In business, relationships are important. One relationship that is essential to successful businesses is the principal-agent relationship. A principal-agent relationship may be established by evidence of the consent of one person to allow another to act on his or her behalf and subject to his or her control, and consent by the other to act, even where the agent is acting as a volunteer. 5015 Art Fin. Partners, LLC v. Christie’s Inc. , 58 A.D.3d 469, 471 (1st Dept. 2009) (quotation marks and citation omitted). In simple cases, the principal is an individual who asks another individual to perform a task. In more complex cases, the principal may be a corporation, a nonprofit organization, a government agency or a partnership. An agency relationship may be based on the actual or apparent authority of the agent to act on behalf of the principal. Actual authority may be based on an express or direct grant of authority to the agent or may be implied based on the principal’s “manifestations which, though indirect, would support a reasonable inference of an intent to confer such authority.” Greene v. Hellman , 51 N.Y.2d 197, 204 (1980). Implied actual authority must be based on a showing that the principal “performed verbal or other acts that gave the reasonable impression that he had authority to enter into the .” Site Five Hous. Dev. Fund Corp. v. Estate of Bullock , 112 A.D.3d 479, 480 (1st Dept. 2013). See also Greene , 51 N.Y.2d at 204. Apparent authority must be based on “words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction. The agent cannot by his own acts imbue himself with apparent authority.” Hallock v. State of New York , 64 N.Y.2d 224, 231 (1984). “‘Rather, the existence of “apparent authority” depends upon a factual showing that the third party relied upon the misrepresentation of the agent because of some misleading conduct on the part of the principal — not the agent.’” Id. at 231 (citing Ford v. Unity Hosp. , 32 N.Y.2d 464, 473 (1973)). “Moreover, a third party with whom the agent deals may rely on an appearance of authority only to the extent that such reliance is reasonable.” Id . See also Wen Kroy Realty Co. v. Public Nat. Bank & Trust Co. , 260 N.Y. 84, 92-93; Restatement, Agency 2d, § 8, Comment c. Thus, “ ey to the creation of apparent authority is that the third person, accepting the appearance of authority as true, has relied upon it.” Greene , 51 N.Y.2d at 204 (citing Restatement, Agency 2d, § 27, and Comment a). Even if the agent possessed no actual authority and there was no apparent authority on which the third person could rely, the principal may still be liable if s/he ratifies or adopts the agent’s acts before the third party withdraws from the transaction. Ramsay v. Miller , 202 NY 72, 75-76 (1911). Ratification usually relates back to the time of the undertaking, creating an agreement after-the-fact as though it had been formed initially. To ratify the acts of another, the principal may expressly tell the parties concerned or, by his/her conduct, manifest his/her willingness to accept the benefits of the transaction as though the acts were authorized. La Candelaria E. Harlem Community Ctr., Inc. v. First Am. Tit. Ins. Co. of N.Y. , 146 A.D.3d 473, 473 (1st Dept. 2017). Silence or a prolonged failure to object to the act can constitute ratification. E.g. , Matter of Cologne Life Reins. Co. v. Zurich Reins. (N.Am.), Inc. , 286 A.D.2d 118, 126-28 (1st Dept. 1991); Clark v. Bristol-Myers Squibb & Co. , 306 A.D.2d 82, 85 (1st Dept. 2003) (holding that “plaintiff implicitly ratified the settlement by making no formal objection for months after she was told about it”). A common question that arises in the principal-agent relationship is who is liable for the violations of law and/or the breaches of duty or contract committed by the agent. Typically, the principal will be held liable for the agent’s misconduct or illegal activities when the agent is acting within the scope of his/her authority, and has been specifically instructed to perform the act on the principal’s behalf.  However, the principal will not be held liable when the agent acts outside the scope of the authority granted. Though these principles seem straightforward, their application is not. Disputes over who is liable for the wrongs committed against third parties by an agent are common place. One such dispute was recently resolved on August 1, 2017, by Justice Friedman of the Supreme Court, New York County, Commercial Division in Arnon Ltd (IOM) v. Beierwaltes , 2017 NY Slip Op. 31605(U) . There, Justice Friedman held that an intermediary negotiating on behalf of a trust was not an agent with the authority to bind the trust with respect to the purchase of an ancient statue. Background At its core, Arnon is a breach of contract action based on the alleged wrongful refusal by the defendants to sell an ancient Greek statue – known as the Kore – to the plaintiff Arnon Ltd (IOM), a company owned by a British trust, which holds the artwork of David Sofer (“Sofer”), a British and Israeli citizen residing in London (“Arnon” or the “Trust”). According to the complaint, the defendants entered into a contract to sell the sculpture to Arnon for $650,000, but within days of entering into the agreement, cancelled it without any basis in the contract. Arnon sued the defendants for breach of contract, and after discovery, both parties moved for summary judgment. The defendants contended that Sofer, an intermediary who negotiated with the defendants to purchase the Kore on Arnon’s behalf, did not have the authority to enter into a contract to acquire the Kore, and that Arnon never ratified Sofer’s purported agreement to purchase the statue. Alternatively, the defendants contended that the parties never reached a meeting of the minds on “the time and method of payment” or that, if a contract was made, it was cancelled by the breach of the payment terms. In opposition to the defendants’ motion and in support of its own motion for summary judgment, Arnon maintained that although “Sofer did not have formal agency powers” ( i.e. , he was not expressly appointed by Arnon to act as its agent), he had either implied actual or apparent authority with respect to the acquisition of the Kore. In addition, Arnon contended that the parties reached an agreement on material terms. The Court’s Ruling The Court found that Sofer did not have apparent or implied actual authority to purchase the Kore on Arnon’s behalf. The Court rejected Arnon’s argument that an email Sofer sent to the defendants, which was carbon copied to a representative of Arnon, demonstrated Sofer’s implied and/or apparent authority to bind Arnon in the purchase of the Kore: he silence of Ms. de Carte in response to the January 12 email is insufficient as a matter of law to manifest either implied actual or apparent authority. Ms. de Carte is neither directly addressed in the email, nor identified as a representative of Arnon.… Further, the email does not detail the terms of the sale of the Kore, and it affirmatively states that Arnon is part of Mr. Sofer’s trust and is managed by independent directors. Ms. de Carte’s failure to respond, within a very short time frame, to such an email could not have led a reasonable person in defendants’ position to conclude that Ms. de Carte, and through her, Arnon, bestowed on Mr. Sofor the authority to bind Arnon to a $650,000 contract. … Ms. de Carte’s non-response to the January 12 email could not have given Mr. Sofer the reasonable impression that he had authority to enter into this one contract. At most, Ms. de Carte’s silence could be interpreted as manifesting agreement that Mr. Sofer was authorized to engage in intermediary discussions or negotiations, but that the independent directors referred to in the January 12, 2013 email must still make the final decision as to whether to bind Arnon to the purchase and must approve a formal written contract. Arnon’s reliance on prior dealings is also insufficient to raise a triable issue of fact as to Mr. Sofer’s apparent authority to bind Arnon to the one Kore transaction. As a general rule, the mere creation of an agency for some purpose does not automatically invest the agent with apparent authority to bind the principal without limitation. An agent’s power to bind his principal is coextensive with the principal’s grant of authority. Further, the existence of apparent authority depends upon a factual showing that the third party relied upon the misrepresentations of the agent because of some misleading conduct on the part of the principal not the agent. At most, said the Court, “the evidence supports a finding that Arnon bestowed on Mr. Sofer authority to recommend artworks to Arnon, but not to bind Arnon to the purchases.” In so holding, the Court rejected Arnon’s contention that the evidence demonstrated its intention to authorize Sofer to contract for the Kore on Arnon’s behalf. The Court noted that Arnon ignored the evidence that only it had the authority to enter into a contract for purchases of antiquities (even if Arnon may have effectively acted as a rubber stamp for Sofer’s recommendations). Significantly, observed the Court, Sofer never testified that he was authorized, or that Arnon even believed him to be authorized, to contract on Arnon’s behalf in the purchase of the Kore. The court cannot ignore, however, that Mr. Sofer created a trust under which he was required to obtain Arnon’s approval of contracts for purchases in order to avail himself of the benefits … of the trust structure, and that he failed to do so before defendants cancelled the contract for the Kore. Next, the Court examined the question whether Arnon ratified the alleged contract. After identifying the applicable principles, the Court found that even if Sofer had entered into an agreement with the defendants, “ratification of an agent’s acts requires knowledge of material facts concerning the allegedly binding transaction,” which the evidence showed could not be imputed to Arnon: “The January 12, 2013 email does not outline any details of the alleged agreement but, rather, explicitly anticipates a future document that would contain ‘the logistics of the sale (formal short agreement, invoice with photos etc.).’” “More important,” said the Court, “any claim of ratification based on Ms. de Carte’s silence in response to the January 12 email would be plainly inconsistent with Ms. de Carte’s repeated testimony, that Arnon required compliance with a formal process in order to approve the contract.” Takeaway The key to determining whether a principal will be held liable for the acts of his/her agent is authority: was the agent authorized to act on the principal’s behalf? If a person has no authority to act as an agent, or an agent has no authority to act in a particular way, the question becomes can the principal be held liable for the wrongs perpetrated on a third party? As Arnon shows, the answer depends on whether the agent has apparent authority – that is, whether the third party reasonably believed from the principal’s words or conduct that s/he had in fact consented to the agent’s actions. And, as in Arnon , the answer to that question is often hotly contested.

On July 10, 2017, new Securities and Exchange Commission ("SEC") rules went into effect that permit companies, regardless of their size, to file  paperwork for initial public offerings without immediately making public disclosures.  The SEC's announcement of the new policy can be found here .  "This is an important step in our efforts to foster capital formation, provide investment opportunities, and protect investors," said Director of the Division of Corporation Finance, Bill Hinman. "This process makes it easier for more companies to enter and participate in our public company disclosure-based system." The new policy is an expansion of rules promulgated under the Jumpstart Our Business Startups ("JOBS") Act of 2012 that allowed emerging growth companies (those with under $1 billion in revenue) to make such confidential filings. The new policy is intended to help companies resolve any issues during the registration process out of public view, further restore the market for IPOs and subsequently boost job growth. "By expanding a popular JOBS Act benefit to all companies, we hope that the next American success story will look to our public markets when they need access to affordable capital," said Chairman Jay Clayton. "We are striving for efficiency in our processes to encourage more companies to consider going public, which can result in more choices for investors, job creation, and a stronger U.S. economy." Under the new policy, the SEC will review a draft of the initial “S-1” registration statement and amendments filed pursuant to the Securities Act of 1933 on a non-public basis. The new policy applies to both domestic and foreign issuers. However, responses to any SEC staff comments must be made in a public filing, not in a revised, non-public draft of the registration statement. Additionally, issuers must publicly file registration statements at least 15 days prior to any road show presentations to investors, or in the alternative, 15 days prior the the requested effective date of the registration statement. The so-called “stealth” filing procedures should help issuers time their IPOs with favorable market conditions. At the same time, companies have the option of withdrawing a filing in the event of a market downturn or other adverse event. The confidential filing procedures will also help issuers maintain the privacy of sensitive financial and business information. Nonetheless, a company that proceeds with a public offering after filing must disclose the S-1 according to the 15-day requirements mentioned above. Since emerging growth companies were given the option of making confidential filings under the JOBS Act, it has proven to be a popular option, with companies like Snapchat, Shake Shack and Twitter taking that route. While the JOBS Act was intended to increase the number of IPOs, the market continues to face a number of challenges. These include a rise in merger and acquisition activity and the ability of companies to raise capital through multiple rounds of venture funding. At this juncture, it remains to be seen what effect the new rules will have on the IPO market or whether the new registration procedures will trigger investor lawsuits.

Notice and reporting requirements in public contracts are common in public works projects. They provide public agencies with timely notice of deviations from budgeted expenditures or of any supposed malfeasance, and allow them to take early steps to avoid extra or unnecessary expense, make any necessary adjustments, mitigate damages and avoid the waste of public funds. A.H.A. Gen. Constr. v. New York City Hous. Auth. , 92 N.Y.2d 20, 33-34 (1998).  Such provisions are important both to the public treasury and to the integrity of the bidding process. Because of these public policy considerations, expressly agreed-upon notice provisions “must be literally performed.” Phoenix Signal & Elec. Corp. v. New York State Thruway Auth. , 90 A.D.3d 1394, 1396-1397 (3d Dept. 2011) (internal quotation marks and citation omitted). Failure to strictly comply with such provisions is a condition precedent to recovery and constitutes waiver of a claim for additional compensation. A.H.A. Gen. Constr. , 92 N.Y.2d at 30-31; see also Kingsley Arms, Inc. v. Sano Rubin Constr. Co., Inc. , 16 A.D.3d 813, 814 (3d Dept. 2005). Recently, in Ridley Electric Company, Inc. v. Dormitory Authority of The State of New York , a public contractor had its case dismissed because it failed to comply with the notice and reporting requirements in its contract with the State. Ridley Elec. Co., Inc. v. Dormitory Auth. of The State of New York , 2017 NY Slip Op 05907 (3d Dept. July 17, 2017). Ridley Electric Company, Inc. v. Dormitory Authority of The State of New York Background In May 2006, the plaintiff, Ridley Electric Company (“Ridley”) entered into a contract with the defendant, the Dormitory Authority of The State of New York (the “Authority”), to act as the prime contractor for electrical work in the construction of the New York State Veteran’s Home. Due to certain issues related to the ceiling design, Ridley had difficulty completing the work. To assist Ridley in resolving the issues, the Authority made various adjustments to the project. Ridley substantially completed its work by September 2008, and the entire project was substantially completed by October 2008. In March 2009, Ridley requested additional compensation for the “extra work” that it allegedly performed related to the ceiling and other specified problems. In February 2010, the Authority advised Ridley that following a preliminary review, it had concluded that Ridley was due some additional funds for labor costs incurred in performing the extra work related to the ceiling, but denied Ridley’s other claims. Change orders allowing the proposed additional funds were attached to the February 2010 correspondence. Ridley refused to sign these work orders, and instead submitted two proposed change orders requesting additional sums. In response, the Authority again issued change orders for the original sum. Thereafter, Ridley commenced an action for, inter alia , breach of contract, seeking damages representing the unpaid contract balance and delay damages. Ridley claimed that it performed extra work, by having to install cable trays and run wires inside them in ceiling spaces that were too small to accommodate them, and by performing certain cleanup work. Ridley maintained that it became aware of the ceiling issue soon after work commenced in May 2007, and that the Authority advised it in writing in April 2008 that the cleanup work fell within the scope of the contract. Notably, Ridley conceded that it did not provide the Authority with timely notice of these claims as required by the contract (it filed the claims after the project had been substantially completed, almost two years after construction commenced), but contended that the Authority knew that it was performing extra work and waived the notice and reporting requirements by offering to make partial payment in response to its belated request. The Authority answered and asserted affirmative defenses claiming, among other things, that Ridley had failed to comply with the notice and reporting requirements in the contract.  These requirements provided, in pertinent part, that if a contractor believes it has been ordered to perform a task that should be considered extra work within the meaning of the contract, the contractor must notify the Authority of its extra work claim by filing a written notice within the time period specified in the contract. Failure to comply with the notice and reporting requirements was deemed to be “ conclusive and binding determination on the part of the ontractor that does not involve extra work and is not contrary to the terms and provisions of the ontract” and, also, “ waiver . . . of all claims for additional compensation or damages as a result of .” Ridley moved for summary judgment as to liability, and the Authority cross-moved for summary judgment to dismiss the complaint. The motion court denied Ridley’s motion, granted the Authority’s cross motion, and dismissed the complaint. Ridley appealed. The Court’s Decision On the issue of waiver (that is, the Authority’s cross motion), the Court affirmed the motion court’s ruling to dismiss the complaint, finding that Ridley “failed to comply with the notice and reporting requirements of the contract.” In so doing, the Court rejected Ridley’s argument that the Authority’s actual knowledge of the ceiling issues “suffice to excuse lack of compliance with strict contractual notice requirement … at issue here.” (Citations omitted.) The Court also rejected Ridley’s contention that the Authority waived the notice requirements by offering partial compensation for the extra work related to the ceiling issue in February 2010. An offer to make partial payment did not suffice, said the Court, to waive the Authority’s rights under the notice and reporting requirements in the contract. Such a waiver, noted the Court, “must be explicit, unmistakable, and unambiguous.” (Citation and internal quotation marks omitted.) In any event, the terms of the contract itself contradicted any notion that the Authority’s partial payment constituted a waiver of the notice and reporting requirements: Here, review of the pertinent documents reveals multiple provisions contradicting the claim that partial payment constitutes a waiver of the notice and reporting requirements. The parties” contract gives defendant the general authority to order extra work and compensate contractors through change orders, as it did here, “ ithout invalidating the ontract,” and further provides that “ ny partial payment made shall not be construed as a waiver of the right of to require the fulfillment of all the terms of the ontract” (emphasis added). Further, the change orders by which defendant tendered payment to plaintiff provide that “ reserves its rights to rely on and enforce the terms of the ontract . . . in connection with this change” and that “ either this change order nor any extension of time for performance granted hereunder constitutes an admission by that it is responsible for any delays or hindrances to ork under the ontract.” In view of these express reservations, and in the absence of any statement to the contrary, defendant’s willingness to compensate plaintiff for a limited amount of extra work cannot be construed as an express and unequivocal manifestation of its intent to waive reliance upon the contract’s notice and reporting requirements as to the extra work claim as a whole. Citations omitted. Takeaway Contracts that contain notice and reporting provisions are conditions precedent to any recovery for breach of contract. As such, no party can prevail on a breach of contract claim if that party has failed to perform a specified condition precedent. As Ridley demonstrates, failure to strictly comply with such provisions constitutes a waiver of the claim for relief.

It is well settled that “ very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Restatement (Second) of Contracts § 205 (1981). See also 511 W 232nd Owners Corp. v Jennifer Realty Co. , 98 N.Y.2d 144, 153 (2002) (“In New York, all contracts imply a covenant of good faith and fair dealing in the course of performance”). “This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” 511 W 232nd Owners , 98 N.Y.2d at 153 (citations and internal quotation marks 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.” Id . (citations and internal quotation marks omitted). To state a cognizable claim, “ plaintiff must allege a specific implied contractual obligation and allege how the violation of that obligation denied the plaintiff the fruits of the contract.” Kagan v. HMC-New York, Inc. , 94 A.D.3d 67, 77 (1st Dept. 2012) (citation omitted). Conduct that frustrates the purpose of a contract is often described as bad faith, and is identified by, among other things, “evasion of the spirit of the bargain,” “abuse of a power to specify terms,” “interference with or failure to cooperate in the other party’s performance,” and willful rendering of imperfect performance. E.g. , Restatement (Second) of Contracts § 205 cmt. d. General allegations of bad faith are insufficient. Kagan , 94 A.D.2d at 77. This Blog previously wrote about the covenant here . On July 13, 2017, Justice Scarpulla of the Supreme Court, New York County, Commercial Division, considered these principles in holding that a defendant who gave a defective notice of lease renewal with the intent to prevent the plaintiff from finding another tenant stated a claim for breach of the covenant of good faith and fair dealing. Foscarini, Inc. v. Greenestreet Leasehold Partnership , 2017 NY Slip Op. 31493(U) . Background On January 16, 2011, the plaintiff, Foscarini, Inc. (Foscarini”), leased a storefront from the defendant, The Greenestreet Leasehold Partnership (“Greenestreet”), for a five-year term that expired on January 16, 2015. The lease provided that Foscarini could renew the lease for an additional five years upon written notice of its intent to renew. Notice had to be provided between six and twelve months prior to the initial expiration of the lease. On January 2, 2015, Foscarini informed Greenestreet in writing that it intended to renew the lease. Greenestreet alleged that the notice was defective, in that it was addressed and sent to the wrong party, and was equivocal regarding Foscarini’s intent to renew.  For various reasons, Greenestreet alleged that Foscarini merely acted as though it were renewing to give it time to seek alternate premises and to cloud title to the space. The parties negotiated the renewal for several months. Unable to agree upon a renewal with acceptable terms, Foscarini sued Greenestreet seeking a declaratory judgment that it properly exercised its option to renew the lease, and that the lease had been renewed for a five-year term beginning on January 1, 2016; and for breach of the lease by failing to recognize Foscarini’s renewal. Greenestreet answered the complaint. Upon the expiration of the initial term on January 15, 2016, Foscarini failed to vacate the premises. The following month, the parties entered into a so-ordered stipulation setting forth the terms of use and occupancy for the premises while Foscarini still occupied it. Greenestreet alleged that, having agreed to the stipulation, Foscarini continued to search for alternate commercial space without telling Greenestreet that it was doing so. On August 9, 2016, Foscarini told Greenestreet that it was vacating the premises at the end of the month, and that it was withdrawing its cause of action for a declaratory judgment. Greenestreet alleged that three weeks’ notice was insufficient notice to vacate, as it left it unable to quickly locate a new tenant for the premises. Foscarini vacated the premises on August 31, 2016, and, thereafter, demanded the return of its security deposit. Greenestreet disputed Foscarini’s right to vacate the premises, to withdraw its cause of action, and to recover the security deposit. On October 25, 2016, the parties stipulated that Greenestreet could file an amended answer to the complaint. In the amended answer, Greenestreet asserted five counterclaims for: (1) breach of the lease; (2) breach of the lease’s implied covenant of good faith and fair dealing; (3) abuse of process; (4) holdover at fair market value; and (5) for a declaratory judgment that Greenestreet could retain all of Foscarini’s security deposit. Foscarini moved, pursuant to CPLR 3211(a)(7), to dismiss the second and third counterclaims for breach of the implied covenant of good faith and fair dealing and abuse of process. Greenestreet later withdrew the abuse of process counterclaim. Greenestreet claimed that Foscarini breached the implied covenant in three ways: 1) Foscarini commenced “a litigation it knew to be without merit” to gain a negotiating advantage over Greenestreet and to continue paying “under-market use and occupancy” while looking for a new location; 2) Foscarini failed to vacate the premises when the lease expired; and 3) Foscarini sent a renewal notice that it knew was defective. Greenestreet argued that Foscarini acted in bad faith in that it had no intention of staying in the premises and that it refused to vacate the premises at the end of the lease term, and then, by leaving on only twenty days’ notice, depriving Greenestreet of the six-month notice period provided for in the lease, and the ability to timely market the premises or obtain a new tenant. In response, Foscarini maintained that the counterclaim was duplicative of Greenestreet’s counterclaim for breach of the lease, as both claims alleged that Foscarini failed to comply with the lease by sending a proper renewal notice or by vacating the premises when the lease expired. Foscarini also claimed that Greenestreet had not been denied the fruits of its bargain. The Court’s Decision Justice Scarpulla rejected the first two bases asserted by Greenestreet for a breach of the implied covenant, but sustained the third one – that Foscarini sent the renewal notice to Greenestreet with no intent to remain in the premises. In doing so, the Court accepted Greenestreet’s contention that implied from the renewal provisions of the lease was an obligation to send a renewal notification only if Foscarini actually intended to renew. Foscarini’s defective notice impeded Greenestreet’s ability to lease the premises once the lease expired and, therefore, frustrated the fruits of the parties’ bargain: The strict notice period provided for renewing the lease is alleged to have been part of the fruits of Greenestreet’s bargain, allowing it the necessary time to relet the premises if Foscarini decided not to renew the lease. Foscarini’s faulty notice impeded Greenestreet’s ability to lease the premises once the lease expired. Indeed, Greenestreet alleges that the faulty renewal notice was merely the beginning of Foscarini’s attempts to prolong its occupancy while searching for new space, as shown by Foscarini’s principal telling a real estate broker in June 2015 that it would either renew the lease or look for new space. Greenestreet has successfully alleged that Foscarini breached its implied obligation to send a renewal notice only if it genuinely meant to renew the lease, and that Greenestreet was damaged in its inability to relet the premises upon Foscarini’s departure. The Court also rejected Foscarini’s argument that Greenestreet alleged that the improper renewal of the lease was a basis for both a breach of contract and implied covenant claim, finding that “Greenestreet’s claim of a bad faith renewal could not be brought as an express breach claim.” In this regard, the Court noted that “ he lease does not place any express, stated conditions on Foscarini’s decision to exercise its right to renew, nor … does the lease provide that Foscarini’s exercise of its right to renew the lease is irrevocable.” Takeaway “The essence of contract law is the bargain: parties of equivalent bargaining power negotiate the terms of the transaction and each is then entitled to the benefit of the bargain.” Detroit Edison Co. v. NABCO, Inc. , 35 F.3d 236, 239 (6th Cir. 1994).  “Neither ha the right to undermine the other’s reasonable expectations, or to make performance more difficult.” Standard Chartered Bank v. AWB (USA) LTD. , No. 05 Civ. 2013 (AKH) (S.D.N.Y. Feb. 16, 2010). When one party acts in way that denies the fruits of the contract for the other, he/she breaches the implied covenant of good faith and fair dealing – a lesson that Foscarini learned in its case with Greenestreet.

Prejudgment attachment is a provisional remedy that provides a plaintiff with a statutory mechanism by which he/she can secure a defendant’s assets during the pendency of a lawsuit. In effect, an order of attachment is a lien against a defendant’s property. As such, a prejudgment order of attachment increases the likelihood of recovery on a later-obtained judgment in the action. The requirements for obtaining a prejudgment attachment order vary from state to state; there is no federal law or common law right to prejudgment attachment. Generally, the plaintiff (or creditor) must: (1) have a pending lawsuit for damages, (2) identify the property or asset to be attached in detail, (3) claim a legal right to that property or asset, and (4) demonstrate the need to secure the property or asset prior to the conclusion of the lawsuit. The Law in New York In New York, the grounds for obtaining a prejudgment attachment are set forth in Civil Practice Law & Rules Sections 6201(1) through 6201(5). Under these sections, a plaintiff may obtain a prejudgment attachment order when, for example: the defendant is a foreign corporation not qualified to do business in New York (CPLR 6201(1)); the defendant with intent to defraud creditors or frustrate enforcement of a judgment that might be rendered in the plaintiff’s favor, has assigned, disposed of, encumbered or secreted property, or removed property from the state or is about to do so (CPLR 6201(3)); or the  cause  of action is based on a judgment, decree or order of a court of the United States or of any other court that is entitled to full faith and credit in New York state, or on a judgment that qualifies for recognition in New York. (CPLR 6201(5).) Attachment is considered to be a drastic remedy. For this reason, the plaintiff must establish that there is a cause of action against the defendant, that it is probable the plaintiff will succeed on the merits (which requires more than the allegations required for a complaint), that one or more statutory grounds for attachment are met, and that the amount demanded exceeds all known counterclaims. CPLR 6212(a).  The moving papers must contain evidentiary facts — as opposed to conclusions — proving the basis upon which the attachment remedy is sought.  ( Societe Generale Alsacienne De Banque, Zurich v. Flemingdon Dev. Corp. , 118 A.D.2d 769, 773 (2d Dept. 1986). Because prejudgment attachment is a drastic remedy, New York courts “strictly construe[ ]” CPLR 6201 “in favor of those against whom it may be employed.” Northeast United Corp. v. Lewis , 137 A.D. 3d 1387, 1388 (3d Dept. 2016) (citation and internal quotation marks omitted). Where fraud is alleged, under CPLR 6201(3), “the plaintiff must demonstrate that the defendant has concealed or is about to conceal property in one or more of several enumerated ways, and has acted or will act with the intent to defraud creditors or to frustrate the enforcement of a judgment that might be rendered in favor of the plaintiff'.” VNB NY, LLC v. Rapaport , 2016 NY Slip Op 50099 (Sup. Ct., Kings Co. Jan. 29, 2016) (citations omitted). “ ere removal, assignment or other disposition of property is not grounds for attachment.” ( Computer Strategies v. Commodore Bus. Machs. , 105 A.D.2d 167, 173 (2d Dept. 1984). “The moving papers must contain evidentiary facts, as opposed to conclusions, proving the fraud.” Id .  Thus, it is not sufficient to merely raise a suspicion of an intent to defraud. Skycom SRL v. FA & Partners, Inc. , 2016 NY Slip Op 32405 (Sup. Ct., N.Y. Co. Dec. 7, 2016). Rather, “it must appear that such fraudulent intent really existed in the mind of the defendants, and not merely in the ingenuity of the plaintiffs.” Id . (citation and internal quotation marks omitted). However, even when the plaintiff satisfies the statutory grounds for an attachment, he/she still “must demonstrate an identifiable risk that the defendant will not be able to satisfy the judgment.” Mascis Inv. P’ship v. SG Cap. Corp. , 2017 NY Slip Op 30813 (Sup. Ct., N.Y. Co. Apr. 21, 2017) (quoting VisionChina Media Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 60 (1st Dept. 2013)); see also Siegel, NY Prac, § 317 (5th ed) (“Even if the plaintiff makes out a case for attachment under CPLR 6201, its granting is still discretionary with the court. . . . f the judge should perceive from the papers that the plaintiff does not need an attachment, either for jurisdiction or security, discretion is appropriately exercised against it even though a CPLR 6201 showing has been made.”).  The risk “should be real.” VisionChina , 109 A.D.3d at 60 (citation and internal quotation marks omitted). In this regard, the court may consider the defendant’s financial position ( i.e. , whether the defendant is in “serious financial distress” ( Elton Leather Corp. v. First Gen. Resources Co. , 138 A.D.2d 132, 134 (1st Dept. 1988)) or past and present conduct, including the defendant’s history of paying creditors and any statements or action evincing an intent to dispose of assets. VisionChina , 109 A.D.3d at 60. In addition, the plaintiff must post a bond, in an amount not less than $500 as fixed by the court, for the purpose of making the defendant whole for all costs and damages, including reasonable attorneys’ fees, which may be sustained by the reason of the attachment if the defendant recovers judgment or it is finally decided that the plaintiff was not entitled to an attachment order. CPLR 6212(b). Typically, courts require the undertaking to be in an amount equal to or greater than the amount of the attachment. E.g. , Von Bock v Metropolitan Life Ins. Co. , 223 A.D.2d 700 (2d Dept. 1996). Finally, a plaintiff may obtain an order of attachment on an ex parte basis (without notice to the defendant being attached). However, if an attachment order is granted on an ex parte basis, the plaintiff must move within five (5) days after levy on notice to the defendant, garnishee and sheriff for an order confirming the attachment. Del Forte USA, Inc. v. Blue Beverage Group, Inc. On July 17, 2017, in Del Forte USA, Inc. v. Blue Beverage Group, Inc. , 2017 NY Slip Op. 31525(U) , Justice Ash of the New York Supreme Court, Kings County, Commercial Division, considered the foregoing principles and declined to grant the plaintiff’s motion for a prejudgment attachment order under CPLR 6201(3) due to a lack of evidence of fraudulent intent. Background The case arose from a dispute between the plaintiff Del Forte USA, Inc., a manufacturer and seller of cold coffee beverages, and Blue Beverage Group Inc. over, among other things, the latter’s alleged failure to carry out the retort process ( i.e. , the process that enables beverages containing milk to remain on retail shelves unrefrigerated for about a year) for Del Forte’s coffee beverages. Based on Blue Beverage’s alleged failures, Del Forte claimed that it sustained direct and consequential damages in excess of $500,000. Del Forte moved for a temporary restraining order to prevent the sale of Blue Beverage’s assets to the Kuzari Group LLC (“Kuzari”), another defendant in the action, unless at least $500,000 of the sale proceeds were placed in escrow for the benefit of the plaintiff, or, in the alternative, for appointment of a receiver, because the transaction would result in a fraudulent transfer under New York Debtor and Creditor Law § 279 (“DCL”). In the alternative, Del Forte sought an order of attachment against the funds paid by Kuzari for Blue Beverage’s assets to ensure that any judgment that may be obtained by Del Forte against the Blue Beverage defendants could be satisfied. Del Forte sought an attachment of at least $500,000 to pay the damages owed by Blue Beverage, and its two owners, Joseph Goldberger (“Goldberger”) and Joseph Menczer (“Menczer”). Del Forte contended that Blue Beverage was insolvent and had intentionally failed to pay its creditors and suppliers. It claimed that numerous pending lawsuits, some of which had resulted in default judgments against Blue Beverage, demonstrated this point, in addition to fraudulent judgments that were filed against Blue Beverage in favor of the Blue Beverage defendants’ family members and insiders, which totaled over $13 million, including a judgment for nearly $7 million in favor of Goldberger’s wife. Del Forte argued that these fraudulent and collusive judgments, combined with Blue Beverage’s repeated failure to pay its creditors, demonstrated that any proceeds received from the sale of Blue Beverage and its assets would be dissipated by the Blue Beverage defendants through payments to their family members and insiders, leaving Blue Beverage insolvent and unable to satisfy any judgment it obtained. In response, the Blue Beverage defendants argued that the Kuzari Group’s contemplated investment in Blue Beverage would result in no harm to Del Forte because it could continue to litigate its claims (namely, its breach of contract claim) against Blue Beverage. The Blue Beverage defendants further argued that Del Forte was not entitled to relief under CPLR 6201 or the DCL because Del Forte failed to satisfy its burden of proving fraud or intent to defraud by the Blue Beverage defendants. The Court’s Decision After citing to some of the authorities mentioned above, the Court denied Del Forte’s motion and vacated the temporary restraining order it had previously granted.  In doing so, the Court found that Del Forte failed to satisfy its burden of proving that Blue Beverage intended to defraud by entering into the transaction with the Kuzari Group: Here, upon consideration of the foregoing and the record before the Court, the Court finds that Plaintiff has not sufficiently satisfied its burden to obtain the relief that it seeks. Specifically, Plaintiff has not demonstrated that the Blue Beverage Defendants are entering into the subject transaction with the intent to defraud creditors. Plaintiff also fails to establish that $5 million constitutes inadequate consideration for what the Kuzari Group seeks to purchase from Blue Beverage and, further, what the value or worth of Blue Beverage is overall. Although Plaintiff provides plenty of evidence of potential judgment creditors of Blue Beverage, there is no evidence that the proposed transaction between the Kuzari Group and Blue Beverage is one that aims to defraud or frustrate potential creditors, nor is there any indication that the proposed sale will render Blue Beverage an “empty shell” of a corporation. Accordingly, the relief that Plaintiff seeks must be denied at this time. Takeaway To obtain an order of attachment under CPLR 6201(3), a plaintiff must demonstrate, with evidence, that the defendant has concealed or is about to conceal property, “and has acted or will act with the intent to defraud creditors, or to frustrate the enforcement of a judgment that might be rendered in favor of the plaintiff.” Benedict v. Browne , 289 A.D.2d 433, 433 (2d Dept. 2001). Since New York courts strictly construe CPLR 6201 “in favor of those against whom it may be employed” ( Hume v. 1 Prospect Park ALF, LLC , 137 A.D.3d 1080, 1081 (2d Dept. 2016)), the burden on the movant is high. Del Forte learned this lesson the hard way.

No one likes to read fine print or lengthy agreements. Anyone buying insurance, for example, knows this to be so. In fact, a 2016 car insurance TV commercial by Liberty Mutual highlights this point. In the ad, the actress talks about an insurance policy that is over 20 pages long that no one reads, except for lawyers. The question becomes, then, does a failure to read an insurance policy bar a claim against an insurance company or broker for failing to obtain insurance believed to be in the policy? Justice Knipel of the Kings County, Commercial Division, found that it does not. In 386 3rd Ave. Partners Ltd. Partnership v. Alliance Brokerage Corp. , 2017 NY Slip Op. 31484(U) , the Court held that an insured’s failure to read an insurance policy was an insufficient basis to dismiss the insured’s claim against a broker for failure to obtain adequate insurance. The Applicable Law An insurance agent has a duty to provide requested coverage within a reasonable time or advise of its inability to do so, and may be held liable for negligence when a client establishes that a specific request was made for coverage that was not provided in the policy. See , e.g. , Murphy v. Kuhn , 90 N.Y.2d 266, 270 (1997); Am. Bldg. Supply Corp. v. Petrocelli Group, Inc. , 19 N.Y.3d 730, 735 (2012). Background of the Action Overview The action arose from flood damage to the plaintiffs’ three Brooklyn, New York properties (the “Brooklyn Properties”) caused by Super Storm Sandy in October 2012 (the “Loss”).  Following the Loss, the plaintiffs (a group of associated partnerships, corporations, limited liability companies, and one individual), submitted insurance claims to their property carrier, Travelers Excess and Surplus Lines Company (“Travelers”). Travelers denied coverage for the Loss on the grounds that the properties were located in National Flood Insurance Program-designated flood zones excluded by the policy. The plaintiffs alleged that their insurance broker, defendant Alliance Brokerage Corp. (“Alliance”), negligently failed to obtain flood coverage for the properties despite a specific request to do so prior to the Loss. Relevant Facts Since 2002, the plaintiffs procured various lines of property and business insurance coverage for the Brooklyn Properties through Alliance. These policies included commercial general liability, property coverage, loss of rental income, boiler and machinery coverage, and excess umbrella coverage. Prior to 2011, the plaintiffs instructed Alliance to obtain quotes regarding flood coverage. After reviewing the quotes, the plaintiffs instructed Alliance to obtain flood coverage for, inter alia , the Brooklyn Properties. The additional insurance coverage for risk of flood damage to, inter alia , the Brooklyn Properties was added to the Travelers policy. Pursuant to its express terms, however, the Travelers policy insured the plaintiffs for flood damage only with respect to the properties that were not located within one or more of the specified flood zones (the zone-based exclusion). Because each of the Brooklyn Properties was located within one or more of the specified flood zones, the Travelers policy did not insure any of those properties for flood damage. Thereafter, the plaintiffs annually renewed the Travelers policy without changing their flood coverage for the Brooklyn Properties. Following Hurricane Irene in August 2011, the plaintiffs requested that Alliance advise them in writing “if any of the Brooklyn commercial properties have the flood coverage.” Alliance responded, in relevant part, that “ ll of the commercial properties have . . . a $1 million limit for flood.…” In making the request, the plaintiffs did not read the policy. The following year, the plaintiffs again renewed the Travelers policy without changing their flood coverage for the Brooklyn Properties. When the flood from Hurricane Sandy damaged each of those properties, Travelers denied the plaintiffs flood coverage, citing the zone-based exclusion in its policy. In January 2014, the plaintiffs filed suit against Alliance. Their complaint asserted tort claims sounding in negligence, breach of fiduciary duty, and misrepresentation. After discovery was completed and a note of issue was filed, the parties filed motions for summary judgment. The Court’s Decision The Court denied the motions. In doing so, the Court found that there were issues of fact requiring the following determinations: (1) whether plaintiffs requested from defendant specific coverage for flood damage to their commercial properties, including the subject properties, and whether defendant failed to obtain an insurance policy as requested; (2) whether an alternative flood insurance policy for the subject properties was available from the FEMA; and (3) whether plaintiffs’ reliance on defendant’s unqualified representation in its Oct. 2011 email that all of their Brooklyn commercial properties had flood coverage was justified. As to the third issue, the Court held that the plaintiffs’ admitted failure to read the “Travelers policy not a superseding cause precluding defendant’s liability as a matter of law.” The Court noted that under New York law, “‘ n the absence of any showing that an insured is aware of the discrepancy between the coverage it claims to have requested and that actually obtained by the insurance , an insured has a right to rely upon the presumed obedience to his or her instructions.’” ( Quoting Mets Donuts, Inc. v. Dairyland Ins. Co. , 166 A.D.2d 508, 509 (2d Dept. 1990). Takeaway As noted in the introduction to this post, the average person does not read fine print or lengthy agreements, including insurance policies. If a person has a coverage question, it is more likely than not s/he would contact his/her insurance company or broker to confirm the scope of the coverage and/or request that coverage be made. 386 3rd Ave. Partners teaches that insurance companies and/or insurance brokers cannot escape liability as a matter of law by pointing to a densely worded, multi-page insurance policy that does not expressly state if the insured is covered. This is especially so when the insured makes a specific request for coverage and receives a response from his/her carrier. As Alliance learned, an insured has the right to reasonably rely on “the expertise of its broker with respect to insurance matters.” Am. Bldg. Supply Corp. , 19 N.Y.3d at 736.

Earlier this month, Judge Richard J. Sullivan of the Southern District of New York dismissed a federal claim at the plaintiffs’ request, despite the defendants’ argument that the plaintiffs were “clearly and intentionally attempting to engage in forum manipulation.” In Nix v. Office of The Commissioner of Baseball, D/B/A Major League Baseball , Judge Sullivan found that while the plaintiffs’ “manifest purpose” was “to defeat federal jurisdiction” it was not the only factor to consider in determining whether to permit withdrawal of the federal claim and remand the remaining claims to state court. Instead, there are many factors to consider – namely, judicial economy, convenience, fairness, and comity. Background The Long and Winding Road Between State Court and Federal Court The case involved allegations that former major league baseball player Neiman Nix (“Nix”) ran a fake player development academy and later a sports science testing facility through which he and the other plaintiff, DNA Lab, sold performance-enhancing drugs to players that had been banned by the MLB. In February 2014, the plaintiffs filed a claim in Florida state court seeking relief against the defendants. However, the plaintiffs missed several initial case management conferences and failed to perfect service of their amended complaint, resulting in the dismissal of the action for failure to prosecute. Although the plaintiffs appealed that decision, they voluntarily withdrew the appeal on April 24, 2015. On July 14, 2016, Nix and DNA Lab filed a diversity jurisdiction action in the Southern District of New York, alleging tortious interference with prospective economic advantage and defamation against the same defendants. See Nix v. Office of the Comm’r of Baseball , No. l 6-cv-5604 (ALC) (S.D.N.Y. July 14, 2016). On October 19, 2016, the defendants filed a pre-motion letter regarding their contemplated motions for dismissal pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of subject matter jurisdiction and sanctions under Rule 11 of the Federal Rules of Civil Procedure. After the court held a pre-motion conference on October 27, 2016, the plaintiffs filed a motion for voluntary dismissal without prejudice pursuant to Rule 4l(a)(l)(A)(i) of the Federal Rules of Civil Procedure on November 3, 2016. On November 9, 2016, the plaintiffs took their case against the defendants to state court again, this time in New York State Supreme Court, alleging tortious interference with business relations, defamation, and violations of the Computer Fraud and Abuse Act (“CFAA”). On February 17, 2017, the defendants removed the case to federal court pursuant to 28 U.S.C. § 1441(a), asserting that the Court had: (1) original jurisdiction pursuant to the 28 U.S.C. § 1331 over the plaintiffs’ CFAA claim, and (2) supplemental jurisdiction over the Plaintiffs’ state law tort claims pursuant to 28 U.S.C. § 1367. On February 27, 2017, Judge Sullivan issued an order directing the plaintiffs to file either: (1) a motion to remand, pursuant to 28 U.S.C. § 1447(c), or (2) an amended complaint conforming to the pleading standards under Rule 8 of the Federal Rules of Civil Procedure. On March 29, 2017, the plaintiffs moved to voluntarily dismiss their CFAA claim and remand the case to New York State Supreme Court pursuant to 28 U.S.C. § 1447. The defendants opposed the motion, arguing that the plaintiffs were engaging in prohibited forum manipulation. The Court’s Decision Judge Sullivan found that since the plaintiffs were “willing to dismiss their CFAA claim with prejudice,” there was no reason under Rule 41(a)(2) not to grant the plaintiffs’ motion, especially since “the defendants not even attempt[] to articulate any they suffer as a result of such a dismissal.…” In fact, said the Court, despite the forum shopping ( i.e. , the attempt to defeat federal jurisdiction through voluntary dismissal), “ ourts have uniformly held that defendants are not prejudiced under Rule 41(a)(2) by having to face trial in state court.” Having granted the motion to voluntarily dismiss the CFAA claim with prejudice, the Court turned its attention to the issue of remand. On this issue, Judge Sullivan found that the balance of factors to be considered by the Court – “judicial economy, convenience, fairness, and comity” – “point toward declining to exercise jurisdiction over the remaining state-law claims.” (Citations and internal quotation marks omitted.) Judicial Economy The Court noted that it had not expended any time and resources to the matter: “the Court has dismissed Plaintiffs’ only federal claim with prejudice long before ‘the investment of significant judicial resources’ – that is, long before any conferences before this Court, motion practice under Rule 12, or discovery. Thus, there ‘no indication that ... judicial economy ... would be advanced by the Court’s exercise of supplemental jurisdiction.’” (Citations omitted.) Convenience, Fairness and Comity The Court said that it could “discern no extraordinary inconvenience or inequity occasioned by permitting Plaintiffs to bring their claims across the street in the New York State Supreme Court, where they will be afforded a surer-footed reading of applicable law.” (Citations and internal quotation marks omitted.) This was so, said Judge Sullivan, because the state law claims involved were “not complex or unsettled,” as the defendants contended. (Citations and internal quotation marks omitted.) The Court rejected the defendants’ argument that the Court should retain jurisdiction because the plaintiffs were “clearly and intentionally attempting to engage in forum manipulation,” to avoid “the adjudication of their claims and avoid an unfavorable decision in this Court.” (Internal quotation marks omitted.)  In doing so, the Court noted that although forum manipulation is a factor to consider “in determining whether the balance of factors” support remand, it is not dispositive. Thus, “where, as here, a plaintiff has voluntarily dismissed his federal claims prior to the start of discovery, even when his ‘manifest purpose’ in doing so ‘is to defeat federal jurisdiction,” a court should decline to exercise supplemental jurisdiction. (Citations omitted.) Finally, the Court concluded that “while Plaintiffs’ failure to prosecute and their general inattentiveness to jurisdictional issues in other cases very troubling,” remand was nevertheless appropriate because “all federal claims have been dismissed before the Court has overseen any discovery or resolved any substantive motions.” Accordingly, the case was remanded to the New York State Supreme Court. Takeaway While forum manipulation is frowned upon, Nix teaches that is not the dispositive consideration in determining whether to permit withdrawal of a federal claim and exercise supplemental jurisdiction. Instead, it is one of many factors ( e.g. , “judicial economy, convenience, fairness, and comity”) to be considered by the courts.

Although courts will pierce the corporate veil “to prevent fraud or achieve equity,” Morris v. N.Y. State Department of Taxation & Finance , 82 N.Y.2d 135, 140 (1993) (quoting Int’l Aircraft Trading Co. v. Mfrs. Trust Co. , 297 N.Y. 285, 292 (1948)), they are, nevertheless, reluctant to disregard the corporate form. TNS Holdings Inc. v. MKI Sec. Corp. , 92 N.Y.2d 335, 339 (1998). After all, the purpose of incorporating is to allow individuals to avoid personal liability. See Gartner v. Snyder , 607 F.2d 582, 586 (2d Cir. 1979) (citing Bartle v. Home Owners Cooperative , 309 N.Y. 103 (1955)). Thus, New York courts will pierce the corporate veil and hold shareholders/owners liable for the corporation’s debts only when “(1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury.” Morris , 82 N.Y.2d at 141. (This Blog previously addressed veil piercing here and, more recently, here .) The determination whether to pierce the corporate veil is a fact-intensive one. And, because it is fact-intensive, the courts have held that it is not appropriate to make the determination “on a pre-answer, pre-discovery motion to dismiss.”  BT Ams. Inc. v. ProntoCom Mktg. Inc. , 859 N.Y.S.2d 893 (Sup. Ct. N.Y. County 2008) (holding that veil piercing “is not well suited for resolution on a pre-answer, pre-discovery motion to dismiss”). Significantly, because the analysis is so fact dependent, it “eschews mechanical interpretation.” LiquidX v. Brooklawn Capital, LLC , 1:16-cv-05528-WHP (S.D.N.Y. May 23, 2017) (quoting Morris , 82 N.Y.2d at 141). Accordingly, the courts consider the totality of the facts and evidence, as well as the public policy of “protect those who deal with the corporation.” Wm. Passalacqua Builders Inc. v. Resnick Developers South, Inc. , 933 F.2d 131, 139 (2d Cir. 1991). Exercise of Control The first inquiry – whether the alleged alter-ego “exercised complete domination” – is case-specific and must be considered in view of “the totality of the facts.” United States v. Funds Held in the Name or for the Benefit of Wetterer , 210 F.3d 96, 106 (2d Cir. 2000). New York courts consider a number of factors in aid of this determination. These factors include: (1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like, (2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common office space, address and telephone numbers of corporate entities, (6) the amount of business discretion displayed by the allegedly dominated corporation, (7) whether the related corporations deal with the dominated corporation at arms length, (8) whether the corporations are treated as independent profit centers, (9) the payment or guarantee of debts of the dominated corporation by other corporations in the group, and (10) whether the corporation in question had property that was used by other of the corporations as if it were its own. Wm. Passalacqua , 933 F.2d at 139; Shisgal v. Brown , 21 A.D.3d 845, 848-49 (1st Dep’t 2005). Because the decision whether to pierce the corporate veil depends “on the attendant facts and equities,” Morris , 82 N.Y.2d at 141, and said facts can apply to an “infinite variety of situations,” William Wrigley Jr. Co. v. Waters , 890 F.2d 594, 601 (2d Cir.1989), no one factor controls the consideration. Thus, for example, in applying the factors, “courts recognize that with respect to small, privately-held corporations, ‘the trappings of sophisticated corporate life are rarely present,’” and, therefore, they “must avoid an over-rigid ‘preoccupation with questions of structure, financial and accounting sophistication or dividend policy or history.’” Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc. , 98 F.3d 13, 18 (2d Cir. 1996) (quoting Wrigley , 890 F.2d at 601); see also Capricorn Investors III, L.P. v. Coolbrands Int’l, Inc. , 897 N.Y.S.2d 668, 24 Misc. 3d 1224(A), at *5 (Sup. Ct. N.Y. Co. 2009) (“LLCs generally have operating agreements, which may include meeting requirements, or other such formalities. Plaintiff’s assertion that the LLCs have no officers or directors, and did not hold board or executive committee meetings are not persuasive veil piercing factors for an LLC, where plaintiff does not argue that management was required to be centralized in a board.”). In applying these and other factors, the cases “reveal[] common characteristics” that necessitated piercing the corporate veil. Wrigley , 890 F.2d at 601. “In each case, the evidence demonstrated an abuse of that form either through on-going fraudulent activities of a principal, or a pronounced and intimate commingling of identities of the corporation and its principal or principals, which prompted the reviewing courts, driven by equity, to disregard the corporate form.” Id. The Use of The Corporate Form to Commit a Fraud or Wrong The second factor allows courts to pierce the corporate veil where the shareholder/owner uses the corporation “to commit fraud , or violate other legal duty, or has been used to do an act tainted by dishonesty or unjust conduct violating plaintiff’s rights or … where such fraud or wrong results in unjust loss and injury to plaintiff ….” Lowendahl v. Baltimore & Ohio R.R. Co. , 247 A.D. 144, 157 (1st Dep’t 1936), aff’d , 272 N.Y. 360 (1936); Morris , 82 N.Y.2d at 141. It is not necessary, however, for there to be an alleged fraud. Gorrill v. Icelandair/Flugleidir , 761 F.2d 847, 853 (2d Cir. 1985). Rather, it is sufficient that the alter ego “through their domination of the corporation, ‘abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against such that a court in equity will intervene.’” JSC Foreign Econ. Assoc. Technostroyexport v. Int’l Dev. And Trade Servs., Inc. , 386 F. Supp. 2d 461, 465 (S.D.N.Y. 2005) (quoting Morris , 81 N.Y.2d at 142). In fact, in Wm. Passalacqua , the court held that it would be error to instruct a jury “that plaintiffs were required to prove fraud” to pierce the corporate veil, stressing that the “critical question is whether the corporation is ‘shell’ being used by the to advance their own purely personal rather than corporate ends.” 933 F.2d at 138. Piercing the Veil Between Corporations The alter ego doctrine has also been applied to pierce the veil between corporations when affiliate or subsidiary corporations are used by a dominating parent corporation to engage in fraudulent or wrongful conduct. Under New York law, a corporation is considered to be a “mere alter ego when it ‘has been so dominated by . . . another corporation . . . and its separate identity so disregarded, that it primarily transacted the dominator’s business rather than its own.’” Trabucco v. Intesa Sanpaolo, S.p.A , 695 F. Supp. 2d 98, 107 (S.D.N.Y. 2010). When that occurs, “the dominating corporation will be held liable for the actions of its subsidiary . . ..” Id . As with veil piercing, control is an important factor. The factors considered for veil piercing are also used to determine alter ego liability.  Trabucco , 695 F. Supp. 2d at 107. Again, no one factor is dispositive and “all need not be present to support a finding of alter ego status.” N.Y. Dist. Council of Carpenters Pension Fund v. Perimeter Interiors, Inc. , 657 F. Supp. 2d 410, 421 (S.D.N.Y. 2009). LiquidX v. Brooklawn Capital, LLC Recently, Judge William H. Pauley, III of the Sothern District of New York had the opportunity to consider these principles in LiquidX v. Brooklawn Capital, LLC , 1:16-cv-05528-WHP (S.D.N.Y. May 23, 2017). Background The Receivables Exchange and the Final Funding Round The dispute arose out of the demise of The Receivables Exchange (“TRE”), a financial technology company that operated an online exchange for accounts receivable – i.e. , debts held on a company’s books, such as scheduled payments for goods shipped on credit. The platform allowed companies to access short-term liquidity by selling these accounts at a discount to buyers on the exchange, who would then become the creditors on these accounts and would profit if and when the debtor paid the account in full. By the fall of 2013, though raising nearly $60 million from a variety of venture capital entities over five rounds of funding, TRE found itself in dire financial straits. To staunch the bleeding, TRE’s board implemented a number of measures to slow the company’s “burn rate”, and secured a $3.25 million loan from Comerica Bank while it sought additional funding. In the summer of 2015, after the TRE board failed to secure a sixth round of funding, Gary Mueller (“Mueller”), an investor and entrepreneur, who was a business acquaintance of John Connolly (“Connolly”), a managing director of TRE, agreed to invest money into TRE and lead a renewed financing campaign. Mueller began his diligence in earnest and set a closing date of September 28, 2015. In late September, Solaia Capital, an aggrieved customer of TRE, won an arbitration against TRE in which the arbitrator awarded Solaia $186,000 in damages. Although the award was relatively small, the Solaia arbitration involved claims substantially similar to those asserted by Brooklawn Capital Fund LLC, and Brooklawn Capital Fund II, LP (collectively, “Brooklawn”) in a separate arbitration against TRE. Brooklawn was seeking more than $8 million in its arbitration. Mueller reviewed the award and, after discussing it with TRE’s management, understood that TRE was exposed to greater liability, and canceled the funding round on the very day it was set to close. The “NewCo” Plan By October 1, two days after he canceled the funding round, Mueller began working with James Toffey (Toffey”), president and CEO of TRE, on an alternative plan – Mueller would form a “NewCo” to purchase TRE’s loan from Comerica and foreclose on TRE’s assets as the first-priority secured creditor. Comerica, aware of the failed funding round, sent a letter on October 15 outlining several different options for TRE to avoid default, including a “going-concern” sale or an outright sale of TRE’s assets. Toffey declined to consider those alternatives and instead pursued Mueller’s proposal. Three TRE insiders – Toffey, Connolly, and finance chief James Kovacs (“Kovacs”) – planned to invest in “NewCo” and join Mueller in running “NewCo” after the foreclosure. An integral part of the plan was keeping it from the other members of TRE’s board, whom Connolly and Mueller did not intend to include in “NewCo.” Starting in October 2015, the three TRE insiders stopped using their TRE email accounts to communicate with Mueller and switched to their personal Gmail accounts. On October 15, 2015, Comerica consented to the Mueller/Toffey plan, but only if the sale was to a “disinterested buyer” who would offer the loan’s entire principal and interest. Because TRE was not yet in default, Comerica would only agree to a sale at par – i.e. , at a price that “pays the bank back in full.” On November 6, 2015, “NewCo” came into being as LiquidX, Inc., with Mueller as president and Kovacs as Treasurer. Toffey, Connolly, Kovacs, and Mueller capitalized the new company with $1,000, receiving approximately 80% of the shares at incorporation. By the end of November, the four investors had purchased additional LiquidX stock and loaned the company $4.05 million. LiquidX was ready to purchase the Comerica loan. The Loan Purchase and Foreclosure On November 20, 2015, Mueller sent a term sheet to the TRE board outlining his plan to purchase the loan and effect a strict partial foreclosure on TRE’s assets. Those assets, which Mueller believed were worth “$2 to $3 million,” would constitute partial satisfaction of the $3.25 million loan – thus, LiquidX would remain TRE’s senior secured creditor. In effect, TRE would cease to be an existing company and LiquidX would acquire its remaining cash and assets, including the exchange platform. In order to implement the foreclosure, TRE needed to obtain an independent appraisal of its assets. Mueller needed the valuation to be low – i.e. , below the $3.25 million loan amount – for the transaction to work. If TRE’s assets were appraised above $3.25 million, TRE’s junior creditors (like Brooklawn) would still have claims on those assets after LiquidX foreclosed. Therefore, Mueller needed a valuation between $2 and $3 million in order to “leave unsecured creditors behind.” On December 4, 2015, Toffey learned that the appraisal expert had valued TRE at $2.05 million With the appraisal in place, LiquidX could acquire TRE for $4.05 million (the cost of the loan plus interest), notwithstanding the fact that Mueller had valued TRE’s assets at $18.2 million, with considerable upside potential. TRE becomes LiquidX Over the following two months, TRE’s management worked on the “rebranding” into LiquidX. Toffey and other executives moved vendor contracts, bank accounts, and customer agreements to LiquidX. Although TRE had informed its vendors and customers of the “rebranding,” TRE’s common stockholders and contingent creditors (including Brooklawn) were left in the dark. LiquidX commenced operations on January 1, 2016, using, inter alia , the same offices, employees, vendors, and finance department that had served TRE the day before. The Lawsuit and Decision As noted, Brooklawn brought an arbitration proceeding against TRE. After the foregoing events occurred, Brooklawn sought to join LiquidX in that proceeding. When Brooklawn did so, LiquidX filed the action seeking a declaration that joinder would be improper on the grounds that it is not TRE’s alter ego. Following a four-day bench trial, the Court found that LiquidX “is the alter ego of TRE.” On the issue of control, Judge Pauley found that TRE and LiquidX “are virtually indistinguishable” and that “LiquidX is a new company in name only.” Beginning on January 1, 2016, LiquidX continued to operate TRE’s business in a seamless transition. TRE’s offices and employees became LiquidX’s offices and employees, the exchange was simply rebranded, and LiquidX took over responsibility for financing and defending TRE’s outstanding legal disputes (including the Brooklawn arbitration.) …. Citation omitted. In concluding that there is “no meaningful distinction between the company that TRE was and the company that LiquidX is today,” the Court rejected LiquidX’s argument that there is no “overlap in ownership because Toffey, Connolly, Kovacs, and Mueller never owned shares of both TRE and LiquidX.” Judge Pauley found that the argument was not compelling, “as it rests on an overly formalistic conception of ‘domination and control.’” Ownership, in the corporate context, is a proxy for control. It is certainly possible, however, to exercise control over corporate functions without owning the corporation itself …. The Court found Mueller, Toffey, Connolly, and Kovacs did, in fact, control LiquidX. In this regard, the Court found that The TRE insiders ensured that Mueller’s transaction would be successful by declining to consider other options after the funding round fell apart. Connolly and Toffey, both former TRE board members, became directors of LiquidX on the company’s first day in business. Kovacs worked for both companies simultaneously in November 2015 as he endeavored to ensure a smooth transition after the foreclosure. Mueller was never a part of TRE but nonetheless exercised considerable influence on the board, as he was the only viable source of funding at the end of 2015. Taken together, these facts reveal a substantial overlap in directors, officers, and control between TRE and LiquidX. “The most significant factor” said the Court, is the fact “that the corporations did not deal with one another ‘at arm’s length.’” The substantial involvement of TRE’s management team, and Toffey in particular, in engineering the foreclosure from both sides suggests that this was anything but a disinterested negotiation between sophisticated parties. Toffey’s influence over the independent appraisal is particularly glaring.… Indeed, there would be no reason for Toffey to push for a low valuation if he were a disinterested TRE executive. On the issue of using control of TRE to commit a wrong, the Court found that there was “ample evidence … that LiquidX, through the actions of TRE’s management, structured and executed this transaction to perpetrate a wrong—namely, a foreclosure that would allow LiquidX to acquire TRE’s business free and clear of its creditors, leaving Brooklawn with nothing but a shell company to litigate against.” According to Judge Pauley, “ he sequence of events leading to the foreclosure renders this conclusion inescapable.” TRE’s final funding round cratered immediately upon Mueller learning of the Solaia arbitration award—not because the award was large, but because it amplified the litigation risk of Brooklawn’s more substantial claim. Instead of walking away from the transaction, Mueller and Connolly came up with an approach that would allow them to acquire TRE’s functioning platform while ‘leav unsecured creditors behind.’ Brooklawn would find itself arbitrating against a ‘ShellCo,” and LiquidX, with TRE’s contingent creditors safely in the rearview mirror, would be a functioning business worthy of a multi-million dollar investment in a matter of months. To achieve this outcome Mueller relied on insiders like Toffey to stack the deck in LiquidX’s favor—for example, by agreeing on behalf of TRE (without disclosing his interest in LiquidX to the board) to amend the loan agreement and allow LiquidX to conduct a private foreclosure. Ultimately, the foreclosure turned Brooklawn’s otherwise-viable arbitration into an exercise in futility. This result would not have been possible without the high degree of control that Mueller, Toffey, Connolly, and Kovacs exercised over TRE’s operations. Citations omitted. Takeaway Although courts are reluctant to impose alter ego liability or pierce the corporate veil, they will do so when the facts and circumstances indicate that the corporate form was used to commit a fraud or other wrong. LiquidX illustrates the type of circumstances in which the factors considered by the courts support the imposition of liability on the corporate owners or affiliates.

A federal judge has given Well Fargo & Co. preliminary approval of its proposed $142 million class-action settlement to compensate millions of customers swept up in the fake account scandal that led to the ouster of CEO John Stumpf in October 2016. Current Wells Fargo Chief Executive Tim Sloan said in a statement that the proposed settlement represents "a major milestone in our efforts to make things right for our customers." The Wells Fargo Scandal The scandal broke in 2013 when it was revealed that thousands of Wells Fargo sales people were pressured to open new checking and savings accounts, credits cards, and lines of credit without customer approval in order to meet quotas. The bank subsequently terminated more than 5,000 employees who were allegedly involved in the improper account openings. In September 2016, the bank agreed to pay regulators $185 million over allegations that it created approximately 2.1 million unauthorized accounts without customer approval. The Class Action Settlement One of the factors involved in working out the proposed settlement was determining how many customers were actually affected. Originally, the bank agreed to pay $110 million based on the the 2.1 million accounts identified in the deal with banking regulators. After an internal investigation revealed that company executives first learned of the unauthorized accounts problem in 2002, Wells Fargo increased the fund to $142 million. Attorneys for the plaintiffs estimated the number of unauthorized accounts to be as high as 3.5 million. The proposed settlement will cover customers who had unauthorized accounts opened beginning May 1, 2002, and compensates customers for fees that were charged based on the number of unauthorized accounts. Moreover, the payout to customers whose credit was actually damaged by unauthorized credit card accounts is based on a formula that considers any loans they took out while their credit score was impaired. Determining the settlement to be preliminarily “fair, reasonable and adequate,” the court scheduled a hearing for January 4, 2018, to decide whether to grant final approval of the settlement. Wells Fargo said the proposed settlement will resolve substantially all claims in ten other pending class actions over the account scandal. While aggrieved customers will receive notices about the claims process in the next three months, payments will not be made until after final court approval.

The Consumer Financial Protection Bureau (CFPB) has released a highly anticipated rule that bars banks and credit card companies from using arbitration clauses to prevent customers from joining class action lawsuits. The rule was initially proposed by CFPB Director Richard Cordray last year and is slated to go into effect in eight months. Currently, mandatory arbitration clauses are used in an array of financial products and the rule applies to new agreements for credit cards, auto loans, payday loans and services that provide third-party billing. “These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up,” CFPB Director Richard Cordray said in a statement. The CFPB was authorized to review the effect of these clauses by the Dodd Frank Act. The bureau’s study indicated that hundreds of millions of contracts rely on arbitration clauses that have kept disputes out of court nearly two-thirds of the time, not only for class actions but individual actions against financial service providers as well. “Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together,” said Cordray Although arbitration clauses are still permitted, the new rule requires companies to state that consumers cannot be stopped from joining class action cases. Instead, customers must be given the option of pursuing arbitration or joining a class action in the event of a dispute . Opposition to the New Rule Congress now has 60 legislative days to overturn the rule and GOP lawmakers may utilize the Congressional Review Act to challenge the regulation (as Republicans have done with a number of rules issued in the waning days of the Obama Administration). In addition, Keith Noreika, the acting Comptroller of Currency, previously sent a letter to Cordray raising concerns about the new rule and asked the CFPB to share data that was relied on to formulate the new rule; the agency did not provide the data. Noreika also noted that the Dodd-Frank Act authorizes the Financial Stability Oversight Council to set aside any CFPB rule that can be shown to put the safety of the wider financial system at risk. The Takeaway Although critics of the rule argue that class actions are costly, result in lower awards for consumers and ultimately benefit attorneys that bring these cases, proponents contend that consumers have a right to be heard in court and the class actions serve to correct bad corporate behavior. At this juncture, It remains to be seen whether GOP lawmakers will set aside the rule or whether lobbying groups such as the U.S. Chamber of Commerce will take legal action to block the rule.

On July 13, 2017, Charlotte-based LPL Financial, the largest retail investment advisory firm and independent broker-dealer in the United States, announced that it planned to provide its advisers with a new mutual fund platform early next year to improve the way its advisors offer mutual funds in brokerage accounts with participating fund companies, reduce fees for investors and standardize adviser compensation. “With this platform, LPL is striving to preserve choice for investors while managing the evolving regulatory environment,” said Rob Pettman, LPL executive vice president of product and platform management, in the firm’s press release. ( Here ). “We will be delivering a price-competitive solution with the benefit of free exchanges across participating fund companies to help our advisors differentiate their practices in the market and serve a broad range of investors.” The new platform, known as the Mutual Fund Only (“MFO”) platform, would standardize advisers’ upfront and trailing compensation for mutual fund sales, and slightly reduce the number of fund families available to clients. Under the MFO platform, advisers will receive a 3.5% one-time upfront commission for onboarding a client, who can then transfer funds in and out of 1,500 mutual funds across 20 asset management firms without incurring additional upfront sales charges. Advisers will receive a 0.25% annual trailing commission regardless of the subsequent fund selection. Clients who currently hold positions in the eligible mutual funds can avoid the onboarding commission if they transfer their positions to an MFO account. LPL’s decision to implement the MFO platform addresses one of the compliance requirements of the Fiduciary Rule ( i.e. , disclosure of compensation), which partially went into effect in June of this year. ( Here .) The Fiduciary Rule will become fully effective in January 2018, barring any congressional legislation to repeal the Rule, changes in the effective date, or amendments/modifications to the substance of the Rule. As this Blog previously noted, the DOL recently issued a request for comment on the Rule to guide any future changes. ( Here .) While the industry is adjusting to the requirements of the Fiduciary Rule, Congress is trying to legislate it out of existence. On the same day that LPL announced the implementation of its MFO platform, the House Financial Services Subcommittee on Capital Markets, Securities, and Investment held a hearing on the Fiduciary Rule, the purpose of which was “to gather evidence” about “the unintended consequences of the DOL fiduciary rule.…” Also on the agenda for the hearing was a discussion draft of a bill written by Rep. Ann Wagner, R-Mo. that would repeal the Fiduciary Rule and replace it with a best-interest standard for retail brokers providing retirement advice. Representative Wagner previously sought to stop the DOL from finalizing the Fiduciary Rule through the Retail Investor Protection Act ( H.R. 1090 ). Though passing the House, the legislation failed to advance in the Senate. Among other things, Representative Wagner’s new legislation: requires brokers to act in a customer’s best interest by providing recommendations that “reflect reasonable diligence,” and “reflect reasonable care, skill and prudence that a broker-dealer would exercise based on the customer’s investment profile”; requires brokers to “avoid, disclose or otherwise reasonably manage any material conflict of interest with a retail customer”; and imposes enhanced disclosure obligations on brokers, who would have to disclose at the point of sale, the compensation they receive, while providing the SEC with rulemaking authority “to promulgate the content of such disclosures.” Additionally, the draft measure allows brokers to charge commissions and take third-party payments, engage in principal transactions, sell proprietary products and offer a limited menu of products. It does not, however, require brokers to “recommend the least expensive security or investment strategy.” The bill would provide an exemption for the sale of annuities, as long as those sales are governed by an advice standard that is “substantially similar” to the one contained in the bill. The Financial Services Institute, which represents independent brokers and financial advisers, “fully supports this legislation,” said FSI spokesman Chris Paulitz. Others in the industry who oppose the Fiduciary Rule, because it is considered to be too complex and costly and will force brokers to abandon clients with modest retirement accounts, also support the draft bill. Opponents of the measure believe that it will do nothing to protect investors. “It’s an unnecessary, ill-conceived, poorly written bill that will weaken protections for retirement savers without doing anything to provide meaningful protections for non-retirement accounts,” said Barbara Roper, director of investor protection at the Consumer Federation of America, in a letter to the committee. Democrats do not support the legislation, calling it a bill that “would be devastating to low-income, middle-income and senior citizens.” ( Here .) To date, Democrats have been united in their opposition to any attempts to repeal the DOL Fiduciary Rule. Though the industry has largely opposed the Fiduciary Rule, with the partial implementation of the Rule this past June, it has taken a pragmatic approach with regard to full compliance. Indeed, as Barbara Roper, Director of Investor Protection, and Micah Hauptman, Financial Services Counsel, of the Consumer Federation of America noted, over the past year, “firms have announced implementation plans that show that the rule is reducing the cost of advice, improving the quality of investment products, and preserving access to advice through both fee and commission accounts for even the smallest account holders.” ( Here .) LPL Financial is the latest example of a firm adjusting to the changes required under the Rule. While the industry adapts, Congress continues to seek repeal of the Rule. The CHOICE Act 2.0 is a reminder of those efforts. ( Here .) This Blog will continue to follow the developments surrounding the industry’s adaptation to the Fiduciary Rule and Congress’s efforts to repeal it.

Under Section 10 of the Federal Arbitration Act (“FAA”), a party can vacate or modify an arbitral award under four narrow circumstances: “(1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption…; (3) where the arbitrators were guilty of misconduct … or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers ….” 9 U.S.C. §10(a).  These grounds are the exclusive ones for vacating an arbitration award under federal law. Hall Street Associates, LLC v. Mattel Inc. , 552 U.S. 576 (2008). Under FAA, the burden is on the parties seeking to modify or vacate an award to demonstrate that the relief sought is warranted. This burden, however, often proves too difficult to overcome. The reason is rooted in the deference accorded by the courts to arbitrators in the decisions they reach.  So long as the arbitrators act within the scope of their contractually delegated authority, their interpretation of the parties’ contract, including the law and facts related thereto, prevails even if the court has a better one. One of the more common bases for seeking vacatur of an arbitral award is that the arbitrators exceeded their authority. Essentially, the movant argues that the arbitrators abandoned their interpretative role. Under Section 10(a)(4) of the FAA (discussed below), courts will vacate an award only when the arbitrators stray from their task of interpreting a contract, not when they perform that task poorly. Section 10(a)(4): Arbitrator Exceeds Authority As noted, Section 10(a)(4) of the FAA permits a court to vacate an award “where the arbitrators exceeded their powers.” 9 U.S.C. § 10(a)(4). Courts have “consistently accorded the narrowest of readings to this provision.” ReliaStar Life Ins. Co. of N.Y. v. EMC Nat’l Life Co. , 564 F.3d 81, 85 (2d Cir. 2009) (citation and internal quotation marks omitted). Consequently, the courts’ inquiry is focused on “whether the arbitrators had the power, based on the parties’ submissions or the arbitration agreement, to reach a certain issue, not whether the arbitrators correctly decided that issue .” Jock v. Sterling Jewelers Inc. , 646 F.3d 113, 122 (2d Cir. 2011) (emphasis in original) (citation omitted). Moreover, a court “will uphold an award so long as the arbitrator ‘offers a barely colorable justification for the outcome reached.’” Jock , 646 F.3d at 122 (quoting ReliaStar , 564 F.3d at 86). The Supreme Court has made it clear that “ t is not enough . . . to show that the panel committed an error—or even a serious error.” Instead, vacatur is appropriate only “when an arbitrator strays from interpretation and application of the agreement and effectively dispenses his own brand of industrial justice.…” Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. , 559 U.S. 662, 671 (2010) (internal citations and quotation marks omitted). Thus, “as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, a court’s conviction that the arbitrator has committed serious error in resolving the disputed issue does not suffice to overturn his decision.” Jock , 646 F.3d at 122 (quoting ReliaStar , 564 F.3d at 86). Against this background, Larry Bogar (“Bogar”), a former registered representative at Ameriprise Financial Services, Inc. (“Ameriprise”), learned how difficult it is to vacate an award under Section 10(a)(4) of the FAA. Bogar v. Ameriprise Fin’l Servs., Inc. , No. 1:16-CV-7199-GHW (S.D.N.Y. May 4, 2017). Background Bogar worked as a registered representative at Ameriprise, a broker-dealer. In August 2013, Bogar signed a promissory note with Ameriprise in which Ameriprise agreed to loan $143,199 to Bogar in exchange for his agreement to repay the loan with interest at 1.47% per annum, in monthly installments for nine years (the “Promissory Note”). The Promissory Note had an acceleration clause that provided if Bogar’s employment with Ameriprise ended for any reason, the “unpaid principal balance of the principal sum, plus accrued interest, shall be due and payable as of the date of the termination.” On December 7, 2015. Bogar’s employment with Ameriprise ended making the outstanding balance ($107,819.56) due and owing under the Promissory Note. Thereafter, Ameriprise demanded payment of the outstanding balance on the loan. Bogar failed to repay the outstanding debt as demanded, and the matter proceeded to arbitration before the Financial Industry Regulatory Authority, Inc. (“FINRA”). Ameriprise asserted four claims for relief in arbitration, all which sought recovery for Bogar’s failure to repay the amount due on the Promissory Note. Bogar failed to appear in the arbitration. On September 28, 2016, the arbitrator issued an award in favor of Ameriprise comprising $107,819.56 in compensatory damages, plus interest at the rate of 1.47% per annum from December 7, 2015 until the award is paid in full, and attorneys’ fees and costs of $2,429.83. Bogar moved to vacate the award under the FAA on the grounds that the arbitrator exceeded his powers. Ameriprise opposed the petition and moved to confirm the award. The Court denied the petition and confirmed the award. The Court’s Decision Bogar sought vacatur on two grounds. First, Bogar argued that the arbitrator exceeded his authority because he considered Ameriprise’s claims of unjust enrichment and conversion in addition to its direct claim for breach of contract in violation of FINRA Rule 13806. Second, Bogar argued that Ameriprise failed to submit proof of non-payment on the Promissory Note required to justify relief under New York law. As to the first grounds for vacatur, the Court found that the arbitrator did not violate the FINRA rule, which provides, in pertinent part, that “a claim may not include any additional allegations.” Rule 13806 applies to arbitrations involving a member’s claim that an associated person “failed to pay money owed on a promissory note.” The Court found “that is precisely the nature of the dispute on which the Award is based.” That Ameriprise pleaded “alternative nominal causes of action” did not, said the Court, “remove its claim for recovery of the debt from the scope of Rule 13806.” Indeed, found the Court, “the basis for Ameriprise’s claim was plainly ‘that an associated person failed to pay money owed on a promissory note.’” Moreover, said the Court, “even if the Arbitrator could not consider those additional counts, the breach of contract claim, uncontested by plaintiff, provides a sufficient basis for the Award.” Noting that an “arbitrator’s rationale for an award need not be explained,” and that the “award should be confirmed if a ground for the arbitrator’s decision can be inferred from the facts of the case” (citation omitted), the Court found that it could “easily infer that the Award was based on Ameriprise’s cause of action for breach of contract,” which Bogar did not claim was beyond “the arbitrator’s power to reach ….” As to the second grounds for vacatur, the Court rejected Bogar’s argument that the “Award must be vacated because Ameriprise did not submit to the Arbitrator any proof of Bogar’s failure to make payment on the note.” In doing so, the Court noted that “ n arbitrator’s factual findings are generally not open to judicial challenge” because “a court accepts the facts as the arbitrator finds them.” Because Bogar “made no concrete showing that the arbitrator lacked sufficient evidence to support a finding of non-payment,” despite having “the opportunity to appear at the arbitration hearing to contest the evidence presented to the arbitrator,” he could not “undermine the arbitrator’s conclusions … based on unsupported speculation.” The Court denied the petition to vacate “ ecause neither of Bogar’s asserted bases come close to clearing the “high hurdle” necessary to justify vacatur of the Award.” Takeaway The Supreme Court has long-held that the FAA “promotes a national policy favoring arbitration.” See , e.g. , Hall St. Assocs. , 552 U.S. at 583-84. Among the reasons why arbitration is favored for resolving disputes include its ability to respond to the parties’ intentions and contractual agreements, its ability to offer greater flexibly and speed than litigating in court, and its cost effectiveness. In order to promote the arbitral forum and its benefits, therefore, judicial review of an arbitration award is strictly limited. Indeed, the limitations on judicial review under the FAA are designed to preserve due process, without undermining the benefits of arbitration, by rendering it “merely a prelude to a more cumbersome and time-consuming judicial review process.” Hall St. Assocs. , 552 U.S. at 587 (quotation omitted). Given the foregoing benefits and policies, Bogar learned a hard and expensive lesson: the FAA not only establishes a “high hurdle” for vacatur, but that the hurdle it imposes is virtually impossible to overcome.