By Jonathan H. Freiberger This BLOG has written numerous times on statutes of limitation issues in mortgage foreclosure actions.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . Briefly stated, and as has been stated previously in this BLOG, an action to foreclose a mortgage is governed by a six-year statute of limitations.  CPLR 213(4) .  See also , Fed. Nat. Mort. Assoc. v. Schmitt , 172 A.D.3d 1324, 1325 (2 nd Dep’t 2019).  When a mortgage is payable in installments, “separate causes of action accrue for each installment that is not paid and the statute of limitations begins to run on the date each installment becomes due.”  HSBC Bank USA, N.A. v. Gold , 171 A.D.3d 1029, 1030 (2 nd Dep’t 2019).  Most mortgages, however, provide that a mortgagee may accelerate the entire debt in the event of, inter alia , a payment or other default by a mortgagor. Thus, “the terms of the mortgage may contain an acceleration clause that gives the lender the option to demand due the entire balance of principal and interest upon the occurrence of certain events delineated in the mortgage.”  Bank of New York Mellon v. Dieudonne , 171 A.D.3d 34, 37 (2 nd Dep’t 2019) (citations and internal quotation marks omitted).  Once the mortgagee’s election to accelerate is properly made, “the borrower’s right and obligation to make monthly installments ceased and all sums became immediately due and payable.”  The statute of limitations begins to run anew on the entire debt upon acceleration.  HSBC , 171 A.D.3d at 1030 (citations omitted). Because some lenders were employing a tactic of acceleration/deacceleration/reacceleration to extend the six-year statute of limitations to circumvent mistakes made in pending foreclosure actions, among other reasons, the Foreclosure Abuse Prevention Act (“FAPA”) was passed by the New York Legislature and signed into law by the Governor.  [Eds. Note: This BLOG addressed FAPA < here =">here"> .]  FAPA, which went into effect on December 30, 2022, became the law in New York, amends certain provisions of the CPLR and other statutes to the extent they relate to mortgage foreclosure actions.   For example, FAPA amended CPLR 213 (4), which governs the six-year statute of limitations for actions on promissory notes, to include subparagraph (a), which provides that “ n any action on an instrument described under this subdivision, if the statute of limitations is raised as a defense, and if that defense is based on a claim that the instrument at issue was accelerated prior to, or by way of commencement of a prior action, a plaintiff shall be estopped from asserting that the instrument was not validly accelerated, unless the prior action was dismissed based on an expressed judicial determination, made upon a timely interposed defense, that the instrument was not validly accelerated.”  In Deutsche Bank Nat. Trust Co. v. Wong , 218 A.D.3d 742, 744 (2 nd Dep’t 2023), based on CPLR 213(4)(a), the lender was estopped from asserting a defense that, because the plaintiff in the earlier action lacked standing to commence same, the underlying debt was not validly accelerated by an earlier commenced action. Similarly, FAPA amended CPLR 203 by adding subdivision (h), which provides that “ nce a cause of action upon an instrument described in subdivision four of section two hundred thirteen of this article has accrued, no party may, in form or effect, unilaterally waive, postpone, cancel, toll, revive, or reset the accrual thereof, or otherwise purport to effect a unilateral extension of the limitations period prescribed by law to commence an action and to interpose the claim, unless expressly prescribed by statute.”   Issues related to FAPA, CPLR 203(h) in particular, were decided on February 8, 2024, by the First Department in HSBC Bank USA v. Gifford .  Lender in Gifford commenced a mortgage foreclosure action in 2019 after a prior action, commenced in 2013, was dismissed based on lender’s failure to comply with the notice requirements of RPAPL 1304.  The new action was commenced six years and four months after the commencement of the prior action, which operated to accelerate the obligations evidenced by the promissory note.  Borrower moved pursuant to, inter alia , CPLR 3211(a)(5) (statute of limitations) and CPLR 213(4).  Lender opposed borrower’s motion by arguing it deaccelerated the loan by letter in June of 2018 and, therefore, its action was timely.  The motion court, finding, inter alia , that the loan was validly deaccelerated, denied borrower’s motion.  Borrower appealed. The First Department noted that following the determination of the motion to dismiss, the New York Legislature enacted FAPA, which included CPLR 203(h). The parties addressed the FAPA issues on the appeal.  The Court found that lender adequately demonstrated that the deacceleration letter was actually mailed.  In addressing the purported deacceleration and its relation to CPLR 203(h), the Court stated: However, the added subdivision (h) to CPLR 203 , provides that once a cause of action to foreclose a mortgage or for a money judgment under the note accrues, "no party may . . . unilaterally waive, postpone, cancel, toll, revive, or reset the accrual thereof, or otherwise purport to effect a unilateral extension of the limitations period prescribed by law to commence an action and to interpose the claim, unless expressly prescribed by statute." Thus, if CPLR 203(h) applies to this previously commenced action, the 2018 letter purporting to restart the running of the statute of limitations on a loan is ineffective, regardless of whether or not the letter was pretextual. The Court, however, remanded the matter for additional proceedings on constitutional issues raised by lender.  Thus, the Court stated: Plaintiff challenges the constitutionality of CPLR 203(h) contending that retroactive application of FAPA would violate the Due Process and Takings Clauses of the United States Constitution, as well as the New York State Constitution. Because of the vitality of the constitutional issues, plaintiff is directed to serve notice on the Attorney General under CPLR 1012(b)(1) and file proof of service, and the matter is remanded for further proceedings on the constitutional question. Footnotes CPLR 213(4)(b), which contains similar language to RPAPL 1501(4), was also added and estops lenders that are defendants in actions brought under RPAPL 1501(4) to cancel or discharge a mortgage from asserting the invalidity of a prior acceleration.  [Eds. Note: This BLOG addressed RPAPL 1501(4) < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . [Eds. Note: This BLOG has extensively addressed issues related to RPAPL 1304.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . The court in U.S. Bank Trust v. Miele , 80 Misc. 3d 839 (Sup. Ct. Westchester Co. 2023), provided a thoughtful analysis of constitutional issues regarding the retroactivity of FAPA. 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 Self-reporting violations of the federal securities laws is an important part of the Securities and Exchange Commission’s enforcement regimen. For decades, the SEC has credited cooperative behavior that assists the Commission in its mission to protect investors. As such, when businesses self-report and rectify allegedly illegal conduct, and otherwise cooperate with Commission staff, the SEC has shown a willingness to forego the imposition of civil penalties when settling enforcement actions.  What does the Commission consider to be sufficient assistance and cooperation? Actions such as self-policing, self-reporting, remediation, and cooperation, are the primary considerations. 1 Self-policing concerns an entity’s governance and compliance programs and their ability to detect potential violations before they come to light. 2 Self-reporting involves the disclosure of misconduct to the public, regulatory agencies, and self-regulatory organizations after conducting a thorough investigation into the origins, scope and consequences of the misconduct. 3 Remediation refers to actions taken by the entity to correct the violations of law, such as termination of employment, employee discipline, modifying and improving internal controls and procedures to prevent recurrence of the misconduct, and compensating those adversely affected. 4 Cooperation refers to the entity providing assistance to regulators and giving regulators access to information relevant to the alleged violations. 5 In the Matter of Cloopen Group Holding Limited , the SEC declined to impose civil penalties against the company because of its self-reporting, cooperation and remediation. Cloopen arose from an alleged accounting fraud perpetrated by the former Operating Management Director and a former Department Head at Cloopen Group Holding Limited (the “Senior Managers”). Cloopen is a Cayman Islands corporation that is headquartered in Beijing, People’s Republic of China (“China”) and operates in China through its variable interest entity, Beijing Ronglian Yitong Information Technology Co. Ltd. Cloopen provides cloud-based communications products and services to enterprises of various sizes located primarily in China. Cloopen’s American depositary shares (“ADSs”) were registered with the Commission pursuant to Section 12(b) of the Exchange Act and traded on the New York Stock Exchange (“NYSE”) under the symbol “RAAS.” According to the SEC, during Cloopen’s year-end audit for fiscal year 2021, its external auditor (the “External Auditor”) identified potential accounting errors. Following an internal investigation, said the SEC, Cloopen determined that, from May 2021 through February 2022, the two China-based Senior Managers, who headed the department that handled Cloopen’s strategic customers, had orchestrated a fraudulent scheme to prematurely recognize revenue on service contracts for which Cloopen had either not completed work or, in some instances, not even started work. The SEC also said that Cloopen identified additional problematic contracts in other departments that were missing or appeared to have falsified supporting documentation. As a result of the foregoing, the SEC alleged that Cloopen overstated the unaudited financial results that it announced in its filings with the SEC for the second and third quarters of 2021. Specifically, said the SEC, Cloopen’s revenue for the second quarter of 2021 was overstated by $1.8 million (RMB 11.6 million) (approximately 4% of its total revenue) and its revenue for the third quarter was overstated by $2.8 million (RMB 17.8 million) (approximately 6% of its total revenue).  In addition, noted the SEC, Cloopen’s announced revenue guidance for the fourth quarter of 2021 was significantly overstated. When Cloopen announced the investigation into potential accounting errors, the price of its ADSs declined 12.7% from the prior day’s closing price. The SEC settled its charges against Cloopen, and declined to impose civil penalties against Cloopen because the company self-reported its accounting issues, cooperated extensively with the staff’s investigation, and undertook prompt remedial measures.  In this regard, in early May 2022, Cloopen self-reported to the Commission’s staff the accounting errors uncovered by the External Auditor. Cloopen made the self-report within a few days of retaining outside counsel to conduct an internal investigation and before any significant steps had been taken as part of that investigation. Thereafter, noted the SEC, Cloopen provided substantial cooperation to the Commission’s staff throughout the staff’s investigation, including by providing detailed explanations of the customer transactions at issue and their financial impact; summarizing interviews of witnesses located in China; identifying, translating, and producing certain key documents originally written in Chinese; and providing other relevant information to the staff. The cooperation afforded by Cloopen, said the SEC, substantially advanced the efficiency of the staff’s investigation and conserved Commission resources. According to the SEC, Cloopen also undertook prompt remedial measures, including: (1) forming an independent special committee of its Board of Directors to investigate the issues raised by the External Auditor; (2) terminating the Senior Managers who orchestrated the early revenue recognition misconduct and also disciplining other employees who were involved; (3) reorganizing or removing the departments involved in the misconduct; (4) strengthening its internal accounting controls surrounding customer contracts, payments, and revenue recognition; (5) retraining company executives, department heads, and employees in the finance, accounting, internal audit, and sales departments on Cloopen’s internal accounting controls and company policies and procedures, including with respect to revenue recognition; (6) recruiting finance and accounting personnel with expertise in U.S. GAAP; and (7) clawing back $228,000 (RMB 1.64 million) of bonus compensation paid to Cloopen’s Chief Executive Officer and Chief Financial Officer for the last nine months of 2021. The SEC found that Cloopen violated the antifraud provisions of the Securities Exchange Act of 1934, as well as certain reporting, recordkeeping, and internal controls provisions of the federal securities laws. Without admitting or denying the SEC’s findings, Cloopen agreed to cease and desist from further violations of the charged securities laws. Commenting on the settlement, and in particular Cloopen’s self-help, cooperation and remediation, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, stated:  This enforcement action demonstrates what we have said repeatedly: there are real benefits to companies that self-report their potential securities law violations, assist during our investigations, and undertake remedial measures. As detailed in our order, Cloopen, a foreign issuer, promptly self-reported accounting errors to Commission staff, provided detailed explanations of the transactions at issue, and cooperated in other ways that substantially advanced the investigation. Cloopen also promptly undertook significant remedial measures, including terminating and disciplining employees involved in the misconduct, strengthening its internal accounting controls, and clawing back compensation from its CEO and CFO. In consideration of Cloopen’s significant cooperation, the Commission determined not to impose a civil penalty against Cloopen. The press release announcing the settlement of the charges can be found here . The SEC’s cease and desist order can be found here . Footnotes See SEC, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions (Exchange Act Rel. No. 44969) (Oct. 23, 2001) ( here ). See SEC Enforcement Manual (Nov. 28, 2017), at 6.12 ( here ). Id. Id. 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 Jonathan H. Freiberger For a variety of reasons, a party asserting a claim may choose to discontinue same.  In such circumstances, CPLR 3217 , provides the mechanism to do so.  [Eds. Note: this BLOG has addressed CPLR 3217 < here =">here"> and < here =">here"> .]   CPLR 3217(a), which addresses situations where a party asserting a claim may voluntarily discontinue a claim without the need for a court order, permits the party to do so, inter alia : (1) by serving on all parties “a notice of discontinuance at any time before a responsive pleading is served or, if no responsive pleading is required, within twenty days after service of the pleading asserting the claim and filing the notice with proof of service with the clerk of the court” (CPLR 3217(a)(1)); or, (2) “by filing with the clerk of the court before the case is submitted to the court or jury, a stipulation in writing signed by the attorneys of record for all parties, provided that no party is an infant, incompetent person for whom a committee has been appointed or conservatee and no person not a party has an interest in the subject matter of the action” (CPLR 3217(a)(2)).  For the purposes of CPLR 3217(a)(1), an interesting question is whether a motion to dismiss constitutes the service of “a responsive pleading.”  The First Department in BDO USA, LLP v. Phoenix Four, Inc. , 113 A.D.3d 507, 511 (2014), found a simple notice to discontinue to be “untimely” because plaintiff served it after “defendants filed their motions to dismiss.”  The Second Department, in Pinkesz Mut. Holdings, LLC v. Pinkesz , 198 A.D.3d 692 (2021), relying on several First Department cases other than BDO , agreed with the First Department’s position on this issue.  The Fourth Department, however, came to the opposite conclusion in Harris v. Ward Greenberg Heller & Reidy LLP , 151 A.D.3d 1808, 1809 (2017).  There, after a thorough analysis of relevant legislative histories, the Harris Court concluded that because a motion to dismiss is not a responsive pleading, a notice of discontinuance is not untimely when served after the filing of motion to dismiss. In all situations other than those set forth in CPLR 3217(a), the party can only discontinue an asserted claim “upon order of the court and upon terms and conditions, as the court deems proper.”  CPLR 3217(b).  The decision of whether to grant a motion to “voluntarily discontinue an action pursuant to CPLR 3217(b) rests within the sound discretion of the court.”  Wilmington Savings Fund Society, FSB v. Moore , 220 A.D.3d 656, 656 – 57 (2 nd Dep’t 2023) (citations and internal quotation marks omitted).  Absent “special circumstances, such as prejudice to a substantial right of the defendant” the court should grant a motion for voluntarily discontinuance.  Id . at 657 (citations and internal quotation marks omitted).  Similarly, a motion to discontinue should not be granted if the discontinuance would “circumvent an order of the court, avoid the consequences of a potentially adverse determination, or produce other improper results.”  Blauvelt Mini-mall, Inc. v. Town of Orangetown , 158 A.D.3d 678, 679 (2 nd Dep’t 2018) (citations omitted); see also Marinelli v. Wimmer , 139 A.D.3d 914, 915 (2 nd Dep’t 2016) (same).  In Marinelli , for example, the Court affirmed the motion court’s denial for a motion to voluntarily discontinue because the record supported “the conclusion that the requested discontinuance was improperly sought to avoid the consequences of a potentially adverse determination with respect to the defendants' motion to change venue as well as to prejudice the defendants' ability to obtain venue in a proper county.”  Marinelli , 139 A.D.3d at 915 (citations omitted).  However, “ elay, frustration and expense in preparation of a contemplated defense do not constitute prejudice warranting denial of a motion for a voluntary discontinuance under CPLR 3217(b).”  Eugenia VI Venture Holdings, Ltd. V. Maplewood Equity Partners, L.P . , 38 A.D.3d 264, 265 (1 st Dep’t 2007) (citations omitted). On January 24, 2024, the Second Department, in U.S. Bank National Ass’n v. Narain , granted lender’s motion to voluntarily dismiss a mortgage foreclosure action pursuant to CPLR 3217(b).  narain matter by reviewing the underlying file on the court’s nyscef filing system.> narain matter by reviewing the underlying file on the court’s nyscef filing system.>  Narain was an action to foreclose a mortgage (the “Second Action”).  The lender in Narain , however, had commenced an earlier action to foreclose the same mortgage (the “First Action”).  The court in the First Action issued a status conference order in which the plaintiff was directed to take certain actions by a specific date and dismissed the lender’s complaint when it failed to comply with the order.  The lender moved, inter alia , to restore the First Action to the calendar and for summary judgment, but the motion was denied.  The lender appealed the order denying its motion to restore. While the appeal in the First Action was still pending, the lender commenced the Second Action.  In their answer in the Second Action, the borrowers asserted an affirmative defense that the action was barred by the applicable statute of limitations and interposed a counterclaim pursuant to RPAPL 1501 (4) to cancel and discharge the mortgage.  [Eds. Note: this BLOG addressed statute of limitations issues in mortgage foreclosure actions < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> and RPAPL 1501(4) < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]  The Court noted that lender moved pursuant to CPLR 3217(b) for leave to discontinue the Second Action “without prejudice, in order to restore to foreclose the mortgage and to proceed to judgment in that action.”  The motion court granted the motion and the borrower’s appealed. The Second Department affirmed and stated: The determination of a motion pursuant to CPLR 3217(b) for leave to discontinue an action without prejudice is within the sound discretion of the court ( see Tucker v Tucker , 55 NY2d 378, 383; Nationstar Mtge., LLC v Dalton , 201 AD3d 726 , 727). "Generally such motions should be granted unless the discontinuance would prejudice a substantial right of another party, circumvent an order of the court, avoid the consequences of a potentially adverse determination, or produce other improper results" ( Haughey v Kindschuh , 176 AD3d 785 , 786 ; see HSBC Bank USA, N.A. v Kone , 188 AD3d 836 , 838). Here, there was no showing of substantial prejudice or other improper results arising from the proposed discontinuance of the action ( see HSBC Bank USA, N.A. v Kone , 188 AD3d at 838; Chase Home Fin., LLC v Sulton , 185 AD3d 646 , 647). On the same day, the Second Department also decided the lender’s appeal on the motion court’s denial of the motion to restore the First Action to the calendar and reversed that decision.  < 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 In 245 E. 19 Realty LLC v. 245 E. 19th St. Parking LLC , 2024 N.Y. Slip Op. 00368 (1st Dept. Jan. 30, 2024) ( here ), the Appellate Division, First Department examined a couple of issues frequently discussed in this Blog: veil piercing/alter ego liability and fraudulent transfers.  As to the issue of fraudulent transfers, 245 E. 19 Realty provides us with the opportunity to examine a case involving the new Debtor and Creditor Law (“DCL”), which became effective on April 4, 2020. The new DCL replaced Article 10, Sections 270-281 of the DCL, the State’s almost century-old fraudulent conveyance law.  here.=">here."> Background 245 E. 19 Realty involved an alleged plan to avoid the negative implications of the Covid-19 pandemic and to increase profits by defendant HPS Investment Partners, LLC (“HPS”). Plaintiff is the owner and landlord of a parking garage located in New York City (“Landlord”). Defendant 245 E. 19th Street Parking LLC (“Tenant”) entered into a written lease agreement on January 1, 2007, with Landlord’s predecessor-in-interest for the demised space at issue.  According to Landlord, at the onset of the Covid-19 pandemic in March 2020, HPS devised a plan and scheme to help defendant Icon Parking Holdings, LLC (“Icon”), a company that HPS allegedly controlled, avoid the negative implications of the pandemic and to increase its profits. Under the plan, Icon’s affiliated garages would effectively stop paying rent. At the time, most garage operators expected an extreme downturn in their daily business. Landlord alleged that HPS, and two of its members (also defendant in the action), directed that payment on Icon affiliates’ rent obligations immediately cease. Landlord claimed that HPS caused Icon to default on its affiliates’ lease obligations at numerous garage locations. Landlord maintained that Icon’s affiliated garages funneled all or substantially all of the funds held in reserve to Icon. Landlord alleged that the transfers from Tenant’s account left it unable to pay its rent when it became due. Thereafter, Icon purportedly transferred those funds to, among others, HPS.  Landlord further alleged that Icon ceased its business operations at the premises. It claimed that: (1) Icon effectively merged into HPS; (2) HPS directed Icon to continue its business operations at the premises under the same ownership and management; and (3) HPS either managed, oversaw or directed the operation of Icon’s business at the premises. Tenant allegedly breached the lease by failing to timely pay monthly installments of fixed rent and additional rent. On March 15, 2021, Icon notified Landlord that it intended to surrender possession of the premises at the end of the month. On March 30, 2021, Icon surrendered possession of the subject premises. Landlord filed an action, asserting 10 causes of action: (1) declaratory judgment; (2) breach of contract against Tenant; (3) alter ego liability/piercing the corporate veil against all defendants; (4) de facto merger against all defendants; (5) tortious interference with the lease against all defendants; (6) piercing the corporate veil against, inter alia , HPS; (7) tortious interference with contract against all defendants; (8) unjust enrichment against all defendants; (9) fraudulent conveyance under new Debtor and Creditor Law (“DCL”) § 273 against all defendants; and (10) attorney’s fees under DCL § 276-a. Defendants moved to dismiss the complaint. The motion court granted the HPS defendants’ motion and granted in part and denied in part the Icon defendants’ motion. The Motion Court’s Decision Veil Piercing/Alter Ego Liability “To make out a cause of action for liability on the theory of piercing the corporate veil because the corporation at issue is the defendant’s alter ego, the complaining party must, above all, establish that the owners of the entity, through their domination of it, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against the party asserting the claim such that a court will intervene.” 1 Notably, piercing the corporate veil is not an independent cause of action. 2 In determining whether the corporate entity 3 is dominated and controlled, “courts have considered factors such as the disregard of corporate formalities; inadequate capitalization; intermingling of funds; overlap in ownership, officers, directors and personnel; common office space or telephone numbers; the degree of discretion demonstrated by the alleged dominated corporation; whether the corporations are treated as independent profit centers; and the payment or guarantee of the corporation’s debts by the dominating entity.” 4 Significantly, “ o one factor is dispositive.” 5 In determining whether the owners abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice, courts look at all the facts and circumstances. “Wrongdoing in this context does not necessarily require allegations of actual fraud. While fraud certainly satisfies the wrongdoing requirement, other claims of inequity or malfeasance will also suffice.” 6 Thus, “ llegations that corporate funds were purposefully diverted to make it judgment proof or that a corporation was dissolved without making appropriate reserves for contingent liabilities are sufficient to satisfy the pleading requirement of wrongdoing which is necessary to pierce the corporate veil on an alter-ego theory.” 7 Conclusory allegations of undercapitalization, intermingling of assets, and domination and control are insufficient to pierce the corporate veil. 8 “As a preliminary matter,” noted the motion court, “the HPS defendants correctly assert that the third and fourth cause of action must be dismissed because “alter-ego liability is not an independent cause of action.” The motion court granted the HPS defendants’ motion to dismiss the veil piercing allegations asserted against them. The motion court found the allegations of “domination and control with respect to these defendants” to be “conclusory and … based upon ‘information and belief,’” which is “insufficient” to withstand a motion to dismiss. The motion court explained that “ lthough Landlord relies on allegedly fraudulent liens filed against Icon’s affiliates, Landlord has not set forth facts showing ‘complete domination of the corporation … in respect to the transaction attacked’ and ‘that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury.’” 9 With regard to the Icon defendants, the motion court held that “the complaint adequately alleges particularized facts to warrant piercing the corporate veil with respect to Icon.” The motion court explained that the complaint sufficiently alleged “that Icon and Tenant ignored corporate formalities and operated as a single economic entity” and that “Icon transferred funds from Tenant’s account on a daily basis, rendering Tenant insolvent at the end of the day and unable to pay rent to Landlord.” The motion court found that there were too many issues of fact making the claim to pierce the corporate veil unsuited for resolution on a pre-answer, pre-discovery motion to dismiss. Fraudulent Transfers Under The DCL In 245 E. 19th Street , Landlord asserted claims under Sections 273(a)(2) and 273(a)(1) of the new DCL. Section 273(a)(2) provides for setting aside transfers or obligations where the defendant or debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation. Section 273(a)(2) further provides that the debtor be engaged or about to be engaged in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due. DCL § 273(a)(1) requires actual intent to hinder, delay or defraud any creditor of the debtor. Under DCL § 273(a)(1), “ here is no requirement that a transaction involve common law deceit or fraudulent misrepresentation to be voidable for ‘actual intent.’ Actual intent to hinder or delay creditors suffices.” 10 Because it is difficult to prove actual intent to hinder, delay, or defraud creditors, the pleader is allowed to rely on “badges of fraud” to support his/her case – that is, circumstances that are commonly associated with fraudulent transfers that their presence gives rise to an inference of intent. Section 273(b) of the DCL enumerates 11 non-exclusive “badges of fraud” that courts may consider in determining intent. These factors include whether the transfer was made to an insider, whether the transfer was concealed, whether the debtor was subject to suit, and whether the debtor absconded. The motion court found that the complaint alleged sufficient badges of fraud to support a DCL § 273(a)(1) claim against the Icon defendants. The motion court explained that the complaint alleged that: (1) Icon was an insider of Tenant; (2) the transfers were concealed from Landlord; (3) all of Tenant’s assets were swept into Icon’s account on a daily basis; (4) the transfers lacked reasonably equivalent value; and (5) the transfers left Tenant insolvent on a daily basis. Such allegations, said the motion court, sufficed to sustain the claim as against the Icon defendants. However, the motion court held that the complaint failed to allege that the transfers were made to them. “The DCL does not, ‘either explicitly or implicitly, create a creditor’s remedy for money damages against parties who … were neither transferees of the assets nor beneficiaries of the conveyance,’” said the motion court. 11 “While Landlord argues that the HPS defendants were the ultimate financial beneficiaries of the alleged wrongful scheme,” noted the motion court, “the complaint only makes conclusory allegations that the HPS defendants benefitted from the alleged fraudulent transfers.” Therefore, concluded the motion court, “the HPS defendants are entitled to dismissal of the ninth and tenth causes of action.” The First Department’s Decision and Order On appeal, the First Department modified the order to grant Tenant and Icon’s motion to dismiss as to the alter ego/veil-piercing and declaratory judgment claims against them, and otherwise affirmed the order. The Court held that the “alter ego/veil-piercing claims against the Icon defendants should have been dismissed, as there is no independent cause of action for veil-piercing.” 12 However, said the Court, veil-piercing was “appropriate as to these defendants” as Landlord “sufficiently alleged that Icon dominated Tenant with respect to the transaction attacked, disregarding corporate formalities and intermingling funds by transferring all of Tenant’s revenue to itself each day.” 13 The Court also found that Landlord “sufficiently alleged that Icon’s domination of Tenant was used to commit a wrong against it — i.e., that Icon transferred all of Tenant’s revenue to itself each day, rendering Tenant unable to pay rent and then intentionally declining to use that revenue to pay rent on Tenant’s behalf.” 14 The Court said that “ t not dispositive that centralized cash management systems commonplace or that the subject system was already in existence prior to the rent nonpayment scheme, as even if the system was not itself fraudulent, plaintiff alleged that Icon took advantage of it to perpetuate a fraud.” 15 The Court held that the “alter ego/veil-piercing claims against the HPS defendants were properly dismissed.” 16 As with the alter ego/veil-piercing claims against the Icon defendants, the Court dismissed the causes of action seeking such relief as “there is no independent cause of action for veil-piercing.” 17 Moreover, held the Court, “plaintiff’s allegations of domination and control by the HPS defendants conclusory and based on information and belief.” 18 The Court further held that the “fraudulent conveyance claim against Icon was correctly sustained.” 19 The Court found that “ laintiff sufficiently alleged that Tenant did not receive fair consideration for transferring its total revenue to Icon each day, establishing a constructive fraudulent conveyance.” 20 The Court noted that “ hile Icon was supposed to provide management and administrative services in exchange for these transfers, including paying Tenant’s bills, plaintiff alleged that Icon stopped paying Tenant’s rent.” 21 “Plaintiff also sufficiently alleged badges of fraud,” said the Court, “raising an inference of actual intent to defraud, establishing an actual fraudulent conveyance.” 22 In this regard, explained the Court, “ laintiff alleged that the transfers were made to an insider (Icon), were concealed from plaintiff, were of substantially all of Tenant’s assets, were made without receiving reasonably equivalent value in exchange, and rendered Tenant insolvent.” 23 Finally, the Court held that the fraudulent conveyance claim against the HPS defendants was correctly dismissed. 24 The Court found that “Plaintiff’s allegations that Icon was controlled by HPS and that monies collected by Icon from Tenant were subsequently transferred to the HPS defendants conclusory and entirely made upon information and belief, and contradicted by the very affidavits plaintiff relie on.” 25 The Court also found that the “liens made by HPS to Icon and Tenant (which were filed several months after the alleged fraudulent scheme began) not, in and of themselves, evidence of control or of any subsequent transfer.” 26 Footnotes Tap Holdings, LLC v. Orix Fin. Corp. , 109 A.D.3d 167, 174 (1st Dept. 2013) (citing ABN AMRO Bank, N.V. v. MBIA Inc. , 17 N.Y.3d 208, 229 (2011)). Id. The doctrine of piercing the corporate veil applies equally to limited liability companies. See Retropolis, Inc. v. 14th St. Dev. LLC , 17 A.D.3d 209, 210 (1st Dept. 2005). Tap Holdings , 109 A.D.3d at 174 (quoting TNS Holdings v. MKI Sec. Corp. , 243 A.D.2d 297, 300 (1st Dept. 1997), rev’d on other grounds , 92 N.Y.2d 335 (1998)). Id. Baby Phat Holding Co., LLC v. Kellwood Co. , 123 A.D.3d 405, 407-408 (1st Dept. 2014) (citations omitted); see also Grammas v. Lockwood Assoc., LLC , 95 A.D.3d 1073, 1075-1076 (2d Dept 2012). Id. See Saivest Empreendimentos Imobiliarios E. Participacoes, Ltda v. Elman Invs., Inc. , 117 A.D.3d 447, 450 (1st Dept. 2014); accord Andejo Corp. v. South St. Seaport Ltd. P’ship , 40 A.D.3d 407, 407 (1st Dept. 2007) (a plaintiff seeking to pierce the corporate veil must “allege particularized facts to warrant piercing the corporate veil”); Albstein v. Elany Contr. Corp. , 30 A.D.3d 210, 210 (1st Dept. 2006), lv. denied , 7 N.Y.3d 712 (2006) (conclusory allegations that a corporation is undercapitalized and functions as the alter ego of the owner are insufficient to pierce the corporate veil). Quoting Baby Phat Holding , 123 A.D.3d at 407. James Gadsden and Alan Kolod, Supplementary Practice Commentaries, McKinney’s Debtor and Creditor Law § 273. Quoting Federal Deposit Ins. Corp. v. Porco , 75 N.Y.2d 840, 842 (1990). Slip Op. at *1 (citing Tap Holdings , 109 A.D.3d at 174). Id. (citation omitted). Id. (citation omitted). Id. (citation omitted). Id. at *3. Id. Id. (citing 501 Fifth Ave. Co. LLC v. Alvona LLC , 110 A.D.3d 494, 494 (1st Dept. 2013)). Id. at *2. Id. (citing DCL § 273(a)(2)). Id. (citation omitted). Id. (citing (DCL § 273(a)(1), (b)). Id. (citation omitted). Id. at *3. Id. (citations omitted). Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.  This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In prior articles, this Blog examined CPLR § 3102, the statutory provision that permits pre-action disclosure. See here and here . We do so again in connection with our examination of the Matter of Khorassani v. Financial Industry Regulatory Authority , 2024 N.Y. Slip Op. 00354 (1st Dept. Jan. 25, 2024) ( here ). CPLR § 3102(c) provides that “ efore an action is commenced, disclosure to aid in bringing an action, to preserve information or to aid in arbitration, may be obtained, but only by court order.” Pre-action disclosure can be used “to enable the plaintiff to frame a complaint,” “to preserve evidence for a forthcoming lawsuit,” and to “ascertain[ ] the identities of prospective defendants.” Pre-action disclosure may not, however, be used to ascertain whether a prospective plaintiff has a cause of action worth pursuing. In other words, “ re-action discovery is not permissible as a fishing expedition to ascertain whether a cause of action exists.” Accordingly, a petition for pre-action discovery will only be granted when the petitioner demonstrates that he/she has a meritorious cause of action and that the information sought is material and necessary to the actionable wrong.  Finally, petitions for pre-action disclosure should be filed in the venue that will adjudicate the matter.  Matter of Khorassani v. Financial Industry Regulatory Authority In June 2021, Torchlight Energy Resources (“Torchlight Energy”) merged with, and became, Meta Materials, Inc. (“Meta Materials” or “MMAT”). After the merger, Meta Materials traded on the NASDAQ under the ticker symbol “MMAT”. In connection with the merger, Meta Materials issued a special dividend in the form of Series A Preferred shares (“MMTLP”) to the holders of Torchlight Energy common stock before the merger. MMLTP shares were not intended to be traded on any public exchange, and were only intended to be a dividend placeholder for shareholders who owned Torchlight Energy shares prior to the merger. In October 2021, the MMTLP shares were listed on the Over-The-Counter Market with the assistance of an unidentified securities broker. Thereafter, unidentified brokers and market makers began trading shares of MMTLP on the open market. In July 2022, the company’s board of directors voted to spin off the assets of Torchlight Energy into a new company called Next Bridge Hydrocarbons, Inc. (“Next Bridge”). In connection with the transaction, MMAT filed a Form S-1 Registration Statement (the “Registration Statement”) with the Securities and Exchange Commission (“SEC”) to register the issuance of stock in Next Bridge. After four amendments, Next Bridge’s Registration Statement was approved by the SEC in November 2022. Shortly after the Registration Statement became effective, short interest in MMTLP shares grew. By early December 2022, the volume of short sales exceeded the volume of stock that was not shorted by traders. As a result, on December 9, 2022, FINRA halted trading of MMTLP shares. FINRA’s halt in trading resulted in the failure by unknown and unidentified brokers to settle their short positions. As a result, Petitioner claimed that he was harmed, in addition to the Company’s other retail investors. Petitioner sought the “Blue Sheets” maintained by FINRA to allow him to ascertain the names, addresses, and basis of liability of the unknown brokers and market makers to frame his claims, which Petitioner said he intended to bring against the unknown and unidentified brokers and market makers for spoofing, naked short selling, market manipulation, and fraud. The motion court denied the petition, holding that Petitioner (a) was using CPLR § 3102 for purposes other than ascertaining the identity of the defendants, and (b) failed to assert a meritorious cause of action for fraud. The motion court found that the allegations and arguments in the petition were speculative and conclusory and, as a result, concluded that the petition was an improper fishing expedition. On appeal, the Appellate Division, First Department affirmed. Focusing on whether the discovery sought was material and necessary, the Court held that it was not since Petitioner “admit that he not able to set forth the particulars of the illegal trading by any specific broker and that he not know the times, dates and particulars of the alleged illegal trading activity.”  Moreover, said the Court, even if “the data in question” was “relevant,” Petitioner’s allegations were “conclusory” and fell “far short of the showing necessary to obtain pre-action disclosure.” In other words, Petitioner failed to state a meritorious cause of action for fraud.  Footnotes Bumpus v. New York City Transit Auth. , 66 A.D.3d 26 (2d Dept. 2009); see also Stewart v. New York City Transit Auth. , 112 A.D.2d 939 (2d Dept. 1985). Uddin v. New York City Transit Auth. , 27 A.D.3d 265 (1st Dept. 2006). See also Matter of Gleich v. Kissinger , 111 A.D.2d 130, 131 (1st Dept. 1985). Bishop v. Stevenson Commons Assocs. , 74 A.D.3d 640 (1st Dept. 2010), lv. denied , 16 N.Y.3d 702 (2011) (quoting Liberty Imports v. Bourguet , 146 A.D.2d 535 (1st Dept. 1989)). Holzman v. Manhattan & Bronx Surface Transit Operating Auth. , 271 A.D.2d 346, 347 (1st Dept. 2000); see also Thomas v. MasterCard Advisors, LLC , 74 A.D.3d 464 (1st Dept. 2010). See Perez v. NY Presbyterian Hosp. , 11 Misc. 3d 722 (Civ. Ct., N.Y. County 2006); Estate of Matter of Wallace , 239 A.D.2d 14 (3d Dept. 1998). Blue Sheets (known as Electronic Blue Sheets) are files that are maintained by FINRA. Blue Sheets contain both trading and account holder information. See Financial Industry Regulatory Authority, Electronic Blue Sheets (EBS), https://www.finra.org/filingreporting/electronic-blue-sheets-ebs. Slip Op. at *1. Id. (citing Matter of GTV Media Grp., Inc. v. Confidential Global Investigations , 205 A.D.3d 539, 539-540 (1st Dept. 2022)). 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 In order to protect homeowners, home improvement contractors are frequently required by municipalities to be licensed.  Unlicensed home improvement contractors are precluded from collecting payments due from homeowners.  Brightside Home Improvements, Inc. v. Northeast Home Improvement Services , 208 A.D.3d 446, 449 (2 nd Dep’t 2022).  This BLOG has discussed such issues < here =">here"> and < here =">here"> .  Along these lines, CPLR § 3015(e) requires that causes of action against a consumer arising out of work performed by a plaintiff whose business requires licensure by state or local authorities for the performance of such work, must allege in its complaint that, inter alia , it “was duly licensed at the time of services rendered” or the cause of action will be subject to dismissal. The purpose of such licensing legislation was previously described in this BLOG when we noted that in Millington v. Rapoport , 98 A.D.2d 765 (2 nd Dep’t 1983), in reversing the court below and dismissing plaintiff’s complaint which sought to foreclose a mechanic’s lien, the Court stated: Since the purpose of is to protect the homeowner against abuses and fraudulent practices by persons engaged in the home improvement business, it is well established that the lack of a license bars recovery in either contract or quantum meruit . Since strict compliance with the licensing statute is required, recovery is barred regardless of whether the work was performed satisfactorily or whether the failure to obtain a license was willful. The fact that the homeowner was aware of the absence of a license or even that the homeowner planned to take advantage of its absence creates no exception to the statutory requirement . Our prior BLOG articles addressed situations where the homes being improved were owned and occupied by individuals.  On January 25, 2024, the Appellate Division, First Department, decided KSP Construction, LLC v. LV Property Two, LLC , in which the owners of the residential property being improved were LLCs.  The First Department was called on to determine whether a business entity could “avail itself of the protections of the New York City home improvement contractor's license requirement.”  To keep you off the edge of your seats, the Court answered the question in the affirmative. The facts of KSP , which are abridged for editorial purposes, go something like this.  Plaintiff/contractor commenced action to recover damages for work it performed renovating a townhouse in Manhattan owned by several LLCs.  Defendants/owners moved to dismiss the complaint because plaintiff/contractor did not have the requisite license from the New York City Department of Consumer Affairs and the motion court granted the motion.  In an amended complaint, the contractor added an allegation that it was “not required to possess a valid home improvement contractor's license at the time it performed the renovation work because the project was commercial in nature, and because defendant owners are business entities that therefore cannot reside in the townhouse.”  Both parties moved for summary judgment on the amended complaint.  To support their motion, defendants/owners submitted an affidavit from their manager in which he averred that, inter alia : the property was going to be used as his personal residence after the completion of the extensive renovations; the certificate of occupancy for the property indicates that it is “residential”; the deed for the property shows a transfer to defendants; and, the contractor was terminated for cause.  The motion court granted summary judgment to defendants/owners, concluding that the licensing requirement for home improvement contractors was applicable to business entities, and denied the motion of plaintiff/contractor. The First Department affirmed.  New York’s Administrative Code relating to home improvement contractors (the “Code”) provides that “ o person shall solicit, canvass, sell, perform or obtain a home improvement contract as a contractor from an owner without a license therefor.”  Code § 20-387(a) .  The Court noted that the articulated purpose of the licensing provisions of the Code is to “‘safeguard and protect … homeowner against abuses and fraudulent practices.’”  (Quoting Code § 20-385 .)  The Court also recognized that the licensing requirement of the Code is not a “ministerial act” and requires “strict compliance”, “with the failure to comply barring recovery regardless of whether the work performed was satisfactory, whether the failure to obtain the license was willful or, even, whether the homeowner knew of the lack of a license and planned to take advantage of its absence.”  (Citations and internal quotation marks omitted.)  The Court found that there was no dispute that plaintiff was a contractor without a license and, therefore, the only question was whether defendants were “‘owners’ within the meaning of Administrative Code § 20-387(a), and, if so, whether the agreement between the parties was a ‘home improvement contract’” as defined in Code § 20-386(6) .  The Court posited that if “the answer to both of those questions is yes, then plaintiff was required to have a home improvement contractor's license to recover for the work; if the answer to either question is no, then plaintiff did not need a license.”  (Footnote omitted.)   While it is “tempting” to assume that an “‘owner’ must be an individual,” the Court said, “the City Council expressly defined the term ‘persons’ as it is used in the Home Improvement Business subchapter to mean ‘an individual, firm, company, partnership or corporation, trade group or association (… Code § 20-386<1> ).’"  (Footnote omitted.)  The Court concluded that defendants were “persons” under the Code and “owners” under Code § 20-386(4) .  Further the Court determined that the plaintiff and defendants were parties to an oral “home improvement contract,” which is expressly permitted under the Code. Code § 20-386(6)   Finally, the Court determined that plaintiff’s work constituted a “home improvement” as defined by the Code.  Code § 20-386(2) .  Accordingly, the Court concluded that the motion court “correctly granted defendant owners’ cross-motion for summary judgment.” 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 readers of this Blog know, we have written about the duplication doctrine on numerous occasions. E.g. , here , here , and here . Courts apply the doctrine when a plaintiff alleges a breach of contract claim and a fraud claim that arise from the same facts and circumstances. In that regard, a fraud claim will be deemed duplicative of a contract claim when the fraud claim arises from the same facts, 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 Eastern Effects, Inc. v. 3911 Lemmon Ave. Assoc., LLC , 2024 N.Y. Slip Op. 00268 (1st Dept. Jan. 23, 2024) ( here ), the Appellate Division, First Department affirmed the dismissal of fraudulent inducement claim on the grounds that it was duplicative of the plaintiff’s breach of contract claim. Eastern Effects involved a commercial lease (“Lease”) for space in a building located in the Gowanus section of Brooklyn (“the Premises”). Eastern Effects, Inc. (“EEI”) is a film and television company that operated a soundstage under the Lease with Defendants 3911 Lemmon Avenue Associates LLC, Esbond Realty LLC, and Eponymous Gowanus LLC (collectively, the “Landlord”). Shortly after the tenancy began, the Environmental Protection Agency (“EPA”) designated the Gowanus Canal a Superfund Site. According to EEI, the Landlord believed that the designation would allow it to terminate the Premises’ below-market leases, like the one with EEI, and transform the Premises into a luxury high-rise apartment complex from which it could obtain significant profits.  The EPA gave the Landlord and other property owners a choice between (i) allowing the Gowanus Canal Environmental Remediation Trust #2 (the “Trust”) to perform the necessary remediation work, or (ii) performing the work themselves. EEI claimed that only the Landlord chose to perform the work.  EEI further claimed that the Landlord chose the second option so that it could remediate the contaminants that had eroded some of the Premises’ foundation and exploit the termination clause in the Lease that would enable it to evict EEI.  To permit the Landlord and the Trust to complete the work required by the EPA, the parties entered into a Settlement Agreement and Release, dated September 15, 2021 (the “Settlement Agreement”). Among other things, the Settlement Agreement provided that EEI would temporarily vacate the Premises and allow the Landlord to perform the work in exchange for compensation from the Trust and rent abatement from the Landlord. EEI alleged that, at the time of the negotiations, the Landlord made a series of material misrepresentations and omissions to induce it into entering the Settlement Agreement. EEI maintained that the Landlord concealed its plan to use the Settlement Agreement to orchestrate EEI’s eviction from the Premises.  According to EEI, soon after the work began, the Landlord claimed that the work had damaged the Premises and that it was terminating the Lease, causing the Trust to stop its business-interruption payments. EEI said that it incurred significant damages without a soundstage to service its film and television clients, and without the Trust’s payments. EEI filed a summons and complaint, asserting claims against the Landlord for declaratory judgment, specific performance of the Lease, specific performance of the Settlement Agreement, breach of the Lease, breach of the Settlement Agreement, unjust enrichment, and fraudulent inducement of the Settlement Agreement.  Thereafter, EEI amended its complaint. In its amended complaint, EEI asserted claims for breach of the Lease against Landlord, breach of the Settlement Agreement against the Trust (which EEI added as a defendant in the action), declaratory judgment against the Landlord based on the Landlord’s alleged breach of the Settlement Agreement, fraudulent inducement of the Settlement Agreement against the Landlord, and conversion against the Landlord.  The Landlord moved to dismiss all claims alleged in the amended complaint, except for EEI’s claim for breach of the Lease and Settlement Agreement. Soon thereafter, the Trust moved to dismiss the breach of contract claim asserted against it.  The motion court granted the Landlord’s motion to dismiss with respect to EEI’s cause of action for fraudulent inducement and its request for punitive damages against the Landlord and granted the Trust’s motion to dismiss EEI’s cause of action for breach of contract against it. On appeal, the First Department unanimously modified the motion court’s order to reinstate EEI’s breach of contract cause of action against the Trust, and otherwise affirmed the order. We examine the Court’s decision with respect to the fraudulent inducement cause of action. The First Department held that EEI’s fraudulent inducement claim was duplicative of its breach of contract claim against the Landlord. The Court explained that EEI “identifie no independent duty outside the contract to support a fraud claim.” 3 “The fraud claim,” said the Court,” was “based on alleged misrepresentations and omissions regarding the timing and performance of the work, plaintiff’s compensation for vacating the premises and lost business, landlord’s duty to make repairs, and the termination of the lease.” 4 The Court concluded that “ hese are all issues that are contemplated by the ettlement greement, the ease, or both, which can be relied upon to make plaintiff whole if it prevails on its breach of contract cause of action.” 5 Takeaway A fraud claim, which arises from the same facts, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreement, is duplicative of a contract claim. What constitutes “a legal duty independent of a contract” is not a question easily answered. 6 In trying to answer the question, the courts make the distinction between a misrepresentation of intention and a misrepresentation of present fact. 7 The former will result in dismissal, while the latter will not. 8 The courts also look to the damages sought to ascertain if they are the same. 9 In Eastern Effects , Plaintiff could not demonstrate any difference between the duty to perform under the agreements at issue and the duty underlying the alleged misrepresentations and omissions. As a result, the Court found that Plaintiff merely alleged a breach of contract claim dressed up in the garb of a fraud cause of action. 10 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. Cronos Group , 156 A.D.3d at 56 (referring to the question as a “recurring” one). Id. at 63. Gosmile, Inc. v. Levine , 81 A.D.3d 77 (1st Dept. 2010). Mosaic Caribe, Ltd. v. AllSettled Group, Inc. , 117 A.D.3d 421, 422-423 (1st Dept. 2014) (fraud claim was insufficient as “duplicative of the breach of contract claim” because it sought “the same damages as the breach of contract claim”). Songbird Jet Ltd., Inc. v. Amax Inc. , 581 F. Supp. 912, 924 (S.D.N.Y. 1984). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.  This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber The objective of an auditor is to supervise the audit engagement, including supervising the work of engagement team members so that the work is performed as directed and supports the conclusions reached. 1 The engagement partner is responsible for the engagement and its performance. 2 Accordingly, the engagement partner is responsible for the supervision of the engagement team and for compliance with PCAOB standards, 3 including standards regarding using the work of specialists, other auditors, internal auditors, and others who are involved in testing controls. 4 The engagement partner and, as applicable, other engagement team members performing supervisory activities, should inform engagement team members of their responsibilities, including, among other things, the objectives of the procedures that they are to perform; the nature, timing, and extent of the procedures they are to perform; and matters that could affect the procedures to be performed or the evaluation of the results of those procedures, including relevant aspects of the company, its environment, and its internal control over financial reporting, and possible accounting and auditing issues. 5 Those in a supervisory role are also required to review the work of engagement team members to determine whether the work was performed and documented; the objectives of the procedures were achieved; and the results of the work support the conclusions reached. 6 In addition to supervision, an auditor is required to exercise due professional care in the planning and performance of an audit and preparation of the audit report. 7 Due professional care requires an auditor to exercise “professional skepticism,” which includes “a questioning mind and a critical assessment of audit evidence.” 8 Negligent conduct by an auditor violates the duty of due care. 9 The generally accepted method for engagement partners to document their supervision of an audit in compliance with PCAOB auditing standards, and their review of the work performed by engagement team members, is by signing and dating (or “signing off”) work papers when they perform or review work. Historically, sign offs occurred on hard copies of work papers but, in recent years, many audit firms moved to electronic sign offs. Whether a sign off occurs in hard copy or electronic form, it provides evidence of who performed or reviewed audit work and the date on which such work or review occurred. By signing off on work papers, an engagement partner documents his or her supervision of the audit. When conducting an audit, the auditor is required to provide a written record of the basis for the auditor’s conclusions. Audit documentation facilitates the planning, performance, and supervision of the audit engagement. 10 An auditor must prepare audit documentation in connection with each audit engagement conducted pursuant to PCAOB auditing standards. 11 The audit documentation should demonstrate, among other things, that the engagement complied with the standards of the PCAOB. 12 The foregoing accounting standards, among others, are the subject of an administrative and cease-and-desist proceeding brought by the Division of Enforcement of the Securities and Exchange Commission (“SEC”) against an engagement partner (“Respondent”) at a national accounting and advisory firm (the “Firm”) for allegedly violating PCAOB audit standards, including those related to supervision, audit documentation, and due professional care, in audits for which Respondent was the lead engagement partner. 13 According to the SEC’s Order ( here ), from 2012 through 2022, Respondent served as the engagement partner for at least 240 audits of public companies, including both operating companies and special purpose acquisition companies. For at least 204 of those audit engagements (or approximately 85%), Respondent allegedly failed to supervise the work of the engagement team as shown by, among other things, his purported failure to review the work of the engagement team and to document his review by the report release date. 14 Respondent also allegedly failed to assemble complete and final audit documentation within 45 days of the report release date for 126 (or approximately 53%) of the audit engagements. These failures, alleged the SEC, violated PCAOB auditing standards.  Further, in connection with the 2018 through 2020 audits of a public company, where Respondent served as the engagement partner, Respondent allegedly violated PCAOB auditing standards, including the exercise of due professional care. The SEC charged Respondent with engaging in improper professional conduct within the meaning of Section 4C(a)(2) of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the SEC’s Rules of Practice and causing the Firm’s violations of Rule 2-02(b)(1) of Regulation S-X. 15 Footnotes AS 1201.02. Id. at .03. The Public Company Accounting Oversight Board (“PCAOB”) was created as part of the Sarbanes-Oxley Act of 2002. The PCAOB oversees audits of public companies that are subject to the securities laws in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB established Auditing Standards for registered public accounting firms to follow in the preparation of audit reports for public companies, other issuers, and broker-dealers. AS 1201.03. Id. at .05. Id. AS 1015.01. Id. at .07. Id. at .03. AS 1215.02. AS 1215.04. Id. at .05.a. The administrative summary from which the description of the proceeding comes can be found here . The report release date is the date on which an audit firm grants permission to use its audit report in connection with the issuance of its client’s financial statements. It is important to remember that the Order is merely an allegation of wrongdoing. Nothing has been proven by the SEC and no findings have been made before a trier of fact. 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 Today’s BLOG article addresses the circumstances pursuant to which the buyer under a real estate sales contract is entitled to prejudgment statutory interest pursuant to CPLR 5001(a) on the return of its down payment upon seller’s breach of that contract. CPLR 5001(a) provides that “ nterest shall be recovered upon a sum awarded because of a breach of performance of a contract, or because of an act or omission depriving or otherwise interfering with title to, or possession or enjoyment of, property, except that in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be in the court's discretion.”  The purpose of the “interest award is to compensate the wronged party for the loss of use of the money” that is the subject of the underlying claim.  CRP/EXTELL Parcel I, L.P. v. Cuomo , 124 A.D.3d 560, 561 (1 st Dep’t 2015), aff’d , 27 N.Y.3d 1034 (2016). Sometimes contracts contain “liquidated damages” provisions, which are designed to quantify, “‘the compensation which, the parties have agreed, should be paid in order to satisfy any loss or injury flowing from a breach of contract.’”  Seymour v. Hovnanian , 211 A.D.3d 549, 553 (1 st Dep’t 2022) ( quoting Truck Rent-A-Center, Inc. v. Puritan Farms 2 nd , Inc. , 41 N.Y.2d 420, 423-24 (1977).  [Eds. Note: this BLOG has addressed liquidated damages, inter alia , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]  Liquidated damages provisions are ideal “‘in those situations where it would be difficult, if not actually impossible, to calculate the amount of actual damage.’”  Id . ( quoting Truck Rent ).  Such provisions will be sustained if they are not deemed to be a “penalty” ( JMD Holding Corp. v. Congress Financial Corp ., 4 N.Y.3d 373, 379 (2005)), but reflect a “reasonable estimate of actual damages” ( J.P. Morgan Securities Inc. v. Vigilant Ins. Co. , 37 N.Y.3d 552, 563 (2021)).   On January 16, 2024, the Appellate Division, First Department, decided IHG Harlem I LLC v. 406 Manhattan LLC .  IHG involved three “largely identical” real estate contracts for the purchase/sale of real property.  At the time of signing of the contracts, the plaintiff/purchaser delivered a down payment exceeding $600,000, which, pursuant to the contracts, were to be deposited in the IOLA account of seller’s attorney.  In a prior appeal, the First Department “held that ‘the contracts provided that if defendants refused or failed to convey the properties, 'shall elect as its sole and exclusive remedy' either termination of the contract and the return of its deposits or enforcement of obligation to convey the property by seeking specific performance. As has elected not to seek specific performance, its sole remedy is the return of its deposits.’”  [Eds. Note: this BLOG has addressed specific performance of real estate contracts < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .] Upon the motion court’s order granting summary judgment to buyer, the parties submitted competing proposed judgments – buyer’s proposed judgment providing for prejudgment interest on the amount held in escrow and seller’s providing for no such interest.  The motion court, denying buyer’s request for interest, signed seller’s proposed judgment, which directed that “the funds being held in escrow be returned to without interest.”  Since the contracts were breached in 2015, the accrued interest on $600,000 (at 9% ( see CPLR 5004)) is significant.  The motion court, in denying interest to the buyer, relied on J. D’Addario & Co., Inc. v. Embassy Indus., Inc. , 20 N.Y.3d 113 (2012), and Sommer v. General Bronze Corp. , 28 A.D.2d 981 (1 st Dep’t 1967), aff’d, 21 N.Y.2d 775 (1968), and stated: In J. D'Addario , the Court of Appeals affirmed the First Department's decision which vacated the trial court's award of statutory interest on the return of a deposit because the parties agreed the seller would have no further rights once the down payment was paid as liquidated damages and the contract required the deposit be held in an interest-bearing account. Meanwhile, in Sommer , the First Department explicitly held that where a contract of sale limited liability to the amount of the down payment, money damages equivalent to the amount of the down payment or interests on that amount were not warranted . . . J. D'Addario and Sommer are squarely on point and since this court is bound to follow its precedent, the court will sign the judgment proposed by defendants which does not award plaintiff a money judgment. The IHG Court in modifying the motion court’s order to include prejudgment interest distinguished J. D' Addario & Co. and Sommer and agreed with buyer’s argument that the motion court “erred by employing too broad a reading” of those cases.  The IHG Court framed the issue for it to decide as “whether the parties' contract language specifying that purchaser's ‘sole remedy’ in the event of sellers' breach is the return of its downpayment constitutes a clear waiver of CPLR 5001 (a) as defined by the Court of Appeals in J. D' Addario & Co. … and requires denying the nonbreaching party statutory prejudgment interest.” In reaching its decision that buyer was entitled to interest, the First Department noted that CPLR 5001(a) provides that prejudgment interest “shall be recovered”.  This the Court concluded, demonstrates that the legislature intended the award of such interest to be a “duty, not discretion.”  (Citation and internal quotation marks omitted.)  The Court further noted that the “principle behind awarding statutory interest on amounts in escrow is not to punish the breaching party, but rather to compensate the wronged party for the loss of use of their money.”  (Citation omitted.)  The Court, however, recognized a few circumstances where the denial of an award of prejudgment interest would be appropriate – including where the parties to a contract agree to waive statutory interest in a manner that “clearly manifests their intent to do so comports with the requirements for waivers in other contexts.”  (Citations omitted.)  The IHG Court, unlike the J. D' Addario & Co. Court, found no such “clear manifestation” precluding an award of prejudgment interest to buyer.   As noted by the First Department in IHG, the Court of Appeals in J. D' Addario & Co. , based its decision to deny prejudgment interest pursuant to CPLR 5001(a) on a “cumulation of factors” that resulted in the conclusion that the parties waived the right to such prejudgment statutory interest.  J. D' Addario & Co. involved a real estate contract that was breached by the buyer.  The contract provided that the “sole remedy” upon breach involved a “liquidated sum” that, inter alia , “included compensation for the lost use of that money over time” and “explicitly waived all further rights and obligations.” The contracts in IHG designated buyer’s “sole and exclusive remedy the return of its downpayment limits damages to the liquidated sum of plaintiff's downpayment.”  However, the IHG Court noted that the mere “use of the term ‘liquidated damages’ neither precludes nor waives the application of CPLR 5001 (a).”  Where compensation for the time value of money – such as the inclusion of bank interest – is included as part of the agreed upon liquidated damages “an award of statutory interest would result in a windfall to the nonbreaching party.”  The IHG Court found that no such compensation is reflected in the parties’ contracts because the deposit was placed in an IOLA account and, therefore, the interest “that accrued on downpayment over seven years was paid to tate’s IOLA fund not to .” Thus, the Court concluded that “ n these carefully drafted agreements there are no express limitations on liability that suggest the parties here intended to vitiate CPLR 5001(a).”  Accordingly, the IHG Court’s award directed the return of the downpayment (in the amount of $626,250.00) plus “statutory prejudgment interest on its deposits at the rate of 9% from November 12, 2015 through November 16, 2022. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), enacted on July 21, 2010, amended the Securities Exchange Act by adding Section 21F-17, “Whistleblower Incentives and Protection.” The purpose of these provisions was to encourage whistleblowers to report possible securities law violations by providing, among other things, financial incentives and confidentiality protections. To achieve this Congressional purpose, the Securities and Exchange Commission (the SEC” or the “Commission”) adopted Rule 21F-17, which provides in relevant part: “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.” Since its adoption, 1 the SEC has vigorously enforced Rule 21F-17. On January 16, 2024, the SEC announced ( here ) that it settled charges against J.P. Morgan Securities LLC (“JPMS”) for impeding hundreds of advisory clients and brokerage customers from reporting potential securities law violations to the SEC. JPMS agreed to pay an $18 million civil penalty to settle the charges. According to the SEC, from 2020 through July 2023 (the “Relevant Period”), JPMS requested that certain clients sign a release (the “Release”) if the clients received a credit or settlement of over $1,000, regardless of whether JPMS admitted or denied any error or wrongdoing in connection with the credit or settlement. In addition, said the SEC, JPMS sometimes offered its clients an additional payment above and beyond the credit or payment calculated for the dispute. In at least one case, noted the SEC, this payment or credit was higher than the original credit or settlement. The SEC alleged that since 2020, at least 362 JPMS clients signed a release, receiving an amount ranging from approximately $1,000 to $165,000. Pursuant to the Release, the client released JPMS from liability and “promise not to sue or solicit others to institute any action or proceeding against arising out of events concerning the Account.” If the client breached the foregoing provision, said the SEC, then JPMS could “undertake whatever legal action deem appropriate to address the breach(s), including, but not limited to, injunctive relief, and monetary damages not to exceed the settlement amount.” According to the SEC, in a another section of the Release, the client agreed to keep the Release confidential and “not use or disclose (including but not limited to, media statements, social media, or otherwise) the allegations, facts, contentions, liability, damages, or other information relating in any way to the Account, including but not limited to, the existence or terms of this Agreement.” Notwithstanding, noted the SEC, the client and the client’s attorneys were permitted to respond “to any inquiry about settlement or its underlying facts by FINRA, the SEC, or any other government entity or self-regulatory organization, or as required by law.” Despite this statement, however, the Release prohibited clients from affirmatively reporting violations of the securities laws to the Commission, claimed the SEC. To settle the action, JPMS agreed to pay a civil penalty of $18 million. In doing so, JPMS neither admitted nor denied the findings, except as to the Commission’s jurisdiction over JPMS and the subject matter of the proceedings, which were admitted.  “Whether it’s in your employment contracts, settlement agreements or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “But that’s exactly what we allege J.P. Morgan did here. For several years, it forced certain clients into the untenable position of choosing between receiving settlements or credits from the firm and reporting potential securities law violations to the SEC. This either-or proposition not only undermined critical investor protections and placed investors at risk, but was also illegal.” “Investors, whether retail or otherwise, must be free to report complaints to the SEC without any interference,” said Corey Schuster, Co-Chief of the Enforcement Division’s Asset Management Unit. “Those drafting or using confidentiality agreements need to ensure that they do not include provisions that impede potential whistleblowers.” A copy of the cease-and-desist order can be found here . Footnote Rule 21F-17 became effective on August 12, 2011. 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 A common theme in commercial litigation is the assertion of a breach of contract claim and a fraudulent inducement claim. A plaintiff claiming a breach of contract must show (1) the existence of a contract; (2) the plaintiff’s performance under that agreement; (3) the defendant’s breach of its obligations; and (4) damages resulting from the breach. One of the provisions parties often include in their contract is a merger clause. A merger clause is a provision in which the parties declare their writing to be the complete and final agreement between themselves. Although it is common to find a merger clause in a contract, it is not necessary to include one for the agreement to be enforceable. A written agreement that is “complete, clear and unambiguous on its face be enforced according to the plain meaning of its terms.” To determine whether a contract without a merger clause is “complete, clear and unambiguous,” the courts look at the agreement in “light of surrounding circumstances” and determine whether other proposed oral contract terms are the type “which the parties would ordinarily be expected to embody in the writing.” If the other proposed terms are the type that would “ordinarily be expected” to have been included in the writing, their omission indicates that the writing is complete. As readers of this Blog know, where contract and fraud claims are asserted in the same complaint, more times than not, the fraud claim will be dismissed under the duplication of claims doctrine. Under this doctrine, “ cause of action to recover damages for fraud will not lie where the only fraud claimed arises from the breach of a contract.” “Mere unfulfilled promissory statements as to what will be done in the future are not actionable as fraud and the injured party’s remedy is to sue for breach of contract.” However, if the plaintiff alleges a misrepresentation of “present facts that collateral to the contract and served as an inducement to enter into the contract, a cause of action alleging fraudulent inducement is not duplicative of a breach of contract cause of action.” The foregoing principles were recently examined in Lentner v. Upstate Forestry & Development, LLC , 2023 N.Y. Slip Op. 06626 (4th Dept. Dec. 22, 2023) ( here ). Lentner involved the sale of timber rights on real property consisting of approximately 299 acres of property improved by a residence (the “Property”). The Property is owned by plaintiff, Joanne Lentner (“Lentner”). On February 24, 2015, Lentner and “Upstate Development” entered into a written Timber Sale Contract (the “Timber Sale Contract”), pursuant to which Lentner sold to Defendant, Upstate Forestry and Development LLC (“Upstate Forestry”), the rights to remove timber on the Property in exchange for an upfront cash payment of $15,500.00. The Timber Sale Contract was negotiated and signed by Defendant, David Isabell (“Isabell”), as authorized agent for Upstate Forestry, and/or Defendant, Charles Nowack (“Nowack”), a member of Upstate Forestry. During negotiations, Isabell proposed dividing the Property into three sections, each to be treated differently under the arrangement. That proposal was reflected in an aerial map that Isabell marked up to show the partition. Pursuant to the parties’ discussions, Lentner would be paid for the “lower” or southerly section of the Property. The “upper” or northern section of the Property was marked on the map by Isabell with x’s to show there was to be no logging on that parcel and would be addressed in a future contract. The “middle” section of the Property was to be logged on a per-tree basis and Plaintiff was to be paid 50% of the value of the timber set forth on sawmill tally sheets to be provided to Plaintiff. The aerial map was not annexed to the Timber Sale Contract. It was attached to another document at the time the parties entered the Timber Sale Contract. Nowak paid Plaintiffs the $15,500.00 in cash on May 27, 2015, after logging was underway. No other payments were made to Plaintiffs. Plaintiffs halted logging on the Property when they discovered the upper or northerly parcel was being logged. Plaintiffs subsequently commenced the action, claiming breach of contract in connection with the trees removed from the middle zone of the Property and not paid for, as well as the trees improperly removed from the northernmost zone. In addition to claiming breach of contract, Plaintiffs alleged that they were fraudulently induced to enter into the Timber Sale Contract. In particular, Plaintiffs alleged that Defendants falsely represented that they would not conduct any logging on the Northern most section of the Property delineated by the parties on the aerial map and that they would compensate Plaintiffs on a per log basis for any timber removed from the middle section of the Property as delineated on the aerial map annotated by the parties. Following discovery, Defendants moved for summary judgment to dismiss the complaint. The motion court denied the motion, holding that the Timber Sale Contract was not integrated and that there were “issues of fact as to the terms of the contract.” The motion court noted that the agreement “lack a sufficient description of the property to be logged,” because “ he only potential description of where logging was to occur is . . . listed as the 911 or mailing address of the seller/owner.” The motion court further noted that “ here no acreage, tax map reference, or any other identifying information” for the Property. As a result, the motion court held, that Plaintiffs’ “testimony as to the area to be logged not necessarily contradictory to the terms” of the Timber Sale Contract “which nowhere clearly states the entire … property is to be logged for $15,500, which would presumably include the area of the residence” in the northern section of the Property. Regarding the fraudulent inducement claim, the motion court held that Defendants “made a number of misrepresentations” to induce Plaintiffs to enter into the agreement, “which include promising not to log on the Northernmost section of the property and paying … on a per log basis for any timber removed from the middle section of the property.” On appeal, the Fourth Department modified and affirmed the motion court’s order. The Court held that “Defendants met their initial burden of establishing that the timber sale contract a complete written instrument,” and, as such, “plaintiffs failed to raise a triable issue of fact in opposition.” Defendants argued that the Timber Sale Contract was a complete contract that set forth the salient terms of the parties’ agreement. The Court agreed, finding that the “contract sets forth the parties, the address of the property, the contract period, the payment terms, and a description of the items sold.” Accordingly, the Court held that “ nasmuch as the contract constituted a complete, integrated agreement, plaintiffs may not rely on an alleged oral agreement to permit logging on the southernmost section of the property, permit logging on the middle section of the property only upon additional payment, and prohibit logging on the northernmost section of the property, to vary the terms of the contract.” In so concluding, the Court emphasized that “one would expect the contract to embody any such restrictions on logging, and ‘ uch a collateral agreement cannot be separately enforced.’” The Court also held that the motion court properly denied the motion with regard to the fraudulent inducement claim against Upstate Forestry. The Court “reject defendants’ contention that the fraud cause of action was merely duplicative of the cause of action for breach of contract.” The Court found that Upstate Forestry’s “representations … to secure permission to log timber on the property, i.e., representations regarding the northernmost and middle sections of the property,” were different than the breach of contract claim. “ hose representations,” said the Court, “were false and known by the agents to be false at the time they were made inasmuch as Upstate intended to log the entire property and not adequately compensate plaintiffs, and that plaintiffs relied upon those fraudulent misrepresentations to their detriment.” Takeaway In Lentner , the Court is making a distinction between the terms of the Timber Sale Contract – $15,500.00 for the right to log timber on the Property – and the partition of the Property for logging purposes that was delineated on the aerial map associated with the Timber Sale Contract. The distinction makes sense: the parties agreed that Upstate Forestry would make an upfront cash payment in exchange for the right to log timber on the Property for a defined period. The partition of the Property for logging timber was not included in the one-page agreement. If the parties intended to include the differentiated zones for logging, then they would have included it in the agreement itself. There was nothing in the Timber Sale Contract that indicated the parties intended to include the delineations outlined in the associated map. Since the delineations in the associated map were not part of the Timber Sales Contract, then the fraudulent inducement claim, which was based on those delineations, could not be duplicative of the breach of contract claim.   Davis v. Zeh , 200 A.D.3d 1275, 1278 (3d Dept. 2021). Greenfield v. Philles Records , 98 N.Y.2d 562, 569 (2002). Braten v. Bankers Trust Co. , 60 N.Y.2d 155, 162 (1983) (internal quotation marks and citation omitted); see also Manufacturers Hanover Trust Co. v. Margolis , 115 A.D.2d 406, 407 (1st Dept. 1985). Braten , 60 N.Y.2d at 162 (citing Mitchill v. Lath , 247 N.Y. 377, 380–381 (1928)). Gorman v. Fowkes , 97 A.D.3d 726, 727 (2d Dept. 2012); see also Selinger Enters., Inc. v. Cassuto , 50 A.D.3d 766, 768 (2d Dept. 2008); Tiffany at Westbury Condominium v. Marelli Dev. Corp. , 40 A.D.3d 1073, 1076 (2d Dept. 2007). Brown v. Lockwood , 76 A.D.2d 721, 731 (2d Dept. 1980) (citation omitted). Did-it.com, LLC v. Halo Group, Inc. , 174 A.D.3d 682, 683 (2d Dept. 2019). Slip Op. at *2 (citing Alvarez v. Prospect Hosp. , 68 N.Y.2d 320, 324 (1986)). Id. (citing Battista v. Radesi , 112 A.D.2d 42, 42 (4th Dept. 1985)). Id. Id. (quoting Braten , 60 N.Y.2d at 162). Id. Id. Id. 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 Jonathan H. Freiberger Today’s Blog relates to extensions of time to serve a defendant under CPLR 306-b, a topic previously addressed by this Blog < HERE =">HERE"> , < HERE =">HERE"> and < HERE =">HERE"> .  The background discussion in today’s Blog was taken from the linked prior Blogs. Under the present “commencement by filing” system, an action (or proceeding) (collectively, an “Action”) is commenced by filing (CPLR 304(a)) the initiatory paper(s) with the “clerk of the court in the county in which the ction … is brought or any other person designated by the clerk of the court for that purpose (CPLR 304(c)).  Once an Action is commenced, the plaintiff (or petitioner) (collectively, a “Plaintiff”) must effectuate service of process pursuant to the parameters of CPLR 306-b, which provides: Service of the summons and complaint, summons with notice, third-party summons and complaint, or petition with a notice of petition or order to show cause shall be made within one hundred twenty days after the commencement of the ction, provided that in an ction ….  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. Among other things, CPLR 306-b provides that, in general, service of process on a defendant (or respondent) (collectively, a “Defendant”) must be effectuated within 120 days of the commencement of an Action.  The Court of Appeals in Leader v. Maroney, Ponzini & Spencer , 97 N.Y.2d 95 (2001), explained the history of CPLR 306-b.  According to Leader , “ s originally enacted in 1992, CPLR 306-b transformed New York from a commencement-by-service to a commencement-by-filing jurisdiction.”  Leader , 97 N.Y.2d at 100 (citation omitted).  Plaintiffs were “considerabl benefit ” by “making the act of filing the point at which a claim is interposed for Statute of Limitations purposes.”  Leader , 97 N.Y.2d at 100 (citation omitted).  Under the old statute, a Plaintiff was afforded 120 days to effectuate service of process and the Action would be “deemed dismissed” if service was not timely made.  Leader , 97 N.Y.2d at 100 (citation omitted).  “The plaintiff was free to commence a new ction and serve process within a second 120-day period from the date of the automatic dismissal, even if the Statute of Limitations had expired.”  Leader , 97 N.Y.2d at 100 (citation omitted).  For a variety of reasons, the “deemed dismissed” provisions of the old statute were considered “unnecessarily harsh” and were amended to provide that if service of process is not made within the 120-day period after the commencement of the Action, an unserved Defendant can move for the dismissal, without prejudice, or the court could extend Plaintiff’s time to serve a Defendant “upon good cause shown or in the interest of justice.”  Leader , 97 N.Y.2d at 101 (citing CPLR 306-b). The Leader Court, in a trio of cases, was called upon to determine the circumstances under which a Plaintiff would be permitted to avail itself of the extension provisions of CPLR 306-b.  Importantly, 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.    See also State of New York Mortgage Agency v. Braun , 182 A.D.3d 63, 66 (2 nd Dep’t 2020).  “Good cause” and “the interest of justice” standards are discussed < HERE =">HERE"> .  “Good cause” is established by demonstrating “reasonable diligence in attempting service.”  Wells Fargo Bank, NA v. Barrella , 166 A.D.3d 711, 713 (2 nd Dep’t 2018) (citation and internal quotation marks omitted).  Absent “good cause” the court must consider the “interest of justice” standard, which requires a careful judicial analysis of the factual settings of the case and a balancing of the competing interests presented by the parties.  Id . (citation and internal quotation marks omitted).  Under the “interest of justice” standard, as opposed to “good cause”, “diligent efforts at service” need not be established “as a threshold matter”; although it may be considered “along with any other relevant factor.”  Id . (citation and internal quotation marks omitted).  Other relevant factors may include the “expiration of the statute of limitations, the potentially 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 . (citation internal quotation marks and brackets omitted).  Relying on Leader, the Barrella Court reiterated that “ here the plaintiff's delay in serving a defendant is protracted, and the defendant has no notice of the action for a protracted period of time, an inference of substantial prejudice arises.  Id . at 714 (citations omitted). On January 11, 2024, the Appellate Division, First Department, decided 1400 Ardel Const’n & Design Group, Inc. v. VBG 990 AOA, LLC , a case addressing the “interest of justice” standard.    Plaintiff in Ardel was a construction contractor and defendant VBG is the owner of property that Ardel, pursuant to a contract, was to redevelop and renovate.  Ardel claimed that VBG breached the agreement (including failure to pay for some of Ardel’s work).  Ardel filed a mechanics’ lien, which was ultimately discharged by a “Discharge of Mechanic’s Lien Bond” issued by defendant Atlantic Specialty Insurance.  [EDS. Note: this BLOG addressed mechanic’s lien discharge bonds < HERE =">HERE"> .]  Ardel commenced action against VBG for, inter alia , breach of contract and against Atlantic to foreclose its lien on the bond.   Ardel did not effectuate service of process on Atlantic and VBG moved to dismiss the complaint.  After the motion to dismiss was decided, Ardel moved for an extension of time to serve Atlantic pursuant to, inter alia , CPLR 306-b.  The motion court denied the motion and plaintiff appealed.  The First Department reversed and stated: Plaintiff's motion for an extension of time to serve Atlantic with the summons and complaint should have been granted because plaintiff established the existence of several relevant factors weighing in favor of the extension.  The eight-month delay in service that would have resulted from the grant of the extension was not so protracted to allow for an inference that Atlantic suffered prejudice from the delay.  Moreover, although there is no record evidence that Atlantic was given actual or constructive notice of the claim, plaintiff aptly notes that any claim of prejudice is undercut by the fact that Atlantic, who posted a bond for the release of the mechanic's lien, knew there was a high likelihood of litigation involving it as defendant VBG's surety and had ample opportunity to investigate the claim.  The record further establishes the potential merits of the lien foreclosure claim, and because the statute of limitations has expired, the denial of the extension would bar plaintiff from litigating the otherwise timely filed claim against Atlantic.  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.