By: Jeffrey M. Haber It should come as no surprise that one of the goals of an investment fraud is the theft of customer funds for the scammer’s personal benefit. In legal parlance, this aspect of a fraudulent investment scheme is called misappropriation.  Misappropriation occurs when a person uses another person’s money without authorization. Misappropriation of funds mirrors the crime of embezzlement, which is a crime committed by a person having a relationship of trust or fiduciary duty to another person and who steals that person’s money or property for his/her own personal gain.  On November 29, 2023, the SEC announced ( here ) that it brought fraud charges against Phoenix-based real estate investment company ArciTerra Companies LLC and its CEO, Jonathan M. Larmore, for engaging in a multi-year scheme to misappropriate millions of dollars of investor funds from investment vehicles that ArciTerra managed. The SEC also charged several entities controlled by Larmore for their roles in the scheme. The SEC alleged that, since at least January 2017, Larmore and the charged entities misappropriated more than $35 million from private real estate funds and other investment vehicles that ArciTerra managed. Larmore allegedly used a substantial portion of the misappropriated funds to pay for his family members’ personal expenses and to fund a lavish lifestyle of private jets, yachts, and expensive residences. The SEC also alleged that Larmore and Cole Capital Funds LLC, an entity Larmore formed and controlled, issued a press release in November 2023 falsely stating that Cole Capital intended to purchase 51 percent of all minority ownership shares in WeWork, Inc., an unrelated public company, at $9 per share, more than nine times WeWork’s then-current trading price. According to the SEC, WeWork’s stock rose close to 150 percent in after-hours trading shortly after the press release was issued. The SEC alleged that Larmore purchased more than 72,000 call options in WeWork at a price far below the stock price in the days before the press release was published, hoping to execute the trades at profit after manipulating the stock price. However, due to a delay in the issuance of the press release, most of the options expired before Larmore could exercise them. The SEC filed its complaint on November 28, 2023. A copy of the complaint, which was filed in the United States District Court for the District of Arizona, can be found here . 1 Commenting on the action, Andrew Dean, Co-Chief of the Asset Management Unit stated, “ s the complaint alleges, instead of protecting client assets, Larmore and his related entities took advantage of investor trust for his and his family’s personal gain. Protecting investors from fraud by their financial advisers is a priority for the SEC, as is protecting the market from false press releases aimed at manipulating the stock of a publicly traded company for personal gain and leaving unknowing investors to lose out.” The SEC’s complaint charged Larmore, ArciTerra, and several related entities controlled by Larmore with violating the antifraud provisions of the federal securities laws. The complaint seeks permanent injunctive relief, the appointment of a receiver, disgorgement and prejudgment interest, and a civil penalty, and other relief. Footnote The case is styled: SEC v. Lamore, et al. , Case 2:23-cv-02470-DWL (D. Az. Nov. 28, 2023). It is important to remember that the complaint is merely an allegation of wrongdoing. Nothing has been proven by the SEC and no findings have been made before a trier of fact ( e.g. , a judge or jury). 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 TD Bank, N.A. v. Keenan , 2023 N.Y. Slip Op. 06158 (2d Dept. Nov. 29, 2023) ( here ), the Appellate Division, Second Department examined the often “nettlesome” question of whether a plaintiff claiming fraud has satisfied the justifiable reliance element of the claim. As readers of this Blog know, we often write about fraud cases where the primary issue for the court to consider is the justifiable reliance element of the claim. We do so because of the importance of pleading and proving justifiable reliance. As noted by the New York Court of Appeals, it is a “fundamental precept” of a fraud claim and is critical to the success of such a claim. 1 Determining whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it is so fact intensive. 2 Recognizing this difficulty, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” 3 Where the falsity of a representation could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim because of the failure to satisfy the justifiable reliance element. 4 Sophisticated parties also have a heightened responsibility to inquire of the truth. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. Such means include obtaining a prophylactic provision in a contract or other writing or making an additional inquiry into the representation. 5 If they fail to do the foregoing, their complaint will be dismissed. 6 Against this background, we examine TD Bank, N.A. v. Keenan . TD Bank, N.A. v. Kennan Defendant Kevin Keenan (“K. Keenan”) and his wife Courtney Keenan (“C. Keenan” and together with K. Keenan, the “Defendants”) acquired property in Garden City, N.Y. on November 2, 2002 (the “Property”). Several years later, TD Bank procured a mortgage on the Property in exchange for a Home Equity Line of Credit (“HELOC”), which it advanced to K. Keenan. On September 12, 2014, Defendants sold the Property to the Allabashis for $1,150,000. The Allbashis purchased the Property in part by a $475,000 loan, which was secured by a mortgage, they obtained from Luxury Mortgage Corp. (“Luxury Mortgage”). In conjunction with that sale, Stewart Title Insurance Company (“Stewart Title”) issued title insurance policies to the Allabashis, as the owners of the Property, and to Luxury Mortgage Corp, as the lender. K. Keenan allegedly drew, and made payments, on the line of credit up to and including the spring of 2016. On April 20, 2016, K. Keenan defaulted on HELOC, a year and a half after the Property had been sold by Defendants to the Allabashis.  On September 30, 2016, TD Bank commenced an action, seeking to foreclose on its mortgage and recover the balance outstanding on the HELOC. The Allabashis and Luxury Mortgage’s successor Bank United, N.A. filed claims under their title insurance policies with Stewart Title. Thereafter, TD Bank settled its claims against the Allabashis and Bank United, based upon Stewart Title’s payment of a negotiated sum to it. TD Bank delivered the original HELOC and its mortgage along with an allonge in Stewart Title’s favor to Stewart Title and stipulated to Stewart Title’s substitution as the plaintiff in the action. TD Bank sought to have Stewart Title substituted as the plaintiff in the action since it held the HELOC and the mortgage. In addition, TD Bank executed a discharge of the accompanying mortgage, which had been recorded in the County’s land records.  Stewart Title sought to amend the complaint to discontinue the foreclosure claim and to add a breach of contract claim against K. Keenan. Stewart Title also sought to add C. Keenan as a defendant and to interpose claims for fraudulent misrepresentation and unjust enrichment against both Defendants. With regard to the fraud claim, Stewart Title alleged that Defendants made materially false statements in the closing affidavits that they executed in connection with the title insurance policies it issued to the Allabashis and Luxury Mortgage. Among other things, Defendants represented that they had no knowledge of any “claims, rights, liens, encumbrances and defects in title except those set forth in the title report,” that they knew of “no other financing which affect the property,” and that they “ha not extended any Instrument that not disclosed by the … title report.” Defendants further represented and acknowledged that they executed the affidavits “to induce Stewart Title” to remove certain possible exceptions to title set forth in the title report and to issue the policy of title insurance covering the Property knowing that Stewart Title would rely on their statements. Finally, they represented that they were unaware of any judgment, encumbrance, lien or claim of right to the Property, except as shown in the title report. Notably, Defendants represented that in the event that there were any open credit line mortgages affecting the Property, they canceled their right to draw against them and directed that any such mortgage be satisfied of record.  Stewart Title alleged that C. Keenan knew of the HELOC and the accompanying mortgage despite not having been a party to them when she executed the affidavits. Defendants opposed the amendment, claiming, among other things, that Plaintiff failed to plead fraud with particularity, the fraud claim duplicated the breach of contract claim and Plaintiff failed to plead justifiable reliance. 7 The motion court denied the motion to amend. Although the motion court found that Plaintiff satisfied the particularity requirement of CPLR § 3016, Plaintiff failed to plead justifiable reliance.  The motion court explained that because the HELOC and mortgage were recorded and publicly available long before Stewart Title extended its title insurance policies, Plaintiff could have protected itself with reasonable diligence: “‘ uch information was readily verifiable through public records and there could be no justifiable reliance on the misrepresentations.’” 8 Therefore, concluded the motion court, the proposed claim for fraudulent misrepresentations was “patently lacking in merit.” On appeal, the Second Department modified the order to allow the amendment. In a pithy opinion, the Court held that “in light of the multiple written and sworn misrepresentations allegedly made by the defendant Kevin Keenan and his wife, Courtney Keenan, and relied upon by the plaintiff, it cannot be said that a cause of action alleging fraud against the Keenans, including the element of the plaintiff’s reasonable reliance, is patently insufficient or palpably devoid of merit.” 9 Takeaway Though not stated in its opinion, it appears that the Court was persuaded by Plaintiff’s argument that the truth concerning the alleged misrepresentations could not have been ascertained simply by looking at the public record. In its briefs on appeal, Plaintiff argued that whether the HELOC was paid down was peculiarly within the knowledge of Defendants. Plaintiff maintained that Defendants, as the only parties to 2014 sale of the Property, knew whether K. Keenan paid the HELOC down to zero or requested that TD Bank close the HELOC. Therefore, simply because the TD Bank mortgage was open of record at the time of the 2014 sale of the Property did not mean that Stewart Title could have learned the truth of the representations in the closing affidavits.  Moreover, Plaintiff maintained that even if the payment and HELOC closure status were verifiable from the public land records, as the motion court held, Stewart Title sought to protect itself from fraud by obtaining written representations in the affidavits from Defendants that the HELOC was paid down and closed and, therefore, had no obligation to conduct any further inquiry as to the veracity of Defendants’ representations. In DDJ Mgmt., LLC v. Rhone Group L.L.C. , the Court of Appeals held that obtaining written representations and warranties suffices to show that an alleged victim of fraud exercised the “means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation.” 10 In particular, the Court held: “We decline to hold as a matter of law that plaintiffs were required to do more—either to conduct their own audit or to subject the preparers of the financial statements to detailed questioning” where “they obtained representations and warranties to the effect that nothing in the financials was materially misleading.” 11 Again, though not stated in the TD Bank opinion, it appears that the Court was persuaded by this argument as well. Footnotes Ambac Assurance Corp. v. Countrywide Home Loans, Inc. , 31 N.Y.3d 569 (2018). DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 322 (1959). E.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 195 (1st Dept. 2012); see also Churchill Fin. Cayman, Ltd. v. BNP Paribas , 95 A.D.3d 614 (1st Dept. 2012). ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015); DDJ Mgmt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010) (holding that in contract negotiations between sophisticated parties, justifiable reliance element sufficiently alleged where plaintiff “has gone to the trouble” of insisting on warranties in the written agreement that certain facts were true). See , e.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-95 (1st Dept. 2012). The motion court held that the fraud claim was not duplicative of the breach of contract claim because it did not relate to the failure to perform under the insurance policy. Instead, Plaintiff’s fraud claim was based on alleged misrepresentation made in applying for the policy. Citing Fartello v. Checkmate Holdings, LLC , 82 A.D.3d 437, 438 (1st Dept. 2011) (citation omitted). Slip Op. at *1. Feldman v. Byrne , 210 A.D.3d 646, 649 (2d Dept. 2022. DDJ Mgmt. , 15 N.Y.3d at 154. 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 Many times, remedies for the breach of a contract other than monetary damages are necessary to make a plaintiff whole.  One such remedy is specific performance [a topic previously addressed by this BLOG, inter alia ,  < here =">here"> , < here =">here"> , < here =">here"> < here =">here"> and < here =">here"> ].  The remedy of specific performance “will not be ordered where money damages would be adequate to protect the expectation interests of the injured party.”  Sokoloff v. Harriman Estates Development Corp. , 96 N.Y.2d 409, 415 (2001) (citations and internal quotation marks omitted).  Specific performance is an equitable remedy that, instead of awarding money damages to the prevailing party, requires the breaching party to perform under the contract.  “Specific performance is appropriate … when ‘the subject matter of the particular contract is unique and has no established market value.’”  BT Triple Crown Merger Co., Inc. v. Citigroup Global Markets Inc. , 19 Misc. 3d 1129, *8 (NOR) (Sup. Ct. N.Y. Co. 2008) (quoting Van Wagner Advert. Corp. v. S&M Enters. , 67 N.Y.2d 186, 193 (1986)).  “The point at which breach of a contract will be redressable by specific performance thus must lie not in any inherent physical uniqueness of the property but instead the uncertainty of valuing it….”  Van Wagner , 67 N.Y.2d at 193.  The Sokoloff Court also stated that: The decision whether or not to award specific performance is one that rests in the sound discretion of the trial court. In determining whether money damages would be an adequate remedy, a trial court must consider, among other factors, the difficulty of proving damages with reasonable certainty and of procuring a suitable substitute performance with a damages award ( see, Restatement of Contracts § 360). Specific performance is an appropriate remedy for a breach of contract concerning goods that “are unique in kind, quality or personal association” where suitable substitutes are unobtainable or unreasonably difficult or inconvenient to procure ( see, id., comment c ). Sokoloff , 96 N.Y.2d at 415.  It is generally accepted that “the equitable remedy of specific performance is routinely awarded in contract actions involving real property, on the premise that each parcel of real property is unique.”  Alba v. Kaufman , 27 A.D.3d 816, 818 (3 rd Dep’t 2006) (citations and internal quotation marks omitted); EMF General Contracting Corp. v. Bisbee , 6 A.D.3d 45, 52 (1 st Dep’t 2004) (same). On November 29, 2023, the Appellate Division, Second Department, in First Korean Church of New York v. 35 Ave & Parsons, LLC , affirmed the motion court’s order dismissing an action for, inter alia , specific performance of a real estate contract because the seller failed to obtain required approvals for the sale in the timeframes set forth in the contract.  The plaintiff/seller in First Korean is a religious corporation that owned a valuable piece of real property in Queens, New York (the “Property”).  In order for a religious corporation to sell real property and/or a significant portion or all of its assets it must comply with various provisions of New York’s Religious Corporations Law (“RCL”) and Not-For-Profit Corporation Law (“NPC”).  See, e.g. , NPC §§ 509 , 510 and 511 ; RCL § 12 .  Under various provisions of the NPC and RCL, inter alia : a majority of a not-for-profit’s board must approve the sale of the corporation’s real property ( see NPC § 509(b)); the “sale … of all, or substantially all, the assets of a corporation may be made” pursuant to certain terms and conditions of the statute ( see NPC § 510); permission to sell or transfer substantially all a corporations assets may be obtained from a court ( see NPC § 511); and, a religious corporation “shall not sell … any of its real property without applying for and obtaining leave of court or the attorney general… ( see RCL § 12).   Plaintiff entered into a contract with defendant/purchaser pursuant to which plaintiff was to sell the Property to defendant for over $40,000,000.  The contract provided that if plaintiff failed to obtain the requisite approvals from its board, the court and/or the Attorney General within ninety (90) days, either party could terminate the contract.  Approvals were not obtained within the agreed upon 90-day period and defendant sent a termination notice per the contract.  Plaintiff responded to defendant’s termination letter by sending its own letter arguing that due to the COVID-19 pandemic it could not hold the necessary Board meeting to obtain necessary approvals.  In addition, plaintiff filed a petition with the court for approval of the sale and said petition was denied by the court and the proceeding was dismissed.  Under the parties’ contract, the failure of the court to grant plaintiff’s petition resulted in the automatic termination of the contract. In light of defendant’s decision to terminate the contract, plaintiff commenced an action in which it sought, inter alia, specific performance of the contract and damages for breach of contract.  Defendant moved to dismiss the complaint pursuant to , inter alia , CPLR 3211(a)(1) based on documentary evidence.  As previously noted in this BLOG, under CPLR § 3211(a), a party may make a motion to dismiss on the “ground that . . . a defense is founded upon documentary evidence.” The CPLR does not, however, define the phrase “documentary evidence.”  To qualify as “documentary,” the content of the document must be “essentially undeniable and …, assuming the verity of and the validity of its execution, will itself support the ground on which the motion is based.” Amsterdam Hospitality Grp., LLC v. Marshall-Alan Assocs., Inc., 120 A.D.3d 431, 432 (1 st Dep’t 2014) , quoting David D. Siegel, Practice Commentaries, McKinney’s Cons. Laws of N.Y., Book 7B, C.P.L.R. C3211:10 at 22. Materials that clearly qualify as “documentary evidence” include judicial records, such as judgments and orders, as well as documents reflecting out of-court transactions, such as contracts, deeds, wills, and mortgages. Fontanetta v. Doe , 73 A.D.3d 78, 84 - 85 (2 nd Dep’t 2010) (citation omitted); see also Davis v. Henry , 212 A.D.3d 597 (2 nd Dep’t 2023).  Thus, in order for evidence to qualify as “documentary,” it must be unambiguous, authentic and undeniable.” Granada Condominium III Ass’n v. Palomino , 78 A.D.3d 996, 996-97 (2 nd Dep’t 2010).   In affirming the motion court, the Second Department stated: When deciding a motion to dismiss for failure to state a cause of action, "the court must 'accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every cognizable legal theory"' ( Rudovic v Law Off. of Timothy A. Green , 200 AD3d 814, 815, quoting Leon v Martinez , 84 NY2d 83, 87-88). A motion to dismiss based on documentary evidence pursuant to CPLR 3211 (a)(l) may be granted "only where the documentary evidence utterly refutes the plaintiffs factual allegations" (Bedford-Carp Constr., Inc. v Brooklyn Union Gas Co., 215 AD3d 907 , 908 ; see Mawere v Landau , 130 AD3d 986, 987).  Here, in support of its motion, the defendant submitted, inter alia, the agreement, which provided, in relevant part, that, if the plaintiff did not obtain all the required approvals for the purchase and sale of the property for any reason within a 90-day time period from the date the parties entered into an amendment to the agreement, either party was permitted to terminate the agreement by written notice. The defendant also submitted documentary evidence that, more than 90 days after the parties executed the amendment to the agreement, the plaintiff had not obtained the required approvals for the purchase and sale of the property and that the defendant served the plaintiff with written notice exercising its option to terminate the agreement. Thus, the defendant's documentary evidence utterly refuted the plaintiffs allegations in the complaint and resolved all factual issues (see Bedford-Carp Constr., Inc. v Brooklyn Union Gas Co., 215 AD3d at 909).  Contrary to the plaintiffs contention, Executive Order (A. Cuomo) No. 202.8 (9 NYCRR 8.202.8), and the subsequent orders extending it, did not toll the 90-day period set forth in the agreement (see Prestige Deli & Grill Corp. v PLG Bedford Holdings, LLC, 213 AD3d 962 , 963).  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.

In Stagen v. Neu , 2023 N.Y. Slip Op. 06105 (1st Dept. Nov. 28, 2023) ( here ), the Appellate Division, First Department addressed an issue of contract interpretation involving a word in a settlement agreement that most readers would think has a distinct and undisputed meaning – “employ”. As discussed below, the Court found an issue of fact as to what it means to be “employed” in the context of the record before it.  The Court also touched upon the law surrounding third-party beneficiaries of contracts. As discussed below, the Court found that based upon the prominence of the third-party in the agreement between the parties, the parties intended to make that third-party a beneficiary of the subject agreement. The plaintiff in Stagen worked as the president of Eden Wood Realty LLC (“Eden”) from April 2017 through October 2022. Plaintiff alleged that in May 2022, defendant entered into a settlement agreement with her father, Richard (“Richard”), in which they both agreed that upon Richard’s retirement, defendant would become president of Eden. The settlement agreement also provided that, until his retirement, Richard had the sole discretion about whether to retain plaintiff as president of Eden and then, if plaintiff remained employed at the time of Richard’s retirement, plaintiff would stay on under the same terms. It also permitted defendant to remove plaintiff if she made a “good faith determination” that plaintiff could no longer perform his duties. Richard retired in August 2022. In October 2022, defendant terminated plaintiff from his employment at Eden. Plaintiff contended that defendant could not possibly have made a good faith determination about his ability to do the job. Plaintiff sued, asserting a single cause of action for breach of contract. Defendant moved to dismiss. Defendant insisted that the settlement agreement cited by plaintiff arose after years of litigation with her father and related to other businesses in addition to Eden. Defendant maintained that plaintiff was no longer an employee of Eden as of the date of her father’s retirement and that another entity, Phyllis Cory Consulting Corp. (“Phyllis Consulting”) was actually paying plaintiff to provide services to Eden. Defendant argued that the provision in the settlement agreement contained a condition precedent—namely that plaintiff remain employed by Eden—at the time of Richard’s retirement. She insisted that because plaintiff was working for Phyllis Consulting, and not Eden, at the time of her father’s retirement, he could not seek relief under the subject provision. Defendant also contended that the complaint failed to allege that plaintiff was an intended third-party beneficiary of the settlement agreement. Defendant argued that the settlement agreement did not mention Phyllis Consulting and so plaintiff could not seek the benefit of an agreement given that Phyllis Consulting was the entity who paid him.  Plaintiff argued that he stated a cause of action for breach of contract. He claimed the provision that cites him in the settlement agreement ( i.e. , paragraph 6) between defendant and her father specifically conferred him with benefits and entitled him to bring this lawsuit. That provision provided that: After Richard chooses to retire in his sole and absolute discretion, or dies, Amy shall become the President of Eden Wood. Until that time, the decision whether to continue to employ Stagen by Eden Wood shall be Richard's alone. Thereafter, and assuming that as of that time Stagen remains employed by Eden Wood, Eden Wood shall continue to employ Stagen on terms no less favorable to Stagen than those in place on the date of Richard's retirement or death, unless and until Stagen voluntarily retires or Amy makes a good faith determination that Stagen is no longer capable of performing his employment duties competently.  Plaintiff claimed that he was employed by Eden at the time he was fired, and that paragraph 6 of the settlement agreement did not prohibit him from using Phyllis Consulting as an intermediary.  Defendant insisted that Eden paid Phyllis Consulting for plaintiff’s services and so there was no basis to find that plaintiff was working for Eden at the time her father retired, which eviscerated a condition precedent to the agreement. She added that there was no evidence that Phyllis Consulting was the intended beneficiary of the agreement. And she argued that plaintiff was merely acting as an agent of the corporate entity, Phyllis Consulting. The motion court granted the motion. On appeal, the First Department unanimously reversed, on the law, and the denied the motion. The Court found that plaintiff was employed by Eden: In support of her motion to dismiss, Amy contends that plaintiff was not “employed by” Eden Wood on the date of Richard’s retirement because Eden Wood did not pay him at all but instead paid his consulting company. At the time of the Settlement Agreement, plaintiff was president of Eden Wood, and with Richard’s knowledge, he was being paid through the corporation he created. Plaintiff’s position as president and the payment arrangement continued after the Agreement was signed and through the time that Richard retired. Accordingly, notwithstanding this arrangement, plaintiff adequately alleges that he was, and remained for all intents and purposes, an employee of Eden Wood at the time of Richard’s retirement. 1 The Court explained that: The court’s interpretation of the contract to require any claim to be made by plaintiff’s consulting company, rather than plaintiff individually, would render the words of the agreement meaningless. Under the circumstances, the undefined term “employ” is subject to ambiguity. Accordingly, it is appropriate to examine the facts and circumstances to determine the intent of the parties. Moreover, interpreting the contract as imposing a requirement that plaintiff must be directly employed by Eden Wood as a condition precedent to recovery would elevate form over substance. The Settlement Agreement did not include any language supporting that reading. 2 Finally, regarding the third-party beneficiary claim, the Court held that “the prominent mention of plaintiff in paragraph 6 of the Settlement Agreement evince the contracting parties’ intent to benefit him.” 3 In reaching this conclusion, the Court relied on LaSalle Natl. Bank v. Ernst & Young , 285 A.D.2d 101 (1st Dept. 2001). In LaSalle , the court discussed the law concerning third-party beneficiaries as follows: In order to claim third-party benefits, the putative third-party beneficiary will be deemed an intended beneficiary if “recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties  and  either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary ; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. * * * An incidental beneficiary * * * is not an intended beneficiary”. A non-party may sue for breach of contract only if it is an intended, and not a mere incidental, beneficiary, and even then, even if not mentioned as a party to the contract, the parties’ intent to benefit the third party must be apparent from the face of the contract. Absent clear contractual language evincing such intent, New York courts have demonstrated a reluctance to interpret circumstances to construe such an intent. 4 Accordingly, the Court concluded that plaintiff was entitled to assert a cause of action for breach of contract as a third-party beneficiary. 5 Footnotes Slip Op. at *1. Id. (citations omitted). Id. at *1-*2 (citation omitted). LaSalle , 285 A.D.2d at 108-109. Slip Op. at *2. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber As we have often explained in the articles in which we have examined fraud claims, to withstand a motion to dismiss, the plaintiff must plead fraud with particularity as required under CPLR § 3106(b), cannot lump all the defendants together so that the plaintiff runs afoul of the group pleading prohibition, and cannot duplicate a breach of contract claim with the fraud claim. Lerman v. 2211 Third Ave. Mazal Holdings LLC , 2023 N.Y. Slip Op. 34092(U) (Sup. Ct., N.Y. County Nov. 16, 2023) ( here ), is another example of a plaintiff failing to comply with the foregoing. Lerman began as a motion for summary judgment in lieu of complaint arising out of an agreement between plaintiff and 2211 Third Avenue Mazal Holdings LLC (“Holdings”) and was based on breach of a promissory note to repay a loan. Because the amount of interest could not be readily discerned, the case was converted to a plenary action.  Plaintiff alleged that defendants fraudulently induced him to increase the amount, and extend the maturity date, of the loan. Plaintiff claimed that defendants Amir Hasid (“Hasid”) and HAP Investments LLC (“HAP”) made material misrepresentations about the financial condition of Holdings, including about the financial projections for the development of a property located at 2211 Third Avenue in New York City (the “Third Avenue Property”). Plaintiff maintained that in December 2018, Holdings executed a promissory note evincing a $500,000.00 loan in connection with the Third Avenue Property. Plaintiff claimed that HAP fraudulently convinced him to increase his “investment” to $700,000.00 and execute a new promissory note showing this increased “investment”. The new note contained a maturity date of one year with an option to extend it another year (to December 2020). Plaintiff alleged that Hasid (on behalf of HAP) wrongfully convinced him to enter into this agreement. Plaintiff alleged that in December 2019, Holdings used its option and extended the maturity date to December 2020. Thereafter, Holdings failed to pay the balance due. Defendants moved to dismiss the operative complaint. They claimed that the complaint contained confusing allegations about the various defendants in an attempt to pierce the corporate veil and hold all the defendants liable under the agreement plaintiff executed with Holdings. Defendants argued that plaintiff did not identify the allegedly fraudulent misrepresentations that were made to him in connection with the loan. Defendants noted that various allegations asserted by plaintiff were made upon information and belief, including that both defendant 2211 Third Avenue Mazal LLC (“Mazal”) and HAP were controlling principals, members, and managers of Holdings. Defendants stressed that the complaint was bereft of sufficient details about the alleged fraud committed by defendants and how that affected plaintiff’s decision to loan money to Holdings. In opposition, plaintiff submitted an affirmation in which he claimed that Hasid spoke with him on behalf of HAP to induce plaintiff to loan the money. Plaintiff claimed that Hasid provided him with financial projections for the building and assurances that the loan would be timely repaid.  Plaintiff explained that Hasid informed him that defendant Eran Polack (“Polack”) was no longer involved with HAP (according to plaintiff, Polack was adjudged to be a fraudster in Israel). He claimed that he would not have invested without that assurance. Plaintiff contended that he started to become uneasy and demanded his money back after learning that Polack was still the CEO of HAP. Plaintiff admitted that he received $200,000.00 “from HAP and/or Mazal” and later received another $10,000.00. The motion court granted the motion. “To state a cause of action to recover damages for fraudulent inducement, there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” 1 The motion court found that plaintiff failed to satisfy the foregoing elements of a fraud claim. First, the motion court found that plaintiff failed to identify any “specific actions by each defendant; instead, plaintiff engage in a ‘group pleading’ that fail to sufficiently separate the allegations between each defendant.” 2 In other words, plaintiff failed to distinguish among the various defendants regarding which misrepresentations each defendant made to plaintiff, when the misrepresentations were made, and where the misrepresentations were made. 3 By pleading the fraud claim against all defendants collectively, without any specification of the conduct charged to a particular defendant, the motion court concluded, without specifically stating as much, that plaintiff deprived defendants of the notice regarding “the material elements of each cause of action” to which defendants were entitled under CPLR § 3013. 4 Second, the motion court held that plaintiff failed to plead his fraud claim with particularity. 5 Under CPLR § 3016(b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.” 6 To satisfy the particularity requirement, the plaintiff must allege such facts as the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result. Put another way, the complaint must identify the “who, what, where, when and how” of the alleged fraud.  In Lerman , the motion court found that plaintiff failed to allege the “misrepresentations and how they were a proximate cause of plaintiff’s decision to enter into the agreement with Holdings.” 7 By doing so, plaintiff failed to identify any specific and material misrepresentation of fact by any of the defendants.  Third, the motion court held that the fraud claims were duplicative of the breach of contract claim. 8 In that regard, the motion court explained that in effect, plaintiff alleged “that defendants misrepresented whether or not Holdings would be able to repay the loan.” 9 “ othing in plaintiff’s opposition (including plaintiff’s affirmation),” said the motion court, “detail what was false in the various projections or documents supplied to plaintiff as part of the negotiating process.” 10 The motion court further noted that “ o the extent that plaintiff alleging that future promises about the expected success of the building project were false, that not an actionable basis for fraud.” 11 A plaintiff must allege misrepresentations of present fact, not merely misrepresentations of future intent to perform under a contract. 12 Under New York law, “ eneral allegations of lack of intent to perform are insufficient ; rather, facts must be alleged establishing that the adverse party, at the time of making the promissory representation, never intended to honor the promise.” 13 In conclusion, the motion court made the following observations about plaintiff’s fraud claims: The majority of plaintiff’s opposition claims that he loaned the money because he was provided with materials about future projections concerning the building project. But “mere puffery, opinions of value or future expectations” do not sustain a fraud claim based on alleged misrepresentations” ( Sidamonidze v Kay , 304 AD2d 415, 416, 757 NYS2d 560 <1st dept 2003> ). To be sure, if an investor was convinced to invest and promised returns based on material misrepresentations, then that would state a claim based upon fraud. But, here, plaintiff was not an investor. Instead, plaintiff was a lender – he loaned money to Holdings – and that loan was not secured by the property and there were no guarantors. And plaintiff received some (but not all) of what he claims he was owed. That renders the alleged misrepresentations as immaterial because the amount he was entitled to receive was not dependent on the success (or failure) of the building project or on which entity actually owned the property. 14 Accordingly, the motion court dismissed the fraud claims against defendants. Footnotes 651 Bay St., LLC v. Discenza , 189 A.D.3d 952, 953-54 (2d Dept. 2020). Slip Op. at *6. See Principia Partners LLC v. Swap Fin. Group, LLC , 194 A.D.3d 584, 584 (1st Dept. 2021). We note that by referring to all defendants together without differentiation, plaintiff failed to plead his fraud claim with the particularity required by CPLR § 3016(b). See El Toro Group, LLC v. Bareburger Group, LLC , 190 A.D.3d 536, 541 (1st Dept. 2021); Total Asset Recovery Servs. LLC v. Metlife, Inc. , 189 A.D.3d 519, 523 (1st Dept. 2020). Slip Op. at *6. Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (citation omitted). Slip Op. at *6. Id. Id. Id. Id. (citing GE Oil & Gas, Inc. v. Turbine Generation Servs., L.L.C. , 168 A.D.3d 563, 564 (1st Dept. 2019) (noting, that a promise about a prediction or expectation cannot form the basis of a fraud claim arising out of a misrepresentation). Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439–41 (1st Dept. 2015). Perella Weinberg Partners LLC v. Kramer , 153 A.D.3d 443, 449 (1st Dept. 2017); see Cronos Group Ltd. v. XComIP, LLC , 156 A.D.3d 54, 71 (1st Dept. 2017). Slip Op. at *8-*9. 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 July of this year, we wrote about a fraud action involving the EB-5 Immigrant Investor Program (“EB-5 Program” or “Program”) (here). Under the EB-5 Program, investors are eligible for permanent residency status in the U.S. if they make a qualifying investment in a new commercial enterprise in the U.S. that creates a certain number of permanent full-time jobs for qualified U.S. workers. As we often do in our articles, we examine the legal issues involved in the case that we examine. In our July post, we examined the EB-5 Program so that our readers could gain an understanding of the program, as well as the risks of fraud and abuse attendant to the program. We repost that examination of the Program below. The EB-5 Program and The Risk of Fraud In 1990, Congress created the EB-5 Program to stimulate the U.S. economy through job creation and capital investment by foreign investors. The EB-5 Program offers foreign investors and members of their family an opportunity to obtain permanent residence in the United States (i.e., obtain a green card) and provides a source of financing for developers to use in, among other things, construction and business projects. The EB-5 Program has been a material source of private investment in the U.S. for many years. According Invest in the USA, the national trade association whose members are EB-5 regional centers,1 “between 2008 and 2021, the EB-5 program helped generate $37.4 billion in foreign direct investment to create and retain U.S. jobs for Americans, all at no cost to the taxpayer” (here). Despite the benefits of the EB-5 Program, the incidence of fraud and abuse has increased over the years.2 Typically, where fraud is involved, a company/regional center and its financial backers will solicit EB-5 Program investors with promises of high rates of return. In some cases, the companies/regional centers guarantee that the investment is risk-free. The Securities and Exchange Commission (“SEC”) has identified a set of common violations of the securities laws arising from the misconduct surrounding the EB-5 Program. These violations include: (a) false or misleading statements in placement memoranda, subscription agreements, advertisements, and sales brochures in violation of Section 10(b)(5) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); (b) theft or misuse of investor funds in violation of Section 17(a) of the Securities Act of 1933, as amended; and (c) improper solicitation of investors by unregistered broker-dealers in violation of Section 15(a) of the Exchange Act. Due to the incidence of fraud, the SEC has released an investor alert to warn investors about potential scams in EB-5 offerings.3 The USCIS has also noted that “fraud – in the form of embezzlement, securities violations, investment schemes, and criminal conduct – has plagued the Regional Center program since its inception.” In a letter to then-President Trump, Senator Charles Grassley also noted that the EB-5 Program had “become riddled with fraud and serious vulnerabilities that present real national security concerns,” and strayed materially from its intended purpose of bringing investment to areas that need investment opportunities the most.4 Given the incidence of fraud and abuse, it is not surprising that the SEC, as well as EB-5 investors, have brought suit against individuals and companies/regional centers, claiming violations of the common law, as well as the federal securities laws. We highlight a few of the many enforcement actions brought by the SEC against EB-5 Program scammers below. In SEC v. Marco A. Ramirez, et al., the SEC brought fraud charges against a husband and wife in Texas for stealing funds from foreign investors under the guise of an investment opportunity to create U.S. jobs and a path to U.S. residency. The SEC alleged that the couple and three companies they own fraudulently raised at least $5 million from investors by falsely promising that their money would be invested as part of the EB-5 Program. The SEC alleged that instead of investing the money as promised, the couple routinely diverted investor funds to other undisclosed businesses and for their personal use. In at least one instance, they used new investor funds to make Ponzi-like payments to an existing investor. In SEC v. A Chicago Convention Center, et al., the SEC charged an individual living in Illinois and two companies behind an investment scheme defrauding foreign investors seeking profitable returns and a legal path to U.S. residency through the EB-5 Program. The SEC alleged that Anshoo R. Sethi created A Chicago Convention Center (“ACCC”) and Intercontinental Regional Center Trust of Chicago (“IRCTC”) and fraudulently sold more than $145 million in securities and collected $11 million in administrative fees from more than 250 investors primarily from China. Sethi and his companies allegedly duped investors into believing that by purchasing interests in ACCC, they would be financing construction of the “World’s First Zero Carbon Emission Platinum LEED certified” hotel and conference center near Chicago’s O’Hare Airport. According to the SEC, investors were misled to believe their investments were simultaneously enhancing their prospects for U.S. citizenship through the EB-5 Program. The SEC alleged that Sethi and his companies spent more than 90 percent of the administrative fees collected from investors despite their promise to return the money to investors if their visa applications were denied. More than $2.5 million of the funds, said the SEC, were directed to Sethi’s personal bank account in Hong Kong. In SEC v. San Francisco Regional Center, LLC, et al., the SEC brought fraud charges against an Oakland, California-based businessman accused of misusing money he raised from investors through the EB-5 Program intended to create or preserve jobs for U.S. workers. The SEC alleged that Thomas M. Henderson and his company San Francisco Regional Center LLC falsely claimed to foreign investors that their $500,000 investments would help create at least 10 jobs within several distinct EB-5 related businesses he created, including a nursing facility, call centers, and a dairy operation. This would qualify the investors for a potential path to permanent U.S. residency through the EB-5 Program. But according to the SEC, Henderson jeopardized investors’ residency prospects and combined the $100 million he raised from investors into a general fund from which he allegedly misused at least $9.6 million to purchase his home and personal items and improperly fund several personal business projects, such as Bay Area restaurants that were unrelated to the companies he purportedly established to create jobs consistent with EB-5 requirements. According to the SEC, Henderson also improperly used $7.5 million of investor money to pay overseas marketing agents, and he shuffled millions of dollars among the EB-5 businesses to obscure his fraudulent scheme. In SEC v. Seyed Taher Kameli, et al., the SEC charged a Chicago-based immigration attorney with defrauding investors participating in the EB-5 Program by improperly commingling and misusing a portion of the approximately $88.7 million raised. The SEC alleged that Seyed Taher Kameli and his companies, Chicagoland Foreign Investment Group, LLC and American Enterprise Pioneers, Inc., falsely claimed to at least 226 foreign investors that each of their $500,000 investments would be used to help construct a specific senior living project in the Chicago area or Florida and create at least 10 permanent full-time jobs within that project. This would qualify each investor for a potential path to permanent U.S. residency through the EB-5 Program. According to the SEC, rather than use investor funds solely for the senior living project for which an investor was solicited, Kameli diverted millions of dollars to fund other projects and to make unrelated payments, which was contrary to representations to investors and the requirements of the EB-5 Program. Kameli also allegedly spent a significant portion of investor proceeds for his own benefit, for his brother’s benefit, and for the benefit of companies he owns. SEC. v. Ahmed Yesterday, on November 21, 2023, the SEC announced (here) that it charged Nadim Ahmed, a New York-based businessman and his companies, NuRide Transportation Group, LLC (“NuRide”) and NYC Green Transportation Group, LLC (NYC Green”), with making fraudulent misrepresentations in securities offerings to investors seeking permanent residency through the EB-5 Program. The SEC also charged Ahmed and Mehreen Shah a/k/a Mona Shah, a New York-based immigration attorney, and her law firm with offering unregistered securities to investors in offerings that raised more than $66 million from more than 100 investors. A copy of the complaint, which was filed in the United States District Court for the Southern District of New York, can be found here.5 According to the SEC, from approximately June 2014 through December 2018, Ahmed, NuRide and NYC Green falsely told NYC Green investors that NYC Green would be operated in a manner consistent with the requirements of the EB-5 Program and that NYC Green’s principals had contributed $11 million to the company. Further, Ahmed, NuRide, and NYC Green allegedly put key revenue-generating contracts in NuRide’s name despite telling investors that NYC Green would be the operating transportation business. Ahmed also allegedly used one investor’s funds to pay a portion of a prior settlement between another one of his companies and the SEC. In addition, said the SEC, from June 2014 through November 2022, Ahmed, NuRide, and NYC Green, along with Shah, her law firm, and three other entities associated with Ahmed and/or Shah, allegedly offered or sold unregistered securities, including to individuals residing in the United States, in three offerings, for which no exemption to the registration requirements was available. According to the complaint, none of the investors in the offerings has received unconditional permanent residency status or a return of their investment. Commenting on the allegations in the complaint, Thomas P. Smith, Jr., Associate Regional Director in the New York Regional Office, said “ll offering materials, including those provided to investors seeking residency under the EB-5 program, must contain accurate disclosures about the securities being issued. And all securities offerings must comply with the registration requirements or the exemptions to those requirements.” The SEC charged Ahmed, NYC Green, and NuRide with violating the antifraud provisions and, along with Shah, her law firm, and three other entities associated with Ahmed and/or Shah, the registration provisions of the federal securities laws. The complaint seeks permanent and conduct-based injunctions, disgorgement, prejudgment interest, and civil penalties. Footnotes Regional centers are businesses that offer investment opportunities under the Program. The fact that a business is designated as a regional center by the U.S. Citizenship and Immigration Services (“USCIS”) does not mean that USCIS, the SEC, or any other government agency has approved the investments offered by the business, or has otherwise expressed a view on the quality of the investment. See Hearing on “Citizenship for Sale: Oversight of the EB-5 Investor Visa Program” before the Senate Committee on the Judiciary on June 19, 2018 (here). See Investor Alert: Investment Scams Exploit Immigrant Investor Program (Oct. 9, 2013) (here). See Grassley to Trump: You Can Restore Integrity To EB-5 Visa Program (June 8, 2018) (here). The case is styled: SEC v. Ahmed, et al., 23 Civ. 10210 (S.D.N.Y. Nov. 21, 2023). It is important to remember that the complaint is merely an allegation of wrongdoing. Nothing has been proven by the SEC and no findings have been made before a trier of fact (e.g., a judge or jury). 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 Barlow v. Skroupa , 2023 N.Y. Slip Op. 05786 (1st Dept. Nov. 16, 2023) ( here ), the Appellate Division, First Department affirmed the dismissal of a fraud claim because the plaintiffs failed to plead fraud with particularity, as required under CPLR § 3016(b), and identify any specific misrepresentations of material fact. We examine Barlow below.  Plaintiffs, who were employees and consultants of Inspire Summits LLC (“Inspire”), doing business as Skytop Strategies (“Skytop”), originally brought the action alleging breach of contract by defendants Skytop and its owner Christopher Skroupa, in addition to other related claims. Following multiple amendments, plaintiffs added parties and causes of action, including, inter alia , fraud in connection with Skytop’s alleged failure to pay its employees and contractors, overcharging participants in its conferences, and related misconduct. More specifically, the fraud claim was based on alleged misrepresentations about Skytop’s revenue, funding, and prospects and defendants’ nondisclosure of Skytop’s financial irregularities. Plaintiffs alleged that defendants misrepresented that they profited only from Skytop’s conferences and not from inducing employees, consultants, and vendors to provide services without payment and that Skytop possessed the financial ability to pay employees, was growing fast, and offered employees rapid growth. Defendants David Katz (“Katz”) and Paula Luff (“Luff”) moved to dismiss all claims pleaded against them pursuant to CPLR § 3211(a)(7). Katz and Luff maintained that plaintiffs failed to allege that these defendants owed any duties to plaintiffs or made any misrepresentations on which plaintiffs reasonably relied and that the allegations otherwise lacked the required particularity for a fraud claim. The motion court granted the motion. The motion court found that plaintiffs engaged in improper group pleading by failing to distinguish among the various defendants regarding which misrepresentations and omissions each defendant made to each plaintiff, when the misrepresentations were made, and where the misrepresentations were made. 1 By pleading the fraud claim against all defendants collectively, without any specification of the conduct charged to a particular defendant, the motion court concluded that plaintiffs deprived defendants of the notice regarding “the material elements of each cause of action” to which defendants were entitled under CPLR § 3013.  The motion court also held that by referring to all defendants together, plaintiffs failed to plead their fraud claim with the particularity required by CPLR § 3016(b). 2 As noted, the First Department affirmed. The Court agreed with the motion court, finding that “plaintiffs failed to plead fraud with particularity as required under CPLR 3016(b).” 3 The Court also found that plaintiffs failed “to identify any specific and material misrepresentation of fact by either Katz or Luff, and offered only general and conclusory allegations that they made “false representations” regarding Skytop’s revenues and its ability to pay wages and benefits.” 4 As a result, concluded the Court, the motion court “properly dismissed claim.” 5 Takeaway To state a claim for fraud, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” 6 The claim must pleaded with particularity. 7 Conclusory allegations will not suffice. 8 Neither will allegations based on information and belief. 9 If “sufficient factual allegations of even a single element are lacking,” then the claim must be dismissed. 10 The requirement that a fraud claim be pleaded with particularity can be found in CPLR § 3016(b). Under CPLR § 3016(b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.” 11  To satisfy the particularity requirement, the plaintiff must allege such facts as the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result. Put another way, the complaint must identify the “who, what, where, when and how” of the alleged fraud. Group pleading runs afoul of the particularity requirement. It also violates CPLR § 3013, which requires the pleader to provide the parties notice of the transactions or occurrences intended to be proved together with the material elements of the plaintiff’s cause of action or the defendant’s defense. In Barlow , plaintiffs failed to comply with the foregoing principles. First, plaintiffs violated the group pleading prohibition “ y pleading the fraud claim against all defendants collectively, without any specification of the conduct charged to particular defendant[ ].” In doing so, “plaintiffs deprive defendants of the notice regarding ‘the material elements of each cause of action’ to which defendants” were entitled under CPLR § 3013. By group pleading their fraud claim, the plaintiffs in Barlow also failed to plead their claim with particularity. Courts routinely hold that a complaint, which asserts, in general terms, that all defendants engaged in the alleged misconduct, is insufficiently particular under CPLR § 3016(b). 12 Second, plaintiffs failed to identify any specific misrepresentation of material fact that either Katz or Luff had made to them. Instead, plaintiffs offered only general and conclusory allegations that defendants made “false representations” regarding Skytop’s revenues and its ability to pay wages and benefits. 13 As such, plaintiffs were unable to satisfy the first element of a fraud claim: the making of a misrepresentation or omission of a material fact. Footnotes See Principia Partners LLC v. Swap Fin. Group, LLC , 194 A.D.3d 584, 584 (1st Dept. 2021). El Toro Group, LLC v. Bareburger Group, LLC , 190 A.D.3d 536, 541 (1st Dept. 2021); Total Asset Recovery Servs. LLC v. Metlife, Inc. , 189 A.D.3d 519, 523 (1st Dept. 2020). Slip Op. at a*1 (citation omitted). Id. Id. Lama Holding Co. v. Smith Barney Inc. , 88 N.Y.2d 413, 421 (1996). Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). Id. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015). RKA Film Fin., LLC v. Kavanaugh , 2018 WL 3973391, at *3 (Sup. Ct., N.Y. County 2018) (quoting Shea v. Hambros PLC , 244 A.D.2d 39, 46 (1st Dept. 1998)). See also Gregor v. Rossi , 120 A.D.3d 447 (1st Dept. 2014). Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (citation omitted). Total Asset Recovery Servs. LLC v. Metlife, Inc. , 189 A.D.3d 519, 523 (1st Dept. 2020). Slip Op. at *1 (citing Principia Partners, 194 A.D.3d at 584). 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 is about usury, a topic that has previously been covered.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> .  Society’s disdain for usury was recently articulated by the Court of Appeals in Adar Bays, LLC v. GeneSYS ID, Inc. , 37 N.Y.3d 320 (2021), where the Court stated: Although the ancient laws relating to usury had religious and moral underpinnings, some of which may have carried into New York’s original usury law, the modern conception of our usury laws focuses on the protection of persons in weak bargaining positions from being taken advantage of by those in much stronger bargaining positions. Without doubt, New York’s voiding of usurious contracts can be harsh, perhaps especially in comparison to other states’ laws, but the penalty reflects the legislature’s consistent condemnation of the evils of usury. The forfeiture of interest and capital serves a strong deterrent effect—one the legislature has repeatedly affirmed. Adar Bays, 37 N.Y.3d at 331 (citations and internal quotation marks omitted).  In describing the historical perspectives of New York’s usury laws, the Adar Bays Court, noting “the legislature’s intention to deter loan-sharking,” stated that “ rganized criminal groups built large and highly lucrative money lending businesses in which they charged unconscionable rates of interest such as 250% or even 2000% per year.  Adar Bays, 37 N.Y.3d at 330 and 333. New York’s Penal Law § 190.40 , which sets forth when lenders are guilty of criminal usury in the second degree, a class E felony, provides that: A person is guilty of criminal usury in the second degree when, not being authorized or permitted by law to do so, he knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding twenty-five per centum per annum or the equivalent rate for a longer or shorter period. See also Roopchand v. Mohammed , 154 A.D.3d 986, 988 (2 nd Dep’t 2017). Usurious loans, as a matter of law, are void.  New York’s General Obligations Law § 5-511 ; see also Bakhash v. Winston , 134 A.D.3d 468, 469 (1 st Dep’t 2015) (“The subject note is usurious as a matter of law and, therefore is void.”); Roopchand , 154 A.D.3d at 588 (“A usurious contract is void and relieves the borrower of the obligation to repay principal and interest thereon”); Adar Bays , 37 N.Y.3d at 333 (“loans proven to violate the criminal usury statute are subject to the same consequence as any other usurious loans: complete invalidity of the loan instrument.”).  Further, “where a loan agreement is usurious on its face, usurious intent will be implied and usury will be found as a matter of law.”  Roopchand , 154 A.D.3d at 989; see also Blue Wolf Capital Fund II, L.P. v. American Stevedoring Inc. , 105 A.D.3d 178, 183 (1 st Dep’t 2013) (“If usury can be gleaned from the face of an instrument, intent will be implied and usury will be found as a matter of law.”).  The New York Court of Appeals has explained: Usurious intent, an essential element of usury, which is embodied in the statutory requirement that an unlawful rate of interest be knowingly taken is a question of fact.  It is the prevailing view that where usury does not appear on the face of the note, usury is a question of fact.  It has been properly observed: If the note or bond shows a rate of interest higher than the statutory lawful rate, it would be immaterial whether the lender actually intended to violate the law. His intent would be conclusively presumed. Freitas v. Geddes Savings and Loan Ass’n. , 63 N.Y.2d 254, 262 (1984) (citations, internal quotation marks and brackets omitted). Where the term of a loan is for less than one year the interest rate is annualized with the stated interest rate being for the period of the loan.  Bakhash , 134 A.D.3d at 469.  In this regard, the Bakhash Court stated: It is true that the stated rate on the four-month note is 12%. However, it does not say 12% per annum. Where, as here, the loan is for less than a year, the interest rate is annualized, and thus, the annual rate on the note is 36%, well above the criminal usury rate of 25%. Id ., at 469 (citation omitted). Frequently, courts must first determine whether a transaction is a loan before determining whether usury is applicable.  [Eds. Note: this Blog previously addressed this issue < here =">here"> and < here =">here"> .]  Recently, the Appellate Division, Second Department, in Crystal Springs Capital, Inc. v. Big Thicket Coin, LLC , addressed this issue.  The parties in Crystal Springs “entered into a written merchant agreement pursuant to which the plaintiff agreed to purchase and the … defendants agreed to sell $140,000 of the … defendants’ future receipts for the price of $90,000.”  The defendants defaulted in appearing in an action commenced by the plaintiff for breach of the agreement.  After a default judgment was entered, the defendants moved, inter alia , to vacate the judgment and to dismiss the action based on criminal usury.  The defendants appealed the motion court’s denial of the motion. On appeal, the Second Department reversed, finding that the motion court “should have granted that branch of the defendants’ motion which was to vacate the judgment in the interest of justice on the ground that the agreement constituted a criminally usurious loan.”  The Court noted that a party “is not necessarily required to establish a reasonable excuse in order to be entitled to vacatur in the interest of justice.”  (Citation and internal quotation marks omitted.) In discussing the law on usury, the Court stated that: The rudimentary element of usury is the existence of a loan or forbearance of money, and where there is no loan, there can be no usury, however unconscionable the contract may be. To determine whether a transaction constitutes a usurious loan, it must be considered in its totality and judged by its real character, rather than by the name, color, or form which the parties have seen fit to give it. Unless a principal sum advanced is repayable absolutely, the transaction is not a loan. Usually, courts weigh three factors when determining whether repayment is absolute or contingent: (1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy. A loan that is criminally usurious is void.  In applying the law to the facts of the case, the Second Department found that the defendants established that the parties’ agreement was criminally usurious and stated: The agreement and addendums thereto provided, among other things, that, in exchange for the purchase, the … defendants were obligated to authorize the plaintiff to automatically debit $4,000 from their bank account each business day, the plaintiff was “under no obligation” to reconcile the payments to a percentage amount of the … defendants’ sales rather than the fixed daily amount, and the plaintiff was entitled to collect the full uncollected purchase amount plus all fees due under the agreement in the event of the … defendants’ default by changing their payment processing arrangements or declaring bankruptcy. Together, these terms established that the agreement was a loan, pursuant to which repayment was absolute, rather than a purchase of future receipts under which repayment was contingent upon the … defendants’ actual sales. The plaintiff does not dispute that the agreement effected an annual interest rate exceeding the criminally usurious threshold of 25% (see Penal Law § 190.40). Accordingly, the Supreme Court should have granted that branch of the defendants’ motion which was to vacate the judgment in the interest of justice on the ground that the agreement constituted a criminally usurious loan.  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 Document discovery is an integral part of any litigation. Documents form the foundation of discovery plans and strategies, and, more significantly, proof at trial. Consequently, litigants must search for, collect, and preserve their documents, particularly electronically stored information (“ESI”), from the moment they are aware of their involvement, or potential involvement, in a lawsuit ( i.e. , when there is a reasonable anticipation that a lawsuit may be filed). When a person or company withholds, alters, hides, loses, or destroys evidence relevant to the litigation, either intentionally or negligently, it is considered “spoliation” of evidence and can lead to sanctions against the party that is guilty of spoliation including, but not limited to, dismissal of the action, striking a pleading, assessing monetary penalties, or permitting the trier of fact to take a negative inference against the spoliating party. The negative inference at trial can be very damaging to a party because it permits the trier of fact to infer that there was something to hide and the missing evidence is unavailable because it negatively impacted that party’s affirmative case or defense. A party that seeks sanctions for spoliation of evidence must show that the party having control over the evidence possessed an obligation to preserve it at the time of its destruction, that the evidence was destroyed with a “culpable state of mind,” and “that the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense.” 1 Where the evidence is determined to have been intentionally or wilfully destroyed, the relevancy of the destroyed documents is presumed. 2 On the other hand, if the evidence is determined to have been negligently destroyed, the party seeking spoliation sanctions must establish that the destroyed documents were relevant to the party’s claim or defense. The party requesting sanctions for spoliation has the burden of demonstrating that a litigant intentionally or negligently disposed of critical evidence, and fatally compromised the movant’s ability to prove a claim or defense. 3 Under certain circumstances, the failure of a party to institute a litigation hold 4 or to implement any uniform or centralized plan to preserve data or even the various devices used by the key players in the transaction might demonstrate gross negligence, which would gave rise to a rebuttable presumption that the spoliated documents were relevant. 5 Sanctions for discarding items in good faith and pursuant to a company’s normal business practices are inappropriate in the absence of pending litigation or notice of a specific claim. 6 However, where the party failing to preserve evidence is placed on notice of litigation within or before the time period when the requested evidence is subject to automatic destruction, a sanction will be appropriate. 7 In National Convention Servs., LLC v. FB Intl., Inc. , 2023 N.Y. Slip Op. 05692 (1st Dept. Nov. 14, 2023) ( here ), the Appellate Division, First Department examined a spoilation motion in the context of the destruction of documents resulting from circumstances beyond one’s control – in that case, Superstorm Sandy and a flood in the room in which the documents were stored.  The documents at issue were lost or damaged due to two separate floods occurring in NCS’ basement (due to Superstorm Sandy and burst pipes). Also at issue were former employee emails, some of which were lost due to an electrical outage on the server in which they were housed. Defendant sought sanctions due to spoliation. The motion court denied the motion. Defendant appealed. The First Department affirmed.  The Court held that defendant did not demonstrate a culpable state of mind with regard to the lost documents and emails. The Court noted that the documents in question were “wet, soiled, and unrecognizable” due to the effects of Superstorm Sandy, a fact that FB International readily acknowledged. 8 The Court also noted that the emails had been damaged due to a power outage affecting the network server on which the emails were stored. 9 The Court concluded that, based upon these circumstances, and the proof submitted, “defendant was unable to demonstrate a culpable state of mind and relevancy to the claims or defenses at issue.” 10 Footnotes Voom HD Holdings LLC v. Echostar Satellite L.L.C. , 93 A.D.3d 33, 45 (1st Dept. 2012) (quoting Zubulake v. UBS Warburg LLC , 220 F.R.D. 212, 220 (S.D.N.Y. 2003); Pegasus Aviation I, Inc. v. Varig Logistica S.A. , 26 N.Y.3d 543, 547-48 (2015). Zubulake , 220 F.R.D. at 220. Utica Mut. Ins. Co. v. Berkoski Oil Co. , 58 A.D.3d 717, 718 (2d Dept. 2009) (citation and quotation marks omitted); Mendez v. La Guacatala, Inc. , 95 A.D.3d 1084, 1085 (2d Dept. 2012). A litigation hold is a directive to maintain and preserve all documents relevant to a lawsuit or potential lawsuit. Essentially, parties and non-parties are instructed that nothing should be deleted, removed, hidden, modified, or discarded by anyone in anticipation, or during the pendency, of a litigation. E.g. , VOOM HD Holdings , 93 A.D.3d at 45; AJ Holdings Group, LLC v. IP Holdings, LLC , 129 A.D.3d 504, 505 (1st Dept. 2015). See , e.g. , Conderman v Rochester Gas & Elec. Corp. , 262 A.D.2d 1068 (4th Dept. 1999); Gogos v. Modell’s Sporting Goods, Inc. , 87 A.D.3d 248 (1st Dept. 2011)). See Strong v. City of N.Y. , 112 A.D.3d 15 (1st Dept. 2013). Slip Op. at *1. 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: Jeffrey M. Haber It is well-settled that a corporation (or limited liability company) acts through its officers, directors and owners. As a result, these individuals are normally not liable for the debts incurred by the corporation (or limited liability company). However, when an officer, director or shareholder abuses the corporate form to perpetrate a wrong or injustice against a third party, courts will intervene on behalf of the third party to hold the corporate actor personally liable. 1 “The concept of piercing the corporate veil is an exception to general rule.” 2 Courts will invoke this exception only where “necessary to prevent fraud or to achieve equity.” 3 “Generally, a plaintiff seeking to pierce the corporate veil must show that (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury.” 4 For example, the plaintiff must show that the officer, director or member used the corporation (or company) for his/her personal benefit and the corporation (or company) was nothing more than an “alter ego” or instrumentality of the officer or member. 5 Conclusory allegations of domination and control are insufficient. 6 The plaintiff must demonstrate that there was a unity of interest and control between the defendant and the entity such that they are indistinguishable. Factors to consider in determining whether an individual has abused the corporate form include failure to adhere to corporate formalities, inadequate capitalization, commingling of assets and personal use of corporate funds for personal benefit. 7 No one factor controls the consideration. 8 In addition to the foregoing factors, a plaintiff must establish a causal connection between the domination and control of the corporate entity and the injury complained of. 9 Notably, courts recognize “that with respect to small, privately-held corporations, ‘the trappings of sophisticated corporate life are rarely present,’” and, therefore, they “must avoid an over-rigid ‘preoccupation with questions of structure, financial and accounting sophistication or dividend policy or history.’” 10 In Groth v. Ferrante , 2023 N.Y Slip Op. 05592 (2d Dept. Nov. 8, 2023) ( here ), the Appellate Division, Second Department affirmed the dismissal of veil piercing claims against the individuals of a corporate judgment debtor. Groth arose from a $150,000 loan that plaintiffs extended to defendant Everest Merchant Funding, Inc. (“EMF”) in March 2013. The loan was secured by a note. Richard Ferrante and Stuart Schoeman (together, the “Individual Defendants”), as shareholders of EMF, did not personally guarantee the debt. EMF ultimately defaulted on the note, and in a prior action commenced by plaintiffs against EMF to recover on the note, plaintiffs obtained a default judgment against EMF in the total sum of $235,354.60. In December 2018, plaintiffs commenced an action against EMF, Ferrante, and Schoeman pursuant to CPLR article 52 to, among other things, enforce the judgment entered against EMF. Plaintiffs sought to pierce EMF’s corporate veil and enforce the default judgment against Ferrante and Schoeman personally. Plaintiffs further sought to set aside certain cash transfers by EMF, which were made primarily to pay salaries, on the ground that those transfers were fraudulent conveyances pursuant to Debtor and Creditor Law §§ 273-275. The Individual Defendants moved for summary judgment dismissing the complaint insofar as asserted against them. The motion court granted the motion on the grounds that the transfers of funds by EMF were not without consideration and that plaintiffs’ allegations of fraudulent inducement were not properly before the court, since no cause of action sounding in fraudulent inducement was alleged in the pleadings. On appeal, the Second Department affirmed. The Court found that there were “some corporate formalities were observed” by EMF sufficient to withstand plaintiffs’ veil piercing efforts. 11 For example, said the Court, “EMF filed tax returns and held an annual shareholders’ meeting in 2014” and “had a functioning board of directors” that “plaintiff Stephen F. Groth served on … pursuant to a corporate resolution dated January 6, 2014.” 12 The Court also held plaintiffs’ allegation of commingling of personal and corporate assets insufficient to support veil piercing. The Court found that “Ferrante’s infusion of $70,500 of his personal funds into EMF to increase EMF’s value,” negated the claim that he improperly took corporate funds for his personal benefit. 13 Accordingly, the Court concluded that “the individual defendants established, prima facie, that the circumstances present here do not warrant piercing the corporate veil ….” 14 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 Under the Private Securities Litigation Reform Act of 1995 (“PSLRA), a mandatory stay of discovery is imposed “ n any private action arising under” the Securities Act of 1933 (“Securities Act”) “during the pendency of any motion to dismiss.” 15 U.S.C. § 77z-1(b)(1). In Camelot Event Driven Fund v. Morgan Stanley & Co. LLC , 2023 N.Y. Slip Op. 05534 (1st Dept. Nov. 2, 2023) ( here ), the Appellate Division, First Department was asked to determine whether the automatic stay under the PSLRA remains in effect “during the pendency” of an interlocutory appeal from the denial of a motion to dismiss. As discussed below, the Court held that it does not. Plaintiff, Camelot Event Driven Fund (“Camelot”), commenced the action in August 2021, against Defendants for violations of the Securities Act in connection with public offerings of preferred and common stock of ViacomCBS Inc. (“Viacom”) in March 2021. Following proceedings for the appointment of a lead plaintiff, Plaintiffs filed the operative complaint. Thereafter, in December 2021, Defendants and Viacom filed motions to dismiss.  On February 7, 2023, the motion court denied the motion as to Defendants but granted Viacom’s motion. Thereafter, discovery commenced. Five months after the motion court issued its decision, Defendants filed an order to show cause that discovery be stayed pending their appeal of the motion court’s order denying their motions. The motion court denied the motion. In doing so, the motion court concluded that “ nasmuch as Court has already issued a decision with respect to the motion to dismiss, and there is no longer a pending motion to dismiss, it would be contrary to and inconsistent with the express language of the PSLRA for the Court to further stay discovery.” Defendants appealed. On appeal, the First Department unanimously affirmed. As an initial matter, the Court held that the section of the PSLRA relating to the automatic stay of discovery ( i.e. , 15 U.S.C. § 77z-1(b)(1)), “applies to any private action, whether brought in state or federal court” 1 as opposed to subsection (a) of 15 U.S.C. § 77z-1, which “applies only to actions in federal court.” This ruling was significant because an issue was raised by the parties as to whether the stay of discovery under the PSLRA applied in state court proceedings and, therefore, whether the question presented was properly before the Court ( i.e. , whether the automatic stay under the PSLRA remains in effect “during the pendency” of an interlocutory appeal from the denial of a motion to dismiss). 2 Having concluded that 15 U.S.C. § 77z-1(b)(1) applied in state court proceedings, the Court turned its attention to the question presented. In that regard, the Court held that 15 U.S.C. § 77z-1(b)(1) “does not apply to stay discovery pending appeals from denials of motions to dismiss.” Looking at the “plain language” of the statute, the Court held that the stay did not apply to pending appeals: As noted, 15 USC § 77z-1(b)(1) states that discovery shall be stayed “during the pendency of any motion to dismiss.” 3 Thus, its plain language provides for a stay of discovery only while a motion to dismiss is awaiting disposition. Here, because defendants’ motions to dismiss have been decided, the stay no longer applies. They are not entitled to a stay of discovery pending their appeals from the denial of the motions. 4 The Court said that its “determination consistent with the statute’s purpose, which ‘is to prevent abusive, expensive discovery in frivolous lawsuits by postponing discovery until after the Court has sustained the legal sufficiency of the complaint.’” 5 Thus, concluded the Court, “ n a case where the court already has sustained the legal sufficiency of the complaint,” as in Camelot , “this purpose has been served.” 6 Footnotes Slip Op. at *1. Plaintiffs maintained that 15 U.S.C. § 77z-1(b)(1) was a procedural rule that applied only in federal court. Defendants maintained that the plain meaning of the statute mandated the application of the automatic stay in both state and federal court. Id. Id. Id. (quoting In re Salomon Analyst Litig. , 373 F. Supp. 2d 252, 254-255 (S.D.N.Y. 2005) (internal quotation marks and citation omitted); see also In re Lernout & Hauspie Sec. Litig. , 214 F. Supp. 2d 100, 106 (D. Mass. 2000)). 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 This Blog has written numerous articles about RPAPL 1304 .  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> and the Blog articles linked to therein.  By way of brief background as discussed in prior articles, RPAPL 1304 requires that at least ninety days before commencing legal action against a borrower with respect to a “home loan” (as defined in the relevant statutes), a lender must: send written notice to the borrower by certified and regular mail that the loan is in default; provide a list of approved housing agencies that offer free or low-cost counseling; and, advise that legal action may be commenced after ninety days if no action is taken to resolve the matter.  One purpose of RPAPL 1304 is to enable defaulted borrowers to “benefit from the information provided in the notice and the 90–day period during which the parties could attempt to work out the default without imminent threat of a foreclosure action, in an effort to further the ultimate goal of reducing the number of foreclosures”.  CIT Bank N.A. v. Schiffman , 36 N.Y.3d 550, 555 (2021) (citation and internal quotation marks omitted). The failure of a lender to comply with RPAPL 1304 will result in the dismissal of a foreclosure complaint. S ee, e.g., U.S. Bank N.A. v. Beymer , 161 A.D.3d 543 (1 st Dep’t 2018).  Indeed, “proper service of the notice containing the statutorily mandated content is a condition precedent to the commencement of a foreclosure action.”  U.S. Bank N.A. v. Taormina , 187 A.D.3d 1095, 1096 (2 nd Dep’t 2020) (citations omitted).  When failure to comply with RPAPL 1304 is raised as an affirmative defense, the foreclosing lender must demonstrate its compliance with the statute as part of its prima facie case.  Bank of America, N.A. v. Wheatly , 158 A.D.3d 736, 737 (2 nd Dep’t 2018) (citations omitted).  However, a “defense based on noncompliance with RPAPL 1304 may be raised at any time during the action.”  Nationstar Mortgage, LLC v. Matles , 185 A.D.3d 703, 706 (2 nd Dep’t 2020) (citations and internal quotation marks omitted).  In Wells Fargo Bank, N.A. v. Davidson , 202 A.D.3d 880 (2 nd Dep’t 2022), in reversing a judgment of foreclosure and sale and granting summary judgment to the borrowers, the Court  stated that “ ontrary to the contention, the did not waive their contention that the failed to comply with RPAPL 1304 as a defense based on noncompliance with RPAPL 1304 may be raised at any time prior to the entry of a judgment of foreclosure and sale.”  Davidson , 202 A.D.3d at 882 (citations, internal quotation marks and brackets omitted); see also U.S. Bank Nat. Ass’n v. Zakarin , 208 A.D.3d 1275, 1277 (2 nd Dep’t 2022).  A source of frequent litigation regarding RPAPL 1304 notices centers on the sufficiency of the notice itself.  For example, in Wells Fargo Bank, N.A. v. Yapkowitz , 199 A.D.3d 126 (2 nd Dep’t 2021), the Court, after surveying and analyzing case law on RPAPL 1304, held that the requirements of RPAPL 1304 were not satisfied where a single notice is addressed to more than one borrower because each borrower is entitled to a separate notice in its own envelope addressed to each borrower.  [Eds. Note: this blog wrote about Yapkowitz promptly upon the decision being rendered < here =">here"> .]  The First Department, in U.S. Bank Nat. Ass’n v. Maioriello , 207 A.D.3d 428 (2022), adopted the Second Department’s holding in Yapkowitz when, citing to Yapkowitz , stated that “ laintiff’s mailing of a 90-day notice jointly addressed  to both borrowers did not comply with RPAPL 1304.”  Maioriello , 207 A.D.3d at 428. On October 26, 2023, the Third Department, in Deutsche Bank Nat. Trust Co. v. Zatari , adopted the Second Department’s holding in Yapkowitz regarding jointly addressed RPAPL 1304 notices and, in so doing, stated: As to the merits, contend that failed to properly serve with the requisite 90-day notice of foreclosure inasmuch as the notices needed to be sent to each individually, rather than in the same envelope. RPAPL 1304 requires that "at least <90> days before a lender, an assignee or a mortgage loan servicer commences legal action against the borrower, or borrowers at the property address and any other address of record, including mortgage foreclosure, such lender, assignee or mortgage loan servicer shall give notice to the borrower" (RPAPL 1304 <1> ). Notice must be sent "by registered or certified mail and also by first-class mail to the last known address of the borrower, and to the residence that is the subject of the mortgage," and "shall be sent in a separate envelope from any other mailing or notice" (RPAPL 1304 <2> . Proper service of the RPAPL 1304 notice containing the statutorily-mandated content is a condition precedent to the commencement of a foreclosure action and the plaintiff's failure to show strict compliance requires dismissal.  Although this Court has not passed on the issue of whether joint borrowers can receive notice in the same envelope, the First and Second Departments have ( see U.S. Bank N.A. v Maioriello , 207 AD3d 428, 428 <1st dept 2022> ; Wells Fargo Bank, N.A. v Yapkowitz , 199 AD3d 126, 133-136 <2d dept 2021> ). Specifically, the Second Department has interpreted the "separate envelope" requirement set forth in RPAPL 1304 (2) to also mean that notices cannot be sent to more than one borrower in the same envelope, and that each borrower should receive separate notices ( see Wells Fargo Bank, N.A. v Yapkowitz , 199 AD3d at 133-136). The First Department has since applied this holding ( see U.S. Bank N.A. v Maioriello , 207 AD3d at 428). As the Second Department noted, the language of RPAPL 1304 (1) is careful to distinguish a borrower, singular, from borrowers, plural ( see Wells Fargo Bank, N.A. v Yapkowitz , 199 AD3d at 134). However, RPAPL 1304 (2), which requires that notices be sent in separate envelopes, only discusses "borrower," singular ( see Wells Fargo Bank, N.A. v Yapkowitz , 199 AD3d at 134; RPAPL 1304 <2> ). In that case, the Court also drew attention to the fact that, although it is possible that whichever borrower reads the notice would alert the other borrower of the mailing, this is not always what occurs ( see Wells Fargo Bank, N.A. v Yapkowitz , 199 AD3d at 135). Accordingly, we now also adopt the holding of the Second Department in Wells Fargo Bank, N.A. Thus, given that the requisite 90-day notices were jointly addressed to both borrowers, did not comply with RPAPL 1304 ( see U.S. Bank N.A. v Maiorello , 207 AD3d at 428; Wells Fargo Bank, N.A. v Yapkowitz , 199 AD3d at 134). As such, given that failed to comply with RPAPL 1304, Supreme Court erred in denying cross-motion for summary judgment dismissing the complaint and granting motion confirming the referee's report and granting the foreclosure and sale of the property.  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.