Like attending school in your underwear, missing a scheduled Court appearance is a recurring nightmare for attorneys.  If an appearance is missed, there can be several and severe consequences.  Rule 22 NYCRR 202.27 (Defaults) provides: At any scheduled call of a calendar or at any conference, if all parties do not appear and proceed or announce their readiness to proceed immediately or subject to the engagement of counsel, the judge may note the default on the record and enter an order as follows:  (a) If the plaintiff appears but the defendant does not, the judge may grant judgment by default or order an inquest.  (b) If the defendant appears but the plaintiff does not, the judge may dismiss the action and may order a severance of counterclaims or cross-claims.  (c) If no party appears, the judge may make such order as appears just. Generally, “a plaintiff seeking to vacate a default in appearing at a conference is required to demonstrate both a reasonable excuse for its default and a potentially meritorious cause of action.”  Citimortgage v. Espinal , 187 A.D.3d 1131 (2 nd Dep’t 2020) (citations and internal brackets and quotation marks omitted).  Similarly, a “defendant who seeks to vacate a default in appearing at a compliance conference is required to demonstrate both a reasonable excuse for the default and a potentially meritorious defense ( see CPLR 5015 <1> ; 22 NYCRR 202.27 ….)  Foley Inc. v. Metropolis Superstructures, Inc. , 130 A.D.3d 680 (2 nd Dep’t 2015) (some citations omitted).  In Foley , the court struck defendant’s answer for failure to appear at a compliance conference.  On appeal, the Second Department reversed because, inter alia , defendant demonstrated that it did not receive notice of “the adjourned compliance conference” and, absent actual notice of the conference date, the “failure to appear at that conference could not qualify as a failure to perform a legal duty, the very definition of a default.”  Foley , 130 A.D.3d at 681 (citations and internal quotation marks omitted).  Under such circumstances, the Second Department held that “vacatur of the default was required as a matter of law and due process, and no showing of a potentially meritorious defense was required.”  Foley , 130 A.D.3d at 681 (citations omitted).  See also Matter of 542 A Realty, LLC , 118 A.D.3d 993, 994 (2 nd Dep’t 2014). These principles were addressed on December 23, 2020 in the Second Department’s decision in U.S. Bank National Association v. Diez .   Diez was a mortgage foreclosure action in which plaintiff failed to appear at a scheduled status conference.  As a result of the default, supreme court, “sua sponte, directed dismissal of the complaint, with prejudice…” and denied plaintiff’s subsequent motion to vacate the dismissal order.  The Second Department Ordered that the “order is reversed, on the law, with costs, and the plaintiff’s motion to vacate the and restore the action to the calendar is granted.”  Thus, the Court found that: Here, in support of its motion to vacate its default, the plaintiff submitted an affirmation from its attorney establishing that the plaintiff did not receive notice of certain scheduled court appearances. In opposition, the defendant did not offer any evidence that the plaintiff received notice of the scheduled appearances. Therefore, the plaintiff's default was a nullity, and vacatur of the April 20, 2017 order directing dismissal of the complaint based upon that default is required ( see Sposito v Cutting , 165 AD3d 863, 865). Accordingly, the Supreme Court should have granted the plaintiff's motion to vacate that order and restore the action to the calendar.

A “recurring question” courts in New York grapple with is whether the facts alleged in a complaint give rise to sustainable claims for both breach of contract and fraudulent inducement. Cronos Grp. v. XComIP, LLC , 156 A.D.3d 54, 56 (1st Dept. 2017). Readers of this Blog know that a fraud claim, which “ar from the same facts , s identical damages and d not allege a breach of any duty collateral to or independent of the parties’ agreements<,> is subject to dismissal as redundant of the contract claim.” Id. at 63 (quoting Havell Capital Enhanced Mun. Income Fund, L.P. v Citibank, N.A. , 84 A.D.3d 588, 589 (1st Dept. 2011) (internal quotation marks omitted). See also HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 206 (1st Dept. 2012). As the First Department noted in Cronos Group , “ here is no shortage of recent decisions by this Court holding to similar effect.” 156 A.D.3d at 63 & n.8 (citing cases). Sometimes, a plaintiff alleges a duty independent of the contract but, nevertheless, has his/her complaint dismissed because the damages sought are the same as those sought by the contract claim. The reason has to do with the purpose of the damages sought. MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC , 165 A.D.3d 108, 114 (1st Dept. 2018); Mañas v. VMS Assoc., LLC , 53 A.D.3d 451, 454 (1st Dept. 2008). Fraud damages are meant to redress a different harm than damages for breach of contract. The latter damages are meant to restore the nonbreaching party to as good a position as it would have been in had the contract been performed; the former damages are meant to indemnify losses suffered as a result of the fraud. MBIA , 165 A.D.3d at 114; Mañas , 53 A.D.3d at 454. Thus, where all the damages are remedied through the contract claim, the fraud claim is duplicative and must be dismissed. MBIA , 165 A.D.3d at 114. This is so even where the plaintiff sufficiently alleges breach of an independent duty owed them separate and apart from the contract. Id. ; Chowaiki & Co. Fine Art Ltd. v. Lacher , 115 A.D.3d 600, 600-601 (1st Dept. 2014) (dismissing fraud claim seeking duplicative damages even where the plaintiff sufficiently alleged breach of an independent duty owed them independent of the contract). In Demurjian v. Demurjian , 2021 N.Y. Slip Op. 00008 (1st Dept. Jan. 5, 2021) ( here ), the Appellate Division, First Department affirmed the dismissal of a fraud cross-claim as duplicative of a contract cross-claim because the damages sought were the same notwithstanding the alleged independent duty owed to the cross-claim plaintiff.   Demurjian concerned the ownership of six parcels of real property (the “Subject Properties”) in Washington Heights. Defendant/Cross-Claim Plaintiff, 187 Street Mazal Manager LLC (“Mazal”) alleged that it entered into a purchase agreement, dated September 24, 2012 (the “Purchase Agreement”), whereby Mazal purchased the Subject Properties from Cross-Claim Defendant, Michael Demurjian (“Michael”), and Cross-Claim Defendant, 661 West 187 Street LLC (“661”).  In the Purchase Agreement, both Michael and 661 represented and warrantied that the Subject Properties were owned in fee simple and that they had the power and authority to convey the Subject Properties to Mazal.  David and Richard Demurjian (collectively, the “Demurjian Brothers”) sued Mazal, claiming that they did not transfer their interests in the Subject Properties to 661. In response, Mazal asserted that to the extent the Demujian Brothers’ allegations were true, and Michael and 661 did not own the Subject Properties free and clear at the time of the Purchase Agreement, Michael and 661 breached their representations and warranties to Mazal to the contrary in the Purchase Agreement. Mazal asserted cross claims for breach of contract, fraud, and indemnification/contribution against Michael and 661. Michael and 661 West moved to dismiss the fraud and indemnification/contribution cross-claims. Relevant to the title of today’s post, the motion court dismissed the fraud cross-claim, finding the fraud cross-claim to be duplicative of the breach of contract cross-claim: “the fraud claim is based upon the same alleged misrepresentation from which the breach of contract cause of action arises” and “is not collateral to the contract, since the question of Michael’s ownership was expressly incorporated into the terms of the Purchase Agreement.”  The First Department affirmed. Although the Court agreed with the motion court that the fraud cross-claim was duplicative of the breach of contract cross-claim, it based its decision on the damages sought rather than the underlying theory of the claims: “Mazal claim identical quanta and measures of damages.” Slip Op. at *1 (citing MBIA , supra ).  In doing so, the Court rejected Mazal’s argument that the damages claimed were not identical because it sought punitive damages, holding that dismissal was appropriate “even though Mazal also demand an additional category of punitive damages for the fraud claim.” Id. (citing MBIA , 165 A.D.3d at 115). Moreover, the Court found Mazal’s cross-claim for indemnification to be duplicative of its breach of contract cross-claim as it “ from the same facts and again the same damages as Mazal’s second cross claim for breach of contract.” Id. The Court explained that “if Mazal is ultimately entitled to indemnification from Michael, it can only be because Michael breached the Purchase Agreement.” Id. “Accordingly,” concluded the Court, “the indemnification cross claim should be dismissed as duplicative of the breach of contract cross claim.” Id. (citing Best v. Law Firm of Queller & Fisher , 278 A.D.2d 441, 442 (2d Dept. 2000), cert. denied , 534 U.S. 1080 (2002)). Takeaway Demurjian is notable because it shows that the determining factor as to the viability of a fraud claim may not be the theory behind the claim, but the measure of damages sought. Thus, although a plaintiff may allege a duty independent of a contract, the fraud claim may nevertheless be redundant of the breach of contract claim, if both claims seek the same damages.

When parties to a contract delegate the question of arbitrability to an arbitrator, the courts will enforce the agreement as written. They may not, without more, decide the arbitrability issue. This “is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” Henry Schein, Inc. v Archer & White Sales, Inc. , _____ U.S. at _____, 139 S.Ct. 524, 529 (2019). Thus, “if a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court not decide the arbitrability issue.” Id. at 139 S.Ct. at 530. This well-recognized principle of law was at issue in Revis v. Schwartz , 2020 N.Y. Slip Op. 08094 (2d Dept. Dec. 30, 2020) ( here ). In Revis , the Appellate Division, Second Department affirmed the motion court’s decision to compel arbitration and to stay the action pending completion of the arbitration on the grounds that the parties intended to arbitrate their disputes. In particular, the parties had agreed to arbitrate “gateway” questions of arbitrability. General Legal Principles A.  Federal Law Under the Federal Arbitration Act (9 U.S.C. § 1 et. seq.) (the “FAA”), agreements to arbitrate “reflect[] the overarching principle that arbitration is a matter of contract” and, therefore, are “‘rigorously enforce ’ according to their terms.” American Express Co. v. Italian Colors Rest. , 570 U.S. 228, 232 (2013) (quoting Dean Witter Reynolds Inc. v. Byrd , 470 U.S. 213, 221 (1985)); Rent-A-Center, West, Inc. v. Jackson , 561 U.S. 63, 67 (2010).  B.  New York State Law The Civil Practice Law and Rules (“CPLR”) provides that “ written agreement to submit any controversy … to arbitration is enforceable without regard to the justiciable character of the controversy and confers jurisdiction on the courts of the state to enforce it and to enter judgment on an award.” CPLR §7501. “A party aggrieved by the failure of another to arbitrate may apply for an order compelling arbitration.” CPLR § 7503(a). “If an issue claimed to be arbitrable is involved in an action pending in a court having jurisdiction to hear a motion to compel arbitration, the application shall be made by motion in that action.” Id. With limited exception, “ here there is no substantial question whether a valid agreement was made or complied with, … the court shall direct the parties to arbitrate.” Id. See Sutphin Retail One, LLC v. Sutphin Airtrain Realty, LLC , 143 A.D.3d 972, 973 (2d Dept. 2016). If the application for an order compelling arbitration is granted, “the order shall operate to stay a pending or subsequent action, or so much of it as is referable to arbitration.” CPLR § 7503(a)). Pursuant to the foregoing procedure, the courts are to perform the initial screening process in order to determine “whether the parties have agreed that the subject matter under dispute should be submitted to arbitration.” Matter of Nationwide Gen. Ins. Co. v. Investors Ins. Co. of Am. , 37 N.Y.2d 91, 96 (1975). “Once it appears that there is, or is not a reasonable relationship between the subject matter of the dispute and the general subject matter of the underlying contract, the court’s inquiry is ended.” Id. at 96. “Penetrating definitive analysis of the scope of the agreement must be left to the arbitrators whenever the parties have broadly agreed that any dispute involving the interpretation and meaning of the agreement should be submitted to arbitration.” Id. Accordingly, on a motion to compel or stay arbitration, a court must determine, “in the first instance … whether parties have agreed to submit their disputes to arbitration and, if so, whether the disputes generally come within the scope of their arbitration agreement.” Sisters of St. John the Baptist, Providence Rest Convent v. Geraghty Constructor , 67 N.Y.2d 997, 998 (1986). “When deciding whether the parties agreed to arbitrate a certain matter … courts generally … should apply ordinary state-law principles that govern the formation of contracts.” First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938, 944 (1995). Notably, “parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.” Rent-A-Center , 561 U.S. at 68-69; see also First Options , 514 U.S. at 943; Monarch Consulting , 26 N.Y.3d at 666. The reason: “parties may delegate threshold arbitrability questions to the arbitrator, so long as the parties’ agreement does so by ‘clear and unmistakable’ evidence.” Henry Schein, Inc. v. Archer & White Sales, Inc. , _____ U.S. _____, _____, 139 S.Ct. 524, 530 (2019) (quoting First Options , 514 U.S. at 944). Revis v. Schwartz 1.  Factual and Procedural Background A.  Allegations in the Complaint Darelle Revis, the former football player, and his wholly owned corporate entity Shavae, LLC (“Shavae”), commenced the action to recover damages for, among other things, breach of fiduciary duty, breach of contract, and fraud.  In January 2007, Revis and defendant Neil Schwartz, a partner in defendant Schwartz & Feinsod, LLC (“S & F”), a law firm that provides legal services to professional football players, entered into a Standard Representation Agreement (the “SRA”) in accordance with the National Football League Players Association Regulations Governing Contract Advisors (the “NFLPA Regulations”). Pursuant to the SRA, “Schwartz would represent … Revis as his attorney and contract advisor” and serve as “his exclusive representative with respect to negotiating player contracts with NFL clubs.”  Revis further alleged that on some unspecified date, he and Schwartz entered into a separate oral agreement, pursuant to which “Schwartz would provide a range of legal services to … Revis in return for a 10% contingent fee from amounts received by … Revis for marketing and endorsement agreements handled by … Schwartz on … Revis’s behalf.” Revis maintained that the SRA was the only written agreement between Revis and Schwartz, and that the SRA contained the only memorialization of the terms of the alleged oral agreement. In this regard, the SRA indicated that Revis and Schwartz had entered into “separate agreements” and included, inter alia , the following description of the services covered by them: “Marketing & Endorsements - Ten (10%) Percent - Cash Only.” The complaint alleged that “ hen Shavae was formed … Schwartz provided legal services to Shavae under the terms of his oral legal engagement agreement with … Revis.” The complaint contained eight causes of action. Each of the causes of action was asserted by both Revis and Shavae, and the complaint alleged that both plaintiffs were entitled to the remedies requested for each cause of action.  B.  The Defendants’ Motion to Compel Arbitration Defendants moved, pursuant to CPLR § 7503, to compel arbitration of the matter and to stay all proceedings pending arbitration. In support of their motion, defendants submitted, inter alia , a copy of the SRA, a copy of the NFLPA Regulations, and a copy of the Labor Arbitration Rules of the American Arbitration Association (the “AAA Rules”). Defendants cited to separate arbitration provisions in the SRA and in the NFLPA Regulations, and argued, among other things, that “ he broad language of the binding arbitration provisions in the SRA and Regulations plainly cover claims here.” Defendants further argued that, by incorporating the AAA Rules into the NFLPA Regulations, the parties had agreed to delegate any threshold arbitrability questions to the arbitrator. Plaintiffs opposed the motion. Plaintiffs argued that defendants “failed to present sufficient evidence of a clear and unequivocal intent to arbitrate the claims at issue.” Plaintiffs contended that their “legal claims … wholly separate from the rights and duties created under the SRA.” Plaintiffs asserted that their “claims from … Schwartz’s separate agreement to provide other legal services to … Revis and his company, Shavae.” The motion court granted defendants’ motion. The motion court stated that “ t clear … that the parties entered into a valid arbitration agreement and that the issues stated in the Summons and Complaint are encompassed within the SRA’s broad arbitration clause.” The motion court rejected plaintiffs’ contention “that the claims in this action are wholly separate from the rights and duties created under the SRA.” Plaintiffs appealed.   In a 3-2 decision, written by Justice Miller, the Second Department affirmed. 3.  The Court’s Decision A.  The Signatories Under the SRA, and in particular the paragraph titled “Disputes,” the parties to the SRA agreed that: “Any and all disputes between Player and Contract Advisor involving the meaning, interpretation, application, or enforcement of this Agreement or the obligations of the parties under this Agreement shall be resolved exclusively through the arbitration procedures set forth in Section 5 of the NFLPA Regulations Governing Contract Advisors.” The SRA incorporated the NFLPA Regulations by reference and defined them to be a part of the parties’ agreement. Section 5 of the NFLPA Regulations contained a broadly worded arbitration clause that covered a wide variety of disputes (“ his arbitration procedure shall be the exclusive method for resolving any and all disputes that may arise from ….”) and set forth the applicable arbitration procedure (“ he hearing shall be conducted in accordance with the Voluntary Labor Arbitration Rules of the American Arbitration Association”).  The AAA Rules provide that “ he parties shall be deemed to have made these rules a part of their arbitration agreement whenever, in a collective bargaining agreement or submission, they have provided for arbitration by the American Arbitration Association.” The AAA Rules go on to specify, under the subdivision titled “Jurisdiction,” that “ he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” The AAA Rules also provide that “ he arbitrator shall interpret and apply these rules insofar as they relate to the arbitrator’s powers and duties.” The Court held, based upon the incorporation by reference doctrine, that the foregoing language in the SRA and the NFLPA Regulations evidenced “a clear intent by Revis and Schwartz to arbitrate the threshold issue of arbitrability.” Slip op. at *5 (citations omitted).  The Court explained that where the rules of the arbitral forum are incorporated into the parties’ agreement, the courts are to enforce the agreements. Thus, “ here the rules that were incorporated into the parties’ agreement provided that threshold arbitrability issues were to be resolved by the arbitrator,” the courts will enforce “that aspect of the parties’ agreement and compel[] the parties to submit ‘gateway’ arbitrability issues to the arbitrator.” Id. (citations omitted). The Court found that the parties intended the arbitrator to decide the gateway issue of arbitrability:  Here, it is undisputed that Revis and Schwartz entered into the SRA, thereby invoking the broad umbrella of the NFLPA regulations and the fiduciary duties created therein. Section 5 of the NFLPA Regulations, which contains a broadly worded arbitration clause, provides that “ he hearing shall be conducted in accordance with the Voluntary Labor Arbitration Rules of the American Arbitration Association.” The AAA Rules, in turn, grant the arbitrator “the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” The SRA thus makes “clear reference” to Section 5 of the NFLPA Regulations, which, in turn, makes “clear reference” to the AAA Rules in such a way that the intent of the parties to incorporate those specific documents “may be ascertained beyond doubt.”  Id. (citing 11 Richard A. Lord, Williston on Contracts § 30:25 (4th ed. 2020)). The Court noted that its decision was consistent with the holdings in state court and in federal court where the courts “similarly reviewed arbitration agreements that incorporated, by reference, virtually identical provisions of the American Arbitration Association.” Id. at *5-*6 (citing and discussing cases). The Court concluded that defendants “demonstrate that Revis and Schwartz incorporated the AAA Rules into the documents that collectively constitute their arbitration agreement,” and therefore “established ‘by “clear and unmistakable” evidence’, that Revis entered into an agreement with Schwartz pursuant to which they agreed to arbitrate ‘gateway’ questions of arbitrability.” Id. at *6. Under the circumstances, therefore, the Court held that the motion court “properly granted that branch of the defendants’ motion which was to compel arbitration of those portions of the complaint which were asserted by Revis against Schwartz, and to stay those portions of the action pending completion of arbitration.” Id. at *7. B. The Nonsignatories Although only “a party to an arbitration agreement is bound by or may enforce the agreement” (1 Domke on Commercial Arbitration § 13:1 (2020), defendants nevertheless maintained that the nonsignatory defendants in the complaint, i.e. , the named defendants that did not sign the SRA, were entitled to compel Revis, a party to that agreement, to binding arbitration in the same manner as Schwartz. “Given the allegations in the complaint,” the majority agreed. Id. at *7. In New York, “ nonsignatory to an arbitration clause may, in certain situations, compel a signatory to the clause to arbitrate the signatory’s claims against the nonsignatory despite the fact that the signatory and nonsignatory lack an agreement to arbitrate.” Id. (citations omitted). “A non-party to an arbitration agreement may compel a party to arbitration if the relevant state contract law allows the non-party to enforce the arbitration agreement.” Id. (citations omitted). Under principles of agency, “agents are afforded the benefit of arbitration agreements that were entered into by their principals to the extent that the alleged misconduct relates to their behavior as officers or directors or in their capacities as agents of the corporation.” Hirschfeld Prods. v. Mirvish , 88 N.Y.2d 1054, 1056 (1996) (citations omitted). Such a rule, the Court of Appeals has said “is necessary not only to prevent circumvention of arbitration agreements but also to effectuate the intent of the signatory parties to protect individuals acting on behalf of the principal in furtherance of the agreement.” Id. at 1056. “Here,” said the Court, “the allegations in the complaint which were made against S & F and Feinsod relate solely to work that ‘was done on behalf of … Schwartz.’” Slip Op. at *8. “Given the allegations in the complaint,” concluded the Court, “the nonsignatory defendants identified therein—Feinsod and S & F—were entitled to enforce the arbitration provisions contained in the SRA and the NFLPA Regulations.” Id. (citations omitted). Accordingly, held the majority, “the Supreme Court properly granted that branch of the defendants’ motion which was to compel arbitration of those portions of the complaint which were asserted by Revis against Feinsod or S & F, and to stay those portions of the action pending completion of arbitration.” Id. Finally, the Court held that, under the direct benefits theory of estoppel, Shavae was bound by the arbitration clause in the SRA, although it was not a signatory to the SRA. Here, the complaint does not distinguish between the two plaintiffs in terms of the relief sought. In other words, Shavae seeks the same relief as Revis in each of the eight causes of action asserted in the complaint. Even assuming that Shavae is not an alter-ego of Revis, Shavae independently seeks to recover, under the fourth cause of action, damages for Schwartz’s alleged breach of the SRA. In the sixth cause of action, the complaint alleges that Shavae is entitled to recover amounts that should have gone to it pursuant to the terms of the SRA and Shavae independently seeks to rescind the SRA and recover “rescissory damages.” Given the allegations in the complaint that Shavae was entitled to certain benefits under the SRA and that it was entitled to recover various types of damages due to Schwartz’s alleged breach of that agreement, Shavae should be compelled to arbitrate in accordance with the arbitration clause contained in the SRA by application of the direct benefits theory of estoppel.  Id. (citations omitted). Accordingly, held the Court, the motion court “properly granted that branch of the defendants’ motion which was to compel arbitration of those portions of the complaint which were asserted by Shavae, and to stay those portions of the action pending completion of arbitration.” Id. In dissent, Justice Dillon, joined by Justice Cohen, would have reversed the motion court and denied the motion to compel.  The dissent argued that the majority misread the relevant documents in that there was no straight line from the SRA to the NFLPA Regulations to the AAA Rules necessary to “conclude that the separate Marketing and Endorsement contract (hereinafter the M & E) must initially go to an arbitrator in the event of a dispute between the parties over the M & E.” Id. at *9. According to Justice Dillon, the SRA did not incorporate the NFLPA Regulations for the resolution of disputes that arose outside of the SRA. Id. As such, “the terms of the AAA Rules not reached.” The dissent found that the limiting language of “Paragraph 8 of the SRA—that the NFLPA Regulations appl to the arbitration of disputes involving ‘ this Agreement ’— consistent with Paragraph 3(A) of the SRA, where the existence of the M & E disclosed but expressly described as a ‘separate agreement,’ and Paragraph 3(B) of the SRA, which provide that the SRA was signed by Revis without being conditioned upon the signing of any other agreement.” Id. (orig’l emphasis). “In other words,” said Jusitice Dillon, “the reference to the M & E in Paragraph 3 was not to include it within the SRA, but to distinguish the M & E from the SRA, with each of the two contracts separate from the other, and the existence of one not conditioned upon the other.” Id. Justice Dillon noted that, while he agreed with the majority about the right of the parties to contractually agree to delegate issues of arbitrability through a “gateway” to an arbitrator, the parties did not delegate the issue with regard to the M & E. “The gateway applies to an arbitrability dispute involving the SRA itself,” said Justice Dillon, “as the gateway’s existence relie upon the broad arbitrability provisions of the NFLPA Regulations and the AAA Rules.” Id. at *10. To the dissent, the M & E did not reach the NFLPA Regulations or the AAA Rules through the SRA. Id. “In other words,” concluded the dissent, “reliance upon the NFLPA Regulations and the AAA Rules, to support the conclusion that arbitrability is solely for the arbitrator to decide, puts the cart (the NFLPA Regulations and AAA Rules) before the horse (the M & E).” Id. The dissent observed that “the M & E, standing alone, independently subject to the broad language of the NFLPA, requiring that the unwritten M & E document subject to arbitrability.” Id.   However, because the point was not raised before the motion court, it was not properly before the Court on appeal, and could not be considered because the issue was not “one of ‘pure’ law untethered to any question of fact.” Id. (citations omitted). The reason, explained the dissent, was because it was unclear whether Schwartz was acting as Revis’ attorney or Contract Advisor in relation to the M & E. Id. Thus, even if the Court were to consider the issue on the merits, “the existence of such a question of fact, by which arbitrability is ambiguous, preclude our compelling an arbitration at this juncture and instead vest the Supreme Court with the obligation of determining whether the parties’ dispute arbitrable.” Id. at *10-*11 (citations omitted) (noting that the language of the NFLPA Regulations, which extended its provisions to “any other activity or conduct which directly bears upon the Contract Advisor’s integrity, competence or ability to properly represent individual NFL players and the NFLPA in individual contract negotiations,” did “not clearly and unmistakenly apply to disputes with individuals who may be acting as private attorneys for a player on matters unrelated to an NFL contract, such as an endorsement deal, a matrimonial litigation, a real estate transaction, or a speeding ticket.”). As to the nonsignatories, Justice Dillon said that “the absence of an unambiguous arbitration agreement between Revis and Schwartz mean that Shavae, LLC, Jonathan Feinsod, and the law firm of Schwartz & Feinsod, LLC, who were also named as defendants, not subject to arbitration over the M & E.” Slip op. at *11. Accordingly, the dissent would have reversed the order appealed from and denied defendants’ motion to compel arbitration and to stay the action pending completion of the arbitration.

If a plaintiff fails to prosecute an action dismissal for “want of prosecution” may be obtained pursuant to CPLR 3216 , which provides, in pertinent part: (a) Where a party unreasonably neglects to proceed generally in an action or otherwise delays in the prosecution thereof against any party who may be liable to a separate judgment, or unreasonably fails to serve and file a note of issue, the court, on its own initiative or upon motion, with notice to the parties, may dismiss the party’s pleading on terms. Unless the order specifies otherwise, the dismissal is not on the merits. (b) No dismissal shall be directed under any portion of subdivision (a) of this rule and no court initiative shall be taken or motion made thereunder unless the following conditions precedent have been complied with: (1) Issue must have been joined in the action; (2) One year must have elapsed since the joinder of issue or six months must have elapsed since the issuance of the preliminary court conference order where such an order has been issued, whichever is later; (3) The court or party seeking such relief, as the case may be, shall have served a written demand by registered or certified mail requiring the party against whom such relief is sought to resume prosecution of the action and to serve and file a note of issue within ninety days after receipt of such demand, and further stating that the default by the party upon whom such notice is served in complying with such demand within said ninety day period will serve as a basis for a motion by the party serving said demand for dismissal as against him or her for unreasonably neglecting to proceed. Where the written demand is served by the court, the demand shall set forth the specific conduct constituting the neglect, which conduct shall demonstrate a general pattern of delay in proceeding with the litigation. Thus, if a party seeks a dismissal pursuant to CPLR 3216, compliance with three conditions precedent must be satisfied, but if it is the Court seeking dismissal, there is a fourth requirement found in the last sentence of subsection (b)(3) thereof.  Before dismissal is granted, all statutory requirements must be met.  Ramirez v. Reyes , 171 A.D.3d 1114, 1116 (2 nd Dep’t 2019).  In order to avoid dismissal if all required conditions are met, “the plaintiff was required to demonstrate a justifiable excuse for the failure to timely abide by the 90-day demand, as well as the existence of a potentially meritorious cause of action.”  Ramirez , 171 A.D.3d at 1116.   In actions where there are multiple defendants, a CPLR 3216 dismissal may only be obtained by the defendant(s) that served a 90-day demand.  Fichera v. City of New York , 79 A.D.597, 598 (2 nd Dep’t 1980); Yunga v. Yonkers Contracting Co., Inc. , 134 A.D.3d 1031, 1033 (2 nd Dep’t 2015). In Rhodehouse v. CVS Pharmacy, Inc. , 151 A.D.3d 771 (2 nd Dep’t 2017), supreme court dismissed plaintiff’s action on its own motion.  In finding that the statutory conditions were not satisfied and in reversing supreme court, the Second Department stated that : (1) “the certification order did not set forth any specific conduct constituting neglect by the plaintiff” as required by CPLR 3216(b)(3); and, (2) “Supreme Court failed to give the parties notice and an opportunity to be heard prior to considering whether to dismiss the action pursuant to CPLR 3216 ” as required by CPLR 3216 (a).  Rhodehouse , 151 A.D.3d at 773. On December 23, 2020, in Deutsche Bank Nat. Trust Co. v. Henry , the Second Department reversed the administrative dismissal of the action pursuant to CPLR 3216.  Henry , a mortgage foreclosure action,was commenced in 2007.  At a status conference held in March of 2017, the court issued a conditional order of dismissal (1) “in which it stated that more than one year had passed since joinder of issue, and that the plaintiff had unreasonably neglected to prosecute the action”; and, (2) in which it stated  that “‘this action is dismissed pursuant to CPLR 3216 and the County Clerk is directed to cancel the Notice of Pendency unless Plaintiff files a note of issue or otherwise proceeds by motion for entry of judgment within 90 days of the date hereof.’"  When the plaintiff failed to comply with the conditional order, the case was administratively dismissed and plaintiff’s motion to restore was denied. In reversing supreme court, the Henry Court stated: CPLR 3216 permits a court, on its own initiative, to dismiss an action for want of prosecution where certain conditions precedent have been complied with.  As relevant here, an action cannot be dismissed pursuant to CPLR 3216(a) unless a written demand is served upon the party against whom such relief is sought in accordance with the statutory requirements, along with a statement that the default by the party upon whom such notice is served in complying with such demand within said ninety day period will serve as a basis for a motion by the party serving said demand for dismissal as against him or her for unreasonably neglecting to proceed.  While a conditional order of dismissal may have the same effect as a valid 90-day notice pursuant to CPLR 3216, the conditional order of dismissal here was defective in that it failed to state that the plaintiff's failure to comply with the notice "will serve as a basis for a motion " by the court to dismiss the action for failure to prosecute. The Supreme Court should not have administratively dismissed the action without further notice to the parties and without benefit of further judicial review. (Citations and some internal quotation marks omitted; emphasis in original.)

Arbitration is a preferred means of dispute resolution. In fact, arbitration is the policy under the Federal Arbitration Act (“FAA”) and the Civil Practice Law and Rules (“CPLR”). For this reason, (1) when parties to a contract have clearly and unambiguously agreed to arbitrate their disputes, the courts will enforce that agreement, as they would any other agreement, to give effect to the parties’ intention; (2) the courts will not substitute their judgment for that of the arbitrator(s); and (3) the courts will confirm an arbitration award, unless a movant can demonstrate that one of the grounds for vacatur set forth in the FAA or CPLR exist – a task that is often difficult to do.  Today, we examine two cases arising under Article 75 of the CPLR involving the foregoing principles. The first action, Matter of Gibson, Dunn & Crutcher LLP v. Johnson , N.Y. 2020 Slip Op. 34212(U) (Sup. Ct., N.Y. County Dec. 17, 2020) ( here ), involved a petition to confirm an arbitration award, pursuant to CPLR §§ 7510 and 7514. The second action, Euro Pac. Capital, Inc. v. Fat Brands, Inc. , 2020 N.Y. Slip Op. 34217(U) (Sup. Ct., N.Y. County Dec. 16, 2020) ( here ), involved a motion to stay arbitration under CPLR §7503(b).  Matter of Gibson, Dunn & Crutcher LLP v. Johnson Gibson Dunn sought an order, pursuant to CPLR §§ 7510 and 7514, to (1) confirm an award that was issued in December 2019 following an arbitration between the parties (the “Award”), and (2) enter a money judgment in Gibson Dunn’s favor against respondent, Sarah Johnson, based on the Award. In the Award, the Arbitrator held that Gibson Dunn was entitled to quantum meruit damages against Johnson in the amount of $1,873,886.24 for attorney’s fees, plus prejudgment interest based on legal services that Gibson Dunn had rendered to Johnson when she was a client. Johnson opposed the petition and moved for an order, pursuant to CPLR § 7511, dismissing the petition and vacating the Award or, in the alternative, substantially reducing the amount awarded.  The Court found that Gibson Dunn had presented everything necessary to support the relief sought – i.e. , an order confirming the Award. In addition, the Court held that the Award was “thorough and extremely well-reasoned” sufficient “to support conclusion that Gibson Dunn entitled to quantum meruit damages against Ms. Johnson in the amount of $1,873,886.24 for attorney’s fees plus prejudgment interest based on legal services rendered.” Slip Op. at *2. “ evertheless”, said the Court, Johnson sought “to vacate the Award pursuant to CPLR 7511(b)(1)(iii), claiming that the Arbitrator ‘exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made.”  Id. (citation omitted). Johnson argued that, “in awarding Gibson fees on a theory of quantum meruit, the Arbitrator violated strong New York public policy standing for the proposition that attorneys should not profit from their misconduct, especially a breach of fiduciary duty to their own clients.” Id. (internal quotation marks omitted). In essence, Johnson argued that because she learned after she discharged Gibson Dunn that the firm allegedly engaged in misconduct, Gibson Dunn was not entitled to the fees it sought because public policy prohibits a lawyer from profiting from their own misconduct: Ms. Johnson’s counsel begins by correctly noting that the law provides that an attorney discharged for “cause” based on misconduct or improprieties is not entitled to fees. However, counsel then acknowledges that Ms. Johnson did not discharge Gibson Dunn for cause. Rather, Ms. Johnson learned only after the attorney-client relationship had ended that, allegedly, “Gibson engaged in misconduct that would have justified Ms. Johnson discharging for cause.” The purported improprieties included alleged misrepresentations about the quality of the associates working on Ms. Johnson’s case and “write-downs” or fee reductions allegedly undisclosed to hide low quality work. Counsel contends the Arbitrator wrongly ignored “indisputable proof” of improprieties, as evidenced by the Arbitrator’s statement, disguised as a credibility determination, that he was “not persuaded that the relevant and credible evidence in the record plausibly establishes that Mr. Snyder ‘lied or knowingly misled’ Ms. Johnson" in connection with these issues. Counsel then points to the Arbitrator’s statement that he had not found any case law supporting the claim that a fee reduction may constitute an impropriety. Counsel attacks this statement, arguing that Gibson Dunn “cannot escape the consequences of its conduct simply because the Arbitration presented an issue of first impression.” Id. (citation to record omitted). The Court held that Johnson’s “argument strained.” Id. at *3. The Court found that the public policy ground for vacating the arbitration award did not present an “explicit conflict” with settled law or strong and well-defined policy considerations. Id. at *4 (citing Matter of City of Oswego (Oswego City Firefighters Ass’n, Local 2707) , 21 N.Y.3d 880, 882 (2013). The Court explained that “ ot only did Ms. Johnson withdraw her claim of malpractice, but the Arbitrator reviewed and entirely rejected on the merits Ms. Johnson’s claim of ‘misconduct,’ finding instead, after a thorough analysis of the evidence, that Gibson Dunn had performed its work with ‘utmost good faith’ and that a ‘very substantial amount of work’ in a ‘complex and challenging’ litigation had been provided on Ms. Johnson’s behalf.” Id. (citation to Award omitted).  The Court further explained that the Arbitrator “conclusively and directly rejected Ms. Johnson’s claim that Gibson Dunn’s efforts to reduce Ms. Johnson’s bills while the litigation was pending somehow constituted ‘unethical conduct,’ concluding the argument was ‘wholly without merit.’” Id. (citation to Award omitted).  As a result, the Court denied Johnson’s motion to vacate the Award. The Court also declined to reduce the amount of the fees awarded by the Arbitrator. Johnson argued that a $1 million reduction constituted “reasonable compensation” within the meaning of In re Freeman’s Estate , 34 N.Y.2d 1, 9 (1974), and its progeny. Under Freeman’s Estate , in considering the reasonableness of a fee, the courts are to consider the following factors: (1) the time and labor required; (2) the difficulty of the questions involved, and the skill required to handle the problems presented; (3) the lawyer’s experience, ability and reputation; (4) the amount involved and benefit resulting to the client from the services; (5) the customary fee charged by the Bar for similar services; (6) the contingency or certainty of compensation; (7) the results obtained; and (8) the responsibility involved. The Court rejected Johnson’s contention that Gibson Dunn’s fees should have been reduced under Freeman’s Estate . Id. at *4. “In sum,” said the Court, “Gibson Dunn ha established its right to confirmation of the Final Award, and the motion by Ms. Johnson to vacate the Award or substantially reduce the amount of the Award is without merit.” Id. at *5. Accordingly, the Court confirmed the Award and denied the motion to vacate, concluding that it had “‘no legal basis to ‘substitute its legal conclusions or factual findings for that of the arbitrat ’ based either on Ms. Johnson’s allegations of misconduct or the amounts the Arbitrator concluded were appropriately billed for the substantial work performed by Gibson Dunn, even if the Arbitrator had made an error of law, which he did not.” Id. at *4-*5 (citing Matter of Falzone (New York Cent. Mut. Fire Ins. Co. ), 15 N.Y.3d 530, 534–35 (2010). Euro Pac. Capital, Inc. v. Fat Brands, Inc. Petitioners moved for an order, pursuant to CPLR § 7503(b), to stay the arbitration commenced by respondent against the petitioners before the Financial Industry Regulatory Authority, Inc. (“FINRA”) (the “FINRA Arbitration”). Petitioners based their motion on an agreement that required all disputes between the parties to be heard “only in the state or federal courts located in the City of New York, State of New York.” On April 24, 2018, FAT Brands Inc. (“FAT Brands”), its affiliates, and Alliance Global Partners (“AGP”, together with Fat Brands, the “AGP Agreement Parties”) entered into a debt private placement agreement pursuant to which AGP agreed to serve as “the co-placement agent and investment banker working with Dalmore Group, LLC (“Dalmore”) in regard to an Investment Banking/Advisory Agreement executed on April 1, 2018 (the “Services”) for , on a best effort basis, in connection with the offer and placement (the “Offering”) by of up $100 million of debt securities, private notes, loans or working capital financing of (collectively, the “Securities”).”  The AGP Agreement contained a jurisdiction and governing law provision, pursuant to which “ ny disputes that under Agreement, even after the termination of Agreement, be heard only in the state or federal courts located in the City of New York, State of New York.”  Unlike the AGP Agreement, the Investment Banking/Advisory Agreement (or the “Dalmore Agreement”) between FAT Brands and Dalmore, a FINRA registered broker dealer (FAT Brands and Dalmore, collectively, the “Dalmore Agreement Parties”), which predated the AGP Agreement, contained an arbitration provision. On or about October 16, 2020, FAT Brands filed a statement of claim before FINRA against petitioners Adam Kinzer and AGP. In pursuing arbitration against AGP and Kinzer, FAT Brands claimed that the AGP Agreement was modified by two emails: (1) dated August 8, 2018, and (2) dated December 8, 2018. Neither email contained a modification of the provision of the ADP Agreement with respect to the parties’ agreement to litigate disputes arising under the Agreement.  Nevertheless, FAT Brands argued that because the Dalmore Agreement Parties agreed to arbitrate, the AGP Agreement Parties also agreed to arbitrate, even though the AGP Agreement expressly provided to the contrary. FAT Brands also argued that FINRA Rule 12200 – which provides for arbitration of disputes between FINRA members and its customers, at the customer’s request, arising in connection with the members’ business activities, unless the customer is a broker or dealer – required arbitration of the parties’ dispute. The Court rejected both arguments. The Court found that the AGP Agreement did not provide for arbitration. Slip Op. at *6. Rather, the AGP Agreement “plainly provide for New York state or federal courts as the exclusive forum for any disputes under that agreement, including ‘even after termination of Agreement.’” Id. The Court also found that even if it were to credit respondent’s argument that the Dalmore Agreement controlled, which it did not because nothing in the August and December emails addressed arbitration in any way, arbitration would still be inappropriate for AGP and Kinzer as both were “indisputably not signatories to the Dalmore Agreement and, therefore, be bound to its terms.” Id. The Court further found respondent’s “reliance on FINRA Rule 12200” to be “unavailing.” Id. “ rbitration pursuant to FINRA Rule 12220 is not mandatory where there is a written agreement between the parties that provides to the contrary,” said the Court. Id. (citing New York Bay Capital, LLC v. Cobalt Holdings, Inc. , 456 F. Supp. 3d 564 (S.D.N.Y. 2020), citing Golden, Sachs & Co. v. Golden Empire Schools Financing Auth. , 764 F.3d 210 (2d Cir. 2014)). Rather, concluded the Court, “where there is an unambiguous forum selection clause such as the one in the AGP Agreement here, the ‘forum-selection clause displaces the agreement to arbitrate in FINRA Rule 12200.’” Id. (quoting New York Bay Capital , 456 F. Supp. 3d at 571). Accordingly, the Court granted the motion to stay the arbitration. Takeaway Under CPLR § 7511(b)(1)(iii), an arbitration award will not be confirmed when the arbitrator exceeded his or her authority under the arbitration agreement. Thus, the movant must demonstrate that the arbitration agreement limited the arbitrator’s authority to act, and the arbitrator subsequently violated that limitation. The same is true with regard to arbitration mandated by statute. Absent an agreement or statute, however, as long as an arbitrator addresses the issue(s) submitted for resolution, vacatur will not be granted, unless the award is completely irrational – that is, the resulting award goes beyond the issues before the arbitrator.  In addition, an award will be vacated when the decision is irrational or is violative of a public policy. In essence, the court must conclude, without any fact-finding or legal analysis, that arbitration of the matter is prohibited by law.  We have examined cases in which a party resisting confirmation of an arbitral award claimed the arbitrator(s) exceeded their authority or the award was violative of public policy. As we have noted in many posts, it is very difficult to vacate an award on those grounds (as it is on the other grounds for vacatur set forth in the FAA and Article 75 of the CPLR). Gibson Dunn is another example of a respondent failing to convince a court that the arbitrator exceeded their authority. We have also examined cases in which a party, who was not a signatory to an arbitration agreement, sought to litigate his/her rights in court rather than in an arbitral forum ( e.g. , here ). Under CPLR § 7503(b), such non-signatories were entitled to a stay of arbitration because there was no valid agreement to arbitrate. CPLR § 7503(b). After all, because arbitration is a “creature of contract” ( Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc. , 252 F.3d 218, 224 (2d Cir. 2001)), only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. TBA Global, LLC v. Fidus Partners, LLC , 132 A.D.3d 195, 202 (1st Dept. 2015). Consequently, as in Euro Pac. Capital , “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Communications Workers of Am. , 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co. , 363 U.S. 574, 582 (1960)).  Euro Pac. Capital is also notable for its holding that a forum selection clause requiring any actions, disputes and proceedings to be brought in court supersedes an earlier agreement to arbitrate, even if that agreement is found in FINRA Rule 12200. FINRA Rule 12200 is a contract and must be interpreted in accordance with principles of contract interpretation. As such, where an agreement supersedes an earlier agreement to arbitrate, such as Rule 12200, the later agreement must be enforced according to its terms so long as it is clear and unambiguous on its face. In Euro Pac. Capital , the Court found such clarity – that is, the clear language of the forum-selection clause demonstrated that the parties intended to resolve their disputes through litigation, rather than FINRA arbitration.

Affinity fraud is a type of securities fraud. In this form of fraud, the person committing the fraud preys upon members of an identifiable group, such as a religious or ethnic community, the elderly, or a professional group. The promoter of an affinity fraud frequently is – or pretends to be – a member or a good friend of the group. The fraudster often enlists respected members of the community or religious leaders from within the group to disseminate information about the scheme by convincing them that a fraudulent investment is legitimate and in their best interests. Affinity frauds exploit the trust and friendship that exist in a group of people who have something in common. Because of the tight-knit structure of the group, it can be difficult for regulators or law enforcement officials to detect an affinity fraud. Victims often fail to notify authorities or pursue their legal remedies and instead try to work things out within the group. This is particularly true where the fraudsters have used respected community or religious leaders to convince others to join the investment. Many affinity frauds involve Ponzi schemes or pyramid schemes, where new investor money is used to make payments to earlier investors to give the illusion that the investment is successful. New investors are induced to invest in the scheme and existing investors are lulled into believing their investments are profitable. Unfortunately, as is often the case, the promoter of the scheme steals the investor’s money for personal use. Both types of schemes depend on an unending supply of new investors – when the inevitable occurs, and the supply of new money stops, the scheme collapses, and investors lose most or all of their money. On December 21, 2020, the Securities and Exchange Commission (“SEC” or the “Commission”) announced (here) that it filed an emergency action against California-based real estate development company SiliconSage Builders LLC, aka Silicon Sage Builders, and its sole owner, Sanjeev Acharya, in connection with an alleged $119 million fraudulent offering. According to the SEC’s complaint (here), Silicon Sage Builders and Acharya raised money from approximately 250 retail investors, most of whom were members of the Northern California South Asian community, by falsely describing Silicon Sage Builders’ real estate business as profitable and promising investors exorbitant returns. The SEC alleged that, in reality, from 2016 to 2019, all but one of Silicon Sage Builders’ projects had significant cost overruns and did not generate enough money to pay investors the promised returns. The SEC also alleged that Acharya misled investors into believing the payments they received were derived from Silicon Sage Builders’ profits when, in fact, Silicon Sage Builders and Acharya had used new investor funds to pay earlier investors. The SEC further alleged that Acharya misled investors as to the amount of money the company was attempting to raise and falsely told investors they could redeem their investments despite there being insufficient funds to meet redemption requests. “As we allege in our complaint, wrongdoers sometimes prey on the trust of members of their communities to raise funds for their fraudulent schemes,” said Alka Patel, Associate Regional Director of the SEC’s Los Angeles Regional Office. “Affinity frauds are particularly harmful to retail investors, and this case demonstrates the SEC’s commitment to pursuing such schemes and protecting retail investors.” The SEC filed its complaint in the U.S. District Court for the Northern District of California. The SEC charged Silicon Sage Builders and Acharya with violating the antifraud provisions of the federal securities laws. In particular, the SEC charged Silicon Sage Builders and Acharya with, among other thing, misleading and deceiving Silicon Sage investors (a) about the safety and security of investors’ funds, how the funds were used, and the promised returns, including: the profitability of Silicon Sage and all of its real estate projects, the source of the interest payments paid to fund investors, the ability to redeem investments, and the amount of the offering, and (b) by making Ponzi payments and lulling existing investors to contribute new capital, roll over existing investments, and defer interest payments. The SEC seeks preliminary and permanent injunctions, the appointment of a receiver over Silicon Sage Builders, asset freezes, disgorgement with prejudgment interest, and financial penalties against the defendants, as well as an order prohibiting the destruction of documents and an accounting. Takeaway The SEC has a long history of commencing enforcement proceedings against affinity fraud promoters. Indeed, the SEC has investigated and taken quick action against affinity frauds that have targeted a wide spectrum of groups. here.=">here."> In the SEC’s Investor Publication, “Affinity Fraud: How to Avoid Investment Scams That Target Group,” the Commission provides a number of helpful tips on how to avoid an affinity fraud (here). These include: Never make an investment based solely on the recommendation of a member of an organization or religious or ethnic group to which you belong. Investors should investigate the investment thoroughly and check the truth of every statement made about the investment. Do not fall for investments that promise spectacular profits or “guaranteed” returns. If an investment seems too good to be true, then it probably is. Similarly, investors should be very hesitant to purchase a security that is said to have no risks. As noted by the SEC, the greater the potential return from an investment, the greater one’s risk of losing money. “Promises of fast and high profits, with little or no risk, are classic warning signs of fraud.” Investors should be skeptical of any investment opportunity that is not in writing. Fraudsters often avoid putting things in writing. Legitimate investments are usually in writing. If a person says that they do “not have the time to reduce to writing” the particulars about the investment, investors should be leery about the opportunity. Investors should also be suspicious if a person says to keep the investment opportunity confidential. Investors should not feel pressured or rushed into buying an investment; investors should think about - or investigate - the investment opportunity. Investors should be skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the promoter bases the recommendation on “inside” or confidential information. Investors should avoid unsolicited emails offering investment opportunities. As the Silicon Sage Builder action shows, investors should be suspicious of investment opportunities that come from members of an ethnic community or religious group. An investment opportunity should never be based on a promise of high returns and little to no risk, even if those opportunities come from trusted people within the community or group. Investors should always perform due diligence before acting on an investment opportunity by conducting their own research or consulting a securities broker or investment advisor. If an investment opportunity seems suspicious, a “can’t miss” or “too good to be true”, then investors should steer clear of the opportunity. And, in such cases, investors should report those opportunities to the SEC.

In prior posts, we examined enforcement actions brought by the Securities and Exchange Commission (“SEC” or “Commission”) against those who seek to benefit from the COVID-19 pandemic ( e.g. , here , here and here ).  Earlier this month, we wrote about an enforcement proceeding that the SEC brought against The Cheesecake Factory ( here ). As noted in that article, that proceeding was the first time the SEC had charged a large public company for misleading investors about the financial effects of the COVID-19 pandemic on the company’s business and operations.  Since February of this year, the SEC has released several warnings to investors to beware of fraud, illicit schemes and other misconduct during the coronavirus health emergency ( here ). In these warnings, the SEC has highlighted the proliferation of internet promotions, often using social media, in which the company claims that its products or services could prevent, detect or cure the virus, and that the sale of these products or service would lead to a dramatic increase in the price of those companies’ stock. Many of these scams, said the SEC, “often take the form of so-called ‘research reports’ and make predictions of a specific ‘target price.’” In reality, explained the SEC, these are pump-and-dump schemes. On December 18, 2020, the SEC announced ( here ) that it brought charges against Decision Diagnostics Corp. (“Decision Diagnostics”), a California-based biotechnology company, and its CEO, Keith Berman, with making false and misleading claims in numerous press releases that the company had developed a working, break-through technology that could accurately detect Covid-19 through a quick blood test. The SEC temporarily suspended trading in Decision Diagnostics’ securities on April 23, 2020 ( here ). In the complaint ( here ), the SEC alleged that Decision Diagnostics and Berman falsely claimed  that Decision Diagnostics had developed a finger prick blood test that could detect Covid-19 in less than a minute. According to the SEC, from March 2020 to at least June 2020, Decision Diagnostics and Berman made false and misleading statements about the existence of Decision Diagnostics’ Covid-19 device and progress towards FDA emergency use authorization. As alleged, at the time Decision Diagnostics and Berman made these claims, the company lacked a proven method for detecting the virus and had no physical testing device. Further, alleged the SEC, the company’s advisors had warned that the testing kit they were trying to manufacture would not work as Decision Diagnostics had described. The SEC further alleged that the statements created the misleading impression that the test was soon to be introduced to the market and led to surges in the price and trading volume of Decision Diagnostics’ stock. “During this unprecedented time, when the need for truthful disclosures concerning Covid-19 tests is of vital importance, Decision Diagnostics and its CEO allegedly misled investors by claiming to have made a working test device when all they had was an idea that had not materialized into a product,” said Stephanie Avakian, Director of the Division of Enforcement. “With the onset of the global pandemic, we quickly pivoted to identify potential areas of fraud. This case is another example of how the Commission will hold accountable those who exploit the pandemic to harm investors.” “In our complaint, we allege that Decision Diagnostics and Berman repeatedly made baseless representations to the investing public about market-moving events like progress in obtaining FDA approval and having breakthrough technology,” said Anita B. Bandy, Associate Director of the Division of Enforcement. “Today's filing is a credit to the dedicated SEC staff, who continued to investigate after the trading suspension and quickly uncovered the alleged fraud.” The SEC filed the complaint the U.S. District Court for the Southern District of New York. The Commission charged Decision Diagnostics and Berman with violating the antifraud provisions of the securities laws. The SEC is seeking to enjoin both Decision Diagnostics and Berman from directly or indirectly violating those provisions and ordering them to pay civil penalties. In addition, the Department of Justice’s Market Integrity and Major Frauds Unit announced ( here ) that parallel criminal charges against Berman were also filed in the U.S. District Court for the District of Columbia. In the indictment ( here ), the government alleged that, from February through December 2020, Berman falsely claimed that the company had developed a 15-second test to detect COVID-19, when in fact the test was merely an idea and not a validated method of accurately detecting COVID-19.  According to the indictment, Decision Diagnostics was in precarious financial condition prior to the pandemic, and Berman wrote in internal emails that he needed a “new story” to “raise millions.”  In addition, the government claimed that Berman falsely told investors that the Food and Drug Administration (“FDA”) was on the verge of approving the company’s request for emergency use authorization of its COVID-19 test.  In truth, alleged the government, Berman knew that the company lacked the financial resources and insurance necessary to conduct the clinical testing required by the FDA to complete the application process. The government also said that Berman sought to exert political pressure on the FDA by hiring a political consultant to lobby Members of Congress, telling them in talking points that the FDA had “moth-balled” the company’s submission and that it remained “stuck in limbo” at or around the same time that Berman was telling investors that the test was on the verge of approval.  Between early March and April 23, 2020, the company’s stock price rose by over 1,500 percent.    The indictment further alleged that, as part of the alleged scheme, Berman used an alias, “plutoniumimplosion,” to repeat false and misleading statements to investors on Internet message boards, and lull suspecting investors into inaction by refuting allegations of fraud and threatening potential whistleblowers with civil or criminal sanctions.

Venue in litigation is where the trial of an action will take place.  Venue, which is governed by Article 5 of the CPLR , is initially chosen by the plaintiff at the commencement of the action.  Sometimes an improper venue is chosen by the plaintiff and other times, while correct, a more convenient venue is available.  This BLOG has previously addressed “ Change of Venue Procedures .”  Today’s article will focus on some issues related to the discretionary change of venue pursuant to CPLR 510(3) , which provides that “ he court, upon motion, may change the place of trial of an action where … the convenience of material witnesses and the ends of justice will be promoted by the change.”   Motions pursuant to CPLR 510(3) “are addressed to the sound discretion of the trial court and, absent an improvident exercise of that discretion, the trial court’s order will not be disturbed on appeal.”  Raghavendra v. Stober , 171 A.D.3d 814, 816 (2 nd Dep’t 2018) (citations omitted). In cases where plaintiff’s initial choice of venue is proper, a discretionary change of venue based on the convenience of witnesses, pursuant to CPLR 510(3), will be granted “only after there has been a detailed evidentiary showing that the convenience of nonparty witnesses would in fact be served by the granting of such relief.”  O’Brien v. Vassar Bros. Hosp. , 207 A.D.2d 169 (2 nd Dep’t 1995).  The O’Brien Court “review … the caselaw decided with reference to CPLR 510(3) and its antecedents that there is a general consensus among appellate courts as to the existence, if not as to the absolute rigidity and inexorability, of four criteria which should be established by the movant in order to demonstrate his or her entitlement to relief pursuant to CPLR 510(3).”  O’Brien , 207 A.D.2d at 172.  The O’Brien criteria are as follows: (1) “the affidavit in support of a motion under this section must contain the names, addresses and occupations of the prospective witnesses”; (2) “a party seeking a change of venue for the convenience of witnesses is also required to disclose the facts to which the proposed witnesses will testify at the trial, so that the court may judge whether the proposed evidence of the witnesses is necessary and material”; (3) “the moving party must show that the witnesses for whose convenience a change of venue is sought are in fact willing to testify”; and (4) “there must be a showing as to how the witnesses in question would in fact be inconvenienced in the event a change of venue were not granted.”   O’Brien , 207 A.D.2d at 172 – 73 (citations, internal quotation marks and ellipses omitted).   Where a proper showing is not made, courts will not hesitate to deny a motion.  Fitzsimons v. Brennan , 128 A.D.3d 634 , 636 (2 nd Dep’t 2015) (citations omitted) (“the defendants failed to offer sufficient proof of the addresses of , the facts to which the would testify, whether the would be willing to testify, and that the would be inconvenienced if venue was not changed.  The defendants also provided the names of fire and police officers and first responders, without providing the current addresses of those individuals, or the basic details which would be the subject of their anticipated testimony.”) Interestingly, a motion to change venue pursuant to CPLR 510(3) may be made by a plaintiff.  Article 5 of the CPLR contains provisions indicating where certain types of actions shall proceed.  For example, CPLR 507 provides that actions affecting title to real property “shall be in the county in which any part of the subject of the action is situated” and CPLR 504 provides the venue for “the place of trial of all actions against counties, cities, towns, villages, school districts and district corporations or any of their officers,  boards or departments.”  Accordingly, a plaintiff may be forced, in the first instance, to bring an action in a venue designated by Article 5 of CPLR.  However, plaintiff’s initial venue may be inconvenient for witnesses.  Such was the case in Xhika v. Rocky Point Union Free School Dist. , 125 A.D.3d 646 (2 nd Dep’t 2015), where plaintiff initially commenced the action in Suffolk County Supreme Court as required by CPLR 504 (because the defendant was a school district), but moved to change venue to Kings County.  The Xhika Court noted that “despite the seemingly unforgiving language of the statute, venue may be changed to a non-mandated county upon a showing of special circumstances.”  Xhika , 125 A.D.3d at 647 (citations and internal quotation marks omitted).)  Consistent with such a finding, the Xhika Court granted the motion to change venue and held that that plaintiff made the requisite showing that treating physicians and eyewitnesses would be inconvenienced if the trial took place in Suffolk County.  Xhika , 125 A.D.3d at 647.  Conversely, the defendant failed to “assert that any of its employees witnessed the accident” and “failed to establish that any of its trial witnesses would be inconvenienced by traveling to Kings County.”  Xhika , 125 A.D.3d at 647-48. It is important to note that the convenience of “the parties, their employees, and their experts is not relevant to determination of a change of venue under CPLR 510(3).”  Leake v. Constellation Brands, Inc. , 112 A.D.3d 792 (2 nd Dep’t 2013) (citations omitted); see also, Joseph v. Agnant , 262 A.D.2d 226 (1 st Dep’t 1999). On December 15, 2020, the First Department decided Manchanda Law Office PLLC v. Marin , in which plaintiff sought a de novo review of an attorney fee dispute arbitration.  In affirming the change of venue from New York County to Albany County, the Court noted that “ efendant supported the motion with affidavits from three witnesses based in Albany County, which showed that they are available and willing to testify on behalf of the movant, the nature of their testimony and the manner in which it is material to issues raised in the case, and the manner in which they would be inconvenienced if required to travel to New York County” and that in opposition, plaintiff failed to identify “factors that would justify retention of venue in New York County, such as by showing that any, let alone the preponderance of, the material nonparty witnesses to the fee dispute are located in there.” (Citation omitted.)

To plead a claim for fraud in the inducement or fraudulent concealment, a plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations. A sophisticated party, like the plaintiff in MBF Clearing Corp. v. JPMorgan Chase Bank, N.A. , 2020 N.Y. Slip Op. 07504 (1st Dept. Dec. 15, 2020) ( here ), must allege that it exercised due diligence and took affirmative steps “to protect itself against deception.” DDJ Mgt., LLC v. Rhone Group 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="and" >here,=">here," for="for" example.="example."> MBF Clearing involved a “self-styled ‘long-established and well-regarded’ commodities futures commission merchant” that claimed, among other things, the defendants fraudulently induced it to invest its customer segregated assets in defendant’s J.P. Morgan U.S. Government Money Market Fund (“USG Fund”).  In particular, plaintiff, MBF Clearing Corp. (“MBF”), alleged that the defendants, JPMorgan Chase Bank N.A (“JPMC Bank”), J.P. Morgan Investment Management Inc. and Kevin T. Murphy (“Murphy”), an employee of JPMC Bank, and a futures commission merchant, fraudulently induced MBF to invest its customer segregated assets by opening a new segregated customer account (“Account x2069”) and invest those assets in the USG Fund. It also alleged that defendants fraudulently changed the title of Account x2069 to remove “commodity customer segregated bank account” in violation of the Federal Commodity Exchange Act and rules and regulations of the United States Commodities Futures Trading Commission.  MBF filed its first complaint on September 16, 2014. Thereafter, MBF filed two more complaints, an amended complaint and a second amended complaint (“SAC”). In the SAC, MBF alleged claims for fraudulent inducement to invest in USG Fund and open Account x2069, fraudulent misrepresentation as to the USG Fund, fraudulent misrepresentation as to Account x2069, fraud in changing the name on Account x2069, fraudulent concealment as to Account x2069, negligent misrepresentation as the USG Fund, negligent misrepresentation as to Account x2069, aiding and abetting in fraud, deceptive conduct, and contribution and indemnity. On January 28, 2016, the motion court dismissed the SAC without prejudice. As to the fraud-based claims and negligence claims involving both Account x2069 and the USG Fund, the motion court dismissed them because MBF failed to allege justifiable reliance. The motion court found that the investment in the USG Fund ran afoul of applicable rules and that MBF did not do its due diligence in making the investment, noting that it simply relied on the documents sent in connection with opening the account (that is, “in terms of setting up the account and opening the account ... there an acknowledgement ... by ... the CFO as well as the principles of plaintiff saying they read all the prospectus related to that opening of the account”). On August 2, 2016, MBF filed a motion to amend the complaint and caption, which was denied by the motion court. MBF then filed a motion to reargue the motion court’s decision denying the amendment. The motion to reargue was granted and the Third Amended Complaint (“TAC”) was deemed served and the caption amended. The TAC omitted all claims as to the USG Fund and focused on Account x2069. As before, MBF alleged several fraud-based claims involving Account x2069, negligent misrepresentation claims involving Account x2069, aiding and abetting, and contribution and indemnity.  The motion court dismissed the TAC on law of the case grounds. “The ‘law of the case’ doctrine is a rule of practice which provides that once an issue is judicially determined, either directly or by implication, it is not to be reconsidered by Judges or courts of co-ordinate jurisdiction in the course of the same litigation.” Holloway v. Cha Cha Laundry, Inc. , 97 A.D.2d 385, 386 (1st Dept. 1983) (citations omitted). The motion court concluded that the claims brought in the TAC were virtually identical to those dismissed in the SAC.  MBF appealed.  The Appellate Division, First Department unanimously affirmed. After concluding that the motion court correctly dismissed the action under the law of the case doctrine, the Court, undertaking its own “sufficiency review” of the claims, determined that plaintiff failed to state a cause of action for which relief could be granted. Slip Op. at *1. With regard to the fraudulent inducement claims, the Court held that the claims “failed” because plaintiff did “not allege justifiable reliance on the alleged misrepresentations.” Id. (citing ACA Fin. Guar. , 25 N.Y.3d at 1045; HSH Nordbank AG , 95 A.D.3d at 194-195). The Court found that plaintiff was a sophisticated party that “could readily have determined for itself whether the representations were false by exercising reasonable due diligence.” Id. As a self-styled “long-established and well-regarded” commodities future commission merchant, required by the Commodities Futures Trading Commission (CFTC) to hold its customers’ assets in customer segregated accounts, plaintiff is presumably familiar with the requirements related to such accounts. Plaintiff could have made inquiries when defendants represented to it that there was no need for a “customer segregation acknowledgment letter” for Account x2069 because it would be linked to, and a sub-account of, plaintiff’s existing Account X0253 for which a segregation letter had been obtained. However, rather than take simple measures to ensure its compliance with CFTC regulations, plaintiff relied on the representations that the segregation letter for Account X0253 would cover Account X2069. Id. (citations omitted). Takeaway MBF Clearing is another example of a court dismissing a fraud claim because the plaintiff failed to avail himself/herself/itself of the means to discover the truth or falsity of the representations and omissions made by the alleged wrongdoer. Although the determination of whether reliance is justified is a fact sensitive one, the courts are clear that failing to conduct any investigation, as in MBF Clearing , into the veracity of a representation or omission when the aggrieved party has the ability to do so, suffices to dismiss a fraud claim. This is especially so when the plaintiff, like MBF, is a sophisticated party.  After all, the rationale for requiring sophisticated parties to “show they used due diligence and took affirmative steps to protect themselves from misrepresentations” ( VisionChina Media , 109 A.D.3d at 57) comports with the public policy behind the rule: it rids the courts “of cases in which the claim of reliance is likely to be hypocritical.” Ambac Assurance Corp. v. Countrywide Home Loans, Inc. , 31 N.Y.3d 569, 580 (2018). As Judge Read explained in her dissenting opinion in ACA Financial Guaranty : Our venerable rule requiring that the reliance necessary to establish fraud must be justifiable is designed to make sure that the courts “reject[] the claims of plaintiffs who have been so lax in protecting themselves that they cannot fairly ask for the law’s protection” and “may truly be said to have willingly assumed the business risk that the facts may not be as represented.” ACA Fin. Guar. , 25 N.Y.3d at 1051.

In New York, foreign entities – that is, corporations, limited liability companies and partnerships authorized to do business in another jurisdiction or country – are required to register to business with the Secretary of State. See BCL § 1312(a). The failure to receive such authority deprives the foreign entity of the ability to affirmatively access the courts of New York and subjects any action commenced by the foreign entity to dismissal. See United Envtl. Techniques, Inc. v. State Dep’t of Health , 88 N.Y.2d 824, 825 (1996) (finding that foreign corporation was not registered to do business in New York and therefore lacked capacity to sue). When applying BCL § 1312(a), the relevant inquiry is whether the foreign entity is “doing business” in the State. Whether a company is “doing business” in New York “depends upon the particular facts of each case with inquiry into the type of business activities being conducted.” Von Arx, A.G. v. Breitenstein , 52 A.D.2d 1049, 1050 (4th Dept. 1976). Notably, “not all business activity engaged in by a foreign corporation constitutes doing business in New York.” Netherlands Shipmortgage Corp. v. Madias , 717 F.2d 731, 735-36 (2d Cir. 1983). A foreign corporation is permitted to transact “some kinds of business within the state without procuring a certificate” authorizing it to conduct business in New York. Globaltex Group, Ltd. v. Trends Sportswear, Ltd. , No. 09-CV-235, 2009 WL 1270002, at *3 (E.D.N.Y. May 6, 2009) (quoting Int’l Fuel & Iron v. Donner Steel , 242 N.Y. 224, 229 (1926)).  In order for a foreign corporation to be doing business in New York within the context of BCL § 1312, “the intrastate activity of the foreign corporation be permanent, continuous, and regular.” Manney v. Intergroove Tontrager Vertriebs GMBH , No. 10 Civ. 4493, 2011 WL 6026507, at *8 (E.D.N.Y. Nov. 30, 2011) (quoting Netherlands Shipmortgage , 717 F.2d at 736) (alteration in original). The entity’s activities cannot be “merely casual or occasional.…” United Arab Shipping Co. (S.A.G.) v. Al-Hashim , 176 A.D.2d 569, 570 (1st Dept. 1991); see also Maro Leather Co. v Aerolineas Argentinas , 161 Misc. 2d 920, 923 (Sup. Ct., App. Term 1st Dept. 1994) (“where a corporation’s activities within New York are merely incidental to its business in interstate and international commerce, BCL § 1312(a) is not applicable.”); Schwarz Supply Source v. Redi Bag USA, LLC , 64 A.D.3d 696, 696-97 (2d Dept. 2009) (same); Paper Mfrs. Co. v. Ris Paper Co., Inc. , 86 Misc. 2d 95, 98 (Civ. Ct., N.Y. Cty. 1976) (noting that if a “foreign corporation is engaged in local business on more than an isolated or accidental basis, it must comply with the statute” and obtain authorization before bringing suit). New York courts consider a number of factors, both quantitative and qualitative, when considering the entity’s activity in the State. Netherlands Shipmortgage , 717 F.2d at 738. Among the factors the courts consider are: (a) whether the entity maintains a physical presence or has employees located within the State ( Uribe v. Merchants Bank of New York , 266 A.D.2d 21, 21 (1st Dept. 1999) (Plaintiff was not doing business where it maintained no office or telephone listing, owned no real property and had no employees in the State)); (b) the frequency and regularity of activities within the State ( G.P. Exports v. Tribeca Design , 147 A.D.3d 655, 656 (1st Dept. 2017) (a single business transaction within the State did not warrant the application of BCL § 1312(a)); and (c) the volume and nature of the activities within the State ( United Arab Shipping Company v. Al-Hashim , 176 A.D.2d 569 (1st Dept. 1991) (Plaintiff was doing business within the State where its New York office employed approximately 17 full-time employees, actively solicited business, conducted sales activities, negotiated and executed contracts, and generated substantial in-state revenue)).  Merely entering into a single contract, engaging in an isolated piece of business, or engaging in an occasional undertaking will not suffice to invoke application of BCL § 1312. Netherlands Shipmortgage , 717 F.2d at 738; Von Arx , 52 A.D.2d at 1049 (the shipment of goods into New York from a foreign country for further shipment within or without the state is considered incidental to interstate and international commerce); Airline Exch., Inc. v. Bag , 266 A.D.2d 414, 415 (2d Dept. 1999) (having a bank account, occasionally using an office in the State, and engaging in three transactions in the State, did not support a finding that the business activity was so systematic and regular and essential to its corporate activities as to constitute doing business in New York); 8430985 Canada Inc. v. United Realty Advisors LP , 148 A.D.3d 428 (1st Dept. 2017) (an investment vehicle not subject to the registration requirements of BCL § 1312(a)). Similarly, “the solicitation of business and facilitation of the sale and delivery of merchandise incidental to business in interstate and/or international commerce is typically not the type of activity that constitutes doing business in the state within the contemplation of section 1312 (a).” Digital Ctr., S.L. v. Apple Indus., Inc. , 94 A.D.3d 571, 572 (1st Dept. 2012) (citation omitted). However, regularly and continuously entering the State to solicit, complete and manage sales to customers in New York may constitute doing business in the State. Highfill, Inc. v. Bruce & Iris, Inc. , 50 A.D.3d 742, 744 (2d Dept. 2008) (corporation was doing business where its regional vice president regularly sent employees to New York to manage “special sales,” and made approximately $6,600,000 in New York sales over several years). The party seeking dismissal under BCL § 1312(a) must show that the business activities within the State were so systematic and regular as to manifest continuity of activity. Maro Leather , 161 Misc. 2d at 923). Absent sufficient evidence to establish that a plaintiff is doing business in the State, “the presumption is that the plaintiff is doing business in its State of incorporation … and not in New York.” Cadle Co. v. Hoffman , 237 A.D.2d 555 (2d Dept. 1997); see also Highfill , 50 A.D.3d at 744.  “ hether was doing business in New York” is determined by looking “at the time the action was commenced.” Remsen Partners, Ltd. v. Southern Mgmt. Corp. , No. 01 Civ. 4427, 2004 WL 2210254, at *3 (S.D.N.Y. 2004) (citation and internal quotation marks omitted) (alteration in original). Finally, if the foreign business entity is found to have been continuously and regularly conducting business in the State, the courts often refrain from dismissing the action. Tri-Term. Corp. v. CITC Indus., Inc. , 78 A.D.2d 609 (1st Dept. 1980). Instead, the courts conditionally grant the dismissal motion and provide the plaintiff with a reasonable time period to cure its deficiency under BCL § 1320. E.g. , Showcase Limousine, Inc. v. Carey , 269 A.D.2d 133, 134 (1st Dept. 2000), mod in part , 273 A.D.2d 20 (1st Dept. 2000); Uribe , 266 A.D.2d at 22 (noting that the failure of the plaintiff to register with the State may be cured prior to the resolution of the action); Credit Suisse Int’l v. URBI, Desarrollos Urbanos, S.A.B. de C.V. , 41 Misc. 3d 601, 604 (Sup. Ct., N.Y. County 2013) (ordering plaintiff to comply with BCL § 1312 within 60 days or face dismissal of its complaint). On November 25, 2020, Justice O. Peter Sherwood of the Supreme Court, New York County, Commercial Diviion issued a decision in Excelsia Leatheware Co. v. Horowitz , 2020 N.Y. Slip Op. 34048(U) (Sup. Ct., N.Y. County Nov. 25, 2020) ( here ), in which the Court denied a motion to dismiss under BCL § 1312(a) on the grounds that plaintiff was not doing business in New York, even though it had “maintained a systematic and continuous business relationship with in New York”. Once the Court determined that the action could go forward under BCL § 1312(a), the Court denied the branch of the motion seeking dismissal of Plaintiff’s fraud claim.  Excelsia Leatheware Co. v. Horowitz Background Excelsia arose out of Defendants’ alleged conduct in inducing Plaintiff, Excelsia Leatherware Company (“Excelsia”), a leather goods producer based in Hong Kong, China, to produce and ship goods to Defendants (Kenneth Horowitz and Bag Studio, LLC) for resale without paying for the goods. On December 20, 2016, Excelsia exported goods valued at $42,479 to Bag Studio, which Bag Studio paid for on or about February 18, 2017. Thereafter, Excelsia continued to manufacture and ship goods to Bag Studio, which promptly paid for the goods within 60 days until February 2018, when it stopped paying for goods that were shipped by Excelsia.  By November 30, 2018, Defendants owed Excelsia at least $2,761,213.55 for goods shipped by Excelsia between November 2017 and November 2018.  According to Plaintiff, to induce it to continue providing goods to Bag Studio, Defendants promised to make payment. As a result of such statements, including that they had the ability and willingness and to make the payments that were past due, Plaintiff shipped additional goods that had been manufactured to Bag Studio’s specifications. However, alleged Plaintiff, Defendants repeatedly failed to keep their word, failing to pay as promised. In addition, Plaintiff alleged that Horowitz demanded that Excelsia pay a 6% administrative fee to pay for Bag Studio’s Chinese operations. That fee, however, was, according to Plaintiff, a kickback that was designed to enrich Horowitz and defraud Excelsia. Plaintiff claimed that Horowitz hid the kickback from other Bag Studio affiliated individuals, provided receipts for the kickback, and asked Excelsia to conceal the scheme.  On June 5, 2019, Plaintiff filed the complaint. Excelsia alleged (1) fraud in the inducement, (2) fraud (against Horowitz), (3) conversion, (4) account stated, (5) breach of contract, (6) unjust enrichment and (7) prima facie tort.  Defendants moved to dismiss. Relevant to this article, Defendants sought dismissal of the complaint in its entirety because Excelsia was not authorized to conduct business in New York pursuant to BCL § 1312(a) and, specifically, the fraud claim because Excelsia failed to plead certain elements of the claim with particularity. The Court denied the motion. The Court’s Decision The Court found that although “Defendants have shown that Excelsia ha maintained a systematic and continuous business relationship with them in New York since 2016,” Defendants failed to show that their “business relationship was anything more than merely facilitating the sale and delivery of Excelsia’s merchandise into New York.” Slip Op. at *3. The Court explained that the entities with which Excelsia was alleged to have done business along with Bag Studio ( e.g. , Nine West Company LLC, Mackage Soho, and Camuto Group LLC) were “Delaware entities with offices in New York.” Id. When Excelsia did business with them, they merely acted as a conduit of the merchandise. Id. (“ laintiff only had title to the merchandise until the merchandise arrived in Shenzen, China. At that point, title would pass to Bag Studio, and Bag Studio “would thereafter be responsible for risk of loss and transportation from there to the U.S.” under NY UCC 2-401) (citation to record omitted). “Accordingly,” concluded the Court, “Defendants’ claim that plaintiff is unauthorized to maintain this action in New York fails.” Id. The Court also held that Plaintiff stated a claim for fraud. Defendants argued that both fraud claims lacked particularity as required under CPLR § 30l6(b) and did not meet the standard for alleging scienter and damages. They also claimed that the fraud claim against Horowitz should fail because the claim was pleaded “upon information and belief” and because Plaintiff lacked actual knowledge of the allegations.  The Court found that Plaintiff satisfied the falsity and reliance elements of the fraud claim against Horowitz.  Here, plaintiff asserts the 6% kickback scheme as a misrepresentation known to be false by defendant Horowitz. Plaintiff alleges Horowitz intentionally created the scheme to induce plaintiff to rely upon it and unnecessarily pay money to him. Plaintiff alleges it relied on this misrepresentation and paid him money.  Id. at *5 (citations to the record omitted). The Court also held that Plaintiff pleaded scienter with the requisite particularity, thereby rejecting Defendants’ contention that Plaintiff failed to satisfy this element because it was based “upon information and belief”: The complaint plainly states “Horowitz’s actions were wanton, willful, and malicious,” and that there was no “legitimate or business purpose for the kickbacks.” The parts of this fraud claim that are based on information and belief are that the kickback fee did not go to Bag Studio, that it was not needed by Bag Studio, and the purposes of the scheme. These claims do not contradict plaintiff’s allegations that it was defrauded out of money. The whereabouts of the kickback fee after payment can be considered information solely in defendants’ possession.  Id. (citations to the record omitted).  Takeaway Motions to dismiss on BCL § 1312(a) grounds are fact intensive. As Excelsia shows, courts will examine the facts and circumstances to determine whether the business activities of a foreign business entity in New York are “systematic and regular,” intrastate in nature, and essential to the plaintiff’s business. A finding that the entity’s business activities are not essential to intrastate or interstate commerce, even if the entity is “doing business” in New York, as in Excelsia , can save the case from dismissal under BCL § 1312(a). Excelsia also highlights that not all allegations on information and belief will spell the end of a fraud claim. As we have note in prior articles, a plaintiff alleging fraud must do so with particularity. This means that the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009). Allegations based on information and belief generally do not suffice. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). The reason, without stating the basis for the information and belief, the court has no factual basis upon which to consider the allegations of fraud. Thus, where the belief is based on factual information that makes the inference of culpability plausible, or where the facts are peculiarly within the possession and control of the defendant, a complaint will withstand a motion to dismiss. Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491-92 (2008) (internal quotation marks and citations omitted).  In Excelsia , Plaintiff alleged that it used the phrase “upon information and belief” only as to whether Horowitz actually sent the kickback fees to Bag Studio, which only Defendants would know. Slip Op. at *4. Plaintiff further argued that it was “able to detail every other aspect of the kickback scheme, including how Horowitz requested that plaintiff keep the kickback scheme secret from Bag Studio.” Id. at *5. Such allegations, held the Court, satisfied both of the foregoing prongs of pleading on information and belief. Id. (“The parts of this fraud claim that are based on information and belief are that the kickback fee did not go to Bag Studio, that it was not needed by Bag Studio, and the purposes of the scheme.… The whereabouts of the kickback fee after payment can be considered information solely in defendants’ possession.”)

The New York Court of Appeals has described as “familiar and eminently sensible,” the proposition of law “that, when parties set down their agreements in a clear, complete document, their writing should be enforced according to its terms.”  159 MP Corp. v. Redbridge Bedford, LLC , 33 N.Y.3d 353, 358 (2019) (citation, internal quotation marks and ellipses omitted).  The same Court has also explained the particular importance of such a rule in the context of real property transactions “‘where commercial certainty is a paramount concern and where … the instrument was negotiated between sophisticated counseled business people negotiating at arms length.’”  159 MP , 33 N.Y.3d at 359 (quoting Vermont Teddy Bear Co. v. 538 Madison Realty Co. , 1 N.Y.3d 470, 475 (2004).) Another established principle of contract interpretation is that whenever possible, “a contract should be interpreted to avoid inconsistencies and to give meaning to all of its provisions, giving a practical and reasonable interpretation to the language employed and the parties’ reasonable expectations with respect thereto.”  Zullo v. Varley , 57 A.D.3d 356 (2 nd Dep’t 2008) (citations and internal quotation marks omitted).  “Therefore, a court should not adopt an interpretation which would leave any provision without force and effect.”  Zullo , 57 A.D.3d at 357 (citation and internal quotation marks omitted). On December 9, 2020, the Appellate Division, Second Department, decided 1710 Realty, LLC v. Portabella 308 Utica, LLC , and addressed the above described principles.  The plaintiff in 1710 was a landlord that, on December 16, 2015, entered into a commercial lease with defendant Portabella, as tenant.  In explaining the relevant portions of the lease, the 1710 Court stated: Section 13.1 of the lease, titled “Landlord’s Work,” provides that the plaintiff “agrees to deliver to the Demised Premises on the Commencement Date as is,” while section 1.2 of the lease, titled “Term,” provides that the lease term shall commence on the Commencement Date. Section 2.1 of the lease, titled “Commencement of the Term,” provides: “The ‘Commencement Date’ shall mean the date which is the later to occur of the date that (i) Tenant is delivered occupancy of the Demised Premises in the Delivery Condition (hereinafter defined), (ii) Tenant has been issued permits from the Department of Buildings of New York City in connection with Tenant’s Work and (iii) January 15, 201<6> . If the Demised Premises is not delivered within 90 days of the date of this Lease, then Tenant shall have the right to terminate the Lease. The payment of Rent, including without limitation, Fixed Rent (as hereafter defined) and Additional Rent (as hereinafter defined), shall commence on the date which is two hundred and seventy days after the Commencement Date (‘Rent Commencement Date’). For purposes herein, the Delivery Condition shall mean vacant, broom clean and free of the prior tenants<’> personal property and fixtures.” The lease contains a merger clause. 1710 Realty commenced the action after tenant, Portabella, exercised “its right of termination pursuant to section 2.1 on the ground that the plaintiff had not delivered the premises in the Delivery Condition within 90 days of the date of the lease.”  Tenant moved for summary judgment arguing that the premises were “not made broom-clean within 90 days of the date of the lease” as a considerable amount of trash and debris remained from the prior tenant.  Landlord opposed the motion and cross-moved for summary judgment and: acknowledged that a portion of the premises was not broom-clean but categorized that portion as “de minimus.” asserted that, pursuant to section 13.1 of the lease, it agreed only to deliver the premises “as is” and that the parties did not intend the premises to be broom-clean because Portabella was to undertake demolition and renovation work provided for in the lease. Supreme court denied tenant’s motion and granted summary judgment to landlord, reasoning that the provision in section 2.1 requiring the plaintiff to deliver the premises broom-clean was modified by the provision in section 13.1 that the premises were to be delivered “‘as is.’” The Second Department modified and, in so doing, recognized that “courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include. Hence, courts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.  In the absence of any ambiguity, we look solely to the language used by the parties to discern the contract’s meaning.”  (Citations and internal quotation marks omitted.)  Further, the Court reiterated that “ here two seemingly conflicting contract provisions reasonably can be reconciled, a court is required to do so and to give both effect.”  (Citations omitted, emphasis in original.) The Court disagreed with the landlord’s argument and supreme court’s determination that the “as is” provision in the lease “modified and effectively eliminated, the ‘broom clean’ requirement set forth in section 2.1.”  The Court found that such an interpretation “renders the Delivery Condition provision meaningless or without force or effect by excising the requirement that the plaintiff deliver possession vacant, broom-clean, and with the prior tenant’s property removed before Portabella’s obligation to pay rent begins to run.”  (Citations omitted.)  In resolving the “two seemingly contradictory positions” and giving effect to both, the Court stated: The Delivery Condition operated as a condition precedent to the triggering of the Commencement Date. Until the Commencement Date, as defined in the subject lease, occurred, by the plain terms of section 2.1, the lease term did not commence, and Portabella’s obligation to pay rent did not begin. In order to trigger the happening of the Commencement Date, the plaintiff had to meet the specific requirements of the Delivery Condition by delivering the premises vacant, broom-clean, and free of the prior tenant’s property and fixtures. Section 13.1 is not to the contrary since it required that the premises be delivered on the Commencement Date “as is” and the Commencement Date would not arrive unless the premises were vacant, broom-clean, and free of the property of the prior tenant. Stated differently, the fallacy in the plaintiff’s position is that the “as is” condition referred to in section 13.1 is the condition of the premises on the Commencement Date, not the condition of the premises on the date of the lease. Additionally, we attach significance to the fact that section 13.1, a one-sentence paragraph, is immediately followed by section 13.2, which sets forth in some detail demolition and renovation work to be undertaken by Portabella. The term “as is” as used in section 13.1 can be given its full and intended effect by reading it, together with sections 2.1 and 13.2, as setting forth the parties’ agreement that the premises would be rendered vacant and broom-clean by the plaintiff on the Commencement Date, would be delivered “as is” on that date to Portabella, and it would be Portabella, not the plaintiff, that would be responsible for any further work required for Portabella to be able to utilize the premises as intended. Because tenant validly terminated the lease due to landlord’s failure to deliver the premises in vacant and broom-clean condition within 90 days of the lease signing, tenant was entitled to summary judgment and the return of its security deposit and the first month’s rent, with interest.

It goes without saying that the spread of the coronavirus is accelerating across the country. As noted in the lead paragraph of an article posted in yesterday’s online version of the Washington Post, titled “U.S. Surpasses 15 million Coronavirus Cases as Spread Accelerates” ( here ):  It took about 100 days for the United States to record its first 1 million coronavirus cases, and 44 more passed before the country topped 2 million. But now, in the middle of the most severe surge yet, it has taken just five days to record one million infections, and on Tuesday, the country surpassed 15 million, more than anywhere else in the world by a wide margin.  Although a vaccine is on the horizon, experts expect the virus will continue to rage during the next couple of months. In New York, COVID-19 deaths have started to climb along with an increase in hospitalizations. More than 4,800 COVID-19 patients have been hospitalized across the state, double the reported number on November 18, 2020, and the highest number of hospitalizations since May 22, 2020. As reported in the downstate news media, the growth in hospitalizations, while not yet at a critical level, “is worrisome” ( here ). Governor Cuomo has warned that shutdowns in a given region will occur if hospitals in that region reach 90 percent capacity in the next three weeks. No region is presently close to that point, though Long Island and New York City are the nearest, with data showing only 18 percent and 19 percent of hospital beds available in those regions. Governor Cuomo wants at least 30 percent free. With the foregoing in mind, on December 7, 2020, Chief Judge DiFiore advised that effective immediately, the court system was “implementing a number of steps to reduce in-court operations and limit the number of people trafficking through courthouses” to help “prevent the spread of the virus.” ( Here .) Starting on December 7th, and continuing “until further notice,” the court system was reducing its “in-person staffing … to 40% or less in courts outside New York City, and to 30% or less in courts within the City.” Importantly, the court system would be “sharply limiting the number of in-person matters allow to proceed in courts.” Chief Judge DiFiore said that “ onessential personal appearances in civil courts being temporarily suspended, and only a small number of in-person essential and emergency matters be heard in criminal, family, and housing court.” “By eliminating nonessential in-person appearances and encouraging virtual appearances whenever possible,” Chief Judge DiFiore explained, “we will be able to dramatically reduce the number of people coming into our buildings and thereby curtail the person-to-person contact that allows this horrific virus to spread.” Chief Judge DiFiore noted that the court system’s “Administrative Judges and court managers implementing these steps within a statewide framework and an established set of protocols.…” She further noted that the protocols would provide the Administrative Judges with the discretion “to make operational decisions that are tailored to the specific needs of their courts and the public health conditions demanding action in their localities.” here.=">here." These="These" become="become" effective="effective" today="today" and="and" will="will" apply="apply" to="to" all="all" court="court" operations="operations" in="in" the="the" Tenth="Tenth" Judicial="Judicial" District—Nassau="District—Nassau" County.="County."> Chief Judge DiFiore said the court system was encouraging virtual appearances whenever possible and would “continue to focus on improving and expanding virtual capacity, especially in the Family Court, where jurists and staff are already handling hundreds of matters remotely each day, including urgent filings involving child abuse and neglect, delinquency, support, custody, visitation and guardianship cases.” She noted that the court system had “distributed hundreds of laptops and other remote technology statewide, and upgrading and improving the virtual court process by, for example, installing voice recognition software to streamline the efficiency and improve the accuracy of virtual proceedings.”  “Like the Family Court, our New York City Civil Court is also making outstanding use of remote technology to conduct its business,” said Chief Judge DiFiore. She highlighted the “dozens of virtual bench trials and settling large numbers of cases each week” in that court. As a result, “the pending inventory, especially in automobile no-fault cases where medical providers seek to recover damages from insurance providers for medical services rendered to their insureds” was favorably impacted. “Because the amounts in dispute are under $25,000 and witness testimony is limited, no-fault cases are especially well-suited for virtual resolution,” observed Chief Judge DiFiore. The appellate courts have gone virtual until further notice.  In the Appellate Division, First Department, the Court said that it will hold all oral arguments remotely via Microsoft Teams. No in-person oral arguments will be conducted ( here ).  In the Second Department, oral arguments are presumed to be conducted virtually, although parties can request in-person argument, though any such request must be accompanied by an explanation as to why argument cannot be heard virtually ( here ).  In the Third Department, the Court will be hearing oral arguments by videoconference ( here ).  In the Fourth Department, oral argument in all matters in which argument had been requested for the Court’s November/December term, commencing November 30 and concluding December 10, will be held remotely via the Court’s remote argument platform ( here ). This Blog will continue to update our readers on the latest COVID-19 developments affecting the New York court system.