Conversion is a tort that “takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person’s right of possession.”  Colavito v. New York Organ Donor Network, Inc. , 8 N.Y.3d 43, 49-50 (2006) (citation omitted).  “In order to establish a cause of action to recover damages for conversion, the plaintiff must show legal ownership or an immediate superior right of possession to a specific identifiable thing and must show that the defendant exercised an unauthorized dominion over the thing in question to the exclusion of the plaintiff’s rights.”  Berkovitz v. Berkovitz , 190 A.D.3d 911 (2 nd Dep’t 2021) (citations, internal quotation marks and brackets omitted); see also , Colavito , 8 N.Y.3d at 50 (citations omitted) (“Two key elements of conversion are (1) plaintiff's possessory right or interest in the property and (2) defendant's dominion over the property or interference with it, in derogation of plaintiff's rights.”)  In circumstances where “the original possession is lawful, a conversion does not occur until the defendant refuses to return the property after demand by the property’s rightful owner.”  Simpson & Simpson, PLLC v. Lippes Mathias Wexler Friedman LLP , 130 A.D.3d 1543, 1545 (2015) (citation and internal quotation marks omitted. While the concept of conversion is readily understandable in the context of converted things, the analysis becomes more difficult when a plaintiff brings a claim for the conversion of money.  “’It is well-settled that an action will lie for the conversion of money where there is a specific, identifiable fund and an obligation to return or otherwise treat in a particular manner the specific fund in question.’”  Amity Loans, Inc. v. Sterling Nat. Bank & Trust Co. of New York , 177 A.D.2d 277, 279 (1 st Dep’t 1991) ( quoting Manufacturers Hanover Trust Co. v. Chemical Bank , 160 A.D.2d 113, 124 (1 st Dep’t 1990)).  “Money may be the subject of a cause of action for conversion only if ‘it can be identified and segregated as a chattel can be….’”  Heckl v. Walsh , 122 A.D.3d 1252, 21254-55 (4 th Dep’t 2014) (quoting Payne v. White , 101 A.D.2d 975, 976 (3 rd Dep’t 1984)). The parties in Simpson & Simpson , supra , were law firms. Defendant law firm employed a bookkeeper that resigned and commenced employment with plaintiff law firm.  Thereafter, defendant discovered that a bookkeeper embezzled over $270,000 while employed by it.  When approached by defendant, the bookkeeper admitted the theft, agreed to restitution and delivered to defendant a promissory note for the amount embezzled.  The bookkeeper then embezzled money from plaintiff law firm to pay the note to defendant.  Plaintiff discovered the embezzlement of its funds and defendant rebuffed plaintiff’s demand that the funds be returned.  Plaintiff commenced its action and, inter alia, asserted a cause of action sounding in conversion in which it sought the return of the embezzled funds.  Supreme court granted defendant’s motion for summary judgment dismissing, inter alia, the conversion claim.  The Fourth Department found that supreme court erred “in determining that the comingling of the embezzled funds in the employee’s joint checking account precluded a cause of action for conversion” because “the embezzled funds are sufficiently identifiable and traceable to sustain a cause of action for conversion.”  Simpson & Simpson , 130 A.D.3d at 1544-45.  The Simpson & Simpson Court also noted that conversion “is an unauthorized assumption and exercise of the right of ownership over personal property belonging to another to the exclusion of the owner’s rights.”  Simpson & Simpson , 130 A.D.3d at 1545.  While the defendant disavowed any knowledge of the bookkeeper’s wrongdoing that led to the funds embezzled from plaintiff coming into defendant’s hands, the Court found that questions of fact existed as to the extent of defendant’s knowledge given the “unique” facts presented because the “circumstances known to defendant[] were so obviously suspicious that no honest person (not just a reasonably prudent person) could turn a blind eye thereto, thus requiring defendant[] to investigate.”  Id. (citations and internal quotation marks omitted). These issues concerning conversion claims involving money were at the fore, in SH575 Holdings LLC v. Reliable Abstract Co. L.L.C. , a case decided by the Appellate Division, First Department, on June 1, 2021.  The plaintiff in SH575 transferred $1,000,000 into the IOLA account of a debtor’s lawyer in conjunction with a transaction pursuant to which plaintiff was going to purchase debtor’s real estate in its bankruptcy proceeding.  Plaintiff demanded the return of the funds after he cancelled the transaction.  Unfortunately, “as part of a Ponzi scheme, transferred most of plaintiff’s funds out of the IOLA account to the moving defendants prior to plaintiff’s demand upon him.”  The Court affirmed supreme court’s dismissal of the conversion claim, finding that plaintiff “failed to show that the funds at issue were ‘specifically identifiable.’”  The Court relied on the unique aspects of an IOLA account.  “An IOLA account is ‘an unsegregated interest-bearing deposit account with a banking institution for the deposit by an attorney of qualified funds” (Judiciary Law § 497; see also Lerner v Fleet Bank, N.A. , 459 F3d 273, 281 <2d cir 2006> ).  Because the account was “unsegregated”, “plaintiff’s funds, upon their transfer therein, became commingled with monies that were already in it, rendering them no longer specifically identifiable.” Additionally, the Court found that plaintiff’s claim was defective because plaintiff never “made demands for return of the funds upon the moving defendants.”

In today’s Fraud Notes, we examine Bullen v. CohnReznick, LLP (1st Dept. May 27, 2021) ( here ), and Sabourin v. Chodos , (1st Dept. May 27, 2021) ( here ), both decided by the Appellate Division, First Department. Bullen involved an alleged fraud in which CohnReznick was accused of being a participant through the issuance of audit reports that gave the entities being audited a clean bill of health – i.e. , the financial statements presented fairly, in all material respects, the financial position of the entities being audited. The primary issues addressed by the courts in Bullen concerned scienter and justifiable reliance. Sabourin involved an alleged fraud that took place more than six years ago. The primary issues addressed by the courts concerned the application of the statute of limitations and the continuing wrong doctrine. We examine both cases below. inter alia, the motion court decision, the appellate court briefing and/or the first department's decision.> inter alia, the motion court decision, the appellate court briefing and/or the first department's decision.> Bullen v. CohnReznick, LLP Bullen was brought by a group of 49 sophisticated investors (comprised of individuals, retirement plans, trusts, limited liability companies, and corporations) who claimed they were defrauded by the managers of a high-risk hedge fund in which they collectively invested $63 million. Plaintiffs sued CohnReznick, LLP, the independent auditor of Platinum Partners Credit Opportunities Fund, L.P. (“PPCO”) and Platinum Partners Value Arbitrage Fund, L.P. (“PPVA”) (collectively, the “Funds”), for its role in the alleged fraud. CohnReznick audited the Funds’ financials statements in the years immediately preceding the Funds’ collapse and issued unqualified audit reports (the “Audit Reports”) that the Funds’ financial statements presented fairly, in all material respects, the financial position of the Funds. Plaintiffs claimed that CohnReznick issued the Audit Reports with knowledge of missing material documentation and questionable transactions, which confirmed that PPCO’s assets were grossly overvalued. According to plaintiffs, CohnReznick knew that, for years, Platinum Management (“Platinum”) propped up the Funds with unsupported and fraudulent asset valuations, commingled investor funds, engaged in illicit related-party transactions, and booked improper inter-company loans. Plaintiffs allegedly relied on the Audit Reports to their detriment, investing over $63 million in PPCO. In their complaint, plaintiffs asserted claims of: (1) fraud; (2) aiding and abetting fraud; and (3) aiding and abetting breach of fiduciary duty. Defendant moved to dismiss. The motion court (Ostrager, J.) denied the motion ( here ). First, the motion court held that plaintiffs pleaded fraud with particularity as required under CPLR § 3016(b). The motion court found that CohnReznick disregarded numerous “red flags” that allowed a reasonable inference of the auditor’s “egregious refusal to see the obvious, or to investigate the doubtful”. Such “red flags” included: CohnReznick’s “access to a substantial amount of information.” (“ any of the suspect activities noted by plaintiffs and the eceiver directly related to documentation available to CohnReznick.”) Information in an affidavit from the court-appointed receiver in which she averred that PPCO’s assets were overvalued “by over 300%”, that there were loans between PPCO and PPVA, and that Platinum engaged in related-party transactions. Platinum’s actions to ease PPVA’s liquidity crisis and the commingling of investor funds: (“Indeed, one can reasonably infer scienter from even the single item that Platinum repeatedly effectuated improper cash transfers, booked as loans, between PPCO and PPVA that were used to ease PPVA’s liquidity crisis and were paid back, in part, with distressed debt and private equity of little to no value. These transfers were presumably reflected in PPCO’s financial statements, which CohnReznick improperly certified as presenting ‘fairly, in all material respects, the financial position of .’ The commingling of investor funds among the various Platinum Funds was another glaring red flag supporting the inference of scienter.”) In addition to the “red flag” allegations, the motion court also considered plaintiffs’ allegations that CohnReznick violated Generally Accepted Accounting Principles (“GAAP”) and Generally Accepted Auditing Standards (“GAAS”). When considered together, the motion court held that plaintiffs pleaded enough facts to raise a reasonable inference that CohnReznick acted with scienter. Second, the motion court held that plaintiffs alleged that CohnReznick had actual knowledge of Platinum’s fraud and breaches of fiduciary duty. According to plaintiffs, CohnReznick knew by early 2015 – before CohnReznick issued the 2014 Audit Reports for both PPCO and PPVA – that PPVA’s then-auditor had discovered a “material weakness” in the way Platinum valued its Level 3 assets (which comprised nearly all the Funds’ holdings). Despite such knowledge, CohnReznick implemented no additional auditing procedures for PPCO and issued a clean Audit Report for the fund. The motion court found that these allegations sufficed to allege actual knowledge of the alleged fraud. Third, the motion court held that plaintiffs sufficiently pleaded that CohnReznick substantially assisted Platinum’s fraud and breaches of fiduciary duty with the required specificity. Fourth, the motion court held that plaintiffs justifiably relied on the Audit Reports in deciding to invest in PPCO. According to the motion court, plaintiffs “were entitled to rely on the information in the Reports as being factually correct and to use those facts to make their own investment decisions.” The motion court noted that “many investors spoke with CohnReznick’s managing partner about their investments” in an effort to make informed decisions about whether to invest in the Funds. Finally, the motion court rejected CohnReznick’s argument that plaintiffs merely claimed that they were induced “to continue to hold securities”, which, under New York law, is not actionable. The motion court explained that plaintiffs invested in PPCO “in the first instance in reliance on the Audit Reports, and not merely to maintain or ‘hold’ the investment.” On appeal, the First Department unanimously affirmed. First, the Court held that the motion court correctly found that plaintiffs pleaded scienter with the requisite particularity. The Court found that “the ‘ llegations of “red flags,” when coupled with allegations of GAAP and GAAS violations, sufficient to support a strong inference of scienter.’” Slip Op. at *1 (quoting In re Bear Stearns Cos., Inc. Securities, Derivative & ERISA Litig. , 763 F. Supp. 2d 423, 511 (S.D.N.Y. 2011)). See also State St. Trust Co. v. Ernst , 278 N.Y. 104, 112 (1938). Second, the Court held that plaintiffs adequately pleaded justifiable reliance. The Court explained that plaintiffs “‘took reasonable steps to protect against deception by’ having their advisor ‘examin available financial information to ascertain the true nature of’ the investment fund’s asset valuation, including contacting defendant about the results of its audits, which were ‘matters peculiarly within the knowledge.’” Slip Op. at *2 (quoting IKB Intl. S.A. v. Morgan Stanley , 142 A.D.3d 447, 448-49 (1st Dept. 2016)). In any event, the Court noted that “‘reasonable reliance is not generally a question to be resolved as a matter of law on a motion to dismiss.’” Id. (quoting ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015)). The Court said that the “same true for the aiding and abetting fraud claim, to the extent that it may require a showing of reasonable reliance.” Id. (citing Bankers Conseco Life Ins. Co. v. KPMG LLP , 189 A.D.3d 402, 403 (1st Dept. 2020)). Third, as to the aiding and abetting fraud claim, the Court held that the “complaint sufficiently alleged ‘actual knowledge’ of the investment fund manager’s fraud, which ‘need only be pleaded generally.’” Slip Op. at *2 (quoting Oster v. Kirschner , 77 A.D.3d 51, 55 (1st Dept. 2010)). oster, 77 a.d.3d at 55.> oster, 77 a.d.3d at 55.> The Court explained that the “timing of defendant’s alleged receipt of information from the prior auditor of a related fund indicating a material weakness in the process of asset valuation, as well as defendant’s multiple years of auditing the fund’s financial statements, allow for the inference that defendant ‘willingly turned a blind eye to evidence’ that the fund’s asset valuations were fraudulent with no documentation supporting them.” Slip Op. at *2 (quoting AIG Fin. Prods. Corp. v. ICP Asset Mgt., LLC , 108 A.D.3d 444, 446 (1st Dept. 2013)); see also Weinberg v. Mendelow , 113 A.D.3d 485, 488 (1st Dept. 2014). The Court noted that the complaint also “sufficiently alleged, inter alia , that defendant ‘ignored irregularities’ in the fund’s ‘books and records,’ which, if reviewed, would have uncovered the fraud.” Slip Op. at *2-*3 (quoting Weinberg , 113 A.D.3d at 488). As to the claim for aiding and abetting breach of fiduciary duties, the Court found that the complaint “sufficiently alleged defendant’s actual knowledge of the fund manager’s improper related-party transactions and unauthorized loans to the related fund, given defendant’s access to the fund’s financial information, as well as defendant’s ‘strong financial motive’ to aid the fund manager, given its allegedly inflated fees.” Slip Op. at *3 (citations omitted). The Court rejected defendant’s argument that it owed no duty to plaintiffs: “‘There are allegations not only that defendant fail to act when required to do so,’ but also that defendant ‘affirmatively assist ’ the fund manager to convince one investor plaintiff to invest additional capital, which obviates any need for plaintiffs to allege that ‘defendant owe a fiduciary duty directly to’ them.” Id. (quoting Kaufman v. Cohen , 307 AD2d 113, 126 (1st Dept. 2003) (citation omitted). Finally, the Court agreed with the motion court that plaintiffs did not merely allege inactionable holder claims. The Court explained that plaintiffs did “not seek ‘recovery for the loss of the value that might have been realized in a hypothetical market exchange that never took place,’ but instead assert ‘an out-of-pocket loss, specifically, the loss of their investment.’” Slip Op. at *3 (citations omitted). Sabourin v. Chodos Sabourin involved an intricate and complex fraud perpetrated by defendant Adam Chodos, an attorney, in concert with his client, William Frost, to divest plaintiffs of their media company and its value. After an arbitration held in 2013-2014, plaintiffs were awarded $56.4 million against Frost. According to plaintiffs, it was only as a result of the documents presented and testimony adduced during the arbitration that they came to learn that defendant was not merely Frost’s lawyer, but also a knowing and indispensable participant in the fraud. Consequently, in February 2015, plaintiffs commenced the action against defendant Chodos, alleging fraud, aiding and abetting fraud, unjust enrichment, aiding and abetting breach of fiduciary duty, civil conspiracy to commit conversion, and tortious interference with economic advantage. Defendant moved for summary judgment, arguing, among other things, that the claims were time-barred because the conduct complained of took place in 2008, well beyond the six-year statute of limitations applicable to the fraud claims and the three-year statute of limitations applicable to the remaining tort claims. The motion court denied defendant’s motion as to the fraud claims ( here ). On appeal, the First Department affirmed. In New York, the limitations period for fraud is the greater of six years from the date of the fraud or two years from the time when, with reasonable diligence, the plaintiff could have uncovered the fraud. CPLR § 213(8). See also Cusimano v. Schnurr , 137 A.D.3d 527, 531 (1st Dept. 2016). To prevail on a motion to dismiss on statute of limitations grounds, the defendant must show that there is no issue of fact under either of the foregoing prongs. Against these principles, the Court found that defendant “failed to show dispositively that plaintiffs were in possession of facts that would have triggered inquiry notice under CPLR § 213(8) more than two years before the action was commenced.” Slip Op. at *1 (citing Sargiss v. Magarelli , 12 N.Y.3d 527, 532 (2009)). The Court rejected defendant’s reference to inconsistent deposition testimony given by plaintiff and an affidavit he submitted in opposition to the motion to dismiss. “Such inconsistencies may be fodder for cross-examination,” said the Court, “but they do not support a finding, as a matter of law, that plaintiffs were on inquiry notice more than two years before this action was commenced.” The Court also found that plaintiffs had “raised issues of fact as to whether defendant committed independent and distinct fraudulent acts in 2009 in furtherance of the fraudulent scheme” to toll the statute of limitations “pursuant to the continuous wrong doctrine.” Slip Op. at *3 (citing Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017)). The Court noted that “plaintiffs submitted documents showing that in 2009 defendant forged Ishak’s signature on a resignation letter and then used the forged letter to freeze the bank account of plaintiffs’ corporation.” Id. In addition, noted the Court, plaintiff showed that defendant prepared fraudulent K-1s and tax filings, and created a series of fake, back-dated notes purporting to evidence debt by one of the plaintiff entities to entities controlled by Frost. Id. here.=">here."> Takeaway It is generally understood that “scienter . . . is … the element most likely to be within the sole knowledge of the defendant and least amenable to direct proof.” Houbigant, Inc. v. Deloitte & Touche , 303 A.D.2d 92, 98 (1st Dept. 2003). For this reason, to plead scienter, a plaintiff need only allege “some rational basis for inferring that the alleged misrepresentation was knowingly made,” or that the defendant acted with reckless disregard of the truth. Id. “ ecklessness … involve conduct that is highly unreasonable, and must ‘in fact, approximate an actual intent to aid in the fraud being perpetrated by the audited company.’” CRT Investments, Ltd. v. Merkin , 29 Misc. 3d 1218(A) (Sup. Ct., N.Y. County 2010), aff’d sub nom. , CRT Investments, Ltd. v. BDO Seidman, LLP , 85 A.D.3d 470 (1st Dept. 2011) (internal citation omitted). When alleging fraud against an auditor, a plaintiff must “allege that the auditor’s practices were so deficient as to amount to no audit at all, that there was a refusal to see the obvious, a failure to investigate the doubtful, or the auditor’s judgments were such that no reasonable accountant would have made the same decisions if confronted with the same facts.” Id. (internal quotations omitted). The failure to do so will result in the dismissal of the claim for the failure to plead scienter with particularity. In Bullen , the courts concluded that plaintiffs satisfied the foregoing standard by providing allegations that CohnReznick disregarded numerous “red flags” and other detailed facts, such as the violation of GAAP and GAAS, related-party transfers and commingling of investor funds, which supported the strong inference that CohnReznick’s audits amounted to “no audit at all”. With regard to justifiable reliance, Bullen highlights how sophisticated parties can satisfy this element. A sophisticated party must allege that it exercised due diligence and took affirmative steps “to protect itself against deception.” DDJ Mgt., LLC v. Rhone Grp. L.L.C. , 15 N.Y.3d 147, 154 (2010). This means, for example, that a sophisticated party must employ whatever “means of verification were available at the time” of the alleged misrepresentations. VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). One way to do so is to make an additional inquiry into the truth of the representation ( ACA Fin. , 25 N.Y.3d at 1045), as the plaintiffs had done in Bullen . As noted by the First Department, plaintiffs had their advisor “examin available financial information to ascertain the true nature of the investment fund’s asset valuation” and, as noted by both courts, they asked questions of CohnReznick’s managing partner about their investments in order to make informed decisions about whether to invest in the Funds. More fundamentally, as both courts indicated, plaintiffs could not have discovered the alleged fraud because the information was peculiarly within CohnReznick’s knowledge. Basis Yield Alpha Fund Master v. Stanley , 136 A.D.3d 136, 143 (1st Dept. 2015). Sabourin concerns the situation most often found in fraud claims – the plaintiff does not know it was the victim of a fraud until years later. Consequently, as is often the case, the plaintiff brings suit well after the statute of limitations has expired. In such situations, the plaintiff can escape dismissal by finding a basis to toll the statute of limitations. In Sabourin , plaintiffs were able to rely on the continuing wrong doctrine. Under the continuing wrong doctrine, “where there is a series of continuing wrongs,” the statute of limitations will be tolled to the last date on which a wrongful act is committed. Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017).  The wrongs, however, must be separate and independent ( id. ), not “continuing consequential damages” that arise from a single tortious act. Town of Oyster Bay v. Lizza Indus., Inc. , 22 N.Y.3d 1024, 1032 (2013). As discussed, in Sabourin , plaintiffs were able to withstand summary judgment by demonstrating that defendant committed independent and distinct fraudulent acts in  in furtherance of the alleged fraudulent scheme. The motion court denied defendant’s motion as to the fraud claims ( here ).

Sometimes a fraud is so undetectable that even an expert hired to assist in due diligence activities can be the victim of fraud. That’s what happened in VXI Lux Holdco, S.A.R.L. v. SIC Holdings, LLC , 2021 N.Y. Slip Op. 03294 (1st Dept. May 25, 2021) ( here ). VXI Lux arose from plaintiff’s $112 million purchase of Symbio S.A. (“Symbio”) from defendants. Plaintiff alleged that defendants, faced with a Chinese government audit, engaged in fraud to hide the fact that they had underpaid the social insurance tax applicable to their employees in Chengdu, China. Defendants allegedly did this by falsifying documents, including by altering personnel files to make it look as though dozens of exempt employees based elsewhere were actually working in Chengdu. To complete the scheme, defendants allegedly bribed the auditing firm, by means of a $25,000 payment funneled through a sham construction contract. Plaintiff alleged that the $3 million tax underpayment, which was an unaccounted expense, had the effect of inflating Symbio’s earnings before interest, taxes, deductions, and amortization (“EBITDA”) by the same amount. Thus, when Symbio presented its books to plaintiff, they allegedly contained several misrepresentations — expenses and tax liabilities were understated, and EBITDA was overstated. The inflation of the EBITDA likewise inflated Symbio’s apparent growth rate, which in turn inflated the company’s market valuation. Even though plaintiff inspected Symbio’s financial statements and other corporate records during due diligence, plaintiff claimed, given the nature of the deception, the fraud was essentially undetectable. Thus, plaintiff alleged, even though it retained a major accounting firm, that accounting firm was also duped and issued a report which did not find the social insurance tax fraud. The social insurance tax fraud allegedly inflated Symbio’s EBITDA, from about $3 million to a projected $8.8 million. The apparent EBITDA growth inflated the company’s revenue prospects, resulting in plaintiff overpaying for Symbio. Plaintiff alleged that, had it known all the facts, it would have offered much less. Plaintiff alleged that the resulting overpayment caused it to suffer significant financial loss. Defendants moved to dismiss the fraud cause of action in plaintiff’s second amended complaint (“SAC”). The motion court granted the motion. On appeal, the Appellate Division, First Department “unanimously reversed, on the law”. The primary issue considered by the Court was whether plaintiff satisfied the justifiable reliance element of its fraud cause of action.  To satisfy the justifiable reliance element of a fraud claim, a plaintiff must demonstrate that he/she took steps to discover “the true nature of transaction he is about to enter into.” 88 Blue Corp. v. Reiss Plaza Assoc. , 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted). In other words, a plaintiff is required to take reasonable steps to protect against deception. A sophisticated party, like the plaintiff in VXI Lux , must allege that it exercised due diligence and took affirmative steps “to protect itself against deception.” DDJ Mgt., LLC v. Rhone Grp. L.L.C. , 15 N.Y.3d 147, 154 (2010). This means, for example, that a sophisticated party must employ whatever “means of verification were available at the time” of the alleged misrepresentations. VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). One way to do so is by obtaining a prophylactic provision in a contract or other writing or exercising due diligence to make an additional inquiry into the truth of the representation. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015); DDJ , 15 N.Y.3d at 154 (holding that in contract negotiations between sophisticated parties, justifiable reliance element sufficiently alleged where plaintiff “has gone to the trouble” of insisting on warranties in the written agreement that certain facts were true). Thus, a sophisticated party cannot “argue justifiable reliance on defendants’ misrepresentation or omission where had the means available to ascertain the status of the ” at issue and did not avail itself of those means. ACA Fin. Guar. , 25 N.Y.3d at 1044; HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-195 (1st Dept. 2012). here,  here and  here,=">here," for="for" example.="example."> In VXI Lux , the Court held that “plaintiff adequately pleaded that it justifiably relied on the documents presented by Symbio during due diligence,” by “taking diligent steps” to uncover any misstatements or omissions. Slip Op. at *1. Such steps included retaining “an accounting firm for review” of the company’s financial statements and corporate records. Slip Op. at *1-*2 (citing Basis Yield Alpha Fund Master v. Morgan Stanley , 136 A.D.3d 136, 141-43 (1st Dept 2015)). As made clear in the Court’s discussion of plaintiff’s fraudulent concealment allegations (Slip Op. at *2), “given the hidden nature of the fraud, which turned on falsified records and bribed auditors, and the practical impossibility of discovering the fraud through ordinary diligence”, it could not be said that plaintiff failed to take affirmative steps “to protect itself against deception.” DDJ Mgt. , 15 N.Y.3d at 154.    The Court also rejected the individual defendants’ argument that the fraud claim should be dismissed as against them because plaintiff used group pleading to assert those allegations. Slip Op. at *1. As noted in our last article on the subject ( here ), group pleading occurs when a plaintiff lumps defendants together rather than attributes specific misrepresentations or wrongdoing to a particular defendant. Such pleading violates the particularity requirement of CPLR § 3016(b), unless the fraud alleged is detailed and pervasive. AIG Fin. Prods. Corp. v. ICP Asset Mgt., LLC , 108 A.D.3d 444, 446-447 (1st Dept. 2013). In VXI Lux , the Court held that the fraud was pervasive and pleaded “in great detail”. As such, the individual defendants’ knowledge of the fraud could be inferred. Slip Op. at *1.  The Court also rejected the argument that plaintiff’s fraud claim duplicated its contract claim. Slip Op. at *2. The Court noted that “Defendants’ alleged deception also breached numerous warranties set forth in the governing stock purchase agreement, including that Symbio’s financial statements were materially complete and correct, that its EBITDA projections were reasonable and made in good faith, that it had no material undisclosed liabilities, and that it conducted its business in compliance with applicable law.” Id. The Court explained that a breach of warranty is not the same as a breach of an obligation to perform – the former is a misrepresentation of present fact. Id. (noting, “ warranty is not a promise of performance, but a statement of present fact”) (quoting First Bank of Ams. v. Motor Car Funding , 257 A.D.2d 287, 292 (1st Dept. 1999)). “Accordingly, a fraud claim can be based on a breach of contractual warranties notwithstanding the existence of a breach of contract claim.” First Bank of Ams. , 257 A.D.2d at 292. Accord Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439, 441 (1st Dept. 2015). Thus, concluded the Court, “the fraud claim not duplicate the contract claim.” Slip Op. at *2 (citing GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81-82 (1st Dept. 2010),  lv. dismissed , 17 N.Y.3d 782 (2011)).  Takeaway A plaintiff suing for fraud (and particularly a sophisticated plaintiff, such as VXI Lux ) must establish that it “has taken reasonable steps to protect itself against deception.” DDJ Mgt. , 15 N.Y.3d at 154. Typically, this means that a plaintiff claiming to have been fraudulently induced to purchase a business, or to lend to a business, must allege that, before entering into the transaction, it availed itself of the opportunity to verify the seller’s or borrower’s representations through an examination of the entity’s books and records. In VXI Lux , plaintiff satisfied this requirement. As discussed, plaintiff retained a major accounting firm to examine Symbio’s financial statements and other corporate records during due diligence. Because of the deception alleged, plaintiff had no way of discovering the truth about Symbio’s financial condition. Under such circumstances, the justifiable reliance element of plaintiff’s fraud claim was satisfied.

As we have discussed in numerous posts, plaintiffs alleging breach of contract and fraud risk having the latter cause of action dismissed because it is duplicative of the former one. Plaintiffs can avoid this fate by alleging: a legal duty owed by the defendant that is separate and apart from the duty to perform under the contract or a duty that is collateral or extraneous to the contract; and damages that are different from the contract damages. In Principia Partners LLC v. Swap Fin. Grp., LLC , 2021 N.Y. Slip Op. 03267 (1st Dept. May 20, 2021) ( here ), the Appellate Division, First Department affirmed the dismissal of a fraud claim because it duplicated the contract cause of action alleged by plaintiff.  In addition to the duplication of claims doctrine, we have discussed the particularity requirement under CPLR § 3016(b) and the need to satisfy this requirement with respect to each element of a fraud claim. One element that is often litigated is scienter – that is, an intent to deceive. Plaintiffs run afoul of the pleading requirements for scienter by engaging in group pleading – i.e. , the practice of grouping multiple defendants together in a complaint when they are alleged to have collectively committed the wrong complained of. here.=">here."> In U.S. Tsubaki Holdings, Inc. v. Estes , 2021 N.Y. Slip Op. 03273 (1st Dept. May 20, 2021) ( here ),although the plaintiffs relied on the group pleading doctrine, the First Department reversed the dismissal of their fraud claims because, among other things, the plaintiffs provided sufficient particularity of the fraud, in addition to the pervasiveness of the alleged misconduct, necessary to infer scienter as to each defendant. The case also concerned the justifiable reliance element of a fraud cause of action and the duplication of claims doctrine, which the Court held did not apply to the claims asserted. We examine both decisions below. Principia Partners LLC v. Swap Financial Group, LLC Principia Partners involved a contract between plaintiff, Principia Partners LLC (“PPP”), and defendant, SWAP Financial Group, LLC (“SFG”), pursuant to which PPP agreed to provide SFG with access to PAS (a program for portfolio analysis and risk management), PPP’s proprietary software for use in valuing swaps. In return for access to PAS, SFG agreed to (i) pay both a minimum quarterly fee, a portion of qualifying revenue from its use of PAS, and interest on late payments, (ii) provide quarterly reports, certified for accuracy, of its qualifying revenue (“Quarterly Reports”), and (iii) allow PPP to audit SFG to verify the accuracy of its reports.  PPP alleged that it fully performed under the Agreement. Until the end of 2017, PPP believed that SFG was performing too. SFG submitted Quarterly Reports throughout the contractual period that it certified for accuracy, and it made regular payments to PPP. However, in 2017, PPP discovered that SFG had clients that were not being reported to PPP, as SFG’s website referred to customers that SFG had never included in its Quarterly Reports. PPP investigated the discrepancy and found evidence that SFG’s Quarterly Reports were allegedly fraudulent in that certain SFG customers who had used PAS were not included in the Quarterly Reports. PPP asserted a pattern of SFG underreporting revenue since 2005.  On February 1, 2018, PPP contacted SFG to address the inconsistencies it had found in the Quarterly Reports. In its February 22, 2018 response, SFG admitted to omitting some clients from the Quarterly Reports. However, SFG also allegedly made numerous material misstatements to PPP. For example, according to PPP, SFG falsely stated that it did not provide valuation reports to certain of its customers when, in fact, it did and SFG misrepresented the time frames in which valuation reports were actually provided to certain customers. In addition, SFG allegedly represented to PPP that it exclusively used a non-party valuation and pricing service instead of PAS for many transactions; however, that too was allegedly false. SFG also knowingly misrepresented to PPP that it “always paid its bills,” which PPP alleged was materially false.  PPP requested an audit, as provided by the Agreement. However, according to PPP, SFG delayed for months and ultimately refused to allow an audit, at which point PPP terminated the Agreement.  PPP filed the action, alleging breach of contract (Counts I and II), fraud and fraudulent inducement (Count III), unjust enrichment (Count IV), and aiding and abetting fraud (Count V). The motion court dismissed the fraud and aiding and abetting fraud causes of action ( here ). With regard to one of the defendants, the motion court found that the alleged misrepresentations were “not collateral or extraneous to the Agreement but rather directly flow from the Agreement.”  With regard to another defendant, the motion court found that PPP failed to plead scienter. The motion court explained that the inference of scienter was insufficient to support the fraud claim because the facts alleged concerned the participation of one of the defendants in the management of SFG without more: “ lthough PPP offers many facts, it fails to offer particularized facts to show that Syncora both completely dominated SFG and did so for the purpose of committing the alleged fraud.” Finally, the motion court held that the fraud claims duplicated the contract claim.  First, the motion court found that there was no duty independent of the contract: “The Quarterly Reports were a contractual requirement. It was therefore a breach of the contract for the Quarterly Reports, and thus the Quarterly Revenue Fees, to allegedly be inaccurate.” Second, the motion court found that the damages sought by the fraud cause of action were speculative and not pleaded with particularity. In that regard, PPP alleged that it “lost key market opportunities”, sustained “reputational harm because customers and competitors become aware that one of PPP’s major clients was stealing millions of dollars of earnings through a scheme” and suffered a “diminution in the esteem in which the PAS system ha been held in the industry.” Under New York law, damages are not pleaded with particularity if the plaintiff fails to allege the causal connection between the tort and the harm. Thus, the plaintiff must plead (i) the precise harm, (ii) the cause, and (iii) specifically connect the two ( Morrison v. National Broadcasting Co. , 19 N.Y.2d 453, 458 (1967), especially where reputational harm is alleged ( Rather v. CBS Corp. , 68 A.D.3d 49 (1st Dept. 2009), lv. to appeal denied , 13 N.Y.3d 715 (2010)). The motion court concluded that “PPP fail to allege one fact to support its assertion of actual damages to its reputation.” On appeal, the First Department unanimously affirmed the dismissal. The Court held that “ he fraud causes of action … were properly dismissed as duplicative of the breach of contract claim.” Slip Op. at *1 (citing Matter of Daesang Corp. v. NutraSweet Co. , 167 A.D.3d 1, 18 (1st Dept. 2018)). The Court explained that the “complaint failed to allege a legal duty to plaintiff separate and apart from the duty to perform under the contract or that a fraudulent misrepresentation was collateral or extraneous to the contract,” and that “plaintiff sought only contract damages.” Id. U.S. Tsubaki Holdings, Inc. v. Estes U.S. Tsubaki arose from the sale of Central Conveyor Company, LLC (“Central Conveyor”) to U.S. Tsubaki Holdings, Inc. (“USTH”) by Central Conveyor’s executives and NS CCC Acquisition LLC (“NSCC”), the majority shareholder of Central Conveyor, pursuant to Purchase and Sale Agreement (“PSA”).  In 2017, NS CCC and two affiliates, New State Capital Partners LLC (“New State Capital”) and New State Management LLC (“New State Management”), began the process of selling Central Conveyor via an auction. USTH participated in this auction process. In conjunction with the auction process, Defendants provided several sales presentations, and touted Central Conveyor as possessing a large, loyal client base, strong customer relations, talented employees, strong growth and high revenue projections. Plaintiffs claimed that defendants’ presentations affirmatively misrepresented the true nature of Central Conveyor’s customer relations, employees, and sales projections.  According to Plaintiffs, the presentations did not reveal that Central Conveyor’s “employees and independent contractors were being incentivized through compensation structured in ways that violated tax laws as well as union and pension obligations.” Nor did the presentations allegedly disclose that Central Conveyor’s “strong culture” was “one of corruption, including rampant expense fraud, time card fraud, schemes to avoid union and pension obligations, and other misconduct that depended on dramatically flawed, and arguably nonexistent, internal control systems and unethical leadership,” and that the historical revenue and other information in its financial statements “were predicated on widespread unlawful and unethical business practices.” Although New State allowed potential bidders to access electronic documentation via a “virtual data room” to conduct due diligence on Central Conveyor’s financial status and the nature of its operations, the documents were allegedly doctored and the information misrepresented and concealed. The true nature of Central Conveyor’s operations, Plaintiffs claimed, were peculiarly within defendants’ knowledge.  USTH extended a $140 million bid to purchase Central Conveyor, which the Sellers accepted in 2018.  In conjunction with the PSA, the Sellers provided USTH with a Disclosure Schedule “in which they purported to provide an accounting” of Central Conveyor’s material agreements, disclosure of Central Conveyor’s noncompliance with applicable laws and legal disputes or proceedings, audited historical financial statements covering fiscal years 2015 through 2017, and other financial and operational information. At closing, the Sellers delivered a Closing Certificate, which certified that their representations and warranties in the PSA remained “true and correct”. Plaintiffs claimed that Central Conveyor’s financial and operational conditions at the time of the auction and sale were different than represented by the Seller defendants. According to plaintiffs, since the closing, there was widespread misconduct within Central Conveyor that defendants allegedly concealed during the acquisition process. Such concealed information and false representations allegedly included that: (i) Central Conveyor regularly paid kickbacks to customers and their employees in exchange for customer contracts; (ii) the historical financial statements were materially affected by the widespread unethical and unlawful practices; (iii) the revenue projections provided were grossly overstated; (iv) Work-in-Progress Schedules were doctored to overstate project profitability; and (v) Central Conveyor was subject to an audit by the Canada Revenue Agency. Plaintiffs alleged “on information and belief” that defendants “knew or were reckless with regard to the fact that” Central Conveyor “had this ongoing audit and exposure to tax liability at the time of Closing”. Additionally, Plaintiffs alleged that (i) defendants caused Central Conveyor to repeatedly underreport its tax liability; (ii) Central Conveyor employees, including Kevin Estes and Jeffrey DeBrabander, regularly used company credit cards for personal use; and (iii) Central Conveyor employees, including Kevin Estes, Jeffrey DeBrabander, and Christopher Estes, engaged in widespread abuses in personal timesheet reporting.  Plaintiffs further alleged that Central Conveyor “historically engaged in certain unlawful and/or contract-breaching employment practices”, including offering an alternative payment scheme (“Cash Option”) to certain union employees which involved underreporting employee hours and compensation to the labor union to avoid union fees, in violation of collective bargaining agreements. Plaintiffs claimed “ n information and belief” that “Defendants had knowledge or else were reckless in failing to learn of the Company’s practice of offering the Cash Option”, and “were directly involved in orchestrating the use of this practice or had a managerial role over the Company that should have necessarily given rise to knowledge of this widespread practice.” “Given the foregoing activities,” Plaintiffs alleged that the Seller defendants breached various representations and warranties in the PSA.  In their amended complaint, Plaintiffs asserted 18 causes of action, with USTH asserting 11, Central Conveyor asserting six, and USTH and Central Conveyor jointly asserting one. Defendants moved to dismiss.  With regard to the fraud causes of action, the motion court granted the motion. First, said the motion court, “the amended complaint failed to meet the heightened pleading standard of CPLR 3016(b).” The court explained that the “amended complaint ‘did not attribute specific misrepresentations or wrongdoing’ to a particular defendant ‘but, rather, impermissibly lumped’ the defendants together.” (Citations omitted.) Such group pleading doomed the pleading because “ raud must be claimed with specificity ‘as to each individual defendant’ which the amended complaint fail to do.” (Citation omitted.) Second, explained the motion court, “the allegations impermissibly made on information and belief.” Such statements said the court, were “‘not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.’” (Quoting Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015)).  Third, noted the motion court, “the amended complaint fail to satisfy the pleading requirements of CPLR 3016(b) as to the elements of scienter and knowledge.” The court held that the scienter allegations were “conclusory and factually insufficient.” (Quoting Facebook Inc. , 134 A.D.3d at 615).  The motion court also found the justifiable reliance allegations to be lacking. The court rejected Plaintiffs’ argument that they satisfied this element by pleading “special facts” that were within Defendants’ knowledge. The motion court said that the “mere disparity of knowledge between sophisticated business entities not trigger a duty to disclose.” (Citations omitted.) Also, the motion court noted that Plaintiffs had “acknowledge they had access to Central Conveyors books, records and personnel and the opportunity to conduct due diligence prior to the closing.” Such access negated the “special facts” exception, ruled the motion court. The motion court also found the fraud claim against the Seller Defendants to be duplicative of the breach of contract claim. The court explained that Plaintiffs failed to allege any misrepresentation that was extraneous to the terms of the parties’ contract. (Citing HSH Norbank AG v. UBS AG , 95 A.D.3d 185 (1st Dept. 2012).  Finally, the motion court held that Plaintiffs failed to state a cause of action against New State Capital and New State Management “neither of which was a party to the alleged fraudulent representations.” “Other than generalized and conclusory allegations, alleged by category of lumped together defendants”, the motion court found that “USTH fail to allege the requisite facts so as to state causes of action in fraud against these two defendants.” The motion court explained that “there no particularized factual allegation as to a misrepresentation made by these two non-signatories of the PSA at any stage of the transaction.” Similarly, noted the motion court, “ he amended complaint … lack a particularized factual allegation as to the elements of scienter, knowledge of the alleged misconduct by other defendants, and the existence of a duty.” Further, noted the motion court, Plaintiffs failed to allege the “circumstances under which these elements be inferred.” On appeal, the First Department unanimously reversed the dismissal. As an initial matter, the Court held that Plaintiffs satisfied the particularity requirement of CPLR § 3016(b), notwithstanding the use of group pleading. Slip Op. at *1. The Court explained that the degree of detail alleged, and the pervasiveness of the alleged fraud, permitted a reasonable inference that each of the defendants named actually knew of defendants’ alleged fraud. Id. (“given the complaint’s concrete allegations, plaintiffs’ grouped allegations are largely superfluous, since knowledge of the fraud can be inferred from the detailed allegations of its pervasiveness.” (citing AIG Fin. Prods. Corp. v. ICP Asset Mgt., LLC , 108 A.D.3d 444, 446 (1st Dept. 2013)). The Court also held that “Plaintiffs’ fraud claims not duplicative of their contract claim.” Slip Op. at *2. The Court explained that “Plaintiffs allege misrepresentation of numerous present facts, in the form of defendants’ alleged breaches of representations and warranties.” Id. These included that: the Company’s accounting was accurate; the Company was in compliance with employment laws; and the Company had disclosed all audits and material contracts. Id. “Moreover,” noted the Court, “the fraud claims asserted against a distinct set of defendants from the contract claims.” Id. In this regard, the Court was referring to the Non-Seller Defendants, who were not parties to the PSA. Because they were not signatories to the PSA, Plaintiffs did not sue them for breach of contract. Accordingly, the Court concluded that the fraud claim against them could not be duplicative of the contract claim against the other defendants. Finally, the Court noted that because “the PSA specifically gave plaintiff U.S. Tsubaki Holdings, Inc., the right to sue for fraud”, the “PSA be said to bar (as duplicative) a cause of action which the PSA itself guarantees.” Id.

Frequently, individuals and entities (principals) act through agents to conduct business.  When litigation arises from such business, the third parties with whom the agent interacted, often seek to hold the agent liable for any damages that are suffered. The law is clear that “an agent for a disclosed principal will not be personally bound unless there is clear and explicit evidence of the agent’s intention to substitute or superadd his personal liability for, or to, that of his principal.”  Savoy Record Co. v. Cardinal Export Corp. , 15 N.Y.2d 1, 4 (1964) (citations and internal quotation marks omitted); see also, Overbay v. Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. , 185 A.D.3d 707, 708-09 (2 nd Dep’t 2020) (citing Savoy Record ).  “The defense of agency in avoidance of contractual liability is an affirmative defense and the burden of establishing the disclosure of the agency relationship and the corporate existence and identity of the principal is upon he or she who asserts an agency relationship.”  Safety Environmental, Inc. v. Barberry Rose Management Co. Inc. , 94 A.D.3d 969 (2 nd Dep’t 2012) (citations, internal quotation marks and brackets omitted).  “A principal is considered to be disclosed if, at the time of a transaction conducted by an agent, the other party to the contract had notice that the agent was acting for the principal and the principal’s identity.”  Stonhard v. Blue Ridge Farms, LLC , 114 A.D.3d 757, 758 (2 nd Dep’t 2014) (citations and internal quotation marks omitted).  The test for whether a principal is “disclosed” is “actual knowledge, not suspicion.”  Safety Environmental , 94 A.D.3d at 970 (quoting Ell Dee Clothing Co. v. Marsh , 247 N.Y. 392, 397 (1928).)  For example, the plaintiff in Stonhard , was a contractor that installed flooring at a food manufacturing facility.  The Second Department, in reversing supreme court’s grant of summary judgment dismissing the individual defendant from the action and granting summary judgment to the plaintiff, stated: The plaintiff established, prima facie, its entitlement to judgment as a matter of law on the complaint insofar as asserted against the defendant Marvin Sussman with evidence that it entered into a contract with Sussman of “Blue Ridge Farms,” pursuant to which the plaintiff was to install flooring at the “Blue Ridge Farms” food manufacturing facility in Brooklyn, and Sussman failed to disclose that he was acting as an agent for the defendant Blue Ridge Foods, LLC, which owns the facility. Stonhard, 114 A.D.3d at 758 (citations omitted).  Since the agent in Stonhard was acting for a “partially disclosed principal in that the agency relationship was known, but the identity of the principal remained undisclosed,” “he became personally liable under the contract”.  Stonhard, 114 A.D.3d at 758-59 (citations and internal quotation marks omitted). The general rule that an agent will not be liable for the principal’s obligations is not without limit.  For example, “ he fact that an agent acts for a disclosed principal does not relieve the agent of liability for its own negligent acts.”  American Ref-Fuel Co of Hempstead v. Resource Recycling, Inc. , 281 A.D.2d 574, 575 (2 nd Dep’t 2001) (citation omitted).  Similarly, “ t has long been an established rule of law that the agent is not liable to third parties for non-feasance but only for affirmative acts of negligence or other wrong.”  Pelton v. 77 Park Ave. Condominium , 38 A.D.3d 1, 11 (1 st Dep’t 2006), overruled on other grounds by Fletcher v. Dakota, Inc. , 99 A.D.3d 43, 49–50, 948 N.Y.S.2d 263 (1st Dep’t 2012). It is against this backdrop that this Blog discusses Elango Medical PLLC v. Trump Place Comdominium , decided on May 18, 2021, by the Appellate Division, First Department.  The individual plaintiff in Elango is “an African-American, is a licensed physician and the sole owner of plaintiff Elango Medical PLLC.”  Corporate plaintiff attempted to lease space to open a medical office in the Trump Plaza Condominium, for which the Trump Corporation is the managing agent for the condominium and its board of managers.  According to plaintiffs, they found a listing for a unit in the subject condominium that was “identified as ‘professional space’ for physician/medical office use.”  Plaintiffs’ offer to lease the unit was accepted by the owner of the unit and the parties “entered into a lease agreement subject to approval by the board.”  The application was denied, however, “because the condominium bylaws restricted the unit to residential use.”  Plaintiffs alleged that they were never advised of any restrictions even though the listing agent and representatives of the Trump Corp. were aware of same.  It was also “undisputed that the unit had previously been used as a medical office from 1993 to mid-2017 and that two other units in the Condominium were currently being used as medical offices.”   Plaintiffs brought claims against Trump Corp. for, inter alia , “race-based discrimination in violation of the New York City and State Human rights laws.”  Trump Corp moved for summary judgment arguing, inter alia : that the application was denied for legitimate reasons (the use of the unit was restricted to residential use); that Trump Corp. was acting as an agent for the board, a disclosed principal; and, that “the Board had no idea who or what Dr. Elango was because…the Application was not reviewed or processed by the Board once it was determined, from the first page of the Lease, that the PLLC’s intended use was impermissible.”  Plaintiffs opposed the motion “arguing that the proffered reason for rejecting their application was pretextual, that issues of fact existed as to the scope of the agency relationship, and Trump Corporation could nonetheless be held liable for its own independent tortious conduct, and that issues of fact existed as to whether Trump Corporation was aware of Dr. Elango’s race.  Supreme court denied the motion. Trump Corp. argued on appeal that “it cannot be held liable because it acted as the agent of a disclosed principal, i.e., the board.”  Supreme court’s order was unanimously affirmed.  The Court, after setting forth the law on agency like that which is set forth herein, including that “an agent may still be held liable for its own affirmative wrongful acts," stated: Here, it would have been premature to grant summary judgment on this issue as document and deposition discovery have not yet begun and are clearly necessary to explore Trump Corporation’s agency status and its relationship with the Board, and whether it was aware of Dr. Elango’s race and its involvement in the decision to reject plaintiffs’ application. In the context of the agency defense and the discrimination claim, the Court was also moved by the fact that: “the evidence that a color photograph of the applicant was required to be submitted with the application was sufficient to create an issue of fact as to whether Trump Corporation was aware of Dr. Elango’s race <; that> the word “COLOR” is spelled out in capital letters for emphasis in its document<; and,> that the unit had previously been used as a medical office.

The proliferation of cyber-events and cyber-enabled crime represents a significant threat to consumers and the financial services system. See FinCEN, Advisory to Financial Institutions on Cyber-Events and Cyber-Enabled Crime (October 25, 2016) ( here) . With today’s technology, the accessibility of the U.S. financial system “make financial institutions attractive targets to traditional criminals, cybercriminals, terrorists, and state actors.” Id. These bad actors target the website, systems, and employees of financial institutions “to steal customer and commercial credentials and proprietary information; defraud financial institutions and their customers; or disrupt business functions.” Id. As noted in the Advisory, “financial institutions can play an important role in safeguarding customers and the financial system from these threats through timely and thorough reporting of cyber-events and cyber-related information in SARs” or suspicious activity reports. SARs are governed by the Bank Secrecy Act (“BSA”) and implementing regulations promulgated by the U.S. Treasury Department’s Financial Crimes Enforcement Network (“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. 31 C.F.R. § 1023.320(a)(2) (the “SAR Rule”). FinCEN’s regulations require that: “A suspicious transaction shall be reported by completing a Suspicious Activity Report.” 31 C.F.R. § 1023.320(b)(1). 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.” See FinCEN, FinCEN Suspicious Activity Report (FinCEN SAR) Electronic Filing Instructions (October 2012) ( here ). 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.” See , e.g. , FinCEN, Guidance on Preparing a Complete & Sufficient Suspicious Activity Report Narrative (Nov. 2003), at 3 ( here ). When a SAR is filed “it must include information about each of the Five Essential Elements of the suspicious activity.” 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). When a SAR “lack basic information regarding the Five Essential Elements … SAR s deficient as a matter of law.” Id. at 800. 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. FinCEN, Account Takeover Activity, FIN-2011-A016 (Dec. 19, 2011) ( here ). 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.” Id. 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. 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). Rule 17a-8 promulgated pursuant to Section 17(a) of the Securities Exchange Act of 1934 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. See Alpine Sec. Corp. , 308 F. Supp. 3d at 798–800. In the Matter of GWFS Equities, Inc. On May 12, 2021, the Securities and Exchange Commission (“SEC” or “Commission”) announced ( here ) that it settled charges against GWFS Equities Inc. (“GWFS”), a Colorado-based registered broker-dealer and affiliate of Great-West Life & Annuity Insurance Company, for violating the federal securities laws governing the filing of Suspicious Activity Reports. GWFS provides services to employer-sponsored retirement plans. The SEC found that from September 2015 through October 2018, GWFS was aware of increasing attempts by external bad actors to hack into the retirement accounts of individual plan participants. The SEC further found that GWFS was aware that the hackers attempted or gained access by, among other things, using improperly obtained personal identifying information of the plan participants, and that the hackers frequently were in possession of electronic login information, such as usernames, email addresses, and passwords. In the SEC’s order ( here ), the Commission found that GWFS failed to file approximately 130 SARs, including in cases when it had detected hackers gaining, or attempting to gain, access to the retirement accounts of participants in the employer-sponsored retirement plans it serviced. Further, for the nearly 300 SARs that GWFS did file, the SEC found that GWFS did not include the “five essential elements” of information it knew and was required to report about the suspicious activity and suspicious actors, including cyber-related data, such as URL addresses and IP addresses. “Across the financial services industry, we have seen a large increase in attempts by outside bad actors to gain unauthorized access to client accounts,” said Kurt L. Gottschall, Director of the SEC’s Denver Regional Office. “By failing to file SARs and by omitting information it knew about the suspicious activity it did report, GWFS deprived law enforcement of critical information relating to the threat that outside bad actors pose to retirees’ accounts, particularly when the unauthorized account access has been cyber-enabled.” In agreeing to the settlement, the SEC noted that GWFS provided significant cooperation with its investigation and took subsequent efforts to address the issues identified by the Commission, which included adding dedicated anti-money laundering staff and systems, replacing key personnel, clarifying delegation of responsibility for filing SARs, and implementing new SAR-related policies, procedures, standards, and training. The SEC found that GWFS violated Section 17(a) of the Securities Exchange Act and Rule 17a-8 thereunder. Without admitting or denying the SEC’s findings, GWFS agreed to a settlement that imposes a $1.5 million penalty, a censure, and an order to cease and desist from future violations.

Readers of this Blog know that to state a cause of action for fraudulent inducement, the complaint must allege “that the defendant intentionally made a material misrepresentation of fact in order to defraud or mislead the plaintiff, and that the plaintiff reasonably relied on the misrepresentation and suffered damages as a result.” Connaughton v. Chipotle Mexican Grill, Inc. , 135 A.D.3d 535, 537 (1st Dept. 2016), aff’d , 29 N.Y.3d 137 (2017) (citations omitted). Significantly, “ claim rooted in fraud must be pleaded with the requisite particularity under CPLR 3016 (b).” Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). This means that if “sufficient factual allegations of even a single element are lacking,” the claim will be dismissed. RKA Film Fin., LLC v. Kavanaugh , 2018 WL 3973391, at *3 (Sup. Ct., N.Y. County 2018) (quoting Shea v. Hambros PLC , 244 A.D.2d 39, 46 (1st Dept. 1998)). “To fulfill the element of misrepresentation of material fact, the party advancing the claim must allege a misrepresentation of present fact rather than of future intent.” Perella Weinberg Partners LLC v. Kramer , 153 A.D.3d 443, 449 (1st Dept. 2017) (citation omitted). “General allegations of lack of intent to perform are insufficient; rather, facts must be alleged establishing that the adverse party, at the time of making the promissory representation, never intended to honor the promise.” Id. (citation omitted). See also 627 Acquisition Co., LLC v. 627 Greenwich, LLC , 85 A.D.3d 645, 647 (1st Dept. 2011); Manas v. VMS Assoc., LLC , 53 A.D.3d 451, 453-54 (1st Dept. 2008); Orix Credit All., Inc. v. R.E. Hable Co. , 256 A.D.2d 114, 115 (1st Dept. 1998). This Blog has written about the foregoing principles on numerous occasions, including here , here , and here . In 320 W. 115 Realty LLC v. All Bldg. Constr. Corp. , 2021 N.Y. Slip Op. 03107 (1st Dept. May 13, 2021) (here), the Appellate Division, First Department recently considered and rejected a fraudulent inducement claim because it was based on nothing more than a promise to perform in the future. 320 W. 115 Realty arose out of a dispute over construction renovation work that was to be performed on two adjacent buildings (the “Project”), located at 318-320 West 115th Street, New York, New York (the “Property”).  Plaintiff, the former owner and developer of the Property, and All Building Construction Corp. (“ABC”) entered into an AIA standard form document A107-2007 agreement, dated November 14, 2014, whereby ABC agreed to perform general contracting management services to renovate the Property for a stipulated sum of $3,313,933. Under the agreement, the Project was to be substantially completed “on or about July 1, 2015.” In or around May 2015, Edward Campanella (“Campanella”), ABC’s owner and principal, allegedly informed Plaintiff that Defendants could not retain the subcontractors necessary to complete the Project at the price agreed to, and allegedly persuaded Plaintiff that Defendants could substantially complete the Project “on or about November 26, 2015” (the “Substantial Completion Date”) for an additional $819,525.35 (together with the original sum, the “Contract Sum”). In June 2015, Plaintiff and ABC entered into a separate AIA standard form document A107-2007 agreement — also dated November 14, 2014 — reflecting this subsequent agreement.  Plaintiff alleged that ABC continuously breached the two agreements (collectively, the “Agreements”) by, among other things: failing to complete the Project by the Substantial Completion Date because of ABC’s defective work and unreasonable delays; deviating from approved construction plans and concealing any unauthorized work; failing to complete major construction tasks; providing defective work; and failing to pay subcontractors for work performed while falsely certifying to Plaintiff that the subcontractors were paid. Plaintiff also alleged that ABC failed to pay its subcontractors, as required by the Agreements and the New York State Lien Law (“Lien Law”), and instead used the funds for purposes unrelated to the Project, which substantially delayed the Project. In addition to alleging breach of contract, Plaintiff alleged that ABC defrauded it by, among other things: misrepresenting and certifying lien waivers that it had paid the subcontractors for their work; fraudulently inflating the Contract Sum by certifying applications for payments that overstated completion costs and submitting false change orders for work already agreed to under the Agreements; and threatening to stop working on the Project and withholding delivery of construction services and materials that were already paid for by Plaintiff unless Plaintiff paid additional funds in excess of the Contract Sum. ABC allegedly abandoned the Project and the Agreements on August 25, 2016. As a result, Plaintiff maintained that it was required to: retain new contractors at higher prices; secure a new permit from the New York City Department of Buildings; incur additional costs to complete the Project, including accrual of interest on its construction loan; and remediate ABC’s defective work. Plaintiff brought suit, asserting four causes of action for: (1) fraudulent inducement against Defendants; (2) breach of contract against ABC; (3) negligence against ABC; and (4) breach of the implied covenant of good faith and fair dealing against ABC. Defendants moved to dismiss the first, third, and forth causes of action. We examine the motion as it pertained to the fraudulent inducement cause of action. In support of its fraudulent inducement cause of action, Plaintiff alleged that “ABC[]’s myriad of breaches came so early and often that the only inference is that ABC[] intended to breach its Agreements from the start ….” Plaintiff also alleged that Defendants knowingly misrepresented the Contract Sum at the time of contracting and that this misrepresentation induced Plaintiff to enter into the Agreements. Moreover, at a July 25, 2016 meeting, Campanella allegedly admitted to Plaintiff that the Agreements were never a firm number contract, and that the Contract Sum was never the real number. Defendants argued that the cause of action must be dismissed, in part, because the complaint failed to allege a misrepresentation that induced Plaintiff to enter into the Agreements, it was duplicative of the breach of contract cause of action, and Campanella could not be held personally liable for acts done on behalf of ABC. The motion court agreed with Defendants and dismissed the fraudulent inducement cause of action ( here ). The motion court held that Plaintiff merely alleged that Defendants lacked the intent to perform the Agreements, which, it said, was “clearly a statement of future intent” and, therefore, “not actionable.” (Citations omitted.) The motion court rejected Plaintiff’s contention that Campanella’s alleged statement that the Contract Sum “was never the real number” showed that Defendants knowingly misrepresented the Contract Sum. The motion court explained that “a review of the Agreements” actually “support Campanella’s statement.” For example, noted the motion court, “the Agreements specifically provide for the possibility that the Contract Sum increase or change under numerous scenarios” and contained a ‘Project Budget,’ … which the heading, ‘Estimate Summary.’”  Finally, with regard to Plaintiff’s other allegations of fraud — such as, ABC fraudulently inflated the Contract Sum by certifying applications for payments that overstated completion costs and submitting false change orders for work already agreed to under the Agreements — the motion court held that they were insufficient to support Plaintiff’s fraudulent inducement claim. The motion court explained that they could not have induced Plaintiff to enter into the Agreements because the activity complained of “allegedly occurred after the parties had already entered into the Agreements.” “At bottom,” concluded the motion court, “Plaintiff has failed to state sufficient facts to turn the breach of contract cause of action into a cause of action for fraudulent inducement.” On appeal, the First Department unanimously affirmed. In a pithy opinion (involving the fraudulent inducement cause of action), the Court held that Plaintiff did not allege a “representation of present fact.” Slip Op. at *1 (quoting Deerfield Communication Corp. v. Chesebrough-Ponds, Inc. , 68 N.Y.2d 954, 956 (1986) (internal quotation marks omitted)). Instead, Plaintiff merely alleged a representation of future intent. Id. Takeaway It has long been held that “promissory statements as to what will be done in the future are not actionable.” Adams v. Clark , 239 N.Y. 403, 410 (1925). However, when the promissory statement is “made with a preconceived and undisclosed intention of not performing it,” it becomes an actionable misrepresentation of existing fact. Sabo v. Delman , 3 N.Y.2d 155 (1957). As explained by the courts in 320 W. 115 Realty , the alleged misstatements were of the former, not the latter, variety.

This Blog frequently highlights cases analyzing the viability of fraud claims when contract claims are also made.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> .  In Michael Davis Construction, Inc. v. 129 Parsonage Lane, LLC , decided on May 12, 2021, the Second Department dismissed defendant’s negligent construction counterclaim as duplicative of its breach of contract counterclaim.   A review of the underlying complaint (available from court’s electronic file) reveals that plaintiff, a general contractor, entered into a contract for the renovation of an existing house owned by defendant.  A dispute arose between the parties and plaintiff agreed to give defendant a $400,000 credit and complete the work for $75,000.  Defendant rebuffed plaintiff’s demand for the $75,000 payment upon substantial completion of the work.  In its answer, defendant asserted, inter alia , an affirmative defense alleging breach of contract because “ laintiff failed to satisfactorily perform or complete its obligations under its agreement with and therefore the claims are barred as a result of breach of contract.”  In addition, defendant, alleging numerous deficiencies with plaintiff’s work and based thereon, asserted counterclaims sounding in breach of contract (first), negligent construction (second), breach of warranty (third), fraud in the inducement (fourth) and negligent misrepresentation (fifth).  In each counterclaim defendant sought damages “in excess of $1,500,000”, in addition to punitive damages of $2,000,000. Supreme court granted plaintiff’s motion to dismiss defendant’s second, third, fourth and fifth counterclaims and the demand for punitive damages.  On appeal, the Second Department modified supreme court’s order to the extent of denying the motion to dismiss with respect to the third counterclaim (breach of warranty) only; the remainder of the order was affirmed. In affirming the dismissal of the negligent construction counterclaim, the Court found it to be duplicative of the breach of contract counterclaim because a breach of contract counterclaim “is not to be considered a tort unless a legal duty independent of the contract itself has been violated.”  (Quoting Clark-Fitzpatrick, Inc. v. Long Is. R.R. Co. , 70 N.Y.2d 382, 389 (1987).)  The legal duty so alleged “must spring from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent upon the contract.”  Id .   The Clark-Fitzpatrick Court, in applying the facts of that case to the relevant law, stated: Here, plaintiff has not alleged the violation of a legal duty independent of the contract. In its cause of action for gross negligence, plaintiff alleges that defendant failed to exercise "due care" in designing the project, locating utility lines, acquiring necessary property rights, and informing plaintiff of problems with the project before construction began. Each of these allegations, however, is merely a restatement, albeit in slightly different language, of the "implied" contractual obligations asserted in the cause of action for breach of contract. Moreover, the damages plaintiff allegedly sustained as a consequence of defendant's violation of a "duty of due care" in designing the project were clearly within the contemplation of the written agreement, as indicated by the design change and adjusted compensation provisions of the contract. Merely charging a breach of a "duty of due care", employing language familiar to tort law, does not, without more, transform a simple breach of contract into a tort claim. Clark-Fitzpatrick, 70 N.Y.2d at 390 (citations omitted). In reaching its decision, the Michael Davis Court also relied on Board of Managers of Beacon Tower Condominium v. 85 Adams Street, LLC. , 136 A.D.3d 680 (2 nd Dep’t 2016), in which the Court stated: A legal duty independent of contractual obligations may be imposed by law as an incident to the parties' relationship, and in such instances, it is policy, not the parties' contract, that gives rise to a duty of care. The nature of the injury, the manner in which the injury occurred, and the resulting harm are all relevant factors in considering whether claims alleging breach of contract and tort may exist side by side. (Citations omitted.) Because the Michael Davis Court found that the counterclaims failed to “allege facts that would give rise to a duty owed to the defendant that is independent of the duty imposed by the parties' agreement,” defendant was essentially “seeking the contractual benefit of its bargain with plaintiff, which cannot be obtained through a counterclaim sounding in tort.” The Michael Davis Court also affirmed the dismissal of the fraud in the inducement counterclaim because “the allegations which form the basis of the counterclaim alleging fraud in the inducement are the same as those underlying the counterclaim alleging breach of contract. The defendant's allegation that the plaintiff fraudulently represented that it would install all soundproofing and thermal insulation on the project amounted only to a misrepresentation of the intent or ability to perform under the contract.  (Citations and internal quotation marks omitted.) As to the affirmance of the dismissed negligent misrepresentation counterclaim, the Michael Davis Court stated: A claim alleging negligent misrepresentation requires the party asserting the claim to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the other party to impart correct information; (2) that the information was incorrect; and (3) reasonable reliance on the information.  When both are alleged, a negligent misrepresentation claim will be found to be duplicative of a breach of contract claim where the pleading fails to allege facts that would give rise to a duty that is independent from the parties' contractual. Here, the allegations supporting the counterclaim alleging negligent misrepresentation are based solely on the contractual relationship between the parties. (Citations omitted.) Finally, the breach of warranty counterclaim was determined not to be duplicative of the contract counterclaim and was reinstated.  The express limited warranty upon which the counterclaim was based, was “an agreement that is independent of the parties’ original construction agreement” and “was executed by the plaintiff several years after the parties allegedly entered into their original construction agreement.”

Pursuant to CPLR § 3211(a)(5), “a party may move for judgment dismissing one or more causes of action asserted against him on the ground that the cause of action may not be maintained” because of collateral estoppel or res judicata.  Under the doctrine of res judicata , a party may not litigate a claim where a judgment on the merits exists from a prior action between the same parties involving the same subject matter. The doctrine applies not only to claims actually litigated but also to claims that could have been raised in the prior litigation. The rationale underlying the doctrine is that a party who has been given a full and fair opportunity to litigate a claim should not be allowed to do so again. See O’Connell v. Corcoran , 1 N.Y.3d 179, 184-185 (2003); Gramatan Home Invs. Corp. v. Lopez , 46 N.Y.2d 481, 485 <1979> ).  New York has adopted a transactional approach in deciding res judicata issues. Matter of Reilly v. Reid , 45 N.Y.2d 24 (1978). Under this approach, once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy. O’Brien v. City of Syracuse , 54 N.Y.2d 353, 357 (1981) (citation omitted). “ Res judicata is designed to provide finality in the resolution of disputes to assure that parties may not be vexed by further litigation.” See Matter of Reilly , 45 N.Y.2d at 28 (citations omitted). “The policy against relitigation of adjudicated disputes is strong enough generally to bar a second action even where further investigation of the law or facts indicates that the controversy has been erroneously decided, whether due to oversight by the parties or error by the courts.” Id. (citations omitted). As the Court of Appeals noted, “ onsiderations of judicial economy as well as fairness to the parties mandate, at some point, an end to litigation.” Id. When a prior action is discontinued with prejudice, such discontinuance may still have a preclusive effect on a later-filed action. Notwithstanding, the court has the discretion to narrowly interpret or disregard “with prejudice” language when the interest of justice or the equities involved warrant such an approach. See Employers Fire Ins. Co. v. Brookner , 47 A.D.3d 754 (2d Dept. 2008). In exercising its discretion, the court should be mindful that “ n properly seeking to deny a litigant two days in court, courts must be careful not to deprive him of one.” Landau, P.C. v. LaRossa, Mitchell & Ross , 11 N.Y.3d 8, 14 (2008) (internal quotation marks omitted). In Martinez v. JRL Food Corp. , 2021 N.Y. Slip Op. 02992 (1st Dept. May 11, 2021) ( here ), the Appellate Division, First Department addressed the foregoing principles in affirming the denial of defendant’s motion to dismiss on res judicata grounds. Martinez arose when plaintiff allegedly tripped over a storage case left in the aisle of defendant Keyfood Supermarket on August 5, 2016. Two months later, plaintiff commenced an action (the first of two prior actions) against defendant JRL Food Corp. D/B/A Keyfood Supermarket (“JRL”) as the operator of Fine Fare Supermarket located in the Bronx, New York (“Fine Fare action”). Approximately one year later, plaintiff commenced a separate action (the second prior action) against 320 Fair Farm Food Corp. as owner/operator of Fine Fare Supermarket (“320 Fair Farm action”). Pursuant to a stipulation, the Fine Fare action was discontinued with prejudice against JRL (“Fine Fare stipulation”). Pursuant to another stipulation, executed a year later, the 320 Fair Farm action was discontinued with prejudice (“320 Fair Farm stipulation”). The action before the First Department was filed on the same day as the 320 Fair Farm stipulation. JRL moved to dismiss the action under CPLR § 3211(a)(5), claiming that the prior stipulation of discontinuance with prejudice barred the action. JRL also moved for dismissal pursuant to CPLR § 3217, alleging that the two prior stipulations of discontinuance with prejudice acted as an adjudication of the merits barring the newly filed claim.  In opposition, plaintiff argued that the action was not barred by the doctrine because the “pivotal foundation fact” was missing – the locations of the supermarket where plaintiff allegedly fell were not the same. Therefore, plaintiff’s claim in the newly filed action against JRL had not been determined on the merits. The motion court denied the motion, holding that the stipulations did not bar the subsequent action. The motion court noted that the Fine Fare stipulation “reflected a clear understanding between the parties that the Fine Fare action was being discontinued against JRL because JRL did not operate the Fine Fair Supermarket located at 320 Gun Hill Road.” The motion court noted that the Fine Fare stipulation could not be “considered in a vacuum.” Both the complaint and bill of particulars in the Fine Fare action, said the motion court, “clearly indicated JRL d/b/a Keyfood Supermarket was not, in the true sense of the word, a party to the Fine Fair action.” (citing Chadbourne & Parke LLP v. Warshaw , 287 A.D.2d 119 (1st Dept. 2001)). “Inasmuch as it is undisputed that JRL never operated its business as Fine Fair Supermarket located at 320 East Gun Hill Road,” concluded the motion court, “it cannot be claimed that there was a determination on the merits and consequently the doctrine of res judicata ” did not apply. On appeal, the First Department affirmed. The Court held that “ he issues involved in plaintiff’s prior actions compared to the instant action concern different factual predicates and, therefore, the instant action not barred by the doctrine of res judicata.” Slip Op. at *1 (citations omitted). The Court explained that “ n the prior two actions plaintiff’s counsel had misunderstood where the accident occurred.” Id. And, “ fter discovering the error, plaintiff stipulated to discontinue the prior actions, since she had commenced the actions against parties believed to have ownership and control of the incorrect premises.” Id. Once plaintiff's counsel discovered the true accident location, plaintiff filed the new action. Id. Moreover, said the Court, the term “with prejudice” should be “narrowly interpreted in the interests of justice.” Id. (citing Employers’ Fire Ins. Co. v. Brookner , 47 A.D.3d 754, 756 (2d Dept. 2008)). The Court reasoned that this approach was consistent with “the most natural understanding of the language ‘with prejudice’ in the stipulations discontinuing the prior actions” in that “litigation concerning an accident that occurred at the incorrect premises would be discontinued; the stipulation was not that the negligence claim as to the accident itself would be discontinued.” Id. Takeaway Res judicata , or claim preclusion, precludes a party from litigating a claim where a judgment on the merits exists from a prior action between the same parties, involving the same subject matter. The doctrine applies even if the later claim is based on a different theory or seeks a different remedy, so long as it arises out of the same transaction. A “linchpin of res judicata is an identity of parties actually litigating successive actions against each other: the doctrine applies only when a claim between the parties has been previously brought to a final conclusion.” City of N.Y. v. Welsbach Elec. Corp. , 9 N.Y.3d 124,127-28 (2007) (quoting Parker v. Blauvelt Volunteer Fire Co. , 93 N.Y.2d 343, 347 (1999) (internal quotations omitted)). As shown in Martinez , the identity of parties was missing. Accordingly, the courts could not apply the res judicata doctrine.

Business relationships come in all forms. People can be shareholders of a corporation, joint venturers and partners.  Sometimes, as in Capizzi v. Brown Chiari LLP , 2021 N.Y. Slip Op. 02956 (4th Dept. May 7, 2021) ( here ), a dispute arises among the parties to a business relationship concerning the existence of the relationship itself. When that happens, courts will, as an initial matter, examine the writings between the parties to determine the existence of the relationship. If there are no such writings, they will consider the conduct of the parties, their intent, and their financial relationship to determine the type of association, if any, between the parties. As discussed below, Capizzi involved a partnership. A partnership is considered to be a voluntary, contractual association among the parties to the relationship. Congel v. Malfitano , 31 N.Y.3d 272, 278 (2018). Typically, the rights and obligations of the parties are governed by an agreement and any disputes concerning those rights and obligations will be determined by reference to the principles of contract law. Id. at 278. When the writing is silent on a matter, New York’s Partnership Law will fill in the gaps left by the parties. Id. Similarly, if there is no writing or the agreement contains provisions contrary to law, the provisions of the Partnership Law will control the relationship. Id. (citation omitted).  Where the very existence of the association is at issue, the Partnership Law instructs that the sharing of business profits constitutes prima facie evidence of the existence of a partnership. See Partnership Law § 11(4). Notwithstanding, the courts have held that the sharing of profits “is not dispositive” of the issue. Fasolo v. Scarafile , 120 A.D.3d 929, 931 (4th Dept. 2014), lv. dismissed , 24 N.Y.3d 992 (2014). Instead, they look to the parties’ conduct, intent, and relationship to determine whether a partnership existed in fact. Hammond v. Smith , 151 A.D.3d 1896, 1897 (4th Dept. 2017). In this regard, they examine: (1) the parties’ intent, whether express or implied; (2) whether there was joint control and management of the business; (3) whether the parties shared both profits and losses; and (4) whether the parties combined their property, skill, or knowledge. Id.   Importantly, “ o single factor is determinative” as the “court consider[] the parties’ relationship as a whole.” Id. (id.). The court in Capizzi v. Brown Chiari LLP applied the foregoing multi-factor test to hold that the parties were partners notwithstanding the absence of a partnership agreement. Capizzi involved the resignation from, and dissolution of, the defendant law firm Brown Chiari LLP (the “firm” or “defendant”). Plaintiff was an attorney of the firm. Plaintiff commenced the action seeking, among other things, a declaration that the firm was dissolved and money damages, including profits, had been wrongfully withheld from him. Defendants James E. Brown (“Brown”) and Donald P. Chiari (“Chiari”), also former attorneys of the firm, argued that they were the only partners in the firm and that plaintiff was not entitled to the relief requested because he was not a partner. Prior to the commencement of the action, Capizzi, Brown, and Chiari had been named as defendants in an action brought by a fourth attorney upon that attorney’s resignation from a prior incarnation of the firm (the “prior firm”). After a nonjury trial in the prior litigation, the court determined that all four attorneys were partners in the prior firm, despite the testimony of plaintiff and Chiari that they did not consider themselves to be partners in the prior firm (the “prior decision”). Among the facts noted by the court were that each of the four attorneys received a percentage of the prior firm’s income; the prior firm’s tax returns identified each as a partner; each received a Schedule K-1 with a capital account; each personally guaranteed a line of credit; and banking resolutions were signed by each, giving them broad authority to transact business on behalf of the prior firm. The court highlighted those facts as supporting the existence of a four-person partnership. Following the dissolution of the prior firm, the defendant firm was formed. After a nonjury trial, Supreme Court (Timothy J. Walker, A.J.) issued two judgments (denominated decisions and orders). The judgment on appeal in appeal No. 1 declared that plaintiff was an equity partner in the firm when he resigned from it. The judgment on appeal in appeal No. 2 declared that the firm had been dissolved upon plaintiff’s resignation. The Appellate Division, Fourth Department affirmed each judgment. With respect to the first factor of the analysis, the Court found that the “parties’ intent to establish a three-person partnership evident from the manner in which they structured firm in the wake of the decision.” Slip Op. at *1. The Court explained that: f Brown and Chiari—two highly experienced and capable attorneys—intended at that time to form a partnership that excluded plaintiff, they had the benefit of decision to serve as a guide. Brown and Chiari could have executed a written partnership agreement detailing the terms of partnership, or they could have structured firm differently from the prior firm by eliminating or substantially limiting the business practices that were identified by the decision as indicia of partnership. They did neither. Indeed, the evidence presented at trial established that plaintiff’s position in firm was much the same as it had been in the prior firm. For example, plaintiff received 20% of profits from 2007 to 2013. The firm’s 2007-2015 tax returns identified plaintiff, Brown, and Chiari as the firm’s partners and indicated that none owned an interest of 50% or more. Plaintiff received a Schedule K-1 with a capital account every year, and he personally guaranteed the firm’s line of credit. Further, plaintiff signed banking resolutions giving him authority to borrow money on the firm’s behalf. In other words, the parties recreated pre- conditions at their newly formed firm.… Id. Based upon the foregoing facts, the Court “conclude that the parties’ conduct in doing so constitute strong evidence of their intent to establish a three-person partnership that included plaintiff.…” Id. The Court found the other factors to be present and supportive of its holding. For example, “ ith respect to the third factor,” the Court found that the parties agreed to share profits and losses, a fact that was “undisputed”. Id. “With respect to the fourth factor, combined property, skill, and knowledge”, the Court found that plaintiff satisfied it as well, as those factors are “inherent in any legal practice”. Id. The Court noted that “ lthough joint control and management arguably not present,” it did not change the result. Id. Accordingly, the Court held that plaintiff was partners with Brown and Chiari in the defendant law firm. Id. Takeaway As discussed, in Capizzi , plaintiff satisfied his burden of proving that he was a partner of the defendant law firm. He successfully demonstrated that, following the dissolution of the prior firm and the formation of the defendant law firm, (1) the parties intended to conduct themselves as partners of the firm by (a) sharing profits and losses, which, under the Partnership Law, is prima facie evidence of a partnership ( see Partnership Law § 11 <4> ), (b) receiving a Schedule K-1 with a capital account, (c) guaranteeing the firm’s line of credit, and (d) signing banking resolutions giving them authority to borrow money on the firm’s behalf; (2) the parties shared supervision of the firm’s business operations and shared responsibility for handling the firm’s financial affairs; and (3) the parties combined their property, skill, and knowledge in furtherance of the firm. In light of the foregoing facts, the Court concluded that there was no reason to disturb the judgments entered by Supreme Court.

Many disciplinary proceedings involving lawyers relate to the mishandling of escrow funds and/or escrow accounts.  Unfortunately, many disciplinary proceedings relating to escrow accounts result from intentional conduct on the lawyer’s part.  However, mere inadvertence or inattention to escrow accounts could be problematic for attorneys as well.   Therefore, it is important for lawyers to be familiar with all rules related to maintaining escrow accounts and holding escrow funds.  On April 7, 2021, the Presiding Justices of New York’s four Appellate Divisions issued a Joint Order amending certain attorney disciplinary and related rules concerning escrow funds.  While the subject rules previously related only to dishonored checks, they were amended to include escrow account overdrafts.  The relevant rules, with interlineations to show the recent changes, can be found < HERE =">HERE"> .   Thus, Part 1200, Rule 1.15 (Rules of Professional Conduct) (Preserving identity of funds and property of others: fiduciary responsibility: comingling and misappropriation of client funds or property: maintenance of bank accounts: record keeping: examination of records), was amended such that, inter alia : Previously, escrow funds had to be maintained in a bank that agreed to provide dishonored check reports to the Lawyers’ Fund for Client Protection pursuant to 22 NYCRR 1300.1 .  Now, banks must also provide overdraft reports. Previously, there was no prohibition on escrow accounts having overdraft protection.  Now, “ o special account or trust account…may have overdraft protection.” Similarly, 22 NYCRR 1300.1 was amended to include overdraft reporting as well as dishonored check reporting and, inter alia : Previously, Special accounts could only be maintained in banks that have agreed to provide dishonored check reports to the Lawyers’ Fund for Client Protection pursuant to 22 NYCRR 1300.1 .  Now, banks must also agree to provide overdraft reports.  See 22 NYCRR 1300.1(a). Previously, agreements to provide dishonored check reports had to be filed with the Lawyers’ Fund for Client Protection.  Now, such agreements must also include the commitment to report on overdrafts.  See 22 NYCRR 1300.1(b). Previously, a report was required whenever a check was dishonored for insufficient funds.  Now, a report is required whenever a check is presented on an attorney special, trust or escrow account that contains insufficient funds “irrespective of whether the instrument is honored.”  See 22 NYCRR 1300.1(c). Previously, the dishonored check report was substantially in the form of the bank’s notice of dishonor sent to the customer.  Now, n the case of an instrument that is presented against insufficient funds, the report shall identify the financial institution, the lawyer or law firm, the account number, the date of presentation for payment, and the date paid, as well as the amount of overdraft created thereby.”  See 22 NYCRR 1300.1(d). Previously, dishonored check reports had to be mailed to the Lawyers’ Fund for Client Protection at the listed address within 5 banking days after presentment against insufficient funds.  Now, overdraft reports are added to the provision.  See 22 NYCRR 1300.1(e). Previously, Lawyers’ Fund for Client Protection held dishonored check reports for 10 business days to permit banks to withdraw reports provided “by inadvertence or mistake,” except that curing the insufficiency by depositing additional funds will not permit the withdrawal of the report.  Now, overdraft reports are added to the provision.  See 22 NYCRR 1300.1(f). Previously, the Lawyers’ Fund for Client Protection was required to forward the dishonored check report to the attorney disciplinary committee for the appropriate judicial department after holding the report for 10 business days.  Now, overdraft reports are added to the provision.  See 22 NYCRR 1300.1(g). Previously, the rules provided that “ very lawyer admitted to the Bar of the State of New York shall be deemed to have consented to the dishonored check reporting requirements of this section.  Lawyers and law firms shall promptly notify their banking institutions of existing or new attorney special, trust, or escrow accounts for the purpose of facilitating the implementation and administration of the provisions of this section.”  Now, overdraft reporting is added to the provision.  See 22 NYCRR 1300.1(g). TAKEAWAY These new rules highlight the seriousness of problems with escrow accounts – whether intentional of inadvertent.  Please be careful out there.

“If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.” This saying best describes the duplication of claims doctrine that this Blog often writes about – that is, the doctrine whereby a fraud claim will duplicate a contract claim when “the only fraud alleged is that the defendant was not sincere when it promised to perform under the contract.” Mañas v. VMS Assoc., LLC , 53 A.D.3d 451, 453 (1st Dept. 2008) (quoting First Bank of Ams. v. Motor Car Funding , 257 A.D.2d 287, 291 (1st Dept. 1999)). As we have noted before ( here ), courts do not hesitate to dismiss fraud claims when they are merely contract claims “dressed in the garb of a fraud count.” Songbird Jet Ltd., Inc. v. Amax Inc. , 581 F. Supp. 912, 924 (S.D.N.Y. 1984).   A fraud-based cause of action may lie, however, where the plaintiff pleads a breach of a duty separate from a breach of the contract. Mañas , 53 A.D.3d at 453. “Thus, where the plaintiff pleads that it was induced to enter into a contract based on the defendant’s promise to perform and that the defendant, at the time it made the promise, had a ‘preconceived and undisclosed intention of not performing’ the contract, such a promise constitutes a representation of present fact collateral to the terms of the contract and is actionable in fraud.” Id. (quoting Deerfield Communications Corp. v. Chesebrough-Ponds, Inc. , 68 N.Y.2d 954, 956 (1986)). The Appellate Division, First Department recently addressed these issues in International Dev. Inst., Inc. v. Westchester Plaza, LLC , 2021 N.Y. Slip Op. 02746 (1st Dept. May 4, 2021). International Development arose from a lease between the parties, whereby plaintiff leased the second floor of defendant’s building for the purpose of running a school. Plaintiff asserted a number of causes of action for, inter alia , breach of the lease, fraud, negligent misrepresentation, and unjust enrichment. With regard to the fraud claim, plaintiff contended that defendant misrepresented that it would cooperate in obtaining the certificate of occupancy (“CO”), including by curing existing first-floor violations and carrying out the supporting work that defendant undertook to do ( e.g. , roof repair and electrical work). The First Department found that the claim duplicated the lease claims because it was simply a contention that “defendant never intended to perform its obligations under the lease.” Slip Op. at *1. Therefore, held the Court, the fraudulent misrepresentation claim should have been dismissed. Id. For the same reason ( e.g. , plaintiff failed to allege the breach of any duty separate and apart from the contractual obligations under the lease), the Court held that the negligent misrepresentation claim should have been dismissed. Id. (citing Greenman-Pedersen, Inc. v. Levine , 37 A.D.3d 250 (1st Dept. 2007)). [Ed. Note: Where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraudulent inducement claim can stand side-by-side with “a simple breach of contract” claim.  Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted).] The Court also found that plaintiff’s fraudulent concealment claim should have been dismissed. Under that claim, plaintiff contended that defendant should have, but did not, disclose numerous existing first-floor violations, which made it impossible to use the premises as a school, as stated in the lease, or to obtain a CO. The Court found that “Plaintiff’s own submissions demonstrate that the first-floor violations were numerous, long-standing (many dating back to the 1990s), and matters of public record.” Id.   As “a sophisticated party to an arm’s-length contract” in which “defendant expressly eschewed any warranties and presented the property for lease ‘as-is’”, “ t was incumbent on plaintiff to exercise full due diligence to ascertain all factors having a bearing on obtaining a CO,” said the Court. Id. Since “Plaintiff did not do so,” concluded the Court, it could not “assert any claim for fraudulent concealment.” Id. (citing Jana L. v. West 129th St. Realty Corp. , 22 A.D.3d 274, 278 (1st Dept. 2005)). see, e.g. , hsh nordbank ag v. ubs ag , 95 a.d.3d 185, 194-95 (1st dept. 2012).> see, e.g. , hsh nordbank ag v. ubs ag , 95 a.d.3d 185, 194-95 (1st dept. 2012).> The Court further held that plaintiff’s unjust enrichment claim, which was based upon its fraud allegations, should have been dismissed as duplicative of the lease claims. Id. at *1-*2. The Court explained that, in addition to the absence of an independent duty, the damages sought by the unjust enrichment claim were not “distinct from the contract claim.” Id. at *2.  “In each case,” observed the Court, “plaintiff principally to recoup the value of the improvements.” Id. here),=">here)," even="even" where="where" a="a" plaintiff="plaintiff" alleges="alleges" duty="duty" independent="independent" the="the" contract,="contract," courts="courts" will="will" dismiss="dismiss" fraud="fraud" claim="claim" because="because" damages="damages" sought="sought" are="are" same="same" as="as" those="those" by="by" contract="contract" claim.="claim." explained,="explained," reason="reason" has="has" to="to" do="do" with="with" purpose="purpose" sought.="sought." MBIA="MBIA" Ins.="Ins." Corp.="Corp." v.="v." Credit="Credit" Suisse="Suisse" Sec.="Sec." (USA)="(USA)" LLC ,="LLC," A.D.3d="A.D.3d" 108,="108," (1st="(1st" Dept.="Dept." 2018);="2018);" Mañas ,="Mañas," at="at" 454.="454." meant="meant" redress="redress" different="different" harm="harm" than="than" for="for" breach="breach" contract.="contract." latter="latter" restore="restore" nonbreaching="nonbreaching" party="party" good="good" position="position" it="it" would="would" have="have" been="been" had="had" performed;="performed;" former="former" indemnify="indemnify" losses="losses" suffered="suffered" result="result" fraud.="fraud." MBIA ,="MBIA," 114;="114;" Thus,="Thus," all="all" remedied="remedied" through="through" claim,="claim," is="is" duplicative="duplicative" and="and" must="must" be="be" dismissed.="dismissed." 114.="114." This="This" so="so" sufficiently="sufficiently" an="an" owed="owed" them="them" separate="separate" apart="apart" from="from" Id. ="Id."> . Accordingly, concluded the Court, the unjust enrichment claims should have been dismissed as duplicative of the contract claims. Slip Op. at *2 (citation omitted). Takeaway The title of this article aptly describes the Court’s reasoning in International Development . As discussed, the Court was asked to examine fraud claims that were essentially indistinguishable from plaintiff’s contract claims. Under the duplication of claims doctrine, the fraud claims could not stand side-by-side with the lease (contract) claims.  As discussed above, plaintiff did not allege any representation that was collateral to the lease. Instead, plaintiff merely alleged that defendant was not sincere when it promised to perform under the lease. To the First Department, under those facts, the fraud-based claims duplicated the contract claims.