By: Jeffrey M. Haber It is not often that we examine a case involving the doctrine of champerty. The last time we did so was on March 8, 2023 ( here ). We also examined the champerty doctrine in 2021 ( here ), 2020 ( here ), and 2016 ( here ).  Today, we examine the champerty doctrine in our discussion of IKB Intl. S.A. v. Morgan Stanley , 2024 N.Y. Slip Op. 01675 (1st Dept. Mar. 26, 2024) ( here ). Champerty is the prohibited practice of purchasing claims for the purpose of commencing litigation. It has been described as “a venerable doctrine developed hundreds of years ago to prevent or curtail the commercialization of or trading in litigation .” 1 The doctrine of champerty is codified in New York within Judiciary Law § 489. 2 Under Judiciary Law § 489, no corporation “shall solicit, buy or take an assignment of … a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon.” However, for an assignment of a claim to be void for champerty, the assignee must have made the purchase “for the very purpose of bringing such suit” to the “exclusion of any other purpose.” 3 Thus, while assignments “for the primary purpose of obtaining costs or ” are void as champertous, 4 assignments are not champertous where the intent to bring a suit is merely “incidental and contingent” to other rights. 5 Moreover, champerty does not apply where the assignee had a “preexisting proprietary interest” in the subject matter. 6 IKB began in the years immediately prior to the financial crisis of 2007-2008. Plaintiff IKB International S.A. (“IKB S.A.”) was a commercial bank incorporated in Luxembourg.  IKB S.A. purchased a number of certificates (“Certificates”) for residential mortgage-backed securities from Morgan Stanley, allegedly in reliance on misrepresentations that Morgan Stanley made in its offering documents. In particular, Morgan Stanley allegedly made misrepresentations to IKB S.A.’s investment managers, Standish Mellon and BlackRock, including misrepresentations regarding loan-to-value and combined loan-to-value statistics, owner-occupancy status of borrowers, and adherence to the originators’ underwriting guidelines. The contemporary value of the Certificates collapsed during the onset of the financial crisis as the poor quality of the underlying loans and resulting increased credit risk became apparent. Ultimately, IKB S.A. was placed into liquidation as part of the German government’s bailout of IKB S.A.’s parent, IKB A.G. In November 2008, IKB S.A. sold the Certificates to IKB A.G. Two weeks later, IKB A.G. sold the Certificates to Rio Debt Holdings (Ireland) Limited (“Rio”), a newly created Irish special purpose vehicle. As part of the sale of Certificates to Rio, IKB A.G. became a junior lender to Rio and also became a portfolio administrator to Rio. IKB A.G. and Rio subsequently executed an assignment on May 9, 2012 (the “2012 Assignment”) in which Rio assigned to IKB A.G. “all the rights of action and claims against any other party with respect to the Securities it may have obtained in connection with its purchase of the Securities from IKB Deutsche Industriebank AG … except rights of action and claims for the receipt of interest and principal on the Securities.” In exchange, IKB A.G. agreed to provide to Rio “a sum equal to the proceeds of any recovery stemming from a resolution of claims relating to the Assigned Rights, net of all agreed costs, taxes and expenses, which shall be set out and governed by a separate agreement to be executed by the Parties.” IKB A.G. maintained that under a supplementary deed (the “Supplementary Deed”) and other governing documents, the parties agreed that 80% of the net litigation proceeds would revert to IKB A.G. Rio and IKB A.G. executed the Supplementary Deed on January 11, 2013—after Plaintiffs filed the summons in the action—but gave it retroactive effect from May 9, 2012. IKB A.G. filed the summons in November 2012 and later filed the complaint on May 17, 2013. The complaint alleged causes of action for fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation. Defendants moved to dismiss the complaint, in part for lack of standing, arguing that the 2012 Assignment of the fraud claims back to IKB A.G. was void as champertous. The motion court denied the motion, finding that Defendants had not shown that “IKB AG’s primary or sole purpose was not to enforce a legitimate claim, or that the claim was not acquired as part of a larger transaction or for leverage in other disputes between the parties.” The motion court determined that IKB A.G.’s intent in the 2012 Assignment was a factual question that required further development of the record. However, the motion court dismissed the causes of action for fraudulent concealment and negligent misrepresentation. On summary judgment, Defendants again sought dismissal on the basis of champerty. The motion court held that the 2012 Assignment was not champertous “because IKB AG had a preexisting proprietary interest in the subject matter.” The motion court explained that  In order to finance the initial assignment of the Certificates to Rio in 2008, IKB AG and Rio entered into a loan agreement. Pursuant to the 2008 loan agreement between IKB AG and Rio, IKB AG as junior lender was entitled to 80% of the profits from the assets. While Defendants are correct that the loan has since been paid down to one dollar, this does not change the fact that, unlike other champertous assignments, the 2012 Assignment indisputably did not involve a “stranger” to the transaction, but a party with a prior interest. 7 The motion court also held that Defendants “failed to establish that the sole purpose for the 2012 Assignment was to profit off of litigation, to the exclusion of all other purposes.” The motion court explained that “ n assignment is not champertous merely because the parties enter into the assignment ‘for the purpose of collecting damages, by means of a lawsuit.’” 8 “Rather,” said the motion court, “there is a key distinction between ‘acquir a right in order to make money from litigating it and … acquir a right in order to enforce it .’” 9 The motion court found that Plaintiffs “provided evidence that they still entitled to 80% of the future cash flows under the 2008 loan agreement with Rio because the loan was not paid off entirely—even though it was paid down almost in its entirety.” “Therefore,” concluded the motion court, “regardless of whether or not the 2012 Assignment’s primary purpose was litigation, Defendants not provided sufficient evidence to establish that the sole purpose, to the exclusion of all other purposes, was to profit off of litigation.” “As such,” said the motion court, “Defendants have failed to establish that the 2012 Assignment is void as champertous.” The Appellate Division, First Department unanimously affirmed. As an initial mater, the Court rejected Defendants’ argument (as the Court framed it) that “any assignment of litigation claims — even when fashioned to protect an independent litigation right of the assignee — must necessarily be void,” stating that such a formulation was “not the law.” 10 “Rather,” explained the Court, “the champerty doctrine is intended to prevent opportunistic parties from profiting from litigation claims that otherwise would not have been brought — not preventing the assignment of legitimate claims to a party holding a beneficial interest in those claims to enforce its own rights.” 11 “The critical distinction,” noted the Court, was “‘between acquiring a thing in action in order to obtain costs and acquiring it in order to protect an independent right of the assignee.’” 12 The Court also held that the motion court “correctly found that champerty only prohibits the acquisition of a cause of action by a ‘stranger’ to the underlying dispute.” 13 The Court found that the evidence “establishe that plaintiff IKB Deutsche Industriebank A.G. had an independent interest in pursuing the claims, and was not a stranger to the action.” 14 “IKB A.G. owns 100% of plaintiff IKB International, S.A., the original purchaser of the assets, and was the assignor’s junior lender beginning in November 2008,” said the Court. “Defendants’ reading of Justinian not compel a different result,” concluded the Court. 15 Footnotes Bluebird Partners, L.P. v. First Fidelity Bank, N.A. , 94 N.Y.2d 726, 729 (2000). Ehrlich v. Rebco Ins. Exchange, Ltd. , 225 A.D.2d 75, 77 (1st Dept. 1996). See Richbell Information Servs., Inc. v. Jupiter Partners , 280 A.D.2d 208, 215 (1st Dept. 2001) (citing Moses v.McDivitt , 88 N.Y. 62 (1882)). In Justinian Capital SPC v. WestLB AG, N.Y. Branch , the New York Court of Appeals explained that to “constitute the offense the primary purpose of the purchase must be to enable to bring suit, and the intent to bring a suit must not be merely incidental or contingent.” 28 N.Y.3d 160, 166 (2016) (internal quotation marks omitted). See 71 Clinton St. Apts. LLC v. 71 Clinton Inc. , 114 A.D.3d 583, 585 (1st Dept. 2014); Trust For the Certificate Holders of Merrill Lynch Mortg. Investors, Inc. v. Love Funding Corp. , 13 N.Y.3d 190, 198 (2009). New York Chinese TV Programs, Inc. v. U.E. Enterprises, Inc. , 1989 WL 22442, *13 (S.D.N.Y. Mar. 8, 1989). See Love Funding , 13 N.Y.3d at 198. Citing Jamaica Public Service Co., Ltd. v. La Interamericana Compania De Seguros Generales S.A. , 262 A.D.2d 73, 74 (1st Dept. 1999); In re Imax Sec. Litig. , 2011 WL 1487090, *6 (S.D.N.Y. Apr. 15, 2011). Quoting Universal Inv. Advisory SA v. Bakrie Telecom Pte., Ltd. , 154 A.D.3d 171, 180 (1st Dept. 2017). Quoting id. Slip Op. at *1. Id. (citation omitted). Id. (citing Justinian , 28 N.Y.3d at 167) (internal quotation marks omitted)). Id. (citation omitted). Id. at *2. 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 On many occasions, we have written about Ponzi schemes that have been the subject of enforcement actions brought by, and/or settlements with, the Securities and Exchange Commission (“SEC” or the “Commission”). E.g ., here , here , here , here , and here . We remain unsurprised by the frequency with which people operate a Ponzi scheme and do so by exploiting the trust and friendship that exist in groups of people who have something in common, such as a religious group, an ethnic group, or a community – also known as affinity fraud. 1 here,=">here," >here.=">here."> Today, we examine an enforcement action brought by the SEC involving a Ponzi scheme that targeted the Latino community. SEC v. Sanchez On March 14, 2024, the SEC announced ( here ) that it charged 17 individuals for their roles in a $300 million Ponzi scheme (collectively, the “Individual Defendants”) that involved CryptoFX LLC, a Texas-based company engaged in trading in the crypto-assets and foreign exchange markets for investors. 2 According to the SEC, CryptoFX targeted more than 40,000 predominantly Latino investors in the United States and two other countries. The complaint ( here ) followed the SEC’s  emergency action  in September 2022. In the prior action, the SEC obtained a temporary restraining order halting the alleged fraud , as well as temporary orders freezing assets and granting other emergency relief. The SEC charged CryptoFX and its two main principals with violating, or aiding and abetting violations of, the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC also charged one of the principals with violating Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and violating the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act. According to the SEC, CryptoFX purported to trade in the crypto asset and foreign exchange markets for investors. The SEC claimed that in reality, CryptoFX was a Ponzi scheme. The SEC alleged that, from May 2020 to October 2022, the Individual Defendants –  individuals from Texas, California, Louisiana, Illinois, and Florida – acted as leaders of the CryptoFX network and solicited investors by variously promising that CryptoFX’s crypto asset and foreign exchange trading would generate returns of 15 to 100 percent. The SEC alleged that CryptoFX raised $300 million from investors but did not use most of the funds for its claimed trading purposes. 3 Instead, said the SEC, the Individual Defendants allegedly used investor funds to pay supposed returns to other investors, to pay commissions and bonuses to themselves and investors, and to fund their own lifestyles. The SEC further alleged that two of the defendants continued to solicit investments after the court issued orders to halt the CryptoFX scheme in September 2022, and one defendant instructed two investors to rescind their complaints to the SEC for them to recover their investments. Another defendant allegedly told investors that the SEC’s lawsuit was fake. The SEC filed the complaint in the U.S. District Court for the Southern District of Texas. 4 It charged six of the Individual Defendants with violating the antifraud, securities-registration, and broker-registration provisions of the federal securities laws. The SEC charged the remaining defendants with violating the securities-registration and broker-registration provisions. In addition, the SEC also charged one of the defendants with violating the whistleblower protection provisions of the federal securities laws. The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties against each defendant. Without admitting or denying the allegations in the SEC’s complaint, two of the Individual Defendants consented to the entry of final judgments, subject to court approval, that permanently restrain and enjoin them from violating the securities-registration and broker-registration provisions of the federal securities laws. They also agreed to pay more than $68,000 combined in civil penalties, disgorgement, and interest. Commenting on the allegations, Gurbir S. Grewal (“Grewal”), Director of the SEC’s Division of Enforcement, stated: “We allege that CryptoFX was a $300 million Ponzi scheme that targeted Latino investors with promises of financial freedom and life-altering wealth from ‘risk free’ and ‘guaranteed’ crypto and foreign exchange investments. In the end, the only thing that CryptoFX guaranteed was a trail of thousands upon thousands of victims stretching across ten states and two foreign countries.”  Grewal also commented on the SEC’s commitment to protect investors from fraud: “A scheme of that size requires lots of participants, and as today’s action demonstrates, we will pursue charges against not just the principal architects of these massive schemes, but all those who further their fraud by unlawfully soliciting victims.” Footnotes In 2014, the SEC issued an investor alert about affinity fraud. The alert can be found here . CryptoFX was registered as a crypto trading platform in February 2020. For example, the SEC claimed that the Individual Defendants misappropriated investors’ funds by falsely promising investments into potentially lucrative cryptocurrencies and nonfungible tokens. SEC v. Sanchez , Case No. 4:24-00939 (S.D.Tx. 2024) 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 On March 19, 2024, the Court of Appeals decided Favourite Limited v. Cico , a case concerning “the proper scope of the trial court's discretion to grant leave to amend a complaint under CPLR 3025 (b) .” (Hyperlink added.)  [Eds. Note: this BLOG has previously addressed CPLR 3025 < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .   This BLOG has previously explained that CPLR 3025(b) provides, in pertinent part, that “ party may amend his or her pleading … at any time by leave of court or by stipulation of all parties.” Importantly, CPLR 3025(b) provides that “ eave shall be freely given.…” Thus, “unless the proposed amendment would unfairly prejudice or surprise the opposing party, or is palpably insufficient or patently devoid of merit,” the motion for leave to amend should be granted. Cirillo v. Lang , 206 A.D.3d 611, 612 (2d Dept. 2022) (citations omitted).  See also Greene v. Esplanade Venture P’ship , 36 N.Y.3d 513, 526 (2021); Toiny, LLC v. Rahim , 214 A.D.3d 1023, 1024 (2d Dept. 2023) (citations omitted). Briefly, in Favourite , plaintiff Upper East Side Suites LLC (“UESS”) is a Delaware corporation that was formed to purchase a building in Manhattan to be used for short-term apartment rentals.  The remaining Plaintiffs are investors in UESS.  The defendants are the managers of UESS.  When the short-term rental business failed, the subject building was sold at a distress sale and the proceeds were used by the defendants as a down payment on the purchase of a different building.  The defendants lost the down payment when they failed to close on the purchase of the new property.  Because of the loss of the down payment, there were no funds to return to the investors, who alleged that the managers “repeatedly lied to them about these operations and that the purchase of the second building was never authorized or disclosed.”  The managers were removed and “plaintiffs commenced an action in May 2016 for breach of the operating agreement, breach of fiduciary duty, and other related claims.”  After the removal of the managers, one of those managers, who was also UESS’ registered agent, resigned from that position.  Accordingly, under Delaware law, UESS’ certificate of formation was cancelled by Delaware’s Secretary of State. After UESS’ counsel failed to appear, the first complaint was dismissed.  After an amended complaint was filed by the investors (and not UESS), the defendants moved to dismiss “arguing among other things that a suit may not be brought on behalf of a cancelled Delaware LLC.”  After one of UESS’ members obtained a “certificate of revival”, the plaintiffs cross-moved to file an amended complaint with the investors and UESS as plaintiffs.  The motion was denied, and the cross-motion was granted, the motion court holding that “because UESS had been revived, the s' arguments related to the inactivity of were no longer relevant.”  The defendant appealed.  While the appeal was pending, the defendants interposed counterclaims against the plaintiffs based on breaches of the operating agreement. The Appellate Division reversed the motion court’s order and dismissed the complaint “holding that UESS had not been properly revived” because there was no evidence that the entity that obtained the certificate of revival for UESS had the authority to do so and, therefore, “ continued to lack standing or capacity.”  A new and proper certificate of revival was obtained, and the plaintiffs moved under CPLR 3025(b) to file a third amended complaint.  The motion was opposed by the defendants, who argued that amendment would be improper because the prior complaint was dismissed in its entirety.  The motion court granted the motion to amend reasoning that “although plaintiffs could have commenced a separate action under CPLR 205 (a) after the Appellate Division dismissed their claims without prejudice, "it would make no sense, under the circumstances, for plaintiffs to have commenced another separate action and then to have moved to consolidate it with this one when this one has always remained active and pending." The Court also noted that the filing of a new action would have been timely on the amendment date.”  As stated in the Favourite opinion, on appeal, and as is relevant here, a divided Appellate Division reversed, holding that “its dismissal of the second amended complaint left Supreme Court powerless to entertain a motion to file another amended complaint, because no complaint remained pending to amend.” The Plaintiffs appealed, as of right, pursuant to CPLR 5601(a) , because “there a dissent by at least two justices on a question of law in favor of the party taking such appeal.”  CPLR 5601(a).  The Court of Appeals reversed the Appellate Division.  Recognizing that “prejudice or surprise” was an issue, the Court of Appeals noted that “the Appellate Division holding rests on the more fundamental premise that when an appellate court has dismissed a complaint in its entirety, the trial court has no discretion to grant leave to amend that complaint under CPLR 3025 (b), even if the dismissal was without prejudice and not on the merits and the defect would be curable by amendment.”  The Court explained: he question on appeal, then, is whether the Appellate Division's decision required the plaintiffs to commence a separate action instead of seeking leave to file an amended complaint. Whatever the answer to that question might be in a case in which no action remained between the parties in Supreme Court, here the action remained pending in Supreme Court because of the s’ counterclaims. Therefore, Supreme Court retained control over the parties and continued to adjudicate claims related to the same transactions that formed the subject-matter of the complaint. For that reason, the Appellate Division order also did not render the case final for purposes of appealability, as no appeal to the Court of Appeals may be taken from an order which leaves claims pending in the action between the same parties.  Thus, despite the fact that the complaint was dismissed, the action remained pending and “Supreme Court retained the power to grant leave to plaintiffs to file another amended complaint.”  As the Court recognized, “ here is nothing particularly novel about repleading a dismissed complaint in Supreme Court to cure a defect discovered on appeal.” Recognizing that there is no such requirement, the Court also rejected the defendants’ argument that amendments are only permitted “when leave to amend is expressly granted by the appellate court.”  The Court also rejected the defendants’ “more technical” argument “that where the entire complaint has been dismissed, granting leave to amend is not possible because there is no complaint remaining to amend,” because such an argument “is at odds with the common practice of dismissing complaints with leave to amend.” 1 It should be noted that there was a lengthy dissent in which Judge Rivera urged, inter alia , that once the “Appellate Division dismissed the second amended complaint in its entirety and held that the named company-plaintiff lacked standing and capacity to sue” the plaintiffs’ only recourse  was to commence a new action under CPLR 205 (a) based on the same transaction or occurrence, if, within that time, it acquired standing to sue.” (Hyperlink added.) 2 Footnotes The Court also determined that the plaintiffs’ motion to amend was timely. This BLOG has previously addressed CPLR 205.  See, e.g. , < 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 As we have often explained in the articles in which we have examined the duplication doctrine, fraud claims that are nothing more than contract claims dressed up in fraud clothing, are subject to dismissal. E.g. , here ,  here ,  here , and  here . Thus, courts will apply the doctrine when a plaintiff alleges a breach of contract claim and a fraud claim that arise from the same facts and circumstances. When that happens, the fraud claim will be deemed duplicative of the contract claim not only because the fraud claim arises from the same facts as the contract claim, but also because the fraud claim seeks the same damages and does not allege a breach of any duty collateral to or independent of the parties’ agreements. 1 Moreover, “ fraud-based claim duplicative of a breach of contract claim when the only fraud alleged is that the defendant was not sincere when it promised to perform under the contract.” 2 In Colle Capital Partners LP v. Automaton, Inc. , 2024 N.Y. Slip Op. 01504 (1st Dept. Mar. 19, 2024) (here), the Appellate Division, First Department considered the duplication doctrine when it reversed the motion court’s order granting leave to amend a complaint to add a fraud claim. colle capital comes from the parties’ briefing on appeal.> colle capital comes from the parties’ briefing on appeal.> Colle Capital involved a claim against Automaton, Inc. (“Automation”) for breach of a stock sale and purchase agreement (“Sale Agreement”), which governed the sale to Colle Capital Partners LP and Colle Logistics Associates, LLC (collectively, “Colle”) of Automaton shares that had been awarded to defendant Michael Murphy (“Murphy”), a former Automaton employee, on terms set forth in a separate restricted stock award agreement (“Stockholder Agreement”). The breach of contract claim concerned Section 5(a) of the Sale Agreement, which provided that Automaton “fully consent to the transfer of the Shares under this Agreement”. Spencer Hewett (“Hewett”), Automation’s Chief Executive Officer, was alleged to have signed the agreement on Automaton’s behalf. Colle based its breach of contract claim on Automaton’s alleged refusal to effectuate the share transfer contemplated by the agreement notwithstanding Colle having paid the purchase price to Murphy, on the ground that the transaction had not been approved by Automaton’s board of directors (the “Board”) as required by the Stockholder Agreement. The proposed amended complaint also asserted a fraud claim against Automaton, based upon Hewett’s alleged misrepresentation that “Automaton and Hewett would … broker the sale of Murphy’s shares in the company to Colle at a discounted price” if Colle would buy a $250,000 promissory note held by SB Media Capital LLC, that the holder had called and which “Automaton lacked sufficient capital to repay”.  Colle alleged that it was led to believe by Hewett that he had authority to make the deal and had obtained all requisite approvals by the Board. Colle also maintained that Hewett represented that Automation’s outside counsel reviewed the terms of the transaction.  When it came time for Automaton and Hewett to transfer Murphy’s shares to Colle, Hewett allegedly informed Colle that he had not received, nor would he seek, consent from Automaton’s Board for the share sale unless Colle agreed to purchase additional convertible notes on non-market terms. When Colle approached Murphy with the problem, Colle claimed that Murphy fraudulently induced Colle to pay Murphy for his shares by representing that all requisite consents were obtained to sell his shares.  Colle sought leave to amend its complaint. The motion court granted the motion, allowing plaintiff to amend its allegations with respect to the fraud and breach of sale agreement claims and to add Hewett and Murphy as defendants. The Appellate Division, First Department modified the motion court’s order to deny the motion with respect to the fraud claim. 3 In a brief decision, the Court held that “ eave to amend the fraud claim should, … , have been denied because this claim, even as amended, was duplicative of the breach of sale agreement claim.” 4 The Court explained that “ he alleged misrepresentations were not collateral to the subject matter of the sale agreement; indeed, some of them were explicitly contained therein.” 5 Finally, said the Court, as alleged, the damages sought by the fraud claim were the same as those alleged with respect to the contract claim: “ lthough plaintiffs could theoretically have suffered damages separate from their payment for shares they never received, they did not allege any other losses.” 6 Footnotes Havell Capital Enhanced Mun. Income Fund, L.P. v. Citibank, N.A. , 84 A.D.3d 588, 589 (1st Dept. 2011). Manas v. VMS Assoc., LLC , 53 A.D.3d 451, 453 (1st Dept. 2008); see also Cronos Group Ltd. v. XComIP, LLC , 156 A.D.3d 54, 64-65 (1st Dept. 2017); HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 206 (1st Dept. 2012); Metropolitan Life Ins. Co. v. Noble Lowndes Intl. , 192 A.D.2d 83, 88 (1st Dept. 1993). Slip Op. at *1. Id. Id. (citations omitted). Id. (citation omitted). 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 Actions or proceedings (collectively, “Actions”) are commenced by filing the initiatory papers with the appropriate county clerk.  CPLR 304(a) . 1 Once the Action is commenced, the plaintiff is required to serve the initiatory papers on the defendant and, generally, such service must occur within 120 days after the Action is commenced.  CPLR 306-b . 2 “If service is not made upon a defendant within the time provided in this section, the court, upon motion, shall dismiss the action without prejudice as to that defendant, or upon good cause shown or in the interest of justice, extend the time for service.” Id. The Leader Court made clear that, under CPLR 306-b, “good cause” and “the interest of justice” are “two separate standards by which to measure an application for an extension of time to serve” a defendant if service is not made within 120 days of the commencement of an Action. Leader , 97 N.Y.2d at 104. In this regard, the Leader Court recognized that because “good cause” and “the interest of justice” are “stated separately, joined by the word ‘or’ hey cannot be defined by the same criteria; otherwise, one would have been sufficient.” Id . (citation omitted). “To establish good cause, a plaintiff must demonstrate reasonable diligence in attempting service.”  Bumpus v. New York City Tr. Auth. , 66 A.D.3d 26, 31 (2 nd Dep’t 2009) (citing Leader ); see also Wilmington Savings Fund Society, FSB v. James , 174 A.D.3d 835, 837 (2 nd Dep’t 2019)).  “Good cause will not exist where a plaintiff fails to make any effort at service or fails to make at least a reasonably diligent effort at service.”  Bumpus , 66 A.D.3d at 31 (citations omitted). Where “good cause” is not established, “courts must consider the ‘interest of justice’ standard of CPLR 306-b.” Bumpus , 66 A.D.3d at 32 (citations omitted); see also Wilmington , 174 A.D.3d at 837. Under the “interest of justice” standard, a court must analyze “the factual setting of the case and a balancing of the competing interests presented by the parties.” Gjurashaj v. ABM Industry Groups, LLC , 213 A.D.3d 479, 480 (1 st Dep’t 2023) ( citing Leader , internal quotation marks omitted); see also Wells Fargo Bank v. Barrella , 166 A.D.3d 711, 713 (2 nd Dep’t 2018). In addition, while no single factor “is determinative,” courts may consider factors such as “diligence, or lack thereof, along with any other relevant factor in making its determination, including expiration of the statute of limitations, the meritorious nature of the cause of action, the length of delay in service, the promptness of a plaintiff's request for the extension of time, and prejudice to defendant.” Id . The Appellate Division, Second Department, addressed CPLR 306-b on March 13, 2024, in PNC Bank, National Ass’n v. Sarfaty , a residential mortgage foreclosure action. In 2013, the lender commenced its foreclosure action. Thereafter, the borrower interposed an answer asserting an affirmative defense of lack of personal jurisdiction due to improper service of process. Within sixty days of serving the answer, the borrower moved to dismiss the complaint pursuant to CPLR 3211(a)(8) due to the failure of service of process. Two years later, and before the borrower’s motion to dismiss was decided, the lender moved for summary judgment. Four years after the borrower moved to dismiss, the motion court issued an order which, “in effect, held in abeyance that branch of 's motion which was pursuant to CPLR 3211(a)(8) to dismiss the complaint insofar as asserted against him for lack of personal jurisdiction due to improper service of process and directed that a traverse hearing be held to determine whether was properly served. After the hearing, the motion court granted the borrower’s motion to dismiss and denied, as moot, the lender’s motion for summary judgment. Thereafter, the lender moved to vacate the dismissal order and for an order pursuant to CPLR 306-b extending the time to serve the summons and complaint on the borrower, which motion was granted. On the borrower’s appeal the Second Department affirmed and, in so doing, stated: Pursuant to CPLR 306-b, a court may exercise its discretion to extend a plaintiff's time to effectuate service for good cause shown or in the interest of justice…. To establish good cause, a plaintiff must demonstrate reasonable diligence in attempting service. The interest of justice standard requires a court to carefully analyze the factual setting of the case and to balance the competing interests presented by the parties…. The interest of justice standard is a broader standard than good cause, intended to accommodate late service that might be due to mistake, confusion or oversight, so long as there is no prejudice to the defendant. Here, although the exhibited a lack of diligence in seeking an extension of time to serve the summons and complaint upon , for example, by waiting more than one year after the issuance of the dismissal order before making the subject motion, the other relevant factors all favor the granting of such relief. Specifically, the timely commenced this action, but the statute of limitations had expired when the moved for the subject relief. In addition, the attempted service in a timely manner, and even though that service was defective, acquired actual notice of this action well within 120 days after its commencement. Moreover, did not demonstrate that his ability to defend against this action would be prejudiced in any way by the delay in service, and the submitted evidence of a potentially meritorious cause of action via incorporation by reference of its prior summary judgment motion, which included an affidavit of merit. Finally, the Supreme Court faulted both parties for delaying this action commenced in 2012. Footnotes This BLOG has previously addressed CPLR 304.  See, e.g., < here =">here"> and < here =">here"> . This BLOG has previously addressed CPLR 306-b.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .  The history and import of CPLR 306-b, as discussed in prior BLOGS, is explained by the Court of Appeals in Leader v. Maroney, Ponzini & Spencer , 97 N.Y.2d 95, 101 (2001).  Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In New York, Article 75 of the Civil Practice Law and Rules (“CPLR”) governs the confirmation, vacatur, modification, and enforcement of arbitration awards. Under CPLR 7511(b)(1)(iii), a court may vacate an arbitration award if “an arbitrator, or agency or person making the award exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made.” In addition, a court may vacate an award when it is irrational, violates public policy, and/or fails to resolve all the issues submitted to the arbitrator. 1 Irrationality includes, among other things, an interpretation of the parties’ agreement that “is unsupported by the plain language of th agreement,” 2 or an award that is “inherently inconsistent.” 3 To vacate an arbitration award, the party seeking to vacate the award “bears a heavy burden and must establish a ground for vacatur by clear and convincing evidence.” 4 Alternatively, a court may modify an arbitral award if, among other things, “there was a miscalculation of figures or a mistake in the description of any person, thing or property referred to in the award.” 5 In today’s article, this Blog examines Gowanus Park LLC v. KSK Construction Group LLC , 2024 N.Y. Slip Op. 30726(U) (Sup. Ct., Kings County Mar. 6, 2024) ( here ), a case addressing the foregoing principles. Gowanus Park involved a contract for the construction of a four-story residential building located in Brooklyn, New York. Plaintiff alleged that defendant KSK Construction Group LLC was not equipped to manage and complete the construction project. Plaintiff maintained that the work defendant performed was defective and had to be redone at significant cost to plaintiff. Litigation ensued and the parties eventually engaged in a multi-day arbitration proceeding that resulted in an award that required plaintiff to pay defendant $589,913.36, plus administrative fees.  Defendant moved to confirm the award. Plaintiff opposed and cross-moved to modify or vacate the award, arguing that the arbitrator failed to properly calculate the amount plaintiff had paid various subcontractors and that such mistake amounted to windfall of almost $300,000 in defendant’s favor. Plaintiff further argued that the arbitrator failed to consider the damages it suffered as a result of defendant’s defective work. The court rejected plaintiff’s windfall argument. The court found that the argument was based upon the testimony of defendant’s principal, who testified at the arbitration that plaintiff had paid subcontractors $1,140, 219.19, without any supporting documentation or evidence. As such, the court found that “the arbitrator was free to ignore such isolated testimony without any supporting documentation.” 6 The court explained that although plaintiff produced checks totaling $1,055,077.06 that it paid to subcontractors, it did not produce any invoices (other than two) substantiating “that those checks concerned work under” defendant’s direction. 7 “Indeed,” said the court, defendant “introduced competent evidence in the form of a detailed spreadsheet that the amount paid by to subcontractors amounted to no more than $846,203.58,” which the court concluded, “the arbitrator appropriately credited.” 8 Thus, concluded the court, “ here can be no improper conclusion reached by the arbitrator for failing to credit unsubstantiated payments urged by .” 9 Turning to the arbitrator’s claimed failure to consider the damages that plaintiff allegedly suffered by reason of defendant’s defective workmanship and delay, the court denied plaintiff’s motion to vacate, holding that it was tantamount to a disagreement with the decision of the arbitrator. 10 “ erely disagreeing with the arbitrators conclusions is not a basis upon which to vacate any arbitration award,” explained the Court. 11 Indeed, said the Court, “it is well settled that even where an arbitrator’s award ‘contains errors of law and fact committed by the arbitrator’ the decision will not be vacated.…’” 12 Accordingly, the court denied the motion to vacate and granted the motion to confirm the arbitration award. here,=">here," and="and" >here.=">here."> Footnotes See , e.g. , Denson v. Donald J. Trump For President, Inc. , 180 AD3d 446, 450 <1st dept 2020> ; Rosenberg v. Schwartz , 176 A.D.3d 1069, 1071 (2d Dept. 2019). Cnty. of Westchester v. Civ. Serv. Emps. Ass’n, Inc., Loc. 860, Westchester Cnty. Unit , 270 A.D.2d 348, 348 (2d Dept. 2000). Spear, Leads & Kellogg v. Bulseye Sec., Inc. , 291 A.D.2d 255, 256 (1st Dept. 2002); City Sch. Dist. of City of New York v. Hershkowitz , 801 NYS2d 231 (Sup. Ct., N.Y. County 2005). Jurcec v. Moloney , 164 A.D. 3d 1431, 1432, 84 NYS3d 433, 434 (2d Dept. 2018). CPLR 7511(c). Slip Op. at *3. Id. Slip Op. at *3-*4. Id. at *4. Id. Id. Id. (quoting Wien & Malkin LLP v. Helrilsley-Spear, Inc. , 6 N.Y.3d 471 (2006) (citation omitted)). 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 Folks have general notions about usury.  However, there are many nuances to the application of the usury laws in New York.  This BLOG has previously written about usury.  See [< here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> .]  As noted in our prior BLOG articles, usury statutes were developed centuries ago to “protect desperately poor people from the consequences of their own desperation.”  Seidel v. 18East 17 th Street Owners, Inc. , 79 N.Y.2d 735, 740 (1992) (citations and internal quotation marks omitted). “To successfully raise the defense of usury, a debtor must allege and prove by clear and convincing evidence that a loan or forbearance of money, requiring interest in violation of a usury statute, was charged by the holder or payee with the intent to take interest in excess of the legal rate.”  Blue Wolf Capital Fund II, L.P. v. American Stevedoring Inc. , 105 A.D.3d 178, 183 (1 st Dep’t 2013). Pursuant to General Obligations Law §5-501(1) , interest on a loan or forbearance “shall be six per centum per annum unless a different rate is prescribed in section fourteen-a of the banking law.”  GOL §5-501(2) prevents individuals or entities from charging interest rates exceeding those permitted pursuant to GOL §5-501(1).  Banking Law §14-a(1) provides that the “maximum rate of interest provided for in section 5-501 of the general obligations law shall be sixteen per centum per annum.”  Because Corporations are “generally the antithesis of … desperately poor people”, they are “ordinarily barred from asserting a usury defense.”  Seidel , 79 N.Y.2d at 740 (citations, footnote and internal quotation marks omitted).  See also GOL  § 5-521(1) .  However, a corporation can assert usury as a defense to the extent that the usury is criminal under Section 190.40 of New York’s Penal law , which makes interest on a loan or forbearance that exceeds twenty-five per cent per annum a felony.  GOL § 5-521(3) .  See also Roopchand v. Mahammed , 154 A.D.3d 986, 988 (2 nd Dep’t 2017) (citation omitted).  Further, the criminal usury laws do not apply to loans in the amount of $2,500,000.00 or more.  GOL § 5-501(6)(b). When calculating interest rates on loans for less than one year, the interest will be annualized if not so stated in the note.  Thus, in Bakhash v. Winston , 134 A.D.3d 468 (1 st Dep’t 2015), the Court found a loan criminally usurious where a four-month note provided for 12% interest without indicating that such rate reflected the annual rate of interest.  The Bakhash Court noted that “ here, as here, the loan is for less than a year, the interest rate is annualized, and thus, the annual rate on the note is 36%, well above the criminal usury rate of 25%.”  Bakhash , 134 A.D.3d at 469 (citation omitted). Further, in addition to the stated interest rate on the note, other factors are used in determining the actual interest rate for usury purposes.  For example, in American E Group LLC v. Livewire Ergogenics Inc. , 2022 WL 2236947 (2 nd Cir. 2022) (applying New York law), the Court affirmed the District Court’s refusal to enforce a promissory note and the dismissal of the lender’s action to enforce the note in light of the borrower’s criminal usury defense.  While the stated interest rate on the $30,000 note was 20%, the borrower was also obligated to give the lender $50,000 in its restricted shares as “additional consideration”, which, the Court agreed, “also count as interest.”  Thus, the Court concluded, the interest rate on the $30,000 loan “far exceed the 25% threshold for criminal usury.”  See also Frost v. Collateral Partners, LLC , 219 A.D.3d 587, 588 (2 nd Dep’t 2023) (finding that since borrower was charged an insurance fee for declined insurance coverage, there was a question of fact as to whether “the purported insurance fee was, in actuality, additional interest on the loan,” precluding summary judgment.); Blue Wolf , 105 A.D.3d at 183 (“If an instrument provides that the creditor will receive additional payment in the event of a contingency beyond the borrower's control, the contingent payment constitutes interest within the meaning of the usury statutes.”) Finally, a usury defense is inapplicable “where the terms of the note impose a rate of interest in excess of the statutory maximum only after default or maturity.”  Torto Note Member, LLC v. Babad , 192 A.D.3d 843, 845 (2 nd Dep’t 2021) (citations, internal quotation marks and ellipses omitted).  See also Kraus v. Mendelsohn , 97 A.D.3d 641 (2 nd Dep’t 2012); 1077 Madison Street, LLC v. Daniels , 954 F.3d 460, 465 (2 nd Cir. 2020) (applying New York law). On March 6, 2024, the Appellate Division, Second Department, addressed some of these issues in Alleon Capital Partners, LLC v. Choudhry .  The lender in Alleon loaned in excess of $2.78 million to defendant medical practices.  The loan was secured by medical receivables.  Considering fees and escrowed funds, only $2.36 million was received by the borrowers.  The borrowers defaulted on their repayment obligations under the note and the lender commenced action.  The borrowers’ motion to dismiss the complaint on the grounds of usury was denied, as was their subsequent motion for renewal and reargument.  On appeal, the Court affirmed, holding that because of the size of the loan, the usury defense was inapplicable.  Thus, the Court stated: General Obligations Law § 5-501(2) provides that “ o person or corporation shall, directly or indirectly, charge, take or receive any money, goods or things in action as interest on the loan or forbearance of any money, goods or things in action at a rate exceeding the rate” ( Zanfini v Chandler , 197 AD3d 594, 595 ). “Under General Obligations Law § 5-521(1), the defense of usury is not available to corporations, but this bar does not preclude a corporate borrower from raising the defense of ‘criminal usury’ (i.e., interest over 25%) in a civil action” ( Adar Bays, LLC v GeneSYS ID, Inc. , 37 NY3d 320, 326). However, civil and criminal usury laws do not “apply to any loan or forbearance in the amount of <$2,500,000> or more” (General Obligations Law § 5-501<6> ). Here, the Supreme Court properly determined that usury laws do not apply to the subject loan since the parties agreed to a principal loan of more than $2,500,000 ( see Specfin Mgt. LLC v Elhadidy , 201 AD3d 31, 42; Shasho v Pruco Life Ins. Co. of N.J. , 67 AD3d 663, 665). Contrary to the appellants’ contention, the portion of the loan that was used to cover closing fees, attorney fees, and taxes did not lower the agreed-upon amount of the loan below the $2,500,000 threshold in this instance ( see Tides Edge Corp. v Central Fed. Sav . , 151 AD2d 741, 742). 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 It should go without saying that people make mistakes. After all, people are human, and humans make mistakes.  When people draft a document, especially a lengthy or complex one, it is not uncommon for a mistake to be made. Lawyers who draft contracts and other written instruments are not immune from this phenomenon. Given the steps a lawyer must take to draft and finalize an agreement or other written instrument there are numerous opportunities for unintentional mistakes to be made. These unintentional mistakes are often referred to as a scrivener’s error. Examples of a scrivener’s error include incorrectly typing a number or omitting a word or words in the document. When a contract fails to conform to the agreement between the parties due to the mutual mistake of the parties, or of the mistake of one party and fraud of the other, a court will reform the contract so as to make it conform to the actual agreement between the parties. 1 The mistake or error must be material ( i.e. , it must involve a “fundamental assumption” of the contract). 2 However, it does not mean that the mistake would have caused the parties not to enter into the contract had they known of it. 3 Rather, a material mistake is one which “vitally” affects a fact or facts on the basis of which the parties contracted. 4 In circumstances of a mistake, one or more of the parties may seek to reform the agreement.  Reformation is an equitable form of relief. The purpose of reformation is not to “alleviat a hard or oppressive bargain, but rather to restate the intended terms of an agreement when the writing that memorializes that agreement is at variance with the intent of both parties.” 5 The burden is high to obtain contract reformation. The party demanding it “‘must establish his right to such relief by clear, positive and convincing evidence.’” 6 Therefore, the party seeking reformation must “show in no uncertain terms, not only that mistake or fraud exists, but exactly what was really agreed upon between the parties.” 7 Only by satisfying this burden can the party seeking reformation “overcome the heavy presumption” that the contract embodies the parties’ true intent. 8 Sometimes reformation is based upon a scrivener’s error. When a scrivener’s error is the basis for reformation, the party demanding reformation must prove “a prior agreement between parties, which when subsequently reduced to writing fails to accurately reflect the prior agreement.” 9 The parties’ course of performance under the contract, or their practical interpretation of a contract for any considerable period of time, is considered to be the most persuasive evidence of the intention of the parties. 10 A claim for reformation, including reformation based on a scrivener’s error, is governed by the six-year statute of limitations, which begins to run on the date that the mistake is made. 11 Nevertheless, a court may correct a scrivener’s error outside of a claim for reformation of a contract in “those limited instances where some absurdity has been identified or the contract would otherwise be unenforceable either in whole or in part.” 12 In other words, a court is not “constrained to adopt an absurd phrasing in the contract merely because the statute of limitations for reformation had passed, when the error is obvious and the drafters’ intention clear.” 13 Absent such an absurdity or unenforceability, “clear, complete writings should generally be enforced according to their terms” to impart “stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses . . . infirmity of memory.” 14 A party seeking reformation based on a scrivener’s error, like a party claiming mutual mistake, for example, has the burden of showing an obvious error by clear and convincing evidence. 15 In NCCMI, Inc. v. Bersin Props., LLC , 2024 N.Y. Slip Op. 01161 (1st Dept. Mar. 5, 2024) ( here ), the Appellate Division, First Department addressed the law concerning the impact of a scrivener’s error on the parties to a contract or other written instrument.  NCCMI concerned a purported $44 million scrivener’s error in a guaranty that exposed Bersin Properties’ principal and co-defendant (“defendant”), an indemnitor under the guaranty, to personal liability.  Defendant Bersin Properties, LLC (“Bersin Properties”) entered into a $135 million Amended and Restated Loan Agreement dated January 29, 2007 (the “Loan Agreement”), as borrower, with Nomura Credit & Capital, Inc. (“Nomura”), plaintiff’s predecessor, as lender, for the purpose of renovating and re-leasing the Medley Centre, a shopping mall located in Monroe County, New York (the “Property”). The Loan Agreement provided that the loan would mature on February 9, 2009, but permitted Bersin Properties to extend the maturity date by up to three successive one-year periods. The Loan Agreement also provided for three loans, each of which was secured by a mortgage encumbering the Property. Although the loan was nonrecourse, which limited Nomura’s remedies for nonpayment to possession of the Property by bringing a “foreclosure action, an action for specific performance or any other appropriate action or proceeding,” the Loan Agreement provided for two carve-outs that would permit Nomura to have recourse against Bersin Properties — recourse for losses resulting from specific bad acts (loss recourse indemnity) and recourse for repayment of the entire debt upon occurrence of certain triggering events (full debt recourse liability). Defendant was designated as the guarantor in the Loan Agreement.  Defendant executed an Indemnity and Guaranty Agreement (the “Guaranty”) in connection with the loan. He was the only one to execute the Guaranty and did so as an “Indemnitor.” The Guaranty sets out Bersin Properties’ and defendant’s respective obligations upon the occurrence of certain events. Specifically, it provided that Bersin Properties, as borrower, and defendant, individually, both collectively referred to as “Indemnitor,” would, jointly and severally, guarantee payment of Bersin Properties’ recourse obligations to Nomura. Similar to the Loan Agreement, the Guaranty provided for a loss recourse indemnity and a full debt recourse liability. The loss recourse indemnity provided that “Indemnitor,” namely Bersin Properties and defendant, assumed liability for certain enumerated bad acts. As to full debt recourse liability, the Guaranty stated, in relevant part: the Debt shall be fully recourse to Borrower … if Borrower defaults hereunder in any way and Borrower or any Guarantor contests or in any way interferes with, directly or indirectly, any foreclosure action … or with any other enforcement of Lender's rights, powers or remedies under any of the Loan Documents or under any document evidencing, securing or otherwise relating to all or any portion of the Property (whether by … bringing any counterclaim, claiming any defense ….).  Nomura conveyed its right, title, and interest in the loan to plaintiff on March 25, 2008. Thereafter, plaintiff funded dozens of draw requests under the Loan Agreement, ultimately lending Bersin Properties over $44 million. The loan matured on February 9, 2009. Bersin Properties did not repay any portion of the debt, thereby defaulting under the terms of the Loan Agreement. On April 25, 2014, more than five years after the loan matured, Bersin Properties and defendant commenced an action against Nomura and plaintiff alleging, among other things, that plaintiff breached the Loan Agreement by refusing to extend the maturity date and by refusing to fund an additional $54 million draw request after that time.  Supreme Court granted Nomura summary judgment dismissing the complaint. In affirming, the First Department held that Bersin Properties had breached the Loan Agreement, which “disqualified it from both extending the loan’s maturity date and receiving further loan advances.” 16 On January 30, 2015, plaintiff commenced the action against Bersin Properties seeking to foreclose on the mortgages on the Property. On March 24, 2015, Bersin Properties answered the complaint, asserting 14 affirmative defenses. In January 2016, Bersin Properties lost title to the Property in a sheriff’s sale that was held to satisfy a junior lienholder’s judgment against it. Plaintiff elected to release its mortgages on the Property to the new owner for $4 million due to the minimal value of the Property, as a consequence of Bersin Properties’ failure to develop the Property, and the costs in maintaining it. In March 2016, plaintiff sought leave to convert its foreclosure action to a plenary action seeking recourse on the underlying promissory notes and the Guaranty for full recovery of the debt, minus the $4 million already received.  Supreme Court granted the motion, and plaintiff served a second supplemental complaint in the converted action. Bersin Properties and defendant filed a joint answer interposing 19 affirmative defenses. After several years of discovery, plaintiff and defendants moved for summary judgment. Relevant to the appeal, both parties sought summary judgment as to defendant’s personal liability under the Guaranty. In seeking to hold defendant personally liable, plaintiff contended that Bersin Properties and defendant triggered full debt recourse liability when Bersin Properties contested the foreclosure action by filing an answer and interposing affirmative defenses. Plaintiff acknowledged that the Guaranty provided that the debt would be “fully recourse to Borrower” upon the occurrence of a full debt recourse triggering event, and not “fully recourse to Indemnitor,” seemingly insulating defendant from the loan indebtedness. It further noted that the language in this recourse provision was a virtual mirror image of the provision set forth in the Loan Agreement and posited that a scrivener’s error occurred insofar as the term “Borrower” was not deleted and replaced with “Indemnitor” when the Loan Agreement’s provision was inserted into the Guaranty. It argued that the Guaranty plainly contemplated for liability to run to defendant for full debt recourse. For support, plaintiff pointed to the Guaranty’s preamble, and numerous additional terms and provisions within the Guaranty. Thus, plaintiff contended that to make only Bersin Properties liable, as opposed to defendant and Bersin Properties, as Indemnitor, would lead to an absurd result because Bersin Properties, as a single-purpose entity with no assets other than the Property, would then become its own guarantor. Defendants argued that plaintiff’s claim of scrivener’s error was time-barred under the applicable six-year statute of limitations for reformation of a contract. Defendants also contended that the literal reading of the Guaranty indicated that full debt recourse liability was available only to Bersin Properties, as “Borrower,” and not to defendant, as an “Indemnitor.” In addition to the language of the Guaranty itself, defendants relied on, among other things, defendant’s deposition testimony, wherein he testified that he never understood himself to be personally guaranteeing the full debt, and a July 2008 email from plaintiff’s president, which referred to the parties’ agreement and stated, among other things, that “the payments not guaranteed by anyone in this loan.” Finally, defendants argued that holding defendant personally liable just because Bersin Properties responded to the foreclosure action would be contrary to public policy. Supreme Court denied plaintiff’s motion to the extent it sought summary judgment on its claim for personal liability against defendant and denied defendants’ motion for partial summary judgment dismissing the claim. In doing so, the motion court found the language “fully recourse to Borrower” to be ambiguous. The motion court noted that while the literal terms appear to have exempted defendant from personal liability for Bersin Properties’ debt, there was a “clear tension” between the “fully recourse to Borrower” provision and the rest of the Guaranty. The motion court further found that extrinsic evidence did not result in a clear understanding that the inclusion of “Borrower” instead of “Indemnitor” had been intentional. Thus, the motion court declined to substitute “Borrower” for “Indemnitor,” noting that plaintiff did not meet its burden of identifying absurdity or unenforceability in the Guaranty. On appeal, the First Department modified the motion court’s order to grant plaintiff’s motion for summary judgment on its claim against defendant, and otherwise affirmed. The Court held that the record established that the Guaranty’s full debt recourse liability was triggered when Bersin Properties filed an answer, with affirmative defenses, in the foreclosure action, and when Bersin Properties and defendant jointly filed an answer, with affirmative defenses, in the plenary action.  The Court noted, however, that the question remained whether defendant, as an Indemnitor, was subject to full debt recourse liability under the Guaranty. The Court found that he was subject to full recourse liability under the Guaranty. In so holding, the Court relied on PNC Capital Recovery v. Mechanical Parking Sys. , 283 A.D.2d 268 (1st Dept. 2001), lv. dismissed , 96 N.Y.2d 937 (2001), appeal dismissed , 98 N.Y.2d 763 (2002), finding the case to be dispositive of the appeal. In PNC Capital , a corporation’s creditor commenced an action against its president, Shlomo Kadosh, individually, on a guaranty of the corporation’s debt that Kadosh signed. Kadosh argued that the presence of his title “president” immediately below his signature line on the guaranty established that he was not personally liable under the guaranty because he had signed it in his capacity as corporate president. The Court unanimously rejected the argument after reading the guaranty as a whole and in the context of the entire transaction and granted the creditor summary judgment on its claim against Kadosh. Notably, the Court held that to permit a corporation to guarantee its own indebtedness was illogical and rendered meaningless the entire guaranty:  Further, an interpretation that Kadosh signed the Guaranty solely in his capacity as president of the corporation would compel the illogical conclusion that the purpose of the Guaranty was to provide that in case of Mechanical’s default, the company would guaranty its own indebtedness, rendering the entire Guaranty meaningless. 17 The Court held that “ PNC Capital’s logic applie to this case.” 18 The Court reasoned that “ or us to accept a literal reading of the Guaranty’s full debt recourse liability to apply to the “Borrower” instead of “Indemnitor” as urged by defendants would countenance an ‘illogical’ result, namely, Bersin Properties, as a single-purpose entity with no assets other than the Property, would be guaranteeing its own debt.” 19 “That result,” said the Court, “renders the Guaranty illusory and meaningless, particularly given that the Property was encumbered at the time of the Guaranty and, notably, already lost in an unrelated foreclosure action when plaintiff sought to enforce the Guaranty.” 20 The Court rejected defendants’ argument that PNC Capital was inapplicable. In so doing, the Court rejected defendants’ attempt to compartmentalize the Guaranty into two separate and mutually exclusive components — a loss recourse indemnity versus a full debt recourse liability. 21 “Compartmentalizing the recourse obligations in this manner fails to read the Guaranty as a whole,” said the Court. 22 “The clear and unambiguous purpose of the Guaranty is to guarantee both the losses incurred under the Loan Agreement and Bersin Properties’ loan obligations under that agreement.” 23 “Further,” held the Court, “the literal application of the phrase ‘fully recourse to Borrower’ only to Bersin Properties and not to , as an Indemnitor, as persisted by defendants would render the full debt recourse liability portion of the Guaranty meaningless and illusory because Bersin Properties is not a signatory to the Guaranty and would not be bound by terms of the Guaranty. Thus, the loan indebtedness would be unguaranteed, undermining the purpose of the Guaranty.” 24 Moreover, as a matter of contract interpretation, the Court held that the “guaranty must be read in the context of the loan agreement and in a manner that accords the words their fair and reasonable meaning, and achieves a practical interpretation of the expressions of the parties.” 25 “In other words,” said the Court, “a ‘contract should not be interpreted to produce a result that is absurd, commercially unreasonable or contrary to the reasonable expectations of the parties.’” 26 Looking at the agreements, the Court noted that “ ertain provisions of the Guaranty confirm that the full debt recourse liability runs to , as an Indemnitor, rather than to ‘Borrower.’” 27 “Specifically,” said the Court, “the paragraph immediately following the full debt recourse liability provision declares that ‘ he liability of Indemnitor under this Agreement shall be direct and immediate’; that ‘Indemnitor waives any right to require that an action be brought against Borrower or any other person or to require that resort be had to any collateral for the Loan’; that ‘Indemnitor shall nevertheless be fully liable’ for the debt even if Borrower’s liability is relieved by bankruptcy or other debtor relief law; and that ‘Indemnitor shall remain liable for all remaining indebtedness and obligations guaranteed hereby’ even if the loan is partially repaid from other sources or by foreclosure.” 28 Further, explained the Court, “section 4 of the Guaranty, which provides for the waiver of defenses by the Indemnitor, would be rendered meaningless if the Indemnitor were not personally liable for repayment of the debt.” 29 “Additionally,” said the Court, “section 5(b) of the Guaranty states that ‘Lender would not make the Loan but for the unsecured personal liability undertaken by Indemnitor herein.’” 30 “If , as an Indemnitor, not, under any circumstances, personally liable for the loan, these provisions would be relegated to meaningless surplusage,” concluded the Court. 31 In sum, the Court held that the terms of the Guaranty “all provide clear and convincing intrinsic proof that the use of the phrase ‘recourse to Borrower’ instead of ‘recourse to Indemnitor’ in the Guaranty was an obvious scrivener's error.” 32 Takeaway The Court’s “reminder” at the outset of the decision sums up the takeaway of NCCMI : “proofreading is an essential, indispensable tool in the drafting of contracts.” 33 Footnotes Janowitz v. 25-30 120th St. , 75 A.D.2d 203, 214 (2d Dept. 1980). Id. (quoting 13 Williston, Contracts <3d ed> , § 1544). Id. Id. (citing 13 Williston, Contracts <3d ed> , § 1544, at 96). George Backer Mgt. Corp. v. Acme Quilting Co. , 46 N.Y.2d 211, 219 (1978). Schultz v. 400 Coop. Corp. , 292 A.D.2d 16, 19 (1st Dept. 2002) (quoting, Amend v. Hurley , 293 N.Y. 587, 595 (1944)). Id. Id. US Bank N.A. v. Lieberman , 98 A.D.3d 422, 424 (1st Dept. 2012). Gulf Ins. Co. v. Transatlantic Reins. Co. , 69 A.D.3d 71, 85 (1st Dept. 2009). CPLR § 213(6); 1414 APF, LLC v. Deer Stags, Inc. , 39 A.D.3d 329, 330 (1st Dept. 2007). Matter of Wallace v. 600 Partners Co. , 86 N.Y.2d 543, 547-548 (1995); see also Jade Realty LLC v. Citicorp Commercial Mtge. Trust 2005-EMG , 20 N.Y.3d 881, 883-884 (2012). Slifka v. Slifka , 177 A.D.3d 418, 419 (1st Dept. 2019). W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157, 160, 162 (1990) (internal quotation marks omitted). Warberg Opportunistic Trading Fund, L.P. v. Georesources, Inc. , 112 A.D.3d 78, 84-85 (1st Dept. 2013). Bersin Props., LLC v. Nomura Credit & Capital, Inc. , 213 A.D.3d 431, 431 (1st Dept. 2023). Id. at 270-271. Slip Op. at *5. Id. Id. Slip Op. at *5. Id. (citing Greenwich Capital Fin. Prods., Inc. v. Negrin , 74 A.D.3d 413, 415 (1st Dept. 2010)). Id. Id. at *6. Id. (citing Greenwich Capital , 74 A.D.3d at 415) (quoting Duane Reade, Inc. v. Cardtronics, LP , 54 A.D.3d 137, 140 (1st Dept 2008) (internal quotation marks omitted)). Id. (citing ( Greenwich Capital , 74 A.D.3d at 415) (quoting Matter of Lipper Holdings v. Trident Holdings , 1 A.D.3d 170, 171 (1st Dept. 2003)). Id. Id. Id. Id. Id. (citing Greenwich Capital , 74 A.D.3d at 415 (rejecting interpretation that relies on “formalistic literalism,” ignores common sense, and could lead to absurd results)). Id. Id. at *2. 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 People and businesses enter into all kinds of contracts with the expectation that the other party will perform according to the respective promises of the parties.  [This BLOG has discussed the basics of contract formation and breach, inter alia , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .] It is well known that a party to a contract may be liable to another party to a contract for a breach.  The elements of a cause of action for breach of contract are: (1) the existence of an enforceable contract; (2) performance of the agreement by one party; (3) breach by the other party; and, (4) damages resulting from the breach. See, e.g., Nassau Operating Co., LLC v. Desimone , 206 A.D.3d 920, 926 (2d Dep’t 2022). “A material breach is a failure to do something that is so fundamental to a contract that the failure to perform that obligation defeats the essential purpose of the contract.” Feldman v. Scepter Group, PTE. LTD , 185 A.D.3d 449, 450 (1 st Dep’t 2020) (citation and internal quotation marks omitted).  Put another way, a “breach is material if it strongly tends to defeat the object of the parties in making the contract.”  Id . (Citation, internal quotation marks and brackets omitted.)  A party can also be deemed to have breached a contract prior to the time of performance – an anticipatory breach.  “An anticipatory breach of contract by a promisor is a repudiation of a contractual duty before the time fixed in the contract for performance has arrived.”  Costea v. Vemen Mgt. Corp. , 213 A.D.3d 634, 637 (2 nd Dep’t 2023) (citations, internal quotation marks, brackets and ellipses omitted).  According to the Costea Court: An anticipatory breach of a contract—also known as an anticipatory repudiation—can be either a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach or a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach. Under the doctrine of anticipatory repudiation, where one party repudiates its contractual obligations prior to the time designated for performance, the nonrepudiating party may immediately claim damages for total breach and be absolved from its obligations of future performance. For an anticipatory repudiation to be deemed to have occurred, the expression of intent not to perform by the repudiator must be positive and unequivocal. Id . (Citations, internal quotation marks and brackets omitted.) The party to a contract faced with a breach of a contract must elect its remedy.  Under the election of remedies doctrine “when one party breaches a bilateral contract, the other party must make an election between declaring a breach and terminating the contract or, alternatively, ignoring the breach and continuing to perform under the contract.”  Todd English Enterprises LLC v. Hudson Home Group, LLC , 206 A.D.3d 585, 587 (2022) (citation and internal quotation marks omitted).  “On learning of the breach, the other party has a reasonable time to elect its remedy.” Id . (Citation and internal quotation marks omitted).   Also relevant to today’s BLOG is the amendment of pleadings.  CPLR 3025 (b) provides in pertinent part that “ party may amend his or her pleading … at any time by leave of court or by stipulation of all parties.” Importantly, CPLR 3025(b) provides that “ eave shall be freely given.…” Thus, “unless the proposed amendment would unfairly prejudice or surprise the opposing party, or is palpably insufficient or patently devoid of merit,” the motion to for leave to amend should be granted. Cirillo v. Lang , 206 A.D.3d 611, 612 (2d Dept. 2022) (citations omitted).  See also Greene v. Esplanade Venture P’ship , 36 N.Y.3d 513, 526 (2021); Toiny, LLC v. Rahim , 214 A.D.3d 1023, 1024 (2d Dept. 2023) (citations omitted). These principles were addressed on February 28, 2024, by the Appellate Division, Second Department, in Contract Pharmacal Corp. v. Air Industries Group , a breach of contract action.  The plaintiff in Contract Pharmacal moved for leave to amend its complaint to interpose a cause of action for anticipatory breach of contract.  The motion was denied.  On the plaintiff’s motion for reargument, the motion court granted reargument and adhered to its original decision denying the motion.   On the Plaintiff’s appeal, the Second Department affirmed.  Asserting claims for breach and anticipatory breach of contract, the Court noted, is “barred”. Therefore, the Court found the proposed amendment was “patently devoid of merit.”  In so doing, the Court stated: Although leave to amend a pleading should be freely given in the absence of prejudice or surprise to the opposing party ( see CPLR 3025 ), the motion should be denied where the proposed amendment is palpably insufficient or patently devoid of merit. When one party to a contract commits an anticipatory breach, the nonbreaching party must choose one of two options: either treat the contract as terminated and seek damages, or ignore the breach and wait for the breaching party to perform. The nonbreaching party must make an election and cannot at the same time treat the contract as broken and subsisting. One course of action excludes the other. In determining which election the nonbreaching party has made, the operative factor is whether the non-breaching party has taken an action (or failed to take an action) that indicated to the breaching party that it had made an election. Once the nonbreaching party has chosen a remedy, the choice becomes binding and cannot be altered. Accordingly, asserting a cause of action alleging breach of contract precludes pleading a cause of action alleging anticipatory breach of contract. Here, the plaintiff, in the complaint, asserted a cause of action to recover damages for breach of contract. In doing so, the plaintiff elected its remedy and communicated that choice to the defendant. Inasmuch as simultaneous prosecution of causes of action alleging breach of contract and alleging anticipatory breach of contract is barred, the proposed amendment to add a cause of action alleging anticipatory breach of contract was patently devoid of merit. Accordingly, upon reargument, the Supreme Court properly adhered to the prior determination denying that branch of the plaintiff's motion which was for leave to amend the complaint to add such a cause of action. (Citations, internal quotation marks, brackets and ellipses omitted.)  Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber It’s been some time since this Blog has written about Regulation Best Interest (“BI”). 1 See here . 2 As a general matter, Reg BI requires a broker, dealer, or associated person to act in the best interest of a retail customer when making a recommendation of a securities transaction (the “Best Interest Obligation”).  Today, we examine an enforcement action and settlement of charges against TIAA-CREF Individual & Institutional Services LLC (“TC Services” or “Respondent”), a subsidiary of Teachers Insurance and Annuity Association of America (TIAA), for allegedly failing to comply with Reg BI in connection with recommendations to retail customers to open a TIAA Individual Retirement Account (“TIAA IRA”). As discussed below, TC Services agreed to pay more than $2.2 million to settle the charges. A Primer on Reg BI Reg BI established a standard of conduct for broker-dealers and associated persons who recommend securities transactions to retail customers. Reg BI is intended to enhance the broker-dealer standard of conduct beyond existing suitability obligations, by requiring broker-dealers to, among other things: act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer; and address conflicts of interest by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest. There are four components to Reg BI: (1) Disclosure Obligation, (2) Care Obligation, (3) Conflict of Interest Obligation, and (4) Compliance Obligation. All four components must be met in order to satisfy the regulation. Under the Disclosure Obligation, before or at the time of the recommendation, a broker-dealer must disclose, in writing, all material facts about the scope and terms of its relationship with the customer. This includes a disclosure that the firm or representative is acting in a broker-dealer capacity; the material fees and costs the customer will incur; and the type and scope of the services to be provided, including any material limitations on the recommendations that could be made to the retail customer. Moreover, the broker-dealer must disclose all material facts relating to conflicts of interest associated with the recommendation that might incline a broker-dealer to make a recommendation that is not disinterested, including, for example, conflicts associated with proprietary products, payments from third parties, and compensation arrangements.  The Care Obligation requires a broker, dealer, or associated person to exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs associated with a recommendation of a securities transaction to a retail customer. According to the SEC, whether a broker, dealer, or associated person exercises reasonable diligence depends on, among other things, the complexity of, and risks associated with, the recommended security. The Care Obligation also requires a broker, dealer, or associated person to have a reasonable basis to believe that the recommendation is in the best interest of the particular retail customer, based on that customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation. Whether the recommendation is in the best interest of the customer depends on the facts and circumstances of the recommendation, including “matching” the recommended security to the retail customer’s investment profile. Where the “match” between the retail customer profile and the recommendation appears less reasonable, it is incumbent upon the broker to establish that it had a reasonable belief that the recommendation was in the best interest of the retail customer. In addition to “matching” the recommendation to the customer’s suitability profile, a registered representative should also exercise reasonable diligence, care, and skill to consider reasonably available alternatives. Under the Conflict of Interest Obligation, a broker-dealer must establish, maintain, and enforce reasonably designed written policies and procedures addressing conflicts of interest associated with its recommendations to retail customers. These policies and procedures must be reasonably designed to identify all such conflicts and at a minimum disclose or eliminate them. Importantly, the policies and procedures must be reasonably designed to mitigate conflicts of interests that create an incentive for an associated person of the broker-dealer to place its interests or the interest of the firm ahead of the retail customer’s interest. Moreover, when a broker-dealer places material limitations on recommendations that may be made to a retail customer ( e.g. , offering only proprietary or other limited range of products), the policies and procedures must be reasonably designed to disclose the limitations and associated conflicts and to prevent the limitations from causing the associated person or broker-dealer from placing the associated person’s or broker-dealer’s interests ahead of the customer’s interest. Finally, the policies and procedures must be reasonably designed to identify and eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time. The Compliance Obligation requires a broker-dealer to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI. According to the SEC, a broker “should consider the nature of that firm’s operations and how to design such policies and procedures to prevent violations from occurring, detect violations that have occurred, and to correct promptly any violations that have occurred.” here).=">here)."> Reg BI After the Compliance Date On April 20, 2023, the SEC released a Staff Bulletin (“Bulletin”) on the care obligation for broker-dealers and investment advisors. 3 As noted in the Bulletin, the Bulletin and other staff documents (including those cited therein) represent the views of the SEC staff. They do not carry the force of a rule, regulation, or statement of the Commission. In fact, the Commission neither approved nor disapproved of the content of the Bulletin.  According to the Staff, the Bulletin was designed to assist firms and their financial professionals with meeting their care obligations under Reg BI. Some commentators have argued that the Staff’s views appear to go beyond the requirements of Reg BI ( here ).  In addition to SEC enforcement of Reg BI, the Financial Industry Regulatory Authority (“FINRA”) has brought enforcement actions involving Reg BI. In October 2022, for example, FINRA charged a representative ( here ) with “recommending a series of transactions in the account of one retail customer that was excessive in light of the customer’s investment profile and therefore was not in that customer’s best interest.” FINRA noted that “ o single test defines when trading is excessive, but factors such as the turnover rate, the cost-to-equity ratio, and the use of in-and-out trading in a customer’s account are relevant to determining whether a member firm or associated person has excessively traded a customer’s account in violation of Reg BI.” To settle the charges, the respondent consented to the imposition of a six-month suspension from associating with any FINRA member in all capacities, and a $5,000 fine. Customers are also bringing arbitrations that include claims that the representative violated Reg BI. In 2023, there were 408 cases on FINRA’s docket in which the claimant alleged a violation of Reg BI, up from 216 in 2022 ( here ).  In the Matter of TIAA-CREF Individual & Institutional Services, LLC On February 16, 2024, the SEC announced ( here ) that TC Services agreed to pay more than $2.2 million to settle charges that it failed to comply with Reg BI in connection with recommendations to retail customers to open a TIAA IRA. The enforcement proceedings arose out of Respondent’s alleged failure to comply with Reg BI between June 30, 2020, the compliance date for Reg BI, and approximately November 1, 2021.  During the Relevant Period, Respondent offered a variety of investment alternatives to retail brokerage customers, including the TIAA IRA, an investment strategy involving securities. The TIAA IRA enabled customers to invest in a pre-selected core menu of affiliated investments, including TIAA mutual funds, Nuveen mutual funds, and TIAA retirement annuities. 4 In the core menu, customers could opt to receive certain benefits like third-party allocation advice on core menu investments and the ability to establish automatic contributions. Affiliated funds in the core menu typically had higher expenses than the lowest-cost share classes offered by those funds and required no minimum initial investment. In addition to the core menu, the TIAA IRA also enabled customers to invest in a broader array of affiliated and non-affiliated investments through the TIAA IRA brokerage window. Specifically, through the TIAA IRA brokerage window, customers could invest in TIAA mutual funds and Nuveen mutual funds, as well as a variety of third-party mutual funds, ETFs, stocks, and bonds. The brokerage window included the lowest-cost share classes of core menu funds where available. These share classes were generally subject to investment minimums.  The SEC’s order ( here ) found that Respondent violated Reg BI by, among other things, failing to disclose both that substantially equivalent, lower-cost share classes of affiliated funds were available in the brokerage window and the conflicts that it created. In particular, according to the SEC, Respondent did not disclose to its retail customers prior to or at the time of the recommendation to open a TIAA IRA account that substantially equivalent, lower-cost share classes of select affiliated funds were available in the brokerage window. The SEC also said that Respondent did not disclose the conflicts associated therewith – that is, that Respondent allegedly earned higher fees when customers invested in more expensive share classes of core menu funds.  The SEC further alleged that Respondent failed to comply with Reg BI’s Care Obligation because Respondent and its associated persons did not exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs associated with its recommendations to open a TIAA IRA. In particular, alleged the SEC, the firm failed to understand the costs associated with their recommendations of that product. Finally, the SEC alleged that Respondent failed to comply with the Compliance Obligation of Reg BI because it failed to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI’s Care Obligation. According to the SEC, Respondent had no policies and procedures in place to detect investment minimum waivers. In addition, said the SEC, Respondent did not enforce its written policies and procedures because the third-party tool Respondent provided to associated persons to consider costs did not consider costs associated with other share classes of core menu funds available within the TIAA IRA brokerage window. As a result of Respondent’s alleged violations of Reg BI, between June 30, 2020 and October 27, 2021, approximately 5,894 retail customer accounts allegedly purchased higher cost share classes of affiliated mutual funds without being informed by Respondent or its associated persons that substantially equivalent, lower cost offerings were also available within the TIAA IRA. In total, said the SEC, these customers paid about $936,714 more in expenses for substantially equivalent funds than they otherwise could have paid if these funds were purchased through the brokerage window. Without admitting or denying the SEC’s findings, Respondent consented to the entry of an order that requires it to cease-and-desist from violating Reg BI, censures the firm, and orders it to pay disgorgement of $936,714, together with prejudgment interest of $103,424.91, as well as a civil monetary penalty of $1,250,000. Footnotes On June 5, 2019, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted “Regulation Best Interest” or “Reg BI”. The SEC set June 30, 2020, as the compliance date in order to give broker-dealers sufficient time to comply with Reg BI. On and after the compliance date, broker-dealers that provide recommendations of securities transactions or investment strategies that register with the Commission were required to comply with Reg BI. In connection with adoption of the regulation, the SEC issued a 175-page release in which it offered guidance on how the Commission interprets Reg BI. See Regulation Best Interest: The Broker-Dealer Standard of Conduct, Exchange Act Release No. 34-86031, 84 Fed. Reg. 33318 (July 12, 2019) ( here ). The case examined in the article remains ongoing.  See SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Care Obligations (Apr. 20, 2023) ( here ). Nuveen, LLC is a wholly owned subsidiary of TIAA.

By Jonathan H. Freiberger Today we revisit CPLR 3215(c), a provision addressed several times by this Blog.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . By way of brief background, and as set forth in one of our prior Blogs, Rule 3215(c) of the New York Civil Practice Law and Rules provides, in pertinent part, that: If the plaintiff fails to take proceedings for the entry of judgment within one year after the default, the court shall not enter judgment but shall dismiss the complaint as abandoned, without costs, upon its own initiative or on motion, unless sufficient cause is shown why the complaint should not be dismissed….  (Emphasis added.) Courts have noted that the language of CPLR 3215(c) is mandatory in the first instance unless plaintiff demonstrates “sufficient cause” for the failure to timely “take proceedings for the entry of judgment]”.  ( See, e.g., US Bank v. Onuoha , 162 A.D.3d 1094, 1095 (2 nd Dep’t 2018); Wells Fargo Bank v. Cafasso , 158 A.D.3d 848, 849 (2 nd Dep’t 2018). The Cafasso Court (quoting Giglio v. NTIMP, Inc. , 86 A.D.3d 301 (2 nd Dep’t 2011)), noted that “sufficient cause” “‘requir both a reasonable excuse for the delay in timely moving for a default judgment, plus a demonstration that the cause of action is potentially meritorious.’”  Cafasso , 158 A.D.3d at 849; see also Wells Fargo Bank, N.A. v. Robinson-John , 220 A.D.3d 974, 977 (2 nd Dep’t 2023).  The “reasonableness” of an excuse is within the sound discretion of the motion court. See, e.g., Onuoha , 162 A.D.3d at 1095 – 96 (citations omitted); Cafasso , 158 A.D.3d at 849 (citations omitted).  In Robinson-John , the Court found that “…the purported submission of a completed loss mitigation application by the defendant did not automatically toll the plaintiff's deadline under CPLR 3215(c) during the time when the plaintiff was reviewing the application” and that the “unsubstantiated and conclusory claims of loss mitigation from the plaintiff's counsel do not amount to a reasonable excuse.”  Robinson-John , 220 A.D.3d at 977 (citations and internal quotation marks, brackets and ellipses omitted. Finally, a default judgment need not be obtained within one year, as long as proceedings to obtain a default judgment have been initiated.  See Bank of America v. Lucido , 163 A.D.3d 614, 615 (2 nd Dep’t 2018); see also Bank of America, N.A. v. Bhola , 219 A.D.3d 430, 432 (2 nd Dep’t 2023); Mort. Electronic Registration Systems, Inc. v. McVicar , 203 A.D.3d 915, 916 - 17 (2 nd Dep’t 2022).  In mortgage foreclosure actions, the preliminary step of moving for an order of reference is deemed to be a sufficient “proceeding” toward the entry of judgment to satisfy the one-year time frame of CPLR 3215(c).  See, e.g., Deutsche Bank v. Delisser , 161 A.D.3d 942, 943 (2 nd Dep’t 2018); Lucido , 163 A.D.3d at 615; Mort. Electronic Registration Systems, 203 A.D.3d at 916 - 17.   A prior BLOG discussed Citibank, N.A. v. Kerszko , 203 A.D.3d 42 (2 nd Dep’t 2022), in which the Court decided “interesting and unusual issues” including the issue addressed by the Court for the “first time” of “whether the presentment to a court of a proposed ex parte order to show cause for an order of reference, which is rejected by the court for defects inherent in the papers, qualifies as a taking of proceedings for the entry of judgment pursuant to CPLR 3215(c), so as to avoid dismissal of the complaint as abandoned under that statute.”  Kerszko , 203 A.D.3d at 43 – 44.  The Kerszko Court, in answering the question in the affirmative, provided a thoughtful analysis of, inter alia , what it means to “take proceedings” under CPLR 3215(c).  Kerszko , 203 A.D.3d at 48 – 52.  Significantly, the lender in Kerszko presented its ex parte order of reference, which the court declined to sign because the moving affidavit was “incomplete”, in November of 2009.  Kerszko , 203 A.D.3d at 44.  A new application for an order of reference was not resubmitted until 2015.  Nonetheless, the Kerszko Court found because “the plaintiff presented a proposed ex parte order of reference within the one-year statutory period the Supreme Court rejected the order of reference as defective the mere presentment of it established the plaintiff's intent to proceed toward the entry of judgment and not to abandon the action.”  Kerszko , 203 A.D.3d at 52. (citation omitted).  According to the Kerszko Court, “ hat matters is the intent manifested by the presentment of an application, not what specific form it took or how it was filed.”  Id. See also MidFirst Bank v. Morris , 221 A.D.3d 889 (2 nd Dep’t 2023). On February 14, 2024, the Second Department decided U.S. Bank N.A. v. Jerriho-Cadogan , a case addressing the “takes proceedings” language of CPLR 3215(c).  Jerriho-Cadogan involves a mortgage foreclosure action commenced in September of 2010.  The borrowers defaulted in appearing, although served with process.  In November of 2010, the lender filed a request for judicial intervention (RJI) for a mandatory foreclosure settlement conference and, as a result, two conferences were held in early 2011.  The case languished for several years whereupon the motion court “issued a conditional order dated April 29, 2014, directing dismissal of the complaint pursuant to CPLR 3216 unless the plaintiff filed a note of issue or otherwise proceeded by motion for the entry of judgment within 90 days.”  Nothing happened until November of 2015, when the lender, inter alia , moved to restore the case to the calendar, which motion was granted in March of 2016.  The lender’s subsequent motion for leave to enter a default judgment was denied without prejudice and “with leave to refile upon showing a reasonable excuse for the delay in timely moving for leave to enter a default judgment.”  The lender moved again, and the motion was not opposed by the borrowers.  In its order deciding the second motion, the court “sua sponte, directed dismissal of the complaint as abandoned pursuant to CPLR 3215(c) and directed the cancellation and discharge of the notice of pendency filed against the subject property.” On the lender’s appeal, the Second Department reversed, finding that steps were taken within a year to obtain a default against the borrowers.  In so doing, the Court explained: To avoid dismissal pursuant to CPLR 3215(c), it is not necessary for a plaintiff to actually obtain a default judgment within one year of the default.  Rather, as long as proceedings are being taken, and these proceedings manifest an intent not to abandon the case but to seek a judgment, the case should not be subject to dismissal.  Here, the demonstrated that, within one year after the default, it filed a request for judicial intervention which sought a foreclosure settlement conference within the foreclosure action as mandated by CPLR 3408 . Where, as here, a settlement conference is a necessary prerequisite to obtaining a default judgment ( see CPLR 3408 , ), a formal judicial request for such a conference in connection with an ongoing demand for the ultimate relief sought in the complaint constitutes ‘proceedings for entry of judgment’ within the meaning of CPLR 3215(c). Since the demonstrated that it initiated proceedings for the entry of a judgment of foreclosure and sale within one year after the default, it was not required to proffer a reasonable excuse or demonstrate a potentially meritorious cause of action. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In Rosenberg v. OSG, LLC , 2024 N.Y. Slip Op. 00691 (1st Dept. Feb. 8, 2024) ( here ), the Appellate Division, First Department underscored the insufficiency of pleading a fraud claim on information and belief. In affirming the dismissal of plaintiffs’ fraudulent inducement claim, the Court held that such pleading was “per se defective.” 1 Rosenberg is a class action arising out of plaintiffs’ participation in the Odyssey Study Group (“OSG”), which is run by Defendants OSG, LLC (“OSG, LLC”), the Individual Defendants, and, during her life, Sharon Gans Horn.  Plaintiffs, Stephanie Rosenberg (“Rosenberg”) and Marjorie Hochman (“Hochman”), alleged that they were members of OSG from 2005 until April 2019 and May 2016, respectively. They claimed that they joined OSG in 2005 after being told by members and leaders “that OSG would help improve their lives economically, physically, and spiritually.” Among other things, plaintiffs maintained that they were “coerced and tricked” by defendants into performing work for OSG, though, according to the motion court, plaintiffs did not specify the means by which they were coerced ad tricked, and that defendants lied to its members about the benefits of membership and the consequences of leaving the group. Plaintiffs commenced the action on September 20, 2021, asserting seven causes of action. Relevant to this article, in their fifth cause of action, plaintiffs alleged that defendants fraudulently induced them to join OSG by misrepresenting the benefits of joining the group. Defendants moved to dismiss. The motion court granted the motion.  To state a claim for fraud in the inducement, a plaintiff must allege “a material misrepresentation of fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff, and damages.” 2 In addition, the plaintiff must “state[] in detail” “the circumstances constituting the wrong.” 3 Conclusory allegations made upon information and belief are insufficient to “establish the necessary quantum of proof to sustain allegations of fraud.” 4 The motion court held that plaintiffs failed to state a cause of action for fraud in the inducement, because they did not allege with sufficient particularity the details of the material misrepresentations made by defendants as required by CPLR 3016(b). The motion court noted that neither the complaint nor plaintiffs in their opposition to the motion specified which defendants made the misrepresentations 5 and the details of the purported misrepresentations.  The motion court also held that plaintiffs failed to allege with sufficient particularity that they justifiably relied upon defendants’ alleged misrepresentations. The motion court found that the complaint “merely allege that “ s a result of Defendants’ misrepresentation, Plaintiffs were led to believe that if they were asked to leave (or quit) they would suffer psychologically and emotionally” and state , in a conclusory manner, that they justifiably relied upon Defendants’ representations.” Further, the motion court found that plaintiffs failed to “specify the existence of a ‘relationship of trust or confidence’ between themselves and any Defendant at the time the alleged representations were made, the Defendants’ level of knowledge regarding the alleged falsity of the representations, or of the level of knowledge of the Defendants who made the representations.” 6 Accordingly, the motion court dismissed plaintiffs’ fifth cause of action for fraudulent inducement. On appeal, the First Department affirmed the dismissal, holding that “Plaintiffs’ fraud in the inducement claim per se defective,” because it was alleged on information and belief. 7 The Court also held, albeit in dicta, 8 that plaintiffs failed “to sufficiently allege that they justifiably relied on any alleged misrepresentation.” 9 Takeaway We have often noted that conclusory allegations and allegations made on information and belief are insufficient to state a claim for fraud. Such allegations are considered defective because they are made without any supporting facts. As noted above, plaintiffs pleading fraud must comply with CPLR 3016(b) and state with particularity the facts and circumstances constituting the alleged fraud. Rosenberg is a good reminder, therefore, that not only is information and belief pleading insufficient but, as noted by the First Department, it is “per se defective.” 10 Footnotes Slip Op. at *1. Carlson v. American Int. Grp., Inc. , 30 N.Y.3d 288, 310 (2017) (quoting Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009) (internal quotation marks omitted)). CPLR 3016(b); see also Carlson , 30 N.Y.3d at 310. Weinberg v. Kaminsky , 166 A.D.3d 428, 429 (1st Dept. 2018) (quoting Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610,615 (1st Dept. 2015) (internal quotation marks omitted)). The Court was referring to the prohibition against group pleading. Group pleading is the practice of grouping multiple defendants together in a complaint when they are alleged to have collectively committed the wrong complained of. Courts routinely dismiss a complaint that lumps together numerous defendants without differentiation on particularity grounds because each defendant is not informed of the wrongs he/she is alleged to have committed. here,=">here," and="and" >here.=">here."> Citing Epiphany Community Nursery Sch. , 171 A.D.3d at 10. Slip Op. at *1 (citing Weinberg v. Kaminsky , 166 A.D.3d 428, 429 (1st Dept. 2018), and Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015)). “Dictum is an abbreviation of the Latin phrase ‘obiter dictum.’ As a legal term, a dictum is any statement or opinion made by a judge that is not required as part of the legal reasoning to make a judgment in a case.” Cornell University, LII Legal Information Institute (2022) ( here ). Id. (citing Epiphany Community Nursery Sch. v. Levey , 171 A.D.3d 1, 9-10 (1st Dept. 2019)). Slip Op. at *1. 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.