In prior articles, we have examined enforcement actions (and settlements thereof) brought by the Securities and Exchange Commission (“SEC” or “Commission”) involving false statements about the subject companies and COVID-19. (E.g., here.) Those actions involved micro-cap companies and the products they claimed to offer to address the pandemic. As we noted in those articles, there was a common thread between the actions – they involved pump and dump schemes in which the company falsely claimed that its products or services could prevent, detect or cure the coronavirus. In today’s article, we examine a COVID-19 related enforcement action against The Cheesecake Factory Incorporated, a Delaware corporation based in Calabasas Hills, California, that operates restaurants across the United States and internationally through licensees. The action represents the first time the SEC has charged a large public company for misleading investors about the financial effects of the pandemic. On December 4, 2020, the SEC announced (here) that it settled charges against The Cheesecake Factory for making false and misleading statements about the impact of the COVID-19 pandemic on its business operations and financial condition in press releases attached to Forms 8-K that were filed with the SEC on March 23 and April 3, 2020, respectively. According to the Cease and Desist Order (the “Order”) (here), in mid-March 2020, The Cheesecake Factory faced an unprecedented challenge to its business and operations arising from the impact of the COVID-19 pandemic. The company issued several disclosures regarding the effect of, and its response to, the pandemic. As described in the Order, certain of those disclosures failed to inform investors of the extent of the pandemic’s impact on the company’s operations and financial condition in the period of late-March through mid-April 2020, when the company obtained additional financing. As explained in the Order, the company began taking steps to conserve cash and increase liquidity in the near-term. Among other things, on March 18, 2020, the company sent a letter to its landlords saying that it would not be paying April rent due to the “severe decrease in restaurant traffic ha severely decreased our cash flow and inflicted a tremendous financial blow to our business,” noting that it “hope to resume our rent payments as soon as reasonably possible.” In addition, on March 23, 2020, the company drew down the last $90 million on a revolving line of credit. As of the start of the second quarter on April 1, 2020, the company had approximately $65 million of cash and cash equivalents. By at least March 23, 2020, said the SEC, the company was actively seeking additional liquidity through either the incurrence of debt through lenders or the issuance of equity to private equity investors with the goal of raising at least $100 million. In presentations shared with lenders and potential private equity investors, noted the SEC, The Cheesecake Factory disclosed its cash position and projected that the company had cash to support approximately 16 weeks of operations under the prevailing circumstances. According to the SEC, internal documents showed that the company was experiencing a negative cash flow rate of $6 million per week. On March 23, 2020, The Cheesecake Factory filed a Form 8-K with the Commission disclosing, among other things, that it was withdrawing previously issued financial guidance due to economic conditions caused by COVID-19. The Cheesecake Factory attached, as an exhibit to the Form 8-K, a copy of a press release also dated March 23, 2020, in which it provided a business update regarding the impact of COVID-19. According to the press release, The Cheesecake Factory announced that it was transitioning to an “off-premise model” (i.e., to-go and delivery) that was “enabling the Company’s restaurants to operate sustainably at present under this current model.” The company also disclosed the $90 million draw down on its revolving credit facility, that it had curtailed planned unit growth, and that it was “evaluating additional measures to further preserve financial flexibility.” The SEC claimed that the March 23, 2020 Form 8-K and the attached press release did not disclose the landlord letters or the company’s negative cash flow rate. Two days later, on March 25, 2020, the media reported that The Cheesecake Factory had sent a letter to each of its restaurants’ landlords on March 18 stating that it was not going to pay its rent for April 2020, and included a copy of one of the landlord letters. On March 27, 2020, following media reports of the landlord letter, The Cheesecake Factory provided information in another Form 8-K, disclosing that it was not planning to pay rent in April and that “it was in various stages of discussions with its landlords regarding ongoing rent obligations, including the potential deferral, abatement and/or restructuring of rent otherwise payable during the period of COVID-19 related closure.” The company also disclosed that effective April 1, 2020, it had reduced compensation for executive officers, its Board of Directors, and certain employees. In addition, the company announced that it had furloughed approximately 41,000 employees but allowed them to retain their benefits and insurance until June and provided them with a daily complimentary meal from their restaurant. On April 3, 2020, The Cheesecake Factory filed a Form 8-K with the Commission that attached a copy of an April 2, 2020 press release as an exhibit. The April 2 press release provided a preliminary first quarter 2020 sales update given the impact of COVID-19. Among other things, The Cheesecake Factory disclosed that “the restaurants are operating sustainably at present under this model.” The SEC alleged that The Cheesecake Factory’s disclosures on March 23 and April 3 regarding the sustainability of its restaurant operations did not disclose that the company was excluding expenses attributable to corporate operations from its claim of sustainability; that the company was, in fact, losing approximately $6 million in cash per week; and that it had only approximately 16 weeks of cash remaining, even after the $90 million revolving credit facility borrowing. In addition, claimed the SEC, The Cheesecake Factory’s March 23, 2020 disclosure that it was “evaluating additional measures to further preserve financial flexibility” did not disclose the March 18, 2020 landlord letters stating that the company would not pay April rent. Based on the foregoing, the SEC claimed that The Cheesecake Factory’s March 23 and April 3, 2020 Forms 8-K were materially false and misleading. On April 20, 2020, The Cheesecake Factory announced that it received a $200 million investment from Roark Capital, a private equity firm, thereby enhancing the company’s liquidity position. “During the pandemic, many public companies have discharged their disclosure obligations in a commendable manner, working proactively to keep investors informed of the current and anticipated material impacts of COVID-19 on their operations and financial condition,” said SEC Chairman Jay Clayton. “As our local and national response to the pandemic evolves, it is important that issuers continue their proactive, principles-based approach to disclosure, tailoring these disclosures to the firm and industry-specific effects of the pandemic on their business and operations. It is also important that issuers who make materially false or misleading statements regarding the pandemic’s impact on their business and operations be held accountable.” “When public companies describe for investors the impact of COVID-19 on their business, they must speak accurately,” said Stephanie Avakian, Director of the Division of Enforcement. “The Enforcement Division, including the Coronavirus Steering Committee, will continue to scrutinize COVID-related disclosures to ensure that investors receive accurate, timely information, while also giving appropriate credit for prompt and substantial cooperation in investigations.” In the Order, the SEC found that The Cheesecake Factory violated reporting provisions of the federal securities laws. Without admitting the findings in the Order, The Cheesecake Factory agreed to pay a $125,000 penalty and to cease-and-desist from further violations of the charged provisions. The company cooperated in the SEC’s investigation – a factor that the Commission considered in determining to accept the settlement. On Friday, December 4, 2020, the price of the company’s shares fell 2% to $38.62 per share.

“A cause of action for fraud does not arise when the only fraud charged relates to a breach of contract.” Krantz v. Chateau Stores of Can. Ltd. , 256 A.D.2d 186, 187 (1st Dept. 1998) (citations omitted).  “To plead a viable cause of action for fraud arising out of a contractual relationship, the plaintiff must allege a breach of duty which is collateral or extraneous to the contract between the parties.” Id. (citations and quotation marks omitted). One way to satisfy this requirement is to allege a present intent to deceive. In doing so, however, the plaintiff cannot allege “a mere misrepresentation of an intention to perform under the contract.” WIT Holding Corp. v. Klein , 282 A.D.2d 527, 528 (2d Dept. 2001) (citation omitted); see also Gorman v. Fowkes , 97 A.D.3d 726, 727 (2d Dept. 2012). Another way to satisfy the requirement is to allege a misrepresentation of material fact, which is collateral to the contract ( id. at 528 (citation omitted)), such as a misrepresentation about the ability to perform under the contract.  In today’s article, we examine Shear Enters., LLC v. Cohen , 2020 N.Y. Slip Op. 07149 (1st Dept. Dec. 1, 2020) ( here ), a case in which the plaintiff avoided the duplication of claims doctrine by alleging a misrepresentation about the ability to perform under the contract.  Shear arose from commercial transactions between plaintiff, Shear Enters., LLC, and defendant, Tres Joli Accessories, Ltd. (“TJ”). For over ten years, plaintiff and TJ did business together whereby TJ manufactured apparel for plaintiff and shipped it to plaintiff’s customers. During this period of time, the parties developed a credit line pursuant to which TJ manufactured and sold apparel to Plaintiff.  In February 2018, plaintiff placed two orders with TJ to manufacture apparel that was ordered by one of plaintiff’s customers (the “Orders”). Among other things, plaintiff told defendants the date by which the Orders had to be shipped to the customer. If the Orders were not shipped by that date, then the customer could cancel the Orders. Defendants allegedly represented that TJ had the ability to timely fill and ship the Orders as requested and that a cash down payment was necessary to secure plaintiff’s payment for the Orders. Defendants also allegedly represented that TJ was financially sound and had the ability to timely fill and ship the Orders.  Plaintiff alleged that the foregoing representations were false and made with the intent of inducing plaintiff to place the Orders – orders that defendants allegedly knew TJ would not fill – and make the down payment – a payment that they allegedly never intended to earn or return. According to plaintiff, TJ did not, for various reasons, timely fill and ship the Orders. As a result, plaintiff’s customer cancelled the Orders. Defendants did not return the down payment, saying that they would re-pay it by crediting it against future orders until the down payment was returned in full. Defendants allegedly reassured plaintiff that TJ was not in financial trouble and had the financial ability to timely ship additional orders and return the down payment. Thereafter, Plaintiff placed additional orders with TJ (the “Additional Orders”). After Plaintiff placed the Additional Orders, defendants allegedly told plaintiff that an additional payment of $110,000 was required for TJ to continue working on the Additional Orders. Among other things, defendants allegedly represented that (1) TJ had the ability to timely fill and ship further orders, (2) they were in the process of working on the Additional Orders, and (3) the Additional Orders were on schedule to be timely produced and shipped. Plaintiff claimed that it made the additional payment in reliance on defendants’ alleged false representations.  Defendants moved to dismiss, arguing, inter alia , that plaintiff’s fraud cause of action duplicated its contract cause of action. The motion court agreed. On appeal, the Appellate Division, First Department reversed. The Court held that the motion “court should not have dismissed the cause of action for fraud as duplicative of the cause of action for breach of contract.” Slip Op. at *2. The Court explained that the “gravamen of the allegations supporting the claim not, as in Cronos Group, Ltd. v XComIP, LLC (156 AD3d 54, 62 <1st dept 2017> ), that defendants ‘made a promise while harboring the concealed intent not to perform it.’” Slip Op. at * 2. “Rather,” said the Court, “plaintiff assert that defendants misrepresented their very ‘ability to perform,’ an allegation that support a non-duplicative fraudulent inducement claim.” Id. (citing Man Advisors, Inc. v. Selkoe , 174 A.D.3d 435, 435 (1st Dept. 2019)). The Court also rejected defendants’ argument that the fraud claim was duplicative because “the damages the same under either theory.” Id. The Court reasoned that “given this early procedural stage of the action, plaintiff should be permitted to plead the cause of action in the alternative pursuant to CPLR 3014.” Id. (citation omitted).  Takeaway We have noted in the past that New York courts do not allow a fraud claim to survive a motion to dismiss when the claim arises from an alleged breach of contract or failure to perform an obligation under the contract. Indeed, the New York Court of Appeals has made it clear that a fraud claim should be dismissed where “ he existence of a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraud claim can stand side-by-side with “a simple breach of contract” claim. Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). Shear provides an example of the type of misrepresentation that courts consider to be collateral to the performance obligations under a contract.  Since courts routinely dismiss fraud claims as being duplicative of contract claims ( e.g. , Clark Constr. Corp. v. BLF Realty Holding Co. , 28 A.D.3d 367, 368-369 (1st Dept. 2006)), Shear is noteworthy because of the Court’s invocation of CPLR § 3014, which permits “ auses of action or defenses be stated alternatively or hypothetically.” While it may be due to the circumstances of the case ( see Slip Op. at *2 (“ e hold that, under the circumstances,…”)), the decision not to dismiss even though the relief sought was duplicative remains an interesting result.

In Trustees of Columbia Univ. in the City of N.Y. v. D’Agostino Supermarkets, Inc. , 2020 N.Y. Slip Op. 06937 (Nov. 24, 2020) ( here ), the New York Court of Appeals was asked to “consider the propriety of a liquidated damages provision in a Surrender Agreement between two New York City icons: Columbia University, one of the City’s premier universities, and D’Agostino Supermarkets, a family-owned food market chain founded in 1932.” Slip Op. at *1. D’Agostino had leased property that was owned by Columbia University. The supermarket chain breached the lease by failing to pay rent for more than seven months. Rather than litigate, the parties settled the matter by entering into a Surrender Agreement. Under the agreement, if D’Agostino made timely installment payments, totaling about $262,000, representing the rent it already owed but had failed to pay, it would be relieved of certain other obligations stemming from its breach of the lease. However, if it failed to timely make the payments, D’Agostino would not “be released and relieved from” the claims Columbia agreed to release and would have to pay liquidated damages in “the aggregate amount of all Fixed Rent, additional rent or other sums and charges due” during the remainder of the lease term (about two years). Defendant failed to timely pay the first four monthly surrender payments, despite plaintiff’s notice to cure. In November 2016, plaintiff commenced the underlying action to enforce the liquidated damages provision in the Surrender Agreement. After defendant answered, plaintiff moved for summary judgment seeking future payments under the terminated lease, i.e. , $1,020,125.15, plus interest and other taxes and costs provided for under the lease. Plaintiff rejected defendant’s December 2020 tender of $175,751.73, which represented overdue and early payments of the remaining surrender installments. Defendant cross-moved for summary judgment striking the damages provision and seeking entry of judgment against itself for $175,751.73—the outstanding amount due under the Surrender Agreement—along with accrued interest as of October 14, 2016, or, in the alternative, denying plaintiff’s motion and ordering discovery on the issue of damages and mitigation based on the new lease. The trial court denied plaintiff’s motion for summary judgment and granted defendant’s cross-motion for summary judgment for the requested amount and interest. The Appellate Division, First Department affirmed (168 A.D.3d 594 (1st Dept. 2019)). The Court granted plaintiff leave to appeal (33 N.Y.3d 904 (2019), and in a 4-3 decision written by Judge Rivera affirmed the Appellate Division’s decision. A significant issue in the action was whether the damages provision should be “measured against defendant’s breach of the Surrender Agreement” or, “against the breach of the terminated lease.” Slip Op. at *3. The majority viewed the matter under the prism of the former, while the dissent viewed the dispute under the latter. Viewed as a breach of the Surrender Agreement, the Court concluded that the liquidated damages provision was “an unenforceable penalty because it plainly disproportionate to the damages for the only contractual breach at issue in th appeal, i.e. , overdue payment of the monthly surrender installments.” Id. Liquidated damages are “an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement.” Truck Rent-A-Ctr. v. Puritan Farms 2nd , 41 N.Y.2d 420, 424 (1977). “A liquidated damage provision has its basis in the principle of just compensation for loss. Id. (citing Restatement of Contracts § 339, and Comment thereon). “Liquidated damages that constitute a penalty, however, violate public policy, and are unenforceable. A provision which requires damages ‘grossly disproportionate to the amount of actual damages provides for penalty and is unenforceable.’” 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Assn., Inc. , 24 N.Y.3d 528, 536 (2014) (citation omitted) (quoting Truck Rent-A-Ctr. , 41 N.Y.2d at 424). here=">here" and="and" >here.=">here."> The party seeking to avoid payment of liquidated damages has the burden of establishing that the damages for a breach are disproportionate to the foreseeable losses and “in fact, a penalty”. JMD Holding Corp. v. Congress Fin. Corp. , 4 N.Y.3d 373, 380 (2005). The Court held that defendant met this burden. The Court observed that the “damages provision effectively reinstated defendant’s future rent liabilities under the terminated lease, to the tune of $1,020,125.15, plus interest and other prospective taxes and costs due under the lease, even though those damages did not flow from a breach of the Surrender Agreement.” Slip Op. at *4. “Those damages,” said the Court, “were 7½ times what plaintiff would have received, if defendant had fully complied with the Surrender Agreement.” To permit plaintiff to recover that amount, reasoned the Court, would be tantamount to the enforcement of “a non-existent lease under the guise of damages for a breach of a separate contract.” Id. (footnote omitted). To be clear, when the lease was in effect, plaintiff could have exercised its rights as the landowner and proceeded against defendant for violating the leasehold terms. Instead, plaintiff negotiated with defendant to terminate the lease in exchange for a set amount of money and surrender of the premises. That contract freed plaintiff from its lessor obligations. Critically, contrary to the dissent’s assertion that plaintiff “received nothing in exchange” (dissenting op at 5), it allowed plaintiff to immediately reenter and relet the premises without the need for litigation, which is exactly what it did. When defendant breached the Surrender Agreement, plaintiff was entitled to proceed under that contract and demand damages for the breach, including the amount past due and acceleration of the remaining installment payments.  Id. (citations omitted). However, said the Court, “plaintiff could not seek a payment grossly disproportionate to the amount past due plus interest.” Id. The Court concluded that “ y any measure the more than one million dollars plus interest demanded here is disproportionate to the $175,751.73 unpaid under the Surrender Agreement.” Id. (citations omitted). The Court posed “ simple hypothetical” to “illustrate[] the penalizing nature of the liquidated damages provision” under the Surrender Agreement. Id. at *5.  According to plaintiff’s interpretation of the Surrender Agreement, if defendant timely made all but the final monthly surrender payment of $15,977.43, defendant's breach would render it liable for $1,029,969.54 plus interest and additional costs. Defendant would be liable for the total amount remaining due under the terminated lease, and defendant would be forced to pay that amount, rather than the final installment, without having had the benefit of the premises which it had surrendered to plaintiff. There is but one way to refer to this outcome: an unenforceable penalty. Id. In finding the damages clause to be “an unenforceable penalty,” Judge Rivera relied on the Court’s decision in Van Duzer . There, like in Columbia Univ. , the defendants maintained that the landowner’s acceleration of prospective rent was disproportionate to the landowner’s actual damages. As in Columbia Univ. , the landowner terminated the lease and relet the premises after the tenant vacated. Without deciding whether the amount sought was a penalty, the Court held that the defendants were entitled to a hearing to present evidence that the undiscounted accelerated rent was disproportionate to the landowner’s actual losses, and thus constituted unenforceable liquidated damages. Van Duzer , 24 N.Y.3d at 536-537. The majority rejected the dissent’s argument that the Surrender Agreement should be examined as a settlement agreement. Slip Op. at *5 (citing the dissenting op. at 3). The reason, said Judge Rivera, “a settlement agreement, like any other agreement, cannot be enforced if it violates public policy, including our state’s rejection of penalties as damages.” Id. (citations omitted).  “Plaintiff's real argument,” observed the majority, “is that it did not receive six payments on time, but that was the risk that it accepted by entering the Surrender Agreement.” Id. Such a risk ( i.e. , the risk of default), noted Judge Rivera, “is a risk common to all contracts, without unique effect in the context of a surrender of premises. And the existence of that risk does not and cannot justify exaction of a penalty.” Id. Finally, the majority took issue with the dissent’s argument “that affirmance … would disincentivize landowners from entering surrender agreements and deprive tenants of the benefit afforded by such arrangements.” Id. “This approach,” explained Judge Rivera, “encourages surrender agreements as providing a benefit to all parties—the tenant is released from future liability and the landowner regains the premises and the opportunity to relet on its own account.” Id. “In contrast,” concluded Judge Rivera, “the dissent’s approach would disincentivize tenants from negotiating a mutually agreeable surrender because the tenant would remain on the hook for back rent, future rent and other contractual damages without the benefit of enjoyment of the premises.” Id. Writing for the dissent, Chief Judge DiFiore argued that the majority opinion interfered with the public policy favoring the freedom to contract. Slip Op. at *5. This policy, said Chief Judge DiFiore, “applie with particular force to the Surrender Agreement—which a settlement agreement crafted by the parties to resolve their dispute without litigation.” Id. “Strict enforcement of settlement agreements serves multiple important purposes, consistent with those underlying freedom of contract,” observed Chief Judge DiFiore. Id. “ hese policies, and the significant interests they protect, should guide the resolution of this dispute between two sophisticated, counseled commercial entities.” Id. Chief Judge DiFiore said the “majority cast[] these principles aside, failing to acknowledge that the Surrender Agreement constituted a settlement of the claims Columbia possessed upon D’Agostino’s breach of the lease, which included a right to collect—not only unpaid back rent—but also future rent owed until the conclusion of the lease term, even if D’Agostino vacated the premises (Columbia had no obligation under the lease to relet the property).” Id. at *5-*6. “The parties’ agreement could not be clearer,” explained Chief Judge DiFiore, “that Columbia waived certain claims it possessed arising from D’Agostino’s breach of the lease only if this condition—timely payment of the installments—was met.” Id. at *6. “Under the plain language of the agreement,” Chief Judge DiFiore noted, “upon D’Agostino’s default or failure to timely cure upon notice, two things would occur: D’Agostino would immediately be obligated to pay the future rent due under the lease (among other associated payments) and it would ‘no longer be entitled to be released and relieved from and against any Released Claims.’” Id. The dissent took issue with the majority’s conclusion “that the Surrender Agreement should be interpreted without reference to the prior breach of the lease and that D’Agostino was relieved of all obligations under the lease even if it failed to timely make the installment payments.” Id. Although the Surrender Agreement “terminated the lease,” it most certainly did not unconditionally release the tenant of all obligations flowing from its breach of that prior agreement, and the majority’s assertion that Columbia seeks to “enforce a non-existent lease under the guise of damages for a breach of a separate contract” (majority op at 8) misses the mark. Columbia does not attempt to enforce the lease—instead, it seeks to enforce the contingent remedy the parties adopted in the Surrender Agreement in the event D’Agostino failed to timely make the Surrender Payments. Id. The dissent found that the “public policy underlying our liquidated damages jurisprudence simply not implicated in circumstances where, as in this case, there is no need to estimate the damages that might result in the event of a future breach because the breach has already occurred and the parties are crafting a settlement agreement.” Id. “But even viewing the contingent remedy as a liquidated damages clause,” said Judge DiFiore, “the majority’s conclusion that the provision reinstating D’Agostino's obligation to pay future rent is an unenforceable penalty because it provides for damages ‘exponentially disproportionate’ to D’Agostino’s outstanding Surrender Payments (approximately $1 million versus $176,000) adopts an overly simplistic view of the Surrender Agreement and fail to ‘giv due consideration to the nature of the contract and the circumstances’ in which it was entered….” Id. (citing Van Duzer , 24 N.Y.3d at 536) (footnote omitted).  It is evident from the Surrender Agreement that the parties understood that D’Agostino’s liability for breach of the lease was much greater than the value of the Surrender Payments. The obligations triggered if those payments were not timely made were not included merely as compensation for breach of the Surrender Agreement but were also intended to compensate Columbia for D’Agostino’s earlier breach of the lease. Thus, an analysis of whether the damages set forth in the Surrender Agreement are grossly disproportionate to Columbia’s probable losses requires consideration not only of the value of the Surrender Payments that D’Agostino failed to make, but also of the probable damages already set in motion by D’Agostino's prior breach of the lease, viewed from the time the Surrender Agreement was executed and not the date of the breach. Id. (citation omitted). Thus, explained the dissent, “ t is irrelevant that Columbia’s actual damages … may ultimately be different than the amount D’Agostino agreed to pay in the contingent remedy provision of the Surrender Agreement.” Id. “The enforceability of a liquidated damages clause,” further explained Chief Judge DiFiore, “does not turn on whether the remedy that the parties contemplated before the breach occurred is identical to the damages actually suffered.” Id. “To impose such a requirement,” reasoned the dissent, “would obviate the entire purpose of such provisions, which is to reasonably estimate the damages that might result, permitting the parties to avoid the costs and uncertainty of litigating damages in the event of a future breach.” Id. “For this reason,” concluded Chief Judge DiFiore, “the rough relationship between the remedy in the contract and the damages flowing from a breach must be assessed based on the terms of the agreement and the information the parties possessed at the time it was executed—not with the benefit of hindsight based on post hoc proof of damages actually incurred.” Id. at *6-*7. In conclusion, the dissent said there was no competing public policy that negated the policy underlying the freedom to contract. Id. at *7. Because there was nothing unfair about the settlement crafted by these well-counseled sophisticated parties, public policy affords no basis to alter their contract. Since the back rent payments were already substantially overdue, Columbia reasonably sought assurance that D’Agostino would uphold its end of the bargain under the Surrender Agreement (something it failed to do under the lease). As reflected in the plain language of the agreement, Columbia was willing to forego pursuit of its then-existing right to collect both unpaid back rent and future rent only if D’Agostino timely made the back rent installment payments (the owner gave up its right to receive more money overall but would be assured of prompt payment of a discounted amount on a regular schedule, without the need for litigation). Of course, that is not what happened. By eliminating the element that induced the owner to give up its rights, the majority creates a distorted, one-sided settlement in which—despite its default—D’Agostino was able to enjoy the full benefit of the bargain. Id.

Hang on Sloopy was a hit song in the mid-1960s. Years later, the band that performed and recorded the song – the McCoys – claimed that they were cheated out of substantial sums of money due to fraud. That claim, however, was time-barred, held the Court in Derringer v F.G.G. Prods. Inc. , 2020 N.Y. Slip Op. 33854(U) (Sup. Ct., N.Y. County Nov. 18, 2020) ( here ). Fraud claims must be commenced within “the greater of six years from the date the cause of action accrued or two years from the time the plaintiff … discovered the fraud, or could with reasonable diligence have discovered it.” CPLR § 213(8). “A cause of action based upon fraud accrues, for statute of limitations purposes, at the time the plaintiff ‘possesses knowledge of facts from which the fraud could have been discovered with reasonable diligence.’” Oggioni v. Oggioni , 46 A.D.3d 646, 648 (2d Dept. 2007) (quoting Town of Poughkeepsie v. Espie , 41 A.D.3d 701, 705 (2d Dept. 2007)). “ here the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.” Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011) (citation and internal quotation marks omitted). Courts look at whether the plaintiff should have discovered the alleged fraud objectively. Prestandrea v. Stein , 262 A.D.2d 621, 622 (2d Dept. 1999); Gorelick v. Vorhand , 83 A.D.3d 893, 894 (2d Dept. 2011).  The question of whether a plaintiff had inquiry notice of fraud is appropriate for determination on a motion to dismiss only if it conclusively appears on the face of the complaint that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred. Epiphany Community Nursery School v. Levey , 171 A.D.3d 1 (1st Dept. 2019). The alleged failure by a defendant to make a required payment is often sufficient to put a plaintiff on inquiry notice that a fraud has occurred. See Cusimano v. Shurr , 137 A.D.2d 527 (1st Dept. 2016) (plaintiffs were on inquiry notice of fraud when defendants did not pay them in accordance with alleged obligations to do so); Stern v. Barney , 129 A.D.3d 619 (1st Dept. 2015) (plaintiffs were on inquiry notice of investment firm’s alleged fraud that took place 10 years prior where they either received monthly account statements, or, if no such statements were received, failed to inquire).  As discussed below, plaintiffs’ silence for more than five decades in the face of defendants’ failure to pay them for the work performing Hang on Sloopy, among other recordings, was fatal to their claims because such nonpayment put them on inquiry notice of the alleged fraud. Derringer v F.G.G. Prods. Inc. Background In July 1965, plaintiffs recorded Hang on Sloopy. At the time plaintiffs recorded the song, Rick Derringer was 17, Randy Zehringer was 15, and Ronnie Brandon was 19. In early August 1965, plaintiffs and Zehringer’s parents met Gerald Goldstein for the purpose of inducing plaintiffs to sign a recording contract with FGG Productions, Inc. (“FGG”) so that FGG could release Hang on Sloopy. According to plaintiffs, at the meeting, Goldstein referred them to Julie Rifkind, who Goldstein described as “a ‘great’ lawyer” who could “represent and advise them.” At the time, Rifkind worked for Bang Records, the record label that was to promote, release, sell and distribute the sound recording of Hang on Sloopy. Bang Records maintained offices in the same office building and on the same floor as FGG’s offices. Goldstein took plaintiffs, Zehringer’s Parents, and Randy Hobbs to Rifkind’s office. Rifkind reviewed a document prepared by FGG, which Rifkind “stated … effect … was a ‘good contract’” (the “1965 Document”). Rifkind gave the 1965 Document to Zehringer’s parents and advised them to sign it. Zehringer’s parents signed the 1965 Document on behalf of Derringer and Zehringer. Brandon and Hobbs were not asked to sign the 1965 Document and did not sign it. Neither Zehringer’s parents nor any of the plaintiffs were given a copy of the 1965 Document. Instead, Rifkind told plaintiffs and Zehringer’s parents that the 1965 Document should be left in his possession for safekeeping, as he was their “attorney.” On June 26, 2018, plaintiffs learned that Rifkind was never an attorney licensed to practice in New York State. After Zehringer’s parents signed the 1965 Document, at FGG’s request, plaintiffs performed and recorded 20 additional songs (together with the sound recording for “Hang on Sloopy,” the “recordings”) as The McCoys. FGG subsequently assigned by agreement any and all rights it had in and to the recordings to Bang Records. Through a series of purchases, transfers, and corporate and business consolidations, Sony Music Entertainment currently owns whatever rights Bang Records held in the recordings. Plaintiffs alleged that defendants have continuously exploited the recordings since 1965 and have received substantial income therefrom. Plaintiffs have received no payments, statements, or documents, from defendants concerning the recordings in the 53 years prior to commencing the action. Plaintiffs claimed that they never consented to defendants’ use of their names, photographs and likenesses for any commercial purposes in connection with the recordings. On June 28, 2018, Derringer commenced the action. FGG answered the complaint on August 8, 2018. On November 18, 2018, plaintiffs filed an amended complaint. Although the amendment was procedurally improper (it was filed more than 20 days after FGG answered), none of the defendants rejected or otherwise objected to the filing.  The amended complaint asserted nine causes of action. Among the claims alleged were rescission of the 1965 Document as against all defendants based on the fraudulent misrepresentation that Rifkind was an attorney representing plaintiffs and Zehringer’s parents and fraud against the FGG defendants for the same alleged conduct. Defendants moved to dismiss the amended complaint. In seeking dismissal, defendants principally argued that plaintiffs were barred from bringing the action due to the expiration of the statutes of limitations governing their claims.  The Court agreed, granting the motion with regard to the fraud claims. The Court’s Decision The Court held that plaintiffs were on inquiry notice of the alleged fraud “long before June 28, 2016”, when they filed the action. Slip Op. at *12. The Court observed that there were “several facts alleged in the amended complaint would have raised clear red flags to a reasonable person in the plaintiffs’ position.” Id. For example, the Court noted that plaintiffs and Zehringer’s parents only met with Rifkind once “and apparently ha never communicated with again.” Id. Moreover, said the Court, Rifkind was “recommended by FGG, their contractually adverse party, and worked for the company that would distribute the plaintiffs’ recordings.” Id. “More significantly,” explained the Court, “plaintiffs allege that they ha received no payment for the exploitation of the recordings since 1965, in spite of Rifkind’s representations to them that they were signing a ‘good contract.’” Id. Even according plaintiffs the benefit of their youth and lack of sophistication in the industry at the time of the 1965 Document, they “did not remain unsophisticated teenage musicians over the five decades that have elapsed since the exploitation allegedly began,” said the Court. Id. at *13. Derringer was, for instance, an accomplished, Grammy award winning artist. Id. Thus, “ ven if the circumstances immediately surrounding the execution of the 1965 Document were not independently sufficient to put the plaintiffs on notice of any alleged fraud, over 50 consecutive years of unpaid payments and unsent statements should have prompted someone of Derringer’s sophistication to look further into the matter.” Id. The Court rejected plaintiffs’ argument that the lack of payment merely put them on notice of a breach of contract, rather than fraud or misrepresentation. Id. The Court observed that plaintiffs’ argument was “belied by the fact that the crux of their fraud-based claims, and the primary motivation for the plaintiffs’ commencing th action, their assertion that they entitled to some payment or accounting for the exploitation of the recordings beginning in 1965.” Id. “Put differently,” said the Court, “plaintiffs point to lack of payment as evidence that they were defrauded. Their contention that the same lack of payment could not or should not have put them on notice of fraud is inconsistent.” Id. The Court noted that plaintiffs did not “explain why none of them, …, questioned or inquired as to why they never received payments for recording Hang on Sloopy after it successfully climbed the pop charts. Nor they proffer any reason why they failed to make any such inquiries after they recorded 20 additional songs for FGG, which launched their music career and have been released on numerous albums since.” Id. at *14-*15. The Court found the case similar to Baiul v. William Morris Agency, LLC , 2014 WL 1804526 (S.D.N.Y. May 6, 2014). Id. at *15.  In Baiul , the court dismissed Oksana Baiul’s fraud claims pursuant to CPLR 213(8). Baiul alleged that as a 16-year-old Ukrainian-born figure skater, she was fraudulently induced into signing numerous contracts in English, a language she did not fully understand, in connection with various performances and undertakings. Baiul stated that she failed to receive any compensation for certain undertakings and was deprived of millions of dollars in royalties for her performances. The court dismissed Baiul’s fraudulent inducement and other related claims, reasoning that even in the face of Baiul’s age and language barrier, Baiul’s silence for 12 years in the face of the defendant’s failure to pay her for the numerous performances she claimed entitled her to significant compensation was fatal to her claims. In short, noted the court, nonpayment was deemed sufficient to put Baiul on inquiry notice of any potential fraud. Finally, the Court noted that “in reaching its conclusion,” it was advancing the “policy considerations underlying statutes of limitations.” Id. at *16-*17 (citations omitted). The Court noted that the “plaintiffs’ fraud-based claims raise precisely the sort of concerns against which statutes of limitations are meant to protect.” Id. at *17-*18. Takeaway In in William Shakespeare’s play Hamlet, upon learning that Claudius had plotted to kill him, Hamlet determined that the best way to respond was by letting Claudius be “Hoist with his own petard”. See Act 3, Scene 4. That idiom perhaps best describes the Court’s analysis in Derringer – plaintiffs’ claim that they did not receive any payments for their records was the reason why they were on inquiry notice of the alleged fraud.  Aside from being on inquiry notice, Derringer highlights the policy reasons for statutes of limitations: “A defendant … ought not to be called on to resist a claim where the evidence has been lost, memories have faded, and witnesses have disappeared.” Flanagan v. Mount Eden Gen. Hosp. , 66 N.Y.2d 473, 476 (1985) (citation omitted; internal quotation marks omitted). That was precisely the facts in Derringer :  Over 50 years ha passed since the events at the center of the plaintiffs’ claims transpired. Key witnesses to the events, including Rifkind and Hobbs, have passed away. Those witnesses that are still alive may understandably be unable to recall specific details about events that took place half a century ago with a high degree of accuracy.”  Slip Op. at *17-*18.

Sometimes, a case involves facts and circumstances that, on their face, lead a court to determine that a fraud was committed. Such was the case in First Franklin Fin. Corp. v. Merchant , 2020 N.Y. Slip Op. 06852 (1st Dept. Nov. 19, 2020) ( here ).  In First Franklin , a judgment debtor transferred property subject to a foreclosure sale to a company that he had formed all on the same day. Such facts and circumstances, said the lower court, represented “badges of fraud” under former Debtor & Creditor Law (“DCL”) § 276 that were indicative of an intent to hinder, delay or defraud the debtor’s creditors. The Appellate Division, First Department agreed. Background Non-party Nereid 2028, an entity created and partially owned by defendant Arnold Merchant (“Merchant”), moved to set aside a non-judicial sale of real property located in the Bronx, New York (the “Property”). Merchant had borrowed $95,000.00 from First Franklin in 2005. The debt was secured by a mortgage dated September 29, 2005.  Merchant defaulted on the note, failing to make the payment due on March 1, 2008, and each payment date thereafter. As a result, First Franklin commenced a foreclosure action. The lower court entered an order of reference in March 2010, and a Judgment of Foreclosure and Sale in January 2016. On June 18, 2018, a referee held an auction of the Property. On the same day, Merchant incorporated Nereid 2028 and transferred a 50% interest in the Property to it for $10.00. Also, on the same day, Nereid 2028 declared bankruptcy.  The bankruptcy proceeding was dismissed on July 20, 2018, due to certain deficiencies in the filing, which Nereid 2028 failed to correct. On March 20, 2019, Nereid 2028 filed an order to show cause in the foreclosure action, seeking to set aside the purchase of the Property. The motion court denied the motion.  The court held that the circumstances surrounding the transfer were fraudulent, finding that the transfer was “obviously undertaken for the sole purpose of impeding the foreclosure sale.” Here, the attendant circumstances are rife with … “badges of fraud.” These include the close relationship between the parties to the transaction, inadequate consideration for the transaction, and the retention of the benefit of the property by defendant, who maintained a 50% ownership interest. The motion court concluded that the badges of fraud indicated that the conveyance was made “with intent to defraud” and held that the transfer was “null and void.” Nereid 2028 appealed. The First Department affirmed. In a pithy decision, the Court found that “ he court correctly found” the transfer to be fraudulent and, therefore, null and void:  The court correctly found that judgment debtor defendant Arnold Merchant’s purported transfer of the property for $10, on the eve of a foreclosure sale, to a brand new entity that he created and caused to commence a Chapter 11 proceeding just a few hours before the foreclosure sale, bore all the badges of fraud necessary to conclude that the transfer was fraudulent as to plaintiff.  Slip Op. at *1 (citing 5706 Fifth Ave., LLC v. Louzieh , 108 A.D.3d 589 (2d Dept. 2013)). Takeaway An action under former DCL § 276 requires proof that the transferor actually intended to hinder, delay, or defraud his/her creditors, whether they be present or future creditors. Since “ irect evidence of fraudulent intent is often elusive … courts will consider ‘badges of fraud’ which are circumstances that accompany fraudulent transfers so commonly that their presence gives rise to an inference of intent.” Dempster v. Overview Equities , 4 A.D.3d 495, 498 (2d Dept. 2004), lv. denied , 3 N.Y.3d 612 (2004) (internal quotation marks omitted). “Badges of fraud” from which fraudulent intent may be inferred include: (1) a close relationship between the parties to the transaction, (2) secrecy and haste in making the transfer, (3) the inadequacy of consideration, (4) the transferor’s knowledge of the creditor’s claim, or a claim so likely to arise as to be certain, and the transferor’s inability to pay it, and (5) the retention of control of property by the transferor after the conveyance. Dempster , 4 A.D.3d at 498. Of the five (5) badges of fraud listed, at least four (4) of them were present in First Franklin : (1) haste in making the transfer: it was done “on the eve of a foreclosure sale”; (2) inadequate consideration: the consideration for the transfer was $10.00; (3) the transferor had knowledge of the creditor’s claim: Merchant knew of the judgment and the foreclosure sale; and (4) retention of control of the property by the transferor after the conveyance: Merchant “created” Nereid 2028 (“and caused to commence a Chapter 11 proceeding”) and, thereafter transferred a 50% interest in the Property to it, while retaining the other 50% for himself. It is not surprising that the motion court concluded that “the attendant circumstances rife with … sufficiently alleged ‘badges of fraud’” – a conclusion with which the First Department agreed (the circumstances surrounding the transfer “bore all the badges of fraud necessary to conclude that the transfer was fraudulent as to plaintiff”).

On November 4, 2020, this Blog (the “November 4 Blog”) provided an update on the New York State Court system’s preparation for the anticipated surge in COVID-19 cases. On November 18, 2020, Andrew A. Crecca, the District Administrative Judge for the 10 th Judicial District (Suffolk County), circulated a memorandum on “Suffolk County Updated Operating Protocols <“the plan”> Effective November 23, 2020” (the “Memorandum”).  As noted in the November 4 Blog, “the country has seen a surge in new coronavirus cases.”  In the Memorandum, Administrative Judge Crecca recognized that while “ oot traffic in the courthouses has been gradually increased to correspond with an improvement in the metrics measuring the spread of Coronavirus” once the Unified Court System “permitted in-person proceedings in accordance with the Governor’s un-PAUSE New York plan.”  However, Administrative Judge Crecca recognized that the recent “metrics have indicated the need to once again reduce foot traffic in the courthouses to protect the health and safety of litigants, lawyers, court staff and judges.” Administrative Judge Crecca incorporated by reference into the Memorandum, Chief Administrative Judge Lawrence Marks’ November 13, 2020 Memorandum (the “Marks Memorandum”).  (The Marks Memorandum in annexed to the Memorandum, but can also be found HERE .)  The Marks Memorandum, which became effective on November 16, 2020 and “revis certain USC statewide operational practices in the trial courts” due to “adverse trends in coronavirus transmission rates in New York State” provides that: (1) no new civil or criminal jurors will be summoned for jury duty, but pending civil and criminal trials will proceed to conclusion; (2) no new grand jurors will be summoned for grand jury duty until further notice, but pending grand juries will continue to conclusion; and, (3) all future bench trials and hearings will be virtual unless permission is otherwise granted by the “respective Deputy Chief Administrative Judge”; (4) in-person socially-distanced court conferences will continue and “all coronavirus health and safety procedures should continue to be closely followed.” According to Administrative Judge Crecca, “the Plan should be considered an update to the Return to ln-Person Operations Plan effective October 19, 2020 and to .”  While the entire Plan is set forth within the Memorandum, some of the components, not otherwise reflected in the Marks Memorandum are as follows: The calendar times for different courts (e.g., family, criminal) in the same building shall be staggered; A maximum of 50% of the courtrooms in a facility can be used at the same time; No more than 50% of judges/referees/magistrates of the same type (e.g., family, criminal) can hold in-person calendars at the same time; No more than 10 cases per part per hour shall be scheduled; Courtroom occupancy shall be limited to the lesser of 10 people or ½ the posted occupancy per code (except for ongoing jury trials and grand jury proceedings; There will be reductions in non-judicial staff reporting to the courthouse and others will work remotely; In-person matters (of the type set forth in the Memorandum) may be heard if the presiding judge finds that it is unlawful or impractical to conduct the proceeding virtually (hybrid in-person/virtual proceedings will also be considered where practical); All other matters not permitted to be heard in person (of the type described in the Memorandum, which include, but are not limited to, civil and criminal bench trials and evidentiary hearings, motion arguments, Mental Hygiene Law proceedings pertaining to a hospitalized adult, ADR where both parties are represented by counsel and counsel will be present, Part 137 attorney-client fee dispute arbitrations) MUST be heard virtually. In addition, the Memorandum also contained updated operating protocols for Suffolk County Town and Village Courts along the lines as stated above.

Brokerage firms, financial institutions and investment advisers are required to provide suitable investment recommendations and strategies to a customer that are consistent with the customer’s investment objectives, risk tolerance and financial needs. See, e.g., here and here (FINRA Rule 2111). This requirement is based on the “know your customer” rule (here (FINRA Rule 2090)), which requires brokerage firms, financial institutions and investment professionals to be aware of all factors that affect a customer’s financial situation. The suitability rule applies to an investment professional’s investment advice regardless of the type of recommendation (e.g., a buy, sell or hold), the complexity of the investment product, and the sophistication of the customer. The rule is not dependent on a particular transaction or the compensation generated from the transaction. The investment professional must understand the investment or strategy being recommended and the customer’s ability to understand and assume the risks associated with the investment or strategy. The investment professional is required to exercise reasonable diligence in gathering all information necessary to make the recommendation or strategy. Such information includes the customer’s age, investment portfolio, employment status, tax status, investment objectives, financial situation and needs, investment experience, investment time horizon, liquidity needs, and risk tolerance. The investment professional should consider any other information disclosed by the customer in connection with the recommendation or strategy to determine the customer’s ability to understand and assume the risks associated with the investment or strategy. Investment losses resulting from unsuitable investment advice can serve as the basis for a claim in a FINRA arbitration and/or an enforcement action by the Securities and Exchange Commission (“SEC”), FINRA or other regulatory body. In today’s article, we examine five settled enforcement actions brought by the SEC involving the suitability of complex exchange-traded products for the subject firms’ retail investors. On November 13, 2020, the SEC announced (here) that it filed actions, all of which settled, against three investment advisory firms and two dually-registered broker-dealer and advisory firms for violations that related to unsuitable sales of complex exchange-traded products to retail investors (the “Actions”). The advisory firms and broker-dealers involved in the Actions are American Portfolios Financial Services/American Portfolios Advisors Inc., Benjamin F. Edwards & Company Inc., Royal Alliance Associates Inc., Securities America Advisors Inc., and Summit Financial Group Inc. Under the settlements, the advisory firms and broker-dealers agreed to return in total over $3 million to harmed investors. The Actions concerned the sale of volatility-linked exchange-traded products between January 2016 and April 2020. As set forth in the orders (here, here, here, here, and here), the firms attempted to track short-term volatility expectations in the market, which are typically measured against derivatives of the CBOE volatility index. According to the SEC, the offering documents for the products made clear that the short-term nature of the products made investments in the products more likely to experience a decline in value when held over a longer period. The SEC found that, contrary to these warnings, and without understanding the products, representatives of the firms recommended their customers and clients buy and hold the products for longer periods, including in some circumstances, for months and years. E.g., American Portfolios (“APFS registered representatives who recommended their brokerage customers buy and hold a complex exchange traded product (“ETP”) without a reasonable basis for believing the recommendation was suitable for their customers” and “did not understand the product, misrepresented its risks and recommended it for a purpose inconsistent with that described in the product’s offering materials.”); Benjamin Edwards (“he Benjamin Edwards brokerage representatives and advisory representatives failed to make a reasonable determination that these investments were suitable for certain of the customers and clients to whom they recommended the Complex ETPs, based on those retail customers’ and clients’ investment objectives, risk tolerance, and financial condition. A number of these brokerage and advisory representatives also misled their customers and clients about the Complex ETPs’ benefits and risks.”) The SEC further found that the firms failed to adopt or implement policies and procedures regarding suitability and volatility-linked exchange-traded products. “It is important for firms to put the appropriate protections in place to ensure complex products are properly evaluated and understood by their representatives. Failing to do so puts investors at risk,” said Stephanie Avakian, Director of the SEC’s Division of Enforcement. “We take these failures seriously, and we will continue to look for sales that expose customers to unsuitable investments.” The Actions were the first to be brought following the investigations by the Division of Enforcement’s Exchange-Traded Products Initiative, which used trading data analytics to uncover potential unsuitable sales. “These cases demonstrate the importance of data analytics in our efforts to surveil the market and pinpoint unsuitable sales of complex financial products,” said Daniel Michael, Chief of the Enforcement Division’s Complex Financial Instruments Unit. “We will continue to use these tools to protect retail investors.” The SEC’s orders found that each firm failed to implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 and its rules. The order against American Portfolios found that the firm failed reasonably to supervise certain brokerage representatives who recommended their customers buy and hold a volatility-linked product. The order against Benjamin Edwards found that the firm failed reasonably to supervise certain brokerage and advisory representatives who recommended their clients buy and hold two volatility-linked products. Without admitting or denying the findings, each firm agreed to cease and desist from future violations of the charged provisions, a censure, and to pay disgorgement and prejudgment interest. American Portfolios and Benjamin Edwards each agreed to pay a civil penalty of $650,000, Securities America and Summit each agreed to pay a civil penalty of $600,000 and Royal Alliance agreed to pay a civil penalty of $500,000.

On April 4, 2020, the New York Uniform Voidable Transactions Act (“NYUVTA”) became effective, replacing Article 10, Sections 270-281 of the Debtor and Creditor Law (“DCL”), the State’s almost century-old fraudulent conveyance law.  In February of this year, this Blog examined the NYUVTA, the DCL and the changes the NYUVTA made to the DCL ( here ).  Since the NYUVTA applies to cases filed on or after April 4, 2020, there remain many cases under the former DCL that are being litigated in the courts of New York. Today, we examine two such cases: Cheek v. Brooks , 2020 N.Y. Slip Op. 06485 (2d Dept. Nov. 12, 2020) ( here ), and JDI Display Am., Inc. v. Jaco Electronics, Inc. , 2020 N.Y. Slip Op. 06507 (2d Dept. Nov. 12, 2020) ( here ). Cheek involved DCL former § 273, and JDI involved DCL former §§ 273, 275 and 276. Cheek v. Brooks Cheek involved an action pursuant to DCL § 273, in which Cheek sought to set aside the conveyance of the certain properties. The conveyances occurred in 2002, when Harold Deveaux, Jr. transferred two properties to his nephew, defendant Khareem Brooks. At the time of the transfer, plaintiff, who lived at one of the properties from her birth in 1994 through at least 1995, possessed a cause of action against Deveaux for lead poisoning. In 2008, plaintiff, by her mother, commenced an action against Deveaux and, in 2009, obtained a judgment against him. Deveaux died in 2015. In 2015, plaintiff commenced the action. Plaintiff moved for summary judgment on the cause of action seeking relief pursuant to DCL § 273. In an order dated October 4, 2018, the motion court, among other things, granted that branch of plaintiff’s motion. Brooks appealed. The Second Department affirmed. Pursuant to DCL § 273, “a conveyance that renders the conveyor insolvent is fraudulent as to creditors without regard to actual intent, if the conveyance was made without fair consideration.” Stout St. Fund I, L.P. v. Halifax Grp., LLC , 148 A.D.3d 744, 747 (2d Dept. 2017); Grace Plaza of Great Neck v. Heitzler , 2 A.D.3d 780, 781 (2d Dept. 2003). To constitute fair consideration, the value given in exchange must be fairly equivalent and proportionate to the value of the property conveyed. DCL § 272; Stout , 148 A.D.3d at 748; Sardis v Frankel , 113 A.D.3d 135, 141 (1st Dept. 2014). “Good faith is required of both the transferor and the transferee, and it is lacking when there is a failure to deal honestly, fairly, and openly.” Matter of CIT Group/Commercial Servs., Inc. v. 160-09 Jamaica Ave. Ltd. Partnership , 25 A.D.3d 301, 303 (1st Dept. 2006) (quoting Berner Trucking v. Brown , 281 A.D.2d 924, 925 (4th Dept. 2001)). “An individual is ‘insolvent’ within the meaning of the Debtor and Creditor Law when ‘the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on … existing debts as they become absolute and matured.’” Grace Plaza , 2 A.D.3d at 781 (quoting DCL § 271(1)); see also Matter of City of Syracuse Indus. Dev. Agency , 156 A.D.3d 1329, 1332 (4th Dept. 2017). Insolvency is a “‘prerequisite[ ] to a finding of constructive fraud under section 273.’” Syracuse Indus. Dev. Agency , 156 A.D.3d at 1332 (quoting Joslin v Lopez , 309 A.D.2d 837, 838 (2d Dept. 2003)). Against the foregoing, the Second Department held that the motion court correctly found that the “alleged purchase prices were not fairly equivalent and proportionate to the value of the subject properties.” Slip Op. at *1. The Court noted that the “deeds for both properties recite consideration in the sum of only $10 and neither indicate that any transfer tax was paid.” Id. The Court noted that Brooks “purchased the Greene Avenue property for $200,000 and the Adelphi Street property for $170,000, and … tendered a contract for the purchase and sale of the Greene Avenue property which stated a purchase price of $200,000.” Id. “Although ‘ t is always open to a party, where a nominal consideration is expressed, to show what the real consideration was,’” said the Court, “Brooks failed to do so.” Id. (internal citation omitted). The Court also found that Brooks failed to rebut the presumption that the transfers were made without fair consideration. Under New York law, “the burden of proving insolvency is on the party challenging the conveyance.” Id. (quoting Battlefield Freedom Wash, LLC v. Song Yan Zhuo , 148 A.D.3d 969, 971 (2d Dept. 2017)) (citation omitted) “However,” noted the Court, as in Cheek , “when a transfer is made without fair consideration, a presumption of insolvency and fraudulent transfer arises, and the burden shifts to the transferee to rebut that presumption.” Id. (quoting Battlefield , 148 A.D.3d at 971). The Court found that “Brooks’s conclusory assertions and those of his aunt that Deveaux was not rendered insolvent were insufficient to rebut that presumption.” Id. JDI Display Am., Inc. v. Jaco Electronics, Inc. JDI involved an action under DCL §§ 273, 275 and 276, in which JDI sought to set aside the transfer of corporate funds to a director and shareholder of one of the corporate defendants. Plaintiff is the developer, manufacturer, and seller of display devices and related products. From September 2014 through October 2017, defendant Jaco Electronics, Inc. was a licensed distributor of plaintiff’s products. As of July 2017, Jaco Electronics owed plaintiff approximately $550,000 for products plaintiff shipped to it.  In August 2017, defendant Jaco Display Solutions, LLC purchased Jaco Electronics’ assets. According to the complaint, as part of the deal, Jaco Electronics received an investment of more than $1 million, which it transferred to defendant Joel Girsky, one of its directors and shareholders, leaving it insolvent.  In an effort to recover damages for the outstanding amount owed to it by Jaco Electronics, plaintiff commenced the action against, among others, Jaco Electronics’ directors and shareholders, Girsky, Robert Savacchio, and Jeffrey Gash.  The first cause of action sought to set aside the alleged fraudulent conveyances between Jaco Electronics and Girsky pursuant to DCL §§ 273, 275 and 276. Defendants moved to dismiss the complaint as asserted against them. By order dated July 9, 2018, the motion court, inter alia , denied the motion to dismiss the first cause of action. Defendants appealed. The Second Department affirmed. The Court held that “the first cause of action state cognizable claims alleging a fraudulent conveyance pursuant to Debtor and Creditor Law former §§ 273, 275 and 276.” Slip Op. at *2. The Court found that “plaintiff sufficiently alleged that Jaco Electronics transferred corporate funds it had received from the sale of its assets to Girsky, one of its directors and shareholders, and that said transfer left it insolvent.” Id. Like DCL § 273, a claim under DCL § 275 must establish that the conveyance or obligation incurred was made without “fair consideration”. However, unlike DCL § 273, a claim under DCL § 275 requires an element of intent or belief that insolvency will result. Wall Street Assocs. v. Brodsky , 257 AD 2d 526, 529 (1st Dept. 1999) (citation omitted). The Court also held that “ he complaint … contained sufficient factual assertions and badges of fraud, … , to support the allegation that Jaco Electronics believed that it would not be able to pay its debts after it transferred funds to Girsky, which give rise to an inference that Jaco Electronics intended to hinder, delay, or defraud the plaintiff.” Id. at *2 (citations omitted). DCL § 276, unlike Sections 273 and 275, concerns actual fraud, as opposed to constructive fraud, and does not require proof of unfair consideration or insolvency. Because it is difficult to prove actual intent, the plaintiff may rely on “badges of fraud” (as noted by the JDI Court) to raise and inference of fraud, i.e. , circumstances so commonly associated with fraudulent transfers “that their presence gives rise to an inference of intent.” Wall Street Assocs. , 257 A.D.2d 526, 529 (internal quotation marks and citations omitted). Among such circumstances are: a close relationship between the parties to the alleged fraudulent transaction; a questionable transfer not in the usual course of business; inadequacy of the consideration; the transferor’s knowledge of the creditor’s claim and the inability to pay it; and retention of control of the property by the transferor after the conveyance. Id. “Depending on the context, badges of fraud will vary in significance, though the presence of multiple indicia will increase the strength of the inference.” MFS/Sun Life Trust v. Van Dusen Airport Servs. , 910 F. Supp. 913, 935 (S.D.N.Y. 1995); see also Gafco, Inc. v. H.D.S. Mercantile Corp. , 47 Misc.2d 661, 664 (Sup. Ct., N.Y. County 1965) (noting, “ lthough ‘badges of fraud’ are not conclusive and are more or less strong or weak according to their nature and the number occurring in the same case, a concurrence of several badges will always make out a strong case”) (internal quotation marks and citations omitted). A conveyance made with actual intent to defraud is fraudulent regardless of whether the debtor receives fair consideration. MFS/Sun Life Trust , 910 F. Supp. at 934 (citation omitted). Since DCL § 276 concerns actual fraud, the plaintiff must plead it with particularity. Thus, the plaintiff must allege specific facts, including, among other things, the identity of the specific transactions or conveyances that the plaintiff claims were fraudulent. Syllman v. Calleo Dev. Corp. , 290 A.D.2d 209, 210 (1st Dept. 2002); see CPLR 3016 (b). In JDI , the Court held that plaintiff satisfied this requirement. Slip Op. at *2. Takeaway Prior to the enactment of the NYUVT, creditors looked to Article 10 of the Debtor and Creditor Law to recover assets that had been (or may be) transferred by debtors to another party. Whether the debtor transferred assets with intent to defraud or without fair consideration, the former DCL (and now the NYUVT) provides creditors with a number of remedies. There are significant differences between the DCL and the NYUVT ( here ). Whether the plaintiffs in Cheek and JDI would have prevailed under the NYUVT is unknown. What is certain, however, is creditors must satisfy the applicable pleading and evidentiary standards to secure the protections under both the former DCL and the NYUVT. In Cheek and JDI , the plaintiffs met their respective pleading and evidentiary requirements.

This BLOG has previously addressed issues related to Statutes of Limitations. See, among many others, < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , and  < HERE =">HERE"> .  Earlier this year, this BLOG posted “ Revive A Time-Barred Claim Using § 17-101 of New York’s General Obligations Law ”, in which, in addition tothe renewal of expired Statutes of Limitation under GOL § 17–101, the purpose and history of Statutes of Limitation was addressed.   Statutes of limitation govern the time in which a cause of action must be interposed after accrual.  “As a general principle, the statute of limitations begins to run when a cause of action accrues ( see CPLR 203 ), that is, when all of the facts necessary to the cause of action have occurred so that the party would be entitled to obtain relief in court.”  Hahn Automotive Warehouse, Inc. v. American Zurich Ins. Co., 18 N.Y.3d 765, 770 (some citations omitted).)  “Statutes of limitation, like the equitable doctrine of laches, in their conclusive effects are designed to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.”  Order of Railroad Telegraphers v. Railway Express Agency, Inc. , 321 U.S. 342, 348-349 (1944).   The policy concerns prompting the enactment of Statutes of Limitation are greatly attenuated if an otherwise “stale” claim is acknowledged by the responsible party.  As stated in prior Blog < HERE =">HERE"> : If, however, a debtor, inter alia , acknowledges a debt under certain circumstances, a “stale” claim relating to such debt may be revived.  “There are two ways in which the statute of limitations may be tolled.  One involves part payment of the debt and the other a signed acknowledgment.  Erdheim v. Gelfman , 303 A.D.2d 714, 714 - 15 (2 nd Dep’t 2003).  As to the former, the Erdheim Court, quoting Lew Morris Demolition Co. v. Board of Educ. , 40 N.Y.2d 516, 521 (1976), stated that tolling may occur if “payment of a portion of an admitted debt, made and accepted as such, accompanied by circumstances amounting to an absolute and unqualified acknowledgment by the debtor of more being due, from which a promise may be inferred to pay the remainder.”  Erdheim , 303 A.D.2d at 715.  As to the latter, the Erdheim Court, again quoting Lew Morris , stated that “ s to a written acknowledgment, pursuant to General Obligations Law § 17-101, the statute of limitations will be tolled by a signed written acknowledgment of an existing debt which contains nothing inconsistent with an intention on the part of the debtor to pay it.”  Erdheim , 303 A.D.2d at 715.   Section 17-101 of New York’s General Obligations Law permits the renewal of a Statute of Limitations when “the party to be charged” acknowledges the contractual obligation in writing.  GOL § 17-101 “applies to contract debt generally” ( see U.S. Bank National Association v. Caruna (1 st Dep’t November 12, 2020)), but, by its terms, does not apply to “action for the recovery of real property” ( see GOL § 17-101).  With respect to mortgage foreclosure actions, GOL § 17-105 applies.  GOL § 17-105(1), which requires a “promise to pay the mortgage debt” to renew a statute of limitations, provides: A waiver of the expiration of the time limited for commencement of an action to foreclose a mortgage of real property or a mortgage of a lease of real property, or a waiver of the time that has expired, or a promise not to plead the expiration of the time limited, or not to plead the time that has expired, or a promise to pay the mortgage debt, if made after the accrual of a right of action to foreclose the mortgage and made, either with or without consideration, by the express terms of a writing signed by the party to be charged is effective, subject to any conditions expressed in the writing, to make the time limited for commencement of the action run from the date of the waiver or promise.  If the waiver or promise specifies a shorter period of limitation than that otherwise applicable, the time limited shall be the period specified. In U.S. Bank, amortgage foreclosure action, the First Department affirmed the dismissal of the action due to time-bar.  An extremely abridged statement of the facts as gathered from the motion court’s decision and order (the “ Motion Court Decision ”) follow.  The defendants defaulted in the repayment of the mortgage note they executed.  A mortgage foreclosure action was commenced in 2009 and was dismissed in 2016 for failure to appear at a scheduled conference and to diligently prosecute the action.  A subsequent motion to restore was also denied.  Borrowers also filed a Chapter 7 Bankruptcy petition in May of 2011.  As to the bankruptcy, the motion court stated: In Schedule D of his bankruptcy petition, acknowledged the debt under the Note and Mortgage as a secured claim.  also executed a document entitled "Chapter 7 Debtor's Individual Statement of Intention" (Statement of Intention) wherein he declared that he intended to "retain" and "keep current" the debt.  obtained a bankruptcy discharge on September 9, 2011. An order of the bankruptcy court dated September 27, 2011 closed his bankruptcy case. Motion Court Decision at p. 3.   Borrower defaulted in making required payments under the loan in January 2012 and, thereafter, borrower and lender communicated about settlements, short sales and short payoff’s of the loan (the “Letters”).  Lender commenced another mortgage foreclosure action in May of 2017, which borrower moved to dismiss on, inter alia , Statute of Limitation grounds.  The motion court determined that the Statute of Limitations began to run when the 2009 foreclosure action was commenced and expired 6 years later (factoring in tolling occasioned by the bankruptcy filing), which time-period expired prior to the commencement of the second foreclosure action.  The lender argued, among other things, that the bankruptcy forms completed by the borrower renewed the Statute of Limitations.  According to the Motion Court Decision: contends that the "Statement of Intention" filed by under section 521(1) of the Bankruptcy Code, in conjunction with his Chapter 7 bankruptcy petition, restarted the running of the statute of limitations.  In particular, contends that because, in the Statement of Intention, " specifically referred to the Chase Home Mortgage and the Property, and expressly wrote that his intention with regard to the Loan was to 'retain and keep current' the Mortgage debt," the Statement of Intention "was an acknowledgment of the Mortgage debt under GOL § 17-101," and renewed the limitations period. Motion Court Decision at p. 9 (citations and brackets omitted, remaining brackets added).  The motion court found lender’s arguments in this regard “unpersuasive” and stated: In a Statement of Intention, a debtor must indicate whether he intends to "surrender" or "retain" property by checking off the appropriate box, and if he intends to retain property, he must then indicate whether he intends to "redeem the property," "reaffirm the debt," or "other" with an explanation. Here, checked off the "retain" box, and then explained in the "other" box that he would "retain, keep current." Significantly, he did not check off the box for "reaffirm the debt." Had he done so, his creditor (i.e. the ) and the bankruptcy court would have had to undertake the highly detailed procedures in section 524 of the Bankruptcy Code. This section sets forth specific methods to reaffirm the debt that would otherwise be dischargeable under section 727 of the Bankruptcy Code, by means of a court-approved reaffirmation agreement between the debtor and the creditor. did not enter into any reaffirmation agreement with the . Instead, the debt under the Note was eventually discharged by order of the bankruptcy court. To equate the simple act of indicating "retain, keep current" in the Statement of Intention with the elaborate provisions and procedures to "reaffirm the debt," as urges, is without merit. Motion court order at 10.  The motion court also found that the Letters “ not amount to ‘absolute and unqualified acknowledgement’ to pay the Mortgage debt” as required by GOL § 17-101.   In affirming the trial court, the First Department stated: The motion court correctly dismissed the complaint as time-barred on the ground that the statement of intention filed by in connection with his bankruptcy petition, in which he indicated, by checking a box, that the condominium would be retained and kept current, did not constitute the acknowledgment of the debt that is required to restart the expired statute of limitations under General Obligations Law (GOL) § 17-101, as plaintiff urged.   Initially, we note that, while GOL § 17-101 applies to contractual debts generally, the provision applicable to mortgage foreclosures in particular, and therefore controlling in this case, is § 17-105(1).  GOL § 17-101 requires an acknowledgment of the debt or a promise to pay it; GOL § 17-105(1) requires a promise to pay the debt. ’s bankruptcy petition did not satisfy either provision, because it merely listed the mortgage debt at issue, neither expressly acknowledging the debt nor promising to pay it. U.S. Bank at pp. 2-3 (citations omitted). The borrower in U.S. Bank filed a petition under Chapter 7 of the Bankruptcy Code.  The borrower in PSP-NC, LLC v. Raudkivi , 138 A.D.3d 709 (2 nd Dep’t 2016), filed a petition under Chapter 13.  In Raudkivi , the lender’s foreclosure action was not deemed to be time-barred because the debtor’s “bankruptcy plan, in which he acknowledged the mortgage debt and promised to repay it, renewed the limitations period.”  Raudkivi , 138 A.D.3d at 711 (citations omitted). TAKEAWAY The representations and acknowledgments made in the context of bankruptcy proceedings could have a meaningful impact on whether an expired statute of limitations will be renewed under Article 17 of the General Obligations Law.

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). Readers of this Blog also know that a plaintiff claiming fraud must demonstrate that he/she justifiably relied on the representation or omission alleged to be false. Whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). As the Court of Appeals observed, “ o two cases are alike ….” Id. For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992). Sophisticated parties have a heightened responsibility. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. If they fail to do so, their complaint will be dismissed. See , e.g. , HSH Nordbank , 95 A.D.3d at 194-95. Accord , Ashland Inc. v. Morgan Stanley & Co. , 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted). Despite the factual nature of the inquiry, the reporters are brimming with cases dismissing a fraud claim because the plaintiff failed to plead justifiable reliance. In Walleye Power, LLC v. Bay Shore Power Co. , 2020 N.Y. Slip Op. 51314(U) (Sup. Ct., N.Y. County Nov. 4, 2020) ( here ), the foregoing issues were considered by the Court. As discussed below, the Court denied a motion to dismiss contract and fraud claims, finding the plaintiff had stated a claim for breach of contract and fraudulent inducement and that the causes of action were not duplicative of each other. Walleye Power involved the purchase of the Bay Shore Cogeneration Plant (the “Plant”) in Oregon, Ohio for $38.7 million. The transaction was subject to the terms, conditions and representations of an Asset Purchase Agreement (“APA”) between Walleye Power, LLC and Bay Shore Power Co. and its indirect affiliate, FirstEnergy Generation LLC (“FEG”). Walleye alleged that it performed its obligations under the APA and that Bay Shore breached its obligations thereunder by falsely representing and warranting that the Generating Facility was in “good operating condition subject to normal wear and tear” and the Plant had been maintained in accordance with Good Utility Practice. Walleye claimed that Bay Shore knew those statements to be false because, among other things, certain major components, including the limestone crusher and the CFB Boiler air heater, needed to be replaced due to causes known to Bay Shore but concealed from Walleye.  Walleye claimed that after closing it learned that Bay Shore and FEG knew “that (a) the Plant’s most valuable assets would likely fail in the near future, (b) these assets had been poorly maintained in violation of First Energy corporate policy and (c) the Records misrepresented the state of the Plant’s operations.” Walleye further alleged that “ ather than disclose what it knew during diligence and before the APA was executed or the Closing, Bay Shore made intentional misrepresentations and omitted key facts, to conceal the true condition and value of the Plant.”  The Court held that these allegations stated a cause of action for willful breach of contract. Slip Op. at *2 (citing Second Source Funding, LLC v. Yellowstone Capital, LLC , 144 A.D.3d 445, 445-446 (1st Dept. 2016). As a result, the Court denied Bay Shore’s motion to dismiss the first cause of action for breach of contract. Walleye also alleged that Bay Shore made multiple affirmative misrepresentations about the condition of the Generating Facility and the accuracy and completeness of the records provided to Walleye during due diligence, which Walleye claimed induced it to enter the APA. Among other things, Walleye claimed that Bay Shore falsely represented that the Generating Facility had been maintained with “Good Utility Practice,” despite its knowledge that it had: (i) failed to follow its Failure Analysis Report and fully inspect and repair its dissimilar metal welds (“DMWs”); (ii) failed to ensure proper water chemistry; (iii) “pad-walled” more than 300 water wall tubes in violation of FEG’s policies; (iv) caused hydrated ash to foul the air heater tubes; (v) failed to properly install and maintain the electrical field voltage transducer; and (vi) failed to install a proper control room alarm for a generator ground.  In addition, Walleye alleged that Bay Shore knew that the Generating Facility had experienced DMW failures which caused one or more outages, but failed to provide this information in the outage report despite the existence of one or more Generation Availability Data System (“GADS”) codes specifically for DMW-related failures. The Court held that these allegations sufficed to state a claim of fraudulent inducement, noting that they were “sufficiently stated with particularity to satisfy CPLR § 3016(b).…” Slip Op. at *3. The Court noted that the alleged misstatements relating to the cause of the shutdowns were also actionable as half-truths. Id. (citing Junius Constr. Corp. v. Cohen , 257 N.Y. 393, 400 (1931); Orchard Hotel LLC v. D.A.B. Group LLC , 172 A.D.3d 530, 531 (1st Dept. 2019)). A half-truth is a deceptive statement because the maker of the statement conceals material facts that makes the statement misleading. Sheridan Drive-In v. State of N.Y. , 16 A.D.2d 400, 408 (4th Dept. 1962). The Court also held that whether Walleye’s reliance on the alleged misrepresentations was reasonable could not “be decided at the motion to dismiss stage based upon the record.” Slip Op. at *4 (“Whether reliance was reasonable based on the codes used, whether the codes themselves are incomplete or incorrect as Walleye alleges, or whether they should have put Walleye on notice of a more serious issue simply cannot be decided at the motion to dismiss stage based upon the record”) (citing ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015)). The Court further held that justifiable reliance was adequately pleaded and best left for the trier of fact because the information allegedly concealed was claimed to be “in Bay Shore’s exclusive knowledge and could not have been ascertained by Walleye in the course of reasonable due diligence without shutting down the Generating Facility for an extended period.…” Slip Op. at *4. Walleye claimed that Bay Shore concealed the information “because it would have alerted Walleye to the undisclosed problems at the plant and required FEG and Bay Shore to spend additional money.” Id. Accordingly, concluded the Court, “Walleye has adequately pled material misstatements of fact intended to deceive Walleye to induce them to enter the APA and Walleye’s justifiable reliance.” Id. (citing Basis Yield Alpha Fund (Master) v. Goldman Sachs Grp., Inc. , 115 A.D.3d 128, 135 (1st Dept. 2014)). Finally, the Court held that the duplication of claims doctrine did not bar the fraudulent inducement claim:  he fraudulent inducement cause of action is not duplicative of the breach of contract cause of action because Walleye alleges a duty separate and distinct from the alleged breach of the APA to provide accurate information and to correct any inaccurate information based on Bay Shore’s superior knowledge of the condition of the Generating Facility, and that Bay Shore made material misrepresentations of the present conditions of the Generating Facility to induce Walleye to agree to a higher purchase price and to enter into the APA in the first place. Id. (citations omitted). Moreover, said the Court, “because the APA limits indemnification claims against Bay Shore to $7.75 million, any damages in excess of that cap that Walleye seeks in connection with the fraudulent inducement claim cannot, as a matter of law, be said to be the same damages as are sought in connection with the breach of contract claim.” Id. (citing Avnet, Inc. v. Deloitte Consulting LLP , — A.D.3d — , 2019 N.Y. Slip Op. 05445 (1st Dept. 2020)). Takeaway The factual context of Walleye Power is common to many complex commercial transactions: one party is alleged to have breached the representations and warranties in the operative contract and made affirmative misrepresentations that induced the other party to enter into the transaction. Walleye Power highlights the independent duties necessary to withstand a motion to dismiss on duplication grounds. Walleye Power is also notable because the Court declined to dismiss the complaint on justifiable reliance grounds. As this Blog has noted in numerous prior posts, cases frequently get dismissed because the plaintiff fails to allege enough facts to demonstrate justifiable reliance on the alleged misstatement or omission. Too often, the plaintiff relies on conclusory statements to satisfy this element of the claim. Walleye Power bucks the trend – the claim was sustained because plaintiff provided sufficient facts to demonstrate it had used diligence and taken affirmative steps to protect itself but was, nonetheless, the victim of an alleged fraud.

Disputes between an insured and insurer occur all the time. These disputes often concern whether the policy covers a certain event. Sometimes, as in AB Oil Servs., Ltd. v. TCE Ins. Servs., Inc. , 2020 N.Y. Slip Op. 06232 (2d Dept. Nov. 4, 2020) ( here ), the dispute concerns the alleged failure to satisfy a specific request for coverage not already provided in one’s policy. Other times, the dispute concerns alleged fraud and negligent misrepresentation ( i.e. , breach of a duty to advise), as alleged in AB Oil . And, still other times, as in AB Oil , breach of contract and fraud are alleged. In this latter scenario, where breach of contract and fraud are alleged, the duplication of claims doctrine becomes relevant. However, as in AB Oil , where there is duty to advise, courts have held that such a duty is collateral to, or independent of, coverage obligations under the policy.   As a general principle, insurance brokers “have a common-law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have no continuing duty to advise, guide or direct a client to obtain additional coverage.” American Bldg. Supply Corp. v. Petrocelli Group, Inc. , 19 N.Y.3d 730, 735 (2012) (internal quotation marks and citation omitted). Thus, where a client “can establish that it made a particular request to the broker and the requested coverage was not procured”, will the broker be held liable to the client. Voss v. Netherlands Ins. Co. , 22 N.Y.3d 728, 734 (2014). Where a special relationship develops between the broker and client, the Court of Appeals has held that the broker may be liable, even in the absence of a specific request, for failing to advise or direct the client to obtain additional coverage. See Hoffend & Sons, Inc. v. Rose & Kiernan, Inc. , 7 N.Y.3d 152, 158 (2006); Murphy v. Kuhn , 90 N.Y.2d 266, 272-273 (1997). In Murphy , the Court recognized that “particularized situations may arise in which insurance agents, through their conduct or by express or implied contract with customers and clients, may assume or acquire duties in addition to those fixed at common law” and that the question of whether such additional responsibilities should be “given legal effect is governed by the particular relationship between the parties and is best determined on a case-by-case basis.” Murphy , 90 N.Y.2d at 272. The Court identified three exceptional situations that may give rise to a special relationship, thereby creating an additional duty of advisement: “(1) the agent receives compensation for consultation apart from payment of the premiums; (2) there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent; or (3) there is a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied on.” Id. (citations omitted). Where damages for breach of contract against an insurance broker are sought, “‘a plaintiff must establish that a specific request was made to the broker for the coverage that was not provided in the policy.’” Brannigan Christie Overhead v. Door , 149 A.D.3d 892, 893-894 (2d Dept. 2017) (quoting Joseph v. Interboro Ins. Co. , 144 A.D.3d 1105, 1108 (2d Dept. 2016) (internal quotation marks omitted)). However, as in any contract action, “actual damages are not an essential element” of the claim. Perry v. McMahan , 164 A.D.3d 1488, 1489 (2d Dept. 2018). A plaintiff may recover nominal damages. Kronos, Inc. v. AVX Corp. , 81 N.Y.2d 90, 95 (1993). AB Oil Servs., Ltd. v. TCE Ins. Servs., Inc. Background AB Oil involved an insurance policy procured through Defendant, TCE Insurance Services, Inc., and its principal, Defendant, Anthony DeFede (collectively, “defendants”). Plaintiffs alleged that defendants failed to obtain insurance they were asked to procure and failed to inform plaintiffs that they did not do so. The subject coverage was for gas main repair work plaintiffs performed for Consolidated Edison (“Con Ed”) during the period July 1, 2015, through June 30, 2016. Plaintiffs alleged that in September 2015, they became interested in performing gas main repair work for Con Ed. The proposed agreement with Con Ed required plaintiffs to maintain insurance. As a result, plaintiffs asked defendants for a quote, providing defendants with a description of the job, a copy of the draft agreement, and the insurance requirements. In October 2015, defendants informed plaintiffs that their existing insurance policy already covered the proposed gas main repair work. Defendants provided a certificate of insurance naming Con Ed as an additional insured under that existing policy. Plaintiffs thereafter entered into the agreement, as proposed, with Con Ed on October 13, 2015. According to plaintiffs, the agreement with Con Ed was, in essence, a pilot program having three consecutive one-year terms, with the option to renew vested solely with Con Ed. In June 2016, plaintiffs decided to bid for a permanent three-year contract to perform the same work. That same month, defendants presented plaintiffs with a quote for renewal of the existing insurance policy for the period July 2016 through June 2017. The new quote increased the annual premium from $380,951.70 to $397,377. At some later point in June 2016, plaintiffs submitted an irrevocable bid for the new contract with Con Ed. Plaintiffs alleged that they priced their bid, in part, based on the increased rate that defendants had quoted for the renewal of the existing insurance policy. Plaintiffs also alleged that they decided to shop for a lower insurance rate, but while doing so they discovered that the insurer had never been informed about the gas main repair work that plaintiffs were performing. The insurer subsequently disclaimed both coverage for that work under the existing policy as well as the $397,377 renewal quote. Plaintiffs alleged that they obtained substitute coverage for one quarter from a different insurer at an annual rate of $691,595, and thereafter obtained more permanent coverage “with reduced protection” for an annual rate of approximately $650,000. Defendants moved to dismiss the complaint, which the motion court granted in an amended order in December 2017. Plaintiffs moved for leave to reargue their opposition to defendants’ motion or, in the alternative, for leave to amend the complaint. In an order dated May 25, 2018, the motion court adhered to its prior determination. The motion court also denied plaintiffs’ motion for leave to amend the complaint. Plaintiffs appealed. The Court’s Decision The Court held that plaintiffs’ contract and fraud claims should have been sustained. Regarding the breach of contract claim, the motion court dismissed the claim because plaintiffs did not allege actual damages. The Court found this to be error. Slip Op. at *3 (citing Perry , 164 A.D.3d at 1489).  Regarding the fraud and negligent misrepresentation claim, the Court held that plaintiffs “sufficiently alleged the existence of a special relationship.” Slip Op. at *4. The Court explained that “plaintiffs’ allegations concerning the specific request they made to the defendants to procure coverage for gas main repair work that the plaintiffs intended to perform for Con Ed beginning in the fall of 2015 sufficient to state a viable claim under the second of the exceptional circumstances identified by the Court of Appeals” – e.g. , there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent. Id. In that regard, the Court found that plaintiffs alleged “an interaction regarding a question of coverage and that the plaintiffs supplied the defendants with a description of the job, a copy of the draft agreement, and the insurance requirements, which would have put the defendants on notice that their advice was being sought and specially relied on.” Id.   To underscore the finding, the Court noted that the “question of coverage reemerged in June 2016 when the defendants produced a quote to renew the plaintiffs’ existing insurance policy, allegedly with the knowledge of the plaintiffs’ existing commitment to perform gas repair work for Con Ed through at least October 2016.” Id. The Court rejected defendants’ contention that the claim was correctly dismissed because plaintiffs failed to plead damages. Id. The Court found that “at a minimum, claim to have suffered damages when they, on two occasions, made bids for long-term contracts to perform gas main repair work for Con Ed that were priced, in part, based on the defendants’ alleged misrepresentations as to the price of insurance coverage for that work.” Id. Finally, the Court rejected defendants’ contention that the fraud claim should have been dismissed because it was duplicative of the contract claim. The Court noted that the fraud and negligent misrepresentation claim concerned matters that were collateral to defendants’ coverage obligations under the alleged contract: “the former < i.e. , the fraud and negligent misrepresentation cause of action> i.e., the fraud and negligent misrepresentation cause of action>, concerns a duty of advisement extending above and beyond the parties’ contractual relationship.” Id. (citing Kimmell , 89 N.Y.2d at 260-266). And, with regard to defendant Anthony DeFede, the Court noted that plaintiffs sought to hold him liable for participating in the commission of a tort, not for breaching the terms of the alleged contract. Id. (citations omitted).  Takeaway AB Oil involved the issue of duties; in particular, whether an insurance agent acquires duties in addition to those fixed at common law and whether such additional responsibilities should be given legal effect.  As discussed above, the Court answered both inquiries in the affirmative.  AB Oil also involved the duplication of claims doctrine. And, as discussed, where the claims involve independent duties, contract claims and fraud claims can stand side-by-side.

CPLR 3215(c) , which encourages the prompt entry of default judgments, provides: If the plaintiff fails to take proceedings for the entry of judgment within one year after the default, the court shall not enter judgment but shall dismiss the complaint as abandoned, without costs, upon its own initiative or on motion, unless sufficient cause is shown why the complaint should not be dismissed.  A motion by the defendant under this subdivision does not constitute an appearance in the action. This BLOG has previously addressed CPLR 3125(c) < HERE =">HERE"> .  “The policy behind CPLR 3215(c) is to prevent parties who have asserted claims from unreasonably delaying the termination of actions, and to avoid inquests on stale claims.”  Giglio v. NTIMP, Inc. , 86 A.D.3d 301, 307 (2 nd Dep’t 2011) (citations omitted).   The provisions of CPLR 3125(c) are mandatory, but “may be excused if sufficient cause is shown why the complaint should  not be dismissed.”  Merilus v. Nassau Inter County Express , 130 N.Y.S.3d 395, 396 (2 nd Dep’t 2020) (citations omitted).  Sufficient cause can be demonstrated where “plaintiff … proffer a reasonable excuse for the delay in timely moving for a default judgment and demonstrate a potentially meritorious cause of action.”  Id. Further, “ t is not necessary for a plaintiff to actually obtain a default judgment within one year of the default in order to avoid dismissal pursuant to CPLR 3215(c).”  US Bank National Association v. Dorestant , 131 A.D.3d 467, 469 (2 nd Dep’t 2015) (citations omitted).  Plaintiff is not “required to specifically seek the entry of a judgment within a year … s long as ‘proceedings’ are being taken, and these proceedings manifest an intent not to abandon the case but to seek a judgment….”  Id. (citations and some internal quotation marks omitted).  In Dorestant , the court found that the plaintiff “took the preliminary step toward obtaining a default judgment of foreclosure and sale by moving, ex parte, for an order of reference, it initiated proceedings for entry of the default judgment of foreclosure and sale within one year of the defendants' default and, thus, did not abandon the action.”  Id. (citations omitted). As long as plaintiff did not intend to abandon the action, the complaint will not be dismissed even if the motion on which plaintiff relied to establish that it took proceedings to enter a default is “later withdrawn”.  Aurora Loan Services, LLC v. Bandhu , 175 A.D.3d 1470, 1471 (2 nd Dep’t 2019) (citation omitted).  Aurora Loan Services, LLC v. Gross , 139 A.D.3d 772 (2 nd Dep’t 2016), was a mortgage foreclosure action.   The Gross plaintiff filed an RJI and moved for an ex parte order of reference within one year of defendants’ default.  The motion was later withdrawn as plaintiff attempted to comply with administrative orders requiring “a plaintiff’s attorney in certain mortgage foreclosure actions to submit an affirmation confirming the accuracy of the allegations in the complaint.”  Id. at 772-73.  The supreme court in Gross “issued an order … which sua sponte directed the dismissal of the complaint pursuant to CPLR 3215 (c), for the plaintiff's failure to move for leave to enter a default judgment within one year after the defendants' default.”  Id . at 273.  In reversing supreme court, the Second Department in Gross stated: Here, the plaintiff initiated proceedings in June 2008 for the entry of a judgment of foreclosure and sale within one year of the defendants' default by filing the request for judicial intervention seeking an ex parte order of reference. There was no evidence that the plaintiff intended to abandon the action.  Rather, it appears that the plaintiff was attempting to comply with newly imposed requirements for certain mortgage foreclosure actions, which were revised while the action was pending. Under these circumstances, the Supreme Court improvidently exercised its discretion in sua sponte directing the dismissal of the complaint pursuant to CPLR 3215 (c), as no extraordinary circumstances existed to warrant dismissal. Id . at 774 (citations omitted). On November 4, 2020, the Second Department decided Deutsche Bank National Trust Co. v. Hasan , which seems to mirror Gross .  In Hasan , plaintiff lender sought to foreclose a mortgage.  Within a year of defendants’ default, lender moved for an order of reference, but “withdrew the motion due to an administrative order of the Supreme Court, Kings County.”   Three years later supreme court “sua sponte, directed dismissal of the complaint as abandoned pursuant to CPLR 3215(c)” and denied lender’s subsequent motion to vacate the dismissal order.  On appeal, the Second Department reversed supreme court.  Consistent with, and relying on, inter alia , Gross , the Hasan Court held that: Here, the plaintiff took the preliminary step toward obtaining a default judgment of foreclosure and sale by moving for an order of reference in May 2010, within one year of the defendants' default.  In such cases, the complaint should not be dismissed pursuant to CPLR 3215(c), even if, as here, the plaintiff's motion is later withdrawn.