Arbitration is an alternative form of dispute resolution where the parties voluntarily agree that a neutral, private person will resolve any legal disputes between them, instead of a judge or jury in a court of law. Rent-A-Ctr., W, Inc. v. Jackson , 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”); Matter of Long Is. Power Auth. Hurricane Sandy Litig. , 165 A.D.3d 1138, 1141 (2d Dept. 2018). In business and commercial transactions, arbitration is the preferred means of resolving disputes. It is encouraged and recognized as the public policy of the State of New York. Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted); Stark v. Molod Spitz DeSantis & Stark, P.C. , 9 N.Y.3d 59, 66 (2007) (internal citation omitted). For this reason, “New York courts interfere as little as possible with the freedom of consenting parties to submit disputes to arbitration.” Stark , 9 N.Y.3d at 66 (internal quotation marks and citation omitted). Since arbitration is a “creature of contract” ( Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc. , 252 F.3d 218, 224 (2d Cir. 2001)), only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. TBA Global, LLC v. Fidus Partners, LLC , 132 A.D.3d 195, 202 (1st Dept. 2015). Consequently, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Communications Workers of Am. , 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co. , 363 U.S. 574, 582 (1960)). For this reason, “a party will not be compelled to arbitrate and, thereby, to surrender the right to resort to the courts, absent evidence which affirmatively establishes that the parties expressly agreed to arbitrate their disputes. The agreement must be clear, explicit and unequivocal and must not depend upon implication or subtlety.” Waldron v. Goddess , 61 N.Y.2d 181, 183-84 (1984); see also Matter of Trump (Refco Props ., 194 A.D.2d 70, 74 (1st Dept. 1993).  In determining whether to compel arbitration, Courts consider three threshold questions: (i) whether the parties made a valid agreement to arbitrate, (ii) whether, if such an agreement was made, it has been complied with, and (iii) whether the claim sought to be arbitrated would be barred by a limitation of time had it been asserted in a court of the State. Matter of Rockland County , 51 N.Y.2d 1, 6-7 (1980). The second inquiry includes the question of whether there has been compliance with any condition precedent. Id. at 7.  Not surprisingly, whether the parties are bound by an arbitration agreement and whether they agreed to submit their dispute to arbitration are hotly contested questions.  Today, we examine Cenni v. Cenni , 2020 N.Y. Slip Op. 33221(U) (Sup. Ct., N.Y. County Sept. 30, 2020) ( here ), a case in which the Court was asked to decide whether a claim for equitable relief fell within the scope of the parties’ agreement to arbitrate. As discussed below, the Court held that such claims were included within the agreement to arbitrate. Adrian Cenni (“ACenni”) brought suit seeking a declaration that he is the managing member of the Atrium Companies, a group of limited liability companies and one corporation, each of which is governed by an Amended and Restated Operating Agreement. ACenni co-owns the Atrium Companies with Rebecca L. Cenni (“RCenni”), his former spouse. All operating agreements contained an arbitration provision mandating arbitration of all claims “arising ... with respect to” the agreements. In pertinent part, each operating agreement provided: “Any claim, controversy or dispute arising between the parties with respect to this Agreement (a ‘Dispute’), to the maximum extent allowed by applicable law, shall be submitted to and finally resolved by, binding arbitration .... Notwithstanding any other provision of this Section, any Dispute in which a party seeks equitable relief may be brought in any court having jurisdiction.”   In 2016, the parties had a dispute concerning the enforceability of a management contract ACenni had entered into on behalf of the Atrium Companies. In a 2017 arbitration of that dispute, RCenni alleged that ACenni attempted to bind the Atrium Companies in unauthorized service agreements with his wholly owned U.S. Virgin Islands company. The arbitrator ruled in RCenni’s favor, finding that ACenni did not have the authority to enter into the subject service agreements. On March 21, 2018, the arbitrator issued a final award, holding that, among other things, ACenni lacked “authority to make or enter into any contract, agreement or other arrangement with a counterparty in which he ha a direct or indirect ownership interest without the approval of ”; ACenni was properly “removed as the Atrium Companies’ ‘President – Operations’”; and ACenni had no authority to run the Atrium Companies’ day-to-day operations. On November 15, 2018, the arbitration award was confirmed and later affirmed on appeal. Cenni v. Cenni , 180 A.D.3d 509 (1st Dept. 2020). ACenni brought the action against RCenni and the Atrium Companies seeking, inter alia , a declaratory judgment and injunctive relief against all defendants in connection with his rights as a managing member of the Atrium Companies.  RCenni moved to compel arbitration, arguing that the arbitration clause in the operating agreements mandated arbitration of those claims.  In response, ACenni argued that he was primarily seeking equitable relief to establish his rights, duties, and responsibilities in the Atrium Companies. He argued that money damages would not be an adequate remedy to address those issues, his ability to obtain information about the companies, his ability to participate in the management of the companies, and his ability to vote and have a voice over company business. Therefore, argued ACenni, the clause in the arbitration agreement permitting the parties to bring a claim for equitable relief in court controlled.  The Court agreed with RCenni, noting that “the dispute involve the application of a provision of the operating agreement” and, therefore, fell within the “broad” scope of the arbitration provision. Slip Op. at *7-*8.   The Court rejected ACenni’s argument that the last sentence of the arbitration provision – “ otwithstanding any other provision of this Section, any Dispute in which a party seeks equitable relief may be brought in any court having jurisdiction” – was “a carve out of, or an exception to, the arbitration clause in the Operating Agreements.” Id. at *8. Relying on the Court’s prior decision in which the same argument was asserted and rejected and Baldwin Tech. Co., Inc. v. Printers’ Serv. Inc. , 2016 WL 354914, 2016 U.S. Dist. LEXIS 10086 (S.D.N.Y. Jan. 27, 2016), the Court held that the clause was not an exception or carve out to arbitration: Here, the parties are signatories to an agreement with a broad arbitration provision, requiring the parties to submit any controversy under the operating agreement to arbitration. ACenni’s claims for the restoration of his managerial duties require an interpretation of the terms of that operating agreement. The provision permitting the parties to bring a claim for equitable relief in the courts does not undermine this mechanism under the operating agreement in any way. That provision does not prohibit the parties from arbitrating claims for equitable relief, but, instead, permits the parties to bring such claims in a court of law. It does not function as an exception. Slip Op. at *9. In the prior action, ACenni “offered th same argument … to oppose the confirmation of the March 21, 2018 final award.” Id. at *8. In the Court’s decision confirming that award, it “found” the “argument” to be “meritless.” Id. The Court explained that “the use of the word ‘may’ in the provision provide the parties with a choice ‘to pursue equitable relief in court or in arbitration; it not, as incorrectly assert , a “carve out” and it not deprive the AAA of jurisdiction to arbitrate any dispute as mandated’ by the broad language of the clause.” Id. (citation to record omitted). In Baldwin Tech. , the court held that “where a contract has both a broad arbitration clause and a clause permitting the parties to seek injunctive relief before a court, courts … have construed the latter clauses as permitting the parties to seek ‘injunctive relief … in aid of arbitration, rather than … transforming arbitrable claims into nonarbitrable ones depending on the form of relief prayed.’” Baldwin Tech. , 2016 WL 354914, at *4, 2016 U.S. Dist. LEXIS 10086, at *9, n. 4.   Accordingly, the Court granted the motion to compel arbitration of the claims asserted in the complaint, concluding that such a result was consistent with the intent of the parties as reflected in their agreement to arbitrate: It would not be consistent with the parties' intentions as set forth in their broad agreement to arbitrate, or with the case law in New York, favoring arbitration, if this court were to deny arbitration on the ground that ACenni is seeking a directive to be restored to his managerial responsibilities. It is plain from the circumstances of this case that arbitration is the most fit and appropriate tribunal to determine what role, responsibilities and duties ACenni is entitled to under the operating agreement. Slip Op. at *9 (citing Sutphin Retail One, LLC v. Sutphin Airtrain Realty, LLC , 143 A.D.3d 972, 974 (2d Dept. 2016) (“Therefore, the appropriate inquiry is whether the dispute is governed by the arbitration agreement and not whether the arbitrator has the authority to award the specific relief sought by the plaintiff in the complaint”)). Takeaway In Cenni , the parties were signatories to an agreement with a broad arbitration provision, requiring them to submit any controversy under the operating agreement to arbitration. Slip Op. at *9. Significantly, both agreed that the arbitration provision represented “a valid agreement” to arbitrate. Slip Op. at *7. As such, the issue before the Court was whether the dispute fell within the scope of that agreement. Applying traditional rules of contract interpretation ( e.g. , Landmark Ventures, Inc. v. H5 Tech., Inc. , 152 A.D.3d 657, 658 (2d Dept. 2017); W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157, 162 (1990)), the Court held that the dispute was arbitrable.  Cenni is also notable for its reliance on Baldwin Tech. In Baldwin Tech. , as noted, the court held that an arbitration agreement that provides the parties with the right to obtain an injunction or other equitable relief in a court of law does not transform arbitrable claims into nonarbitrable ones. Such a provision “is merely declaratory of existing legal rights.” Erving v. Virginia Squires Basketball Club , 468 F.2d 1064, 1067 (2d Cir. 1972). To hold otherwise, concluded the Baldwin Tech. court, would be inimical to accepted principles of contract construction and the strong public policy in favor of arbitration. Remy Amerique, Inc. v. Touzet Distribution, S.A.R.L. , 816 F. Supp. 213, 218 (S.D.N.Y. 1993); see also WMT Inv’rs, LLC v. Visionwall Corp. , 2010 WL 2720607, at *4 (S.D.N.Y. June 28, 2010) (“ f there is a reading of the various agreements that permits the arbitration clause to govern, the Court will choose it.”).

Under New York law, a party commences a civil action by filing a summons and complaint. Generally speaking, these documents set forth the claims that are being asserted against the defendant(s). Typically, though not required in all instances, the plaintiff will verify the complaint. “A verification is a statement under oath that the pleading is true to the knowledge of the deponent .…” CPLR § 3020 (a). The verification makes the pleading sworn and, therefore, is the equivalent of an affidavit and may be used for the same purposes. CPLR § 105(u) (“A ‘verified pleading’ may be utilized as an affidavit whenever the latter is required”). Once a pleading is verified, all pleadings thereafter must be verified. A complaint can be verified by the plaintiff or by counsel. CPLR § 3020 (d). However, when the pleading is verified by counsel pursuant to CPLR 3020 (d) (3), and not by someone with personal knowledge of the facts, the pleading is insufficient for evidentiary purposes. See McKenna v. Solomon , 255 A.D.2d 496 (2d Dept. 1998); Peterson v. Scandurra Trucking Co. , 226 A.D.2d 691, 692 (2d Dept. 1996). The reason: the affirmation of an attorney which does not contain evidentiary facts from one having personal knowledge is insufficient to establish the merits of a claim. See Zuckerman v. City of New York , 49 N.Y.2d 557, 563 (1980). The impact of a verified pleading on a motion for summary judgment was recently considered by the court in Marinelli v. RPZL, LLC , 2020 N.Y. Slip Op. 33185(U) (Sup. Ct., N.Y. County Sept. 23, 2020) (here). There, the Court denied a motion for summary judgment on the grounds that, inter alia , the verified complaint, which served as an affidavit, conflicted with defendants’ affidavits such that issues of fact were raised and could not be resolved.  Marinelli arose from an investment by plaintiff, Gina Marinelli (“Marinelli”), in defendant, RPZL, LLC (“RPZL”), a company that provides hair extensions and hair styling services. Defendants Lisa Richards (“Richards”) and Monica Thornton (“Thornton”) own RPZL. According to plaintiff, Richards and Thornton approached Marinelli about investing in RPZL. Plaintiff alleged that Richards and Thornton made material misrepresentations about the company’s technology and their plans to open locations across the nation: to wit, (i) RPZL had original patent, pending technology on a machine and process that could bond hair extensions to hair without damaging the hair, (ii) had secured a natural hair source that could provide RPZL with inexpensive and high-quality natural hair, and (iii) was raising additional capital to open up new store locations nation-wide. Plaintiff further alleged that Richards and Thornton promised her a paid role in the company and a spot on RPZL’s advisory board in exchange for her investing $100,000. On December 4, 2014, plaintiff made a $100,000 investment in RPZL pursuant to which the parties signed a promissory note for that amount with a maturity date of December 4, 2017. The next day, the parties entered a side letter agreement that provided: (i) plaintiff would have the sole discretion as to whether the promissory note would convert to an equity interest or become due in full at maturity, (ii) plaintiff would act as a consultant for RPZL, (iii) plaintiff would have a position on RPZL’s advisory board, and (iv) in exchange for her role as a consultant, the principal would be increased by 15% to $115,000 and plaintiff would receive compensation in the form of a 15% payment of the principal amount on each anniversary of the promissory note until the time of its conversion. Plaintiff claimed that she never received any payments despite performing work for RPZL. On December 5, 2017, plaintiff elected to call for the repayment of the promissory note. No payment was made, even after multiple demands. Thereafter, plaintiff filed suit. In her complaint, plaintiff alleged four causes of action. The first cause of action, asserted against RPZL, claimed breach of contract under the promissory note. The second cause of action, asserted against all defendants, alleged fraudulent misrepresentation based upon, inter alia , defendants’ claims regarding RPZL’s patent-pending technology and natural hair source. The third cause of action, asserted against RPZL, claimed a violation of Labor Law § 198(1-a) based upon RPZL’s failure to pay plaintiff’s salary. The fourth cause of action, asserted against all defendants, claimed unjust enrichment based upon RPZL’s failure to pay plaintiff any salary or wages.  Defendants answered the complaint, offering general denials and affirmative defenses, including that plaintiff was not employed by RPZL. Discovery was conducted and the note of issue was filed on November 15, 2019. Defendants moved for partial summary judgment dismissing the second, third, and fourth causes of action. The Court denied the motion. On a motion for summary judgment, the moving party must make a prima facie showing that it is entitled to judgment as a matter of law by submitting evidentiary proof in admissible form sufficient to establish the absence of any material, triable issues of fact. See CPLR § 3212(b); Jacobsen v. New York City Health & Hosps. Corp. , 22 N.Y.3d 824 (2014); Alvarez v. Prospect Hosp. , 68 N.Y.2d 320 (1986); Zuckerman , supra . Once the movant meets this burden, it becomes incumbent upon the party opposing the motion to come forward with proof in admissible form to raise a triable issue of fact. See Alvarez , supra ; Zuckerman , supra . However, if the movant fails to meet this burden and establish its claim or defense sufficiently to warrant a court directing judgment in its favor as a matter of law ( see id. ; O’Halloran v. City of New York , 78 A.D.3d 536 (1st Dept. 2010)), the motion must be denied regardless of the sufficiency of the opposing papers. See Winegrad v. New York Univ. Medical Center , 64 N.Y.2d 851 (1985). This is because “summary judgment is a drastic remedy, the procedural equivalent of a trial. It should not be granted if there is any doubt about the issue.” Bronx-Lebanon Hosp. Ctr. v. Mount Eden Ctr. , 161 A.D.2d at 480 (1st Dept. 1990) (quoting Nesbitt v. Nimmich , 34 A.D.2d 958, 959 (2d Dept. 1970)). In support of their motion, defendants submitted, inter alia , the affidavits of the individual defendants, who both averred that plaintiff was aware that (i) RPZL did not have an advisory board in place at the time she entered into the promissory note, but rather hoped to create one, (ii) that there was not any patent-pending technology on a machine and process that could bond hair extensions to hair without damaging the hair, but that RPZL was contracting with a third-party to try and develop this kind of technology, and (iii) RPZL directly manufactured its own hair extensions, and therefore was not seeking any outside hair sources. Richards further averred that plaintiff was never an employee or consultant for RPZL, and therefore no W-2 or 1099 forms were ever issued to her. On the fraudulent inducement claim, the Court held that because the individual defendants’ affidavits conflicted with the verified allegations in the complaint, summary judgment was inappropriate: The defendants contend that the affidavits of Lisa Richards and Monica Thornton demonstrate that the plaintiff was aware that RPZL did not have an advisory board, patent-pending technology, or an outside hair source, and that the defendants never made any representations otherwise. However, in opposition, the plaintiff argues that these affidavits merely offer conclusory denials of her allegations, and thus only create a triable issue of fact as to whether Richards and Thornton made the alleged misrepresentations to the plaintiff. As it is well settled that a verified pleading is the equivalent of a responsive affidavit for the purposes of a motion for summary judgment, ( see Travis v Allstate Ins. Co. , 280 AD2d 394 <1st dept. 2001> ; CPLR 105 ) and a triable issue of fact cannot be resolved on conflicting affidavits, the portion of the defendant’s motion seeking summary judgment on the second cause of action is denied. See Brunetti v Musallam , 11 AD3d 280 (1st Dept. 2004). Slip Op. at *3. As to the Labor Law claims, the Court found that the individual defendants’ affidavits conflicted with, inter alia , the verified complaint necessitating denial of the motion: The defendants contend that they are entitled to dismissal of this claim as the affidavits of Lisa Richards and Monica Thornton demonstrate that the plaintiff was never an employee of RPZL. The affidavits aver that the plaintiff was not hired as an employee of RPZL and never received a W-2 or 1099 from the company. However, the plaintiff alleges in both her verified complaint and her affidavit in opposition to the instant motion, that she reported to Richards and Thornton daily, five days a week, from December 2014 to June 2015, and on a weekly basis thereafter. She further claims that she aided the company on legal matters, brand marketing, sourcing clients, creating promotions, performing market research, and assisting with onboarding employees. The plaintiff also submits a number of email chains where either Richards or Thornton discuss with the plaintiff her work for RPZL. These submissions raise a triable issue of fact as to the defendants exercised a sufficient degree of control over the plaintiff, such that she is an employee under the Labor Law. Id. at *4 (citation omitted). Takeaway When making a motion for summary judgment, the moving party must make a prima facie showing that it is entitled to judgment as a matter of law. It can do so by submitting evidentiary proof in admissible form sufficient to establish the absence of any material, triable issues of fact. Such proof includes an affidavit of a party or someone with knowledge of the facts and circumstances relevant to the claims and defenses, authenticated documentary proof, or by a pleading verified by the party to the action that sufficiently details the facts and the basis for the relief sought. In Marinelli , plaintiff’s verified complaint constituted such proof.

Whistleblowers often risk career and reputation to report fraud or other illegal conduct. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) to, among other things, promote compliance with the federal securities laws. The Dodd-Frank Act contains whistleblower provisions that authorize the Securities and Exchange Commission (“SEC” or “Commission”) to pay cash rewards to whistleblowers who voluntarily provide the SEC with timely and credible information about securities fraud and other violations of the securities laws, including the Foreign Corrupt Practices Act. The Dodd-Frank Act enables the SEC to pay an award to any individual, or group of individuals, who provide “original information” about a violation of the federal securities laws. Both U.S. citizens and foreign nationals may file whistleblower claims and receive a reward. To be “original”, the information must be unknown to the SEC and derived from the whistleblower’s independent knowledge or analysis. Whistleblowers who provide “original information” that the SEC uses in furtherance of an enforcement action can recover a reward of between 10% – 30% of the total amount of money collected by the SEC when the monetary sanctions exceed $1 million.  As set forth in the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers and does not disclose information that could reveal a whistleblower’s identity. here )=">here)" and="and" SEC’s="SEC’s" >here).=">here).">  On September 30, 2020, the SEC announced that it awarded almost $5 million to four whistleblowers who submitted tips under the SEC’s whistleblower program. Each of the whistleblowers provided material information that alerted the Commission to the alleged violation of the securities laws and resulted in successful enforcement action . For the fiscal year, the SEC made 39 individual awards of approximately $175 million to whistleblowers under the program, more than in any prior fiscal year.  In the first order ( here ), the SEC awarded a whistleblower nearly $2.9 million for alerting the Commission to hard-to-detect violations.  According to the SEC, the whistleblower provided critical information and supporting evidence that conserved the agency’s time and resources. In the second order ( here ), the SEC awarded a whistleblower, a former company insider, more than $1.7 million. According to the SEC, the whistleblower provided extensive and ongoing assistance to the SEC’s investigative team over the course of the investigation. In the third order ( here ), the SEC awarded two whistleblowers nearly $400,000 for jointly providing a tip and giving continuing assistance during the course of the investigation, including meeting with staff and providing detailed information that helped them understand key documents and identify witnesses. According to the SEC, the whistleblowers also internally reported their concerns and suffered personal hardships as a result of the reporting. “Today marks the end of a record-setting year for the whistleblower program. We’ve made significant strides to further streamline and accelerate the evaluation of claims under the rules, substantially increasing the rate at which whistleblower claims are evaluated and awards are issued,” said Stephanie Avakian, Director of the Division of Enforcement. “We remain committed to rewarding the valuable contributions of whistleblowers in a timely and efficient manner.” “The awards issued in the last month demonstrate the variety and breadth of tips received from whistleblowers,” added Jane Norberg, Chief of the SEC’s Office of the Whistleblower.  “Award recipients in the last month include company outsiders who provided independent analysis, international whistleblowers who shone a light on hard to detect overseas conduct, and company insiders who provided critical information and substantial assistance that helped the Commission better protect investors and the marketplace. And today, the four individuals awarded each provided the tip that sparked the opening of the case.” The SEC has awarded almost $562 million to 106 individuals since issuing its first award in 2012. All whistleblower awards are paid from an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. Under the program, no money is taken or withheld from investors harmed by the violations of law to pay whistleblower awards.

In looking at the causes of action asserted in Kocak v. Dargin , 2020 N.Y. Slip Op. 33121(U) (Sup. Ct., N.Y. County Sept. 23, 2020) ( here ), one could walk away with the impression that the claims are disparate and lacking cohesion – breach of fiduciary, fraudulent transfers and corporate dissolution. However, when the facts and evidence in Kocak are considered, a common theme emerges: the alleged actions taken by the majority shareholder of the corporation oppressed the rights of the minority. Each of those actions, according to the Court, supported summary judgment on each of the aforesaid claims.   Kocak v. Dargin Background Kocak concerned a restaurant, known as Sahara’s Turkish Cuisine (“Sahara’s”), which plaintiff purchased in 2001. Beginning in 2007, plaintiff operated the restaurant through Baba’s Restaurant Inc. (“Baba’s”), an entity of which plaintiff was the sole owner. Plaintiff’s brother managed the restaurant.  In 2012, plaintiff agreed to sell 75% of his shares in Baba’s to defendant for $281,250.00, to be paid in installments, in accordance with the terms of a Stock Transfer Agreement. On the same day, the parties also entered into an employment agreement whereby plaintiff agreed to be an employee of Baba’s and to provide services as the Marketing and Business Development Manager in return for a net monthly salary of $2,500.00. Both the Stock Transfer Agreement and the employment agreement contained merger clauses providing that the agreements represented the parties’ entire understanding with respect to the subject matter contained therein and could be modified, amended or terminated only by a written instrument executed by the parties or their respective successors or assigns.  Following execution of the Stock Transfer Agreement, defendant assumed responsibility for operating Sahara’s on behalf of Baba’s, assumed the role of manager, was made a cosignatory (along with plaintiff) of the bank account that served as Baba’s operating account, and was added as a signatory to the lease that Baba’s had with its landlord, Daniela Sarraf (“Sarraf”).  Thereafter, a First Amendment of Lease, dated February 8, 2012 was entered into between Baba’s and Sarraf. Both plaintiff and defendant signed the Lease Amendment on behalf of Baba’s. Under the Lease Amendment, the lease term was extended for ten years, until December 31, 2021.  In 2014, defendant formed Munzur LLC (“Munzur”), which he co-owned with his sister, Feliz Dargin.  On or about September 14, 2014, a Lease Agreement was entered into between Sarraf as landlord and Munzur as tenant, for the New York City location where the restaurant opereated. Feliz Dargin signed the Lease Agreement on behalf of Munzur. In 2015, defendant opened a bank account in the name of Munzur, to serve as the operating account for the restaurant. Plaintiff was not made a signatory to the Munzur account. Defendant began depositing revenues and other monies from the operations of the restaurant into the Munzur account. In or around September or October, 2015, defendant ceased making such deposits into Baba’s bank account. In or around September or October 2015, defendant began operating Sahara’s entirely through Munzur and paid distributions from Munzur to himself and Feliz Dargin beginning in 2016.  In 2017, defendant formed Rojava LLC (“Rojava”), of which he was the sole owner. Thereafter, defendant amended the lease, and bank accounts to the exclusion of plaintiff. Following execution of the Stock Transfer Agreement in 2012, plaintiff had not been paid any distribution from the profits of the restaurant (whether operated through Baba’s, Munzur, or Rojava). Plaintiff filed the action on April 18, 2016, alleging causes of action for: 1) breach of fiducuary duty; 2) fraudulent conveyance pursuant to DCL § 274; 3) fraudulent conveyance pursuant to DCL § 276; and 4) violations of New York Labor Law § 191. Issue was joined by the service of an Answer, dated June 20, 2016, containing counterclaims: 1) alleging unjust enrichment; and 2) seeking a declaratory judgment that plaintiff was no longer an owner of the subject property.  By order, dated February 3, 2017, plaintiff added Baba’s as a party defendant. Plaintiff filed a Note of Issue on January 10, 2020, and thereafter filed a motion for partial summary judgment on the issue of liability on his first, second and third causes of action and seeking statutory dissolution pursuant to BCL § 1104-a.  On August 21, 2020, defendants cross-moved for summary judgment on their counterclaims and dismissal of plaintiff’s complaint. The Court’s Decision Breach of Fiduciary Duty The Court held that plaintiff established a breach of fiduciary.  “ he elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct.” Palmetto Partners, L.P. v. AJW Qualified Partners, LLC , 83 A.D.3d 804, 807 (2d Dept. 2011). In a close corporation, the majority shareholders owe a fiduciary duty to the minority shareholders. O’Neill v. Warburg, Pincus & Co. , 39 A.D.3d 281, 282 (1st Dept. 2007); Gjuraj v. Uplift Elevator Corp. , 110 A.D.3d 540, 541 (1st Dept. 2013).  The Court found that following the execution of the Stock Transfer Agreement, defendant, as Baba’s majority shareholder, owed plaintiff fiduciary duties. Slip Op. at *4. The Court explained that the evidence demonstrated that defendant breached his fiduciary duty to plaintiff: it undisputed that defendants transferred the assets of Baba’s to Munzur, LLC and subsequently to Rojava, LLC without paying any consideration to plaintiff, removed all funds from the Baba’s bank account to bank accounts controlled by Dargin and his family and ceased all distributions to plaintiff.  Slip Op. at *4-*5. “As such,” concluded the Court, “plaintiff has established a prima facie entitlement to summary judgment on his Breach of Fiduciary Duties claim.” Id. at *5. Debtor & Creditor Law Claims The Court held that plaintiff established entitlement to summary judgment on his DCL claims. Purusant to Debtor and Creditor Law § 273, “every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.” “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.” Battlefield Freedom Wash, LLC v. Song Yan Zhuo , 148 A.D.3d 969, 971 (2d Dept. 2017).  Pursuant to DCL § 276 “every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.” To demonstrate a violation of DCL § 276, a plaintiff may “rely on ‘badges of fraud.’” Wall Street Assocs. v. Brodsky , 257 A.D.2d 526, 529 (1st Dept. 1999). Badges of fraud include 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. at 529.  The Court found that defendant had transferred all of Baba’s assets to entities controlled by him and his family without consideration, with full knowledge that plaintiff had claims against Baba’s for 25% of its assets and compensation arising from plaintiff’s employment contract. As a result, plaintiff “established a prima facie entitlement to summary judgment on his DCL claims.…” Slip Op. at *5.  Involuntary Dissolution Business Corporation Law § 1104-a permits involuntary dissolution of a corporation when the controlling shareholders are found guilty of “oppressive action” toward the minority. Oppression arises when “those in control” of the corporation “have acted in such a manner as to defeat those expectations of the minority stockholders which formed the basis of participation in the venture.” In re Kemp & Beatley, Inc. , 64 N.Y.2d 63, 74 (1984). Situations where the petitioner is “frozen out” or “squeezed out” are precisely the type of oppressive situations” that BCL § 1104-a is designed to address. In re Wiedy’s Furniture Clearance Center Co. , 108 A.D.2d 81, 84 (3d Dep’t 1985); In re Rambusch , 143 A.D.2d 605, 606 (1st Dept. 1988); In re Dissolution of Pickwick Realty , 246 A.D.2d 863, 866 (3d Dept. 1998) (finding that the lower court’s ordering of dissolution following its consideration of, inter alia , the “shareholders’ attempt at voiding petitioner’s shares” was “proper in the totality of these circumstances and fully necessary to protect petitioner’s interest”).  The Court found that defendant’s actions frustrated plaintiff’s “reasonable expectations of remaining a shareholder of the entity operating the restaurant and to share in the profits of the business.” Slip Op. at *6. The Court explained that the record showed that defendant “diverted the property and assets of Baba’s Restaurant within the meaning of BCL § 1104-a(a)(2).” Id. (“It is undisputed that Dargin transferred, assigned, or otherwise diverted, for no consideration, all the assets of Baba’s and that he denies that Kocak has any ownership of the disputed shares.”). As such, the Court concluded that plaintiff satisfied BCL § 1104- a(a)(2). Id. (citing Matter of Verdeschi , 63 A.D.3d 1084, 1085 (2d Dept. 2009). Accordingly, the Court granted summary judgment on this claim.

“A promissory note is a financial instrument that contains a written promise by one party (the note’s issuer or maker) to pay another party (the note’s payee) a definite sum of money, either on demand or at a specified future date. See Investopedia, Adam Barone, Apr. 20, 2020 ( here ). “A promissory note typically contains all the terms pertaining to the indebtedness, such as the principal amount, interest rate, maturity date, date and place of issuance, and issuer's signature.” Id. “When an action is based upon an instrument for the payment of money only ... the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint. A note qualifies as such an instrument for this purpose, provided the plaintiff can establish a prima facie case via proof of the note and a failure to make the payments called for by its terms. It does not qualify if outside proof is needed, other than simple proof of nonpayment or a similarly de minimis deviation from the face of the document.” Bonds Fin., Inc. v. Kestrel Tech., LLC , 48 A.D.3d 230, 231 (1st Dept. 2008) (internal quotations and citations omitted). See also Weissman v. Sinorm Deli , 88 N.Y.2d 437 (1996). In Firmenich Inc. v. TPR Holdings LLC , 2020 N.Y. Slip Op. 33087(U) (Sup. Ct., N.Y. County Sept. 18, 2020) ( here ), plaintiff filed a motion for summary judgment in lieu of complaint in connection with the failure by defendant to make payments under a promissory note executed as part of a settlement between the parties. The Court (Justice Arlene P. Bluth) granted the motion. Plaintiff claimed that in February 2016, the parties settled a dispute, pursuant to which defendant delivered a promissory note for $1,450,000, plus interest in plaintiff’s favor. The note required defendant to pay plaintiff according to a schedule set forth therein. Plaintiff claimed that there were numerous issues with defendant’s payments, culminating with defendant ceasing to make payments after March 2019. Plaintiff sent defendant a notice of default dated July 31, 2019 after defendant failed to make the April, May, June and July 2019 payments. Plaintiff asserted that under the terms of the note, it could commence the action after a default and appropriate notice to defendant. Plaintiff alleged that defendant owed plaintiff $320,175.00 under the terms of the note.  In opposition, defendant claimed that the note referenced the settlement agreement between the parties and that agreement imposed obligations on plaintiff, which rendered the use of summary judgment in lieu of complaint inapplicable. It claimed that plaintiff had to establish other elements besides simply nonpayment before it could recover. In addition, defendant claimed that the emergence of the COVID-19 pandemic had rendered performance under the settlement agreement objectively impossible and frustrated the purpose of the agreement: “the cataclysmic shutdown of commerce arising from the COVID-19 emergency (which was entirely unforeseeable and unforeseen) rendered the performance of the supply obligations of the parties under the Settlement Agreement objectively impossible.” Slip Op. at *2 (citation to the record omitted). In granting the motion, the Court found that the note was “an instrument for the payment of money only ( i.e. the payment of $1,450,000 in certain installments)” and did not impose any “obligations on plaintiff except for the requirement that plaintiff provide written notice to defendant if there was a default.” Slip Op. at *3. That requirement, said the Court, “only required plaintiff to comply with a procedure to collect the money; it d not remove the note from the auspices of CPLR 3213.” Id. The Court rejected defendants’ argument that “reference to the settlement agreement” imposed an obligation on plaintiff to perform, stating that such reference “was … besides the point.” Id. The Court explained that the settlement agreement merely “memorialized that the dispute … was being resolved for $1.45 million and that defendant was to pay that amount.” Id. Thus, concluded the Court, “ here no issue of fact regarding whether th case involve an instrument for the payment of money only.” Notably, observed the Court, “defendant not dispute that it failed to make payments or that plaintiff failed to abide by the notice provisions contained in the note.” Id. The Court also rejected “defendant’s claims about impossibility and frustration of purpose,” saying that they were “patently absurd.” Slip Op. at *3, *4. The Court noted that the non-payments “started in April 2019. The pandemic did not start causing business disruption in the United States until 2020.” Id. at *3. The Court found it to be “patently absurd” to use the pandemic as a defense, saying that such as defense was “disingenuous[ ]”, especially since the “default … occurred last year.” Id. at *4. The Court admonished defendant for using the pandemic as “a catch-all defense”. Id. Accordingly, the Court granted the motion and directed the clerk to enter judgment in favor of plaintiff and against defendant in the amount of $320,175.00, plus interest, from March 24, 2019 until the entry of judgment and then at the statutory rate. Takeaway CPLR § 3213 provides that a plaintiff may file a motion for summary judgment in lieu of a complaint “ hen action is based upon an instrument for the payment of money only ....” here=">here" and="and" >here.=">here."> The provision “was enacted to provide quick relief on documentary claims so presumptively meritorious that a formal complaint is superfluous, and even the delay incident upon waiting for an answer and then moving for summary judgment is needless.” Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro , 25 N.Y.3d 485, 491-92 (2015) (internal quotation marks and citation omitted).  “To establish prima facie entitlement to summary judgment in lieu of complaint, a plaintiff must show,” as in Firmenich , “the existence of a promissory note executed by the defendant containing an unequivocal and unconditional obligation to repay and the failure of the defendant to pay in accordance with the note’s terms.” Zyskind v. FaceCake Mktg. Techs., Inc. , 101 A.D.3d 550, 551 (1st Dep’t 2012). “Once the plaintiff submits evidence establishing these elements, the burden shifts to the defendant to submit evidence establishing the existence of a triable issue with respect to a bona fide defense.” Id. As the Court in Firmenich explained, reliance on the COVID-19 pandemic, which occurred in 2020, months after defendant’s default, was not a bona fide defense.   Although there will likely be many cases exploring how the pandemic might affect disputes over contracts and promissory notes, this is not such a case. In fact, it is patently absurd that defendant would disingenuously cite to a pandemic that has caused so much harm around the world as a defense to a default that occurred last year. The pandemic is not a catch-all defense to disputes that began last year. Slip Op. at *3-*4.

After being served with a summons and complaint in a lawsuit, a defendant generally appears and serves an answer or makes a motion seeking to dismiss some or all of the complaint.  Defendant’s formal appearance in an action is governed by CPLR 320 .  This Blog has addressed formal and informal appearances < HERE =">HERE"> . If a defendant fails to appear in an action, among other things, a plaintiff can seek from the Court, a default judgment pursuant to CPLR 3215 .  If plaintiff’s claim is “for a sum certain or for a sum which can by computation be made certain,” a plaintiff can seek a default judgment from the Clerk of the Court if the application is made within 1 year of the default.  See CPLR 3215(a).  This BLOG has addressed issues surrounding a plaintiff’s failure to seek a default judgment within 1 year of default (CPLR 3215(c) < HERE =">HERE"> . In the event that a plaintiff obtains a default judgment, there are several methods that may be employed by a defendant to vacate same.  This BLOG has previously addressed some of those methods.  < HERE =">HERE"> .  Pursuant to CPLR 5015 (a)(1), a defendant can move “the court which rendered a judgment or order relieve a party from it upon such terms as may be just, on motion of any interested person with such notice as the court may direct” due to, among other things, “excusable default, if such motion is made within one year after service of a copy of the judgment or order with written notice of its entry upon the moving party, or, if the moving party has entered the judgment or order, within one year after such entry….” In seeking the vacatur of a default entered pursuant to CPLR 5015, a two-prong test must be satisfied requiring a defendant to “demonstrate a reasonable excuse for the default and a potentially meritorious defense to the action.”  Global Liberty Ins. Co. v. Shahid Mian, M.D., P.C. , 172 A.D.3d 1332 (2 nd Dep’t 2019) (citations omitted). While some might expect leniency from a court when a default judgment for failure to appear is entered against an unrepresented defendant, such was not the case in Kelly v. Hinkley , decided by the Appellate Division, Third Department, on September 24, 2020.  The plaintiff landlord and defendant tenant in Kelley were parties to a lease agreement.  Plaintiff commenced an action, and served defendant with a summons and complaint, after defendant stopped paying the monthly rent.  Defendant was served on June 22, 2018 and his answer was due on July 10, 2018.  On July 9, 2018, plaintiff’s counsel received a call from an attorney that claimed that he “had recently been retained by defendant.”  Counsel then stipulated to extend until July 19, 2018, defendant’s time to answer the complaint.  On July 19, however, a different attorney “who was anticipating being retained” contacted plaintiff’s counsel and requested a further extension.  Plaintiff’s counsel refused the request for an additional extension.  Ultimately, defendant never retained an attorney.  On July 23, four days later, a letter was sent to defendant advising that he was in default and that any answer that he filed would be rejected as untimely.  Defendant filed an answer with the Delaware County Clerk on August 1, 2018, but neglected to serve a copy on plaintiff.  On September 26, 2018, the Kelley plaintiff moved for a default judgment, on notice.  Defendant failed to oppose the motion, which was granted on November 5, 2018.  Defendant’s pro se motion to vacate the judgment pursuant to CPLR 5015(a)(1), made on January 22, 2019, was denied.  On appeal, the Third Department found that “Supreme Court did not abuse its discretion in denying defendant’s motion to vacate the default judgment.”  After noting the two prong analysis previously discussed herein, the Kelley Court recognized that “ motion to vacate a prior judgment or order is addressed to the court's sound discretion, subject to reversal only where there has been a clear abuse of that discretion.”  (Citations and internal quotation marks omitted.)   Citing numerous cases, the court rejected defendant’s argument that the default should be vacated due to his pro se status and his difficulty retaining counsel, finding that “Supreme Court did not abuse its discretion in concluding that defendant's purported inability to secure counsel and his unawareness of the procedural requirements due to his pro se status do not constitute reasonable excuses for his default.” The Court was not moved by the underlying facts either and stated: The record reveals that defendant was personally served with a summons and complaint on June 22, 2018 and that the summons explained that defendant must serve a copy of his answer on plaintiffs' attorney within 20 days. Defendant consulted with two separate attorneys, one of whom obtained an extension of time, but defendant failed to timely file or serve an answer. Defendant filed an answer a week after a letter from plaintiffs' counsel advised him that he was in default, that plaintiffs would not accept service of an answer and that any answer would be rejected as untimely. Defendant never served that answer, nor did he respond to plaintiffs' motion for a default judgment. Further, he waited 2½ months before moving to vacate the default judgment. Because the Court found that there was no reasonable excuse for defendant’s default, there was no need to determine whether defendant “demonstrated the existence of a potentially meritorious defense.”  (Citations and internal quotation marks omitted.) TAKEAWAY Pro se litigants should not count on leniency from the court due to their lack of knowledge.

A threshold question for litigants is whether the court can exercise personal jurisdiction over the defendant. After all, a court cannot issue a valid and binding judgment without possessing such jurisdiction. Assuming the court can exercise such jurisdiction, the next issue to consider is service of process. The Civil Practice Law and Rules (“CPLR”) govern the methods and manner of service in cases filed in the courts of New York. Where a corporation is a defendant, the Business Corporation Law (“BCL”) or the Limited Liability Company Law, as applicable, should also be considered.  In today’s article, we examine service of process upon a foreign corporation that is not registered to do business in the State of New York.  Service of Process Under the CPLR and the BCL Section 311(1) of the CPLR provides that personal service upon a foreign or domestic corporation must be made by delivering the summons “to an officer, director, managing or general agent, or cashier or assistant cashier or to any other agent authorized by appointment or by law to receive service.” Pursuant to BCL § 304(a), “ he secretary of state shall be the agent of every domestic corporation and every authorized foreign corporation upon whom process against the corporation may be served.” Pursuant to BCL § 307(a), the Secretary of State is also authorized to receive service on behalf of unauthorized foreign corporations amenable to the State’s jurisdiction. Thus, when the Secretary of State is authorized to receive service on behalf of a corporation, delivery of the summons to the Secretary of State constitutes compliance with the jurisdictional requirements of CPLR § 311(1). BCL §§ 306 and 307 contain additional requirements as to the manner of service of process when the Secretary of State is served on behalf of a corporation with the former containing the applicable provisions in the case of a domestic or foreign corporation registered to do business in New York and the latter  containing the applicable provisions in the case of an unregistered foreign corporation. Both sections provide that delivery of process to the Secretary of State or his/her deputy or his/her designated agent must occur at the office of the Department of State in the City of Albany.  Under BCL § 306 (b), duplicate copies of process must be delivered to the Secretary of State. Service is complete when the Secretary of State is so served. Id. Pursuant to BCL § 307, only one copy of process has to be served to the Secretary of State and a second copy, together with notice of service on the Secretary of State, must be personally delivered to the foreign corporation or sent to it by registered mail with return receipt requested; service is complete 10 days after an affidavit of compliance, together with certain other papers, is filed with the clerk of the court in which the action is pending. BCL § 307(b), (c).  The requirements in BCL §§ 306 and 307 are jurisdictional and require strict compliance. Meyer v. Volkswagen of Am. , 92 A.D.2d 488 (1st Dept. 1983).  Notably, New York permits service on unregistered, foreign corporations outside of New York “if the service through the Secretary of State of was consistent with service under a New York statute other than 307, then personal jurisdiction validly obtained over defendant.” Breer v. Sears Roebuck & Co. , 184 Misc. 2d 916, 921 (Sup. Ct., Bronx County 2000). Under CPLR § 313, a person or entity “may be served with the summons without the state, in the same manner as service is made within the state, by any person authorized to make service within the state or by any person authorized to make service by the laws of the state….” Thus, a defendant subject to long-arm jurisdiction in New York may be served outside of New York State in a manner consistent with New York law. Id. at 922. The foregoing issues were recently considered by the Appellate Division, Third Department. In Garrow v. Pittsburgh Logistics Systems, Inc. , 2020 N.Y. Slip Op. 05010 (3d Dept. Sept. 17, 2020) ( here ), the Court reversed the motion court’s order to extend the time for service on defendant Pittsburgh Logistics Systems, Inc. (PLS”), an unregistered foreign corporation, because plaintiff  failed to comply with the requirements of BCL § 307. Garrow v. Pittsburgh Logistics Systems, Inc. In March 2018, plaintiffs filed a summons with notice in the Saratoga County Clerk’s office naming PLS and United Furniture Industries, Inc. (“United Furniture”) as defendants. Plaintiffs thereafter sought to effectuate service upon PLS, a foreign corporation not authorized to do business in New York, by personally delivering the summons with notice to an authorized agent of the Secretary of State and sending a copy of the summons with notice by registered mail, return receipt requested, to the address that PLS had registered with the Bureau of Corporations and Charitable Organizations within Pennsylvania’s Department of State. The mailing, however, was not ultimately received by PLS, having instead been returned to plaintiffs’ attorney as undeliverable – a fact, noted the Court, that went unnoticed by plaintiffs for several months. Slip Op. at *1. In June 2018, plaintiffs filed a complaint, seeking to recover for personal injuries that plaintiff Ross Garrow had allegedly sustained during a furniture delivery to his place of employment. PLS learned of the personal injury action in July 2018 through correspondence from United Furniture’s insurance carrier and later sought and obtained a copy of the summons and complaint from the carrier. In September 2018, PLS filed an answer to the complaint, asserting various affirmative defenses, including lack of personal jurisdiction, and a cross claim against United Furniture.  Thereafter, PLS moved, pursuant to CPLR §§ 311(a) and 3211(a)(8), to dismiss the complaint against it on the ground that plaintiffs had failed to effectuate service in strict compliance with BCL § 307 and, thus, the motion court had not acquired personal jurisdiction over it. Plaintiffs opposed the motion and cross-moved for an order pursuant to CPLR § 2004 granting them a 30-day extension to file “the package containing the undelivered mailing of the ummons with otice” with the Saratoga County Clerk, as well as an order dismissing PLS’s affirmative defense alleging lack of personal jurisdiction. Slip Op. at *1. The motion court denied PLS’s motion, granted plaintiffs’ cross motion to the extent of affording them a 120-day extension of time under CPLR § 306-b “to start again” and otherwise denied plaintiffs’ cross motion. Id. PLS appealed. In the proceedings below, plaintiffs conceded that they failed to strictly comply with the requirements of BCL § 307. Slip Op. at *1. In particular, plaintiffs failed to timely file within 30 days an affidavit of compliance, together with the process and “the return receipt signed by or other official proof of delivery or … the original envelope with a notation by the postal authorities that acceptance was refused.” Id. (citing BCL § 307(c)(2). In seeking to extend the 30-day period within which to file the affidavit of compliance and the requisite accompanying documents, plaintiff relied on the extension provision contained in CPLR § 2004. That section provides that, “ xcept where otherwise expressly prescribed by law, the court may extend the time fixed by any statute, rule or order for doing any act, upon such terms as may be just and upon good cause shown, whether the application for extension is made before or after the expiration of the time fixed.” Importantly, because the failure to strictly comply with the procedures of BCL § 307 constitutes a jurisdictional defect, rather than a mere irregularity, the 30-day time period in BCL § 307(c)(2) is not subject to extension under CPLR § 2004. See Flannery v. General Motors Corp. , 86 N.Y.2d 771, 773 (1995); Flick v. Stewart-Warner Corp. , 76 N.Y.2d 50, 56-57 (1990); Smolen v. Cosco, Inc. , 207 A.D.2d 441, 441-442 (2d Dept. 1994). Thus, held the Court, the motion court “should have denied plaintiffs’ cross motion on this basis.” Slip Op. at *1. “Instead,” noted the Court, “on its own initiative, used CPLR 2004 to grant plaintiffs an extension under CPLR 306-b, affording plaintiffs 120 days from the date of its decision and order ‘to start again; i.e. , to re-serve PLS in full compliance with all of the terms of § 307.’” Id. In doing so, the motion court used the extension standard set forth in CPLR § 2004, rather than the one contained in CPLR § 306-b, which provides that a court may extend the 120-day time period for service following the commencement of the action “upon good cause shown or in the interest of justice.” The Court concluded that “ hen the proper standard applied, plaintiffs would not have been entitled to an extension of time under CPLR 306-b to properly serve PLS in accordance with Business Corporation Law § 307. Id. As noted, to be entitled to an extension of time to effectuate service upon a defendant under CPLR § 306-b, a plaintiff must make a showing of “good cause” for the failure to timely serve the defendant or, alternatively, that an extension of time is warranted “in the interest of justice.” The “good cause” showing is the more stringent ground for extension under CPLR § 306-b, requiring the plaintiff to establish that reasonably diligent efforts were made to effectuate service. See Leader v. Maroney, Ponzini & Spencer , 97 N.Y.2d 95, 104-105 (2001); Bumpus v. New York City Tr. Auth. , 66 A.D.3d 26, 31-32 (2d Dept. 2009). The Court found that “plaintiffs did not make reasonably diligent efforts to comply with the procedures of Business Corporation Law § 307.” Slip Op. at *1. The Court explained that “ lthough plaintiffs personally delivered the summons with notice to an authorized agent of the Secretary of State and sent a copy of the summons with notice by registered mail, return receipt requested, to the address that PLS had registered with the Bureau of Corporations and Charitable Organizations within Pennsylvania’s Department of State ( see Business Corporation Law § 307 , <2> ), they made absolutely no effort to thereafter file the affidavit of compliance and the requisite accompanying documents ( see Business Corporation Law § 307 <2> ).” Id. Moreover, noted the Court, “the excuse provided for plaintiffs’ failure to timely serve PLS in accordance with Business Corporation Law § 307 amount to law office failure, an excuse that has been held to be insufficient to constitute good cause.” Id. (citing Leader , 97 N.Y.2d at 104-105; Zegelstein v. Faust , 179 A.D.3d 541, 542 (1st Dept. Jan. 21, 2020); Rodriguez v. Consolidated Edison Co. of N.Y., Inc. , 163 A.D.3d 734, 736 (2d Dept. 2018). Thus, concluded the Court, “as plaintiffs did not make the requisite showing, they not entitled to an extension ‘upon good cause’ under CPLR 306-b.” Id. Addressing the alternative “interest of justice” standard, the Court analyzed “the factual setting of the case” and balanced “the competing interests presented by the parties.” Id. (quoting Leader , 97 N.Y.2d at 105). In conducting the analysis, “courts may consider the plaintiff’s diligence in attempting service, ‘along with any other relevant factor …, including expiration of the tatute of imitations, the meritorious nature of the cause of action, the length of delay in service, the promptness of a plaintiff’s request for the extension of time, and prejudice to defendant.” Id. (quoting Leader , 97 N.Y.2d at 105-106; Heath v. Normile , 131 A.D.3d 754, 755 (3d Dept. 2015). “In addition to plaintiffs’ failure to make reasonably diligent efforts to effectuate service pursuant to Business Corporation Law § 307,” said the Court, “plaintiffs did not seek an extension of time to complete service until November 2018 — approximately four months after sending a copy of the summons with notice to PLS by registered mail and roughly eight months after filing the summons with notice.” Slip Op. at *1. Notably, observed the Court, “ uch extension request was not prompted by plaintiffs’ own discovery of their failure to comply with Business Corporation Law § 307 (c) (2); rather, it was in response to PLS’s motion to dismiss the complaint against it for failure to properly effectuate service.” Id. Finally, said the Court, although the motion court was under the impression that the statute of limitations had not yet run, there was “no indication in the record as to why the three-year statute of limitations did not expire in March 2016, three years after the alleged injuries occurred and two years prior to the commencement of th action.” Id. (footnote omitted) (citing CPLR § 214(5). “Together,” concluded the Court, “the foregoing considerations weigh heavily against an extension under CPLR 306-b in the interest of justice.” Id. (citing Zegelstein , 179 A.D.3d at 542-543; Jung Hun Cho v. Bovasso , 166 A.D.3d 868, 870 (2d Dept. 2018).  Accordingly, the Court held that the motion court should have granted PLS’s motion to dismiss the complaint against it and denied plaintiffs’ cross motion. Takeaway Garrow shows that the failure to comply with the requirements of BCL § 307 will result in dismissal of the action. Such requirements are jurisdictional and not mere irregularities. Garrow also highlights the interplay between CPLR § 306-b and BCL § 307. Under CPLR § 306-b, if the plaintiff fails to comply with the service requirements of the CPLR and, as in Garrow , the BCL, “the court, upon motion, shall dismiss the action without prejudice as to that defendant, or upon good cause shown or in the interest of justice, extend the time for service.” The “good cause” and “interest of justice” prongs of Section 306-b constitute separate grounds for extensions, and are defined by separate criteria. Leader , 97 N.Y.2d at 104. “A good cause extension requires a showing of reasonable diligence in attempting to effect service upon a defendant.” Henneberry v. Borstein , 91 A.D.3d 493, 496 (1st Dept. 2012) (internal quotation marks omitted). “Good cause will not exist where a plaintiff fails to make any effort at service … or fails to make at least a reasonably diligent effort at service.” Bumpus , 66 A.D.3d at 31. Law office failure does not constitute “good cause”. Henneberry , 91 A.D.3d at 496. “By contrast, good cause may be found to exist where the plaintiff’s failure to timely serve process is a result of circumstances beyond the plaintiff's control.” Bumpus , 66 A.D.3d at 31-32 (internal citations omitted) (noting difficulties of service with a person in the military or difficulties with service abroad through the Hague Convention).  The interest of justice standard, however, is more lenient, allowing courts to accommodate late service that might be attributed to mistake, confusion or oversight, so long as it does not prejudice the defendants. Leader , 97 N.Y.2d at 104-105. As noted, courts may consider such factors as diligence, or lack thereof; the expiration of the statute of limitations; the meritorious nature of the causes of action; the length of the delay in service; the promptness of plaintiff’s request for an extension of time; and the prejudice to defendants. See Spath v. Zack , 36 A.D.3d 410, 413-414 (1st Dept. 2007).  In Garrow , the Court found that plaintiffs could not satisfy either the “good cause” or the “interest of justice” standards.

Over the years, this Blog has addressed numerous issues involving mortgage foreclosures in New York. < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> .  On September 16, 2020, the Appellate Division, Second Department, decided U.S. Bank, N.A. v. Tauber , in which a mortgagor was estopped from arguing that service of process was not made at a proper address – a new mortgage foreclosure issue for this Blog.  CPLR 308 provides a variety of methods for “personal service upon a natural person.”  According to CPLR 308(2), personal service on a natural person can be made by, among other things, “delivering the summons within the state to a person of suitable age and discretion at the actual place of business, dwelling place or usual place of abode of the person to be served.”   The defendant in Tauber was served with process at the foreclosure address pursuant to CPLR 308(2) when the summons and complaint were left with someone of suitable age and discretion at that location.  Defendant moved to vacate a judgment of foreclosure and sale pursuant to CPLR 5015 (a)(4) (which permits a litigant to obtain relief from a judgment or order) and to dismiss the action pursuant to CPLR 3211 (a)(8) (based on lack of personal jurisdiction).  Supreme court, without holding a hearing, denied both motions and defendant appealed.  On appeal, the Second Department reversed and remanded the matter for a hearing on whether service of process was proper and for a new determination of whether to vacate the judgment of foreclosure and sale. On remand, supreme court held a hearing and, thereafter, issued an order upholding service.  Defendant appealed once again.  In recognizing its broad powers of review, the Second Department stated that in “reviewing a determination made by a hearing court, the power of this Court is as broad as that of the hearing court, and this Court may render its own determination as warranted by the facts, taking into account that, in a close case, the hearing court had the advantage of seeing and hearing the witnesses.”  (Citation and internal quotation marks omitted.) The Tauber Court found that there was no reason “to disturb the Supreme Court’s conclusions” that service was proper.  Among other things, the Court found that Tauber was estopped from denying that the address at which she was served was not a proper address for service pursuant to CPLR 308(2).  An estoppel: "is imposed by law in the interest of fairness to prevent the enforcement of rights which would work fraud or injustice upon the person against whom enforcement is sought and who, in justifiable reliance upon the opposing party's words or conduct, has been misled into acting upon the belief that such enforcement would not be sought" ( Nassau Trust Co. v Montrose Concrete Prods. Corp., 56 NY2d at 184; see White v La Due & Fitch, Inc., 303 NY 122, 128 <1951> ). Fundamental v. Tocqueville , 7 N.Y.3d 96, 106 (2006). Tauber testified that she never lived at the foreclosure address at which she was served.  Moreover, the Court noted that “ hile, as a general matter, a defendant has no obligation to inform a party who may wish to sue of his or her whereabouts ( see Feinstein v Bergner , 48 NY2d 234, 241-242), "where a defendant willfully misrepresent his address or violate a statutory notification requirement, or where he engage in conduct calculated to prevent the plaintiff from learning his actual place of residence, he may be estopped from asserting the defense of defective service" ( Bank of N.Y. v MacPherson , 301 AD2d 485, 486 ).  Tauber, *1 to *2 . In finding that Tauber’s actions effectuated an estoppel, the Court stated: Here, despite the defendant's testimony that she never lived in the subject property, the evidence adduced at the hearing reflects that the defendant repeatedly held herself out as a resident of the subject property throughout the pendency of this litigation, including in applications for mortgage assistance through the federal government's "Making Home Affordable Program" and in a power of attorney she executed for the purpose of permitting a family member to participate on her behalf in court conferences pursuant to CPLR 3408(a). Moreover, the evidence reflects that the defendant never gave the plaintiff the address of her purported true place of residence, despite having ample opportunity to do so. Under these circumstances, the defendant is estopped from contending that the subject property was not her "dwelling place" or her "usual place of abode" (CPLR 308<2> ; see U.S. Bank Natl. Assn. v Vanvliet , 24 AD3d 906 , 908; Bank of N.Y. v MacPherson , 301 AD2d at 486). Tauber , at 2.

The term “digital asset” or “digital token” generally refers to an asset that is issued and transferred using distributed ledger or blockchain technology, including “cryptocurrencies,” “coins,” and “tokens.” A blockchain or distributed ledger is a peer-to-peer database spread across a network, that records all transactions in theoretically unchangeable, digitally recorded data packages. The system relies on cryptographic techniques for secure recording of transactions. Blockchains or distributed ledgers can also record “smart contracts,” essentially computer programs designed to execute the terms of a contract when certain triggering conditions are met. Entities have offered and sold digital assets in fundraising events, called “initial coin offerings” or “ICOs,” in exchange for consideration, often other digital assets. Generally, digital assets may entitle holders to certain rights related to a venture underlying the ICO, such as rights to profits, shares of assets, rights to use certain services provided by the issuer, and/or voting rights. These digital tokens may also be listed on online digital asset trading platforms, where they can be traded for other digital assets or fiat currency. The digital tokens are often transferable immediately upon delivery to investors. ICOs are typically announced and promoted through public online channels. The prospectus soliciting the public to acquire tokens in the ICO is usually in the form of a “white paper,” which constitutes marketing materials describing the project and the terms of the ICO. To participate, investors may transfer funds to a unique digital address set up by the issuer, and the issuer may deliver tokens to the participants’ unique digital address on a distributed ledger or blockchain. This process may be partially automated through the use of a smart contract. On July 25, 2017, the Securities and Exchange Commission (“SEC”) issued the DAO Report of Investigation (the “Report”) (here), advising that digital tokens or coins may be securities, and thus, subject to the federal securities laws. In particular, the Report found that tokens offered and sold by the “virtual” decentralized, autonomous organization known as “The DAO” were securities and therefore subject to the federal securities laws. The Report confirmed that issuers of distributed ledger or blockchain technology-based securities had to register offers and sales of such securities unless a valid exemption applied. The Report made clear that those participating in unregistered offerings could also be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities had to register unless they were exempt. The Report stemmed from an inquiry that the SEC’s Enforcement Division launched into whether The DAO and associated entities and individuals violated federal securities laws with unregistered offers and sales of DAO Tokens in exchange for “Ether,” a virtual currency. On September 11, 2020, the SEC announced (here) that it brought charges against five Atlanta-based individuals, including film producer Ryan Felton, Clifford Harris, Jr., a well-known musician, actor, and producer, also known as T.I. or Tip, and three others who each promoted one of Felton’s two unregistered and allegedly fraudulent ICOs. The SEC also charged FLiK and CoinSpark, the two unincorporated Atlanta-based companies controlled by Felton that conducted the ICOs. Aside from Felton, all the individuals agreed to settle the charges against them. In the complaint (here), the SEC alleged that Felton promised to build a digital streaming platform for FLiK and a digital-asset trading platform for CoinSpark. Instead, Felton allegedly misappropriated the funds raised in the ICOs. The SEC also alleged that Felton secretly transferred FLiK tokens to himself and sold them into the market, reaping an additional $2.2 million in profits, and that he engaged in manipulative trading to inflate the price of SPARK tokens. Felton allegedly used the funds he misappropriated and the proceeds of his manipulative trading to buy a Ferrari, a million-dollar home, diamond jewelry, and other luxury goods. In a settled administrative order (here), the SEC found that Harris offered and sold FLiK tokens on his social media accounts, falsely claiming to be a FLiK co-owner and encouraging his followers to invest in the FLiK ICO. Harris also asked a celebrity friend to promote the FLiK ICO on social media and provided the language for posts, referring to FLiK as T.I.’s “new venture.” The SEC’s complaint alleged that T.I.’s social media manager William Sparks, Jr. offered and sold FLiK tokens on T.I.’s social media accounts, and that two other Atlanta residents, Chance White and Owen Smith, promoted SPARK tokens without disclosing they were promised compensation in return. “The federal securities laws provide the same protections to investors in digital asset securities as they do to investors in more traditional forms of securities,” said Carolyn M. Welshhans, Associate Director in the Division of Enforcement. “As alleged in the SEC’s complaint, Felton victimized investors through material misrepresentations, misappropriation of their funds, and manipulative trading.” The SEC filed its complaint in the U.S. District Court for the Northern District of Georgia. The SEC charged Felton with violating registration, antifraud, and anti-manipulation provisions of the federal securities laws. FLiK and CoinSpark were charged with violating registration and anti-fraud provisions. White and Smith were charged with violating registration and anti-touting provisions. Sparks was charged with violating registration provisions. The SEC seeks injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties, as well as an officer-and-director bar against Felton. In the settled order, Sparks agreed to disgorge his ill-gotten gains plus prejudgment interest. Sparks, White, and Smith each agreed to pay a penalty of $25,000 and to conduct-based injunctions prohibiting them from participating in the issuance, purchase, offer, or sale of any digital asset security for a period of five years. Harris agreed to pay a $75,000 penalty and not participate in offerings or sales of digital-asset securities for at least five years. The proposed settlements are subject to court approval. Three of Felton’s family members and an LLC that he established were also named as relief defendants. The U.S. Attorney’s Office for the Northern District of Georgia brought criminal charges against Felton in a parallel action (here). In that proceeding, the government is seeking a forfeiture of the proceeds of Felton’s alleged schemes.

Under CPLR § 3101, New York State’s procedural rule governing disclosure of documents and information, “there shall be full disclosure of all matter material and necessary in the prosecution or defense of an action, regardless of the burden of proof.” The rule applies to parties and non-parties alike. A question often arises as to whether the documents and information at issue are “material and necessary” (often interpreted as relevant) to the action. Courts in New York interpret the phrase liberally. As such, they require disclosure of any facts bearing on the controversy that will assist preparation for trial by sharpening the issues and reducing delay and prolixity. As the Court of Appeals explained, the test is one of usefulness and reason. Allen v. Crowell-Collier Publishing , 21 N.Y.2d 403 (1968). Notwithstanding, CPLR § 3101 establishes three categories of materials protected from disclosure. First, the statute excludes from disclosure privileged matter. Privileged matter includes, but is not limited to, self-incriminating matter, communications between an attorney and client, communications between spouses, communications between doctor and patient and secret grand jury information. This is an absolute immunity. Second, the statute excludes from attorney work product materials. Like privileged matter, this is an absolute immunity. Finally, the statute excludes from disclosure trial preparation materials. Such materials are subject to disclosure on a showing of substantial need and undue hardship. Preservation of documents and information is a key component of the disclosure regime. After all, a person or entity cannot disclose documents and information material and necessary to an action if such evidence is not preserved.  The duty to preserve evidence is a broad one. It requires preservation of materials known, or reasonably known, to be relevant to the action. And it requires preservation of documents and material that are reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery, and/or is the subject of a pending discovery request.  The duty to preserve exists independent of any notification or instruction to preserve from the opposing party. It applies to corporations and individuals. Notably, attorneys have a duty to be familiar with their client’s document retention policies and protocols to ensure that all sources of relevant information are discovered. The duty to preserve documents and information arises during litigation and when a party reasonably anticipates litigation. Thus, the duty to preserve is triggered by: service of a complaint; receipt of a preservation of evidence demand letter; receipt of a discovery demand requesting particular documents and information; and written correspondence or oral communication from an opposing party or a third party or an employee indicating that litigation is anticipated.  When a party is the plaintiff, the duty to preserve is triggered when that person or entity learns of facts that make it probable that he/she/it will pursue litigation against another and has information that is relevant to any potential defense. It is important to note that the duty to preserve does not require an obligation to maintain every piece of paper and every document. Rather, the duty requires a party to act in good faith and take reasonable steps to preserve documents and information.  Relevant to today’s article, the duty to preserve includes electronically stored information (“ESI”). ESI includes: (a) materials stored on personal computers, CD-ROM’s, external hard drives, flash drives, servers, and cell phones; (b) email accounts like “Gmail” or “Yahoo”; (c) social networking sites like “Facebook” or “Linked In”; and (d) handheld devices. ESI also includes electronic communications, such as text messages, emails, recorded conversations, information stored on apps, and the like.  Where evidence, including ESI, is destroyed when it should have been preserved, a party may be guilty of spoliation. A party may seek sanctions for the spoliation of evidence by showing that the party having control over the evidence possessed an obligation to preserve it at the time of its destruction, that the evidence was destroyed with a culpable state of mind, and that the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense. Pegasus Aviation I, Inc. v. Varig Logistica S.A. , 26 N.Y.3d 543, 547 (2015), quoting VOOM HD Holdings LLC v. EchoStar Satellite L.L.C. , 93 A.D.3d 33, 45 (1st Dept. 2012); see also Squillacioti v. Independent Grp. Home Living Program, Inc. , 167 A.D.3d 673 (2d Dept. 2018). Where the evidence is determined to have been intentionally or wilfully destroyed, the relevancy of the destroyed documents is presumed. Pegasus , 26 N.Y.3d at 547. If, however, the evidence was destroyed negligently, the moving party bears the burden to establish that the evidence was relevant to its claims or defenses. Id. at 547-548. Trial courts may, in the exercise of discretion, impose sanctions to provide relief to the affected party, including: (a) preclusion of evidence favorable to the spoliating party, (b) awarding costs associated with obtaining replacement evidence, or (c) employing an adverse inference instruction at trial. Id. at 551, citing CPLR § 3126 (“If any party … refuses to obey an order for disclosure or willfully fails to disclose information which the court finds ought to have been disclosed … the court may make such orders with regard to the failure or refusal as are just”). In addition, the trial court can strike the pleading of the spoliating party. Striking a pleading is a drastic sanction to impose in the absence of willful or contumacious conduct and, in order to impose such a sanction, the court “will consider the prejudice that resulted from the spoliation to determine whether such drastic relief is necessary as a matter of fundamental fairness.”  Squillacioti , 167 A.D.3d at 675 (citations omitted). However, “where the moving party has not been deprived of the ability to establish his or her case or defense, a less severe sanction is appropriate.” Id. (citations omitted). “Where evidence has been found to have been negligently destroyed, adverse inference charges have been found to be appropriate.” Id. ; see also Pegasus , 26 N.Y.3d at 554. In Carey v. Shakhnazarian , 2020 N.Y. Slip Op. 51040(U) (Sup. Ct., N.Y. County Sept. 11, 2020) ( here ), the Court addressed the foregoing principles in granting a motion for sanctions due to the spoliation of ESI evidence. Carey v. Shakhnazarian Background Plaintiff, Mariah Carey, commenced the action against defendant, Lianna Shakhnazarian, plaintiff’s former executive assistant, claiming that defendant breached a non-disclosure agreement (“NDA”) that defendant signed by, among other things, making unauthorized video recordings and disseminating confidential information to the Daily Mail. In connection with discovery proceedings, plaintiff served two requests for production of documents. In both sets of requests, plaintiff demanded the disclosure of documents from March 13, 2015 to the present. Among the materials requested were those stored on defendant’s cellphone – that is, the cellphone that she had been using since early 2018 (the “2018 Cellphone”). According to the Court, defendant did not search the 2018 Cellphone for responsive documents. At her deposition, defendant denied having ever backed up any of the documents from her 2018 Cellphone and said that she was not aware if anything was automatically saved to the iCloud. Defendant also claimed that in August 2019, she accidentally spilled water on the 2018 Cellphone, rendering it inoperable. She did not deny, noted the Court, that she failed to take any measures to recover the documents and communications on the device. Instead, defendant gave the 2018 Cellphone to her boyfriend to see if she could get any money toward a new phone by trading it in. She could not, however, recall the name or location of the store where the phone was surrendered. Relevant to the action, defendant acknowledged that she had deleted WhatsApp messages that she deemed “unnecessary,” but denied deleting any WhatsApp messages since the time when she began contemplating litigation against plaintiff. In addition, although defendant represented that no other recordings were made or disseminated, forensic imaging of her cellphone, conducted after the motion for disclosure sanctions was filed, revealed a fourth recording that had not previously been disclosed. The forensic imaging report showed that defendant sent or attempted to send this fourth recording to a third party, but that she subsequently “unsent” the video. Forensic imaging also revealed that defendant had saved copies of the exact documents, images, and videos that were leaked to the Daily Mail, including documents relating to plaintiff’s medical treatment and private photos and videos, evidence that she previously denied having in response to plaintiff’s discovery requests. Moreover, the forensic imaging revealed that, just before defendant sued plaintiff in California for unpaid overtime and other employment related claims, defendant sent herself a significant volume of confidential information, including the documents, images, and videos that were leaked to the Daily Mail. The forensic imaging further established that the 2018 Cellphone was enabled to be backed up to the iCloud. Finally, although defendant previously represented that she only had one email address, the forensic imaging established that she used two other email accounts: an iCloud account (the “iCloud Account”) and a Gmail account (the “Gmail Account”), both of which, noted the Court, she failed to search for responsive documents. The Court’s Decision The Court held that defendant had a duty to preserve the ESI on the 2018 Cellphone as early as October 16, 2017, when she sent WhatsApp messages to plaintiff’s former “managing executive,” asking for an attorney recommendation and stating that she “want to build my case,” against plaintiff, and as late as January 16, 2019, when the New York lawsuit was filed. Slip Op. at *5. As to the former, the Court explained that defendant “reasonably anticipated litigation with and therefore had a duty to preserve evidence as of that date.” Id. Thus, defendant’s “destruction of at least two video recordings on October 20, 2017 and subsequent deletion of WhatsApp messages constitute spoliation of evidence.” Id. (footnote omitted). As to the latter, the duty to preserve was triggered by the filing of the lawsuit. The Court explained that by “discard the 2018 Cellphone approximately seven months later in August 2019 without making any effort to preserve the documents and communications that the 2018 Cellphone contained,” defendant’s conduct “constitute spoliation.” Id. The Court found that “credible evidence support a finding that conduct ha been willful, intentional, and contumacious.” Id. As such, “ he relevance of the destroyed evidence therefore presumed.” Id. (citing Pegasus , 26 N.Y.3d at 547). The Court also held that plaintiff had “met her burden of establishing that the destroyed evidence was relevant to her claims.” Id. “Critically,” said the Court, “this is a dispute about alleged breach of the NDA by taking and disseminating unauthorized video and audio recordings, pictures, and communications and disclosing confidential information to various persons, including the Daily Mail.” Id. As such, “ he destroyed videos were material and necessary to establish the private and invasive nature of the recordings and were the objective record of what recorded.” Id. In addition, the Court found that the deleted WhatsApp messages were relevant because the objectivity and creditability of the persons who sent and received the messages were at issue in this case and “the deleted messages may have revealed additional information regarding recording and sharing of confidential information in violation of the NDA, including whether she shared any recordings with any other third parties.” Id. The Court concluded that defendant’s “destruction of messages and videos during the critical time when her relationship with and her staff was clearly deteriorating constitutes, at best, gross negligence …, and, at worst, willful and contumacious conduct.” Id. (citation omitted). The Court also concluded that “trading in her cellphone without taking any measures to save the videos, messages, and other data after this lawsuit was filed, when had an undeniable duty to preserve evidence, was grossly negligent, if not intentional.” Id. (citations omitted). Accordingly, the Court granted the motion for sanctions and held that it would “issue appropriate adverse inference instructions at trial.” Id. at *6 (citation omitted). The Court also ordered a forensic examination of defendant’s current cell phone “for any evidence of any violation of the NDA, any text messages or other documents which may have been backed up on the iCloud which may be used for impeachment purposes, and any further spoliation thereof.” Id. In addition, the Court order defendant “to pay the reasonable attorneys’ fees incurred in preparing this motion.” Id. (citing Zacharius v. Kensington Publ. Corp. , 154 A.D.3d 450, 451 (1st Dept. 2017) (affirming award of attorneys’ fees and costs of reviewing evidence and preparing motion as appropriate sanction for spoliation)).  Takeaway In today’s modern world, so much information is kept on our cellphones and backed up to the cloud. Yet, many people simply do not realize how much of that information is stored or backed up. The facts in Carey , as described by the Court, however, show more than a mere unawareness. To the Court, they showed an understanding that the documents and information were discoverable and retrievable. It is not surprising, therefore, that the Court granted the motion. It will be interesting to see, however, whether defendant appeals the Court’s decision and order.  Carey also serves as a warning that nothing, or almost nothing, is irretrievable. Indeed, forensic imaging can retrieve documents and information from the cloud and electronic devices often thought to be deleted and/or discarded. Thus, the deletion of ESI or the transfer of ESI from one device to another will almost always be detected by forensic imaging professionals.

Covid-19 has created numerous health, economic and other significant problems throughout the world.  Social distancing and quarantining during the pandemic is a means to address the spread of the virus.  Among the methods to permit business to continue while in quarantine is the use of video conferencing technology as a substitute for in-person meetings.  Businesses and individuals have embraced the use of virtual meetings so that necessary interactions – both business and personal – can proceed in an effort to return to normalcy.   As William E. Gladstone, a former British Statesman and Prime Minister, once said, “justice delayed is justice denied” – a quote often used by litigants and Courts to stress the importance of moving legal matters forward.  While New York’s court system, along with others throughout the world, came to a temporary halt as a result of Covid-19, judges and court administrators have quickly adapted to the crisis through, in many cases, resort to technology.  Thus, in order to keep legal proceedings moving, courts have, for example, expanded the use of electronic filings of legal papers, conducted legal proceedings using video conferencing technology and the like.  Indeed, Judiciary Law § 2-b(3) permits a court to “devise and make new process and forms of proceedings, necessary to carry into effect the powers and jurisdiction possessed by it.” By Order dated September 4, 2020, in Ciccone v. One W. 64 th St., Inc. , the court addressed the need for technology to advance the objectives of litigants in the face of an unprecedented pandemic.  Ciccone is the tortured tale of Madonna’s year’s long fight with her co-op board.  In 2016, Madonna commenced an action against her co-op to challenge certain restrictions in her proprietary lease and sought the co-op’s books and records to prove her claims.  Notwithstanding the court’s determination that Madonna’s “challenge to the co-op’s actions was time-barred, Madonna refused to “drop her distinct books-and-records claim intended to support that challenge … went so far as to move (unsuccessfully) for summary judgment on that claim in the spring of 2018.”  The court determined that Madonna “‘brought and continued to pursue her claims in this action in bad faith’ within the meaning of the co-op lease – and therefore that defendant was entitled to its reasonable attorney fees incurred in defending the action.”  Accordingly, the court appointed a referee to conduct a hearing to determine the amount of legal fees to which the defendant was entitled.  While the defendant wanted to resolve the matter on papers, Madonna argued that a 3-5-day hearing was necessary and testimony from 20 witnesses – every defense lawyer that billed time to the matter – was required. The hearing was adjourned due to settlement negotiations, which ultimately broke down.  Thereafter, Madonna sought the deposition of a former defense counsel lawyer and served subpoenas on “every current and former attorney who had worked on this action.”  In addition to testimony at the fee hearing, the subpoenas sought the production from each subpoenaed attorney all their “‘notes, time records, emails, and other correspondence or documents regarding this action,’ including ‘unredacted time records’ and ‘unredacted intra-office communications’ with other attorneys.”  Defendants moved for, and received, a full protective order. The “contentious” hearing began in February of 2020 and was scheduled to continue on March 12, 2020 but did not go forward due to COVID-19 restrictions.  While defendant was willing to continue the hearing virtually, Madonna “objected vehemently to a virtual hearing….”  The referee referred to the Court the question of whether the attorney’s fees hearing should proceed virtually.  The court explained that: The current dispute requires this court to balance weighty considerations. The judicial system traditionally prefers to conduct proceedings in person—a point that has particular force in a fact-finding hearing such as the one at issue here, for which credibility could conceivably prove relevant. The parties and the court each have vital and complementary interests in seeing actions resolved expeditiously and fairly after a proper opportunity for all sides to be heard. And, of course, in light of the COVID-19 pandemic (and the havoc it has wreaked worldwide), the New York court system owes a responsibility to avoid putting lives at risk by resuming in-person proceedings court (sic) prematurely. The court rejected Madonna’s proposal to adjourn the hearing indefinitely until in-person proceedings could safely be conducted.  The court recognized that, although the limited attorney fee hearing was “a collateral matter limited to a dispute over money,” it was not “trivial”; although “less pressing” than other more significant matters.  Nonetheless, the court was: loath to permit plaintiff to continue to drag out proceedings to avoid paying the costs of the legal work that she forced defendant and its counsel to undertake needlessly. Indeed, but for the time spent litigating and adjudicating plaintiff's repeated efforts to obtain extensive and burdensome discovery in an attorney-fee proceeding , the fee hearing would likely have been completed before COVID-19 even became an issue.  (Emphasis in original.)  While the court determined that it did not want to wait for an in-person hearing, it also deemed it necessary to determine “whether conducting the fee hearing in this case virtually is a viable alternative—i.e., whether this mode of proceeding is not only safe and expeditious but also fair to the parties, and whether this court has the authority to require the parties to participate even over objection.” In deciding the issue in favor of holding a virtual hearing, the Ciccone court agreed with the court’s finding in A.S. v. N.S. , 2020 NY Slip Op 20161 (Sup. Ct. NY Co. July 1. 2020), that “under the circumstances of the case before (a contentious custody dispute), holding a virtual hearing was feasible, fair, and preferable to further postponing trial.”  In addition, the Ciccone court was also “guided not only by the decision in A.S. v N.S. but also by rulings from federal trial courts across the country that consider how to proceed during the COVID-19 pandemic have consistently determined that given the pandemic, it is necessary, appropriate, and fair to hold bench trials entirely by videoconference.” (Footnote omitted.)  Further, the court fund that a virtual hearing was authorized by Judiciary Law § 2-b(3). The Ciccone court went on to analyze numerous federal authorities addressing whether to direct virtual trials and hearings and stated: The federal trial courts considering the issue have acknowledged that conducting a trial by videoconference is certainly not the same as conducting a trial where witnesses testify in the same room as the factfinder, and that certain features of testimony useful to evaluating credibility and persuasiveness, such as the immediacy of a living person can be lost with video technology. At the same time, these courts have found that given advances in technology, the near instantaneous transmission of video testimony permits the court to see the live witness along with his hesitation, his doubts, his variations of language, his confidence or precipitancy, and his calmness or consideration.   Federal courts have also found that given the unprecedented nature of the circumstances faced by our society at present due to the COVID-19 pandemic, compelling reasons exist to conduct trials virtually.  And given the court closures required by the pandemic, the months' long delay that has resulted, and the continuing lack of clarity about when it will be safe to resume normal in-person operations, the courts have concluded that it is 'absolutely preferable' to conduct the bench trial via such contemporaneous transmission rather than to delay the trial indefinitely.  (Citations, internal quotation marks. ellipses and brackets omitted.) The Ciccone court found the reasoning of the courts it analyzed to be “persuasive.”  The court also noted that: dditionally, current technology enables the court and litigants to participate in reliable, real-time videoconferencing with high image quality using readily available computer programs. A hearing conducted virtually by videoconference will allow for cross-examination of witnesses and for both counsel and the court to assess the witnesses' demeanor and credibility through seeing them up close on-screen.  Such a hearing may not be equivalent to hearing testimony and cross-examination in person. But it is more than adequate to ensure that both sides have a full opportunity to be heard and that Referee … can make a properly informed report and recommendation following the hearing.   Indeed, the particular context of this hearing makes it especially amenable to being conducted virtually. The issue before Referee, namely the amount of defendant's reasonable attorney fees, is discrete and straightforward. That issue will be heavily based on documentary evidence in the form of defendant's counsel's invoices and billing records, and—as this court concluded in quashing plaintiff's testimonial subpoenas—will require comparatively little testimony from live witnesses. (Footnote omitted.) The court concluded that “in the exercise of its discretion under Judiciary Law § 2-b(3), that this case presents extraordinary and compelling circumstances in which it is both necessary and appropriate to require the parties to participate in a hearing conducted by videoconference.”  The court then considered and rejected Madonna’s objections to a virtual hearing.

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. With little or no legitimate earnings, Ponzi schemes require a constant flow of money from new investors to continue. Ponzi schemes inevitably collapse, most often when it becomes difficult to recruit new investors or when a large number of investors ask for their funds to be returned.” See SEC Spotlight, “SEC Enforcement Actions Against Ponzi Schemes” (here). According to a February 11, 2020 article posted on CNBC.com (here), Ponzi schemes have hit their highest level in a decade. Over 60 Ponzi schemes were uncovered by state and federal authorities in 2019, “with a total of $3.25 billion in investor funds — the largest amount of money unearthed in scams since 2010 and more than double the amount from 2018, according to data from the website Ponzitracker.” The most notorious Ponzi scheme in history was run by Bernard Madoff. His scam, which was uncovered in 2008, cost thousands of investors over $65 billion. In 2008, in addition to the Madoff scheme, authorities uncovered “40 Ponzi schemes with a combined $23 billion of investor funds — roughly seven times the amount of funds from last year, according to Ponzitracker.” Like many frauds, investors do not know that they are the victim of a Ponzi scheme until the market crashes and they try to redeem their investments. As noted in the CNBC article, this is what “happened during the financial crisis when clients tried redeeming their money only to realize it wasn’t there.” According to the SEC, Ponzi schemes share many common characteristics. Among them are: High returns with little or no risk. When a person claims high returns with little or no risk, investors should “e highly suspicious of any ‘guaranteed” investment opportunity.” Overly consistent returns. Account statements that show consistent returns should be viewed skeptically. After all, investments go up and down over time. Therefore, investors should “e skeptical about an investment that regularly generates positive returns regardless of overall market conditions.” Unregistered investments. “Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators.” Registration provides investors with access to information about the company’s management, products, services, and finances. Unlicensed sellers. By law, both state and federal, investment professionals and firms must be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms. Secretive, complex strategies. One of the hallmarks of Madoff’s scheme was his “black box” strategy – that is, a secretive split-strike conversion strategy using proprietary quantitative techniques to minimize portfolio volatility. Investors had no idea what this meant. Investors should avoid investments in which the investment strategy is too complex to understand and the promoter refuses to provide sufficient information about the investment. Issues with paperwork. Another hallmark of the Madoff Ponzi scheme was the dissemination of error laden account statements. As noted by the SEC, “ccount statement errors may be a sign that funds are not being invested as promised.” Difficulty receiving payments. A telltale sign of a Ponzi scheme is the difficulty getting one’s money out. “Be suspicious if you don’t receive a payment or have difficulty cashing out,” warns the SEC. “Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.” See SEC General Resources on Ponzi schemes (here). On August 28, 2020, the SEC announced (here) that it charged two Maryland companies and their principals for a Ponzi scheme that allegedly defrauded approximately 1,200 investors, many of them African immigrants, of more than $27 million. According to the SEC’s complaint (here), Dennis Jali (“Jali”), John Frimpong (“Frimpong”), and Arley Johnson (“Johnson”), directly and through their companies 1st Million LLC and The Smart Partners LLC, falsely told investors that their funds would be used by a team of skilled and licensed traders for foreign exchange and cryptocurrency trading, promising risk-free returns of between 6% and 42%. The complaint alleged that defendants often targeted vulnerable African immigrants and exploited their common ancestry and religious affiliations. The complaint further alleged that Jali, who claimed to be a pastor and falsely held himself out as a self-made millionaire and expert trader, rented office space to conduct in-person meetings and give the appearance of a legitimate company. According to the complaint, defendants diverted investor funds for personal use and to make Ponzi payments to prior investors. “As alleged in our complaint, the defendants exploited religious affiliations and cultural affinities to gain investors’ trust,” said Kelly L. Gibson, Director of the SEC’s Philadelphia Regional Office. “We encourage all investors to be on high alert whenever they are offered investments promising low risk and guaranteed returns, including from members of a trusted community.” The SEC’s complaint, filed in the United States District Court for the District of Maryland, charged defendants with violating the antifraud provisions of the federal securities laws and seeks permanent injunctive relief, return of allegedly ill-gotten gains with prejudgment interest, and civil penalties. The SEC also named Access2Assets as a relief defendant, seeking the return of proceeds of the alleged fraud to which it had no legitimate claim. In parallel actions, the U.S. Attorney’s Office for the District of Maryland announced (here) the filing of criminal charges and the U.S. Commodity Futures Trading Commission (“CFTC”) filed a civil action. In the CFTC announcement (here), the commission expounded upon the details of the alleged fraud. In that regard, the CFTC explained that over a three-year period, from 2017 to 2020, over 1000 participants contributed at least $28 million to the 1st Million Pool, often pursuant to so-called “secure contracts” that falsely promised participants’ funds would be held in trust or escrow, used to trade forex and bitcoin, and then returned in their entirety at the end of the pool participation term. The CFTC alleged (here) that defendants misappropriated at least $7 million of 1st Million Pool funds and used it to pay for expensive cars, personal travel, and living and business expenses. Defendants allegedly targeted members of church communities by portraying the 1st Million Pool as a means to obtain financial freedom and support charitable religious causes. According to the complaint, defendants lied about their backgrounds and trading experience, as well as the likelihood of profit and risk of loss. For example, defendants promised pool participants they would receive rates of return on trading of up to 30% per month and falsely represented that Jali had a proven track record of positive returns. The complaint further alleged that Jali told certain participants that he had achieved positive returns of over 1700%. Jali also allegedly proclaimed in an online promotional video that his trading had generated returns of “400% in six weeks, all live trading in real markets” and that he was so successful a “forex trader” that “my wife has never worked a day in her life.” The complaint alleged that instead of generating trading profits as promised, defendants used at least $18 million of participants’ funds to make Ponzi scheme-like payments for the purpose of creating the illusion of profitability. The complaint also charged all defendants with failing to register with the CFTC as required. The CFTC seeks full restitution to defrauded pool participants, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and a permanent injunction against violations of the federal commodities laws, as charged. In the criminal proceeding, which provided even more detail of the alleged scheme, the government alleged that 1st Million presented itself as a wealth management and financial literacy company, with its core business offering being a 12-month guaranteed investment contract. These investment contracts, entitled “Corporate Guarantees,” allegedly guaranteed individuals who invested money with 1st Million monthly returns ranging from 6% to 35% of the initial investment. At the end of the investment period, the contract allegedly promised that the investor would receive the return of all of the principal invested. The government alleged that the contract represented that the client’s principal would be invested in foreign currency or cryptocurrency. The government alleged that Jali, Frimpong, and Johnson recruited victims to invest in 1st Million by holding promotional events at upscale hotels and event spaces, attending church-sponsored events intended to target investments from churchgoers, and representing themselves as religious men more interested in the philanthropic financial freedom of others than personal financial gain. Defendants allegedly presented themselves as “pastors,” and told prospective investors that 1st Million’s work was in furtherance of God’s mission as it helped churches and their members achieve personal wealth and financial freedom. Affinity="--> Affinity" scams="scams" exploit="exploit" trust="trust" friendship="friendship" exist="exist" who="who" have="have" something="something" common.="common." Because="Because" tight-knit="tight-knit" structure="structure" many="many" groups,="groups," it="it" can="can" difficult="difficult" for="for" regulators="regulators" law="law" enforcement="enforcement" officials="officials" detect="detect" scam.="scam." Victims="Victims" fail="fail" notify="notify" authorities="authorities" pursue="pursue" legal="legal" remedies="remedies" instead="instead" try="try" work="work" things="things" out="out" This="This" particularly="particularly" true="true" where="where" fraudsters="fraudsters" used="used" convince="convince" others="others" join="join" investment.="investment." Blog="Blog" examined="examined" here.=">here."> To encourage individuals to invest with 1st Million, Jali, Frimpong, and Johnson are alleged to have falsely stated that: investors’ principal would be held in a trust account protected from any financial instability of 1st Million or market volatility; that 1st Million and its traders, including Jali and Frimpong were fully licensed and qualified to pursue their investment activities by all relevant federal regulators, including the SEC, and had extensive experience trading on Wall Street; that the financial condition of the company was healthy and earning astronomical profits; and that the investors’ money would be used to invest in foreign currency and cryptocurrency markets, when in fact, investors’ money was used to pay earlier investors and diverted for the personal use of Jali, Frimpong, and Johnson. To increase the amount of money obtained from investors, defendants allegedly promised higher guaranteed rates of return to 1st Million investors who invested greater amounts of money in the investment contracts. Jali, Frimpong, and Johnson allegedly promised investors that they could increase the returns on their investments, typically by 0.5% per month, for every new investor they successfully recruited to 1st Million. Defendants allegedly hired “agents” of 1st Million to organize recruiting events to attract more investors, in exchange for a higher return on the agents’ investments. Jali further recruited investors by allegedly misrepresenting his own personal wealth and exhibiting a lavish lifestyle purportedly paid from his successful currency trading on his personal accounts when, according to the indictment, his lavish lifestyle was allegedly paid for with diverted investor funds. For example, the indictment alleged that Jali spent at least $47,000 of investor money on luxury vehicles and approximately $78,000 on private jets that he used to fly on personal or semi-personal trips, including a flight from Charlotte, North Carolina to Washington, D.C. on January 9, 2019, with Jali, his wife, and his three children as the only passengers. Over the course of the fraudulent scheme, defendants allegedly persuaded or attempted to persuade investors to provide them with wire transfers, checks, and cash totaling more than $28 million, from numerous victims, under the fraudulent pretense of investing in the foreign exchange and cryptocurrency markets. The indictment seeks a money judgment of at least $28,021,868.01, including $2,481,994.57 seized from 10 bank accounts associated with the defendants, and a 2016 Porsche SUV. If convicted, defendants face a maximum sentence of 20 years in federal prison for a wire fraud conspiracy and for each count of wire fraud; a maximum of five years in federal prison for a securities fraud conspiracy and a maximum of 20 years in federal prison for each count of securities fraud. Jali also faces a maximum of 10 years in federal prison for each of three counts of money laundering. “The defendants allegedly recruited investors at churches, presenting themselves as pastors concerned about the investors’ financial freedom,” said U.S. Attorney Robert K. Hur. “The indictment alleges that instead, the defendants used new investments to further their Ponzi scheme and to fund their lavish lifestyles, including luxury vehicles and private jets.” “In a time of such financial insecurity, the defendants allegedly preyed on their victims with false hope of financial security,” said FBI Special Agent in Charge Jennifer Boone. “They used the victims’ hard earned money for luxury cars, private jets and family vacations while the victims ended up with false promises and empty hopes.”