sent the notice, as opposed to Multiplan, because Multiplan “met the definition of a ‘Beech affiliate’ under the Beech Street Agreement.” Consequently, there could be no breach of contract “since the defendants provided Rayham with proper notice that the Beech Street Agreement would be amended so as to subject claims to the Multiplan fee schedule, and Rayham failed to object in writing within the 30-day notice period.” Having disposed of the contract claim, the Court turned its attention to the breach of the implied covenant of good faith and fair dealing. Noting that “ he covenant is breached where one party to a contract seeks to prevent its performance by, or to withhold its benefits from, the other,” the Court found that the Defendants’ “submissions established, prima facie, that they did not withhold the benefits of, or seek to prevent the performance of, the Beech Street Agreement either in its original form, or as amended.” Consequently, the motion court “properly granted that branch of the defendants’ motion which was for summary judgment dismissing the cause of action alleging a breach of the implied covenant of good faith and fair dealing.” Takeaway Rayham teaches that in order to breach the implied covenant of good faith and fair dealing, one party must act in way that denies the fruits of the contract for the other. Rayham learned this lesson the hard way – the Defendants acted consistent with the terms of the Beech Street Agreement.

Previously, this Blog considered the rules for judicial dissolution of a limited liability company (“LLC”). Here . A brief reminder follows below. Under Section 702 of New York’s Limited Liability Company Law (“LLCL”), a court sitting in the judicial district in which the office of the company is located may dissolve the company “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” LLCL § 702. To successfully petition for the dissolution of a limited liability company under LLCL § 702, the petitioning member must demonstrate the following: 1) the management of the company is unable or unwilling to reasonably permit or promote the stated purpose of the company to be realized or achieved; or 2) continuing the company is financially unfeasible. Matter of 1545 Ocean Avenue, LLC v. Crown Royal Ventures, LLC , 72 A.D.3d 121 (2d Dept. 2010); Doyle v. Icon, LLC , 103 A.D.3d 440 (1st Dept. 2013). Therefore, where the purposes for which the LLC was formed are being achieved and its finances remain feasible, dissolution pursuant to LLCL § 702 will be denied. Matter of Eight of Swords, LLC , 96 A.D. 3d 839, 840 (2d Dept. 2012). Disputes between members, by themselves, are generally insufficient to dissolve an LLC that operates in a manner within the contemplation of its purposes and objectives as defined in its articles of organization and/or operating agreement. See e.g. , Matter of Natanel v. Cohen , 43 Misc.3d 1217(A) (Sup. Ct. Kings Co. 2014). It is only where discord and disputes by and among the members are shown to be inimical to achieving the purpose of the LLC will dissolution be considered an available remedy to the petitioner. Matter of 1545 Ocean , 72 A.D.3d at 130-132. (This Blog wrote about a case, In the Matter of The Dissolution of 47th Road LLC, a New York Limited Liability Company , 2017 NY Slip Op. 50196(U), (Sup. Ct. Queens Co. Feb. 16, 2016), in which the discord between the partners was so severe, it became violent, thereby persuading the court that dissolution was appropriate < here =">here"> ). Today, this Blog revisits judicial dissolution under LLCL § 702 by discussing a decision coming out of the Supreme Court, Appellate Division, Second Department, wherein the Court held that questions of fact precluded the dismissal of an application to dissolve an LLC. Mace v. Tunick , 2017 NY Slip Op. 06170 (Aug. 17, 2017). Mace v. Tunick Background In July 2007, the plaintiff, David Mace (“Mace”), the defendant Nicholas Tunick (“Tunick”), and Tunick’s father, Peter Tunick (collectively” the “Owners”), formed Pedani Realty Services, LLC (“Pedani”). Mace and Tunick each owned 20% interests in the company, while Peter Tunick owned a 60% interest. In addition, each owned Ceres Chemical Co., Inc. (“Ceres”), in the same percentages as their ownership interests in Pedani. According to Mace’s complaint, the Owners formed Pedani for the sole purpose of purchasing and holding real property in Pound Ridge, New York (the “Property”) to serve as the headquarters for Ceres. Pedani took title to the Property in September 2007. Each of the Owners funded the purchase of the Property in same percentages as their ownership interests in Ceres. With the exception of a small amount of cash, the Property was the sole asset of Pedani. From approximately October 2007 through December 2013, Ceres occupied the Property under a lease with Pedani and paid monthly rent to Pedani. In or about 2012, Peter Tunick retired from Ceres and transferred his remaining stock in Ceres to his son, Nicholas Tunick. Additionally, Peter Tunick assigned his ownership in Pedani to his son with the consent of all members of Pedani. In October 2013, Mace retired from Ceres and sold his interest to Tunick, with the understanding that Ceres would remain at the Property and continue to pay rent to Pedani. However, subsequent to Mace’s retirement from (and sale of his interest in) Ceres, Tunick moved Ceres’ headquarters to South Carolina and vacated the Property. In October 2015, Mace commenced the action, inter alia , for the judicial dissolution of Pedani. Mace claimed, among other things, that the relocation deprived Pedani of the monthly income generated from the lease with Ceres, and was inimical to the purpose for which Pedani was formed. The defendants moved to dismiss, inter alia , the first cause of action, seeking judicial dissolution. The motion Court granted that portion of the motion. Mace then moved, inter alia , for leave to renew his opposition to the motion seeking dismissal of the first cause of action. That motion was also denied. Mace appealed. The Court’s Ruling The Second Department reversed. Applying the principles discussed above, the Court found that the operating agreement at issue did not did not set forth any particular purpose to warrant dismissal of the petition for dissolution: Here, the plaintiff alleged in the complaint that Pedani was formed for the purpose of acquiring title to and managing property to serve as Ceres’ headquarters, and that it became impossible to fulfill that purpose once Ceres relocated to a different property, not owned by Pedani. Contrary to the defendants’ contention and the Supreme Court’s conclusion, the defendants did not show, through the operating agreement or any other evidence, that the material fact alleged by the plaintiff regarding Pedani’s purpose “is not a fact at all” and that “no significant dispute exists regarding it.” In this respect, the operating agreement did not set forth any particular purpose for Pedani. The court’s determination that Pedani’s purpose was simply to acquire and manage property constituted an impermissible factual finding. Moreover, the defendants were not entitled to dismissal of the first cause of action under CPLR 3211(a)(1). Neither the operating agreement nor the leases of the property to Ceres and, upon Ceres’ relocation, a third party, utterly refuted the plaintiff’s allegation as to Pedani’s purpose so as to conclusively establish a defense as a matter of law to the plaintiff’s dissolution cause of action. Citations omitted. Takeaway Mace is instructive for two reasons. First, it underscores the importance of negotiating and drafting an operating agreement that includes a provision governing how members can exit the LLC. While not every situation demands consideration of exit provisions at the outset of the company, the parties to the operating agreement should understand the consequences of that decision and the risk that they may not be able to agree on dissolution terms at a later date. Mace learned this lesson the hard way. Second, it underscores the importance of identifying with specificity the purpose of the LLC at the time of formation. While many states permit general-purpose clauses in the operating agreements, indicating that the LLC is formed to engage in “all lawful business,” other states require a more specific explanation of the products and/or services the LLC will provide. Maces shows that even where a general-purpose clause is all that is required, the better practice is to provide specificity in describing the business purpose of the company.

Melville, NY ( Law Firm Newswire ) August 31, 2017 -  Freiberger Haber LLP to leverage more than 50 years of combined experience in delivering results oriented, client-centric representation to corporations, small businesses, partnerships and individuals. Jonathan Freiberger and Jeffrey Haber, former partners at prominent New York law firms, have come together to launch  Freiberger Haber LLP . The new law firm will represent businesses and individuals involved in a broad range of complex business and commercial litigation matters. “Forming the firm gives us an opportunity to marshal our diverse and extensive experience,” Freiberger said. “Through litigation and counsel, we have helped guide our clients through all types of litigation, legal and business challenges. Together, we offer our clients the sophistication and counsel of a large national law firm with the economy, flexibility, and personal attention of a small firm,” Haber added. Both Freiberger and Haber bring broad experience to their new enterprise. Freiberger is a dedicated and experienced litigator with more than 27 years’ experience, first with a large multi-national law firm with an office in New York City, and for the past seventeen years as a member of a Long Island, New York law firm. Throughout his career, he has successfully represented clients in construction, banking and real estate related litigation, as well as other types of commercial litigation and corporate counseling. “Jonathan is a smart and creative lawyer who has provided insightful guidance and forceful advocacy to his clients,” said Haber. “Over the years, he has produced extraordinary results for his clients. I am excited to start this venture with him.” Haber is an effective litigator with more than 28 years’ experience, having been a member of two New York City-based, national plaintiffs’ law firms (the second of which was for 16 years), where he concentrated his practice in complex class action litigation involving securities fraud and shareholders’ rights, as well as whistleblower litigation, complex commercial litigation and corporate counseling. Prior to forming the new firm, he was the principal of his own business and commercial litigation law firm. Mr. Haber has been recognized as a leading lawyer in securities and business litigation by Super Lawyers Magazine (2008–2010; 2012–2016) and by Super Lawyers Business Edition (2011, 2013, and 2016), has been repeatedly “recommended” in the Legal 500 (2011–2012; 2014–2016) and was recognized as a “local litigation star” for his securities work in the 2013–2015 editions of Benchmark Plaintiff. He also has published articles on topics involving securities and whistleblower litigation. “Jeff is an effective and tenacious litigator who combines an analytical approach with outstanding instincts to deliver results for his clients,” said Freiberger. “Just as importantly, he understands the need to align his strategy with his clients’ objectives. I look forward to growing our firm with Jeff.” The firm is located in New York City and Melville, New York (the firm’s primary office location). “It is important to us to have offices that are conveniently located and easily accessible to our clients,” Haber said. “This is especially so for our clients who travel from out of state,” added Freiberger. About Freiberger Haber LLP Located in New York City and Melville, Long Island, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals involved in a broad range of complex business, construction and commercial litigation matters. Founded by Jonathan Freiberger and Jeffrey Haber, Freiberger Haber leverages more than 50 years of combined experience to deliver sophisticated and creative representation to their clients. The firm’s approach is results oriented and client-centric, providing clients with the sophisticated counsel expected from larger firms with the flexibility and agility of a small firm. ATTORNEY ADVERTISING. © 2017 Freiberger Haber LLP. The law firm responsible for this advertisement is Freiberger Haber LLP, 105 Maxess Rd., Suite 124, Melville, NY 11747, (631) 574-4454; 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. Contact: Freiberger Haber LLP Melville Office: 105 Maxess Rd., Suite 124 Melville, New York 11747 Tel: (631) 574-4454 New York Office: 708 Third Avenue, 5th Floor New York, N.Y. 10017 Tel: (212) 209-1005 Fax: (212) 209-7101 Email: info@fhnylaw.com

In July, this Blog wrote about the settlement in connection with Wells Fargo & Co.’s phony accounts scandal that will require the bank to pay millions of dollars to aggrieved customers. Now, Wells Fargo has disclosed in a regulatory filing that the Consumer Finance Protection Bureau ("CFPB") is investigating whether the bank incorrectly closed real accounts and left customers without access to their funds. CFPB Probes Wells Fargo Account Closures The CFPB probe was commenced after the consumer watchdog received numerous complaints from Wells Fargo customers who suffered financial hardship after the bank inexplicably froze or closed their accounts.  In particular, some of the complaints raised the possibility that fraudulent deposits of unknown origin were made. Additionally, customers who said they were victims of identity theft claimed that Wells Fargo closed their accounts and refused to reopen them or open new ones. The complaints noted that there was confusion over why the accounts were frozen or closed. Customers were not only unable to access their money, they did not receive assistance from the bank’s customer service representatives. Although the CFPB does not reveal details of consumer complaints, it does not appear that similar regulatory probes at other money center banks are underway. A spokesman for Wells Fargo said that the company is cooperating with the regulator and that its goal is to protect customers and the bank from fraud while minimizing the risk and impact on customers. Unlike the the phony accounts scandal that appeared to be an effort to drive revenue, some observers believe this matter may have arisen from an abundance of caution to protect customers from suspicious activity. Nonetheless, the probe adds to the bank’s woes. Since Wells Fargo settled with the customers who were swept up in the phony accounts fiasco, the bank has also acknowledged that customers were charged for insurance they did not request and required others to pay unnecessary mortgage fees. The question remains as to whether Wells Fargo was overzealous in closing the accounts to prevent fraud or whether this is part of a larger pattern of its mistreatment of customers.

The hits keep coming for money center banks, such as Goldman Sachs, JP Morgan Chase and others, as three U.S. pension funds have filed a class action lawsuit over alleged stock lending abuses. The suit, brought by the Iowa Public Employees’ Retirement System, Orange County Employees’ Retirement System, and Sonoma County Employees’ Retirement Association, claims the banks’ stock lending practices violate federal antitrust laws. The funds allege that the banks colluded to boycott start-up lending platforms by threatening and intimidating potential clients. An attorney representing the funds said that the banks colluded to corner the lucrative stock lending market for years and harmed investors and retirees by forcing them to pay high fees to conduct transactions that involved stock lending. What is stock lending? Securities lending is generally conducted between broker/dealers and institutional investors, although pension funds and other entities may also lend securities to hedge funds. This essentially involves loaning a stock, derivative or other security to an investor, typically in connection with short selling. In a short sale, an investor looks to sell the borrowed securities at a higher price in anticipation of the price falling, and then buying the securities back at a lower price. The borrower is required to put up collateral in the form of cash, security or a letter of credit, and also pay a fee to the lender. The Pension Funds’ Claims The lawsuit claims that the banks conspired to undermine AQS, a startup lending platform that was developed by Quadriserv Inc. and SL-x. The AQS platform was designed to allow lenders and borrowers to interact directly, with lower fees being charged by AQS compared to traditional stock lending firms. The funds contend that the banks jointly created a securities lending platform, Equilend LLC. in 2009, to prevent access to other marketplaces. One tactic Equilend allegedly employed was buying certain AQS intellectual property and shelving it, effectively keeping the platform off the stock lending market. The lawsuit also contends that in 2012, Goldman Sachs threatened to cut off Bank of New York Mellon if it continued to support the AQS platform and that the bank acquiesced. Takeaway Other banks named in the suit include Bank of America Corp., Credit Suisse AG, Morgan Stanley, UBS AG, and Equilend. The pension funds are seeking unspecified treble damages and an order forcing the banks to stop the alleged collusion. Whether the funds will successfully demonstrate the necessary elements to prevail on their antitrust claims under the Sherman Act remain to be seen. Nonetheless, the resolution of this case, either way, will have far reaching implications for the securities lending market and the development of alternative lending platforms.

When disputes arise over the meaning of a contract or a clause within a contract, courts are called upon to interpret the agreement to give it meaning. Courts in textualist jurisdictions will examine the language of the contract as whole – the “four corners rule” – rather than the disputed clause in isolation. And, when the contract is clear, unambiguous and fully integrated ( i.e. , the parties have integrated their agreement into a single writing), all prior negotiations and agreements with regard to the same subject matter of the contract are excluded from consideration and cannot be used to expand or vary the terms of the contract. When reviewing a contract in dispute, courts will give the terms used by the parties their plain, ordinary, and generally accepted meaning, unless the agreement shows that the parties used them in a technical or different sense. Extrinsic evidence is inadmissible under these circumstances ( i.e. , it cannot be used to contradict or change the meaning of clear, unambiguous language). Only after a contract is found to be ambiguous will courts admit parol evidence to ascertain the intentions of the parties. A contract is ambiguous when its meaning is uncertain and doubtful or is reasonably susceptible to more than one interpretation. This Blog recently wrote about the rules of contract interpretation ( here ). Today’s post looks at another case, this time coming out of Texas (a textualist jurisdiction), where the meaning of a contract was at the heart of a dispute, even though the parties did not think so. Holmes v. Newman , No. 01-16-00311-CV (Tex. App. – <1 dist.> July 6, 2017). Holmes v. Newman Background The case involved an investment in a start-up internet company that provides betting tips to gamblers for a fee. The company, SportsPicks.com, was formed by the defendant, Leonard Holmes (“Holmes”), a former broker for TD Ameritrade. Holmes asked Steven Newman (“Newman”), a former customer of his, if Newman wanted to help fund the internet startup company. In April 2013, Holmes invested $50,000 in return for a 50% interest in SportsPicks.com. The parties memorialized their agreement through a series of emails on April 3 and 4, 2017. The first email set forth the terms of their percentage ownership in the new company, as well as their return of capital: “50k for 50%. We also agreed the first return of capital would go to you up to 50k (your investment) and then be split according to ownership perpetually. Capital will be distributed quarterly, 4 times a year.” The April 4 emails confirmed the terms with a slight variation on the timing of the payment and a discussion about formation of the company as a limited liability corporation. Over the next the next 10 months, the company struggled to turn a profit. On February 19, 2014, Newman and the other investor in the company, Rob Abbott (“Abbott”), requested an additional capital contribution from Holmes, which Holmes declined to make. Newman and Abbott made additional capital contributions, which Holmes alleged diluted his interest in the company. SportsPicks.com did not return a profit, and Newman did not receive any capital distributions. Contending that the agreement required that he receive capital distributions regardless of profit, Newman sued Holmes for breach of contract, fraud and breach of fiduciary duty. Holmes filed a combined traditional and no-evidence motion for summary judgment. The trial court granted Newman’s motion for summary judgment without specifying whether it was granting the no-evidence motion or the traditional motion and dismissed all claims asserted in Holmes’s seventh amended petition. Holmes appealed. The Court’s Ruling Regarding the breach of contract claim, the Court had to determine “whether Newman breached his contractual duties to Holmes by not returning his capital.” To do so, the Court had to “decide the meaning” of the term “return of capital” and the word “capital” in the parties’ email agreement. Neither party claimed that the terms were ambiguous, though each offered “differing interpretations of the provisions.” Noting that under Texas law a court can review the language of the contract to determine whether it is ambiguous “even in the absence of a claim of ambiguity by the parties” ( J.M. Davidson, Inc. v. Webster , 128 S.W.3d 223, 231 (Tex. 2003)), the Court found that the parties’ agreement contained ambiguous language. Reviewing the contract de novo, and giving the language in the contract its ordinary and generally accepted meaning, the Court found that the terms “first return of capital” and “capital,” were susceptible to different meanings. Though not defined by the parties, the terms “first return of capital” and “capital,” referred to a disbursement that returned one’s investment. In this case, the contract required Newman “to return a portion of Holmes’s investment four times per year.”  That finding was underscored by “the requirement that ‘capital will be distributed quarterly’ suggests that something would be distributed four times per year.” (Orig’l emphasis). However, other terms in the agreement “suggest that the parties’ meant something other than the ordinary and generally accepted meaning of “capital.” For example, noted the Court, language in the agreement suggested that the parties intended the terms to refer “to profits or dividends rather than capital, because capital cannot be split ‘perpetually’ once the amount of a shareholder’s investment has been returned.” The Court further noted: Similarly, “capital,” if defined as one’s investment, is not generally returned quarterly, but remains invested until the company shows a profit. To return capital quarterly would pull money out of the company before it has had an opportunity to become profitable. Further, the clause does not say how much capital would be returned quarterly, or when such quarterly payments would commence. Consequently, the Court found that the agreement was ambiguous and susceptible to more than one meaning: In sum, the court cannot determine from the face of this contract what the parties meant when they agreed that Holmes would be entitled to the “first return of capital,” and that such “capital” would be split according to ownership and distributed quarterly. While the plain language of the term suggests that the parties meant that a portion of Holmes’s investment would be returned quarterly (but does not state how much of the investment would be returned), the manner in which that term “first return of capital” is used suggests that the parties may have meant profits or dividends would be paid quarterly, or may have intended to create a priority for Holmes to receive his investment, i.e. his capital, out of the corporation’s first profits. Indeed, it appears that the parties’ may have used the same word—capital—to mean a shareholder’s investment in one place and profits or dividends in another place. In light of the ambiguity, the Court reversed the grant of summary judgment on Holmes’s breach of contract claim and remanded for further proceedings. Was There a Fiduciary Duty? In addition to the contract claim (and the fraud claim), Holmes alleged that because he had relied on Newton “for financial guidance as his broker at TD Ameritrade and thereafter up to and including his investment in SportsPicks.com,” Newton had breached his fiduciary duty to him. The Court affirmed the grant of summary judgment as to this claim. In affirming the lower court’s ruling, the Court noted that the fiduciary relationship that once existed at TD Ameritrade had concluded. As such, it did not carry over into other aspects of their relationship which “would give rise to a continuing, informal relationship imposing even broader fiduciary duties than Newman held under the prior relationship”: There is nothing in the record to show that Holmes’s account with TD Ameritrade was discretionary or that the broker/client relationship between the two gave rise to anything other than a principal/agent duty to execute the trades ordered. Thus, Holmes has not raised a fact question regarding whether Newman owed him any fiduciary duty other than fulfilling the trades authorized by Newman. Because Newman’s fiduciary duty was satisfied once the trades were made in accordance with Holmes’s instructions, it is not the sort of preexisting relationship of trust and confidence that would give rise to a continuing, informal relationship imposing even broader fiduciary duties than Newman held under the prior relationship. The Court’s decision can be found here . Takeaway Texas, like other textual jurisdictions, adheres to the “four corners” approach to contract interpretation. Thus, when a dispute arises over a term in a contract, Texas courts will consider the entire writing to harmonize and give effect to all provisions of the contract so that none will be rendered meaningless. No single provision, taken alone, will be given controlling effect; rather, all provisions are considered within the context of the entire instrument. In performing this analysis, these courts will give the words in the writing their plain, ordinary, and generally accepted meaning absent some different indication by the parties. Parol evidence may not be admitted to give meaning to a contract unless the writing is ambiguous – i.e. , the term in dispute is susceptible to more than one reasonable meaning. Holmes illustrates these principles of contract interpretation. Holmes is notable, however, because the Court determined sua sponte whether the contract in question was ambiguous. Under Texas law, because the issue of ambiguity is for the court to determine, courts can examine the disputed contract for that purpose even in the absence of a claim of ambiguity by the parties. In fact, an appellate court can do so for the first time on appeal. Finally, Holmes is noteworthy for its discussion of an informal fiduciary duty. In this regard, the Court observed that, while not every relationship “involving a high degree of trust and confidence rises to the stature of a fiduciary relationship,” an informal fiduciary duty can arise from “a moral, social, domestic or purely personal relationship of trust and confidence.” In a commercial setting, such a duty will be found only where the relationship of trust and confidence exists prior to, and apart from, the agreement that is the basis of the lawsuit.  Holmes learned that his prior broker/client relationship with Newman, though a formal fiduciary relationship, did not give rise to an informal fiduciary duty because that prior relationship (which was based on a non-discretionary account) concluded when Newman left TD Ameritrade.

On August 8, 2017, the U.S. Department of Justice (“DOJ”) announced a nearly $75 million settlement with PHH Mortgage Corporation (NYSE: Symbol PHH) and PHH Home Loans (collectively, “PHH”) to resolve allegations that PHH violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s (“HUD”) Federal Housing Administration (“FHA”), guaranteed by the United States Department of Veterans Affairs (“VA”), and purchased by the Federal National Mortgage Association (“Fannie Mae”), and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), that did not meet applicable origination, underwriting, and quality control requirements. PHH agreed to pay $65 million to resolve the FHA allegations, and $9.45 million to resolve the VA and FHFA allegations. The settlement was reached following negotiations that began in March of this year. “PHH submitted defective loans for government insurance, and homeowners and taxpayers paid the price. This significant resolution helps rectify the misconduct by returning more than $74 million in wrongfully claimed funds to the government,” said Acting U.S. Attorney for the District of Minnesota Gregory Brooker. Allegations and Admitted Facts Between January 1, 2006, and December 31, 2011, PHH certified for FHA insurance mortgage loans that did not meet HUD underwriting requirements and did not comply with FHA’s self-reporting requirements. In the press release, the DOJ provided examples of loan defects that PHH admitted resulted in loans being ineligible for FHA mortgage insurance.  These included: Failing to document the borrowers’ creditworthiness, including paystubs, verification of employment, proper credit reports, and verification of the borrowers’ earnest money deposit and funds to close. Failing to document the borrower’s claimed net equity in a prior residence or obtain documentation showing that the borrower had paid off significant debts. Including these debts in the borrower’s liabilities resulted in the borrower exceeding HUD’s debt-to-income ratio requirements for FHA-insured loans. Insuring a loan for FHA mortgage insurance even though the borrower did not meet HUD’s minimum statutory investment for the loan. In 2007, PHH audited a targeted sample of government loans for closing or pre-insuring requirements and found that its “percent accurate” did not exceed 50 percent during 2007. Since at least 2006, HUD has required self-reporting of material violations of FHA requirements. However, between January 1, 2006, and December 31, 2011, PHH Home Loans did not self-report any loans to HUD; rather, PHH Home Loans did not self-report any loans to HUD until 2013, after the Government commenced its investigation resulting in the settlement. As a result of PHH’s conduct and omissions, PHH admitted, HUD insured loans endorsed by PHH that were not eligible for FHA mortgage insurance, and that HUD would not otherwise have insured. PHH admitted that HUD subsequently incurred substantial losses when it paid insurance claims on those loans. In addition, from at least 2005 to 2012, PHH submitted for guarantee by the VA mortgage loans that did not meet the VA’s requirements. PHH is a VA approved lender that originates and underwrites mortgage loans and obtains VA loan guarantees (wherein the VA guarantees a portion of home loans). Also from at least 2009 to 2013, PHH sold mortgage loans to Fannie Mae and Freddie Mac, two entities that Congress created to provide stability and liquidity in the secondary housing market.  During this period, PHH originated and sold loans to Freddie Mac and Fannie Mae that did not meet their requirements. “We have agreed to resolve these matters, which cover certain legacy origination and underwriting activities, without admitting liability, in order to avoid the distraction and expense of potential litigation,” said PHH in a press release ( here ). “While we cooperated fully in these investigations since receiving subpoenas in 2013, we concluded that settling these matters is in the best interest of PHH and its constituents. Adhering to high legal, regulatory and ethical standards is at the core of how we conduct business, and we remain committed to serving our customers and all of our stakeholders consistent with that principle.” Whistleblower Lawsuit Some of the allegations resolved by the settlements were included in a whistleblower lawsuit filed under the False Claims Act against PHH Home and PHH Mortgage by a former employee of PHH, Mary Bozzelli (“Bozzelli”). Bozzelli worked as an underwriter and supervisor for PHH for nearly three decades.  Two years after she left PHH, Bozzelli filed the qui tam action to redress misconduct she had observed during her tenure. See United States ex rel. Mary Bozzelli v. PHH Mortg. Corp. and PHH Corp. , 13-cv-3084 (E.D.N.Y. May 28, 2013). “It is great to see PHH finally held accountable for its actions,” said Bozzelli. “Mortgage fraud is hardly victimless. Not only did PHH defraud taxpayers, but instead of helping deserving borrowers obtain home loans through the government loan programs, I witnessed firsthand the ways in which PHH abused the programs to line its own pockets.” As a result of the settlement, Bozzelli will receive over $9 million as a whistleblower award. Under the False Claims Act, a whistleblower can sue on behalf of the government and share in any recovery . The settlement agreements can be found here and here . Takeaway The settlements with PHH are notable because False Claims Act investigations of mortgage lenders typically focus on the lender’s participation in government-insured lending programs, such as those offered by the FHA and VA. The settlements not only involve those lending programs, but also involve lender certifications to Fannie Mae and Freddie Mac, a rare instance of the False Claims Act being used as an enforcement tool. The settlements are also notable because even though PHH denied wrongdoing, the company nevertheless admitted that it failed to satisfy certain program requirements, such as failing to document the borrowers’ creditworthiness, including verifying income, assets, and funds during underwriting. Typically, no such admissions are made in settlements.

The foundation of virtually every business and commercial transaction is a contract. Indeed, it is hard to imagine any transaction for the purchase or sale of goods, the merger or acquisition of a business, or the provision of services that is not founded upon a contract. There is almost nothing more frustrating, or potentially costlier, to businesses and commercial practitioners than a dispute over the meaning of a contract. Such disputes often arise over the performance or non-performance of a term in the contract. The dispute as to the meaning of a contract can take many forms. It may be that the language used is ambiguous; or the language is reasonably clear but is susceptible to different meanings; or although the language is clear, taken literally, it might not reflect the parties’ intent; or, as is often the case, an event has occurred that was not contemplated by the parties at the time of drafting, so the contract does not specifically provide for it. When parties enter into a contract, each assumes that the language in their agreement accurately memorializes their understandings and intentions. For this reason, when a dispute arises, the courts in New York look to the intent of the parties as expressed by the language they chose to put into their writing. Ashwood Capital, Inc. v. OTG Mgt., Inc. , 99 A.D.3d 1 (1st Dept. 2012). A clear, complete document will be enforced according to its terms. Id . at 7. When the parties have a dispute over the meaning of their contract, the court first asks if the contract contains any ambiguity. Id .  Since New York is a textual jurisdiction (where the courts look to the agreement itself to determine the meaning of the agreement), whether there is ambiguity “is determined by looking within the four corners of the document, not to outside sources. Kass v. Kass , 91 N.Y.2d 554, 566 (1998). Thus, courts will examine the parties’ intentions as set forth in the agreement and seek to afford the language an interpretation that is sensible, practical, fair, and reasonable. Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P. , 13 N.Y.3d 398, 404 (2009); Abiele Contr. V. New York City School Constr. Auth. , 91N.Y.2d1, 9-10 (1997); Brown Bros. Elec. Contr. v. Beam Constr. Corp. , 41 N.Y.2d 397, 400 (1977). A contract is not ambiguous if, on its face, it is definite and precise and reasonably susceptible to only one meaning. White v. Continental Cas. Co. , 9 N.Y.3d 264, 267 (2007). The “parties cannot create ambiguity from whole cloth where none exists, because provisions are not ambiguous merely because the parties interpret them differently.” Universal Am. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. , 25 NY3d 675, 680 (2015) (citation and internal quotation marks omitted). “Whether or not a writing is ambiguous is a question of law to be resolved by the courts.” WWW Assocs., Inc. v Giancontieri , 77 N.Y.2d 157, 162 (1990). “ xtrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.” Id . at 163. This rule is especially applicable where the parties are commercially sophisticated and their contract contains a merger clause. Schron v. Troutman Sanders LLP , 20 N.Y.3d 430, 436 (2013) (“where a contract contains a merger clause, a court is obliged to require full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to vary or contradict the terms of the writing.”) (citation and quotation marks omitted). Finally, since a “contractual provision that is clear on its face must be enforced according to the plain meaning of its terms,” Bank of N.Y. Mellon v. WMC Mortg., LLC , 136 A.D.3d 1, 6 (1st Dept. 2015) (citation omitted), courts may not “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.” Id . (citations omitted). This is especially so “in commercial contracts negotiated at arm’s length by sophisticated, counseled business people.” Id . Hoeg Corporation v. Peebles Corporation These principle were at play recently in Hoeg Corp. v. Peebles Corp. , 2017 NY Slip Op. 06066 (2d Dept. Aug. 9, 2017). There, the Second Department ruled that the contract before it was clear, complete and unambiguous and, therefore, should have been enforced according to its terms. Background Hoeg arose from a dispute over a contract concerning a joint venture the parties formed in May 2012. The venture came about in December 2011, when Hoeg contacted Peebles about the possibility of forming the relationship for the purpose of responding to requests for proposals from the New York City Economic Development Corporation (“EDC”). Thereafter, the parties entered into a written retainer agreement in May 2012 (the “Retainer Agreement”), setting forth the terms of their relationship and, inter alia , the compensation to be paid to the plaintiff. Hoeg alleged that, notwithstanding the written Retainer Agreement, it had earlier entered into a separate oral agreement with Peebles for the joint venture wherein the equity would be split 75%/25% in favor of Peebles. Hoeg filed suit asserting, inter alia , that Peebles breached that oral agreement. According to Hoeg, after Peebles used it to win a bid to purchase and develop an EDC property and ultimately sold the development rights to that property in a multimillion dollar deal, Peebles failed to honor the terms of the oral agreement. Peebles moved to dismiss. Relying on parol evidence, the motion court granted Peebles’ motion. The Second Department reversed. The Court’s Ruling The Court held that the motion court should have granted Peebles’s motion to dismiss the breach of contract claim. The Court found that the written Retainer Agreement was “a complete written instrument,” which prohibited the motion court from considering “evidence of what may have been agreed orally between the parties prior to the execution of this integrated written instrument.” The Court held that because the written Retainer Agreement “was comprehensive in its scope and coverage,” the motion court should not have received parol evidence “to vary the terms of the writing.” The Court explained: The written retainer agreement provided that the plaintiff would act as a consultant in order to facilitate the defendant’s acquisition and development of real property in New York City. The written retainer agreement did not limit its application to any particular project or property, or carve out any exceptions to the plaintiff’s full-time dedication to the purpose of the agreement. The written retainer agreement also set forth different commission structures for work performed by the plaintiff in facilitating the defendant’s acquisition and development of certain specified properties in Harlem, as well as the acquisition and development of properties other than the specified Harlem properties. Additionally, the written retainer agreement provided for the reimbursement of all expenses incurred by the plaintiff in connection with any work performed by the plaintiff on the defendant’s behalf.… Thus, the documentary evidence submitted by the defendant conclusively disposed of the plaintiff’s claim alleging breach of the purported oral joint venture agreement. Citation omitted. Takeaway Hoeg is yet another case in a long line of New York cases that stand for the proposition that a written agreement, which is complete, clear, and unambiguous on its face, must be enforced to give effect to the meaning of its terms, even in the absence of a merger clause. (This Blog recently discussed merger clauses and their effect on contract interpretation here .)  As Hoeg demonstrates, a contract is considered to be complete, clear and unambiguous where the language used has a definite and precise meaning, unaccompanied by the risk of misconception in the language of the agreement itself, and where there is no reasonable basis for a difference of meaning or opinion. Thus, as Hoeg learned, parol evidence of a communication made during negotiations of the written agreement that contradicts, varies, or explains the agreement or a term therein cannot be used to vary or contradict the terms of that writing.

According to the latest  report  from Cornerstone Research, which it jointly prepared with the Stanford Securities Class Action Clearinghouse, titled “Securities Class Action Filings – 2017 Mid-Year Assessment,”  securities class action lawsuits hit a record pace during the first 6 months of 2017. (The press release announcing the issuance of the Report can be found here .) By the end of June 2017, plaintiffs filed 226 securities fraud class actions in federal court, more than in any equivalent period since the enactment of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). The surge in 2017 represents an increase of 135 percent of the semiannual average of class action filings (96 filings) between 1997 and 2016, and a 49 percent increase over the 152 filings in the second half of 2016. Projecting forward for the entire year, plaintiffs are on pace to file 452 federal securities fraud class actions, which would represent an increase of 135 percent over the 1997-2016 annual average of 192 filings, and an increase of 66 percent over the number of filings in 2016 (272 actions). To put this surge in even more perspective, over the last year and a half, there have been more securities class action filings in federal court than in any comparable period since the PLSRA became law. “If the litigation rate of traditional securities class actions in the second half of 2017 equals that of the first half, the annual rate will nearly double the historical average,” said Dr. John Gould, a senior vice president at Cornerstone Research. “If one considers M&A filings as well, 2017 is on pace to be more than double the historical average.” According to the Report, the spike in securities fraud filings is due, in part, to an increase in the number of lawsuits challenging the price and/or fairness of mergers and acquisitions ("M&A") in federal court. Plaintiffs filed 95 M&A objection lawsuits in the first half of 2017, compared to 85 during the entire year in 2016. The authors attribute the increase in the number M&A cases in federal court to a shift away from state court due to the Delaware Chancery Court's hostility to disclosure only settlements in M&A objection actions. In addition to the shift from state court to federal court, the authors attribute the spike in filings to a change in the business model used by plaintiffs' counsel.  In the press release accompanying the Report, Professor Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse, opined: “ nother part of the spike seems attributable to a decline in the quality of complaints filed by attorneys who have recalibrated their business strategies to pursue a portfolio of cases with more remote payoffs because the costs of building such a portfolio remains low.” The Report also contains an interesting analysis of the frequency with which individual and institutional investors have served as the lead plaintiff in securities class actions (excluding M&A objection cases) over the past 20 years.  The authors found that from 1997 to 2003, individual investors were appointed more frequently than institutional investors in traditional securities class actions. Over the next nine years, from 2004 through 2012, institutional investors were as or more likely to be appointed lead plaintiff as individuals. However, since 2013, individual investors have been appointed lead plaintiff more frequently than institutional investors.  Finally, the percentage of filings in which the lead plaintiff was both an individual and institution has declined since 2000; in fact, it has been below 10 percent since 2009. Finally, the report highlights a number of key trends: Disclosure dollar loss or DDL (which measures the change in a company’s market capitalization between the trading day immediately before the end of the class period and the trading day immediately after the end of the class period) rose to $74 billion during the time period (23 percent higher than the historical semiannual average); Mega filings declined to 24 percent of DDL and 43 percent of Mega Dollar Loss or MDL (which measures the change in a company’s market capitalization from the trading day with the highest market capitalization during the class period to the trading day following the end of the class period). There were three mega filings with a DDL of at least $5 billion and eight with an MDL of at least $10 billion; Cases are being filed more quickly for traditional filings. The median lag time to file from the end of the class period fell to just 8 days — the shortest lag time since the enactment of the PSLRA; The number of filings against S&P 500 firms in the first half of 2017 occurred at an annualized pace of 11.2 percent, the highest rate since 2002; and Pharmaceutical firms were the most common targets of filings—the number at 2017 midyear already exceeds the full-year 2016 total.

As a general matter, when parties negotiate an agreement in a clear and unambiguous document, their writing will be enforced according to its terms. Evidence outside the four corners of the document as to what the parties really intended ( i.e. , parole evidence) is generally inadmissible. Golden Gate Yacht Club v. Societe Nautique De Geneve , 12 N.Y.3d 248 (2009). Among the reasons for this rule is to give “stability to commercial transactions,” and other types of commercial interactions. W.W.W. Assoc. v Giancontieri , 77 N.Y.2d 157, 162 (1990). As the New York Court of Appeals observed, such a rule can safeguard “against fraudulent claims, perjury, death of witnesses ... infirmity of memory.…” Id . Notwithstanding, questions arise about the enforceability of commitments made alongside a commercial transaction.  These questions tend to play out in disagreements over the meaning and effect of a contract, where one party attempts to rely on the extra-contractual statements of the other ( e.g. , in emails, telephone calls, or meetings) to support an argument, claim or defense. One way to address such disputes before they happen is to include a “merger clause” or “integration clause,” in the contract or agreement. What is a Merger Clause? A merger clause is a provision in a contract that declares the writing to be the complete and final agreement between the parties.  The following is a common example of a merger clause: The Agreement constitutes the entire agreement and understanding between the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. Merger Clauses: Broad vs. Specific Merger clauses typically are found at the end of a contract or agreement, among the other “boilerplate” provisions, and, as such, are often neglected or ignored during negotiations. Boilerplate merger clauses are given little weight by the courts. However, when the merger clause evidences a negotiation by the parties, courts accord such clauses more weight in determining the parties’ intent. In New York, the courts have required the parties to specify the agreements and matters being merged or integrated into their agreement. See Hobart v. Schuler , 55 N.Y.2d 1023, 1024 (1982) (deeming merger clause to be insufficient to bar parol evidence of fraudulent misrepresentation where clause states “all representations, warranties, understandings and agreements between the parties are set forth in the agreement”); LibertyPointe Bank v. 75 E. 125th St., LLC , 95 A.D.3d 706, 706 (1st Dept. 2012) (concluding that merger clause is insufficient to bar claim for fraudulent inducement where it fails to reference particular misrepresentations allegedly made by former president). Without such specificity, the courts have allowed parole evidence to be used to explain the parties’ intent, especially in cases involving claims of fraudulent inducement. Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 320-21 (1959) (holding that fraudulent inducement claim premised upon representations as to building’s operating expenses and expected profits was barred by merger clause that specifically disclaimed plaintiff’s reliance on representations regarding building’s “physical condition, rents, leases, expenses, operation”); Laduzinski v. Alvarez & Marsal Taxand LLC , 132 A.D.3d 164, 169 (1st Dept. 2015) (holding that merger clause was mere boilerplate that was “too general to bar plaintiff’s claim since it makes no reference to the particular misrepresentations allegedly made here by .”) (internal quotation marks and citation omitted) (alteration in original). Merger Clauses: Anti-Reliance Provisions In order for a party to disclaim reliance on extra-contractual representations, an agreement must contain language that makes it clear that the parties are not relying on such representations. The following is an example of a common anti-reliance provision: Each of the Parties acknowledges that no other party, nor any agent or attorney of any other party, has made any promise, representation, or warranty whatsoever, and acknowledges that the Party has not executed or authorized the execution of this Agreement in reliance upon any such promise, representation or warranty, that is not expressly contained herein. Courts will enforce anti-reliance language that identifies the specific information on which a party has relied and which forecloses reliance on other information. Danann , 5 N.Y.2d at 320 (finding that the plaintiff purchaser of a building could not assert that it was relying on oral representations made by the seller outside of a contract in which the plaintiff had specifically agreed in writing not to rely on such representations). See also Laxer v Edelman , 75 A.D.3d 584, 585–86 (2d Dept. 2010) (holding a fraudulent inducement claim concerning flooding and mold issues in building was barred by merger clause that disclaimed reliance on any statements by defendants regarding condition of premises). There is, however, an exception to the enforceability of an anti-reliance provision – where the defendant has unique or peculiar knowledge of an allegedly misrepresented fact.  Under such circumstances, even a specific contractual disclaimer will not defeat a plaintiff’s contention that it reasonably relied on the misrepresentation. Danann , 5 N.Y.2d at 322. The exception is designed to address circumstances under which a party would expend significant resources, or find it extraordinarily difficult to determine the truth or falsity of an oral misrepresentation (for example, where the information is not easily verifiable, such as a latent property defect). Schooley v. Mannion , 241 A.D.2d 677, 678 (3d Dept. 1997).  It does not apply, however, where the other party has the ability to learn the truth by the exercise of ordinary intelligence. See ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015). “In assessing whether reliance on allegedly fraudulent misrepresentations is reasonable or justifiable, New York takes a contextual view, focusing on the level of sophistication of the parties, the relationship between them, and the information available at the time of the operative decision.” JP Morgan Chase Bank v. Winnick , 350 F. Supp. 2d 393, 406 (S.D.N.Y. 2004). Sophisticated parties are held to a higher standard, especially since they have “the means of knowing, by the exercise of ordinary intelligence, the truth, or the real quality of the subject of the representation.” Mallis v. Bankers Trust Co. , 615 F.2d 68, 80-81 (2d Cir.1980) (quoting Schumaker v. Mather , 133 N.Y. 590, 596 (1892)). Therefore, “where sophisticated businessmen engaged in major transactions enjoy access to critical information but fail to take advantage of that access, New York courts are particularly disinclined to entertain claims of justifiable reliance.” Grumman Allied Indus. v. Rohr Indus., Inc. , 748 F.2d 729, 737 (2d Cir.1984). In addition, “ heightened degree of diligence is required where the victim of fraud had hints of its falsity.” JP Morgan Chase Bank , 350 F. Supp. 2d at 406. This rule applies where the “ ircumstances so suspicious as to suggest to a reasonably prudent plaintiff that the defendants’ representations may be false”; in such cases, a plaintiff “cannot reasonably rely on those representations, but rather must make additional inquiry to determine their accuracy.” Id . (citations and internal quotation marks omitted). Representaciones E Investigaciones Medicas, S.A. De C.V. v. Abdala On July 31, 2017, Justice Sherwood of the Supreme Court, New York County, Commercial Division dismissed a fraud claim relating to the acquisition of a pharmaceutical company based on a merger clause in the transaction agreements. Representaciones E Investigaciones Medicas, S.A. De C.V. v. Abdala , 2017 NY Slip Op. 31619(U) . Background The action arose out of two merger and acquisition transactions between sophisticated and well-represented parties, Teva Pharmaceutical Industries Limited (“Teva”) and Representaciones e Investigaciones Médicas, S.A. de C.V. (“Rimsa”), a Mexican pharmaceutical company owned by the defendants Fernando Espinosa Abdalá and Leopoldo de Jesús Espinosa Abdalá (the “Espinosas”). The first transaction involved the acquisition of Rimsa by Teva for $460 million pursuant to a Share Purchase Agreement (“SPA”) with the Espinosas; the second involved the acquisition of certain intellectual property for $1.84 billion that had been licensed to Rimsa by PPTM International S.à.r.l., a company controlled by the Espinosas located in Luxembourg, pursuant to a separate Asset Purchase Agreement. According to Teva, the Espinosas operated Rimsa as a fraud and took elaborate steps to conceal their wrongdoing from both Mexican regulators and Teva. Under the Espinosas’ leadership, claimed Teva, Rimsa obtained registrations to sell its products from regulators by submitting made-up “paper” formulations and false test results for products not yet developed or tested. When Rimsa actually finished the products, it unlawfully sold them under the guise of those false registrations, even though the actual formulations were often completely different. To conceal the fraud from regulators during audits, Teva alleged that Rimsa concocted an elaborate scheme of “double paperwork” and parallel computing systems. The Espinosas then concealed the fraud from Teva during due diligence by using that same fraudulent double paperwork. After the transactions closed, Teva received an anonymous email containing allegations of fraud. Teva investigated and, over the following months, uncovered what the Espinosas had known all along – Rimsa was selling numerous products in violation of the law. As a result of the alleged violations, Teva claimed that it suffered substantial losses because it could not derive any revenue from products it could not lawfully sell. It also claimed that it had incurred costs from idle capacity and employee severance, as well as expenses investigating and attempting to develop and implement remediation plans. Finally, Teva alleged that the fraud imperiled its reputation as a reliable pharmaceutical manufacturer. The Parties’ Arguments and Motion to Dismiss Teva sued the Espinosas for fraud and breach of contract . The Espinosas moved to dismiss . Regarding the fraud claim, the Espinosas argued, among other things, that the claim was barred by the merger clause in the SPA, which provided that Teva was not relying on any statements outside the SPA, itself, including statements made in due diligence. In this regard, the Espinosas argued that even if misstatements made during due diligence were actionable, the merger clause in the SPA was specific and integrated any statements made during Teva’s due diligence. Moreover, the information allegedly concealed from Teva was or could have been known to it.  Teva performed its own due diligence, and must have concluded that the issues raised in the complaint were not sufficiently problematic to stop it from making the purchase. According to the Espinosas, Teva failed to allege that the information “could not be discovered through the exercise of reasonable diligence” and that it is not its “own evident lack of due care which is responsible for predicament,” as Teva had access to the Rimsa’s books and facilities during its due diligence. Teva responded by stating that the merger clause in the SPA was not sufficiently specific to exclude the use of parol evidence to show fraud in the inducement. Teva also contended that, even if the merger clause was sufficiently specific, it would still be unenforceable because the fraud was peculiarly within the Espinosas’ knowledge. TIAA Glob. Investments, LLC v. One Astoria Sq. LLC , 127 A.D.3d 75, 87 (1st Dept. 2015). The Court’s Ruling The Court agreed with the Espinosas, finding that the merger clause was specific and directed to the claims asserted by Teva in its complaint: Here, plaintiff has in the plainest language announced and stipulated that it is not relying on any representations as to the very matter as to which it now claims it was defrauded. Such a specific disclaimer destroys the allegations in plaintiffs’ complaint that the agreement was executed in reliance upon these contrary oral representations.… This merger clause specifies that the purchaser expressly acknowledges and agrees ... that it is not relying on any statement, representation or warranty ... in any materials made available ... during the course of its Due Diligence Investigation, which are the representations and materials providing the basis for the remainder of the fraud claim. Citation and internal quotation marks omitted; alteration added. The Court went on to note that since the merger clause was negotiated by sophisticated parties, if Teva wanted to carve-out statements and representations made during due diligence from the merger clause, it could have done so. But, it did not. As such, Teva could not claim the merger clause was unenforceable. Teva is a sophisticated entity and performed extensive due diligence … before entering into a major transaction, including a site visit and employee interviews. If it had wanted to include a carve-out that it could rely on the materials presented to it, or information included in due diligence, or a representation that the material it viewed during due diligence was correct, it could have done so. It did not. The Court also rejected Teva’s argument that the exception to the anti-reliance provision of the merger clause saved its fraud claim, noting that Teva failed to “allege[] how the alleged misrepresentations remained particularly in the knowledge of the defendants despite Teva’s access to Rimsa’s personnel, facility, and products.” Accordingly, the Court enforced the merger clause and dismissed Teva’s fraud claim. Takeaway Parties to a transaction should carefully negotiate and consider the content of their merger clauses, and not rely on boilerplate language. In that regard, they should specify the representations and matters being merged or integrated into the agreement. If the parties intend complete integration, then they should ensure that the merger clause clearly articulates their intention. And, if they include anti-reliance language in the merger clause, such language should be specific and identify the representations and matters to be included or excluded. In Rimsa , many of these takeaways were at play. The merger clause was negotiated by sophisticated parties; it was not mere boilerplate. Because it was negotiated, it was specific in content and scope, thereby demonstrating the parties’ intent as to representations and matters covered by the clause. And, because Teva was sophisticated and had, by its own admission, conducted an extensive and thorough due diligence, it could not escape the anti-reliance provision in the merger clause directed to its due diligence. Rimsa therefore exemplifies the effect of a negotiated and specific merger clause on a dispute between parties to a contract.

Robocalls.  We all get them.  They are annoying. But, are they legal? Not surprisingly, the answer depends on the circumstances involved. In 1991, Congress passed the Telephone Consumer Protection Act (“TCPA”) to protect consumers from businesses that use automatic telephone dialing systems to deliver prerecorded messages without prior consent. Mims v. Arrow Fin. Servs., LLC , 565 U.S. 368, 370-71 (2012) (noting that the TCPA was enacted in response to “ oluminous consumer complaints about abuses of telephone technology.”); see also In re Rules & Regs Implementing the Tel. Consumer Prot. Act of 1991 , 30 FCC Rcd. 7961, 7979-80 (2015) (citing S. Rep. No. 102-178, at 2, 4-5 (1991)). The TCPA bans various privacy-invading practices, including, but not limited to: calling homes before 8 a.m. or after 9 p.m. local time; making unsolicited phone calls or sending unsolicited text messages without prior written consent; making robocalls with prerecorded messages; using an automatic telephone dialing system to place phone calls; and calling consumers who registered their name and number(s) on the National Do Not Call Registry. The TCPA allows consumers who receive such calls to recover the greater of their actual monetary loss or $500 per violation, and allows for treble damages where a violation is willful or knowing. 47 U.S.C. § 227(b)(3). Mejia v. Time Warner Cable, Inc. Numerous lawsuits have been filed across the country by consumers who seek to hold businesses accountable for violating the TCPA. In August 2015, one such lawsuit was filed against Time Warner Cable Inc. (“Time Warner”) by a former customer who alleged, on behalf of all others similarly situated, that the company violated the TCPA. Mejia v. Time Warner Cable, Inc. , 15-CV-6445 (JPO) (S.D.N.Y. Aug. 14, 2015). In her complaint, Raquel Mejia (“Mejia”) alleged that Time Warner used an autodialer to make at least two unsolicited sales calls a day to her cellphone in an attempt to win back her business. Mejia claimed that she never consented to the calls, and did not have any business relationship with Time Warner after 2007. Mejia claimed that she terminated her service in 2007. Mejia also claimed that she repeatedly informed Time Warner that she was not interested in the cable provider’s products and requested that the company stop calling her. According to the complaint, Time Warner denied her request and continued to make the unwanted cell phone calls at a rate Mejia contended “amounted to harassment.” Mejia alleged that Time Warner violated the TCPA by calling her without her prior express written consent and by using an automatic telephone dialing system to make the unsolicited phone calls to her cell phone. Mejia sought to enjoin the practices complained of and recover damages for Time Warner’s violations of the act. Procedural Background Mejia filed her complaint on August 14, 2015. An amended complaint was filed on March 28, 2016, removing Mejia and adding Leona Hunter and Anne Marie Villa as plaintiffs. Shortly thereafter, Allan Johnson filed a complaint in the Southern District of New York against Time Warner alleging violations of the TCPA, stemming from calls made to Johnson’s phone by the company using an “interactive voice response” calling system. Johnson v. Time Warner Cable Inc. , No. 15 Civ. 6518 (S.D.N.Y. Aug. 18, 2015). The parties moved for summary judgment in both the Mejia and Johnson actions. Time Warner also moved for judgment on the pleadings in both actions on the grounds that the TCPA violates the First Amendment. The Court denied the motions , except for Time Warner’s motion for summary judgment, which it granted in part and denied in part. This Post addresses Time Warner’s motion on the pleadings. The Court’s Ruling Time Warner challenged the constitutionality of Section 227(b)(1)(A)(iii) of the TCPA under the First Amendment, arguing that the act impermissibly draws distinctions that are content based (relying on Reed v. Town of Gilbert , 135 S. Ct. 2218 (2015)), and failed strict scrutiny analysis (which “which requires the Government to prove that the restriction furthers a compelling interest and is narrowly tailored to achieve that interest.” ( Arizona Free Enterprise Club’s Freedom Club PAC v. Bennett , 131 S.Ct. 2806, 2817 (2011) (citation and internal quotation marks omitted)). First, Time Warner argued that Section 227(b)(1)(A)(iii), which exempts from liability “call made solely to collect a debt owed to or guaranteed by the United States,” is content based on its face, because it “define regulated speech by particular subject matter.” (Quoting Reed , 135 S. Ct. at 2227). Second, Time Warner argued that because recent judicial and FCC decisions have made it clear that Section 227(b)(1) of the TCPA exempts governmental speakers, it contains a speaker-based restriction. The Court agreed with Time Warner, finding that Section 227(b)(1)(A)(iii) of the TCPA is content-based. Notwithstanding, the Court found that the statute withstood constitutional challenge on the strength of two recent district court cases, in which the courts held that although the debt-collection exemption under Section 227(b)(1)(A)(iii) was content based, the TCPA satisfied strict scrutiny consideration. See Holt v. Facebook, Inc. , No. 16 Civ. 02266, 2017 WL 1100564, at *7-10 (N.D. Cal. Mar. 9, 2017); Brickman v. Facebook, Inc. , No. 16 Civ. 00751, 2017 WL 386238, at *4-9 (N.D. Cal. Jan. 27, 2017). First, the Court found that the TCPA “serves a compelling government interest” – “to protect the privacy interests of residential telephone subscribers by placing restrictions on unsolicited, automated telephone calls to the home and to facilitate interstate commerce by restricting certain uses of facsimile (fax) machines and automatic dialers.” Citing S. Rep. No. 102-178, at 1 (1991).  This interest, held the Court, more than satisfied the first prong of the strict scrutiny analysis. Carey v. Brown , 447 U.S. 455, 471 (1980) (noting that “ he State’s interest in protecting the well-being, tranquility, and privacy of the home is certainly of the highest order in a free and civilized society.”). In so holding, the Court rejected Time Warner’s argument that there is a distinction between residential privacy and cell phone privacy, and that the TCPA only applied to the former. he Court sees no reason that this compelling interest does not also extend to cell phones. See Patriotic Veterans, Inc. v. Zoeller , 845 F.3d 303, 305-06 (7th Cir. 2017) (“No one can deny the legitimacy of the state’s goal: Preventing the phone (at home or in one’s pocket) from frequently ringing with unwanted calls. Every call uses some of the phone owner’s time and mental energy, both of which are precious.”); see generally Riley v. California , 134 S. Ct. 2473, 2494-95 (2014) (“Modern cell phones are not just another technological convenience. With all they contain and all they may reveal, they hold for many Americans ‘the privacies of life.’” (quoting Boyd v. United States , 116 U.S. 616, 630 (1886))). Second, the Court found that the TCPA was narrowly tailored because “ t imposes liability only on a party using an autodialer or artificial voice to make calls without the recipient’s consent.” The Court noted that Section 227(b)(1)(A)(iii) does not impose restrictions on calls made without the use of an autodialer or artificial voice, and “allows autodialer or artificial voice calls so long as consent has been secured.” In short, observed the Court, “Congress… carefully targeted the calls most directly raising its concerns about invasion of privacy, while also furthering its interest in collecting federal government debts.” The Court rejected Time Warner’s argument that Section 227(b)(1)(A)(iii) of the TCPA was underinclusive: Here, the government debt carve-out is a narrow exception from liability in furtherance of a compelling interest … . Indeed, the statute expressly authorizes the FCC to further “restrict or limit the number and duration of calls made . . . to collect a debt owed to or guaranteed by the United States.” And . . . “ he government debt exception would likewise be limited by the fact that such calls would only be made to those who owe a debt to the federal government.” This narrow exception, and the provision as a whole, are well-designed to further the interests that Congress sought to pursue with the TCPA. Takeaway In Mejia , Judge J. Paul Oekten joins two other district courts in finding that although the TCPA imposes content-based restrictions on speech, it nevertheless passes constitutional muster.  In so holding, Mejia answers the question at the top of this post by making it clear that robocalls and autodialed calls are legal only if the recipient gives prior written consent to receive them. The absence of such consent will result in a violation of the TCPA, even though the statute is not content neutral. Under the strict scrutiny test, such a narrowly tailored approach suffices to pass constitutional muster.

As this Blog has noted in a previous post ( here ), to state a retaliation claim, both the Sarbanes-Oxley Act of 2002 (“SOX”) and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) require plaintiffs to demonstrate, among other things, that they engaged in protected whistleblowing activity, that their employer knew they engaged in protected activity, and that there was a causal connection between the protected activity and an adverse employment action. Failure to satisfy these requirements will result in the dismissal of the claim. Recently, the Ninth Circuit affirmed the grant of summary judgment in an employer’s favor because the plaintiff failed to demonstrate that she had engaged in protected activity under either SOX or Dodd-Frank. Rocheleau v. Microsemi Corporation, Inc. , No. 15-56029 , 2017 WL 677563 (9th Cir. Feb. 21, 2017). Background  The defendant, Microsemi Corporation, Inc. (“Microsemi”), a publicly traded company, hired the plaintiff, Ramona Lum Rocheleau (“Rocheleau”), as an independent contractor in 2006.  Beginning in 2008, Rocheleau internally reported concerns that Microsemi (1) engaged in certain technical violations of the affirmative action requirements imposed by the Office of Federal Contract Compliance Programs (“OFCCP”), (2) misclassified Rocheleau and two other employees as independent contractors, and (3) asked Rocheleau to retroactively change hiring and recruiting data in violation of OFCCP regulations. Microsemi terminated her employment on February 17, 2010. Thereafter, Rocheleau filed a whistleblower retaliation lawsuit in the United States District Court for the Central District of California, claiming violations of the anti-retaliation provisions in SOX and Dodd-Frank.  Rocheleau maintained that Microsemi defrauded its shareholders by creating an unreported risk to Microsemi’s business ( i.e. , an investigation by OFCCP into Microsemi) and by engaging in payroll tax fraud. Microsemi moved for summary judgment on the grounds that Rocheleau failed to establish that she was engaged in a protected activity under either statute, as she could not hold an objectively reasonable belief that Microsemi violated the securities laws such that it and its shareholders suffered losses.  The district court granted Microsemi’s motion for summary judgment and Rocheleau appealed. The Court’s Ruling.  The Ninth Circuit affirmed the district court’s ruling, concluding that Rocheleau failed to demonstrate that she engaged in protected activity under either SOX or Dodd-Frank.  The Court noted that to demonstrate that she was engaged in protected activity, Rocheleau had to show that she possessed a reasonable belief that the information she was providing to Microsemi related to a securities law violation. In this regard, the Court held that Rocheleau had to allege “at least … the basic elements of a claim of securities fraud.”  According to the Court, Rocheleau failed to make this showing because she only complained about violations of OFCCP rules and regulations and misclassifications of individuals as independent contractors: Reports of violations of OFCCP regulations are not themselves protected under SOX or Dodd-Frank, and no objectively reasonable basis existed to believe that any such violations would cause Microsemi and its shareholders to suffer significant losses, as required to establish a prima facie case of reasonable belief in shareholder fraud. Similarly, Rocheleau’s belief in misclassification of employees was reasonable only in regard to herself, and the misclassification of a single employee as an independent contractor falls far short of the materiality standard for shareholder fraud. As to the claim that Microsemi defrauded its shareholders by failing to disclose a risk to Microsemi’s business (namely, OFCCP’s investigation into Microsemi), the Court held that Rocheleau’s claim failed for temporal reasons: the annual report on Form 10-K in which Microsemi would disclose such information was not due to be filed until after Rocheleau made her report. Takeaway  Being a whistleblower involves personal sacrifice and professional risk.  Many violations of the law go unreported because people who know about them are afraid of being disciplined, losing their job, being demoted, or being passed over for promotion. For these reasons, it is important for whistleblowers and their counsel to be reasonably sure that the conduct about which the whistleblower is complaining is actionable under the securities laws. This means that the whistleblower should come forward with facts supporting the basic elements of a securities fraud claim. Anything less, as Rocheleau learned, will not suffice.