When parties negotiate the terms of a contract, they cannot account for every contingency or event that may affect performance. To be sure, they try. But, it is simply not possible to account for every occurrence that might arise during the course of the contract. This inability, therefore, gives the parties wide latitude in the performance and enforcement of their contractual obligations. Underlying this discretion is the duty to act in good faith and with fair dealing. As set forth in the Restatement (Second) of Contracts, “[E]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Restatement (Second) of Contracts § 205 (1981). A party to a contract breaches these duties when his/her conduct frustrates the purpose of the contract, e.g., by failing to perform the things necessary to carry out the purpose for which the contract was entered and to refrain from destroying or injuring the other party’s right to receive the fruits of the contract. Such conduct is often described as bad faith, and is identified by, among other things, “evasion of the spirit of the bargain,” “abuse of a power to specify terms,” “interference with or failure to cooperate in the other party’s performance,” and willful rendering of imperfect performance. E.g., Restatement (Second) of Contracts § 205 cmt. d. It is widely recognized that New York was the first jurisdiction to identify the duty of good faith and fair dealing as an implied covenant that made a contract enforceable. See Wood v. Lucy, Lady Duff - Gordon, 222 N.Y. 88 (1917). Wood involved an endorsement and licensing agreement in which the parties agreed that the plaintiff could sell or license the defendant’s fashion designs in exchange for the payment of one half of all the profits and revenues generated under the agreement. A dispute arose and the defendant argued that there was no agreement between the parties. The court rejected the defendant’s argument, stating: The defendant insists, however, that it lacks the elements of a contract. She says that the plaintiff does not bind himself to anything. It is true that he does not promise in so many words that he will use reasonable efforts to place the defendant’s endorsements and market her designs. We think, however, that such a promise is fairly to be implied. The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal. It takes a broader view today. A promise may be lacking, and yet the whole writing may be “instinct with an obligation,” imperfectly expressed. If that is so, there is a contract. Id . at 90-91 (citations omitted). New York Law: In the 1933, the New York Court of Appeals expressed the duty found in Wood as an implied covenant of good faith and fair dealing. In Kirk La Shelle Co. v. Paul Armstrong Co., a case involving a dispute between parties to a settled copyright litigation, the Court held that “in every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract, which means that in every contract there exists an implied covenant of good faith and fair dealing.” 263 N.Y. 79, 87 (N.Y. 1933). Since Kirk La Shelle, the courts in New York have implied a covenant of good faith and fair dealing in the course of the performance of all contracts. See, e.g., Van Valkenburgh, Nooger & Neville v. Hayden Publ. Co., 30 N.Y.2d 34, 45 (N.Y.), cert. denied, 409 U.S. 875 (1972); Dalton v Educational Testing Serv., 87 N.Y.2d 384, 389 (N.Y. 1995). While the duties of good faith and fair dealing do not imply obligations “inconsistent with other terms of the contractual relationship” (Murphy v. American Home Prods. Corp., 58 N.Y.2d 293, 304 (N.Y. 1983)), they do include “any promises which a reasonable person in the position of the promisee would be justified in understanding were included.” Rowe v. Great Atl. & Pac. Tea Co., 46 N.Y.2d 62, 69 (N.Y. 1978) (citation omitted). When the contract contemplates the exercise of discretion by the parties, it includes a promise not to act arbitrarily or irrationally in exercising that discretion. Tedeschi v. Wagner Coll., 49 N.Y.2d 652, 659 (N.Y. 1980). New York law does not, however, “recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim, based upon the same facts, is also pled.” Harris v. Provident Life and Acc. Ins. Co., 310 F. 3d 73, 81 (2d Cir. 2002). Therefore, when a complaint alleges both a breach of contract and a breach of the implied covenant of good faith and fair dealing based on the same facts and seeks the same relief, the latter claim will be dismissed as redundant. JFK Holding Co. LLC v. City of New York, 98 A.D.3d 273 (1st Dep’t 2012); MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 87 A.D.3d 287 (1st Dep’t 2011); Logan Advisors, LLC v. Patriarch Partners, LLC, 63 A.D.3d 440, 443 (1st Dep’t 2009). Rebecca Broadway L.P. v Hotton Recently, the Appellate Division, First Department had the opportunity to once again consider the covenant of good faith and fair dealing. On August 16, 2016, the First Department decided Rebecca Broadway L.P. v Hotton, NY Slip op. 05839, a case that arose “from an unsuccessful effort to produce a Broadway musical about a ghost.” Id. at 1. As the New York Law Journal observed, the facts of the case “offer[ ] enough twists and turns to rival a stage play.” Jason Grant, Appellate Ruling Sets the Stage for Trial in Broadway Scandal, NYLJ, Aug. 18, 2016, available here. Distilled to their essence, the facts of the case are as follows: After it was reported that a major foreign investor in the production had died, it emerged that the supposedly deceased backer had never been more than a ghost himself —the man had never existed, except as a deceptive construct conjured up by a dishonest fundraiser, who has since been incarcerated for this wrongdoing. The publicity agent for the show, when he began to suspect the truth about the supposedly deceased foreign investor, expressed his concerns to the producer's principal, who essentially told him to keep quiet about it. Apparently stung by this dismissive treatment, the publicity agent sent four anonymous emails to another potential investor (this one an actual, living person), who had wished to remain anonymous. The last of these emails, sent under a fictitious name, made various highly negative allegations about the producer and the show's prospects, and urged the potential investor not to back the play. After receiving this email, the potential investor promptly withdrew from involvement in the production, preventing it from going forward. Slip op. at 1-2. The plaintiff, Rebecca Broadway Limited Partnership (“RBLP”), sued Marc Thibodeau (“Thibodeau”) a publicity agent for breach of contract, tortious interference with business relations and defamation. The motion court granted RBLP’s motion for summary judgment as to Thibodeau’s liability for breach of contract and denied RBLP’s summary judgment as to RBLP’s causes of actions for tortious interference with business relations and defamation. The motion court also denied Thibodeau’s cross motion for summary judgment for, among other things, breach of contract. Thibodeau appealed the motion court’s order. The First Department affirmed. “As to the breach of contract cause of action,” the First Department found that the motion court “properly granted RBLP summary judgment as to liability on that claim.” Slip op. at 4. The Court found that the “record establishes that Thibodeau, without RBLP’s authorization, and using confidential information he had obtained as a result of his employment as RBLP’s press representative,” caused “a key potential investor” “to withdraw his financial commitment,” to the show, “which resulted in the cancellation of rehearsals and the play’s failure to open.” Id. That sufficed to breach the terms of the agreement with RBLP. The First Department noted that “[E]ven assuming that his conduct did not violate the express terms of his agreement to act as the play’s press representative, Thibodeau breached the implied duty of good faith and fair dealing by essentially defeating the purpose of the agreement by his actions.” Slip op. at 4 (citation omitted). In so holding, the Court found that "Thibodeau was hired by RBLP to use his public relations skills to facilitate the production of a play; his actions, in which he made use of confidential information that RBLP had entrusted to him in the course of his employment, made it impossible for RBLP to produce the play as planned. It is difficult to imagine a plainer case of a party to a contract utterly defeating the purpose for which the other party had entered into that contract, or a more blatant example of an agent's disloyalty to his principal." Id. Having affirmed the motion court’s decision, the First Department turned to the denial of Thibodeau’s cross motion for summary judgment. Thibodeau claimed that RBLP breached the covenant of good faith and fair dealing by instructing him to answer all questions about the project, notwithstanding the direction to refrain from discussing possible foreign investors. The First Department rejected this claim: Although Thibodeau might well have felt uncomfortable in meeting the press while under orders not to give them the information they sought, RBLP did not breach the covenant of good faith and fair dealing by giving him those instructions. Again, while the record establishes that RBLP — as was its right — directed Thibodeau not to respond substantively to questions concerning the Abrams (i.e., foreign investor) issue, Thibodeau does not allege that RBLP ever directed him to respond falsely to press inquiries. He could have responded to questions about Abrams, both truthfully and consistent with RBLP’s directives, by stating that RBLP was investigating the matter. RBLP, as Thibodeau’s principal, was entitled to limit the subjects that Thibodeau, as RBLP’s agent, was authorized to discuss substantively with the press and public; if Thibodeau was uncomfortable with that limitation on his authority, he was free to resign. Slip op. at 5. The Court went on to observe that even if RBLP breached the covenant of good faith and fair dealing before Thibodeau breached his covenant, the result would remain unchanged. As the Court noted, Thibodeau could have resigned and terminated the agreement with RBLP: Even if RBLP could be deemed to have somehow breached its implied duty to Thibodeau of good faith and fair dealing before he committed his own breach of that covenant by sending the anonymous emails, we would not reach a different result. Any such material breach by RBLP, before the breach by Thibodeau, would have given Thibodeau grounds to suspend his own performance and, absent a timely cure by RBLP of its breach, to terminate his contract with RBLP (and then, perhaps, to seek damages for breach) …. But a first material breach of the parties’ agreement by RBLP, if there was one, would not have justified Thibodeau’s remaining in RBLP’s employ while using confidential information entrusted to him to sabotage the production. A party to a bilateral contract, when faced with a breach by the other party, must make an election between declaring a breach and terminating the contract or, alternatively, ignoring the breach and continuing to perform under the contract. Such a party has no right to represent himself as continuing to perform under the contract —and continuing to receive the other party’s performance in exchange — while at the same time surreptitiously breaching his own duty by flouting his own implied duty of good faith and fair dealing. Slip op. at 5-6 (citations and quotations omitted). Takeaway: The implied duty of good faith and fair dealing has long been accepted as a judicial tool of contract analysis. It is aimed at ensuring that the parties to a contract do not interfere with the other party’s performance or destroy the other party’s expectations with respect to the benefits of the contract. Rebecca Broadway serves as a recent example of the duty and how it can serve as the basis for a separate cause of action. Rebecca Broadway is also notable for its admonition to contracting parties about how to conduct themselves when there is a breach. In this regard, the Court made it clear that when a party to a contract breaches the agreement, the non-beaching party must make an election of remedies between declaring a breach and terminating the contract or, ignoring the breach and continuing to perform under the contract. This article was written by Jeffrey M. Haber, a partner at 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 New York, NY (Law Firm Newswire) August 10, 2016 - The Legal 500 USA, a leading legal ranking and referral guide, has again recognized Mr. Haber, co-founding partner of Freiberger Haber LLP, for his work as a plaintiff’s attorney in securities litigation. Mr. Haber was identified in the 2016 edition as a “recommended” lawyer in the “Dispute Resolution: Securities Litigation – Plaintiff” category. Mr. Haber was also “recommended” in the 2011–2012 and 2014–2015 editions of The Legal 500 USA. The Legal 500 is an independent guide that ranks law firms and individual lawyers around the world. It spends several months each year conducting in-depth research into the legal market, using information provided by law firms and “feedback from peers and clients.” The purpose of the guide is “to assess … overall visibility and reputation … buyers of legal services with an objective analysis of the U.S. market….” About Freiberger Haber LLP Located in New York City, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals involved in a broad range of complex business and commercial litigation matters. Freiberger Haber LLP combines the sophistication and counsel of a large national law firm with the economy, flexibility, commitment and personal attention of a small firm. This article was written by Jeffrey M. Haber, a partner at 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 How many awards has the Commodity Futures Trading Commission ("CFTC") made under its whistleblower program? The CFTC awarded a whistleblower $50,000, the second such award this year. The $50,000 award comes on the heels of a $10 million award earlier in 2016, the largest award under its program to date. Authority Under the Dodd-Frank Act The whistleblower award program created under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") in 2010 authorized the commodities watchdog, along with the Securities and Exchange Commission ("SEC"), to reward whistleblowers who report violations of the commodities and securities laws. The CFTC program rewards individuals for voluntarily providing original information about Commodity Exchange Act ("CEA") violations, provided that the information leads to an enforcement action that results in monetary sanctions greater than $1 million. The whistleblower gets an award of between 10 and 30 percent of the amount collected by the CFTC. Under the law, the CFTC cannot identify the whistleblower, or the enforcement action on which the award is based. The $50,000 award is based on monetary sanctions collected by the CFTC thus far, and the whistleblower will receive between 10 and 30 percent of any additional sanction collected. CFTC Whistleblower Awards in 2016 Since the program was rolled out, the CFTC has made four awards for a total of $10.6 million, which is far less than awarded under the SEC's whistleblower program in which 32 awards of more than $85 million have been made - the largest being $30 million. While the CFTC was slow in rolling out its program - the first award was in 2014 - the program is said to be picking up steam. Protection Against Retaliation The Dodd-Frank Act also protects whistleblowers under the CFTC program, whether or not the individual is eligible for an award. Employers are prohibited from terminating, demoting, suspending, threatening, harassing (directly or indirectly), or in any manner discriminating against a whistleblower for any lawful act taken by the whistleblower under the CFTC program. These protections apply to any whistleblower who reasonably believes the information provided is related to possible violations of the CEA. Whistleblowers can also file a lawsuit in federal court in the event that they are discharged or discriminated against by an employer. The Takeaway The $10 million award earlier this year and the latest $50,000 award are an indication that the CFTC is becoming more aggressive in its enforcement activities. If you have knowledge of a violation of the CEA, an experienced attorney can help you report your concerns and obtain compensation. For related coverage, see our posts on IRS Whistleblowers Win Big as Court Ruling Stands and Former Employee Sued by Tesla Claims Whistleblower Status. This article was written by Jeffrey M. Haber, a partner at 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 What is a FINRA arbitration? The Financial Industry Regulatory Authority ("FINRA") issued a Regulatory Notice in July 2016 reminding member firms that customers have a right to request arbitration "at any time." In addition, the self-regulator stated that customers do not forfeit their right to a FINRA arbitration by signing an agreement that calls for another venue. The notice also reiterated that FINRA members cannot require registered representatives and certain employees to waive their right to arbitration in a pre-dispute arbitration agreement. FINRA Arbitration at a Glance The FINRA arbitration forum protects customers from a wide range of practice violations, such as unsuitable investment advice, churning, breach of fiduciary duty, and the like. Arbitration is a more expedient and cost-effective approach to dispute resolution than a court trial. The process involves selecting a neutral third party, the "arbitrator," to resolve the dispute. By pursuing arbitration, a customer waives the right to pursue the matter in court, and the arbitrator's decision is final and binding. The Regulatory Notice is a reminder that failing to comply with the rules concerning arbitration agreements, or failing to submit disputes to a FINRA forum, are rules violations that could result in disciplinary action. The notice serves as a warning to firms that have reportedly been including restrictive provisions regarding dispute forums in their arbitration agreements. While these restrictions are more common in disputes between member firms and registered representatives, the real issue in customer disputes tends to be the selection of law. In a related development, FINRA has also filed a proposed rule with the SEC to amend its Code of Arbitration Procedure for Customer Disputes. The goal is to provide a more efficient arbitration process that is also less costly, while maintaining the rights of the parties involved in a dispute. Some observers believe the process could be made more efficient, but argue that any cost savings should be passed through to the customers involved in the proceeding. FINRA has continued to refine its arbitration and dispute-resolution procedures since; see our post on FINRA's proposed changes to the expungement process for a related development. Notwithstanding FINRA's July 2016 notice, brokers and investment advisors have a duty to act in a reasonable and prudent manner when acting as a fiduciary, and are required to put their customers' interests first. A registered representative who becomes embroiled in a dispute with a customer or employer should engage the services of an experienced securities arbitration attorney. For a broader look at how the process works, see our post, In Focus: Securities Arbitration. This article was written by Jeffrey M. Haber, a partner at 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 Deadlines are a big part of litigation. When a litigant serves a late paper, they may receive a notice of rejection in response. What happens if a notice of rejection is not timely served? If the rejection is made after fifteen days, the objection is deemed waived pursuant to CPLR 2101(f), which provides: A defect in the form of a paper, if a substantial right of a party is not prejudiced, shall be disregarded by the court, and leave to correct shall be freely given.  The party on whom a paper is served shall be deemed to have waived objection to any defect in form unless, within fifteen days after the receipt thereof, the party on whom the paper is served returns the paper to the party serving it with a statement of particular objections. In Gorgia v. Dolan, 250 A.D. 3d 809 (2d Dept. 2026), was an employment discrimination case. Pursuant to CPLR 3012(b) a complaint must be served within twenty days of demand. The motion court dismissed the complaint because it was served thirty days after the defendant’s demand. The Second Department reversed holding that the defendant waived the right to argue that the complaint was served late. The defendant was untimely in rejecting same and a “party is deemed to have waived late service where it retains the paper without rejecting to late service.” Gorgia, 250 A.D.3d at 813 (citations omitted). In Lyles v. Nassau County, 213 A.D.3d 921 (2d Dept. 2023), the plaintiff served the defendant with a copy of the summons and complaint on March 15, 2019. More than two months later, defendant served and filed an untimely answer. The answer was never rejected, and, instead, the plaintiff moved for a default judgment five months later. The defendant cross-moved to dismiss the complaint as time-barred. The motion court denied plaintiff’s motion and granted the cross-motion. On plaintiff’s appeal, the Court affirmed holding that the retention of the answer without rejection waived the late service and default. Aron Law, PLLC v. New York City Health and Hospitals Corp., 232 A.D.3d 528 (1st Dept. 2024), involved a petition regarding FOIL records. When petitioner’s response to a FOIL request contained numerous redactions, he brought an article 78 Proceeding seeking the production of unredacted documents. The motion court granted the petition and directed that the agency produce unredacted copies. On the agency’s appeal, the Court unanimously reversed. The Court found that the agency submitted, with the records, a detailed explanation of its redactions, in evidentiary form that should not have been disregarded by the motion court. In addition, the Court held that “petitioner waived any objections to any procedural deficiencies in the answer by raising them for the first time in reply, instead of returning the answer to respondent with a statement of objections within 15 days pursuant to CPLR 2101(f).” Aron Law, 232 A.D.3d at 529. Against this backdrop we discuss PNC Bank, N.A. v. Kane, 2026 WL 2336292 (2d Dept. 2026). The defendant in PNC Bank made a pre-answer motion to dismiss the plaintiff’s foreclosure complaint. The motion was denied in June 2023. Pursuant to CPLR 3211(f), the defendant’s answer was due “ten days after service of notice of entry of the order” denying the motion. Instead, the defendant served her answer in October. Twenty days later the plaintiff rejected the answer as untimely. Thereafter, the defendant moved for an order compelling the plaintiff to accept a late answer and the plaintiff cross-moved for a default judgment. The motion court denied defendant’s motion and granted the cross-motion. On defendant’s appeal, the Second Department reversed holding that: Pursuant to CPLR 2101(f), “[t]he party on whom a paper is served shall be deemed to have waived objection to any defect in form unless, within fifteen days after the receipt thereof, the party on whom the paper is served returns the paper to the party serving it with a statement of particular objections.” Here, the plaintiff’s undisputed failure to reject the defendants’ answer within the 15-day statutory time frame constituted a waiver of the late service and the default (see Globalized Realty Group, LLC v Crossroad Realty NY, LLC, 239 AD3d 950, 952; U.S. Bank N.A. v Lopezv, 192 AD3d 849, 850; Glass v Captain Hulbert House, LLC, 103 AD3d 607, 608-609). Accordingly, the Supreme Court should have granted the defendants’ motion to compel the plaintiff to accept their late answer and denied the plaintiff’s cross-motion for leave to enter a default judgment against the defendants (see U.S. Bank N.A. v Lopez, 192 AD3d at 850-851; Glass v Captain Hulbert House, LLC, 103 AD3d at 609). Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber The Securities and Exchange Commission (the “Commission”) regulates investment advisers, primarily under the Investment Advisers Act of 1940 (“Advisers Act”) and the rules adopted under that statute. One of the central elements of the regulatory program is the requirement that an investment adviser under the Advisers Act register with the Commission, unless exempt or prohibited from registration. Generally, only larger advisers that have $100 million or more of regulatory assets under management, or that provide advice to investment company clients, are permitted to register with the Commission. Smaller advisers register under state law with state securities authorities. Exempt Reporting Advisers (“ERAs”) are a category of private fund advisers under the Advisers Act that are not required to register with the Commission. ERAs include advisers to venture capital funds, and advisers to private funds with less than $150 million in assets under management in the United States. The registration exemption for advisers to venture capital funds is Advisers Act Section 204(l); the registration exemption for private fund advisers is Advisers Act Section 204(m). While ERAs are exempt from the registration requirements, any books or records they do maintain are subject to examination by the Commission under Section 204(a) of the Advisers Act. Section 204(a) of the Advisers Act provides that all records of investment advisers are “subject at any time, or from time to time, to such reasonable periodic, special, or other examinations by representatives of the Commission as the Commission deems necessary or appropriate in the public interest or for the protection of investors.”[1] Form ADV is the form used by investment advisers to register with the Commission and with state securities authorities. It consists of two parts, both of which are required to be filed with the Commission, and both of which are publicly available once filed: Form ADV Part 1 and Form ADV Part 2. ERAs, while exempt from registration, are still required to file certain items in Form ADV Part 1. ERAs do not complete Part 2. Part 1 asks for information about, among other things, an adviser’s business, amount of assets under management, ownership, and clients. Form ADV is filed electronically with the Commission through the Investment Adviser Registration Depository (“IARD”), a secure Internet-based filing system that collects and maintains the registration, reporting, and disclosure information for investment advisers. The Financial Industry Regulatory Authority (“FINRA”), under contract with the Commission, is the developer and operator of the IARD system. Once filed, the Form ADV is available to the public through the Commission’s Investment Adviser Public Disclosure database (“IAPD”), located at https://adviserinfo.sec.gov. The importance of the Form ADV disclosure regime and the Commission’s authority to examine records maintained by advisers and exempt reporting advisers were highlighted in Securities and Exchange Commission v. Wisdom Capital Management Group Ltd., an enforcement action filed by the Commission in 2024 in which a final judgment was recently entered. Securities and Exchange Commission v. Wisdom Capital Management Group Ltd. According to the Commission’s complaint, Wisdom Capital Management Group Ltd. (“Wisdom”) filed a Form ADV in December 2023 claiming that it qualified as an ERA under both of the Advisers Act’s principal private-fund exemptions. Specifically, Wisdom represented that it both advised only venture capital funds and acted solely as an adviser to private funds with less than $150 million in assets under management in the United States. The filing contained information concerning Wisdom’s business operations and organizational structure. Wisdom identified a Wall Street address in New York City as its principal office and place of business and designated an individual, “Ricardo Jobity”, as both its Chief Executive Officer and Chief Operating Officer. It also reported that it had $10 million in private fund assets under management in the United States and disclosed two private funds that it purportedly advised. In addition, the filing represented that Wisdom was a public reporting company and supplied a Central Index Key (“CIK”) number typically associated with entities that make periodic filings with the SEC. The Commission’s investigation allegedly revealed multiple inconsistencies with those representations. According to the Commission’s complaint, the occupant of the Wall Street address identified in the Form ADV had been located there for more than seven years and had no knowledge of either Wisdom or “Ricardo Jobity”. The Commission further alleged that a third-party registered investment adviser identified in Form ADV as providing information about Wisdom’s private funds did not report those funds in its own filings. Nor, according to the Commission, were the funds or their listed identification numbers found elsewhere in the SEC’s records. The Commission also alleged that searches of the SEC’s public-company database produced no information corresponding to either Wisdom or the CIK number provided in the filing. According to the Commission, the matter was compounded by its inability to verify the information directly with the firm. The telephone number listed for Wisdom’s New York office used a San Antonio, Texas area code, and when Commission attorneys called the number on two occasions, the calls allegedly went unanswered and resulted only in a busy signal. The Commission also sent requests seeking books and records relating to the information reported on the Form ADV, including organizational records and information relating to the firm’s reported private-fund assets under management. According to the complaint, neither Wisdom nor “Jobity” responded to those requests. By engaging in the conduct described in the Complaint, the Commission alleged that Wisdom violated Sections 204(a) and 207 of the Advisers Act of 1940. The Commission sought injunctive relief and civil monetary penalties. On August 3, 2026, the court entered a final judgment by default. Pursuant to the judgment, (1) Wisdom was enjoined from future violations of Sections 204(a) and 207 of the Advisers Act, (2) Wisdom, its owners, and its executive officers were enjoined from filing a Form ADV as an Exempt Reporting Adviser, and Wisdom was ordered to pay a civil penalty of $1,152,316. Takeaway Wisdom Capital serves as a reminder that Exempt Reporting Adviser status relieves an adviser of the obligation to register with the SEC, but it does not remove the adviser from the Commission’s oversight authority. ERAs remain subject to the Advisers Act’s examination provisions and must be prepared to substantiate the information they disclose in Form ADV filings. The enforcement action underscores that the Commission views Form ADV as a critical regulatory disclosure document and expects advisers relying on registration exemptions to provide accurate and verifiable information concerning their business operations, assets under management, personnel, and fund activities. The enforcement action also demonstrates the breadth of the Commission’s authority under Section 204(a) of the Advisers Act. According to the Commission, when questions arose regarding the accuracy of Wisdom’s disclosures, the Commission’s staff requested books and records supporting the firm’s representations. The alleged failure to respond to those requests became an important aspect of the case. Wisdom Capital therefore illustrates that an adviser cannot rely on its exempt status as a shield against regulatory inquiry; records maintained by an ERA remain subject to SEC examination, and a failure to cooperate with those examination efforts can itself form the basis for enforcement action. Finally, Wisdom Capital highlights the risks associated with inaccurate or unsupported Form ADV disclosures. The Commission alleged that multiple representations in Wisdom’s filing, including information concerning its address, management, assets under management, private funds, and public-company status, could not be verified and were inconsistent with information available from other sources. By pursuing claims under Section 207, which prohibits untrue statements of material fact in filings made under the Advisers Act, the Commission reinforced the principle that advisers claiming an exemption from registration must provide truthful and complete information in the filings that the statute requires them to make. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. ___________________________________ [1] 15 U.S.C. § 80b-4(a).

By: Jeffrey Haber In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or the “Act”) to combat illegal and fraudulent conduct on Wall Street and promote compliance with the federal securities. The Dodd-Frank Act contains whistleblower provisions that authorize the Securities and Exchange Commission (“SEC” or the “Commission”) to pay substantial cash rewards to whistleblowers that voluntarily provide the SEC with information about violations of the securities laws. The Act further empowers whistleblowers to report corporate fraud or illegal conduct by prohibiting retaliation against individuals who blow the whistle under the SEC whistleblower program. In 2011, the SEC adopted Rule 21F-17 to implement the whistleblower-protection provisions of the Act. The rule provides that “o 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. The SEC Begins To Enforce Rule 21F-17 Since the rule’s adoption, whistleblowers and their counsel have complained that employers have used confidentiality and non-disclosure agreements to harass and intimidate employees and former employees from reporting a violation of the securities laws to the SEC. The problem from the whistleblower’s perspective was that following adoption, the SEC was not enforcing the rule. That changed, however, in March 2014, when the SEC whistleblower office promised to police confidentiality agreements, and punish those companies that used such agreements to impede whistleblowing communications with the Commission. A year later, in February 2015, the SEC laid the foundation to make good on that promise. According to numerous media reports, the SEC asked dozens of public companies for nondisclosure agreements, employment contracts, severance agreements, and other similar documents as part of an investigation into whether there were efforts to suppress lawful whistleblowing activities. See, e.g., Rachel Louise Ensign, “SEC Probes Companies’ Treatment of Whistleblowers,” The Wall Street Journal, Feb. 25, 2015. The KBR Administrative Action: In April 2015, the SEC made good on its promise to crackdown on agreements and policies that restrict whistleblowing activities, when it issued a cease-and-desist order against KBR Inc. (“KBR”) for using confidentiality agreements that could chill the whistleblower process. According to the SEC, KBR, a global technology and engineering firm based in Houston, required employees participating in internal investigations to sign confidentiality statements containing language warning that the employee could be disciplined and/or fired if he/she discussed the investigation and its subject matter with outside parties without the approval of KBR’s legal department. The SEC acknowledged that it was “unaware of any instances in which (i) a KBR employee was in fact prevented from communicating” with the Commission, or “(ii) KBR took action to enforce the form confidentiality agreement or otherwise prevent such communications,” but nonetheless found that the agreement “impedes such communications.” KBR agreed to pay a $130,000 penalty to settle the SEC’s charges and amend its confidentiality statement by adding language making it clear that employees could report securities law violations to the SEC and other federal agencies without KBR approval or fear of retaliation. Commenting on the settlement, Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, underscored the vigor with which the SEC would pursue companies for violating Rule 21F-17: By requiring its employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us. SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision. The KBR order was the first reported enforcement action by the SEC that was based solely on the language of a confidentiality agreement. There would be others, albeit more than a year later. The BlueLinx Holdings Administrative Action: On August 10, 2016, the SEC announced that BlueLinx Holdings Inc. (“BlueLinx”), a building products distributor based in Atlanta, agreed to pay $265,000 in settlement of charges that it violated Rule 21F-17 by using severance agreements that required outgoing employees to waive their rights to a monetary recovery if they filed a complaint with the SEC or other federal agencies. According to the SEC, BlueLinx used several forms of severance agreements “that prohibited the employee from sharing with anyone confidential information concerning BlueLinx that the employee had learned while employed by the company, unless compelled to do so by law or legal process,” but which failed to exempt the employee from providing “information voluntarily to the Commission or other regulatory or law enforcement agencies.” Even though BlueLinx’s severance agreements did not prohibit former employees from reporting violations to the SEC, the SEC nevertheless claimed that the company unlawfully restricted outgoing employees from participating in the SEC’s whistleblower program. According to the SEC, “by requiring its departing employees to forego any monetary recovery in connection with providing information to the Commission, BlueLinx removed the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.” The SEC also objected to the requirement that outgoing employees notify the company’s legal department prior to disclosing information to third parties, because the agreement did not expressly exempt the SEC from the restriction. The SEC determined that “BlueLinx forced those employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits.” Although the company did not admit or deny the findings, BlueLinx agreed: “(1) to amend its severance agreements to make clear that employees may report possible securities law violations to the SEC and other federal agencies without BlueLinx’s prior approval and without having to forfeit any resulting whistleblower award, and (2) to make reasonable efforts to contact former employees who had executed severance agreements after Aug. 12, 2011 to notify them that BlueLinx does not prohibit former employees from providing information to the SEC staff or from accepting SEC whistleblower awards.” In the announcement of the settlement, the SEC made it clear that the Commission would continue to aggressively enforce Rule 21F-17. Stephanie Avakian, Deputy Director of the SEC’s Enforcement Division underscored this point, stating “We’re continuing to stand up for whistleblowers and clear away impediments that may chill them from coming forward with information about potential securities law violations.” Jane Norberg, Acting Chief of the SEC’s Office of the Whistleblower, added, “Companies simply cannot undercut a key tenet of our whistleblower program by requiring employees to forego potential whistleblower awards in order to receive their severance payments.” The Health Net Inc. Administrative Action: On August 16, 2016, the SEC announced that Health Net Inc. (“Health Net”), a health insurance provider based in California, agreed to pay a $340,000 penalty for using severance agreements that required outgoing employees to waive their right to obtain monetary awards for blowing the whistle under the SEC’s whistleblower program. Health Net provided a severance package pursuant to an agreement that outgoing employees signed when leaving the company. These agreements included a Waiver and Release of Claims that listed various potential claims against the company that an outgoing employee waived as a condition of receiving severance payments and other consideration from Health Net. In August 2011, Health Net amended the Waiver and Release of Claims to specify that, while not prohibited from participating in a government investigation, the outgoing employee who executed the Waiver and Release of Claims was prohibited from filing an application for, or accepting, a monetary award from the SEC. In June 2013, Health Net further amended the Waiver and Release of Claims by removing the language “expressly prohibiting employees from applying for whistleblower awards pursuant to Exchange Act Section 21F,” and added an exemption for “communicating directly with, cooperating with or providing information to any government regulator.” However, Health Net “retained restrictions in the Waiver and Release of Claims that removed the financial incentive for its former employees who executed that agreement to communicate with Commission staff concerning possible securities law violations at Health Net.” On October 22, 2015, Health Net amended its severance agreements to remove the prohibition described above. Notably, the SEC acknowledged that it found no evidence of any instances in which an outgoing Health Net employee who executed the severance agreements did not communicate directly with the SEC about potential securities law violations, nor did the SEC find any evidence that Health Net enforced the waiver provisions or otherwise prevented such communications. Nonetheless, the SEC concluded that both the 2011 and the 2013 provisions violated Rule 21F-17 by removing the financial incentive to communicate with the SEC concerning possible securities law violations at Health Net. In addition to paying the penalty, Health Net agreed to make reasonable efforts to contact former employees who signed the Waiver and Release of Claims, and provide those employees with a link to the SEC’s order and a statement that “Health Net does not prohibit former employees from seeking and obtaining a whistleblower award from the Securities and Exchange Commission pursuant to Section 21F of the Exchange Act.” In the announcement of the settlement, the SEC continued to emphasize its effort to enforce Rule 21F-17. In this regard, Antonia Chion, Associate Director of the SEC Enforcement Division, stated, “Financial incentives in the form of whistleblower awards, as Congress recognized, are integral to promoting whistleblowing to the Commission. Health Net used its severance agreements with departing employees to strip away those financial incentives, directly targeting the Commission’s whistleblower program.” Takeaway: The foregoing administrative actions demonstrate the SEC’s intention to make good on its promise to crack down on agreements and policies that impede whistleblowers from reporting securities fraud to the Commission. Whistleblowers should take comfort knowing that the SEC is aggressively enforcing Rule 21F-17 so that there are no contractual or policy impediments to blowing the whistle on securities fraud. Companies should review their severance agreements and policies to ensure that they are compliant with Rule 21F-17. Even companies that have previously reviewed their severance agreements and company policies should undertake such a review in light of the SEC’s recent enforcement actions. 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.

In the commercial world, parties to a transaction often allocate the risk of economic loss in the event the transaction is not fully executed by including a sole remedy clause in their agreement. New York courts have long upheld such contractual provisions. However, as the First Department of the New York Supreme Court, Appellate Division, recently held, there are exceptions. One such exception pertains to a party’s grossly negligent conduct. As explained in Morgan Stanley Mortgage Loan Trust 2006-13ARX v. Morgan Stanley Mortgage Capital Holdings LLC, 2016 NY Slip Op. 05781 (1st Dep’t. Aug. 11, 2016), a party cannot “insulate itself from damages caused by its grossly negligent conduct.” Id. at *4 (internal quotations omitted). THE CASE The case arose from the securitization and sale of residential mortgages. The underlying mortgage loans originated with an affiliate of the defendant, Morgan Stanley Capital Holdings LLC (“Morgan Stanley”). The mortgage loans were pooled together and sold to the Morgan Stanley Mortgage Loan Trust 2006-13ARX (the “Trust”), which, through the plaintiff, U.S. Bank National Association (the “Trustee”), issued certificates representing ownership shares in the combined assets. These assets were then offered for sale, by prospectus, to investors as residential mortgage backed securities (“RMBS”). The Trustee sued Morgan Stanley to recover the losses sustained by investors who purchased the RMBS after a massive number of the loans defaulted. Facts: In 2006, Morgan Stanley sold debt, in the form of 1,873 residential mortgage loans, to a Morgan Stanley affiliate, Morgan Stanley Capital I, Inc. The sale, which represented an unpaid principal balance of more than $600,000,000, was largely effectuated through two integrated agreements, a Mortgage Loan Purchase Agreement (“MLPA”) and a Pooling and Servicing Agreement (“PSA”). These residential mortgage loans were pooled together and sold to the Trust, which issued certificates representing ownership shares in the combined assets. These RMBS were then offered for sale, by prospectus, to investors. Mortgage payments were the anticipated source of revenues that the Trustee would use to pay investors. However, when hundreds of the borrowers defaulted in making their mortgage payments, the RMBS became virtually worthless. The Proceedings Below: The Trust alleged that it incurred more than $140 million in damages due to Morgan Stanley’s false representations and warranties. According to the Trustee, Morgan Stanley acted with reckless indifference by failing to adhere to minimum underwriting standards. The Trustee claimed that when it notified Morgan Stanley of the defective loans, demanding that Morgan Stanley repurchase them, Morgan Stanley refused to do so. The Trustee claimed that a forensic examination of the RMBS showed that there were hundreds of loans that were of lesser quality than what Morgan Stanley had represented. The complaint alleged that many of the underlying borrowers obtained their loans by providing inaccurate, if not outright false, information on their applications that Morgan Stanley failed to verify. The Trustee maintained that Morgan Stanley should have notified the Trustee of these conditions because it knew of them, or could have discovered them with due diligence, given its access to documents and information about the loans. The Trustee alleged that Morgan Stanley made representations to make the loans appear less risky than they were. Despite the sole remedy provision, the Trustee alleged that contractual damages would not adequately compensate the Trust for its losses. Morgan Stanley moved to dismiss the complaint. The trial court dismissed the cause of action alleging a breach of contract based on Morgan Stanley’s alleged failure to notify the Trustee about the defective loans. The court rejected the Trustee’s argument that Morgan Stanley’s inaction constituted an independent breach of contract claim, finding that the requirement was not a contractual obligation, but merely a notification remedy. The court also dismissed the Trustee’s claims that it was entitled to damages caused by Morgan Stanley’s gross negligence on the basis that “the relief available to plaintiff is limited by the sole remedy provisions in the [PSA] and the [MLPA]” (2014 NY Slip Op 32520[U], *1-2 [2014]). Alternatively, the court held that “even if, legally, the sole remedy limitations in the MLPA and PSA could be rendered unenforceable by Morgan Stanley’s willful misconduct or gross negligence,” the Trustee’s complaint “did not contain facts to sufficiently support that claim.” Id. The Court’s Decision: In dismissing the Trustee’s failure to notify cause of action, the trial court observed that the issues raised by the Trustee were substantially the same as those raised in Nomura Asset Acceptance Corp. Alternative Loan Trust v Nomura Credit & Capital, Inc., an RMBS case that was pending before it, and that its ruling was consistent with that earlier case. However, after the parties briefed the appeal, the First Department modified the Nomura decision, “holding that under similar RMBS agreements, a seller’s failure to provide the trustee with notice of material breaches it discovers in the underlying loans states an independently breached contractual obligation, allowing a plaintiff to pursue separate damages.” Slip Op. at *4 (citing Nomura Home Equity Loan, Inc. v Nomura Credit & Capital, Inc., 133 A.D.3d 96, 108 (1st Dep’t 2015) (lv granted 1st Dep’t Jan. 5, 2016)). Consistent with the First Department’s Nomura decision, the Court reinstated the failure to notify claim. In connection with the Trustee’s claims of gross negligence, the Court held that although the courts in New York will honor “the remedies that the parties have contractually agreed to,” they will not allow a party to “insulate itself from damages caused by its grossly negligent conduct.” As a general principle of law, damages arising from a breach of contract will ordinarily be limited to those necessary to redress the wrong (see e.g. Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603, 613 [1994]). Where parties contractually agree to a limitation on liability, that provision is enforceable, even against claims of a party's own ordinary negligence (Sommer v Federal Signal Corp., 79 NY2d at 553, 554). There are exceptions to this rule of law, however, and as a matter of long-standing public policy, a party may not insulate itself from damages caused by its “grossly negligent conduct” (Sommer at 554). Looking at the complaint, the Court found that the Trustee sufficiently alleged that Morgan Stanley acted with reckless indifference. In that regard, the Court noted that: “It alleges there were widespread breaches across the loans being held by the Trust and that Morgan Stanley failed to adhere to even minimal underwriting standards or to verify basic and critical information about potential buyers; it further alleges that Morgan Stanley had access to the underlying loan files and that more than half of the loans later reviewed by plaintiff's forensic analysts revealed rampant breaches of the warranties Morgan Stanley made. It further alleges that Morgan Stanley simply ignored its contractual obligations, disregarded the known or obvious risks that the loans sold to the Trustee were defective and then failed to notify the Trustee of any breaches or effectuate a cure/repurchase. We hold that these allegations are sufficient to withstand dismissal at the pleading stage.” Takeaway: Agreements limiting the remedies available to parties for the failure to perform the terms of their agreement are enforceable under the law. In fact, such provisions are an accepted means to allocate risk between the parties. Morgan Stanley teaches that despite the parties’ attempt to contractually limit the remedies available for a breach, they cannot limit the remedies available for their fraudulent or reckless misconduct. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

Did Tesla violate securities laws by not disclosing a fatal accident? In May, the driver of a Tesla Model S was killed after colliding with a truck while the Autopilot feature, which is designed to assist drivers in steering, braking and avoiding collisions, was engaged. Since October 2014, Tesla Motor Co. has installed autopilot software in all of its cars, even though the feature is still being tested in a public beta. Now, the Securities and Exchange Commission ("SEC") is said to be probing the matter to determine if Tesla violated the federal securities laws by failing to disclose the fatal accident. Tesla claims it immediately reported the crash to the National Highway Traffic Safety Administration ("NHTSA"), however. The overarching issue is whether the company should have also disclosed the crash to the SEC. Some observers argue that the accident was a material event, and the electric car maker breached its corporate duty by not informing the agency, and its investors. While the SEC has not confirmed that an investigation is underway, the NHTSA and the National Transportation Safety Board are looking into the crash. For its part, Tesla said it has not received any communication from the SEC, and also noted that this is the first fatality in 130 million miles of travel with the Autopilot mode activated. While the company acknowledges the system has not been perfected, the system is designed to reduce drive workload and improve safety. However, there have recently been other non-fatal accidents in Montana and Pennsylvania in which Tesla drivers were in the self-driving mode. The accidents come at an inopportune time for Tesla, and its founder, Elon Musk, who until this time has been the darling of investors. The company recently announced shipments of Tesla models missed second quarter projections after previously announcing a first quarter miss and has been forced to revise its projected shipments downward for the year. On the other hand, it remains to be seen whether the accident was material to Tesla's future. Shares of the company's stock rose after news of the crash first became public on July 1. Investors in the electric car maker are said to view this as developing technology and that errors are inevitable. Questions have also been raised as to whether the driver was using the Autopilot feature as intended. Drivers are required to maintain control of the vehicle, keeping both hands on the wheel at all times. The system alerts the driver if hands are not detected and the car is designed to slow down until the driver responds. Whether the SEC will find that this accident was a material event that should have been disclosed is uncertain, but any company being probed by the agency needs to engage the services of an experienced attorney. This article was written by Jeffrey M. Haber, a partner at 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 Freiberger As discussed in a prior BLOG article “Pursuant to RPL 282(1), Attorney’s Fees are Available to Borrowers in Mortgage Foreclosure Actions if They Know How to Ask for Them,” potential clients, when consulting about a new litigation matter, always ask “can we recoup our legal fees in the litigation.” We explain that, according to the “American Rule,” “the prevailing litigant is ordinarily not entitled to collect a reasonable attorney fee from the loser.” Alyeska Pipeline Services Co. v. Wilderness Society, 421 U.S. 240, 247 (1975) (providing a historical perspective on the awarding of attorneys’ fees in Federal Court litigation); see also Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 21-22 (1979). The “American Rule” “reflects a fundamental legislative policy decision that, save for particular exceptions or when parties have entered into a special agreement, it is undesirable to discourage submission of grievances to judicial determination and that, in providing freer and more equal access to the courts, the present system promotes democratic and libertarian principles.” Mighty Midgets, 47 N.Y.2d at 22 (citations omitted). Exceptions to the “American Rule” exist, for example, where the recovery of attorney’s fees “is authorized by agreement between the parties, statute or court rule.” Hooper Assoc., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487 (1989) (citations omitted); Premium Productions, Inc. v. O’Malley, 246 A.D.3d 948, 955 (2d Dept. 2026); Giannakopoulos v. Figame Realty Mgt., 219 A.D.3d 803, 805-06 (2d Dept. 2023). Further, “[i]n general, only a prevailing party is entitled to recover an attorney's fee and to be considered a prevailing party, a party must be successful with respect to the central relief sought.” Village of Hempstead v. Taliercio, 8 A.D.3d 476 (2d Dept. 2004) (citations, internal quotation marks and brackets omitted); see also YC MD, P.C. v. Shusterman, 229 A.D.3d 708, 709 (2d Dept. 2024). “Such a determination requires an initial consideration of the true scope of the dispute litigated, followed by a comparison of what was achieved within that scope.” DKR Mortgage Asset Trust 1 v. Rivera, 130 A.D.3d 774 (2d Dept. 2015) (citations and brackets omitted); see also YC MD, P.C., 229 A.D.3d at 709. Frequently, mortgages provide that if the lender commences litigation to foreclose, it is entitled to recover its reasonable legal fees and expenses. As typically written, such provisions are unilateral and, therefore, under the express terms of the mortgage, a borrower that successfully defends a mortgage foreclosure action would not be entitled to recover legal fees and expenses. However, Real Property Law § 282(1), which resolves this imbalance, “reads into” mortgages a reciprocal attorney’s fees provision when the existing attorney’s fees provision is one-sided. RPL 282(1), by its express terms, makes plain that for a borrower to benefit from this provision, an affirmative claim for such fees must be made either by commencing an action or by asserting a claim for such fees by way of counterclaim. See, e.g., U.S. Bank N.A. v. Onuoha, 216 A.D.3d 1069, 1073 (2d Dept. 2023) (denying fees where no claim was made); Nationstar Mortgage, LLC v. Dorsin, 180 A.D.3d 1054, 1055 and 1057 (2d Dept. 2020) (awarding fees where a claim was made). Against this backdrop, we discuss 21st Mort. Corp. v. Nweke, a mortgage foreclosure action decided by the Appellate Division, Second Department, on August 5, 2026. In 2014, lender commenced an action to foreclose a mortgage. Lender’s motion for summary judgment was denied and borrower’s cross-motion for summary judgment dismissing the action as time-barred and for attorney’s fees pursuant to RPL 282 was granted. The motion court, however, sua sponte, imposed an equitable mortgage in favor of the lender. On the borrower’s appeal, the Second Department reversed to the extent that the motion court awarded the lender an equitable mortgage. The Court granted those branches of the borrower’s cross motion dismissing the foreclosure action as time-barred and awarding legal fees pursuant to RPL 282 and remitted the matter to the motion court to determine the amount of fees and expenses to be awarded to the borrower. Upon remittitur, the motion court confirmed the appointed referee’s report over the lender’s objections and awarded the borrower $100,000 in fees and expenses. This time the lender appealed and the Second Department affirmed. The Court’s decision focused on the award of “fees on fees” – that portion of the “legal fees and costs incurred by the [borrower] in prosecuting her claim for an award of attorney’s fees.” An award of such fees “generally must be based upon a specific contractual provision or statute. In this regard, “[w]here a contract provides for indemnification for ‘legal costs and charges, including counsel fees’, this Court has determined that such provision did not provide for ‘fees on fees’ in the absence of unmistakably clear intent regarding their recovery.” (Citations and some internal quotation marks omitted.) However, the Second Department noted that in conjunction with RPL 234, it and the Court of Appeals “have authorized the inclusion of fees for prosecuting or defending an appeal dealing with attorneys’ fees.[1] In so doing, the Court noted that RPL 234, was designed to “level the playing field between landlords and residential tenants, creating a mutual obligation that provides an incentive to resolve disputes quickly and without undue expense. The statute thus grants to the tenant the same benefit the lease imposes in favor of the landlord” and that RPL 282 had a similar purpose. Here, the note and mortgage provide: that in the event of a default, the note holder would have the right to be paid back in full “for all of its costs and expenses in enforcing this Note to the extent not prohibited by applicable law” and those expenses included attorneys’ fees. The mortgage further provided that “[i]n any lawsuit for Foreclosure and Sale, Lender will have the right to collect all costs and disbursements and additional allowances allowed by law and will have the right to add all reasonable attorneys’ fees to the amount Borrower owes.” [Internal brackets omitted; emphasis added.] The lender in 21st Mortgage took the position that it was not entitled to “fees on fees” and, therefore, neither was the borrower. The Court disagreed and noted that in Gertler v. Davidoff Hutcher & Citron LLP, 233 A.D.3d 846 (2d Dept. 2024), it awarded “fees on fees” pursuant to a statute (Labor Law § 198[1-a]) that used “all reasonable attorney’s fees” language (emphasis added). Here, the Court, noting that the operative note and mortgage use the word “all” too, stated: Real Property Law § 282 does not use the term “all,” and neither does Real Property Law § 234. However, the legislative intent—as was recognized by the [lender]—was to impose reciprocal obligations upon lenders and landlords. To hold otherwise would give the lender an undue advantage by permitting it to litigate the issue of attorneys’ fees with impunity, and frustrate the legislative purpose. In the instant case, since the [lender] may recover, like the plaintiff in Gertler, “all” reasonable attorneys’ fees, including “fees on fees,” the [borrower] may recover “fees on fees.” The evidence submitted by the [borrower] was sufficient to establish the reasonableness of the requested fees. [Citations and internal quotation marks omitted Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1] The cases to which the Court was referring involved claims for legal fees in landlord/tenant summary proceedings under RPL 234. RPL 234, like RPL 282, implies a reciprocal legal fee provision in residential leases entitling a prevailing tenant to recoup legal fees in summary proceedings where the lease, as written, only permits the recovery of legal fees by the landlord.

By: Jonathan H. Freiberger As discussed in a prior BLOG article, one of the first question asked by a potential client when consulting about a new litigation matter is “can we recoup our legal fees in the litigation.” In response, we must explain that, according to the “American Rule,” “the prevailing litigant is ordinarily not entitled to collect a reasonable attorney fee from the loser.” Alyeska Pipeline Services Co. v. Wilderness Society, 421 U.S. 240, 247 (1975) (providing a historical perspective on the awarding of attorneys’ fees in Federal Court litigation); see also Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 21-22 (1979). The “American Rule” “reflects a fundamental legislative policy decision that, save for particular exceptions or when parties have entered into a special agreement, it is undesirable to discourage submission of grievances to judicial determination and that, in providing freer and more equal access to the courts, the present system promotes democratic and libertarian principles.” Mighty Midgets, 47 N.Y.2d at 22 (citations omitted). Exceptions to the “American Rule” exist, for example, where the recovery of attorney’s fees “is authorized by agreement between the parties, statute or court rule.” Hooper Assoc., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487 (1989) (citations omitted); Giannakopoulos v. Figame Realty Mgt., 219 A.D.3d 803, 805-06 (2nd Dep’t 2023) (quoting Hooper). Indeed, contracts typically contain language permitting a party to collect its reasonable legal fees in the event of litigation. Further, “[i]n general, only a prevailing party is entitled to recover an attorney's fee and to be considered a prevailing party, a party must be successful with respect to the central relief sought.” Village of Hempstead v. Taliercio, 8 A.D.3d 476 (2nd Dep’t 2004) (citations, internal quotation marks and brackets omitted). “Such a determination requires an initial consideration of the true scope of the dispute litigated, followed by a comparison of what was achieved within that scope.” DKR Mortgage Asset Trust 1 v. Rivera, 130 A.D.3d 774 (2nd Dep’t 2015) (citations and brackets omitted). In most cases, mortgages provide that if the lender commences litigation to foreclose,[1] it is entitled to recover its reasonable legal fees and expenses. As typically written, such provisions are not reciprocal and, therefore, under the express terms of the mortgage, a borrower that successfully defends a mortgage foreclosure action would not be entitled to recover legal fees and expenses. However, borrowers in foreclosure should not fret because Real Property Law § 282(1) “reads into” mortgages a reciprocal attorney’s fees provision when the existing attorney’s fees provision is one-sided. Thus, RPL § 282(1), provides: Whenever a covenant contained in a mortgage on residential real property shall provide that in any action or proceeding to foreclose the mortgage that the mortgagee may recover attorneys’ fees and/or expenses incurred as the result of the failure of the mortgagor to perform any covenant or agreement contained in such mortgage, or that amounts paid by the mortgagee therefor shall be paid by the mortgagor as additional payment, there shall be implied in such mortgage a covenant by the mortgagee to pay to the mortgagor the reasonable attorneys’ fees and/or expenses incurred by the mortgagor as the result of the failure of the mortgagee to perform any covenant or agreement on its part to be performed under the mortgage or in the successful defense of any action or proceeding commenced by the mortgagee against the mortgagor arising out of the contract, and an agreement that such fees and expenses may be recovered as provided by law in an action commenced against the mortgagee or by way of counterclaim in any action or proceeding commenced by the mortgagee against the mortgagor. Any waiver of this section shall be void as against public policy. [Emphasis added.] RPL 282(1), by its express terms, makes plain that for a mortgagor to benefit from this position, an affirmative claim for such fees must be made either by commencing an action or by asserting a claim for such fees by way of counterclaim. This point was highlighted in, U.S. Bank N.A. v. Onuoha, 216 A.D.3d 1069, 1073 (2nd Dep’t 2023), a mortgage foreclosure action. The borrower, in her answer, inter alia, asserted an affirmative defense based on the expiration of the applicable statute of limitations[2] and a counterclaim to discharge the subject mortgage pursuant to RPAPL 1501(4)[3] on the ground that the action was time-barred. The borrower “moved for summary judgment dismissing the complaint insofar as asserted against her and on her counterclaim pursuant to RPAPL 1501(4) to cancel and discharge of record the mortgage, to vacate the notice of pendency filed against the subject property, and for an award of attorneys’ fees pursuant to Real Property Law § 282.” The Second Department reversed the motion court’s denial of the motion to the extent related to the expiration of the applicable statute of limitations. However, the Court held that the motion court properly denied the borrower’s request for attorney’s fees and stated: Although, in light of our determination, the defendant is the prevailing party for purposes of Real Property Law § 282, her contention that she is entitled to an award of attorneys’ fees pursuant to that statute is without merit. Real Property Law § 282(1) expressly provides that attorneys’ fees are recoverable by a mortgagor only “in an action commenced against the mortgagee or by way of counterclaim in any action or proceeding commenced by the mortgagee against the mortgagor.” Here, the defendant did not assert a counterclaim for an award of attorneys’ fees pursuant to Real Property Law § 282 in her answer or move to amend her answer to assert such a counterclaim. Accordingly, the Supreme Court properly denied that branch of the defendant's motion which was for an award of attorneys’ fees pursuant to Real Property Law § 282. Onuoha, 216 A.D.3d at 1073 (some citations omitted). In Nationstar Mortgage, LLC v. Dorsin, 180 A.D.3d 1054, 1055 and 1057 (2nd Dep’t 2020), however, the Court reversed the order of the motion court and granted the borrower’s cross-motion to discharge the mortgage pursuant to RPAPL 1501(4) and for attorney’s fees pursuant to RPL 282 because the borrower’s answer preserved such claims and he affirmatively moved for such relief. 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. [1]Eds. Note: this BLOG has written numerous articles addressing all aspects of residential mortgage foreclosure. To find BLOG articles related to foreclosure, visit the “BLOG” tile on our website and enter “foreclosure” (or any related topic of interest) in the “search” box. [2]Eds. Note: this BLOG has written numerous articles addressing statutes of limitation issues in foreclosure actions. To find BLOG articles related to this issue, visit the “BLOG” tile on our website and enter “statute of limitations” in the “search” box. [3]Eds. Note: this BLOG has written numerous articles addressing actions to quiet title pursuant to RPAPL § 1501(4). To find BLOG articles related to this issue, visit the “BLOG” tile on our website and enter “1501(4)” in the “search” box.

By: Jeffrey M. Haber Res judicata, or claim preclusion, is grounded in the principle that disputes, once fully and fairly adjudicated, should not be relitigated. The doctrine serves the important goals of finality, judicial economy, and consistency by preventing parties from pursuing successive lawsuits arising from the same underlying transaction or occurrence. New York courts therefore apply a broad transactional approach to claim preclusion, barring not only claims that were actually litigated in a prior action, but also those that could have been raised in that action. The doctrine extends to parties and those in privity with them, including successors-in-interest whose rights derive from a party to the earlier litigation. As the Second Department recently reaffirmed in Rosio v. MTGLQ Invs., L.P., 2026 N.Y. Slip Op. 04782 (2d Dept. July 27, 2026), where a successor mortgage holder was in privity with the plaintiff in a prior foreclosure action, a borrower could not evade the preclusive effect of a judgment of foreclosure by repackaging previously litigable issues as a later General Business Law § 349 claim. Because the judgment of foreclosure conclusively resolved, or could have resolved, issues relating to the mortgagee’s standing and authority to negotiate and service the loan, and because the subsequent claim would impair rights established by the judgment of foreclosure, the action was barred by res judicata. Applicable Principles “Under the doctrine of res judicata, a final adjudication of a claim on the merits precludes relitigation of that claim and all claims arising out of the same transaction or series of transactions by a party or those in privity with a party.”[1] “The doctrine of res judicata bars a party from relitigating any claim which could have been or should have been litigated in a prior proceeding.”[2] Thus, “[a] judgment of foreclosure and sale is final as to all questions at issue between the parties, and concludes all matters of defense which were or could have been litigated in the foreclosure action.”[3] “Moreover, [a] judgment by default that has not been vacated is conclusive for res judicata purposes and encompasses the issues that were raised or could have been raised in the prior action.”[4] “[A] defendant who fails to assert a counterclaim is not barred by the doctrine of res judicata from subsequently commencing a new action on that claim unless the claim would impair the rights or interests established in the first action.”[5] Rosio v. MTGLQ Invs., L.P. In 2015, Nationstar Mortgage, LLC (“Nationstar”), commenced an action to foreclose a mortgage (the “2015 foreclosure action”) against, among others, the plaintiff in the action. Plaintiff failed to answer. In an order dated October 17, 2016, the Supreme Court, inter alia, granted Nationstar’s unopposed motion for leave to enter a default judgment and for an order of reference. In an order and judgment of foreclosure and sale dated February 24, 2020, the court, among other things, substituted MTGLQ Investors, L.P. (“MTGLQ”), as the plaintiff in the 2015 foreclosure action, confirmed the referee’s report, and granted a judgment of foreclosure and sale in favor of MTGLQ. On December 11, 2023, plaintiff commenced the action against MTGLQ, inter alia, to recover damages for deceptive practices in violation of General Business Law § 349. Plaintiff alleged, among other things, that MTGLQ did not obtain valid possession of the note and consequently lacked standing to foreclose the mortgage. Plaintiff, thus, alleged that MTGLQ’s actions taken in furtherance of the foreclosure amounted to a deceptive practice in violation of General Business Law § 349. MTGLQ moved pursuant to CPLR 3211(a) to dismiss the complaint on the ground, inter alia, that the action was barred by res judicata. In an order dated November 4, 2024, the Supreme Court granted MTGLQ’s motion. Plaintiff appealed from so much of the order as dismissed the third cause of action, alleging violation of General Business Law § 349, as barred by the doctrine of res judicata, pursuant to CPLR 3211(a)(5). The Second Department affirmed. The Court first held that MTGLQ, as Nationstar’s successor-in-interest, was in privity with Nationstar and therefore entitled to invoke the preclusive effect of the prior judgment of foreclosure.[6] “As such,” said the Court, “the judgment of foreclosure and sale encompassed all issues that were raised or could have been raised in the foreclosure action, including whether MTGLQ had standing to foreclose on the mortgage, to engage in loan modification reviews with [plaintiff], or to negotiate with him.”[7] “Consequently,” the Court concluded that plaintiff was “precluded from asserting a cause of action alleging violation of General Business Law § 349 that [was] predicated on those same issues.”[8] Finally, the Court held that permitting the claim to proceed would impair rights established by the judgment of foreclosure.[9] Because success on plaintiff’s GBL § 349 claim would undermine determinations embodied in the prior foreclosure action, the claim was independently barred under the principles of res judicata.[10] Takeaway The Second Department’s decision in Rosio highlights the scope of the res judicata doctrine. The Court reaffirmed that once an action results in a final judgment, the parties are bound not only by issues actually litigated, but also by issues that could have been litigated in that action. Litigants cannot avoid the preclusive effect of a judgment by repackaging previously available challenges under a different legal theory in a subsequent lawsuit. The decision is also a significant reminder that res judicata extends beyond the original parties to those in privity with them. Because MTGLQ was Nationstar’s successor-in-interest, the Court found that it stood in Nationstar’s shoes for purposes of claim preclusion. As a result, any issues that could have been raised against Nationstar in the foreclosure action were equally barred when asserted against MTGLQ. The Court further emphasized the finality afforded to judgments. By holding that the judgment of foreclosure encompassed questions concerning the mortgage holder’s standing, authority to conduct loan-modification reviews, and right to negotiate with the borrower, the Court reinforced the principle that defenses and claims relating to the validity or enforcement of the mortgage must ordinarily be raised in the foreclosure action itself. Failure to do so generally forecloses later attempts to challenge those matters. Equally important, Rosio demonstrates that a plaintiff cannot evade the application of the res judicata doctrine merely by recasting a dispute under a different legal theory – in Rosio, as a statutory consumer-protection claim under General Business Law § 349. The Court looked beyond the label attached to the cause of action and focused on the underlying conduct and issues upon which the claim was based. Because the alleged deceptive practices depended on the same issues that either were or could have been litigated in the foreclosure action, the claim was barred notwithstanding its different legal theory. Finally, Rosio highlights an important limitation on New York’s rule that unasserted counterclaims are not automatically precluded. Although defendants are generally not required to bring all counterclaims in a prior action, a later claim will nevertheless be barred where success on that claim would impair rights established by the earlier judgment. The Court concluded that permitting the claim to proceed would impair rights established by the judgment in the foreclosure action. Because the claim was predicated on issues that were resolved, or could have been resolved, in the prior proceeding, a judgment in plaintiff’s favor would undermine the finality of the judgment of foreclosure. In so holding, the Court reaffirmed the principle that a party may not circumvent the preclusive effect of a final judgment by repackaging previously litigated claims or issues in a subsequent action. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. ___________________________________ [1] Ciraldo v. JP Morgan Chase Bank, N.A., 140 A.D.3d 912, 913 (2d Dept. 2016); see Gramatan Home Invs. Corp. v. Lopez, 46 N.Y.2d 481, 486-487 (1979); Harrison DGR44, LLC v. Luiso 44 Harrison, LLC, 219 A.D.3d 1413, 1414 (2d Dept. 2023). [2] Montoute v. Wells Fargo Bank, N.A., 208 A.D.3d 474, 475 (2d Dept. 2022) (internal quotation marks omitted); see Sheodial v. U.S. Bank N.A., 218 A.D.3d 511, 512 (2d Dept. 2023). [3] Sheodial, 218 A.D.3d at 512 (internal quotation marks omitted); see Eaddy v. US Bank N.A., 180 A.D.3d 756, 758 (2d Dept. 2020). [4] Id. (internal quotation marks omitted); see Eaddy, 180 A.D.3d at 758. [5] Wax v. 716 Realty, LLC, 151 A.D.3d 902, 904 (2d Dept. 2017); see Schuylkill Fuel Corp. v. Nieberg Realty Corp., 250 N.Y. 304, 306-308; Sweet Constructors, LLC v. Wallkill Med. Dev., LLC, 106 A.D.3d 810, 811 (2d Dept. 2013). [6] Slip Op. at *2, citing Gramatan, 46 N.Y.2d at 486-487; Harrison DGR44, 219 A.D3d at 1414; Ciraldo, 140 A.D.3d at 913. [7] Id., citing Sheodial, 218 A.D.3d at 512; Montoute, 208 A.D.3d at 475; Eaddy, 180 A.D.3d at 758. [8] Id., citing Sheodial, 218 A.D.3d at 512; Montoute, 208 A.D.3d at 475. [9] Id. [10] Id., citing Schuylkill, 250 N.Y. at 306-308; Wax, 151 A.D.3d at 904; Sweet Constructors, 106 A.D.3d at 811.