By: Jeffrey M. Haber In Nosegbe v. Charles , 2024 N.Y. Slip Op. 02406 (4th Dept. May 3, 2024) ( here ), the Appellate Division, Fourth Department affirmed the dismissal of a fraud claim because the plaintiff failed to identify the statement claimed to be false. The Court also reinstated a claim that the motion court dismissed on the grounds that, inter alia , the text message on which the lower court relied was not documentary evidence within the meaning of CPLR 3211(a)(1). We examine Nosegbe below. Plaintiff is a dentist who operated a dental practice named Fayetteville Family Dentistry PLLC (“FFD”). 1 At some point, plaintiff engaged the services of two management companies to convert FFD into a new practice, Family Smiles Dentistry PLLC (“FSD”). Disagreements arose, leading plaintiff to commence an action against FSD, the two management companies and their principals. While the first action was pending, plaintiff commenced the action before the Court against defendants, who are the former or current principals of FSD.  Plaintiff alleged in sum and substance that defendants improperly removed her name from the PLLC application for FSD and then misappropriated her property, patient list, business telephone number, and federal tax identification number. Defendants filed a pre-answer motion to dismiss pursuant to CPLR 3211 or, in the alternative, to add FSD as a necessary party or to consolidate the action with the first action.  The motion court granted the motion insofar as it sought dismissal of the complaint and thus did not address defendants’ requests for alternative relief. Plaintiff appealed. The Fourth Department modified the motion court’s order by denying the motion to the extent that it sought to dismiss the second and fourth causes of action and reinstating those causes of action, and, as modified, affirmed the order. The Court held that the motion court correctly dismissed plaintiff’s fraud claim (the first cause of action). After reciting the elements of a fraud claim, 2 the Court found that “there no allegations of any material misrepresentation made by either defendant to plaintiff, let alone any misrepresentation that defendants knew was false or that was meant to induce reliance.” 3 The Court explained that “it not appear that plaintiff ever conversed with either defendant about anything until after the events that alleged as the basis of the first cause of action.” 4 Accordingly, the Court “conclude that the court properly granted defendants’ motion with respect to the first cause of action.” 5 The Court also held that the motion court erred in dismissing plaintiff’s second and fourth causes of action pursuant to CPLR 3211(a)(1). 6 CPLR 3211(a)(1) permits a court to dismiss a cause of action where it is conclusively refuted by documentary evidence . Documents such as text messages “do not meet the requirements for documentary evidence” to support a CPLR 3211(a)(1) motion. 7 “To be considered documentary, evidence must be unambiguous and of undisputed authenticity, that is, it must be essentially unassailable.” 8 The Court found that the text messages used by defendants did not rise to the level of documentary evidence: “the text messages not even identify the person who communicating with plaintiff. The names and numbers are redacted.” 9 “Moreover,” noted the Court, “the text messages not ‘conclusively establish[ ] a defense as a matter of law’ with respect to the fourth cause of action.” 10 Accordingly, to the extent the motion court granted the motion to dismiss the second and fourth causes of action on CPLR 3211(a)(1) grounds, the Court modified the order. Footnotes Plaintiff filed the action pro se. “The elements of a cause of action for fraud require a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff<,> and damages.” Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). Slip Op. at *1. Id. Id. Id. at *2-*3. Id. at *3 (citations omitted). Bath & Twenty, LLC v. Federal Sav. Bank , 198 A.D.3d 855, 855-856 (2d Dept. 2021); see Eisner v. Cusumano Constr., Inc. , 132 A.D.3d 940, 942 (2d Dept. 2015); Fontanetta v. John Doe 1 , 73 A.D.3d 78, 86 (2d Dept. 2010). Slip Op. at *3. Id. (quoting Goshen v Mutual Life Ins. Co. of N.Y. , 98 N.Y.2d 314, 326 (2002); and citing, among other cases, Lots 4 Less Stores, Inc. v. Integrated Props., Inc. , 152 A.D.3d 1181, 1183 (4th Dept. 2017)). 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.

By Jonathan H. Freiberger There are two “components and constitutional predicates of personal jurisdiction.”  Keane v. Kamin , 94 N.Y.2d 263, 265 (1999). “One component involves service of process, which implicates due process requirements of notice and opportunity to be heard.” Keane , 94 N.Y.2d at 265 (citations omitted). 1 The law is clear that a “court lacks personal jurisdiction over a defendant who is not properly served with process.” Everbank v. Kelly , 203 A.D.3d 138, 142 (2 nd Dep’t 2022) (citations omitted); see also Castillo-Florez v. Charlecius , 220 A.D.3d 1, 2 (2 nd Dep’t 2023) (same). “When it is determined that process was ineffective, all subsequent proceedings are rendered null and void as to that party.” Everbank , 203 A.D.3d at 143 (citations omitted); see also Federal Nat. Mort. Ass’n v. Smith, 219 A.D.3d 938, 941-42 (2 nd Dep’t 2023) (citations and internal quotation marks omitted). “‘Service of process upon a natural person must be made in strict compliance with the methods of service set forth in CPLR 308 .’” Federal Nat. Mort. Ass’n v. Smith , 219 A.D.3d 938, 941-42 (2 nd Dep’t 2023) ( quoting Everbank , supra ) (some citations omitted, hyperlink added); see also Castillo-Florez , 220 A.D.3d at 2 (citations omitted). When a judgment or order is issued against a party that has not been properly served with process, it will be vacated. Generally, to vacate a default, the moving party must demonstrate a “reasonable excuse for the default and a meritorious defense to the action.” Liu v. Chang , 2024 WL 1915013 (1 st Dep’t May 2, 2024); see also Wells Fargo Bank, N.A. v. Senenfelder , 225 A.D.3d 728 (2 nd Dep’t 2024) 2 . CPLR 5015 (a) provides several bases upon which a party may move to vacate a judgment or order. One such basis, related to today’s article, is found in CPLR 5015(a)(4), which provides, in pertinent part, that “ he court which rendered a judgment or order may relieve a party from it upon such terms as may be just, on motion of any interested person with such notice as the court may direct, upon the ground of … lack of jurisdiction to render the judgment or order.”  See Bank of America v. Lewis , 190 A.D.3d 910 , 910-11 (2 nd Dep’t 2021). The Second Department has held that, pursuant to CPLR 5015(a)(4), a “default must be vacated once the movant demonstrates a lack of personal jurisdiction, and the movant is relieved of any obligation to demonstrate a reasonable excuse for the default and a potentially meritorious defense.” Wells Fargo Bank, N.A. v. Spaulding , 177 A.D.3d 817, 818 (2019) (citations omitted) (emphasis added). See also Rabinowitz v. Rabinowitz , 137 A.D.3d 884 , 885 (2 nd Dep’t 2016) (citations and internal quotation marks omitted).  A “process server’s affidavit of service gives rise to a presumption of proper service.”  Deutsche Bank National Trust Co. v. Stolzberg , 165 A.D.3d 624, 625 (2 nd Dep’t 2018) (citations and internal quotation marks omitted). “To be entitled to vacatur of a default judgment under CPLR 5015(a)(4), a defendant must overcome the presumption raised by the process server’s affidavit of service.” Lewis, 190 A.D.3d. at 911 (citations and internal quotation marks omitted). Further, while “ are and unsubstantiated denials are insufficient to rebut the presumption,” “a sworn denial containing a detailed and specific contradiction of the allegations in the process server’s affidavit will defeat the presumption of proper service.” Stolzberg, 165 A.D.3d at 625 (citations, internal quotation marks and brackets omitted). For example, the Second Department, in Castillo-Florez , held that the defendant’s sworn affidavit “in which he, inter alia , denied receipt of service, denied residing at the address at the time service allegedly was made, and set forth the location of his address at the time of service,” was sufficient to rebut the presumption of service. Castillo-Florez , 220 A.D.3d at 14 (citations omitted); see also Lewis , 190 A.D.3d at 915 (finding the presumption rebutted where defendant averred that he did not reside at the service address and annexed to his affidavit copies of tax records indicating he lived elsewhere).  On May 1, 2024, the Appellate Division, Second Department, addressed service of process issues in 115 Essex Street, LLC v. Tenth Ward, LLC . 115 Essex was a breach of contract action in which the defendant defaulted in responding to the complaint. The motion court granted plaintiff’s motion for leave to enter a default judgment pursuant to CPLR 3215 . 3 Thereafter the defendant moved pursuant to, inter alia , CPLR 5015(a) to vacate the default judgment. The motion court denied the motion. On the defendant’s motion for reargument, the motion court granted the motion but adhered to its original decision.  On the defendant’s appeal, the Second Department reversed and, in so doing, the Court noted that when “a defendant seeking to vacate a default judgment raises a jurisdictional objection pursuant to CPLR 5015(a)(4), the court is required to resolve the jurisdictional question before determining whether it is appropriate to grant a discretionary vacatur of the default under CPLR 5015(a)(1).” (Citations and internal quotation marks omitted.) After discussing available relief under CPLR 5015(a)(4), the Court recognized that the “failure to serve process in an action leaves the court without personal jurisdiction over the defendant, and all subsequent proceedings are thereby rendered null and void.” (Citations and internal quotation marks omitted.) The Court, in explaining its rationale for reversing the motion court, stated: Here, the Supreme Court erred in determining the defendant's motion, inter alia, pursuant to CPLR 5015(a) and 317 to vacate the judgment insofar as entered against him without first conducting a hearing, as the defendant demonstrated his entitlement to a hearing on the issue of service. The process server's affidavit of service established, prima facie, that the defendant was served pursuant to CPLR 308(2) by delivery of the summons and complaint to "John Doe, Worker," a person of suitable age and discretion at the defendant's actual place of business, and by mailing a copy of the summons and complaint to the defendant at his actual place of business. However, the defendant successfully rebutted the process server's affidavit through his specific averments, inter alia, denying receipt of service, asserting that his actual place of business is not "opened to the general public," that he "did not have employees working for " at the time of service and was "the only one working there," and by pointing to significant discrepancies between the process server's physical description of John Doe and the defendant's actual physical appearance. Accordingly, we remit the matter to the Supreme Court, Kings County, for a hearing to determine whether the defendant was properly served with process and for a new determination thereafter of the defendant's motion, inter alia, pursuant to CPLR 5015(a) and 317 to vacate the judgment insofar as entered against him. Footnotes Eds. Note: this BLOG has addressed various issues related to service of process, inter alia , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . Eds. Note: this BLOG has addressed default judgments, inter alia , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . Eds. Note: this BLOG has addressed various issues under CPLR 3215, inter alia , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . 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 On December 22, 2020, the Securities and Exchange Commission (the “SEC” or the “Commission”) adopted significant amendments to Rule 206(4)-1 promulgated under the Investment Advisers Act of 1940 (the “Amended Marketing Rule”). Rule 206(4)-1 governs marketing by Commission-registered investment advisers.1 Among other things, the Amended Marketing Rule states that it is unlawful for registered investment advisers, directly or indirectly, to disseminate any advertisement that includes:2 • any untrue statement of a material fact, or omits to state a material fact necessary in order to make the statement made, in light of the circumstances under which it was made, not misleading;3 • any material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission;4 • any endorsement, and prohibits an adviser from providing compensation (other than de minimis compensation), directly or indirectly, for an endorsement, unless the adviser has a written agreement with any person giving an endorsement that describes the scope of the agreed-upon activities and the terms of compensation for those activities;5 • any presentation of gross performance, unless the advertisement also presents net performance: (i) with at least equal prominence to, and in a format designed to facilitate comparison with, the gross performance; and (ii) calculated over the same time period, and using the same type of return and methodology, as the gross performance;6 or • any hypothetical performance,7 unless the registered investment adviser “(i) adopts and implements policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement; (ii) provides sufficient information to enable the intended audience to understand the criteria used and assumptions made in calculating such hypothetical performance; and (iii) provides . . . sufficient information to enable the intended audience to understand the risks and limitations of using such hypothetical performance in making investment decisions ….”8 On April 12, 2024, the SEC announced (here) that it settled charges against five registered investment advisers for violating the Amended Marketing Rule. All five firms – GeaSphere LLC, Bradesco Global Advisors Inc., Credicorp Capital Advisors LLC, InSight Securities Inc., and Monex Asset Management Inc. – agreed to settle the SEC’s charges and to pay $200,000 in combined penalties. In the SEC’s orders,9 the Commission found that the five firms advertised hypothetical performance to the general public on their websites without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of each advertisement’s intended audience, as required by the Amended Marketing Rule. Four of the five firms – Bradesco, Credicorp, InSight, and Monex – received reduced penalties because of the corrective steps they undertook in advance of being contacted by the SEC staff. The SEC also found that GeaSphere violated other regulatory requirements, including by making false and misleading statements in advertisements, advertising misleading model performance, being unable to substantiate performance shown in its advertisements, and failing to enter into written agreements with people it compensated for endorsements. In addition, the SEC found that GeaSphere committed recordkeeping and compliance violations and made misleading statements about its performance to a registered investment company client and that the misleading statements were included in the client’s prospectus filed with the Commission. “The Marketing Rule’s provisions are crucial to protecting investors from misleading advertising claims,” said Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Today’s actions show that we will continue to employ targeted initiatives to ensure that investment advisers fully comply with their obligations under the rule. They also serve as a reminder of the benefits to firms that take corrective steps before being contacted by Commission staff.” Without admitting or denying the SEC’s findings, all of the firms consented to the entry of orders finding that they violated the Advisers Act and ordering them to be censured, cease and desist from violating the charged provisions, and comply with certain undertakings. GeaSphere agreed to pay a civil penalty of $100,000. Bradesco, Credicorp, InSight, and Monex agreed to pay civil penalties ranging from $20,000 to $30,000, which reflected certain corrective steps taken by each of these firms prior to being contacted by the Commission staff. This is the second set of cases that the Commission has brought as part of an ongoing targeted sweep concerning Amended Marketing Rule violations after charging nine advisory firms in September 2023 (here). Footnotes See Investment Adviser Marketing, Release No. IA-5653 (Dec. 22, 2020) (effective May 4, 2021). The Amended Marketing Rule defines an “advertisement,” in pertinent part, to include “ny direct or indirect communication an investment adviser makes . . . to one or more persons if the communication includes hypothetical performance, that offers the investment adviser’s investment advisory services with regard to securities to prospective clients … or offers new investment advisory services with regard to securities to current clients.” Rule 206(4)-1(e)(1). Rule 206(4)-1(a)(1). Rule 206(4)-1(a)(2). Rule 206(4)-1(b). Rule 206(4)-1(d)(1). “Hypothetical performance” is defined as “performance results that were not actually achieved by any portfolio of the investment adviser” and includes, but is not limited to, performance that is backtested by the application of a strategy to data from prior time periods when the strategy was not actually used during those time periods. Rule 206(4)-1(e)(8)(i)(B). Rule 206(4)-1(d)(6). The five orders can be found here, here, here, here, and here. 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.

By: Jeffrey M. Haber In Lane’s Floor Coverings & Interiors, Inc. v. DiLalla , 2024 N.Y. Slip Op. 02257 (1st Dept. Apr. 25, 2024) ( here ), the Appellate Division, First Department considered an alleged scheme to defraud plaintiff by using checks that were fake or missing endorsements. As discussed below, the Court modified the motion court’s order dismissing the action to deny defendants’ motion as to the fraud claims asserted against Defendant Anthony DiLalla, the branch manager of Defendant Valley National Bank, to the extent predicated on checks drawn on or after July 10, 2012, and plaintiff’s first cause of action as against defendant Valley National Bank to the extent predicated on checks identified in plaintiff’s original complaint. Plaintiff’s claims arose out of its former financial controller’s passing of fraudulent checks. The controller’s scheme was revealed, according to plaintiff, upon its investigation following the controller’s abandonment of his position on December 23, 2013. In the original complaint, plaintiff sought recovery for five allegedly fraudulently negotiated checks between September 16, 2013, and December 12, 2013, the total of which amounted to approximately $60,000. By motion dated July 10, 2018, plaintiff amended the complaint to set forth 60 additional allegedly fraudulent checks from October 9, 2009 to September 16, 2013, totaling approximately $850,000. With respect to the checks added in the amended complaint, plaintiff alleged that it realized the full impact of the former controller and defendants’ misconduct after conducting its own internal review of records in 2017 following a meeting with the New York County District Attorney’s Office in 2016. Upon defendants’ motion to dismiss, the motion court granted the motion in its entirety. Plaintiff appealed. To state a claim 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.” The claim must pleaded with particularity. Conclusory allegations will not suffice. Neither will allegations based on information and belief. If “sufficient factual allegations of even a single element are lacking,” then the claim must be dismissed. The requirement that a fraud claim be pleaded with particularity can be found in Section 3016(b) of the Civil Practice Law and Rules (“CPLR”). Under CPLR 3016 (b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.”   To satisfy the particularity requirement, the plaintiff must allege such facts as the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result. Put another way, the complaint must identify the “who, what, where, when and how” of the alleged fraud. Notwithstanding, in Pludeman v.Northern Leasing Systems, Inc. , the Court of Appeals held that CPLR 3016(b) “should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.” Thus, as noted, a plaintiff will satisfy CPLR 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct. In Lane’s Floor Coverings , the Court held that plaintiff satisfied the particularity requirement with respect to the fraud claim against DiLalla but failed to do so with respect to the fraud claim against the Bank. The Court noted that, with respect to DilLalla, plaintiff sufficiently “allege , among other things, that defendant DiLalla was an active participant in the scheme, that he oversaw and signed off on the fraudulent checks, and that he shared in the checks’ proceeds.” With respect to the Bank, however, the Court found that plaintiff merely “allege , in conclusory terms, that it helped the scheme and “provided a safe haven” to DiLalla. The Court also held that certain aspects of the fraud claims were time-barred under the applicable statute of limitations due to inquiry notice. Under New York law, an action based upon fraud must be commenced within six years of the date the cause of action accrued, or within two years of the time the plaintiff discovered or could have discovered the fraud with reasonable diligence, whichever is greater. The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged”, “even though the injured party may be ignorant of the existence of the wrong or injury.” Determining when accrual occurs is not easy and often contested. So too is the determination of when the plaintiff discovered or could have discovered the fraud. In New York, “plaintiffs will be held to have discovered the fraud when it is established that they were possessed of knowledge of facts from which it could be reasonably inferred, that is, inferred from facts which indicate the alleged fraud.” “ ere suspicion will not constitute a sufficient substitute” for knowledge of the fraud. “Where it does not conclusively appear that a plaintiff had knowledge of facts from which the fraud could reasonably be inferred, a complaint should not be dismissed on motion and the question should be left to the trier of the facts.” Moreover, where the circumstances suggest to a person of ordinary intelligence the probability that s/he has been defrauded, a duty of inquiry arises, and if s/he fails to undertake that inquiry when it would have developed the truth and shuts his/her eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him/her. The test as to when fraud should with reasonable diligence have been discovered is an objective one. Thus, while it is true that New York courts will not grant a motion to dismiss a fraud claim where the plaintiff’s knowledge is disputed, courts will dismiss a fraud claim when the alleged facts establish that a duty of inquiry existed and that an inquiry was not pursued. “The burden of establishing that the fraud could not have been discovered before the two-year period prior to the commencement of the action rests on the plaintiff, who seeks the benefit of the exception.” In Lane’s Floor Coverings , the Court held that “plaintiff was on inquiry notice of the alleged fraud in December 2013 when it conducted its initial investigation concerning the controller’s abandonment of his employment. “Thus,” said the Court, “plaintiff’s reliance on the District Attorney’s 2016 investigation and its own 2017 examination to extend the time of its inquiry notice for the earlier checks unavailing.” “Accordingly,” concluded the Court, “plaintiff’s fraud claim timely under the applicable six-year statute of limitations … only to the extent based on checks drawn on or after July 10, 2012.” Finally, the Court held that plaintiff’s first cause of action against the Bank should be reinstated to the extent it was based on the checks asserted in the original complaint. The Court explained that since defendants had “previously acknowledged that the five checks referenced in plaintiff’s original complaint were timely identified,” it was error to dismiss them with respect to the Amended Complaint. _____________________________ 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. Lama Holding Co. v. Smith Barney Inc. , 88 N.Y.2d 413, 421 (1996). Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). Id. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). RKA Film Fin., LLC v. Kavanaugh , 2018 WL 3973391, at *3 (Sup. Ct., N.Y. County 2018) (quoting Shea v. Hambros PLC , 244 A.D.2d 39, 46 (1st Dept. 1998)). See also Gregor v. Rossi , 120 A.D.3d 447 (1st Dept. 2014). Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (citation omitted). Id. at 491 (internal quotation marks and citation omitted). Id. at 492. Id. Slip Op. at *1-*2. Id. at *1. Id. at *1-*2 (citing CPLR 3016(b); Friedman v. Anderson , 23 A.D.3d 163, 166 (1st Dept. 2005); and Prudential-Bache Sec. v. Citibank , 73 N.Y.2d 263, 276-277 (1989) (well-pleaded claim of commercial bad faith permitted where supported by factual allegations concerning, among other things, the frequency of deposits and cash withdrawals at a single bank branch, the branch's failure to complete required currency transaction reports, and conversations with and between a number of branch employees, such that the defendant bank's actual knowledge could not be ruled out upon motion to dismiss)). CPLR 213(8). See also Sargiss v. Magarelli , 12 N.Y.3d 527, 532 (2009); Carbon Capital Mgmt., LLC v. Am. Express Co. , 88 A.D.3d 933, 939 (2d Dept. 2011). Carbon Capital Mgmt. , 88 A.D.3d at 939 (citation and alterations omitted). Schmidt v. Merchants Despatch Transp. Co. , 270 N.Y. 287, 300 (1936). Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). Id. Trepuk v. Frank , 44 N.Y.2d 723, 725 (1978). Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011).  Id. (citation and internal quotation marks omitted). See Shalik v. Hewlett Assocs., L.P. , 93 A.D.3d 777, 778 (2d Dept. 2012). Celestin v. Simpson , 153 A.D. 3d 656, 657 (2d Dept. 2017). Slip Op. at *2 (citing Aozora Bank, Ltd. v. Deutsche Bank Sec. Inc. , 137 A.D.3d 685, 689-690 (1st Dept. 2016); Ghandour v. Shearson Lehman Bros. Inc ., 213 A.D.2d 304, 305-306 (1st Dept. 1995)). Id. Id. (citing CPLR 213(8)). Id. Id.

By Jonathan H. Freiberger In situations where the statute of limitations expires during the pendency of an action, under certain circumstances, CPLR 205 (a) 1 permits the plaintiff to commence a new action if the original action is dismissed but was timely commenced. CPLR 205(a) provides: If an action is timely commenced and is terminated in any other manner than by a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, a dismissal of the complaint for neglect to prosecute the action, or a final judgment upon the merits, the plaintiff … may commence a new action upon the same transaction or occurrence or series of transactions or occurrences within six months after the termination provided that the new action would have been timely commenced at the time of commencement of the prior action and that service upon defendant is effected within such six-month period. Where a dismissal is one for neglect to prosecute the action made pursuant to rule thirty-two hundred sixteen of this chapter or otherwise, the judge shall set forth on the record the specific conduct constituting the neglect, which conduct shall demonstrate a general pattern of delay in proceeding with the litigation. As this BLOG has previously explained, CPLR 205(a) is a “remedial” statute that “has existed in New York law since at least 1788” and can race[] its roots to seventeenth century England.” Wells Fargo Bank, N.A. v. Eitani , 148 A.D.3d 193, 199 (2 nd Dep’t 2017), appeal dismissed , 29 N.Y.3d 1023 (2017). The purpose of CPLR 205(a) is to “ameliorate the potentially harsh effect of the Statute of Limitations in certain cases in which at least one of the fundamental purposes of the Statute of Limitations has in fact been served, and the defendant has been given timely notice of the claim being asserted by or on behalf of the injured party.”  George v. Mt. Sinai Hospital , 47 N.Y.2d 170, 177 (1979). Thus, the statute provides “a second opportunity to the claimant who has failed the first time around because of some error pertaining neither to the claimant’s willingness to prosecute in a timely fashion nor to the merits of the underlying claim.”  George , 47 N.Y.2d at 178-79. At the end of 2022, the Foreclosure Abuse Prevention Act (“FAPA”) went into effect and amends certain provisions of the CPLR and other statutes to the extent they relate to mortgage foreclosure actions. 2 Among other things, FAPA’s provisions were designed to curtail certain practices of lenders designed to avoid statute of limitations issues in residential mortgage foreclosure actions by accelerating and deaccelerating loans to start the running of statutes of limitations anew. 3 As part of FAPA, the Legislature enacted CPLR 205-A , which addresses issues similar to those in CPLR 205(a), but specifically in the context of certain residential mortgage foreclosure actions. CPLR 205-A provides: If an action upon an instrument described under subdivision four of section two hundred thirteen of this article is timely commenced and is terminated in any manner other than a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, a dismissal of the complaint for any form of neglect, including, but not limited to those specified in subdivision three of section thirty-one hundred twenty-six, section thirty-two hundred fifteen, rule thirty-two hundred sixteen and rule thirty-four hundred four of this chapter, for violation of any court rules or individual part rules, for failure to comply with any court scheduling orders, or by default due to nonappearance for conference or at a calendar call, or by failure to timely submit any order or judgment, or upon a final judgment upon the merits, the original plaintiff … may commence a new action upon the same transaction or occurrence or series of transactions or occurrences within six months following the termination, provided that the new action would have been timely commenced within the applicable limitations period prescribed by law at the time of the commencement of the prior action and that service upon the original defendant is completed within such six-month period. For purposes of this subdivision: 1 . a successor in interest or an assignee of the original plaintiff shall not be permitted to commence the new action, unless pleading and proving that such assignee is acting on behalf of the original plaintiff; and 2 . in no event shall the original plaintiff receive more than one six-month extension. The emphasized language in the above-quoted portions of CPLR 205(a) and 205-A was of critical importance to the Court (and the parties) in Deutsche Bank Nat. Trust Co. v. Heitner , decided on April 24, 2024, by the Appellate Division, Second Department. The lender in Heitner commenced a foreclosure action in 2009, which was dismissed on October 24, 2018, for failure to comply with RPAPL 1304. 4 A new action was commenced by the lender in 2019 to foreclose the same mortgage. The borrower moved to dismiss the new action as time-barred. The lender opposed the motion and cross-moved to extend the time to serve the borrowers with the summons and complaint. The borrower’s motion was granted and the lender’s cross-motion was denied. The lender appealed. The Second Department reiterated that mortgage foreclosure actions are governed by a six-year statute of limitations, which began to run when the loan was accelerated at the time the original action was commenced in 2009. 5 The lender argued that the new action was commenced within the six-month extension period afforded by CPLR 205(a). However, FAPA, which has been applied retroactively, “replaced the savings provision of CPLR 205(a) with CPLR 205-a in actions upon instruments described in CPLR 213(4) .” (Hyperlink added.) The Court highlighted the differing language between CPLR 205(a) and 205-A that was previously emphasized in above quoted statutory provisions. Thus, the Court stated: Pursuant to CPLR 205-a, where, as here, an action upon an instrument described under CPLR 213(4) is timely commenced and is not terminated on certain enumerated grounds, "the original plaintiff . . . may commence a new action upon the same transaction or occurrence or series of transactions or occurrences within six months following the termination, provided that the new action would have been timely commenced" and that "service upon the original defendant is completed within such six-month period" ( see id. § 205-a ). Notably, under CPLR 205(a), in order to qualify for the six-month extension, service need only be "effected" within the six-month period ( id. ; see U.S. Bank N.A. v McLean , 209 AD3d 792 , 794). In contrast, in enacting CPLR 205-a, the Legislature chose to require that service upon the defendant be "completed" within the six-month period. This distinction became critical because the borrowers were served by “affix and mail” pursuant to CPLR 308(4). As the Court explained: In the instant action, the defendants were served by the "affix and mail" method pursuant to CPLR 308(4), which statute provides that "service shall be complete" 10 days after the filing of proof of service with the clerk of the relevant court. Since the plaintiff filed proof of service on April 19, 2019, service on the defendants was completed on April 29, 2019. It is undisputed that the 2009 foreclosure action was terminated on October 24, 2018, such that the six-month extension period provided by CPLR 205-a expired on April 24, 2019, five days before service upon the defendants was "completed." Accordingly, the instant action was not timely commenced under CPLR 205-a, and therefore, the Supreme Court properly granted the defendants' motion pursuant to CPLR 3211(a)(5) to dismiss the complaint insofar as asserted against them as time-barred. (Citation omitted.) Footnotes Eds. Note: this BLOG has written about CPLR 205(a) < here =">here"> and < here =">here"> . Eds. Note: this BLOG has written dozens of articles addressing numerous aspects of residential mortgage foreclosure. At this point, please see the BLOG tile on our website and search for any foreclosure, or other commercial litigation, issues that may be of interest you. Eds. Note: This BLOG has addressed issues related to FAPA, and its retroactive application , < here =">here"> , < here =">here"> and < here =">here"> . Eds. Note: This BLOG has written numerous articles related to RPAPL 1304. Please see the BLOG tile on our website and search for RPAPL 1304 related articles. Eds. Note: This BLOG has written numerous articles related to statute of limitations issues in mortgage foreclosure actions. Please see the BLOG tile on our website and search for “statute of limitations” and/or “acceleration” related articles. 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 The doctrine of successor jurisdiction provides that when two entities merge, the successor entity inherits the merged entity’s jurisdictional status for purposes of specific jurisdiction ( i.e. , personal jurisdiction). Thus, if the merged entity was subject to jurisdiction in a particular forum, then the successor would also be subject to the court’s jurisdiction, regardless of whether the successor entity would otherwise be subject to the court’s jurisdiction.  The foregoing principle seems simple enough. However, what happens when the transaction at issue is not a merger but rather a purchase of the other entity’s assets and liabilities? Does the successor jurisdiction doctrine still apply? In Lelchook v. Société Générale de Banque au Liban SAL , 2024 N.Y. Slip Op. 02081 (Apr. 18, 2024) ( here ), the New York Court of Appeals answered the question in the affirmative.  Lelchock arose from two certified questions coming from United States Court of Appeals for the Second Circuit. The first question asked, “Under New York law, does an entity that acquires all of another entity’s liabilities and assets, but does not merge with that entity, inherit the acquired entity’s status for purposes of specific personal jurisdiction?” 1 The second question asked, “In what circumstances will the acquiring entity be subject to specific personal jurisdiction in New York?” 2 In an opinion written by Judge Caitlin J. Halligan, 3 the Court answered the first question affirmatively and declined to reach the second as unnecessary. 4 The plaintiffs in Lelchock are 21 United States citizens who were harmed, and the estate and family members of a U.S. citizen who was killed, in rocket attacks perpetrated in 2006 by the Hizbollah terrorist organization in Israel. Plaintiffs alleged that in the years leading up to the attacks, the Lebanese Canadian Bank (“LCB”) provided extensive financial services to Hizbollah, including millions of dollars in wire transfers that LCB facilitated through a New York-based correspondent bank. In separate litigation commenced in 2008, many of the plaintiffs sued LCB for its alleged assistance to Hizbollah. 5 In response to two certified questions, the Court held that the pleadings established the transaction of business in New York with a sufficient “nexus” or “relationship” to give rise to personal jurisdiction over LCB under CPLR 302, New York’s long-arm statute, 6 and the Second Circuit subsequently held that exercising jurisdiction over LCB comported with due process. 7 Years later, the Second Circuit also held that the plaintiffs’ complaint in that case adequately stated an aiding-and-abetting claim against LCB under the Anti-Terrorism Act of 1990 (“ATA”) (18 USC § 2331 et seq.), as amended in 2016 by the Justice Against Sponsors of Terrorism Act (“JASTA”) (18 USC § 2333(d)(2)). 8 During the pendency of the foregoing actions, in February 2011, the United States Department of Treasury designated LCB a “primary money laundering concern”. 9 In June 2011, LCB and respondent Société Générale de Banque au Liban SAL (“SGBL”), a private company incorporated in Lebanon with headquarters in Beirut, executed a purchase agreement that, according to plaintiffs, expressly provided that, in exchange for a $580 million payment to LCB, “the Seller shall transfer, convey, and assign … to the Purchaser , and the Purchaser shall receive and assume from the Seller, all of the Seller’s Assets and Liabilities.” In 2019, plaintiffs brought claims against SGBL, as LCB’s successor, in the United States District Court for the Eastern District of New York for damages stemming from the 2006 attacks. 10 Plaintiffs alleged that SGBL inherited LCB’s jurisdictional status and was subject to personal jurisdiction in New York because it “assumed and bears successor liability for LCB’s liability to the plaintiffs” by virtue of the June 2011 transaction between LCB and SGBL, and that although LCB continued to exist at least for the purpose of defending litigation, it was insolvent. 11 SGBL contended that under New York law, a theory of inherited jurisdiction may not be invoked to permit imputation of LCB’s jurisdictional contacts to SGBL. 12 The district court dismissed the action for lack of personal jurisdiction over SGBL. 13 The court reasoned that, based upon its reading of several Appellate Division and federal court decisions, it could only impute jurisdictional status in the event of a merger, not an acquisition of all assets and liabilities. 14 On appeal, the Second Circuit determined that New York courts had not addressed whether successor jurisdiction lies when “a successor acquires all of a predecessor’s assets and liabilities, but did not do so through either a statutory merger or a transaction that meets established standards for a de facto merger.” 15 Accordingly, the Second Circuit certified the two questions noted above, and reserved consideration of whether exercising personal jurisdiction over SGBL under a successor jurisdiction theory would comport with constitutional due process. The Court of Appeals accepted the certified questions. 16 Beginning with the first question – whether under New York law, an entity may inherit another entity’s specific personal jurisdiction status when it acquires all of that entity’s liabilities and assets but does not merge with the entity – the Court held that it does. The Court noted that since the Second Circuit had already found that LCB was subject to specific personal jurisdiction under CPLR 302 for claims “materially identical” to those raised in Lelchock , 17 it would “proceed on the assumption that the predecessor entity here, LCB, subject to specific personal jurisdiction in New York.” 18 The Court rejected SGBL’s argument that plaintiffs had to establish that SGBL independently had contacts sufficient to satisfy CPLR 302, wholly apart from LCB’s contacts with New York. 19 The Court explained that SGBL’s argument “would be so if plaintiffs sought to exercise personal jurisdiction based on SGBL’s own conduct, but,” said the Court, “plaintiffs’ theory of successor jurisdiction relie instead on the imputation of a predecessor entity’s contacts.” 20 The Court reasoned that if it “credit that theory, LCB’s jurisdictional contacts would become SGBL’s jurisdictional contacts for purposes of the long-arm statute, and requiring a showing that SGBL itself had sufficient contacts would render this proposition irrelevant.” 21 “For this reason,” concluded the Court, “courts that have accepted successor jurisdiction have taken the view that only the contacts of the predecessor, not the successor, must satisfy the long-arm statute.” 22 The Court next turned to the “question of whether the jurisdictional status of a predecessor entity may be imputed to a successor who acquires all assets and liabilities.” 23 The noted that “CPLR 302 does not resolve the question, contrary to what SGBL contends.” 24 The Court explained that “ owever helpful canons of statutory construction might generally be, the text of the long-arm statute cannot bear the weight SGBL places on it.”25 The observed that SGBL had not shown that the legislature “even contemplated theories of successor jurisdiction, let alone meant to preclude it in a sale of all assets and liabilities.”26 Turning to precedent within the State, the Court noted that, although other courts had ruled on the issue, it had not done so. 27 The Court turned to the separate but related question of successor liability for guidance. “Although liability and jurisdiction are distinct legal concepts,” said the Court, “the principles animating one may inform the other.” 28 In that instance, the Court identified four exceptions to the general rule that a purchaser of assets is not liable for the seller’s torts: when “(1) expressly or impliedly assumed the predecessor’s tort liability, (2) there was a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape such obligations.” 29 The Court reasoned that the foregoing “considerations helpful touchstones in considering successor jurisdiction.” 30 Thus, applied to jurisdiction, the Court said that the “ elevant factors include the impact of our rule on parties to a potential acquisition, whether imputing jurisdiction fairly reflects the reasonable assumptions and expectations of the parties to such transactions, whether doing so induces responsible parties to internalize responsibility for risks they create, and the impact of imputing jurisdiction on those injured by a predecessor’s acts.” 31 “Those factors tip in favor of allowing successor jurisdiction where a successor purchases all assets and liabilities,” said the Court. 32 This is especially so, noted the Court, because “ ophisticated corporate entities such as SGBL will undoubtedly engage in robust due diligence before agreeing to acquire all assets and liabilities of another entity. In doing so, they should understand where jurisdiction over such liabilities may lie and the potential cost if ultimately found liable, and will presumably negotiate a purchase price that is discounted by that prospect.” 33 The Court found that the “history of this case indicates that SGBL, as the successor, would have been on notice when it made this acquisition of LCB’s potential exposure in New York in connection with the terrorist attacks.” 34 The Court explained that LCB’s support for Hizbollah and its designation as a primary money laundering concern by the U.S. Department of Treasury before SGBL agreed to assume LCB's liabilities, in addition to the Licci litigation, which involved allegations nearly identical to those in Lelchock , should have put SGBL on notice that in acquiring LCB’s assets and liabilities in 2011, it would be subject to successor jurisdiction. 35 “A contrary rule would give rise to unfortunate incentives,” said the Court: 36 Allowing a successor to acquire all assets and liabilities, but escape jurisdiction in a forum where its predecessor would have been answerable for those liabilities, would allow those assets to be shielded from direct claims for those liabilities in that forum. As the Second Circuit put it, a predecessor could “decouple … its assets from its enforceable liabilities, for value.” Injured parties would be left to directly sue the successor in a forum that may well be less favorable, with respect to both the likely outcome and available mechanisms to enforce a judgment. As a consequence, the value of plaintiffs’ claims would likely be reduced, perhaps by a significant amount, leaving the injured parties to absorb those costs themselves. That, in turn, would compromise the objective of having a “responsible source” available to absorb the risk of liability and compensate injured parties. 37 Finally, the Court rejected SGBL’s “catch me if you can” response to concerns a plaintiff would not be able to collect on a judgment following a purchase of assets and liabilities transaction: Additionally, while a predecessor’s assets should be available to satisfy a judgment against it prior to a sale of all assets and liabilities, that may no longer be true afterwards, depending on the terms of the deal. That risk appears to be borne out here: although plaintiffs allege that LCB had substantial assets in 2010, LCB stated in 2017 that it was “defunct, insolvent, and unable to pay any judgment rendered against it”. SGBL’s response to this concern—that plaintiffs can sue SGBL or pursue its assets in other jurisdictions—encourages “catch me if you can” gamesmanship, to the detriment of New York plaintiffs. 38 In conclusion, the Court found that there was “no good reason to require plaintiffs to take an indirect and uncertain path to recompense where a predecessor entity allegedly caused harm, subjecting it to jurisdiction in New York, and then agreed to an acquisition of all of its assets and liabilities by a successor, who in turn reaps the benefits of the predecessor’s business in New York while evading jurisdiction here.” 39 “Accordingly, the first certified question should be answered in the affirmative and the second question not answered as unnecessary.” 40 Takeaway As noted above, the Court held that successor jurisdiction applies to the purchase of assets and liabilities. It should not be forgotten, however, that the rule announced by the Court should be judged against the following factors: the impact of applying successor jurisdiction on parties to a potential acquisition, whether imputing jurisdiction fairly reflects the reasonable assumptions and expectations of the parties to such transactions, whether doing so induces responsible parties to internalize responsibility for risks they create, and the impact of imputing jurisdiction on those injured by a predecessor’s acts. It will be interesting to see how the lower courts will apply Lelchock – that is, will the courts consider the foregoing factors or apply the holding without such a consideration. Footnotes 67 F.4th 69, 71-72 (2d Cir. 2023). Id. at 72. Chief Judge Wilson and Judges Rivera, Garcia, Singas, Cannataro and Troutman concurred. Slip Op. at *1. See Licci v. Lebanese Canadian Bank, SAL , 673 F.3d 50, 55 (2d Cir. 2012). Licci v. Lebanese Canadian Bank , 20 N.Y.3d 327 (2012). Licci v. Lebanese Canadian Bank, SAL , 732 F.3d 161, 165 (2d Cir. 2013). See Kaplan v. Lebanese Canadian Bank, SAL , 999 F.3d 842, 847-848, 864 (2d Cir. 2021). 67 F.4th at 72. Id. at 74. Id. at 72, 74. See 2021 WL 4931845, at *2 (E.D.N.Y. 2021). Id. at *2-*3. Id. at *2. 67 F.4th at 81. 39 N.Y.3d 1146 (2023). 67 F.4th, at 74; see also Licci , 732 F.3d at 168-174. Slip Op. at *1. Id. Id. Id. at *1-*2. Id. at *2 (citing cases). Id. Id. SGBL argued that CPLR 302 expressly provides that an agent’s acts may give rise to personal jurisdiction, and that successor jurisdiction is available only where the successor and predecessor are “one and the same” because they are alter egos, or via a merger or corporate reorganization. Applying the principle of expressio unius est exclusio alterius (or “the expression of one thing is the exclusion of the other”), SGBL contended that CPLR 302 precludes successor jurisdiction in all other circumstances. Id. Id. Id. (citing, inter alia , Gronich & Co., Inc. v. Simon Prop. Grp., Inc. , 180 A.D.3d 541, 542 (1st Dept. 2020) (determining without explanation that a merger imputes successor jurisdiction, but “merely acquir the assets of the predecessor company” does not) (citing U.S. Bank N.A. v. Bank of Am. N.A. , 916 F.3d 143, 156-158 (2d Cir. 2019)); Semenetz v. Sherling & Walden, Inc. , 21 A.D.3d 1138, 1140-1141 (3d Dept. 2005) (broadly stating that “in certain circumstances a successor corporation may inherit its predecessor’s jurisdictional status,” but finding no such jurisdiction on “the facts of the subject case” (internal quotation marks omitted)); BRG Corp. v. Chevron U.S.A., Inc. , 163 A.D.3d 1495, 1496 (4th Dept. 2018) (confirming issue of successor jurisdiction is “novel and unsettled”); Applied Hydro—Pneumatics v. Bauer Mfg. , 68 A.D.2d 42, 46 (1979) (holding that successor corporation’s nunc pro tunc ratification and adoption of its predecessor’s acts in New York yields personal jurisdiction over the successor without discussing imputation)). Id. (citation omitted). Id. at *2-*3 (citations omitted). Id. at *3. Id. Id. Id. (citations omitted). Id. Id. at *3-*4. Id. at *4 Id. (citations omitted). Id. (citation omitted). Id. (citation omitted). Id. 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.

By:  Jeffrey M. Haber The foundation of virtually every business and commercial transaction is a contract. It is difficult to imagine a transaction for the purchase or sale of goods, the merger or acquisition of a business, or the provision of services that is not based upon a contract. There is almost nothing more costly to businesses and their owners than a dispute regarding the meaning of a contract. Such disputes often arise over the performance or non-performance of a term in the contract. Disputes over the meaning of a contract or a term therein can take many forms. For instance, the language used in the contract may be ambiguous or reasonably clear but susceptible to different meanings. Sometimes, the language in a contract is clear but, when taken literally, it does not reflect the parties’ intent. Additionally, an event may have occurred that was not contemplated by the parties at the time of drafting, so the contract does not specifically provide for that occurrence. When parties enter a contract, they naturally assume that the language used in their agreement accurately memorializes their understandings and intentions. For this reason, when a dispute arises, the courts in New York look to the intent of the parties as expressed by the language they chose to put into their writing. 1 A clear, complete agreement will be enforced according to its terms. 2 When a dispute over the meaning of a contract arises, the court first asks if the contract contains any ambiguity. 3 Since New York is a textual jurisdiction ( i.e. , where the courts look to the agreement itself to determine the meaning of the agreement), whether there is ambiguity “is determined by looking within the four corners of the document,” not to extrinsic and parol evidence. 4 Thus, courts will examine the parties’ intentions as set forth in the agreement and seek to afford the language an interpretation that is sensible, practical, fair, and reasonable. 5 A contract is not ambiguous if, on its face, it is definite and precise and reasonably susceptible to only one meaning. 6 The “parties cannot create ambiguity from whole cloth where none exists, because provisions are not ambiguous merely because the parties interpret them differently.” 7 “Whether or not a writing is ambiguous is a question of law to be resolved by the courts.” 8 “ xtrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.” 9 This rule is especially applicable where the parties are commercially sophisticated and their contract contains a merger clause. 10 Since a “contractual provision that is clear on its face must be enforced according to the plain meaning of its terms,” 11 courts may not “add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.” 12 This is especially so “in commercial contracts negotiated at arm’s length by sophisticated, counseled business people.” 13 In addition, it is important to remember that “ very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” 14 “This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” 15 “While the duties of good faith and fair dealing do not imply obligations inconsistent with other terms of the contractual relationship, they do encompass any promises which a reasonable person in the position of the promisee would be justified in understanding were included.” 16 To state a cognizable claim, “ plaintiff must allege a specific implied contractual obligation and allege how the violation of that obligation denied the plaintiff the fruits of the contract.” 17 Conduct that frustrates the purpose of a contract is often described as bad faith, and is identified by, among other things, “evasion of the spirit of the bargain,” “abuse of a power to specify terms,” “interference with or failure to cooperate in the other party’s performance,” and willful rendering of imperfect performance. 18 General allegations of bad faith are insufficient. 19 Mayville Engineering Company, Inc. v. Peloton Interactive, Inc. These principles were at play recently in Mayville Engineering Company, Inc. v. Peloton Interactive, Inc. , 2024 N.Y. Slip Op. 01990 (1st Dept. Apr. 11, 2024) ( here ).  Mayville Engineering involved a supply agreement between the parties pursuant to which plaintiff was to manufacture custom parts for defendant’s home exercise bikes. The agreement contained a “volume-based pricing agreement,” which incorporated a “volume-based pricing model” for various component parts that plaintiff was to manufacture.  The pricing model was set forth in Exhibit A to the agreement; that exhibit, in turn, comprised 12 pricing charts, 11 of which corresponded to each part to be manufactured by plaintiff. The first column of each of those 11 charts showed the number of parts to be ordered by defendant, with the first row showing zero parts ordered, and the remaining columns set out, among other data, columns for revenue. All columns, including the zero-parts row, showed some revenue.  Plaintiff argued that the volume-based pricing model, as illustrated by the charts, guaranteed that defendant was obliged to make fixed payments to plaintiff even when no orders for those parts were actually placed. Defendant, on the other hand, argued that the supply agreement did not require it to make any payments to plaintiff where it did not actually order any parts from plaintiff, and that the only reasonable interpretation of the agreement, including the pricing model, is that defendant was entitled to place no orders and make no payments. Defendant moved to dismiss the cause of action for breach of the implied covenant of good faith and fair dealing (second cause of action) and the cause of action for breach of contract (the first cause of action). The motion court granted the motion as to the second cause of action, with prejudice, and denied the motion as to the first cause of action.  The First Department affirmed the rulings with regard to the two causes of action. The Court held that “Plaintiff sufficiently stated a claim for breach of contract, as it ha offered a facially reasonable reading of the relevant contract provisions.” 20 The Court found that the defendant failed to “make a definitive showing that plaintiff’s reading of the agreement unreasonable as a matter of law, or that it foreclosed by the contractual language or any other evidence in the record.” 21 “On the contrary,” explained the Court, “plaintiff provide a plausible explanation for the inclusion of revenue in the zero-unit column — namely, that the guaranteed payment obligation served to mitigate plaintiff’s required upfront investment costs.” 22 “Therefore,” concluded the Court, the motion court “correctly found that a contractual ambiguity exist , requiring the denial of the motion to dismiss.” 23 The Court also held that “plaintiff failed to state a claim for breach of the implied duty of good faith and fair dealing.” 24 The Court explained that the claim was based upon an allocation of risks and, therefore, was not an implied duty inherent in the agreement: The claim is based on plaintiff's allegations that under the parties’ agreement, defendant had an implied obligation to reimburse plaintiff for its reasonable and actual fixed costs, and that plaintiff entered the agreement in reliance on defendant's promises to do so. These allegations, however, do not support the cause of action. A favorable allocation of risks to one party is not an implied duty inherent in an agreement, nor would it be reasonable for a promisee to believe that allocating risks in its favor is an inherent obligation of a promisor … Rather, any claim concerning the allocation of the risk of plaintiff's up-front investment costs could arise only from a negotiated contractual term or some other legal basis for undertaking the obligation. 25 Accordingly, the Court held that “the dismissal with prejudice was appropriate, as the record offers no evidence to suggest that allowing plaintiff to replead would cure the deficiency in the cause of action.” 26 Footnotes Ashwood Capital, Inc. v. OTG Mgt., Inc. , 99 A.D.3d 1 (1st Dept. 2012). Id. at 7. Id. Kass v. Kass , 91 N.Y.2d 554, 566 (1998). Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P. , 13 N.Y.3d 398, 404 (2009); Abiele Contr. v. New York City School Constr. Auth. , 91 N.Y.2d 1, 9-10 (1997); Brown Bros. Elec. Contr. v. Beam Constr. Corp. , 41 N.Y.2d 397, 400 (1977). White v. Continental Cas. Co. , 9 N.Y.3d 264, 267 (2007). Universal Am. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. , 25 N.Y.3d 675, 680 (2015) (citation and internal quotation marks omitted). WWW Assocs., Inc. v. Giancontieri , 77 N.Y.2d 157, 162 (1990). Id. at 163. Schron v. Troutman Sanders LLP , 20 N.Y.3d 430, 436 (2013) (“where a contract contains a merger clause, a court is obliged to require full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to vary or contradict the terms of the writing.”) (citation and quotation marks omitted). Bank of N.Y. Mellon v. WMC Mortg., LLC , 136 A.D.3d 1, 6 (1st Dept. 2015) (citation omitted). Id. (citations omitted). Id. Restatement (Second) of Contracts § 205 (1981). See also 511 W 232nd Owners Corp. v. Jennifer Realty Co. , 98 N.Y.2d 144, 153 (2002) (“In New York, all contracts imply a covenant of good faith and fair dealing in the course of performance”). 511 W 232nd Owners , 98 N.Y.2d at 153 (citations and internal quotation marks omitted). Id. (citations and internal quotation marks omitted). Kagan v. HMC-New York, Inc. , 94 A.D.3d 67, 77 (1st Dept. 2012) (citation omitted). E.g. , Restatement (Second) of Contracts § 205 cmt. d. Kagan , 94 A.D.2d at 77. Slip Op. at *1. Id. Id. Id. (citing Telerep, LLC v. U.S. Intl. Media, LLC , 74 A.D.3d 401, 402 (1st Dept. 2010)). Id. Id. at *1-*2 (citing Jaffe v. Paramount Communications , 222 A.D.2d 17, 22-23 (1st Dept. 1996); Dalton v. Educational Testing Serv. , 87 N.Y.2d 384, 389-390 (1995)). Id. at *2 (citing Izhaky v, Izhaky , 215 A.D.3d 588, 589 (1st Dept. 2023); Carde v. Rodriguez , 189 A.D.3d 498, 498 (1st Dept. 2020)). 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.

By Jonathan H. Freiberger This BLOG has previously addressed issues related to proper licensure for contractors and the problems that arise for them if they perform work without a license. See, e.g. , < here =">here"> , < here =">here"> and < here =">here"> . We have previously noted that home improvement contractors are frequently required by municipalities to be licensed. Unlicensed home improvement contractors are precluded from collecting payments due from homeowners. Brightside Home Improvements, Inc. v. Northeast Home Improvement Services , 208 A.D.3d 446, 449 (2 nd Dep’t 2022). The purpose of such licensing legislation was previously described in this BLOG when we noted that in Millington v. Rapoport , 98 A.D.2d 765 (2 nd Dep’t 1983), in reversing the court below and dismissing plaintiff’s complaint which sought to foreclose a mechanic’s lien, the Court stated: Since the purpose of is to protect the homeowner against abuses and fraudulent practices by persons engaged in the home improvement business, it is well established that the lack of a license bars recovery in either contract or quantum meruit . Since strict compliance with the licensing statute is required, recovery is barred regardless of whether the work was performed satisfactorily or whether the failure to obtain a license was willful. The fact that the homeowner was aware of the absence of a license or even that the homeowner planned to take advantage of its absence creates no exception to the statutory requirement . Millington , 98 A.D. at 766 (citations omitted); see also Callos, Inc. v. Julianelli , 300 A.D.2d 612, 2013 (2 nd Dep’t 2002) (“It is well settled that licensing statutes are to be strictly construed and that an unlicensed contractor forfeits the right to recover damages based either on breach of contract or on quantum meruit.”) Section 27-3017(a) of the New York City Administrative Code (Electrical Code) prohibits the performance of electrical work without a license. This furthers the purpose of the Electrical Code, which provides that “ ince there is danger to life and property inherent in the use of electrical energy, the electrical code is enacted to regulate the business of installing, altering or repairing wiring and appliances for electrical light, heat, power, signaling, communication, alarm or data transmission in the city of New York and the licensing of all persons who engage in such business.” New York City Administrative Code § 27-3002 . The significance of the Electrical Code and the strictness with which compliance will be construed was reinforced on April 10, 2024, by the Second Department in Electrical Contracting Solutions Corp. v. Trump Village Section 4, Inc. The defendant in Electrical Contracting owned several buildings. The electrical systems of those buildings were damaged during a storm and had to be replaced. The plaintiff electrical contractor entered into contracts with the defendant to perform the work. While the plaintiff’s vice president held a master electrician’s license (NYC Admin Code § 27-3017), the plaintiff corporation did not. The Plaintiff’s vice president obtained permits for the electrical work from the New York City Department of Buildings under the name of his own (but different from the Plaintiff) company. The plaintiff’s vice president supervised the electrical work that was performed by the Plaintiff’s own employees. The defendant owner failed to pay the plaintiff for the work once completed. The plaintiff filed a mechanic’s lien and commenced and breach of contract action against the defendant. During a bench trial, the defendant asserted that the plaintiff was an unlicensed contractor and that it was not entitled to recovery. The motion court determined that the plaintiff was entitled to recovery on the unpaid invoices. “With respect to the issue of non-licensure, the court found that the "breach was insubstantial and nominal only." On the defendant’s appeal, the Second Department modified the judgment by dismissing the complaint. After noting that the NYC Administrative Code requires electrical contractors to be properly licensed, and that the Code provisions were promulgated to protect the public health and safety, the Court reiterated that the plaintiff was not licensed and held: The plaintiff’s contention that recovery should not be denied because was a duly licensed subcontractor which performed the electrical work is without merit. This Court has previously held that such a relationship is insufficient to permit an unlicensed contractor to recover for work performed in the City ( see JME Enterprises, Inc. v Kostynick Plumbing and Heating, Inc. , 273 AD2d 201; Fisher Mech. Corp. v Gateway Demolition Corp. , 247 AD2d 579). "'So strict has been judicial construction of the statutory requirement through concern for the public health and welfare that the requirement may not be satisfied by employing or subletting' the work to an appropriately licensed person" ( Charlebois v Weller Assoc. , 72 NY2d 587, 592-593, quoting Vitanza v City of New York , 48 AD2d 41, 44). Moreover, that the plaintiff's vice president had a master electrician's license, and that the defendant's architect knew that the electrical work permits were issued to an entity other than the plaintiff, does not bar the application of the above rule ( see Bronold v Engler , 194 NY 323; Fisher Mech. Corp. v Gateway Demolition Corp. , 247 AD2d at 580; Piersa, Inc. v Rosenthal , 72 AD2d 593). 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 The federal securities laws impose recordkeeping requirements on registered investment advisers to ensure that they responsibly discharge their roles in the nation’s markets. The Securities and Exchange Commission (“SEC” or “Commission”) has long said that compliance with these requirements is essential to investor protection and to the Commission’s efforts to further its mandate of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.  Section 204 of the Advisers Act of 1940 (the “Advisers Act”) authorizes the Commission to issue rules requiring investment advisers to make and keep for prescribed periods, and furnish copies of, certain records. The Commission adopted Advisers Act Rule 204-2 pursuant to this authority. Rule 204-2 specifies the manner and length of time that the records created in accordance with Commission rules, and certain other records produced by investment advisers, must be maintained and produced promptly to Commission representatives. The rules adopted under Advisers Act Section 204, including Advisers Act Rule 204-2(a)(7), require that investment advisers preserve in an easily accessible place originals of all communications received and copies of all written communications sent relating to, among other things, recommendations made or proposed to be made and any advice given or proposed to be given; any receipt, disbursement, or delivery of funds or securities; or the placing or execution of any order to purchase or sell any security. In recent years, the SEC has brought charges against numerous firms for violating the foregoing rules. In September 2022, the SEC fined 15 broker-dealers and one affiliated investment advisor a total of $1.1 billion to settle charges of “widespread and long-standing” regulatory failures ( here ). The SEC maintained that the firms violated record-keeping requirements, with employees (including those at senior levels) communicating via text messaging and platforms like WhatsApp.  On August 8, 2023, the SEC announced charges against 10 firms in their capacity as broker-dealers and one dually registered broker-dealer and investment adviser for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications ( here ). The firms admitted the facts set forth in their respective SEC orders and agreed to pay combined penalties of $289 million to settle charges against them. In September 2023, the SEC announced charges against five broker-dealers, three dually registered broker-dealers and investment advisers, and two affiliated investment advisers for widespread and longstanding failures to maintain and preserve electronic communications ( here ). To settle the matter, the firms admitted the facts set forth in their respective SEC orders, acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, and agreed to pay combined civil penalties of $79 million. In February 2024, the SEC charged 16 broker-dealers, dual registrants and affiliated investment advisors for sending and receiving off-channel communications that related to the broker-dealer business, and for sending and receiving off-channel communications that related to recommendations made or proposed to be made and advice given or proposed to be given. To settle the matter, the firms agreed to pay combined civil penalties of $81 million. Senvest Management LLC, a registered investment adviser, is the latest registered investment adviser to be charged with violating the SEC’s recordkeeping rules.  On April 3, 2024, the SEC announced ( here ) that it charged Senvest for widespread and longstanding failures to maintain and preserve certain electronic communications. The SEC also charged Senvest with failing to enforce its code of ethics. To settle the matter, Senvest admitted the facts set forth in the Commission’s order ( here ), acknowledged that its conduct violated the federal securities laws, and agreed to pay a $6.5 million penalty and to implement improvements to its compliance policies and procedures. According to the Commission’s order, from at least January 2019 through December 2021, Senvest employees at various levels of authority communicated about company business internally and externally using personal texting platforms and other non-Senvest messaging applications in violation of the firm’s policies and procedures. Senvest also failed to maintain or preserve the off-channel communications as required under the federal securities laws and the firm’s policies and procedures. In one instance, said the SEC, three senior employees engaged in off-channel communications on personal devices that were set to automatically delete messages after 30 days. Additionally, the SEC found that certain Senvest employees failed to adhere to provisions of the firm’s code of ethics requiring them to obtain pre-clearance for all securities transactions in their personal accounts. The SEC found that Senvest violated certain recordkeeping and ethics provisions of the Investment Advisers Act of 1940 and failed to reasonably supervise with a view to preventing and detecting violations. In addition to the $6.5 million penalty, Senvest was censured and ordered to cease and desist from future violations of the relevant provisions of the federal securities laws. The firm also agreed to retain a compliance consultant to, among other things, conduct comprehensive reviews of its policies and procedures relating to the retention of electronic communications found on personal devices and the framework for addressing non-compliance by its employees with those policies and procedures. Commenting on the order, Eric Werner, Director of the Fort Worth Regional Office, stated: “The Commission continues to focus on regulated entities’ compliance with the recordkeeping requirements. Adherence to these requirements is essential for the Commission to effectively exercise its regulatory oversight and enforce the federal securities laws.” 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.

By Jeffery Haber There are four primary levels of services provided by an accountant with respect to an entity’s financial statements: preparation, compilation, review, and audit.  A preparation engagement is a basic one. In this level of service, the accountant assists management or the business owner in preparing financial statements for internal use.  In a compilation engagement, the accountant assists management or the business owner in the presentation of the entity’s financial statements in accordance with General Accepted Accounting Principles (“GAAP”). In this level of service, the primary function of the accountant is to review the financial statements and propose adjustments, if any are necessary to make them materially correct. The accountant is not required to obtain an understanding of the entity’s internal controls or assess the presence of fraud risks . However, if the presence of fraud comes to the accountant’s attention, then he or she is supposed to report such fraud to management or the business owner.  In a review engagement, the accountant takes a more in-depth examination of the financial statements than in a compilation. In this level of service, the accountant provides a limited level of assurance that there are no material modifications that should be made to the financial statements. This limited assurance is obtained primarily through inquiry and procedures, which are not required in a preparation or compilation engagement. In a review, the accountant is not required to obtain an understanding of the entity’s internal controls or assess any fraud risks that may be extant at the time of the review.  In an audit engagement, the highest level of service provided by an accountant, the objective is to obtain reasonable assurance about whether the financial statements are free of material misstatement. In this level of service, the accountant expresses an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with GAAP. In all four levels of services, the responsibility for the financial information provided, and the financial statements that are prepared, is with management or the business owner.  In 1650 Broadway Assoc., Inc. v. Sturm , 2024 N.Y. Slip Op. 01864 (1st Dept. April 4, 2024) ( here ), the Appellate Division, First Department was asked to determine whether an outside auditor performing a compilation can be held liable for aiding and abetting a fraud in connection with the services provided by the accountant. As discussed below, the First Department held that when an accountant performs “unaudited services,” the accountant is not shielded “from liability because accountant must perform all services in accordance with the standard of a reasonable accountant under similar circumstances, which includes reporting fraud that is or should be apparent” to the accountant.” 1 1650 Broadway is action for accounting malpractice and fraud, in which the “question on appeal whether an accountant hired to perform ‘compilation services’ shielded from liability for the alleged improper activities of an officer of the company.” 2 Plaintiff 1650 Broadway Associates, Inc. owns the Stardust Diner, a family business originally owned by Irving Sturm and plaintiff Ellen Sturm, and then in part by their son, defendant Kenneth Sturm. At all relevant times, Ellen, along with the two trust plaintiffs, owned 89% of the Diner, and Kenneth owned 11%. After Irving’s death in 2010, Kenneth assumed day-to-day managerial responsibility for the Diner. Ellen was vice-president of the Diner, while Kenneth served as secretary and treasurer. Plaintiffs alleged that when Ellen stepped back from active operations of the Diner, Kenneth began looting the Diner. In particular, he allegedly gave himself large salary increases and began to take unauthorized loans from the Diner. Over the course of several years, these loans amounted to approximately $12 million. Plaintiffs also alleged that in 2016 and 2017, Kenneth obtained a $2.5 million line of credit from Citibank. Kenneth allegedly forged Ellen’s signature on loan documents that made Ellen the personal guarantor on the loans. The books and records of the Diner reflected the loans. They also reflected certain “reductions” in the amounts of the loans. Plaintiffs alleged that the records purporting to show the reductions were manufactured after the fact by Kenneth. Defendant Getzel, Schiff & Pesce, LLP is a public accounting firm. For a period including 2012 through 2019, defendant performed certain accounting services for plaintiffs, the Diner, and Kenneth. It provided these services through a series of year-after-year engagement letters. Under the terms of these letters, for each of the relevant years, defendant agreed to provide “compilation services” and to prepare the local, state, and federal tax returns for the clients. Between 2002 and 2008, defendant’s managing partner had annual meetings with Ellen at her home, during which the partner provided her only a broad summary of the Diner’s finances but never disclosed any details about the Diner’s accounting, books and records. In 2019, Ellen hired new personal accountants who uncovered the alleged loans to Kenneth. In addition to taking the money for himself, Kenneth also allegedly used the “loan” proceeds to finance various other business ventures. Plaintiffs alleged that defendant was the accountant to these other businesses. In 2021, plaintiffs commenced the action asserting claims for fraud and breach of fiduciary duty against Kenneth. Regarding defendant, plaintiffs asserted claims for accounting malpractice and aiding and abetting fraud. Kenneth and defendant each moved to dismiss. The motion court granted Kenneth’s motion, but gave plaintiffs leave to amend. The court also granted defendant’s motion. The court held that because it was undisputed that the loans were disclosed on the financial statements, plaintiffs could not show how defendant breached professional accounting standards or aided Kenneth’s fraud. Plaintiffs appealed the grant of defendant’s motion. The First Department reversed. The Court held that “Plaintiffs sufficiently pleaded causes of action for accounting malpractice and aiding and abetting fraud, which not utterly refuted by the documentary evidence” presented with the motion. 3 On appeal, defendant primarily argued “that the malpractice and fraud claims refuted by the fact that the accounting firm was hired to prepare tax returns and other financial statements that documented the loans at issue”; it was not engaged to “investigat and report[ ] Kenneth’s alleged fraud,” as such services “were beyond its duties.” 4 Defendant did not contend that plaintiffs failed to plead accounting malpractice and aiding and abetting fraud by Kenneth.  Plaintiffs countered, arguing that defendant was not “hired to discover Kenneth’s wrongdoing, but rather that information obtained by defendant during its business interactions with Kenneth and information used by defendant in order to prepare tax returns and financial statements put defendant on notice about the impropriety of Kenneth’s loans to himself such that defendant had a duty to inform plaintiffs of the questionable payments.” 5 The Court agreed, noting that the “law is very clear that an agreement to perform unaudited services does not shield an accountant from liability because an accountant must perform all services in accordance with the standard of a reasonable accountant under similar circumstances, which includes reporting fraud that is or should be apparent.” 6 In addition, plaintiffs argued that not only did defendant have knowledge of Kenneth’s alleged improper transactions but that it participated in the alleged breaches. 7 Under New York law, noted the Court, “ ne who aids and abets a breach of a fiduciary duty is liable for that breach as well, even if he or she had no independent fiduciary obligation to the allegedly injured party, if the alleged aider and abettor rendered ‘substantial assistance’ to the fiduciary in the course of effecting the alleged breaches of duty.” 8 Alternatively, defendant argued that the accounting malpractice and aiding and abetting claims were refuted by the fact that the allegedly improper loans were included in the tax returns and financial statements, which plaintiff Ellen had a duty to review. 9 “However,” said the Court, “while plaintiffs’ own negligence in monitoring Kenneth’s activities in managing the Diner may have been a factor in enabling Kenneth to continue his alleged fraudulent scheme for several years, the pleadings and documentary evidence submitted do not show that such negligence was the sole proximate cause of the Diner’s loss.” 10 The Court noted that it had “not been established that such negligence impeded defendant’s duties to reveal to plaintiffs what it knew about Kenneth’s alleged improper conduct regarding the loans.” 11 Accordingly, the Court reversed the motion court’s order which granted defendant’s motion. 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. References Slip Op. at *3. Id. at *1. Id. Id. Id. at *2-*3. Id. at *3 (citing 1136 Tenants’ Corp. v. Rothenberg & Co. , 36 A.D.2d 804 (1st Dept. 1971), aff’d , 30 N.Y.2d 585 (1972); William Iselin & Co., Inc. v. Mann Judd Landau , 71 N.Y.2d 420, 424-425 (1988); United States v. Natelli , 527 F2d 311, 320-321 (2d Cir. 1975), cert. denied , 425 U.S. 934 (1976); Blakely v. Lisac , 357 F. Supp. 255, 265-266 (D. Or. 1972); Robert Wooler Co. v. Fidelity Bank , 330 Pa. Super. 523, 531-535, 479 A.2d 1027, 1031-1033 (1984)). Id. Id. (citing Caprer v. Nussbaum , 36 A.D.3d 176, 193 (2d Dept. 2006); Operative Cake Corp. v. Nassour , 21 A.D.3d 1020 (2d Dept. 2005)). Id. Id. Id. (citing Collins v. Esserman & Pelter , 256 A.D.2d 754, 757 (3d Dept. 1998); National Sur. Corp. v. Lybrand , 256 App. Div. 226, 235-236 (1st Dept. 1939)).

By Jonathan H. Freiberger Whether a non-existent corporation can enter into a contract is an interesting question. The interesting answer is that sometimes it can.  Pursuant to BCL § 403 , a corporation’s existence begins “ pon the filing of the certificate of incorporation by the department of state.”  Generally, “a nonexistent entity cannot acquire rights or assume liabilities, a corporation which has not yet been formed normally lacks capacity to enter into a contract.” Rubenstein v. Mayor , 41 A.D.3d 826, 828 (2 nd Dep’t 2007); see also TY Builders II v. 55 Day Spa, Inc. , 167 A.D.3d 679, 680 (2 nd Dep’t 2018) ( quoting Rubenstein ).  Under certain circumstances, despite not having been formed prior to entering into a contract, “a corporation may be deemed to exist and possess the capacity to contract pursuant to the doctrine of incorporation by estoppel.”  TY Builders , 167 A.D.3d at 681 (citation omitted). The doctrine of corporation (or incorporation) by estoppel “is based on the principle that "one who has recognized the organization as a corporation in business dealings should not be allowed to quibble or raise immaterial issues on matters which do not concern him in the slightest degree or affect his substantial rights." Rubenstein , 41 A.D.3d at 828; see also TY Builders , 167 A.D.3d at 681.  One of the leading, and often cited, cases on this subject is Boslow Family Ltd. Partnership v. Glickenhouse & Co. , 7 N.Y.3d 664 (2006). Boslow , involved a limited partnership, and not a corporation, but nonetheless the Court applied the doctrine of corporation by estoppel. The plaintiff in Boslow signed an initial certificate of limited partnership, but its counsel “failed to file the initial certificate with the Department of State. Id . at 666. 1 The plaintiff opened a discretionary investment account with the defendant investment advisory firm .  The account was active for three years, during which time the defendant earned $31,000 in fees. The plaintiff closed the account due to displeasure with the defendant’s investments choices. Thereafter, the plaintiff brought suit alleging breach of contract and negligence in the management of the investment account. “Defendant moved to dismiss the complaint pursuant to CPLR 3211 (a) (1), (3) and (7), asserting, among other things, that plaintiff had failed to file its initial certificate prior to the commencement of the action and therefore lacked the capacity to enter into the agreement and bring suit.” The Court of Appeals reversed the Appellate Division’s affirmance of the motion court’s grant of the motion to dismiss. The Boslow Court found that while it “is undisputed that plaintiff had not complied with the Partnership Law’s mandatory formation requirements at the time it entered into the agreement and commenced this suit … efendant … does not dispute that it derived a benefit from the agreement and that the investment services provided were not dependent in any way on the nature of the plaintiff as a limited partnership.” Boslow , 7 N.Y.3d at 667. Accordingly, the Court held that the defendant was “estopped from denying the partnership’s validity.” Id. at 667-68 (citations omitted). The Court reasoned that should not be able to “us that sword to escape liability after it benefitted from its contract with plaintiff.”  On April 3, 2024, the Appellate Division, Second Department, decided Teva Realty, LLC v. Comega Holding Corp . , 2 a case decided under the doctrine of corporation by estoppel. Teva Realty is an action for, inter alia , specific performance and anticipatory breach with respect to a contract for the purchase of three parcels of real estate. 3 In 2016, a plaintiff, Rockaway Cornaga LLC (“RC”) entered into a contract for the purchase of the real property. At or about the time the contract was executed, a related, non-party, entity delivered to the defendant seller a $100,000.00 down payment. The contract provides, inter alia , that the purchaser is RC or “an entity to be formed”. At the time the contract was executed, RC had not been formed. In fact, RC was not formed until 2019 – just prior to commencing its action.  In addition, the other two plaintiffs were formed for the purpose of acquiring the lots and were not parties to the contract.  When the defendant failed to close, the plaintiffs commenced their action.  The motion court granted the seller’s motion for summary judgment dismissing the specific performance and anticipatory breach causes of action because RC did not exist at the time the contract was executed and could not acquire contract rights. Relying on the corporation by estoppel doctrine, the Second Department modified the motion court’s order by denying summary judgment on the anticipatory breach cause of action.  The Court sustained the dismissal of the specific performance cause of action; albeit on different grounds.  In so doing, the Court stated: The defendants failed to make a prima facie showing that RC lacked capacity to enter into a contract and, thus, that they were entitled to summary judgment dismissing the causes of action for specific performance of the contract … and alleging anticipatory breach of contract on that basis. Generally, it is true that since a nonexistent entity cannot acquire rights or assume liabilities, a corporation which has not yet been formed normally lacks capacity to enter into a contract. However, under the doctrine of corporation by estoppel, one who has recognized an organization as a corporation in business dealings should not be allowed to quibble or raise immaterial issues which do not concern him or her in the slightest degree or affect his or her substantial rights. Thus, parties who deal with an entity holding itself out as a corporation and who receive performance from such entity are estopped from avoiding their obligations to it. Here, the defendants dealt with RC as an incorporated entity for several years, from the execution of the contract in 2016 until the commencement of this action in 2019. Contrary to their contentions, the defendants failed to establish that they received no benefit from the contract, as they admit to having received the contract deposit, which was held in escrow by their attorney. Accordingly, the defendants are estopped from denying RC's validity for the purposes of avoiding their obligations to it….  However, the Supreme Court properly granted those branches of the defendants' renewed motion which were for summary judgment dismissing the causes of action for specific performance of the contract … on the alternate ground that those remedies are unavailable pursuant to the contract. … The contract provides that RC "agrees that after July 31, 2017, it shall not have the right to compel specific performance of this Agreement." As this action was not commenced until 2019, the defendants established, prima facie, that RC cannot seek specific performance of the contract….  Footnotes Like BCL § 403, Partnership Law § 121-201(b) provides that a limited partnership is formed when the initial certificate of limited partnership is filed with the department of state. Eds. Note: some of the facts recited herein came from the supreme court file available on NYSCEF. Eds. Note: this BLOG discussed specific performance of real estate contracts < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . 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 Attorneys are often asked by their clients if they can sue for attorney’s fees. Whether attorney’s fees may be recovered in litigation depends on the circumstances. Under the general rule, attorney’s fees are incidents of litigation, and the prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties, statute or court rule. 1 In LMM Capital Partners, LLC v. Mill Point Capital, LLC , 2024 N.Y. Slip Op. 31014(U) (Sup. Ct., N.Y. County (Mar. 26, 2024) ( here ), the question before the motion court was whether the defendants – the prevailing parties in the action – were entitled to attorney’s fees under an agreement between the parties? As discussed below, the motion court answered that question in the affirmative.  LMM Capital involved the potential acquisition of E&M Logistics, Inc. (“E&M”) and its affiliate Mill Point Capital LLC (“Mill Point”) by LMM Capital Partners, LLC (“LMM”). On April 21, 2021, LMM entered into a Mutual Termination Agreement and Release with E&M (the “Termination Agreement”), pursuant to which the parties terminated their letter of intent, dated August 4, 2020 (the “LOI”), governing LMM’s potential acquisition of E&M. Among other things, if a superior offer came along after entry of the Termination Agreement, the LOI gave E&M the option to pay a $400,000 “break-up fee” to pursue that proposal. E&M exercised this option and paid LMM $420,000 over a period of six months, which LMM accepted.  Section 1.C of the Termination Agreement included a broad mutual release, pursuant to which LMM released E&M and E&M’s “future Affiliates,” from any and all claims by LMM, whether known or unknown, “arising out of … the and the transactions contemplated thereby.” Mill Point became an “Affiliate” of E&M under the Termination Agreement on September 7, 2022, when it acquired E&M.  Section 2 of the Termination Agreement provided that: “The successful Party in any action to enforce this Agreement will be entitled to be awarded all costs, including reasonable attorney’s fees, paid, or incurred by such prevailing Party in such action to enforce this Agreement.” (the “Prevailing Party Provision”). On September 30, 2022, LMM filed the action, alleging breach of contract and tortious interference with Plaintiffs’ business relations against Mill Point; tortious interference with contract and constructive fraud against Defendants; and fraudulent inducement against Defendants. Plaintiffs also sought a declaration that the Termination Agreement and release were unenforceable. On December 8, 2022, Defendants moved to dismiss the complaint pursuant to CPLR 3211(a)(1), (5), and (7) and demanded, among other things, that Plaintiffs withdraw the complaint.  On May 10, 2023, the motion court dismissed the complaint with prejudice, finding, inter alia , that the release at issue was “extremely broad” and “applie to all claims asserted … by LMM against all the named defendants.” 2 On August 30, 2023, pursuant to the Termination Agreement, Defendants filed their motion for attorneys’ fees. The motion court granted the motion as to liability and “referred to a Special Referee or Judicial Hearing Officer to determine the proper amount of fees to be awarded.” 3 “To determine whether a party has ‘prevailed’ for the purpose of awarding attorneys’ fees, the court must consider the ‘true scope’ of the dispute litigated and what was achieved within that scope.” 4 A “prevailing party” is a person or entity that “prevail on the central claims advanced, and receive substantial relief in consequence thereof.” 5 Based upon the foregoing principles, the motion court held that there was no question that Defendants were the successful or prevailing parties under Section 2 of the Termination Agreement. 6 As such, Defendants were entitled to their attorney’s fees. In so holding, the motion court rejected Plaintiffs’ arguments that the court lacked jurisdiction to consider the motion for attorney’s fees and that the motion was premature. 7 Plaintiffs maintained that Defendants were required to include in their motion to dismiss an express request that the court retain jurisdiction to award attorney’s fees if the court granted the motion. The motion court noted that that Plaintiffs failed to cite to any authority for that proposition.” 8 Plaintiffs also contended that the motion for attorney’s fees was premature due to the pendency of the appeal. The motion court concluded that the argument failed since the First Department affirmed the dismissal of the action. 9 Having found Plaintiffs liable for Defendants’ attorney’s fees, the motion court referred the determination of the amount to a Special Referee or Judicial Hearing Officer. The motion court found that “the invoices submitted by the defendants heavily redacted and otherwise provide minimal details of the legal work performed and other costs incurred in th action.” 10 Finally, the motion court directed Defendants to submit “proper and adequate proof to meet their burden of establishing a reasonable amount of fees and costs.” 11 In doing so, the Court stated that the following factors should be considered: “the time and labor expended, the difficulty of the questions involved and the required skill to handle the problems presented, the attorney’s experience, ability, and reputation, the amount involved, the customary fee charged for such services, and the results obtained.” 12 Footnotes See Flemming v. Barnwell Nursing Home and Health Facilities, Inc. , 15 N.Y.3d 375 (2010); Hooper Assoc. v. AGS Computers , 74 N.Y.2d 487, 491 (1989); see also Coopers & Lybrand v. Levitt , 52 A.D.2d 493 (1st Dept. 1976). By order dated February 15, 2024, the Appellate Division, First Department, affirmed. This Blog examined the First Department’s decision and order here . Slip Op. at *1. Excelsior 57th Corp. v. Winters , 227 A.D.2d 146 (1st Dept. 1996). Board of Mgrs. of 55 Walker Condo. v. Walker St. LLC , 6 A.D.3d 279 (1st Dept. 2004); Sykes v. RFD Third Ave. I Assocs., LLC, 39 AD3d at 279 (1st Dept. 2007). Id. at *2. Id. Id. Id. See also n.2, supra . Id. Id. Id. (quoting Matter of Barich , 91 A.D.3d 769 (2d Dept. 2012), and citing Matter of Freeman , 34 N.Y.2d 1 (1974)). 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. One method of providing for attorney's fees in actions between the parties is to provide for payment as a form of liquidated damages. Such fees are enforceable if they are not unconscionable (see, Equitable Lbr. Corp. v IPA Land Dev. Corp., 38 N.Y.2d 516 (1976).