By: Jonathan H. Freiberger Artificial Intelligence (“AI”) and Generative Artificial Intelligence (“GenAI”) are all the rage these days. While AI and GenAI can be useful tools, caution is necessary when using such tools. Today we will discuss Deutsche Bank National Trust Co. v. Letennier , a case decided by the Appellate Division, Third Department, on January 8, 2026. The Court described the decision as the “ first appellate-level case in New York addressing sanctions for the misuse of GenAI.” [1] Deutsche Bank  is a mortgage foreclosure action [2]  commenced in 2018. The borrower, in his answer, asserted numerous affirmative defenses, including lack of standing. The lender and borrower moved for summary judgment and the motion court granted the lender’s motion and denied the borrower’s cross motion. The order was affirmed on the borrower’s appeal. Thereafter, the borrower filed numerous motions, both before and after a judgment of foreclosure and sale was issued. One of the motions was deemed to be frivolous and the motion court warned the borrower about the issuance of monetary sanctions if frivolous conduct continued. Subsequent motion practice by the borrower resulted in a finding by the motion court that the borrower was “a vexatious litigant that must bring future motions by order to show cause, and awarding costs and legal fees to [the lender] for [the borrower]'s frivolous conduct.” Additional motions for previously sought relief were filed by the borrower and appeals from the denial of those motions are the subject of Deutsche Bank. While the Court noted that “[i]nitially, the merits of this appeal are unremarkable in nature” it went on to state that the appeal becomes “unconventional” because the borrower’s “opening brief cites six cases which do not exist” and which the lender’s counsel identified as “possibly being the product of artificial intelligence.” The lender moved for sanctions against the borrower and its counsel. In response, [the borrower] claimed the nonexistent cases were citation or formatting errors that he would correct in his reply brief and then opposed the motion for sanctions with more fake cases and interpretations for existing cases that are at best strenuously attenuated, and at worst entirely inapposite.” The borrower subsequently included more fake cases and “false legal propositions” in letters to the Court. The Court added: In examining the propriety of defendant's previously filed papers, more nonexistent cases were discovered in a motion that granted affirmative relief to defendant. Defense counsel reluctantly conceded during oral argument that he used AI in the preparation of his papers and, although he told the Court that he checked his papers, the filings themselves demonstrate otherwise. In total, defendant's five filings during this appeal include no less than 23 fabricated cases, as well as many other blatant misrepresentations of fact or law from actual cases. The Court explained that “ generative artificial intelligence … represents a new paradigm for the legal profession, one which is not inherently improper, but rather has the potential to offer benefits to attorneys and the public – particularly in promoting access to justice, saving costs for clients and assisting courts with efficient and accurate administration of justice.” (Citations and footnote omitted.) The Court then cautioned that “attorneys and litigants must be aware of the dangers that GenAI presents to the legal profession [including] AI “hallucinations,” which occur when an AI database generates incorrect or misleading sources of information due to a “variety of factors, including insufficient training data, incorrect assumptions made by the model, or biases in the data used to train the model.” (Citations and internal quotation marks omitted.) The Court then noted that other courts “throughout the country which have been confronted with AI-generated authorities have concluded that filing papers containing hallucinated cases and fabricated legal authorities may be sanctionable….” (Citations omitted.) The Court recognized that sanctions can be awarded against a party or attorney for engaging in frivolous conduct under 22 NYCRR 130-1.1  and “that rule 3.3 of the Rules of Professional Conduct  provides that ‘[a] lawyer shall not knowingly ... make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer’”. (Hyperlinks added.) In determining that sanctions were appropriate against counsel for GenAI related conduct, the Court found, inter alia : Here, defendant submitted at least 23 fabricated legal authorities across five filings during the pendency of this appeal. He has also misrepresented the holdings of several real cases as being dispositive in his favor – when they were not. It is axiomatic that submission of fabricated legal authorities is completely without merit in law and therefore constitutes frivolous conduct. It cannot be said that fabricated legal authorities constitute “existing law” so as to provide a nonfrivolous ground for extending, modifying or reversing existing law…. Where we are most troubled is that more than half of the fake cases offered by defendant came after he was on notice of such issue, whereby his reliance on fabricated legal authorities grew more prolific as this appeal proceeded – despite it being apparent to him that such conduct lacked a legal basis. Rather than taking remedial measures or expressing remorse, defense counsel essentially doubled down during oral argument on his reliance of fake legal authorities as not germane to the appeal. [Citations, internal quotation marks and footnotes omitted.] After analyzing other AI sanction cases the Court assessed a sanction in the amount of $5,000.00 against the borrower’s counsel for the “misuse of GenAI”.  The Court added that “ attorneys and litigants are not prohibited from using GenAI to assist with the preparation of court submissions. The issue arises when attorneys and staff are not sufficiently trained on the dangers of such technology, and instead erroneously rely on it without human oversight.” The Court also found that the appeal was frivolous and assessed a $2,500.00 sanction against the borrower and an additional $2,500.00 sanction against the borrower’s attorney. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1]  The Court, relying on United States v. Google LLC , 2025 WL 2523010, at 9, 2025 U.S. Dist LEXIS 170459 at 52-53, explained that “‘ GenAI is a subfield of AI “that uses machine-learning techniques to generate new data, including text, images, sound, code, and other media.’” Deutsche Bank  at n. 5. [2]  This BLOG has written dozens of articles addressing numerous aspects of residential mortgage foreclosure. To find such articles, please see the BLOG tile on our website and search for any foreclosure, or other commercial litigation, topics that may be of interest you.

By:  Jeffrey M. Haber In Alphasense, Inc. v. Financial Tech. Partners LP , 2026 N.Y. Slip Op. 00185 (1st Dept. Jan. 15, 2026), the Appellate Division, First Department, considered whether Plaintiffs validly terminated an advisory agreement with Defendants under a “Key Man” provision. Plaintiffs alleged that Defendants’ managing partner, critical to the engagement, gradually stopped participating in essential advisory work, including investor meetings, introductions, and fundraising support, leading to termination in 2022. Defendants moved to dismiss, arguing the managing partner never ceased leading the team, that sporadic absences were insufficient to trigger the “Key Man” provision, and that Plaintiffs waived termination rights through continued performance and a 2015 amendment. Both the motion court and the First Department rejected these arguments, finding the provision ambiguous and fact-dependent, requiring further development. Applicable Legal Principles Declaratory Judgment CPLR 3001 provides that the “court may render a declaratory judgment having the effect of a final judgment as to the rights and other legal relations of the parties to a justiciable controversy whether or not further relief is or could be claimed.” The “primary purpose of declaratory judgments is to adjudicate the parties’ rights before a wrong actually occurs in the hope that later litigation will be unnecessary.” [1]   A “declaratory judgment does not entail coercive relief, but only provides a declaration of rights between parties … [i]n other words, the declaration in the judgment itself cannot be executed upon so as to compel a party to perform an act.” [2]   Moreover, “where a full and adequate remedy is already provided by another well-known form of action,” declaratory relief is improper. [3]   Waiver “A party to an agreement who believes it has been breached may elect to continue to perform the agreement and give notice to the other side rather than terminate it.” [4]  When “performance is continued and such timely notice is given, the nonbreaching party does not waive the right to sue for the alleged breach.” [5]   “However, by choosing not to terminate the contract at the time of the breach, the nonbreaching party surrenders his or her right to terminate later based on that breach.” [6]   In National Westminster Bank, U.S.A. v. Ross , [7]  the court explained the waiver of contractual breaches as follows: It is well-established that where a party to an agreement has actual knowledge of another party's breach and continues to perform under and accepts the benefits of the contract, such continuing performance constitutes a waiver of the breach. It is equally well-settled that a party to an agreement who believes it has been breached may elect to continue to perform the agreement rather than terminate it, and later sue for breach; this is true, however, only where notice of the breach has been given to the other side. [8] Alphasense, Inc. v. Financial Tech. Partners LP Alphasense  arose from a dispute between Plaintiffs, AlphaSense, Inc., AlphaSense OY, and AlphaSense, LLC (collectively “AlphaSense” or “Plaintiffs”), and Defendants, Financial Technology Partners LP and FTP Securities LLC (collectively “FTP” or “Defendants”), regarding an engagement for financial advisory services.   Plaintiffs engaged Defendants as their financial and strategic advisors pursuant to an Engagement Letter dated January 23, 2015, as later amended on October 9, 2015 (the “Agreement”). Plaintiffs alleged that, at the time they negotiated the Engagement Letter, they received express assurances from the managing partner at FTP that he would be personally and directly involved in the business relationship for the entirety of its duration. Accordingly, Plaintiffs negotiated for a “Key Man Termination” provision in the Engagement Letter (“Key Man Provision”) that allowed for the termination of the Agreement if the managing partner ceased his active involvement.  Plaintiffs alleged that the managing partner’s promised level of involvement receded shortly after the Agreement was signed, with minimal participation in the Company’s capital-raising efforts.  Plaintiffs further alleged that from 2015 onwards, the managing partner did not attend any investor meetings in connection with the capital raising, and that Plaintiffs relied on their own resources for investor introductions and capital raising. Despite the managing partner’s alleged lack of involvement, Plaintiffs allegedly paid FTP approximately $22.4 million in fees since 2015. On October 13, 2022, Plaintiffs terminated the Agreement by sending a letter to Defendants pursuant to the Key Man Provision. Plaintiffs alleged that the termination became effective on November 12, 2022, with Defendants’ entitlement to any additional fees for the eighteen months ending on May 12, 2024 (the “Tail Period”). [9]  Defendants had not provided services to Plaintiffs since receiving the termination letter. Defendants did not formally respond to the termination notice until sixteen (16) months after receipt, on February 12, 2024, at which time they insisted that “the Engagement Letter remain[ed] in full force and effect.” Defendants also asserted that Plaintiffs owed fees on post-termination transactions plus accrued interest of $1,620,968.78. Plaintiffs claimed that they timely paid the post-transaction fees and no interest was owed. Plaintiffs commenced the action on April 9, 2024. Pursuant to CPLR 3001, Plaintiffs sought a declaratory judgment that (1) the Key Man Termination was valid and enforceable, (2) FTP’s entitlement to fees expired at the end of the eighteen-month Tail Period as provided for in the Engagement Letter, (3) the Tail Period began to run thirty (30) days after Plaintiffs provided FTP with written notice of termination, and (4) no interest was owed to FTP.   On May 31, 2024, Defendants filed a motion to dismiss the complaint for failure to state a cause of action pursuant to CPLR 3211(a)(7). Defendants argued that the complaint failed to allege facts showing that the Key Man Provision was triggered. They contended that Plaintiffs did not plausibly allege that the managing partner stopped leading or co‑leading the FTP team, as required under the Agreement. Instead, Plaintiffs identified only isolated instances in which the managing partner did not attend certain investor meetings or did not personally make introductions. According to Defendants, occasional absences could not reasonably be equated with a cessation of leadership. Defendants maintained that “leading” or “co‑leading” referred to providing strategic guidance, oversight, and high‑level direction, not personally performing every task. Delegation, they argued, was consistent with active leadership. Defendants further emphasized that the engagement was co‑led by another senior colleague, TW. They asserted that Plaintiffs’ failure to address TW’s leadership role undermined their theory that the managing partner’s participation fell below the contractual threshold. Plaintiffs’ argument, in Defendants’ view, ignored the collaborative leadership structure contemplated by the parties. Defendants also asserted that Plaintiffs improperly relied on pre-contract statements concerning the managing partner’s promised level of personal involvement. Because the Engagement Letter contained a merger clause, Defendants argued that such extracontractual statements could not impose obligations not found in the Agreement. If Plaintiffs believed that attendance at investor meetings or ongoing direct involvement was essential, they should have bargained for those terms expressly rather than seeking to retroactively add requirements through litigation, said Defendants. Defendants further argued that Plaintiffs’ own timeline showed that any alleged termination right arose in 2015, when the managing partner supposedly ceased active participation. Plaintiffs nevertheless continued to perform under the Agreement for seven years, paid substantial fees, and accepted services without significant objection. Defendants claimed that this prolonged performance constituted a waiver of any termination rights and triggered the doctrine of election of remedies. They also contended that the Agreement’s no‑waiver clause did not preclude waiver arising from a course of conduct, noting that Plaintiffs continued to interact with the managing partner as late as 2021. Defendants also maintained that Plaintiffs ratified the Engagement Letter by executing an October 2015 amendment that reaffirmed the Agreement in full, including the Key Man Provision. Combined with continued performance for years, Defendants argued that the amendment confirmed Plaintiffs’ intent to relinquish termination rights based on earlier alleged breaches. Plaintiffs countered that the complaint adequately alleged that the Key Man Provision was triggered by the managing partner’s sustained lack of involvement. They identified multiple deficiencies: he provided no meaningful guidance, made no investor introductions, attended no investor meetings, offered no feedback on their pitch, and contributed minimal input to their fundraising efforts. In Plaintiffs’ view, these allegations showed a significant and ongoing decline in his role, not isolated absences. Plaintiffs rejected Defendants’ suggestion that the managing partner may have been “leading behind the scenes,” arguing that this theory was speculative and contradicted their detailed factual allegations. They also clarified that they were not alleging a discrete triggering event in 2015 but rather a gradual decline from 2015 to 2022. Defendants’ Termination Response Letter, they argued, did not conclusively refute these allegations. On waiver, Plaintiffs pointed to the Agreement’s no‑waiver clause requiring any waiver to be in a signed writing, which did not exist. They also noted that the Agreement permitted termination “at any time” upon cessation of active leadership, making their 2022 termination timely in light of the alleged gradual decline. Plaintiffs rejected Defendants’ election‑of‑remedies theory, asserting they were simply exercising an express contractual right, not rescinding the Agreement. Finally, Plaintiffs argued that the 2015 amendment could not ratify future misconduct, particularly where the alleged decline occurred largely after that amendment. The motion court denied the motion. The motion court held that Plaintiffs sufficiently presented justiciable controversies sufficient to invoke the motion court’s power to render a declaratory judgment.  The motion court found that Plaintiffs adequately alleged facts supporting their claim that the Key Man Provision in the Engagement Letter was triggered by the managing partner’s gradual cessation of involvement with the FTP team responsible for providing financial advisory services to Plaintiffs. The motion court emphasized that the provision’s language was inherently subjective, and Defendants’ competing interpretation, as well as their dispute over whether and when the provision may have been triggered, underscored the existence of a justiciable controversy appropriate for declaratory judgment. The motion court further determined that, irrespective of any pre‑contractual statements or negotiations, it could not adjudicate the parties’ respective rights or the validity of Plaintiffs’ alleged termination of the Agreement at the pre-answer stage of the action. Such issues required a factual record inappropriate for resolution on a motion to dismiss. The motion court also rejected Defendants’ arguments based on waiver, election of remedies, and ratification. Although Defendants asserted that Plaintiffs forfeited any right to invoke the Key Man Provision by continuing to perform under the Agreement for roughly seven years after the managing partner allegedly ceased his active involvement, the motion court concluded that these arguments raised factual questions unsuited for dismissal under CPLR 3211(a)(7). Waiver, the motion court noted, “should not be lightly presumed” and generally requires a clear, intentional relinquishment of a known contractual right—an inquiry typically reserved for the trier of fact. Defendants’ waiver theory relied on the premise that the Key Man Provision could be triggered only by a discrete event in 2015, after which Plaintiffs were obligated to terminate immediately or forever lose the right. The motion court rejected this construction, observing that Defendants identified no contractual language imposing a singular triggering moment. In contrast, said the motion court, the complaint alleged a steady decline in the managing partner’s involvement from 2015 through 2022, providing a plausible basis for concluding that the provision was triggered at some point during that multi‑year period. Finally, the motion court found no clear evidence of Plaintiffs’ intent to waive their rights, particularly given the Agreement’s express no‑waiver clause requiring any waiver to be in writing. This same clause, noted the motion court, undermined Defendants’ ratification argument, as the alleged conduct triggering the Key Man Provision occurred after the parties’ 2015 amendment and could independently give rise to termination rights. The Appellate Division, First Department, affirmed. The Court held that the motion “court properly determined that the [Key Man] provision was open to interpretation and it was not appropriate to dismiss the complaint based only on the pleadings.” [10]   Regarding the declaratory judgment cause of action, the Court held that Plaintiffs adequately stated a claim “based on allegations that defendants’ managing partner ‘ceas[ed] his role of actively leading or co-leading the team providing the advisory services’ to plaintiffs.” [11]  The Court explained that the complaint alleged “that the managing partner … failed to provide guidance or meaningful support, was absent from investor meetings, and offered no more than minimal input on fundraising efforts.” [12]  These allegations, “made in the context of the other specific allegations,” said the Court, were “not conclusory and [were] relevant to the overall claim that the managing partner failed to lead or co-lead the team triggering the ‘key man’ provision.” [13] The Court rejected Defendants’ argument that under the plain language of the Agreement Plaintiffs were required to specifically allege the precise moment that the managing partner ceased to actively lead or co-lead the team. [14]  “As the motion court correctly determined,” concluded the Court, “the ‘key man’ provision, on its face, fail[ed] to resolve plaintiff’s declaratory judgment claim.” [15]   _________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1] Klostermann v. Cuomo , 61 N.Y.2d 525, 538 (1984) (internal quotation marks omitted; emphasis added) (citations omitted). See also   Gaul v. New York State Dep’t of Env’t Conservation , 25 Misc. 3d 679, 688 (Sup. Ct., Suffolk County), judgment entered sub nom. , Gaul v. The New York State Dep’t of Env’t Conservation  (Sup. Ct., Suffolk County 2009). [2] Morgenthau v. Erlbaum , 59 N.Y.2d 143, 148 (1983). [3] Automated Ticket Systems, Ltd. v. Quinn , 90 A.D.2d 738, 739 (1st Dept. 1982) (internal quotation marks and citation omitted), aff’d , 58 N.Y.2d 949 (1983). [4] Albany Medical College v. Lobel , 296 A.D.2d 701, 702 (3d Dept. 2002) (citations, internal quotation marks and ellipses omitted, emphasis added). [5] Id . at 702-03 (citations omitted). [6] Id . (Citations, internal quotation marks and brackets omitted.) [7] 130 B.R. 656 (S.D.N.Y. 1991), affd. sub nom. ,  Yaeger v. National Westminster , 962 F.2d 1 (2d Cir. 1992). [8] Id.  at 675 (applying New York law) (citations omitted). [9] The Agreement defined the “Tail Period” as “eighteen (18) months from the end of the Notice Period in the case of a Key Man Termination.” [10] Slip Op. at *1 (citations omitted). [11] Id. [12] Id. [13] Id. [14] Id. [15] Id.

By:  Jeffrey M. Haber In BH 336 Partners LLC v. Sentinel Real Estate Corp. , 2026 N.Y. Slip Op. 00305 (1st Dept. Jan. 22, 2026), the Appellate Division, First Department, modified an order denying in part a motion to dismiss a complaint containing fraud and fraudulent‑inducement claims arising from Plaintiffs’ purchases of five Manhattan buildings. Plaintiffs alleged that Defendants orchestrated an illegal deregulation scheme that inflated property values through fraudulent individual apartment improvements and misrepresentations about rent‑regulation status. The motion court denied dismissal, finding the claims were not time-barred, standing, justifiable reliance, scienter, and particularity adequately pleaded, and holding the disclaimer in the purchase agreement was too general. On appeal, the First Department modified the order, dismissing the claims by most Plaintiffs as time-barred because a 2019 complaint filed by the New York Attorney General placed them on inquiry notice of the alleged fraud. However, the Court upheld standing for the remaining Plaintiffs, finding broad assignment language and surrounding circumstances permitted a factfinder to infer that the fraud claims were transferred. The Court also rejected the disclaimer argument. BH 336 Partners  is an action alleging fraud and fraudulent inducement in connection with a series of real estate transactions.   Plaintiffs alleged that Defendants defrauded them in connection with their purchase of five Manhattan apartment buildings (the “Properties”) between April 2016 and August 2017. [1]   The Complaint alleged that Sentinel and its affiliates fraudulently induced Plaintiffs to purchase the Properties by concealing an unlawful deregulation scheme. According to Plaintiffs, Sentinel directed Newcastle to supervise the illegal deregulation of rent‑regulated units. Newcastle allegedly engaged favored contractors to perform apartment renovations and intentionally inflated the costs of these improvements to justify removing units from rent regulation. Plaintiffs contended that this scheme produced artificially inflated valuations for the Properties at the time of sale. Plaintiffs further asserted that Defendants misrepresented the legal status of the apartment units, DHCR registrations, Individual Apartment Improvements (“IAIs”), rent rolls, and lease documentation. They alleged that Sentinel representatives relied on DHCR rent roll reports and provided leases and riders that were fraudulent because they falsely characterized illegally deregulated units as free‑market apartments. Plaintiffs maintained that they justifiably relied on these representations and would not have purchased the Properties had the true regulatory status been disclosed. Plaintiffs alleged that Defendants knowingly made these misstatements, intending that Plaintiffs would rely on them. Between 2015 and 2017, Heritage entered into purchase contracts with the Seller Defendants, later assigning the contracts to Plaintiffs at closing. Assignments were executed by Aryeh and, for one property, by Charles M. Yasskey. After the closings, all Seller Defendants were voluntarily dissolved. Plaintiffs claimed they first learned of Sentinel’s deregulation scheme in March 2023, when the New York Attorney General (“AG”) and DHCR notified them that various units must be re‑regulated. The AG’s earlier investigation resulted in a July 11, 2022 Assurance of Discontinuance, which made detailed findings regarding the deregulation practices; Plaintiffs incorporated those findings into their Complaint. They also referenced a separate AG civil enforcement action against former Newcastle Head of Operations, David Drumheller, who allegedly received contractor kickbacks to support inflated renovation costs. Plaintiffs commenced the action on August 9, 2023, asserting claims for fraud and fraudulent inducement, including rescission. Defendants moved to dismiss, arguing lack of standing, statute of limitations, contractual reliance disclaimers, and failure to state a claim. The Moving Defendants argued that all Plaintiffs except 113 West lacked standing because only 113 West directly purchased a Property; the remaining Plaintiffs received assignments of Heritage’s purchase contracts. These Defendants contended that the assignee Plaintiffs could not assert fraud or fraudulent‑inducement claims because they were not the original purchasers and the assignments did not expressly transfer tort claims. Plaintiffs countered that privity was unnecessary for a fraudulent‑misrepresentation claim and that they effectively purchased the Properties directly, as the purchase contracts included express riders acknowledging that the Seller Defendants permitted assignment to related entities. A defendant moving for dismissal for lack of standing bears the burden of making a prima facie showing that the plaintiff lacks standing. [2]  A plaintiff needs “only to raise a triable issue of fact as to its standing” to defeat such a motion, without needing to affirmatively establish its standing. [3]   In New York, fraud claims are freely assignable, although the right to assert such claims does not automatically transfer with the conveyed contract. [4] To effectuate the assignment of fraud claims, there must be “some explicit language evidencing the parties’ intent to transfer broad and unlimited rights and claims.” [5] The “[l]ack of privity is not a viable defense to a fraud claim.” [6] The motion court held that Defendants failed to satisfy their burden of showing that the assignee Plaintiffs lacked standing. The motion court explained that the parties to the purchase contracts specifically contemplated assignment in each agreement’s respective Seller’s Rider. In fact, noted the motion court, the assignments were broadly worded to convey “all . . . right, title and interest” of the purchasers in the respective purchase contracts. Moreover, noted the motion court, the assignments were made between closely related entities, with the same person signing on behalf of the purchaser-assignors and the assignees. The Moving Defendants next argued that Plaintiffs’ claims were time-barred with respect to three of the five Properties: 845 West 180 Street, 220 Wadsworth Avenue, and 643 West 171st Street. These Defendants maintained that under either the six-year accrual part of the statute or the discovery rule, Plaintiffs’ fraud claims were time-barred. In New York, the statute of limitations for fraud is “the greater of six years from the date the cause of action accrued or two years from the time the plaintiff or the person under whom the plaintiff claims discovered the fraud, or could with reasonable diligence have discovered it.” [7]  “ On a motion to dismiss a fraud claim based on the two-year discovery rule, a defendant must make a prima facie case that a plaintiff was on inquiry notice of its fraud claims more than two years before it commenced the action. [8] Should the movant make its prima facie case, “[t]he burden then shifts to the plaintiff to establish that even if it had exercised reasonable diligence, it could not have discovered the basis for its claims before that date.” [9]  This is a “mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily on statute of limitations grounds.” [10]   The inquiry as to whether a plaintiff could have discovered the alleged fraud with reasonable diligence “turns on whether the plaintiff was possessed of knowledge of facts from which [the fraud] could be reasonably inferred.” [11] A duty of inquiry arises “where the circumstances are such as to suggest to a person of ordinary intelligence the probability” that they have been defrauded. [12]  Should the party “[omit] that inquiry when it would have developed the truth, and shuts [its] eyes to the facts which call for investigation, knowledge of the fraud will be imputed to” the party. [13] “[P]ublic reports and lawsuits of alleged fraud are sufficient to put a plaintiff on inquiry notice of fraud.” [14]   The motion court held that under the six-year portion of the statute of limitations, the fraud claims as to the three Properties in questions were barred: “As the sale of the three Properties closed between April and September 2016, the motion court held that the fraud claims related to those sales accrued outside of the six-year statute of limitations.” Regarding the discovery rule, the motion court held that there were issues of fact as to whether the Drumheller complaint placed Plaintiffs on inquiry notice as to fraud claims arising out of their purchase of 845 West 180th Street, 220 Wadsworth Avenue, and 643 West 171st Street. The Moving Defendants argued that Plaintiffs were on notice of any alleged fraud at the Properties in June 2019, when the AG’s office emailed their counsel a copy of the Drumheller complaint. According to the Moving Defendants, the Drumheller complaint “specifically discusse[d] [properties] including 336 Fort Washington Avenue” and outlined the fraudulent deregulation scheme that formed the basis of Plaintiffs’ allegations in the action. In holding that there were issues of fact, the motion court distinguished the allegations in the Drumheller complaint with those in the action. In that regard, the motion court found that the  allegations in the Drumheller complaint focused solely on the misconduct of Drumheller and certain Newcastle employees, specifically that they accepted kickbacks from favored contractors in exchange for inflating renovation costs. Nothing in that complaint, noted the motion court, alleged or suggested that Drumheller acted at the direction of senior personnel at Newcastle, Sentinel, or any affiliated entity, nor that Sentinel or its affiliates orchestrated or participated in the scheme. The single reference to Sentinel, said the motion court, merely noted that many buildings managed by Newcastle were “or [had] been owned by single purpose entities controlled by others, including Sentinel,” a statement that did not imply Sentinel’s involvement or knowledge. The motion court went on to say that the Drumheller complaint repeatedly emphasized that the misconduct benefitted Drumheller personally, not Newcastle, Sentinel, or the Sentinel‑controlled entities that owned the buildings, including the Seller Defendants. Accordingly, concluded the motion court, the thrust of the Drumheller complaint was fundamentally different from the fraud claims asserted in the action. The Moving Defendants also maintained that the Complaint failed to state a cause of action for fraud because Plaintiffs disclaimed reliance on extracontractual representations, or, in the alternative failed adequately to plead justifiable reliance.  The motion court denied the motion  on the basis of disclaimer. The motion court found that the disclaimer in the purchase contracts was general, not specific. [15]  The motion court, therefore, rejected the Moving Defendants’ claim that the disclaimer disclaimed any alleged misrepresentations about the rent regulation status of units. Even if the disclaimer was sufficiently specific, said the motion court, the misrepresentations alleged by Plaintiff “concern[ed] facts peculiarly within” Defendants’ knowledge, namely the scheme whereby Sentinel-affiliated entities deregulated certain units at the Properties and their concealment thereof. [16]   Finally, the motion court held that the Complaint adequately pleaded justifiable reliance and due diligence, crediting allegations that Plaintiffs conducted lease audits and had no reason to suspect fraudulent IAI adjustments. The Moving Defendants contended that Plaintiffs failed to plead reliance, scienter, material misstatements, or particularity, arguing that they neither performed diligence nor alleged Defendants’ knowledge or involvement in any misconduct. The motion court, however, found scienter sufficiently alleged: the pleaded facts – Sentinel’s value‑enhancement strategy, Newcastle’s renovation oversight, inflated IAI costs, deregulation of units, and subsequent sales – supported an inference of the Moving Defendants’ actual knowledge. The motion court also rejected the arguments that only omissions were alleged or that the Complaint lacked particularity, noting its identification of specific Sentinel representatives, the documents provided (DHCR rent rolls, leases, riders), and the timing of events (during due diligence), among other things. On appeal, the Appellate Division, First Department, modified the order, on the law, to dismiss all claims against Defendant as time-barred, except for those asserted by EZ Wadsworth Partners LLC and BH 336 Partners LLC, and otherwise affirmed. The Court held that the motion court erred in finding issues of fact with regard to the Moving Defendants’ motion dismiss on statute of limitations grounds. The Court explained that the “time-barred plaintiffs” could not “rely on their lack of awareness of the fraud to take advantage of the two-year discovery period under CPLR 213(8), as they were placed on inquiry notice no later than June 20, 2019, when the Office of the New York Attorney General forwarded their attorneys a copy of a complaint in People v David Drumheller.” [17] The Court noted that the “complaint alleged that David Drumheller, an employee of Newcastle, along with contractors and other Newcastle employees, artificially inflated the renovation costs of various units in apartment buildings throughout New York City owned by Sentinel affiliates.” [18]  “[T]hat complaint,” said the Court, alleged that “Drumheller did so to fraudulently deregulate the units.” [19]  Thus, held the Court, “[a]lthough the complaint mentioned only one of the buildings plaintiffs purchased in passing, the complaint otherwise stated that Newcastle managed 2,500 apartments; that Drumheller was critical to Newcastle’s practice of deregulating rent-stabilized units; and that Drumheller caused hundreds of such units to be fraudulently deregulated.” [20] Accordingly, concluded the Court, “plaintiffs’ awareness of the possibility of the fraudulent scheme involving buildings they purchased from Sentinel-controlled entities placed on plaintiffs a duty to investigate the fraud, even if plaintiffs had no reason at the time to believe that Sentinel or Newcastle was involved.” [21]  “Plaintiffs did not engage in such an investigation,” said the Court. [22]   Regarding the assignment, the Court held that the motion court “was correct in holding that defendants did not meet their burden on a motion to dismiss to establish that the remaining plaintiffs lacked standing.” [23]  “As the Supreme Court found, the parties to the original purchase contracts specifically contemplated that the assignment would be a part of the transaction, and the assignments were broadly worded to convey ‘all . . . right, title and interest’ of the purchasers in the respective purchase contracts.” [24]  As such, said the Court, “[a] factfinder could find the requisite intent to transfer fraud claims under these circumstances.” [25]   The Court noted that “[i]n the presence of sufficiently broad assignment language, courts are permitted to assess the circumstances of the surrounding assignment to discern if the parties intended to transfer fraud claims.” [26] This holistic approach, said the Court, was consistent with the approach of other courts. [27] The Court cited to Banque Arabe Et Internationale v. Md. Nat. Bank , 57 F.3d 146, 151-153 (2d Cir. 1995), as an example. [28]  In Banque Arabe , the Second Circuit held that a recitation in an assignment agreement transferring “all of [the predecessor party’s] rights, title and interest” in a “transaction” was sufficient to transfer a fraud claim upon analyzing the underlying circumstances. The Court also distinguished the case from other actions with similarly broad assignment language in which the Court found that the fraud claims had not been assigned. [29]  The Court explained that those “cases did not involve a situation like here, where it [was] alleged that the original purchasers were, in effect, the same as the assignee plaintiffs, with the same person signing on behalf of the purchaser-assignors and the assignees.” [30] “Instead,” said the Court, the other cases dealt “with the post-facto assignment of rights under a contract entered into between the assignee and a third party, where the intention of the assignor would be more difficult to discern.” [31] Finally, the Court held that Plaintiffs “did not disclaim reliance based on the general disclaimer included in the contract, which made no mention ‘to the particular type of fact misrepresented or undisclosed,’ which were ‘peculiarly within the seller’s knowledge.’” [32] Takeaways BH 336 Partners  offers several important lessons for parties litigating fraud claims. First, it reaffirms that standing to assert fraud may pass through assignment when the assignment language is broad, and the surrounding circumstances indicate an intent to transfer all rights. Thus, where related entities orchestrate a transaction, and the same individuals sign on both sides, a factfinder may reasonably infer an intent to assign fraud claims. Second, BH 336 Partners  underscores the difficulties overcoming the application of the statute of limitations in the face of publicly available information in fraud cases. While fraud claims may be brought within six years of accrual or two years from discovery, the two‑year discovery rule is triggered once a plaintiff is placed on inquiry notice. The AG’s 2019 complaint, sent to Plaintiffs’ counsel in 2019, was deemed sufficient to alert Plaintiffs to the possibility of fraud, even though the complaint did not directly implicate the exact Properties at issue in BH 336 Partners . Finally, BH 336 Partners  illustrates that general contractual disclaimers do not bar fraud claims where the alleged misrepresentations concern facts peculiarly within the seller’s knowledge. In BH 336 Partners , because Defendants allegedly orchestrated a concealed deregulation scheme, Plaintiffs could not have discovered the truth through ordinary diligence, and the generic disclaimer found in the purchase contracts lacked the specificity required to defeat reliance as a matter of law. ______________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1] Plaintiffs, BH 336 Partners LLC, EZ Wadsworth Associates LLC, 220 MMM Partners LLC, LIV Hudson Heights LLC, 643 Bar Partners LLC, 113 West LLC (“113 West”), 2576 Flatbush Ave Realty LLC, and Roe Gem II LLC, are entities owned and controlled by non‑party Michael Aryeh and his company, Heritage Realty LLC (“Heritage”). Defendant Sentinel Real Estate Corporation (“Sentinel”) is a real estate investment company affiliated with the other defendants, including the single‑purpose entities that owned the Properties prior to the sales (the “Seller Defendants”) and defendant Newcastle Realty Services, LLC (“Newcastle”), the Properties’ managing agent during that period. Defendant GRF, a Delaware corporation affiliated with Sentinel, served as manager for 854 West 180 Limited Partnership. [2] DLJ Mtge. Capital v. Mahadeo , 166 A.D.3d 512, 513 (1st Dept. 2018). [3] Id. , citing Deutsche Bank Trust Co. Ams. v. Vitellas , 131 A.D.3d 52, 59-60 (2d Dept. 2015). [4] SureFire Dividend Capture, LP v. Industrial & Commercial Bank of China Fin. Servs. LLC , 216 A.D.3d 584 (1st Dept. 2023), quoting Commonwealth of Pa. Pub. Sch. Employees’ Retirement Sys. V. Morgan Stanley & Co., Inc. , 25 N.Y.3d 543, 545 (2014). [5] Commonwealth of Pa. Pub. Sch. Employees’ Retirement Sys. , 25 N.Y.3d at 545. [6] Shafran v. Kule , 159 A.D. 2d 263, 264 (1st Dept. 1990); see also   Ramsarup v. Rutgers Casualty Ins. Co. , 98 A.D.3d 494, 495 (2d Dept. 2012). [7] CPLR 213(8). [8] Epiphany Community Nursery Sch. v. Levey , 171 A.D.3d 1, 7 (1st Dept. 2019). [9] Id. [10] Berman v. Holland & Knight, LLP , 156 A.D.3d 429, 430 (1st Dept. 2017) (internal quotation and citation omitted). [11] Norddeutsche Landesbank Girozentrale v. Tilton , 149 A.D.3d 152, 164 (1st Dept. 2017) (quotations omitted). [12] Id. , quoting Gutkin v. Siegal , 85 A.D. 3d 687, 688 (1st Dept. 2011). [13] Id. [14] Aozora Bank, Ltd. v. Deutsche Bank Sec. Inc. , 137 A.D.3d 685, 689 (1st Dept. 2016), citing CIGFG Assur. N. Am., Inc. v. Credit Suisse Sec. (USA) LLC , 128 A.D.3d 607, 608 (1st Dept. 2015). [15] Loreley Fin. (Jersey) No. 3 Ltd. v. Citigroup Global Mkts. Inc. , 119 A.D.3d 136, 143 (1st Dept. 2014). [16] Id. ; see also Steinhardt Group, Inc. v. Citicorp , 272 A.D.2d 255, 257 (1st Dept. 2000). [17] Slip Op. at *1. [18] Id. [19] Id. [20] Id. [21] Id. [22] Id.  (citations omitted). [23] Id. [24] Id. [25] Id. [26] Id.  (citation omitted) [27] Id. [28] Id. [29] Id.  (citing cases). [30] Id. [31] Id. [32] Id. , quoting Basis Yield Alpha Fund [Master] v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014).

By:  Jeffrey M. Haber To pierce the corporate veil under New York law, a plaintiff must satisfy a two‑part test and plead specific, non‑conclusory facts supporting each element. First, the plaintiff must show that the individual exercised complete domination and control over the corporation with respect to the specific transaction at issue. Second, even if domination exists, the plaintiff must show that the domination was used to commit a fraud, injustice, or other wrongful act that caused the plaintiff’s injury. In Borini v. Inform Studios, Inc. , 2026 N.Y. Slip Op. 00309 (1st Dept. Jan 27, 2026), which we examine in today’s article, plaintiffs did not satisfy either prong of the test. Borini  concerned a written contract between Inform Studio, Inc. (“Inform”) and plaintiffs for the renovation of plaintiffs’ cooperative apartment unit (the “Project”). [1]  The contract was executed on November 15, 2017, and required Inform to achieve substantial completion within one year of the January 12, 2018 commencement date of the Project. After work began, a burst pipe elsewhere in the building caused damage to plaintiffs’ apartment, resulting in Project delays. On August 6, 2018, the cooperative board (the “Board”) directed that the Project be stopped and denied Inform further access to the premises. The Board asserted that plaintiffs had exceeded the time period permitted under an alteration agreement between plaintiffs and the Board. Inform was not a party to that agreement. Access to the unit remained restricted for more than one year while plaintiffs and the Board litigated the issue in New York County Supreme Court. On August 22, 2019, the court issued a mandatory injunction requiring the Board to allow the Project to proceed. Following the injunction, Inform and plaintiffs discussed resuming work. Inform requested payment of its outstanding contract balance and reimbursement of certain delay-related costs, including storage fees, extended labor expenses, and subcontractor remobilization costs. The parties submitted these issues to mediation, and on November 19, 2019, executed a post‑mediation agreement (“PMA”) resolving them, including plaintiffs’ agreement to pay the identified amounts. The PMA contemplated a March 1, 2020 restart date. Before that date, New York City suspended nonessential construction due to the Covid‑19 pandemic. Inform regained access to the apartment on July 28, 2020, and continued work until achieving substantial completion on January 28, 2021. Inform thereafter performed punch-list work and closed out the Project. On October 19, 2021, plaintiffs obtained a Department of Buildings “Letter of Completion,” based on certifications submitted by their design professionals. Nearly two years later, plaintiffs commenced the action against Inform alleging breach of contract. Plaintiffs also named Patrick Eck, a licensed contractor and principal of Inform, and two additional entities in which Eck is a principle, Inform Studios Installer, Inc. (“Installer”) and Block-Studio, Inc. (“Block”). Neither Eck, Installer nor Block were signatories to the contract. Defendants Eck, Installer, and Block moved to dismiss plaintiffs’ complaint. The motion court denied the motion. The Appellate Division, First Department, unanimously reversed. The Governing Law It is well settled that a corporation only acts through its officers, directors and owners. Thus, these individuals are generally not liable for the debts incurred by the corporation. However, when an officer, director or owner abuses the corporate form to perpetrate a wrong or injustice against a third party, courts will intervene on behalf of the third party to hold the corporate actor personally liable. [2]   “Generally, a plaintiff seeking to pierce the corporate veil must show that (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.” [3]   Importantly, it is not enough for the plaintiff to demonstrate that the officer, director, or owner dominated and controlled the corporate entity. [4] The plaintiff must show that the officer, director or member used the corporation for his/her personal benefit and the corporation was nothing more than an “alter ego” or instrumentality of the officer or member. [5]  Conclusory allegations of domination and control are insufficient. [6]  So too are allegations asserted on information and belief which amount to nothing more than a restatement of legal elements. [7]  The plaintiff must demonstrate that there was a unity of interest and control between the defendant and the entity such that they are indistinguishable. While application of the doctrine depends on the facts and circumstances of each case, [8]  several factors have emerged in determining whether the plaintiff has made the requisite showing. These factors include, among others: (1) the failure to adhere to corporate formalities; (2) inadequate capitalization (that is, the corporation or LLC does not have sufficient funds to operate); (3) a commingling of assets; (4) one person or a small group of closely related people were in complete control of the corporation or LLC; and (5) use of corporate funds for personal benefit. [9]  No one factor controls the consideration. [10]   Courts recognize, however, “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.’” [11]   In addition to the foregoing factors, a plaintiff must establish a causal connection between the domination and control of the corporate entity and the injury complained of. [12] The injury complained of must lead to inequity, fraud or malfeasance. [13]  It does not include a simple breach of contract claim. [14]   The First Department’s Decision The Court held that plaintiffs failed “to allege that Eck ‘exercised complete domination’ [over the] defendant corporations with respect to the transactions at issue and that ‘such domination was used to commit a fraud or wrong against [plaintiffs] which resulted in [their] injury.’” [15]  The Court found that the “complaint contain[ed] only conclusory allegations, reciting several factors supporting veil piercing, made solely upon plaintiffs’ ‘information and belief.’” [16]   In so holding, the Court noted that “[a]lthough the record show[ed] that the corporate defendants [were] connected” because “they share[d] a common address and a common principal,” plaintiffs nevertheless “failed to show complete domination and control.” [17]  “Plaintiffs’ proffered evidence,” said the Court, “demonstrated that Eck was a licensed contractor who acted on behalf of the corporate defendants” and “‘by definition, a corporation acts through its officers and directors.’” [18]  “Thus,” concluded the Court, “allegations and proof that Eck, a principal for all the corporate defendants, dealt with plaintiffs and represented the corporations are insufficient to pierce Inform’s corporate veil.” [19]   “Moreover,” the Court held that “the complaint lack[ed] any allegations that Eck perpetrated ‘a wrong or injustice’ against plaintiffs.” [20]  “Therefore,” concluded the Court, “plaintiffs’ breach of contract claim, without more, [did] not warrant piercing the corporate veil.” [21] To underscore its holding, the Court explained that plaintiffs did “not raise[ ] claims for fraud or similar wrongdoing, nor [did] plaintiffs allege[ ] that Installer and Block were not legitimate subcontractor businesses, that they were created for the improper purpose of preventing plaintiffs from enforcing the contract, or that corporate funds were diverted to those entities to render Inform judgment proof.” [22]  “Under these circumstances,” concluded the Court, “plaintiffs failed to state a claim for breach of contract as against Installer, Block, and Eck,” and “‘the hope that something will turn up in discovery [was] an insufficient basis to deny the motion to dismiss.’” [23] Takeaway In Borini , plaintiffs sued Inform for delays and alleged defects in a renovation project. Plaintiffs also tried to sue Inform’s owner and two related companies, even though none of them signed the renovation contract. To do that, plaintiffs attempted to pierce the corporate veil. As discussed, Borini shows how difficult it is under New York law to hold a business owner personally liable for their company’s obligations. The First Department rejected plaintiffs’ claims and dismissed the case against all non‑contracting defendants. The Court held that plaintiffs failed to allege any facts showing that the owner misused the corporation or engaged in wrongdoing that would justify personal liability. Simply alleging that the owner managed the companies, shared an address among them, or communicated directly with plaintiffs was not enough. Corporations act through their officers and directors; however, that alone does not create personal exposure. Most importantly, plaintiffs alleged only a simple breach of contract, nothing more. The Court made clear that a contract dispute, without more, is not grounds for piercing the corporate veil. There must be evidence of fraud, misuse of corporate assets, or other inequitable conduct. None was present in Borini . The Court also rejected the notion that plaintiffs could proceed to discovery “just to see what turns up,” reiterating that specific allegations of wrongdoing must be made at the outset. _______________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions and not on matters handled by the firm. [1] The background facts come from the briefing on appeal. [2] TNS Holdings v. MKI Sec. Corp. , 92 N.Y.2d 335, 340 (1998) (the corporate veil may be pierced to impose liability for corporate wrongs upon persons who have “misused the corporate form for [their] personal ends.”);  Matter of Morris v. New York State Dept. of Taxation & Fin. , 82 N.Y.2d 135, 142 (1993) (the corporate veil may be pierced where the owners have “abused the privilege of doing business in the corporate form” by “perpetrat[ing] a wrong or injustice . . . such that a court in equity will intervene.”);  Tap Holdings, LLC v. Orix Fin. Corp. , 109 A.D.3d 167, 174 (1st Dept. 2013) (citation omitted). [3] Conason v. Megan Holding, LLC , 25 N.Y.3d 1, 18 (2015) (internal quotation marks omitted);  TNS Holdings , 92 N.Y.2d at 339. [4] Matter of Morris , 82 N.Y.2d at 141-142;  TNS Holdings , 92 N.Y.2d at 339. [5] TNS Holdings , 92 N.Y.2d at 339. [6] East Hampton Union Free School Dist. v. Sandpebble Bldrs., Inc. , 16 N.Y.3d 775, 776 (2011) (noting that at the pleading stage, “a plaintiff must do more than merely allege that [the defendant] engaged in improper acts or acted in ‘bad faith’ while representing the corporation”). [7] See 501 Fifth Ave. Co. LLC v. Alvona LLC. , 110 A.D.3d 494 (1st Dept. 2013); see also Cortlandt St. Recovery Corp. v. Bonderman , 226 A.D.3d 103, 104 [(1st Dept. 2024), aff’d ,  — N.Y.3d —, 2025 N.Y. Slip Op. 07078 (2025); Albstein v. Elany Contracting Corp. , 30 A.D.3d 210, 210 (1st Dept. 2006). [8] Ledy v. Wilson , 38 A.D.3d 214, 214 (1st Dept. 2007). [9] Shisgal v. Brown , 21 A.D.3d 845, 848 (1st Dept. 2005) (internal citation omitted). [10] Tap Holdings , 109 A.D.3d at 174 (citation omitted). [11] Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc. , 98 F.3d 13, 18 (2d Cir. 1996) (quoting  Wm. Wrigley Jr. Co. v. Waters , 890 F.2d 594, 601 (2d Cir. 1989) (applying New York law)).  Accord ,  Leslie, Semple & Garrison, Inc. v. Gavit & Co., Inc. , 81 A.D.2d 950, 951 (3d Dept. 1981) (recognizing that it is often difficult and impractical for small closely-held corporations to comport with the typical corporate formalities).  See also Bahar v. Schwartzreich , 204 A.D.2d 441, 443 (2d Dept. 1994);  Bullard v. Bullard , 185 A.D.2d 411, 413 (3d Dept. 1992). [12] Matter of Morris , 82 N.Y.2d at 141;  Guptill Holding Corp. v. State of N.Y. , 33 A.D.2d 362, 365 (3d Dept. 1970) (noting that an element of veil piercing is “an injury proximately caused by said wrong”) (citation omitted);  East Hampton Union Free School Dist. , 66 A.D.3d at 132 (noting that the plaintiff must articulate conduct by the individual that creates a nexus between it and the “transactions or occurrences” alleged in the complaint). [13] TNS Holdings , 92 N.Y.2d 339. [14] Brandsway Hosp., LLC. v. Delshah Cap. LLC , 216 A.D.3d 486, 487 (1st Dept. 2023 ); Kahan Jewelry Corp. v. Coin Dealer of 47th St. Inc. , 173 A.D.3d 568, 569 (1st Dept. 2019); Skanska USA Bldg. Inc. v. Atl. Yards B2 Owner, LLC , 146 A.D.3d 1, 12 (1st Dept. 2016), aff'd , 31 N.Y.3d 1002 (2018). [15] Slip Op. at *1 (quoting Matter of Morris , 82 N.Y.2d at 141). [16] Id.  (citations omitted). [17] Id.  (citing Sass v. TMT Restoration Consultants Ltd. , 100 A.D.3d 443, 443 (1st Dept. 2012); Fantazia Intl. Corp. v. CPL Furs N.Y., Inc. , 67 A.D.3d 511, 512 (1st Dept. 2009)). [18] Id.  (citing East Hampton Union Free School Dist. , 16 N.Y.3d at 776. [19] Id.  (citing J. Carey Smith 2019 Irrevocable Trust v. 11 W. 12 Realty LLC , 240 A.D.3d 432, 433 (1st Dept. 2025); Springut Law PC v. Rates Tech. Inc. , 157 A.D.3d 645, 646 (1st Dept. 2018)). [20] Id.  (citing Matter of Morris , 82 N.Y.2d at 142). [21] Id.  (citing Skanska , 146 A.D.3d at 12). [22] Id.  (citing World Wide Packaging, LLC v. Cargo Cosmetics, LLC , 193 A.D.3d 442, 442-443 (1st Dept. 2021)). [23] Id.  (citations omitted).

By: Jonathan H. Freiberger On January 28, 2026, the Appellate Division, Second Department, decided Deutsche Bank National Trust Company v. Starr , a mortgage foreclosure action that addresses many of the issues raised in our prior BLOG articles. [1]  The borrower in Starr  allegedly defaulted in her repayment obligations under a promissory note secured by a mortgage on real property. In 2009, the lender commenced a mortgage foreclosure action (the “First Action”). In 2010, the First Action was discontinued by order of the Court on the lender’s motion. The Lender commenced a new foreclosure action in 2012, in which the borrower asserted numerous affirmative defenses. In 2016, the motion court granted the lender’s motion for summary judgment and denied the borrower’s cross motion to dismiss the complaint due to the lender’s failure to comply with RPAPL 1304 and 1306 . [2]  In 2019, the Second Department modified the motion court’s order by denying the lender’s motion for summary judgment and affirming the denial of the borrower’s motion for summary judgment. Here is where things get interesting. The lender, realizing that it could not prove compliance with RPAPL 1306, brought an order to show cause by which it sought an order “dismissing the instant action, without prejudice, due to [the lender’s] inability to show compliance with RPAPL 1306 and/or on equitable grounds.” [3]  Compliance with RPAPL 1306 is a condition precedent to the commencement of a foreclosure action. Tri-State III, LLC v. Litkowski , 239 A.D.3d 911, 914 (2 nd Dep’t 2025); see also  our BLOG article “ Second Department Dismisses Two Mortgage Foreclosure Actions for Failure to Comply with RPAPL 1306 .” Typically, a motion to discontinue an action would be brought under CPLR 3217(b) , [4] which provides: Except as provided in subdivision (a), an action shall not be discontinued by a party asserting a claim except upon order of the court and upon terms and conditions, as the court deems proper. After the cause has been submitted to the court or jury to determine the facts the court may not order an action discontinued except upon the stipulation of all parties appearing in the action. Unfortunately, however, a dismissal under CPLR 3217(b) would have been the death knell of the lender’s claim because the lender would have been time-barred from commencing a new action. In some cases, CPLR 205-a(a) provides a six-month grace period to commence a new action if the old action is dismissed after the statute of limitations expires. However, the six-month grace period expressly excepts from its scope, inter alia , “voluntary dismissals”. [5] Accordingly, the borrower cross-moved under CPLR 3217(b) to discontinue the action, with prejudice, because any new action would be time-barred. The motion court denied the lender’s motion, granted the borrower’s cross-motion and dismissed the action with prejudice. The motion court found that the dismissal was warranted due to the lender’s laches, an argument not raised by any party. On the lender’s appeal, the Court affirmed on alternative (statute of limitations) grounds (because laches was not raised by any of the parties). The Court explained: Contrary to the [lender]’s contention, its motion, denominated as one to dismiss the complaint without prejudice based upon its inability to comply with RPAPL 1306 and/or on equitable grounds, was, in actuality, one pursuant to CPLR 3217(b) to discontinue the action without prejudice… [W]hen an action is terminated by a voluntary discontinuance, a plaintiff is not entitled to the benefit of the six-month grace period afforded by CPLR 205-a(a)…. Here, the [lender] attempted to avoid the undesired consequences of a voluntary discontinuance by denominating its motion as one seeking dismissal of the complaint, but, as the [lender] was moving to dismiss its own action, its motion was, in actuality, one to voluntarily discontinue the action pursuant to CPLR 3217(b)….” * * * …CPLR 3217(b) permits a voluntary discontinuance of an action by court order “upon terms and conditions, as the court deems proper.” In general, absent a showing of special circumstances, including prejudice to a substantial right of the defendant or other improper consequences, a motion for a voluntary discontinuance should be granted without prejudice. The determination of whether, and upon what terms and conditions, to grant a motion to discontinue an action pursuant to CPLR 3217(b) lies within the sound discretion of the court. Here, in opposition to the [lender]’s motion and in support of her cross-motion, the borrower made the requisite showing that she would be prejudiced by a discontinuance of the action without prejudice. The [borrower] demonstrated, prima facie, that a future action would be time-barred [for the reasons previously discussed]. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1]  This BLOG has written dozens of articles addressing numerous aspects of residential mortgage foreclosure. To find such articles, please see the BLOG tile on our website and search for any foreclosure, or other commercial litigation, issue that may be of interest you. [2]  This BLOG has written numerous articles addressing RPAPL 1304 and 1306. To find such articles, please see the BLOG  tile on our website and type “RPAPL 1304” and/or “RPAPL 1306” into the “search” box. Briefly, RPAPL 1304 requires a lender, ninety days before the commencement of a foreclosure action, specific notices. RPAPL 1306, among other things, requires lenders to file with the Superintendent of Financial Services, certain information about borrowers within three business days of sending RPAPL 1304 notices. [3]  Some of the facts stated herein were obtained from the appellate records available on the Court’s NYSCEF system. The quoted language is from the Lender’s order to show cause. [4]  CPLR 3217(a), in general, permits an action to be discontinued by serving a notice of discontinuance on all parties prior to the time a responsive pleading is served or by stipulation signed by all parties of record before the case “has been submitted to the court or jury”. [5]  CPLR 205-a is recently enacted pursuant to FAPA and applies to foreclosure actions. CPLR 205  is a similar statute and applies to other cases. This BLOG has written numerous articles on CPLR 205, CPLR 205-a and FAPA. To find such articles, please see the BLOG tile on our website and type “CPLR 205”, “CPLR 205-a” or “FAPA” into the “search” box.

By: Jeffrey M. Haber The common law doctrine of caveat emptor is a well-accepted rule of law in New York. Under the doctrine, the courts will not impose liability on a seller of property for failing to disclose information material to the transaction when the parties deal at arm’s length, [1]  unless there is some conduct on the part of the seller which constitutes active concealment. [2]  “If, however, some conduct ( i.e. , more than mere silence) on the part of the seller rises to the level of active concealment, a seller may have a duty to disclose information concerning the property.” [3]   “To maintain a cause of action to recover damages for active concealment, the plaintiff must show, in effect, that the seller or the seller’s agents thwarted the plaintiff’s efforts to fulfill his [or her] responsibilities fixed by the doctrine of caveat emptor.” [4]  “Where the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him or her of knowing, by the exercise or ordinary intelligence, the truth or the real quality of the subject of the representation, he or she must make use of those means, or he or she will not be heard to complain that he or she was induced to enter into the transaction by misrepresentations.” [5] Where the falsity of a representation could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim under the caveat emptor doctrine. [6]  The same is true under the justifiable reliance element of a fraud claim. [7]   [Eds. Note: This Blog examined the caveat emptor doctrine here and here and the impact of publicly available information on a fraud claim, in particular on the justifiable reliance element here and here .] In 98 Gates Ave. Corp. v. Bryan , 2024 N.Y. Slip Op. 01284 (2d Dept., Mar. 13, 2024) ( here ), the Appellate Division, Second Department, examined the foregoing principles. As discussed below, 98 Gates Ave.  involved an alleged breach of a contractual representation and the fraudulent concealment of defendant’s true ownership interest in certain real property (the “Premises”). Plaintiff commenced the action in February 2020, claiming fraud and breach of contract arising out of a written agreement between plaintiff and defendant for the sale of defendant’s interest in certain real property located in Brooklyn, N.Y. that had been owned by defendant’s deceased father. Plaintiff alleged that, among other things, it purchased defendant’s purported 50% interest in the Premises based upon false representations by defendant that he was the sole heir and distributee of his father, that defendant was a 50% owner of the Premises, and that his father did not have a will. According to plaintiff, after the closing, plaintiff discovered the existence of a will of defendant’s father, which had been probated in New York County prior to plaintiff’s purchase and learned that defendant had owned only a 25% interest in the Premises. Defendant moved to dismiss the complaint pursuant to CPLR 3211(a). In an order dated March 12, 2021, the motion court granted the motion. The Second Department affirmed. The Court held that plaintiff failed to allege a misrepresentation of fact – that is, defendant’s father did not have a will. [8]  In so holding, the Court found that “evidence submitted by the defendant in support of his motion established that the will at issue was probated and a matter of public record.” [9]  As such, plaintiff could not have been misled by defendant’s representation. [10]   Moreover, the Court held that defendant’s failure to disclose the will to plaintiff did not constitute active concealment because the information that was allegedly withheld was not peculiarly within defendant’s knowledge or unlikely to be discovered by a prudent person exercising due care with respect to the subject transaction. [11]  In other words, plaintiff failed to allege that defendant’s alleged concealment of information thwarted plaintiff’s ability to conduct its own investigation into the existence of a will or that it justifiably relied on the information allegedly concealed: “Since the will, which had been probated, was a matter of public record and not exclusively within the knowledge of the defendant, any failure by the defendant to disclose the will to the plaintiff did not constitute active concealment and was thus not actionable as fraud.” [12]   Takeaway   Under the doctrine of caveat emptor, the purchaser of real property has a duty to investigate the truth or the real quality of the subject of the representation and satisfy himself/herself as to the bona fides the transaction. The same is true under the justifiable reliance element of a fraud claim. The courts in New York will not hesitate to dismiss a fraud claim by a purchaser of real property where information alleged to have been concealed could have been reasonably discovered through an inspection or another form of due diligence. Since the seller has no duty to disclose, the seller will be liable only when he/she thwarts or prevents the purchaser from discovering the truth about the transaction through the exercise of due diligence. In 98 Gates Ave. plaintiff was unable to satisfy that pleading burden. _____________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1] It is important to note that the caveat emptor doctrine applies not only to concealed conditions but also to claims relating to the ownership of property and other tangible attributes of the property. E.g. , Clearmont Prop., LLC v. Eisner , 58 A.D.3d 1052, 1056 (3d Dept. 2009) (misrepresentations concerning legal ownership of the subject property); McDonald v. O’Connor , 189 A.D.3d 1208, 1211 (2d Dept. 2020) (misrepresentation concerning whether the property at issue was subject to landmark classification); Mosca v. Kiner , 277 A.D.2d 937, 938 (4th Dept. 2000) (misrepresentation concerning the existence of deeded lake rights). [2] Simone v. Homecheck Real Estate Servs., Inc. , 42 A.D.3d 518, 520 (2d Dept. 2007); Razdolskaya v. Lyubarsky , 160 A.D.3d 994, 996 (2d Dept. 2018); Radushinsky v. Itskovich , 127 A.D.3d 838, 839 (2d Dept. 2015). [3] Hecker v. Paschke , 133 A.D.3d 713, 716 (2d Dept. 2015) (internal quotation marks omitted); see also   Daly v. Kochanowicz , 67 A.D.3d 78, 92 (2d Dept. 2009). [4] Jablonski v. Rapalje , 14 A.D.3d 484, 485 (2d Dept. 2005); Razdolskaya , 160 A.D.3d at 996. [5]   Rojas v. Paine , 101 A.D.3d 843, 845 (2d Dept. 2012). [6] E.g. , Clearmont Prop. , 58 A.D.3d at 1056 (ownership records were a matter of public record); McDonald , 189 A.D.3d at 1211 (property’s landmark status was a matter of public record); Mosca , 277 A.D.2d at 938 (the existence of deeded lake rights was a matter of public record.); Eisenthal v. Wittlock , 198 A.D.2d 395, 396 (2d Dept. 1993) (misrepresentations concerning the boundaries of the premises). [7] E.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 195 (1st Dept. 2012); see also Churchill Fin. Cayman, Ltd. v. BNP Paribas , 95 A.D.3d 614 (1st Dept. 2012). [8] Slip Op. at *2. [9] Id. [10] Id.  (citing DeMartino v. Abrams, Fensterman, Fensterman, Eisman, Formato, Ferrara & Wolf, LLP , 189 A.D.3d 774, 775 (2d Dept. 2020); Glazer v. LoPreste , 278 A.D.2d 198, 199 (2d Dept. 2000)). [11] Id. [12] Id.  (citing Chapman v. Jacobs , 197 A.D.3d 851, 851-852 (4th Dept. 2021); Rojas , 101 A.D.3d at 845).

By: Jeffrey M. Haber As readers of this Blog know, one of the elements of a fraudulent inducement claim is “justifiable reliance.” The New York Court of Appeals has emphasized the importance of the justifiable reliance element, noting that it is a “fundamental precept” of a fraud claim and is critical to the success of such a claim. [1] Determining whether a plaintiff justifiably relied on a misrepresentation or omission, however, is “always nettlesome” because it is so fact intensive. [2]  Recognizing this difficulty, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” [3] Where the falsity of a representation could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim because of the failure to satisfy the justifiable reliance element. [4] The same is true with regard to documents that a party signs, such as contracts, offering plans, and private placement memoranda. “A party who signs a document without any valid excuse for not having read it is ‘conclusively bound’ by its terms.” [5] When that happens, the plaintiff’s failure to read the document prevents him/her from establishing justifiable reliance. [6] In Dille v. Zoelle LLC , 2023 N.Y. Slip Op. 04923 (1st Dept. Oct. 3, 2023) ( here ), the Appellate Division, First Department examined the foregoing principles in affirming the dismissal of a complaint alleging fraudulent inducement. Dille  involved the purchase a condominium unit. Plaintiff entered into a contract of sale to purchase the unit for $19,000,000 from Zoelle. Plaintiff alleged that she agreed to purchase the unit in reliance upon extra-contractual representations made by Zoelle that the building had a full-time doorman. As noted by the Court, “the building has a doorman physically present during the daytime hours of each day, and a virtual doorman for the remaining hours that a doorman is not physically present on site.” [7] Plaintiff alleged that a full-time doorman, who was physically present, was material to her decision to enter into the contract to purchase the unit. As a consequence of the alleged misrepresentations, plaintiff refused to close the transaction, declaring the contract null and void and seeking a return of the $1,900,000 down payment that was made under the contract of sale. Zoelle moved to dismiss the complaint pursuant to CPLR §§ 3211(a)(1) [8] and (7). Zoelle also sought an order directing that the escrowee immediately release the contract deposit of $1.9 million. [9] Among other things, Zoelle argued that the existence of a virtual doorman could have been discovered by plaintiff by reading the condominium offering plan, which was available to plaintiff and which provided that there was a virtual doorman during certain hours of operation. The motion court granted the motion ( here ). The motion court found “that [the] condominium offering plan, which was undisputedly available to the plaintiff, establishe[d] a complete defense as to plaintiff’s fraud claims.” The motion court noted that “there [was] no requirement in the contract [of sale] that the subject premises have a doorman, let alone a full-time doorman.” As such, the motion court held that the plaintiff failed to satisfy the justifiable reliance element of her fraudulent inducement claim. On appeal, as noted, the First Department affirmed. The Court found that “[t]he documentary evidence utterly refutes plaintiff’s allegations that she justifiably relied upon defendants’ alleged misrepresentations regarding the building’s doorman services.” [10] The Court explained that “[t]he condominium’s offering plan outlined the physical doorman hours versus the virtual doorman hours, and the sale contract provides that the ‘Purchaser has examined or has waived the examination of … the offering plan, all amendments to the offering plan, the Declaration, the By-Laws and the House Rules.’” [11] The Court also noted that the contract of sale provided “that the purchaser has inspected or waived inspection of the premises, and that the seller is not bound by any representations as to the premises made by its employees or agents unless such representations were specifically made part of the contract of sale.” [12] The contract of sale “did not,” said the Court, “contain any provision addressing expected doorman services.” The Court “reject[ed] plaintiff’s claims … that defendants’ representatives concealed the existence of a virtual doorman during plaintiff’s pre-contract inspections of the premises, and that the virtual doorman service was within defendants’ peculiar knowledge.” [13] “Due diligence by plaintiff,” said the Court, “would have discovered the doorman arrangement at the building, particularly given that the information was set forth in the condominium offering plan and given that under the terms of the contract, plaintiff bore the risk of failing to review that document.” [14] Finally, the Court noted that plaintiff did not allege that she “made a specific inquiry into the doorman services during [her] inspection of the premises or at any time before entering into the contract.” [15] [This Blog examined a fact scenario similar to Dille   here .] Takeaway To demonstrate reliance, a plaintiff must demonstrate that he/she relied upon the alleged misrepresentation to his/her detriment. Such reliance must be “justifiable” and “reasonable.” [16] Thus, as noted above, where a party has the means to discover “the true nature of the transaction by the exercise of ordinary intelligence and fails to make use of those means, he cannot claim justifiable reliance on defendant’s misrepresentations.” [17] In Dille , plaintiff could not demonstrate reasonable reliance on the alleged misrepresentations about the existence of a full-time doorman because, among other things, she failed to read the offering plan. As noted by the Court, the disclosures in the offering plan, and the terms of the contract, made it unreasonable to rely on any statement concerning the existence of a full-time doorman. The law is settled that “a party will not be excused from his failure to read and understand the contents of a [relevant document].” [18] For this reason, “the signer of a written agreement is conclusively bound by its terms unless there is a showing of fraud, duress or some other wrongful act on the part of any party to the contract.” [19] In Dille , there was no evidence of such conduct. __________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1] Ambac Assurance Corp. v. Countrywide Home Loans, Inc. , 31 N.Y.3d 569 (2018). [2] DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). [3] Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 322 (1959). [4] E.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 195 (1st Dept. 2012); see also Churchill Fin. Cayman, Ltd. v. BNP Paribas , 95 A.D.3d 614 (1st Dept. 2012). [5] Ferrarella v. Godt , 131 A.D.3d 563, 567-568 (2d Dept. 2015) (quoting Gillman v. Chase Manhattan Bank , 73 N.Y.2d 1, 11 (1988)); see also Sorenson v. Bridge Capital Corp. , 52 A.D.3d 265, 266 (1st Dept. 2008). [6] Stortini v. Pollis , 138 A.D.3d 977, 978 (2d Dept. 2016); Sorenson , 52 A.D.3d at 266. [7] Slip Op. at *1. [8] A motion to dismiss pursuant to CPLR § 3211(a)(1) ( i.e. , that the action is barred by documentary evidence) may be granted only where the documentary evidence utterly refutes a plaintiff’s factual allegations, and conclusively establishes a defense as a matter of law. See Goshen v. Mutual Life Ins. Co. of New York , 98 N.Y.2d 314, 327 (2002). Judicial records, as well as documents reflecting out-of-court transactions, such as mortgages, deeds, contracts, and any other papers, the contents of which are “essentially undeniable,” qualify as “documentary evidence” in the proper case. Fontanetta v. Doe , 73 A.D.3d 78 (2d Dept. 2010). This Blog examined CPLR § 3211(a)(1) here and here , for example. [9] The other defendants also moved to dismiss the complaint. [10] Slip Op. at *1 (citations omitted). [11] Id. [12] Id.  This Blog previously examined “no reliance” clauses and “disclaimers”, such as the one refenced above, here , here , and here . [13] Id. [14] Id.  (citations omitted). [15] Id.  at 1- 2. [16] Daly v. Kochanowicz , 67 A.D.3d 78, 91 (2d Dept. 2009). [17] Rosenblum v. Glogoff , 96 A.D.3d 514, 515 (1st Dept. 2012). [18] Johnson v. Thruway Speedways , 63 AD2d 204, 205 (3d Dept. 1978) (citation omitted). [19] Columbus Trust Co. v. Campolo , 110 A.D.2d 616, 617, aff’d , 66 N.Y.2d 701 (1985).

By: Jeffrey M. Haber As readers of this Blog know, we have often written about the justifiable reliance element of a fraud claim. Considered by the courts to be nettlesome, [1] justifiable reliance is often the most difficult element for plaintiffs to satisfy. That was the case in FPG Maiden Lane, LLC v. Bank Leumi USA , 2022 N.Y. Slip Op. 07150 (1st Dept. Dec. 15, 2022) ( here ). FPG  concerned construction loans (the “Loan”) for FPG’s unfinished residential skyscraper in lower Manhattan (the “Property”). After negotiating with various lenders, FPG agreed to a debt financing arrangement in 2015 with Bank Leumi USA (“BLUSA”). On May 26, 2016, FPG’s debt financing arrangement expanded to include Harel-Maiden Lane General Partnership (together, the “Lenders”). The relevant agreements with the Lenders are a Project Loan Agreement dated May 26, 2016, as amended (the “Project Loan Agreement”) and a Building Loan Agreement dated May 26, 2016, as amended (the “Building Loan Agreement” and collectively with the Project Loan Agreement, the “2016 Loan Agreements”). The 2016 Loan Agreements provided that FPG could make requests for advances to cover the costs of construction and development of the Property (“Request for Advances”). Upon delivery of a Request for Advances, the Lenders were obligated to “fund the Request for Advance[s] within ten (10) business days,” subject to certain exceptions. One such exception was the existence of an Event of Default enumerated in Section 4.1 of the Loan Agreements. An Event of Default includes “if [FPG] fails to comply with ... the terms, covenants or conditions of” the 2016 Loan Agreements. As originally drafted, the 2016 Loan Agreements provided for a completion date for the Property of April 3, 2018. Due to problems in construction (including the original construction manager’s failure to perform), the Property was not completed on the anticipated timetable. FPG and the Lenders agreed to modify the terms of the 2016 Loan Agreements to account for the delays. In September 2018 and in June 2019, FPG invested, in total, more than $22 million in additional equity pursuant to further amendments to the 2016 Loan Agreements. The completion date for the Property was extended to April 1, 2020. By Fall 2019, it was apparent that the construction of the Property would not be completed by April 1, 2020. Plaintiff alleged that the delays were exacerbated by the Lenders’ delay of Loan draw requests. The parties agreed to engage in another renegotiation of the Loans, which culminated in the execution of the Third Amendments to the Loan Agreements on March 13, 2020. Plaintiffs alleged that in the renegotiation of the Loans, the Lenders had two material requests. First, the Lenders wanted FPG to infuse an additional $20 million in cash into the Property to cover budget overruns. Second, the Lenders demanded that FPG obtain a Temporary Certificate of Occupancy (“TCO”) by a negotiated deadline from the New York City Department of Buildings. A TCO indicates “that the property is safe for occupancy, but ... has an expiration date.” The Lenders proposed May 31, 2020, as the deadline for obtaining the TCO, with a 30-day grace period before an Event of Default could be triggered. This round of negotiations continued into 2020. Plaintiffs alleged that the Lenders continued to point to the unbalanced budget as a reason to refuse funding any Request for Advances. FPG alleged that it became increasingly concerned it would run out of funds to pay the new construction manager and that all parties understood any delay in construction would adversely affect plaintiffs’ ability to meet the May 31, 2020 TCO deadline that the Lenders were proposing. FPG alleged that it was vocal about its concerns and repeatedly raised them from January 2020 through March 2020. FPG alleged that the Lenders made numerous false promises upon which FPG reasonably relied during negotiations in early 2020. Specifically, FPG alleged that over several telephone conversations in late February and early March 2020, BLUSA told plaintiffs that the May 31, 2020 TCO deadline was merely a formality, and that the banks would be flexible on these and other deadlines in the implementation of the contracts, just as the banks had been in the past with FPG. Among other promises, BLUSA allegedly assured plaintiffs that, if FPG agreed to provide the additional $20 million in equity for the Property, the Lenders (as they had been in the past) would be flexible and would not declare a default based upon the TCO deadline. FPG agreed to the third amendments to the 2016 Loan Agreements on March 13, 2020 (the “Third Amendments”), which included the new May 31, 2020 TCO deadline. The Third Amendments extended the completion date for the Property from April 1, 2020 to November 30, 2020 and the maturity date of the Loan from April 1, 2020 to December 31, 2020. The Third Amendments also altered the way the parties would handle budget overruns. Under as-amended Section 8.4 of the 2016 Loan Agreements, the Lenders agreed to fund the cost for any line item in the Property budget even if there were cost overruns on another line item or on the budget as a whole. FPG invested an additional $20 million in the project. FPG alleged that the Lenders were then supposed to, but failed to, fund the Requests for Advances. FPG maintained that, in June 2020, the Lenders manufactured an excuse to claim that an Event of Default existed as of June 2020. As a consequence, the Lenders claimed that they did not have to fund any outstanding Requests for Advances because FPG purportedly owed the Lenders money in unpaid interest on the Loan as of June 1, 2020. FPG alleged that more than twice this amount was available to the Lenders under the loan budget to cover the unpaid interest. Nevertheless, although FPG disputed that there was any unpaid interest, FPG wired money to the Lenders, which the latter returned the next day. Finally, FPG alleged that on June 27, 2020, BLUSA admitted to plaintiffs during a telephone call that the Lenders never had any intention of funding any requests drawn from the Loan if the budget was out of balance. BLUSA allegedly further stated that the Lenders would not fund any requests drawn from the Loan unless FPG put up additional collateral and brought the budget into balance. BLUSA allegedly stated that it did not care, and never had cared, what the Third Amendments said. Plaintiffs brought suit against defendants, asserting claims for, among others, fraud, negligent misrepresentation and breach of contract. In the fraud causes of action, FPG alleged that the Lenders fraudulently induced it to enter into the Third Amendments to the 2016 Loan Agreements by misrepresenting that the Lenders would be flexible about the TCO deadline and fund Requests for Advances if the budget for the Property that FPG was constructing was out of balance. In the breach of contract causes of action, FPG alleged that it submitted Requests for Advances before June 2020, i.e. , before the TCO default, and defendants failed to honor those requests. Defendants moved to dismiss. The motion court denied the motion. Plaintiffs appealed. The Appellate Division, First Department modified the motion court’s order to reverse the denial of the motion to dismiss the fraud claims; the Court otherwise affirmed the motion court’s order. With regard to the fraud causes of action, the Court held that FPG failed state a claim upon which relief could be granted. Through case citation, the Court held that FPG could not satisfy the justifiable reliance element of a fraud claim because the alleged false promises were “flatly contradicted by section 17 of the [T]hird [A]mendments.” [2] The Court further held that “[t]o the extent the fraud claim is based on a promise that the [L]enders would fund [R]equests for [A]dvances if the budget for the building was out of balance, that promise is reflected in section 8.4 of the [T]hird [A]mendments”. [3] “Thus,” concluded the Court, “it is duplicative of the breach of contract claim”. [4] With regard to the negligent misrepresentation cause of action, the Court held that “because the borrower-lender relationship between the parties here does not constitute the special relationship required to support the claim”, the claim failed. [5] Finally, the Court held that the complaint stated claims for breach of contract. The Court explained that “the complaint alleges that FPG submitted requests for advances before June 2020, i.e. , before the TCO default.” [6] “Furthermore,” said the Court, defendants could not rely on their alleged creation of an event of default to defeat the breach of contract claim: “if an event of default was created by the [L]enders’ refusal to lend, they cannot rely on it to their benefit”. [7] Takeaway As a general matter, a sophisticated party “cannot justifiably rely on oral representations when it thereafter enters into a contract containing terms that directly contradict those oral representations.” [8] As discussed, FPG executed the Third Amendments relying on the Lenders’ alleged oral promises to refrain from exercising their contractual rights. Those promises, however, were contradicted by the terms of the amendments which FPG negotiated and agreed to. The Court in FPG  found that those written provisions prevented FPG from satisfying the justifiable reliance element of its fraud-based claims. In modifying the motion court’s order, the Court reaffirmed New York law, which prevents a party that fails to satisfy its contractual obligations from escaping the consequences of its actions by claiming the defendant promised not to enforce the terms of the agreement between them. As the FPG  Court observed, a plaintiff, especially a sophisticated one, cannot satisfy the justifiable reliance element of a fraud claim, when the oral representations claimed to be false are negated by the terms of the agreement between the parties. _____________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1]   DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). [2]  Slip Op. at *1 (citing, Perrotti v. Becker, Glynn, Melamed & Muffly LLP , 82 A.D.3d 495, 498 (1st Dept. 2011) (“[A] party … cannot be said to have justifiably relied on a representation when that very representation is negated by the terms of a contract executed by the allegedly defrauded party”); Glenfed Fin. Corp., Commercial Fin. Div. v. Aeronautics & Astronautics Servs. , 181 A.D.2d 575, 576 (1st Dept. 1992), lv. dismissed , 80 N.Y.2d 893 (1992)). [3]   Id. [4]   Id.  (citing, New York City Waterfront Dev. Fund II, LLC v. Pier A Battery Park Assoc., LLC , 206 A.D.3d 565, 566 (1st Dept. 2022); ESBE Holdings, Inc. v. Vanquish Acquisition Partners, LLC , 50 A.D.3d 397, 398 (1st Dept. 2008)). [5]   Id.  (citing, Korea First Bank of N.Y. v. Noah Enters., Ltd. , 12 A.D.3d 321, 323 (1st Dept. 2004), lv. denied , 4 N.Y.3d 710 (2005) ; New York City Waterfront , 206 A.D.3d at 567)). [6]   Id.  at 1- 2. [7]   Id.  at *2 (citing, VXI Lux Holdco S.A.R.L. v. SIC Holdings, LLC , 171 A.D.3d 189, 195 (1st Dept. 2019)). [8]   Perrotti , 82 A.D.3d at 498.

By Jeffrey M. Haber As readers of this Blog know, to recover damages for fraud, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” [1]  When a plaintiff contends that he or she was fraudulently induced to take some action, such as enter into a contract, the plaintiff must allege “a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” [2]   The element that most often spells failure for a plaintiff is reasonable reliance – that is, reliance on the alleged misrepresentation or omission. The cases are brimming with dismissals on this ground. In prior articles, we have discussed the impact a disclaimer clause in a contract can have on a fraud claim.  See ,  e,g. ,  here . As we have noted, disclaimer clauses often are worded as “no reliance” clauses. In a such a clause, the parties represent that they are not relying on any extra-contractual representations. Today, we examine Kim v. XP Securities, LLC , a case in which the foregoing principles were present. Kim v. XP Securities, LLC [Ed. Note: the background facts have been taken from the motion court’s decision and the briefs submitted by the parties in connection with the subject motion to dismiss.] Kim  involved an employment dispute. Plaintiff is a finance professional and veteran of the foreign exchange industry (“Forex”). Prior to joining defendant, plaintiff led the Asia Forex desk for the Americas at a global financial firm. There, he conceived of a tool, called the “Magic Box”, to facilitate Forex trading. While considering an offer to join another firm, plaintiff alleged that he was fraudulently induced to turn down that offer and instead work for defendant based on representations about the state of defendant’s technology that was necessary to develop plaintiff’s trading platform. According to plaintiff, based upon the false representations, the parties executed an employment agreement (the “Agreement”). Among other provisions, the Agreement contained a merger provision, stating generally that the agreement superseded all prior agreements, as well as a “no representations” clause, stating: “[Plaintiff] has not executed this Agreement in reliance upon any promise, representation, statement or warranty whatsoever, express or implied, which is not expressly contained in this Agreement.” Defendant moved to dismiss. The motion court granted the motion as to the fraudulent inducement claim. First, the motion court held that the “no representations” clause mandated dismissal of the fraudulent inducement claim: plaintiff’s “disclaimer of reliance on pre-contractual representations … precludes his fraud claim ( see   WT Holdings Inc. v. Argonaut Group, Inc. , 127 AD3d 544 [1st Dept 2015]).” [Ed. Note: In New York, a party’s disclaimer of reliance cannot preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. [3]  “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.” [4] ] Second, the motion court held that plaintiff failed to satisfy the justifiable reliance element of the claim. The motion court noted that plaintiff “did not attempt to verify any of the general claims made about the status of the platform.” “For instance,” said the court, “when he visited Sao Paulo, plaintiff could have stayed for another day or two to conduct due diligence rather than simply accepting the explanation that XPI’s employees were busy at the convention.” “Had plaintiff pressed for more details and insisted on actually verifying the state of the technology before entering into the Agreement, he could have discovered its true status,” said the motion court. As a sophisticated party, his “lack of due diligence render[ed] his reliance unjustifiable as a matter of law,” concluded the motion court. [Ed. Note: New York courts have found that “[w]here a party has means available to him for discovering, ‘by the exercise of ordinary intelligence,’ the true nature of a transaction he is about to enter into, ‘he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”’ [5]  “Where, however, a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred.” [6]  “In a fraud action, whether a party could have ascertained the facts with reasonable diligence so as to negate justifiable reliance is a factual question.” [7]   Sophisticated parties “must show they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time.” [8]  A sophisticated party satisfies this requirement by obtaining a prophylactic provision in a contract or other writing or exercising due diligence to make an additional inquiry into the representation. [9] Whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis. [10]  As the Court of Appeals observed, “[n]o two cases are alike ….” [11] ] On appeal, the Appellate Division, First Department affirmed. Kim v. XP Sec., LLC , 2021 N.Y. Slip Op. 06764 (1st Dept. Dec. 2, 2021) ( here ).   The Court agreed with the motion court that the disclaimer (or “no representations” clause) precluded recovery for fraudulent inducement: Plaintiff’s employment agreement contained a merger provision stating generally that the agreement superseded all prior agreements, as well as a “no representations” clause stating specifically, “[Plaintiff] has not executed this Agreement in reliance upon any promise, representation, statement or warranty whatsoever, express or implied, which is not expressly contained in this Agreement.” In light of these provisions, the motion court properly dismissed the fraudulent inducement claim ….” [12] The Court also agreed with the motion court that plaintiff failed to plead justifiable reliance: “plaintiff's pleadings do not demonstrate that he exercised ordinary diligence in investigating defendant’s representations, despite their alleged importance to the employment agreement.” [13] Takeaway A plaintiff suing for fraud (and particularly a sophisticated plaintiff, such as the plaintiff in Kim ) must establish that it “has taken reasonable steps to protect itself against deception.” [14] Typically, this means that a plaintiff claiming to have been fraudulently induced to purchase a business, or to lend to a business, must allege that, before entering into the transaction, it availed itself of the opportunity to verify the seller’s or borrower’s representations through an examination of the entity’s books and records. As shown in Kim , plaintiff failed to do so. Kim  also shows the power of the disclaimer clause. A contractual disclaimer that is clear and directly addresses the subject of the alleged misrepresentation will preclude a fraudulent inducement claim. ______________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1]   Lama Holding Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996); see also Genger v. Genger , 152 A.D.3d 444, 445 (1st Dept. 2017). [2]   GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010). [3]   Basis Yield Alpha Fund [Master] v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch , 81 A.D.3d 419 (1st Dept. 2011). [4]   Basis Yield , 115 A.D.3d at 137. [5]   88 Blue Corp. v. Reiss Plaza Assoc. , 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted). [6]   DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). [7]   Country World, Inc. v. Imperial Frozen Foods Co. , 186 A.D.2d 781, 782 (2d Dept. 1992). [8]   VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). [9]   ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015); DDJ , 15 N.Y.3d at 154 (holding that in contract negotiations between sophisticated parties, justifiable reliance element sufficiently alleged where plaintiff “has gone to the trouble” of insisting on warranties in the written agreement that certain facts were true). [10]   DDJ , 15 N.Y.3d at 155 (internal quotation marks omitted). [11]   Id. [12]  Slip Op. at *1. [13]   Id. [14]   DDJ , 15 N.Y.3d at 154.

By: Jeffrey M. Haber On January 23, 2020, the Appellate Division, First Department, unanimously affirmed the dismissal of fraud-based claims alleged in connection with the purchase of a promissory note that memorialized a $1.5 million loan. Cestone v. Johnson , 2020 N.Y. Slip Op. 00495 (1st Dept. Jan. 23, 2020) ( here ). The decision, though short and concise, addresses a couple of principles this Blog frequently examines: whether contractual disclaimers can preclude a fraudulent inducement claim; and whether the plaintiff justifiably relied on the oral representations supporting the fraudulent inducement claim. Disclaimer Clauses To state a claim for fraudulent inducement, “there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). See also Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439–41 (1st Dept. 2015); MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 87 A.D.3d 287, 294 (1st Dept. 2011). In New York, a party’s disclaimer of reliance cannot preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. Basis Yield Alpha Fund [Master] v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v Harris , 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch , 81 A.D.3d 419 (1st Dept. 2011). “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.” Basis Yield , 115 A.D.3d at 137. Justifiable Reliance New York courts have found that “[w]here a party has means available to him for discovering, ‘by the exercise of ordinary intelligence,’ the true nature of a transaction he is about to enter into, ‘he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”’ 88 Blue Corp. v. Reiss Plaza Assoc. , 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted). “Where, however, a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred.” DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). “In a fraud action, whether a party could have ascertained the facts with reasonable diligence so as to negate justifiable reliance is a factual question.” Country World, Inc. v. Imperial Frozen Foods Co. , 186 A.D.2d 781, 782 (2d Dept. 1992). Sophisticated parties “must show they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time.” VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). A sophisticated party satisfies this requirement by obtaining a prophylactic provision in a contract or other writing or exercising due diligence to make an additional inquiry into the representation . ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015); DDJ , 15 N.Y.3d at 154 (holding that in contract negotiations between sophisticated parties, justifiable reliance element sufficiently alleged where plaintiff “has gone to the trouble” of insisting on warranties in the written agreement that certain facts were true). Cestone v. Johnson Cestone  arose from a $1.5 million loan made by defendant, Holly Bartlett Johnson (“Holly”), to nonparty Worldview Entertainment Holdings Inc. (“Worldview”). Plaintiff, Maria Cestone (“Cestone”), claimed that Holly and her sister, Sarah Johnson (“Sarah”), fraudulently induced her into purchasing the note that memorialized the loan, by failing to disclose that Sarah, a guarantor on the loan, had already repaid Holly the loan prior to the purchase. Defendants argued that Cestone’s fraudulent inducement claims should be dismissed because she agreed in clear and unambiguous terms that she was not relying on any representations other than those set forth in the note agreement. In this regard, under Paragraph 6(b) of the agreement, Celeste represented that she (1) had received and reviewed copies of the note, (2) was a sophisticated party, (3) was able to bear the economic risk associated with the purchase of the note, (4) had adequate information concerning the business and financial condition of Worldview and any other obligor or guarantor under the note necessary to make an informed decision regarding the purchase of the note, (5) had knowledge and experience so as to be aware of the risks and uncertainties inherent in the purchase of the rights and assumption of liabilities contemplated in the agreement, and (6) had independently and without reliance upon defendants, or any agent or representative of defendants, made her own analysis and decision to enter into the note agreement. The motion court granted defendants’ motion and dismissed Cestone’s fraudulent inducement claims.  The Appellate Division, First Department affirmed. The Court held that the motion court “properly dismissed the fraud-based claims based on paragraph 6(b) of the note purchase agreement,” pursuant to which Cestone “specifically disclaimed reliance on the alleged misrepresentation or omission that [she] now claims had defrauded her.” Slip Op. at *1 (citing Danaan Realty , 5 N.Y.2d at 320-321). The Court explained that “[u]nder that provision, plaintiff represented that she had ‘adequate information concerning the business and financial condition of Borrower [Worldview] and . . . guarantor under the Note’ and ‘independently and without reliance upon Seller . . . made her own analysis and decision to enter into this Agreement.’” Id . The Court noted that in addition to Paragraph 6(b), Cestone “also disclaimed reliance on ‘any documents or other information regarding the credit, affairs, financial condition or business of or any other matter concerning the Borrower or any obligor.’” Such disclaimers sufficed to preclude Cestone’s fraud-based claims. The Court also held that “the alleged misrepresentation or omission regarding Sarah’s repayment of the loan was not ‘peculiarly within’ defendants’ knowledge.” Id . (citing Loreley Fin. [Jersey] No. 3 Ltd. v. Citigroup Global Mkts. Inc. , 119 A.D.3d 136, 143 (1st Dept. 2014); Basis Yield , 115 A.D.3d at 137). The Court explained that Cestone, “who was admittedly the sole director of Worldview, as well as the chair of Worldview’s sole shareholder, Worldview Entertainment Holdings LLC, occupied a position that afforded her reasonable access to information about Worldview’s finances, including whether the loan had been repaid by Sarah as the guarantor, before plaintiff purchased the note.” As such, she could not “argue justifiable reliance on defendants’ misrepresentation or omission where she had the means available to ascertain the status of the loan.” ACA Fin. Guar. , 25 N.Y.3d at 1044; HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-195 (1st Dept. 2012). Takeaway Although brief in length, Cestone  is notable for its reiteration of the law concerning contractual disclaimers and fraudulent inducement claims. As the Court observed, contractual disclaimers will not preclude a fraudulent inducement claim unless the disclaimers specifically address the subject of the alleged misrepresentation.  In Cestone , the disclaimers relied upon by Cestone were specific enough to preclude the fraudulent inducement claims. Cestone  also reinforces the principle that the courts will not sustain a fraud claim in which the plaintiff fails to avail himself/herself/itself of the means to discover the truth or falsity of the representations and omissions made by the alleged wrongdoer. Although the determination of whether reliance is justified is a fact sensitive one, the courts are clear that failing to conduct any investigation into the veracity of a representation or omission when the aggrieved party has the ability to do so, suffices to dismiss a fraud claim. This is especially so when the plaintiff is a sophisticated party. Cestone  is the most recent example coming out of the First Department to underscore these principles.

By: Jonathan H. Freiberger A basic tenet of contract interpretation is that “agreements are construed in accord with the parties’ intent.” Greenfield v. Philles Records, Inc. , 98 N.Y.2d 562, 569 (2002) (citations omitted); see also SM Owner, LLC v. Envoy Towers Co., L.P. , 245 A.D.3d 973 (2 nd  Dept. 2026). It is equally fundamental that the “best evidence of what parties to a written agreement intend is what they say in their writing.” Greenfield , 98 N.Y.2d at 569 ( quoting Slatt v. Slatt , 64 N.Y.2d 966, 967 (1985); South Shore Eye Care, LLP v. Lane , 242 A.D.3d 792, 793 (2 nd  Dept. 2025). Clear and unambiguous written agreements, therefore, “must be enforced according to the plain meaning of its terms.” South Shore , 242 A.D.3d at 794 (citations and internal quotation marks omitted); see also Greenfield , 98 N.Y.2d at 569. However, implied in every contract is a covenant of good faith and fair dealing in the course of performance. Singh v. City of New York , 40 N.Y.3d 138, 145 (2023). The covenant ensures that a party to a contract will do nothing to “destroy[] or injur[e] the right of the other party to receive the fruits of the contract.” Mahope Family Ltd. P’ship v. Avgush , 220 A.D.3d 850 (2 nd  Dept. 2023) (citations and internal quotation marks omitted). Thus, the duty of good faith and fair dealing requires “that the parties to perform under the contract in a reasonable way.” Cordero v. Transamerica Annuity Service Corp . , 39 N.Y.3d 399, 409 (2023) (citation and internal quotation marks omitted). In this regard, where “the contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally in exercising that discretion.” Id . (citation and internal quotation marks omitted). Such implied obligations are “in aid and furtherance of other terms of the agreement … [and, therefore, n]o obligation can be implied … which would be inconsistent with other terms of the contractual relationship.” Murphy v. American Home Products Corp. , 58 N.Y.2d 293, 304 (1983); see also Cherry Operating LLC v. CPS Fee Co. LLC . , 216 A.D.3d 544, 545 (1st Dept. 2023). The covenant may be breached when a party “exercises a contractual right as part of a scheme to deprive the other party of the benefit of the bargain.” Gutt v. North American Partners in Anesthesia, LLP , 237 A.D.3d 1063, 2066 (2nd Dept. 2025) (citation, internal quotation marks and brackets omitted). The Gutt Court also noted that “[t]echnically complying with the terms of a contract while depriving the plaintiff of the benefit of the bargain may constitute a breach of the covenant of good faith and fair dealing.” Id . (citation and internal quotation marks omitted). For example, 6243 Jericho Realty Corp. v. Autozone, Inc. , 71 A.D.3d 983 (2 nd  Dept. 2010), involved a lease dispute between a landlord and potential tenant. Under the lease, the tenant had a period of time to obtain certain municipal approvals; absent which the tenant could unilaterally cancel the contract. Having not received the contemplated approvals, the tenant, as permitted under the lease, provided notice of cancellation to the landlord. After trial, the tenant was found to have breached the covenant by failing to make a good faith effort to obtain the approvals. The ruling was affirmed by the Second Department. Against this backdrop, we discuss Zormati v. Citibank ,  a case decided on March 25, 2026, by the Appellate Division, Second Department. The plaintiff in Zormati (“Borrower”) borrowed funds from Citibank and secured the repayment obligation with a mortgage on real property. Subsequently, US Bank recorded a mortgage on the same property and, thereafter commenced an action to foreclose its mortgage and named Citibank, but not the Borrower, as a defendant (the “Foreclosure Action”). Citibank defaulted in the Foreclosure Action. The Borrower commenced the Zormati action and alleged that Citibank breached its loan agreement by failing to the Borrower notice of the Foreclosure Action or otherwise defending the priority of the Citibank mortgage. The motion court granted Citibank’s motion to dismiss the complaint. The Second Department affirmed. First the Court found that Citibank did not breach the loan agreement because it contained no requirement that Citibank notify the Borrower of the Foreclosure Action or protect the priority of its mortgage. Second, the Court found that there was no breach of the duty of good faith and fair dealing because: the defendants demonstrated their prima facie entitlement to judgment as a matter of law dismissing the cause of action to recover damages for breach of the implied covenant of good faith and fair dealing by submitting evidence that established that they did not withhold the benefits of, or seek to prevent the performance of, the loan agreement. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In Kim v. XP Sec., LLC , 2026 N.Y. Slip Op. 01731 (1st Dept. Mar. 24, 2026), the Appellate Division, First Department affirmed the denial of summary judgment in a wrongful termination action, reiterating settled principles of contract interpretation: clear, unambiguous agreements between sophisticated, counseled parties are enforced according to their plain meaning, without recourse to extrinsic evidence. The plaintiff, a senior executive employed under a five‑year agreement permitting termination only for cause, challenged his discharge following an internal email exchange. The employer’s reliance on alleged misconduct and insubordination raised triable issues of fact, including whether workplace policies were uniformly enforced and whether the stated grounds for termination were pretextual. Because factual disputes remained as to whether the conduct satisfied the contractual definition of “cause,” summary judgment was properly denied. Under well-settled New York law, the “best evidence of what parties to a written agreement intend is what they say in their writing.” [1]  A “written agreement that is complete, clear, and unambiguous on its face must be enforced according to the plain meaning of its terms.” [2]  Moreover, when “interpreting a commercial contract negotiated by and entered into at arms length between sophisticated business people, represented by an attorney, a court must enforce the agreement according to its terms, and extrinsic and parole evidence is not admissible to create an ambiguity in a written agreement that is complete, clear, and unambiguous on its face.” [3]   With these principles in mind, we examine Kim v. XP Sec., LLC . Defendant, a broker-dealer, hired plaintiff in 2017 to be the head of its Asia Desk. At the time he was hired, plaintiff was a professional with decades of experience in the emerging markets foreign exchange (Forex) community. He had conceived a technology-based solution, to be called HUBL, designed to radically improve Forex trading, and was looking for a firm to provide the support necessary to develop it. Defendant hired plaintiff specifically for the purpose of developing, at defendant’s expense, a computerized Forex technology “stack” to more efficiently manage bid price points in the industry. Defendant represented to plaintiff that it had the technology and infrastructure necessary to accomplish this objective.  Plaintiff was hired pursuant to a five-year employment agreement (the “Agreement”), which provided that he could only be terminated for “cause.” The Agreement defined “cause” as, among other things, insubordination and “willful or gross serious misconduct” in the performance of an employee’s duties and responsibilities, including conduct in disregard of defendant’s written rules or policies. Defendant’s employee handbook, as well as its separate written ethics code, prohibited employees from engaging in offensive or disruptive behavior, including threatening employees; using abusive or vulgar language; interfering with others in the performance of their duties; engaging in acts of disloyalty to defendant, including but not limited to slandering or disparaging defendant, its officers and/or employees; and from displaying discourteous or inappropriate conduct with clients and customers.  After plaintiff joined the firm, he learned that it did not have the promised resources necessary to develop HUBL. In late January 2020, defendant’s management notified the firm’s entire New York office via email that a senior employee would be leaving and that defendant would be closing down parts of its business, including plaintiff’s division. The email also directed the entire New York office that “nothing beyond the announcement” of the employee’s departure “[was] to be discussed/commented outside of [the firm].” Plaintiff sent an email to the employees in the New York office, pointing out that they had been instructed not to discuss this change, but that the employees in the London office had not been given the same instructions. He suggested that the two offices should be given the same instructions to avoid confusion. On January 27, 2020, defendant suspended plaintiff and barred him from its offices for his “inappropriate” and “insubordinate” email. By letter dated February 27, 2020, defendant purported to terminate plaintiff “for cause,” specifically citing his “common law disloyalty” and “willful or gross serious misconduct” as referred to in certain provisions of the Agreement. The letter also made general allegations that plaintiff was “derisive” and “rude.”  Plaintiff commenced the action, which, as amended, alleged (1) defendant’s breach of contract for not dedicating any funds to HUBL; (2) defendant’s breach of the covenant of good faith and fair dealing for not dedicating any funds to HUBL; (3) fraud in the inducement against all of the defendants, because of their false representations to plaintiff that defendant had the technological tools and skills that would enable it to support plaintiff’s development of HUBL; (4) declaratory judgment against defendant that the conduct plaintiff was accused of did not amount to “common law disloyalty” or “willful or gross misconduct”; and (5) breach of contract against defendant for its “wrongful termination of [him] for ‘cause.’ ” Defendant moved for summary judgment dismissing plaintiff’s breach of contract cause of action for wrongful termination. The motion court denied the motion. The First Department affirmed, holding that the motion court properly denied the motion. [4]  The Court noted that since the Agreement was “[a]n arm’s length commercial contract executed by counselled, sophisticated parties,” it “should be enforced according to its terms.” [5]   In considering the propriety of the motion court’s decision and order, the Court framed the dispute as whether the specific conduct identified as the basis for termination – an internal email response – satisfied the contractual definition of “cause,” rather than whether plaintiff had engaged in objectionable conduct more generally. In that regard, defendant contended that plaintiff’s termination complied with the Agreement based on a history of allegedly offensive language toward colleagues and a client, conduct for which plaintiff had previously been admonished and disciplined. However, noted the Court, plaintiff was not terminated for that conduct. Rather, defendant discharged plaintiff for alleged insubordination arising from an internal email responding to a directive that the departure of a senior manager not be discussed outside defendant’s New York office. In that response, plaintiff merely suggested that the same instruction be communicated to the London office to avoid confusion. Whether this conduct, said the Court, viewed in context, “constituted insubordination or otherwise satisfied the Agreement’s contractual standard for termination ‘for cause’ present[ed] a factual question, particularly where the employer relied on prior conduct not identified as the basis for termination.” [6]   As a result, the Court held that “[o]n th[e] record [before it] there [were] triable issues of fact that preclude[d] summary judgment in [defendant]’s favor.” [7]  First, said the Court, “there [were] questions of fact as to whether the rules or policies on which [defendant] relie[d] were followed and uniformly enforced - in particular, its rules prohibiting ‘offensive or disruptive behavior, including . . . using abusive or vulgar language’ and ‘discourteous or inappropriate conduct with clients/customers.’” [8]  The Court noted that “[m]ultiple [firm] employees testified that emotional exchanges, yelling, cursing, and demeaning language, including some of the same slurs plaintiff was] alleged to have used, were common among employees at [the firm].” [9]  “This testimony,” concluded the Court, “raise[d] questions as to whether [plaintiff]’s rude behavior was in line with the prevailing culture at [the firm] and whether [defendant]’s reference to it as a reason for his termination was pretextual.” [10]    Second, held the Court, “there [were] questions of fact as to whether the financial burden associated with the promises [defendant] made to plaintiff at the time of his hiring was the reason [defendant] examined more closely plaintiff’s offensive work comments and chose termination as the discipline to impose.” [11]   Finally, said the Court, “there [were] questions of fact as to whether plaintiff’s email sent solely to the members of the New York office concerning a management change constituted an ‘insubordinate’ or ‘inappropriate’ response to an email directing employees not to discuss the matter outside the New York office.” [12]   Takeaway In New York, plain meaning and ambiguity perform distinct but complementary roles, and understanding their limits is critical to explaining how courts approach disputes like the one in Kim . As the Court noted, when a contract is complete, clear, and unambiguous on its face, courts enforce it as written, without resort to extrinsic evidence. Ambiguity is not created merely because the parties disagree about the contract’s effect or because one party wishes the language were different. Nor do courts consider outside evidence to manufacture ambiguity where the text reasonably bears only one meaning. The limit of focusing solely on plain meaning, however, lies in its application. Even where contractual language is unambiguous, disputes often arise over whether the conduct at issue falls within the scope of that language. This is not textual ambiguity but a factual dispute – a question of whether undisputed terms have been satisfied by disputed conduct. New York courts recognize that enforcing a contract according to its terms does not require accepting a party’s characterization of events. Instead, courts examine whether the conduct relied upon reflects the parties' intent as set forth in the contract. Accordingly, ambiguity is carefully confined. Courts do not relax plain‑meaning rules to accommodate after‑the‑fact explanations. But they also do not treat clear and unambiguous language as solely dispositive when the dispute between the parties concerns conduct or performance. In Kim , the Court did not find the Agreement ambiguous. To the contrary, the Court held that the Agreement – negotiated by sophisticated, counseled parties – was clear in permitting termination only for “cause.” Under New York law, that clarity foreclosed any resort to extrinsic evidence to alter or modify the contractual standard. Therefore, defendant could not rely on generalized notions of business judgment, workplace norms, or equitable considerations to justify termination outside the language of the Agreement. At the same time, the Court recognized the limit of plain meaning: while the meaning of the contract was fixed as a matter of law, whether plaintiff’s conduct satisfied that meaning was not. Defendant attempted to defend the termination by invoking a broader narrative of prior misconduct and disciplinary history. The Court rejected that framing, focusing instead on the conduct actually cited as the basis for discharge – an internal email suggesting that employees in another office receive the same instruction to avoid confusion. That focus reflects an important principle of contract interpretation: disagreement over whether conduct meets a contractual standard is not textual ambiguity, but a factual question concerning conduct and performance. Therefore, because reasonable people could differ on whether the email constituted “insubordination” or “willful or gross misconduct” within the meaning of the Agreement, the case could not be resolved on summary judgment. ___________________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.  This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions and not on matters handled by the firm. ____________________________________________ [1] Slamow v. Del Col , 79 N.Y.2d 1016, 1018 (1992). [2] Greenfield v. Philles Records , 98 N.Y.2d 562, 569 (2002). [3] Pavarini McGovern, LLC v. Tag Court Sq., LLC , 62 A.D.3d 680, 680 (2d Dept. 2009) (citing Madison Ave. Leasehold, LLC v. Madison Bentley Assoc. LLC , 8 N.Y.3d 59, 66 (2006)). [4] Slip Op. at *1. [5] Id.  (citing Madison Ave ., 8 N.Y.3d at 66). [6] Id. [7] Id. [8] Id. [9] Id. [10] Id. [11] Id. [12] Id.