By: Jeffrey M. Haber We have often written about the SEC’s whistleblower program and, in particular, the success of the program with respect to detecting and preventing violations of the federal securities laws. The success of the program depends, in large part, on the ability of would-be whistleblowers to have the freedom to report wrongdoing without fear of reprisal. Taking steps to impede an employee or former employee from sharing information with the SEC impairs this free flow of information to the Commission. To ensure the freedom to communicate, the SEC has cracked down on companies that use severance agreements and other types of employment contracts to silence and discourage employees from reporting wrongdoing to the Commission. 1 In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) to combat illegal and fraudulent conduct on Wall Street and promote compliance with the federal securities and commodities laws.  The Dodd-Frank Act contains whistleblower provisions that authorize the Commission to pay substantial cash rewards to whistleblowers that voluntarily provide the SEC with information about securities fraud and other violations of the securities laws, including the Foreign Corrupt Practices Act.  To fulfill the purpose of the Dodd-Frank Act, the Commission adopted Rule 21F-17, 2  which provides in relevant part: (a) 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. Rule 21F-17 applies to any policy or procedure, or agreement, such as confidentiality, severance, and non-disclosure agreements, that may impede an employee or former employee from providing information to the SEC about a securities law violation.  Despite being effective for more than 12 years, many companies have ignored the mandate of Rule 21F-17. In this regard, they have used severance agreements and other types of employment contracts to silence and discourage employees from reporting violations of the securities laws to the Commission. That was the case in the Matter of D. E. Shaw & Co, L.P. , Securities Exchange Act of 1934, Release No. 98641 (Sept. 29, 2023). Matter of D. E. Shaw & Co, L.P. On September 29, 2023, the SEC announced ( here ) that it settled charges against New York-based registered investment adviser D. E. Shaw & Co., L.P. (“DESCO”) for impeding whistleblowing by requiring employees to sign agreements prohibiting the disclosure of confidential corporate information to third parties, without an exception for potential SEC whistleblowers, and by requiring departing employees to sign releases affirming that they had not filed any complaints with any government agency in order for the employees to receive deferred compensation. DESCO agreed to pay $10 million to settle the SEC’s charges . The SEC found ( here ) that, from at least 2011 through 2019, DESCO required new employees to sign agreements that prohibited them from disclosing confidential information to anyone outside the company unless authorized by DESCO or required by law or court order. Confidential information was broadly defined to include any information gained in the course of employment that could reasonably be expected to be damaging to DESCO if disclosed to third parties. In addition, according to the SEC, from at least 2011 through 2023, DESCO required approximately 400 of its departing employees to sign releases affirming that they had not filed any complaints with any governmental agency, department, or official in order for them to receive deferred compensation and other benefits sometimes worth millions of dollars. According to the SEC, in 2017, DESCO circulated a firm-wide email notifying employees that they were not prohibited from communicating with regulators regarding possible violations of law and that notice to DESCO was not required. However, said the SEC, DESCO did not include similar whistleblower protection language in its employment agreements until 2019 and in its releases until 2023—after the SEC’s investigation commenced. “Entities employing confidentiality, separation, employment and other related agreements should take careful notice of today’s enforcement action,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “The Commission takes seriously the enforcement of whistleblower protections and those drafting or using these types of agreements should take equally serious their obligations to ensure that they don’t impede whistleblowers from contacting the Commission.” “Protected by federal law, whistleblowers play a significant role in uncovering fraud and other illegality in the securities markets, particularly with respect to registered entities regulated by the Commission,” said Sheldon L. Pollock, Associate Director of the SEC’s New York Regional Office. “The SEC remains committed to ensuring their unfettered ability to provide information to further our investigations.” In its cease-and-desist order ( here ), the SEC found that DESCO violated Rule 21F-17(a) of the Securities Exchange Act of 1934. Without admitting or denying the SEC’s findings, DESCO agreed to be censured, cease and desist from violating the whistleblower protection rule, and pay a $10 million civil penalty. Footnotes In April 2015, the SEC brought the first enforcement action for a violation of the whistleblower protection rule based on a company’s use of a restrictive confidentiality agreement. See In the Matter of KBR, Inc. , Exchange Act Release No. 74619 (Apr. 1, 2015). This Blog wrote about that enforcement action here . Since 2015, the SEC has instituted nearly 20 additional enforcement actions charging violations of the rule. This Blog has examined some of those enforcement actions here , here ,  here ,  here , and  here . 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 In New York, foreign entities – that is, corporations, limited liability companies and partnerships authorized to do business in another jurisdiction or country – are required to register to business with the Secretary of State. 1 The failure to receive such authority deprives the foreign entity of the ability to affirmatively access the courts of New York and subjects any action commenced by the foreign entity to dismissal. 2 The purpose of the registration requirement is to regulate foreign companies that are conducting business within New York State so that they are not doing business under more advantageous terms than “those allowed a corporation of this State.” 3 When applying BCL § 1312(a), the subject of today’s article, the relevant inquiry is whether the foreign entity is “doing business” in the State. The test of doing business in New York for the purpose of BCL § 1312(a) “is not the same as that for jurisdictional purposes.” 4 “Both raise constitutional questions, but the latter involves the due process clause while the former involves the interstate commerce clause.” 5 In construing statutes that license foreign corporations to do business within New York State, the courts try to avoid any interference by the State with interstate commerce. 6 Whether a company is “doing business” in New York “depends upon the particular facts of each case with inquiry into the type of business activities being conducted.” 7 Moreover, “whether was doing business in New York” is determined by looking “at the time the action was commenced.” 8 Notably, “not all business activity engaged in by a foreign corporation constitutes doing business in New York.” 9 A foreign corporation is permitted to transact “some kinds of business within the state without procuring a certificate” authorizing it to conduct business in New York. 10 In order for a foreign corporation to be doing business in New York within the context of BCL § 1312, “the intrastate activity of the foreign corporation be permanent, continuous, and regular.” 11 The entity’s activities cannot be “merely casual or occasional.…” 12 New York courts consider a number of factors, both quantitative and qualitative, when considering the entity’s activity in the State. 13 Among the factors the courts consider are: (a) whether the entity maintains a physical presence or has employees located within the State; 14 (b) the frequency and regularity of activities within the State; 15 and (c) the volume and nature of the activities within the State. 16 Merely entering into a single contract, engaging in an isolated piece of business, or engaging in an occasional undertaking will not suffice to invoke application of BCL § 1312. 17 Similarly, “the solicitation of business and facilitation of the sale and delivery of merchandise incidental to business in interstate and/or international commerce is typically not the type of activity that constitutes doing business in the state within the contemplation of section 1312 (a).” 18 However, regularly and continuously entering the State to solicit, complete and manage sales to customers in New York may constitute doing business in the State. 19 The party seeking dismissal under BCL § 1312(a) must show that the business activities within the State were so systematic and regular as to manifest continuity of activity. 20 Absent sufficient evidence to establish that a plaintiff is doing business in the State, “the presumption is that the plaintiff is doing business in its State of incorporation … and not in New York.” 21 Finally, if the foreign business entity is found to have been continuously and regularly conducting business in the State, the courts often refrain from dismissing the action. 22 Instead, the courts conditionally grant the dismissal motion and provide the plaintiff with a reasonable time period to cure its deficiency under BCL § 1320. 23 In Central Care Solutions, LLC v. Grand Great Neck, LLC , 2023 N.Y. Slip Op. 04749 (2d Dept. Sept. 27, 2023) ( here ), the Appellate Division, Second Department considered the foregoing principles in modifying the dismissal of a complaint with prejudice on BCL § 1312(a) grounds. Central Care Solutions is an action to recover damages for, inter alia , breach of contract. The action was commenced in January 2020 by Clean-Tex Services, Inc. (“Clean-Tex”) and two other plaintiffs.  In March 2020, defendants moved to dismiss the amended complaint insofar as asserted by Clean-Tex on the ground that, inter alia , Clean-Tex lacked the capacity to sue pursuant to BCL § 1312(a), as it was a foreign corporation doing business in New York without registering to do so. Clean-Tex opposed the motion.  On November 2, 2020, the motion court granted the motion with respect to Clean-Tex, directing that Clean-Tex take all necessary actions to obtain authorization to conduct business in New York within six months or else the amended complaint insofar as asserted by Clean-Tex would be dismissed with prejudice upon defendants’ submission of a proposed order of dismissal. Clean-Tex did not obtain authorization to conduct business in New York by the court-ordered deadline of April 29, 2021. However, on April 23, 2021, Clean-Tex submitted an affirmation to the motion court, with notice to defendants, acknowledging that it had not yet obtained the authorization and explaining its efforts so far. In this affirmation, without a notice of motion, Clean-Tex requested a 90-day extension to comply with the motion court’s November 2, 2020 order. On April 30, 2021, one day after the court-ordered deadline, defendants submitted a proposed order and argued that the amended complaint insofar as asserted by Clean-Tex should be dismissed with prejudice. In response, Clean-Tex once again requested an extension to comply with the order and argued that dismissal with prejudice would be a disproportionate and drastic remedy. On May 17, 2021, the motion court entered judgment dismissing the amended complaint insofar as asserted by Clean-Tex with prejudice. On June 8, 2021, 40 days past the court-ordered deadline, Clean-Tex obtained its authorization to conduct business in New York. As noted, on appeal, the Second Department modified the judgment to make the dismissal without prejudice. In a terse opinion, after briefly discussing the purpose of BCL § 1312(a), and noting “the clear preference for disposition of cases on the merits,” 24 the Court held that, “ nder all of the circumstances present here, … the Supreme Court … improvidently exercised its discretion in” dismissing the amended complaint as asserted by Clean-Tex “with prejudice”. 25 Footnotes See , e.g. , BCL § 1312(a). See United Envtl. Techniques, Inc. v. State Dept. of Health , 88 N.Y.2d 824, 825 (1996) (finding that foreign corporation was not registered to do business in New York and therefore lacked capacity to sue). Von Arx, A.G. v. Breitenstein , 52 A.D.2d 1049, 1050 (4th Dept. 1976); see also National Lighting Co. v. Bridge Metal Indus., LLC , 601 F. Supp. 2d 556, 566 (S.D.N.Y. 2009) (additional citation omitted). Great White Whale Adver., Inc. v. First Festival Prods. , 81 A.D.2d 704, 706 (3d Dept. 1981). Id. Id. (citations omitted). Id. Remsen Partners, Ltd. v. Southern Mgmt. Corp. , No. 01 Civ. 4427, 2004 WL 2210254, at *3 (S.D.N.Y. 2004) (citation and internal quotation marks omitted) (alteration in original). Netherlands Shipmortgage Corp. v. Madias , 717 F.2d 731, 735-36 (2d Cir. 1983). Globaltex Group, Ltd. v. Trends Sportswear, Ltd. , No. 09-CV-235, 2009 WL 1270002, at *3 (E.D.N.Y. May 6, 2009) (quoting Int’l Fuel & Iron v. Donner Steel , 242 N.Y. 224, 229 (1926)). Manney v. Intergroove Tontrager Vertriebs GMBH , No. 10 Civ. 4493, 2011 WL 6026507, at *8 (E.D.N.Y. Nov. 30, 2011) (quoting Netherlands Shipmortgage , 717 F.2d at 736) (alteration in original). United Arab Shipping Co. (S.A.G.) v. Al-Hashim , 176 A.D.2d 569, 570 (1st Dept. 1991); see also Maro Leather Co. v Aerolineas Argentinas , 161 Misc. 2d 920, 923 (Sup. Ct., App. Term 1st Dept. 1994) (“where a corporation’s activities within New York are merely incidental to its business in interstate and international commerce, BCL § 1312(a) is not applicable.”); Schwarz Supply Source v. Redi Bag USA, LLC , 64 A.D.3d 696, 696-97 (2d Dept. 2009) (same); Paper Mfrs. Co. v. Ris Paper Co., Inc. , 86 Misc. 2d 95, 98 (Civ. Ct., N.Y. Cty. 1976) (noting that if a “foreign corporation is engaged in local business on more than an isolated or accidental basis, it must comply with the statute” and obtain authorization before bringing suit). Netherlands Shipmortgage , 717 F.2d at 738. Uribe v. Merchants Bank of New York , 266 A.D.2d 21, 21 (1st Dept. 1999) (Plaintiff was not doing business where it maintained no office or telephone listing, owned no real property and had no employees in the State). G.P. Exports v. Tribeca Design , 147 A.D.3d 655, 656 (1st Dept. 2017) (a single business transaction within the State did not warrant the application of BCL § 1312(a)). United Arab Shipping , 176 A.D.2d at 570 (Plaintiff was doing business within the State where its New York office employed approximately 17 full-time employees, actively solicited business, conducted sales activities, negotiated and executed contracts, and generated substantial in-state revenue). Netherlands Shipmortgage , 717 F.2d at 738; Von Arx , 52 A.D.2d at 1049; Airline Exch., Inc. v. Bag , 266 A.D.2d 414, 415 (2d Dept. 1999) (having a bank account, occasionally using an office in the State, and engaging in three transactions in the State, did not support a finding that the business activity was so systematic and regular and essential to its corporate activities as to constitute doing business in New York); 8430985 Canada Inc. v. United Realty Advisors LP , 148 A.D.3d 428 (1st Dept. 2017) (an investment vehicle not subject to the registration requirements of BCL § 1312(a)). Digital Ctr., S.L. v. Apple Indus., Inc. , 94 A.D.3d 571, 572 (1st Dept. 2012) (citation omitted). Highfill, Inc. v. Bruce & Iris, Inc. , 50 A.D.3d 742, 744 (2d Dept. 2008) (corporation was doing business where its regional vice president regularly sent employees to New York to manage “special sales,” and made approximately $6,600,000 in New York sales over several years). JPMorgan Chase Bank, N.A. v. Didato , 185 A.D.3d 801, 802-803 (2d Dept. 2020); Maro Leather , 161 Misc. 2d at 923. Cadle Co. v. Hoffman , 237 A.D.2d 555 (2d Dept. 1997); JPMorgan Chase , 185 A.D.3d at 803; Airline Exch. , 266 A.D.2d at 415. Tri-Term. Corp. v. CITC Indus., Inc. , 78 A.D.2d 609 (1st Dept. 1980). E.g. , Showcase Limousine, Inc. v. Carey , 269 A.D.2d 133, 134 (1st Dept. 2000), mod in part , 273 A.D.2d 20 (1st Dept. 2000); Uribe , 266 A.D.2d at 22 (noting that the failure of the plaintiff to register with the State may be cured prior to the resolution of the action); Credit Suisse Int’l v. URBI, Desarrollos Urbanos, S.A.B. de C.V. , 41 Misc. 3d 601, 604 (Sup. Ct., N.Y. County 2013) (ordering plaintiff to comply with BCL § 1312 within 60 days or face dismissal of its complaint). Slip Op. at *1 (citations omitted). Id. (citations omitted). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber “The doctrine of forum non conveniens permits a US court to decline to exercise its judicial jurisdiction if the court would be a seriously inconvenient forum and if an adequate alternative forum exists.” 1 The doctrine presupposes at least two forums in which the defendant is amenable to process; the doctrine furnishes criteria for choice between them. 2 “The forum non conveniens determination is committed to the sound discretion of the trial court. It may be reversed only when there has been a clear abuse of discretion.” 3 Under CPLR § 327, which codified the common law doctrine of forum non conveniens , a court may dismiss an action where “in the interest of substantial justice the action should be heard in another forum.” “The doctrine is based upon justice, fairness and convenience . . . and the burden is on the party challenging the forum to demonstrate that the action would be best adjudicated elsewhere.” 4 Among the factors to be considered are the residence of the parties, the location of the transaction giving rise to the cause of action, the applicability of the laws of another state or country, the location of the witnesses and any pending discovery, the burden on the New York courts, the potential hardship to the defendant, and the unavailability of an alternative forum where the plaintiff may bring suit. 5 “No one factor is controlling,” since the doctrine is flexible in application and “based on the facts and circumstances of each case.” 6 In Brandwein v. Hartig , 2023 N.Y. Slip Op. 04711 (1st Dept. Sept. 26, 2023) ( here ), the Appellate Division, First Department applied the foregoing principles in affirming the dismissal of an action involving Israeli defendants. Brandwein v. Hartig Background Brandwein concerned alleged financial wrongdoing by defendants. Plaintiffs are New York residents, who claimed to be the “Personal Representatives” of the Estate of Zehava Greenberg (“Greenberg” or “Decedent”). At the time of her death in Israel in December 2019, Greenberg was an Israeli citizen, who resided in Jerusalem for several years.  Defendant Michael Hartig (“Defendant”) is the nephew of the Decedent and of Sheldon Greenberg (“Sheldon”), who predeceased the Decedent in Israel. He died in September 2019. Hartig resides in Pennsylvania, though plaintiffs maintained that he was a New York resident. Defendant Koatz is an attorney residing in New York. Plaintiffs alleged that while Sheldon was alive, Defendant manipulated him to use marital assets to purchase an apartment in Jerusalem, without Decedent’s permission, allegedly in violation of Israeli law. According to Plaintiffs, following the purchase of the apartment by Sheldon, Defendant put the apartment in his name. Thereafter, Sheldon and Decedent moved into the Jerusalem apartment.  Plaintiffs claimed that after the purchase of the apartment, while Sheldon was still alive, Defendants allegedly created a fake power of attorney from Decedent to Defendant in order to steal Decedent’s money.  Plaintiffs also alleged that, beginning in August 2019, Defendant improperly obtained funds from a joint bank account maintained by Sheldon and the Decedent, as well as an account in Sheldon’s name. The accounts were maintained by a bank in New York. According to Plaintiffs, Defendant obtained control of the marital bank account and Sheldon’s bank account, while they were both alive, and purportedly stole money from them. Plaintiffs initially filed a complaint against Defendants in the Southern District of New York on October 16, 2020. Among other things, Plaintiffs alleged causes of action for fraud, financial abuse, theft, conversion, and unjust enrichment. Plaintiffs later withdrew the federal action.  Thereafter, Plaintiffs filed an action in state court, asserting similar allegations and causes of action. Defendants moved to dismiss the complaint, pursuant to CPLR §§ 3211(a)(1)(2)(3) and (7) and CPLR § 327(a). On July 12, 2022, the motion court granted defendants’ motion on the grounds that New York was an inconvenient forum for the action.  The First Department’s Decision As noted, the First Department affirmed the motion court’s order, dismissing the action on forum non-conveniens grounds. The Court noted that “ ost of the factors considered by New York courts in deciding whether to retain jurisdiction – the burden on the New York court, the potential hardship on the defendant, the unavailability of an alternative forum in which the plaintiff may bring suit, and whether the transaction out of which the cause of action arose occurred primarily in a foreign jurisdiction — favor a finding that Israel ha a greater stake in, and the proper forum for, th action.” 7 The Court explained that “ ost of the relevant actions occurred in Israel while the decedent and defendant Hartig resided there, the relevant medical records and other documents are written in Hebrew and located in Israel, and the decedent’s heirs almost entirely reside in Israel, as do most of the witnesses and the decedent’s guardian.” 8 As such, concluded the Court, “New York’s retention of jurisdiction would impose a heavy, undue burden upon the court, requiring translation of the Hebrew documents into English and nuanced application of Israeli tort and inheritance law. 9 The Court also noted that because “defendants have consented to Israel’s jurisdiction,” they “would suffer no significant hardship from litigating there.” 10 Finally, the Court rejected plaintiffs’ argument that because they and the bank, as well as some witnesses, were located in New York, New York was the most convenient forum. 11 “The deposition of the New York witnesses and production of the New York Community Bank records,” said the Court, “can be conducted via the internet.” 12 Takeaway The forum non conveniens doctrine permits a court to dismiss an action when “in the interest of substantial justice the action should be heard in another forum.” CPLR § 327(a). It is based upon “justice, fairness and convenience”, 13 in which the party challenging the forum bears the burden of demonstrating that the action would be better adjudicated in a different forum. It is a flexible doctrine that is based upon the facts and circumstances of each case. Only “when it plainly appears that New York is an inconvenient forum and that another is available which will best serve the ends of justice and the convenience of the parties” should a case be dismissed on forum non conveniens grounds. 14 As shown in Brandwein , defendants were able to satisfy the burden reflected in the principles discussed above. here=">here" and="and" >here.=">here."> Footnotes U.S. Department of State, The Doctrine of Forum Non Conveniens in the United States (1997-2001) ( here ) (quoting Gary B. Born & David Westin, International Civil Litigation in United States Courts 275 (2d ed. 1994)). Id. (citing Gulf Oil Corp. v. Gilbert , 330 U.S. 501, 506-507 (1947)). Id. (quoting Piper Aircraft Co. v. Reyno , 454 U.S. 235, 257 (1981)). Grizzle v. Hertz Corp. , 305 A.D.2d 311, 312 (1st Dept. 2003) (citations and internal quotation marks omitted); Islamic Republic of Iran v. Pahlavi , 62 N.Y.2d 474, 479 (1984), cert . denied , 469 U.S. 1108 (1985). Grizzle , 305 A.D.2d at 312; Pahlavi , 62 N.Y.2d at 479; Daly v. Metro. Life Ins. Co. , 4 Misc. 3d 887, 894 (Sup. Ct., N.Y. County 2004). Pahlavi , 62 N.Y.2d at 479. Slip Op. at *1 (citing Pahlavi , 62 N.Y.2d at 479). Id. Id. (citing Estate of Kainer v. UBS AG , 175 A.D.3d 403, 405 (1st Dept. 2019), aff’d , 37 N.Y.3d 460 (2021) (applicability of foreign law is an important factor in forum non conveniens analysis weighing in favor of dismissal)). Id. Id. Id. Pahlavi , 62 N.Y.2d at 479. Silver v. Great Am. Ins. Co. , 29 N.Y.2d 356, 361 (1972). 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 Most often a lawsuit begins with the filing of a summons and complaint or summons with notice.  CPLR 304 .  Once the lawsuit is commenced, the plaintiff is required to serve the defendant(s) with process – the event by which the court obtains personal jurisdiction over the defendant(s).  [This Blog has written about service of process, see, e.g. , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]  There are numerous ways in which service of process may be effectuated on a natural person ( CPLR 308 ) and the CPLR also provides for service of process on, inter alia , different types of business and governmental entities (CPLR 307 (State), 308, 309 (infant, incompetent or conservatee), 310 (partnership), 310-a (limited partnership), 311 (corporation or governmental subdivision), 311-a (limited liability company) and 312 (court, board or commission). Once service of process is effectuated, the defendant has a certain amount of time to appear in the action depending on the manner in which service is made.  A defendant can appear by making a formal appearance, which can be done by “serving an answer or a notice of appearance, or by making a motion which has the effect of extending the time to answer.”  CPLR 320 .  Defendants can also make informal appearances, which can have serious implications in litigation.  [This Blog has written about informal appearances, see, e.g., < here =">here"> and < here =">here"> .] If a defendant is served with process, but fails to appear, a plaintiff can seek judgment by default against the non-appearing defendant.  CPLR 3215 .  If plaintiff’s claim is “for a sum certain or for a sum which can by computation be made certain,” a plaintiff can seek a default judgment from the Clerk of the Court if the application is made within 1 year of the default.  See CPLR 3215(a).  A clerk’s judgment requires no inquest.  A “sum certain” in the context of CPLR 3215 “contemplates a situation in which, once liability has been established, there can be no dispute as to the amount due, as in actions on money judgments and negotiable instruments.”  Reynolds Securities, Inc. v. Underwriters Bank & Trust Co. , 44 N.Y.2d 568, 573 (1978); see also Freeport Plaza Realty, LLC v. Freeport Moon, Inc. , 205 A.D.3d 685, 687 (2 nd Dep’t 2022).  Thus, if extrinsic evidence is necessary to calculate damages, a clerk’s judgment is unavailable.  Id.   If the plaintiff does not take proceedings for the entry of default within a year, the court “must” dismiss the action against the non-appearing defendant unless “sufficient cause” is shown for the failure to do so.  CPLR 3215(c); see also U.S. Bank, N.A. v. Onuoha , 162 A.D.3d 1094, 1095 -96.  [This Blog has written about CPLR 3215(c), see, e.g., < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]   The vacatur of a clerk’s judgment is the subject of today’s article.  There are numerous grounds upon which a judgment may be vacated.  See, e.g. , CPLR 5015 .  [This Blog has written about CPLR 5015, see, e.g., < here =">here"> , < here =">here"> and < here =">here"> .]  In order to “vacate a judgment, including a clerk’s judgment, entered upon default in appearing and answering the complaint must demonstrate a reasonable excuse for its delay in appearing and answering, and a meritorious defense to the action.”  Verde Elec. Corp.v. Federal Ins. Co. , 50 A.D.3d 672, 672-73 (2 nd Dep’t 2008); see also Barnett v. Diamond Finance Co., Inc. , 202 A.D.3d 651(2 nd Dep’t 2022).   In Fidelity Nat. Title Ins. Co. v. Valtech Research, Inc. , 73 A.D.3d 686 (2 nd Dep’t 2010), a negligence action, the plaintiff obtained a clerk’s judgment.  The Court found, among other things, that the defendant was not permitted to vacate the default under CPLR 5015 because it “failed to establish a reasonable excuse for that default.”  Id . at 687.  However, the Court also found that plaintiff was not seeking a “sum certain” and, therefore, the clerk lacked authority to enter judgment in Plaintiff's favor.  Id.  Thus, the Court remitted the matter “for an inquest and the entry thereafter of an appropriate judgment.” Id . On September 13, 2023, the Appellate Division, Second Department, decided Pizzarotti, LLC v. Cabgram Developer, LLC , a case involving the vacatur of a clerk’s judgment.  The plaintiff in Pizzarotti obtained a clerk’s judgment exceeding $2,300,000 based on the defendant’s failure to appear or answer the complaint.  The defendant’s motion to vacate the judgment was granted and the plaintiff appealed.  The Second Department in affirming the motion court’s order and noting the short length of the default, stated: Although the general rule is that in order to vacate a default, a party must demonstrate a reasonable excuse for the default and a potentially meritorious defense ( see CPLR 5015 <1> ), the sufficiency of an excuse is not as significant where the default is only a short period. Here, the less than seven-week delay between when the defendant's time to answer expired and when the defendant moved to vacate the clerk's judgment is brief, and there is no evidence that the defendant's default was intentional or part of a pattern of neglect. Moreover, in light of the lack of prejudice to the plaintiff resulting from the defendant's short delay in appearing and seeking to answer the complaint, the existence of a potentially meritorious defense, and the strong public policy favoring resolution of cases on the merits, the Supreme Court providently exercised its discretion in granting the defendant's motion to vacate the clerk's judgment entered upon its default.  Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP commercial litigation attorneys. 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 question about the application of law sometimes arises when a statute is amended, or the Legislature enacts a new statute that governs a particular issue. In this regard, the question concerns whether the new law or amendment should be applied retroactively or prospectively. There are “two axioms of statutory interpretation” that are relevant in determining whether a statute or amendment should be given retroactive effect. 1 “Amendments are presumed to have prospective application unless the Legislature’s preference for retroactivity is explicitly stated or clearly indicated.” 2 However, “remedial legislation should be given retroactive effect in order to effectuate its beneficial purpose.” 3 “Remedial statutes are those designed to correct imperfections in prior law, by generally giving relief to the aggrieved party.” 4 Courts also consider a statute or amendment to be remedial where: the Legislature has conveyed a sense of urgency; the statute was designed to rewrite an unintended judicial interpretation; and the enactment itself reaffirms a legislative judgment about what the law in question should be. 5 While the foregoing principles serve as guides, a court must discern the legislative intent either from the particular words used or from the nature of the legislation. 6 In Pacheco v. P.V.E. Co., LLC , 2023 N.Y. Slip Op. 23279 (Sup. Ct., Kings County Sept. 6, 2023) ( here ), the court was asked to determine whether the Justice for Injured Workers Act (N.Y. Work. Comp. § 118-a) (the “Act”), enacted on December 30, 2022, should be applied retroactively or prospectively. As discussed below, the court held that the Act should be applied retroactively. Pacheco is an action to recover damages for personal injuries. Defendants/third-party plaintiffs/third third-party plaintiffs P.V.E. CO., LLC, P.V.E. II CO., LLC, and 70 NARDOZZI LLC (“PVE/Nardozzi”) moved pursuant to CPLR § 3025 (b) and (c) for leave to amend its verified answer to assert a proposed affirmative defense of collateral estoppel. Plaintiff cross-moved for the imposition of costs and sanctions against PVE/Nardozzi for interposing a frivolous motion. Plaintiff commenced the action against PVE/Nardozzi and Suffolk Construction Company, Inc., alleging that he sustained injuries as a result of an accident that occurred at a construction site located in New Rochelle, New York. On or about March 17, 2021, PVE/Nardozzi filed its answer to the complaint. Subsequently, the parties received a Notice of Decision from the Workers’ Compensation Board (the “Board decision”), in which, inter alia , the Workers’ Compensation Board determined that treatment for plaintiff’s neck injury had not been established and disallowed the neck injury claim. PVE/Nardozzi moved for leave to amend its answer to assert a proposed affirmative defense of collateral estoppel based upon the Board decision. In opposition, plaintiff argued that the Act, which was enacted on December 30, 2022, warranted the denial of PVE/Nardozzi’s motion. Under Work. Comp. § 118-a, “no finding or decision by the workers’ compensation board, judge or other arbiter shall be given collateral estoppel effect in any other action or proceeding arising out of the same occurrence, other than the determination of the existence of an employer employee relationship.” Plaintiff moved for costs and sanctions against defendants for refusing to withdraw the motion and for willfully interposing a frivolous motion. PVE/Nardozzi opposed the cross-motion, arguing that Work. Comp. § 118-a was not applicable as it should be applied prospectively to actions filed post-enactment. The court denied both motions. In denying the motion to amend, the court observed that, although there was “no express directive” in Work. Comp. § 118-a instructing that it should be applied retroactively, “it clear that is a remedial law intended to ‘correct recent court decisions that granted preclusive effect to decisions of the Workers’ Compensation Board (WCB), barring injured workers from seeking justice through the courts because of an administrative decision of the WCB.’” 7 The court explained that the “legislative history, specifically the sponsor memorandum, highlight that administrative hearings before a Worker’s Compensation Law Judge sacrifice basic procedures and evidentiary rules of trials to swiftly decide the claims and that NY WORK COMP § 118-a ‘needed to ensure that findings from cursory Worker’s Compensation Board hearings not prevent workers from exercising their constitutional right to a jury trial.’” 8 Apart from the legislative history, the court noted that “the statute took effect immediately,” thereby evincing “a sense of urgency.” 9 The court also noted that “retroactive application not result in unfairness or impair substantive rights.” 10 The court explained that “retroactive application not increase liability but rather provide plaintiff with an opportunity to exercise his right to a fair trial.” 11 “These factors together,” concluded the court, “weigh in favor of the finding that the remedial purpose of NY WORK COMP § 118-a should be effectuated through retroactive application.” 12 Takeaway In determining whether a statute should be given retroactive effect, the New York Court of Appeals has identified two competing axioms of statutory interpretation. On the one hand, new statutes and amendments are presumed to have prospective application unless the Legislature states a preference for retroactivity that is explicitly stated or clearly indicated. On the other hand, remedial legislation or statutes governing procedural matters should be applied retroactively, unless such application would “impair vested rights or bestow additional rights.” 13 Courts must discern the Legislature’s intent, first by looking to the language of the statute and, if necessary, considering legislative history and other guides, such as those discussed above. In Pacheco , the court examined a number of the factors discussed above, including legislative history, whether retroactive application would result in unfairness or impair substantive rights, and whether there was a sense of urgency in passing the legislation, to conclude that Work. Comp. § 118-a should be applied retroactively. Footnotes Matter of Gleason (Michael Vee, Ltd.) , 96 N.Y.2d 117, 122 (2001); see also Nelson v. HSBC Bank USA , 87 A.D.3d 995, 997 (2d Dept. 2011). Id. ; see also Majewski v. Broadalbin-Perth Cent. School Dist. , 91 N.Y.2d 577, 584 (1998); Matter of OnBank & Trust Co. , 90 N.Y.2d 725, 730 (1997); People v. Duggins , 192 A.D.3d 191 (3d Dept. 2021). Matter of Gleason , 96 N.Y.2d at 122; Majewski , 91 N.Y.2d at 584; Matter of OnBank & Trust Co. , 90 N.Y.2d at 730. Nelson , 87 A.D.3d at 998 (internal quotation marks omitted). E.g. , Matter of OnBank & Trust Co. , 90 N.Y.2d at 730. See Matter of Regina Metro. Co., LLC v. New York State Div. of Hous. & Community Renewal , 35 N.Y.3d 332, 370 (2020); Matter of OnBank & Trust Co. , 90 N.Y.2d at 730. Slip Op. at *3 (quoting 2021 N.Y. Senate Bill S9149). Id. (quoting id. ). Id. (quoting Matter of Gleason , 96 N.Y.2d at 122). Id. Id. Id. See Matter of City of New York (Long Is. Sound Realty Co.) , 160 A.D.2d 696, 697 (2d Dept. 1990). 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 “Cherry-picking” is a practice of fraudulently allocating profitable trades to favored accounts at the expense of other advisory clients.  here.=">here."> On September 14, 2023, the Securities and Exchange Commission (“SEC”) announced ( here ) that it settled fraud charges against GlennCap LLC (“GlennCap”), a Connecticut-based investment advisory firm, and its owner, Jonathan Vincent Glenn (“Glenn”), for engaging in a cherry-picking scheme whereby they allocated profitable securities trades to favored accounts, including GlennCap’s own accounts and client accounts that paid GlennCap a higher percentage of positive returns in fees, while allocating a disproportionate amount of unprofitable trades to disfavored clients. Under the settlement, respondents agreed to disgorge $2,743,616, plus prejudgment interest of $251,357. Glenn agreed to pay a civil money penalty of $500,000. According to the SEC, between at least January 2020 and March 2022, Glenn, who was also an investment adviser of GlennCap, engaged in block trading, which allowed him to pool funds from multiple clients’ accounts into trades, and then, after seeing whether a position increased or decreased in value, he allocated the more profitable trades to accounts that he favored. The SEC noted that the probability that the favored accounts received the more profitable trades by chance was statistically nearly zero. The SEC found that respondents received at least $2.7 million in profits from the cherry-picking scheme. The SEC found that the scheme, which was perpetrated in two phases, came to a stop in March 2022, when the broker-dealer that was executing respondents’ trades notified respondents that, due to concerns about respondents’ trading, the broker-dealer was terminating GlennCap’s access to the omnibus account that respondents were using and ending its relationship with GlennCap altogether in 90 days. Thereafter, said the SEC, Glenn asked GlennCap’s clients to move their accounts to another broker-dealer. That brokerage firm, noted the SEC, prohibited investment advisers from using omnibus trading accounts. As a result, said the SEC, respondents could no longer cherry-pick profitable trades. Further, the SEC found that Glenn made false and misleading statements regarding GlennCap’s trading practices in documents it provided to clients and prospective clients. Commenting on the settlement, Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, said: “Glenn allocated millions of dollars from profitable trades to accounts benefitting himself while unloading unprofitable trades on GlennCap’s clients.” In an effort to warn other brokers and investment advisors about the SEC’s ability to detect cherry-picking schemes, Dean stated: “The SEC has the means to identify investment advisers that abuse their position through cherry-picking, as Glenn and GlennCap did. We use these methods to ensure investor trust in our markets.”In the cease and desist order ( here ), the SEC found that Glenn and GlennCap violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, Section 17(a) of the Securities Act of 1933, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Respondents consented to the entry of the cease-and-desist order, without admitting or denying the SEC’s findings, and, as noted, the payment of more than $3 million in civil penalties, disgorgement, and prejudgment interest. Glenn also consented to an industry and officer bar, which prohibits him from associating with any investment advisor, broker-dealer, transfer agent, municipal securities dealer, municipal advisor, or nationally recognized statistical rating organization, as well as from acting as an officer, director, manager, advisor, underwriter or depositor of any such entity. 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 Sometimes someone receives a valuable benefit from your efforts and refuses to compensate you.  If the “benefit” was the result of a contractual relationship, a lawsuit for the breach of that contract would be viable.  What happens, however, where there is no contract on which to bring a claim?  There are several theories of liability sounding in “quasi-contract” that may offer you relief for your efforts.  While today’s post will focus on the quasi-contract claim of unjust enrichment, there are others. By way of background, a quasi-contract “is not really a contract at all, but rather a legal obligation imposed in order to prevent a party’s unjust enrichment.”  Clark-Fitzpatrick, Inc. v. Long Island Rail Road Co. , 70 N.Y.2d 382, 388 (1987) (citations omitted).  The New York Court of Appeals has explained that: uasi contracts are not contracts at all, although they give rise to obligations more akin to those stemming from contract than from tort. The contract is a mere fiction, a form imposed in order to adapt the case to a given remedy.  Briefly stated, a quasi-contractual obligation is one imposed by law where there has been no agreement or expression of assent, by word or act, on the part of either party involved. The law creates it, regardless of the intention of the parties, to assure a just and equitable result. Clark-Fitzpatrick , 70 N.Y.2d at 388-89 (citation, internal quotation marks and ellipses omitted; emphasis in original).  For these reasons, a quasi-contract claim, such as unjust enrichment, will ordinarily be dismissed when “the relationship between the parties defined by a valid written contract, which detailed the applicable terms and conditions” of the parties’ relationship.  Fortune Limousine Service, Inc. v. Nextel Communications , 35 A.D.3d 350, 353 (1 st Dep’t 2006); see also, The Fifth and Fifty-Fifth Residence Club Assoc., Inc. v. Vistana Signature Experiences, Inc. , 217 A.D.3d 564, 566 (1 st Dep’t 2023).  Conversely, the “theory of unjust enrichment lies as a quasi-contract claim and contemplates an obligation imposed by equity to prevent injustice, in the absence of an actual agreement between the parties.”  Nasca v. Greene , 216 A.D.3d 648, 650 (2 nd Dep’t 2023) (citation and internal quotation marks omitted). However, in Sebastian Holdings, Inc. v. Deutsche Bank AG , 78 A.D.3d 446 (1 st Dep’t 2010), the Court sustained an unjust enrichment claim on a motion to dismiss because the “claim for unjust enrichment does not depend on the existence of valid and enforceable written contracts between the parties, but rather arises from facts wholly independent of any contract upon which the plaintiff sues herefore, it cannot be said at this early stage of the proceedings that these claims are duplicative of the breach-of-contract claims, and the rule of Clark-Fitzpatrick … does not apply.” The elements of a claim for unjust enrichment are “(1) the defendant was enriched, (2) at the plaintiff’s expense, and (3) that it is against equity and good conscience to permit the defendant to retain what is sought to be recovered.”  GFRE, Inc. v. U.S. Bank, N.A. , 130 A.D.3d 569, 570 (2 nd Dep’t 2015) (citation and internal quotation marks omitted); see also, Paramount Film Distr. v. State of New York , 30 N.Y.2d 415, 421 (1972) (“The essential inquiry in any action for unjust enrichment … is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered.”)   A claim for unjust enrichment was sustained on September 13, 2023, by the Appellate Division, Second Department, in Bedford-Carp Construction, Inc. v. Brooklyn Union Gas .    The plaintiff in Bedford-Carp was a construction contractor that entered into a contract with a New York City agency to “install a box storm sewer” in Brooklyn.  During performance of the contract, plaintiff discovered 45,000 tons of contaminated soil.  The site of the work was near Brooklyn Union Gas’ facility.  The parties contract provides that plaintiff “shall not seek additional compensation from gas companies except as specifically set forth its contract” and  anticipated that there may be interference from existing and abandoned gas lines. Plaintiff’s bid was to reflect same.  In addition, the contract indicates that Brooklyn Union Gas may be responsible to the City for contamination it caused.   When contamination was found and verified, the City was notified and, in turn, contacted Brooklyn Union Gas and requested that it undertake remediation efforts.  Defendant declined.  In order to maintain the progress of the project, plaintiff undertook the remediation effort.  Subsequently, plaintiff sued Brooklyn Union Gas – alleging causes of action sounding in breach of contract, declaratory judgment (that defendant, Brooklyn Union Gas must compensate plaintiff for remediation costs) and unjust enrichment.  Plaintiff appealed the motion court’s dismissal of each cause of action in response to defendant’s motion to dismiss. The Second Department sustained the dismissal as to the breach of contract and declaratory judgment cause of action because “there was no contractual relationship or privity between the plaintiff and the defendant.”  The Court, however, held that the unjust enrichment claim should not have been dismissed and, in so doing, stated: However, the Supreme Court erred in granting that branch of the defendant's motion which was to dismiss the third cause of action, alleging unjust enrichment. Unjust enrichment lies as a quasi-contract claim and contemplates an obligation imposed by equity to prevent injustice, in the absence of an actual agreement between the parties. To recover under a theory of unjust enrichment, a litigant must show that (1) the other party was enriched, (2) at that party's expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered.  The essential inquiry in any action for unjust enrichment is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered. Although privity is not required for an unjust enrichment claim, a claim will not be supported if the connection between the parties is too attenuated. Here, affording the complaint a liberal construction, we find that it sufficiently alleged that the defendant was unjustly enriched, at the plaintiff's expense, by the plaintiff's remediation of the contaminated soil, and that it would be against equity and good conscience to permit the defendant to retain what was sought to be recovered. Moreover, we find that the Supreme Court erred in determining, in effect, that the connection between the parties was too attenuated to support a claim for unjust enrichment.  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 our last article ( here ), we examined a choice-of-law provision that, if applied, would violate New York public policy concerning usurious loans. In that case, Virginia law, which does not prohibit usury, was deemed “so violative of New York’s public policy that the choice-of-law provision” at issue was deemed invalid.  The underlying predicate in that case was an agreement whereby the corporate defendant agreed to pay plaintiff $1,742,000 over the course of 52 weeks in exchange for a loan of $1,300,000 that had a stated interest rate of 34% – a percentage that is significantly higher than the maximum interest rate allowable in New York. Under those facts, there was no question that the court was examining the terms of a loan agreement – a requirement under the General Obligations Law for a finding of usury. 1 Sometimes, however, it is not always easy to determine whether the financial instrument at issue is a loan or forbearance or something else, such as the sale of a receivable (the question presented in EBF Partners, LLC v. Creative Sports Concepts LLC , 2023 N.Y. Slip Op. 33073(U) (Sup. Ct., N.Y. County Sept. 6, 2023) ( here )). To address this issue, courts look to “the real purpose of the transaction” – that is, “on the one side, to lend money at usurious interest reserved in some form by the contract and, on the other side, to borrow upon the usurious terms dictated by the lender.” 2 Notably, “ he court will not assume that the parties entered into an unlawful agreement . . . when the terms of the agreement are in issue, and the evidence is conflicting.” 3 Nevertheless, “the lender is entitled to a presumption that he did not make a loan at a usurious rate.” 4 There are three factors that courts consider in determining whether the transaction at issue should be considered a loan or a sale of receivables: “(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.” 5 No factor is dispositive. 6 In addition, courts may consider other factors such as a discretionary reconciliation provision, default provisions entitling the lender to immediate repayment, and collection on a personal guaranty in the event of default or bankruptcy. 7 here.=">here."> EBF Partners involved a Payment Rights Purchase and Sale Agreement, pursuant to which plaintiff purchased $99,400.00 worth of the corporate defendant’s future receivables for $70,000. The agreement was guaranteed by the individual defendant. Under the agreement, defendant was entitled to reconcile the daily payment amount to better reflect its actual sales each calendar month. While several events of default were listed in the agreement, a bankruptcy proceeding involving the corporate defendant was not one of them. Shortly after the agreement was executed, Plaintiff claimed that plaintiff’s daily debit on defendant’s account was blocked, and since that time defendant had not tendered the daily percentage of its receivables to plaintiff or restored plaintiff’s access to the account.  Plaintiff filed suit claiming, among other causes of action, breach of contract. On plaintiff’s motion for summary judgment, defendants argued that the agreement was a usurious loan, that plaintiff was barred from enforcing the agreement due to its unclean hands, that the guarantee did not sufficiently bind the individual defendant, and that there were issues of fact related to how much money was actually owed. Relevant to this article, the motion court granted the motion, 8 finding that the agreement was not a usurious loan. The motion court found that the agreement “appear to be what it states on its face, a purchase of future receivables.” 9 In that regard, noted the motion court, “ he agreement lacks a finite term, contains a reconciliation provision, and does not provide that ’s filing for bankruptcy protection is a default under the agreement.” 10 As such, weighing the factors discussed above, the motion court concluded that “defendants cannot show that the Agreement is a criminally usurious loan.” 11 Footnotes Under General Obligations Law § 5-501, usury only applies to a “loan or forbearance of any money, goods or things in action.” See also Donatelli v. Siskind , 170 A.D.2d 433, 434 (2d Dept. 1991). Donatelli , 170 A.D.2d at 434. Giventer v. Arnow , 37 N.Y.2d 305, 309 (1975). Id. LG Funding, LLC v. United Senior Props. of Olathe, LLC , 181 A.D.3d 664 (2d Dept. 2020). Id. at 666. Davis v. Richmond Capital Grp. , LLC, 194 A.D.3d 516, 517 (1st Dept. 2021). The motion court found, however, issues of fact with regard to the issue of damages. See Slip Op. at *5. Slip Op. at *4. Id. Id. (citing, Principis Capital, LLC v. I Do, Inc. , 201 A.D.3d 752, 754 (2d 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: Jeffrey M. Haber It is well settled that parties to a contract are free to include choice-of-law provisions in their agreements. Such provisions are generally enforced by New York courts 1 and will be “interpreted so as to effectuate the parties’ intent.” 2 The freedom to contract, however, has limits. Courts will not, for example, enforce agreements that are illegal or where the chosen law violates “some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal.” 3 Indeed, New York appellate courts have repeatedly determined that a foreign jurisdiction’s laws should not be applied when they violate New York public policy. 4 As shown in Samson Lending LLC v. Greenfield Mgt. LLC , 2023 N.Y. Slip Op. 23267 (Sup. Ct., Ontario County, Sept. 5, 2023) ( here ), the prohibition against usury is such a fundamental policy of New York, the courts will not hesitate to void a choice of law provision that conflicts with this state policy.   A Primer on Usury New York has a long history prohibiting usury. Since at least 1717, various New York legislatures have repeatedly passed legislation to address (and prohibit) usury. Over the intervening years, while other states repealed their usury laws, New York’s legislature refused to lessen the protections afforded by the usury statutes. 5 Adar="Adar" Bays,="Bays," LLC="LLC" v.="v." GeneSYS="GeneSYS" ID,="ID," Inc.="Inc." ( here),=">here)," the="the" New="New" York="York" Court="Court" of="of" Appeals="Appeals" provided="provided" a="a" lengthy="lengthy" and="and" extensive="extensive" discussion="discussion" State’s="State’s" history="history" with="with" enacting="enacting" usury="usury" laws.="laws."> Today, New York’s usury law can be found in General Obligations Law §§ 5-501, 5-511, 5-521; Banking Law § 14-a (1); and Penal Law § 190.40. Together, the statutes establish that loans of less than $250,000 to individuals cannot exceed a 16% annual rate, loans between $250,000 and $2.5 million cannot exceed 25% (the criminal usury rate) and loans of $2.5 million or more are not subject to the usury laws. More specifically, the General Obligations Law and Banking Law provide that the maximum rate of interest upon a “loan or forbearance of any money, goods, or things” is 16% per annum unless otherwise provided by law, 6 and “ o person or corporation shall, directly or indirectly, charge, take or receive any money, goods or things in action as interest” at a rate exceeding 16%. 7 In addition, a lender commits a class E felony when, without other legal authorization, the lender “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 <25%> per annum or the equivalent rate for a longer or shorter period.” 8 Any loan that reserves or takes any greater interest “than is prescribed in section 5-501”— the civil usury prohibition (16%) —“shall be void”, unless the lender is a bank or loan association, which will be held to have forfeited all interest on the loan. 9 Under General Obligations Law § 5-521 (1), the defense of usury is not available to corporations, but this bar does not preclude a corporate borrower from raising the defense of “criminal usury” ( i.e. , interest over 25%) in a civil action. 10 Samson Lending LLC v. Greenfield Mgt. LLC Samson Lending involved a loan agreement pursuant to which the corporate defendants agreed to pay plaintiff $1,742,000 over the course of 52 weeks in exchange for a loan of $1,300,000, a stated interest rate of 34%, with the terms of the corporate defendants’ compliance guaranteed by the individual defendant.  The agreement contained a choice-of-law and a venue and jurisdiction provision that would require the court to apply Virginia law to the agreement. Defendants moved to dismiss the complaint, arguing that the interest rate under the loan agreement (34%) violated New York’s public policy against criminal usury and that this vitiated the application of the agreement’s choice-of-law provision requiring application of New York law to the agreement.  In opposition, Plaintiff argued that the choice-of-law provision must be honored, as Virginia law does account for usury, and alternatively argued that should New York law apply, the agreement should be modified according to its terms to allow the maximum interest rate allowable under New York law. The motion court agreed with defendants, finding that “regardless of the agreement’s provision that Virginia substantive law would apply to the agreement’s terms, … the application of Virginia law (which would allow a 34% interest rate) would be so violative of New York’s public policy that the choice-of-law provision is invalid.” 11 Thus, concluded the motion court, “the choice-of-law provision is void, and New York law will apply to the agreement.” 12 Having determined that New York law would apply to the dispute, the motion court next addressed whether defendants met their burden of showing that plaintiff acted with usurious intent. Under New York law, “where a loan agreement usurious on its face, usurious intent will be implied, and usury will be found as a matter of law.” 13 The motion court concluded that defendants met their burden. 14 Here, the agreement had a stated interest rate of 34%, significantly higher than the maximum interest rate allowable in New York. Thus, as the agreement was for a loan less than $2.5 million, the agreement was usurious on its face.  Finally, the motion court rejected plaintiff’s request to reform the contract in accordance with the “usury savings clause” in the agreement. 15 The motion court explained that, under New York law, reformation is not available, either as a contractual or equitable remedy, when the lender has charged criminally usurious interest. 16 Takeaway Samson Lending is notable because of its conclusion that the bar against usurious loans is a fundamental precept of New York public policy. As such, the motion court could not apply the parties’ choice-of-law agreement. To do so would be, as the motion court held, offensive to the public policy of this State.  Footnotes inisters & Missionaries Ben. Bd. v. Snow , 26 N.Y.3d 466, 470 (2015). Welsbach Elec. Corp. v. MasTec N. Am., Inc. , 7 N.Y.3d 624, 629 (2006). Cooney v. Osgood Mach., Inc. , 81 N.Y.2d 66, 78 (1993) (quoting, Loucks v. Standard Oil Co. of N.Y ., 224 N.Y. 99, 111 (1918)). See , e.g. , Brown & Brown, Inc. v. Johnson , 25 N.Y.3d 364, 370 (2015) (holding that application of Florida law “would be offensive to a fundamental public policy of this State.”) (internal quotation marks and citation omitted); Welsbach , 7 N.Y.3d at 632; Cooney , 81 N.Y.2d at 80. Adar Bays, LLC v. GeneSYS ID, Inc. , (37 N.Y.3d 320, 329 (2021). GOL § 5-501 (1); Banking Law § 14-a (1). GOL § 5-501 (2). Penal Law § 190.40. GOL § 5-511 (1). GOL § 5-521 (3). Slip Op. at *5. Id. at *7. See O’Donovan v. Galinski , 62 A.D.3d 769, 770 (2d Dept. 2009); Fareri v. Rain’s Intl. , 187 A.D.2d 481, 482 (2d Dept. 1992); Roopchand v. Mohammed , 154 A.D.3d 986, 988-89 (2d Dept. 2017). Id. Slip Op. at *8. Id. (citations omitted). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger Frequently, individuals or entities looking to purchase real property have insufficient savings to make the purchase with cash or otherwise do not want to purchase with cash.  In such circumstances purchasers typically seek bank financing to consummate the purchase.  At the time of contract purchasers are generally required to deliver a substantial down payment.  Absent a mortgage contingency clause in the sale contract, the purchaser’s down payment would be put at risk if lenders denied the purchaser’s mortgage applications.  [Eds. Note: this Blog has previously written about mortgage contingency clauses < here =">here"> and < here =">here"> .]  Thus, contracts for the purchase of real property generally provide that purchasers have a certain period of time to obtain a mortgage without risking the loss of a down payment.  “A mortgage contingency clause protects a contract vendee from being obligated to consummate the transaction in the event mortgage financing cannot be obtained in the exercise of good faith through no fault of the purchaser.”  Creighton v. Milbauer , 191 A.D.2d 162, 166 (1 st Dep’t 1993) (citations omitted).  Accordingly, a “purchaser is entitled to return of the down payment where the mortgage contingency clause unequivocally provides for its return upon the purchaser’s inability to obtain a mortgage commitment within the contingency period.”  Blair v. O’Donnell , 85 A.D.3d 954 (2 nd Dep’t 2011) (citation omitted).  “However, when the lender revokes the mortgage commitment after the contingency period has elapsed, the contractual provision relating to failure to obtain an initial commitment is inoperable, and the question becomes whether the lender's revocation was attributable to any bad faith on the part of the purchaser.”  Chahlis v. Roberta Ebert Irrevocable Trust , 163 A.D.3d 623, 624 (2 nd Dep’t 2018) (citations and internal quotation marks omitted). A “mortgage contingency clause is construed to create a condition precedent to the contract of sale.”  Bunnell v. Haghighi , 661 Fed Appx 110 at 5 (2d Cir. 2016) (citation and internal quotation marks omitted).  “In the absence of waiver by the buyer, any claim that the seller is entitled to retain the down payment for failure to satisfy such a condition must be based on allegations that the buyer acted in bad faith by bringing about the failure of the condition precedent.”  Id . (Citations, internal quotation marks, brackets and ellipses omitted.)  The seller has the burden of establishing bad faith.  Id .  See also, Creighton , 191 A.D.2d at 165.  Thus, in order “to enforce the purchase agreement in the absence of the financing contemplated by the mortgage contingency clause, it is incumbent upon to establish that failure to fulfill the condition necessary to obtaining financing was a mere pretense to avoid their obligations under the contract.”  Lindenbaum v. Royco , 165 A.D.2d 254, 260 (1 st Dep’t 1991). In circumstances where a mortgage contingency is solely for the benefit of the purchaser, it can be unilaterally waived by the purchaser, who can proceed to closing with cash, but if the clause is for the benefit of both parties, it cannot be unilaterally waived by the purchaser.  Dale Mortgage Bankers Corp. v. 877 Stewart Avenue Assoc. , 133 A.D.2d 65, 66 (2 nd Dep’t 1987) (citation omitted).  A mortgage contingency clause will be deemed for the benefit of the purchaser and the seller where either party has the right to cancel the contract in the event the purchaser fails to procure a mortgage commitment.  Indeed, it has been held that “unless the contract clearly states otherwise, such provisions are meant to protect the seller as well as the buyer, on the theory that the issuance of a mortgage commitment to the prospective buyer increases in direct proportion to the amount of the mortgage commitment itself, the chances that the buyer will in fact be able to perform his obligations in a timely manner.”  Ting v. Dean , 156 A.D.2d 358, 360 (2 nd Dep’t 1989) (citations omitted).  Further, a purchaser can be found to be in breach where a mortgage commitment is denied, but the mortgage application is inconsistent with the nature of the loan required by the sales contract.  See, e.g., HSM Real Estate, Inc. v. Dragon , 94 A.D.3d 702 (2 nd Dep’t 2012) (the purchaser applied for a $455,000 loan but the contract required the purchaser to apply for a $400,000 loan). On August 30, 2023, the Appellate Division, Second Department, in Rivkin v. 1946 Holding Corp. , addressed mortgage contingency clauses.  The plaintiff in Rivkin entered into a contract to purchase real property and delivered the requisite down payment to seller.  The mortgage contingency clause in the contract “conditioned the obligations under the contract on his ability to obtain a mortgage loan commitment within a certain period of time, and provided him with the right to cancel the contract and receive his down payment if he did not obtain such a commitment within the specified time.”  The purchaser timely obtained a loan commitment; however, it was subject to an environmental report satisfactory to the seller.  Although the purchaser’s loan commitment was extended several times by the lender while the parties were awaiting the environmental report, the lender refused to further extend the loan commitment due to the lack of a satisfactory environmental report.  The seller refused to return the purchaser’s deposit when requested. The purchaser commenced action against the seller in which he sought a declaratory judgment that he was entitled to the return of the down payment.  The seller asserted a counterclaim for breach of contract. Both sides moved for summary judgment.  The motion court denied the purchaser’s motion and granted summary judgment to the seller.  The purchaser appealed. After discussing the relevant caselaw, the Rivkin Court reversed the motion court’s decision and stated: Here, the was entitled to the return of his down payment on the basis that the revocation of the loan commitment was not attributable to any bad faith on his part. Contrary to the contention, the did not waive his right to cancel the contract of sale. The established that the lender revoked the loan commitment due to delays regarding remediating environmental contamination on the property and that these delays were not attributable to the . In opposition, the failed to raise a triable issue of fact. Accordingly, the was entitled to summary judgment on his first cause of action and dismissing the counterclaims. 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 A suspicious activity report (“SAR”) is a document that financial institutions, broker-dealers, and those associated with their business, must file with the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) whenever money laundering or fraud is suspected. In May 2021, this Blog wrote about an enforcement action the Securities and Exchange Commission (“SEC”) brought against a broker-dealer for failing to file SARs in connection with retirement accounts it serviced ( here ). As we typically do, in that article, we discussed the legal principles that governed the SEC’s action. For the convenience of our readers, we reprint that discussion below.  SARs are governed by the Bank Secrecy Act (“BSA”) and implementing regulations promulgated by FinCEN. The law requires broker-dealers to file SARs with FinCEN to report a transaction (or pattern of transactions of which the transaction is a part) conducted or attempted by, at, or through the broker-dealer involving or aggregating funds or other assets of at least $5,000 that the broker-dealer knows, suspects, or has reason to suspect: (1) involves funds derived from illegal activity or is conducted to disguise funds derived from illegal activities; (2) is designed to evade any requirement of the BSA; (3) has no business or apparent lawful purpose and the broker-dealer knows of no reasonable explanation for the transaction after examining the available facts; or (4) involves use of the broker-dealer to facilitate criminal activity. 1 FinCEN’s regulations require that: “A suspicious transaction shall be reported by completing a Suspicious Activity Report.” 2 FinCEN instructs SAR filers to “provide a clear, complete, and concise description of the activity, including what was unusual or irregular that caused suspicion” in the narrative and to “include any other information necessary to explain the nature and circumstances of the suspicious activity.” 3 To be effective, the SAR should describe “the five essential elements of information – who? what? when? where? and why? – of the suspicious activity being reported.” 4 When a SAR is filed “it must include information about each of the Five Essential Elements of the suspicious activity.” 5 When a SAR “lack basic information regarding the Five Essential Elements … SAR s deficient as a matter of law.” 6 FinCEN has provided additional instruction regarding the obligations of financial institutions to report cyber-related events. In December 2011, for example, FinCEN issued an advisory to alert financial institutions to the increased threat of cyber account takeover activity. 7 FinCEN advised that “ ybercriminals are increasingly using sophisticated methods to obtain access to accounts” and these “attacks aim to deliberately exploit a customer’s account and, in many instances, to gain seemingly legitimate access to another customer’s account.” 8 In order to assist financial institutions with identifying and reporting account takeover activity where cybercriminals attempt intrusions into a customer’s account in order to steal the customer’s funds, FinCEN also set forth detailed instruction for reporting account takeovers that emphasizes the importance of reporting cyber-related information—including cyber-event data, such as URL address and IP addresses with timestamps, as well as email addresses and other electronic identifying information—in the event of a cyber-enabled account takeover. 9 Rule 17a-8 promulgated pursuant to Section 17(a) of the Securities Exchange Act of 1934 (“Exchange Act”) requires broker-dealers registered with the Commission to comply with the reporting, record-keeping, and record retention requirements of the BSA. The failure to file a SAR as required by the SAR Rule—including omitting from a filed SAR “a clear, complete, and concise description of the activity, including what was unusual or irregular that caused suspicion” or failing to “identify the five essential elements of information – who? what? when? where? and why? – of the suspicious activity being reported”—is a violation of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder. 10 In the Matter of Archipelago Trading Services, Inc. On August 29, 2023, the SEC announced ( here ) that it brought charges against Archipelago Trading Services Inc. (“ATSI”), a Chicago-based broker-dealer, for failing to file hundreds of SARs between August 2012 and September 2020. The charges were related to transactions in over-the-counter (“OTC”) securities executed on ATSI’s alternative trading system (“ATS”). 11 ATSI agreed to pay $1.5 million to settle the charges. According to the SEC’s order ( here ), ATSI’s sole line of business was to operate an OTC equity securities ATS, known as Global OTC, which was used by broker-dealers to execute trades in OTC securities. Global OTC played a significant role in executing trades of microcap and penny stock securities, which are not listed on any national exchange and tend to be high-risk securities. Despite thousands of high-risk microcap and penny stock securities transactions executed daily on Global OTC, the SEC found that ATSI failed to establish an anti-money laundering surveillance program for its transactions until September 2020. 12 Therefore, said the SEC, ATSI failed to surveil approximately 15,000 transactions executed on Global OTC for possible red flags regarding suspicious manipulative trading activity, including possible spoofing, layering, wash trading, and pre-arranged trading. As a result, the SEC found that ATSI failed to file at least 461 SARs, most of which involved microcap or penny stock securities.     Commenting on the action, Daniel R. Gregus, Director of the SEC’s Chicago Regional Office stated: “All SEC-registered broker-dealers have the responsibility to comply with the requirements of the Bank Secrecy Act, including the obligation to file SARs. When firms like ATSI fail to investigate red flags, especially those involving higher-risk microcap and penny stock securities, they put the investing public at risk.”  The SEC’s order found that ATSI violated Section 17(a) of the Exchange Act and Rule 17a-8 promulgated thereunder. Without admitting or denying the SEC’s findings, ATSI agreed to a censure and a cease-and-desist order in addition to the $1.5 million penalty. Footnotes: 31 C.F.R. § 1023.320(a)(2) (the “SAR Rule”). 31 C.F.R. § 1023.320(b)(1). See FinCEN, FinCEN Suspicious Activity Report (FinCEN SAR) Electronic Filing Instructions (October 2012) ( here ). See , e.g. , FinCEN, Guidance on Preparing a Complete & Sufficient Suspicious Activity Report Narrative , at 3 (Nov. 2003) ( here ). See SEC v. Alpine Sec. Corp. , 308 F. Supp. 3d 775, 804 (S.D.N.Y. 2018) < here =">here"> , aff’d , 982 F.3d 68 (2d Cir. 2020). Id. at 800. FinCEN, Account Takeover Activity , FIN-2011-A016 (Dec. 19, 2011) ( here ). Id. See FinCEN, Advisory to Financial Institutions on Cyber-Events and Cyber-Enabled Crime , FIN2016-A005 (Oct. 25, 2016) ( here ); see also Frequently Asked Questions (FAQs) regarding the Reporting of Cyber-Events, Cyber-Enabled Crime, and Cyber-Related Information through Suspicious Activity Reports (SARs) (Oct. 25, 2016). See Alpine Sec. Corp. , 308 F. Supp. 3d at 798–800. OTC securities are securities that are not listed on a national securities exchange. The securities at issue in ATSI were primarily microcap and penny stock securities. The term “microcap stock” generally refers to securities issued by companies with a market capitalization of less than $250 to $300 million. See , e.g. , U.S. Securities and Exchange Commission, Microcap Stock: A Guide for Investors (Sept. 18, 2013) ( here ); U.S. Securities and Exchange Commission, Investor Bulletin, Microcap Stock Basics (Sept. 30, 2016) ( here ). The term “penny stock” generallyrefers to a security issued by a very small company that trades at less than $5 per share ( here ). See Section 3(a)(51) of the Exchange Act and Rule 3a51-1 thereunder. ATSI updated its systems after receiving a deficiency letter from the SEC’s Division of Examinations in May 2020. ATSI updated its AML Policies in August 2020. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP complex commercial litigation. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber On March 20, 2018, the United States Supreme Court decided Cyan, Inc. v. Beaver County Employees Retirement Fund , in which it unanimously held that the Securities Litigation Uniform Standards Act of 1998 does not strip state courts of subject-matter jurisdiction over class actions involving claims brought under the Securities Act of 1933 (the “Securities Act”) and does not allow for the removal of those cases to federal court. Since that time, there has been an increase in the number of state court class action lawsuits asserting claims under the Securities Act. Today, we examine one such case, City of Hialeah Employees’ Retirement System v. Teladoc Health, Inc. , 2023 N.Y. Slip Op. 50876(U) (Sup. Ct., N.Y. County Aug. 23, 2023) ( here ). Cyan="Cyan" decision="decision" here.=">here."> A Primer on The Securities Act Following the stock market crash in 1929, Congress enacted the Securities Act and the Securities and Exchange Act of 1934 (the “Exchange Act”). The Securities Act has two primary objectives: (1) to provide transparency in financial statements so investors can make informed decisions about securities being offered for public sale; and (2) to address misstatements and omissions in the securities markets. To accomplish these goals, Congress required the disclosure of material information through the registration process. Thus, under the Securities Act, companies that issue securities must file with the Securities and Exchange Commission (“SEC”) a statement (known as a registration statement) that contains the following information: a description of the company’s business, the securities offered to the public, the company’s corporate management structure, and recent audited financial statements. In addition to the registration statement, issuers are required to file a prospectus. A prospectus is used to market securities to potential investors. The prospectus is included as part of the registration statement. Registration statements are subject to SEC examination for compliance with disclosure requirements. An issuer cannot make false statements in, or omit material facts from, a registration statement or prospectus. In fact, when a fact is disclosed, the issuer must disclose all information required to make that fact not misleading. This includes all known trends or uncertainties that the registrant reasonably expects will have a material, unfavorable impact on revenues or income from continuing operations, 1 and “material factors that make an investment … speculative or risky. 2 Section 11 of the Securities Act provides securities purchasers a private right of action if any part of a registration statement, when it became effective, “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statement therein not misleading.” A plaintiff bringing an action under Section 11 must establish one of the following bases of liability: “(1) a material misrepresentation; (2) a material omission in contravention of an affirmative legal disclosure obligation; or (3) a material omission of information that is necessary to prevent existing disclosures from being misleading.” 4 Section 11 “‘imposes strict liability on issuers and signatories, and negligence liability on underwriters,’ for material misstatements or omissions in a registration statement.” 5 To be actionable under Section 11, any misrepresentation or omission must be material. Materiality is an “inherently fact-specific finding.” 6 A plaintiff demonstrates materiality when there is a “substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” 7 Neither accurate statements about past performance, nor expressions of puffery and corporate optimism are actionable under the Securities Act. 8 Unlike a securities fraud under Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), a Section 11 plaintiff need not demonstrate “scienter, reliance, or loss causation.” 9 Nevertheless, a defendant in a Section 11 action will not be liable if it can prove “negative loss causation” – that is, if it can demonstrate that the alleged misstatement or omission did not lead to a decline in the company’s stock price. 10 To sustain this defense, a defendant must establish that “the risk that caused the losses was not within the zone of risk concealed by the misrepresentations and omissions,” or that “the subject of the misstatements and omissions was not the cause of the actual loss suffered.” 11 Because Section 11 “allocate the risk of uncertainty to the defendants,” courts have described rebutting loss causation as a “heavy burden.” 12 “Section 12(a)(2) provides similar redress where the securities at issue were sold using prospectuses or oral communications that contain material misstatements or omissions.” 13 Claims under Section 12(a)(2) may be brought against a “statutory seller,” which includes those who successfully solicited the purchase of the security in service of their own financial interests. 14 “ he elements of a prima facie claim under section 12(a)(2) are: (1) the defendant is a ‘statutory seller’; (2) the sale was effectuated ‘by means of a prospectus or oral communication’; and (3) the prospectus or oral communication ‘include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading.’” 15 Section 11 imposes “‘virtually absolute’ liability” as to issuers, while other defendants under Sections 11 and 12(a)(2) may be held liable for mere negligence. Securities Act claims “must be brought ‘within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.’” 16 Under CPLR § 3211(a)(5), defendants bear the “initial burden” to establish that the limitations period has expired and if successful, the “burden then shifts to the plaintiff to raise an issue of fact as to whether the statute of limitations is tolled or otherwise inapplicable.” 17 “In considering , a court must take the allegations in the complaint as true and resolve all inferences in favor of the plaintiff” and give the plaintiff’s responses “their most favorable intendment<.> ” 18 City of Hialeah Employees’ Retirement System v. Teladoc Health, Inc. Background Teladoc is a securities class action brought on behalf of all persons who purchased or otherwise acquired shares of Teladoc Health, Inc. (“Teladoc” or the “Company”) common stock in connection with Teladoc’s merger with Livongo Health, Inc. (“Livongo”) on or about October 30, 2020 (the “Merger”). Teladoc is a virtual healthcare company. The Company generates revenue by selling access to the Company’s platform and services to clients, such as large employers or insurance companies. The Company charges clients a subscription access fee on a per-member-per-month basis, where a member is an individual user of the Company’s platform. As alleged, the Company’s subscription access revenue is the primary source of its revenue and is driven primarily by how many clients and members it has under contract, with the majority of its members and subscription access revenue coming from the United States. As such, U.S. membership is one of the most important metrics in assessing the Company’s success and future prospects.  In August 2020, the Company issued a press release indicating that it had agreed to merge with Livongo in a deal valued at $18.5 billion. The press release provided that pursuant to the terms of the Merger, Livongo shareholders would receive 0.592 Teladoc shares for each Livongo share and following closing, Teladoc shareholders would own 58% and Livongo shareholders would own 42% of the combined Company. The Merger required Livongo shareholder approval. Plaintiff alleged that the Company continued to report significant U.S. membership growth in the lead up to the Merger and otherwise indicated that there remained a lot of opportunity for continued growth. However, claimed plaintiff, despite these assurances, the Company’s pipeline was virtually depleted, that the rebuilding process would take more than a year following the Merger, and that U.S. memberships would grow as little as 1% in the 18 months following the Merger. The Company filed a registration statement in connection with the Merger on September 3, 2020; it was declared effective as of September 15, 2020. The Company also filed a joint proxy statement and prospectus on September 15, 2020, incorporating various financial reports and other SEC filings for the Company. The registration statement did not make any projection about membership growth. The registration statement did, however, make a projection about 2021 revenue. As noted by the motion court, it was “undisputed that the Company met its 2021 projection.” 19 Plaintiff alleged that the registration statement was materially misleading because it failed to disclose that the extraordinary growth in membership tied to the COVID-19 pandemic had been pulled forward to be booked prior to the Merger and that the Company should have disclosed that its pipeline for future membership growth would take more time to rebuild than the market anticipated based on the track record that defendants stated in the registration statement. Thus, plaintiff alleged that investors had a false and misleading picture about the future membership growth and cash flows for the Company. Plaintiff alleged that, on February 24, 2021 (the “February Disclosure”), the Company issued a press release revealing the Company’s financial results for Q4 2020 and full year 2020 detailing a low membership outlook for 2021. Plaintiff claimed that this negative trend was known by the Company at the time of the Merger and that, as a result of the low membership growth in 2021, the price of the Company’s stock fell substantially.  Defendants moved to dismiss the complaint on two grounds: the action was time-barred, and plaintiff failed to state a cause of action. The motion court granted the motion. The Motion Court’s Decision First, the motion court held that the action was time-barred by the one-year statute of limitations. 20 The motion court noted that in “a previously filed lawsuit in (the Illinois Lawsuit), the amended complaint filed by the Plaintiff in that action alleged that the Company … first disclosed the alleged misstatements on January 11, 2021 (the January ‘Bombshell’ Disclosure) during an analyst conference.” 21 The motion court found that “Plaintiff then waited until January 26, 2022 to file this action.” 22 In a footnote, the motion court rejected plaintiff’s argument that “the January ‘Bombshell’ Disclosure … was actually February 24, 2021” and “that the January ‘Bombshell’ Disclosure’ ‘did not include every problem that the ompany disclosed’ or that the disclosures not perfectly match the Plaintiff’s allegations.” 23 The motion court concluded that “ hat matters is that this Plaintiff previously admitted that the January ‘Bombshell’ Disclosure disclosed the basis upon which the was allegedly misleading and they did not proceed to prosecute this action within the statute of limitations period provided for by the United States Congress.” 24 Since there was no tolling agreement entered into between the parties and plaintiff was not entitled to class action tolling, the lawsuit was dismissed. 25 Second, the motion court held that even if timely, plaintiff failed to state a claim. 26 In that regard the motion court found that plaintiff failed to “allege a material misstatement of fact.” 27 The motion court explained that the “complaint predicated on the theory that the Registration Statement … was materially misleading because the defendant Company … failed to disclose, in connection with … that a surge of membership growth occasioned by the COVID-19 pandemic had been pulled forward prior to the erger and, because the indicated that membership growth was important to the Company’s revenue growth, the should have disclosed that the pipeline for membership growth was to be truncated for the next year — 2021.” 28 “The problem,” said the motion court, was that the registration statement “did disclose the effects of the COVID-19 pandemic and did not otherwise make any projection about membership growth.” 29 “In fact,” said the motion court, the registration statement “set forth historical data, made other accurate statements, and made a 2021 revenue projection which projection the Company met.” 30 “In addition,” noted the motion court, “the record … indicate that the Company did disclose that it had pulled forward its surge in membership in other filings, and that this was in fact discussed on, among other things, an earnings call on April 29, 2020 … — approximately five months before the September, 2020 was issued and approximately six months before the October 2020 erger was consummated.” “Thus,” concluded the motion court, “it can not be said that the failure to disclose the timeline for growth in membership was material or would have otherwise affected the ‘total mix of information’ available to investors.” 31 Finally, the motion court rejected plaintiff’s argument that information from other sources could not be incorporated into the registration statement, finding that the complaint made “clear that membership did not decline. It had surged during the pandemic to 51.5 million members in a six-month period at the beginning of 2020 and it remained at 51.8 million at the end of 2020….” 32 “Thus,” concluded the motion court, “it not matter that the disclaimed that investors could not rely on information not incorporated into the [registration statement (as registration statements typically provide) because this alleged omission of interim membership rate growth and membership pipeline activity was not material and simply not actionable.” 33 Footnotes Item 303, 17 C.F.R. § 229.303. See also Litwin v. Blackstone Grp., L.P. , 634 F.3d 706, 716 (2d Cir. 2011). Item 105, 17 C.F.R. §229.105. See also Citiline Holdings, Inc. v. iStar Financial Inc. , 701 F. Supp. 2d 506, 514 (S.D.N.Y. 2010). 15 U.S.C. § 77k(a). Hutchison v. Deutsche Bank Sec. Inc. , 647 F.3d 479, 484 (2d Cir. 2011). Fed. Hous. Fin. Agency for Fed. Nat’l Mortg. Ass’n v. Nomura Holding Am., Inc. , 873 F.3d 85, 99 (2d Cir. 2017) (quoting, NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co. , 693 F.3d 145, 156 (2d Cir. 2012)). Basic Inc. v. Levinson , 485 U.S. 224, 236 (1988). Ganino v. Citizens Utils. Co. , 228 F.3d 154, 162 (2d Cir. 2000) (quoting, Basic , 485 U.S. at 231-32). In the Matter of Netshoes Sec. Litig. , 64 Misc. 3d 926 (Sup. Ct., N.Y. County 2019); Nadoff v. Duane Reade, Inc. , 107 Fed. App’x 250, 252 (2d Cir. 2004). In re Morgan Stanley Info. Fund Sec. Litig. , 592 F.3d 347, 359 (2d Cir. 2010). See 15 U.S.C. § 77k(e) (“ f the defendant proves that any portion or all of such damages represents other than the depreciation in value of such security resulting from , such portion of or all such damages shall not be recoverable.”). Fed. Hous. Fin. Agency , 873 F.3d at 154 (alterations and internal quotation marks omitted). Akerman v. Oryx Commc’ns, Inc. , 810 F.2d 336, 341 (2d Cir. 1987). Morgan Stanley , 592 F.3d at 359 (citing, 15 U.S.C. § 77l(a)(2)). Id. Id. (quoting 15 U.S.C. § 77l(a)(2)). Netshoes , 64 Misc. 3d at 933 (quoting, 15 U.S.C. §77m). Id. at 930. Benn v. Benn , 82 A.D.3d 548, 548 (1st Dept. 2011). Slip Op. at *2. Id. at **1, 4. Id. at *1. Id. Id. at n.1 (citations omitted). See also id. at *4. Id. (citation omitted). Id. at **1 and 4 (citing, American Pipe & Const. Co. v. Utah , 414 U.S. 538, 553-555 (1974)). Id. at **1 and 5. Id. at *1. Id. Id. Id. Id. (citations omitted). Id. Id. See also id. at *5. 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.