Alternative dispute resolution (“ADR”) is the name given for the procedures by which parties can settle their disputes without litigation, such as arbitration, mediation, or negotiation. ADR procedures are generally, though not always, less costly and more expeditious. Here.=">Here."> Although arbitration has increased in popularity over the years and is part of most business and commercial contracts and employment agreements, there remains resistance to engaging in ADR procedures. This resistance is sometimes manifested in a motion to stay arbitration – that is, a motion to stop a pending arbitration from proceeding on the grounds that, inter alia , the parties did not agree to arbitrate their disputes. In Gol v. TNJ Holdings, Inc. , 2020 N.Y. Slip Op. 50974(U) (Sup. Ct., N.Y. County Aug. 13, 2020) ( here ), the Court was asked to stay an arbitration pending before the American Arbitration Association (“AAA”). As discussed below, the Court denied the petition to stay the arbitration of claims asserted by TNJ Holdings, Inc. but granted the petition brough by Respondents Jossef and Julian Kahlon because they were not parties to any agreement mandating arbitration for dispute resolution. On May 15, 2020, Respondents Jossef Kahlon (“Jossef”) and Julian Kahlon (“Julian”), co-founders of Project Verte, Inc. (“Verte”), a closely held corporation, initiated an arbitration against Petitioners Jane Gol (“Gol”) and Amir Chaluts (“Chaluts”), Verte’s other co-founders, claiming that Gol and Chaluts abused their powers as controlling shareholders and harmed Respondents and Verte itself. Respondents alleged in arbitration that their claims arose out of, or related to, the parties’ Initial Stockholders Agreement (“ISA”) and a subsequent Share Forfeiture and Note Transfer Agreement (“SFNTA”), both of which contained mandatory arbitration provisions to which Petitioners (including Gol and Chaluts individually) were contractually bound. Accordingly, Respondents contended that AAA arbitration was the appropriate forum for their dispute. Petitioners argued that the ISA could not be a basis for mandatory arbitration against Gol and Chaluts because it was superseded by an Amended and Restated Stockholders Agreement (“ARSA”) to which Gol and Chaluts were not parties. Unlike the ISA, which Gol and Chaluts signed in their own names as initial stockholders, they signed the ARSA (which contained a mandatory arbitration provision) solely on behalf of Verte and the AJ Entities (entities through which Gol held a stake in Verte). Further, they argued that the SFNTA could not be a basis for mandatory arbitration because the claims in the arbitration did not relate to the SFNTA. Finally, they argued that even if there was an agreement permitting TNJ Holdings, Inc. (“TNJ”) (the entity through which the Kahlons held a stake in Verte) to arbitrate claims against one or more of the Petitioners, TNJ’s owners Jossef and Julian (who are not parties to the ISA or SFNTA) could not do so. Petitioners sought to stay the arbitration. For the reasons discussed below, the Court denied the petition to stay arbitration of claims asserted by TNJ. Given the Verte shareholders’ broad contractual agreements to resolve disputes through arbitration, the Court held that Petitioners did not establish grounds to stop TNJ from arbitrating its claims. Under the terms of the parties’ agreements, concluded the Court, which incorporated AAA’s Rules, it was for the arbitrator (not the Court) to decide whether TNJ’s specific claims were within or beyond the scope of the arbitration provisions. However, the Court granted the petition to stay arbitration of claims asserted by Jossef and Julian. Unlike TNJ, noted the Court, the Kahlons were not Verte shareholders and, more importantly, were not parties to the relevant agreements containing mandatory arbitration provisions. As the Court noted, the threshold question in assessing a petition to stay arbitration is whether there is a valid and binding agreement to arbitrate. Slip Op. at *4-*5 (citing CPLR § 7503(b); Matter of Belzberg v. Verus Invs. Holdings Inc. , 21 N.Y.3d 626, 630 (2013)). If, as the Court noted, it “finds that a valid arbitration agreement exists, the next question is whether the dispute comes within the scope of that agreement.” Slip Op. at *5. Courts look to the agreement to see if the parties delegated to the arbitrator (rather than the court) the issue of arbitrability. Id. (citing Zachariou v. Manios , 68 A.D.3d 539, 539 (1st Dept. 2009) (“Whether a dispute is arbitrable is generally an issue for the court to decide unless the parties clearly and unmistakably provide otherwise.”); see also Henry Schein, Inc. v. Archer and White Sales, Inc. , 139 S.Ct. 524, 530 (2019) (“ f a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue”)). The Court found that “ he threshold question of whether there a valid agreement mandating arbitration of disputes between TNJ and Petitioners easily answered here.” Slip Op. at *5. The reason, noted the Court, was because there were three agreements to arbitrate. Id. Each of the ISA, SFNTA and ARSA, said the Court, required the arbitration of disputes. Id.  “Collectively,” explained the Court, “those agreements bind all of the Petitioners.” Id. Even the ARSA, observed the Court, “upon which Petitioners rely to free Gol and Chaluts from arbitration,” “broadly mandate arbitration of disputes between TNJ and all Petitioners other than Gol and Chaluts.” Id. See also id. at *5-*6. Having determined that there was a valid arbitration agreement, the Court turned its attention to the next question: whether the matter in dispute came within the scope of the agreement. The Court held that the parties “clearly and unmistakably” reserved that question for decision by the arbitrator. Id. at *6-*7. This was reinforced, explained the Court, by the incorporation of the AAA rules. Id. at *7 (quoting Zachariou v. Manios , 68 A.D.3d 539, 539 (1st Dept. 2009) (“ here there is a broad arbitration clause and the parties’ agreement specifically incorporates by reference the AAA rules providing that the arbitration panel shall have the power to rule on its own jurisdiction, courts will ‘leave the question of arbitrability to the arbitrators’”) (citations omitted)). The ISA, SFNTA, and ARSA all expressly incorporate the AAA Rules which, in turn, provide that the arbitrator “shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.” By expressly invoking such Rules, the parties have agreed to have the AAA arbitrator determine questions such as the applicability of the ISA, SFNTA, and ARSA arbitration agreements and whether Petitioners’ claims in the arbitration arise out of or relate to one or more of those agreements. Id. at *7 (citation and footnote omitted). The Court rejected the argument that certain exceptions to dispute resolution, “such as for intellectual property disputes”, undermined the requirement to arbitrate the parties’ disputes. Id. at *8. “For the matters that are covered by the arbitration provision,” held the Court, “the parties opted for the application of AAA Rules, which include deference to the arbitrator to decide issues with respect to scope of the provision and the like.” Id. The Court also rejected “Petitioners’ reliance on Loan Agreements and related documents with forum clauses pointing to litigation.…” Id.  The Court noted that “Respondents not rely on those agreements.” Id. Instead, they relied on the ISA, SFNTA, and ARSA, all of which contained “broad, straightforward arbitration provisions that incorporate AAA Rules.” Id. “Under Zachariou , concluded the Court, “that is sufficient to indicate an intent to adopt the AAA Rule with respect to deferring certain decisions — including whether the dispute arises under these agreements — to the arbitrator.” Id. Finally, the Court held that there was no agreement to arbitrate the Kahlons’ claims – a point that Petitioners did not contest. Nevertheless, Petitioners argued that Kahlons should be forced to arbitrate because they were “the parties of interest behind TNJ, both as the sole shareholders of the corporation, and as corporate representatives and signatories.” Id. (citation to record and internal quotation marks omitted). The Court found “no legal support for that proposition.” Id. See Funk v. Golden Hands, Inc. , 168 A.D.2d 220, 221 (1st Dept. 1990) (“ party to a written arbitration agreement may not be compelled to arbitrate disputes which arise thereunder with a nonparty.”); Groval Knitted Fabrics, Inc. v. Alcott , 39 A.D.2d 524, 524 (1st Dept. 1972) (“It is axiomatic that arbitration is consequent upon an agreement to arbitrate and no one can be forced to arbitrate with one whom he has not contracted to do so”), aff’d sub nom. , Groval Knitted Fabrics v. Alcott , 31 N.Y.2d 796 (1972)). The Court rejected the Kahlons’ reliance on Hirschfeld Prods. v. Mirvish , 88 N.Y.2d 1054 (1996), which held that non-signatory corporate officers could compel arbitration of a dispute arising out of a contract between their corporate employer and the plaintiff. The Court noted that the underlying predicate for that decision was the principal-agent relationship. Slip Op. at *8 (quoting Hirschfeld , 88 N.Y.2d at 1056 (“ he Federal courts have consistently afforded agents the benefit of arbitration agreements entered into by their principals to the extent that the alleged misconduct relates to their behavior as officers or directors or in their capacities as agents of the corporation. The rule is necessary not only to prevent circumvention of arbitration agreements but also to effectuate the intent of the signatory parties to protect individuals acting on behalf of the principal in furtherance of the agreement.”); and citing Huntsman Intl. LLC v. Albemarle Corp. , 163 A.D.3d 420, 421 (1st Dept. 2018) (affirming grant of a motion by non-signatory officer defendants to compel arbitration “because any breach of would have to be the result of an action or inaction attributable to ”), lv to appeal dismissed in part, denied in part , 32 N.Y.3d 1040 (2018)). The Court explained that neither case, as Respondents suggested, stood for the proposition that a corporate representative could vindicate the rights of the corporation through an arbitration agreement to which the corporation was a party. Id. at *8. “At most,” said the Court, Hirschfeld and Huntsman “stand for the proposition that in certain circumstances a non-signatory defendant in a civil action may be permitted to compel arbitration of a claim that is, effectively, against the signatory (acting through its non-signatory corporate officer).” Id. The Court noted that Respondents failed to cite “any cases applying that rationale in the context of a non-signatory plaintiff seeking to enforce an arbitration agreement as a sword rather than as a shield.” Id. Accordingly, concluded the Court, “ Hirschfeld and Huntsman not apply.” Id. Takeaway Whether a dispute is arbitrable is generally an issue for the court to decide unless the parties clearly and unmistakably provide otherwise. Where there is a broad arbitration clause and the parties’ agreement specifically incorporates by reference the rules of a dispute resolution organization, such as the AAA, in which the arbitration panel is given the power to rule on its own jurisdiction, courts will “leave the question of arbitrability to the arbitrators.” Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s , 66 A.D.3d 495, 496 (1st Dept. 2009), quoting Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 47 (1997)). In Gol , the parties’ agreements contained broad arbitration provisions that incorporated by reference the AAA rules. As such, consistent with the law in New York, the Court found that there was clear and unmistakable evidence that the parties ( i.e. , Petitioners and TNJ) intended to have an arbitrator decide the issue of arbitrability. However, there was no such intent with regard to the Kahlons. As the Court noted, neither were Verte shareholders nor parties to any of the relevant agreements.

Rule 3213 of the CPLR – which permits a litigant to move for summary judgment in lieu of filing a complaint – was designed to streamline litigation in situations where the statute is applicable, provides: When an action is based upon an instrument for the payment of money only or upon any judgment, the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint. The summons served with such motion papers shall require the defendant to submit answering papers on the motion within the time provided in the notice of motion. The minimum time such motion shall be noticed to be heard shall be as provided by subdivision (a) of rule 320 for making an appearance, depending upon the method of service. If the plaintiff sets the hearing date of the motion later than the minimum time therefor, he may require the defendant to serve a copy of his answering papers upon him within such extended period of time, not exceeding ten days, prior to such hearing date. No default judgment may be entered pursuant to subdivision (a) of section 3215 prior to the hearing date of the motion. If the motion is denied, the moving and answering papers shall be deemed the complaint and answer, respectively, unless the court orders otherwise. The Court of Appeals has described CPLR 3213 as a procedural device that “for the limited matters within its embrace, melded pleading and motion practice into one step, allowing a summary judgment motion to be made before issue was joined.”  Weissman v. Sinorm Deli, Inc. , 88 N.Y.2d 437, 443 (1996) .  The provision is “intended to provide a speedy and effective means of securing a judgment on claims presumptively meritorious … a formal complaint is superfluous and even the delay incident upon waiting for an answer and then moving for summary judgment is needless.”  Interman Indus. Products, Ltd. v. R.S.M. Electron Power, Inc ., 37 N.Y.2d 151, 154 (1975) (citations and internal quotation marks omitted).   A litigant can properly utilize CPLR 3213 when an action is “based upon an instrument for the payment of money only.”  Much litigation related to CPLR 3213 is related to what constitutes an “an instrument for the payment of money.”  See, e.g. , Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 25 N.Y.3d 485 (2015) (holding that an “unconditional and absolute” guaranty falls within the purview of CPLR 3213); Interman Indus. Products, Ltd. v. R.S.M. Electron Power, Inc ., 37 N.Y.2d 151, 154 (1975) (an account stated does not qualify).  This issue was previously addressed in this Blog < HERE =">HERE"> .   CPLR 3213 provides that the return date of a motion for summary judgment in lieu of complaint shall, at a minimum, be “as provided by subdivision (a) of rule 320 for making an appearance, depending upon the method of service.”  CPLR 320 (a) provides: Requirement of appearance. The defendant appears by serving an answer or a notice of appearance, or by making a motion which has the effect of extending the time to answer. An appearance shall be made within twenty days after service of the summons, except that if the summons was served on the defendant by delivering it to an official of the state authorized to receive service in his behalf or if it was served pursuant to section 303, subdivision two, three, four or five of section 308, or sections 313, 314 or 315, the appearance shall be made within thirty days after service is complete. If the complaint is not served with the summons, the time to appear may be extended as provided in subdivision (b) of section 3012. Thus, depending on the method of service of the notice of motion for summary judgment in lieu of complaint, defendant’s time to appear could be as little as 20 days, but could be 30 days, 40 days or more depending on when the affidavit of service is filed.  If service is made, for example, on an individual pursuant to CPLR 308 (2) or (4) or a partnership pursuant to CPLR 310(b) or (c) a defendant would have 40 days from the time the affidavit of service is filed with the court.  A plaintiff making a motion for summary judgment in lieu of complaint must be careful and conservative about choosing a return date for the motion because at the time the papers are delivered to a process server, it is not known how long service will take and what method of service will be employed by the process server.  As one court noted: CPLR 3213 is a hybrid procedure incorporating certain elements of an action and certain elements of motion practice.  As with a plenary action, jurisdiction is obtained over the Defendant by serving the Defendant with the summons, notice of motion and supporting papers in a method prescribed in CPLR Article 3.  The minimum amount of time the Plaintiff must give the Defendant to oppose the motion for summary judgment in lieu of complaint is determined by the amount of time the Defendant would have to appear in the action if the Defendant had been served with a summons and complaint or summons with notice. Goldstein v. Saltzman , 13 Misc.3d 1023 (2006) (citations omitted).  In Goldstein , the plaintiff gave the “defendant the minimum notice required by statute but demand answering papers 10 days before the return date”.  The court denied plaintiff’s summary judgment motion without prejudice and dismissed the action because: CPLR 3213 gives the plaintiff an option; that is, either make the motion returnable as soon as possible and permit the defendant to file its opposition papers on the return date or demand opposition papers in advance and give the defendant additional time in which to oppose the motion. Plaintiff cannot give defendant the minimum amount of time permitted to oppose the motion and demand opposition in advance. Because Goldstein demanded the service of answering papers 10 days prior to the return date of the motion, Saltzman was not provided with the statutorily required time in which to respond. Where plaintiff fails to provide the defendant with the statutorily required time to respond, the motion should be denied and the action dismissed. Goldstein , 13 Misc. 3d at 1028 (citations omitted). On August 20, 2020, the Supreme Court, Kings County (Silber, J.) decided Quicksilver Capital, LLC v. Tea at the Center, Inc. , in which the court denied plaintiff’s unopposed motion for summary judgment in lieu of complaint.  The plaintiff in Quicksilver had made a prior motion under CPLR 3213, which was denied due to improper service.  Plaintiff tried again.  The new motion was served on July 8, 2020 and the notice of motion made the return date July 22, 2020.  The notice of motion also demanded that opposition papers be served 10 days in advance of the return date.  “ he corporate defendant quicksilver> quicksilver> was served by delivery to a "manager", the corporation is allowed twenty (20) days to appear, and the individual defendant, served pursuant to CPLR 308(4), is allowed thirty (30) days to appear after such service is complete.”  The court determined that the motion papers were “short served” and, therefore, the motion was denied.  The court, however, stated that the “failure is not jurisdictional, and thus the action does not need to be dismissed.”  Instead, the court ordered “that the notice of motion, the summons and the papers upon which it relies are hereby converted to a summons and complaint pursuant to CPLR 3213” and gave the defendant 30 days from service of the order with notice of entry to answer or move.” The court also found that denial of the motion was appropriate on the substantive ground that the moving affidavit was not made by someone with first-hand knowledge and the supporting documents were submitted without the appropriate authentication. TAKEAWAY CPLR 3213 was designed to streamline actions that fall within its purview.  However, due to the practicalities of proper and timely service, this “benefit” is sometimes illusory.

Last week, this Blog wrote about the ramifications of failing to meet a deadline or otherwise act in a timely manner ( here ). In today’s post, we examine the ramifications of failing to meet the procedural requirements set forth in a statute. In Lincoln Sq. Synagogue, Inc. v. Lexington Strategies, LLC , 2020 N.Y. Slip Op. 32793(U) (Sup. Ct., N.Y. County Aug. 26, 2020) ( here ), the Court dismissed a turnover proceeding against a garnishee because the judgment creditor failed to follow the notice provisions set forth in CPLR §§ 5222 (d) and (e).  Article 52 of the Civil Practice Law and Rules provides the enforcement mechanisms that judgment creditors, such as the petitioner in Lincoln Square , use to collect on a money judgment. Jackson v. Bank of Am., N.A. , 149 A.D.3d 815, 818 (2d Dept. 2017). These mechanisms include, among other things, the imposition of a restraining notice against a judgment debtor or a third-party garnishee. Id. CPLR § 5225 allows a judgment creditor to initiate a special proceeding directing a person in possession of money or property in which the judgment debtor has an interest to turn the money or property over to the judgment creditor. CPLR § 5227 allows a judgment creditor to commence a special proceeding “against any person who it is shown is or will become indebted to the judgment debtor.”  CPLR § 5222 provides the procedures for serving a restraining notice on the judgment debtor and a third-party garnishee. That statute requires the service of a copy of the restraining notice and a Notice to Judgment Debtor within four days of the service of the restraining notice if not already served within one year prior to the service of the restraining notice. CPLR §§ 5222 (d) and (e). See also Weinstein v. Gitters , 119 Misc. 2d 122, 123 (Sup. Ct., Suffolk County 1983). The Notice to Judgment Debtor is “designed to inform the judgment debtor, if he be a natural person, that certain monies are exempt from application to the satisfaction of the judgment” ( Chemical Bank v. Flaherty , 121 Misc. 2d 509, 510 (Civ. Ct., Queens County 1983)), and sets forth the availability of procedures for asserting exemptions (CPLR § 5222). The judgment creditor has the burden of proving compliance with the statute. Chemical Bank , 121 Misc. 2d at 510. When a restraining notice is served on a third-party garnishee, as in Lincoln Square , the turnover proceeding may not be maintained if the judgment creditor fails to comply with CPLR §§ 5222 (d) and (e) ( i.e. , the provisions requiring notice to the judgment debtor about that restraining notice). Matter of Kitson & Kitson v. City of Yonkers , 40 A.D.3d 758 (2d Dept. 2007) (failure to serve a notice as required by CPLR  5222 § (d) on the judgment debtor rendered execution ineffective); Friedman v. Mayerhoff , 156 Misc. 2d 295, 296 (Civ. Ct., Kings County 1992) (failure to comply with CPLR § 5222 notice to debtor resulted in vacatur of the restraining notice); Weinstein , 119 Misc. 2d at 123-124 (restraining notice dismissed without prejudice for failure to serve judgment debtor in accordance with CPLR § 5222); Chemical Bank , 121 Misc. 2d at 511; Lincoln Fin. Servs., Inc. v. Miceli , 17 Misc. 3d 1109 (A), 2007 N.Y. Slip Op. 51893 (U) (Dist. Ct., Nassau County 2007) (vacating restraining order). In Lincoln Square , the Court found “no proof” in the Restraining Notice and the amended petition, or any assertion that petitioner complied with CPLR §§ 5222 (d) or (e) with respect to providing notice to the judgment debtor. Slip Op. at *2-*3. Instead of such proof, said the Court, petitioner merely submitted a copy of the Restraining Notice it served on Lexington Strategies, LLC, the third-party garnishee. Id. at *3. Accordingly, the Court dismissed the petition for failure to comply with the notice requirement of CPLR 5222 §§ (d) and (e). Takeaway As noted in our article about the ramifications of failing to meet a deadline or otherwise act in a timely manner, there are ramifications for failing to comply with deadlines and other requirements. Lincoln Square highlights the ramifications of failing to comply with statutory requirements. “The restraining notice is designed to prevent a garnishee or other person from disposing of the judgment debtor’s property pending a levy by the Sheriff or court order.” Chemical Bank , 121 Misc. 2d at 510. When a judgment creditor serves a restraining notice on a third-party garnishee, a proceeding to enforce the judgment under § CPLR 5227 against the third-party garnishee may not be maintained if the judgment creditor does not comply with CPLR § 5222 (d). When that happens, as in Lincoln Square , the proceeding must be dismissed.  As one would expect, the burden is on the judgment creditor to plead and prove compliance with CPLR §§ 5222 (d) and (e). “To hold otherwise would serve to emasculate the protection afforded to judgment debtors by the CPLR 5222 (subd ) notice.” Id. at 510-511. One other point needs to be made about Lincoln Square and CPLR §§ 5222 (d) and (e). The notice requirement reflects “a legislative attempt to comply with constitutional due process requirements vis-à-vis the enforcement of judgments.” Friedman , 156 Misc. 2d at 298 (citations omitted). “Thus the failure to meet these notice requirements, that is to advise a judgment debtor that his property may be exempt from application to a judgment, involves a fundamental due process right to which the presence or absence of prejudice would seem to be irrelevant.” Id. For this reason, “the failure to comply with CPLR 5222 and 5232 necessitates vacating restraining notice and/or execution” upon a third-party garnishee possessing assets or property of a judgment debtor. Id.

Conducting business with family, friends, or neighbors can be a rewarding endeavor. But, like any relationship, it can also be painful, both emotionally and economically. When the latter occurs, lawsuits can follow. The same is true with romantic relationships, especially when the health and well-being of a party to the relationship is at issue. In today’s Fraud Notes, we examine two “relationship” cases. In Salimi v. Raffaelle , 2020 N.Y. Slip Op. 32749(U) (Sup. Ct., N.Y. County Aug. 21, 2020) ( here ), the relationship at issue concerned neighbors who had invested in Coffeed Corporation (“Coffeed”). Plaintiff alleged that to induce him into investing money in the company, defendant misrepresented his position with Coffeed and the assets that Coffeed owned. Plaintiff sued defendant for, among other things, fraudulent inducement. Defendant moved to dismiss the claim on, inter alia , particularity grounds. The Court denied the motion. In Guilllen v. Bober , 2020 N.Y. Slip Op. 32761(U) (Sup. Ct., N.Y. County Aug. 13, 2020 ( here ), the relationship at issue was an “on-again, off-again” romantic relationship that spanned more than 10 years. Plaintiff alleged that during their last affair, defendant misrepresented whether he had any sexually transmitted diseases/infections. Plaintiff sued defendant for, among other things, fraud. Defendant moved to dismiss the claim. The Court granted the motion. Salimi v. Raffaelle Plaintiff and defendant are neighbors in a residential building in New York City. Both were investors and officers in Coffeed. Their relationship, while initially friendly, deteriorated after plaintiff made two investments in Coffeed in 2018: the first for $50,000.00 and the second for $300,000.00. Plaintiff alleged that defendant misrepresented his position with Coffeed and the assets that Coffeed owned, to induce plaintiff to make these investments. In particular, plaintiff “allege that defendant misrepresented Coffeed Corporation’s ownership of the Marine Dining Hall, which another entity controlled by defendant owned; misrepresented Coffeed Corporation’s ownership of another restaurant and that restaurant’s revenue; and made these misrepresentations to induce plaintiff to invest $350,000.00 in Coffeed Corporation.” Slip Op. at *6. Defendant moved to dismiss the complaint. In connection with the fraud claim, defendant argued that plaintiff failed to plead the elements of fraud with particularity.  To state a cause of action for fraud, a plaintiff must allege “a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.” Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009); Braddock v. Braddock , 60 A.D.3d 86 (1st Dept.), appeal withdrawn , 12 N.Y.3d 780 (2009). Such a claim must be pleaded with particularity. CPLR § 3016(b); Eurycleia , 12 N.Y.3d at 559. This means that the plaintiff must provide the details of the alleged fraud. Scott v. Fields , 92 A.D.3d 666, 668 (2d Dept. 2012), citing Moore v. Liberty Power Corp., LLC , 72 A.D.3d 660, 661 (2d Dept. 2010). In situations where those details are peculiarly within the knowledge of an adverse party, “the heightened pleading requirements of CPLR § 3016(b) may be met when the material facts alleged in the complaint, in light of the surrounding circumstances, ‘are sufficient to permit a reasonable inference of the alleged conduct’ including the adverse party’s knowledge of, or participation in the fraudulent scheme.” JP Morgan Chase Bank, N.A. v. Hall , 122 A.D.3d 576, 580 (2d Dept. 2014), quoting High Tides LLC v. DeMichele , 88 A.D.3d 954, 957 (2d Dept. 2011).  Notably, “actual knowledge need only be pleaded generally, , particularly at the prediscovery stage, that a plaintiff lacks access to the very discovery materials which would illuminate a defendant’s state of mind.” Oster v. Kirschner , 77 A.D.3d 51, 55-56 (1st Dept. 2010). After all, as the Oster Court noted, “Participants in a fraud do not affirmatively declare to the world that they are engaged in the perpetration of a fraud”; rather, “intent to commit fraud is to be divined from surrounding circumstances.” Id. at 77 A.D.3d at 55-56. In short, CPLR § 3016(b) is satisfied when the alleged facts permit a “reasonable inference” of the claimed misconduct. Epiphany Community Nursery Sch. v. Levey , 171 A.D.3d 1, 9 (1st Dept. 2019). When the facts of the alleged fraud are not plainly observable, they may be supplemented by the surrounding circumstances. The test is whether the plaintiff’s allegations inform the defendant of the conduct about which he/she complains. Id. In seeking dismissal of the fraud claim, defendant contended that plaintiff failed to identify the false and misleading statements that defendant allegedly made and failed to demonstrate justifiable reliance on any alleged misstatements.  The Court denied the motion, holding that plaintiff satisfied the particularity requirement of CPLR § 3016(b). The Court found that plaintiff “specifie each alleged misrepresentation by defendant and the monetary damages that plaintiff incurred from his two investments in Coffeed Corporation.” Slip Op. at *4-*5. In this regard, noted the Court, plaintiff “allege that defendant misrepresented Coffeed Corporation’s ownership of the Marine Dining Hall, which another entity controlled by defendant owned; misrepresented Coffeed Corporation’s ownership of another restaurant and that restaurant’s revenue; and made these misrepresentations to induce plaintiff to invest $350,000.00 in Coffeed Corporation.” Slip Op. at *6. In other words, said the Court, plaintiff identified the who, what, where, how and why of the alleged fraud: he complaint alleges that defendant misrepresented a corporation’s revenue and assets to induce plaintiff to contract with the corporation and purchase corporate stock. The complaint supplies all the details. It names the corporation; identifies the times, places, parties to, and nature of the alleged deception; defendant’s alleged motive; and the amount of damages that the deception caused plaintiff to incur. Id. at *6. In denying the motion, the Court noted that defendant failed to identify the factual details that were “absent/or confusing” in the complaint. Instead, said the Court, defendant “impermissibly relie on facts outside the complaint.…” Id. (citations omitted).  The Court also rejected defendant’s argument that plaintiff failed to allege justifiable reliance on the alleged misrepresentations. Noting that the argument was predicated on alleged facts outside the complaint ( e.g. , “that plaintiff was offered unfettered access to Coffeed Corporation’s records before he invested in the corporation…”), the Court declined to consider them. To do so, said the Court “would require a factual inquiry into plaintiff’s access to the corporate records and his diligence in reviewing them.”  Id. at *7.  “Even if the court accepted defendants alleged offer of unfettered access to the corporation’s records,” said the Court, “defendant cite no support for the proposition that such an offer would negate plaintiff’s allegations of justifiable reliance.” Id. [Ed. Note: The Court granted defendant’s motion to dismiss the breach of fiduciary duty claim. Slip Op. at *9. Plaintiff claimed that a fiduciary duty existed between the parties by reason of their friendship. Id. at *8 (describing the relationship as a “close personal friendship”). The Court held that plaintiff merely alleged a friendship with defendant, not any “‘special circumstances that might give rise to a fiduciary relationship.’” Id. , quoting Benzies v. Take-Two Interactive Software. Inc. , 159 A.D.3d 629, 630-31 (1st Dept. 2018). Guilllen v. Bober Plaintiff alleged that she and defendant had an over decade-long affair, during which defendant physically and emotionally abused her and caused her to develop stress-related alopecia. She alleged that defendant had a history of having unprotected sex with prostitutes. In 2017, after a hiatus, plaintiff and defendant resumed their relationship. During this time, plaintiff asked defendant whether he had any sexually transmitted diseases/infections to which defendant told her that she had “nothing to worry about.” Slip Op. at *2. The parties engaged in unprotected sexual intercourse. Plaintiff claimed that she found Herpes Simplex medication in defendant’s medicine cabinet. Soon thereafter, plaintiff was diagnosed with Herpes Simplex 2 (HSV-2). In 2018, plaintiff ended the relationship.  Defendant denied the allegations, claiming, inter alia , that when he met plaintiff in August of 2006, she was a “call girl”, who advertised her services on Craigslist. Id. Defendant claimed that during their relationship, he “loaned” plaintiff tens of thousands of dollars and supported plaintiff, plaintiff’s family, and plaintiff’s various business ventures. Id. Plaintiff asserted causes of actions for, inter alia , fraudulent misrepresentation. Defendant moved to dismiss, claiming that plaintiff failed to plead scienter – that is the state of mind characterized by an intent to deceive, manipulate, or defraud. The Court agreed. The Court held that “there no facts to suggest that defendant intended to defraud the plaintiff.”  Slip Op. at *2. The Court found that defendant’s response to plaintiff’s question concerning exposure to sexually transmitted diseases – that she had “nothing to worry about” – without more was “insufficient to establish intent, as some carriers of the herpes virus are asymptomatic and consequently, would not know or have reason to know of their status.” Id. (footnote omitted). The Court also rejected plaintiff’s contention that the bottle of medication she claimed to have seen demonstrated fraud. Id. The Court said that it was “unclear how plaintiff knew the medication was herpes medication or why plaintiff did not confront the defendant contemporaneously concerning her discovery.” Id. Additionally, noted the Court, defendant’s alleged history of engaging in unprotected sex with prostitutes, as well as his manipulative and abusive conduct, “suggest that plaintiff’s reliance on defendant’s purported statement that she had ‘nothing to worry about’ was unreasonable.” Id. at *3. “Thus,” concluded the Court, “plaintiff failed to establish a prima facie claim of fraudulent representation.…” Id.

Every now and then a litigant or counsel fails to meet a deadline or otherwise acts in an untimely manner.  Sometimes there is a reasonable excuse and sometimes there is not.  Several “saving” provisions in the CPLR are available to assist a litigant or counsel when deadlines are missed.  Some such provisions are as follows: CPLR 2005 provides that “ pon an application satisfying the requirements of subdivision (d) of section 3012 or subdivision (a) of rule 5015, the court shall not, as a matter of law, be precluded from exercising its discretion in the interests of justice to excuse delay or default resulting from law office failure.” CPLR 3012(d) provides that “ pon the application of a party, the court may extend the time to appear or plead, or compel the acceptance of a pleading untimely served, upon such terms as may be just and upon a showing of reasonable excuse for delay or default.” CPLR 5015(a) provides that the “court which rendered a judgment or order may 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, upon the ground of: (1) 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….”  The key to availing one’s self of such provisions is the reasonableness of the excuse for the delay or default.  Indeed, there are many cases that analyze what constitutes “reasonable excuse” and/or excusable “law office failure.”  While in an article such as this, this BLOG would typically survey such cases, it will not do so today in order to illustrate the importance of avoiding forced reliance on the CPLR’s “savings” provisions. Instead, this BLOG will summarize the August 26, 2020 decision of the Appellate Division, Second Department, styled: SRP 2015-1, LLC v. Thomas , in which the Court affirmed the motion court’s denial of defendants’ motion for leave to serve a late answer after plaintiff rejected their untimely answer.   SRP 2015-1 was a mortgage foreclosure action commenced by the lender to foreclose on property owned by Thomas.  Apparently, after being served, Thomas contacted plaintiff’s counsel and entered into a stipulation pursuant to which Thomas’ time to answer the complaint was extended until May 20, 2016.  At the time, Thomas did not have an attorney.  Thomas retained an attorney on May 20, 2016, but counsel failed to serve Thomas’ answer until June 3, 2016, which plaintiff’s counsel rejected as untimely.  Thereafter, Thomas’ counsel moved for leave to serve a late answer and to compel plaintiff’s acceptance of same.  The motion was denied, and a judgment of foreclosure and sale was subsequently issued by the motion court. In affirming the motion court’s order, the Second Department in SRP 2015-1 first recited the general law on “reasonable excuse” and stated: To extend the time to answer the complaint and to compel the plaintiff to accept an untimely answer as timely, a defendant must provide a reasonable excuse for the delay and demonstrate a potentially meritorious defense to the action. The determination of what constitutes a reasonable excuse lies within the sound discretion of the Supreme Court. Law office failure may constitute a reasonable excuse ( see CPLR 2005). However, conclusory and unsubstantiated allegations of law office failure are not sufficient, and mere neglect is not a reasonable excuse.  (Some citations, internal quotation marks and brackets omitted.) The SRP 2015-1 Court then found that there was no reasonable excuse for missing the stipulated May 20, 2020 deadline (even though the answer was only served two weeks late).  The Court found that Thomas and counsel were guilty of “mere neglect” which was insufficient to rise to the level of a “reasonable excuse.”  (Citations and brackets omitted).  Specifically, the Court found that: the defendants neglected the case by failing, for unexplained reasons, to retain their attorney until the day their answer was due under the extension that the plaintiff had granted. Their attorney then neglected their case by failing to answer for another two weeks. Counsel failed to provide a detailed or substantiated explanation as to why he could not have arranged for the answer to be prepared and served on or immediately after May 20, 2016.  (Citations omitted.) The Court never decided the issue of whether Thomas had a meritorious defense because of its ruling on the issue of “reasonable excuse.” TAKEAWAY Litigants and counsel should not take for granted that adversaries and/or the court will always grant courtesies or extensions of time to file papers.

In our last post ( here ), we examined the Statute of Frauds – General Obligations Law § 5-701 through § 5-705 – in the context of employment at-will contracts. We noted that such contracts are capable of performance within one year – a requirement under GOL§ 5-701(a)(1). Cron v. Hargro Fabrics , 91 N.Y.2d 362, 367 (1998). As the Court of Appeals has explained, because an at-will employment relationship may be “freely terminated by either party at any time for any reason or even for no reason” ( Murphy v. American Home Prods. Corp. , 58 N.Y.2d 293, 300 (1983)), such a relationship “may usually be completed within a year and ordinarily would not require performance to extend beyond that time” ( Cron , 91. N.Y.2d at 367). For this reason, the Court of Appeals has held that employment at-will agreements “are without the proscription of the Statute of Frauds concerning one-year performance.” Cron , 91 N.Y.2d at 367 (citations omitted). What if the at-will employment agreement is breached? In that case, the courts consider the agreement to be “terminable within one year only breach by one of the parties.” D&N Boening v. Kirsch Beverages , 63 N.Y.2d 449, 456 (1984). As the Court of Appeals noted, “termination is not performance, but rather the destruction of the contract where there is no provision authorizing either of the parties to terminate as a matter of right.” Id. at 456-57; see also Zupan v. Blumberg , 2 N.Y.2d 547, 552 (1957) (“The possibility of such wrongful termination is not, of course, the same as the possibility of performance within the statutory period.”). The foregoing rules also apply to an oral agreement that forms a partnership or joint venture. F.S. Intertrade Off. Prods. V. Babina , 199 A.D.2d 95, 96 (1st Dept. 1993), lv denied , 83 N.Y.2d 757 (1994); Prince v O’Brien , 234 A.D.2d 12 (1st Dept. 1996); Rella v. McMahon , 169 A.D.2d 555 (1st Dept. 1991)). Like the oral employment agreement, an oral agreement to form a partnership or joint venture without a definite duration creates an at-will partnership or joint venture. As such, it may be dissolved, without liability for breach of contract, on a “moment’s notice”. Shandell v Katz , 95 A.D.2d 742, 743 (1st Dept. 1983); Alnwick v. European Micro Holdings, Inc. , 281 F. Supp. 2d 629, 644 (E.D.N.Y. 2003) (“Where ... there is no definite term of duration for the joint venture, it may be terminated at will”)). With the foregoing principles in mind, we examine Eiji Ichimura v. Elkon , 2020 N.Y. Slip Op. 32722(U) (Sup. Ct., N.Y. County Aug. 21, 2020) ( here ), a case involving, among other things, an oral at-will joint venture agreement. Eiji Ichimura is a world-renowned sushi chef. Ichimura alleged that he entered into an oral at-will employment relationship with defendants whereby he agreed to serve as the sushi chef at a restaurant to be operated by defendants in Manhattan. According to plaintiff, he gave defendants oral permission to use his name for the restaurant while he was working there. About four months later, Ichimura terminated his relationship with defendants. Thereafter, plaintiff brought suit.  In their answer, defendants denied the allegations and advanced five counterclaims: unjust enrichment, breach of employee loyalty, conversion, breach of contract, and defamation and disparagement of goods, based on alternative theories that plaintiff breached a joint venture agreement he had made with defendant Idan Elkon to open the restaurant, or that he breached his duty as an employee, and that in any event, he unjustly enriched himself by benefiting therefrom. Plaintiff moved for summary judgment, claiming, inter alia , that the Statute of Frauds barred the breach of contract counterclaim.  Defendants argued that the joint venture agreement could be performed within one year. They contended that the agreement was partly performed, thereby making the Statute of Frauds inapplicable to the parties’ agreement. Defendants claimed that plaintiff breached the oral agreement by failing to fully perform.  In reply, plaintiff maintained that the Statute of Frauds was applicable to their relationship. Plaintiff claimed, among other things, that the alleged oral joint venture agreement was not capable of being performed within one year because, according to Elkon’s sworn interrogatory responses, plaintiff had committed to run the kitchen and sushi bar and serve as head chef “for years to come ....” Plaintiff also maintained that the parties did not partially perform the agreement nor were their actions unequivocally referable to the agreement. Rather, plaintiff claimed, the execution of the lease and building out of space were preparatory for the operation of the restaurant.  The Court held that plaintiff “satisfie his burden of demonstrating that the counterclaim for breach of contract ha no factual or legal basis.…” Slip Op. at *5. The Court noted that the agreement had no definite term. “Thus,” reasoned the Court, “to the extent that the parties entered into a joint venture, it was at will, and plaintiff cannot be held liable for breaching it.” Id. “And,” said the Court, “even if the venture was not at will, the statute of frauds would bar a cause of action for breach of contract.” Id. (citing Massey v. Byrne , 112 A.D.3d 532, 533 (1st Dept. 2013) (absent evidence that parties’ oral agreement constituted joint venture or partnership, breach of contract claim barred by statute of frauds)).

Like most states in the country, New York is an “employment at will” state.  This means that if there is no written agreement between the employer and employee governing when the employer can fire the employee, the employer has the right to fire the employee at any time for any reason. Smalley v. Dreyfus Corp. , 10 N.Y.3d 55, 58 (2008). The Court of Appeals has “repeatedly refused to recognize exceptions to, or pathways around, these principles.” Id.   Thus, when an employee at will is fired, the employee has no legal recourse even when the termination is arbitrary, unfair or unreasonable. While the employee-at-will has no recourse with regard to his/her termination, he/she may have recourse to recover compensation that is fixed and earned but not paid prior to termination. This was the issue before the Appellate Division, Fourth Department in Bermel v. Vital Tech Dental Labs, Inc. , 2020 N.Y. Slip Op. 04666 (4th Dept. Aug. 20, 2020) ( here ).  In Bermel , plaintiff, an employee-at-will, sought, inter alia , payment of commissions that he allegedly earned from sales that occurred during the course of his employment with defendant. Plaintiff claimed that he was owed commission income for past sales, as well as sales “generated by on a future and ongoing basis including post-termination of employment.” Plaintiff alleged that defendant had promised to pay him those commissions pursuant to an oral employment agreement. Because Plaintiff alleged that he and Defendant had an oral employment agreement, the Court had to consider whether the Statute of Frauds barred the relief that Plaintiff sought. In New York, the Statute of Frauds is found in General Obligations Law § 5-701 through 5-705. These provisions require a signed writing for certain types of agreements, including, but not limited to: (1) agreements that by their terms are “not to be performed within one year from the making thereof”; (2) the conveyance of real property; (3) contracts for the payment of finder’s fees; (4) agreements for “goods sold at public auction”; (5) contracts to pay compensation for services rendered in negotiating a business opportunity; and (6) modifications to written agreements which state that they cannot be changed orally. The Statute of Frauds neither applies to an agreement that “appears by its terms to be capable of performance within the year; nor to cases in which the performance of the agreement depends upon a contingency which may or may not happen within the year.” North Shore Bottling Co. v. Schmidt & Sons , 22 N.Y.2d 171, 176 (1968) (citation omitted). Instead, it applies to “those contracts only which by their very terms have absolutely no possibility in fact and law of full performance within one year.” D&N Boening v. Kirsch Beverages , 63 N.Y.2d 449, 454 (1984). See also JNG Constr., Ltd. v. Roussopoulos , 135 A.D.3d 709, 710 (2d Dept. 2016) (quoting D & N Boening , 63 N.Y.2d at 454)). The Court of Appeals has repeatedly held that the courts should “analyze oral agreements to determine if … there might be any possible means of performance within one year.”  Id. at 455. Thus, wherever an agreement is susceptible of fulfillment within one year, “in whatever manner and however impractical,” the courts should find “the Statute to be inapplicable, a writing unnecessary, and the agreement not barred.” Id. However, oral agreements that are “terminable within one year only upon a breach by one of the parties” are unenforceable. Id. at 456. The reason: “termination is not performance, but rather the destruction of the contract where there is no provision authorizing either of the parties to terminate as a matter of right.” Id. at 456-57; see also Zupan v. Blumberg , 2 N.Y.2d 547, 552 (1957) (“The possibility of such wrongful termination is not, of course, the same as the possibility of performance within the statutory period.”). By contrast, “where one or both parties have … an explicit option to terminate their agreement within one year, that agreement is, by its own terms, capable of completion within that period and is not governed by the Statute.” Id. If an alleged agreement is found to fall within the scope of GOL § 5-701(a)(1) (or any other subsection of GOL § 5-701(a)), it is void “unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent. …” There is sufficient tangible evidence that a contract has been made if, inter alia : (i) there is admissible “electronic communication (including, without limitation, the recording of a telephone call or the tangible written text produced by computer retrieval) … sufficient to indicate that in such communication a contract was made between the parties”; (ii) “ he party against whom enforcement is sought admits in its pleading, testimony or otherwise in court that a contract was made”; or (iii) “ here is a note, memorandum or other writing sufficient to indicate that a contract has been made, signed by the party against whom enforcement is sought or by its authorized agent or broker.” Id. Email communications can satisfy the “writing” requirement. See Sassoon v. CDx Diagnostics , 172 A.D.3d 617 (1st Dept. May 28, 2019); Naldi v. Grunberg , 80 A.D.3d 1, 13 (1st Dept. 2010). The “writing” need not be a communication between the parties to the contract. It can be an internal communication by the party against whom enforcement is sought. See Int’l Trading & Sales, Inc. v. Philipp Bros. , 99 A.D.2d 983, 984 (1st Dept. 1984) (“If defendant has such a note or memorandum even though it be internal, that could satisfy the Statute of Frauds.”); Scura Partners Sec. LLC v Universal Stainless & Alloy Prods., Inc. , No. 653308/11, 2013 WL 1127733, at *6 (Sup. Ct. N.Y. Cty. Mar. 6, 2013) (permitting discovery to satisfy Statute of Frauds because the defendant “may have internal emails and memorandums which would confirm the existence of the agreement, and these documents are ‘peculiarly within the knowledge’ of .”). With these general principles in mind, the Bermel Court considered defendant’s contention that, even assuming arguendo that there was an oral employment agreement between plaintiff and defendant, such an oral agreement was void pursuant to General Obligations Law § 5-701(a). The Court rejected Defenant’s contention. In doing so, the Court held that “an at-will employment . . . is capable of being performed within one year despite the fact that compensation remains to be calculated beyond the one-year period.” Slip Op. at *1 (quoting Harrison v. Harrison , 57 A.D.3d 1406, 1408 (4th Dept. 2008) (internal quotation marks omitted)); see Hubbell v. T.J. Madden Constr. Co., Inc. , 32 A.D3d 1306, 1306 (4th Dept. 2006); American Credit Servs. v. Robinson Chrysler/Plymouth , 206 A.D.2d 918, 919 (4th Dept 1994). As such, the Court held that the motion court did not err in denying Defendant’s motion with respect to Plaintiff’s “claim for payment of commissions fixed and earned during the course of plaintiff’s employment with defendant.” Slip Op. at *1. However, the Court agreed with Defendant that the motion court erred in denying its motion with respect to Plaintiff’s claim for “‘commissions on sales to any accounts generated by on a future and ongoing basis including post-termination of employment,’ i.e. , the claim for commissions that would accrue subsequent to the termination of plaintiff’s employment.” Id. at *2. The Court noted that “ lthough ‘ n oral agreement that is terminable at will is capable of performance within one year and, therefore, does not come within the Statute of Frauds . . . <,> General Obligations Law § 5-701 (a) (1) bars enforcement of a promise to pay commissions that extends indefinitely, dependent solely on the acts of a third party and beyond the control of the defendant.’” Id. (quoting Murphy v. CNY Fire Emergency Servs. , 225 AD2d 1034, 1035 (4th Dept. 1996) (internal quotation marks omitted)). Thus, concluded the Court, the motion “court erred in denying defendant’s motion with respect to plaintiff’s claim for commissions accruing subsequent to the termination of plaintiff’s employment.…” Id. (citing Zupan v. Blumberg , 2 N.Y.2d 547, 550 (1957); Tamara Brokerage, Inc. v. Andreoli , 24 A.D.3d 536, 537 (2d Dept. 2005); Murphy , 225 A.D.2d at 1035). Takeaway The Statute of Frauds applies to void an oral agreement that by its terms cannot be performed within one year. An at-will employment is capable of being performed within one year despite the fact that compensation remains to be calculated beyond the one-year period. When the employment relationship is terminable within one year and the measure of compensation has become fixed and earned during that period, the sole obligation to calculate such compensation does not bring the agreement within the one-year proscription of the Statute of Frauds.  In Bermel , plaintiff alleged entitlement to commission income for sales that occurred during the course of plaintiff’s employment with defendant, as well as commissions that would accrue subsequent to the termination of plaintiff’s employment. Under prevailing New York law, only those commission that were fixed and earned during plaintiff’s employment were recoverable. As the Court observed, the Statute of Frauds is inapplicable to an employment at-will agreement in which compensation is fixed and earned.

On August 19, 2020, District Administrative Judge, Hon. Andrew A. Crecca, issued a Memorandum regarding the “Return to In-Person Operations in the 10 th Judicial District, Suffolk County – Phase 4.1” (the “Memo”) < HERE =">HERE"> .  According to the Memo, Phase 4.1 “builds upon our reopening efforts to date by providing for enhanced in-person operations in all courts throughout the District, the continued use of virtual technology where we have found it to be appropriate and preferred, and the commencement of civil and criminal jury trials.” Consistent with the prior Phase, Phase 4.1 “no more than 50% of the courtrooms in a courthouse will be used for in person proceedings at the same time, and occupancy of every courtroom in the District will be kept at or below 25% of its maximum capacity.”  Staffing levels in court buildings will not exceed 80%.  Social distancing will be maintained. Although the presiding Judge will have the final word on how matters will be heard, matters that are presumptively “in-person”, include: Supreme Court 1 : -- trials, evidentiary hearings, inquests, essential matters and appearances and conferences with one or more self-represented parties. County Court (Superior Criminal) —trials, evidentiary hearings, non-custodial arraignments, Waivers of indictment, pleas and sentences for defendants not in custody, motion arguments, treatment court and judicial diversion cases where the Judge determines that an appearance is necessary to protect the health and safety of a defendant, grand jury proceedings, instances where the defendant can not be located or communicated with and essential matters Family Court – evidentiary hearings, child support proceedings, permanency hearings, FCA Article 10 consents, admissions and surrenders and essential matters.  Surrogate’s Court – citations and orders to show cause, bench trials, evidentiary hearings, essential matters and appearances and conferences with one or more self-represented parties District Court Civil – bench trials, evidentiary hearings, small claims matters, out of custody arraignments on Town Code violations and essential matters. District Court Criminal – trials preliminary hearings, evidentiary hearings, appearance ticket arraignments, vehicle and traffic appearances, pleas and sentences for defendants at liberty, motion arguments, arraignments of defendants accused of violations of Article 31 of the Vehicle and Traffic law, treatment court where the Judge determines that an appearance is necessary to protect the health and safety of a defendant and essential matters. While the Memo lists specific matters that presumptively will be held virtually, anything not listed above presumptively will be held virtually. In addition, civil and criminal jury trials will commence on a pilot basis on September 8, 2020.  Operational considerations will be put in place to protect the health and safety of those in the courthouse, including those called for jury duty.  These protocols will include, but not be limited to, social distancing, the required wearing of face masks, enhanced cleaning services and access to sanitizing stations.  A push to resolve matters through settlement (civil) and pleas (criminal) will be made prior to scheduling a case for trial and again before jury selection. As to default judgments the Memo provides that: Please also be advised that continuing in Phase 4.1, default judgments shall not be granted where, pursuant to CPLR § 3215, the default occurred after March 16, 2020. Furthermore, no default judgment requiring the defendant's notice pursuant to CPLR § 3215(g) shall be granted, unless the application was heard prior to March 17, 2020 and, proper notice was given (10th Judicial District, Suffolk County's AO 45-20 < HERE =">HERE"> ). 1  This Blog has been advised by the Office of the Administrative Judge, that the reference to “Superior Civil” Court means Supreme Court and the reference to “Superior Criminal” court means County Courts.

On March 20, 2018, the United States Supreme Court decided Cyan, Inc. v. Beaver County Employees Retirement Fund , 138 S. Ct. 1061, 1069 (2018), in which it unanimously held that the Securities Litigation Uniform Standards Act of 1998 does not strip state courts of subject-matter jurisdiction over class actions involving claims exclusively brought under the Securities Act of 1933 (the “1933 Act”), and does not allow for the removal of those cases to federal court. This Blog wrote about the decision here .  Among the issues we discussed that could arise in the wake of the decision was the possibility that defendants would be subject to parallel securities litigation in state and federal court.  Following Cyan , researchers at Stanford Securities Litigation Analytics performed at study, at the request of the Professional Liability Underwriting Society, that tracked the number of parallel state court actions filed under the 1933 Act. According to the report, titled “State Section 11 Litigation in the Post-Cyan Environment” ( here ), “ n the year since Cyan was decided, 26 Section 11 cases have been filed in state courts, compared to 10 cases filed in the prior year.” Of those cases, “48% … have been filed in both federal and state courts—meaning 48% of defendants have faced litigation for the same alleged violations in both state and federal court simultaneously.” Id. In the three years prior to Cyan, defendants only faced parallel litigation in 16% of the cases. Id. The New York Experience On July 1, 2019, this Blog wrote about Hoffman v. AT&T Inc. , 2019 N.Y. Slip Op. 31811(U) (Sup. Ct. N.Y. County, June 21, 2019) ( here ). here.=">here."> Hoffman involved a motion, under CPLR § 2201, to stay a securities class action filed in state court, alleging claims under the 1933 Act, in favor of a parallel class action filed in federal court, alleging claims under the 1933 Act and the Securities Exchange Act of 1934 (the “Exchange Act”). As discussed in the article, the Hoffman court denied the motion, holding that a stay would be inimical to the first-filed rule, the establishment of the Commercial Division, and the U.S. Supreme Court’s decision in Cyan . Shortly after we published our article examining Hoffman , Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division, decided a motion, under CPLR § 2201, to stay a securities class action alleging claims under the 1933 Act in favor of a parallel securities class action filed in federal court alleging claims under the 1933 Act and the Exchange Act. Matter of PPDAI Grp. Sec. Litig. , 2019 N.Y. Slip Op. 51075(U) (Sup. Ct., N.Y. County July 1, 2019) ( here ).  Like the Court in Hoffman , Justice Scarpulla, who cited to Hoffman , denied the motion.  However, unlike the Hoffman court, Justice Scarulla applied CPLR § 2201 in making her decision. Recently, Justice Andrea Masley of the Supreme Court, New York County, Commercial Division, was faced with a motion to stay an action arising under Section 11 of the 1933 Act. Convery v. Jumia Tech. AG , 2020 N.Y. Slip Op. 32639(U) (Sup. Ct., N.Y. County Aug. 7, 2020) ( here ). Like Justice Scarpulla, Justice Masley, who cited to and relied upon, inter alia , Matter of PPDAI Group , applied CPLR § 2201 in making her decision to deny the motion. Convery v Jumia Tech. AG Background Convery was filed as a putative class action under the 1933 Act, brought on behalf of the purchasers of American Depository Shares (“ADS”) of Jumia Technologies AG (“Jumia”) pursuant or traceable to the Registration Statement issued in connection with Jumia’s April 2019 initial public offering (“IPO”) of 15.525 million ADS (including the exercise of an over-allotment option) at $14.50 per share.  In a parallel securities class action, filed in the United States District Court for the Southern District of New York ( In re Jumia Technologies AG Securities Litigation , No. 19-cv-4397 (S.D.N.Y.) (Castel, J.)), a different plaintiff, Steven Strugala, asserted claims under the Exchange Act and the rules promulgated thereunder. Strugala alleged that Jumia’s share price fell 28% on May 10, 2019 from $33.11 per ADS to $24.50 per ADS, the day after Citron Research issued a report (the “Citron Report”) asserting that “Jumia is a Fraud” that “deserves immediate SEC attention”. In addition to Jumia, Struglia named as defendants Jumia’s Co-Chief Executive Officers and Chief Financial Officer (the “Management Board Defendants”). The state court action was filed on October 15, 2019, and amended on January 27, 2020. The federal court action was filed on May 14, 2010, and amended twice, on December 30, 2019 and March 13, 2020. In the state court complaint, Plaintiff asserted claims under Sections 11 & 15 of the 1933 Act. Like the original federal complaint, the state court complaint was brought against Jumia and the Management Board Defendants and relied upon the Citron Report for its allegations. However, besides naming a different class representative, Plaintiff added the seven underwriters participating in the IPO, as defendants (the “Underwriter Defendants”). The federal complaint was amended following consolidation and contested motions for appointment of lead plaintiffs and lead counsel. The amended complaint, brought by different plaintiffs, set forth the same allegations as those in the initial complaint, but enlarged the class period. Importantly, the plaintiffs asserted new claims under Sections 11 and 15 of the 1933 Act and named the Underwriter Defendants and eight members of Jumia’s supervisory board (the “Supervisory Board Defendants”), as parties.  In the amended state court complaint, Plaintiff added a claim under Section 12(a)(2) of the 1933 Act, added the Supervisory Board Defendants, Donald J. Puglisi (“Puglisi”), Jumia’s U.S. representative who signed the company’s allegedly false and misleading Registration Statement, and Ernst & Young, the accounting firm who issued an audit report alleged to be materially misleading in violation of international accounting standards, as defendants. Thereafter, the plaintiffs in the federal action filed a second amended complaint. The second amended complaint set forth the same allegations and claims as the amended federal complaint, but added Puglisi as a defendant. On April 3, 2020, the defendants in the federal action filed a pre-motion letter explaining the grounds for their proposed motion to dismiss the second amended complaint. Pursuant to an April 10, 2020 scheduling order, the district court judge permitted defendants to file the motion on June 1, 2020, with the briefing to be completed on August 21, 2020. Discovery was stayed pending further order of the court. Defendants moved, pursuant to CPLR § 2201, to stay all proceedings pending adjudication of the federal action. The Court’s Decision The Court analyzed the motion to stay the action through the lens of CPLR § 2201. Under CPLR § 2201, “ xcept where otherwise prescribed by law, the court … may grant a stay of proceedings …, upon such terms as may be just.” A motion pursuant to CPLR § 2201 to stay an action pending in favor of another action is directed to the sound discretion of the trial court. Dietz v. Linde Gas N. Am., LLC , 178 A.D.3d 469, 470 (1st Dept. 2019); Mook v. Homesafe Am., Inc. , 144 A.D.3d 1116, 1117 (2d Dept. 2016). In making the determination, a court may consider a number of factors, including: 1) which forum will offer a more complete disposition of the issues; 2) which forum has greater expertise in the type of matter; 3) which action was commenced first and the stage of the litigations; 4) whether there is substantial overlap between the issues raised in each court; 5) whether a stay will avert “duplication of effort and waste of judicial resources;” and 6) whether plaintiffs have demonstrated that they would be prejudiced by a stay. Asher v. Abbott Labs. , 307 A.D.2d 211, 211-212 (1st Dept.), lv. dismissed , 98 N.Y.2d 728 (2003). Applying the foregoing factors, the Court denied the motion to stay the state court action. The Court held that the first and fourth factors weighed in favor of Plaintiffs. Slip Op. at *5. The Court explained that “ lthough there is substantial overlap between the claims and the defendants, neither action completely dispose of all of the issues relating to the IPO.” Id.   The reason, noted the Court, was because the federal court had exclusive jurisdiction over the Exchange Act claims, but shared jurisdiction over the 1933 Act claims with the state court. Id. (“While both courts have jurisdiction over the 1933 Act claims, the federal court has exclusive jurisdiction over the claim brought under the 1934 Act, so it can only be disposed of there.”) (citing Cyan , 138 S.Ct. at 1078). The Court also noted that the state court action contained different parties and claims in that it “include claims against the accounting firm, and a claim under section 12(a)(2) of the 1933 Act for which rescission is available.” Id. (citation omitted). The Court concluded that “the difference in the relief sought militate against a stay.” Id. (citing Uni-Rty Corp. v. New York Guangdong Fin., Inc. , 117 A.D.3d 427, 429 (1st Dept. 2014)). The Court also found dispositive the different standard of review for the Exchange Act claims, noting that “the fraud claims in the federal action may be subject to heightened scrutiny.” Id. The Court held that the second factor weighed against a stay. Similar to the courts in Hoffman and PPDAI Grp. , the Court held that the federal court had no greater expertise in adjudicating the claims asserted in the state action, “including federal law as it pertains to securities cases.” Id. at *6 (quoting Labourers’ Pension Fund of Cent. and Eastern Canada v. CVS Health Corp. , 2020 WL 2857654, at *6 (Sup. Ct., N.Y. County June 1, 2020), and citing In re PPDAI Grp. Sec. Litig. , 2019 WL 2751278, at *5 (Sup Ct., N.Y. County 2019) (“the Commercial Division is a longstanding, specialized business court which deals exclusively with complex commercial litigation”); and Hoffman v. AT&T Inc. , 2019 WL 2578360, at *2 (Sup. Ct., N.Y. County 2019) (“ he liability issues in a 1933 Act case are, if anything, less complex than issues the Commercial Division resolves every week”)). The Court found the third factor to weigh against the grant of a stay. Slip Op. at *6. “Although the federal action was commenced first,” observed the Court, “it was not ‘first in time’ with respect to claims under the 1933 Act, which were first interposed in action – over two months before being added to the federal complaint by way of amendment.” Id. “Indeed,” said the Court, “it appears that at the time federal action was filed, plaintiff could not have sought 1933 Act damages because the ADSs price was still above the IPO offering price.” Id. (citations to the record omitted).  Moreover, said the Court, because discovery had been stayed in each case, the “first to file” factor was “not dispositive” and “not particularly meaningful.” Id. (citing Labourers’ Pension Fund , 2020 WL 2857654, at *7).  Further, noted the Court, “nothing of significance happened in the five months between the original filing of the federal action and , because the parties in the federal action were litigating over the appointment of lead plaintiffs and lead counsel.” Id. “And,” explained the Court, “although the federal action ha progressed slightly further with the partial briefing of a motion to dismiss, action would likely have been at a more advanced stage had defendants not disrupted the previously stipulated litigation schedule by filing this stay motion.” Id. The fifth factor, held the Court, weighed against a stay. The Court explained that because the two actions involved differing claims, “‘ he possibility or actuality of two trials of no importance.’” Id. at *7 (quoting Mt. McKinley Ins. Co. v. Coming, Inc. , 33 A.D.3d 51, 59 (1st Dept. 2006), and citing PPDAI Grp. , 2019 WL 2751278, at *6)). Further, said the Court, “‘ uplication of efforts or waste also not a concern because the parties and courts can cooperate as they do in so many other sophisticated securities cases.’” Id. (quoting Labourers’ Pension Fund , 2020 WL 2857654, at *3 (citation omitted)).  Finally, the Court found that “due to the differences between the parties named, remedies sought and standards of review, the plaintiff and the class might be prejudiced by a stay in pursuing action.” Id. Takeaway In this Blog’s takeaway of PPDAI Group , we said that the decision “may portend things to come in New York. While two decisions do not make a tidal wave of authority, they do indicate the current thinking of Commercial Division judges who will have to decide motions to stay 1933 Act claims under CPLR § 2201. And, that thinking points to the denial of motions to stay state court actions alleging claims under the 1933 Act in favor of parallel actions filed in federal court alleging claims under the 1933 Act and the Exchange Act.”  With the decisions in Labourers’ Pension Fund and Convery , the Commercial Division judges continue to deny motions to stay 1933 Act actions in favor of parallel federal court actions alleging claims under 1933 Act and the Exchange Act. Regardless of the reasons – such as parity with their federal court colleagues in handling complex securities matter or the dictates of the cases decided under CPLR § 2201 – the judges in the Commercial Division are increasingly denying motions to stay parallel securities actions. While these decisions do not constitute a tidal wave, they do constitute a trend that cannot be ignored.

Judicial protection of confidential information is often sought to shield highly sensitive information, trade secrets and financial information from the public. One way to achieve this objective is to obtain an order that seals the record from public view. In New York, the issue is governed by Section 4 of the Judiciary Law and Section 216.1(a) of the Uniform Rules for Trial Courts.  Section 4 of the Judiciary law provides that judicial proceedings “shall be public, and every citizen may freely attend the same.” There are exceptions, of course, such as those involving divorce, rape and criminal sexual acts. Id. But the presumption in favor of public access to court proceedings, both as a matter of constitutional law ( Richmond Newspapers v. Virginia , 448 U.S. 555 (1980) and “statutory imperative” ( Anonymous v. Anonymous , 158 A.D.2d 296, 297 (1st Dept. 1990)) is broad. Danco Lab, Ltd. v. Chemical Works of Gedeon Richter, Ltd. , 274 A.D.2d 1, 7 (1st Dept. 2000). After all, “the public needs to know that all who seek the court’s protection will be treated evenhandedly” ( Baidzar Arkun v. Farman-Farma , 2006 N.Y. Slip Op. 30724(U), at *2 (Sup. Ct., NY County 2006) (citation omitted)) and that judicial proceedings “are conducted efficiently, honestly and fairly.” Danco Lab , 274 A.D.2d at 7 (citations omitted).  Pursuant to the foregoing policy objectives, New York promulgated Section 216.1(a) of the Uniform Rules for Trial Courts (22 N.Y.C.R.R.). This section provides that “ xcept where otherwise provided by statute or rule, a court shall not enter an order in any action … sealing the court records, whether in whole or in part, except upon a written finding of good cause, which shall specify the grounds thereof. In determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties.” 22 N.Y.C.R.R. § 216.1 (a). Although the rule does not define “good cause,” “‘a standard that is difficult to define in absolute terms,’ a sealing order should rest on a ‘sound basis or legitimate need to take judicial action.’” Danco Lab , 274 A.D.2d at 8 (quoting Coopersmith v. Gold , 156 Misc. 2d 594, 606 (Sup. Ct., Rockland County 1992) (quoting In re Alexander Grant & Co. , 820 F.2d 352, 356 (11th Cir. 1987)). For this reason, the burden of proof is on the party seeking to seal the record. Mosallem v. Berenson , 76 A.D.3d 345, 348-349 (1st Dept. 2010) (citations omitted). Since the public’s right of access is not absolute ( Anonymous v. Anonymous , 263 A.D.2d 341, 297 (1st Dept. 2000); Danco Lab , 274 A.D.2d at 8), the determination of whether to seal the record “is best left to the sound discretion of the trial court, a discretion to be exercised in light of the relevant facts and circumstances of the particular case.” Matter of Crain Communications, Inc. v. Hughes , 135 A.D.2d 351, 351 (1st Dept. 1987) (citing Nixon v. Warner Communications, Inc. , 435 U.S. 589, 598-599 (1978)).  Notably, “ erely because some of the documents marked ‘confidential’ or ‘private’ ‘is not controlling on the court’s determination whether there is good cause to seal the record.’” Mosallem , 76 A.D.3d at 350 (quoting Eusini v. Pioneer Elecs. (USA), Inc. , 29 A.D.3d 623, 626 (2d Dept. 2006)). In the business context, courts have sealed records where trade secrets are involved or where the disclosure of documents “could threaten a business’s competitive advantage.” Mosallem , 76 A.D.3d at 350-351 (citations omitted). Additionally, courts have permitted the sealing of records where there is no articulable public interest in the documents and materials. See , e.g. , Dawson v. White & Case , 184 A.D.2d 246, 247 (1st Dept. 1992).  Applying the foregoing principles, Justice Andrea Masley of the New York Supreme Court, Commercial Division, granted numerous motions to seal and redact various sensitive, financial documents from the public record. North Star Debt Holdings, L.P. v. Serta Simmons Bedding, LLC , 2020 N.Y. Slip Op. 32584(U) (Sup. Ct., N.Y. County Aug. 4, 2020) ( here ). Although the motions were unopposed, the Court weighed the competing interests of the movants and the public and held that disclosure of the information “could threaten competitive advantage in the market going forward.” Slip Op. at *2.

Litigation can be a long and drawn out process.  As a result, parties sometimes die during the pendency of a lawsuit.  In such a case, CPLR § 1015 – Substitution Upon Death – is instructive and provides: (a) Generally.  If a party dies and the claim for or against him is not thereby extinguished the court shall order substitution of the proper parties. (b) Devolution of rights or liabilities on other parties.  Upon the death of one or more of the plaintiffs or defendants in an action in which the right sought to be enforced survives only to the surviving plaintiffs or against the surviving defendants, the action does not abate.  The death shall be noted on the record and the action shall proceed. The procedure for the substitution of a party, whether due to death or otherwise, is set forth in CPLR § 1021 and the extensions of time necessary to tend to the procedural steps involved with the substitution of a party are governed by CPLR § 1022 . Generally, “ he death of a party divests the court of jurisdiction to conduct proceedings in an action, the action is stayed as to him or her pending substitution of a legal representative, and any determination rendered without such a substitution is deemed a nullity.”  Stancu v. Hyang-Oh , 74 A.D.3d 1322, 1322 – 23 (2 nd Dep’t 2010) (citations omitted).  For example, in Danzig Fishman & Decea v. Morgan , 123 A.D.3d 968 (2 nd Dep’t 2014), plaintiff law firm sued a former client for unpaid legal fees.  Plaintiff’s unopposed motion for summary judgment was granted by the motion court after defendant’s death.  Once a representative of defendant’s estate was appointed, a motion to vacate the judgment was granted and, on plaintiff’s appeal, the Second Department affirmed.  Relying on, inter alia , Stancu , the Danzig Court found that the motion court’s grant of summary judgment to plaintiff “was a nullity, as it was after death and before the substitution of a legal representative.”  Danzig , 123 A.D.3d at 969. Sometimes, however, “where a party’s demise does not affect the merits of a case, there is no need for strict adherence to the requirement that the proceedings be stayed pending substitution.”  U.S. Bank National Assoc. v. Esses , 132 A.D.3d 847, 847 (citations omitted).  In Esses , property was owned by a grandfather and grandson as joint tenants with rights of survivorship.  When the grandfather, who was the obligor on the note and mortgage, defaulted, the lender commenced a foreclosure action.  Shortly thereafter, the grandfather died and the trial court stayed all proceedings.  The lender appealed.  The Second Department affirmed. The Court in Esses recognized that “ n the context of a mortgage foreclosure action, where a deceased made an absolute conveyance of all his or her interest in the mortgaged premises to another defendant, including his or her equity of redemption, and the plaintiff either discontinued the action as against the deceased defendant or elected not to seek a deficiency judgment against the deceased defendant’s estate, then the deceased defendant is not a necessary party to the action.”  Esses , 132 A.D.3d at 848 (citations omitted).  However, while the grandson, “as the surviving joint tenant, automatically inherited the subject property from , the plaintiff has neither moved to substitute a representative for estate as a defendant ( see CPLR 1021), discontinued the action insofar as asserted against , nor represented that it would not seek a deficiency judgment against estate.  Esses , 132 A.D.3d at 848 (some citations omitted).  Accordingly, the motion court‘s stay was affirmed. On August 12, 2020, the Second Department decided Nationstar Mortgage, LLC v. Azcona .  The lender in Azcona commenced a mortgage foreclosure action and the defendants were served with process in 2012 but failed to answer the complaint or appear in the action.  One of the defendants died in 2015 and, in 2016, the court entered a default judgment of foreclosure and sale.  In 2017, the remaining defendants moved pursuant to CPLR § 5015(a)(4) to vacate the default judgment because “ had died prior to its entry and, as such, the court was divested of jurisdiction until a legal representative was substituted for .”  The Second Department affirmed the denial of the motion.  In so doing, the Court recognized the general rule that the death of a party divests the court of jurisdiction and proceedings are stayed pending the appointment of a representative of the estate.  The court also noted that a stay is unnecessary when a party’s death “does not affect the merits of the case”.   The Azcona Court affirmed the denial of the vacatur motion.  The Court found that defendants, including the decedent, were properly served with process and defaulted three years prior to decedent’s death. Accordingly, ince defaulted in answering or appearing three years before his death, neither he nor any successor in interest was entitled to notice of the judgment of foreclosure or of the ensuing sale of the subject property.”  (Citations omitted.)  Therefore, the Court “agreed with the Supreme Court that Azcona’s death did not affect the merits of this action, and that there was no need to strictly adhere to the requirement for a stay pending substitution.” (Citations omitted.)

On August 10, 2020, the Securities and Exchange Commission (“SEC” or the “Commission”) announced (here) that Interactive Brokers LLC (“Interactive Brokers”) agreed to pay $11.5 million to settle charges it repeatedly failed to file Suspicious Activity Reports (“SARs”) for U.S. microcap securities trades it executed on behalf of its customers. In parallel actions, the Financial Industry Regulatory Authority (“FINRA”) and the Commodity Futures Trading Commission (“CFTC”) also announced settlements with Interactive Brokers (here and here) related to anti-money laundering (“AML”) failures in which the registered broker-dealer agreed to pay penalties of $15 million and $11.5 million, respectively, for a total of $38 million in penalties paid to the three agencies. Broker-dealers are required to file SARs for transactions suspected to involve fraud or a lack of an apparent lawful business purpose. In that regard, under Section 17(a) of the Securities Exchange Act and Rule 17a-8 promulgated thereunder, a registered broker-dealer is required to file a SAR when it knows, suspects, or has reason to suspect that certain transactions (1) involve funds derived from illegal activity, (2) involve the use of the broker-dealer to facilitate criminal activity, (3) are designed to evade any requirement of the Bank Secrecy Act (“BSA”), or (4) have no business or apparent lawful purpose. According to the SEC’s order (here), over a one-year period, Interactive Brokers failed to file more than 150 SARs to flag potential manipulation of microcap securities in its customers’ account, some of the trading accounting for a significant portion of the daily volume in certain of the microcap issuers. The SEC found that Interactive Brokers failed to recognize red flags concerning these transactions, failed to properly investigate suspicious activity as required by its written supervisory procedures, and failed to file SARs in a timely fashion even when suspicious transactions were flagged by compliance personnel. The SEC further found that Interactive Brokers violated the financial recordkeeping and reporting provisions of the federal securities laws and a related SEC rule. “SAR filings are an essential tool in assisting regulators and law enforcement to detect potential violations of the securities laws, particularly in the microcap space,” said Marc P. Berger, Director of the SEC’s New York Regional Office. “Today’s multi-agency settlement reflects the seriousness we place on broker-dealers complying with their SAR reporting obligations and maintaining appropriate anti-money laundering controls.” The CFTC found that Interactive Brokers failed to ensure that its employees followed established policies and procedures with respect to supervision of customer accounts. The agency said that the firm also lacked a reasonably designed process for conducting investigations of account activity and making SAR determinations. According to the CFTC order (here), these failings contributed to the firm’s inability to maintain an adequate AML program. As a result, alleged the CFTC, Interactive Brokers employees failed to adequately investigate and identify signs of suspicious activity in accounts that, according to the firm’s own compliance procedures, should have prompted the filing of SARs with appropriate authorities. “Our regulatory regime requires certain intermediaries to monitor and report suspicious activity. These suspicious activity reports – or SARs – serve as key tools that we, together with our regulatory partners, use to identify fraud, manipulation, and other wrongdoing in our markets – often at the earliest stages,” said CFTC Director of Enforcement James McDonald. “This case marks the first time the CFTC has charged a violation of Regulation 42.2 and shows our commitment to ensuring these requirements are met.” FINRA found that Interactive Brokers failed to dedicate the resources necessary to meet its AML obligations. In particular, according to the Letter of Acceptance, Waiver and Consent (here), FINRA determined that Interactive Brokers failed to meet its AML obligations because of various shortcomings, such as: not reasonably surveilling customers’ wire transfers for money laundering concerns, including deposits into customers’ accounts from countries recognized as “high risk” by U.S. and international AML agencies; not reasonably investigating suspicious activity when it found it because it lacked sufficient personnel and a reasonably designed case management system; and failing to establish and implement policies, procedures, and internal controls reasonably designed to cause the reporting of suspicious transactions as required by the BSA. Jessica Hopper, FINRA Executive Vice President and Head of Enforcement, said, “Today’s action is a reminder that member firms must tailor their AML programs to the firms’ business model and customer base, and also dedicate resources to programs commensurate with their growth and business lines. FINRA will continue to take steps to ensure that firms comply with their obligation to monitor for, detect and report suspicious activity.” Without admitting or denying the SEC’s findings, Interactive Brokers agreed to be censured, to cease and desist, and to pay an $11.5 million penalty. In its settlements with FINRA and the CFTC, Interactive Brokers agreed to retain an independent compliance consultant and to disgorge certain profits in addition to the penalties assessed by those agencies.